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When a buyer evaluates a business acquisition in the Dallas–Fort Worth metropolitan area, the conversation may turn to real estate. Dallas is a market where commercial property values have climbed steadily over the past decade, where industrial and logistics space has been in extraordinary demand, and where the relationship between a business and its physical location can represent one of the most significant components of the deal’s overall value or one of its most significant risks.
Whether the target company owns its facilities outright, leases them from a third party landlord, or occupies space under a related party arrangement, the real estate component of a business acquisition in Dallas raises questions that go well beyond the purchase price. Zoning compliance under the City of Dallas Development Code, ad valorem property tax obligations through the Dallas Central Appraisal District, environmental conditions regulated by the Texas Commission on Environmental Quality, title encumbrances, lease assignability, and the interplay between real property and business personal property all demand careful analysis before a buyer commits to closing.
Law Offices of Alan Abergel, P.C. ("LOAA") workS with clients involved in disputes that arise after business transactions close. Situations where real estate issues that should have been identified during due diligence instead become the subject of post closing litigation. This article walks through the key real estate considerations that are unique to acquiring a business in the Dallas market.
The decision of how to structure a business acquisition as an asset purchase, a stock or membership interest purchase, or a statutory merger under the Texas Business Organizations Code is often influenced heavily by the target’s real estate holdings. Each structure treats the real property differently, and the tax, liability, and operational consequences vary in ways that matter to both the buyer and the seller.
In an asset purchase, the buyer selects which assets to acquire and which liabilities to assume. If the target owns real estate, the buyer can choose to purchase the property as part of the transaction, or the parties can structure the deal so that the seller retains the property and leases it back to the buyer under a new commercial lease. This sell-and-leaseback arrangement is common in Dallas acquisitions, particularly in industries like manufacturing, distribution, and auto dealerships, where the real estate may represent a disproportionately large share of the total enterprise value. By separating the real property from the operating business, the parties can sometimes achieve a more favorable allocation of the purchase price for tax purposes, with the buyer depreciating the business assets and deducting lease payments, while the seller retains ownership of an appreciating real estate asset.
In a stock or membership interest purchase, the buyer acquires the entity itself, including all of its assets and liabilities. If the entity owns real property, the buyer takes ownership of the entity that holds the property and with it, the entity’s existing property tax obligations, environmental liabilities, title encumbrances, and lease commitments. In this structure, may also mean the buyer inherits whatever real estate issues the entity already has.
In a statutory merger under Chapter 10 of the TBOC, the surviving entity succeeds to all assets and liabilities of the merging entity by operation of law, including real property.
Before acquiring any business that includes real estate in Dallas County, a buyer should obtain a current title commitment from a title insurance company and have the commitment reviewed carefully. The title commitment will identify the current owner of the property, describe any liens, easements, deed restrictions, and other encumbrances, and set forth the conditions that must be satisfied before the title company will issue a title insurance policy.
Dallas County’s real property records are maintained by the Dallas County Clerk’s office and are publicly searchable. These records include deeds, deeds of trust, mechanics’ liens, lis pendens filings, UCC fixture filings, and other instruments that affect title to real property. A buyer should review the chain of title to confirm that the seller has clear authority to convey the property and that there are no undisclosed encumbrances that could affect the buyer’s intended use.
Several types of encumbrances are particularly common in Dallas commercial real estate. Deed restrictions imposed by prior owners or master planned development associations can limit the type of business activity permitted on the property. Easements for utilities, drainage, or access may restrict where the buyer can build or expand. Oil, gas, and mineral reservations which are more common in Texas than in many other states because Texas law treats mineral rights as a separate estate from the surface which can create issues if the seller or a third party retained subsurface rights that conflict with the buyer’s surface operations. A thorough title examination will identify these issues before they become disputes.
Dallas County itself does not have the authority to enact zoning ordinances for incorporated areas, as the Dallas County Planning and Development department notes on its website at www.dallascounty.org/departments/plandev/zoning.php. Instead, each city within the county—including the City of Dallas, Irving, Plano, Richardson, Garland, Mesquite, and others—establishes and enforces its own zoning regulations.
