Page 1

APRIL 2013 ™

JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY


NON-PROFIT ORG. U.S. POSTAGE PAID DALLAS, TEXAS PERMIT No. 70 COLLEGE STATION, TEXAS 77843-2115

In This Issue Texas Exports Dollar Stores Housing Supply Flexibility West Texas Mineral Law Home Office Deduction Managing Texas’ Growth Property Tax vs. Sales Tax


APRIL 2013 ™

JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY


iii

TIERRA GRANDE


Visit us online at

recenter.tamu.edu

APRIL 2013

VOLUME 20, NUMBER 2 ™

TIERRA GRANDE JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

14 Mineral Law West of the Pecos

Director, GARY W. MALER Chief Economist, MARK G. DOTZOUR

Figuring out who owns mineral rights in Far West Texas is tough. It requires, among other things, a history lesson, some seriously weighty reading of old laws and interpretations of what constitutes a mineral. Even attorneys are left scratching their heads.

Senior Editor, DAVID S. JONES Managing Editor, NANCY MCQUISTION Associate Editor, BRYAN POPE Assistant Editor, KAMMY BAUMANN Art Director, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III

BY JUDON FAMBROUGH

Circulation Manager, MARK BAUMANN Lithography, RR DONNELLEY, HOUSTON ADVISORY COMMITTEE: Mario A. Arriaga, Spring, chairman; Kimberly Shambley, Dallas, vice chairman; James Michael Boyd, Houston; Russell Cain, Port Lavaca; Jacquelyn K. Hawkins, Austin; Joe Bob McCartt, Amarillo; Kathleen McKenzie Owen, Pipe Creek; Ronald C. Wakefield, San Antonio; and Avis Wukasch, senting the Texas Georgetown, ex-officio repre­ Real Estate Commission. TIERRA GRANDE™ (ISSN 1070-0234) is published quarterly by the Real Estate Center at Texas A&M University, College Station, Texas 77843-2115. Telephone: 979-845-2031. SUBSCRIPTIONS free to Texas real estate licen­ sees. Other subscribers, $20 per year. Subscribe online at http://recenter.tamu.edu/store VIEWS EXPRESSED are those of the authors and do not imply endorsement by the Real Estate Center, Mays Business School 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. PHOTOGRAPHY/ILLUSTRATIONS: Harold Hunt, pp. 1, 14–15, 16–17, 18–19; JP Beato III, pp. 2–3, 6, 8–9, 10, 12; Robert Beals II, pp. 4, 21; Real Estate Center files, pp. 22, 25, 26. © 2013, Real Estate Center. All rights reserved.

2 All My Exports Come

From Texas

Texas is a major player in the export game. It ranks first among the states in exported goods and 55th in the world. That translates into income and jobs that strengthen the state’s economy.

20 Home Work Tax Perk

Enjoy the home office deduction, but remember, the kids can’t be Skyping with their friends or watching Spongebob Squarepants in there. And that’s just a couple of many “can’ts.” BY JERROLD J. STERN

BY LUIS TORRES

8 Come Back to the Five

and Dime

Blink and you’re likely to miss a new dollar store opening in your neighborhood. In tiny towns and gigantic cities alike, they’re popping up like bluebonnets after an early spring rain.

22 Crowd Control

Planning for Texas Population Growth Growth management comes in a number of styles. Which is best? With Texas’ population increasing exponentially, any of them are better than not planning at all. BY JAMES P. GAINES AND HAROLD D. HUNT

BY MARK G. DOTZOUR, DANIEL PARULIAN AND MICHAEL STEWART

ON THE COVER Spring’s wildflower meadow in DeWitt County.

PHOTOGRAPHER Laurence Parent

26 In Defense of the

12 Home Stretch

Property Tax

Housing Supply Flexibility Texas’ housing supply flexibility kept home prices here from skyrocketing in the boom years. That’s why Texas avoided the heartbreak of a housing bubble. And that’s why housing supply flexibility is a good thing.

Property tax haters, be careful what you wish for. Replacing that tax with an expanded sales tax may not provide the much-longed-for relief you’re seeking. BY CHARLES E. GILLILAND, DAVID ADAME AND MICHAEL OBERRENDER

BY ALI ANARI APRIL 2013

1


Texas Economy

Texas exports more goods than any other U.S. state (Figure 1). Almost two of ten manufactured goods are exported from Texas to world markets. Some of these goods are manufactured in the state. Others are produced out of state and shipped to Texas for consolidation in distribution centers and export. Though these goods are not produced in Texas, they have positive spillover effects for the state’s economy in areas such as transportation and warehousing services, which generate income and jobs for the regional economy. 2

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State Manufacturing Exports*

2000

2012 14%

16% 57% 5%

Texas California New York Illinois Florida Remaining States

19%

10% 57%

4% 4%

5% 5% 4%

*Estimated by the Real Estate Center at Texas A&M University. Origin of Movement (OM) state export data free alongside ship (f.a.s).

Sources: U.S. Department of Commerce, International Trade Administration, U.S. Census Bureau and Bureau of Economic Analysis APRIL 2013

3


TEXAS EXPORTS FIND THEIR WAY to over 200 countries across the globe. Border neighbors Mexico and Canada are the top two recipients of goods manufactured in Texas. Exports to China tripled since 1999.

T

exas has taken advantage of its geographical location as a border state with seaports, and its natural oil and gas resources. Its labor and capital endowment and their development have enabled the state to export manufactured technological goods such as computer and electronic products. These factors have contributed to Texas’ success as a world exporter of manufactured goods. The state is also a major recipient of foreign direct investment (FDI). Firms from around the world have established operations in Texas. This investment creates job opportunities and brings new capital and new technologies that increase productivity and generate higher wages and income for the state’s population. Small and medium-size firms are the major Texas exporters. In 2010, there were 27,893 exporting firms. Of these, 93.1 percent were small- and medium-size firms with an export value of $51.2 billion, or 35 percent of the state’s merchandise exports. Texas ranks fourth nationally by the number of firms and small-medium exporting firms.

Texas has more manufacturing exports than Peru, Chile and Norway.

Where Do Texas Exports Go? Texas sends manufactured goods to 222 countries. Mexico is Texas’ largest trading partner (Figure 2). Approximately onethird (36 percent) of all manufacturing exports originated in

Figure 2. Texas Manufacturing Exports to Mexico* 800 700

Mexico Trend Mexico

Rest of the World (ROW) Trend ROW

600 500 400

How Much Does Texas Export?

300

In 2012, Texas exports totaled $265 billion and manufacturing exports $251 billion. In 2011, they represented 19.2 percent and 12.8 percent, respectively, of the state’s gross state product. From 1990 to 2012, Texas exports have increased 7.9 percent on average annually. Manufacturing exports increased 8.1 percent during the period, an impressive figure considering it includes the 2001 economic recession and the Great Recession of 2008–09. Texas exports were almost 1 percent of world manufacturing exports and ranked in the top 55 versus other countries’ exports in 2009.

200

4

(Index 1988=100)

100 0 1988

Peso Crisis

1992

1996

China Enters WTO

2000

Great Recession

2004

2008

2012

*Estimated by the Real Estate Center at Texas A&M University. BEA Export Indexes 2000=100. Origin of Movement (OM) state export data free alongside ship (f.a.s).

Sources: WISER trade, U.S. Department of Commerce, International Trade Administration, U.S. Census Bureau, Bureau of Economic Analysis (BEA) and Bureau of Labor Statistics TIERRA GRANDE


Texas were exported to Mexico in 2012; Canada was a distant second at 9 percent. In recent years, exports to Mexico and Canada have fallen while those to Brazil, the Netherlands and China have increased. Manufacturing exports to Brazil and the Netherlands doubled, while exports to China tripled from 1999 to 2012. This trend has diversified Texas’ export business. The increase in exports to Brazil and China has been a direct result of their recent economic growth, which has increased demand for goods such as chemical and petroleum products. When comparing Texas export markets with those of the United States, the pattern is slightly different. Canada was the biggest export destination with 19.4 percent of U.S. manufactured exports in 2012; Mexico was second with 14.5 percent.

produced by Texas firms, the Census Bureau recommends the report on exports from manufacturing establishments. The latest establishment manufacturing survey reports Texas was a major exporting state in 2009. Chemicals were the major exporting industry group, with 29.6 percent of direct exports, followed by transportation equipment with 15.3 percent, petroleum and coal products with 13.7 percent, computer and electronic products with 13.4 percent and machinery with 11.4 percent. These five industry sectors made up 83.4 percent of the state’s manufacturing exports. Chemical exports show the importance of the state’s petrochemical industry. These data give a better idea of what is being produced by Texas firms and exported to the world.

