Housing Finance Corporation Loophole Criticized in Texas

Texas’ multifamily syndicators are exploiting a loophole in one of the state’s housing programs as a way to salvage underperforming real estate projects.

With rising interest rates, flat rent growth, and sky-high property taxes making many projects unviable, housing finance corporations have become an essential tool for developers trying to turn a profit on distressed properties, The Promote reported.

Texas HFCs were designed to facilitate affordable housing, providing developers with significant tax breaks, including exemptions from property and sales taxes. This tax relief can often be the difference between a project failing or succeeding, particularly in markets where costs have soared.

The growing use of HFCs follows the closure of a similar loophole involving public facility corporations, which had been abused by developers to obtain tax exemptions in high-demand markets like Austin and Houston.

When Texas introduced the PFC program in 2015, it was intended to incentivize affordable housing development. Developers could benefit from waived property taxes if they committed to reserving a portion of their units for affordable housing. However, the program was quickly co-opted, with PFCs being used far beyond their original purpose.

State lawmakers closed the PFC loophole last year, leaving developers in search of other ways to navigate rising costs.

This is where HFCs entered the picture. Unlike PFCs, HFCs must be sponsored by a city or county and are required to join the general partner entity of a project. In exchange, developers receive a package of tax breaks.

As the real estate market in Texas became more challenging, multifamily syndicators have increasingly turned to this model to save their projects.

Like PFCs, Texas’ HFCs program has not been without controversy. Two of the most active HFCs — Garland (near Dallas) and Cameron County (which includes Brownsville) — have been involved in numerous projects across Texas, leaving questions of how much affordable housing they’ve created in their local communities.

Cameron County’s HFC went from $250,000 to $6 million in the span of six years, the county’s top elected official, Eddie Treviño, said while “grilling” HFC executives Sergio Gonzalez and Mark Yates in a meeting this summer.

“The problem is … I don’t know how much of that benefit is for the people of Cameron County,” he said.

Lawmakers are taking notice. State Sen. Paul Bettencourt, a Republican from Houston who played a key role in shutting down the PFC loophole, has already begun pushing for reforms to the HFC program when the Texas Legislature meets again in January.

— Andrew Terrell