The Effect of Trump’s “Sanctuary City” Ban on Houston Real Estate Development

Hilary Tyson, Lauren McLaughlin

January 4, 2018

President Trump’s “sanctuary city” ban has been enmeshed in litigation since it was enacted, as has the Texas legislature’s version, SB4. But while the bans’ futures may not be certain, they still stand to exact broad impacts, both in Houston and beyond.

Houston builders have been vocal about potential fallouts in the construction workforce if the bans are enforced. If undocumented workers view Houston as a risky place to live as a result of SB4, they will move to friendlier states such as Florida, which have plenty of similar work. This would leave Houston short on much needed construction labor, particularly in the wake of Hurricane Harvey.

Less talked about is how the contemplated treatment of “sanctuary cities” could otherwise impact real estate development. Importantly, if Houston and Harris County hold fast to their current positions and are designated as “sanctuary jurisdictions,” President Trump’s executive order will render them ineligible for federal grants, resulting in a potential cooling of local real estate development.

“Federal grants” are different from “categorical grants,” which comprise 90 percent of federal funds and are already allocated by Congress or set by formula (Medicaid is a categorical grant). President Trump’s ban does not reach categorical grants. It does reach Federal grants, the smaller portion of the budget allocated to the executive branch for spending on a discretionary basis. Federal grants are the mechanism by which the federal government funds local governments, where future involvement or ownership by the federal government is not anticipated.

A good portion of discretionary federal grant funding—the funding President Trump’s order stands to revoke—benefits real estate development. This funding is made available to local jurisdictions through Community Development Block Grants (CDBGs) that are designated for spending on items like affordable housing projects, enhanced policing and security improvements, and disaster recovery funds.

Importantly, CDBGs also go to community real estate amenities, which are an increasingly potent driver of a community’s market value. The more amenities—parks, pedestrian and bicycle corridors, enhanced streetscapes, shops, and other features that foster a vibrant street presence—the higher the value of the real estate, and the more developers are drawn to invest in and rejuvenate an area. This causal chain ties into a related trend in real estate development—the move away from the development of noteworthy structures and towards the creation of “sense of place” destinations in which people can live, work, and play. To create destination-driven projects, real estate developers are increasingly incorporating amenities into their developed spaces. The continued roll-out of successful active-adult communities and mixed-use developments throughout Houston exemplifies this trend.

The drawback of amenities, though, is that they utilize valuable square footage and represent a cost to the developer that has no upside—square footage with no potential for developer profit. So, many developers partner or collaborate with the public sector to fund and manage amenities adjacent to private development projects. Developers may also choose locations for private development near existing amenities that have been redeveloped, or which may be ripe for redevelopment or enhancement. In some cases, without the availability or intention of the public sector to redevelop public spaces to provide desired amenities, investment in private real estate development in a particular area may not happen.

The City of Houston’s 2016 budget included a net of $148 million in funds from grant sources, some derived from federal CDBGs. Those funds went towards such things as funding parks and community service centers, revitalizing Emancipation Park, and installing and maintaining public lighting and security. CBDGs will fund Mayor Turner’s Complete Communities Initiative, which is intended to direct resources towards certain underserved Houston neighborhoods. All of these initiatives are directed at developing and rejuvenating amenities and enhancing city services, which in turn draw real estate developers to invest in local projects.

Now, President Trump’s “sanctuary city” ban stands to end this funding. This would be an unattractive change for real estate players, particularly when considered alongside the strain federal immigration policies are placing on Houston’s supply of skilled construction workers (who were in high demand even before the bans were on the table). Taken collectively, the ban stands to exact adverse impacts on the market value of local real estate and the desirability of local real estate development.

This is a strange (and likely unthought) result of an order promulgated by President Trump, a real estate mogul himself.

SB4, on the other hand, does not threaten to revoke funding to “sanctuary jurisdictions.” State funds will still, at least for now, flow to budgetary line items that are attractive to developers, like infrastructure improvements and education funding. (Education funding improves local school districts, which in turn raises the market values of the property within such school districts.) However, SB4 will diminish funds for jurisdictions that are already cash strapped, not only through civil penalties, but also through expenditures arising from diverted law enforcement efforts. Under SB4, the cost savings that once came from prioritizing local law enforcement over federal immigration laws would be exceeded by the civil penalties SB4 exacts.

Local jurisdictions are armed with several potential challenges to President Trump’s ban. For instance, jurisdictions could challenge the ban under the Tenth Amendment of the U.S. Constitution, which prohibits the federal government from directing states, cities, or municipalities to enforce federal policies. As the late Justice Antonin Scalia explained, the Tenth Amendment exists to prevent “federal commandeering of state governments.” An argument could be made that Trump’s “sanctuary city” ban, which commands local law enforcement to enforce federal immigration policies, does just that.

There is also a potential “rational basis” challenge to the ban. The Constitution requires that any conditions on federal funding be reasonably related to the reason for the funding in the first place. Here, the ban imposes a clear condition on federal funding—jurisdictions receiving it must enforce the federal immigration agenda in certain tangible ways. But federal immigration enforcement does not necessarily relate to the affected funding, which is for urban renewal, community development, and parks projects, among other things.

There are other potential challenges to President Trump’s ban. In addition, SB4 is already under attack by the City of Houston and other jurisdictions on numerous constitutional grounds, which focus on the constitutional requirements for arrests, searches, seizures, due process, and equal protection.

On the other hand, real estate developers that are impacted by these developments are armed with only untested legal avenues. Private individuals are broadly barred from suing the federal government due to sovereign immunity and other issues. That said, we anticipate at least some civil litigation seeking recovery of damages arising from “sanctuary city” bans (whether on a detrimental reliance, promissory estoppel, or other basis).

Whether or not the challenges are successful, one potential impact of the “sanctuary city” bans is the chilling of local real estate development—likely an unintentional result coming from the Trump administration, but a probable one nonetheless.