A mathematical model for plant communities in water-limited systems is introduced and applied to a mixed woody-herbaceous community. Two feedbacks between biomass and water are found to be of crucial importance for understanding woody-herbaceous interactions: water uptake by plants' roots and increased water infiltration at vegetation patches. The former acts to increase interspecific competition while the latter favors facilitation. The net interspecific interaction is determined by the relative strength of the two feedbacks. The model is used to highlight new mechanisms of plant-interaction change by studying factors that tilt the balance between the two feedbacks. Factors addressed in this study include environmental stresses and patch dynamics of the woody species. The model is further used to study mechanisms of species-diversity change by taking into consideration tradeoffs in species traits and conditions giving rise to irregular patch patterns.