Monday, February 25, 2008

"Its time to scrap the current DEIS process and start over with the right people and the right resources."

TTC-69: The impact on property values in Texas

February 25th, 2008

Don Garrett
Citizens for a Better Waller County
Copyright 2008

One of the many flaws behind the Trans Texas Corridor system (TTC) and the Draft Environmental Impact Statement (DEIS) is that the DEIS does not address the economic impact on business, income producing real estate, land and/or agricultural value, or the existing infrastructure of rural Texas counties.

By avoiding this critical component, TxDOT is attempting to segment the process for easier approval. Allowing the isolation or elimination of a critical component skews the end result and guts the context of any study. An economic impact analysis or feasibility study is one of the first steps in the due diligence process of any prudent business plan. If it doesn’t work on paper then the possibility of it working in the field is negligible. As such, TxDOT is deliberately trying to pass this critical portion off until the Phase II of the DEIS.

Since the inception of the TTC, TxDOT has chosen not to objectively review its own archives of transportation studies that are readily available. What they have chosen to do is interpret studies to their liking thus drawing a conclusion that has more holes than a sieve.

Several studies initiated by TxDOT reported how new highways and interstate construction affect the development of communities along their paths. TxDOT attempts to use one recent study to draw a positive correlation between the TTC and typical highway development. Through generalities associated with the existing transportation systems the TTC is purported to have an overall positive affect on property values. However, this study relates to transportation infrastructures that are totally different from anything ever envisioned in both size and concept of the TTC. (see TxDOT Report on Property Values).

TxDOT even noted in this study that “…the effects of transportation improvements have been well studied, but not well understood”. Texans will find little comfort in such statements especially when TxDOT is about to depart from traditional forms of transportation and undertake a radical transformation into an area of unknown consequences.

The aforementioned study focused on property values adjacent to the transportation facilities before and after completion. It touched briefly on rural towns bypassed by the new facilities and says little if anything about the synergistic affects to outlying areas.

Another study done by the University of Texas, Center for Transportation, summary shows what can happen to rural towns when highways are re-routed around these communities. The study followed trends from 1954 to 1992. The study fails to draw a final conclusion, but makes statements such as “The results suggest that most of the changes in these communities have been the results of factors other than the relief route but that the relief route tends to amplify trends in the community, either positive or negative. Larger communities located close to metropolitan areas or that serve as natural stopping points are in a better position to take advantage of the opportunities created by the relief route”.

Texans living along Hwy 290, Interstate 45, and Hwy 59 (the proposed TTC-I69) know first hand the devastating affects a new highway system can have when it is re-routed around small towns and rural communities. Small towns such as Ganado, Louise, Edna, and Wharton felt the affects when Hwy 59 South was rerouted; Hockley, Waller, Hempstead on Hwy 290; Splendora, Cleveland, and Shepherd again on Hwy 59 North; Madisonville, Leona, Centerville, and Buffalo on Hwy 75, reroute by Interstate 45. There are countless other small towns in Texas that can attest to this affect. Both of the aforementioned studies suggest that midsize towns can handle these shifts which are mainly due to their strong existing infrastructure. It is most obvious that towns such as Conroe, Huntsville, and Victoria, handled the transition with minimal affects.

The affects on small towns are quite obvious and need only a simple observation to see what has transpired. Many of these small towns have been forced to grow to the new system and in many cases it took years due to the loss of their existing infrastructure and business. Businesses dependent on high traffic counts that could relocate to the new routes did so, and abandoned their facilities along the older route. Many of those that could not relocate eventually went out of business or survived by converting to a secondary use in the form of thrift stores and antique shops; thus creating a downward movement in property value.

