Clay & Company » A Texas Commercial Real Estate Blog

The article below addresses something all property owners must deal with. See this post for a video on fighting your taxes.

By Amy Wolff Sorter

DALLAS-In North Texas, it’s the time of year during which the frigid, 55-degree temperatures give way to the more temperate weather and the Bradford trees begin to flower. And, for commercial real estate owners throughout the Lone Star State, it’s that time of year to ensure the right paperwork, numbers and other information are on hand and ready in the event a property tax appeal need to be filed.

Experts tell Globest.com that, no matter when the assessment date or appeal date in a particular taxing jurisdiction, the best way to beat unfair tax rates is by having information ready. “What we’re doing at this point in time is assembling support data from our clients to build cases so we can determine if appeals are warranted,” says Jeff Kurz with locally based Kurz Group Inc. In other words, from the moment a commercial real estate owner receives his or her notice of appraised value, it’s a race against the clock to determine if a value is fair, and if an appeal is necessary.

Let’s take a look at Texas. January 1 is assessment day for the coming year with CRE owners receiving valuations by spring. After those valuations are received, commercial real estate owners have an eight-week window to file any kind of appeal, with that window snapping shut in July. Overall, it seems as though owners with commercial property in Texas are in luck — Rick Kurz, also with the Kurz Group says that, during the past three years, tax values have trended downward, with most of the county appraisal districts recognizing the impact of the economic downturn on real estate values.

But Texas seems to be an anomaly. On average, across the nation, “property owners of commercial real estate continue to see their taxes increase,” says David B. Wolfe, a partner with Skoloff & Wolfe PC in New Jersey. The reason is pretty straightforward: Cash-strapped municipal and county governments need a way to get revenue. So, despite the decline in value of commercial real estate, municipal and county taxes increase. “It’s a competing situation,” notes Peter Foster Kelsen, a partner with Blank Rome LLP in Philadelphia. “Since the economic downturn, cities are becoming more desperate for revenue, while property owners are feeling the pinch because rents in the commercial sector have dropped.” As a result, “assessments may not reflect the current reality,” Kelsen says. Unlike, say, Dallas, TX, taxes in Philadelphia have been steadily marching north since 2008. What has changed in the City of Brotherly Love, however is that the number of appeals has increased.

Even in Texas, property taxes are frustrating and for reasons other than the obvious. It’s a given that a property tax expense line on any income statement is pretty large. But it’s difficult to pigeonhole that expense line. “It’s a moving target,” Rick Kurz says. “You can generally come up with maintenance and repair budgets for a given year and be reasonably on budget. But property taxes aren’t that simple. Any increase or decrease in property tax assessments can have a dramatic impact on the net operating income of a piece of real estate.”

The good news, however, is that reductions in taxes are possible. More than possible. “My sense is that, in many cases, reductions have been made by the taxing authorities based on the fact that market value has contracted, income has contracted and sales are few and far between,” Kelsen says. The experts in this article point to the fact that they’ve been successful in obtaining reductions for clients. But doing so requires numbers proving an unfair assessment – and the sooner those numbers can be collected, the better.

Jeff Kurz says the “must have” in any kind of assessment reduction tool kit is income and expense information from the previous year or years. The more a trend can be suggested, the better off the owner. “If they’re using a consultant, consultants are requesting that information between now and when the notices come out,” Jeff Kurz adds. The Kurz Group is walking the talk as well.

“Right now, we’re looking at cap rate studies and are doing a thorough scrub of our clients’ financials,” Rick Kurz says. “We’re looking at historical trends and trying to figure out how financials look this year relative to last year.”

In addition to having the financials ready, what is also helpful, Kelsen suggests, is finding a credible property appraiser and having that person conduct a careful assessment of the property to back up the numbers. It’s also hugely important to be aware of the deadlines for filing appeals. Though this might be a given, different jurisdictions have different filing dates – and to a commercial real estate owner with assets in multiple states, those deadlines can quickly loom. “I get dozens of calls from people who are in trouble and who want something done,” Kelsen says. “But it’s three months after the deadline for filing an appeal. I can’t do anything.”

