TG - Summer 2023

Summer 2023

TM

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

TEXAS A&M UNIVERSITY

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

In This Issue Flood Insurance CO2 Emissions in Commercial Buildings ‘As Is’ Sales Austin Housing Market Tax Benefits for Farmers Property Taxes Texas Industrial Overview Land Market Insights Lender-Required Repairs

Helping Texans make the best real estate decisions since 1971

Summer 2023

TM

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

Before inviting friends to enjoy the great outdoors at your place . . .

. . . read our Land Occupier’s Liability Guide .

Available on our website.

Learn how you could be held liable for an injury that occurs on a piece of land you occupy—even if you’re not the landowner.

iii

Land Occupier’s Liability Guide Rusty Adams

Research Attorney TEXAS A&M UNIVERSITY

Texas Real Estate Research Center

TECHNICAL REPORT

2 3 8 0

M AY 2 0 2 3

TR

SUMMER 2023

TM

VOLUME 30, NUMBER 3 www.recenter.tamu.edu @recentertx TEXAS REAL ESTATE RESEARCH CENTER

5

2 | Come Rain or High Water Flood, Water Damage, and the Homeowners’ Insurance Policy With recent deluges, Texans need to check more than their rain gauges. Insurance needs and policy coverages should be on the radar as well. By Richard Rudolph

8 | Navigating ‘As Is’ Sales Commercial’s Carbon Conundrum Carbon-dated? Not quite, but CO2 emissions could soon impact the fate of aging buildings. By Harold D. Hunt and Bucky Banks

When it comes to an “As Is” home sale, what the buyer sees is what the buyer gets, right? Actually, it’s not as simple as that. Here’s what you need to know to help your client sell that fixer-upper. By Kerri Lewis

10 | Austin’s Power

14

Why the Capital City’s Home Prices Surged The city that flaunts its reputation for being “weird” has become a major destination city for technology and science-based companies. That, along with other factors, has taken its toll on area home prices. By Joshua Roberson and Mallika Natarajan

18 | Texas’ Property Tax Puzzle Greener Pastures Tax Benefits for Farmers Attention, investors: That large piece of rural land you just purchased could be rich with potential tax benefits . . . provided you don’t mind a little thought, planning, and getting your hands dirty. By William D. Elliott

Executive Director, GARY W. MALER Operations Director, PAMELA CANON Research Director, DANIEL ONEY Senior Editor, BRYAN POPE Associate Editor, KAMMY BAUMANN Creative Manager, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III Graphic Designer III, ALDEN DeMOSS

Texans want tax relief, but attempted solutions in other states have had unintended consequences. This report explains the factors that are at play as the Texas Legislature looks for some middle ground. By Charles E. Gilliland and Lynn D. Krebs

23 | A Bumpy Ride Mostly ‘Ups’ for Texas Industrial Markets Over the past four decades, the state’s industrial markets have had more ups and down than the Texas Giant. But geographic patterns emerge when you take a closer look at individual markets. By Daniel Oney

26 | For Land’s Sake Texas Land Market Outlook and Issues The Center’s Outlook for Texas Land Markets conference has always yielded a bumper crop of practical insights and takeaways for landowners, and this year was no different.

28 | Practically Speaking Real Estate Questions Answered The mortgage lender is requiring an outdated septic system be replaced before closing on a loan. The cost is expensive, and the option period has already ended. It’s enough to leave a buyer flushed with anxiety.

But there are options. By Kerri Lewis and Avis Wukasch

ADVISORY COMMITTEE: Doug Jennings, Fort Worth, chairman; Doug Foster, San Antonio, vice chairman; 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 Academic and Strategic Collaborations, 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.

Communications Advisor, DAVID S. JONES

PHOTOGRAPHY/ILLUSTRATIONS: Alden DeMoss, pp. 1 (top), 2-3, 4, 26-27; Robert Beals II, pp. 1 (bottom), 8; Center files, pp. 7, 10-11, 12-13, 14-15, 16-17, 18-19, 22, 23.

Circulation Manager, MARK BAUMANN

LICENSEE ADDRESS CHANGE. Log on to your Texas Real Estate Commission account to change your mailing address.

Lithography, RR DONNELLEY, HOUSTON

© 2023, Texas Real Estate Research Center. All rights reserved.

ON THE COVER: SUMMER 2023 Brown pelicans perched at Port Bolivar ferry landing. Photographed by JP Beato III.

1

Residential

Flood, Water Damage, and the Homeowners’ Insurance Policy Homeowners should consider their insurance needs for the likely types of “water damage” loss that could occur, then read their policies carefully to understand what is and is not covered. By Richard Rudolph

A

ccording to the Insurance Information Institute, the second leading cause of homeowners’ claims is water damage and freezing. This type of loss accounts for 29 percent of claims, with an average claim paid of $11,097 in 2021.

Because water damage is the cause of nearly one-third of all homeowners’ claims, homeowners should understand what coverage is provided in the typical homeowners’ policy and, just as importantly, what coverage is not. This will allow them to take appropriate actions to address this common source of losses and claims and avoid unpleasant surprises and expenses.

Unfortunately, the overly broad and loose interpretation of the term “water damage” makes this relatively simple step challenging. Floods, leaks, seepage, backups, heavy rains, overflowing rivers or lakes, and tidal surges are common examples of water damage, and various insurance coverages respond differently to each.

WHAT CONSTITUTES A ‘FLOOD’?

One of the most widely misunderstood words in the typical homeowner’s insurance policy is “flood.” The reason is simple: the term “flood” appears as an exclusion to coverage but is not defined in the policy. For example, the Insurance Services Office (ISO) Homeowners Policy form has several exclusions addressing perils that may be considered a “flood”: • under “earth movement,” a “landslide, mudslide or mudflow, subsidence or sinkhole, or any other earth movement,” and • under “water damage,” “(a) flood, surface water, waves, tidal water, overflow of a body of water, or

2

spray from any of these, whether or not driven by wind, (2) water or water-borne material which backs up through sewers or drains or which overflows or is discharged from a sump, sump pump, or related equipment,” or seepage.

The Texas HOB Homeowner’s Policy form has similar wording: “We do not cover loss . . . caused by settling, cracking . . . of foundations, walls, floors, . . . retaining walls . . . We do not cover loss caused by or resulting from flood, surface water, waves, tidal water or tidal waves, overflow of streams, or other bodies of water or spray from any of these whether or not driven by wind.”

Both forms have a similar weakness because of the lack of definitions in the policy terms and conditions. In the ISO form, the only terms found in the exclusion that are defined in the policy are “earth movement” and “water damage.” The Texas form defines none of the specific terms. What constitutes the terms “earth movement” and “water damage,” or “flood, surface water, waves, etc.,” is also not found in the Texas form. In short, many important terms and definitions are found in neither of the insurance contracts.

When a specific term is not defined by the insurance policy, other sources must provide the definition. Therein lies the problem. According to three popular dictionaries, “flood” broadly means a large amount of water covering an area that is usually dry. As such, these definitions would appear to be commonsense interpretations of what constitutes “flood” in the homeowner’s insurance policy.

However, the standard practice in the insurance industry is to use the Federal Emergency Management Agency’s (FEMA) definition of “flood” (and, by extension, “earth movement”) without specific reference to that source. That definition is not closely aligned to a commonsense definition of the term “flood.”

TG

According to FEMA’s National Flood Insurance Program (NFIP) Dwelling Form F-122, a flood is: • a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (one of which is your property) from: 0 overflow of inland or tidal waters, 0 unusual and rapid accumulation or runoff of surface waters from any source, or 0 mudflow (as defined in the policy form); or • collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined . . . above.

Because “flood” is clearly excluded from the standard homeowners’ insurance, the homeowner must seek coverage from the NFIP. To start, the homeowner must determine the property’s flood zone. This is easily accomplished by going to fema.gov and selecting “Floods & Maps,” then following the link to Flood Map Service Center to determine if the property is in a designated flood zone. This step is important because it gives the likelihood of the location flooding, which helps determine the amount of the insurance premium. The average flood insurance premium for properties in Special Flood Hazard Areas (SFHA), noted as a zone beginning with A or V, is almost 50 percent higher than the premium for properties in low- to moderate-risk zones (any zone labeled B, C, or X). omeowners who have a governmentbacked mortgage and are in a designated flood zone must purchase flood insurance from the NFIP. So must recipients of federal disaster relief money. Mortgage holders may also require flood insurance as a condition for making a loan even if the mortgage is not governmentbacked.

Homeowners who do not have a government-backed mortgage or have not received federal disaster relief and are not in a high-risk flood zone may still purchase flood insurance from the NFIP. The most serious drawback of NFIP coverage is that its limits are relatively low, at $250,000 for an ordinary dwelling and $100,000 for contents. In addition, the “flood” insurance coverage offered by NFIP only covers

“flood” as defined by FEMA. Other types of “flood” losses, such as backup of sewers or septic systems, burst pipes, overflow from a washing machine, or damage caused by rain, sleet, snow, or hail, are not included in FEMA’s definition and are, therefore, not covered by an NFIP policy.

NOW A WORD ABOUT WATER DAMAGE In addition to the matter of “flood,” homeowners must consider “water damage,” a term that is more broadly defined in the homeowners’ insurance policy than FEMA’s definition of “flood.” Fortunately, homeowners’ insurance coverage with higher limits is widely available in the homeowners’ insurance marketplace at relatively reasonable rates. Additional coverage options beyond the standard homeowners’ policy may also be available through the broader insurance marketplace. The homeowners’ insurance agent may have knowledge of or access to these.

