TG - WINTER 2024 by Texas Real Estate Research Center

WINTER 2024

TEXAS REAL ESTATE RESEARCH CENTER T E X A S A & M U N I V E R S I T Y

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2024

In This Issue

Our 2024 Texas Real Estate Forecast

TEXAS A&M UNIVERSITY

Texas Real Estate Research Center COLLEGE STATION, TEXAS 77843-2115

In This Issue SPECIAL REPORT Our real estate forecast for 2024 Legislative changes Texas real estate professionals need to know New protections for consumer personal information Strategies for retaining heirloom properties How innovative communities can address the state’s growing pains

Helping Texans make the best real estate decisions since 1971

WINTER 2024

TEXAS REAL ESTATE RESEARCH CENTER T E X A S A & M U N I V E R S I T Y

T CAS RE

TEXA SR

L ESTATE FO EA

2024

In This Issue

Our 2024 Texas Real Estate Forecast

33RD OUTLOOK

TEXAS

LAND MARKETS April 4–5, 2024 • Hyatt Regency Riverwalk • San Antonio, Texas

The 33rd Annual Outlook for Texas Land Markets delivers the time-honored knowledge and trusted forecasts of legal, economic, social, and natural resource issues inﬂuencing current Texas land market dynamics.

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VOLUME 31, NUMBER 1 www.recenter.tamu.edu @recentertx TEXAS REAL ESTATE RESEARCH CENTER

2 | What’s in YOUR Data? New Texas Law Protects Consumer Personal Information Nobody needs the stress that comes with identify theft. Thankfully, an act passed by the state legislature in 2023 provides an extra level of protection for Texans. By Kerri Lewis

6 | String of Perils

SPECIAL REPORT 2024 Texas Real Estate Forecast Texas real estate decisions impact everyone, from those buying or renting homes in the state’s smallest communities to global firms looking to relocate. Informed insights from our economic research team appear in this special tear-out forecast report. By TRERC Research Team

Understanding Homeowner Insurance Forms and Coverage Limits Breaking news: Insurance is complicated. This guide to the different types of perils, policy forms, and coverage types can help you better understand your choices for property coverage and make informed decisions. By Richard Rudolph

11 | 2023 Legislative Changes What Texas Real Estate Professionals Need to Know We’ve highlighted recent legislative changes so you’ll know when the new laws take effect (but download the full report to read later, of course). By Rusty Adams

15 | Mechanic’s & Materialman’s Liens All in the Family Strategies for Retaining Heirloom-Quality Real Property Say you have a property that’s been in your family for generations, and you’d like to pass it on to your children while minimizing tax liabilities. This case study shows it can be done. By William D. Elliott Executive Director, PAMELA CANON Director of Strategic Initiatives, GARY W. MALER Research Director, DANIEL ONEY Director of Outreach Innovation, THOMAS CAWTHRA Senior Editor, BRYAN POPE Associate Editor, KAMMY BAUMANN Creative Manager, ROBERT P. BEALS II Photographer/Graphic Designer, JP BEATO III Graphic Designer, ALDEN DeMOSS Circulation Manager, RYAN PERRY Lithography, RR DONNELLEY, HOUSTON

Recent Changes to the State Lien Statutes Perhaps it’s not a complete cure for the “Working Man Blues,” but Texas lien statutes that help ensure tradesmen get paid for their work have been changed to simplify the process of perfecting liens and expand protections. By Rusty Adams

20 | On the Trail of ESG If you’re a landowner in Texas, you’ve likely heard of ESG— environmental, social, and governance—particularly in the context of carbon credits. But what exactly is it, where did it come from, and what does it mean for you? By Charles E. Gilliland

22 | Thinking Outside the Grid How Innovative Communities Can Address Growing Pains For years, communities in states like Florida and Arizona have been experimenting with new ways to address problems such as traffic congestion and overworked power grids. Is Texas learning from them? By Harold D. Hunt and Bucky Banks

28 | Practically Speaking Real Estate Questions Answered At first blush, townhomes and condominiums seem similar, but there are important differences between the two. Real estate sales transaction forms spell it out in simple terms. By Kerri Lewis and Avis Wukasch

ADVISORY COMMITTEE: Doug Jennings, Fort Worth, presiding officer; Doug Foster, San Antonio, assistant presiding officer; Troy C. Alley, Jr., Arlington; Russell Cain, Port Lavaca; Vicki Fullerton, The Woodlands; Patrick Geddes, Dallas; Besa Martin, Boerne; Rebecca “Becky” Vajdak, Temple; and Barbara Russell, Denton, ex-officio representing the Texas Real Estate Commission. TG (ISSN 1070-0234) is published quarterly by the Texas Real Estate Research Center at Texas A&M University, College Station, Texas 77843-2115. Telephone: 979-845-2031. VIEWS EXPRESSED are those of the authors and do not imply endorsement by the Texas Real Estate Research Center, Division of Research, or Texas A&M University. The Texas A&M University System serves people of all ages, regardless of socioeconomic level, race, color, sex, religion, disability, or national origin. Nothing in this publication should be construed as legal or tax advice. For specific advice, consult an attorney and/or a tax professional. PHOTOGRAPHY/ILLUSTRATIONS: Robert Beals II, p. 1 (top); Center files, pp. 1 (bottom), 2-3, 5, 9, 11, 12-13, 15, 17, 18, 20-21, 22-23, 24-25; Alden DeMoss, pp. 14 and forecast insert. LICENSEE ADDRESS CHANGE. Log on to your Texas Real Estate Commission account to change your mailing address. © 2024, Texas Real Estate Research Center. All rights reserved.

ON THE COVER: Snow blankets a house in Bryan, Texas. Sales of existing homes could stay cool for much of

WINTER 2024 to our 2024 Texas Real Estate Forecast, included in this issue. Photographed by Robert Beals II. 2024 according

LEGAL ISSUES

What’s in YOUR Data? New Texas Law Protects Consumer Personal Information Legislators recently passed the Texas Data Privacy and Security Act (TDPSA) to spell out consumers’ rights regarding their personal data. Real estate brokerage firms can share and use that data under strict new rules beginning July 1, 2024. By Kerri Lewis

n this age of social media and online transactions, sharing highly personal information is almost second nature. As anyone who’s ever been a victim of online fraud will attest, this comes with obvious risks, even when sharing with a business entity for legitimate business reasons like real estate. To address this, the state legislature passed regulations that provide an additional layer of protection for Texans. These regulations will mean changes in how real estate brokerage firms handle clients’ personal data. Unlike the European Union, which adopted the General Data Protection Regulation (GDPR) in 2018, the United States does not have a comprehensive federal law that establishes protections for privacy and security of all personal data about individuals. With the passage of the Texas Data Privacy and Security Act (TDPSA), also known as H.B. 4, Texas joins 12 other states (California, Virginia, Colorado, Connecticut, Utah, Iowa, Indiana, Tennessee, Florida, Montana, Oregon, and Delaware) enforcing regulations regarding consumer personal data. Most of the TDPSA takes effect July 1, 2024, with a required universal “opt-out” mechanism for consumers taking effect Jan. 1, 2025. TG

Controller and Processor Obligations Subchapter C of the TDPSA sets out the duties and prohibitions for controllers and processors. Any business that must comply with this new law should consult an attorney or other private data compliance specialist to assist them with compliance.

Controller’s Duties • Process personal data only for the purposes for which it has been collected and disclosed to the consumer. • Process only the minimum amount of data necessary for fulfilling the processing purpose. • Obtain explicit consent for processing sensitive data. • Provide consumers with privacy notices. • Honor consumer requests to access, correct, delete, or port their personal data. • Take reasonable measures to protect the confidentiality, integrity, and accessibility of personal data.

Processor’s Duties • Process personal data only on behalf of the controller and in accordance with the controller’s instructions. • Implement appropriate technical and organizational measures to protect personal data. • Assist the controller in complying with its obligations under the TDPSA, including responding to consumer requests and data breaches.

Controller’s Prohibitions

The Texas law uses language similar to the GDPR and other states that have recently passed privacy laws referring to “controllers” and “processors.” A “controller” is “an individual or other person that, alone or jointly with others, determines the purpose and means of processing personal data.” A “processor” processes the data on behalf of the controller.

What is Considered Personal Data? The TDPSA defines “personal data” as “information that is linked or reasonably linkable to an identified or identifiable individual.” This definition is broad and includes any information that can be used to identify a person “directly or indirectly,” including name, address, birthdate, and Social Security number. Sensitive personal data is included as well and is defined as personal data revealing racial or ethnic origin; religious beliefs; mental or physical health diagnosis; sexual orientation; citizenship or immigration status; genetic and biometric data that is processed to uniquely identify an individual; precise geolocation data (location within a radius of 1,750 feet); and personal data collected from a known child under the age of 13. WINTER 2024

• May not process personal data for a purpose that is neither reasonably necessary to nor compatible with the disclosed purpose for which the personal data are processed, as disclosed to the consumer, unless the controller obtains the consumer’s consent. • May not process personal data in violation of state and federal laws that prohibit unlawful discrimination against consumers. • May not discriminate against a consumer for exercising any of the consumer rights contained in the TDPSA. • May not process a consumer’s sensitive data without obtaining the consumer’s consent, or, in the case of processing the sensitive data of a known child, without processing that data in accordance with the Children’s Online Privacy Protection Act.

Processor’s Prohibitions • May not process personal data for their own purposes or for the purposes of any other controller. • May not subcontract the processing of personal data to another processor without the controller’s prior written consent.

The TDPSA also includes “pseudonymous data” in its definition of personal data, which is different than other states’ data privacy laws, but is contained in the EU’s GDPR. Pseudonymous data is “de-identified” data, where direct identifiers such as name or Social Security numbers are removed. If a controller or processor uses the pseudonymous data in conjunction with additional information that could reasonably link the data to an identified or identifiable individual, it is subject to TDPSA regulations.

Consumer Rights

onsumers can exercise consumer rights listed in the TDPSA at any time by submitting a request to a controller specifying the rights they want to exercise. Parents can make that request for children under 13. According to Subchapter B of the TDPSA, consumers can: (1) confirm whether a controller is processing the consumer’s personal data and access that data; (2) correct inaccuracies in the personal data, considering the nature of the data and the purposes of the processing of the data; (3) delete personal data provided by or obtained about the consumer;

(4) if the data the consumer provided to the controller are available in a digital format, obtain a copy of it in a portable and, to the extent technically feasible, readily usable format that allows the consumer to transmit the data to another controller without hindrance; or (5) opt out of the processing of the personal data for purposes of: (A) targeted advertising; (B) the sale of personal data; or (C) profiling in furtherance of a decision that produces a legal or similarly significant effect concerning the consumer. The controller must respond to a consumer request without “undue delay,” which cannot be later than 45 days after receipt of a request (subject to a 45-day extension where reasonably necessary). The controller must provide the requested information free of charge, but only two times a year per requestor.

