JULY 2015 ™
JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY
NON-PROFIT ORG. U.S. POSTAGE PAID HOUSTON, TEXAS PERMIT No. 4126 COLLEGE STATION, TEXAS 77843-2115
In This Issue Job Growth Water Marketing Housing Affordability Manufactured Housing Residential Construction Cycles Oil and Gas Lease Extensions Retirement Plans
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JULY 2015 ™
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TWENTY-FIVE TEXAS METROPOLITAN STATISTICAL AREAS FOUR HUNDRED AND FIftY REAL ESTATE NEWS OUTLETS r e c e n t e r. t a m u . e d u / n e w s t a l k
TIERRA GRANDE
JULY 2015
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Director, GARY W. MALER Chief Economist, MARK G. DOTZOUR Senior Editor, DAVID S. JONES Managing Editor, NANCY MCQUISTION Associate Editor, BRYAN POPE Assistant Editor, KAMMY BAUMANN
VOLUME 22, NUMBER 3 ™
TIERRA GRANDE
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JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY
24 Devil in the Details Oil and Gas Lease Extensions
Here’s a bit of advice for mineral owners negotiating leases. Watch out for gaps in the contract that allow the lessee to extend the lease despite little or no production. BY JUDON FAMBROUGH
Art Director, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III Circulation Manager, MARK BAUMANN Lithography, RR DONNELLEY, HOUSTON ADVISORY COMMITTEE: C. Clark Welder, San Antonio, chairman; Russell Cain, Port Lavaca, vice chairman; Mario A. Arriaga, Conroe; Jacquelyn K. Hawkins, Austin; Doug Jennings, Fort Worth; Walter F. “Ted” Nelson, Houston; Doug Roberts, Austin; Kimberly Shambley, Dallas; Ronald C. Wakefield, San Antonio; and Bill Jones, Temple, ex-officio representing the Texas Real Estate Commission. TIERRA GRANDE ™ (ISSN 1070-0234) is published quarterly by the Real Estate Center at Texas A&M University, College Station, Texas 77843-2115. Telephone: 979-845-2031. SUBSCRIPTIONS free to Texas real estate licensees. Other subscribers, $20 per year. Subscribe online at www.recenter.tamu.edu/store VIEWS EXPRESSED are those of the authors and do not imply endorsement by the Real Estate Center, Mays Business School 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. PHOTOGRAPHY/ILLUSTRATIONS: JP Beato III, pp. 1, 26; Real Estate Center files, pp. 10–11, 20, 22–23, 24; Robert Beals II, p. 9; Harold Hunt, pp. 14–15, 17, 18. © 2015, Real Estate Center. All rights reserved.
2 Labor Gains Texas’ Job Market Outpaces Nation’s In the post-Great-Recession race to create jobs, Texas did itself proud. It beat the nation as a whole. BY ALI ANARI
8
Liquid Assets
Marketing Texas Groundwater In the future, some areas of Texas will need to buy water from parts of the state with more than enough. The process likely will be politically and legally complicated. BY CHARLES E. GILLILAND
10 The Affordability Gap ON THE COVER Supercell storm near Vega, Texas.
PHOTOGRAPHER Valentina Abinanti
JULY 2015
Texas housing prices have been rising since the end of the Great Recession, but incomes have not. Result: Texas housing affordability is taking a hit. BY JAMES P. GAINES
14 Thinking Outside the Box
When community officials discuss affordable housing developments, manufactured homes are seldom in the mix. Perhaps they should be. BY HAROLD D. HUNT
20 Home Work
Estimating Residential Construction Cycles This new economic index is not a crystal ball. But it will give economists a clearer picture of which direction the residential housing construction industry is headed. BY JESUS CAÑAS, KEITH R. PHILLIPS AND LUIS B. TORRES
28
Retirement Plans for the Self-Employed Increases in allowable contributions to retirement plans are good news for self-employed real estate professionals. BY JERROLD J. STERN
1
Texas Economy
LABOR G
TEXAS’ JOB MARKET O By Ali Anari
2
Number (Thousands)
130,000
t R ece ss
ion
2010
2012
120,000 110,000 100,000 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2014
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 2. Texas Nonfarm Jobs
12,000
Number (Thousands)
11,000
Gre
sio ces a t Re
n
10,000 9,000 8,000 7,000 6,000 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
2010
2012
2014
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 3. Shares of U.S. Jobs Texas, California, New York
12 11 10 Percent
An ongoing research program at the Real Estate Center monitors the performance of the Texas economy vis-à-vis the U.S. economy and other state economies in the aftermath of the Great Recession. An article in the April 2015 Tierra Grande compared the Texas economy’s recovery with the U.S. economy’s measured in terms of gross domestic product. This article reports findings regarding Texas’ share of U.S. job recovery since the end of the Great Recession.
140,000 ea Gr
The Great Recession (GR) was the largest economic downturn since the Great Depression. According to the Business Cycle Dating Committee of the National Bureau of Economic Research, it began in December 2007 and ended in June 2009. During this period, the U.S. economy lost 3.1 percent of its aggregate output measured in terms of gross domestic product (GDP) adjusted for inflation. But job losses were even more severe. From January 2008 to December 2009, the U.S. economy lost 8.7 million jobs or 6.3 percent of total nonfarm jobs.
Figure 1. U.S. Nonfarm Jobs
150,000
California Texas New York
9 8 7 6 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
TIERRA GRANDE
R GAINS
T OUTPACES NATION’S
Sources of Texas Job Recovery Texas’ total job gains since the GR is the sum of net job gains by its industries. Table 2 shows Texas industries ranked by their shares of U.S. job gains since the end of the GR. The state’s mining and logging industry created 52 percent of mining jobs and ranked first in job creation followed by financial activities, information and construction. In terms of the number of jobs, the state’s professional and business JULY 2015
Figure 4. Texas’ Share of U.S. Mining and Logging Industry Jobs
40
Texas’ share of U.S. mining jobs Texas’ share of U.S. nonfarm jobs
Percent
30 20 10 0 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
2010
2012
2014
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 5. Texas’ Share of U.S. Construction Industry Jobs
11
Texas’ share of U.S. construction industry jobs Texas’ share of U.S. nonfarm jobs
10 Percent
S
ince December 2009, the U.S. economy has had a slow and modest labor market recovery. It took about six years to recover jobs lost in the GR. In May 2014, the U.S. economy reached its prerecession peak of more than 138 million jobs (Figure 1). The most recent employment data show that the nation gained more than 10.9 million jobs from December 2009 to December 2014. The GR was less severe in Texas than in the United States as a whole. Along with half a percent of its GDP, the state lost 431,000 or 4.1 percent of nonfarm jobs from a pre-GR peak in August 2008 to the trough in December 2009 (Figure 2). It took about two years, until November 2011, for Texas to recover jobs lost in the GR. This “Texas sized” job recovery has been playing an important role in the nation’s labor market recovery from the GR. The Texas economy has created more than 1.539 million jobs since December 2009, a 15.1 percent growth rate, ranking first among U.S. states in job growth rate (Table 1). Texas’ share of U.S. jobs increased from 7.9 percent in December 2009 to 8.4 percent in December 2014 (Figure 3). As a result of a higher-than-national average employment growth rate, Texas’ share of U.S. jobs increased at the expense of New York’s and California’s share of jobs (Figure 3). Texas’ share of U.S. jobs exceeded that of New York in 1994. The gap between Texas and California is narrowing.
9 8 7 6 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Table 1. Regional Labor Market Recovery Since Great Recession Number of Jobs (Thousands)
Job Gains
Region
Dec. 2014
Dec. 2009
Number (Thousands)
Percent Growth
Texas California Florida Michigan Georgia North Carolina New York Ohio Illinois Pennsylvania Rest of U.S. Total U.S.
