TG - Fall 2023 by Texas Real Estate Research Center

Fall 2023

TEXAS REAL ESTATE RESEARCH CENTER T E X A S A & M U N I V E R S I T Y

TEXAS A&M UNIVERSITY

Texas Real Estate Research Center COLLEGE STATION, TEXAS 77843-2115

In This Issue Insurance for Small Businesses Federal Land-Use Regulation Real Estate Recovery Trust Account Tax Incentives for EnergyEfficient Properties Midland and Odessa Market Profile Industrial Job Classification T-47 Affidavit

Helping Texans make the best real estate decisions since 1971

Fall 2023

TEXAS REAL ESTATE RESEARCH CENTER T E X A S A & M U N I V E R S I T Y

iii

FALL 2023

VOLUME 30, NUMBER 4 www.recenter.tamu.edu @recentertx TEXAS REAL ESTATE RESEARCH CENTER

2 | Taking Care of Business Assessing Insurance Needs for Small Companies Insurance is a big deal, no matter the size of your firm. But what types of coverage should owners consider, and how often should those needs be reassessed? Here are some tips to help you mind your business. By Richard Rudolph

A Nagging Question Supreme Court Ruling Limits Federal Land-Use Regulation When does a body of water on privately owned land fall under federal jurisdiction, and what does that mean for the landowners? That question recently resurfaced, and the Supreme Court plunged in. By Rusty Adams

8 | Fund of Last Resort Real Estate Recovery Trust Account Explained In a perfect world, real estate transactions are completed without incident. But this isn’t a perfect world. Fortunately for Texans, the state has a trust account to reimburse consumers for losses from problematic actions by license holders. Here’s how it works. By Kerri Lewis

11 | Save Energy, Save Money

Go West Who’s Moving to the Petroplex One city may be known for ostriches and the other for jackrabbits, but let’s talk about the people of Midland and Odessa—specifically, the ones who are moving there and impacting the region’s economy. By Harold Hunt, Mallika Natarajan, and Priyadarshini Chatterjee Executive Director, GARY W. MALER Operations Director, PAMELA CANON Research Director, DANIEL ONEY Director of Outreach Innovation, THOMAS CAWTHRA Senior Editor, BRYAN POPE Associate Editor, KAMMY BAUMANN Creative Manager, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III Graphic Designer III, ALDEN DeMOSS Circulation Manager, RYAN PERRY

Tax Incentives for EnergyEfﬁcient Properties It ain’t easy bein’ green, but building energy-efficient residential and commercial properties can yield hefty rewards—even moreso thanks to a new law. By William D. Elliott

20 | What’s My Line? Two Approaches to Classifying Jobs Ask any market analyst and they’ll tell you there’s more than one way to count a job. This article gives you two, and together they provide a more complete understanding of Texas’ industrial job markets. By Daniel Oney

28 | Practically Speaking Real Estate Questions Answered Lenders and title companies require a T-47 affidavit when an existing property survey will be used in a sales transaction.The contract for sale incorporates this requirement and has consequences if a seller does not provide it to the buyer in a timely manner. By Kerri Lewis and Avis Wukasch

ADVISORY COMMITTEE: Doug Jennings, Fort Worth, chairman; Doug Foster, San Antonio, vice chairman; Troy C. Alley, Jr., Arlington; Russell Cain, Port Lavaca; Vicki Fullerton, The Woodlands; Patrick Geddes, Dallas; Besa Martin, Boerne; Rebecca “Becky” Vajdak, Temple; and Barbara Russell, Denton, ex-officio representing the Texas Real Estate Commission. TG (ISSN 1070-0234) is published quarterly by the Texas Real Estate Research Center at Texas A&M University, College Station, Texas 77843-2115. Telephone: 979-845-2031. VIEWS EXPRESSED are those of the authors and do not imply endorsement by the Texas Real Estate Research Center, Division of Academic and Strategic Collaborations, 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. Nothing in this publication should be construed as legal or tax advice. For specific advice, consult an attorney and/or a tax professional. PHOTOGRAPHY/ILLUSTRATIONS: Center files, pp. 1 (top, bottom), 5, 6-7, 8-9, 14-15; Robert Beals II, pp. 2-3, 4, 20-21, 23, 24, 25; JP Beato III, pp. 11, 13; Alden DeMoss, pp. 16-17, 18-19. LICENSEE ADDRESS CHANGE. Log on to your Texas Real Estate Commission account to change your mailing address. © 2023, Texas Real Estate Research Center. All rights reserved.

Lithography, RR DONNELLEY, HOUSTON

ON THE COVER: 1953 Santa Fe Warbonnet locomotive, Galveston Railroad Museum. Photographed by JP Beato III. FALL 2023

Insurance

Taking Care of Business

Assessing Insurance Needs for Small Companies

Except for the coverage limits and premiums, insurance needs for small businesses are much like those for big businesses. Insurance representatives are well-placed to assist the business owner in assessing the needs and reviewing how the selected policies work to protect the small business. By Richard Rudolph

hat defines “small” in small business depends on what industry the business is in, but the types of insurance coverage needed by a small business are essentially the same as those for a big business, only smaller in limits and premiums. Nearly every business needs commercial property insurance to protect it from direct loss or damage to business property from perils such as fire, wind, water, theft, and vandalism. Indirect property loss resulting from the loss of use of the business property is included in this type of coverage. For example, loss of net income or loss of rental income is an indirect property loss, as are certain extraordinary expenses incurred because of a loss. Depending on the nature of the goods or services provided, small businesses need four broad types of liability insurance to protect them from injury or damage to third parties and to defend against lawsuits. • All businesses need general liability insurance for financial loss from bodily injury, property damage, medical expenses, and personal injury such as libel, slander, and unlawful detention or false arrest. • Businesses that make or sell products or provide services such as building a deck or installing cabinets need product liability or completed operations insurance to protect against financial loss from a defective product or faulty workmanship. TG

• Businesses that render services of a professional nature require professional liability insurance, sometimes called malpractice or errors and omissions insurance, to protect against financial loss from malpractice, errors, or negligence in the delivery of those services. • Small businesses should have umbrella insurance, which adds higher limits to liability coverage purchased in the basic insurance policies and extends coverage over some activities or exposures not specifically covered in the basic insurance policy but not excluded in the umbrella.

Other Types of Coverages Businesses that operate motor vehicles as part of their business activities should have business automobile insurance. This coverage protects against the physical loss of the vehicle as well as liability to third parties for bodily injury or property damage. In addition, liability arising from the business use of vehicles not owned or leased by the business, such as the business owner’s or employee’s personal auto, can be covered. While some types of crime coverage are provided in the basic property insurance, loss of money, checks, and securities are excluded or limited. Theft and crime coverage protects against loss of money and securities caused by theft, robbery, or burglary. For small businesses that have an employee benefits plan, the Employment Retirement Income Security Act of 1974 requires a fidelity bond, a special type of crime coverage protecting the assets of the benefit plans. Workers’ compensation insurance is needed for nearly all businesses with employees. Because this coverage applies to a state-regulated plan to pay medical bills and replace some lost wages for employees injured at work or those who have a work-related disease or illness, the requirements as to which business must have the coverage differs significantly. A listing of workers’ compensation laws by state is available at forbes. com/advisor/legal/workers-comp/workers-compensationlaws/. All states except Texas require businesses to purchase workers’ compensation coverage or be approved by the state as a self-insurer (a process that generally is not applicable to most “small” businesses). Texas employers have the option of being a nonsubscriber, meaning the business is solely responsible for providing the state-regulated benefits of medical and wage replacement expenses without important legal protections, including immunity from most lawsuits by injured employees. FALL 2023

usinesses might want to purchase certain specialty coverages for property that is high-valued or restricted or limited in the basic policies. For example, “inland marine” or “floater” polices insure property that is highly mobile and seldom at the business location, such as tools, equipment that is moved from one job site to the next, property in transit, or property that is stored by a third party. Block policies are another type of specialty policy. They provide coverage for such businesses as jewelry stores or furriers where the merchandise is of high value and a likely target for thieves. Block policies complement coverage provided in the basic property policy. Businesses that rely on e-commerce should consider data compromise coverage or cyber liability to protect against disruption of commerce and security breaches that expose confidential customer information. Disability, health, and life insurance are other types of insurance that any small business should consider providing to its owners and employees. However, when such benefits are provided, the small business should also consider purchasing employment practices liability (EPL) to protect against lawsuits resulting from the administration of these benefits, either as an endorsement to a general liability policy or a separate EPL policy. The EPL policy would also provide liability coverage for general employment-related lawsuits such as those involving discrimination, wrongful termination, various types of harassment, or a hostile work environment.

Creating an Effective Insurance Program To create an effective insurance program for the small business, the business owner should follow these four steps. Assess the risks. The first step should always be identifying the exposures, or the assets of and activities conducted by the business. The business owner must consider what kind of accidents, natural disasters, human actions, or lawsuits could arise from those assets or the activities of the business. Once the exposures are identified, the focus should shift to the possible causes of the loss, such as fire, theft, wind, and the like, and the extent of the financial impact on the business. Finally, the business owner should be aware of the hazards present wherever business activity is conducted. Examples of hazards include puddles of water on the floor, poor housekeeping, or equipment that is in a bad state of repair. The business should remedy these conditions as soon as they are noticed to minimize the likelihood of a loss or lessen the seriousness of the loss. Find a reputable licensed insurance representative. The insurance representative is the access to insurance coverage.

