Texas in Transition from Oil to Real Estate

Texas in Transition from Oil to Real Estate

RISMEDIA, Nov. 14 — (KRT) — When the Texas General Land Office announced this year that income from real estate investment was up 2,844%, the jump looked more dramatic than the cash value would indicate.

The state had done little in real estate before: Oil and gas earnings were more than $302 million in 2004, compared with $48 million for real estate. But the four-digit percentage jump was just a taste of things to come.

Over several years, the state of Texas promises to have a significant role in land development, even though state law severely restricts the land office from development.

In Bexar County, two major deals were done this year involving state revenue of more than $30 million. That was not quite a 10th of the more than $300 million the land office will be trying to plunk into property deals each year.

With the expansion of its real estate operations, the land office is bringing in experienced brokers and finding lucrative deals statewide. The agency buys land that is likely to appreciate quickly because it is in the path of high-end development, but it also buys income-producing properties.

In June, the land office put itself in position to profit from the upscale housing boom by purchasing a 2,316-acre Hill Country site, Rancho Sierra, for almost $27 million. Rancho Sierra is 14 miles west of Fair Oaks Ranch and the Dominion.

At 1,892 feet, Rancho Sierra is billed as the highest elevation in Bexar County. The marketing plan would allow 380 to 700 custom houses in a low-density setting; most of the land would be a natural conservation area.

Land office spokesman Jim Suydam said the agency has “more money than we can responsibly spend. A good chunk of it goes back into the Permanent School Fund uninvested in land.” The land office also puts money into bonds, stocks and other securities. But it was criticized in years past for a lack of diversified investments. That led to the 2001 passage of a law that lets oil and gas royalties go into land deals on behalf of the Permanent School Fund.

The state university systems for decades have been supported through oil and gas royalty earnings. But the volatility of Wall Street and the state’s declining oil and gas reserves sensitized the Legislature to the need for a different long-term investment strategy.

“We can’t rely on oil and gas forever,” land office Commissioner Jerry Patterson said during the announcement of a recent land deal near Houston. “We’re taking steps now, even as oil and gas prices are high, to find new ways to earn money for Texas schoolchildren.” Despite a $300 million-a-year piggy bank, the land office should not have a significant impact on the real estate markets, said Steve Raub, executive vice president at Investment Realty Co.

“Land activity in Texas is very high,” said Raub, a specialist in raw land, office and retail properties. “$300 million is not a drop in the bucket, but when you spread it across the state of Texas it’s not a big deal.” Raub also noted that the land office is restricted to purchasing properties at or below the appraised value, “so they’re not bidding up the market or being aggressive against other investors.” The office is also very limited in its ability to improve land. It can do some things, such as provide storm drainage, but for the most part its strategy on raw land purchases is to hold it long term and sell to developers.

The land office may be relatively new to the real estate investor scene, but the Texas market is often seeing new investors, such as pension funds and real estate investment trusts, with just as much clout, Raub said.

In recent years, the land office has expanded its real estate division. The agency started by disposing of state-owned lands that were not income-producing, such as agricultural properties adjacent to state prisons.

“The way the Texas Department of Criminal Justice used to work, they would produce their own commodities for the prisons,” Suydam said. “Each prison has its own farm system.” The prison system was allowed to centralize its agricultural land in one place and sell off the excess.

“There’s a lot of prison units,” Suydam said. “We’re making beaucoup money.” The Rancho Sierra purchase was the largest in Bexar County this year, but as an upscale residential deal its economic impact is small compared with others.

Earlier this year, the land office approached First American Commercial Property Group, which brokered the sale of a 175-acre parcel on Red Bird Ranch just across Potranco Road from Texas Research Park in western Bexar County.

In marketing the site, First American had hired architecture firm 3D/I to design a master plan for a retail center. Its most likely use remains some type of major retail development, but Chelsea Kane at First American said the land office is also looking to buy land within the research park.
Suydam said no plans have been made for the property, but the land office will probably do something that would complement the research park’s mission.

The land office isn’t keeping its eyes exclusively on outlying land or undeveloped property. It owns a block of San Antonio riverfront property at Durango Boulevard. And in Baytown, the land office announced its biggest deal yet, the $100 million purchase in August of a 4 million-square-foot bulk storage facility.

Commissioner Jerry Patterson said the acquisition would earn the school fund $338 million over 30 years, and “as a fringe benefit” it would provide 1,900 jobs and $66 million in annual payroll.

Copyright © 2005, San Antonio Express-News

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