11,749.5 15,860.7 7,965.7 4,217.6 4,226.5 4,203.1 9,156.3 5,369.9 5,907.0 5,825.5 66,110.2 140,592.0
10,209.7 14,155.9 7,128.0 3,835.7 3,844.3 3,845.8 8,489.8 5,007.9 5,584.9 5,583.1 61,999.9 129,685.0
1,539.8 1,704.8 837.7 381.9 382.2 357.3 666.5 362.0 322.1 242.4 4,110.3 10,907.0
15.1 12.0 11.8 10.0 9.9 9.3 7.9 7.2 5.8 4.3 6.6 8.4
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
3
Table 2. Texas and U.S. Job Gains by Industry Since Great Recession Texas Jobs (Thousands)
U.S. Jobs (Thousands)
Rank
Industry
Dec. 2014
Dec. 2009
Job Gains
Dec. 2014
Dec. 2009
Job Gains
Texas’ Share (Percent)
1 2 3 4 4 6
Mining and logging Financial activities Information Construction Other services Trade Transportation, warehousing and utilities Professional and business services Leisure and hospitality Education and health services Manufacturing
319.6 713.2 204.2 677.9 412.3 1,858.3
189.6 622.2 198.6 565.3 359.5 1,611.2
130.0 91.0 5.6 112.6 52.8 247.1
913.0 8,049.0 2,767.0 6,275.0 5,611.0 21,372.8
663.0 7,743.0 2,744.0 5,654.0 5,320.0 19,799.6
250.0 306.0 23.0 621.0 291.0 1,573.2
52.0 29.7 24.3 18.1 18.1 15.7
489.8
413.8
76.0
5,296.2
4,673.4
622.8
12.2
1,576.1
1,246.2
329.9
19,439.0
16,475.0
2,964.0
11.1
1,212.5
998.4
214.1
14,948.0
12,944.0
2,004.0
10.7
1,553.1
1,358.8
194.3
21,718.0
19,712.0
2,006.0
9.7
891.2
811.8
79.4
12,301.0
11,475.0
826.0
9.6
7 8 9 10 11
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 6. Texas’ Share of U.S. Financial Activities Industry Jobs
9.0
Texas’ share of U.S. financial activities jobs Texas’ share of U.S. nonfarm jobs
8.5
T
Percent
8.0 7.5 7.0 6.5 6.0 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
2010
2012
2014
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 7. Texas’ Share of U.S. Trade Industry Jobs
9.0
Texas’ share of U.S. trade jobs Texas’ share of U.S. nonfarm jobs
8.5
Percent
8.0 7.5 7.0 6.5 6.0 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
4
services industry, by creating 329,900 jobs, ranked first followed by the trade industry, leisure and hospitality, and education and health services (Table 2). exas’ stronger job market recovery has enhanced the long-term upward trends in the state’s share of U.S. jobs by industry. All Texas industries expanded their shares of U.S. jobs since the end of the GR, but the expansion rates varied across industries. Texas’ share of jobs in the state’s mining and logging industry, construction, financial activities, trade, transportation, warehousing and utilities, and government sector have been greater than the state’s share of U.S. nonfarm jobs (Figures 4 to 9). The state’s shares of manufacturing, professional and business services, education and health services, leisure and hospitality, and other services industries have been less than the state’s shares of nonfarm jobs (Figures 10 through 14). Helped by higher oil prices, Texas’ mining and logging industry experienced the largest increase in share of U.S. mining jobs, from 28.6 percent in December 2009 to 35 percent in December 2014, well above the state’s share of U.S. nonfarm jobs (Figure 4). Texas’ share of U.S. construction jobs expanded rapidly in the GR, but the expansion rate has slowed since 2010 (Figure 5). Texas’ share of financial activities jobs has exceeded the state’s shares of nonfarm jobs since 1999 TIERRA GRANDE
Figure 8. Texas’ Share of U.S. Transportation and Utilities Industry Jobs
10
Texas’ share of U.S. transportation, utilities and warehousing jobs Texas’ share of U.S. nonfarm jobs
Percent
9
8
7
6 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 9. Texas’ Share of U.S. Government Jobs
8.5
Texas’ share of U.S. government jobs Texas’ share of U.S. nonfarm jobs
Percent
8.0 7.5 7.0 6.5 6.0 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 10. Texas’ Share of U.S. Manufacturing Industry Jobs
9
Texas’ share of U.S. manufacturing jobs Texas’ share of U.S. nonfarm jobs
Percent
8 7 6 5 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 11. Texas’ Share of U.S. Professional and Business Services Industry Jobs
9
Texas’ share of U.S. professional and business services jobs Texas’ share of U.S. nonfarm jobs
Percent
8
and reached 8.9 percent in December 2014 (Figure 6). Texas’ share of U.S. trade industry jobs has moved alongside and above the state’s shares of U.S. nonfarm jobs, reaching 8.7 percent in December 2014 (Figure 7). The state’s transportation and utilities industry posted a steady long-run upward trend and expanded its share of U.S. jobs from 7.1 percent in December 1990 to 9.2 percent in December 2014 (Figure 8). Texas’ shares of government jobs after the GR were higher than the state’s shares of U.S. nonfarm jobs until 2012. Since then, the gap between the state’s share of U.S. nonfarm jobs and its share of U.S. government jobs has been narrowing (Figure 9). Texas’ share of U.S. manufacturing jobs has moved alongside and below its share of U.S. nonfarm jobs, reaching 7.2 percent in December 2014 (Figure 10). The long-run upward trend in Texas’ share of U.S. professional and business services jobs accelerated from 6.8 percent in December 2004 to 8.1 percent at the end of 2014 (Figure 11). Another long-term upward trend expanded Texas’ share of U.S. education and health services industry jobs to 7.2 percent in December 2014 (Figure 12). The state’s share of leisure and hospitality jobs was lower than its share of U.S. nonfarm jobs at 8.1 percent in December 2014 (Figure 13). Texas’ share of the U.S. other services industry has trended upward since 2006, reaching 7.3 percent in December 2014 (Figure 14). The state’s information industry, which suffered job losses in the aftermath of the bursting of the dot.com bubble in the early 2000s, expanded its share of U.S. jobs to 7.4 percent at the end of 2014 (Figure 15).
Job Recovery by Metropolitan Areas
7 6 5 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
JULY 2015
2010
2012
2014
Texas job gains are the sum of job gains of the state’s local economies (Table 3). Houston-Sugar Land-Baytown ranked first in the state’s labor market recovery, accounting for 28.95 percent of the state’s job gains from 2009 to 2014,
5
Table 3. Texas Metro Areas Ranked by Shares of Texas Job Gains Number of Jobs (Thousands)
Job Gains
Rank
Metropolitan Area
Dec. 2014
Dec. 2009
Number (Thousands)
Percent
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
Houston-Sugar Land-Baytown Dallas-Plano-Irving Austin-Round Rock Fort Worth-Arlington San Antonio-New Braunfels Midland McAllen-Edinburg-Mission Odessa Corpus Christi El Paso Laredo Longview Brownsville-Harlingen Lubbock Killeen-Temple College Station-Bryan Beaumont-Port Arthur Tyler Victoria Amarillo San Angelo Waco Sherman-Denison Abilene Wichita Falls Texarkana Micropolitan Texas Total
2,992.6 2,360.3 928.8 999.0 965.3 98.8 249.8 82.3 197.5 298.4 100.9 105.9 138.6 139.0 137.0 107.5 169.1 101.2 45.8 117.6 49.6 112.7 46.1 69.4 59.0 59.5 1,017.8 11,749.5
2,546.9 2,042.3 770.8 874.5 849.5 68.4 222.3 59.4 178.2 280.3 88.7 94.0 127.0 128.4 127.2 98.9 160.6 93.8 39.4 112.5 45.0 109.2 42.7 66.1 58.5 61.3 863.8 10,209.7
445.7 318.0 158.0 124.5 115.8 30.4 27.5 22.9 19.3 18.1 12.2 11.9 11.6 10.6 9.8 8.6 8.5 7.4 6.4 5.1 4.6 3.5 3.4 3.3 0.5 –1.8 154.0 1,539.8
28.95 20.65 10.26 8.09 7.52 1.97 1.79 1.49 1.25 1.18 0.79 0.77 0.75 0.69 0.64 0.56 0.55 0.48 0.42 0.33 0.30 0.23 0.22 0.21 0.03 –0.12 10.00 100.00
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 12. Texas’ Share of U.S. Education and Health Services Industry Jobs
8.5
Texas’ share of U.S. education and health services jobs Texas’ share of U.S. nonfarm jobs
8.0 Percent
7.5 7.0 6.5 6.0 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
2010
2012
2014
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 13. Texas’ Share of U.S. Leisure and Hospitality Industry Jobs
8.5
Texas’ share of U.S. leisure and hospitality jobs Texas’ share of U.S. nonfarm jobs
8.0 Percent
7.5 7.0 6.5 6.0 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
6
TIERRA GRANDE
Figure 14. Texas’ Share of U.S. Other Services Industry Jobs
8.4
Texas’ share of U.S. other services industry jobs Texas’ share of U.S. nonfarm jobs
8.0
Percent
7.6 7.2 6.8 6.4 6.0 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Texas Job Gains and the State’s Real Estate Industry
Figure 15. Texas’ Share of U.S. Information Industry Jobs
8.5
T
Texas’ share of U.S. information industry jobs Texas’ share of U.S. nonfarm jobs
8.0 Percent
7.5 7.0 6.5 6.0 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
Number of Home Sales (Thousands)
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
Figure 16. Texas Home Sales
300 250 200 150 100 50 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
Average Price (Thousands of Dollars)
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
exas post-GR job gains have helped both Texas home sales and home prices to rebound from the GR. The number of homes sold increased from 203,637 units in 2010 to 285,111 in 2014, a 40 percent increase (Figure 16). The average Texas home price increased by 24.7 percent, from $192,300 in 2010 to $239,800 in 2014 (Figure 17). Texas’ labor market recovery has been stronger than the nation’s, attracting more people and companies to Texas and increasing demand for all types of real estate properties. As Texas’ shares of U.S. jobs by industry demonstrate, the state’s job gains are broad based, leading particularly to more demand for commercial and industrial real estate properties in Texas. As to the future, the Texas economy is expected to continue generating more jobs but at a slower pace because of falling oil prices. Since June 2014, the state’s oil and gas extraction industry has curtailed its investment expenditures. As in the past, the state’s economy is expected to weather the current oil price collapse in the longer term, but 2015–16 will be a challenging period and a test of its strength. Dr. Anari (m-anari@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.