The City of Dallas governs land use and development through the Dallas Development Code, codified in Chapter 51A of the Dallas City Code. The Development Code establishes a system of zoning districts—including residential districts (R-5, R-7.5, R-10, and others), office districts (O-1, O-2), commercial and business districts (CR, CS, CA-1, CA-2), industrial districts (IM, IR, I-1, I-2, I-3), and Planned Development (PD) districts—each with its own permitted uses, height restrictions, setback requirements, parking standards, and density limitations. The City of Dallas maintains zoning maps and district information through its Planning and Urban Design department at dallascityhall.com/departments/pnv/Pages/zoning.aspx.
For a buyer acquiring a business that operates from a specific location, zoning verification is a critical due diligence step. The buyer needs to confirm that the target’s current use of the property is a permitted use under the applicable zoning district or, if it is not, that the use is protected as a legal nonconforming use (commonly called a “grandfathered” use). A legal nonconforming use is one that was lawful when it began but no longer complies with the current zoning classification due to a subsequent change in the zoning ordinance. If the target’s use is nonconforming, the buyer should understand the limitations that apply: under the Dallas Development Code, a nonconforming use generally cannot be expanded, and if the use is discontinued for a specified period, the right to continue the nonconforming use may be lost.
Planned Development (PD) districts warrant particular attention. PD zoning is a flexible classification that allows developers to propose customized standards for a property, including mixed use configurations, modified setbacks, and tailored development schedules. PD ordinances are unique to each property or development area, and the specific terms of the PD ordinance including any development schedule requirements and conditions of approval must be reviewed individually. A buyer acquiring a property within a PD district should obtain and review the full PD ordinance, including any amendments, to understand exactly what is permitted on the site.
Property taxes are a significant cost of doing business in Dallas. Texas does not impose a state level property tax, but local taxing authorities including the City of Dallas, Dallas County, the Dallas Independent School District, Dallas County Community College District, Parkland Hospital District, and various special districts each levy ad valorem taxes based on the appraised market value of real and personal property. The combined effective property tax rate in Dallas County has historically been among the higher rates in the state, making property tax exposure a material consideration in any business acquisition.
The Dallas Central Appraisal District (DCAD) is responsible for appraising all taxable property within Dallas County and maintaining the official appraisal records. DCAD covers approximately 900 square miles and maintains roughly 815,000 tax accounts, serving over 60 local taxing jurisdictions. DCAD appraises property at market value as of January 1 of each year, using cost, sales comparison, and income approaches to valuation. Property owners can search appraisal records and access account information through the DCAD website at www.dallascad.org.
For a buyer, several property tax issues require attention during due diligence. First, the buyer should review the target’s current appraised values for both real property and business personal property (BPP) and compare them to the values reflected in the target’s financial statements. If the appraised values are significantly below market, the buyer should anticipate that a change of ownership particularly one that involves a deed transfer and a recorded sales price may trigger a reappraisal that increases the property’s assessed value and, consequently, the annual tax burden.
Second, the buyer should verify that the target has been filing its annual BPP renditions on time. Under the Texas Property Tax Code, every business that owns tangible personal property used in the production of income must file a rendition with the county appraisal district by April 15 of each year. DCAD’s Business Personal Property Division is specifically tasked with discovering, listing, and valuing all business personal property in Dallas County. Failure to file renditions, or filing renditions that materially understate the value of the property, can result in penalties of 10% to 50% of the additional taxes owed. A buyer inheriting an entity with unfiled or inaccurate renditions may be exposed to back assessments and penalties that were not reflected in the target’s financial records.
Third, the buyer should investigate whether the target has any pending property tax protests or outstanding protest deadlines. Property owners in Dallas County may file a protest with the Dallas County Appraisal Review Board (ARB) if they believe DCAD’s appraised value is too high or that the appraisal is not uniform with similar properties. The protest deadline is typically May 15 or 30 days after the notice of appraised value is delivered, whichever is later. Protests that are pending at the time of closing may affect the property’s tax liability for the current year, and the buyer and seller should address in the purchase agreement who will have the right to pursue the protest and who will bear the benefit or burden of the outcome.
Many Dallas based businesses do not own their facilities, they lease them. When the target company operates from leased premises, the buyer’s ability to continue using the space after closing depends entirely on the terms of the lease. This makes the lease one of the most important documents in the entire due diligence package.
The first question is whether the lease is assignable. Most commercial leases in Texas include provisions that restrict the tenant’s ability to assign the lease or sublet the premises without the landlord’s prior written consent. In an asset purchase, where the buyer is acquiring the business assets but not the entity that holds the lease, the transaction will typically constitute an assignment that requires landlord consent. In a stock or membership interest purchase, where the entity itself is not changing, only its ownership, the question becomes whether the lease contains a change of control provision that treats a transfer of ownership interests as an assignment requiring consent.