The choice of using an independent insurance agent or broker to procure coverage from an insurance company or using a direct employee or contractor (often called a direct writer) who works exclusively for an insurance company does not matter. The key is to find a representative who is competent and has a good reputation in the community. epresentatives with professional designations such as Certified Insurance Counselor (CIC) or Chartered Property Casualty Underwriter (CPCU) have passed a series of rigorous tests and agreed to follow a strict code of ethics, and they are good choices. Shop around. While good insurance is tailored to customers according to their needs, prices and benefits vary between insurance companies. The business owner should consider comparison shopping, particularly if using a direct writer or exclusive agent of the insurance company. A professional independent agent who represents several insurance companies should do this shopping for the consumer as part of her insurance placement services. However, comparing both prices and benefits for the average business owner is challenging, as insurance is a technical subject. Because it is generally counterproductive to shop around every year, it is prudent to make this type of intensive review every three years unless there is a sudden increase in prices or a dramatic decrease in coverage limits at renewal time. Reassess the program annually. As businesses grow and change over the year, the needs will also change, and the program should be reevaluated to make sure it is still meeting the identified needs. The annual reassessment should address property insurance to account for changes in property values because of inflation, acquisition, or divestiture. Reassessment of liability limits is more challenging. The generally recommended procedure is to purchase sufficient limits to protect the business from being taken over as the result of a lawsuit. As businesses grow in their scope of activities or size of assets, the likelihood of a lawsuit also increases. The professional insurance representative should help with this as part of the annual insurance renewal process.

homeowner’s policy as well as liability insurance, including products liability, for injury to third parties. The endorsement does not extend coverage to “other structures,” such as a detached garage at the location that is used for business purposes, or increase the small limit on business property that is located away from the home. However, loss of use of property, workers compensation coverage, business auto, inland marine or floater policies, and the other types of insurance coverage are not available by endorsement to the homeowner’s policy. If those are needed, an insurance representative should be able to place the coverage for the business as stand-alone policies. When the scope of the business is beyond the simple home-based business, separate insurance coverages must be purchased. Most of the basic types of coverage—both direct and indirect property, general liability, crime, and some automobile coverage—can be written in a package policy called a Business Owners Policy (BOP). This option combines the typical coverage types into one policy, which simplifies the purchasing process and provides a discount in the premium. Except for selecting limits of coverage, the business owner has few options to customize the BOP to their specific business needs. The business owner still must consider a separate policy for the business auto, workers compensation, inland marine, umbrella liability, and other types of coverages. For still larger “small” businesses, individual policies can be purchased. Some of these policies can be combined into a package policy, typically including property, general and product liability, and crime, with the other coverages provided on separate policies. These policies can be customized and tailored to the specific needs of the business.

The business owner should consider comparison shopping, particularly if using a direct writer or exclusive agent of the insurance company.

Insurance Coverage Options For the truly small “small” business that is home-based, three of the basic required coverage types can be purchased by an endorsement to the business owner’s homeowner’s insurance policy. This endorsement adds a small amount to the limit for business personal property automatically provided by the

Requirements When Providing Services for Government Agencies Many small businesses provide services or products to government agencies of all types. Often, a government agency will require minimum limits of liability or specific wording, such as an additional insured endorsement, a waiver of subrogation, or a nonstandard notice of cancellation clause. When selecting the policies, the small business owner must consider whether or not the contemplated policies will meet the demands of those agencies. Dr. Rudolph (famousreindeer2@yahoo.com) has 20 years in insurance brokerage and 30 years of experience in insurance and risk management consulting and education. TG

Water

A Nagging Question Supreme Court Ruling Limits Federal Land-Use Regulation A new U.S. Supreme Court ruling limits the power of the federal government to regulate land use and resolves decades of uncertainty. By Rusty Adams

riest Lake, Idaho, is a place of spectacular natural beauty. The Priest Lake Chamber of Commerce calls it “Idaho’s Crown Jewel.” It is a popular vacation destination, where travelers enjoy fishing, hiking, rock climbing, and an array of outdoor activities. A vacation there, says the Chamber, will only tempt you to stay longer. Michael and Chantell Sackett were so tempted, and in 2004 they bought a small parcel of land near Priest Lake, planning to build a home. In preparation to build, they began backfilling the lot with dirt. The process was interrupted by the Environmental Protection Agency (EPA), which classified the land as “waters of the United States” (WOTUS) because they were near a ditch that fed into a creek, which fed into Priest Lake, a FALL 2023

lake entirely within the boundaries of Idaho. The EPA ordered them to stop backfilling and restore the site, threatening penalties of over $40,000 per day. On May 25, 2023, the United States Supreme Court issued its opinion in Sackett v. Environmental Protection Agency, 598 U.S. ____, 143 S.Ct. 1322 (2023), addressing what the Court called a “nagging question” about the reach of federal land-use regulation. More on that ruling later. First, some important background.

It Begins with Water The Clean Water Act (CWA) was originally passed by Congress in 1972 and has been amended several times since. The Act prohibits the “discharge of any pollutant” into “navigable waters” without a permit, and it empowers the EPA and the U.S. Army Corps of Engineers (Corps) to promulgate and enforce rules to prevent such discharge. “Pollutant” is broadly defined to include not only chemical contaminants, but also materials such as rock and sand. “Navigable waters” are defined as “waters of the United States, including the territorial seas.” Only waters falling within this definition are within the jurisdiction of the EPA and the Corps.

The law imposes severe civil and criminal penalties, even for inadvertent violations. If landowners want to build on their property, the EPA recommends asking the Corps for a jurisdictional determination. However, this can be an onerous and expensive process. First, the Corps claims it has no obligation to make such a determination. Second, the process may require large expenditures on expert consultants. Even then, the Corps ultimately finds jurisdiction about 75 percent of the time. Once jurisdiction is found, the landowner must begin the long and expensive process of seeking a permit. For years, the EPA and the Corps have promulgated rules attempting to define the meaning of WOTUS. The rule, known as the WOTUS rule, has gone through several iterations over the years, typically following the enforcement priorities of the agencies and the presidential administrations. During this time, courts have issued several opinions clarifying the meaning of the law and the rules.

Courts Wade In At the heart of the controversy is just how much power the agencies should have over land use. The agencies have generally sought to define broadly the waters—and therefore the land—over which they may exercise control. he rules defined the waters of the United States to include waters and adjacent wetlands that “could affect interstate or foreign commerce,” whether they did or not. They extended regulation to “intrastate lakes, rivers, streams (including intermittent streams), mudflats, sand flats, wetlands, sloughs, prairie potholes, wet meadows, playa lakes, or natural ponds,” and defined “adjacent” to mean “bordering, contiguous, or neighboring,” including those separated from covered waters “by man-made dikes or barriers, natural river berms, beach dunes, and the like.” “Wetlands” included areas “inundated or saturated by surface or ground water at a frequency and duration sufficient to support, and that under normal conditions do support, a prevalence of vegetation typically adapted for life in saturated soil conditions.” In the first Supreme Court case concerning WOTUS, the Court dealt with wetlands that abutted a navigable waterway. The Court noted that wetlands were not exactly navigable waters, but nevertheless held that wetlands abutting a navigable waterway were within the jurisdiction of the Corps. United States v. Riverside Bayview Homes, Inc., 474 U.S. 121 (1985). After that case, the agencies expanded their rules further. The “migratory bird rule” included any waters or wetlands that “are or would be used as habitat” by migratory birds or endangered species, a rule that would include nearly all waters or wetlands in the United States. The Court rejected this rule in Solid Waste Agency of Northern Cook Cty. v. Army Corps of Engineers, 531 U.S. 159 (2001) (SWANCC), holding that the CWA does not cover ponds that are not adjacent to open water. After SWANCC, the agencies attempted to narrow the applicability of the Court’s holding. They took the position that

Author Rusty Adams talks more about this on

TRERC’s YouTube channel.

THE ENVIRONMENTAL PROTECTION AGENCY (EPA) says “Waters of the United States” is a threshold term in the Clean Water Act. It establishes the geographic scope of federal jurisdiction under the Act. The EPA and the Department of the Army—not the Clean Water Act—have defined “waters of the United States” since the 1970s. Pictured on page 5: Priest Lake, Idaho, which was at the center of the most recent Supreme Court ruling regarding the reach of federal land-use regulation.

the holding only limited its authority over waters that were nonnavigable, isolated, and intrastate, and instructed staff to exercise broad authority. Ultimately, the agencies were using an interpretation that included almost any land containing even an intermittent drainage ditch, covering almost 300 million acres.

