Commercial Real Estate Risk in Texas and California: What Investors (and Their Brokers) Should Know Before Expanding

In recent years, investors have increasingly expanded across state lines, particularly between Texas and California. Capital flows both ways; industrial users relocate; developers diversify. Cap rates, property taxes, and labor costs typically dominate the conversation. But legal risk allocation and enforcement climate are often overlooked.

Texas and California take meaningfully different approaches to commercial leasing norms, guarantees, eviction rights, CAM structures, environmental exposure, insurance allocation, and tax treatment. Investors (and the brokers advising them) should understand these differences before closing.

This overview is not exhaustive. It highlights recurring issues that arise when clients expand between these two major markets. As always, practices vary by asset class and market.

NNN: Same Label, Different Function

Triple-net (NNN) leases are common in both states, particularly with retail and industrial spaces. But in practice, they operate differently.

Texas: “True” NNN

Texas landlords often use “true” NNN structures. This means that tenants are handling a lot of costs, typically covering:

• Common area maintenance fees (CAMs)

• Property taxes

• Insurance

• Administrative fees, including property management fees (perhaps 10-15%)

Expense caps are less common in smaller deals. Audit rights are often narrower. Cost volatility is frequently pushed to tenants.

California: More Negotiation and Expense Scrutiny

Triple net is common in California as well with some limitations. Tenants more frequently negotiate caps on some CAMs, you may see audit rights (true for Texas as well, though less common), expense exclusions can be very detailed, and office leases tend to be gross leases (that is, rent is higher but much of those expenses are considered included, and the landlord’s obligation).

Investor takeaway: A Texas-style lease template may face significant redlining in California (and vice versa).

Evictions and Enforcement Climate

Enforcement speed is one of the most underestimated differences.

Texas

• Generally faster commercial eviction timelines

• Fewer procedural hurdles

• Courts tend to enforce lease language as written

• Perceived as more creditor-friendly

California

• Slower with greater procedural protections for tenants

• Greater risk of tenant defenses delaying lockout

• Strict scrutiny of notice compliance

• Some municipalities impose additional commercial eviction protections

Investor takeaway: As a commercial landlord, the eviction process is hands-down simpler, quicker, and cheaper in Texas.

Personal Guarantees and Practical Leverage

Personal guarantees (sometimes “guaranties”) are common in both states, particularly in retail and industrial leasing.

Texas

• Broad-form guarantees are standard

• Courts frequently enforce guarantees strictly

• Burn-off provisions are less common in smaller deals

California

• More negotiation around scope

• More limited guarantees

• More burn-off structures

• Procedural hurdles can complicate enforcement

Investor takeaway: The practical leverage behind a guarantee may differ materially, even when the language appears similar.

Environmental Exposure and Regulatory Climate

Environmental risk allocation differs materially.

Texas

• Generally lighter regulatory burden

• Environmental reviews are common but often less burdensome

California

• Greater environmental scrutiny

• Proposition 65 exposure

• More robust hazardous materials provisions in leases

• Increased diligence for industrial and redevelopment projects

Environmental indemnities tend to be more detailed in California leasing and purchase agreements.

Investor takeaway: Environmental diligence timelines and lease risk allocation typically require more attention in California.

Litigation Climate and Business Culture

Perception matters because it affects leverage and strategy.

Texas is generally viewed as:

• More business-oriented

• Faster in many jurisdictions

• More contract-enforcement focused

California is often viewed as:

• More heavily regulated

• More procedurally complex

• More litigation-prone

• More technical in compliance enforcement

  
  

While much has been made of Texas’s new business courts, most commercial real estate disputes will still be handled at the District Court (or lower) level. Outcomes depend on drafting and venue, but the broader risk environment should factor into underwriting.

Property Taxes: Structure Shapes Strategy

Property tax structure is one of the most consequential — and misunderstood — differences between the two states.

Texas: Higher Rates, Ongoing Reassessment Risk

Texas has:

• No state income tax

• Higher commercial property tax rates

• Regular reassessment exposure

Key characteristics:

• Property taxes are reassessed periodically and can increase with market values

• Commercial valuations are frequently challenged — and litigated

• Active tax protest strategy is often necessary

• Tax increases typically flow through NNN leases

This creates operating expense volatility, particularly in appreciating markets. Underwriting errors on future tax increases can materially impact returns.

California: Proposition 13 and Acquisition-Based Reassessment

Under Proposition 13:

• Base property tax is generally ~1% of assessed value at acquisition

• Annual assessed value increases are typically capped at 2%

• Reassessment is triggered by change of ownership or certain restructurings

This creates predictable annual increases, significant tax reset at acquisition, and long-term tax stability for hold investors.

In NNN leases, tenants typically pay property taxes, but annual volatility is generally lower than in Texas after the initial reset.

Investor Implications: In Texas, investors need to anticipate higher property tax rates and greater annual volatility. Underwriting must model reassessment risk, and it’s important to be familiar with the protest procedures. In California, investors can expect generally lower property tax rates with predictable annual increases. However, on acquisition, reassessments can be dramatic.

Insurance and Catastrophe Risk Allocation

Insurance is often treated as routine in underwriting, especially in NNN leases where premiums are passed through to tenants, and deductible structure alone can materially shift risk allocation. But risk profiles differ materially. Recent events in California have led to premium spikes and coverage restrictions, while in Texas (at least non-coastal Texas) fluctuations are less severe.

Some general features:

Texas

• Hurricane and windstorm exposure (Gulf Coast)

• Hail claims statewide

• Flood risk in certain markets

• Windstorm deductibles are often percentage-based (2-5% or more is typical)

California

• Earthquake exposure statewide

• Wildfire risk in many regions

• Carrier withdrawal and underwriting restrictions in some markets

• Earthquake coverage not included in standard policies

• Earthquake deductibles often 10–20% of building value

Investor takeaway: Insurance does not change cap rates, but it can materially affect operating stability and downside exposure.

What This Means for Brokers

Brokers advising cross-state investors can add meaningful value by flagging:

• CAM structure expectations

• Eviction timelines and leverage realities

• Guarantee enforceability differences

• Licensing compliance risks (California)

• Indemnity and insurance mismatches

• Environmental exposure allocation

• Lien procedure differences

• Construction defect frameworks

• Property tax structure and reassessment risk

These issues rarely kill a deal at LOI, but they often drive disputes after closing — or during distress. Helping clients understand risk allocation early positions brokers as strategic advisors, not just deal facilitators.

Conclusion

Texas and California are both major commercial real estate markets. But they operate under materially different legal and enforcement frameworks. Before expanding across state lines, investors should ensure that purchase agreements, lease templates, CAM structures, etc. are tailored to the jurisdiction and not recycled from prior deals.

Thank you to Andrew W. Hervey of WAH Tex Realty, LLC for his input on this post!