The experts also believe that hiring a consultant or an expert in the field of commercial property can be helpful. Wolfe notes that attorneys who do a significant amount of work in that field can provide guidance as to whether an assessment is out of line; the best place to find an attorney is through an organization called the National Association of Property Tax Attorneys. The Kurzes acknowledge that individuals can certainly do as good a job of filing their own appeals, however, an experienced eye can determine whether taking the time to do so is worth it.

But is it? Certainly paying lower taxes is a good thing, but Wolfe cautions that, in some jurisdictions, “you appeal at your peril. Your assessment can be increased as a result.” Furthermore, Kelsen says, in some jurisdictions, even if the assessing authority makes reductions, the school districts and municipalities are filing challenges to those reductions. “They’re doing what they can to protect their tax base,” he adds.

But with realistic numbers and facts to back those numbers up, the chances are good that taxes can be reduced. “For the most part, assessing authorities are receptive,” Kelsen says. “But they need to be given the data that supports the request for a lower value.”

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Via the Alamo City Beat

Some more good news regarding the local housing market — San Antonio is one of only two cities in the U.S. to see home values rise since 2007.

The other city to accomplish this — another Texas metro — is Houston.

These findings are part of the latest residential price index (RPI) put out by Oxford, Miss.-based real estate information technology company FNC Inc.

The RPI is based on information regarding home sales — including public records and real-time appraisals of properties and neighborhoods.

The peak of the housing market, notes FNC, dates back to 2007 — “that golden era when loan originations were at an all-time high,” its report states.

And as of Nov. 30, 2011, only San Antonio and Houston had seen improvement since that golden era — reporting home price increases of 2.7 percent and 4.8 percent, respectively, according to the FNC analysis.

Looking at home prices as of Dec. 31, 2011, the Houston numbers were up 1.7 percent, compared to home prices reported at the end of December in 2010.

As for San Antonio, on a year-to-year basis, home prices were flat — which is still not bad considering that many U.S. cities continue to report price declines.

Indeed, the national numbers are less encouraging. FNC reports that home prices were down 3.5 percent at year-end 2011, compared to home prices reported at the end of December in 2010.

The underlying factor behind the price decline — the distressed market.

Distressed homes, FNC reports, continue to make up a large part of the country’s residential sales. Given that these properties usually go at very deep discounts, this market has succeeded in putting downward pressure on underlying property values for the larger housing sector.

And Houston lands #1 by a healthy margin. More than 100,000 new jobs were created in Houston since the recession, making it the most prosperous city in the country according to a recent Business Journals study.

On Numbers used preliminary U.S. Bureau of Labor Statistics data to estimate 2011 private-sector employment levels for all 100 markets. Those estimates were then compared against the official figures for 2006, the last full year before the recession’s onset. Houston was the most prosperous metro over that five-year span with 4 of the top 5 in Texas.

1. Houston (+109,700 jobs)
2. New Orleans (+39,400)
3. Austin (+37,900)
4. Dallas-Fort Worth (+36,000)
5. San Antonio (+25,200)

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As part of a settlement between 49 states and five of the nation’s largest banks, some struggling Texas homeowners will receive restructured loans with lower mortgage payments. Others who already went through foreclosures may get $2,000 checks.

The $25 billion deal, agreed to by all U.S. states except Oklahoma, stems from inappropriate handling of foreclosures by Ally/GMAC, Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo. Nine other institutions may become part of the agreement, pushing the national settlement total $5 billion higher.

Many mortgage lenders admitted to inappropriate activities in processing foreclosures, including failing to verify underlying documents, signing documents without reviewing them, and using fictitious names to sign documents.

