The County Appraisal Districts seem oblivious to the fact that commercial property values have declined, as the cost of capital has increased over the last year. On March 16th, 2022, the Federal Open Market Committee started one of history’s most aggressive rate hiking journeys. As the interest rates increased, capital inflows decreased due to market volatility; as a result, cap rates increased, and property values declined.
Specifically, for the multifamily asset class, rent growth went from nearly 20% year-over-year to about 5% year-over-year, trending to almost 2.5% for 2023. Despite revenue growth slowing, multifamily property owners aren’t getting any reprieve on expenses. Although controllable expenses such as marketing and advertising, payroll, repairs and maintenance, and contract services continue to experience sharp increases, the non-controllable expenses are tough for multifamily owners to stomach. It’s “property-level stagflation”, as costs outpace income growth.
What are those non-controllable expenses? Property taxes are the most significant expense line item for all Texas multifamily property owners, and it has been growing at a double-digit pace. Property Taxes and Insurance have seen double-digit increases in the last few years. Insurance premiums have grown a whopping 30-100%+ due to the significant Texas storms. That being said, insurance is a lesser expense compared to property taxes.
Property owners are forced to spend time and money to protest their proposed values every year. Four primary counties recently released 2023 proposed values, and three of the four counties averaged over a 50% increase to the proposed assessed values for multifamily properties. Multifamily property values have declined 20%+ from the peak, and many of the proposed values are higher than what the property is worth today.
The significant increases in property taxes are a primary headwind that multifamily investors face. It has become such a problem that it’s even deterring some multifamily owners from further investment of capital into Dallas-Ft. Worth and Texas… So, what’s the solution?
In the late 1970s, as California started to boom, the state implemented ‘Proposition 13’, which restricted the property tax rate to 1% and enforced an appraisal cap to limit appraised value increases to 2% per year. ‘Proposition 13’ is often criticized for contributing to a widening wealth gap, severe housing shortage, and inadequate funding of schools. Not to mention the attribution to ‘ghost buildings’ that are vacant because long-term real estate owners are not motivated to sell because their property taxes are so low.
The current Texas Property Tax Code provides a ‘Homestead Cap,’ which limits assessed value increases to 10% for those with a Homestead Exemption. This cap is only providing relief for homeowners, not multifamily owners. That being said, in April of this year, the Texas House passed House Bill 2, which provides $12 billion for Texas schools while providing property owners some tax relief. There is controversy over reducing the appraisal cap from 10% to 5% and extending the cap to all property owners. Opponents of the bill try to compare it to California’s ‘Proposition 13′, but there are stark differences given Texas’ higher property tax rate, funding for schools, and higher cap percentage. As of May 2023, House Bill 2 is currently at the Texas Senate for consideration.
The leadership and members of the Texas Apartment Association (TAA) are excellent advocates for multifamily owners, and the property tax issue remains one of their top priorities. The TAA encourages owners to continue to protest their assessed valuations, hire a tax consultant to help with the process, get involved in the budgeting process for local taxing entities, and reach out to our state legislators and local officials to let them know how property tax increases are affecting their business and housing affordability for their residents.
Over the years, Texas state and local leadership has done an incredible job attracting businesses to foster economic growth. Leadership must continue to focus on driving growth to expand our tax base and relieve pressure on assessed values and property taxes. First, the state can offer targeted tax incentives and exemptions to businesses, such as tax credits for job creation or investment in specific industries. This approach can encourage companies to establish or expand their operations in Texas without immediately burdening property owners with increased taxes. Additionally, the state can focus on improving infrastructure, including transportation and utilities, to enhance the business environment and attract more enterprises. By investing in infrastructure development, Texas can create a favorable ecosystem for businesses without solely relying on property taxes for revenue generation. Moreover, diversifying the economy by promoting industries beyond real estate, such as technology, renewable energy, or manufacturing, can help expand the tax base while mitigating the pressure on property taxes. This diversification will attract a broader range of businesses and ensure a more balanced and sustainable growth trajectory for Texas.
All-in-all, Multifamily owners, the TAA, and local and state leaders must work together to find creative solutions. Through a cohesive effort, they can help ensure that all stakeholders can benefit from a fair and equitable tax system that supports schools and infrastructure while promoting long-term economic growth and stability.
Let’s turn headwinds into tailwinds.