Figure 17. Texas Home Sales Average Price
250
followed by Dallas-Plano-Irving (20.65 percent), Austin-Round Rock (10.26 percent), Fort Worth-Arlington (8.09 percent), and San Antonio-New Braunfels (7.52 percent). Although larger metropolitan areas generated more jobs, higher oil prices boosted job gains in Midland and Odessa.
200
THE TAKEAWAY
150 100 50 0 1990
1992
1994
1996
1998
2000
2002
2004
2006 2008
2010
2012
2014
Texas’ labor market had a stronger recovery after the Great Recession than did the nation’s. Jobs created were concentrated in larger metro areas, but higher oil prices also increased Midland’s and Odessa’s job gains.
Sources: U.S. Bureau of Labor Statistics and Real Estate Center at Texas A&M University
JULY 2015
7
Water Marketing
I
n 1997, Texas began to address emerging water shortages by initiating a comprehensive planning process designed to ease water shortages through action at the local level. Rather than imposing a statewide solution from Austin, the legislature opted for a locally focused regional planning effort (see Center publication “Just Add Water” at recenter.tamu. edu/pdf/2066.pdf). Ideally, this system would evolve into an organized market allowing water-starved entities to contract with willing water rights owners channeling water to users most in need. However, smoothly operating markets depend on welldefined rights and certainty about the amount and quality of the water associated with those rights. In 2000, a transaction negotiated by Moody Land and Cattle Company on behalf of a consortium of sellers transferred groundwater rights to the City of Amarillo (see Center publication “Got Water? Tapping a New Texas Market” at recenter.tamu.edu/pdf/1357.pdf). That sale suggested a number of conditions needed to move water from where it is to where it is needed. The key issues were: • location, • total quantity of water, • legal guarantee to a specific amount of water each year, • water quality and • timing of the sale.
8
This sale by Moody appeared to be a breakthrough in the quest to solve water problems in Texas through transfer of groundwater. Owing to a number of impediments to the sale of surface water, marketing efforts have generally focused on groundwater transactions. As 2015 began, two projects in progress suggest that the promise of a smoothly functioning water market remains an elusive goal. In 2012, the San Antonio Water System (SAWS) adopted an updated water management plan. The plan combines a set of strategies aimed at allowing San Antonio to weather a repeat of the 1950s drought. These strategies include conservation, desalinization and various augmentation of existing supplies. The goal is limiting dependence on the Edwards Aquifer to 30 percent of total usage by 2020. As a point of reference, in the year 2000, SAWS would have relied on that aquifer for 70 percent of its supplies in a record drought. art of the strategies envisioned a request for competitive sealed bid proposals (RFCSP) to provide up to 50,000 acre feet (approximately 16.29 billion gallons) to SAWS by 2018. This would supply more than 330,000 people at the targeted drought usage of 135 gallons per capita per day. The RFCSP yielded nine bids with the evaluation process focusing on the Vista Ridge Consortium to provide the water. Blue Water Systems of Austin and Abengoa, an international company headquartered in Spain, make up the consortium,
P
TIERRA GRANDE
which currently holds groundwater leases permitting withthe City of Buda, Anthem subdivision (a proposed municipal drawal of as much as 71,000 acre feet each year. Abengoa has a utility district), and the Goforth Special Utility District. The long history of building complex industrial projects. patchwork of rules and regulations governing groundwater he principals approved the contract in October 2014, have made this project especially contentious. Although surinitiating the development phase of the project, which rounding lands are located in the Hays Trinity groundwater is expected to take up to 30 months to complete, culdistrict, the proposed supplying well is not. It lies within the minating in financial closing. A 42-month construction phase boundaries of the Edwards Aquifer Authority (EEA), which follows. The contract requires the consortium to complete governs withdrawals from the Edwards Aquifer. EEA has no well infrastructure, a pipeline and transfer facilities expected jurisdiction over the Trinity Aquifer from which the Electro to cost more than $844 million (see map). SAWS will build Purification project would pump. That means the site appears the interconnecting facilities at a cost of approximately $100 to be governed by the generic rule of capture allowing virtually million. When it becomes operational, perhaps as early as 2019, unlimited pumping from the Trinity Aquifer. the project will deliver up to 50,000 acre feet of water per year to Surrounding residents have protested, fearing the project SAWS for 30 years. Blue Water currently holds 3,400 leases priwill lower the water table, making their existing wells useless. marily located in Burleson Although Electro Purificaand Milam Counties. When tion has offered to mitigate Proposed Vista Ridge Pipeline the operation phase ends, any such outcome, they title to the pipeline transfers face legal action to attempt Bryan/College Milam Station to SAWS with an agreement to extend controls from Williamson to continue buying water existing agencies to cover Caldwell from Blue Water for 30 more this area. In addition, no Burleson years. less than four bills were Travis Lexington Water Well Field In addition to augmentfiled to block this agreeAustin Lee ing water supplies for San ment. Only one, House Bastrop Antonio, SAWS reserves a Bill 3405, survived to Hays Bastrop right to commercial opporbecome law and extend San Marcos tunities related to the projjurisdiction of the Barton Lockhart Comal ect. That provides SAWS Springs-Edwards Aquifer Caldwell New Braunfels the opportunity to sell Conservation District to unneeded water to municicover the disputed terriSeguin For the next 30 years and beyond, palities lying along the tory. This measure ensures Guadalupe San Antonio Vista Ridge Pipeline would provide path of the pipeline. This that Electro Purification the largest non-Edwards Aquifer Bexar supply in the city's history. project involves land in two must submit to the per• Enough water for 162,000 new groundwater conservation mitting process specified 142 miles of pipeline will transport water from families. Burleson County to San Antonio. districts (GWCDs) mostly by the district to complete • 20 percent more water for San Antonio. located in two counties. the project. If that process Source: San Antonio Water System • Protection for the Edwards Many landowners in those produces unsatisfactory Aquifer during drought. GWCDs opted not to lease results, litigation will • Delivered by 2020. their water, and grassroots activists have embarked on likely ensue. At this writefforts to stop the project to protect the integrity of the aquifers ing, the future of this marsupplying the water. At this point, either of the parties to the keting proposal is clouded because they have failed to resolve contract may terminate the agreement, but once the developthe legal guarantees to a defined quantity of water. ment phase ensues, only SAWS can do so. These two situations illustrate the potential minefields of The issues involved in water marketing resulted in this political and legal intrigue surrounding water marketing. Percomplex arrangement that would introduce water into SAWS haps this local approach will ultimately guide water to its most at a cost of $2,000 per acre foot. That would result in an estihighly valued uses in optimal locations, but getting there will mated 16 to 17 percent increase in the average water bill for probably be a bumpy ride. San Antonio residents. Proponents argue that the deal locks in Dr. Gilliland (c-gilliland@tamu.edu) is a research economist with the Real needed future supplies of water at today’s prices and ensures Estate Center at Texas A&M University. San Antonio has adequate water supplies. However, the project faces continued opposition. Only time will tell if this water marketing effort will yield drinking THE TAKEAWAY water for San Antonio. If the project proceeds to completion, San Antonio will no longer need to buy water, reinforcing the Texas continues to rely on water marketing to allocate urgent issue of timing in marketing water. water resources where they are valued the most. However, In Hays County, Electro Purification LCC, a Houston-based the marketing process continues to face daunting obstacles company, has proposed withdrawing approximately 5,830 acre in the quest to close transactions. feet of water from the Trinity Aquifer. The water would supply
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Housing Markets
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Figure 1. Record Texas Median Home Price Five Years in a Row
13
170,000
10
140,000
7
110,000
4
80,000
–1
Median Home Price
$200,000
50,000 1989
1994
1999
2004
2009
Percent Change
H H
ousing affordability refers to the relationship between housing costs and household income. A household, whether an individual or a family, is the basic demand unit for a housing unit. The dollar amount a household can afford to purchase or rent a home is a direct function of its income. The principal measures of housing affordability are the homebuying (purchasing) power of a dollar of income and the ratio of monthly housing costs (payments or rent) to monthly income. Texas housing affordability therefore requires analysis of the relationship between Texas house prices and household income levels and the changes in each relative to changes in the other. The rapid increase in home prices in most Texas markets since 2011 has caused concern regarding housing affordability in the future. The statewide median home price set a record high each of the past five years and increased a total of 24 percent from 2012–14 (Figure 1). The median price for a home increased even more in many communities. But the increases in the past three years are somewhat misleading. During the ten-year period since 2004, the Texas median home price increased an average of 3.6 percent per year, which is only one-half a percentage point less than the 4.1 percent long-term average rate of increase. However, the “Texas Price Gap,” the competitively advantageous difference between the Texas median home price and the national median, has narrowed substantially. Historically, the Texas median-priced home equaled about 25 to 30 percent less than the national median price. In 2006, when the national median price ballooned to its peak, the Texas median-priced home
–2 2014
Source: Real Estate Center at Texas A&M University
was 36 percent lower than the national median price. By 2014, the difference declined to slightly less than 12 percent (Figure 2).
