Texas HB 21 and Legislative Risk in the Capital Stack

A 318-unit, two-property portfolio in Waco and Denton went to special servicing in April – not on rent softness or occupancy, but because a property tax exemption the loan was underwritten around failed to materialize. Per an April 24 Morningstar Credit report shared with Multifamily Dive, the failed exemption obligated the borrower to pay down principal to meet a 10.33% debt yield hurdle, and negotiations are underway to spread that paydown over time. It is at least the third Texas deal since March to enter servicing or trip cash-management provisions on the same issue.

The origin is legislative. In May 2025, Texas enacted HB 21, which overhauled how housing finance corporations grant property tax exemptions. Under the prior Chapter 394 framework, a developer partnering with an HFC and renting to low- and moderate-income tenants could receive a 100% property tax exemption; the new law targeted "traveling" HFCs claiming exemptions outside their home jurisdictions and applied retroactively to some existing agreements. In a state with some of the highest property taxes in the country, that exemption often functioned as a permanent expense reduction capitalized directly into DSCR and debt yield covenants. When it disappeared, otherwise-performing deals broke covenant.

The category of risk is what deserves attention here. This is not the familiar path into special servicing (i.e. effective-rent erosion or a failed lease-up); it is a statutory subsidy being repriced after close. Per Holland & Knight, HB 21 created "meaningful compliance risks, timeline delays and underwriting complexities" for lenders and developers, and deals that penciled on a full exemption may no longer support their original debt structures. The irony here is that a statute intended to tighten affordability compliance is, in the near term, generating distress concentrated in the workforce and affordable stock it was meant to discipline.

For underwriters, the lesson travels beyond Texas: wherever an affordability-linked tax benefit carries a material share of a deal's coverage, it is a credit assumption with legislative risk attached, not a fixed line item – and it should be sized and stressed accordingly. What I would watch over the next two years is the Texas maturity slate, where properties that no longer qualify will be testing refinance markets that now treat the exemption as conditional.

Source: More Texas properties go to servicing after tax exemption issues (Multifamily Dive)

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