In short
Texas AI data center developers can create four types of special districts (MUDs, PIDs, TIRZs, and MMDs) that issue bonds to pay for water, roads, and other infrastructure. They can also negotiate property tax abatements under Chapter 312 and performance based grants under Chapters 380 and 381. These tools often stack. In Caldwell County, the Edged Energy campus (a $7.3 billion project) uses a Chapter 312 agreement with pilot payments and two development agreements. The Goodland mixed use project layers a master district, an MMD, and a six zone TIRZ. Two critical constraints. School districts cannot participate in Chapter 312 abatements. Chapter 312 sunsets September 1, 2029. And a county property tax revenue cap can force multi billion dollar projects off the tax rolls altogether through PILOT agreements.
What special district and incentive tools can an AI data center developer use in Texas?
An AI data center developer building in Texas can tap a mix of special districts and tax agreements. The special districts are Municipal Utility Districts (MUDs), Public Improvement Districts (PIDs), Tax Increment Reinvestment Zones (TIRZs), and Municipal Management Districts (MMDs). The tax agreements are Chapter 312 property tax abatements and Chapter 380 or 381 economic development grants. Tex. Loc. Gov’t Code ch. 380, Tex. Loc. Gov’t Code ch. 381, Tex. Tax Code ch. 312
The table below shows what each district does and how it pays for improvements.
| District | What it finances | How it repays | Security | Typical AI data center use |
|---|---|---|---|---|
| MUD | Water, sewer, drainage, roads, firefighting | Unlimited property tax (ad valorem) plus bonds | First lien tax on all district property, parity with city and county taxes | Off-site water lines, road access, utility extensions |
| PID | Sidewalks, lighting, landscaping, parks, additional infrastructure | Special assessments plus assessment bonds | Lien on assessed properties, not a city obligation | On-site improvements, landscaping, dedicated roads |
| TIRZ | Public infrastructure in a designated zone | Captured property tax growth (tax increment) bonds | Future tax increment, no direct tax lien | Infrastructure in reinvestment zones, often mixed-use with data centers |
| MMD | Supplemental services (security, advertising), economic development, supplementary infrastructure | Ad valorem taxes, impact fees, bonds | District taxing power, but not city debt | Services for master-planned data center campuses, layered with TIRZ/312 |
Separately, Chapter 312 abatements let a city, county, or special district exempt up to 100% of new improvement value for up to 10 years. Tex. Tax Code ch. 312 Chapter 380 and 381 agreements let cities and counties provide loans and grants of public money to promote economic development. Tex. Loc. Gov’t Code § 380.001, Tex. Loc. Gov’t Code § 381.004, Texas Comptroller, Ch. 380/381 Economic Development Programs
How does a MUD help finance AI data center infrastructure?
A MUD, or Municipal Utility District, is a special government district created under the Texas Water Code. It can build water, sewer, drainage, and road facilities, issue tax exempt bonds to pay for them, and levy an annual property tax to repay the bonds. Tex. Water Code §§ 54.201, 54.234, 54.501, 54.503, 54.601, 26 U.S.C. § 103 The tax lien has first priority over every private mortgage and sits alongside county, city, and school district taxes. Texas Legislature MUD handout Because the tax is unlimited, MUD bonds are highly secure and carry low interest rates.
How a MUD is created
A MUD can be created either by a petition to the Texas Commission on Environmental Quality (TCEQ) or by a special act of the Texas Legislature. If the land is inside a city’s limits or its extraterritorial jurisdiction (ETJ), the city must consent. [Tex. Water Code § 54.016] The city often imposes conditions, such as approving the infrastructure plan and capping bond terms. The city bears no risk and can later annex the MUD and take over its assets and debt. Texas Legislature MUD handout
The MUD bond reimbursement cycle
The developer typically builds the infrastructure first using its own capital. After TCEQ reviews the project and confirms it meets financial feasibility rules, the MUD issues bonds. The bond proceeds then reimburse the developer. From that point on, the MUD levies property taxes on all real property in the district to service the bonds. This cycle repeats for each phase of a large campus.