A Watershed Case In Rapanos v. United States, 547 U.S. 715 (2006) (plurality opinion), the Court addressed a regulatory decision dealing with wetlands near ditches and drains that, through a series of ditches and streams, emptied into navigable waters over 11 miles away. No majority decision was reached. In a plurality opinion, four Justices said the CWA covered “relatively permanent bodies of water connected to traditional interstate navigable waters” and “wetlands with such a close physical connection to those waters that they were ‘as a practical matter indistinguishable from waters of the United States.’” Four Justices would have allowed agency jurisdiction. Justice Kennedy, while concurring in the judgment, suggested jurisdiction required a “significant nexus” between the wetlands and the navigable waters. He said that nexus exists if “the wetlands, either alone or in combination with similarly situated lands in the region, significantly affect the chemical, physical, and biological integrity” of the waters. After Rapanos, the agencies made several other rules, eventually settling on a rule that broadly defined WOTUS to include traditional navigable waters, interstate waters, the TG

power to regulate interstate commerce. In keeping with that, the statutes were originally limited to keeping “traditional navigable waters” free of impediments, and, in fact, the current CWA uses the term “navigable waters.” It acknowledges that at least some adjacent wetlands are jurisdictional. However, the Court concluded, wetlands that are separate from traditional navigable waters are not part of those waters, even if they are nearby. A continuous surface connection is required. The Court also noted that a landowner may not escape federal jurisdiction by illegally constructing a barrier on wetlands otherwise covered by the CWA. Justice Thomas, joined by Gorsuch, contributed an opinion concurring in full. Thomas observed that the agencies’ expansion of their jurisdiction is “indicative of deeper problems with the Court’s Commerce Clause jurisprudence,” which has given the federal government much more power than originally intended by the Constitution’s framers and ratifiers. ustice Kavanaugh issued a separate concurrence, joined by Sotomayor, Kagan, and Jackson. He agreed that the Sacketts’ land was outside the scope of the CWA. However, he believed the Court read the rule too narrowly. “Adjacent” and “adjoining” have separate meanings, he argued. “Adjacent” can include waters that are nearby but without a continuous surface connection, and thus wetlands separated from covered waters by man-made barriers, river berms, beach dunes, and the like should still be jurisdictional. Justices Kagan, Sotomayor, and Jackson issued a separate concurrence agreeing with Kavanaugh regarding the definitions of “adjacent” and “adjoining.” They also cite several policy reasons focused on Congress’ intent to regulate pollution and protect the environment. They, and Kavanaugh, appear to assume the existence of federal power under the expansive modern reading of the Commerce Clause. The EPA and the Army Corps of Engineers announced the final rule in response to the decision in Sackett v. EPA on August 29, 2023. The new rule removes the significant nexus standard relating to tributaries, adjacent wetlands, and “additional waters.” It also removes the factors to be considered in determining whether wetlands “significantly affect” the integrity of the waters as related to the significant nexus test. Under the new rule, and in accord with the Court’s holding, the waters or wetlands must be relatively permanent, standing, or continuously flowing bodies of water and have a continuous surface connection to the waters of the United States. The rule removes interstate wetlands from the interstate waters covered. It also removes wetlands and streams from covered intrastate waters. Under the new rule, covered intrastate waters must be lakes and ponds that are relatively permanent, standing or continuously flowing bodies of water with a continuous surface connection to traditional navigable waters or their tributaries. The new rule also redefines “adjacent” to require a continuous surface connection. Wetlands that are near waters of the United States but separated from them by manmade dikes or barriers, natural river berms, beach dunes, and the like are no longer included in jurisdictional waters. Nothing in this publication should be construed as legal advice for a particular situation. For specific advice, consult an attorney.

territorial seas, as well as their tributaries and adjacent wetlands. Also included were intrastate lakes and ponds, streams, or wetlands with either a continuous surface connection to those waters or a significant nexus to interstate or traditional navigable waters. Again, the agencies’ test included almost all waters and wetlands in the United States. This set the stage for the Sacketts’ case.

Sacketts and the Supremes

fter the EPA’s attempt to thwart the Sacketts’ plans, the Sacketts sued, claiming the property was not within the EPA’s jurisdiction. For almost 20 years, the property sat empty while the parties duked it out in a series of court proceedings. On May 25, the U.S. Supreme Court issued its opinion. All of the Justices decided the case in the Sacketts’ favor. The U.S. Supreme Court rejected the “significant nexus” test and held that the CWA covers only wetlands that are “as a practical matter indistinguishable from waters of the United States.” To meet this test, the water must be adjacent to “a relatively permanent body of water connected to traditional interstate navigable waters,” and also must have “a continuous connection with that water, making it difficult to determine where the ‘water’ ends and the ‘wetland’ begins.” The majority (Alito, Thomas, Gorsuch, and Barrett) examined the history of federal water regulation. Regulation of land and water use is normally a state matter, and federal law on these issues is necessarily tied to the federal government’s FALL 2023

Adams (r_adams@tamu.edu) is a member of the State Bar of Texas and a research attorney for the Texas Real Estate Research Center at Texas A&M University.

Brokerage

or the first time since 2003, the Texas Legislature has raised the statutory amount consumers can recover from the Real Estate Recovery Trust Account (Trust Account), recognizing inflation and increased costs of claims. Senate Bill 1577 raised the amount that can be recovered arising out of a single transaction from $50,000 to $125,000 and increased the cumulative cap that can be collected from each license holder from $100,000 to $250,000. The bill also gave the Texas Real Estate Commission (TREC) rule-making authority to set and collect fees to cover maintenance of the Trust Account. These updates, which take effect Jan. 1, 2024, provide a good opportunity to review the Trust Account’s history, purpose, and how it operates.

and ensure its sustainability. These amendments have included changes to eligibility criteria, claim processes, and fund management. According to TREC’s May 2023 staff report on the Trust Account, TREC has paid out almost $17 million dollars from the Trust Account since its inception (see table), with the average size of a claim paid being $20,417. The Trust Account has served as a vital resource for consumers who have suffered financial losses due to the actions

Payment History Fiscal Year

Number of Payments

Total Payments

Through 2013

712

$13,639,550.68

Protecting Consumers, Maintaining Integrity

2014

297,028.02

The Trust Account was established in the mid-1970s to replace surety bond requirements for real estate license holders. Its purpose is to reimburse consumers for out-of-pocket damages caused by real estate license holders when the license holders cannot pay for those damages. It is considered a “fund of last resort.” This means it is only available to consumers who have been unable to recover their damages through other means, such as from the license holder himself, from another party responsible for the damage, or through insurance. Over the years, the Texas Legislature has made several amendments to the Trust Account to enhance its effectiveness

2015 2016 2017 2018 2019 2020 2021 2022 2023

15 20 14 7 22 7 11 5 4

490,540.91 636,691.80 319,142.23 193,671.65 458,766.76 223,285.53 374,581.34 147,546.65 165,164.53

Total

830

$16,945,970.10

Source: Texas Real Estate Commission TG

To be eligible for reimbursement from the fund, a consumer must have obtained a civil judgment against a licensed real estate professional, the license holder must be unable or unwilling to pay the judgment, and the consumer must comply with other requirements detailed later in this article. The lawsuit in the civil court must be filed within two years after the event giving rise to the consumer’s claim. In addition, the consumer must file a claim with TREC within two years of the date of the civil court judgment. The fund has been used to compensate consumers for a variety of losses, including: • fraudulent or deceptive practices, • failure to disclose material facts, • negligence, and • breach of contract.

Filing a Claim for Reimbursement

of licensed real estate professionals. It provides a means for affected individuals to seek compensation and recover a portion of their losses. By ensuring the availability of financial restitution, the Trust Account plays a crucial role in protecting consumers and maintaining the integrity of the real estate profession in Texas.

Funding The Trust Account was initially created by the Texas Legislature with a balance of $1 million. It has since been continuously funded through the collection of annual assessments from real estate agents, brokers, and easement/right-of-way agents at their biennial renewals. In addition, any administrative penalty collected by TREC through disciplinary action is deposited into the Trust Account. TREC invests the Trust Account’s outstanding balance in conservation investments to generate investment income to help replenish and grow the account. As of the May 2023 TREC staff report, the available balance of the Trust Account was just over $3.4 million. Any amount over $3.5 million at the end of a fiscal year is required to be turned over to the state’s general fund.