What Does Texas Export?

Texas Exports Outperform the Nation

The global increase in demand has made petroleum and coal products Texas’ biggest export category. In 2002, it represented only 4 percent of manufactured exports; by 2012, it was 22.8 percent (Figure 3). Demand has been especially strong in emerging markets. Other exports with increasing shares are basic chemicals, and resin and synthetic rubber/fiber exports, which rose from 9 percent and 5.4 percent, respectively, in 2002 to 10.4 percent and 5.9 percent in 2012 (Figure 3). In contrast, semiconductors and other electronic component shares decreased considerably in the same period, falling from 16 percent to 5.6 percent (Figure 3).

Texas’ 2000–12 manufactured exports grew by 7.2 percent compared with 3.8 percent for U.S. exports. A shift-share analysis of 2002–12 reveals that four factors impact Texas export growth: (1) national share, (2) industry mix, (3) competitive effect and (4) destination effect. The net results when considering only regional factors indicate that Texas’ industry mix was concentrated in industries showing greater growth relative to the entire country. The positive competitive effect signals that local economic factors in Texas caused the state’s industries to grow faster than the nation’s. Finally, the destination effect shows that Texas exports were concentrated in high-growth foreign markets.

How Much of Texas’ Exports Are Produced In-State?

Metro Area, Custom Port Export Growth

Origin-of-movement export figures do not reflect production locations, and in the case of Texas, they overestimate what proportion of exported goods are produced in the state. For a better indication of what portion of exported goods are actually

The Houston-Sugar Land-Baytown region, a global behemoth in the petroleum industry, achieved an impressive export performance from 2005 to 2011. Its agglomeration of petroleum companies allowed exports to grow at an annual rate of 13.1

Figure 3. Manufacturing Exports by Industry*

2002

2012

4%

Petroleum & Coal Products

9%

Basic Chemicals

5%

53%

16%

23%

Resin, Synthetic Rubber, Artificial & Synthetic Fibers Semiconductors & Other Electronic Components

46%

10%

Computer Equipment

7% 6%

6%

Motor Vehicle Parts Other Industry Groups

5% 5%

6%

*Estimated by the Real Estate Center at Texas A&M University. Origin

of Movement (OM) state export data free alongside ship (f.a.s). North American Classification System (NAICS) Industry Group.

Sources: U.S. Department of Commerce, International Trade Administration, U.S. Census Bureau and Bureau of Economic Analysis APRIL 2013

5


percent from 2006 to 2011, or 52.3 percent Table 1. Top MSA Exporters* of the state’s exports (Table 1). This is five Ranking Metropolitan Export Area Market times more than second-place Dallas-Fort Worth-Arlington, which had 13.3 percent of 1 Houston-Sugar Land-Baytown Mexico, Canada and Brazil 2 Dallas-Fort Worth-Arlington Mexico, Canada and China the state’s exports (Figure 4 and Table 1). The 3 El Paso Mexico, Canada and China state’s other two major metropolitan areas, 4 San Antonio Mexico and Canada San Antonio and Austin, had 5.3 percent 5 Austin-Round Rock Taiwan, Mexico and Malaysia and 4.3 percent of Texas exports, respec6 Brownsville-Harlingen Mexico, Canada and United Kingdom tively (Table 1). San Antonio’s export growth 7 Corpus Christi Mexico and Netherlands outpaced the other major Texas metropolitan 8 Beaumont-Port Arthur Mexico, Netherlands and Gibraltar 9 Laredo Mexico, Canada and Netherlands areas (Figure 4). 10 McAllen-Edinburg-Mission Mexico Texas’ other major exporting areas are *Estimated by the Real Estate Center at Texas A&M University. State Export Data free alongside ship (f.a.s) border and port areas, including El Paso, the zip code based. third-highest exporting MSA in the state Source: U.S. Department of Commerce and U.S. Census Bureau (Table 1). Between them, these areas represent 19.4 percent of the state’s export movements. Employment Benefits These are not manufacturing regions but custom ports where Texas employment benefits from export manufacturing firms. many exports leave the country. They are among the nation’s Manufacturing-related jobs numbered 208,000 in 2009. Non­ major exporting regions. Brownsville-Harlingen merchandise manufacturing jobs stood at 359,700, including business exports have grown at a greater rate than the other border (108,200), transport (53,400) and trade (97,200). They were 5.4 MSAs (Figure 5).

LOCATION, LOCATION, LOCATION and an abundance of natural oil and gas resources give Texas a leg up in the export ranks. An international border and gulf seaports complete the effort. Marine loading arms line the dock at the Port of Houston, ready to fill ships with petroleum and chemical products in liquid form.

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Figure 5. Top Exporting Border MSAs* (Index 2005=100)

Figure 4. Top Exporting MSAs*

300 Brownsville–Harlingen Laredo McAllen–Edinburg–Mission El Paso

(Index 2005=100)

400 San Antonio Houston–Sugar Land–Baytown Dallas–Fort Worth–Arlington Austin–Round Rock

300

200

100

200

100

0 2005

0 2005

2007

2009

2011

* Estimated by the Real Estate Center at Texas A&M

2007

2009

2011

* Estimated by the Real Estate Center at Texas A&M

University. BEA Export Indexes 2000=100. State export data free alongside ship (f.a.s) zip code based.

Sources: U.S. Department of Commerce and U.S. Census Bureau

University. BEA Export Indexes 2000=100. State export data free alongside ship (f.a.s) zip code based.

Sources: U.S. Department of Commerce, International Trade Administration, U.S. Census Bureau, Bureau of Economic Analysis and Bureau of Labor Statistics

Table 2. Foreign Firms in Texas percent of all civilian employment and 6.5 percent of all private sector employment. More than one-quarter of Texas manufacturing jobs are export related. Direct exports employ 137,100 while 71,000 are related to supporting shipments. The most export-related jobs are in transportation equipment, fabricated metal products, computers and electronics products, machinery and chemicals.

Industry (Percent) 38.9 12.7 3.6 3.2 4.5 6.5 0.7 29.9

United Kingdom Canada France Netherlands Germany Japan Switzerland Other

15.7 8.9 8.9 8.9 8.3 7.8 7.7 33.9

Sources: U.S. Department of Commerce and Bureau of Economic Analysis

Foreign Companies in Texas

I

n 2010, there were 1,457 foreign firms in Texas. They employed 458,100, or 5 percent of the state’s total private workers. Most of the jobs created by foreign firms are in the manufacturing industry (38.9 percent). English firms generate 15.7 percent of employment by foreign direct investment (FDI; Table 2). Texas ranks third nationally in number of foreign firms, surpassed only by California and New York, and is second to California in number of jobs created by foreign firms. In addition to generating jobs, FDI results in firms bringing new capital and technology into the regional economy. That can lead to higher wages and income through productivity gains in how goods and services are produced.

International Shock Vulnerability Texas as an open economy is not immune to international shocks, positive or negative, especially as a major exporter and beneficiary of FDI. So, if prices of international commodities change abruptly, or if another financial crisis erupts, Texas’ economy will be exposed to those shocks. The Texas economy is particularly vulnerable to shocks in the oil market. APRIL 2013

Country (Percent)

Manufacturing Wholesale Retail trade Information Finance and insurance Professional, scientific and technical service Real estate, rental and leasing Other

Major moves in the exchange rate of the euro, yen and yuan can impact Texas exports. A weaker U.S. dollar makes imported goods from the rest of the world more expensive and makes goods produced in the United States and Texas cheaper for international customers. Texas has benefited from international trade and investment and should continue to do so in a world that is becoming more and more integrated every day. For more information, see Center publication 2022, Texas’ Stake in International Trade Through its Exports and Some FDI at recenter.tamu.edu/pdf/2022.pdf. Dr. Torres (ltorres@tamu.edu) is an associate research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Texas’ border location, sea access, natural oil and gas resources, along with favorable labor costs and a friendly business climate have made it the top exporting state in the country and a major world exporter.

7


Commercial Markets

8

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S

hopping is an American pastime. Erma Bombeck said that shopping was a contact sport like football. Bo Derek said whoever said money can’t buy happiness simply didn’t know where to go shopping. Tammy Faye Bakker suggested that shopping is cheaper than a psychiatrist. Oscar Wilde said that anyone who lives within their means suffers from a lack of imagination. In the past decade, the concept of shopping has changed dramatically. With household incomes barely growing, more and more Americans are shopping at “dollar” stores. These stores locate in towns too small to attract national retailers as well as large cities, offering convenience and savings to local shoppers and sales tax revenue to the community.

