Texas's Public Facility Corporations Case Study
“Right-Sizing” Property Tax Incentives to Increase Housing Affordability
In 2015, Texas implemented a unique multifamily tax exemption program. Facilitated under Texas Local Government Code, Texas is one of the first places to provide this form of incentive to create affordable housing and, as a result, it has had opportunities to refine the program towards ensuring it accomplishes its intended public purpose over time.
The Texas program allows Public Facilities Corporations (PFC) created by cities, counties, public housing authorities, and other public entities to utilize their tax-exempt status to incentivize and subsidize affordable housing development or preservation through the creation of public-private partnerships. These arrangements typically operate through ground leases where the PFC acts as lessor and a private developer as lessee.
In exchange for placing income and rent restrictions on not less than one-half of a property’s units, both the fee and leased entities are exempt from property and sales taxes. The private developer provides and secures all capital needed to fund the acquisition, development, and renovations.
In addition to the income and rent restrictions on at least one-half of the units, the PFC often receives additional consideration for facilitating the tax exemption; an origination fee, annual monitoring fee, a portion of cash flow, an annual payment in lieu of taxes (PILOT), and/or a percentage of the proceeds from a sale or refinancing of the property. These funds are often used by the PFC to fund other activities including, but not limited to, housing for very-low and extremely-low-income residents. Importantly, the benefit of the tax exemption is received by the lessee for the entire length of the ground lease as the PFC continues to own the property at the end of the lease term.
To ensure the property tax exemptions align with the intended public purpose of creating affordability through below-market rents, the enabling statute was amended in 2023. As amended, the statute creates different requirements for new construction, acquisition with rehabilitation, and stabilized properties without reinvestment.
The amended statute requires that developers of new multifamily communities receiving the benefit of the tax exemption reserve at least 10% of the units for households earning 60% or less of AMI and at least 40% for households earning 80% or less of AMI. More stringent requirements are placed on existing occupied properties, whether they are acquired and renovated or simply transitioned from market-rate to mixed income tenancy.
To address concerns that properties receiving the benefit of the tax exemption were already naturally affordable, the amended statute requires the partnership to obtain a third-party underwriting assessment finding that a new development would not be feasible “but for” the exemption and that an occupied property would have not less at least 60% of the property
tax savings returned to residents via reduced rents during the second to fourth years after acquisition.
Other provisions in the amended statute included requiring the local jurisdiction to approve the tax exemption, limiting the initial term of the exemption to 60 years for a new development and 30 years for a stabilized property, requiring property owners to accept housing choice vouchers for rent, and incorporating tenant protections.
Prior to June 18, 2023, the effective date of the amended statute, the Texas multifamily tax exemption was often used not only to incentivize the development of new properties but also the acquisition of stabilized properties, and tens of thousands of units were developed or acquired in partnerships with PFCs. However, the more stringent affordability requirements included in the amended statute has resulted in the incentive now being primarily utilized for new development, not the conversion of stabilized properties.
Since the effective date of the amended PFC statute, owners of and investors in existing, occupied properties have used a similar but arguably not as efficient provision in the Texas Local Government Code to secure tax exemptions for their properties. Using the legal principle of “equitable title,” Texas’ public housing authorities (PHA) and housing finance corporations (HFCs) can also facilitate tax exemptions for existing properties and new developments under the Texas Local Government Code.
Much like tax exemptions provided by PFCs that did not create significant new affordability, recent transactions facilitated by PHAs and HFCs have been subject to criticism as failing to serve a public purpose. Much like the Texas Legislature amended relevant PFC code in its 2023 session, it is currently considering amending relevant PHA and HFC code in its current session. Multifamily tax exemptions facilitated by PFCs, PHAs, HFCs, and other governmental entities have been and will likely continue to be a very efficient tool to create affordable housing opportunities for moderate, low, and, on occasion, very low-income residents.