Eligibility for a Claim The Trust Account can be used to reimburse consumers for damages caused by licensed real estate brokers, sales agents, easement/right-of-way agents, or a license holder’s employees. FALL 2023

Filing an application for payment from the Trust Account is completely separate and independent of filing a complaint with TREC’s Enforcement division. Although a consumer may file both, they are two unrelated independent processes. The process for filing a claim for reimbursement from the Trust Account can be long and complicated. If a consumer hires an attorney to assist in the process, reasonable attorney’s fees can be paid from the Trust Account, but only up to the Trust Account’s payment limit. Before TREC will review a claim, the consumer must obtain from or file in a civil court each of the following documents: • Final Judgment. The judgment must be against a real estate license holder involving damages incurred while the license holder was engaged in real estate activities that require a license and the license holder’s action falls under the statutory grounds for suspension or revocation of a license. For example, damages caused by defects in a custom home built by a builder who also happened to have a real estate license would not qualify for reimbursement from the Trust Account because the damages were not caused by real estate brokerage activity. Note that if the consumer is going to get an Agreed Judgment (an order all parties agree to submit to the judge in the case), it must be submitted to TREC for review prior to being signed by the judge to be eligible for reimbursement from the Trust Account. • Abstract of Judgment. An Abstract of Judgment must be obtained and filed with the county clerk in the real property records of the county in which the civil court judgment was obtained. Each Texas county may have different requirements for getting an Abstract of Judgment, so the consumer should check with the county clerk’s office where the judgment was obtained and follow their instructions. • Writ of Execution Returned Nulla Bona. After the Abstract of Judgment is filed in the county real property records, the consumer must ask the court where the final judgment was obtained to issue a Writ of Execution order. This order directs the constable or sheriff to try to locate

the defendant, demand payment, and seize eligible assets. If the defendant cannot be located and there are no available assets, the sheriff will submit a return to the Writ of Execution order to the court with the words nulla bona (Latin for “no goods”) stamped or written on the writ. That phrase or its equivalent must appear on the sheriff’s return that is delivered to TREC with the application. • Filing an Application for Order Directing Payment from the Trust Account. After obtaining the three previously listed items, the consumer is ready to file an Application for Order Directing Payment from the Real Estate Recovery Trust Account. This application is filed in the same court from which the consumer obtained the final judgment and with the same cause number that is on the final judgment. The consumer then needs to submit a filestamped copy of the application, along with copies of the Final Judgment, Abstract of Judgment, and Writ of Execution (returned nulla bona) to TREC. A hearing date in the civil court does not need to be set unless TREC indicates it is necessary. Most claims are settled by TREC without a civil court hearing.

Review and Payment of Claim

n receipt and initial review of an application, TREC will send the consumer an acknowledgement letter describing any additional information that is needed to review the claim. According to TREC’s website, common additional information requested includes “a file-stamped copy of the original petition, an explanation of the facts and circumstances surrounding the case, and attorney billing statements.” If TREC determines the claim is eligible for payment from the Trust Account, staff will recommend payment and the amount of payment to the Commission at its next scheduled meeting. The Commission discusses the specifics of each case in executive session so they can get advice from their general counsel regarding settlement of each claim. However, the recommendation of a payment and a vote to approve payment are always done in open session. Once approved by the Commission, TREC staff will prepare an Order Directing Payment and an Assignment of Judgment that assigns payment of the judgment to TREC. These documents are sent to the Office of the Attorney General for approval. Once approved, the Attorney General will send the documents to the consumer with instructions on how to sign and file the documents with the court and return them to the Office of the Attorney General. The Attorney General will send the executed and filed documents back to TREC, who then processes the payment to the consumer within two to three weeks of receipt. If the application is denied by the Commission, the consumer can appeal that decision to the Office of the Attorney General.

No Free Ride for License Holders Following Payment of Claim

ome license holders incorrectly believe that TREC will investigate and defend the license holder’s actions once the consumer makes a claim against the Trust Account, even going as far as to not defend themselves in the civil suit that results in a default final judgment. License holders need to understand that this is not like a complaint that is filed with TREC where TREC investigates and determines whether the license holder violated the statute or rules. The judgment of what the license holder did and whether the license holder is liable to the consumer for damages is determined in civil court. TREC cannot change the judgment. TREC’s function when an application is received is to determine whether the claim meets the criteria set out in the statute as detailed in this article. Once an application claim is paid, TREC is obligated by law to pursue collection of the amount paid from the license holder. Under §1101.612 of the Texas Occupations Code, TREC is subrogated to all rights of a judgment creditor under the final order and has priority for repayment on any subsequent recovery on a judgment. TREC works with the collection division of the Office of the Attorney General to try to recover assets and payments from license holders on whose behalf TREC made Trust Account payments. In addition, §1101.655 of the Texas Occupations Code provides that TREC shall revoke a license after TREC makes a payment from the Trust Account on behalf of a license holder if the license holder does not repay the full amount paid from the Trust Account to TREC before the 31st day after the date TREC provides notice of the payment to the license holder. Although TREC does have the authority to probate this revocation, it’s rarely done and then only with an aggressive repayment plan in place. The statute also provides that once revoked, a new license cannot be obtained until the amount, with accrued interest, is fully repaid. It is also important to note that a claim against a business entity license holder is also considered a claim against the business entity’s designated broker. Any funds repaid by or recovered from a license holder are deposited back into the Trust Account.

The judgment of what the license holder did and whether the license holder is liable to the consumer for damages is determined in civil court. TREC cannot change the judgment.

Note on Real Estate Inspection Recovery Fund Effective Jan. 1, 2024, House Bill 1363 eliminates the real estate inspection recovery fund. This was done in recognition that the statute requires inspectors to carry liability insurance and the fact that the recovery fund has paid out only three claims in the last ten years. Lewis (kerrilewis13@gmail.com) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission. TG

Taxes

TA X

Save Energy, Save Money

Tax Incentives for Energy-Efﬁcient Properties The Inflation Reduction Act of 2022 expands existing tax incentives for individuals and businesses who expend money on energy-saving property. While some of the incentives are likely to result in substantial tax savings, they are complex. By William D. Elliott FALL 2023

he Inflation Reduction Act of 2022, which President Biden signed into law Aug. 16, 2022, could give real estate investors and homeowners even more reason to make their properties energy efficient. Many, if not most, of the provisions in the legislation already existed, but the new law modifies, extends, and expands the tax benefits. Although the law has been covered abundantly in the news, many might have missed the particulars of the energy incentives. For example, expenditures for construction and improvements to real estate that have energy efficiency benefits can yield significant tax savings. There are also some considerable requirements to qualify. The level of complexity in the new energy provisions cannot be overstated. The statutory language is not easily understood. A summary booklet published by the Joint Committee on Taxation shows how much mind-numbing detail the 2022 law contains. It lists the law’s 25 energy tax provisions and three credit monetization changes, then spends about 100 pages of single-spaced

textual narratives to summarize the provisions. The anticipated Treasury Regulations interpreting the new laws will no doubt contribute to the breadth and scope of the laws in a manner that will keep tax lawyers and accountants employed for years to come. The legislation’s energy-related tax benefits come primarily in the form of tax credits rather than a tax deduction. Some of the tax credits are designed for individuals and others for business. Tax credits are particularly valuable because they are a direct tax reduction. Every dollar expended that qualifies reduces taxes dollar-for-dollar. A $1,000 tax credit, for instance, lowers the tax bill by $1,000. There are three types of tax credits: nonrefundable, refundable, and partially refundable. Nonrefundable tax credits are amounts directly deducted from an individual’s tax liability until the tax due equals $0. Any amount greater than the tax owed, which normally results in a refund for the taxpayer, is not paid out as a refund (hence the term “nonrefundable”). Refundable tax credits are the most beneficial because they’re paid out in full. This means a taxpayer (regardless

of income or tax liability) is entitled to the entire amount of the credit, beyond a zero amount of tax due. Some tax credits are only partially refundable. One important feature of the new legislation is the ability to transfer tax credits. Not all taxpayers can use a tax credit, so this feature will open a new area of planning: tax credit transfer planning for potentially qualifying projects.

Commercial Properties

he new law expands and extends tax deductions (as opposed to tax credits) for expenditures for energy-efficient commercial properties. Generally, the deduction is allowed for depreciable or amortizable property installed on or in a building. The deduction has been substantially increased from $1.88 to $5 per square foot. The deduction is available for property installed as part of: • interior lighting systems; • heating, cooling, ventilation, and hot water systems, or • building envelope (the building’s exterior, or anything that separates the property’s conditioned and unconditioned environments). To qualify for the deduction, the property installed must be certified as part of a plan to reduce the total annual energy and power costs by 25 percent in any of these three categories of expenses. The credit not only applies to new construction, but also to modifications to existing buildings that reduce the building’s total energy use by at least 25 percent in any of the three categories of expenses listed above. Previously, retrofits had to reduce the building’s energy use by 50 percent. Another interesting change is the expansion of the credit for buildings constructed for tax-exempt organizations (and native tribal governments and Alaska native corporations). How can an entity that does not pay income tax benefit from a tax credit? The new

Home Improvements

rules allow the nonprofit incurring the expenditures to allocate the credit to the person primarily responsible for designing the property. This allocation rule raises numerous issues for further consideration, such as defining the responsible party or determining whether the tax-exempt entity can be compensated for the allocable credit.

Single-Family and Multifamily Homes A builder is entitled to a $5,000 tax credit for a qualifying, energy-efficient, new single-family home or $1,000 to

A generous tax credit was already available for home improvements that reduce energy consumption, but the 2022 legislation extended and expanded it for qualifying expenditures placed in 2023 through 2032. The Energy Efficient Home Improvement Credit increased the tax credit to 30 percent of amounts expended. Homeowners who make qualified energy-efficient improvements to their home after Jan. 1, 2023, may qualify for a tax credit of up to $3,200 for the tax year in which the improvements are made. Renters, as well as owners of second homes used as residences, may also claim credits. Landlords, however, cannot. There are three categories of applicable expenditures: • Expenditures for energy-efficient components in the building envelope, such as windows, doors, skylights, and insulation that satisfies specific standards. • Expenditures for items that increase energy efficiency, including heat pump water heaters; heat pumps; central air conditioner; and natural gas, propane, or oil water heater or furnace. • Expenditures for a home energy audit. Unlike the previous law, which put a lifetime limit on qualifying expenditures, the new law imposes annual limits. The maximum credit that can be claimed each year is: • $1,200 (or 30 percent of the amount paid, whichever is less) for energy property costs and certain energyefficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150). • $2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers. Potentially, the maximum total yearly energy efficient home improvement credit amount could be up to $3,200.