The key to covering water damage is realizing that the damage must be sudden and accidental. For example, water pouring from a burst pipe qualifies, but water seeping in from a foundation does not. The typical homeowners’ insurance covers water damage caused by: • burst pipes, • accidental leaks from plumbing or appliances, • wind-blown snow or rain, • a roof leak following damage from a storm or wind, • water used to extinguish a fire, and • water that enters the dwelling because of ice dams on the roof.

Related to the water damage is damage caused by mold and mildew from unknown leaks or seepage.

H

SUMMER 2023

3

THINGS POLICIES GENERALLY DON’T COVER There are also common policy exclusions that address the peril of water damage. For example, water damage is not covered if the damage arises from a lack of maintenance or negligence.

Damage from a burst pipe is covered unless the damage arises from freezing caused by a lack of sufficient heat. Related to that exclusion is water damage caused by an intentional act, such as turning heat off in the winter. However, damage caused by filling a bathtub with water and then simply forgetting to turn it off is covered.

Leaks from a swimming pool or similar structure and seepage or leakage through a foundation are excluded.

Damage caused by mold and mildew is excluded if the leakage or seepage is known to the homeowner or arises out of normal maintenance or negligence.

The last exclusion addresses the cost to repair or replace the source of water damage. While the damage itself may be covered, the cost of repair or replacement of the device causing the leak is not.

OPTIONAL COVERAGES Homeowners can purchase optional endorsements that provide coverage for water damage normally excluded from the policy.

Water backup coverage fills the gap created by the exclusion that addresses “water or water-borne material that backs up through sewers or drains or that overflows or is discharged from a sump, sump pump, or related equipment.” This endorsement covers backup of sewers, drains, septic systems, and sump pumps.

Another available endorsement covers damaged utility lines under the homeowners’ property, including the expense to excavate and reseed.

4

PLAN AHEAD AND AVOID PESKY PAPERWORK While purchasing appropriate insurance coverage is always prudent, so is taking steps to prevent losses before they occur or mitigate damages.

Practical measures include stockpiling sandbags for building dams around openings in the dwelling, having emergency pumping equipment on hand, keeping personal property off the floor, and storing property in waterproof containers. or new construction, homeowners might consider building away from designated flood zones or on the highest elevation in the area, or building the dwelling on stilts or a concrete foundation that raises it above the expected high-water level.

In addition, the following simple steps could help homeowners avoid the irksome task of filing an insurance claim: • Drain water heaters twice a year to prevent sediment buildup that can lead to corrosion of the tank, thus preventing leaks.

• Install smart water leak detectors on appliances such as dishwashers or washing machines. These smart devices will send a message to a cell phone alerting the homeowner of a leak. Some of these smart devices can also automatically shut off the water supply to an appliance that suddenly springs a leak, and others detect an overflow from sump pumps.

• Regularly inspect hoses on appliances and replace those worn or cracking before a leak occurs.

• Inspect the roof for damage, particularly following a severe storm with high winds or hail. Replace any loose or missing shingles or tiles and secure flashing that has been pulled away.

• In cold climates, insulate pipes or wrap them with heating tapes. Insulate, heat, or leave open any enclosed areas with pipes, such as attics, to prevent freezing. Do not turn off or significantly lower heat in areas where water pipes are present.

• Use a rake to safely remove snow from roofs to prevent buildups that result in ice dams. Ice dams allow for snow/ice melt to pool during the day and seep under shingles.

• Clean leaves out of gutters in the fall to prevent clogged drains and downspouts that can lead to the formation of ice dams.

For more on the information covered in this article, consult a licensed insurance agent.

F

Dr. Rudolph (famousreindeer2@yahoo.com) has 20 years in insurance brokerage and 30 years of experience in insurance and risk management consulting and education.

TG

Commercial

Commercial’s Carbon Conundrum

The U.S. Green Building Council estimates that buildings and construction account for at least 31 percent of energy-related CO2 emissions globally. Although no strict timeline has been established, commercial building owners in Texas may have to one day consider the level of emissions created throughout the life of their properties when deciding what to do with aging structures.

By Harold D. Hunt and Bucky Banks

SUMMER 2023

T

he global movement to address environmental, social, and governance (ESG) concerns continues to accelerate.

Government regulations are becoming more stringent in an attempt to protect the environment. Businesses large and small are also increasingly sensitive to their impact on energy usage, resource conservation, and the climate.

In real estate, the environmental impact of a decision to either refurbish or demolish and rebuild an existing commercial property is a perfect example of pressures on the horizon that will force more attention on this subject. The Carbon Leadership Forum reports that approximately 30 percent of all global carbon emissions are attributed to the building sector.

When attempting to quantify the environmental impact of decisions regarding existing properties, one of the challenges commercial property owners may soon face will be minimizing “embodied carbon.” According to the U.S. Green Building Council (USGBC), eight states already have policies in place addressing the issue: Washington, Oregon, California, Colorado, Minnesota, Connecticut, New York, and New Jersey.

5

Life Cycle of Commercial Buildings

E

mbodied carbon is defined as the greenhouse gas emissions produced by the manufacture, transportation, installation, maintenance, and disposal of building materials. All of these factors combine to make up the life of a commercial building. Numerous publications separate a building’s cradle-to-grave life cycle into four discrete stages: 1. Product stage: Involves the extraction, transportation, and manufacture of the materials needed to construct a building.

2. Construction stage: Involves the transportation to and installation of material components at the site to erect the building.

3. Use stage: Involves the operation, maintenance, repair, and possible refurbishment of the finished building.

4. End-of-life stage: Involves the deconstruction, transportation, waste processing, and disposal of building materials.

The embodied carbon in a commercial building comprises all greenhouse gases (GHGs) produced in every life cycle stage except the use stage. GHGs produced in the use stage are defined as “operational” carbon that can be heavily impacted by the building’s energy efficiency. Historically, much more attention has been paid to the level of operational carbon in commercial buildings than levels of embodied carbon. The formula used to calculate embodied carbon is typically:

Embodied carbon = quantity of each material or product × a carbon factor for the product According to the Institution of Structural Engineers (ISE), approximately 55 percent of the carbon embodied across a building’s life cycle occurs before a building is even occupied. The highest levels of embodied carbon will be produced in the production stage followed by the construction stage.

A quick online search reveals several available software products for estimating embodied carbon in new construction. ISE also provides a detailed analysis and discussion of the subject in its 2020 publication How to Calculate Embodied Carbon.

These numbers can provide a reasonable estimate for a proposed building’s environmental impact from construction to demolition, so long as the exact materials and quantities or volumes are known. However, the availability of embodied carbon statistics for the materials being used in construction is a limiting factor.

The USGBC reports that levels of embodied carbon in building materials and products can be identified through a reporting system known as Environmental Product Declarations (EPDs). The system can assess a material’s environmental impact throughout every life cycle stage. Although EPDs are largely voluntary in the U.S., their use is on the rise.

The USGBC’s LEED rating system does offer “materials and resources” credits to reduce embodied carbon. However, they also note that changes to the LEED requirements and credits are ongoing as new information, strategies, and policies become available.

The Inflation Reduction Act (IRA) is a recent attempt at the federal level to decrease embodied carbon. The legislation aims to reduce total carbon emissions by 40 percent by 2030. Approximately $5 billion will be allocated to low-carbon spending to improve physical infrastructure. The distribution of funds will include money for developing and standardizing EPDs as well as labeling and using low-embodied carbon materials, technologies, and products.

Regulatory Response and Developer Dilemmas Real estate professionals should expect more legislation at all levels of government addressing the environmental impact of commercial development and redevelopment. The USGBC, EPA, and the Urban Land Institute (ULI) are all advocating and adopting increasingly stringent standards for limiting GHG emissions through improved designs and materials.

While the cost of altering or removing dated properties may prove beneficial to the environment, it can simultaneously lower the return on a property owner’s investment. How landlords respond will have a significant impact on the future of commercial real estate development. If a meaningful shift in demand or supply for commercial space occurs along with GHG restrictions, many properties may have trouble maintaining positive cash flow, thus reducing any financial benefits from a renovation.

Destruction of property value and a loss of appeal for new development will follow.

A newly constructed building using superior materials can produce a property that is more energy efficient and lower in embodied carbon. However, developers will also factor in the tradeoff in extra cost for constructing such a property. Furthermore, calculating the amount of embodied carbon in older existing buildings is a much more complex task. Again, cost will play an important role in the decision to refurbish or demolish an existing building.

Cost benchmarking data for determining acceptable embodied carbon in a commercial retrofit project is another limiting factor in the process. Due to a lack of building-level data, no consensus has formed around any benchmark for embodied carbon levels in a building.

Real estate professionals should expect more legislation at all levels of government addressing the environmental impact of commercial development and redevelopment.

Author Harold Hunt talks more about this on

TRERC’s YouTube channel.

6

TG

RESPONDENTS TO A RECENT U.S. GREEN BUILDING Council survey on green building trends and sentiments ranked passive design principles, energy efficient equipment, and reducing embodied carbon of key materials such as concrete, steel, and glass as the top three strategies for achieving building decarbonization.

T

o quantify GHGs and their potential effects on climate change, a method known as a life cycle assessment (LCA) is used to track the emissions produced over the full life cycle of a material or construction process. The emissions are then converted into specific metrics that reflect their potential effects on the environment.

LCA tools are becoming more popular for deciding whether to refurbish or demolish and rebuild commercial properties.

