Texas Housing Law Addresses Problem but Creates Major Loopholes

Texas’ HB 21, signed by Gov. Greg Abbott (R) to crack down on sham affordable housing deals, is a solid first step in improving affordability. But its vague thresholds and potential enforcement gaps could still let developers game the system, ultimately undermining its purpose.

The law will help correct a system that allowed Wall Street-backed landlords to lock in 99-year tax breaks with precious little local oversight and even less actual affordability. And it’s a good start—but its affordability thresholds need firming up, and its enforcement mechanisms need to be tightened.

Absent revision, Texas could wind up with less bad development, but also not nearly enough good development to meet demand.

The core of the law’s affordability metric is a deceptively gameable standard: area median income, which is calculated by taking the median family income in a region and adjusting it for inflation. Developers must reserve at least 50% of units for low-income renters, but “low-income” is defined as anyone making up to 80% of AMI.

That figure can vary dramatically across Texas, where in high-income areas such as Austin, a rent keyed to 80% of AMI may look a lot like market rates elsewhere in the state. The result is that projects technically may meet the statute’s affordability requirement but offer rents that aren’t affordable to the families most in need.

AMI is a problematic metric to lean on. It is typically calculated at the regional level—often encompassing several counties—which can paper over disparities between municipalities. Gentrified or high-income areas can pull up the AMI for the entire region.

Apartments seen undergoing construction downtown on March 19, 2024, in Austin, Texas.

Photographer: Brandon Bell/Getty Images

Tying affordability to what renters can actually afford, based on prevailing wages in a small area, would be a better benchmark—something like 30% of income for a full-time minimum wage worker in a given city. This would reflect the actual calculus involved in finding a place to live.

Using AMI allows developers enough wiggle room to site projects where affordable rent will be nearly synonymous with market rates. That said, even if a developer must fudge some numbers and stretch the definition of “affordable,” there seems to be little risk of immediate consequence.

Under HB 21, audits to verify compliance appear to occur after tax exemptions have been granted, which could easily slide into years-long delays. That means developers can collect generous tax breaks upfront while putting off meaningful affordable housing construction or offerings.

While the law requires income-restricted units to match market rate finishes and amenities, enforcing that kind of architectural and design equity—short of sending roving bands of inspectors into every unit—will be difficult at best. It likely will be more symbolic than substantive and probably won’t be a major stumbling block for developers.

Perhaps most alarmingly, even if a project does fall out of compliance, developers may lose the exemption prospectively, but there is no clawback mechanism for the benefits already pocketed. These kinds of tax credit systems typically allow the government to demand repayment of credits already paid if noncompliance is found.

For example, the federal Low-Income Housing Tax Credit has a provision by which improperly paid out credits can be recaptured for a period of 15 years. This balances the provision of benefits to spur development with the risk of improperly allocating funds.

HB 21 contains no such guardrail. So what’s to stop a developer from claiming credits with full knowledge that, come inspection time, their continued eligibility will be thrown into question?

Tightening both the metric and the timeline would be a more durable fix. The state should move away from AMI and toward wage-based affordability, and move compliance audits up front.

Texas should require affordability certifications with rate plans and amenity inspections before exemptions are granted, not years after. Even a conditional exemption model, where tax breaks are slowly phased in as compliance milestones are met, would do more to ensure developer incentives and affordability outcomes are aligned.

By raising the bar for affordability without closing the door on creative or technical compliance, HB 21 lands in an unhelpful middle ground. It’s too strict for some legitimate developers to bother—they won’t plan on pocketing a few years’ worth of credits while waiting to be audited—but too porous to stop gamesmanship and manipulation.

The result could be a net reduction in housing construction, particularly in middle- and low-income areas and where building is expensive and profit margins are small. If legitimate developers see the new requirements as too onerous or unclear, or enforcement too lax, they may simply choose not to build. That would leave Texas in a precarious position where there may be fewer exploitative deals, but there also would be fewer affordable homes.

Texas’ deepening housing affordability crisis partially stems from a lack of supply. To that end, HB 21 deserves credit for confronting the issue of housing credit abuse.

But the Lone Star State shut the door on one real estate shell game and cracked a window open for a new one. If Texas wants to ensure that tax-exempt housing serves low-income residents and directly confronts the affordability crisis, it needs stronger enforcement with tighter income definitions and real-time compliance oversight.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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