Homeowners who make qualiﬁed energy-efﬁcient improvements to their home after Jan. 1, 2023, may qualify for a tax credit of up to $3,200 for the tax year in which the improvements are made.

$5,000 in tax credits per unit in a new multifamily property. A substantially reconstructed existing single-family or multifamily home that satisfies the standards for energy efficiency is also eligible for the tax credit. Makers of manufactured homes also qualify for the tax credit. This credit is a continuation of a prior credit and is now extended through 2032, but with new qualification requirements starting in 2023. Buried in the qualification rules is a requirement that construction labor costs be at the prevailing wage for the location of the residence, as determined by the U.S. Department of Labor. Special benefits apply to qualified affordable housing. This could result in two tax credits for such properties—one for energy expenses and another for lowincome housing.

The credit is available for qualifying expenditures to an existing home or for an addition or renovation of an existing home, not for a newly constructed home. The credit is nonrefundable, which means homeowners cannot get back more from the credit than what is owed in taxes, and any excess credit cannot carry over to future tax years.

Residential Clean Energy Credit

omeowners who invest in energy improvements for their main home may qualify for an annual Residential Clean Energy Credit, which equals 30 percent of the costs of new, qualified clean energy property installed anytime from 2022 through 2033. Qualified expenses include those for: • solar electric property, • solar water heating property, • wind turbines, • geothermal heat pump, • fuel cells, and • battery storage technology expenses. Homeowners may be able to claim a credit for certain improvements other than fuel cell property expenditures made to a second home that they live in part-time and do not rent to others. The credit has been increased to 30 percent of expenditures for the years 2023 through 2032, and slightly reduced in 2033 and 2034. No credit is available after 2034. Clean energy equipment must meet the following standards to qualify for the Residential Clean Energy Credit: • Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by the applicable state. • Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase. • Battery storage technology must have a capacity of at least three kilowatt hours. The credit is available for qualifying expenditures incurred for installing new FALL 2023

clean energy property in an existing home or for a newly constructed home. This credit has no annual or lifetime dollar limit, except for fuel cell property. Taxpayers can claim this credit each tax year that they install eligible property until the credit begins to phase out in 2033. This is a nonrefundable credit, which means the credit amount received cannot exceed the amount owed in tax. Taxpayers can carry forward excess unused credit and apply it to any tax owed in future years. When it is time to file a tax return, taxpayers can use Form 5695, Residential Energy Credits, to claim the credit. This credit must be claimed for the tax year when the property is installed, not just purchased.

Transferring Tax Credits The new legislation permits transfers of credits, but it is subject to restrictions. • Only certain credits are eligible for transfer. • Most taxpayers can transfer the credits, but the credits must be transferred to other, unrelated taxpayers. • The transfer must be paid for in cash. • Once made, the transferred credit may not be transferred by the transferee. • The Internal Revenue Service may, as a condition of and prior to any transfer, require information or registration as deemed necessary. The election to transfer credits cannot have been made before Feb. 12, 2023, and must be made no later than the due date (including extensions of time) for the tax return for the year in which the credit was determined. Elliott (bill@wdelliottlaw.com) is a Dallas tax attorney, Board Certiﬁed, Tax Law; Board Certiﬁed, Estate Planning & Probate; Texas Board of Legal Specialization; and Fellow American College of Tax Counsel.

Market Proﬁle

14 14

TG TG

Oil and gas jobs remain the lifeblood of Midland and Odessa, attracting workers from across the state and country. Knowing about these migrants and what they do sheds light on how they’ve impacted each city’s economy and housing market. By Harold D. Hunt, Mallika Natarajan, and Priyadarshini Chatterjee

FALL 2023 FALL 2023

15 15

he oil and gas sector has seen its ups and downs since the Great Recession. Several unforeseen events, such as an explosion in new fracking technology, Russia’s war with Ukraine, and the COVID pandemic, have contributed to significant oil and natural gas price swings. Since 2011, the price of West Texas Intermediate (WTI) crude oil has fluctuated from a high of more than $120 to a low of -$36 per barrel. The drop below zero in 2020 was the first since trading in the commodity on the New York Mercantile Exchange began in 1983. Natural gas followed suit with a Henry Hub spot price high of more than $23 and a low of $1.33 per million BTUs during the same period. Several local and regional economies in Texas remain heavily influenced by oil and gas activity. Located in the heart of the Permian Basin, Midland and Odessa are two notable examples. The first commercial oil well was completed in the Permian in 1921, and the region remains just as important to U.S. oil and gas production today as it ever was. It should be no surprise that oil and gas price volatility has often been accompanied by employment volatility in the Permian. Oilfield jobs are some of the few remaining that can provide an above average income for workers with varying levels of skills and education. As a result, during good times workers have been drawn to the Permian from many areas of the state and country, often from areas that don’t pay as well for a given skill or are less prosperous economically. Although the impact may vary, employment volatility can significantly influence local housing markets. Crude

250

Index of Crude Prices, Employment, Apartment Occupancy, Home Sales (Jan. 2011 = 100 except for Apartment Occupancy)

200 150 100 50 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Monthly crude price (three-month average) NSA mining/logging/construction employment, Midland Apartment occupancy, Midland/Odessa NSA mining/logging/construction employment, Odessa NSA nonfarm employment, Midland Home sales, Midland NSA nonfarm employment, Odessa Home sales, Odessa Note: Home Sales are 12-month moving average, apartment occupancy is 12-mo. moving average, crude price is three-month moving average, apartment data only available from 2016. Sources: U.S. Energy Information Administration, Haver Analytics, ALN Apartment Data, and Texas Real Estate Research Center at Texas A&M University

price, employment, home sales, and apartment occupancy have often moved in tandem in Midland and Odessa (see figure). A deeper look into the characteristics of migrants relocating to Midland and Odessa from 2011 to 2021 provides further insight into their composition and possible influence on local housing and job markets.

WHO ARE THE NEW ARRIVALS? Workers, often accompanied by their families, came from a number of different states to many parts of the Permian Basin in the 11-year period being analyzed. Although the Permian covers 17 counties in Texas as well as a large part

Table 1. Top 5 States Moving Households to Petroplex (2011- 21 Average Annual Percentage) Odessa

Midland

Percent of Total from Other States

Total Households

New Mexico

21.2

2,685

State

of southeastern New Mexico, the focus here is restricted to the Midland and Odessa Metropolitan Statistical Areas (MSAs). Each MSA is composed of only one county—Midland County (Midland) and Ector County (Odessa). The data source for migrant characteristics is IPUMS USA, University of Minnesota, www.ipums.org, which collects, preserves, and harmonizes U.S. Census Bureau microdata from decennial censuses and the annual American Community Survey (ACS). Out-of-state households came to Odessa from 28 different states between 2011 and 2021. However, the top five states accounted for 52.1 percent of the total. Meanwhile, households relocating to Midland came from 31 states, with the top five accounting for 54.7 percent of the total. New Mexico and California were the top two states sending migrants to both MSAs (Table 1). The year with

Percent of Total from Other States

Total Households

New Mexico

20.1

3,123

State

California

13.6

1,718

California

13.2

2,049

Virginia

6.7

849

Colorado

8.3

1,291

Nebraska

5.8

728

Oklahoma

7.1

1,110

Tennessee

4.8

610

Florida

5.9

920

Total

52.1

6,590

Total

54.7

8,493

Source: IPUMS USA

16 16

Table 2. Education Level of Movers to Petroplex (2011- 21 Average Annual Percentage) Odessa

Status

Midland

Percent of Total Percent of Total from from Other States Within Texas

Status

High school (grade 9-12)

Some college

College degree

Total

Source: IPUMS USA

the highest total out-of-state migration was 2013, a year when WTI price peaked at $107 per barrel ($140 per barrel in 2023 inflation-adjusted dollars). Total households moving to Midland, including those from within Texas and from other states, exceeded 43,000. Instate moves were 64 percent, or about two thirds, of the total. Odessa’s total moves exceeded 34,000, with 62 percent coming from inside Texas. The median age of all movers over the age of 18 was 36 for folks moving to Midland and 35 for those moving to Odessa. verage household incomes for the 11-year period were somewhat similar for in-state and out-ofstate movers, although incomes varied widely by year. For Midland, the average was $79,600 for out-of-state movers and $81,400 for in-state movers. Odessa’s averages were lower at $67,600 for outof-state movers and $65,900 for those coming from within Texas. The average household income for the state during the same period came in significantly lower at $58,500. Educational attainment showed mixed results. From 2011 to 2021, Odessa exceeded Midland in the percentage of movers from inside Texas who had some

high school education. The percentage of college graduates moving from out of state was almost the same for both cities. The percentage of movers from out of state with some high school education moving to Midland was greater than the percentage moving to Odessa (Table 2). The highest percentage of college graduates moving to Midland from out of state (48 percent) occurred in 2011, while the peak year for Odessa was 2021 (74 percent). Marital status is often a factor when deciding what type of housing to occupy. Married movers from outside Texas were much more likely to bring a spouse with them than those moving from within Texas. Conversely, a greater percentage of single movers came from within Texas than from other states (Table 3). All movers overwhelmingly selected rentals over homeownership as their housing choice in both MSAs. The average homeownership rate for out-of-state movers from 2011 to 2021 was higher in Odessa (31 percent) than in Midland (23 percent). Conversely, the average homeownership rate during the same period for in-state movers was higher in Midland (30 percent) than in Odessa (26 percent).