However, users should be aware that different LCA tools will generate different results. Unfortunately, some underlying databases are not regularly maintained, while documentation of some data sources and methodologies are not always easily available. Furthermore, most LCA tools have been primarily focused on specific material characteristics and not whole buildings. Data collection and reporting guidelines are needed for data standardization and transparency. Material manufacturers must increase participation in this process as well.

Users should also remember that embodied carbon calculations in LCAs are only estimates. Many variables and assumptions are included in the calculations. For example, estimates of the embodied carbon generated can vary widely based on the location where materials are produced, the transportation distance from production to final destination, and the method of production. Uncertainty in results can increase even further when estimating embodied carbon in older buildings.

Refurbish or Demolish? That is the Question The decision to refurbish an older commercial building or demolish it for new construction will generally be based on which choice produces the highest return on investment. The answer may often be in favor of demolishing and redeveloping the property. Unexpected problems can always arise when the choice is refurbishment. Newly constructed buildings have the advantage of newer, possibly higher quality materials that abide by more stringent energy codes that many cities have put in place.

SUMMER 2023

The result of implementing such products should be an improved tenant experience and higher rents, a win-win for both developers and tenants. Practically speaking, owners should be committed to supporting the refurbishment of an existing building if there is tenant demand. However, most owners will remain committed to maintaining the attractiveness and energy efficiency of a property only if it supports improved cash flow growth. Although studies have shown that refurbishing buildings has only half the embodied carbon impact of new construction, energy efficiency does not necessarily guarantee a building will command superior rents. Building owners have little reason to support any costly renovation that does not increase tenant demand or utility.

The current, post-COVID economic environment has initiated the conversation between building owners, developers, and municipalities regarding what to do about existing commercial buildings, especially office properties. As a result, expect refurbishment or demolition to make way for new construction to be a higher priority for many office buildings. efore the pandemic, trophy-class office properties were often assumed to be insulated from near-term market forces. Such properties are no longer shielded by the perception of continued strong demand for office space in the years ahead. This trend appears to be entrenched, and the negative value shift may provide property owners with an incentive to seek returns through alternative uses. Such a decision will invariably result in a greater release of GHGs. As more older commercial buildings of every type become increasingly inefficient or obsolete, the concern over the environmental impact of any type of change or removal of the structures will only grow.

B

Dr. Hunt (hhunt@tamu.edu) is a research economist with the Texas Real Estate Research Center at Texas A&M University and 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.

7

Residential

Understanding the mechanics of an “As Is” contract and the interplay of the option period is important for agents and their clients when negotiating the original sales price of a contract or renegotiating the sales price during an option period. By Kerri Lewis

N

ow that the COVID-era feeding frenzy for buying properties has subsided and interest rates are on the rise, buyers and sellers are on more equal footing. This is a good time to remind buyers, sellers, and their agents how the property’s condition affects the sales price at various stages of the real estate transaction.

A logical place to start is by looking at the importance of the Seller’s Disclosure Notice, the meaning of “As Is,” the inspection provisions of Paragraph 7 of the One to Four Family Residential Contract (Resale), and use of the option period when renegotiating the sales price following an inspection.

Seller’s Disclosure Notice Although the Seller’s Disclosure Notice is a separate document from the sales contract, it’s no coincidence that it’s part of the contract’s Paragraph 7 on Property Condition. The Seller’s Disclosure Notice is required by Texas Property Code Section 5.008. That statute sets out the minimum information about a property’s condition that a seller must disclose to a buyer in a residential sales transaction, including prior flooding events.

The Texas Real Estate Commission (TREC) has a Seller’s Disclosure Notice

8

that parallels the statutory provisions.

Some real estate trade associations and brokerages have Seller Disclosure Notices that contain more information than is required by the statute.

Paragraph 7B of the sales contract indicates whether the buyer has received the notice before signing the contract, the buyer has not yet received the notice, or the seller is not required to give the notice under specific exemptions contained in the property code.

If the buyer has not yet received the notice, the seller has a negotiable number of days to deliver it, and the buyer has the right to terminate the contract within seven days after receiving the notice. Paragraph 7B is structured this way because the sales contract is an “As Is” contract (more on this in a moment), and knowing information about the property’s condition prior to signing the contract will affect how much the buyer is willing to pay for the property. The seven-day period allows the buyer time to review the disclosures made by the seller and possibly renegotiate the sales price or repairs based on the new information. If the parties reach an agreement during that period, they will execute an amendment to the sales contract. If no agreement is reached, the buyer has the right to terminate the sales contract and get his earnest money back.

Not only is the Seller’s Disclosure Notice important for negotiation of the sales price of a property, but it could also affect a buyer’s decision to purchase the property at all. Knowing this, some sellers may get “selective amnesia” when filling out the notice to make their property more attractive to buyers. But sellers beware: failing to properly disclose the condition of a home can bring a lawsuit from the buyer months or years after the sale. eep in mind that Texas law requires sellers and real estate agents to disclose any known material defect on the property to the buyer, whether or not it is an item listed on the Seller’s Disclosure Notice. Real estate agents do not want to get drawn into a lawsuit, so here are a few best practices concerning the Seller’s Disclosure Notice: • The seller’s disclosure is only the seller’s disclosure, and agents should never assist the seller in filling out the form. Sellers who need assistance should contact a real estate attorney or use an online program that takes them through a step-by-step program to complete the notice. Agents are certainly able to refer their clients to either.

• An agent should offer the seller every form of Seller’s Disclosure

K

TG

Notice available in the market area, (unless her broker has told them otherwise) and let the seller decide which one to complete.

• An agent should talk to his clients about the importance of completing the form fully and truthfully.

• If an agent knows about a material defect and the seller does not disclose it, the agent has an obligation under the law to disclose it to the buyer.

Notice indicates that the HVAC system is not in working order. A buyer could submit a contract noting in Paragraph 7D that the seller must repair or replace the HVAC system prior to closing. Of course, because the seller noted the issue prior to the contract, she may counter at a higher price to take into account the cost of the repair.

Paragraph 7D, “As Is” Provision

Under Paragraph 7A of the sales contract, sellers must allow buyers and their chosen inspectors (licensed by TREC or otherwise permitted by law to make inspections, like a plumber, electrician, or termite inspector) access to the property at reasonable times to perform any inspection of the property the buyer deems necessary.

The seller is also required to keep the utilities on while the contract is in effect to facilitate inspections.

The language making the sale of the property “As Is” can be found in Paragraph 7D entitled “Acceptance of Property Condition.”

The contract language defines “As Is” to mean “the present condition of the Property with any and all defects and without warranty except for the warranties of title and the warranties in this contract.” Knowing the condition of the property by receiving and reviewing the Seller’s Disclosure Notice and walking through the property to observe its current, visible condition are important steps for a buyer to take before entering into a contract and will determine what price she is willing to pay for the property.

Paragraph 7D provides two options for buyers: (1) the buyer accepts the property As Is; or (2) the buyer accepts the property As Is provided the seller, at the seller’s expense, completes certain specifically named repairs and treatments.

It is important for agents and their buyer clients to understand that the blank to be filled in for Paragraph 7D(2) is not a catch-all to be used for anything found in a future inspection (more on inspections in a minute) but for specific items that may have been noted in the Seller’s Disclosure Notice as not being in working condition, or for visible items of disrepair the buyer observed when viewing the property.

Agents and their buyer clients should also understand this paragraph provides that accepting the property “As Is” under either 7D(1) or 7D(2) does not preclude them from performing any inspections under Paragraph 7A or from negotiating an amendment based on what they find.

An example of the proper use of 7D(2) would be where the Seller’s Disclosure

Paragraph 7A Inspection Provision

sale price or have seller perform certain repairs should the inspection report reveal issues with the property that were not noticeably visible or otherwise disclosed by the seller. That last point is important when a buyer is asking for sales price reduction or repairs to be paid for by the seller under an “As Is” contract.

Remember that an “As Is” contract is one where the buyer is submitting an offer to the seller based on the property’s current condition. Generally, the listing price set by the seller is what the seller thinks the property is worth in its present condition. The seller rightfully assumes that the offer brought by the buyer is based on what the seller has revealed about the property in the Seller’s Disclosure Notice and what the buyer observed about the property’s condition during a walk-through. This is why many sellers are put off by a buyer who tries to renegotiate the contract terms based on items in an inspection report that were previously disclosed or readily observable at the property—because the seller agreed to a sales price based on the property’s present condition.

It is important that the parties and their agents understand that under an “As Is” contract, renegotiation of the sales price or seller-paid repairs should be limited to items that were not previously disclosed or not readily observable. That is the value that an inspection report brings to the transaction.

If the buyer is still in the option period, he can try to renegotiate the contract terms based on new items found.

Although the seller does not have to agree to a price reduction or repairs, he risks losing the deal if the buyer walks and gets her earnest money refunded.

In a hot market, this was not such a big deal for the seller. But in a more balanced market, the seller should consider whether he will get another offer and how much longer that will take.

Also keep in mind that if the inspection report reveals material defects, and the seller is made aware of those defects, the seller is obligated to reveal those to the next buyer, and that buyer might want equal or greater price concessions.

Texas law requires sellers and real estate agents to disclose any known material defect on the property to the buyer, whether or not it is an item listed on the Seller’s Disclosure Notice.

SUMMER 2023

Only hydrostatic testing requires written approval by the seller.

All inspections are at the buyer’s expense.

The buyer’s right to have inspections performed is not tied to the option period. This right is available regardless of whether the buyer purchased an option period, or whether or not the option period has expired.