Dollar Store Concept It is generally accepted that the F.W. Woolworth Company was the pioneer of the five-and-dime store, the precursor of the dollar store concept. The first Woolworth store opened in February 1878 in Utica, New York, under the banner “Woolworth’s Great Five Cent Store.” The stores sold discounted general merchandise at fixed prices that undercut local competitors. In addition to lower prices, Woolworth became popular for allowing the public to hand-select their own merchandise without the help of a sales clerk, which was previously common practice. This innovative approach changed the retail scene forever. APRIL 2013

In the past decade, America has seen the continued development of dollar stores across the country. The largest are Dollar General, Dollar Tree and Family Dollar. These companies were inspired by F.W. Woolworth’s ability to deliver quality goods at deeply discounted prices. These three retailers now have more than 20,000 stores nationally, with a huge presence in Texas (Table 1). Dollar General and Family Dollar have more stores in Texas than any other state. The Real Estate Center used Google Maps to positively locate 968 stores for Dollar General, 855 for Family Dollar and 248 for Dollar Tree. In addition, 104 stores are doing business under names including Lucky Dollar, Dollar Savers, Dollar Depot, King Dollar, Just a Dollar, Dollar Plus, Senor Dollar, Super Dollar, Dollar and More, Dollar Supreme, Pearland Dollar Store Plus, Dolex Dollar Express and Mega $1.09. Others include Cowboy Dollar Store, Dollar Selection, USA Dollar, Everything Dollar Plus, Global Dollar, Texas Dollar and More, Dollar Express, Save a Dollar, Super Dollar, Gotta Dollar, Wise Dollar, Dollar and Dollar, Dollar Deals and Dollar and More.

Prevalence in Small Towns The smallest communities in America seldom get national retailers to move in, but dollar stores are popping up in small towns across Texas. According to the Dollar General website, the company looks for a trade area population of at least 4,500.

9


THIS STORE IN DOWNTOWN HOUSTON illustrates the scope of the dollar store phenomenon. Small towns love them and metros do too.

However, that number is apparently not carved in stone. Ben own ability to support additional stores. Of course, median Wheeler is a community 25 miles west of Tyler with a popuincomes also play a role in this decision. Dollar General lation of 504 and a Dollar General store to boot. This is not states that median income must be less than $75,000. Notice an isolated occurrence, as there are approximately 170 towns there is no lower threshold, only an upper one. and cities in Texas with populations under 4,500 that have Relative Saturation of Dollar Stores a nationally branded dollar store. According to the Center’s Another measurement when considering areas of opportunity analysis, the average population for one-store towns was and value creation is the relative saturation of dollar stores, 3,863, excluding large suburbs of major MSAs like Cypress meaning how much of the population one store serves. Saturation and Grapevine. Mt. Enterprise, population 447, has a Family Dollar. Elm Mott, with a population of Table 1. Dollar Stores in Texas 300, is the smallest town in Texas with a dolTexas’ Rank in Number of lar store. Table 2 lists the five smallest towns Terms of Number States Where in Texas with dollar stores. Total Stores Texas Stores of Stores Present So, how big does a town need to be to supDollar General 9,937 1,109 1 39 port two dollar stores? Warren, with a populaFamily Dollar 7,442 946 1 45 tion of 757, is the smallest town in the state Dollar Tree 4,351 268 3 48 with two dollar stores (Table 2). Several Texas Sources: Dollar General, Family Dollar and Dollar Tree annual reports communities with fewer than 1,000 people have two stores in town. Three towns in Texas with a population Table 2. Population of Smallest Communities with One to Four Dollar Stores less than 2,500 are supporting three dolOne Store Two Stores Three Stores Four Stores lar stores. Whitney has three stores and Elm Mott – 300 Warren – 757 Whitney – 2,087 Port Isabel – 5,006 a population of 2,087. Crosby and Nocona Windthorst – 409 Pineland – 850 Crosby – 2,299 Livingston – 5,335 also support three dollar stores. The smallMt. Enterprise – 447 Cold Spring – 853 Nocona – 2,385 Palmview – 5,460 est towns that have four stores in operation Ben Wheeler – 504 Rio Vista – 873 New Boston – 4,550 Gun Barrel – 5,672 have a minimum population of over 5,000. Spurger – 590 Clint – 926 Zapata – 5,089 Granbury – 7,978 Table 2 can be a useful guide for other Source: Real Estate Center at Texas A&M University small communities as they consider their

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Table 3. Relative Saturation — Texas Cities Number of Dollar Stores Average Population per Store Number of Communities

1

2

3

4

5

6

7

8+

Cities*

3,856

3,789

6,324

5,436

5,551

5,072

5,051

8,483

8,256

225

189

43

26

14

11

7

15

22

*Abilene, Amarillo, Austin, Beaumont, Corpus Christi, Dallas–Fort Worth, El Paso, Houston, Killeen, Laredo, Longview, Lubbock, McAllen–Harlingen–Brownsville, Midland, Odessa, San Angelo, San Antonio, Texarkana, Tyler, Victoria, Waco, Wichita Falls

Table 4. Relative Saturation — Texas MSAs is determined by dividing the City Number of Stores Population Population per Store population of the community by Abilene 13 117,063 9,005 the number of stores in the comAmarillo 33 190,695 5,779 munity. A low number means Austin 37 790,390 21,362 Beaumont 23 118,296 5,143 there are a lot of stores in town Corpus Christi 32 305,215 9,538 to serve the population. A high Dallas–Fort Worth 92 1,197,816 1,320 number means there are few El Paso 83 649,121 7,821 stores serving a larger population Houston 173 2,099,451 12,136 per store. Killeen 17 127,921 7,525 tores in Texas’ smallest Laredo 20 236,091 11,805 Longview 18 80,455 4,470 communities with one or Lubbock 27 229,573 8,503 two dollar stores operating McAllen–Brownsville–Harlingen 144 369,749 2,568 serve an average of about 3,800 Midland 12 111,147 9,262 people per store (Table 3). In Odessa 19 99,940 5,260 larger towns with three to seven San Angelo 12 93,200 7,767 stores, each store serves from San Antonio 118 1,327,407 11,249 Texarkana 21 143,486 6,833 5,000 to 6,000 people. In cities Tyler 28 96,900 3,461 with eight or more stores, each Victoria 13 62,592 4,815 store serves around 8,500 people. Waco 17 124,805 7,341 Median income does play a Wichita Falls 15 104,553 6,970 role when dollar stores decide Average Population per Store: 8,256 whether or not to move in. Plano, Source: Real Estate Center at Texas A&M University for example, has a relative saturalthough population is an important component for doltion of 43,307, well above average. It was also the wealthilar store suitability, it shouldn’t be the only indicator est Texas city in 2008 and currently has a median income of considered when searching for investment opportuni$110,800. ties. For example, some cities are near recreational areas such The number of stores currently operating in selected Texas as lakes and state parks, which generate higher traffic even cities, along with population served per store, are shown though the populations are small. in Table 4. Cities with a lot of dollar stores have a smaller The dollar store concept has been around for a long time and population-to-store ratio. Cities with the highest ratios may has been a consistently viable business. The recent economic be candidates for further retail development. For example, environment (increased pressure on consumers, increased volaBeaumont has 23 stores to serve a population of over 118,000 tility in markets and an unpredictable future) have led many people. By comparison, Abilene has nearly the same populainvestors to wait it out; however, it is precisely these events tion, but has only 13 stores. that support the predictable cash flows of these dollar stores. Metro areas with the highest population per store include Austin, Houston, San Antonio, Laredo, Corpus Christi and Dr. Dotzour (dotzour@tamu.edu) is chief economist and Parulian and StewAbilene. Those with the lowest ratio include Dallas–Fort art research assistants with the Real Estate Center at Texas A&M University. Worth, McAllen–Brownsville–Harlingen, Tyler, Longview and Victoria. Saturation information is useful when analyzing which THE TAKEAWAY towns are underserved or over “stored.” Bryan, for example, has seven stores: three Dollar General stores, three Family While most large national retail chains shun small towns, Dollar stores and a King Dollar. With a population of 76,000, dollar stores have been successful in towns with populathe relative saturation is almost 10,900 persons per store, tions as few as 300 people. Relative saturation (how many which is almost double the average for other Texas cities with people one store serves) is one factor to consider in deterseven dollar stores. This research suggests Bryan could support mining which communities can support more dollar stores. more dollar stores.

