HFC Tax Abatement in Texas: Chapter 394, HB 21, and Compliance

An HFC tax abatement in Texas is not technically an abatement at all. It is a full property tax exemption granted under Chapter 394 of the Local Government Code when a Housing Finance Corporation takes ownership of a multifamily development that agrees to keep a share of its units affordable. The entire property comes off the ad valorem tax rolls for as long as the HFC holds it and the development meets statutory conditions. House Bill 21, effective May 2025, rewrote the rules: standardized affordability tiers, a 50% rent pass-through requirement, tenant protections, and annual state-level compliance audits that begin in 2026.¹

One boundary worth stating up front. This exemption is separate from a Chapter 312 tax abatement, which only freezes value increases for up to ten years. The HFC route removes the property from taxation entirely.

The Legal Basis in Chapter 394

The Texas Housing Finance Corporations Act lets any city or county create an HFC as a public nonprofit corporation and a constituted authority of the local government.² That governmental status is the foundation of the tax break. Section 394.905 exempts the corporation, all property it owns, and income from that property from every tax imposed by the state or any political subdivision.³ The exemption lasts as long as the HFC maintains ownership and the property continues to meet the conditions in the statute.

How the Ownership Structure Works

The exemption depends on the HFC actually holding the property. In practice, the HFC or a wholly owned subsidiary takes title to the land and leases it back to a limited partnership controlled by the private developer through a long-term ground lease, often 60 years or more.⁴ The developer’s partnership handles construction, operations, and tenant management. The HFC keeps formal ownership for tax purposes and typically holds a controlling interest in the general partner. Texas courts have upheld this layered arrangement so long as the HFC retains beneficial ownership of the property.

Affordability Requirements Under HB 21

Before HB 21, income thresholds varied from one HFC agreement to another. The new law sets a statewide floor. To qualify for the exemption on a multifamily development:

At least 10% of the units must be reserved for households earning no more than 60% of the area median income.
At least 40% of the units must be reserved for households at or below 80% of AMI.
The remaining units may rent at market rate.⁵

Both limits are adjusted for family size using HUD definitions. These are minimums. An individual HFC’s regulatory agreement can tighten them, and a development also using Low-Income Housing Tax Credits must separately meet LIHTC income and rent limits. Affordability commitments get recorded in local deed records so they bind future owners for the life of the agreement.

The 50% Rent Pass-Through Rule

HB 21 added a financial accountability layer that did not exist before. The owner of an HFC-exempt development must confirm each year that at least 50% of the estimated property tax savings has been passed through to tenants as reduced rent. If the pass-through falls short, the owner has to pay the difference to each affected taxing unit on a pro rata basis.¹ The calculation compares actual rents on income-restricted units against estimated maximum market rents, so a claimed discount has to be documented.

Tenant Protections Written Into Every Lease

HB 21 requires that every lease in an HFC-exempt development include three provisions:

No denial of housing to a household solely because it uses a Section 8 or other federal rental assistance voucher.
No retaliation against a tenant for forming or participating in a tenant organization.
Nonrenewal only for substantial lease violations, failure to provide required income or eligibility information, or repeated minor violations affecting health, safety, quiet enjoyment, or property management, and only after written notice.

Properties owned by HFCs before HB 21 took effect had to incorporate these protections by January 1, 2026. New developments must include them from the start.¹

Applying for the Exemption

Because the exemption flows from the HFC’s public-entity status rather than a negotiated abatement, the developer does not file a Chapter 312 abatement application. The developer works with the HFC to structure the ownership, and the HFC files with the local appraisal district to establish that the property is publicly owned and used for a public purpose.

The filing typically needs a legal description of the land and improvements, a recorded ground lease or partnership agreement showing HFC title or beneficial ownership, a unit mix schedule proving the income tiers are met, the recorded regulatory agreement binding the property to affordability and tenant-protection terms, and a plan for verifying tenant incomes on an ongoing basis. The chief appraiser reviews the filing to confirm the structure satisfies Chapter 394 before removing the property from the tax rolls, which can take several weeks. The HFC board must also formally approve a resolution granting the exemption for the specific project. Both approvals have to be in place before the tax office adjusts the assessment.

Annual Audits and TDHCA Monitoring

HB 21 shifted ongoing oversight from local appraisal districts to the Texas Department of Housing and Community Affairs. Every HFC or HFC user claiming the exemption on a multifamily development must submit an annual compliance audit report to both TDHCA and the chief appraiser.⁵ The first reports are due by June 1, 2026, and by June 1 each year after that.⁶

The audit has to be done by an independent auditor or compliance expert with demonstrated housing-audit experience and a current Certified Occupancy Specialist certification or equivalent. The auditor cannot be affiliated with the developer or the management company, and the same individual cannot audit the same development for more than three consecutive years. The file sample has to cover at least 20% of restricted units, capped at 50 household files. The developer pays for the audit.⁷

An annual service fee is also due to TDHCA by June 1. If more time is needed, the extension request has to reach TDHCA by May 1, and no extension can push the deadline more than 120 days past June 1. One important carve-out: developments receiving LIHTC are exempt from the HB 21 monitoring requirements during the LIHTC compliance period, because those projects already undergo federal oversight.⁶

What Happens if a Property Falls Out of Compliance

When an audit finds that a development is short on affordability, rent reductions, or tenant protections, TDHCA has to notify the HFC user, the HFC, and the chief appraiser in writing within 120 days of receiving the report. The notice specifies the reasons and proposes at least one corrective action. The HFC user then has 180 days to fix the problem.¹

If it is not fixed in that window, the property loses its Section 394.905 exemption and goes back on the tax rolls. Taxing units can then assess taxes that would have been owed. On a large multifamily development, the annual cost of losing the exemption can reach hundreds of thousands of dollars.

Out-of-Jurisdiction HFC Deals

Some HFCs sponsor developments outside the boundaries of the city or county that created them. Chapter 394 already provides that the chapter does not apply to property in a municipality with more than 20,000 residents unless the governing body of that municipality approves it.⁴ HB 21 tightened this. Properties already owned by out-of-jurisdiction HFCs must obtain local government approval by December 31, 2026. Without that approval, the exemption disappears on January 1, 2027, and the property owes full ad valorem taxes the following year regardless of its affordability commitments.

Open Meetings and Public Records

HB 21 brought HFCs under the Texas Open Meetings Act and extended the Public Information Act to all HFC records.³ Board meetings must be posted and open to the public, and financial records, regulatory agreements, and audit results can be requested like the records of any other government body. For a tenant or local taxpayer who wants to check whether a development is meeting its commitments, that is a way to verify compliance without waiting for the annual TDHCA cycle.

1
Texas Legislature Online. 89(R) HB 21 – Enrolled Version – Bill Text
2
State of Texas. Local Government Code Chapter 394 – Housing Finance Corporations
3
State of Texas. Texas Local Government Code Section 394.905 – Exemption From Taxation
4
Office of the Attorney General of Texas. Request for Legal Opinion Regarding Chapter 394 of the Texas Local Government Code
5
Texas Legislature Online. 89(R) HB 21 – Introduced Version – Bill Text
6
Texas Department of Housing and Community Affairs. Housing Finance Corporation Compliance Monitoring
7
Texas Department of Housing and Community Affairs. 10 TAC Chapter 10, Subchapter J – HFC Compliance Monitoring Rule