Who Must Comply? The TDPSA applies broadly to any individual or entity collecting, storing, or handling the personal data of any resident of

How Could the TDPSA Affect Real Estate Brokerage Firms?

eal estate brokerage firms collect and process a significant amount of personal data about their clients, including names, addresses, contact information, financial information, and property details. These data are used to provide services to clients, such as marketing properties, showing homes, and negotiating contracts. The TDPSA will require real estate brokerage firms that do not qualify as a small business (see What is Considered a ‘Small Business’? pg. 5) to take steps to protect their clients’ personal data and to give consumers more control over their data. Specifically, real estate brokerage firms will need to: • provide consumers with a privacy notice that describes how they collect, use, and share personal data; • limit the collection of personal data to what is adequate, relevant, and reasonably necessary in relation to the purpose of processing as disclosed to the consumer;

• safeguard personal data from unauthorized access, disclosure, use, modification, or destruction; • obtain consent from consumers before processing their sensitive personal data, such as financial or health information; • honor consumer requests to exercise their rights under the TDPSA, such as the right to access, correct, or delete their personal data; • conduct data protection assessments for certain types of processing that pose heightened risks to consumers’ personal data; • prepare new policies and procedures encompassing the TDPSA requirements and train their agents and staff on their implementation; and • starting Jan. 1, 2025, provide consumers with a global opt-out mechanism that allows them to opt out of the sale of their personal information and targeted

advertising (this means real estate brokerage firms will not be able to sell their clients’ personal data to third-party advertisers without their clients’ consent). Here are some examples of how the TDPSA could affect a real estate brokerage firm’s day-to-day operations that a brokerage might want to include in new policies and procedures: • When listing a property, firms might need to obtain consent from the seller before sharing personal data with potential buyers or their agents. This could include information such as the seller’s name, address, phone number, and email address. • When working with buyers, firms might need to obtain consent before sharing their personal data with lenders or other third-party service providers. This could include information such as the buyer’s income, employment status, and credit history. TG

The TDPSA defines personal data as “information that is linked or reasonably linkable to an identified or identifiable individual.” This definition is broad and includes any information that can be used to identify a person “directly or indirectly,” including name, address, birthdate, and Social Security number.

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he Texas Attorney General will enforce the TDPSA. The Attorney General has the authority to investigate and prosecute violations of the law and to seek civil penalties of up to $7,500 per violation, but must give a 30-day notice of violation to a person before bringing any enforcement action. If the person cures the violation by taking all the steps identified in the TDPSA, the Attorney General will not seek further enforcement. Overall, the TDPSA is a significant new law that will have an impact on real estate brokerage firms in Texas. Brokerages should consult with an attorney who specializes in this area and take steps to comply with the TDPSA before it takes effect July 1, 2024.

In general, to be classified as a small business by the SBA, a business must be below the standard size for a business in that industry (defined by annual revenue and sometimes number of employees), not be affiliated with a larger organization, and have its principal place of business in the United States. There are different size eligibility standards depending on the industry. The North American Industry Classification System (NAICS) gives each industry a code, and the SBA has set small business size standards for each NAICS code in

Enforcement

What is Considered a ‘Small Business’?

Title 13, Chapter 1, Part 121.201 of the Electronic Code of Federal Regulations. The NAICS code for real estate brokerages is 531210. Real estate brokerages are classified as small businesses based on their annual revenue. The size standard listed for real estate brokerages under Part 121.201 is $15 million in annual revenue. So, if a brokerage makes less than $15 million in annual revenue and meets the other two criteria listed above, the brokerage can be considered a small business.

Texas or transferring that data for any consideration. Specifically, it applies to businesses that: • conduct business in Texas or produce products or services consumed by Texas residents; • process or engage in the sale of personal data; and • are not small businesses as defined by the United States Small Business Administration (SBA). The small business exemption has one caveat. Small businesses that sell sensitive personal data must get consumer consent in advance even though they are otherwise exempt from the law. Sensitive personal data is defined earlier in this article. A few other targeted exemptions carve out data for which businesses have reporting obligations under other federal law, like data subject to the Health Insurance Portability and Accountability Act (HIPAA) or the Fair Credit Reporting Act (FCRA). The law also exempts personal data processed for employment purposes.

Kerri Lewis, J.D. (kerrilewis13@gmail.com) is a research fellow with the Texas Real Estate Research Center and a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission.

INSURANCE

HO-1 POLICY COVERED PERILS

ne of the most important decisions homeowners face is selecting the appropriate amount and type of home insurance coverage. Understanding how much property insurance to purchase on the home requires knowing: • certain insurance policy terms, conditions, and definitions, some of which are not clearly stated in many insurance policies; and • being aware of claims settlement practices, which are rarely disclosed. Failure to select the appropriate amount of insurance can result in overinsuring, which is a waste of premium dollars, or under-insuring, which can lead to unpleasant surprises at the time of a loss.

Selecting the Right Policy Form The homeowner’s first challenge is selecting the policy form providing the option for types of perils or causes of loss that are insured against, as that decision controls other decisions. Broadly speaking, there are three options: • HO-1 and HO-2 are “named perils” policies in which only the ten or 16 specifically listed causes of loss are covered; • HO-3 is an “all-risk” or “open perils” policy in which all losses to the dwelling are covered unless specifically excluded, but personal property is covered for only 16 named perils; and • HO-5 is an “all-risk” policy for both the dwelling and personal property. HO-3 is the most frequently selected type of insurance, with HO-5 being second-most common and HO-2 being third. Additionally, there are four other types of forms for homeowners with specific types of residences: • HO-4, for renters, providing personal property coverage only; • HO-6, for condo owners; • HO-7, for mobile home or manufactured home owners; and WINTER 2024

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• HO-8, for owners of older homes that do not meet insurer standards for other policy forms.

Lightning Windstorms

Four Basic Types of Coverage After selecting the form, the homeowner needs to understand the four basic types of property coverage offered: • Coverage A applies to the dwelling but does not cover any land, including land the dwelling occupies. • Coverage B applies to structures at the insured premises other than the dwelling, such as a detached garage, outbuilding, fence, or the like. • Coverage C applies to personal property. • Coverage D applies to additional living expenses if the dwelling is unfit for occupation. These brief explanations of types of coverage are based on the Insurance Services Office (ISO) HO policy forms, meant to capture only the essence of the property coverage, and are subject to many restrictions, qualifications, and exclusions. Not all insurance companies use the standard ISO forms, and of those that do, some may modify or alter them. The homeowner should always refer to the policy language or consult a trusted insurance expert for a more detailed analysis of the policy language. The selection of coverage limits begins with Coverage A. Coverage B, C, and D are automatically included as a percentage of Coverage A. Generally, the limits provided for Coverage B, C, and D are 10 percent, 50 percent, and 20 percent, respectively, although higher or lower limits can be selected to tailor the coverage to the homeowner’s specific needs and in accordance with the insurance company’s underwriting and rating rules.

How Coverage Limits are Determined To make an appropriate selection of limits, the homeowner must understand the three common values placed on a

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Riots house. Homeowners’ coverage limits are based on replacement cost (also known as replacement value), depreciated value, and market value. The first valuation, replacement cost, applies to Coverage A and Coverage B. This term is not defined in the definitions section of the ISO homeowners policy but is explained in the conditions section under “Loss Settlement” (or similar language in non-ISO policy forms such as “How Losses Are Settled”). In the “Loss Settlement” clause, replacement cost is explained: “. . . we will pay the cost to repair or replace, after application of any deductible and without deduction for depreciation. . . (2) the replacement cost of that part of the building damaged with material of like kind and quality and for like use.” his quasi-definition is in accordance with the general custom and practice in the insurance industry. The term “full replacement cost” is explained later in the policy wording. HO-2, HO-3, HO-5, HO-6, and HO-7 provide replacement cost on Coverage A and B automatically, while HO-1 and HO-8 do not. The second valuation is depreciated value, commonly known as actual cash value or ACV. While some homeowners’ policies define ACV, the standard ISO policy does not. In those cases, its definition varies from state to state in accordance with statute or case law. If a homeowner’s policy issued in Texas does

not define ACV, it is roughly equated with fair market value (U.S. Fire Ins. Co. v. Stricklin, 556 S.W.2.d, 575, 582 [Tex. Civ. App. 1977]). In a small number of states, specific statutes may provide the definition. Most states use the broad evidence rule, which considers many factors in the development of the ACV. Other interpretations are used in six other states. In the section on “Loss Settlement,” losses to damaged covered property insured under Coverage C, Personal Property, are settled on the ACV basis. In the rarely used HO-1 or in the HO-8, Coverage A, the dwelling is valued at ACV. The third valuation is market value. The market value or “real estate” value of the house represents the value that a willing buyer and a willing seller agree on. For basic insurance purposes, this value is not used. However, this value may have some bearing on the selection of coverage limits and the arrangement for financing the purchase of the home. The market

value represents the purchase price of the home, but that value includes more than the replacement cost of the building. That transaction includes the land on which the home is located as well as value derived from the surrounding area, such as from quality of schools, proximity to shopping and recreational opportunities, convenience of means of transportation, scenery, and the like. The value derived from the surroundings is not covered in the homeowner’s policy, and land is specifically excluded from property coverage, hence market value is not directly used in selecting coverage limits. Occasionally, a problem may arise when arranging financing. A mortgage lender may require Coverage A limits equal to the loan amount, an amount that is essentially the market value less any down payment or deposit. For example, assume a homeowner purchases a desirable home for $600,000 and makes a down payment of $50,000. An appraisal might place the value of the

lot at $100,000 and the replacement cost of the home at $400,000. A lender might attempt to require insurance of $600,000 less the down payment, but an insurance company might not be willing to “overinsure” the home, leading to an impasse in the closing process. equired over-insurance by lenders is prohibited in Texas as well as in 38 other states (Texas Finance Code Title 3. Financial Institutions and Businesses, Subtitle E. Other Financial Businesses Chapter 180. Residential Mortgage Loan Originators.). A homeowner in Texas facing such a demand should ask the insurance agent to intercede or, in an extreme situation, involve the Texas Department of Insurance. At the time the homeowner’s policy is purchased, the homeowner should use replacement cost for Coverage A to select the appropriate level of limits. This valuation may be available from the real estate professional handling the transaction and will be available from the insurance agent.

Alternatively, a homeowner could engage an appraisal service to provide a replacement costbased valuation of the property. At each renewal, the homeowner should review coverage limits and make the appropriate upward adjustment in value to reflect inflation’s effect on building costs. Insurance companies may offer an endorsement automatically adjusting Coverage A limits upward to reflect inflation and increased costs of construction, repair, and replacement. The insurance company or insurance agent may also be of assistance in determining the effect of inflation on the home’s replacement value. Coverage C, personal property, is valued at ACV, but a homeowner may wish to insure personal property on a replacement cost basis for an additional premium.