S

A

APRIL 2013

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Texas Economy

N

Number (thousands)

Number (thousands)

early a decade ago, home prices starting shooting up Measuring Housing Supply Flexibility all over America. Double-digit price gains every year This study defined housing supply flexibility as the ratio of were commonplace in California, Arizona, Nevada home supply to home demand. Demand for housing units in and Florida. In Texas, home prices were increasing but at a a period was measured as the number of homes sold. Housing much slower pace. Center staff frequently were asked why. supply was measured as homes sold plus homes for sale at the Homebuilders in Texas have kept the supply up, which in turn kept prices at a reasonable level. In scientific terms, Texas end of the period (that is, the total number of listings). The study used annual data on homes sold and homes for has a higher Housing Supply Flexibility (HSF) — how houssale in the United States and in ing supply responds to changes in Texas from 1989 to 2012. U.S. data housing demand — than the rest of Figure 1. Texas Housing Supply and Demand on existing homes sold came from the country. A high HSF kept home 1989–2012 the National Association of Real500 prices here from skyrocketing in the Demand (number of homes sold) tors; data on new homes sold came Supply (number of homes sold boom years, and helped Texas avoid 400 plus inventory of homes) from the U.S. Census Bureau. The the massive collapse in home prices 300 Real Estate Center was the source of that has plagued the rest of the counannual Texas data. try for the past five years. 200 Historical housing supply and Ever since nationwide and regional 100 housing demand trends for Texas home price data have been availand the United States are shown in able, Texas residents have enjoyed 0 higher levels of housing affordability, 1989 1993 1997 2001 2005 2009 2012 Figures 1 and 2. Dividing housing supply data by housing demand data mainly because of home prices lower Source: Real Estate Center at Texas A&M University produces HSF ratios for Texas and than the national average. The Figure 2. U.S. Housing Supply and Demand the United States (Figure 3), which state’s economy did not experience 1989–2012 show three major trends in HSF ratios. a home price bubble in the nation12,000 Demand (number of homes sold) First, there was a downward trend wide housing crisis of 2006–12. Supply (number of homes sold 10,000 in HSF ratios for both the nation and The Real Estate Center conducted plus inventory of homes) Texas from 1989 to 2006, when the a research study on the interactions 8,000 housing crisis began. HSF for Texas of supply and demand in the Texas 6,000 fell from 2.06 in 1989 to an all-time housing market. The research low of 1.37 in 1999, increasing to revealed that Texas’ HSF played 4,000 1.49 in 2003 before falling to 1.40 in a key role in keeping Texas home 2,000 2006. The HSF ratio for the nation prices lower than the national aver1989 1993 1997 2001 2005 2009 2012 fell from 1.57 in 1989 to an all-time age and in helping the state weather Sources: U.S. Census Bureau, National Association of Realtors low of 1.34 in 2004, before the the housing crisis. and Real Estate Center at Texas A&M University

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Figure 3. Texas and U.S. Housing Supply Flexibility Ratios 2.2

Texas U.S.

2.0 Ratio

Dollars (thousands)

1989–2012

1.8 1.6 1.4 1.2 1989

1993

1997

Figure 4. Texas and U.S. Median House Prices

2001

2005

2009 2012

Source: Real Estate Center at Texas A&M University

1989–2012

250

Texas U.S.

200 150 100 50 1989

1993

1997

2001

2005

2009 2012

Sources: U.S. Census Bureau, National Association of Realtors and Real Estate Center at Texas A&M University

Median Home Price Growth Rate (Percent)

Median Home Price Growth Rate (Percent)

housing crisis. This trend shows it The gap between Texas and U.S. Figure 5. Relationship between Median Price has been increasingly difficult for the median home prices was $29,700 in Growth Rates and Housing Supply to supply side of the housing market 1989 and reached an all-time high of Housing Demand Ratio in Texas to respond to increasing demand for $86,000 in 2005 (Figure 4). After the 10 homes since 1990. nationwide home price bubble burst, 5 The second noticeable trend the gap between median home is that Texas had a higher-thanprices for the United States and 0 national-average HSF ratio from Texas narrowed to $23,500 in 2012. 1989 to 2005. The average ratio of To investigate and quantify HSF’s –5 housing supply to housing demand impact on home prices, this study for Texas during that period was 1.59 estimated the relationship between –10 compared with 1.44 for the United 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 growth rates of home prices in real States. From 2005 to 2010, the U.S. terms and the ratios of housing supHousing Supply/Housing Demand Ratio ratios exceeded the corresponding ply to housing demand for Texas and Source: Real Estate Center at Texas A&M University Texas ratios mainly because of the the United States. Growth rates of nationwide housing crisis, which home prices in real terms are growth Figure 6. Relationship between Median Price was characterized by falling housing rates of home prices less inflation Growth Rates and Housing Supply to demand and the collapse of home rate. Housing Demand Ratio in United States prices in several major U.S. metro Employing the statistical tech10 areas. nique of regression analysis shows The recent downward trend in the estimated relationships between 5 HSF ratios for Texas and the nation home price appreciation (deprecia0 in the aftermath of the housing tion) and the HSF ratios for Texas crisis points to tightening housing and the nation (Figures 5 and 6). –5 supplies. But Texas’ housing sector In Texas, growing home price –10 asserts more supply flexibility as appreciation in real terms is associshown by higher-than-nationalated with HSF ratios smaller than –15 1.33 1.40 1.48 1.56 1.64 1.72 1.80 1.59 (Figure 5). For the nation’s average HSF ratios. Housing Supply/Housing Demand Ratio HSF depends on a number of fachousing market, median home tors. The most important are the prices are expected to increase as Source: Real Estate Center at Texas A&M University availability and costs of land and long as HSF ratios are less than 1.49 construction materials, land use regulations, housing construc- (Figure 6). tion regulations, and length and complexity of land developTexas has survived the first housing collapse of the 21st Cenment processes from land acquisition to construction and sales tury. One of the key reasons is builders in our state can respond of housing units. The construction industry and the real estate quickly to increased demand. This keeps prices from escalating at industry play key roles in HSF given that homes supplied and an unsustainable rate. Consequently, when the Great Recession sold include both new and existing homes. came, there was no price bubble to burst.

HSF, Home Price Appreciation Economic theory posits that higher (lower) supplies of goods and services and more (less) responsiveness to growing demand by the supply sides of goods and services result in lower (higher) prices of goods and services. Both Texas and the nation had an upward trend in home prices in response to the downward trend in the ratios of home supply to home demand (Figure 4). But median home prices in Texas have stayed below the national average thanks to more supply side flexibility in the housing market from 1989 to 2012. APRIL 2013

Dr. Anari (m-anari@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY A Center research study revealed that Texas’ housing supply flexibility (HSF) helped the state through the 2006–12 housing crisis by keeping home prices lower than the national average. HSF measures how housing supply responds to changes in housing demand.

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Legal Issues

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“The Law West of the Pecos” conjures images of Judge Roy Bean and his unorthodox administration of the law. “Mineral classified land,” to those familiar with the term, brings to mind the unique application of mineral law in the same region. Anyone owning, selling, buying, brokering or appraising land in Far West Texas should be aware of the rules to avoid problems with clients and the state. A Bit of Texas History At one time, all land was owned by the state (or sovereign). Private ownership began when the state conveyed the property to a private individual. This transaction is sometimes referred to as the patent or land grant. Over time, different sovereigns patented land in Texas. Spain issued the first patent in 1730. By 1830, Spain and Mexico combined had patented more than 26 million acres. Under these Spanish land grants, title to the minerals remained with the sovereign even though not specifically reserved. When Texas won its independence, it acquired vast amounts of unsurveyed land. The state recognized the former Spanish land grants and continued to reserve the minerals in its patents. APRIL 2013

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The railroads agreed to survey this remote area in return for receiving ownership of every other section of land. Unlike the metes-and-bounds legal description used in the Spanish land grants, the railroad surveys divided the acreage into blocks and sections. A block contained 36 sections; a section contained 640 acres. For the most part, Texas kept the even-numbered sections and granted the odd-numbered ones to the railroads without retaining the minerals. This created a checkerboard effect on mineral ownership maps. The state placed the retained acreage (approximately 42.5 million acres) in the Public School and Asylum Fund to ensure a free public education to its citizens.

Private Ownership of Minerals In the 1860s, when Sam Houston was president of the republic, an ownership dispute involving salt erupted in South Texas. The outcome forever changed mineral law in this state. The issue focused on the ownership of salt left in deposits when the Gulf of Mexico receded centuries earlier. Salt trade existed in the area from prehistoric times through the Civil War. The republic claimed the revenue from the sales because Texas owned the minerals and salt is a mineral. The “La Sal del Rey Lake Controversy� led to a constitutional amendment in 1876 giving the state-owned minerals to the then-owners of the surface. However, the amendment did not preclude the state from reserving the minerals in future conveyances or grants.