Option Period and Renegotiation of Price After an Inspection The option period provides the buyer with some leverage to renegotiate the sales price following an inspection, so it is advisable that a buyer pay an option fee to obtain an option period under Paragraph 5 of the contract. It is also advisable that the buyer get an inspection performed during the option period with enough time left to renegotiate the

Lewis (kerrilewis13@gmail.com) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission.

9

Residential

Why the Capital City’s Home Prices Surged

I

n response to 2020’s COVID-19 pandemic, the U.S. gov-

Number of Migrants (Thousands)

Austin’s reputation as a ernment executed a series of steps, including interest rate cuts, to hold off economic calamity. What followed was technology and science hub an unprecedented increase in housing sales set off by a fall in mortgage rates to historically low levels. Housing markets the country experienced a major boost in activity, but has attracted a growing number across some markets stood out more than others.

Austin, for example. of residents in recent years, Take The capital city already had a reputation for high-priced many of them high earners housing in a state that boasted affordability. It had a strong from out of state. This increase 250 Figure 1. Texas’ Net Domestic Migration in housing demand, coupled 200 with higher buying power and a 150 still-low housing inventory, will likely keep area home prices 100 elevated. By Joshua Roberson 50 0 and Mallika Natarajan 1992

1996

2000 2004

2008

2012

2016

2020

2024

Sources: U.S. Census Bureau and Haver Analytics

10

TG

economy, attracted young talent, and had a migration boom, factors that only intensified beyond 2020. What followed was a price surge that drew much national attention.

the number of movers from other states exceeded the number from within Texas.

From which state did most movers come? California, but that’s true every year given the Golden State’s massive size.

Which Way to Austin?

However, in 2020 and 2021 the number of households from Texas has been a popular destination over the past ten years, California was more than double that of prior years (Figure 2). welcoming a steady flow of migrants from other states. After As a result, the proportion of out-of-state moves from Cali2020, Texas experienced a fornia increased to almost 30 Table 1. Percentage of Household Moves spike of inbound migration not percent of all inbound moves into Austin-Round Rock seen since migrants from New by 2021 (Table 2).

Orleans relocated following One would think Austin International Out-of-State In-State Year Moves Moves Moves the devastation of Hurricane would be a major destination Katrina (Figure 1). for Californians, especially 2012 10% 37.8% 52.3% Austin, especially, has been from the Bay Area, given both 2013 7.6% 42.8% 49.5% one of the state’s top destinacities’ connection to technol2014 9.1% 45.3% 45.6% tions for new residents. Before ogy and innovation. According 2015 7.1% 49% 44% 2020, Austin received an averto consumer data from Infu2016 6.4% 46.2% 47.4% age of 48,335 new households. tor Data Solutions, almost a 2017 8.7% 43.2% 48.1% By 2021, that number spiked third of California moves in 2018 7.3% 44.6% 48.1% to 75,555. The city had already 2021 came from the Bay Area 2019 6.4% 46.6% 47.1% been trending upward since and surrounding communi2020 8.1% 48.6% 43.3% 2016, with 2019 setting a record ties. Movers with a prior San 2021 7.9% 51.4% 40.7% of 53,680 new households.

Jose address accounted for 4.6 Source: IPUMS USA, University of Minnesota, www.ipums.org Before COVID, the majorpercent of moves, while San ity of households that moved to Austin were from other parts Francisco accounted for an additional 4.3 percent. of Texas (Table 1). Moves from other states were second, and The largest overall city source in 2021 was Los Angeles with international moves a distant third. Deep into the pandemic, 6.5 percent of moves. That’s a bit underwhelming considering SUMMER 2023

11

Number of Households

Figure 2. California Households Migrating to Austin

9,000

6,000

3,000

0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: IPUMS USA, University of Minnesota, www.ipums.org

L.A. is many times larger than both San Francisco and San Jose In most major metros, such as Dallas-Fort Worth, profescombined. Probably the biggest surprise was San Diego with sional and business services includes white collar jobs such as 5.6 percent of moves. accountants, lawyers, and executives. In Austin, however, that While California received a lot of attention in Texas during category leans heavily in the technology and sciences sectors, the pandemic, data show migration to Texas increased from and jobs in those sectors grew at the fastest rates between 2020 many other sources. For example, the number of moves from and 2021.

New York climbed from 6 percent of total moves in 2019 to 9 For example, computer systems design expanded over 40 perpercent in 2021 (Table 2). North Carolina was another top state cent in just two years, resulting in 17,600 new jobs. Estimated in the inbound pipeline, likely because of similarities between annual wages for this occupation also grew quickly during this Austin’s and Raleigh-Durham’s economies and demographics.

Table 2.Top States for Migration to Austin Regardless of where people came from, Inbound State 2015 2016 2017 2018 2019 2020 2021 they brought a lot of earning power. In 2021, California 12.6% 18.5% 16.2% 19.2% 21.5% 31.9% 29.1% the average household income of out-of-state movers was $130,000 (Table 3). Households Florida 3.4% 6.1% 5.3% 5.2% 7.1% 2.1% 6.8% moving to Austin from other parts of the Illinois 7.7% 2.0% 10.6% 3.5% 5.3% 1.9% 2.8% state earned $87,000 on average. Up until New York 10.4% 5.7% 6.4% 7.1% 6.1% 3.2% 9.1% 2017, the earnings differential was minimal.

Other 65.8% 67.7% 61.6% 65.0% 60.0% 60.8% 52.1% After that, the gap widened, with the largest Source: IPUMS USA, University of Minnesota, www.ipums.org difference occurring during COVID.

Tech-Driven Employment Explosion Like migration, Austin employment growth exploded during COVID, making the metro’s economy one of the quickest to recover. That growth was driven largely by professional and business services, which include a lot of higher-income jobs.

Growth in Austin’s professional and business services sector was already strong, ranging from 3 to 8 percent year-over-year growth in the decade leading up to COVID (Figure 3). Texas’ growth in this sector was closer to 5 percent year-over-year in 2019. Like elsewhere, Austin’s job numbers fell drastically in April 2020 but quickly bounced back by that August. After that, growth continued to expand at double-digit rates before hitting the ceiling in October 2022. Since then, month-tomonth growth has been minimal, but overall employment levels remain considerably higher than 2019 levels.

12

Table 3. Average Austin-Round Rock Household Income, In-State vs. Out-of-State Moves Year

Out-of-State

In-State

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

$89,760 $55,280 $83,224 $89,521 $91,978 $89,787 $87,995 $124,438 $115,061 $152,036 $130,327

$54,096 $60,193 $70,427 $67,995 $80,050 $77,235 $78,643 $77,191 $84,312 $102,699 $86,751

Source: IPUMS USA, University of Minnesota, www.ipums.org TG

MSA Price (Thousands of Dollars)

For more on Austin’s housing market, read Dr. Adam Perdue and Reece Neathery’s report, “What’s Driving Austin Home Price Affordability?,” by scanning the QR code.

period, expanding from almost $140,000 to $164,000. These jobs earn more than the mean household income in Austin, which was $115,863 in 2021.

Figure 3. Austin-Round Rock Professional and Business Services Job Growth

Thousands

90

60 2016

2018

2020

2022

2024

Sources: U.S. Bureau of Labor Statistics, Texas Workforce Commission, and Haver Analytics SUMMER 2023

200 100 2000

2003

2006 2009

2012

2015

2018

2021

2024

W

hile home sales peaked in the summer of 2020, home prices would not peak for almost another two years.

The most notable change in prices occurred during the first half of 2021. The highest point was in May 2022 when the median home price reached $550,000 (Figure 4), a far cry from the $328,000 recorded in May 2020.

For the next few months, Austin home prices declined in large part due to the drastic rise in mortgage interest rates influenced by the Federal Reserve’s inflation-fighting policies.

During this time, concerns about housing bubbles and crashes began to intensify. By December 2022, the median home price retreated to $450,000. Between then and March 2023, home prices hovered there, signaling that the worst may be over.

Going forward, general speculation remains concerning Austin’s housing market.

So far this year, sales have been underwhelming compared with the past five years. Homes took far longer to sell in March 2023 (80 days on average) than they did 12 months before (22 days on average).

Home prices have remained stable for the past few months with the help of chronic low listing counts. While listings have increased since 2021 and 2022, they are essentially back to pre-COVID norms, which at that time meant tight markets.

Combined with strong migration, low inventory levels may keep Austin prices elevated even after the initial drop at the height of the market.

120

2014

300

Looking Ahead

150

2012

400

Home Prices’ Rapid Rise

Regardless of where they came from, plenty of potential homebuyers came to Austin with major buying power amplified by record-low mortgage rates. The result was one of the most intense housing markets nationally.

Even with the April 2020 statewide shutdown of housing activity, Austin reached a new milestone for monthly home sales by July: 4,481 sales, an almost 20 percent increase from the year before.

The housing market was hot, but the supply was not enough to keep up. Despite strong demand, home listings never matched the sales pace, resulting in tremendous pressure in home prices.

2010

500

Source: Texas Real Estate Research Center at Texas A&M University

Hot Housing Market

180

Figure 4. Austin Median Home Price

600

Roberson (joshuaroberson@tamu.edu) is a lead data analyst and Natarajan (mallika@tamu.edu) a senior data analyst with the Texas Real Estate Research Center at Texas A&M University.

13

Taxes

Investors purchase rural land for a host of reasons, including the hope of making money when land values appreciate. Powerful tax provisions favoring farms are another reason rural land is an attractive investment option.

By William D. Elliott

P

eople purchase rural land for a variety of reasons. Many want the serenity of living on a few acres in a rural area.

Others just like the idea of purchasing and holding on to it, waiting for the metropolis to come to them.