Towns that were fortunate enough to have the ability to create new infrastructure such as water, storm and sewer trunk lines to the new area in many cases simply replaced what was lost along the older route. Additionally, access in the form of feeder or access streets that paralleled the new highway was a major component for the survival of these towns. The second study done by the Center for Transportation Research disputes this relationship to access roads which runs contrary to reason. Both studies noted the importance of bypasses and crossovers noting development in these areas. The first study mentioned noted that “land near the bypass, especially at roadway crossings that provided access to the towns, generally increased in value”. Keep in mind that as proposed by TxDOT the TTC will have limited access.

Other studies indicate additional impacts by toll roads on local infrastructure that were never anticipated. It was noted in a recent study by Peter Swan of Penn State – Harrisburg and Michael Belzer of Wayne State University. “The study concludes that if governments allow private toll road operators to maximize profits, higher tolls will divert trucks to local roads, depending on the suitability of substitute roads. The number of diverted trucks is important to both the State of Ohio and the Nation for economic and social reasons. First, many of the substitute roads are two-lane highways with crash rates many times that of the Turnpike. Second, the increased traffic has reduced the quality of life for communities located along diversion routes and dramatically increased the maintenance costs of these roads”.

TxDOT has estimated that it will take approximately 9,600 automobiles to equal the road damage that can be done with one truck. This was stated in one of the recent TxDOT townhall meetings in January, 2008.

Reducing the quality of life does have a relationship to property value and the DEIS does not take into account these additional impacts. Also, cutting through rural counties with limited or no access, disrupting EMS and law enforcement, requiring rural school districts to double their transportation requirements to accommodate the needs on both sides of a concrete barrier will have just the opposite affect on property value. Farmers and ranchers will have to go miles around this barrier to access their property that was once a simple gate crossing. The increase in fuel consumption and the separation of a contiguous operation will only increase the cost of their operations.

Rural towns across Texas and the USA will be bypassed or have limited access. Having little or no feeder/access roads running parallel to this concrete monstrosity will stifle any and all commercial development. What access there is to fuel and food along the long stretches of this superhighway will be located in the interior of the corridor thus eliminating the need for trucks and autos to exit the system for points of convenience or “natural stopping points”.

Points of destination will be the main recipient of auto and commercial vehicles heading to major metropolitan areas such as Houston, Dallas, Austin, and San Antonio. The commercial activity will then proceed onward to the inland ports in Kansas. Vehicular traffic on the TTC will interact with communities if they are fortunate enough to be located along a major interstate exchange such as I-10, I-45, and I-20. This will also depend on having sufficient distances for exits/ entrance ramps and access roads. So how does one extrapolate a positive impact on rural and small town property values? It just doesn’t compute.

One of the most incredulous claims coming from the proponents of the TTC is that it will increase the property value along the vast superhighway as it stretches across Texas and the United States. TxDOT would like for you to believe that property value will react positively to the TTC. Their appraisers like to use the term “highest & best use” which is defined by the American Institute of Real Estate Appraisers as, “the reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and results in the highest value”.

TxDOT is assuming that the economic benefits of the TTC will create a demand for commercial property thus converting farm land into income generating assets that will benefit the land owner. However, there must be growth to support the infrastructure and trade is only one component. What growth there is will again be concentrated in the larger SMSA’s as noted by economist, Dr. James Gaines of Texas A&M, (January 2008, Looming Boom, Tierra Grande, Vol. 15, Number 1, pp 2-7: Real Estate Center, Texas A&M University). Texas will have over 10 million new residents within the next 30 years and most of them will be concentrated in the larger metropolitan areas of Houston, Dallas, San Antonio, and Austin. He refers to this as the “Central Texas Triangle”. People are moving to Texas because of the availability of jobs and “population and employment growth go hand and hand”. The success of this continuous growth inside the triangle is contingent upon such factors as successful transportation infrastructures within these major metropolitan areas. There was no relationship mentioned between growth and highway infrastructure outside the standard metropolitan statistical areas. TxDOT would have you believe that it’s the TTC that will bring the jobs (see Perryman Group, Moving into Prosperity, The Potential Impact of the Trans-Texas Corridor on Business Activity in Texas, June 2006).