TCEQ feasibility requirements
Before a MUD can issue bonds, TCEQ rules require that the financed water, sewer, and drainage facilities be complete. They also require that access streets be finished and that at least 25 percent of the projected value of improvements is complete. In addition, the projected property values must support a reasonable tax rate while keeping utility rates competitive. 30 Tex. Admin. Code § 293.59 as explained in Texas Legislature MUD handout
Forward financing innovation
Waiting for TCEQ approval and bond issuance can tie up a developer’s capital for years. Two financing programs solve this by advancing money against future MUD reimbursements. The Launch Bond and the Texas Infrastructure Program (TIP) are non recourse, tax exempt structures. They let a developer borrow early stage capital without pledging the project land. The first Launch Bond transaction closed in 2023 and the market has now raised over $1 billion. Land Advisors Organization, HousingWire Typical all-in borrowing cost for TIP financing is 7 to 11 percent.
What can a Public Improvement District (PID) do for an AI data center campus?
A PID is a district that a city or county can create to pay for specific public improvements like sidewalks, lighting, landscaping, and parking facilities. Special assessments on the benefiting properties pay for the improvements, and bonds can be issued against those assessments. Unlike MUD bonds, PID bonds are not backed by the city’s full taxing power. When structured as revenue bonds, they are payable from and secured by a lien on the assessment revenue, though the chapter also authorizes general obligation bonds backed by the city’s taxing power. Tex. Loc. Gov’t Code ch. 372
How a PID is started
A property owner or the city can initiate a PID. A petition must be signed by owners of taxable real property representing more than 50 percent of the appraised value and more than 50 percent of the record owners (or owners of more than 50 percent of the area). [Tex. Loc. Gov’t Code § 372.005] The governing body then holds a hearing and passes an ordinance.
Authorized improvements and assessment term
The law lists many eligible improvements, including water and wastewater facilities, drainage, streets, parks, mass transportation, and affordable housing. A 2025 amendment added geothermal water conveyance facilities. [Tex. Loc. Gov’t Code § 372.003] The assessment must be paid over at least five years, but in practice schedules often run 30 to 35 years. PID overview
Reimbursement bonds
If a developer builds a PID improvement with its own money and dedicates it to the city, the city can issue reimbursement bonds under Section 372.152 to repay the developer. The improvement must be in a PID created after January 1, 2005, and the city must have agreed to the reimbursement before dedication.
How does a Tax Increment Reinvestment Zone (TIRZ) work?
A TIRZ is not a separate district. It is a zone a city or county designates in an area that would not develop without public help. The government draws a boundary and records the total taxable property value inside as the base value. It then captures the property tax revenue growth above that base. That growth, called the tax increment, goes into a special fund and pays for public infrastructure within the zone. Tex. Tax Code ch. 311
Creation and participation
A city or county can create a TIRZ if it finds that development or redevelopment would not happen solely through private investment. The area must meet some blight criteria. [Tex. Tax Code § 311.003, 311.005] Each taxing unit that levies property tax in the zone can choose to contribute all or part of its increment. School districts can participate. [Tex. Tax Code § 311.013]
Planning and board
A board of directors, appointed by participating taxing units, prepares a project plan and financing plan. The financing plan must include an economic feasibility study and specify how much increment each unit will contribute. [Tex. Tax Code § 311.011] The city council must approve both plans by ordinance.
City of Houston example
Houston has more than 28 active TIRZs. In 2016, TIRZ revenue there reached $136 million, up from $30 million in 2006. Texas Law TIRF advocacy toolkit The city uses TIRZs to fund streets, drainage, and other improvements that attract development.
County limits
Texas counties face a constitutional problem when trying to pledge TIRZ revenue to secure debt. That could make county backed TIRZ bonds vulnerable to challenge. FHWA TIRZ FAQ
What is a Municipal Management District (MMD)?
An MMD is a special district that can provide supplemental services and improvements, such as security, advertising, landscaping, and economic development initiatives. Like a MUD, it can impose ad valorem taxes, impact fees, and special assessments and issue bonds. But an MMD’s debt is not the city’s debt and does not affect the city’s bonding capacity. City of Dallas MMD briefing
MMDs are created either by TCEQ under Chapter 375 of the Local Government Code or by individual statutes in the Special District Local Laws Code. Four MMDs operate in Dallas, each created by its own law. [City of Dallas MMD briefing] MMDs are explicitly eligible to be included in a TIRZ or a Chapter 312 reinvestment zone, which makes them a flexible overlay.
How do Chapter 312 property tax abatements fit in?