Many institutional landlords in the Dallas market include change of control clauses in their commercial leases, particularly for office and retail space in Class A properties and in major developments like those along the Dallas North Tollway corridor, in Uptown, in the Design District, or in the Legacy area of Plano. If the lease does contain such a clause, the buyer must obtain the landlord’s consent before closing or risk the landlord declaring a default and terminating the lease. In some cases, the landlord may condition its consent on an increase in the security deposit, a revision to the personal guaranty, or even renegotiated lease terms, all of which can affect the economics of the deal.
The buyer should also evaluate the remaining term of the lease, the availability and terms of any renewal options, the rental rate relative to current market rates, any co-tenancy or exclusivity provisions, and the tenant’s obligations for maintenance, insurance, property taxes (in a triple-net or NNN lease), and common area maintenance (CAM) charges. In the Dallas market, where commercial rental rates have risen significantly in recent years across industrial, office, and retail sectors, a below-market lease with remaining term can be a valuable asset and an above market lease with no escape provisions can be a meaningful liability.
Environmental due diligence is essential for any acquisition that involves real property in Dallas, and the importance increases significantly for properties with industrial or commercial histories. The Dallas–Fort Worth area has a long and varied industrial past, encompassing defense manufacturing, petroleum refining, chemical processing, aviation, and heavy logistics, all of which can leave behind soil and groundwater contamination that creates ongoing liability under both federal and state environmental law.
The Texas Commission on Environmental Quality (TCEQ) administers the state’s environmental laws related to contaminated sites, including the Texas Voluntary Cleanup Program (VCP) and the state’s hazardous waste management regulations. The TCEQ maintains public records of known contaminated sites, permits, and enforcement actions through its online databases at www.tceq.texas.gov. At the federal level, the U.S. Environmental Protection Agency (EPA) maintains the Superfund database (CERCLIS), the Resource Conservation and Recovery Information System (RCRInfo), and the Toxic Release Inventory (TRI), all of which should be searched as part of any environmental records review.
A Phase I Environmental Site Assessment, conducted in accordance with ASTM E1527-21, is the industry standard for identifying recognized environmental conditions (RECs) on a property. The assessment includes a review of historical records such as Sanborn fire insurance maps, aerial photographs, city directories, and regulatory database reports as well as a physical site inspection and interviews with knowledgeable parties. If the Phase I identifies potential contamination, a Phase II assessment involving soil boring, groundwater monitoring well installation, and laboratory analysis may be warranted to determine the nature and extent of contamination.
In Dallas, certain areas have well-documented environmental histories that buyers should be aware of. Properties near former military installations, old rail corridors, historical dry cleaning operations, automotive repair facilities, and manufacturing sites are more likely to have environmental conditions that require investigation. The presence of underground storage tanks (USTs)—which are regulated by both the TCEQ and the EPA is another common issue on Dallas commercial properties, particularly those that once served as gas stations or fueling depots. The TCEQ’s Petroleum Storage Tank (PST) program tracks registered USTs and leaking petroleum storage tank (LPST) sites across the state.
The Dallas area has an active economic development landscape, and many businesses operate under tax abatement agreements, Tax Increment Financing (TIF) district benefits, or other incentive arrangements with local taxing jurisdictions. These agreements can significantly reduce a company’s property tax burden, but they often come with conditions such as minimum capital investment thresholds, job creation requirements, or restrictions on the type of use that the buyer must evaluate carefully.
A property tax abatement is an agreement between a taxing jurisdiction and a property owner to exempt all or a portion of the property’s increased value from taxation for a specified period, typically in exchange for a capital investment or job creation commitment. The City of Dallas, Dallas County, and the Dallas Independent School District have each entered into tax abatement agreements with businesses in the area. Chapter 312 of the Texas Tax Code authorizes municipalities and counties to grant tax abatements in designated reinvestment zones. The Texas Comptroller of Public Accounts maintains general information about property tax exemptions and incentives at comptroller.texas.gov.