These larger metropolitan areas will create a greater demand for real estate and the appreciation of value. Growth and demand start in these areas and grow outward along the transportation infrastructure. TxDOT is of the opinion that land speculation will begin along the entire length of the TTC. However, prudent speculation will follow the growth, existing infrastructures, crossovers, and interchanges. This growth and relationship to value was also noted in one of the aforementioned TxDOT studies. In fairness to TxDOT, there will be a need for expansion and improvements to the interconnecting highways. However, it should be noted that it is not the TTC that is the significant cause of the growth; it’s the migration of people looking for jobs or jobs drawing the people into these major metropolitan areas.

Other reports and studies from Texas A&M note that Texas will have continuous growth trends in demand for rural property primarily from recreational and secondary home use. Baby boomers are looking for a little piece of earth and the price of rural property near the larger metropolitan areas have experienced a tremendous increase in value over the past five years.

However real estate brokers and agents along the paths of the TTC are beginning to show concern regarding the TTC as they are required by law to disclose any adverse conditions that may affect property value. Disclosure will no doubt have a negative impact on the volume of transactions which could be the first indication of things to come.

TxDOT will be getting into the real estate business by the taking of over 500,000 acres of Texas land. The process will start with the DEIS which may take two to four years before the final path is selected. If environmental concerns are discovered the process could be further delayed. TxDOT apparently has not taken into consideration how these delays can adversely affect property value.

Anything of this magnitude will very likely have an affect. Residences, businesses, ranches, and farms within this area could become a no-man’s land suffering a loss in value attributed to what is known as economic and/or external obsolescence. Economic or external obsolescence is defined by the American Institute of Real Estate Appraisers as “an element of accrued depreciation; a defect, usually incurable, cause by negative influences outside a site”. It is measured by either 1) capitalizing the income or rent loss attributed to the negative influence, or 2) compares the sales of similar properties that are subject to the negative influences to others that are not.

The difference in value is the loss attributed to this type of obsolescence. Excluding a national recession, or a loss in the capital markets as related to the current sub-prime correction, TxDOT will be the sole contributor to this affect. Property located in and around these proposed or recommended paths will likely be impacted the greatest. Any decline in property value will contribute to a loss in the taxable revenue even before the actual taking of property through condemnation begins. School districts and county governments will have to adjust their tax rolls plus incur the additional cost from increased activity of property value protests. Lenders who recently financed property in these areas may have to reclassify their loans as possibly suspect due to a decrease in the loan to value ratios. Going forward, lenders may technically redline these areas by increasing their loan to value ratios, increase the down payments, and/or increase the spread on their interest rates to cover the risk. All of this taking place before the final 1,200 ft. right-of-way is selected.

Property owners that are fortunate enough to escape the condemnation for the right-of-way will still have to deal with the consequences of a decline in property value. Some will eventually recover if there is adequate access to the TTC and a demand for commercial end use. However, this will not be known until after completion of the project. The question remains as to how long it will take for property values to stabilize and how property owners should be compensated for their time/value loss that was cause by government interaction. Then there will be those that will truly fall under economic obsolescence due to the noise and air quality adjacent to the TTC. They may never recover as potential buyers will take this into consideration during their due diligence.

How then does one go about placing a value on such property? How are property owners to be compensated for this negative influence adjacent or near their property? Additionally, how are property owners in the final path to be compensated? Is their property to be valued at a stabilized value before the release of the DEIS, will it be base on property not affected by the DEIS, or will be based on the value at the time of condemnation? Finally, how will income properties that have their access to county roads and state highways impaired, re-routed, or severed be compensated for their loss in income streams due to reduced retail sales and/or the loss of property tenants? Many of these effects were noted on rural towns and communities from previous highway studies.

The DEIS and construction of the TTC may have a far greater debilitating effect on property values than just agricultural land value. Taking the aggregate loss in value from the start of the DEIS process before the actual taking of property to the finished product could have a compounding affect on taxable revenues to rural counties throughout Texas.