The settlement prevents states from suing the mortgage lenders for these activities. However, it does not stop individual homeowners from pursuing legal remedies in civil court.

The fact that Texans will receive only about 1% of the total settlement despite the state’s large population may be a result of the low foreclosure rate in Texas … less than half the national average, according to Core Logic.

People eligible for the loan modifications or payments will receive letters over the next six to nine months. More information is available at NationalMortgageSettlement.com and from an FAQ by the Texas Attorney General’s Office.

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Below is a synopsis of this article by Mark Heschmeyer of CoStar

Five Years After the Onset of the Great Recession, Banks Are Ready To Venture Back in to Commercial Real Estate

• For the first time in five years, a majority of banks are finally talking about their ability to grow their loan portfolios.

• Up until the fourth quarter of 2011, non-performing commercial mortgage and construction loans were still increasing notably. And indeed, for many banks, they are still going up, but at moderating rates. So there is still a note of caution from bankers.

• “Because the financial condition of many of our borrowers has suffered over the last several years, we expect to continue to see downgrades within the portfolio into an extended recovery as a play,” said Daryl D. Moore, executive vice president and chief credit officer of Old National Bancorp. “This will be especially true in the commercial real estate portfolio where capital and liquidity continued to be an issue for many of our clients.”

• Some banks are still being aggressive in charging off some loans, particularly construction loans, and are trying to sell off their foreclosed real estate inventory and nonperforming loans as best as they can.

• However, in the Federal Reserve Board’s latest Senior Loan Officer Opinion Survey issued this week, U.S. bank loan officers reported that demand for CRE loans had strengthened, on net, over the past three months. In addition, during the past 12 months, on net, domestic banks reportedly eased maximum CRE loan sizes and many domestic banks trimmed loan rate spreads.

• “Through 2011 obviously we’ve all been very cautious in that sector due to some of the challenges that have been experienced,” said Claude Davis, president and CEO of First Financial Bancorp. “Where we’ve seen our new opportunities are really with those investors who have weathered the storm well, had the liquidity and the cash and the capacity to kind of grow and expand if you will, kind of win assets at a cheaper level. And so we’ve actually seen the quality be very good from our perspective in that book.”

• Banks are still staying away from the high risk areas like residential development.

• Philip Flynn, president and CEO of Associated Banc-Corp., said, “We continue to see opportunities for growth and expansion in CRE lending because of the retrenchment of other competitors and other sources of capital.

• While it is apparent that the growth in commercial real estate lending will be limited and cautious, the timing for an improved lending environment couldn’t be better for some investors who financed at the peak of the market five years ago. As mortgage production ramps up, investors will see banks being more competitive on pricing.

• The bad news is that, initially, it will be the well heeled who stand to benefit first and financing terms are likely to be fairly tight. Banks will also use the opportunity to restructure the makeup of their portfolios – weeding out the less creditworthy.

• At CVB Financial Corp., Christopher D. Myers, its president and CEO, said most of the deals his bank is doing are pricing in the 4.5% to 5.25% range — unless the bank does an interest rate swap. Then typically the bank is pricing CRE loans somewhere around 3% on a variable rate.

• In general, bank executives said they would be targeting the strongest growth in particular assets and markets. Multifamily was most frequently mentioned as a targeted asset category as were some select middle-market industry segments such as, restaurants, health care and energy.

• By market area, Bank of the Ozarks Inc.’s George Gleason, chairman and CEO, said, “I think the largest part of [our] growth is going to come from our Texas offices. The second largest part of that growth I would expect to come from our metro Little Rock, [AR], area offices and the third largest part of growth I would expect to come from our metro Charlotte [NC] office.”

• In the last quarter Bank of the Ozark’s Texas office had accounted for 41.8% of its total loan portfolio.

Today Houston Business Journal’s Commercial Real Estate Outlook was published:

Houston’s outlook continues to offer more options than the rest of the country in regards to businesses and job seekers alike, say local economic and development experts.