When Valuation Issues Occur The purchasing of the insurance policy is not the only time the homeowner must be concerned about appropriate levels of limits. When an insured loss occurs, valuation issues will arise. WINTER 2024

One issue has to do with replacement cost or replacement value, as there are three additional qualifiers applying to this valuation found in the “Loss Settlement” section. The definition of replacement cost for Coverage A and Coverage B continues with “we will pay . . . but not more than the least of the following amounts: • the limit of liability under this policy that applies to the building; • the replacement cost of that part of the building damaged with material of like kind and quality and for like use; or • the necessary amount actually spent to repair or replace the damaged building.” The last qualifier is the one most likely to cause issues for a homeowner, because it limits a loss payment to the money spent. If the homeowner does not

repair or replace the damaged property and no money is spent, there is no loss payment even though there was a loss to covered property.

Roof Damage Another issue arises when the damaged property happens to be the roof. While the roof is clearly part of the dwelling, a structure covered in Coverage A and automatically subject to replacement cost, damage to it may be reimbursed at ACV. In these instances, in keeping with individual insurance company claims settlement practices, losses to a roof are valued at the replacement cost of the new roof less depreciation for age and wear, because roofs are rated according to their expected useful life, such as 15- to 20-year three-tab shingles or slate shingles rated for 50 to 100 years.

Further, some insurance carriers specifically endorse the homeowner’s policy to pay only the ACV for damage to the roof surface caused by wind or hail. The homeowner must carefully review the policy to determine if this endorsement is present or ask the insurance agent how a wind or hail loss would be settled.

When There’s Inadequate Insurance If there’s a covered loss, the insurance carrier will calculate the replacement cost of the home to determine if the insurance-to-value (ITV) clause of the policy applies. A homeowner feels the

impact of under-insuring in one of two ways. First, most insurance policies include an ITV provision requiring the homeowner to carry Coverage A limits equal to at least 80 percent of the home’s full replacement cost. According to the ISO policy form, in the “Loss Settlement” clause, “full replacement cost” does not include the “full” amount of the home, as footings, foundations, other undersurface supports, and underground ﬂies, pipes, wiring, and drains are not included in the calculation. If the homeowner fails to carry an ITV provision, a partial loss will result

To make an appropriate selection of limits, the homeowner must understand the three common values placed on a house. Homeowners’ coverage limits are based on replacement cost (also known as replacement value), depreciated value, and market value.

in a penalty imposed in the claim payment. The penalty for under-insuring is determined by the following formula: (insurance carried/insurance required at 80 percent) × loss. The deductible is then applied to the reduced loss to determine the final payment. If the 80 percent ITV provision is met, the loss payment is at 100 percent of the loss less any deductible. Second, even if the 80 percent ITV provision is met, any loss in excess of the insurance carried is not covered because the policy limit is exhausted. The homeowner will receive the policy limit from the insurance company and pay the difference out of pocket. While total losses are unlikely in nearly all situations, recent events such as wildfires, hurricanes, tornadoes, and ﬂoods demonstrate total losses are indeed possible.

Weighing Cost and Risks

hen the homeowner considers the amount of insurance to purchase, the type of insurance, and the premium charged, they should consider the axiom, “Do not risk a lot for a little.” The premiums, as high as the homeowner may think they are, are much less than an uncovered loss. Further, premiums can be included in the household budget and money set aside on a regular basis, but when an uncovered or partially covered loss occurs, that expense is an immediate and potentially significant financial hit. The recommended course of action is to purchase insurance for 100 percent of the full replacement value and to annually update the limits to avoid an unpleasant shock to the household budget. If the household budget is tight, lowering the limits to 80 percent will lessen the premium, but that savings comes at the risk of under-insuring. Understanding valuation methods helps the homeowner make an informed decision.

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Richard Rudolph, Ph.D. (famousreindeer2@yahoo.com) is a research fellow with the Texas Real Estate EL LO Research Center and has 20 years of experience in insurance brokerage and 30 years of experience in insurance and risk management consulting and education. AR SE

LEGAL ISSUES

2023 Legislative Changes What Texas Real Estate Professionals Need to Know Many of the bills passed by the 88th Texas Legislature touch on such areas as property taxes and appraisals, development and construction, local regulations, disclosure notices, and property owners’ associations. Real estate professionals need to be aware of what’s changed. Here are some highlights. By Rusty Adams

he Texas Legislature passed a number of bills in 2023 that may have a significant impact on property owners or real estate professionals. This article touches on some of the key ones but is not an exhaustive list.

Property Taxes and Appraisal SB 2 (Second Special Session): Property Tax Changes. Amends various sections of the Education Code and the Tax Code: • Increases homestead exemption on school taxes from $40,000 to $100,000. WINTER 2024

• Provides $7 billion in tax rate compression. Tax rate compression means school districts receive more money from the state, which in turn reduces tax rates imposed by the school districts. School districts, counties, and cities that have an optional percentage homestead exemption for the 2022 tax year are prohibited from reducing or repealing that exemption until 2028. • Provides a 20 percent cap on appraisal increases each year for three years on non-homestead properties with an appraised value of less than $5 million. • Expands the board of directors for appraisal districts in counties with population greater than 75,000

from three to nine directors, three of which are to be elected. • Reduces property taxes without affecting the funds available to school districts. The difference is made up in state money.

SB 1191: Late Applications for Open-Space Appraisal for Survivors. Amends Tex. Tax Code § 23.541 to allow a surviving spouse, surviving child, executor or administrator of the estate, or a fiduciary acting on behalf of the surviving spouse or surviving child to file a late application for qualified openspace appraisal on agricultural land. The provision applies if the land was appraised as agricultural land in the preceding tax year, the ownership of the land changed as a result of the death of an owner, and the application is filed not later than the delinquency date for the taxes on the land for the year in which the application is filed. Effective immediately to apply to the 2023 tax year.

SB 2091: Private Tax Sales to Abutting Landowners. Amends Tex. Tax Code §§ 33.43 and 34.02, and adds Tex. Tax Code § 34.0101 to provide that, under certain circumstances, real property seized under a tax warrant or ordered sold due to a tax foreclosure may be sold to an owner of abutting property at a private sale. Procedures are set out, including a process to be followed when there is more than one owner of abutting property. These provisions only apply to certain properties, such as property that is unusable because of its shape or size under current zoning or development ordinances, is landlocked, or is in a ﬂoodway or at risk of ﬂooding. Effective Sept. 1, 2023.

SB 1381: Homestead Exemption for Survivor. Amends Tex. Tax Code § 11.43 to allow a surviving spouse to receive the homestead exemption for an individual 65 years of age or older without applying for the exemption if the appraisal district learns of the individual’s death from any source and the surviving spouse is otherwise eligible for the exemption. Effective Jan. 1, 2024, and applies to tax years beginning on or after that date. HB 260: Appraisal of Open-Space Land in Disease or Pest Area. Amends Tex. Tax Code § 23.51 to require that in calculating net to land of open-space land located in or adjacent to a wildlife or livestock disease or pest area, the chief appraiser shall take into consideration the effect that the presence of the applicable disease or pest or the designation of the area has on the net income from the land. “Wildlife or livestock disease or pest area” means an area designated by a state agency as an area in which a disease or pest that affects wildlife or livestock exists or may exist, including a chronic wasting disease containment or surveillance zone and an area subject to a quarantine authorized by Subtitle C, Title 6, Agriculture Code. Effective Jan. 1, 2024, to apply to tax years beginning on or after that date.

HB 4077: Over 65 Homestead Exemption. Amends Tex. Tax Code § 11.43 to provide that a person who receives a residence homestead property taxation exemption in a tax year may receive the mandatory residence homestead property tax exemption for those 65 years of age or older, as well as any local option exemption for those 65 years of age or older, on the same property in the next tax year without applying for the 12 12

exemption if the person becomes 65 years of age in that next year. Effective Jan. 1, 2024, to apply to tax years beginning on or after that date.

Development and Construction HB 14: Third-Party Review. Adds Chapter 247 to the Local Government Code. In the event a regulatory authority fails to conduct a document review or development inspection in a timely manner (within 15 days after the time required by the code), the review or inspection may be conducted by a qualified third party who meets the requirements set out in the statute. Effective Sept. 1, 2023.

HB 3485: Protection for Contractors—Change Orders. Adds Tex. Prop. Code § 28.0091, allowing contractors and subcontractors to elect not to proceed with additional work until they have received a fully executed change order for the work if the value of the additional work exceeds 10 percent of the original contract amount. In the event the contractor or subcontractor elects not to proceed, he is not responsible for damages caused by not proceeding. The act amends Tex. Gov’t Code § 2251.0521 to make similar changes with respect to public contracts. Effective Sept. 1, 2023, to apply to contracts entered into on or after that date.

HB 3492: Setting of Municipal and County Fees. Adds Tex. Local Gov’t Code §§ 212.906 and 232.901. Under the act, application, review, engineering, inspection, acceptance, administrative, or other fees imposed by a municipality or county related to the acceptance, review, or processing of engineering or construction plans or for the inspection of improvements for construction of a subdivision or lot or a related improvement associated with or required in conjunction with that construction must be set by considering the actual cost to review and process the application or plan or to inspect the public infrastructure improvement. The municipality or county may not consider the cost of constructing or improving the public infrastructure for a subdivision, lot, or related property development in determining the amount of these fees. Effective Sept. 1, 2023. HB 3697: Plat Approval. Makes various changes to the Local Government Code to regulate county plat approval. Amends Tex. Loc. Gov’t Code § 232.001 to prohibit a commissioners court or the county authority responsible for approving plats from requiring an analysis, study, document, agreement, or similar requirement to be included in or as part of an application for a plat, development permit, or subdivision of land that is not explicitly required by state law. Adds Tex. Loc. Gov’t Code § 232.0022, allowing the commissioners court or the court’s designee to delegate plat approval to one or more officers or employees of the county, with a right to appeal in the applicant. Amends Tex. Loc. Gov’t Code § 232.0025 to require counties to issue a written list of all documentation and other information that must be submitted with a plat application, and to maintain the list on its website. Amends the same section to strengthen timing requirements on the approval process and provide remedies if the county fails to meet the requirements. The remedies include a partial refund TG TG

of the fee, approval of the application by operation of law, the ability of the applicant to petition the district court for a writ of mandamus, and attorney fees and court costs. Amends Tex. Loc. Gov’t Code § 232.0033 to prohibit refusal for failure to identify a corridor, as defined by Section 201.619, Transportation Code, unless the corridor is part of an agreement between the Texas Department of Transportation and the county under that section. Effective Sept. 1, 2023, to apply to plat applications submitted on or after that date. The written list required by Section 232.0025 must be adopted and published by Jan. 1, 2024.