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Code). The statute granted (relinquished) a portion of the minerals to the surface owners on mineral classified land patented by the state between Sept. 1, 1895, and Aug. 21, 1931. The act applied only to oil and gas. The state continued to own all the other minerals. The determination of these “other” substances created a modern-day dilemma (discussed later). The language of the act appears to grant surface owners fifteen-sixteenths of the oil and gas in and under the property. The state retained the remaining one-sixteenth. Because of constitutional issues with the wording, subsequent case law casts a different interpretation. The courts determined that the act conveyed no interest to the surface owners. Title to the oil and gas remained with the state for the benefit of the Public School and Asylum Fund. The surface owners simply became an agent of the state to lease the oil and gas. ase law and statutes address the division of the lease payments. To compensate the surface owners for leasing and for surface damages stemming from the oil and gas activity, the surface owners receive half of the bonus, rentals and royalties. They are entitled to no other compensation. The law placed restrictions on how the surface owners could convey and reserve these rights. Prior to entering an oil and gas lease, surfaces owners cannot assign, convey or reserve any mineral rights, including the executive rights. Once the surface is sold, the executive rights follow the surface ownership. However, if the land is under lease or in production, the seller may assign, convey or reserve his or her interest in the lease but only for the duration of the lease. (This primarily

C The constitutional mandate in 1876 also required the land that had been placed in the Public School and Asylum Fund to be sold and the proceeds deposited into the fund. However, before it could be sold, the state (and evidently the General Land Office [GLO]) classified it as “grazing or pasture land,” “timberland,” “agricultural land,” “mineral land” or combinations thereof. Land classified as mineral land was not sold but leased for mineral development. This changed in 1907. Thereafter, it could be sold, but the minerals were reserved by the state. n the other classified lands, the state still retained the minerals but by more indirect means. For example, in some instances purchasers were required to sign affidavits relinquishing to the state all rights to any minerals subsequently discovered on the property. Any land on which the state retained the minerals after 1876 was called “mineral classified land.” Most of this land is located in the Trans-Pecos Region. As interest in development of oil and gas grew, the state began leasing more and more of the retained mineral acreage (mineral classified land) to oil companies. The surface owners (settlers) protested, viewing this as an intrusion on their peaceful possession of the property. The settlers refused oil companies entry and in some cases threatened violence.

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The Relinquishment Act The Relinquishment Act (the act), passed in 1919, resolved the controversy (Section 52.171 et seq., Texas Natural Resource APRIL 2013

Interpreting ‘Mineral Classified Land’ Here are some rules from the Schwarz and Cemex cases used by the courts to determine what substances are minerals on mineral classified land. • The sale of public school land is governed by the law (statute) in effect at the time of the sale and not necessarily the language contained in the patent. • Two statutes, the Mining Act and the Land Sales Act, governed the sale of public lands from 1895 until 1913. Both were repealed in 1913. The Mining Act lists specific substances being reserved, including clay, marble, natural cement, coal, valuable stone for building purposes and other valuable building materials. The Land Sales Act lists none. • When construing land grants, the courts ascertain the legislative express intent. Any ambiguity in the statute must be interpreted in favor of the state. • When construing the reservations of minerals in patents by the state after 1876, whatever is not unequivocally granted in clear and explicit terms is withheld (reserved by the state). 17


entails the right to receive half of royalties from future production). This right terminates when the lease ends. Thereafter, the right reverts to the state. The GLO commissioner oversees the leasing of relinquished lands. Certified copies of all mineral leases must be filed with and approved by the GLO to be effective. The basic terms of the oil and gas leases are set forth on the GLO’s website. The state, not the surface owner, is the named lessor. The state alone possesses the power to enforce or cancel the lease. Surface owners have no rights except to protect the surface from trespassers. As a result of these decisions, the mineral rights attached to the surface ownership on relinquished land may (or should) be capitalized into the sales price, making the land more valuable.

Mineral Substances

I

nterestingly, Texas courts recognize two definitions (or lists) of substances included in the term minerals. One attaches to land where the state retained no minerals or where they were released in 1876. The other definition applies to mineral classified land. On lands where the state retained no minerals (or where they were subsequently released), the term includes oil, gas, sulfur, salt and possibly uranium. Unless specifically named in the reservation or conveyance, no other substances are included. The term, as a matter of law, does not include limestone, caliche, surface shale, building stones, sand, gravel and groundwater. Likewise, the term does not include coal, lignite and iron ore that lies on or within 200 feet of the surface that will destroy or deplete the surface when produced. These substances belong to the surface owners. A completely different picture emerges on mineral classified land. Here, the courts ruled that the substances retained by the state depend primarily on the statute in effect when the patent occurred. Various statutes have been in effect since 1876, making determination difficult. For example, the Texas Mining Act, in effect from 1895 to 1913, specifically lists clay, marble, natural cement, coal, valuable stone for building purposes and other valuable building materials as a mineral. After 1913, different statutes were in effect with different wording. As yet, no appellate decisions have ascertained the substances retained in mineral reservations by the state after 1913. In 1986, the Texas Supreme Court ruled in Schwarz v. State that coal and lignite belong to the state on mineral classified land. The Mining Act in effect at the time specifically listed

coal and lignite as a mineral. The rule applies even though the surface will be destroyed or depleted when the coal and lignite are produced. In 2011, the Eighth Court of Appeals in El Paso ruled in State v. Cemex Construction Materials South that the Land Sales Act of 1895, in effect at the time of the patent, included “dirt, caliche, sand, gravel, limestone, and other materials at issue, even though the state did not expressly reserve such materials.” The Cemex case was appealed to the Texas Supreme Court. Prior to the high court hearing the case, the parties reached an out-of-court settlement. In these instances, Rule 56.3 of the Texas Rules of Appellate Procedure applies, holding that unless the supreme court vacates the appellate court’s opinion, it stands. On March 16, 2012, the high court did just that. It vacated the Eighth Court of Appeal’s judgment but sustained the opinion. Thus, as one GLO attorney summarized the status of the case, the opinion stands as binding authority in the Eighth Court of Appeals and persuasive authority throughout the rest of the state. Seventeen counties lie in the Texas Eighth Court of Appeals’ jurisdiction: Hudspeth, Jeff Davis, Loving, Presidio, Reagan, Reeves, Upton, Ward, Winkler, Andrews, El Paso, Pecos, Terrell, Brewster, Crane, Crockett and Culberson. All these counties are in the Trans-Pecos Region, with ten located west of the Pecos and the others just across the river.

As the leasing agent of the state, surface owners receive 40 percent of all bonuses, rentals and royalties payable under leases entered before Sept. 1, 1987, and 20 percent on all leases entered thereafter.

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Because the state owns the coal, lignite, sand, gravel, surface shale and even dirt that will destroy or deplete the surface when produced on mineral classified land, does this destruction offset any increases associated with the partial ownership of oil and gas via the Relinquishment Act? Only a knowledgeable appraiser knows the answer.

Leasing Minerals on Mineral Classified Land

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he Relinquishment Act clarified how oil and gas is leased and how the revenue is shared on relinquished land patented between 1895 and 1931. Texas legislators passed other statutes addressing how other substances are to be leased and the revenue shared on mineral classified land. The process is found in the Relinquishment Act (Sections 53.061– 53.066, Texas Natural Resources Code). The state constitutes (appoints) the owner of the surface as its agent to lease any minerals, except oil and gas, subject to the Relinquishment Act, that may be found within all or a part of a survey previously sold with a mineral reservation to the state. These substances may be leased either separately or together on a form or forms prepared by the GLO. As the leasing agent of the state, surface owners receive 40 percent of all bonuses, rentals and royalties payable under leases entered before Sept. 1, 1987, and 20 percent on all leases entered thereafter. However, for leases allowing the surface mining of coal, lignite, potash, sulphur, thorium or uranium entered on or after Sept. 1, 1999, surface owners are entitled to 40 percent of the bonuses, rentals and royalties. Payments received by the surface owners are in lieu of all damages to the soil. The surface owner(s) are not entitled to further compensation.

