By Adam Pagnucco.
On Tuesday, the county council is due to vote on a bill providing 20-year tax breaks to some office-to-residential conversion projects. The bill is part of the More Housing N.O.W. package authored by Council Members Andrew Friedson and Natali Fani-Gonzalez. The other two components – a zoning text amendment and a subdivision regulation amendment – are also up for a vote on the same day.
Let’s get to the tax break bill. In its amended form, the bill offers 20-year tax breaks (known as PILOTS) to some office-to-residential conversion projects if at least 17.5% of their units are affordable to households earning 60% or less of the area median income. (The original provisions provided for 25-year tax breaks and 15% affordable units, making the amended bill less attractive to developers than the original.) Another amendment sunsets the bill after 10 years although any existing tax breaks would remain in effect. Eligible projects would need to be at least 50% vacant at their time of application.
County Executive Marc Elrich is no fan of this bill. In a letter of opposition to the county council, Elrich cites the cost of lost revenues, an unfavorable racial equity analysis (issued not by his administration but by the council’s own Office of Legislative Oversight) and the fact that 17.5% of the units are affordable. (He would like a higher percentage.) He points to one conversion project in Silver Spring by Guardian Realty that did not receive a subsidy as evidence that subsidies are allegedly not needed and then makes this argument:
The above example of the Guardian illustrates that an automatic (by-right) PILOT could disadvantage other property owners who have recently undergone a conversion. Additionally, property owners/developers who are producing housing but not eligible for a conversion PILOT are at a disadvantage for no public benefit. It does not make financial sense to authorize automatic payments to private developers that could potentially cost the county billions of dollars in lost revenues and disadvantage other developers and property owners.
Elrich’s letter can be downloaded below.
CE Letter Urging No Final Vote on Exp. Bill 2-25.ds
Elrich’s reaction is predictable given his skepticism of market-rate development and corporate welfare. A more interesting reaction came from land use attorneys Matthew Gordon and Bob Dalrymple in a Bisnow column published last week. Gordon and Dalrymple praise the bill and its companion land use measure as “a thoughtful approach to comprehensively address the challenges in the commercial office market, as well as barriers to the production of more residential units and affordable housing by facilitating and encouraging the conversion of increasingly unoccupied office buildings.” They elaborate:
These legislative efforts, if approved, will be a step in the right direction for the county because: i) the removal of obsolete office space will serve to strengthen and stabilize the remaining office buildings to be responsive to market demands (simple supply and demand), and ii) not only will housing inventory (including affordable housing) for residents increase in desirable locations throughout the county, but also it will be a net-positive for the county tax base by creating a continuing revenue stream for occupied residential space that would not otherwise exist. In this respect, a 25-year PILOT and the resulting 25-year property tax exemption as per the pending legislation will result in increased income tax revenue to the county that will more than offset any foregone real property taxes provided through the PILOT.
However, they also argue that the bill “is not enough.” They want tax breaks to be available to even more projects, including “projects that have already been approved under the traditional regulatory approval process, but which have been unable to move forward with Commercial to Residential Reconstruction due to the cost of construction and financing or market conditions.” They finish with this argument:
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While this legislative package, if approved, will be a positive outcome for the county’s commercial office and infill residential markets, it is important to note the following. First, other nearby jurisdictions have already adopted similar tax abatement policies to encourage Commercial to Residential Reconstruction projects, and their policies provide greater incentives to property owners than those being proposed by the Montgomery County Council.
Second, Montgomery County’s attractiveness for private capital investment has already been diminished materially over the past five+ years due to unfavorable economic development policies adopted by the county (e.g., rent stabilization, increases to recordation taxes, and other regulatory barriers more onerous than those in neighboring jurisdictions). Combined with general economic concerns impacting the economy, the county must be more cognizant of how competitive the county is relative to other jurisdictions in the region.
As a result, it is important that the County Council study and implement additional policies that will supplement ZTA 25-03 and Expedited Bill 2-25 if the goal is to be competitive for economic development and housing opportunities relative to neighboring jurisdictions.
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Gordon and Dalrymple are making a similar argument to my position: that the county’s mix of tax and regulatory policies has diminished its attractiveness to real estate investors. They assert that the county must do more to overcome its own self-inflicted wounds, possibly including more tax breaks and subsidies. That is likely to become the position of the real estate community writ large, or at least that portion of it that is still willing to invest here at all.
The council will very likely pass the tax break bill (but not unanimously). Elrich will veto it. The council will likely override it and establish the tax breaks in law. And while the county may get some benefit from it, it will be very hard to overcome the fact that we have been redlined by national real estate investors.
And so we are entering a negative feedback loop. We pass things like rent control, building efficiency performance standards, all-electric building requirements and regular tax hikes and then throw tax dollars at developers to try to compensate for them. And then these developers ask for even more tax dollars, which we provide because not doing so means “throwing up our hands.” Meanwhile, other jurisdictions like Loudoun County successfully compete for development by being good places to do business.
Will we ever stop getting in our own way?