Liability HB 73: Enhanced Landowner Liability Protection. Amends Tex. Civ. Prac. & Rem. Code § 75.006 to expand liability protection for landowners and occupiers. Owners and occupiers are protected from liability for the acts or omissions of trespassers, third parties who enter without express or implied permission and damage fences or gates, wildlife, and acts of God. The liability protection applies regardless of whether the damage occurs on or off the property. The landowner must cure any resulting defect on the land within a reasonable time. Effective Sept. 1, 2023, to apply to causes of action that accrue on or after that date.

Local Regulations HB 2127: State Preemption of Local Rules. Adds numerous sections of various codes that prohibit municipalities and counties from adopting, enforcing, or maintaining ordinances or rules inconsistent with state law. Such an ordinance or rule is void. Allows persons to bring civil suits against municipalities and counties for violations, waives governmental immunity, and allows attorney fees and court costs. The act contains other provisions and exclusions. Effective Sept. 1, 2023.

Disclosures HB 697: Changes to the Required Seller’s Disclosure. Amends Tex. Prop. Code § 5.008 to require inclusion of fuel gas piping, black iron pipe, copper, and corrugated stainless steel tubing on the required seller’s disclosure form. Effective Sept. 1, 2023, to apply to all transfers for which the parties enter into a binding contract on or after that date.

Property Owners’ Associations HB 886: Notices for Filing Property Owners’ Association Assessment Liens. Amends Tex. Prop. Code § 209.0094, involving notice procedures for filing property owners’ association assessment liens. The first notice must be given by first class mail or email. A second notice must be given by certified mail, return receipt requested, at least 30 days after the first notice. The assessment lien may not be filed until 90 days after the second notice. Effective Sept. 1, 2023, to apply only to assessments that become delinquent on or after that date. FALL 2023 WINTER 2024

HB 1193: Discrimination by Property Owners’ Association Based on Method of Payment. Adds Tex. Prop. Code § 202.024, prohibiting a property owners’ association from discriminating against a tenant based on the tenant’s method of payment (i.e., vouchers, rental assistance, or subsidies). Effective Sept. 1, 2023.

HB 614: Fine Enforcement Policy of Property Owners’ Association. Adds Tex. Prop. Code § 209.0061, requiring that a property owners’ association with authority to levy fines must adopt an enforcement policy including categories of violations and a schedule of fines for each. The policy must be provided to property owners and be made available on the association’s website. The policy may reserve the association’s authority to levy a fine from the schedule that varies on a caseby-case basis. Effective Jan. 1, 2024, and applies only to a fine that becomes due on or after that date.

Landlord/Tenant SB 1259: For Landlord’s Failure to Make Repairs, Tenants May Seek Money Judgment Up to $20,000 in Justice Court. Amends Tex. Prop. Code § 92.0563 to raise the maximum judgment amount that may be awarded by a justice court to a tenant in a suit involving a landlord’s failure to make certain required repairs after notice from the tenant. The maximum is raised from $10,000 to $20,000. Effective Sept. 1, 2023, and applies only to causes of action that accrue on or after that date.

Business Organizations SB 1514: Documents to Be Considered Company Agreement. Amends several sections of the Business Organizations Code and the Business and Commerce Code. Notably, it amends Tex. Bus. Org. Code § 101.001(1) to provide that a “Company agreement” means any agreement—written, implied, or oral—of the members concerning the affairs or the conduct of the business of a limited liability company. A company agreement of a limited liability company having only one member is not unenforceable because only one person is a party to the company agreement. A written company agreement may consist of one or more agreements, instruments, or other writings and may include or incorporate one or more schedules, supplements, or other writings providing for the conduct of the business and affairs of the limited liability company or of a series of the limited liability company. In this day and age of constant digital communication, people produce “writings” all the time. Courts may have to determine whether these writings are part of the company agreement. Effective Sept. 1, 2023. For a more in-depth look, download the Report on the 88th Texas Legislature by scanning the QR code. Nothing in this article should be considered legal advice. For advice on a specific situation, consult an attorney. Rusty Adams, J.D. (r_adams@tamu.edu) is a member of the State Bar of Texas and a research attorney for the Texas Real Estate Research Center.

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T CAS RE

TEXA SR

ESTATE F L O EA

2024

2024 Texas Real Estate Forecast 14

2024 Texas Real Estate Forecast By the TRERC Research Team

Given the Lone Star State’s powerful economic influence, real estate decision makers shape our entire economy and impact more than 30 million residents. Our forecast shines new light. Texas is a real estate trendsetter when it comes to residential, commercial, and land markets in the U.S. In fact, four Texas housing markets—DFW, Houston, Austin, and San Antonio—outranked every U.S. real estate market in 2023. Is this sustainable in 2024? That’s where our 2024 Texas Real Estate Forecast illuminates with relevant and reliable data. Not all real estate decisions are good ones, but an informed economic forecast can improve the odds. Our new forecast is intended to help Texans make better real estate decisions.

›

It draws attention to the most influential, bigpicture trends that impact individual real estate asset markets (see the macro drivers sidebar).

›

It gives our best consensus projections for those markets (see the handy color-coded risk and certainty notes).

› And it connects the dots between the macro drivers and risk projections for contingency planning across the state (see the seven principles).

To help shape this forecast, our research team adopted seven principles:

» AUDIENCE. Real estate decision makers are the audience:

financiers, developers, builders, homebuyers and sellers, business occupiers, and those who facilitate real estate transactions.

» ASSETS. For residential housing, we include single-family and

multifamily housing; for commercial spaces, we include office, industrial, and retail; and for land, we consider rural land.

» COMPARISON. We present 2024 results qualitatively and in comparison to 2023’s overall performance.

» METHOD. We use both quantitative and qualitative methods for team consensus.

» SCENARIOS. We base real estate asset forecasts on plausible scenarios.

» EVALUATION. We will regularly evaluate the forecast and revise as needed.

» VETTING. We questioned and challenged each other’s meth-

ods and results before reaching a consensus on macro driver assumptions and asset forecasts. We enlisted outside authorities to challenge assumptions and forecasts for efficacy.

The 2024 Texas Real Estate Forecast: It’s REAL ESTATE. It’s RELEVANT. It’s TEXAS.

RESIDENTIAL COMMERCIAL

Single-Family Housing 2023 Situation: There are 8.2 million single-family homes in Texas. Single-family home sales continued to plummet with final sale levels likely to fall somewhere between 320,000 and 340,000. Median home price ranged between $320,000 and $345,000 and should end the year below $340,000. Statewide single-family rents ended the year at $2,100 per month.

Deliveries

At best, average overall home price levels could remain flat or, at most, dip slightly but stay near $340,000.

Single-family rents are expected to fall, continuing their 2023 trend.

Home sales have not bottomed out, and total sales are expected to remain flat in 2024 compared to 2023, at about 330,000 units. Lower interest rates for at least part of 2024 may boost this somewhat. New sales will continue to account for a larger-than-average share of total sales—around 20 percent.

CERTAINTY

Rent

2023 Situation: The Texas office market includes almost 1.2 billion square feet of leasable space, amounting to 82 square feet per payroll worker. This inventory grew by almost 12 million square feet, or about 1 percent in 2023. Statewide rents through 2023 averaged $30.00.

Deliveries

Net Absorption

Rent

New deliveries will run at or above the 2023 level. Depending on how vigorously under-construction projects are completed, statewide inventory may increase by a net 10 million square feet, half of that by the first quarter.

Net absorption in 2024 will be negative with substantially more office space given up than leased. As a percentage of inventory, net absorption will range from minus 1 to 2 percent.

Average statewide rent across all classes will fall through 2024. December 2024 rents will be 3 to 4 percent below their 2023 end.

CERTAINTY

Key Macro Drivers The market behaviors and established macro drivers are the foundation of TRERC’s asset forecasts in 2024. Our economists and researchers believe the macro drivers listed here were the most important determining factors in this forecast. Each market— residential, commercial, and land—includes a row of icons indicating which macro drivers will most impact that market asset.

Significant risk, significant uncertainty

CERTAINTY

Office Space

Based on historical relationships and the methods used to forecast each asset, the level of certainty fluctuates across the forecast, demonstrated by our color-coded signals:

Intermediate risk, some uncertainty

Sales

Single-family deliveries will increase in 2024 relative to 2023. With almost 4 percent growth over last year, construction will match pre-COVID levels.

Asset Risk Certainty

Low risk, relative certainty

Prices

ECONOMIC OUTPUT Gross Domestic Product U.S.: 1.0% to 1.5% TX: 2.0% to 2.5%

JOBS Payroll Employment U.S.: 0.8% to 1.0% TX: 1.1% to 2.7%

INTEREST RATES Federal Reserve Fed Funds Target Range 4.5% to 5.5% 30-Year Fixed Mortgage Rate 6% to 8%

INCOME Personal Income TX: 2.7% to 3.8% (nominal)

INFLATION Consumer Price Index 2.0% to 3.0% Producer Price Index 1% to 2%

SPENDING Personal Consumption Expenditures U.S.: 2.0 to 4.0% (nominal)

ENERGY PRICES West Texas Intermediate $80 to $100, ending 2024 at $90 Henry Hub Natural Gas Prices $2.75 to $3.75, ending 2024 at $3.50

POPULATION TX Population Growth 1.0% to 2.0%

LEGAL & GEOPOLITICAL Continued political division brings risks over spending and debt policy. Risks from many global conflicts are relatively high.

2023 Situation: In Texas, new home construction hammered other U.S. markets. Dallas-Fort Worth, Houston, Austin, and San Antonio are top homebuilding markets in the United States, and are expected to continue that positive trend in 2024. TOP STATE PERMIT ISSUERS Total Housing Units

SINGLE-FAMILY BUILDING PERMITS

RESIDENTIAL COMMERCIAL

New Construction

15,000 10,000 5,000

2020

2023 NORTH CAROLINA

GEORGIA

2023 Situation: Retail markets in Texas total 1.5 billion square feet of leasable space. This amounts to 51 square feet of retail space per person in the state. A net 7.5 million square feet were added to the retail inventory. Retail rent averaged $22.18 in 2023.

Deliveries

Net Absorption

Rent

Statewide inventory will remain unchanged, with the potential for a 1 to 2 percent increase or decrease from December 2023. This will depend on the rate at which older spaces are converted and how closely new construction matches demand.

Retail net absorption as a percentage of inventory will be positive but lower in 2024 than in 2023. Total net absorption may approach ten million square feet or about 0.5 percent of inventory.

Retail rents are expected to end 2024 slightly above their December 2023 level. Up to 2 percent growth statewide is possible.

