On May 28, 2025, Texas Governor Greg Abbott signed House Bill 21 (HB 21) into law, setting in motion sweeping changes to how affordable housing projects in Texas can access property tax exemptions. Aimed at addressing the growing concern over “traveling” Housing Finance Corporations (HFCs) that operate outside their home jurisdictions, this law imposes new restrictions and compliance obligations that developers, lenders, and local governments must now navigate. The legislation took effect immediately and will affect both current and future affordable housing projects across the state.

Local Approval Now Mandatory

Under HB 21, HFCs can no longer extend their activities outside of their founding jurisdiction without obtaining explicit approval from the local governing body. This requirement applies retroactively, meaning that any HFC currently operating outside its jurisdiction must secure such approval by January 1, 2027 to retain their tax-exempt status. Without this consent, affected properties risk losing their property tax exemptions entirely.

Stricter Affordability Thresholds

The new law significantly raises the bar for affordability standards. To qualify for a tax exemption, at least 50 percent of a project’s units must be designated for income-restricted tenants under one of two scenarios:

• 10% of units for households at 60% of area median income (AMI) and 40% for those at 80% AMI, or
  
• 10% of units for households at 50% AMI and 40% for those at 100% AMI
  

These thresholds are considerably more stringent than previous guidelines and must be verified through independent annual audits. Developers and lenders must now underwrite deals with a long-term view on maintaining these ratios to avoid compliance failures that could jeopardize the tax benefit.

Rent Reduction Requirement Introduced

A key provision of HB 21 is the new “rent reduction test.” At least 50 percent of the property tax savings granted by the exemption must either be passed on to tenants through reduced rents or refunded to the taxing authorities. This calculation is done annually, using the prior year’s figures. If a property fails to meet the required 50 percent rent reduction, the HFC user must make up the shortfall by reimbursing the local taxing entities in proportion to their share of the missed savings. While existing developments receive a temporary reprieve, they must come into full compliance within 10 years or earlier if the property is sold, refinanced, or if majority ownership changes.

Retroactive Impact on Existing Projects

One of the most significant aspects of HB 21 is its retroactive application. HFCs that already hold interests in out-of-jurisdiction properties must secure local approval by January 1, 2027. Failure to meet this deadline could result in the revocation of property tax exemptions for existing deals, posing a serious risk to project cash flows, loan covenants, and asset valuations. For lenders, this adds a new layer of underwriting complexity. They must now assess compliance not only at origination but also on an ongoing basis. Noncompliance could have ripple effects on loan performance, investor confidence, and the stability of affordable housing portfolios.

Legal Uncertainty and Pending Litigation

Multiple lawsuits have already been filed by local jurisdictions challenging the authority of HFCs to operate beyond their borders. At the center of this legal debate is whether such cross-jurisdictional activity is permitted under Chapter 394 of the Texas Local Government Code. Despite calls for a formal opinion, Texas Attorney General Ken Paxton declined to issue guidance on June 3, 2025, citing ongoing litigation. As a result, the legality of certain HFC transactions remains unresolved, further complicating the legal landscape for housing stakeholders.

Implications for Developers and Lenders

For developers, HB 21 imposes higher compliance costs, tighter project timelines, and the possibility of denied exemptions from local authorities. Projects once considered safe bets may now carry higher risk, especially those relying on out-of-jurisdiction HFC support. Lenders face underwriting challenges and risk of exemption revocation mid-loan, which could impact debt service coverage ratios and trigger defaults. Ongoing monitoring of affordability requirements and rent reduction compliance will be critical.

Local Governments Now Hold the Power

The requirement for explicit local approval gives cities and counties greater control over affordable housing projects. While this may empower local oversight, it also opens the door to potential political delays or denials, particularly in communities resistant to new affordable housing developments. This shift in authority may also result in greater variability in project viability across Texas, depending on the stance of local governments. Developers will need to invest more in building local relationships and securing community support.