Most parts of the city have seen continued growth throughout 2011, and that momentum is not expected to slow down. The Houston metropolitan statistical area will add about 84,600 jobs this year, up from about 80,000 jobs added in 2011, according to the Greater Houston Partnership.

The Houston Business Journal has identified six Houston submarkets that experts expect to be active in 2012 — Downtown, The Woodlands, East End, Uptown, North and the Energy Corridor. Below is an excerpt about each area. Click on the submarket name for more thorough information.

North Houston
With many large corporations, including ExxonMobil moving or expanding to North Houston, we should expect to see land sales and spec construction increase this year. The corridor is appealing because it offers more available shovel-ready land, nearby residential, a strong labor pool, amenities and transportation. This aerial photo shows the new Exxon Mobil campus site under construction at I-45 North and the Hardy Toll Road. Photo Source: Brian Kennedy, www.birdseyehouston.com.

The Woodlands
The Woodlands continues to be a boon for energy companies drawn by Exxon Mobil’s planned corporate campus near the master-planned community. The demand for office space in the submarket — and the desire to be near Exxon — puts further pressure on the Class A office market. This growth should also positively affect the retail market.

Energy Corridor
Despite the exodus of energy companies flocking to The Woodlands, the Energy Corridor is still appealing to firms of its namesake. Dallas-based Trammell Crow Co’s purchase of 18.8 acres from the Texas General Land Office at the southwest corner of Interstate 10 and Eldridge for future development proves continued interest. Sources told HBJ last year that Trammell Crow anticipates doing a multiphase office campus, with construction starting in 2012. Besides office construction, growth in the multifamily industry in the corridor is focused on lifestyle and creating walkable communities.

Uptown
This link on the HBJ website was not working so we will update it when it become available.

East End
The Houston Dynamo’s opening game and the debut of the new BBVA Compass Stadium will occur on May 12, and with it comes an expected surge of people to the east side of the city. The 22,000-seat, open-air stadium will be a boost to growth and development on the east side of Interstate 59 downtown. Also promising for the area is the “Building a Better Houston” campaign, established between the Dynamo and BBVA Compass, which will focus on revitalizing Houston’s East End, among other initiatives. Rendering of the new Dynamo Stadium. Photo Source.

Downtown
Vacancy rates are expected to drop into the single digits this year due to rapid demand in the heart of the city, sending rental rates soaring. Last year saw the entrance of two new office buildings, Hess Tower and BG Group Place, (about 1.9 million square feet combined) and they sit at . 100 percent occupancy and 70 percent occupancy, respectively. Several new buildings have also designed, but are on hold until tenants can be secured. There are no large retail projects planned to date and any hotel projects are at the beginning stages. The addition of a free bus service on a 2.5 mile loop around downtown also will contribute to changes downtown. The contemporary-designed shuttle will connect workers, hotel guests and residents to the George R. Brown Convention Center, shopping and other amenities in the area. The Greenlink Circular Transit is set to start its first route in May.

12 PREDICTIONS FOR 2012 via Real Estate Bisnow Houston

1. HOTELS IMPROVE

Performance in the hospitality industry is on the up, according to Smith Travel Research and PKF Hospitality Research. Smith reports that Houston is doing particularly well; our hotels rank second in the US (behind Nashville) for year-over-year gain in room demand.

2. WESTCHASE RISES

With at least two spec office buildings slated to break ground in 2012, Westchase may just be the hottest submarket this year. Westchase District’s Sherry Fox tells us leasing volume in the submarket had topped 1M SF by Q3 ’11, well ahead of 2010 numbers. That put occupancy at 86.7% by the end of Q3, and Sherry says very big blocks are available.

3. FUNDS ARE UNPOPULAR

Ernst & Young American RE sector leader Mike Straneva (we snapped him at an E&Y/Baker Botts event in December to the right of Archstone’s Neil Bown and HFF’s Jody Thornton) says the recession taught people that they need to know who all investors are in a deal. That said, funds that do exist are attracted to RE because of returns.