CERTAINTY

Significant risk, significant uncertainty

2022 CALIFORNIA

Retail Space

Based on historical relationships and the methods used to forecast each asset, the level of certainty fluctuates across the forecast, demonstrated by our color-coded signals:

Intermediate risk, some uncertainty

FLORIDA

Sources: U.S. Census Bureau and Texas Real Estate Research Center at Texas A&M University

Asset Risk Certainty

Low risk, relative certainty

2021 TEXAS

ECONOMIC OUTPUT Gross Domestic Product U.S.: 1.0% to 1.5% TX: 2.0% to 2.5%

JOBS Payroll Employment U.S.: 0.8% to 1.0% TX: 1.1% to 2.7%

INTEREST RATES Federal Reserve Fed Funds Target Range 4.5% to 5.5% 30-Year Fixed Mortgage Rate 6% to 8%

INCOME Personal Income TX: 2.7% to 3.8% (nominal)

INFLATION Consumer Price Index 2.0% to 3.0% Producer Price Index 1% to 2%

SPENDING Personal Consumption Expenditures U.S.: 2.0 to 4.0% (nominal)

ENERGY PRICES West Texas Intermediate $80 to $100, ending 2024 at $90 Henry Hub Natural Gas Prices $2.75 to $3.75, ending 2024 at $3.50

POPULATION TX Population Growth 1.0% to 2.0%

LEGAL & GEOPOLITICAL Continued political division brings risks over spending and debt policy. Risks from many global conflicts are relatively high.

RESIDENTIAL COMMERCIAL

Multifamily Housing 2023 Situation: The Texas apartment market has over 2.5 million units, or one apartment for every 11 residents in the state. The market delivered over 80,000 units. Average per-unit rent is above $1,400 per month.

Deliveries

CERTAINTY

Deliveries

Net Absorption

Rent

Even with macroeconomic conditions softening in 2024, deliveries will remain relatively strong. Depending on how vigorously under-construction projects are finished, total statewide inventory may increase by 1.5 to 3 percent by December 2024.

Statewide net absorption will be healthy in 2024, but at two-thirds the rate of 2023, or about 50 million square feet. This is about 2 percent of December 2023 inventory.

Statewide industrial rents will continue increasing in 2024, but the 2 to 4 percent increase will be below 2023’s pace.

CERTAINTY

Significant risk, significant uncertainty

Multifamily effective rent growth will strengthen in 2024. Growth in the largest metropolitan markets will average 2.5 percent for the year.

2023 Situation: The Texas industrial market includes 2.7 billion square feet of leasable space, averaging out to 191 square feet per payroll worker in Texas. Inventory grew by 2.8 percent, a total increase of 73 million square feet. Rents averaged $9.35 through 2023.

Based on historical relationships and the methods used to forecast each asset, the level of certainty fluctuates across the forecast, demonstrated by our color-coded signals:

Intermediate risk, some uncertainty

Apartment deliveries will be much lower in 2024 than in 2023 as the under-construction pipeline has peaked. Statewide deliveries will be 20 percent lower by year end.

Industrial Space

Asset Risk Certainty

Low risk, relative certainty

Rent

ECONOMIC OUTPUT Gross Domestic Product U.S.: 1.0% to 1.5% TX: 2.0% to 2.5%

JOBS Payroll Employment U.S.: 0.8% to 1.0% TX: 1.1% to 2.7%

INTEREST RATES Federal Reserve Fed Funds Target Range 4.5% to 5.5% 30-Year Fixed Mortgage Rate 6% to 8%

INCOME Personal Income TX: 2.7% to 3.8% (nominal)

INFLATION Consumer Price Index 2.0% to 3.0% Producer Price Index 1% to 2%

SPENDING Personal Consumption Expenditures U.S.: 2.0 to 4.0% (nominal)

ENERGY PRICES West Texas Intermediate $80 to $100, ending 2024 at $90 Henry Hub Natural Gas Prices $2.75 to $3.75, ending 2024 at $3.50

POPULATION TX Population Growth 1.0% to 2.0%

LEGAL & GEOPOLITICAL Continued political division brings risks over spending and debt policy. Risks from many global conflicts are relatively high.

Rural Land Market

LAND

2023 Situation: Roughly 142.7 million acres make up the state’s rural land market. This includes about 83 percent of all Texas land or 4.7 acres of rural land per Texan. Although rural land sales volumes fell from the heated demand in 2021 and the first half of 2022, prices continued to rise through 2023. However, declines in total dollar volume and the recent slowdown in price appreciation imply many market participants perceive prices are too high. With interest rates expected to remain high and a potential recession on the horizon, we expect the following in 2024.

Sales

Prices

Rural land sales volumes will continue to decline in 2024.

Median land price will reach a near-term peak, possibly by the end of 2023, and then decline.

CERTAINTY

Legal Outlook TRERC expects the following legal and regulatory issues from the 88th Texas legislative session to eventually have a substantial impact on real estate markets. Ultimate impact will depend on factors such as implementation and interpretation by the legal system and market participants.

ALL PROPERTY OWNERS

» SB 929 provides a process for property

COMMERCIAL OR RESIDENTIAL DEVELOPERS

» HB 3697 and HB 14

owners required to stop a nonconforming use. Owners may elect to receive certain costs plus the diminution in the market value of the property, or recoup that amount through continued nonconforming use.

change what a county may require for plat approval, allow delegation of plat approval, and strengthen timing requirements and the consequences for failure to meet them. A qualified third party may conduct document review or development inspection if a regulatory authority fails to do so within 15 days after the time required.

Why this matters: Because property owners now have this option, municipalities may change the way they address zoning issues.

Why this matters: This may streamline the approval process for developers, but it also may increase the potential for inconsistencies in plat approvals.

HOMEOWNERS

» SB 2

(Second Special Session) makes changes to the property tax system, including an increased homestead exemption and a three-year, 20 percent appraisal cap on nonhomestead properties under $5 million. Why this matters: This may enable more homeowners to stay in their homes, and it may affect the real estate market and the general Texas economy.

» HB 1526 may affect development and markets in mu-

nicipalities with population greater than 800,000 by prohibiting required dedication of parkland or fees in lieu thereof for commercial uses other than multifamily, hotel, or motel. Why this matters: This change may encourage development in some cases by reducing costs and making more land available to the developer.

» HB 2127 may eliminate some regulations by municipalities and counties.

Why this matters: It may result in easier, faster, or less expensive development.

About the Forecast The 2024 Texas Real Estate Forecast introduces an innovative approach for the Texas Real Estate Research Center at Texas A&M University (TRERC). Projections for real estate sales and lease transactions, including prices for each asset within the residential, commercial, and rural

land sectors, were made at a statewide level. 2023 summaries necessarily include an extrapolation to arrive at year-end numbers for each asset class. Projections for 2024 are relative to the 2023 baseline. Giving the most weight to macro drivers, TRERC researchers assumed these

drivers, or trends, would behave within the ranges indicated in the sidebar. Teams of TRERC researchers projected performance for each asset, with three or more researchers addressing each of the asset categories. This report reflects the consensus of those teams.

Sources for 2023 asset statistics: Single-family: Texas REALTORS® Data Relevance Project, U.S. Census Bureau American Community Survey Multifamily, office, industrial, and retail: CoStar Group Inc, www.costar.com, U.S. Census Bureau American Community Survey Rural land: Texas A&M Natural Resources Institute, Texas Farm Bureau

Daniel Oney, Ph.D.

Lynn Krebs, Ph.D.

Rusty Adams, J.D.

James Gaines, Ph.D.

Adam Perdue, Ph.D.

Joshua Roberson

Charles Gilliland, Ph.D.

Tian Su, Ph.D.

Wesley Miller

Harold Hunt, Ph.D.

Mallika Natarajan

About the Texas Real Estate Research Center The Texas Real Estate Research Center at Texas A&M University is the nation's largest publicly funded organization devoted to real estate research. Created by the state

legislature in 1971 to meet the data and knowledge sharing needs of many audiences, including the real estate industry, instructors, researchers, legislators, and the

www.recenter.tamu.edu @recentertx

public, the Center creates public content, including digital and print documents, publications, and videos that are available on the Center’s website www.recenter.tamu.edu.

LEGAL ISSUES

Mechanic’s & Materialman’s Liens Recent Changes to the State Lien Statutes

Texas law includes statutes to help ensure tradesmen get paid for their work, but perfecting liens can be complicated. The 87th Texas Legislature overhauled these statutes to simplify the process and expand those protections. By Rusty Adams

here’s more to tradesmen’s protection than hard hats and steel-toe boots. There’s the matter of payment for services rendered. That’s where Texas law comes in. It provides a mechanic’s and materialman’s lien that gives tradesmen a way to protect themselves and collect for their work. A previous article, “Lien on Me: Payment Protection for Tradesman” (scan QR code), outlined the law governing mechanic’s and materialman’s liens, but the 87th Texas Legislature made changes to that law. This article reﬂects legislative changes through 2023 but is not exhaustive.

Constitutional and Statutory Mechanic’s Liens Texas has two types of mechanic’s liens—constitutional and statutory. All Texas mechanic’s liens have their source in WINTER 2024

Article XVI, Section 37 of the state constitution, which provides for the lien and instructs the legislature to provide for its enforcement. The legislature did so by passing the mechanic’s lien statutes found in Chapter 53 of the Texas Property Code. A constitutional lien is self-executing. In other words, it requires no filing or action on the part of the contractor. However, it applies only to contractors and suppliers who have a direct contractual relationship with the property owner. A subcontractor does not have a constitutional lien. In addition to the constitutional lien, contractors, subcontractors, and suppliers have a statutory mechanic’s lien that provides more protection and applies against subsequent purchasers. Liens may be claimed by those who provide labor or materials, including specially fabricated materials, for construction or repairs to a house, building, or improvement, as well as architectural or engineering design services, surveying, landscape, dirt work, or demolition. Chapter 53 sets out the rules governing statutory liens.

Relationship Between Property Owners, Contractors, and Subcontractors The laws governing these liens vary depending on the relationship between the property owner and the contract, so it is important to understand the terms involved. The original contract is the contract made by a contractor with the owner or the owner’s agent. This is often a contract whereby the owner and general contractor agree to the terms

of the contract, and various parts of the work are performed by subcontractors. The statutes give the contractor who contracts directly with the owner or owner’s agent the title of original contractor. There can be more than one original contractor. An original contractor is any contractor who contracts with the owner or owner’s agent. Often, the original contractor has separate contracts with other subcontractors. Subcontractors may also contract with additional subcontractors, forming levels of contractors commonly referred to as tiers. Thus, the original contractor has a contract with the owner. A ﬁrst-tier subcontractor has a contract with the original contractor. A secondtier subcontractor has a contract with the first-tier subcontractor, and so on.

Subcontractor Rules

Under the new notice rules, if the deadline falls on a Saturday, Sunday, or legal holiday, the deadline is extended to the next day that is not a Saturday, Sunday, or legal holiday. Tex. Prop. Code §§ 53.003.

