DALLAS-For now, a proposed 5% cap on commercial real estate values is dead. But, cautions the general counsel for the Texas Association of Property Tax Professionals, it might be just a temporary reprieve.

The Texas Senate is adjourning today without bringing HB 3223 to a floor vote. Still, a special session is likely to revive the legislation, which is carrying a groundswell of support from South Texas, Houston in particular.

Mark Hutcheson, partner in Austin-based Popp & Ikard, which is the association’s general counsel and the Texas member of the American Property Counsel, says the word in Austin is that a special session will be held in the fall to weigh an educational system bailout. It most likely will include HB 3223 as a possible revenue generator, among other cash-flow strategies.

The real estate cap has gathered support because it promises relief for homeowners, whose values are now capped at 10% annually. The legislation proposes a 5% across-the-board cap for residential and commercial properties, action that’s perceived by its proponents as a balancing act. Not so, says Hutcheson, who remained quiet in the waning days of the legislative session to see if HB 3223 would make it to a full Senate vote. With the issue dead for now, he’s willing to talk.

“What’s clear to me is this was hastily put together,” Hutcheson tells GlobeSt.com. “As a result, if enacted, it would have created a lot of unintended consequences. I would hope that the legislature would think this through before considering it again.”

The association and commercial property owners say the proposal would only serve to skew the playing field among competitors. New construction and income-producing real estate that’s been sold or upgraded would be subject to assessments at market rates while older properties in a long-term hold would have a lesser assessment due to the value cap. Thus, the pass-through to the tenant for comparable properties would vary.

Only California, under Proposition 13, has a cap on commercial real estate values. And that, Hutcheson stresses, has proven to be a “disaster” for the state budget. The issue has created an underground of loopholes and challenges to ownership. To protect the cap, owners use 99-year leases and even resort to structuring single-asset companies just for the sake of merging the brick-and-mortar assets to successfully argue that there was no ownership change regardless of the name on the deed.

Similar challenges are lobbed to protect the cap in the case of capital improvements. “The question becomes is it needed as repair and maintenance or is it an actual improvement,” Hutcheson explains of the legal definitions now confronting California assessment boards.

Hutcheson realizes Texas needs to mine more revenue to cover its $10-billion deficit, mainly due to the school system drain. Recourses, as the taxpayer knows, are limited to real estate, income and sales. A state income tax isn’t likely, even if it didn’t require a constitutional amendment. He doesn’t have the answer to the budget dilemma, but he’s confident that a commercial value cap isn’t the way to go. “It’s a credit to the Senate that they maintained restraint,” he says.

With the legislation getting through the House on a 134-0 vote in early May, it’s a safe bet Texas will again entertain the notion. “There is a 100% chance it will resurface in the next called special session,” he says, noting it could be spring 2004 but talk around town is the pitch will be made this fall. Reps. Dwayne Bohac, Glenn Hegar, Dennis Bonnen, Martha Wong and Charlie Howard are the sponsors of HB 3223.

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