By Adam Pagnucco.
In Parts One and Two, my real estate sources commented on the impact of the county’s new rent control law on new construction. In Part Three, they began commenting on existing properties. These are the people who are directly engaged in the businesses of owning, managing, developing and/or financing real estate. Today, they resume commenting on this question:
Question 2: What will rental unit owners do with their existing properties? Will they sit on those properties, sell them, convert them to condos or redevelop them to trigger the 23-year exemption for new construction?
Source 8
Owners of properties >23-years old: I will appeal my tax assessment on the basis of a government imposed encumbrance that has devalued my property. I am exploring condo conversion, will be difficult to attract new equity for a redevelopment in a market with rent control. Exploring a substantial renovation to get a 15-year exemption, some naturally affordable buildings will go this route or condo. Some to most severely cost-burdened residents will be displaced.
Owner of properties <23-years old: Every day is a day closer to rent control, in many cases it’s best to sell now even with a buyer’s price adjustment deduct for the imminent rent control. Explore condo conversion prior to year 23.
Source 9
I focus on acquisitions and over the past couple of decades have invested alongside major “institutional” private equity real estate funds. During that time, these private equity funds have invested in over $600 million of multifamily real estate in Montgomery County (representing roughly $200 million of equity). We have focused on acquiring poorly managed and undercapitalized assets. We then upgraded each of these properties – in some cases making simple cosmetic improvements and kitchen/bath renovations, while in other instances renovations were far more extensive, including structural fixes and some very expensive central plant utility conversions (where we decommissioned expensive, antiquated, dirty and energy inefficient central utility plants and installed highly efficient, individually controlled electrical mechanical systems in each apartment) – which largely decarbonized the properties and dramatically increased energy efficiency (consumption savings ranging between 40%-70%) while also providing residents with more flexibility and control over their energy consumption.
Based on recent conversations with our “go to” decades-long private equity partners, I fear they will no longer be interested in making investments in Montgomery County, particularly in apartment communities that have extensive capital needs. These are groups with national reach and they are simply going to invest in less constrained markets. They do not *need* to be in Montgomery County. Without these well-capitalized buyers, the quality of the housing stock is going to go down as the incentives for both existing multifamily owners to make capital improvements on their properties and for new purchasers to acquire capital-starved properties and invest in significant capital improvements is being gutted.
Source 10
High-end rentals will go condo or co-op at a much faster pace than in a normal market. Low-end rentals will suffer from enhanced deferred maintenance. What is now fairly limited to pockets of Langley Park will spread virus-like to Wheaton, Silver Spring, Glenmont, and up to Germantown. Unless Gaithersburg can be exempted from the county law, it, too, will be hit by the same virus of disinvestment. As for the so-called 23-year exemption, really? What green eyeshades banker would now count on the demonstrably arbitrary whims of ever more far left Montgomery County politicians?
Pagnucco’s Take
Unlike the issue of new construction, on which my sources unanimously agree that supply growth will decline, my sources differ on what will happen to existing properties. That suggests that a range of outcomes will occur depending on how they pencil out for specific buildings.
Another factor to consider is the implementing regulations and the ultimate design of the system of administration. The council’s debate on the legislation reinforced how complicated this issue is and that will play out with implementation. The more challenging compliance is, the less likely it will be that landlords will keep their assets inside the system. The ultimate result could be net losses of rental units as has happened in Takoma Park.
One more thing: I have not heard from a single source who believes that assessment appeals are unlikely. There WILL be appeals. This WILL result in losses to the assessable property base. This WILL put strain on the county budget over time and homeowners will be on the hook. Believe that!
My sources did not confine themselves to answering my questions on new construction and existing properties. Some offered free-form commentary which makes for interesting reading. We will conclude in Part Five.