Home-Price-to-Income Ratio The relationship between home prices and household incomes is a major key to a competitive future housing outlook. Because of lower overall home prices, Texas households have been able to keep the home-price-to-income ratio within a healthier financial range than in many other states and the nation. Sound mortgage underwriting guidelines suggest that the typical household can generally afford to buy a home priced between 3 and 3.5 times its annual income with a 20 percent TIERRA GRANDE
Median Home Price
$250,000
Figure 2. U.S. and Texas Median Price Single-Family Home
210,000
reverted to 3.5 by 2009. The price bubble for new homes was even more pronounced as the ratio increased from 4.0 in 2000 to 5.2 in 2005. Exuberant home demand fueled by subprime mortgages led to aggressive bidding for a limited supply of new and existing homes during those years. Recent figures may cause concern of a return to an overpriced housing market nationally as the new home-price-toincome ratio is estimated to have reached 5.3 and the existing home ratio to be greater than 3.9 in 2014. By themselves, these levels are not alarming, but if the upward trend continues, it could signal a more significant problem.
U.S.
170,000 130,000
Texas
90,000 50,000 1989
1994
1999
2004
2009
2014
Sources: National Association of Realtors and Real Estate Center at Texas A&M University
down payment and a 30-year, fixed-rate mortgage. If market conditions force buyers to pay substantially more than this, buyers may make lower percentage down payments. The resulting mortgage payments become a higher percentage of monthly income, causing potential delinquency problems. During the 2003–06 housing boom, lower interest rates and easy credit terms caused the national price-to-income ratio for existing homes to exceed 4.0, peaking at more than 4.7, and new home buyers paid more than five times their annual income (Figure 3). The national home price bubble is apparent in Figure 3 as the price-to-income ratio for existing homes went from a reasonable 3.53 in 2000 to 4.73 in 2005 and 4.6 in 2006 and then JULY 2015
Figure 3. Median Home Price as a Multiple of Median Household Income
5.40 5.20 U.S. New Homes 5.00 (1975–2000 average = 3.82) 4.80 4.60 4.40 4.20 4.00 3.80 3.60 3.40 3.20 U.S. Existing Homes 3.00 (1975–2000 average = 3.36) 2.80 2.60 Texas MLS Homes 2.40 (1989–2010 average = 2.88) 2.20 2.00 1975 1985 1995 2005 2014e Sources: U.S. Census Bureau, National Association of Realtors and Real Estate Center at Texas A&M University
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With notably lower-priced housing, Texas homebuyers have for the full year of 2014, essentially equal to the 1999 index not been forced to pay such high multiples of annual income (Figure 5). for their homes. The lower mortgage interest rate environment Texas remains a relatively affordable state compared with of the 2000s has allowed the price-to-income ratio to expand comparable U.S. measures of affordability. During the 16 years from less than three to roughly 3.2 from 1999 to 2014, Texas averaged Figure 4. Texas and U.S. Housing to 3.3. Even during the housing an index value about 20 percent boom, Texas homebuyers were paygreater than the comparable U.S. Affordability Indexes ing no more than 3.3 times annual index score. The “Texas spread,” 2.50 1Q2013 Since 1Q2013: Texas down 21.5% income. The steeper price increases or the differential between the U.S. Since 1Q2012: U.S. down 28% 2.21 1Q2012 in 2013 and 2014 caused the stateindex value and the Texas index, 2.20 2.13 wide price-to-income ratio to move 4Q2014 narrowed to only 6 percent in 2011 to around 3.25 and 3.4, still generas home prices nationally bottomed 1.74 1.90 ally within a sound range. out but has rebounded to a nearly 15 Texas percent spread in 2014. U.S. Texas Housing Affordability 1.60
Index
I
Texas Household Income and House Price Changes
4Q2014 n 2014, Texas continued its 1.30 1.52 A telling measure of housing affordlong-standing position as a ability stability is the rate of change state with affordable hous1.00 in home prices over time relative to ing. According to the Real Estate 2005 2007 2009 2011 2013 2014 the change in household earnings. Center’s Texas Housing AffordSource: Real Estate Center at Texas A&M University Data in Figure 1 depict the change ability Index (THAI), Texas ended in the Texas median home price 4Q2014 with an index value of 1.74, since 1989. Texas’ median home price typically increases about just slightly less than the 1.79 value recorded in 4Q2013 and 4 percent per year. But it increased 24 percent between 2012 the 1.80 average index level since 2005. The 4Q2014 index of and 2014 and may easily show the same level of increase or 1.74 means that the state’s median income was 1.74 times (or more in 2015. 174 percent of) the income required to qualify to purchase the During the same period, Texas nominal household income median-priced home with an 80 percent purchase mortgage at rose just 11.2 percent, less than half the rate of increase of the the prevailing interest rate and the lender requiring that the median home price. Household income adjusted for inflation total mortgage payment be no greater than 25 percent of the increased 6.1 percent during the past buyer’s monthly income. The higher three years but is essentially flat relthe index value, the more affordable Figure 5. Texas Housing ative to the 2001 level and actually homeownership is in the state. Affordability Index less than the 1999 level (Figure 6). The THAI peaked in 4Q2012 and 2.20 The widening gap between home 1Q2013 at 2.21; affordability has price and nominal household declined nearly 21.5 percent since Texas U.S. income that started in 2000 reflects then. The comparable U.S. afford1.90 a general decline in the affordability ability index (as computed by the of Texas homes. As the gap widens, Real Estate Center) declined nearly households are forced to pay a higher 28 percent during the same period 1.60 multiple of income for a home. (Figure 4). Overall affordability can be mainSince 1999, home affordability has tained if interest rates and other gone virtually full cycle in Texas. 1.30 recurring costs stay low, allowThe composite THAI for 1999 was ing monthly costs to remain in a 1.74. After dipping to 1.58, the index sound relationship with monthly reached a maximum of 1.81 in 2003 1.00 1999 2002 2005 2008 2011 2014 income. When interest rates or other and then dropped to 1.45 by 2007. Source: Real Estate Center at Texas A&M University Housing monthly costs of housing increase The median home price declined by Affordability Index (rent or taxes or insurance costs), 0.3 percent and 0.7 percent in 2008 overall affordability is reduced. From 1989 through 1999, and 2009, respectively, and advanced only 1.2 percent and 0.8 household income and median home prices tracked tightly percent in 2010 and 2011. With median home price holding with each other. Since 1999, though, the dispersion in the two basically flat for these four years, the THAI expanded rapidly, indexes continues to widen, creating the potential for a greater reaching the peak of 2.14 in 2012. With the rapid increases impact on overall affordability when interest rates start to rise. in median home price since 2011, the index fell back to 1.72
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TIERRA GRANDE
A
Because a large number of homes pplying the same loan Figure 6. Texas Median Household are purchased using long-term parameters as in the Income and Median Home Price mortgage debt, the amount a houseexample to the 9.11 million Indexed to 1989 = 100 hold can afford to pay for a home Texas households as distributed is not only a function of its income 280 by annual income indicates that but also the terms and conditions with a 3 percent down payment Median Texas Home Price 2011–14 of credit available. The two eleapproximately 46 percent of Texas 240 +24% ments work in opposite directions. households could not afford to buy Recent efforts to improve a home priced more than $150,000, 200 national affordability have focused meaning they cannot meet the on lowering down payment require35 percent limit of total monthly 2011–14 ments, especially for lower-income, 160 housing cost to monthly income +11% Nominal Household Income first-time buyers. Lowering the requirement. With a 10 percent required down payment may actudown payment, approximately 45 120 ally hinder overall affordability as percent of the households could 2011–14 Real Household Income +6% it increases the necessary monthly not buy a home priced more than 80 mortgage payment and thereby $150,000, and with a 20 percent 1989 1994 1999 2004 2009 2014e reduces the home-purchasing power down payment about 43 percent Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University of each dollar of income. could not afford a home more than or example, assume a poten$150,000. Lowering the down paytial buyer can qualify for a 30-year, fixed-rate mortgage ment from 20 percent to 3 percent means that roughly 273,300 at 4.15 percent interest, and the lender limits the total Texas households cannot afford to purchase a $150,000 home. housing payment (principal and interest plus taxes, insurance This impact becomes even greater at higher interest rates. and utilities, estimated at 5.5 percent of the house price) to no Texas and the major Texas metropolitan areas continue to more than 35 percent of monthly income. The home-purchasenjoy a housing affordability competitive advantage over most ing power of each dollar of other large population The Home-Price Multiplier at Various Down Payments* income — the home price states and communities. multiplier — varies by the Home price increases Down Payment Home Price Maximum Home Price percent of down payment over the past decades (Percent) Multiplier with $70,000 Income the buyer can accommohave been relatively 3 3.14 $219,800 date (see table). modest, without the high 5 3.17 $221.900 The greater the down volatility resulting from 10 3.26 $228,200 payment, the lower the booms and busts. At the 15 3.35 $234,500 monthly payment, and same time, economic 20 3.44 $240,800 the higher the price one growth fostered income 25 3.54 $247,800 can afford to pay. In this growth that until 1999 30 3.65 $255,500 example, a buyer with correlated closely with *Assuming 4.15 percent fixed mortgage interest rate; 5.5 percent taxes, insurance and utilities; and 35 annual income of $70,000 home price changes. percent qualifying ratio. Source: Real Estate Center at Texas A&M University and savings for a 15 perSince the 2007 recession, cent down payment can home prices and houseafford a home priced at 3.35 times income or $234,500. Note, hold incomes have diverged at an accelerated pace, making this is essentially equal to the estimated income multiplier Texas home affordability in the future more uncertain. currently in Texas (Figure 3) but substantially less than the Dr. Gaines (jpgaines@tamu.edu) is a research economist with the Real Estate indicated national multiplier estimate. Center at Texas A&M University. If the same buyer only has funds for a 3 percent down payment, they would be unable to qualify to buy a house priced at THE TAKEAWAY more than $219,800. If that same buyer could make a 30 percent down payment, they could buy a home priced at $255,500, Housing affordability rests on the relationship between a price 16 percent greater than what could be bought with a home prices and household incomes, both of which have 3 percent down payment. A buyer who pays more than the risen over the past two decades. Since the Great Recession, indicated maximum home price at any down payment will be however, home prices have increased but incomes have forced to spend more than 35 percent of their monthly income not kept pace, casting uncertainty on future Texas home in total housing payments, creating greater potential of future affordability. default or severely limiting other consumer activity.