Preliminary Notices

riginal contractors are still not required to give preliminary notices. However, an original contractor on a residential construction contract must provide a special disclosure statement as set forth in Tex. Prop. Code § 53.255. Original contractors on residential construction projects are also required to furnish a list of all subcontractors and suppliers of materials (Tex. Prop. Code § 53.256). Claimants other than original contractors must give preliminary notices of claims for unpaid labor or materials to the owner or reputed owner and the original contractor.

The new statutes eliminate many of the differences in how the Residential rules apply to the various tiers of subcontractors, resulting in For residential construction projects, the notice must be sent more uniform (but still complex) rules. The new rules apply only if the original contract was entered no later than the 15th day of the second month after the month during which the labor or materials were provided. If the lien into on or after Jan. 1, 2022. If the original contract is entered is for specially fabricated materials, the notice must be sent into in 2021 and a subcontract is entered into in 2022, the old no later than the 15th day law applies. of the second month after Note that a residential Liens may be claimed by those who the month during which construction contract means the labor or materials were a contract between an owner provide labor or materials, including provided, or the 15th day of and a contractor for the conthe second month after the struction or repair of the ownspecially fabricated materials, for month during which the er’s residence. Construction construction or repairs to a house, undelivered materials would of a home is not a residential normally have been delivered construction project unless building, or improvement, as well as [Tex. Prop. Code § 53.056(a)]. the property is owned by the resident. Tex. Prop. Code § architectural or engineering design Nonresidential 53.001(9)-(10). services, surveying, landscape, dirt For nonresidential construcWhat is Perfection? tion projects, the notice must work, or demolition. be sent no later than the 15th To get the full protection of day of the third month after the statutory lien, the person the month during which the labor or materials were provided. claiming the lien must perfect the lien in accordance with the If the lien is for specially fabricated materials, the notice must statutes. This means the claimant must: be sent no later than the 15th day of the third month after the 1. give the appropriate preliminary notices, month during which the labor or materials were provided, or 2. make the appropriate filing, and the 15th day of the third month after the month during which 3. give notice to the property owner. the undelivered materials would normally have been delivered The Texas Legislature has amended the statutes to simplify [Tex. Prop. Code § 53.056(a)]. the process and eliminate traps for the unwary. Section 53.056 sets forth a statutory form for the notice. The Who Has a Mechanic’s Lien notice given must be in substantially the same form set out Under the new rules, a licensed architect, engineer, or surveyor in the statute to be valid [Tex. Prop. Code § 53.056(a-2)]. The notice may include an invoice or billing statement [Tex. Prop. who provides a design, drawing, plan, plat, survey, or specificaCode § 53.056(a-3)]. A claimant may give a written notice of tion has a mechanic’s lien, even if the licensed person providunpaid past-due labor or materials to the original contractor, ing the service does not have a contract with the owner. Tex. but this is not required for the lien to be valid [Tex. Prop. Code Prop. Code § 53.001, 53.021. § 53.056(a-4)].

Delivery of Notices

Notices required under Chapter 53 must be delivered to the party entitled to the notice or that party’s agent by personal delivery, certified mail, or any other form of traceable, private delivery, or mailing service that can confirm proof of receipt. Unless receipt is otherwise required, a notice sent by certified mail is considered sent when it is mailed. If the person entitled to receive the written notice actually receives the notice, the method by which it is sent is immaterial.

Payments Withheld Contractual retainage is part of a contract payment that is withheld from a progress payment and paid later, after the contract has been performed and subcontractors and materialmen are paid. A subcontractor whose contract provides for retainage must give notice under Section 53.057 for a lien for unpaid retainage to be valid. The notice must be sent to the owner or reputed owner and the original contractor no later than the 30th TG

day after the claimant’s contract is completed, terminated, or abandoned, or the 30th day after the original contract is terminated or abandoned [Tex. Prop. Code § 53.057(a)]. The notice must be substantially in the statutory form set forth in Tex. Prop. Code § 53.057(a-2) to be valid. The notice may be combined with and included in the notice set forth in Tex. Prop. Code § 53.056 [Tex. Prop. Code § 53.057(a)]. Under the new statute, “retainage” refers to contractual retainage. Statutory retainage is now called “reserved funds.”

Lien Afﬁdavits

ll lien affidavits are filed with the county clerk and must be filed in the county where the improvements are being made [Tex. Prop. Code § 53.052(e)]. An original contractor on a residential construction project must file the lien affidavit no later than the 15th day of the third month after the month in which the original contractor’s work was completed, terminated, or abandoned. For nonresidential construction projects, the affidavit must be filed no later than the 15th day of the fourth month after the month in which the original contractor’s work was completed, terminated, or abandoned [Tex. Prop. Code § 53.052(a)(2)]. A subcontractor on a residential construction project must file the affidavit no later than the 15th day of the third month after the month the claimant last provided labor or materials. For specially fabricated materials, the affidavit must be filed no later than the 15th day of the third month after the month the claimant last provided labor or materials, or the 15th day of the fourth month after the month in which the claimant would normally have been required to deliver the last of the specially fabricated materials that have not been actually delivered, whichever is later [Tex. Prop. Code § 53.052(c)]. On a nonresidential construction project, a subcontractor must file the affidavit no later than the 15th day of the fourth month after the month the claimant last provided labor or materials. For specially fabricated materials, the affidavit must WINTER 2024

be filed no later than the 15th day of the fourth month after the month the claimant last provided labor or materials, or the 15th day of the fourth month after the month in which the claimant would normally have been required to deliver the last of the specially fabricated materials that have not been actually delivered, whichever is later [Tex. Prop. Code § 53.052(b)]. A subcontractor claiming a lien for retainage must file an affidavit no later than the 15th day of the third month after the month in which the original contract was completed, terminated, or abandoned [Tex. Prop. Code § 53.052(d)]. The contents of the affidavit have not changed.

Notice of Filing of Lien Afﬁdavits The filer of an affidavit must send a copy of the affidavit to the owner or reputed owner at the owner’s last known business or residence address by the fifth day after the affidavit is filed with the county clerk. If the claimant is not an original contractor, he must also send a copy to the original contractor’s last known business or residence address within five days [Tex. Prop. Code § 53.055].

Special Rules for Homestead Property For a lien to be fixed on a homestead, the claimant and the owner must have a written contract signed by the owner and the owner’s spouse if the owner is married. The contract must be executed before the material is furnished or the labor is performed, and it must be recorded in the county where the homestead is located. The contract inures to the benefit of the subcontractors. Special notices must be included in the preliminary notice and in a lien affidavit filed against homestead property [Tex. Prop. Code § 53.254]. Nothing in TG should be considered legal advice. For advice or representation on a specific situation, readers should consult an attorney. Rusty Adams, J.D. (r_adams@tamu.edu) is a member of the State Bar of Texas and a research attorney for the Texas Real Estate Research Center.

TAXES

All in the Family Strategies for Retaining Heirloom-Quality Real Property Holding onto heirloom-quality property while minimizing estate taxes when the patriarch or matriarch dies is a tall order, but a 2011 court case shows how an estate accomplished both by creating undivided interests and using long-term leases. By William D. Elliott

eeping heirloom property (personal real property that is handed down from one generation to the next) in the family while minimizing estate taxes when the patriarch or matriarch dies is a particularly large challenge. One strategy is to use a generation-skipping trust, which could offer some relief from the estate tax as the property passes inter-generationally. Another approach—devilishly creative yet simple— involves combining long-term leases with undivided interests. But then there’s a third strategy: doing both. Such was the case in the 2011 Tax Court case Estate of Mitchell v. Commissioner, T.C. Memo 2011-94. Although the case was decided more than a decade ago, the strategies— which, when combined, might be called the “Mitchell Strategies”—have been overlooked in estate-planning literature. Consider the following facts from the case: Decedent died owning two valuable and unique real property assets—a beachfront property and a ranch. Both properties had special qualities that made them heirloom quality (i.e., properties to keep in the family for generations). The beachfront property was strategically located with a generous amount of beach frontage and

included a large residence. The ranch was large, had historical attributes, and was in a highly sought-after location. There were two residential structures on the ranch—a primary and secondary residence. There was a significant difference in how IRS and estate appraisers in Mitchell valued the ranch property. The IRS valued the property at $20 million, and the estate at $3.5 million. The estate used the income method for valuing the property, while the IRS tried a novel approach: a lease-buyout method. The Tax Court adopted the estate’s income capitalization approach. Although income capitalization methods are not typically used by residential property, the long-term leases persuaded the court to adopt this valuation method. The court agreed with the estate’s appraisal and found the fee simple absolute value for the ranch to be $13 million. Using a 3.5 percent annual appreciation rate and a discount rate of 9.5 percent for comparable properties, the Tax Court found a property value of $2 million after discounting. The beachfront property was also valued using the income approach. Applying the same factors used for the ranch property (namely, the 3.5 percent annual appreciation rate and a 9.5 percent discount rate for comparable properties) to the $14.5 million value for the fee simple estate, the ultimate value was determined to be $4.6 million after discounts. The estate plan in Mitchell involved two critical valuation strategies that, used together, yielded significant estate tax savings.

Strategy 1: Creating Undivided Interests An important factor in the Mitchell case was that the court applied an undivided ownership discount to the estate tax valuation. The decedent gave 5 percent minority interest in the TG

Discount value amount

Ranch

$14 million

$13 million

19%

35%

$2.66 million

$4.55 million

For two properties with an aggregate fee simple value of $27 million, assuming a 40 percent estate tax rate, these undivided property discounts alone yielded a value reduction of $7.21 million and an estate tax savings of $2.88 million. Hence, the power of the undivided interest discount. Sometimes the simplest strategy pays off.

Strategy 2: Long-Term Leases

William D. Elliott (bill@wdelliottlaw.com) is a research fellow with the Texas Real Estate Research Center and a Dallas tax attorney, Board Certified, Tax Law; Board Certified, Estate Planning & Probate; Texas Board of Legal Specialization; and Fellow American College of Tax Counsel.

The Basics: The Valuation Standard

aluation of real estate in federal tax matters is one of the critical planning steps to a successful business or estate plan. The basic tax rules are well known. The Federal estate tax is a tax imposed on the transfer of property from a deceased property owner. The gross estate of a deceased property owner includes the fair market value of any interest the decedent held in property. The fair market value of property reﬂects the price at which the property would change hands between a willing buyer and a willing seller, neither having any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.

