State Legislature’s Attempt to Rein in Housing Finance Corporations Ignores the Texas Constitution

The Texas Constitution is explicit: lawmakers cannot retroactively impair contracts or strip away legal rights. Yet that is exactly what the Texas state legislature has been accused of in the lawsuit filed just yesterday by the Texas Workforce Housing Coalition against the Bexar Appraisal District. The lawsuit alleges the legislature rewrote the rules for housing finance corporations (HFCs), the local entities that help finance affordable housing. By rolling back property tax exemptions codified in the Texas Housing Finance Act of 1979 that have helped make such developments possible, the state has triggered a constitutional challenge and – as the lawsuit contends – raised the specter of mass evictions for teachers, nurses, first responders, and others who already struggle to afford to live in the communities they serve.

To fully appreciate the stakes of this legal battle, it’s important to understand what HFCs are and how they function. Established by municipalities to spur private investment in affordable housing, HFCs typically acquire property and extend ad valorem tax exemptions to developers who agree to serve income-restricted tenants. But as the program has grown, so too have its critics. They have recently targeted so-called “traveling” HFCs—those that partner on developments outside their home jurisdictions— with new legislation known as HB 21, arguing that these cross-boundary projects dilute local control and extend tax benefits beyond the communities that granted them.

Supporters of HB 21 claim their changes merely close an unintended loophole that allowed the proliferation of traveling HFCs. But cross-jurisdictional HFCs are not a loophole at all—they were explicitly authorized by the 1979 Texas Housing Finance Act, which empowered HFCs to operate “within and outside the jurisdiction” of their municipalities under the supervision of the Texas Department of Housing and Community Affairs. The possibility of traveling HFCs was anticipated from the beginning, and the contracts they entered into with private developers rest on firm legal footing. To now suggest that they have been operating beyond their remit is arguably disingenuous and most assuredly misguided.

What makes HB 21 especially problematic is its retroactive reach. By imposing new geographical restrictions, the law attempts to nullify longstanding agreements and terminate ad valorem tax exemptions that were legally granted—sometimes years after affordable housing projects have already been completed and occupied. This retroactive claw back does more than rewrite policy; it shreds valid contracts between HFCs and private businesses, a move that is plainly unconstitutional. The active lawsuit aims to seek a ruling from the Court that HB21 directly violates the Texas Constitution and that legally, Old Chapter 394 allowed “traveling HFCs”.

Article I, Section 16 of the Texas Constitution clearly states that retroactive laws “impairing the obligation of contracts” are prohibited. Yet the new law would do just this by impairing loan agreements, regulatory agreements, ground leases, and operating contracts between developers and HFCs. The business model that enabled these partnerships is being upended, jeopardizing both private investment and housing supply at a time when Texas is already faced with a housing shortage.

Building affordable housing has never been easy. Municipalities are reluctant to issue bonds, while private developers face tight margins and escalating construction costs. Tax exemptions are the necessary bridge that makes these projects feasible. Eliminating them after the fact adds crippling uncertainty to an already difficult market and have negative impacts at several levels.

 Municipalities will not be able to sustain quality public services if the people that provide them cannot afford to live where they work. At the state level, unraveling valid tax exemptions risks damaging Texas’s reputation as a reliable place to do business. Investors, meanwhile, will think twice before partnering with a government willing to rewrite contracts retroactively.

To make matters worse, some appraisal districts, emboldened by the Legislature’s actions, have begun revoking exemptions on developments that should remain valid under the new statute. This directly contradicts HB 21, which delays the loss of exemptions for out-of-jurisdiction projects until January 1, 2027. But if state leaders can play loose with the constitution, it is no surprise that local officials might play loose with the law as well.

None of this is to say that concerns that HFCs may not be delivering the promised relief for income-restricted tenants or lack transparency as non-profit corporations outside of the political hierarchy of a municipality do not merit consideration. But voiding legal agreements that until the recently changes fully complied with state law is an illegitimate and destructive response that ignores constitutional protections while sabotaging the very tools designed to expand affordable housing.

HB 21 is a piece of legislation that places a higher priority on legislative oversight than on the previous local and contractual arrangements. By undermining the contracts that make affordable housing possible, the legislature risks displacing families, weakening public services, and eroding Texas’s reputation as a state where business and law are taken seriously. The courts should strike down its retroactive provisions before the damage becomes permanent.

 

Charles B. Meyer is a frequent legal commentator on Texas and Federal matters involving contracts, real property, trade secrets, and trends in the state and federal Constitutional law. He is well known for advocating legal reforms to reduce unnecessary burdens on businesses, small and large. He is a member of the Texas Bar, a registered patent attorney, and a certified information privacy professional. He is the principal attorney at the Law Firm of Chuck Meyer, PLLC, in The Woodlands, Texas, where his practice includes property law, state and federal administrative law, intellectual property, software law and the laws applicable to Generative AI and other disruptive technologies.