Investors generally want two things: return of their money (initial investment) and an economic return on the money invested. Investing in rural land has traditionally been thought an effective way to accomplish these twin goals. Given sufficient time, an economic return in rural land can almost certainly result from appreciation in land value. Many investors purchase land to hold long term, waiting for the marketplace to create the favorable profit.

One idea for investors to consider while holding rural land and waiting for it to turn a profit is to operate a farm on the land. That may not be the first idea that comes to most people’s minds, but farms and farmers enjoy significantly favorable tax treatment. In fact, there is a strong pro-farm current

14

throughout many U.S. laws (and not only tax laws). The most prominent federal law oriented toward farming is the periodic subsidy bills that congress enacts about every five years or so.

The average person might be surprised at the degree to which the federal government subsidizes U.S. farms.

Harvesting Tax Savings In Texas, one of the most sought-after property tax benefits is the agriculture use valuation, commonly referred to as an “ag exemption.” This treatment represents a tremendous cost savings. However, it’s not an exemption, but rather a special method of valuing the real estate. In 1978, the Texas Constitution was amended to allow open-space land to be appraised based on its productivity value. In 1995, it was amended again to permit agriculture appraisal for land used to manage wildlife.

Property tax valuation is generally based on the best use of the land, but agriculture landowners are entitled to have their TG

property taxes computed based on the productive agriculture value. Obtaining the agriculture exemption can yield significant cost savings, so anyone acquiring rural land should pay attention to the requirements for an agriculture exemption.

Generally, about ten acres of qualified agricultural land is required for the special agricultural valuation. The land must have been primarily used for agricultural purposes for five out of the seven preceding years. The landowner applies for the special agriculture valuation with the local appraisal district.

In addition to property taxes, farmers also enjoy relief from sales and use and various fuel taxes when purchasing certain items used exclusively to produce agricultural products. To claim the tax exemption, the landowner must apply to the Comptroller of Public Accounts for an agriculture registration number, which is then used when purchasing qualifying items.

The cost savings from an agriculture tax exemption from sales and fuel taxes can be significant.

SUMMER 2023

What is Agriculture Use? The definition of “agriculture use” is broad.

As a principal guideline, the comptroller publishes a Manual for the Appraisal of Agricultural Land (scan QR code to view), which says agricultural use is cultivating the soil; producing crops; raising or keeping livestock, poultry, or fish; or planting cover crops. The land can be used to raise exotic animals or birds (or even bees), harvest timber, or for wildlife management. Local appraisal districts also publish guidelines concerning the degree of intensity of agricultural use generally accepted in the county.

For federal tax purposes, IRS guidelines indicate farming could include: • operating a nursery or sod farm; • raising or harvesting trees bearing fruits, nuts, or other crops;

15

• raising ornamental trees (but not evergreen trees that are more than six years old when severed from the roots); • raising, shearing, feeding, caring for, training, and managing animals; and • leasing land to a tenant engaged in a farming business, but only if the lease payments are based on a share of the tenant’s production (not a fixed amount) and determined under a written agreement entered into before the tenant begins significant activities on the land.

But the IRS cautions that farming does not include: • contract harvesting of an agricultural or horticultural commodity grown or raised by someone else, or • merely buying or reselling plants or animals grown or raised by someone else.

Hobby Losses

A

nother important tax benefit of owning and operating a farm is using economic losses from the farm to offset other ordinary income. The weekly release of current tax developments routinely includes at least one Tax Court case involving someone attempting to sustain tax losses from rural property that is said to be a farm (or ranch), and the IRS arguing that the taxpayers are merely engaging in a hobby.

The basic rule of “hobby losses” is often quoted but perhaps not readily understood. The governing statutes from the tax code distinguish trades or business from activities other than those engaged in for profit–or those engaged in as a hobby. The Internal Revenue Code allows a taxpayer to deduct “all the

16

ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business” [IRC §162(a)].

However, if the activity giving rise to the expenses “is not engaged in for profit,” deduction of expenses incurred in the activity is permitted “only to the extent that the gross income derived from such activity (i.e., the not-for-profit activity) for the taxable year exceeds the deductions.”

Activities not engaged in for profit are usually referred to as “hobbies.”

Hobby expenses may be deducted from hobby profits but not from any other income the taxpayer may have. Of course, this is exactly what a taxpayer hopes to achieve by owning rural property—to deduct large sums of money year after year against other income the taxpayer derives from other (and genuine) businesses or trusts or other conventional sources of income.

Hobby loss rules are based on a presumption. An activity is presumed to be engaged in for profit if the activity shows a profit for any of three out of five consecutive years ending with the year for which tax deductions are taken. For horse breeding, training, showing, or racing, the period is extended to two out of seven years. This presumption is not an absolute bar from using the losses against ordinary income. Rather, the hobby loss rule is a presumption in favor of a hobby. This means the taxpayer can take deductions in excess of income over a longer period provided the taxpayer can overcome the presumption that the losses are engaged in for a hobby (i.e., not engaged in for profit).

An activity constitutes a “trade or business”—and it escapes the hobby loss limitations—if the taxpayer has an actual and

TG

honest objective to realize a profit. The courts look at all surrounding facts and circumstances.

In one of the more prominent cases, an Indianapolis restaurant owner and operator maintained a horse-training activity outside of the city. The Tax Court denied him the deductions on the grounds that he was engaged in a hobby, but the U.S. Court of Appeals (Seventh Circuit) upheld the deductions stating that the Tax Court misapplied the usual factors considered.

The Circuit Court rejected the Tax Court’s explanation that a profit motive will not be found when a taxpayer combines horse-racing activities with social and recreational activities.

The Circuit Court explained that a business owner’s enjoyment of his business doesn’t automatically make the activity a hobby.

Income Averaging for Farmers Although income averaging is no longer generally available, farmers retain this helpful feature. They can average their incomes over three years.

Since farm income can vary widely from year to year, the ability to average becomes an important benefit. It provides a way to balance an income tax burden over several years, reducing the effects of both lean and bounty years. Tax brackets increase as one earns more income. Thus, for bounty years, taxes increase because the tax bracket increased. Averaging allows the taxpayer to reduce the harsh effect of the higher brackets in the bounty years.

Special Rules for Debt Relief Special relief from cancellation of indebtedness income is an important tax provision for the farmer.

For most taxpayers, when debt is cancelled, the relieved debt is income. The principal exception is when the taxpayer is insolvent. If debt is cancelled when the taxpayer is insolvent, there is no income. Farmers do not have this requirement. They can avoid debt cancellation income if the debt was incurred directly in connection with the farm’s business activity and

SUMMER 2023

the taxpayer’s predominate income (over 50 percent) for the past three years comes from farming. The lender or creditor of the debt in question must also be in the business of lending money.

Conservation Improvements and Restoration

E

xpenditures for conservation expenses is an important area of favorable tax rules for farmers.

These types of expenses are normally capitalized, but for farmers they are deductible. The tax code provision describes the pertinent conservation expenses as those for the purposes of soil and water conservation with respect to land used in farming, or for the prevention of erosion or farmland.

The farmer is required to have a conservation plan, which the U.S. Department of Agriculture must approve. If there is no plan, the improvements must be consistent with a soil conservation plan of another state agency concerned with farming.

Deductions for conservation expenses are limited to 25 percent of farm gross income, but a carryforward is permitted.

The limitation being expressed as a percentage of gross farm income is an important feature, suggesting the potential for offsetting other nonfarm income.

Vehicle Expense Farmers receive liberal treatment for their auto and vehicle expenses.

The normal requirement of documentation to support auto or truck expense is waived for farmers. Up to 75 percent of vehicle expenses are deductible even without documentation.

Nothing in this publication should be construed as legal or tax advice. For specific advice, consult an attorney and/or a tax professional.

Elliott (bill@wdelliottlaw.com) is 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.

17

Property Tax

Texas’ Property Tax Puzzle Texas citizens have been clamoring for property tax relief. In California, Proposition 13 was supposed to keep taxes down by limiting appraisal growth rates, but the results have been far from beneficial. Texans can learn from the changes California made and what ultimately went wrong. By Charles E. Gilliland and Lynn D. Krebs

C

oncerns about persistently increasing property tax burdens, especially on homeowners, have dominated the Texas legislature over the current and past two sessions. While property values have risen steadily, most tax entities grew their budgets even more by raising rates prior to 2019, when the legislature curbed the growth rate of Texas property taxes.

Despite the legislative change, concerns of seemingly everincreasing property taxes persist. Currently, an unprecedented state budget surplus, largely driven by sales tax revenues, provides the legislature a unique opportunity to take another bite out of property taxes. The challenge is to do this without creating economic distortions related to real estate and other taxable property.

Property Taxes and Public School Funding: A Brief History Beginning in the 1970s, a series of lawsuits challenging Texas state public school financing produced a system that inexorably links Texas property tax policy with school funding issues.

Lacking public support for a personal income tax to equalize available resources across school districts, the Texas Legislature came to rely on local property taxes to meet those needs.

This dependence dramatically inflated tax burdens for Texas property owners. Effective tax rates increased from approximately 1 percent of market value in the early 1980s to rates exceeding 3 percent in some areas of the state.

18

In addition to rate increases, administrative reorganization created a single appraisal district in each county except for Randall and Potter, which share a single district. That move necessitated a comprehensive overhaul of the entire property tax system.

Because home values tend to increase more rapidly than those of other property types, this new system shifted a growing proportion of total property taxes to homeowners. Frequent reappraisals caused sizable increases in taxes as rising values, coupled with steady or rising tax rates, increased tax liabilities.