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Affordable Housing
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TIERRA GRANDE
No single “magic bullet� will solve the growing affordable housing development problem in Texas cities. When considering all the possible alternatives, small traditional stick-built homes or subsidized low-income apartments usually top the list. Rarely are manufactured housing (MH) communities thought of as a viable alternative. JULY 2015
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ustainable, attractive MH communities already exist in the state today. However, city officials and residents remain skeptical about the ability of MH developments to blend in and thrive in either urban or suburban environments. As a result, the state’s nicest MH communities have evolved outside city limits. These communities are largely restricted to residents age 55 and older. Still, they may offer a path to one more affordable housing alternative for cities, one that combines economically feasible MH development with greater acceptance of MH by wary local residents.
Nothing New Under the Sun Quality MH communities are not a new concept. Upscale MH development activity was quite strong in the 1960s and 1970s, mostly in Sunbelt states such as California, Arizona and Florida. Many offered retirees housing in high-cost areas where traditional single-family homes otherwise would have been unaffordable. Although spiraling land costs have curtailed development of new MH communities in California, manufactured homes on rented land in Malibu’s Paradise Cove Mobile Home Park have sold for more than $3 million. Just “the box” can be quite valuable in the right location. In Texas, Winter Texans have been coming to MH communities in the Rio Grande Valley for decades. However, they are considered more part-time visitors than full-time local residents. The focus of this article is on specific MH communities located in the Texas Hill Country outside Kerrville. The intent is to showcase what can be accomplished with MH developments and discuss what has made them successful as a more affordable permanent housing alternative.
Hill Country Communities
Keys to Successful Development The three MH development owners tend to agree on a number of factors that have led to the success of these communities. “The objective is to make a set of rules for a community that work but aren’t oppressive,” says Sam Spears, owner of Windmill Ridge. “It comes down to good restrictions, good management and offering the residents pride of ownership and a store of value.” “Residents are drawn to our community because they like the lifestyle,” says Sue Steele, owner of The Wilderness. “They like the freedom to come up with their own activities, but management must still sign off on their ideas. They like the structure good rules provide.” “Good management and tight enforcement of rules create stability in the community,” says John David Grisebaum, owner of Scenic Valley. “The residents know that we are all in this together. The better the community is maintained, the more their homes will retain their value.” The owners agree that amenities and visual aesthetics are important. These communities offer elevation changes, greenspace, paved and landscaped streets and variety in the spacing and placing of homes on a site. Scenic Valley’s main focal point is a man-made lake. The Wilderness and Windmill Ridge provide residents with community clubhouses for activities.
Although spiraling land costs have curtailed development of new manufactured home communities in California, homes on rented land in Malibu’s Paradise Cove Mobile Home Park have sold for more than $3 million.
Three MH communities in the Kerrville area offer insights into this issue. They are Windmill Ridge, The Wilderness and Scenic Valley. Owners of the three developments retain ownership of the land, charging residents a ground lease somewhere between $200 and $400 per month. The MH unit is owned by the resident. Some combination of basic services are typically included in the ground lease payment, including such things as water, sewer, garbage pickup or basic cable TV. All three properties are 99 percent occupied.
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Developed in 1999, Windmill Ridge is the newest community of the three. The 125-lot development is open to adult residents only. About 90 percent of the homes are multisection (double- or triple-section) units. The Wilderness is an age-restricted (55 and older) property developed in 1969 with a total of 100 MH sites. Multisection units make up about 40 percent of the community. Finally, Scenic Valley was developed in 1993. A total of 92 age-restricted (55 and older) sites are located in the community, with about 50 percent of the MH units being multisection homes. None of the three communities provide short-term lease spaces for recreational vehicle (RV) travelers, minimizing neighborhood traffic and transient activity. However, many of the permanent residents own and store personal RVs in designated areas within the communities.
TIERRA GRANDE
The Wilderness, Windmill Ridge and Scenic Valley all require rock skirting and do not have short-term spaces for recreational vehicles. Other rules range from requiring two-car garages for multisection homes and mandating concrete driveways to banning “for sale” signs in yards to keep through traffic to a minimum.
JULY 2015
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SCENIC VALLEY OFFERS waterfront lots on its man-made lake.
Finally, all owners screen their prospective homeowners carefully. “We interview potential buyers and go over the community rules with them ahead of time,” says Steele. “No surprises.” “I look for two things in residents,” says Griesbaum. “I want creditworthy people who are of good character. That minimizes most of my problems as an owner, including rent collection.” The result has been MH properties that can retain value over time, something that surprises most people. “We just had a ten-year-old property of about 1,800 square feet sell for $158,000,” says Spears. He notes that the median sales price in Windmill Ridge is about $90,000. The bulk of sales in Windmill Ridge are double-section units.
Community Restrictions
A
lthough rules and regulations are not identical across these three communities, many commonalities exist. All control the number and size of pets. All limit the ability of residents to sublease their property to others. All rigidly restrict the conditions under which street parking is allowed. Spears, a MH dealer, originally created Windmill Ridge as an outlet to sell manufactured homes. Through the use of deed restrictions, he has also maintained tight control over the quality of housing installed in the community. MH options are restricted to six brands that only use HardiePlank or Smart Panel exterior siding. Spears also retains control of allowable exterior colors when units are repainted.
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Wind-resistance technology has also improved significantly in both the construction and installation of MH. Spears also installs and warranties all MH placed in Windmill Ridge. Today, all three communities require rock skirting around the base of the homes. Windmill Ridge imposed this restriction from the beginning, while the other two parks require this upgrade as older homes are replaced with newer ones. The Wilderness currently requires that a MH unit offered for sale must exceed $42,500 in value or be removed from the park at the seller’s expense. This price point is determined via a proprietary formula based on MH prices published by NADA, an independent third-party data provider. Homes worth less than this amount are grandfathered in until offered for sale. Windmill Ridge mandates garages and concrete driveways, with Spears maintaining control over their construction standards. Two-car garages are required for multisection homes, while one-car garages are allowed with single-section units. Although Windmill Ridge and Scenic Valley allow “for sale” signs in yards, The Wilderness does not. Fliers representing homes for sale are posted on a community bulletin board. “This is just another way to keep traffic to a minimum in the neighborhood,” says Steele.
Availability of Financing Financing options are readily available from FHA, VA or USDA when a MH is sold along with the land in a real property transaction. Financing for properties in the three Kerrville parks must be provided through personal property “chattel” loans, TIERRA GRANDE
since no deed transfer is involved. Only title to the MH unit itself transfers. “Most closings in these communities occur at title companies,” says Linda Stillwell, MH salesperson and real estate agent at Coldwell Banker D’Ann Harper Realtors. “It provides uniformity to the closing process and the assurance that all taxes and fees have been paid.” Stillwell obtained a MH salesperson license to permit her to conduct more than three personal property MH transactions per year. Under Texas law, real estate licensees are not subject to any transaction limits when the MH is sold in conjunction with the land as a real property transaction. “To obtain a MH salespersons license in Texas, applicants must fill out an application, take an eight-hour class, pass an open-book exam and work under a sponsoring broker or retailer,” says DJ Pendleton, executive director of the Texas Manufactured Housing Association (TMHA). Brokers may “stand alone” with no MH inventory of their own to sell. MH retailers sell their own stock of manufactured homes on lots resembling automobile dealerships. Bonding is also a requirement. MH brokers are required to carry a $50k bond. MH salespersons are exempt because they are working under a bonded broker. National lenders specializing in chattel loans include Vanderbilt Mortgage and Finance and 21st Mortgage Corporation. Local banks also conduct chattel lending. Security State Bank & Trust (SSBT), a Fredericksburg-based community bank, has been an active lender in the three Kerrville communities. A common myth is that lenders will not finance resales of used MH with chattel loans. This is not the case, especially when the MH is located in well-maintained communities. “We’ve financed a number of the resales in these parks,” says Trish Perez, vice president/loan officer at SSBT in Kerr ville. “I’ve actually financed a few units that were gutted and renovated by flippers.” “I’m happy to see flippers improve the homes and resell them,” says Spears. “It just increases the overall value of the community.”