Groundwater Ownership If the state owns the coal, lignite, dirt, caliche, sand, gravel, limestone and other valuable substances on mineral classified lands, does this ownership extend to groundwater? If so, what is left? APRIL 2013

The answer lies again in the Natural Resources Code, which provides that “unless otherwise expressly provided by statute, deed, patent, or other grant from the State of Texas, groundwater shall not be considered a mineral in any past or future reservation of title or rights to minerals by the State of Texas” (Section 53.1631; emphasis added). However, according to the statute, the state retains the right to use a reasonable amount of both the surface and the groundwater for mineral development and production purposes. As a general rule, the term development means for drilling when it comes to oil and gas production. The term production encompasses fracking (or fracturing). Consequently, significant amounts of groundwater could be used for oil and gas production without compensating surface owners. According to Ken Slavin, one of the El Paso attorneys who represented the GLO in the Cemex case, mineral law takes a different twist once you reach the Pecos River (the Trans-Pecos Region) going west. The statutes and case law governing ownership, reservation and leasing of minerals are different than what most people are used to. Anyone owning, purchasing, selling, brokering or appraising land located in the Trans-Pecos Region should check the maps online with the GLO to see if the land is subject to any mineral classification or reservation by the state. The maps are at http://gisweb.glo.texas.gov/glomap/index.html. The GLO does not guarantee that the maps are accurate. Fambrough (judon@tamu.edu) is a member of the State Bar of Texas and a lawyer with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Laws governing mineral rights in Texas’ Trans-Pecos region are extraordinarily complicated. Who retains the rights to minerals and what specific minerals are included varies widely in this area.

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Income Taxes

HOME WORK

TAX

PERK BY JERROLD J. STERN

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he home office deduction can save taxes for salaried individuals and self-employed people such as real estate professionals. To qualify, the office must be used “exclusively” and “on a regular basis” for either the entire business or its administrative and management activities. A 2012 tax court decision draws attention to taxpayer mistakes that can limit or eliminate the deduction. The “regular basis” test is met if business usage is continuous throughout the year. Incidental or occasional use is not sufficient. To satisfy the “exclusive use” test, additional criteria apply. The home office area must be used only for the business. Unrelated activities will disqualify home office deductibility. Examples of disqualifying activities include nonbusiness use of a computer in the room (such as surfing the

web for nonbusiness purposes or reading/writing nonbusiness email), paying household bills, and entertaining friends. Occasional use of the family den or kitchen table for work-related activities, such as the preparation of business documents or business-related reading, does not qualify for deduction purposes. Fully deductible items include business supplies, painting, separate business phone, business computer, and housecleaning services for the office. Also deductible are the “business use percentage” of typical homeowner expenses such as homeowners insurance, utilities, rent and a security system. For homeowners, the business portion of the cost of the home can be written off each year (depreciated). However, if the home is sold for a profit, all of the depreciation will be taxable as a capital gain. The capital gains tax rate depends on the homeowner’s marginal tax rate on ordinary income. The “business use percentage” is the percentage of the home devoted to the home office (including business storage). There are two computation methods. For example, if there are five rooms in the home and one is a home office, then the business percentage is 20 percent regardless of the size of the rooms. Alternatively, the percentage of the home office floor space relative to the home’s total floor space can be used. In a 2012 tax court case, a married couple’s 100 percent business use percentage was reduced to 16 percent by the IRS and upheld in court. According to the case, the taxpayers claimed that the percentage should be 100 percent “to reflect storage space, floor space under furniture and equipment [computers and a copy machine] located in combined use areas, and bathrooms connected to their offices.” However, the IRS determined that personal records were stored in a TIERRA GRANDE


FULLY DEDUCTIBLE – business supplies – painting – separate business phone – business computer

NOT DEDUCTIBLE anything shared with home – bathroom – table – computer – copy machine closet and on computers the taxpayers treated as business property, thus disqualifying them. The IRS also states, “A table, a computer, or a copy machine located in a room that is used both for business and personal purposes may be occasionally used for business, but [such] dual use of pieces of furniture or equipment does not satisfy the exclusive use test. Nor does occasional business use of a room, such as a bathroom which is also used for personal purposes, satisfy” the exclusive use test. ome office rules allow deductions for rooms and separately identifiable areas in a single room, such as a desk and bookshelf in the corner of the room. Closets and storage areas are considered part of the home office (leading to larger deductions) if they are used exclusively for the business. Thus, such areas may be used to keep office supplies and real estate “for sale” signs. Amounts paid for business long-distance phone calls as well as the cost of a second phone line that is exclusively for business are deductible even if the taxpayer does not qualify for a home office deduction. The cost of a dual-use cell phone is not deductible. Home office deductions are also available even if the home office is used exclusively for administrative/management activities for work performed outside the home. This rule can be used by real estate professionals who do not have

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APRIL 2013

any other office available to them. Minimal use of an office outside the home is allowed. For 2013 and later years, the IRS recently announced that taxpayers can opt to deduct $5 for each square foot of home office space. However, since the maximum deduction under this method is $1,500 (300 square feet × $5), taxpayers should compare the deduction using all methods. IRS publication 587, “Business Use of Your Home,” is accessible at www.ustreas.gov and provides further explanation and examples of home office rules.  For specific advice, especially regarding the choice of computation method, consultation with a tax accountant or tax attorney is recommended. Dr. Stern (stern@indiana.edu) is a research fellow with the Real Estate Center at Texas A&M University and a professor of accounting in the Kelley School of Business at Indiana University.

THE TAKEAWAY Real estate professionals and other taxpayers who have home offices can save taxes if IRS requirements are met. A 2012 tax court case illustrates potential pitfalls.

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Housing Markets

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apid population growth and urbanization are nothing new to Texas. It is the fastest growing state in the country by numbers and the fifth fastest by percentage. Between 1940 and 2010, Texas averaged an astounding 21.6 percent rate of growth per decade, compared with only 13.3 percent for the country.

During the first decade of the new millennium, Texas added more than four million new residents, more than any other state. And projections are for growth to continue just as strong during the next several decades. This growth will be fueled by economic success, relatively low-cost housing, comparatively lower tax structure, a favorable climate and transportation network. Texas is also growing in urbanization. The lure of jobs, entertainment, sports and social networks and the desire to be “where the action is” attracts residents to the principal urban areas of the state. Today, nearly two out of every three Texans live in the metropolitan areas of Dallas-Fort Worth, Houston, Austin or San Antonio. Nine out of ten Texans live in one of the state’s 25 Metropolitan Statistical Areas (MSAs). The concentration of population into smaller geographical areas creates disproportionate demands for public goods and services, especially infrastructure and essential utilities as well as for mass transit, education and other social needs.

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Growth Planning Objectives Texas added approximately 14 million people in the four decades between 1970 and 2010. The strain on public services such as education, transportation, utilities and drainage was immense. It is expected to grow by roughly another 14 million in the coming two decades, from a population of roughly 25.5 million to more than 39 million by 2030. In a world of instant gratification and short-term outlooks, few leaders in either the public or private arena exhibit the capacity or the will to make hard, long-term decisions. But today’s decisions and actions will dictate quality of life over the next several decades. The principal objectives of effective growth planning for Texas’ future may be summarized in four essential goals: 1. Balance growth and private land development needs and objectives with individual communities’ ability to absorb new growth and provide local infrastructure and public services (for example, schools and water supplies); 2. Protect local health, safety and the environment with flexible, sensible requirements and performance standards for development; 3. Optimize local public resources allocation: land, capital, tax revenues and public expenditures; and 4. Encourage and accommodate quality housing development including affordable housing for low-income households. Planning for growth is a daunting but essential function covering many different future needs. The various public and private requirements typically include the following interconnected needs: • allocate rational land uses optimally; • coordinate land and infrastructure development timing, especially roads and water and sewer service delivery; TIERRA GRANDE


• • • •

fund public capital improvements; distribute public service costs equitably; preserve and enhance neighborhood quality and ambiance; provide parks, open space and other public amenity land uses; • protect and improve the environmental quality of communities; • promote the health, safety and general welfare of each community; and • create affordable housing for working-income-level households. Private sector planning is as essential as public sector planning. Private developers know that new projects must fit within the larger guidelines of public needs while also providing acceptable risk-return parameters to attract private capital. Truly effective growth planning demands the balance between the private sector necessities and the public needs.

