Incentives for Real Estate Development: 3 Key Steps for Texas Tax Abatement

Tax abatement agreements are popular with cities and developers in Texas, and with good reason. Utilizing Chapter 312 of the Texas Tax Code, which allows taxing entities (other than school districts) to limit the property taxes they collect, tax abatements are an excellent way for cities to attract real estate developments that will improve their communities.

The tax abatement process in Texas involves three major steps: (1) the city must establish its tax abatement guidelines and criteria, usually by resolution; (2) the city must designate certain property as a reinvestment zone to be eligible for tax abatement; and (3) the city must approve and execute a tax abatement agreement with the developer. Each of those three major steps involve additional minor steps that are required by Chapter 312.

Tax Abatement Guidelines and Criteria

The first step for any Texas city wishing to enter into tax abatement agreements is to establish guidelines and criteria for those agreements. Many cities do this by resolution. The criteria itself are not specified by statute and often relate to logistical or practical issues; for example, even though tax abatement agreements may have a term of up to ten years, many cities choose to limit the term of all tax abatement agreements to five years. This can be done in the resolution establishing the guidelines and criteria.

Reinvestment Zone

Only real property located within a designated reinvestment zone may be used for a tax abatement agreement. Establishing a reinvestment zone is a multi-step process for the city:

• Acquire a metes and bounds legal description of the proposed reinvestment zone/tax abatement property.
• Publish a notice of public hearing on the proposed reinvestment zone designation in a newspaper of general circulation at least 7 days before the hearing.
• Send written notice of the public hearing to the presiding officer of other taxing units that would be affected by the proposed ordinance at least 7 days before the hearing.
• Hold a public hearing on the proposed reinvestment zone designation at least 7 days after the notice of the hearing.
• Amend and adopt an ordinance designating the reinvestment zone.

Tax Abatement Agreement

After the reinvestment zone is established, the city may negotiate, agree upon, and approve the actual tax abatement agreement, but again, certain procedures are required:

• Send written notice regarding the consideration of the municipal tax abatement agreement to the presiding officer of other taxing units that would be affected by the proposed tax abatement at least 7 days before the city council meeting. The notice must include a copy of the proposed tax abatement agreement.
• At a regularly scheduled city council meeting at least 7 days after the written notice, consider and adopt an ordinance adopting the tax abatement agreement.

The guidelines and criteria expire automatically after two years; the designation of the reinvestment zone is good for five years; the term of the tax abatement agreement must be ten years or less.

Cities should be careful in allowing for or granting variances from the established guidelines and criteria, either in a resolution, ordinance, or the tax abatement agreement itself. Texas Tax Code 312.002(c) states that tax abatement guidelines and criteria “may be amended or repealed only by a vote of three-fourths of the members of the governing body.” Therefore, any variance from the guidelines or criteria that is approved by a majority council vote – or even a 2/3 supermajority – would violate the statute.

There are a number of “hoops” cities must jump through to establish tax abatement agreements in their communities, but in many cases, they are well worth it.

Please do not rely on this article as legal advice. We can tell you what the law is, but until we know the facts of your given situation, we cannot provide legal guidance. This website is for informational purposes and not for the purposes of providing legal advice. Information about our municipal law practice can be found here.