4. CMBS IMPROVES, BUT IS THAT ENOUGH?

Commercial Mortgage Backed Security values will be on the rise this year: Wells Fargo Securities expects $25B, and Credit Suisse Group AG and UBS AG predict as much as $45B issued in 2012. But Andrews Myers CRE attorney Patrick Hayes has less confidence. Although Patrick has seen a resurgence of CMBS loans, he cautions borrowers that underwriting is tough to the point of being unreasonable. He suggests borrowers avoid that route unless they’re confident their properties can withstand the underwriting process.

5. INVESTORS COME TO CRE

Texas A&M Real Estate Center chief economist Mark Dotzour thinks US stocks and CRE broken deals are the most undervalued assets in the country right now. People are bound to catch on soon, making them the next investment trend.

6. AND TEXAS IN PARTICULAR

Houston and Dallas are among the top CRE hot spots (NY and DC are the others) generating investor interest, says Younan Properties chairman/CEO Zaya Younan. Foreign investors (including the Chinese and Europeans) only want to talk Texas because of its fast-growing, strong fundamentals.

7. DRIVING AUSTIN

A problem everywhere: traffic congestion. For Austin and San Antonio, the problem compounds with 70% of the NAFTA truck traffic making its way up I-35. But, that also means opportunities, too, according to the experts at the Bisnow Future of the I-35 Corridor in Austin yesterday. Only 80 miles apart, the two major metro areas may one day mesh into one greater MSA with a population of about four million. Major universities, international airports, and the NAFTA superhighway are a recipe for growth between the two cities.

7. OFFICE ABSORPTION INCREASES

Houston’s office leasing market fundamentals improved remarkably last year, according to PMRG VP of research Ariel Guerrero. Office product absorbed 3.2M SF, the most since ’08. Look for a continued shift to a landlord-favorable market as rents rise and quality space options diminish.

8. CLASS-A WILL DO EVEN BETTER

Of the 3.2M SF Houston absorbed last year, 2.4M SF was Class-A.

9. HEALTHCARE’S ABOUT CLASS-B

Marcus & Millichap’s Tanner McGraw tells us investors in the healthcare space are paying more attention to Class-B product. According to Marcus & Millichap’s October report, statewide MOB transaction velocity increased 28% from the same period in 2010. Activity accelerated dramatically for buildings below 5,000 SF, and lower-quality properties were the lion’s share of deals. Tanner is also seeing more health systems building and acquiring off-campus assets through physician practice acquisitions.

10. SPECIALTY GROCERS COME TO MARKET

The retail market in 2011 was dominated by HEB and Walmart, but look for specialty stores to creep into Houston in 2012. Transwestern’s Nick Hernandez says we’ll see Aldi, Trader Joe’s, Sprouts, and others open their first Houston stores this year. And here’s two for the price of one: Nick also says we can expect retail landlords to squeeze more value out of existing centers by adding pad sites in parking lots or tacking on small buildings for additional SF.

11. SELECTED CONSTRUCTION GAINS

Expect modest gains in construction this year, according to Andrews Myers construction attorney Ben Westcott. He expects construction to increase in infrastructure, municipal, education-driven, and multifamily projects. The latter three project types will see a bump from the population spread across our fair city. This is leading to more construction jobs: The Labor Department reports that 9,000 were added in November and 17,000 in December. Plus, construction spending increased over three of the last four months of 2011.

12. INDUSTRIAL STAYS HOT

Many of the spec developments under way will deliver this year, most have significant preleasing. And that means that concessions are burning off. The team predicts they’ll become the exception rather than the rule, a nice change for landlords from the previous three years. The north submarket will be the hottest, possibly running the risk of being overbuilt.

Each number has been summarized. See more on each category HERE.