As tighter appraisal regulations are clarified and understood by all parties involved in the MH transaction, the increased standardization of MH values should further improve financing options and availability down the road. For a more in-depth analysis of the MH appraisal issue, see Pendleton’s article titled “The Coming HPML Appraisal Train” at www.texasmha. com/news/featured/the-coming-hpml-appraisal-train.
Developing Successful MH Communities
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ike any other real estate development, the creation of new MH communities has its challenges. “Building a new development from the ground up requires a substantial cash outlay up front,” says Spears. “Finding the right tract of land is another major hurdle,” he says. Griesbaum agrees. “Absorption can also be relatively slow in a new manufactured home community. There are a lot of moving parts that make new development riskier than just buying an existing MH park and upgrading it. You need fairly deep pockets.” Cities could play a critical role in the success of new MH development if they are convinced the reward is sufficient. “I think if cities can view manufactured housing communities as a viable form of older/retiree affordable housing, they should consider not only allowing for it but incentivizing it,” says Pendleton. “Cities give tax rebates, loan programs, buying assistance programs, rent abatements, the works for things like drought tolerant yards, affordable housing (apartments almost exclusively) and energy efficiency improvements,” Pendleton adds. “Applying specific incentives to foster MH community development could create more demand and help defray initial costs that make a project more profitable sooner. In the long run, it would also relieve the pressure to increase rents or lessen resident restrictions just to fill a vacant space.”
Financing options are readily available from FHA, VA or USDA when a manufactured home is sold along with the land in a real property transaction.
Appraisal Issues Good comparable sales data on resales are critical, since no full Universal Standards of Professional Appraisal Practice (USPAP) appraisal has been required for chattel loans. However, DoddFrank legislation has mandated a rule change concerning appraisals of personal property MH loans as of July 18th. JULY 2015
Dr. Hunt (hhunt@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.
THE TAKEAWAY In Texas, manufactured homes have not been included in the discussion of affordable housing development. However, they can be when developments are well thought out and restrictions are reasonable. Good management and restriction enforcement can result in win-win situations for residents and the surrounding community.
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Texas Economy
By Jesus CaĂąas, Keith R. Phillips and Luis B. Torres
T
he recent boom and bust in home prices and residential construction and their impact on the global financial crisis has highlighted the need for upto-date economic indicators that can help analyze the residential construction sector. While various measures of residential construction are available, what is needed is a comprehensive measure of the direction of this important sector because various indicators can at any point in time move in different directions. Historically, the residential construction sector has played an important role in the U.S. business cycle as exemplified by the use of residential building permits in the Conference Board U.S. Leading Index. While the timing of the residential construction cycle may not always match the overall business cycle, its size and volatility make it an important sector in the overall economy’s
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growth. This is true at the regional level as well. A coincident index seeks to measure the underlying comovement among various broad measures of an economy or sector that is consistent with the business cycle. The index can be used to define precise peaks and troughs in the cycle and thus the timing and length of expansions and recessions. Indices are constructed from variables that represent broad measures of the economy or sectors of interest but come from different sources or measure different types of activity such as labor, capital, consumption or production. For example, while real gross domestic product (RGDP) is a broad measure of economic activity, the Conference Board estimates a U.S. coincident index that includes measures such as employment, income, production and sales. The underlying comovement of these variables is likely to better represent the business cycle than simply the movements in RGDP. TIERRA GRANDE
Research on business cycle indices has expanded through the years to regional economies. Such widespread acceptance of indices is explained by their recognized ability to measure the overall direction and timing of broad movements in the overall economy or in specific sectors. This is especially critical in the absence of a timely measure of state and local gross state product (GSP) and the lack of high-quality historical time series. Regional coincident indicators have done a good job of providing a timely and accurate overall picture of the current state of a local economy. To date, there is no reliable summary indicator to measure the residential construction cycle at a regional level. Here, a methodology is applied to calculate a single underlying unobserved variable that represents the coincident index. The approach allows the data to define the component weights that best define the underlying comovement in the component variables.
Figure 2. Components of Texas Residential Construction Coincident Index (Index 1990: Q4 = 100)
600 500 400 300 200
100 1991
1995
1999
2003
2007
2011
2014
Residential Construction Coincident Index Residential Construction Employment Residential Contract Values Residential Construction Wages
Figure 1. Texas Residential Construction Coincident Index (Index 1990: 10 = 100) 500
Source: Real Estate Center at Texas A&M University
400 300
turning points. The index provides a smooth and clear signal of the state of residential construction from the three input variables: real contract values, real wages paid and the number of jobs (Figure 2). esearch economists at the Real Estate Center at Texas A&M University identified the turning points of Texas residential business construction independent of this index. These turning points serve as a benchmark to evaluate the performance of the residential construction coincident index (Table 1). Center researchers applied the same methodology as the National Bureau of Economic Research business cycle dating committee for the U.S. economy. This consists of identifying economic activity based on a range of indicators while at the same time defining contractions and expansions based on their knowledge of the Texas residential market. They identified three troughs and two peaks in the Texas residential construction business cycle between January 1970 and May 2015. The Texas residential construction coincident index matched the designated turning points for the peak achieved between September 2006 and January 2007 and the trough between April and June 2011 (Table 2). No other peaks and troughs were identified by the coincident index besides the aforementioned from October 1990 to May 2015. The coincident index performs well, replicating the features of the Texas residential construction business cycle for the sample period.
R
200 100 0 Oct. 1990
Feb. 1994
Apr. 1998
Jun. 2002
Aug. 2006
Oct. 2010
May 2015
Notes: Shaded area represents a recession in Texas residential construction. Retrended with real contract values. Source: Real Estate Center at Texas A&M University
There is no single indicator that best estimates the timing and length of the broad upswings and downturns in Texas residential construction. Even real residential construction contract values by themselves do not capture the underlying state of the sector, as contracts can be canceled, and the timing of construction activity can vary between contract signing and building activity.
Texas Residential Construction Coincident Index The estimation period for this coincident index is January 1990 to May 2015. The period of economic contraction as defined by the coincident index is shaded (Figure 1). The coincident index moves smoothly upward during expansion and downward during contraction, thus minimizing the number of false signals of business cycle JULY 2015
Table 1. Chronology of Texas Residential Construction Business Cycle Peak Date
Trough Date
Months Contraction, Peak to Trough
Months Expansion, Trough to Peak
September 1979 May 1984 January 2007
August 1982 March 1989 June 2011
36 59 54
— 22 215
Source: Real Estate Center at Texas A&M University
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Table 2. Chronology of U.S. and Texas Business Cycles Peak Date
Trough Date
Months Contraction, Peak to Trough
Months Expansion, Trough to Peak
November 1970 March 1975 July 1980 November 1982 March 1991 November 2001 June 2009
11 16 6 16 8 8 18
106 36 58 12 92 120 73
March 1983 January 1987 June 2003 November 2009
14 16 28 18
— 32 171 61
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United States December 1969 November 1973 January 1980 July 1981 July 1990 March 2001 December 2007 Texas February 1982 October 1985 March 2001 June 2008
Texas Residential Construction Coincident Index September 2006
April 2011
Notes: The coincident index from the Dallas Federal Reserve does not identify an economic downturn for Texas during the 1970s. The Texas Residential Construction Coincident Index starts in October 1990. Sources: National Bureau of Economic Research (NBER) and Dallas Federal Reserve
T
he Texas coincident index estimated by the Dallas Federal Reserve matched the designated turning points for the state’s economy and is widely used as the major reference for the regional business cycle (Table 2). However, nation, while recovering earlier than the nation (Figure 5). the Texas residential construction index did not conform with This confirms past findings regarding the heterogeneity of the timing of the turning points in the overall Texas economy. business cycles in both timing and magnitude at different For example, residential construction did not register a downlevels of disaggregation, where differences are present not turn in 2001, but it did register a slowdown two years later (Figure 3). Figure 3. Texas Residential Construction Coincident Index This reflects the differences between the aggregate and Texas Business Cycles economy’s business cycle and residential construc(Month-to-Month % Annualized, Seasonally Adjusted) tion. In particular, it shows how residential investm/m% m/m% ment can lead the business cycle, whereas a fall in 6 60 residential investment can be a foreteller of a recession, as was observed during 2007. The differences 4 40 also indicate that the 2001 technology downturn did 2 not affect residential construction in Texas. The resi20 dential construction recovery has been slower than 0 the Texas economy’s recovery. This is because of the 0 constraints on construction after the crisis, such as –2 securing financing for tract developments for single–20 family homes. –4 The same methodology was applied to estimate –40 a residential construction coincident index for the –6 United States to compare the national residential –60 –8 construction cycle with Texas’ (Figure 4). ObservaNov. Nov. Nov. Nov. Nov. Mar. tions reveal a difference in timing and magnitude, 1990 1996 2002 2008 2014 2015 as in 2000 and 2001, when the U.S. coincident Texas Residential Construction Coincident Index index reflects a mild recession compared with the Texas Coincident Index (right y-axis) Texas index, which represents more of a slowdown. Notes: Shaded Areas represent recessions as defined by Yucel and Thompson, and Also, between 2006 and 2010, residential construcPhillips’ Texas coincident index. tion in Texas recorded a downturn later than the Source: Real Estate Center at Texas A&M University
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Figure 5. Texas and U.S. Residential Construction Coincident Index (Month-to-Month % Annualized, Seasonally Adjusted)
80 60 40 20 0 –20 –40
–60 Nov. 1990
Nov. 1995
Nov. 2000
Nov. 2005
Nov. 2010
Jan. 2015
Texas United States Source: Real Estate Center at Texas A&M University
only from national to regional but from aggregate to industry or sector. The Texas residential construction index indicates broad directional changes in residential construction in a timely manner. Its estimates of economic turning points are sharp
Figure 4. Texas and U.S. Residential Construction Coincident Index (Index 1990: 10 = 100)
480 430
330 280
130
230
Texas
United States
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and agree with dates determined by experts at the Real Estate Center. It defines one brief slowdown in residential construction from 2001 to 2002 and a steep, long recession from 2007 to 2011. It shows that the residential construction cycle differs in timing from the Texas business cycle and the U.S. residential construction cycle. Although the index performed well since 1990, this is a relatively short period by which to judge the coincident business cycle indicator. Currently, with data through May 2015, the index is signaling a healthy expansion accompanied by a slowdown in Texas residential construction activity with a low probability that the sector is entering a downturn. The usefulness of this indicator to signal 180 directional changes in Texas residential construction 170 will be monitored in real time in the future. 160 Cañas and Phillips are with the Dallas Federal Reserve and Dr. 150 Torres (ltorres@mays.tamu.edu) is a research economist with the Real Estate Center at Texas A&M University. 140 120
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THE TAKEAWAY
110
130
90
The Texas Residential Construction Coincident Index is based on the movements in three direct measures of residential construction activity: real contract values, real wages paid and number of jobs. This index should be a useful tool for understanding the current direction of Texas residential construction activity. With data through May 2015, the index is signaling a healthy expansion that is showing signs of slowing.
