Regulatory Roundup: Tax Abatements — State Lawmakers, Commercial Mortgage Alert

Lenders are reevaluating their treatment of property-tax abatements on affordable housing following rollbacks in Florida and Texas.

The move comes as a growing number of local and state policymakers have become concerned that tax-abatement programs for affordable housing aren’t providing enough of a public benefit to justify the amount of lost tax revenue.

In Texas, lawmakers once again are mulling changes to a popular tax-exemption program they reformed in 2023, after law firms and investment banks found ways around those changes.

In part, the proposals seek to address deals involving partnerships in which a housing finance corporation buys the ground beneath an apartment property and leases it back to the owner, who then commits to maintain affordability in exchange for a property-tax abatement. Legislators now want to prohibit housing finance corporations from offering tax breaks on properties outside their districts, among other changes.

In Florida, the Live Local Act, passed in 2023, provided tax abatements for new properties with more than 70 units that are affordable to tenants earning no more than 120% of the area median income. Legislators implemented several changes last February, including deputizing property appraisers to verify eligibility by collecting tenants’ tax returns, among other methods. The bill also allowed local municipalities to opt out of the program — and several did, including those in Orlando and Tampa.

Many other states and local municipalities have offered similar abatement programs for years, and some now are reconsidering their value.Lenders are taking note of the less certain future of such programs.To wit, Freddie Mac in November changed its underwriting, at least temporarily, to disallow inclusion of the tax abatement in the property’s net operating income, significantly lowering total loan proceeds. “Across the nation, local governments are looking at whether they are getting enough benefit for this forgone revenue. Everyone will be looking at that, studying it and rethinking it,” said Evan Blau, a partner and head of agency lending for law firm Cassin & Cassin.