To counteract that tendency, the legislature crafted a number of measures designed to soften rising tax burdens. Concentrating the efforts on homeowners, various measures addressed the problem on three fronts. First, to ease homeowners’ tax burdens, various measures exempt part or all of the taxable value of qualified homes. Second, to cushion homeowners from unanticipated tax increases, appraised value increases were limited to 10 percent each year for qualified homes. Third, so-called “truth in taxation” provisions created a process to empower taxpayers to roll back proposed tax rate increases by taxing units.

In 2019, Senate Bill 2 and House Bill 1 changed “rollback tax rate” to “voter-approved tax rate” and lowered that rate from 8 percent to 3.5 percent for cities and counties and 2.5 percent for school districts. The change also came with a requirement for cities to hold automatic elections to approve tax rates exceeding the voter-approved tax rate.

TG

Table 1. Effective Property Tax Rates

The rollback rule came with some exceptions. It did not apply to special taxing units, such as groundwater conservation districts, junior college districts, and hospital districts. Also, cities with populations of less than 30,000 are not subject to the automatic election requirement. Additionally, a city may add its “unused increment rate” to the annual 3.5 percent limit on maintenance and operations increases.

How Texas Tax Rates Measure Up Nationally

D

espite these measures, property tax increases have propelled Texas 2020 effective tax rates for homeowners to the sixth highest in the nation according to research published by the Tax Foundation, indicating a substantial property tax burden for Texans compared with other states (Table 1).

Texas sales tax rates were also among the highest, ranking 14th nationally as of 2023 according to the Tax Foundation (scan the QR code to view).

Another Tax Foundation report analyzes the overall burden of state and local taxes for each state (Table 2). In this study, the Tax Foundation defines “a state’s tax burden as state and local taxes paid by a state’s residents divided by that state’s share of net national product” (scan the QR code for Tax Foundation, Page 3, “State and Local Tax Burdens, Calendar Year 2022,” April 7, 2022). Texas ranks sixth lowest among the SUMMER 2023

Rank

State or District

Effective Rate

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51

New Jersey Illinois New Hampshire Vermont Connecticut Texas Wisconsin Nebraska Ohio Iowa Pennsylvania Rhode Island New York Michigan Kansas Maine South Dakota Massachusetts Minnesota Maryland Alaska Missouri North Dakota Oregon Georgia Florida Oklahoma Washington Virginia Indiana North Carolina Kentucky Montana California Idaho Tennessee New Mexico Mississippi Arizona Arkansas District of Columbia Nevada Delaware Utah Wyoming South Carolina West Virginia Colorado Louisiana Alabama Hawaii

2.21% 2.05% 1.96% 1.82% 1.76% 1.66% 1.63% 1.61% 1.58% 1.50% 1.49% 1.43% 1.38% 1.38% 1.32% 1.25% 1.18% 1.14% 1.10% 1.04% 1.02% 0.99% 0.95% 0.94% 0.91% 0.91% 0.88% 0.88% 0.87% 0.84% 0.82% 0.82% 0.75% 0.73% 0.70% 0.68% 0.66% 0.65% 0.65% 0.64% 0.61% 0.60% 0.59% 0.59% 0.56% 0.56% 0.55% 0.54% 0.54% 0.39% 0.31%

s

Source: Tax Foundation

19

Table 2. State and Local Tax Burdens

by State, Calendar Year 2022 State

Effective Tax Rate

Rank

Alabama

9.8%

20

Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

4.6% 9.5% 10.2% 13.5% 9.7% 15.4% 12.4% 12.0% 9.1% 8.9% 14.1% 10.7% 12.9% 9.3% 11.2% 11.2% 9.6% 9.1% 12.4% 11.3% 11.5% 8.6% 12.1% 9.8% 9.3% 10.5% 11.5% 9.6% 9.6% 13.2% 10.2% 15.9% 9.9% 8.8% 10.0% 9.0% 10.8% 10.6% 11.4% 8.9% 8.4% 7.6% 8.6% 12.1% 13.6% 12.5% 10.7% 9.8% 10.9% 7.5%

1 15 26 46 19 49 42 (39) 11 8 48 29 44 14 34 33 17 12 41 35 37 5 39 21 13 27 38 18 16 45 25 50 23 7 24 10 31 28 36 9 4 3 6 40 47 43 30 22 32 2

Source: Tax Foundation (taxfoundation.org/publications/state-localtax-burden-rankings)

20

50 states and District of Columbia with an overall 8.6 percent effective state and local total tax rate. That amounts to 45.9 percent below New York, the highest state at 15.9 percent.

Texas’ burden is well below the average of 10.6 percent (Pennsylvania) and the median burden of 10.2 percent (Arkansas and New Mexico).

Texas has consistently ranked among the lowest six states in this study over the last several years, though it declined from third place in 2020. However, the state’s burden in 2020 was 8.7 percent, a tick higher than in 2022. Texas’ effective state and local tax burden, as measured by this study, has been as high as 8.9 percent (1977) and as low as 7.7 percent (1980), but has been remarkably consistent in a range of 8.2 percent to 8.7 percent since 2010.

Relief Efforts . . . and Results

D

espite Texas’ relatively low overall tax burden, the effective property tax rate of $1.66 per $100 of value indicated in Table 1 continues to prompt outcries from taxpayers for further relief. This in turn has some lawmakers casting about for a measure that would provide significant tax relief through more restrictive caps on appraisal increases.

An appraisal increase limit of 5 percent was recently proposed in the Texas House. However, the intended benefit of such a cap could be undone, at least partially, by higher rates set by cities and counties across the state, as would be permissible to maintain their budgetary needs, even with existing budget growth limits (see analysis later in this article).

Furthermore, caps on assessed values spawn several market distortions and inequities. For example, it creates a disincentive to mobility and investment and disadvantages for newer real estate buyers, including homeowners. The longer one owns a property subject to an assessment cap, the greater the benefit (and incentive to stay put without making improvements that could trigger a reassessment). Additionally, new entrants to the market, even neighbors to existing owners, would face a disproportionate share of the local tax burden.

Finally, other (non-capped) classifications of property would increasingly be subject to rising effective rates.

Similar pressures in California inspired the famous Proposition 13 tax measure in the late 1970s, which limited annual increases on appraisals to 2 percent so long as ownership continued in the same hands. This provision led to predictions that assessed values would lag market values in areas with rapidly rising prices. Decades later, circumstances confirmed that forecast. As stated in the report Property Tax Limitations and Mobility: The Lock-in Effect of California’s Proposition 13, “longer tenure itself leads to higher subsidies whenever property values increase by more than 2 percent per year,” among other issues. Scan the QR code to view the report.

Further unanticipated consequences of the limits continued to roil taxpayers. Newer homebuyers began to notice substantially lower taxes applied to long-term homeowners, with TG

Billions of Dollars

properties of equal market values incurring vastly different tax liabilities. This horizontal inequality tended to inhibit Figure 2. Trends in Texas Tax Levies by Taxing Unit sales by those with longstanding tenure and impose higher 4.0 taxes on newcomers and younger homeowners. These 3.5 conditions led a taxpayer to take the matter to the U.S. Supreme Court contending that such a scheme violated 3.0 the Equal Protection Clause of the U.S. Constitution (Nor2.5 dlinger v. Hahn). The court ruled for the assessor, affirming the Prop 13 limitations. Thus, the unequal treatment 2.0 of homeowners persists in California.

1.5 This history suggests that those advocating tax policy changes should examine anticipated outcomes before 1.0 adopting particular measures to avoid unintended con0.5 sequences. A review of economic studies suggests that evaluation of alternative tax policies should consider the 0.0 following issues: 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 • Will it provide an adequate tax base to support the Special District Levy County Levy budgeted activity at an acceptable rate?

City Levy School Levy • Will the tax inflict a minimal distortion to the signals guiding economic decision-making?

• Will the tax system be readily understandable?

• Will the tax policy be regarded as “fair”?

Scan the QR code to see Texas Real Estate Research Center publication 2037, Property Taxes: The Bad, The Good, and the Ugly, for a discussion of these criteria.

Total tax levies by the various taxing entities in Texas from 1985 through 2021 are shown in Figure 1. In 2021, the $38.9 billion school tax levy represented 53 percent of the total, down from 60.3 percent in 2005 and from 54.9 percent in 2013. Obviously, school taxes still compose the major portion of property taxes statewide.

Consider the index of tax levies adjusted for inflation to 1994 dollars (Figure 2). Values greater than one indicate a real increase in tax revenues. At 2.514, school tax levies have more than doubled (approximately 2.5 times) in real terms since 80

Figure 1. Texas Property Tax Levies by Taxing Unit

Billions of Dollars

70 60 50 40 30 20 10

Note: Index of Texas deflated tax levies by taxing unit 1994 = 1.0 Source: Texas Comptroller of Public Accounts

1994. Other units’ levies have increased by even more since that time. From 1994 through 2005, school levies increased faster than other units.

Tax relief measures taking hold in 2007 halted that trend.

School tax rate compression legislation that passed in 2019 also curbed the increases, whereas the rate growth peaked in 2020 at 2.6 times the 1994 level. The 2021 rate fell just below the 2019 level of 2.521. Special district levies, fueled in part by the addition of numerous groundwater conservation districts after 1997 and not being restrained by the same rate rules that apply to cities, counties, and schools, expanded most rapidly from 2005 to 2013 and then again from 2016 to 2021. Both city and county total levies also expanded rapidly from 2005 through 2008. From 2009 through 2011, levies did not grow for cities, counties, and schools. However, in 2012, cities, counties, and schools began to expand their total levies once more until 2019 (or 2020, when the 2019 legislation took effect).