80 Oct. 1990
Oct. 1996
Oct. 2002
Oct. 2008
Texas United States Notes: Shaded area represents recession in Texas residential construction. Both coincident indexes are retrended with real contract values. Source: Real Estate Center at Texas A&M University
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80 Oct. Apr. 2014 2015
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Legal Issues
T OIL AND GAS LEASE EXTENSIONS BY J U D O N FA M B R O U G H
he recent downturn in oil and gas prices stymied exploration and production in many areas of the state. Presently, oil and gas companies are scrambling to find ways to hold leases with marginal or no production, awaiting the return of higher prices. Mineral owners (lessors) tend to focus on ways to get production established when negotiating leases and often overlook provisions that allow prolonged extensions when prices fall or production becomes marginal. The duration of the lease sets the parameters for understanding unanticipated extensions. Paragraph two of a lease, known as the habendum clause, describes the length or duration of a lease. The clause divides the lease into two terms: primary and secondary. The negotiated length of the primary term averages three to five years. The lease terminates at the end of the primary term unless the operator has established production or commenced drilling operations. If so, the lease enters the secondary term and lasts for as long as production or operations continue without ceasing for more than some stated period, generally 90 consecutive days. When the cessation occurs, the lease terminates. There are ways oil companies may extend leases within these parameters. At the same time, there are ways mineral owners may avoid these extensions when negotiating a lease.
Extensions at End of Primary Term The length of the primary term appears straightforward, but the lack of definitions creates problems starting on the day the oil company enters the property for drilling preparations. Because the lease contains no definition of what constitutes the commencement of drilling operations, clarity lies in Texas case law. The Texas courts adhere to a liberal definition. According to two rulings, selecting the drill site, hauling lumber
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onto the premises, procuring a water supply and similar acts preliminary to the beginning of drilling, when performed with the bona fide intention to diligently proceed toward the commencement of a well, constitute the beginning of drill operations within the purview of lease terms (Whelan v. R. Lacy Inc. and Peterson v. Robinson Oil & Gas Co.). While the physical entry is quite evident, determining whether the acts are performed with the bona fide intent to begin drilling operations is not. Obviously, mineral owners need to formulate a more exact definition. Otherwise, the oil company could conduct limited operations on the property every 60 to 90 days just to hold the lease. A violation of the bona-fide-attempt and due-diligence tests rests in litigation, which should be avoided if possible. Some lessors define the beginning of drilling operations as the moment the drill bit begins rotating in the ground under its own power with sufficient equipment on site to drill to the depth of the permit issued by the Railroad Commission of Texas (the commission). Failing to meet this test before the end of the primary term permits the lease to terminate. nother way to hold leases at the end of the primary term is to drill shallow wells. In Texas, the mineral estate extends to the center of the earth as does the depth of mineral leases. Consequently, any production at any depth holds the lease to the center of the earth. The Austin Chalk lies immediately above the Eagle Ford Shale in many parts of the state. The chalk contains proven reserves but not to the extent of the Eagle Ford Shale. The chalk can be developed less expensively with vertical wells as opposed to more expensive horizontal wells to the lower Eagle Ford Shale. Hence, oil and gas companies (lessees) drill shallow vertical wells to the chalk before the end of the primary term to
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hold the shale until higher prices merit development of the lower, more productive formation. The same occurs in other areas of the state with similar overlying formations. This practice could have been avoided by negotiating a horizontal severance clause or depth clause. Typically, the clause provides that the lease terminates at the end of the primary term starting 100 feet below the stratigraphic equivalent of the deepest producing formation. If such a clause had been negotiated in the above scenario, the shallow well would hold the lease down to the Austin Chalk. The Eagle Ford Shale and all lower depths would no longer be bound after the end of the primary term. Many oil companies agree to depth clauses starting 100 feet below the deepest drilled depth but not 100 feet below the deepest producing formation. There is quite a difference. Specify below the deepest producing formation. Another possible extension is known as continuous drilling operations. This is not a standard clause but one negotiated by the parties on larger lease tracts where it would be impossible to develop the entire lease during the primary term. The clause allows continuous development based on two contingencies: (1) the lessee is drilling a well at the end of the primary term and (2) no more than 180 days elapse between the completion of one well and the beginning of drilling another. The problem with the clause lies in calculating the 180 days. As discussed earlier, a strong definition for the exact day the commencement of drilling operations begins is needed. Likewise, a definition of the exact day the well is completed or abandoned is needed. The lack of definitions opens the door for disagreements and litigation. A good definition of the completion or abandonment of a well could be
“the day the drilling rig is removed from over the borehole.” Never define completion as “the day the completion report is filed with the commission.” This could be months later. Finally, lessees may resort to pooling before the end of the primary term to hold multiple leases with one well. aragraph four permits the lessee to unify the lease with other adjacent lease tracts to create what is known as a pooled production unit. A production unit is the area assigned to the well by the lessee to establish the amount of production allowed by the commission. Pooling enables the lessee to meet the commission’s spacing and density requirements. While this may appear innocuous, it may create problems for mineral owners. Paragraph four goes on to say that any operations on or production from the pooled unit will be construed as operations or productions on all the leases from which the pooled unit was carved. This means that if the lessee places ten acres from a 500-acre lease in a pooled unit, any operations on or production from the pool holds the entire 500 acres with only ten in production. This permits the lessee to hold vast amounts of nonproducing acreage with one well. The practice could lead to a lawsuit for bad faith pooling, though. Lessors may limit the impact of this practice two ways. First, limit the size of the pooled units to those prescribed by the commission. Generally, leases allow the lessee to create unit sizes prescribed or permitted by the commission. The prescribed sizes are the ones described in the commission’s rules and regulations. The permitted sizes are the ones granted on request by the lessee. Lessees may desire larger units to hold
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more nonproducing acreage with one well. Second, place a vertical severance (or Pugh Clause) in the lease. This clause divides the pooled from the nonpooled acreage. At the end of the primary term or the end of continuous drilling operations (if one has been included), whichever is later, the lease continues only on the pooled acreage. The lease terminates on the nonpooled acreage. On larger leases, lessees are able to create production units from one tract without resorting to pooling. The language in a standard Pugh Clause addresses only the creation of a pooled unit or units. If no pooling occurs, the Pugh Clause has no effect. Consequently, the language needs to be modified on larger tracts to separate acreage in production units (whether pooled or not) from the rest of the lease. itigation may still provide an option for lessors whose leases do not have Pugh Clauses. Texas courts recognize an implied duty for the lessee to continuously develop the premises when a profitable well has been drilled. Likewise, the courts prohibit a concept known as bad-faith pooling (mentioned earlier) when the lessee forms pooled units immediately before the end of the primary term simply to hold leases regardless of the geological aspects of a formation. Either practice may be difficult and expensive to prove in court.
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Extensions During Production The lease contains two ways to suspend or “toll� a lease while production occurs or can occur in paying quantities.