Growth Planning Approaches

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ver the years, several distinct styles of growth planning have evolved based on local needs, objectives and attitudes about change. The dominant general style of growth planning incorporates a growth management approach. Growth management broadly includes a rational accommodation of growth and development without purposefully limiting or preventing growth. This approach recognizes that growth may be not only inevitable but quite often sought and encouraged through local economic development efforts. A growth management methodology attempts to anticipate the timing, needs and likely results of growth to minimize adverse impacts, to provide necessary public services and to support and plan for requisite public funding or other actions. A second, less accommodating style of growth planning employed in some communities around the country is termed growth control. This approach tries to discourage growth by deliberately slowing, restricting or even stopping it from occurring. During the peak of high population growth in California and Florida during the 1970s and 1980s, many communities enacted local ordinances limiting building permits, stopped infrastructure expansions, charged excessively high impact fees, enacted severe subdivision requirements or restricted selected land uses through exclusionary zoning ordinances. The objective of this approach is to slow or control the pace of

growth to fit the community’s ability (or willingness) to absorb it. The end result in almost all cases was that land prices increased explosively, resulting in some of the highest-priced housing markets in the country. The third technique is the so-called smart growth approach, which consists of enacting policies, regulations and practices to counteract or prevent suburban sprawl. The approach features a form of growth control that encourages or directly requires growth into higher-density, mixed-use developments concentrated in urban centers. It is not focused on preventing or stopping development but rather is a tactic to foster more concentrated urban spatial development instead of suburban sprawl. The primary difference in the three growth planning approaches lies in the intent of the authority implementing the approach. If a jurisdiction’s intent is to stop or retard growth, then a rigorous growth control approach is developed. If the intent is to embrace growth and to try to cope with it as well as possible, then a growth management approach is appropriate. But even the most accommodating management approach will still contain some elements of control. Smart growth has become a popular, stylized approach during the past two decades, and many major metropolitan areas have embraced some aspect of it.

Limitations, Local Planning Problems Regardless of the approach to planning and application, the process may possess inherent limitations, often with conflicting specific results. Land use and development regulations are aimed at protecting existing property values, providing funding for public infrastructure construction, or achieving specific local public goals such as parks, open space and transportation modes. There is no common standard for growth planning among or between jurisdictions. Each jurisdiction may employ different practices and enact its own overlapping codes and regulations. These regulatory controls often influence areas beyond the political boundaries of the local community. For example, a smart-growth initiative within a city may well encourage urban sprawl into a surrounding county not subject to the same regulations. Differences in regulations and controls also create competitive local advantages and disadvantages between metropolitan areas that encourage local developers to gravitate toward one community in preference to another.

Texas added approximately 14 million people between 1970 and 2010, a four-decade period. It is expected to grow by roughly another 14 million people in the coming two decades.

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Further problems arise in providing uniform enforcement for local growth controls. Developers and planners spend significant time and resources negotiating local land use codes — zoning codes, building codes, environmental codes — resulting in numerous variances and exceptions.

Effects On Housing

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ublic growth planning affects housing in different ways, but typically it results in higher land and development costs, which translate into higher housing costs. For some, this alone would be an argument to limit or eliminate public planning and land use controls. But the reality is that effective planning can facilitate timely development and more efficient land uses as well as plans for public financial requirements and accommodation of other changes that growth inevitably creates. The marginal cost-benefit of planning and land use regulation is a never-ending debate. Housing cost increases caused by local land use regulations and ordinances typically come from three sources: 1. Direct restrictions on housing supply through zoning, density controls, land set-asides, open space requirements and similar regulations. These regulatory controls effectively ration the supply of developable land, increasing land costs or forcing development to move beyond the boundaries of the regulatory enforcement. 2. Direct costs or impact fees, permitting and platting fees, or building- and energy-code requirements or special assessments. Direct costs are typically constant per housing unit (or lot) regardless of the value of the unit. They affect low-priced housing far more severely than higherpriced properties. 3. Indirect costs caused by uncertain time and compliance requirements such as lengthy permit and plan review processes with unpredictable outcomes. These costs simply manifest the old adage that time is money. For the developer financing the project, the interest clock never stops ticking. Other problems derive from the ongoing conflict between fluctuating public wants and needs — open space, transportation and congestion relief and tax revenues, for example — and a private developer’s need to cover costs and make a profit. In some cases, there is little or no incentive for efficiency in regulatory processes and procedures for government enforcement. Multiple agencies or departments may become involved before any final development project authorization is granted. On top of the time delay problem is the uncertainty of the review

process result, which creates additional risk and cost to development. All developers attempt to pass through as much of the regulatory costs as possible to buyers. The land developer passes the costs through to the builder in the form of a higher land (lot) price, and the builder passes the costs through to the homebuyer either as higher rent or a higher sales price. How much of the regulatory costs can be passed through is limited by the strength of market demand within the final price point. Many developers follow the path of least resistance, preferring to develop property outside the jurisdictional boundaries of regulatory control — typically in the county outside of a municipality. Developing land subject to fewer regulatory controls avoids the extra direct and indirect costs, leading to lower-cost housing products. Of course, this often results in the urban sprawl that some of the regulations attempted to forestall. Some developers, however, intentionally look to develop new housing in highly controlled areas to minimize competition and achieve monopoly pricing. As the sole or limited provider of new product, they can pass through the extra costs through higher-priced final units, especially where demand for new units is strong. These developers become accustomed to dealing with the various regulatory agencies and simply plan for the delays and extra costs that arise.

Extensive research over decades suggests that growth planning and land use regulatory practices increase land and housing costs from 10 percent to 40 percent.

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Affordable Housing and Growth Planning By increasing the per-unit land cost, the effect of land use controls and growth planning on local affordable housing is fairly obvious. Affordable housing may not be a high priority or even a growth-planning objective. Even if affordable housing is a stated objective, the consequences of land use controls still increase land and housing costs, working at odds with producing affordable products. In the past couple of decades, the regulatory trend has been toward “inclusionary” zoning that mandates a predetermined number of affordable housing units in new major urban residential developments. Affordable housing broadly refers to decent-quality housing that low- and moderate-income households can afford without paying more than 30 percent of their income for total housing costs. Roughly defined, low-income households earn 50 percent or less of the local area median household income — an amount at or very near poverty level. Moderate-income, “workforce” households generally earn between 50 percent and 80 percent of the local median income. TIERRA GRANDE


At the state level, Texas’ 2011 median household income was $49,392. Thus, low-income Texas households (by definition 25 percent of all Texas households) earn $24,696 or less per year. Moderate-income Texas households earn between $24,696 and $39,514 (80 percent of median). About 40 percent of Texas households fall into this category. Assuming households can get a 30-year, fixed-rate 4 percent mortgage with a 5 percent down payment and taxes, insurance and utilities run about 5.8 percent of the property value per year, with a 30 percent debt-to-income ratio, the median income household could afford a home priced no more than $131,799. A moderate-income household (at 80 percent of median) could afford a home priced no more than $105,440; and a low-income household could afford no more than $65,900. As local growth planning leads to higher-cost housing it becomes increasingly difficult to produce new housing units in the price ranges needed to satisfy the demand for housing by low- and moderate-income households.

Planning Efficiency, Effectiveness

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rowth planning is not standardized and lacks common methodology, application and intent across jurisdictions. Consequently, evaluating the efficacy of an individual planning effort is difficult, and differences between and among jurisdictions often create unbalanced competition between areas for new development. Changing market conditions in specific areas further render growth-planning impacts less predictable. Nevertheless, extensive research over decades suggests that growth planning and land use regulatory practices increase land and housing costs from 10 percent to 40 percent. The relative cost-benefits of local planning are blurred by unanticipated speed-up or slow-down in growth and market demand. Local planners trying to implement policies and practices to protect public interests while fostering orderly, sustainable growth in the community find themselves at odds with pro-growth advocates. Affordable housing mandates, for example, may face stiff “not-in-my-backyard” and local political objections. Texas’ growth continues at a rapid pace. Efficient, effective growth planning is paramount to address statewide issues such as interurban transportation systems, water supply and education APRIL 2013

as well as local issues including road congestion, signage and aesthetics, and drainage. In broad terms, planners and policy makers may want to incorporate the following concepts in formulating and enacting future growth plans: • standardize local practices, policies and forms of land use growth planning (for example, maximum fees for specific regulations); • regionalize planning to avoid major disparities among or between competing local communities as well as surrounding, nonregulated areas for new growth and development; • simplify review and regulatory processes and procedures to avoid excessive delays and to facilitate better understanding of planning intent and objectives; and • establish uniform oversight and enforcement that leads to fewer variances and exceptions. Texas’ long-term development may be well served if such simple planning fundamentals are incorporated into future state and local growth planning efforts. Dr. Gaines (jpgaines@tamu.edu) and Dr. Hunt (hhunt@tamu.edu) are research economists with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Texas’ population is growing rapidly. Government and the private sector alike should plan, anticipate and prepare for this growth. While there is a cost for growth planning, that cost is generally acceptable considering the chaos that could prevail without planning.