Peak homeownership rates for out-ofstate movers by year occurred in 2020 for Midland and 2016 for Odessa. Both were years when the average 30-year mortgage rate based on Freddie Mac data was quite low at 3.1 percent for Midland and 3.7 percent for Odessa. Average homeownership rate by nonmovers was extremely high at 75 percent for Midland and 73 percent for Odessa. The overall U.S. homeownership rate varied between 64 and 66 percent during the same 11-year period. On the whole, movers favored multifamily properties over single-family homes. In-state movers chose to live in single-family homes more often than out-of-state movers. Manufactured housing was a more popular choice in Odessa than in Midland for both in-state and out-of-state movers (Table 4). luctuations in annual home sales and median prices were similar for the two cities, but they were by no means identical (Table 5). Moderately similar periods of lower sales and prices are evident in 2015 and 2020. Rig count, WTI price, and employment growth all trended downward during both years. Periods of increasing sales and prices were similar in 2012, 2017, and 2021. WTI price, rig count, and employment peaked in 2012 and 2017. However, only WTI price and employment were strengthening in 2021. Rig count was extremely low, bottoming in August of that year.

IMPACT ON LABOR FORCE TRENDS IPUMS data reported 546 specific job categories for all workers employed in either Midland or Odessa from 2011 to 2021. The total number of workers employed in all 546 occupations during

Table 3. Marital Status of Movers to Petroplex (2011-21 Average Annual Percentage) Odessa

Status Divorced

Percent of Total Percent of Total from from Other States Within Texas 6

Status

Divorced

Percent of Total Percent of Total from from Other States Within Texas 11

Married, spouse absent

Married, spouse present

Never married, single

Widowed or separated

Total

100

Total

100

Source: IPUMS USA FALL 2023

Midland

17 17

Table 4. Housing Type Chosen by Movers to Petroplex (2011-21 Average Annual Percentage) Odessa

Midland

Percent of Total Percent of Total from from Other States Within Texas

Status

Percent of Total Percent of Total from from Other States Within Texas

Status

Single-family home, detached

Multifamily bldg. (small)

Multifamily bldg. (large)

Manufactured home

Other

Total

100

Total

100

Source: IPUMS USA

the 11-year period averaged over 181,000 for Texas, Midland, and Odessa were employed in an occupation in Midland per year. Restricting the count of job used to show inequalities between averaged just under 94,000 per year, categories to occupations where at least wage rates by geography (Table 8). while Odessa averaged approximately one employee relocated from outside Unfortunately, only some of the 546 87,000 per year, a somewhat even split. Texas, that number drops to 167. Just total occupations reported wages for all COMPARING TEXAS, under 53,000 people working in these three geographies. occupations came from other states durStill, a selected comparison of wages MIDLAND, ODESSA ing the 11-year study period, an average shows disparities do exist that could WAGE RATES of approximately 4,800 per year or 2.6 cause workers to migrate from other U.S. Bureau of Labor Statistics indipercent of the total workforce. parts of Texas to Midland or Odessa for vidual job category wage data for 2022 Of those 167 occupations, 106 logged higher pay. employment proportions by out-of-state workers higher than Table 5. New, Existing Residential Properties Sold Through MLS 2.6 percent, meaning those 106 occupaMidland Annual Midland Annual Annual Odessa Annual Year Sales % Change Median Price % Change Odessa Sales % Change Median Price % Change tions employed a higher-than-average 2011 1,820 N/A $185,000 N/A 965 N/A $135,000 N/A number of out2012 2,028 11.4 $207,250 12.0 1,159 20.1 $150,000 11.1 of-state workers. 2013 1,966 -3.1 $222,000 7.1 1,194 3.0 $159,000 6.0 Although all occu2014 2,271 15.5 $244,901 10.3 1,253 4.9 $173,000 8.8 pations cannot be 2015 2,005 -11.7 $240,000 -2.0 1,107 -11.7 $175,000 1.2 listed, a selected sample of more 2016 2,052 2.3 $235,450 -1.9 1,096 -1.0 $165,750 -5.3 familiar occupations 2017 2,747 33.9 $255,000 8.3 1,319 20.3 $175,000 5.6 with higher- and 2018 2,795 1.7 $289,900 13.7 1,677 27.1 $202,130 15.5 lower-than-average 2019 2,874 2.8 $300,500 3.7 1,663 -0.8 $227,000 12.3 employment by out-of-state workers 2020 2,545 -11.4 $299,900 -0.2 1,426 -14.3 $228,000 0.4 is shown in Tables 6 2021 2,972 16.8 $310,000 3.4 1,777 24.6 $225,000 -1.3 and 7. Source: Real Estate Research Center at Texas A&M University Both Odessa and Midland employed workers in 424 of the Table 6. Selected Occupations Where Percentage of Out-of-State Workers was Higher Than 2.6 Percent Average 546 occupations dur(Persons employed sometime during 11-year study period in Midland or Odessa) ing the 11-year study Total Number of Persons Hired in This Occupation

Number of Out-of-State Persons Hired in This Occupation

Percentage of Out-of-State Workers

Bus drivers, transit and intercity

354

247

69.8

Physicians

1,294

502

38.8

Computer programmers

1,774

316

17.8

period. Workers Occupation

18 18

Computer support specialists

5,355

712

13.3

Pipelayers, plumbers, pipefitters, and steamfitters

10,431

1,241

11.9

Bus and truck mechanics and diesel engine specialists

8,890

768

8.6

Source: IPUMS USA TG TG

Table 7. Selected Occupations Where Percentage of Out-of-State Workers was Lower Than 2.6 Percent Average (Persons employed sometime during 11-year study period in Midland or Odessa) Total Number of Persons Hired in This Occupation

Number Of Out-ofState Persons Hired in This Occupation

Secretaries and administrative assistants

36,668

144

0.4

Accountants and auditors

20,570

143

0.7

Occupation

Percentage of Out-of-State Workers

First-line supervisors of construction trades and extraction workers

37,310

310

0.8

Nursing, psychiatric, and home health aides

15,045

196

1.3

Civil engineers

2,877

1.6

Property, real estate, and community association managers

17,163

277

1.6

Source: IPUMS USA

Although oil and gas prices are impossible to predict, Midland and Odessa’s position as a global competitor in their production should continue to be a magnet for both out-of-state and in-state workers for the foreseeable future.

Author Harold Hunt talks about this on TRERC’s YouTube channel.

Dr. Hunt (hhunt@tamu.edu) is a research economist, Natarajan (mallika@tamu.edu) is a senior data analyst, and Chatterjee a research intern with the Texas Real Estate Research Center at Texas A&M University.

Table 8. Occupations Reporting Higher 2022 Hourly Wage Rates in Midland or Odessa Compared with Texas Overall Midland Wage ($/hr.)

Odessa Wage ($/hr.)

Texas Wage ($/hr.)

Administrative services managers

$63.57

$54.63

$53.26

Automotive body and related repairers

$28.60

$23.75

$24.52

Civil engineers

$48.24

$40.53

$45.18

Compliance officers

$43.97

$34.42

$35.31

Computer and information systems managers

$83.99

$65.28

$75.07

Computer systems analysts

$60.82

$41.29

$51.31

Construction managers

$60.52

$51.94

$49.91

Crane and tower operators

$34.77

$30.23

$29.57

Electricians

$29.47

$26.44

$26.43

Executive secretaries and executive administrative assistants

$37.36

$32.86

$32.58

Facilities managers

$58.03

$66.02

$52.12

Financial managers

$94.45

$71.19

$78.37

First-line supervisors of construction trades and extraction workers

$42.03

$36.61

$34.39

First-line supervisors of production and operating workers

$48.26

$35.14

$33.36

General and operations managers

$59.45

$53.79

$52.96

Industrial production managers

$75.76

$60.89

$61.30

Inspectors, testers, sorters, samplers, and weighers

$22.93

$27.84

$22.53

Marketing managers

$76.35

$68.64

$66.60

Production, planning, and expediting clerks

$32.14

$28.74

$25.67

Project management specialists

$50.99

$50.19

$45.38

Property, real estate, and community association managers

$56.28

$41.86

$36.86

Sales reps of services, except advertising, insurance, finance & travel

$42.93

$37.84

$33.62

Occupation

Source: IPUMS USA and U.S. Bureau of Labor Statistics FALL 2023 FALL 2023

19 19

Industrial

What’s My

Two Approaches to

Line?

