New Texas law triggers legal battle over affordable housing agreement

A legal battle is heating up over a new Texas state law that advocates say is closing the curtain on tax exemptions that developers have abused under the guise of providing affordable housing across the state.

The Texas Workforce Housing Coalition, a coalition of low-income housing providers, filed a lawsuit this month challenging the constitutionality of the law, which, advocates say, closed a loophole that outside groups used to gain 100% property tax breaks without following through on their side of the deal to provide localities with affordable housing.

The revamped law targeted out-of-town agencies, known as traveling housing finance corporations, that would partner with developers to acquire properties in other parts of the state.

The Texas Workforce Housing Coalition lawsuit argues the new law is unconstitutional because it seeks to upend contracts that developers inked, often after getting investors to pony up billions for long-term affordable housing projects based on the understanding that the project would be tax-free.

“The State of Texas lured billions of dollars worth of investments from real estate developers to build affordable housing for working-class Texans with the promise of favorable tax treatment, only to now pull the rug out from under those developers,” said Trey Cox, an attorney from Gibson Dunn & Crutcher, the firm representing the coalition. “The unconstitutional implementation of HB21 is nothing less than the breakdown of the rule of law in Texas.”

“Worse yet, the teachers, nurses, first responders, and other essential workers who currently benefit from affordable housing will be the ones hurt most as they will likely be forced to move from their homes when affordable housing units across the State begin to evaporate,” Mr. Cox said.

Supporters of the new law say bad actors were leaving localities with less property tax revenue for schools, police and hospitals, while providing little to no affordable housing.

The Texas Workforce Housing Coalition lawsuit was filed against the Bexar Central Appraisal District in San Antonio for putting a hold on a tax exemption.

A lawyer for the Bexar Central Appraisal District did not respond to a request for comment. 

However, hundreds of deals were already made under the new law, according to state Rep. Gary Gates, a Republican who spearheaded the overhaul of the affordable housing tax breaks.

“The lawsuit is nonsense,” he said. “We’ll be able to knock it back very easily.”

Gov. Greg Abbott, a Republican, signed the law in May. The law, known as HB21, takes full effect in 2027.

Mr. Gates said the problem is that developers have been abusing the system, leaving localities without more low-rent housing and with less of the property tax revenue they rely on heavily to pay for schools, roads, and police.

“These guys got greedy,” he said.

As soon as Mr. Abbott, a Republican, signed the law, real estate developers and investors predicted an enormous amount of legal pushback.

“Many people are going to argue this is unconstitutional,” Rob Beardsley, head of Lone Star Capitol, which does business in Texas, said in a company podcast shortly after the law hit the books. “People are going to simply say you can’t have a law that says one thing, and then you basically kill the law, and it is not grandfathered in.”

Mr. Beardsley, whose company portfolio does not include deals with the targeted traveling housing finance corporations, said it is a bit of a “bad look for Texas” and that could make good-faith affordable housing developers think twice about doing business there.

“It shows the world if you come to do business in Texas, we might just flip the script on you and change the game,” he said.

• This story includes wire service reports.