A $62.5M CMBS loan backed by a Houston apartment complex is in special servicing after losing a tax exemption, according to Morningstar Credit.

The borrower, an entity tied to Tim Bratz of Legacy Wealth Holdings and Ash Shah of Impex Capital, according to Morningstar, is on the commercial mortgage-backed securities loan backed by the 550-unit Waterford Grove Apartments in Northwest Houston. The loan was transferred to special servicing on Feb. 26 due to imminent monetary default.

The loan agreement required a housing finance corporation tax exemption to be secured for the property as of Feb. 15. But the borrower, which Bisnow was unable to identify as of the time of this writing, lost its exemption due to the passage of Texas House Bill 21, which outlawed traveling HFCs, The Real Deal reported.

HFCs and public facility corporations were intended to spur affordable housing development by allowing developers to dodge property taxes if they made some units affordable to people earning a specified percentage of the area's median income. The tax breaks have drawn criticism and allegations of misuse and have been a recent focus of Texas lawmakers and lawsuits.

The borrower had secured the Houston complex’s tax break through an HFC from Edcouch, a Texas city near the Mexican border. In addition to creating additional affordability requirements, HB 21 requires apartment landlords to partner with local organizations for properties for which they seek an HFC, according to The Real Deal.

Without a tax exemption in place, the loan agreement requires the borrower to pay down the principal to meet a debt service coverage ratio of 1.25 and a debt yield of 8.5%, but the borrower refused, according to the special servicer's comments.

“The Borrower stated it is unwilling to remit the full principal prepayment as and when due under the Loan Agreement,” the comments state.

The borrower used the $62.5M loan to refinance Waterford Grove Apartments last year after buying the property in 2021, according to The Real Deal.

The complex at 3125 Crestdale Drive was built in 1973 and renovated in 2024. The loan was underwritten with a property value of $93.5M, while the property was appraised at $48M last year.

CORRECTION, MARCH 26, 5:53 P.M. ET: An earlier version of this story misidentified the borrower. It has been updated.