These expanding numbers reflect the combined influence of local growth and local decisions to provide more revenue to the various taxing units. Some, perhaps a major share, of the expansion of special district levies can be traced to the implementation of statewide water policy provisions in response to regional water planning. Arguably, supporting this planning effort involves prudent outlays designed to provide water for future generations of Texans. Increasing city and county levies reflect individual local governmental decisions to pursue activities requiring local public expenditures. These locally focused actions presumably address concerns of the local citizenry.

Possible Effects of Appraisal Cap

0 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 Reductions in Texas The Texas Real Estate Research Center conducted a comSchool Levy City Levy County Levy parative static analysis of the potential tax shifting effects of Special Purpose District Levy proposed property tax reforms envisioned in HB 2 of the 2023 Source: Texas Comptroller of Public Accounts SUMMER 2023

21

Texas regular legislative session. This included school tax rate compression and a more broadly applied 5 percent appraisal cap.

As shown in the appendix (see QR code and note below), though the school tax rate would be reduced, the proposed appraisal cap would most likely lead to higher tax rates imposed by cities and counties because of the more limited tax base. Applying the new total tax rate to the indicated adjusted taxable values for each property category reveals how the tax burden would shift among properties post reform. Singlefamily homestead taxpayers would see a 7.8 percent reduction in taxes. Other real estate property (as defined in the appendix) owners would experience a 10.1 percent reduction while personal property and all other property category taxpayers would face a 2 percent increase in property taxes.

However, these estimates do not account for the new construction exempted from the value cap. Adjusting the potential value loss to the 5 percent cap to 80 percent of total in the initial estimates allows an evaluation of the potential effects of new construction in these shifts. Reducing the cap loss would result in a 6.2 percent decrease for single-family homesteads, a nearly 11 percent decrease for other real estate, and a 1.6 percent increase for all other taxpayers.

Expected impacts by property category in the first year: Single-family residential taxes -6.2% Other real property (as defined in appendix) taxes -10.98% Personal property and all other property taxes +1.62%

These estimates illustrate the shifting effects that would accompany the imposition of the 5 percent cap along with a 15-cent tax rate compression. Homeowners and other real estate owners would benefit at the expense of other property owners, including rural landowners, who would see tax increases as well. This is the expected impact in the first year following such a policy change, assuming similar market conditions as 2022. However, as previously explained, the outcomes in the years following will be varied, and impacts on homeowners will vary based on local market conditions and length of ownership.

Scan the QR code to see the online version of this article, which includes an appendix for additional analysis assumptions and calculations.

Weighing Merits and Potential Impacts of Reducing Property Taxes When weighing the merits of proposed policy changes, Texans should keep in mind the criteria of an effective and efficient

22

tax previously listed and the redistributive impact of appraisal caps shown in this analysis. urrently, some citizens argue that the property tax base as it is configured does not provide adequate funding at a reasonable tax rate. Further restricting tax caps would aggravate that situation. A restrictive cap, such as the one California has adopted, could eventually foster noticeable and growing distortions to the efficient operation of housing markets.

Attempting to reduce tax liabilities by capping appraisal increases multiplies inconsistencies in the tax system over time. Furthermore, appraisal caps do not necessarily reduce tax liabilities proportionately. Although Californians decided that unequal treatment of homeowners is justified, Texans need to carefully weigh these long-term effects resulting from tightened caps.

In addition to these factors, imposing the cost of supplying public goods on those enjoying them through higher taxes causes taxpayers to weigh cost and benefits before supporting spending measures. Reducing tax burdens for homeowners, arguably the main beneficiaries of local government expenditure, could bias them in favor of more spending because they bear a lesser burden than they would face without the caps.

As the debate over high property tax burdens progresses, Texans should be cautious to avoid even larger problems for the future.

C

Dr. Gilliland (c-gilliland@tamu.edu) and Dr. Krebs (lkrebs@tamu.edu) are research economists with the Texas Real Estate Research Center at Texas A&M University.

TG

Industrial

B e A ump d i y R

‘Ups’ fo y l t rT s o ex M a

T

Growth in Texas industrial markets has been uneven over the business cycle. That growth has also been more consistent in some markets than others with the I-35 corridor and oil-related metros outgrowing the rest of the state. By Daniel Oney

exas is a large, diversified state boasting the ninth largest economy in the world. At $2.4 trillion, its gross state product accounts for almost 10 percent of all economic activity in the U.S. In an economy of such size, it should be no surprise that parts of the state perform better than others. One example is the wide-ranging performance of industrial real estate in the state’s 25 Metropolitan Statistical Areas (MSAs) during the last 40 years.

While an earlier article, “Industrial Space Race: Texas Market Overview,” showcased industrial market diversity in Austin, Dallas-Fort Worth, Houston, and San Antonio, this article considers the individual performance of all 25 MSAs. The goal is to assess changes in industrial inventory over the business cycle from 1982 to the close of 2022.

During the course of this study, two key findings emerged.

Finding 1: Which Markets Diverged, and When The motivating question for this research was whether the large markets began growing faster than the small markets around 2014. The short answer is that, in general, growth picked up across Texas, but the larger markets did exceptionally well compared with most small markets.

SUMMER 2023

s t e rk a M l a i r t s u s I nd

In the five years before fourth quarter 2014, the average growth rate across all metros was 4 percent. After 2014, the average increased to 12 percent. A closer look shows which markets were growing faster or slower than the average before and after 2014.

Before 4Q2014, small markets performed relatively well as a class, but some did better than others. Ten markets grew faster than the state average, and only two of them—San Antonio and Houston—were among the “Big Four.” The five fastest-growing markets were all smaller metro areas: Victoria, Midland, San Angelo, College Station-Bryan, and Laredo. The top ten best performers averaged a 14 percent growth rate. The 15 markets that grew at a slower rate than the state average grew at only 1 percent.

As growth accelerated after 4Q2014, the big markets performed exceptionally well. The average growth rate across all 25 MSAs was 12 percent, but this growth was concentrated in fewer markets. Only five markets grew faster than the state average, and three of these—Dallas-Fort Worth, Austin, and Houston—were from the Big Four. The 20 markets that grew slower than the state average grew at 5 percent. Figure 1 shows how much growth rates increased or decreased in each MSA in the five years before and after 2014.

23

Figure 1. Percent Change in Market Growth Rates Between Five Years Before/After 2014

What about growth over the longer term?

Based on how they fared during the five national expansions and four recessions since 1982, individual markets tend to perform consistently. Markets that grow faster tend to grow faster throughout the business cycle. There is a 65 percent positive correlation between a market’s performance over expansions and recession periods.

How markets ranked in terms of growth rates across the business cycle phases are shown in the table (page 25). For instance, Abilene’s average rank across all nine phases of the business cycle was 22nd out of 25. It performed a little better during the five expansionary phases, ranking 19th. It ranked 22nd again during the four recessions. The top-ranked markets in terms of growth over all business cycle phases since 1982 were Laredo, Austin, San Antonio, Dallas-Fort Worth, and McAllen.

Scan the QR code to see the data appendix in the online version of this article for detailed growth statistics for all markets over each business cycle phase.

Finding 2. How Texas Markets Clustered When markets are grouped by their overall performance since 1982, a few geographic patterns emerge. These patterns can be defined by classifying markets in terms of whether they grew

Business Cycles 101

9

T

Dallas-Fort Worth Austin All Texas MSAs Longview Corpus Christi Tyler Laredo Houston San Antonio Sherman-Denison McAllen Waco Brownsville-Harlingen El Paso Amarillo Odessa Wichita Falls Texarkana Lubbock Killeen Abilene Beaumont San Angelo College Station-Bryan Midland Victoria

12% 11% 8% 7% 7% 6% 6% 6% 3% 3% 2% 2% 2% 1% 1% 1% 1% 1% 0% 0% 0% –1% –3% –4% –12% –40%

Sources: Texas Real Estate Research Center at Texas A&M University and Costar Group Inc.

YOY Change in Real U.S. GDP (Recessions in Gray)

Percent

he term “business cycle” is a 8 helpful shorthand for economic 7 ups and downs over a long time.

6 The broadest way of measuring the business cycle is with Gross Domestic 5 Product (GDP). This statistic is calcu4 lated by the U.S. Bureau of Economic 3 Analysis (BEA) for each calendar quarter. It is defined as the final dollar 2 value of all goods and services sold in 1 that quarter. The figure plots the change 0 in U.S. GDP since 1982 and indicates Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 recessions with gray vertical bands.

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024 While the BEA produces GDP Source: U.S. Bureau of Economic Analysis estimates, it does not define the stages Business Cycle Phases Since 1982 of the business cycle (see table). That Business Cycle Period Cycle Period role is assumed by a private entity with a government-sounding name: the 1980s Expansion 4Q1982 to 3Q1990 National Bureau of Economic Research (NBER). A group of eight lead1991 Recession 3Q1990 to 1Q1991 ing academic economists at NBER have identified what they consider to 1990s Expansion 1Q1991 to 1Q2001 be the turning points in the U.S. economy since just before the American DotCom Recession 1Q2001 to 4Q2001 Civil War. Pre Great Recession Expansion 4Q2001 to 4Q2007 The NBER does not use the commonly assumed definition of a recession Great Recession 4Q2007 to 2Q2009 as two consecutive quarterly declines in GDP. In practice, they look at Post Great Recession Expansion 2Q2009 to 4Q2019 many economic indicators. Their careful deliberations take time, and the COVID Recession 4Q2019 to 2Q2020 economy may be in a new phase before the last phase has been officially Post COVID Expansion 3Q2020 to Present named. The U.S. economy could be in a recession now, but NBER may Source: NBER not declare a recession for some months.

