Texas Legislature Approves Housing Finance Corporation Reforms

A proposal aimed at reforming “traveling” housing finance corporations could set off a wave of multifamily distress in big Texas cities.

Lawmakers are trying to close a loophole that gives multifamily investors property tax exemptions in big cities when they partner with housing finance corporations in far-flung small towns. An amendment to House Bill 21, introduced by Richmond Republican Rep. Gary Gates, is also going after HFC deals that are already in place.

The loophole has been blamed for removing billions of dollars worth of property from tax rolls in Austin, Dallas, Houston and San Antonio. The program was intended to spur affordable housing development but, as it exists today, has few safeguards for ensuring its users reserve housing for low-income people.

The reform bill not only establishes more stringent restrictions on the use of housing finance corporations; it also applies the new guidelines to transactions that occurred before the legislation.

Under the legislation, housing finance corporations would only be able to purchase property for development that’s located within the entity’s county or municipality. Property purchased outside those boundaries for the purpose of development must receive approval by the local municipality or county.

In addition, the law makes property tax exemptions contingent on stricter affordability guidelines. To receive the credits, 10 percent of units must be reserved for people making up to 60 percent of the area median income, and 40 percent of units must be reserved for people making up to 80 percent of the area median income.

The proposal gives another option for the affordability split: 10 percent of units reserved for people making up to 50 percent of the area median income, and 40 percent for people making up to 100 percent of the area median income.

In Dallas, the median income for a one-person household is $77,210.

The proposed law also would also cut off tax benefits for properties previously purchased with traveling housing finance corporations, starting in 2027, unless the properties start complying with the new guidelines.

The application will likely result in foreclosures, said John Drachman, co-founder of Newport Beach, California-based affordable housing developer Waterford Property Company.

“Some of these projects that were done were deals that would have gone into foreclosure anyway if they didn’t get this property tax exemption, this lifeline,” he said.

Despite the industry’s criticism of the loophole — which culminated in Freddie Mac pressing pause on quoting deals that use traveling housing finance corporations — they’re still in use.

CoStar data shows housing finance corporations in Pecos, Maverick, Pleasanton and Cameron counties participated in about 35 of these deals across Texas in the last year, Drachman said. Those four housing finance corporations have been identified as repeat offenders who’ve used the loophole.

CBS News found at least 61 multifamily properties — appraised at nearly 2.7 billion — have been removed from the tax rolls in Dallas-Fort Worth through the use of this loophole. The list includes three properties which were at one point owned by beleaguered investor Tides Equities, whose multifamily portfolio has been bleeding profusely for years.

Criticism of the loophole hasn’t prevented people from continuing to use it. As recently as April, Scott Everett’s S2 Capital recapitalized a Dallas apartment complex by partnering with an affordable housing organization in Pecos, a 13,000-person town more than 400 miles from Dallas.

Drachman has “no love lost” for investors who could feel consequences as a result of the reform bill.

“I think every one who did a traveling HFC project knew that they were doing something that wasn’t necessarily right,” he said.

House Bill 21 passed in the Texas House May 10 and the Senate on May 15. It’s now headed to Gov. Greg Abbott’s desk for his signature.