A Chapter 312 abatement is an agreement between a property owner and a city, county, or non-school special district to exempt part or all of the property taxes on new improvements for up to 10 years. Tex. Tax Code ch. 312 Only the increase in value from the new construction is abated. The pre-existing land value continues to be taxed. School districts are barred from participating. [Tex. Tax Code § 312.002]
How to get one
First, the taxing unit must designate a reinvestment zone after a public hearing and seven day newspaper notice. Then it must adopt guidelines that spell out eligibility and negotiate an agreement. Before approval, at least 30 days’ public notice must describe the owner, applicant, zone location, general nature of the improvements, and estimated cost. [Tex. Tax Code § 312.207(d), 312.404] Comptroller FAQ
Terms and compliance
The agreement may last up to 10 years. It must include a clawback provision requiring the owner to pay back taxes if it fails to comply, and the owner must file an annual certificate of compliance. Chapter 312 brief
Recent use
In fiscal years 2022 through 2023, Texas reported 75 new abatements, 66 of which were commercial or industrial. About 71 percent ran the full 10 year term. The combined total property value projected to be abated across all active agreements from fiscal 2022 to 2031 was nearly $101.5 billion. Comptroller Chapter 312 Executive Summary 2024
Sunset
Chapter 312 is scheduled to expire September 1, 2029. Texas Policy Foundation The Legislature may renew it, but any project relying on a long term abatement agreement should plan around that risk.
How do Chapter 380 and 381 economic development agreements work?
Chapter 380 lets a Texas city make a grant or loan of city funds to promote economic development. Chapter 381 lets a county do the same. Tex. Loc. Gov’t Code § 380.001, Tex. Loc. Gov’t Code § 381.004 For AI data centers, the grant is often calculated as a percentage of the property tax the project pays. That works like a property tax rebate. The payout only happens after the project meets performance benchmarks, so the government bears no upfront cost. Rockdale Chapter 380 program
Example from El Paso
In El Paso, the city entered a Chapter 380 agreement with Wurldwide LLC for an AI data center on over 1,000 acres. The agreement provides annual grants equal to 80 percent of the property tax revenue from the initial improvements for 15 consecutive years, with similar terms for later phases. El Paso 380 Economic Development Agreement PDF The city also signed a separate Chapter 312 abatement. The agreement required road improvements within five years, with penalties for delays.
Sales tax rebate cap
A city may also rebate sales taxes under Chapter 380. The maximum rebate is 50 percent of the sales tax collected, and the money must be used for approved infrastructure improvements. Chapter 380 guidance That helps offset the cost of building private substations and on-site roads.
How do these tools layer together on a single project?
In a typical large AI data center campus, a developer can combine multiple tools. The table below shows a typical combination.
| Layer | Tool | What it covers | Security |
|---|---|---|---|
| 1 | MUD | Water, wastewater, drainage, fire protection lines, access roads | MUD property tax (first lien) on all district property |
| 2 | Chapter 312 abatement (with city, county, or MUD) | Up to 100% abatement on the new improvements’ value for up to 10 years | Reinvestment zone designation |
| 3 | Chapter 380 or 381 grant (city or county) | Additional rebate of property tax or sales tax, performance based | No lien, cash grant after benchmarks |
| 4 | PID | On-site landscaping, lighting, sidewalks, dedicated roads | Special assessments on benefiting parcels |
| 5 | TIRZ | Captures tax increment for public infrastructure in a wider zone | Tax increment fund |
| 6 | MMD | Security, advertising, supplemental services | Ad valorem tax within the MMD |
A project can choose any combination. The Edged Energy project in Caldwell County uses at least layer 2 (Chapter 312). Caldwell County March 26, Caldwell County April 9
What real AI data center projects are using these tools?
Edged Energy, Caldwell County
In March and April 2026, Caldwell County approved a Chapter 312 tax abatement and two development agreements for an Edged Energy affiliate. The project sits on roughly 330 acres near the LCRA Timmerman Power Plant in Maxwell. Total estimated cost of improvements is $7.3 billion. Phase 1 is an 869,685 square foot building, with construction cost estimated at $2.8 billion, running from June 2026 to June 2028. Austin Business Journal, DataCenterDynamics The Chapter 312 agreement uses pilot payments (PILOT) instead of property taxes for up to 10 years.
The county’s tax roll is only $9 billion. If a $7.3 billion project landed on the tax roll at full value, the county would have to cut its tax rate so far that county income could drop by half or more. That could cause insolvency. So the Chapter 312 agreement keeps the property off the roll and replaces taxes with predictable pilot payments. [Caldwell County March 26] The county’s development agreements also mandated a closed loop server cooling system using non potable water. [Caldwell County April 9]
Prime Data Centers, Caldwell County
In March 2024, Caldwell County designated a reinvestment zone for Prime Data Centers and approved three Chapter 312 abatement agreements for a turnkey AI data center campus. Estimated improvement cost is $1.3 billion. Simultaneously, the county approved three Chapter 381 economic development agreements. Caldwell County Commissioners Court video, Special meeting agenda PDF That layering of Chapter 312 and 381 mirrors the Edged deal.
