Houston CRE Avoids Property Tax Hike, But Legislative, Valuation Dangers Lurk

Houston property owners seemingly averted a city tax bill increase after the state announced it would deliver $50M in disaster relief funds to Texas communities impacted by May’s derecho and July’s Hurricane Beryl.

But commercial real estate might not be off the hook yet.

Commercial property owners had faced a potential rate raise of at least 3.2 cents per $100 of assessed property value to cover damage costs amid a city financial crisis, which would have increased taxes on a $10M building by $3,200 a year. 

Five Houston City Council members proposed raising the property tax rate by 5% to help fill the gap, but they withdrew that proposal by their Wednesday meeting due to the disaster relief fund announcement, Houston Landing reported.

That it didn't happen had some in CRE breathing a sigh of relief.

Yet some say they shouldn't necessarily exhale yet, arguing that the $50M won’t be enough to fix the budget shortfall that earned the city a negative outlook from two major credit rating agencies. And because Texas property owners pay taxes to numerous entities besides their city, they would do well to remember the bigger picture.

The state legislature is trying to keep local jurisdictions’ budgets from getting out of control, said Tony Trahan, a director with property tax consultant firm KE Andrews. Texas has put limits on how much a taxing entity can increase rates, and since 2019, a state law requires voter approval for any raise of more than 3.5%.

But Harris County commissioners this year took advantage of a disaster declaration loophole that allows them to raise the tax rate by up to 8% without voter approval.

The county increased its tax rate by the full 8% last month, bringing it up 7 cents per $100 of assessed property value. For a $10M building, the increase will bump up the annual tax bill by $7K.

“It’d be interesting to see, when a governor declares financial disaster, how many jurisdictions actually go and try to take the full [rate increase],” Trahan said. “It’s a creative way to not get pushback.” 

As part of a property tax cut last year, the Texas Legislature gave the greatest relief to homeowners, raising the homestead exemption from $40K to $100K. That could lead jurisdictions to put pressure on commercial properties to make up the difference, Trahan said.

“Because they've had these sort of synthetic [tax rate] caps in place, they still have a lot of room to collect new revenue,” he said. 

That room could include significantly raising appraisal values, though some commercial owners got a break on their appraised values this year, Trahan said. Values of office and multifamily properties in Houston decreased this year because appraisers utilized cap rates in their models, he said. 

Yet retail and industrial values still increased, Trahan said. 

“Retail and industrial, largely the way that those lease agreements are designed, they’re triple net,” he said. “So the tenant, in almost every case, will bear the brunt of those taxes.” 

Another potential cost increase ahead involves the state's schools. Texas property owners typically face the most significant tax rates from local school districts. During the last legislative session, lawmakers agreed to spend $12.7B to compress school property tax rates for all homeowners and business properties, a measure voters approved in November.

The bill reduced school operating cost tax rates by 10.7 cents for every $100 of property value. In theory,  the measure should save a $10M property owner $10,700 per year.

Yet school districts often try to raise more money by asking voters to approve bonds, another thing property owners should keep an eye on, Trahan said. 

With financial distress in the air, the pressure is on owners to do due diligence and potentially hire a tax consultant so new costs don’t eat into rental rates, Trahan said. 

Meanwhile, despite the $50M state injection, Houston still needs to cut costs, increase revenues and balance its budget to “right the city’s financial ship and maintain creditworthiness,” Houston Comptroller Chris Hollins said in a statement reported by Houston Landing. 

“These much-needed funds are expected to offset most recovery-related costs, but they don’t change the $200 million budget imbalance we already had before storms hit the Houston area.”

Mayor John Whitmire expects Houston to get most of the disaster money, he told the city council at the Wednesday meeting. Whitmire has remained staunchly opposed to increasing the property tax rate, instead hiring an outside contractor to examine the city’s finances and find potential budget cuts.