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Property Taxes

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exans despise taxes. Mere mention of the word invites a torrent of complaints about the confiscatory nature of taxes levied in the taxpayer’s particular corner of the state. Some say Texas might do well to focus revenue-raising efforts on consumption by foregoing property tax collections in favor of an expanded sales tax. That expansion would presumably include a sales tax applied to real estate transactions in place of annual property tax assessments. This alternate tax plan has stimulated interest despite a current sales tax that exacts a 6.25 percent state levy plus up to 2 percent more for local governments.

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Conventional wisdom says Texas’ property tax imposes a crushing burden on its citizens that is strangling economic growth. But facts suggest a different reality.

Tax Structure Analysis The Tax Foundation, a nonpartisan tax research group, publishes a complete analysis of the tax structure for state and local tax collections in each state. This report allows businesses to compare tax climates from one locale to another. Entitled “Facts & Figures 2012: How Does Your State Compare,” the report covers all taxes assessed, including individual income, corporate income, sales,

property taxes, excise taxes, estate taxes and even implicit lottery tax revenue. The report lists and ranks each of these revenue sources for each state and combines them to compare total tax burdens. The analysis reveals that Texas, at $3,197 in tax burden per capita, ranked 39th among the 50 states and was well below the national average of $4,160 per capita for the 2009 fiscal year. The total Texas state and local tax burden amounts to 7.9 percent of state income. By that measure, Texas ranked 45th nationally, well short of the 9.8 percent national average. The foundation analysis continues with a calculated state business tax climate index designed to measure how the mix of tax laws in each state impacts business performance. The lower the number, the better the climate for businesses. Reflecting Texas’ reputation for a business-friendly environment, the foundation index ranks Texas as the 9th best business tax environment among the states. However, the Texas corporate tax climate ranks 37th. The much-maligned property tax places Texas 31st while the current sales tax actually places it 35th, making it less business friendly than the property tax. Unemployment tax checks in at 15th, and the franchise tax on partnerships and subchapter S corporations leads to a 7th place ranking on the individual income tax, behind the other six states without such a tax. These rankings suggest that sales tax is more of a problem for businesses than property tax. TIERRA GRANDE


Sales Tax–Property Tax Tradeoff

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dvocates of the expanded sales tax in place of property tax cite a study, “Enhancing Texas’ Economic Growth Through Tax Reform,” published by the Texas Public Policy Foundation. The study suggests such a move would lead to a renaissance in Texas business formation, adding jobs to an already strong economy. Using sophisticated modeling, the authors conclude that adopting this unprecedented tax structure would provide the Texas economy a substantial boost. Evaluations of the sales tax for property tax tradeoff suggest that purchasers of commercial properties would realize enough operating cost savings to more than compensate for the sales tax on the purchase of the property. Moreover, given an unprecedented expansion of the tax base, the move could be made with a sales tax rate of 11 percent according to the Texas Public Policy Foundation study. However, the analyses do not consider the effects an increased sales tax would have on other operating expenses in the economy. Higher taxes on those items would tend to offset any property tax savings. Further, those estimates seem to ignore the tax avoidance behavior that unprecedented tax rate increases would undoubtedly inspire in the everyday conduct of commerce. Other difficulties associated with such a move were identified in “A ‘Big Idea’ That’s Bad for Texas,” an article by Billy Hamilton, commissioned by Texas Tax TRUTH. Notably, the tax base would have to be expanded to include items and activities currently not taxed, APRIL 2013

including groceries, medicine, agricultural feed, seed, chemicals, supplies, and other items such as animals sold by nonprofit animal shelters. Presumably, all of the currently available exemptions and exclusions from the sales tax would be potential candidates for the expanded tax base. The sale of real estate would also be subject to the expanded sales tax. Without such an expansion, the report estimates the proposed switch would

One study suggests the property tax may well be more beneficial to economic growth than either the income tax or a consumptionbased tax. require a 25 percent sales tax rate just to maintain revenues at recent levels. A report from the comptroller’s office to Representative Jim Keffer confirms that an estimated 23 percent rate would be needed to provide a $61.76 billion revenue stream, which approaches recent combined total property and sales tax revenues. Given the political difficulties of expanding the tax base and uncertainty surrounding the proposed shift, Hamilton describes the proposition as “a risky and untested experiment.”

Property Taxes, Economic Growth Before undertaking this strategy, Texans may find it prudent to consider the effects discovered in a study conducted by the Organization for Economic Cooperation and Development (OECD) entitled “Do Tax Structures Affect Aggregate Economic Growth? Empirical Evidence from a Panel of OECD Countries.” Analysis of tax structures in 21 OECD countries found that property taxes may be the least destructive of the three major tax instruments (income, consumption and property). The exhaustive study looked at the relationship between tax structures and economic performance measured by gross domestic product. The study findings note: The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property. More precisely, the findings allow the establishment of a ranking of tax instruments with respect to their relationship to economic growth. Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth friendly [emphasis added] followed immediately by consumption taxes. This study suggests the property tax may well be more beneficial to economic growth than either the income tax or a consumption-based tax. Moving to a consumption-based tax from a property tax may actually have a negative effect according to these results.

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P

The Hamilton study found year-to-year variations in sales tax collections, as measured by standard deviation, exceeded those in property tax collections by more than 40 percent between 2000 and 2011.

erhaps the property tax deserves another look. Despite being perceived as big, in your face, and not fair, the property tax has not vanished. Could it be that it has redeeming qualities? Property taxes in the United States predate the Declaration of Independence by more than 130 years. That makes it the oldest of the three major tax bases for state and local governments. The tax emerged as the only form of tax available to fund local governments and provided all the revenues for local governmental operations. Property owners benefited from the activities of local governments as they built and maintained infrastructure, provided legal services and regulated local activities. The relative values of the property owned by the citizens reflected the value of those benefits, thus serving as the basis for assessing each property owner’s share of the cost. Moreover, the amount of that cost was decided by locally controlled governmental entities. As societies and economies matured, other forms of taxation appeared to bolster local governmental operations. Sales taxes, income taxes and user fees emerged as alternative sources of revenue for local governments, increasingly taking on tasks far removed from providing basic services. Public services came to include an increasing variety of activities ranging from animal bites to youth workshops and public schools. Despite other sources of revenue and nonproperty-related activities, the property tax continues to provide a substantial share of local government revenue. Because it has been such a consistent

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standby for local governments for so long, owners expect to pay property taxes each year, and they know where to go to appeal assessments. This locally administered source of funding leaves control of local government activies in the hands of community members.

Stable Tax Base

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ecause property values change slowly, the property tax base is more stable than income and sales taxes. The Hamilton study found yearto-year variations in sales tax collections, as measured by standard deviation, exceeded those in property tax collections by more than 40 percent between 2000 and 2011. This suggests that local governments can depend on a more stable revenue stream from property taxes. Property tax visibility, which is seen as a negative quality, also could be seen to have a positive influence on the supply of public goods and services. Because these assessments impose sizable outlays on an annual basis, citizens are reminded annually of the cost of these goods and services offered by their local governments. Each remittance may prompt citizens to evaluate the wisdom of

continuing local activities at current levels given the expense. So the very quality that contributes to the property tax’s unpopularity also enhances the efficiency of providing local government activities. Critics often point out that rising values make taxes unaffordable for current owners. Owners faced with rising levies may decide to sell and move to more affordable properties. But even this pernicious aspect of the tax can have a positive effect on local community development. Take, for example, the owner of vacant land ripe for development. Rising market values feed rising property tax levies, motivating the owner to convert unused land to a higher-valued use. Without a property tax expense, a speculator could delay development indefinitely, potentially contributing to urban sprawl and depriving the community of needed housing and commercial properties. These factors suggest that the property tax likely will continue as a major source of revenue in Texas for the foreseeable future. Dr. Gilliland (c-gilliland@tamu.edu) is a research economist and Adame and Oberrender research assistants with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Texas’ property tax has few fans. Some argue that the tax has a negative effect on economic growth and should be replaced with an expanded sales tax. Research, however, suggests otherwise.

TIERRA GRANDE


Don’t worry. We’re not going to tell you anything that will make you blush. But you’ll definitely get excited about the “next generation” of our popular Market Reports, cleverly named

Market Data Sources.

This new resource provides links to all the data sources from our old annual Market Reports. It’s even better, though, because links will be updated throughout the year, whenever new data are posted.

We’re talking lots of information here.

Demographics, education, employment, housing, hotel, industrial, multifamily, office and retail for all Texas metropolitan statistical areas.

Lots, but not “too much.” Go to www.recenter.tamu.edu In the DATA menu, click Market Data Sources.

APRIL 2013

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Tierra Grande - April 2013  

The Real Estate Center is the nation's largest publicly funded organization devoted to real estate research. The Center's flagship periodica...

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