Another economic impact that has not been addressed is the capital gains issue. Those unfortunate enough to lie in the final path of the TTC did not invite the State to come take their property, yet they still are required to pay capital gains taxes on their net sales proceeds. Farmers and ranchers whose land has shown considerable appreciation over the years will have a lower basis than other newly acquired property. Also impacted will be agricultural entities that chose to incorporated years ago. They will have a substantial gain to recognize. In addition to a possible decline in the current market value they may be required to pay an additional 10 to 30% in capital gains tax depending on the political climate at the time of the sale or condemnation.

If people are not informed how to structure a tax free 1031 exchange to delay the gain then they may not have sufficient proceeds to purchase a comparable property. There needs to be federal legislation to address the issue of eliminating capital gains on property subject to condemnation for this project.

Since the inception of the TTC, TxDOT has argued that the taking of agricultural property would have far less of an impact on the tax rolls due to their agricultural tax exemption. That may be true, but it’s the loss of the going concern or agriculture business that goes far beyond the taxable value of the real estate. It will have a ripple affect through local and state coffers when 500,000+ acres are taken out of production. Provisions should be made for the mitigation of agriculture lands taken for the TTC as much of this land cannot be replaced and will be lost from production forever. This will have a compounding affect on the present loss and the overall time value of money in existing commodities and futures that no one to date has addressed. Texas agriculture is the second largest industry in the State and employs one out of seven people.

What about the argument of converting the “highest and best use” of farm land to commercial and residential property? Again, if the demographics and access points are not there to support the transition then its “highest and best use” is still agriculture. Additionally, if the negative affects of noise and air quality are present and/or other negative factors caused by the TTC, then the question of economic obsolescence may again come into play. Most importantly, how do you address the loss of a family institution that will be gone forever? It is a family business that has been passed down through generations. You simple can’t take a person with such specific skills and convert them into another vocation without causing hardships. They will need additional training as will their employees.

For the last four years our governor and the Texas Transportation Commission have been pressing hard for Texans to accept the Trans Texas Corridor system; primarily the TTC I-35 and TTC I-69. There have been many promises and claims as to the benefits this multimodal form of transportation will bring to Texas. However, there is no supporting evidence to justify such an undertaking. Claims of enhanced property value, resolving traffic congestion, and the financial benefits of foreign control versus local control are just a few examples that defy common sense.

What is known is that property values follow population and economic trends. Studies have shown that infrastructure is a key component to successful development and without its support the consequences are most damaging, especially to rural Texas. The DEIS process is flawed in that it should have first taken into account the socioeconomic affects on rural Texas before the release of any proposed recommended routes of the TTC.

Additionally, Texas is blessed with some of the finest institutional learning facilities in the nation that could have assisted in the process of determining those affects, but TxDOT choose to cherry pick various studies and reports that dimly support the basis of the TTC. Our governor and TxDOT have chosen to be led by Wall Street, foreign investors, and financial consultants favoring public private partnerships.

Texans should call upon the governor and TxDOT to properly utilize those resources such as the Transportation Institute at Texas A&M, and learned experts at TAMU such as Dr. Charles Gilliland and Dr. James Gaines; the University of Houston, Dr. Barton Smith; and other fine institutions such as the University of Texas and its Center for Transportation Research, just to name a few. Its time to scrap the current DEIS process and start over with the right people and the right resources.

Don M. Garrett
Citizens for a Better Waller County

Don Garrett is a resident of Waller County, Texas and has been active in real estate for over 30 yrs. During the mid ’80’s thru early ‘90’s, he was employed by several major lending institutions in Texas to help liquidate their nonperforming real estate assets. He was responsible for bringing the appraisal department of one of these institutions into regulatory compliance and orderly liquidating R.E.O assets in access of $1 billion. He has experienced first hand the impact government intervention can have on local real estate markets and rural property values.

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