Will Newly Enacted State Legislation Affect the Value of CRE in Texas?

Posted on September 24, 2019

Will Newly Enacted State Legislation Affect the Value of CRE in Texas?

The Texas State Legislature convenes only every two years. Such a schedule ensures that each session is a busy one, and the recently adjourned 86th regular legislative session was no exception.

According to one estimate, during that 140-day assembly (which began January 8 and ended May 27, 2019) legislators filed 7,795 bills and resolutions. Of those, only about 19.5 percent (1,525) reached Governor Greg Abbott’s desk, with slightly over 1,400 now scheduled to become law.

Of these 1,400 enacted measures, several pertain to real estate, both residential and commercial. Among them are four laws whose provisions could significantly influence how real property is valued, traded, and developed across the state.

Read on to learn more about the new real estate laws on Texas’ books, how they got there, and what their presence could mean for your business.

House Bill (HB) 2439: Prohibition of Local Government Product Mandates

This legislation prohibits cities from using building codes or other local ordinances to require the use of construction products that exceed national standards.
HB 2439’s bipartisan authors, sponsors, and supporters hope this measure will curtail a domino effect in which one requirement leads to the direct or indirect prohibition of otherwise approved construction products, thus creating significant compliance challenges for contractors — or effectively forcing them to work with a vendor they might not otherwise prefer.
For example, authorities can no longer mandate masonry material percentages in new construction or limit contractors to using a single type of insulation, piping, or tubing if national model building codes permit other options.
Elected officials representing several municipalities across Texas (including Dallas and McKinney) urged a veto of HB 2439, saying it fails to strike an adequate balance between financial and aesthetic considerations. They argue that the law penalizes communities by limiting their ability to designate conservation districts and preserve the character of their local architecture.
However, the law does contain exceptions for neighborhoods officially registered as historically or culturally significant. This exception also includes commercial buildings located in downtown areas participating in the Texas Main Street Program (TMSP).
Will the enrolled version of HB 2439 contribute to a decline in the quality and safety of construction, as its opponents fear? Or will it deliver on its chief promises: to provide consumers more choice when selecting building materials and make housing, especially multi-family dwellings, more affordable? Answers to these and other questions may be soon in coming, as the law has been in effect since September 1, 2019.

HB 2496: Historic Landmark Designation

The stated purpose of HB 2496 is to protect individual property owners from what its authors deem to be unfair and inconsistent rules around the establishment of historic landmarks.
HB 2496 stipulates that a municipality in Texas cannot name a property a historic landmark unless:
1. the owner of the property consents to the designation; or
2. the designation is approved by a three-fourths vote of the governing body of the municipality as well as the municipality’s zoning, planning, or historical commission.

HB 2469 further stipulates that owners whose properties are subject to historic designation be issued a “historic designation impact statement.” Upon reviewing this official document, owners may withdraw previously granted consent.
HB 2496 received the backing of the Home Builders Association of Greater Austin, among others. These proponents claim that historic designations unjustly strip property owners of their rights and devalue their real property investments. They cite the fact that even though landmark status does offer owners property tax relief, it may obligate them to undertake expensive repairs and saddle them with burdensome regulatory obligations.
Organizations such as Preservation Austin, Preservation Texas and the National Trust for Historic Preservation contend that HB 2496’s requirements do more than make it difficult to save specific historic structures from either the wrecking ball or a landlord with a vision for modernizing such properties. These organizations believe the law all but prevents the creation of new historic districts, citing the virtual impossibility of securing approval under its strict provisions.
Is a historic landmark more or less attractive to prospective buyers? The answer to this question varies by location, market (residential versus commercial real estate), and even property type. Whatever the case, the Texas Legislature has, with this law, clearly sided with current property owners and targeted what they consider overreach by local governments.
HB 2469 was signed into law by Governor Abbott on May 25 and is effective as of September 1, 2019.