TIF districts operate differently. In a TIF district, the incremental increase in property tax revenue generated by new development within the district is captured and reinvested in the district typically for infrastructure improvements, public amenities, or other development costs. The City of Dallas has established numerous TIF districts across the city, including districts in downtown Dallas, the Cedars, the Design District, Cypress Waters, and along the Southern Dallas corridor. A buyer acquiring a property within a TIF district should understand how the TIF affects the property’s tax obligations, whether the TIF has any outstanding bond obligations that are secured by the property’s tax increment, and when the TIF is scheduled to expire.
The critical due diligence question for any incentive agreement is whether the benefits will survive the change of ownership. Some abatement agreements include provisions that require the taxing jurisdiction’s consent before the property or business can be transferred, and failure to obtain that consent can result in the termination of the abatement and a recapture of previously abated taxes. A buyer who relies on the continuation of a tax abatement as part of the deal’s financial model needs to confirm, before closing, that the agreement either permits the transfer or that the taxing jurisdiction has consented to the assignment.
The presence of real property in a target company’s asset base can complicate the valuation process in a business acquisition. If the target owns its facilities, the buyer must determine how much of the total purchase price is attributable to the real estate and how much is attributable to the operating business, including goodwill, equipment, inventory, intellectual property, and customer relationships. This allocation has significant tax consequences under both federal law (specifically, the allocation rules of Internal Revenue Code Section 1060 for asset acquisitions) and state law.
In Dallas, where commercial property values have appreciated substantially particularly in industrial and logistics corridors along Interstate 35E, Interstate 30, and in the southern Dallas County submarket, the real estate component can represent a majority of the total deal value for asset-heavy businesses. This can create tension between the buyer and seller: the buyer may prefer to allocate a larger portion of the purchase price to depreciable assets and amortizable intangibles, while the seller may prefer to allocate more to real property (which may qualify for capital gains treatment) or to a covenant not to compete.
When the target company leases its facilities from a related party such as when the business owner also owns the real estate through a separate holding entity the buyer needs to evaluate whether the lease terms are at arm’s length or whether the rent has been set above or below market to shift income between the entities. An above market lease inflates the real estate entity’s income at the expense of the operating company’s earnings, and a buyer who acquires the operating company without renegotiating the lease may find that the business’s actual profitability is lower than the historical financials suggest.
In an asset purchase, the general rule under Texas law is that the buyer of a business’s assets does not assume the seller’s liabilities unless the buyer expressly agrees to do so. However, when real property is part of the transaction, certain liabilities can attach to the property itself rather than to the seller personally, meaning they effectively transfer to the buyer regardless of what the purchase agreement says.
Property tax liens are a prime example. Under the Texas Property Tax Code, the taxing jurisdiction’s lien for ad valorem property taxes attaches to the property on January 1 of each year and is superior to virtually all other liens. If the seller has unpaid property taxes at the time of closing, those taxes remain a lien on the property even after it transfers to the buyer. The title company will typically require that delinquent property taxes be paid at closing, but the buyer should independently verify the target’s property tax account status with DCAD and the applicable tax assessor-collector’s office.
Environmental liabilities present a similar risk. Under CERCLA, liability for the cleanup of hazardous substances on a contaminated property can attach to the current owner of the property, regardless of whether the current owner caused the contamination. The “bona fide prospective purchaser” defense under CERCLA provides a degree of protection for buyers who conduct all appropriate inquiries before acquiring the property and who did not cause or contribute to the contamination, but that defense requires the buyer to have conducted a Phase I Environmental Site Assessment before closing. A buyer who skips this step and later discovers contamination on the property may be unable to invoke the defense, leaving it potentially liable for cleanup costs that can be substantial.
Real estate is not a peripheral issue in a Dallas business acquisition, it is often one of the deal’s defining features. The structure of the transaction, the valuation of the business, the buyer’s ongoing operating costs, the property tax exposure, the environmental risk profile, and the buyer’s ability to continue using the target’s facilities after closing all depend on how the real estate component is analyzed, negotiated, and documented.
The Law Offices of Alan Abergel P.C., law practice includes defense in disputes arising from business acquisitions and commercial transactions involving real property. If you are involved in a dispute as a defendant related to a Dallas-area business acquisition whether it involves undisclosed environmental conditions, property tax liabilities, lease disputes, or other post-closing claims, we welcome the opportunity to discuss how we may be able to assist.
Disclaimer:
This article is provided for informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Every legal situation is unique, and results depend on the specific facts and circumstances involved. If you have questions about a particular legal matter, you should consult with a qualified attorney.
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