Fair Market Value Determining fair market value requires judgment rather than mathematics. Even the U.S. Supreme Court observed long ago that “At best, evidence of value is largely a matter of opinion, especially as to real estate.” This statement has remained true through the years. The value of tangible property must reﬂect its highest and best use as of the valuation date. An exception is made for special valuation rules for family farms under the provisions of IRC Section 2032A. Estate tax regulations require that if a decedent’s estate contains assets that WINTER 2024

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AR SE

ong-term leases enabled the properties to be maintained and retained for future generations. The decedent did not use one single long-term lease, but a series of four five-year lease terms combined with the unilateral right of the lessee to renew the terms. The Tax Court made a critical finding when it was persuaded that the four five-year lease terms should be combined into a 20-year lease for valuation purposes. Whether or not the lessee renews any or all of the renewal terms is beside the point. The lease was treated as a 20-year lease for valuation purposes. This reduced the present value of the reversionary interest (the interest

Fee simple 100% value Undivided interest discount

Beachfront

taking effect after the initial lease term), resulting in dramatically lower tax values and, consequently, higher tax savings. For valuation purposes, the reversionary interest after the long-term lease terms is a critical component of the ultimate value conclusion. The present value of the lease payments combined with the present value of the reversionary interest results in the current property value. The longer the lease, the smaller the reversionary interest and the lower the appraised value. The structuring of the long-term leases involves many issues. In Mitchell, for example, the lease payments were specifically structured to enable the property to be maintained and the property taxes to be paid. Annual rent increases were reasonably modest. The lessees asked for and received a right to relet the property, which was important to them. They also extensively remodeled the residence on the beachfront property. In short, the leases were structured to create an incentive for the lessee to renew. The genius of the Mitchell Strategies was the long game that entailed combining two simple strategies into one larger strategy and using traditional appraisal techniques to achieve striking results. The estate tax savings were extraordinary, and the heirloom properties were kept in the family for generations to come.

properties to trusts for his two sons, allowing the decedent’s 95 percent retained, undivided interest to achieve a significant discounted value:

have marked artistic or intrinsic value totaling more than $3,000, an expert appraisal, executed under oath, must be filed with the estate tax return. The regulations also require that care be taken to ensure expert appraisers are reputable and recognized as competent to appraise the assets involved. As the subject matter expert, the real estate appraiser is the critical person in the process. If the IRS disagrees with the property owner, both parties may obtain appraisals from valuation experts. The burden of proof falls on the property owner both to prove the asset’s value and to prove that the IRS’ valuation is wrong. Most commonly, however, when valuation of property is the principal issue in the case, the dispute to be resolved by a judge becomes a battle of the experts.

Qualiﬁed Valuation Experts In this battle, the Tax Court and other courts evaluate expert testimony, considering each appraiser’s demonstrated qualifications and all other evidence in the record. When experts offer competing estimates of fair market value, courts will determine how to weigh those estimates by examining their underlying logic and the factors they considered in reaching their conclusions. Courts are free to ignore all expert opinions entirely

or partly and reach their own determination of value. Because all assets are unique, valuing property can be difficult. How judges decide a valuation varies. Many times, a court will use what it believes to be the better appraisal, though what qualities inﬂuence a judge to select one appraisal over another is one of the mysteries of the courtroom. In many instances, the court may take the middle ground and average the appraisals. A review of cases in which the estate tax valuation is the critical issue shows judges are greatly inﬂuenced by qualified valuation experts who prepare and present a well-documented appraisal and clearly explain their appraisal opinions. Most judges will carefully consider all the facts and relevant evidence and draw appropriate inferences and conclusions to determine fair market value. Trial lawyers often speak of the uncertainty of outcome in the courtroom, which is a comment directed at the fact that the judging process involves decision-making and is, therefore, somewhat unpredictable. Nevertheless, quality appraisers are an essential part of persuading a court of the fair market value of property, and their importance is indisputable.

RURAL LAND

Since the pandemic, the principles of environmental, social, and governance (ESG) have had a growing inﬂuence on corporate decisionmakers. The most visible impact for Texas landowners has been in the growing demand for use of their land for carbon sequestration. While this seems to provide lucrative opportunities for landowners, many regard the market for carbon credits as too young for this to be a viable trend. By Charles E. Gilliland

ecently, Texas landowners have been hearing about opportunities to earn income by dedicating their land to carbon sequestration, the practice of using plants to capture carbon from the atmosphere and deposit it in the soil. The general idea is that they can earn marketable carbon credits by reducing their carbon footprint. Because there is no thriving market for carbon credits, many have questioned the viability of this emerging trend. An investigation of this emerging demand for carbon sequestration elicited references to ESG, an initialism for environmental, social, and governance.

What is ESG, and How Did It Originate? Although ESG didn’t really start emerging as a factor inﬂuencing corporate decisions until after the pandemic—indeed, some

For an introduction to ESG, read “Down to Earth: Carbon Credits for Landowners,” on the Center’s website by scanning the QR code. 20

even suspected it was an attempt to politically manipulate business decisions—the concept was first introduced in 2006 by the Principles for Responsible Investment (PRI), a network of investors supported by the Global Compact of the United Nations. The network is made up of voluntary “signatories” pledging to invest in sustainable entities. It began with 75 signatories in 2006, expanded to 1,785 by 2018, and exploded to around 5,400 in 2023. Signatories consist of 737 asset owners, 4,140 investment managers, and 534 service providers. Many of these entities are well-known firms. Nearly 20 percent of signatories list the United States as their headquarters country. The UK is home to 14.3 percent; France, 7.5 percent; and Germany, 5.5 percent. Together, these countries account for nearly half of the total.

Six Principles In 2005, signatories established six principles for investors to incorporate into their investment strategies. Believing that compliance with ESG imperatives would affect investment performance in the long run, they argued that investors had a fiduciary responsibility to evaluate whether companies conformed to those principles, and to what extent. As signatories strove TG

to make ESG a cornerstone of their analyses, they drafted the following commitment: As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise (sic) that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following: • Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes. • Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. • Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest. • Principle 4: We will promote acceptance and implementation of the Principles within the investment industry. • Principle 5: We will work together to enhance our effectiveness in implementing the Principles. • Principle 6: We will each report on our activities and progress towards implementing the Principles. To encourage compliance with these principles, the PRI has developed a set of 17 “sustainable development goals.” A description of each of these goals plus a list of targets to achieve them can be viewed by scanning the QR code.

Controversies Surrounding ESG Ratings

uch ambitious development goals essentially demand that companies desiring access to capital be cognizant of the ESG process. Many enterprises have begun examining the size of their carbon footprint, and many have taken measures to reduce it to raise their ESG score (a low score suggests careless or harmful behavior related to the three criteria of environmental, social, and governance). However, the processes used by providers (the firms that evaluate companies and calculate the ratings) to assign ESG scores remain murky at best. Most models involve a staggering number of variables designed to measure aspects of each of the components. In addition, the validity of data needed to analyze those variables is often questionable. In an August 2022 working paper, ESG Ratings: A Compass Without Direction, Stanford University researchers noted that the European Securities and Market Authority regarded the market for ESG ratings to be “immature,” and that institutional investors expressed concerns ranging from inaccurate data to inexperienced analysts. Many doubted ESG quality could be effectively summarized in a single score. WINTER 2024

They identified patterns and unexplained differences in ESG ratings, noting that large companies’ average ratings were higher than smaller companies’ ratings, possibly because large companies had more resources to devote to ESG. Finally, scores for European companies average higher than U.S. companies, while emerging market firms have scores below those in developed economies. They also found low correlations in rating across providers despite stated goals of evaluating the same issues. One study they cite found that divergences among providers resulted from fundamental methodological variations across rating firms. A follow-up study found, surprisingly, that corporate disclosure of ESG information increases these variations. Another study—Does Sustainability Generate Better Financial Performance? Review, Meta-analysis, and Propositions (scan QR code), which reviewed more than 1,100 peer-reviewed papers between 2015 and 2021—concluded that results from ESG investing had been “indistinguishable from conventional investing.” Meanwhile, ESG Performance and Disclosure: A CrossCountry Analysis (scan QR code), in a regression analysis, found Bloomberg and Sustainalytics ESG scores had no statistically significant effect on returns overall. In a separate, countryfocused analysis, only the Bloomberg score produced a marginally (10 percent level) significant result, reducing returns by 0.0799 percent in the United States. The negative coefficient suggests ESG investors may pay a premium for stocks in companies with high ESG scores.

Impact on Texas Landowners Despite these results, ESG continues to impact strategies of firms focused on responsible investing, and PRI continues to support their signatories in pursuit of the 17 goals. Businesses, mindful of the large pool of capital managed by signatories, have worked to improve their ESG scores. The most visible impact for Texas landowners is in the demand for using their acreage for carbon sequestration. Reducing the carbon footprint should enhance the landowner’s ESG score, but that motivation may pale in comparison to subsidies provided by the Inﬂation Reduction Act passed in 2022. Those increased subsidies have inspired renewed activities aimed at capturing and sequestering carbon both in plots of land and in underground caverns. The latter targets industries that emit substantial amounts of carbon dioxide. Plans call for capturing it at or near the plants releasing the gas, transporting it to a disposal site, and pumping it into a sealed underground cavern where it will be permanently deposited. Owners of land situated over the cavern would receive lease payments for the storage. The Texas Gulf Coast seems to be uniquely suited to this activity. ESG investment criteria and the Inﬂation Reduction Act subsidies currently combine to drive demand for landowner contracts for carbon sequestration. Charles E. Gilliland, Ph.D. (c-gilliland@tamu.edu) is a research economist with the Texas Real Estate Research Center.

DEVELOPMENT

Thinking Outside the Grid How Innovative Communities Can Address Growing Pains

The state’s population is projected to almost double in the next 25 years, creating potential infrastructure problems that need to be addressed. The innovative principles of New Urbanism could provide solutions. By Harold D. Hunt and Bucky Banks

exas is growing, and the growing pains are evident everywhere: bumper-to-bumper rush-hour traffic even in smaller metros, loss of power for many during severe weather events, and a dwindling water supply. By 2050, the state’s population is expected to nearly double according to projections by the state demographer. In-migration

Ten principles of urbanism identified by NewUrbanism.org that can be applied to individual buildings or entire communities. 22

Walkability

to Texas from other states, responsible for almost half the state’s growth in 2022, is also expected to remain strong. Such extraordinary growth means more serious challenges for the state. No silver bullet exists to fix all the problems that lie ahead, but innovative ideas being applied to several New Urbanist developments may help address three concerns increasingly impacting many Texas communities: power grid strains and reliability, road congestion, and escalating utility costs.

What is New Urbanism? New Urbanism is a planning and development approach based on principles of how cities and towns had been built for the last several centuries, according to Congress for the New Urbanism. This includes walkable blocks and streets, housing and shopping near each other, and accessible public spaces, primarily focusing on human-scaled urban design.