HB 347: Annexation

This 2019 legislation revises SB 6, which was enacted in 2017.
With SB 6, the 85th Texas Legislature separated the state’s counties into two tiers. Tier 1 counties — defined as having a population of less than 500,000 — were allowed to annex land at their sole discretion. However, Tier 2 counties — with a population of over 500,000 — could annex land only after holding an election in the area proposed to be annexed and winning the approval of a majority of the landowners.
HB 347 abolishes this system. Now, all Texas counties are effectively Tier 2. Any municipality that wishes to annex land must put the proposal to a vote as specified above.
Passed by super-majorities in both houses, this measure went into effect immediately after Governor Abbot signed it on May 24, 2019.
Both the Texas Association of Realtors and grassroots supporters throughout the state hailed the law for putting an end to what they called “forced annexation.” One of the bill’s authors, Rep. Phil King, was encouraged to act by residents of a neighborhood is his home county (Parker) unwilling to be incorporated into the city of Weatherford, itself located just 25 miles west of Fort Worth.
HB 347 has the potential to alter the pace of urbanization in Texas. Since 2010, Texas has welcomed over 1 million new residents from the other 49 states. Writing for The Dallas Morning News, Lloyd Potter, Texas’ official demographer, reveals that “the state’s metro regions garnered 94 percent of the total domestic migration between 2010 and 2014.”
Urbanization has helped fuel Texas’ economic expansion over the past decade as well — as the health of the state’s CRE market indicates. For example, retail occupancy rates in Texas’ four largest metropolitan areas (Austin, Dallas-Fort Worth, Houston, and San Antonio) currently average 94 percent.
The passage of HB 347 should serve as a reminder that property rights in Texas can be a particularly sensitive issue, especially as more of the state’s traditionally rural areas are faced with the choice of becoming suburbs and exurbs.

SB 2: Property Tax Reform

This law, dubbed the Property Tax Reform and Relief Act of 2019, provides an automatic property tax rollback election if cities, counties and other local entities propose an increase of more than 3.5 percent.
These increases cannot be scheduled for a special election and must be included on ballots issued during the state’s November general elections.
Under previous legislation, voters could petition for a property tax rollback only if a proposed revenue increase exceeded 8 percent.
The law also obligates the state’s Central Appraisal Districts (CAD) to conduct their business more transparently. Each CAD must now maintain a property value database that allows for public comments on proposed rate increases.
Additionally, these databases must contain public hearing information so property owners can more easily appeal (or protest) the assessed (or taxable) value of their property.
City officials in the state’s larger metropolitan areas expressed considerable opposition to SB 2. They fear that the measure, while a potential boon to individual taxpayers, will lead to critical budget shortfalls that will significantly limit their ability to maintain and expand essential services. They argue that those limitations could, in turn, slow future development and retard the growth of Texas’ economy.
Supporters of SB 2 insist the lower rollback rate will help ease economic strain experienced by both homeowners and business owners.
Leaders in the state’s CRE market have by and large championed SB 2. Considering that commercial property appraisal values in Houston (to take but one example) increased by nearly 40 percent in a five-year period ending in 2017, this should come as little surprise. But the financial implications of such a surge go beyond property tax bill sticker shock.
Upward-trending property values become an issue for landlords when a property’s profitability cannot keep pace with its taxable value. Owners then have little choice but to pass the tax hike down to their tenants. When those tenants are businesses, they may choose to absorb that rent increase by cutting costs elsewhere — for example, by instituting hiring freezes or postponing (or even canceling) planned expansions.
Nevertheless, cities such as Dallas and Houston have become desirable places to live, especially among millennials, due to their having made concerted urban revitalization efforts. While that revitalization does not happen without the private capital needed to build and renovate, it also takes the cooperation of local governments solvent and functional enough to maintain roads, collect garbage, and ensure public safety.
The bulk of SB 2’s provisions will take effect on January 1, 2020.