24

TG

Figure 2. Geography and Growth: Relative Performance Over the Business Cycle Number of Times MSA Grew Faster than Average During Five Expansions Zero to Two Times Two to Three Times

Number of Times MSA Grew Faster than Average During Four Recessions

Killeen Victoria Waco

One Time

Zero Times

Abilene Amarillo Beaumont Corpus Christi Lubbock San Angelo Sherman-Denison Texarkana Tyler Wichita Falls

Three Times

Four to Five Times

Houston Longview Midland Odessa

Austin Dallas-Fort Worth Laredo San Antonio

McAllen

College Station-Bryan

Brownsville-Harlingen El Paso

Sources: Texas Real Estate Research Center at Texas A&M University and CoStar Group Inc.

How Markets Ranked Over the Entire Business Cycle Since 1982 MSA

All Cycle Phases

Expansions

Recessions

Abilene Amarillo Austin Beaumont Brownsville-Harlingen College Station-Bryan Corpus Christi Dallas-Fort Worth El Paso Houston Killeen Laredo Longview Lubbock McAllen Midland Odessa San Angelo San Antonio Sherman-Denison Texarkana Tyler Victoria Waco Wichita Falls

22 18 2 18 13 7 15 4 10 6 16 1 9 21 4 8 12 24 3 17 20 23 11 13 25

19 16 2 19 9 4 16 6 8 7 21 1 11 24 5 10 13 23 3 15 14 22 16 12 25

22 19 6 16 18 14 11 4 14 1 10 2 6 16 8 5 11 25 9 19 23 21 3 13 24

Note: Average rank out of 25 markets. Green = better performers, Red = poorer performers. Ties are possible in the rankings.

Source: Texas Real Estate Research Center analysis of Costar data, CoStar Group Inc., www.costar.com SUMMER 2023

faster than the state average over each business cycle phase.

Doing this shows some markets consistently grew faster than the average in all or most expansions and recessions, some consistently grew slower than average, and some had mixed results.

The three-by-three matrix in Figure 2 assigns each market to a cell. The columns define the number of expansions in which the market grew faster than average in expansions, and the rows define the same for recessions. The closer to the upper right, the better the MSA’s performance; the closer to the lower left, the worse the MSA’s performance. At first inspection, three groups of markets emerge.

The top-tier performing markets—those that tended to grow continuously—are all along the I-35 corridor. A second tier includes mostly energy leaders that grew faster than the MSA average during most expansions and at least one recession. McAllen and College Station-Bryan also fall into this performance tier. A third cluster of poorer-performing markets include ten smaller metro areas that are mostly in West Texas or East Texas, outside the major growth corridors of the Texas Triangle. Other markets do not fall into these neat categories.

The apparent spatial clustering of markets in terms of inventory growth is not completely surprising. This raises more questions about local market differences and how they experience broader business cycles. Opportunities for future research include exploring how factors such as workforce skills and industry structure might explain the divergence and clustering of Texas industrial markets.

Dr. Oney (doney@tamu.edu) is research director with the Texas Real Estate Research Center at Texas A&M University.

25

Land Markets

FOR LAND’S SAKE TEXAS LAND MARKET Land ownership requires a solid understanding of a range of issues, including conservation and management of the land’s natural resources, navigation of sometimes complex land sales, energy issues, water concerns, state laws impacting land usage, and the general economy. Here are key takeaways from the Texas Real Estate Research Center’s recent annual land market outlook conference.

Conservation

General Market Outlook Federal Reserve interest rate policy is driving the rural land market’s economic environment.

Land transaction prices continue to rise, but the volume of land sales is declining, so it’s taking longer to sell. Sellers of good quality land still find eager buyers, but sellers of inferior quality land may face declining interest.

The continuing shortage of land for sale suggests land prices will continue to rise this year.

Dr. Charles Gilliland & Dr. Lynn Krebs research economists Texas Real Estate Research Center

Texas has roughly $350 million in tax incentives for wildlife management lands and $7 billion overall for open-space lands. This amounts to about $50/acre in incentives.

Because Texas is a private-lands state, ag, timber, and wildlife tax valuations are the state’s most wide-reaching and cost-efficient conservation incentives.

The wildlife management valuation law fills an essential conservation need because its incentive is strongest on marginal agricultural lands in highgrowth areas of the state, which are often ecologically important and at the greatest risk of land conversion (e.g., the Edwards Plateau/Hill Country).

Shane J. Kiefer

CEO Plateau Land & Wildlife

Carbon Sequestration Carbon sequestration “is the biggest gold rush the land industry has seen in a long time.”

Richard R. Lonquist Lonquist & Co. LLC

26

TG

Like-Kind Exchanges Like-kind exchanges are useful but technical. There is risk of error. They can take numerous forms, and planning early yields best results. The best practice when undertaking an exchange is to have first-class advice and to follow that advice.

William D. Elliott

tax attorney Elliott, Thomason & Gibson LLP

Energy Usage Because the energy transition has been performed too aggressively, Texas is seeing backlash “behavior” regarding market instability.

There are physical constraints that will stop the adoption process:

Economy The national economy is plagued by uncertainty and contradictory data, and it’s trending toward a modest recession probably by the end of the year.

The state’s economy is stronger and better suited to withstand the national downturn. It will decline somewhat from national pressures, but overall it should recover more quickly than many other states.

Dr. James Gaines

former chief economist Texas Real Estate Research Center

• Metal and mineral prices related to the transition are rising.

• Mining investing is not happening at a required rate.

• Technology advancements are not happening as quickly as needed for the transition to occur.

Natural gas demand is low this year, but it will increase over the next five to ten years. Expect increased natural gas prices in the U.S. as new liquefied natural gas (LNG) terminals come online.

Dr. Detlef Hallermann

clinical professor and director of Reliant Energy Trading Center Texas A&M University

Water Management The state has a vigorous planning process focused on development of plans to meet 50-year demands through regional planning groups. Regional plans are then woven into a statewide plan. However, impediments to new water development still present a challenge.

Conservation to reduce demand is the easiest way to make our water go further, but it is hard to achieve when water is inexpensive despite its importance.

State Growth People are still coming to Texas from other states and other countries, and the pressure this growth puts on infrastructure, housing, jobs, social services could be overwhelming.

Dr. James Gaines

former chief economist Texas Real Estate Research Center

Russell Johnson

partner McGinnis Lochridge “We’ve had three different administrations and three different Waters of the United States (WOTUS) rules, and we still don’t really know what it is.” A new rule took effect March 20, 2023.

Our Texas Land Markets 2023 Recap can be viewed by scanning the QR code.

Rusty Adams

research attorney Texas Real Estate Research Center

SUMMER 2023

27

Q. A seller and buyer have a fully executed contract. The inspections have shown that the septic system is completely

failing. The option period is over, but the lender wants the septic replaced. The seller does not want to replace it. How does the buyer get out?

A. If this septic system replacement is a “lender-required repair,” it might be more than 5 percent of the sales price. If it is, under paragraph 7E of the One to Four Family Residential Contract (Resale), the buyer can terminate and receive a refund of her earnest money. Use TREC Form 38-7 to give notice of termination. In paragraph (8), identify contract paragraph 7E as the reason for the termination.

Q. Our buyer and the seller have agreed to split evenly the amount of lender-required repairs. The bid is for a total of $20,000. How do we write this up?

A. On TREC Form 39-9 “Amendment,” paragraph 5, you would fill in $10,000 in each blank, then have both the buyer and seller sign the form.

What the Law Says The contract is a binding agreement between the parties to the transaction. All terms of the parties’ agreement for the transaction should be reflected in the contract or addenda.

Paragraph 7E of the contract provides that if the cost of

lender-required repairs exceeds 5 percent of the sales price, the buyer may terminate the contact and the earnest money will be refunded to the buyer. This provision is independent of any option period purchased by the buyer.

For Example The Joneses have a property under contract with a sales price of $300,000. The option period has ended. An inspection shows that the septic system is old and outdated.

The Joneses’ lender is requiring that the septic system be replaced before they close on the loan. The sellers refuse

to replace the septic system, which is estimated to cost $20,000. Buyers could terminate the contract and get a refund of the earnest money because the cost of lenderrequired repairs exceeds 5 percent of the sales price ($15,000).

Best Practice Broker training on contracts and negotiations should include what strategies and negotiations might take place regarding lender-required repairs. The TREC contract provides that lender-required repairs will have to be done.

However, it does not specify who will pay for those repairs.

The repairs must be done for the lender to make the loan.

This becomes a negotiation.

Bonus Question Q. In the example, what are the buyer’s options?

A. The buyer could negotiate with the seller to pay all or a part of the septic replacement, or the buyer could walk away and expect a refund of the earnest money. Keep in

mind that even if the seller agrees to pay for the new septic system, the buyer still has the right to terminate when the repair exceeds 5 percent of the sales price.

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

Lewis (kerrilewis13@gmail.com) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission (TREC). Wukasch (avis@2oldchicks.com) is a broker and former TREC chair.

28

TG

WELCOME BRONZE AGE TO THE

BEST OF

AWARD OF

MERIT TG MAGAZINE

DIVISION TRERC 2021-22 ANNUAL REPORT / 2023 CALENDAR

AWARD OF

EXCELLENCE TRERC 2021-22 ANNUAL REPORT / 2023 CALENDAR

Presented in June 2023 by the Houston chapter of the International Association of Business Communicators (IABC)