Connectivity

Mixed-Use

New Urbanism principles can be applied to urban infill and revitalization, new development, or preservation projects. They can also be applied to all tiers of development in the full range of places, including rural main streets, booming suburban areas, urban neighborhoods, dense city centers, and even across entire regions. The framework for New Urbanism has been described by Dr. Dave Amos, assistant professor at Cal Poly University, as a pyramid that addresses land use, urban design, and aesthetic style. At the bottom of the pyramid is aesthetic style, which often incorporates the feel of a small town where street orientation, the placement of buildings, and the use of shading can contribute to the community’s energy efficiency. In this way, costs can be reduced while still maintaining aesthetic appeal. Urban design occupies the middle of the pyramid. This phase of development requires a larger scope, one that often falls outside the purview of developers or requires more, often costly, effort. Not all developers will approach projects from the broader perspective of establishing schools, parks, and city centers. Such a framework favors density and walkability over dependence on the automobile. By centralizing around a community hub, housing, jobs, daily needs, and other activities should all be within walking distance of each other. If available, transit stops can provide ease of access to other areas while reducing road traffic and noise. The developments also stress the importance of pedestrian infrastructure such as sidewalks, crosswalks, benches, and ample lighting. Diverse housing types enable residents from a range of economic

& Diversity

Mixed Housing

backgrounds and age groups to live within its boundaries. Businesses prioritize workforce ﬂexibility, helping foster a range of job types for residents. and-use considerations reside at the top of the pyramid. Few developers tackle complex land issues involving true mixed-use development and affordable housing, often because of the extensive time and money required to plan and implement effective affordable housing initiatives. Successful mixed-use development requires a great deal of thought and community feedback regarding the application of appropriate zoning as well. Cities grow in big blocks, and zoning controls how those blocks can develop. State and municipal codes often require streets to be wider than developers would prefer. Minimum lot sizes reduce density and often lead to higher home prices to support investor returns. All parties must share the vision for a cohesive, acceptable design to ensure its success.

Time to Power Up According to Electric Reliability Council of Texas (ERCOT) assessments, Texas’ electrical power is sufficient to accommodate the current population. However, the need for additional expansion is inevitable. If the speed of power grid development is unable to match future growth, the state could become less attractive to prospective individuals and businesses. Unexpected external events such as the February 2021 freeze have accelerated the importance of grid reliability in Texas. Providing new residential developments with their own dedicated electrical power could help protect residents from grid reliability problems, a strategy one Florida community has already put into place. Babcock Ranch, a new residential project north of Fort Myers, is designed around New Urbanism principles where 50 percent of the development’s footprint is set aside for green spaces. Homes are all built to Florida Green Building standards and include further community-wide standards for energy efficiency, conservation, and low-impact landscaping. Neighborhood

Quality Architecture & Urban Design

parks, community gardens, and expansive trails for alternative transportation provide ways for residents to connect with their neighbors and the environment. To provide reliable electricity, the community resides next to an 870-acre solar array with 650,000 individual solar panels that power Babcock Ranch during the day. The panels are owned and operated by Florida Power & Light. At night and on cloudy days, a natural gas generator provides community power. The solar array can supply electricity for up to 30,000 homes. About 5,000 residents currently reside in Babcock Ranch, although total housing units will exceed 20,000 when completed. Any excess electricity generated is fed into the electric grid to power surrounding communities. Power lines from the solar array to Babcock Ranch are all underground, shielding them from high winds. Florida had 2.5 million power outages in 2022 when Hurricane Ian struck with gusts of more than 100 miles per hour. However, Babcock Ranch residents never suffered a power loss. Jennifer Languell, who helped design Babcock Ranch, believes the storm provided proof of concept for future communities that can learn from the development’s innovations.

neighborhood in favor of scooters, bikes, and ride-sharing. A bundle of discounted mobility services for ridesharing and access to the adjacent Valley Metro transit system are included in residents’ monthly rent. ease terms require residents keep any automobiles outside a quarter-mile radius of the site. Specific areas in the community are designated for ridesharing pickup and an on-site car-sharing service for tenants traveling outside the community. The city of Tempe agreed to waive parking requirements for the development. Culdesac’s scale is modest at about 16 acres, with significantly more retail and open spaces than are typical for its size. A June 2023 survey by the National Association of Realtors showed that 78 percent of respondents would pay more for a home in a walkable community. Young adults prioritized walkability the most, with 90 percent of Gen Z and millennial respondents indicating they would pay more for such a residence. The project was funded by debt and equity from traditional real estate investors. Culdesac has shown that it’s possible to get the financing needed to create a development that is not dependent on automobiles. Time will tell, but Culdesac could be a residential development worth watching as an alternative to help address future traffic congestion.

The federal government’s Energy Star program reports that an average U.S. household spends more than $2,000 a year on total energy bills, with the largest share going toward heating and cooling expenses.

Prescription for Trafﬁc Decongestion? Traffic congestion is a growing problem for many areas of the country, not just Texas. Culdesac Tempe, a new 1,000-tenant rental property development in Tempe, Arizona, is trying something different to address it. Culdesac has banned cars in the fully walkable

Traditional Neighborhood Structure

Curbing Utility Costs Whisper Valley, located east of SH 130 in Austin, is an example of a residential development providing a holistic approach to lowering utility costs for its residents.

Increased Density

Green

When completed, the community will have 7,500 singlefamily homes along with duplexes and an area for multifamily housing that will all be zero-energy capable, meaning it will be designed to produce as much energy as it consumes if a sufficiently sized renewable energy generation system (solar panels, for example) is voluntarily added to the property at a later date. All Whisper Valley homes have some solar panels as well as smart-home products usually reserved for more expensive homes. Phase two of the development provides the additional option to add battery backup systems to protect against power outages. One of the community’s unique features is a development-wide geothermal system providing heating, cooling, and hot water to every house. The “geogrid” was installed during the infrastructure phase of the development, using geothermal loop piping where builders seamlessly connect to the system, similar to tapping a community water line. The federal government’s Energy Star program reports that an average U.S. household spends more than $2,000 a year on total energy bills, with the largest share going toward heating and cooling expenses. Homebuilders in Whisper Valley install heat pumps in place of traditional HVAC systems, reducing heating and cooling costs by more than 50 percent. Integrating geothermal technology into traditional land development reduced the infrastructure cost significantly, making the system more affordable for first-time homebuyers. The cost of the geothermal system is folded into a package put together by EcoSmart Solution, a green energy services provider that designed and delivered the geothermal infrastructure for Whisper Valley. The package reportedly costs between $20,000 and $35,000 for homebuyers, depending on home size. Buyers can purchase the technology features upfront or finance the package into their mortgage. Homeowners do get a tax break for the system. Under the Inﬂation Reduction Act of 2022, the federal tax credit for residential geothermal system installations and other specified

Transportation

Sustainability

energy efficiency improvements was increased to 30 percent, effective from Jan. 1, 2023, through 2032. EcoSmart creates a package for each ﬂoor plan, purchases the appropriate type and quantity of products from the vendor, and delivers them directly to the builder. The company also provides installation support for builders who want to offer a highperformance product but are wary of trying new technologies. Not every homeowner will want to pay extra even if it means extensive reductions in utility costs. Some may want to put the additional funds toward added square footage in a more traditional home. However, if Whisper Valley’s concept proves widely popular with buyers, more developers may choose to implement such systems to help reduce utility costs.

When Aesthetics Meet Innovation

he success of New Urbanist communities has shown that many residents prefer a natural feel along with built environments. Buildings and communities that possess such qualities should attract more buyers and retain value. Neighborhood designs devoid of natural elements tend to grow outdated sooner, which will eventually impact value. Ultimately, the decision to pursue more functional, cohesive, and pleasing communities will require a collective buy-in by residents, developers, and local governments. Other less widely known innovations, such as small modular nuclear reactors that power individual communities, and agrivoltaics, where crops are grown underneath elevated solar panels, are being tested and may find acceptance in the future. Traditional New Urbanist development and innovative new ideas could bring meaningful lifestyle enhancements for Texas residents as the state continues to grow. Harold D. Hunt, Ph.D. (hhunt@tamu.edu) is a research economist with the Texas Real Estate Research Center, and Bucky Banks (bbanks@mays.tamu. edu) is associate director and executive assistant professor for Texas A&M’s Master of Real Estate program in Mays Business School.

Quality of Life

Q. What is the difference between a residential townhome and a residential condominium? A. The primary difference between a residential townhome and a residential condominium is the ownership of the land under

the improvements. Generally speaking, in a townhome both the structure and the land underneath the structure (and perhaps a little more) convey to the buyer. With a townhome, a person owns the walls in the front and the back and shares the interior walls with their neighbors. The owner is responsible for maintenance and repair of the inside of the unit and the walls and land they own. Homeowners Association (HOA) fees will cover maintenance of common areas. With a condominium, a person generally owns the inside of the unit but not the land under the unit (although some may have a fractional common interest in the land). The owner is responsible for all maintenance inside the unit. Common areas, including all exterior and common walls, are usually the responsibility of the condo association to which the owner pays fees.

Q. Which contract do I use for a residential townhome or a residential condominium? A. The One to Four Family Residential Contract (Resale) (TREC 20-17) would be used for a townhome, along with the Addendum for Property Subject to Mandatory Membership in a Property Owners Association (TREC 36-10). The Residential Condominium Contract (TREC 30-16) would be used for the resale of a condominium. The Condominium Resale Certificate (TREC 32-4) is a good form to use to help with compliance with condominium resale requirements. Texas Realtors has contract forms for new condominiums, as well as other forms to assist members in this type of sale.

What the Law Says Condominiums have to be created in accordance with the Uniform Condominium Act, Chapter 82 of the Texas Property Code. TREC Rule §537.11(a) requires license holders to use the mandatory forms approved by the Commission for the specific type of transaction. Therefore, it is important for license holders to understand the type of property they are working with to ensure the proper form is used. TREC Rule

§535.2(a) requires brokers to notify sponsored sales agents in writing of the scope of the types of brokerage activities they are permitted to perform. Additionally, TREC Rule §535.2(i) requires a broker to ensure that their sponsored agents are competent in the areas in which they practice and provide training and coaching to a sales agent the first three times they perform a new type of brokerage activity.

For Example Sales Agent Sally has sold only single-family homes in the past. Her cousin asks her to sell her “townhome.” Sally thinks her cousin lives in a condominium, and she isn’t sure how to list the

property or what contract to use. Sally calls her broker, who immediately assigns Sally to work with Mentor Mark, an agent with a lot of experience selling condominiums, throughout this transaction.

Best Practice Brokers should consider the level of competency of an agent when setting the scope of activities they are permitted to perform. Brokers need to have policies, procedures, and training in place to ensure their sponsored agents are competent to perform brokerage activities for different types of

properties. Remember, a coaching or mentorship program is now required the first three times an agent performs a new type of brokerage activity. Agents should always reach out to their broker for help when they are going to work with a new type of property.

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Nothing in this publication should be construed as legal advice for a particular situation. For specific advice, consult an attorney. AR SE

Kerri Lewis, J.D. (kerrilewis13@gmail.com) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission (TREC). Avis Wukasch (avis@2oldchicks.com) is a broker and former TREC chair. Both are research fellows with the Texas Real Estate Research Center. TG

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