El Paso Wurldwide LLC
The City of El Paso executed a Chapter 380 agreement with Wurldwide LLC for an AI data center on 1,038.948 acres of city-owned land. The agreement provides annual grants of 80 percent of the aggregate property tax revenue from initial project improvements for 15 consecutive years, with similar terms for subsequent phases meeting investment thresholds. The city also adopted a separate Chapter 312 tax abatement agreement. El Paso Chapter 380 Economic Development Program Agreement The developer must finish certain road improvements within five years to avoid losing grant years.
Goodland Master Planned Community, Grand Prairie ETJ
The 5,000 acre Goodland MPC includes AI data centers alongside residential, retail, and industrial uses. The financing uses a master district system for water, sewer, drainage and roads, an MMD, and a six zone phased TIRZ providing up to 60 years of reimbursement. Project counsel page That structure demonstrates how a developer can use districts to finance infrastructure for a mixed-use development that includes hyperscale data centers.
Other projects
Rowan Digital Infrastructure is advancing a 300 MW AI data center campus in Temple, representing a minimum $700 million investment. Rowan Digital Infrastructure The Stargate Project, a $500 billion nationwide AI infrastructure venture, is building on 1,100 acres near Abilene and expects to create about 100 permanent jobs. ConstructConnect Data City, Texas near Laredo is a 50,000 acre self powering hyperscale campus, with Phase 1 at 300 MW and 1 million square feet, expandable to 5 GW. ConstructConnect Fermi America HyperGrid near Amarillo is a planned $300 billion AI campus with 11 GW of IT capacity. ConstructConnect
Why do counties use PILOT agreements instead of letting data centers on the tax roll?
The Texas Legislature caps the year over year growth in a county’s property tax revenue at 3.5 percent above the no new revenue rate. When a multi billion dollar AI data center is built, the total taxable value in the county can multiply overnight. To stay under the cap, the county must slash its tax rate. That can slash total county revenue, even below pre-project levels, potentially making the county insolvent. To avoid that, counties negotiate Chapter 312 agreements with PILOTs (payments in lieu of taxes) that keep the project off the tax roll and provide a steady, negotiated stream of payments. Caldwell County March 26 Caldwell County officials described this exact dilemma when approving the Edged Energy and Prime Data Centers agreements.
What are the key legal constraints and sunset risks?
School district exclusion
School districts cannot participate in Chapter 312 abatements. They were removed in 2001 when the Legislature created a separate Chapter 313 program for school district value limitations. Chapter 313 expired on December 31, 2022, and was replaced by the Jobs, Energy, Technology and Innovation Act (JETI) for new agreements. TTARA Chapter 313 and JETI presentation, Texas Comptroller JETI overview, Texas Comptroller Chapter 313 report This means that while a city and county can abate their portions of property tax, the school district portion cannot be abated under Chapter 312. The JETI program may offer an alternative for school tax relief, but that is beyond the scope of this article.
Chapter 312 sunset
Chapter 312 is set to expire September 1, 2029. Texas Policy Foundation A project that relies on a 10 year abatement signed near the sunset date risks the Legislature not renewing the chapter, which could affect future years. Developers should monitor legislative activity.
Constitutional public purpose requirement
Any grant of public funds under Chapter 380 or 381 must serve a public purpose, and the city or county must receive roughly equivalent benefit. The Texas Constitution generally forbids gifts of public money to private entities. City of Laredo Chapter 380 page So agreements must be carefully structured with performance obligations and documented returns.
County authority limits
Texas counties generally have no conventional zoning authority and cannot directly provide gas or electric utilities. Caldwell County March 26 Environmental permitting is handled by TCEQ, not the county. This means a developer must secure water, wastewater, and stormwater through a special district or private system, and must comply with TCEQ regulations.
TIRZ participation by counties
Texas Attorney General opinions have suggested that counties cannot pledge TIRZ revenue to secure debt, creating legal uncertainty for county-led TIRZ bonds. FHWA TIRZ FAQ
Key takeaways
- AI data center developers in Texas can layer MUDs, PIDs, TIRZs, MMDs, and Chapter 312 and 380 agreements to finance infrastructure and manage property tax exposure.