• Houston is appealing to Mexican National Investors
• Historically they used to buy/hold mainly land
• Now more focused on Income-Producing Deals
• Many times trying to move here and live off investments
• Very relationship oriented – sometimes deals can take longer – have to overcome some trust factors – they dont like to feel pressured
• Commission structure is the same

To jump-start their economies and create more jobs, states increasingly are trying to spur private sector business growth and investment. One way some political leaders are doing this is by reducing business taxes and government regulations.

According to the Tax Foundation, a nonpartisan public policy organization in Washington, D.C., “the most competitive tax systems create the fewest economic distortions by enforcing the most simple, pro-growth tax systems characterized by broad bases and low rates.”

Recently, the U.S. Chamber of Commerce published a report called “Enterprising States 2011” that ranked states in a variety of performance metrics, including their tax and regulatory environments. Those environments were compared in five ways: overall state and local tax burdens, corporate taxes, small-business costs, state government budget gaps, and cost-of-living indices.

With the exception of Texas, States that made the Chamber of Commerce’s top-ten list are not found on the East Coast or the West Coast because desirable coastal states don’t always need incentives to attract business investment and expansion. So states that offer lower taxes and regulations view those attributes not only as advantages but also as necessities in today’s competitive landscape for business expansion and job growth.

The importance of this relates both to corporate entities and to real estate development. Locating in or doing business in a low-tax state can help generate higher profit margins, while operating with fewer regulatory and bureaucratic hurdles can reduce red tape in the real estate development process, whether for environmental reviews or incentive programs.

Here is what they say about #6 Texas:

The Lone Star State is a low-tax state that offers a low cost of living and has an enterprise-friendly climate that’s paying off with high job growth rates. Recent state initiatives include a business tax reform that raises the revenue exemption.

Article excerpt from the Urban Land Institute by Jeffery Spivak

Where is America moving?

As it does every January, Atlas Van Lines reviews data on the origins and destinations of interstate moves during the last 12 months. The 2011 Migration Patterns study results provide a snapshot of relocation patterns, showing an overall increase in the number of moves over last year.

Southwestern and Mid-Atlantic coastal states were popular destinations in 2011. The Midwest continues to lose residents, but Michigan became a balanced state after six consecutive years of steady outbound moves. For the sixth year in a row, Washington, D.C. had the highest percentage of inbound moves, while Ohio came out the clear leader in the highest percentage of outbound moves.

Other migration trends:

Northern States
With the exception of New Hampshire, which went from an inbound to a balanced state, and Massachusetts, Connecticut and West Virginia, which transformed from balanced to outbound states, the Northern States saw relatively few changes in moving patterns from 2010 to 2011.

Southern States
The Southeast remains balanced with the exception of Louisiana, which switched from a balanced state to an outbound one in 2011. Southwest states Texas and New Mexico continue to be inbound states, as well as Mid-Atlantic states Virginia and North Carolina. After becoming a newly inbound state in 2010, Kentucky is now balanced.

Midwestern States
Again seeing the majority of its states with more outbound than inbound moves, the Midwest region only has three balanced states – Iowa, South Dakota and Michigan. Despite uncertain economic conditions, Michigan became a balanced state following a six-year streak as an outbound state. Wisconsin, Nebraska and Kansas finished 2011 as outbound states – all of which were previously classified as balanced states for seven, nine and 10 years in a row, respectively.

Western States
The annual study shows that the majority of the Western states remain balanced with only two states changing status. Utah is now an outbound state and Wyoming is now balanced.

How is a state classified?

Each state/province has a threshold value, which is the total number of shipments multiplied by 0.55 (for example, in a state with 100 moves, at least 55 of them would have to be outgoing to classify the state as outbound). A state/province is considered:

Outbound when outbound shipments exceed the threshold.

Inbound when inbound shipments exceed the threshold.

All other states are classified as balanced. Shipments noted for Canada are cross-border-to the United States or from the United States (not inter-provincial.)

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