Classifying Jobs Considering both North American Industrial Classification System industry data and the Standard Occupational Classification occupation data is the key to understanding Texas’ industrial real estate job markets. By Daniel Oney

FALL 2023

Employment is an important driver of real estate demand. Market analysts track jobs to understand current market conditions and forecast future activity. The most commonly used employment metrics are based on industrial classification. All workers in the U.S. can be classified by the industries in which they work. Firms that use similar production methods are grouped into industrial sectors, and all their employees are counted in their respective industry. Employment by industry classifies workers based on the industry in which they do their work, regardless of the type of work they do. Two examples of industrial sectors include finance and insurance, and manufacturing.

Figure 1. Texas Employment by Industry, 2022 (Percent of Total Workforce)

Ag & Net Resources 1.2% Mining 1.3% Utilities 0.6% Construction Manufacturing Wholesale Trade Retail Trade Transport & Warehousing Information 1.7% Finance & Insurance Real Estate & Rental & Leasing 2.0% Prof, Sci, Tech Services 1.1% Mgmt of Companies Admin & Waste Mgmt Educational Services Health Care & Social Assistance Arts, Entertainment, and Recreation 1.4% Accommodation & Food Services Other Services Public Administration Unclassiﬁed 0.1%

4.4%

7.2% 6.6% 10.2%

5.1% 4.4% 7.5% 7.1%

3.3%

8.9%

12.7%

8.9%

4.3%

Note: Yellow bars are heavy industrial space users. Source: Texas Real Estate Research Center’s analysis of BLS data

Figure 2. Texas Employment by Occupation, 2022 (Percent of Total Workforce)

Management Business & Fin Ops 5.9% Computer & Math 3.4% Engineering 1.7% Sciences 0.7% Community and Social 1.1% Legal 0.7% Education 6.1% Arts, Media, Sports 1.0% Health Practitioners 5.4% Healthcare Support 4.3% Protective Services 2.2% Building Cleaning & Maint Food Prep & Serving 2.7% Personal Care 1.6% Sales Oﬃce and Admin Support Farm, Fish, Forestry 0.1% Construction & Extraction 4.7% Install, Maintenance, Repair 4.5% Production 5.1% Transport & Material Moving

7.8%

8.9% 9.1%

13.5%

9.4%

Note: Yellow bars are heavy industrial space users. Source: Texas Real Estate Research Center’s analysis of BLS data

nother way of classifying employment is by occupation. This approach classifies workers based on the job they do, regardless of which industry they are in. For example, an accountant is classified by occupation as a business and financial operations worker. That accountant might work for a bank, where she would be counted as a finance and insurance industry employee, or that accountant might work for a food processor and be classified as a manufacturing worker. The U.S. Bureau of Labor Statistics (BLS) conducts separate surveys to collect both the industry and occupational employment measures. Figures 1 and 2 summarize Texas employment by the highest-level categories in each of these systems. The analysis that follows presents the different perspectives each

employment system can bring to industrial real estate market analysis. Three key findings emerge: • Different ways of measuring employment can lead to different assessments of industrial markets. Measuring employment by industry may overstate the actual amount of factory or warehouse space needed. • Occupational measures of employment may do a better job explaining the demand for industrial space, because they isolate factory and warehouse floor jobs fromoverhead and administrative jobs that may be sited in office properties. • Since 2012, Texas markets have seen mixed performance in terms of growth in production occupations, while all TG

Table 1. Occupational Mix of Key Industrial-Using Industries 2022 Industry (and NAICS Codes) Manufacturing (31-33) areas of Texas have seen great gains in transportation and material-moving occupations. lassifying workers by occupation rather than industry offers some advantages, but both systems have pluses and minuses. A thorough market analysis will use both. Industry employment is timelier, being tallied monthly, while occupational employment is only measured annually. The sampling used in industry employment gives more reliable total job estimates, but occupation employment gives more details at the local level for individual metropolitan and rural areas. Finally, if wage data are of interest, occupational employment data include details on mean, median, and various market percentiles, revealing a picture of the distribution of wages across markets. Manufacturing, and transportation and warehousing industrial sectors (Figure 1) and production, and transportation and material-moving occupation groups (Figure 2) each use a lot of industrial real estate and are, therefore, key categories for tracking industrial real estate markets. A total of 11.7 percent of employment measured by North American Industrial Classification System (NAICS) industry sector falls into the two industrial-using categories. A total of 14.5 percent of employment

FALL 2023

Occupation (and SOC Code)

Transportation and Warehousing (48-49)

U.S.

Texas

U.S.

Texas

Management (11)

6.4%

7.4%

3.7%

4.2%

Business and Financial Operations (13)

4.7%

4.9%

0.0%

Computer and Mathematical (15)

2.4%

2.9%

0.0%

Architecture and Engineering (17)

6.0%

6.4%

0.0%

Life, Physical, and Social Science (19)

1.2%

1.1%

0.0%

Community and Social Service (21)

0.0%

Legal (23)

0.1%

0.0%

Educational Instruction and Library (25)

0.0%

Arts, Design, Entertainment, Sports, and Media (27)

0.7%

0.6%

0.0%

Healthcare Practitioners and Technical (29)

0.1%

0.0%

Healthcare Support (31)

0.0%

Protective Service (33)

0.1%

0.0%

Food Preparation and Serving Related (35)

1.0%

0.6%

0.0%

Building and Grounds Cleaning and Maintenance (37)

0.6%

0.7%

0.5%

Personal Care and Service (39)

0.0%

0.2%

0.0%

Sales and Related (41)

3.4%

3.5%

1.2%

0.9%

Oﬃce and Administrative Support (43)

7.8%

8.3%

20.9%

22.6%

Farming, Fishing, and Forestry (45)

0.2%

0.0%

Construction and Extraction (47)

1.6%

2.2%

0.5%

Installation, Maintenance, and Repair (49)

5.2%

6.1%

5.0%

6.0%

Production (51)

49.3%

45.0%

1.2%

2.0%

Transportation and Material Moving (53)

9.2%

9.7%

66.7%

63.3%

Note: Green cell means Texas industry has a larger share of the occupation than national average. Occupations in blue are typically associated with industrial space (i.e., factory or warehouse ﬂoor occupations). Source: Texas Real Estate Research Center analysis of BLS Occupational Employment and Wage Statistics (OEWS) data

falls into the two major Standard Occupational Classification (SOC) occupation groups that are heavy users of industrial space (see sidebar for a brief explanation of the NAICS and SOC).

Measuring Industrial Real Estate Using Employment

he BLS publishes occupational details within each major NAICS industrial sector. Table 1 breaks down these details—at both the state and national levels— for the two industrial sectors most associated with industrial space. This allows one to compare one industry’s employment structure with the other and to compare the Texas industry with the corresponding one nationally. These data have two notable features. First, a large share of each industry includes jobs typically found in an office setting rather than a factory or warehouse setting. About two-thirds of transportation and warehousing employment and only about half of manufacturing employment involve tasks that require shop floor real estate (such as factories and warehouses). The remainder in each industry

includes workers that may be sited in office space (onsite or at another location). Second, these industries in Texas employ a smaller share of their workforce in the industry’s “core” occupations. Nationally, 49 percent of manufacturing employees are in production occupations compared with 45 percent in Texas. Likewise, for transportation and warehousing firms, nationally 67 percent are in transportation and material moving occupations. In Texas, the share is 63 percent. This implies industry in Texas may consume relatively less factory or warehouse space than the industry nationally. Using industrial (that is, NAICS employment) to estimate demand for industrial space may overstate the actual demand for true warehouse or factory space. Industrial space-using occupations are found in more than these two industries. Table 2 shows the top five NAICS industries that employ these types of workers in Texas. As expected, production workers are heavily concentrated in manufacturing industries. In Texas, 62 percent of production occupations work in those industries. The second-largest concentration of production workers is in the administrative and waste management industry (7 percent). This results from staffing agencies

About NAICS and SOC In accordance with the U.S. Bureau of Labor Statistics, industries are classified by North American Industrial Classification System (NAICS) codes. Occupations are classified by Standard Occupational Classification (SOC) codes. At the most summary level, there are 20 NAICS codes, usually called industrial sectors. There are 22 major occupational groups (excluding military occupations).

Table 2. Distribution of Production and Transportation and Material Moving Occupations by Industry, 2022 (Percent of total occupation found in each NAICS industry) Production Workers (SOC 51)

Transportation and Material Moving Workers (SOC 53)

31-33 Manufacturing

61.8%

48-49 Transportation and Warehousing

33.4%

56 Administrative and Support and Waste Management and Remediation Services

7.2%

44-45 Retail Trade

20.0%

42 Wholesale Trade

6.8%

42 Wholesale Trade

12.1%

44-45 Retail Trade

3.7%

56 Administrative and Support and Waste Management and Remediation Services

9.1%

23 Construction

3.4%

31-33 Manufacturing

7.2%

Remaining 15 Industries

17.1%

Remaining 15 Industries

18.2%

Source: Texas Real Estate Research Center analysis of BLS Occupational Employment and Wage Statistics (OEWS) data

that supply many production workers to manufacturing firms. Production occupations are sometimes found in unexpected sectors, such as wholesale, retail, and even construction. This reflects final assembly operations in goods distribution and construction job site work, among other factors. Transportation and material moving workers are less concentrated. The actual transportation industry employs only 33 percent of these workers. Other important industrial sectors for these occupations are retail (20 percent), wholesale trade (12 percent), and, yet again, the administrative and waste support industry (9 percent). That these types of workers are found in a variety of industries is less surprising than the case of production workers given the commonality of warehouse space in many businesses.