- MUDs provide first lien tax exempt bonds for water, sewer, drainage, and access roads, but require TCEQ approval and at least 25 percent project completion before issuance.
- The Launch Bond and TIP programs offer a way to accelerate MUD reimbursements without encumbering land.
- PIDs allow targeted improvements through special assessments, but require a property owner petition meeting the 50 percent value and owner thresholds.
- TIRZs capture tax increment for infrastructure in designated zones, and school districts can participate, but they require blight findings and planning approvals.
- Chapter 312 abatements can exempt up to 100 percent of new improvement value for 10 years, but they sunset in 2029 and exclude school districts.
- Chapter 380 and 381 agreements are performance based and can rebate a large share of property taxes (up to 80 percent in El Paso), with no upfront public cost.
- The county revenue cap makes PILOT agreements essential for mega projects that would otherwise destabilize county budgets.
- Developers should secure Chapter 312 agreements before the sunset date and monitor JETI for school district incentives.
- Every agreement must satisfy constitutional public purpose requirements, so structure them as performance-based exchanges with clear public benefits.
Frequently asked questions
Q:What is a MUD, and why do AI data centers use them?
A:A MUD is a special district that can issue tax exempt bonds to finance water, sewer, drainage, and road infrastructure. It repays the bonds by levying property taxes on all real property inside the district. AI data centers need massive water and utility infrastructure, and a MUD allows the developer to build it with bond proceeds and then pass the tax cost to the future property owners (or the data center itself) over time.
Q:How is a PID different from a MUD?
A:A MUD focuses on essential utilities like water, sewer, and drainage. A PID handles more on-site improvements like sidewalks, landscaping, lighting, and signage. A PID is funded by special assessments on the properties that benefit, not by a district wide property tax. A PID also requires a petition signed by owners of more than 50 percent of the property value and more than 50 percent of the record owners.
Q:Can a data center use a TIRZ if the land is not blighted?
A:The TIRZ statute requires the city or county to find that the area would not develop without public help and that some blight criteria are met. Even rural or greenfield sites can sometimes meet the unproductive or underdeveloped criteria. In practice, cities like Houston have been flexible when a project promises major investment and jobs. However, the area must at least meet the statutory definition.
Q:What is the maximum Chapter 312 abatement a data center can get?
A:A city, county, or special district can abate up to 100 percent of the property tax on the value added by new improvements for up to 10 years. The abatement only covers the increase in value, not the pre-existing land value. School district taxes cannot be abated under Chapter 312.
Q:What happens if the developer fails to complete the project after getting a Chapter 312 agreement?
A:Chapter 312 agreements must include a clawback clause. If the property owner fails to meet the performance benchmarks (such as completing construction or creating jobs), they must pay the abated taxes back. They also must file annual compliance certificates. Noncompliance can result in the agreement being terminated and back taxes collected.
Q:Can a project get both a Chapter 312 abatement and a Chapter 380 grant?
A:Yes. They are separate programs. A developer can get a Chapter 312 abatement from the city or county and simultaneously get a Chapter 380 (city) or 381 (county) grant, as seen in the Caldwell County and El Paso projects. The Chapter 380/381 grant often acts as an additional property tax rebate or a sales tax rebate.
Q:Why would a county rather receive PILOT payments than full property taxes?
A:Because of the 3.5 percent annual property tax revenue cap, a large project can force the county to cut its tax rate to a level that reduces overall revenue. A PILOT agreement pays a fixed amount that is not subject to the cap, giving the county predictable income without triggering the ratchet-down effect.
Q:Is Chapter 312 going away?
A:Chapter 312 currently sunsets on September 1, 2029. The Texas Legislature could extend it or replace it. A developer signing a 10 year agreement in 2026 should consider that the law may not be in force for the full term. No extension has been enacted as of May 2026.
Q:Do these special district and incentive programs work for leased AI data centers?
A:Yes. The agreements and district structures can be arranged so that the tenant (the data center operator) is responsible for the taxes or assessments, or the developer passes through the abatement benefits. The El Paso agreement, for example, was with a developer entity that will likely lease the facility. The structure depends on the specific lease terms.
Q:Are there any other Texas incentives for AI data centers besides these?
A:Texas also offers a sales tax exemption on qualifying data center equipment under Texas Tax Code Section 151.359. That exemption is separate from the property tax and economic development programs discussed here. Large users can also negotiate with utility providers for special rates, though that is not a state program.
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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.