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These include the shut-in and the force majeure clauses. Both are referred to as tolling provisions. The shut-in provision, contained in the royalty clause, allows the lease to remain in effect whenever the production from a well is not being sold or used by the lessee for 60 to 90 consecutive days. The well must be capable of producing in paying quantities. Lack of a pipeline to a newly completed gas well accounts for most shut-ins, but the clause is much broader than that. The lease allows the producer to shutin a well for other reasons. For example, the lessee is not obligated to settle labor problems or market gas on terms unacceptable to the lessee. These are subjective standards. Consequently, the lessee may shut-in a well whenever gas prices drop below a threshold unacceptable to the lessee. However, once the shut-in occurs, the lessee faces another obligation. The lessee must tender annual payments known as shut-in royalties to the royalty owners. As long as the lessee tenders the required annual payments in a timely fashion, the lease (and the shut-in) continue indefinitely. The amount of annual shut-in royalties is negotiable. Provisions in lease
forms before the late 1970s provided that failure to tender the payment within 90 days after the shut-in occurred terminated the lease. Later, lease forms provided that the failure resulted in a right to sue for the delinquent payments only. The lease did not terminate. Lessors cannot avoid shut-ins but may limit them. Generally, oil companies consent to limiting a shut-in to no more than 24 consecutive months. Lessors should counter with a limitation of no more than 24 months in the aggregate, which is a big difference. Also, lessors should fashion the timing of the payments as a condition, making delinquency grounds for terminating the lease. The force majeure clause, much like the shut-in, protects oil companies from losing the lease whenever causes reasonably beyond their control suspend operations or production. Acts of God are good examples. However, the clause may include events such as financial problems, lack of water, lack of workers, and so on that may be within the lessee’s reasonable control. wo problems are apparent. First, which clause controls when an event could be classified as either a shut-in or a force majeure? The shut-in clause permits the lessee to shut-in a well if it cannot settle labor problems. Could this lack of workers also be classified as a force majeure? Second, how soon after a force majeure is removed must the lessee restart operations? To resolve these issues when negotiating a lease, first stipulate that whenever
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an event could be classified as either a shut-in or a force majeure, it will be classified as a shut-in. Shut-ins require annual payments and the duration may be limited. Not so with a force majeure. econd, require the lessee to recommence operations or production within 30 to 60 days after the force majeure is removed. Some leases allow as many as 15 months. Finally, review items listed as a force majeure and delete those that are within the lessee’s control.
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Extensions at End of Lease The closing moments of a lease create a multitude of problems. Most focus on how much production is needed to hold the lease. Generally, leases phrase the duration of the secondary term “as long as production continues with no cessation for 90 consecutive days.” In this context, production means production in paying quantities. But, again, the term is not defined in the lease. According to Texas case law, if the well returns a profit, even small, over operating expenses, it produces in paying quantities even though it may never repay all its costs. The enterprise as a whole may prove unprofitable yet meet the test per Garcia v. King. The courts have developed a rather precise method for calculating (quantifying) production in paying quantities (see Center publication, “Termination of an Oil and Gas Lease” at recenter. tamu.edu/pdf/601.pdf). For example, if there is more than one well on the lease, the test applies to all the wells as a whole and not to individual ones. Case law does not dictate the length of time over which to apply the test. If the lease does not define the period, the courts resort to what is reasonable. In the past, this has varied between six JULY 2015
and 18 months depending on the circumstances. In Clifton v. Koontz, the Texas Supreme Court said, “We again emphasize that there can be no limit as to time, whether it be days, weeks, or months, to be taken into consideration in determining the question of whether paying production from the lease has ceased.” If the well or wells produce small amounts, but not in paying quantities, does the lease terminate? Again, the answer depends on the circumstances. According to the courts, the lease would not terminate if, under all the relevant circumstances, a reasonably prudent operator would, for the purpose of making a profit and not merely for speculation, continue to operate a well in the manner in which the well in question was operated. Finally, if there is a total cessation of all operations and production and the cessation continues for 60 to 90 consecutive days, the lease terminates regardless of whether it is producing in paying quantities or not. The reasonableness of the operator’s actions under the circumstances becomes irrelevant. How can these situations be avoided? One possibility lies in a provision known as required minimum royalties during the secondary term. Basically, the provision divides the lease into annual events starting at the end of the primary term. If during any annual period the lessor does not receive a certain amount of royalties based on the number of acres held by the lease, the lessee must make up for the difference or the lease terminates. However, the payment of minimum royalties will not hold the lease when no operations or production occurs during any 12-month period except when the lease is being held by a shutin or a force majeure.
Finally, with improved technology, lessees may easily decrease the rate of production and extend the lease by reducing pump speed. Many lessors have seen their royalty checks decrease not only because of falling prices but also because of the reduced rate of production. This practice could occur anytime during the lease and appears permissible as long as the production occurs once every 90 days and continues in paying quantities. If negotiated, minimum royalties would be required during the secondary term when production drops too low.
Actual Extension Agreements
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he lessee may seek an actual extension of the lease agreement rather than resort to the methods described here. While this removes any guesswork on what constitutes an extension, it does not resolve all problems. A lease extension continues the terms and provisions of the existing lease. If the lease does not contain the recommended provisions just described, the lessor remains in the same precarious predicament. For more information, see the updated research article Hints on Negotiating an Oil and Gas Lease at recenter.tamu.edu/ pdf/229.pdf. This article is for information only. For specific legal advice, consult an attorney. Fambrough (judon@tamu.edu) is a member of the State Bar of Texas and a lawyer with the Real Estate Center at Texas A&M University.
THE TAKEAWAY When prices fall, oil companies may resort to inventive ways to extend leases with little or no production. Mineral owners need to be aware of these possibilities and guard against them when negotiating leases.
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Income Taxes
RETIREMENT PLANS for the
self-employed
by jerrold j. stern
W
hile inflation has been fairly low in recent years, limits on contributions to retirement accounts have risen steadily. The revised limits make such accounts significantly more attractive for self-employed workers. This is good news for real estate brokers and sales associates operating as independent contractors who are considered self-employed for tax purposes, rather than employees. Several retirement plans exist for the selfemployed. The plans differ in complexity and in the amount of contribution allowed. The least complicated plans are Roth IRAs and Deductible (“Traditional”) IRAs.
Roth IRAs
Roths are generally considered a better option than Deductible IRAs. Contributions to Roth IRAs are nondeductible, but all qualified withdrawals are tax free. There is no age limit for contributions and no mandatory withdrawals. A 10 percent penalty plus regular income tax applies to Roth earnings if withdrawn prior to age 59½, but there are several exceptions to the penalty. For example, the penalty does not apply to the first $10,000 of “qualified
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first-time homebuyer distributions” used to purchase or construct a home. To be considered a “first-time homebuyer” for this rule, the buyer and his/her spouse must not have owned a home for the two prior years. Homes owned prior to two years ago are ignored. A major advantage of Roths is that there is no tax rate risk. For instance, the remaining options discussed here require income tax to be paid on withdrawals, a disadvantage because future tax rates are unpredictable. In contrast, qualified withdrawals from Roths avoid tax rate risk because they are tax free. Contributions to Roths are generally limited to $5,500 per year ($6,500 for those 50 years or older). However, the limits begin to phase out for married taxpayers filing jointly whose adjusted gross income (AGI) exceeds $183,000. Contributions are precluded once AGI reaches $193,000. For singles, the AGI phase-out range is $114,000 to $129,000. SEP-IRAs and SIMPLE-IRAs, discussed later, offer larger annual contributions.
Deductible (“Traditional”) IRAs
In contrast to Roths, contributions to Deductible IRAs provide a tax deduction in the year they are made. All qualified withdrawals are taxable as ordinary income and are thus subject to tax rate risk. Penalty-free withdrawals can begin at age 59½ and must be taken at 70½ and each year thereafter. No contributions are allowed after 70½. As with Roths, withdrawals prior to age 59½ are subject to a 10 percent penalty in addition to tax on the amount withdrawn. Exceptions to the 10 percent penalty are the same as those for Roths. With or without the penalty, income tax must be paid on the entire amount withdrawn. In contrast to Roths, AGI limits are reduced if one or both spouses are covered by employer pension plans.
SEP-IRA
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elf-employed workers can establish a Simplified Employee Pension (SEP) for themselves. Contributions are deductible and are made to the taxpayer’s Deductible IRA account (but not a Roth account). The annual contribution limit is the smaller of (1) 18.587045 percent of net self-employed earnings, or (2) $53,000 for 2015 (up from $52,000 in 2014). Roth and Deductible IRA contribution limits already discussed are not affected by SEP-IRA contributions.
SIMPLE-IRA (Savings Incentive Match Plan for Employees) A SIMPLE-IRA allows a self-employed person to make a deductible deposit of $12,500 ($15,500 if older than 50) per year plus a “matching” deductible contribution of up to 3 percent of selfemployment net income. For example, a self-employed broker with $100,000 net self-employment income could contribute $15,500 to a SIMPLE-IRA ($12,500 plus 3 percent of $100,000) plus $5,500 to a Roth or Deductible IRA. The optimal retirement strategy for one person may not be appropriate for another. Because of the complexity of retirement planning, consultation with a tax accountant or tax attorney is recommended.
Dr. Stern (stern@indiana.edu) is a research fellow with the Real Estate Center at Texas A&M University and a professor of accounting in the Kelley School of Business at Indiana University.
THE TAKEAWAY Several retirement plan options are available for self-employed real estate professionals, such as brokers and salespersons. The plans differ in complexity and in the amount of contribution allowed. TIERRA GRANDE
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