Table 3. Change in Key Industrial Space-Using Employment: Industries and Occupations, 2012-22 U.S.

Texas

Change

Percent Change

Change

Percent Change

Manufacturing Industries (NAICS 31-33)

718,600

6.1 %

48,560

5.7%

Transportation and Warehousing Industries (48-49)

1,886,190

37.6 %

202,830

46.1%

Production Occupations (51)

144,800

1.7 %

9,490

1.5%

Transportation and Material Moving Occupations (53)

4,788,760

54.6 %

491,610

67.6%

Source: Texas Real Estate Research Center analysis of BLS Occupational Employment and Wage Statistics (OEWS) data

Changes in Industry and Occupational Employment 2012 to 2022 The implications of employment analysis for industrial market analysis can be seen by examining the differences in growth FALL 2023

Table 4. Correlation Between Industrial Demand, Employment Metrics, 2012-22

rates in terms of industries and occupations. Table 3 Industrial Net Industrial Inventory compares job growth nationally and in Texas for key Employment Metric Absorption Change industrial space-related industries and occupations. Industrial Employment (NAICS) 92.9% 90.2% Over the ten years ending in 2022, manufacturing industries nationally grew their employment 6.1 Occupational Employment (SOC) 97.3% 95.7% percent. This exceeded the growth in manufacturing Source: Texas Real Estate Research Center analysis of BLS Occupational Employment and Wage industries in Texas, which added 5.7 percent to their Statistics (OEWS) data employment. Texas’ slower growth is partly because of declines in oil and petrochemical industries after Alternative Employment Measures and Demand 2016. In the transportation and warehousing industries, the for Industrial Space national employment growth was robust at 37.6 percent. Texas These differences in employment performance have implifirms in these industries grew even faster at 46.1 percent. cations for understanding the demand for industrial space. Turning to changes in occupational employment, producComparing changes in each tion jobs barely grew nationemployment measure to two ally and in Texas. U.S. produckey industrial market metrics— tion employment increased change in inventory and cumulaby 1.7 percent, Texas by 1.5 tive net absorption—yields the percent. Of the few jobs manucorrelations shown in Table 4. facturing sectors added, most In these cases, occupational were off the factory floor. For employment is more highly coroccupations involved with related with these measures of transportation and material industrial demand than indusmoving, growth was strong trial employment. For instance, both nationally and in Texas. the change in cumulative net The workforce in these occupaabsorption across Texas has a 92.9 tions grew by 54.6 percent percent correlation with the change in industrial employment nationally and by 67.6 percent in Texas. Job growth has been strong by industry and occupation in categories that deal with over the same period. The correlation of net absorption with occupation employment is 97.3 percent. moving goods.

Different ways of measuring employment can lead to different assessments of industrial markets. Measuring employment by industry may overstate the actual amount of factory or warehouse space needed.

Figure 3. Change in Production Workers (SOC 51), 2021-22 1.7%

USA Total Texas Non-Metro Victoria -52% Longview Amarillo Corpus Christi Laredo Beaumont El Paso Wichita Falls San Angelo McAllen Houston Odessa Killeen Waco Lubbock DFW Brownsville Texarkana San Antonio Austin Sher-Den Tyler Col St-Bry Abilene Midland

-31% -27%

-18% -16% -15% -14% -12% -9% -9% -8% -5% -2% -1%

3% 5%

10.2%

12% 13% 14%

29% 29% 30% 31%

38%

45%

Source: Texas Real Estate Research Center’s analysis of Occupational Employment and Wage Statistics (OEWS) data

Author Daniel Oney talks more about this on

TRERC’s YouTube channel.

Figure 4. Change in Transportation and Material Moving Workers (SOC 53), 2021-22 USA Total Texas Non-Metro

32%

Victoria Corpus Christi Texarkana Longview Beaumont Odessa San Angelo Abilene McAllen Brownsville Wichita Falls Houston Laredo El Paso Midland Amarillo Sherman-Denison Lubbock Waco College Station-Bryan Tyler Killeen DFW San Antonio Austin

11%

55%

20% 21% 24% 27% 32% 34% 36% 41% 42% 44% 52% 57% 60% 60% 60% 61% 61% 63% 65% 72% 74%

95% 100%

146%

Source: Texas Real Estate Research Center’s analysis of Occupational Employment and Wage Statistics (OEWS) data

Occupational employment’s better fit is likely because of those industries in which many workers, as noted earlier, do not use factory or warehouse space. These overhead or administrative workers may be housed in separate office buildings. While these preliminary results need further scrutiny, they hint that only using NAICS industrial employment to track industrial markets may not be ideal. Occupational trends are also important.

Metropolitan Area Performance

sing occupational employment can highlight trends across Texas metro areas. Growth in industrial inventory has not been uniform across the state over the last decade. The rate of growth in production workers varied greatly between MSAs from 2012 to 2022 (Figure 3). Nine metro areas saw double-digit growth: Midland, Abilene, College Station-Bryan, Tyler, Sherman-Denison, Austin, San Antonio, Texarkana, and Brownsville-Harlingen. Fourteen of the state’s 25 MSAs lost production workers over this interval. Oil-and-gas-focused markets were hit particularly hard. All Texas MSAs, including those in rural areas, saw doubledigit growth in transportation and material moving workers (Figure 4). The different results by these two occupation groups have direct impacts on local market supply and demand for FALL 2023

industrial space. Historically, production workers require less industrial space than warehouse workers to perform their jobs. The dramatic growth in transportation and material moving workers largely explains much of the increase in industrial inventory in Texas in recent years. In many Texas markets, the growth in industrial space has been almost completely due to distribution rather than manufacturing.

Implications for Employers Looking at Texas Logical next steps in this research include examining the data at a finer level of detail. For instance, the manufacturing sector can be broken down into sub-industries such as food processing or petrochemicals. Likewise, occupational groups such as production workers can be broken down into more specific occupations such as machinists or team assemblers. The actual mix of workers by occupation has important implications for firms seeking to set up shop in Texas. Some markets will likely be better places to find those workers. Examining the differences across Texas metro areas may better explain why some metro areas grow faster than others. Dr. Oney (doney@tamu.edu) is research director with the Texas Real Estate Research Center at Texas A&M University.

Q. The title company told me I could wait until closing to have a T-47 notarized. Is that correct? A. No, if the seller has agreed to provide an old survey and provides it, the seller must also provide a notarized Residential Real Property Affidavit (T-47) to the buyer within the time frame the parties have agreed on in the contract.

Q. What happens if the seller does not have an old survey and they signed the contract with Paragraph 6C (1) checked? A. The seller is going to buy the buyer a new survey. What the Law Says The contract is a binding agreement between the parties to the transaction. The language in the contract controls what happens after execution. Paragraph 6C (1) provides “If Seller fails to furnish the existing survey or affidavit within the time prescribed, Buyer shall obtain a new survey at Seller’s expense no later than three days prior to Closing Date.” “Seller” is a defined term under Paragraph

1 of the contract and includes all persons named in the blank space in Paragraph 1, so anywhere the contract refers to “Seller,” it means all persons named in the blank space must perform. Also, an affidavit, by definition, is a document that a person makes before a notary or officer of the court, so the T-47 must be signed in the presence of a notary public.

For Example Johnny is the listing agent for the seller, and the seller tells Johnny they have an old survey. The seller provides Johnny with a plat of the subdivision, not a survey of the property with an engineer’s seal. The property is under contract, and the buyer’s agent is asking why the buyer does not have the old survey and T-47, because yesterday was the last day the seller had to provide this information. The

contract says the seller will pay for a new survey ordered by the buyer if the seller fails to furnish an existing survey within the agreed-upon time frame. The buyer’s agent is getting ready to tell the buyer to order a new survey and tell the title company and the seller’s agent that the seller will pay for it.

Best Practice If you represent the seller, have her locate the existing survey before checking box 1 in Paragraph 6C. Then provide her with the T-47 affidavit at or before contract signing and tell her she needs to sign the affidavit in the presence of a notary before the time set in the contract expires or she will have to pay for a new survey for the buyer.

If you represent the buyer, keep track of when the time for providing the survey and T-47 affidavit expires. If your buyer does not receive both on time, point out Paragraph 6C to your clients and let them know they can order a new survey at the seller’s expense. If the buyer clients have other questions, refer them to a few competent real estate attorneys.

Bonus Question Q. What happens if only one of the sellers (husband and wife) signs the T-47?

under “Seller.” Paragraph 6C (1) is not fulfilled, so the seller will be purchasing the buyer a new survey.

A. The requirement for signing the T-47 affidavit falls on both the husband and the wife since they are both listed

Nothing in this publication should be construed as legal advice for a particular situation. For specific advice, consult an attorney. Lewis (kerrilewis13@gmail.com) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission (TREC). Wukasch (avis@2oldchicks.com) is a broker and former TREC chair.

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