By Adam Pagnucco.
Blunt as ever, Montgomery County Executive Marc Elrich recently told a meeting of the District 18 Breakfast Club that the county’s affordable housing program “kind of sucks.” According to Bethesda Today, he believes that “too often housing being built are high rise apartments that aren’t affordable for the vast majority of those living in the county.” The solution? A new mandate.
Elrich didn’t get into details at this meeting, but he did offer specifics on the Politics Hour with Kojo Nnamdi back in April. On that show, Elrich mentioned the county’s Moderately Priced Dwelling Units (MPDU) program, which requires housing projects with 20 or more units to set aside 12.5-15 percent of units to be affordable to people making up to 70% of the area median income. (This map shows required percentages by area of the county.) Elrich believes that the county should require an additional 15 percent of units to be affordable for people making 80 to 100 percent of area median income. That means 27.5-30 percent of units in new housing developments would be income restricted.
Of course developers will oppose any new mandate, but if Elrich’s proposal were to take effect, how would they respond? They would have two options. First, if revenue potential is restricted on an additional 15 percent of units in the building, they will attempt to raise prices or rents on the remaining non-covered units to compensate. That would create winners and losers – one group of people would get a price or rent break but a much larger group would have to pay more. Second, if market conditions made such a price or rent increase non-competitive, the return from the project would decline – perhaps to the point that the project could not get financing. In other words, the new housing simply would not be built.
Fifteen percent of zero equals zero.
Elrich’s proposal occurs in this context: Montgomery County already has a combination of tax and regulatory policies that strangle the economics of housing construction. The county regularly threatens and sometimes passes increases to taxes and fees on real estate. (There were three of those two years ago.) It has the highest impact taxes in Maryland, and despite that, it suffered a collapse in collections that damaged its capital budget. It has recently imposed requirements for all-electric building construction and building energy performance standards. Elrich wants to raise commercial property taxes, which would impact apartment buildings since they are classified as commercial buildings in assessments. Worst of all is the new rent control law, which pushed the county towards almost no multifamily units permitted in the last three quarters.
No other jurisdiction in the region has this combination of policies that so radically increases costs and limits revenue generation in multifamily real estate. D.C. and Prince George’s County have rent control too, but their laws exempt buildings constructed after specific dates. Our law eventually brings the vast majority of new units under control, with more being added every year.
Of course, our housing market is not isolated – we exist in a region with strong competitors. A recent report by the county’s planning department showed substantial generation of permitted multifamily units in Fairfax, D.C., Loudoun, Arlington, Howard, Anne Arundel and Frederick while we stagnate. No wonder that’s happening. Why would developers put up with our requirements when they can easily build elsewhere?
The end result of our policies is a steep drop in the for-profit housing sector, which is happening now. Most of the few projects that will remain are partnerships between the county and nonprofit developers, all of which require huge subsidies by taxpayers. This is the worst of all worlds: an unending housing shortage and higher tax bills.
That’s why tax abatements, zoning changes and the well-intended executive order on housing by Governor Wes Moore won’t make a big difference for our housing production in the end. We have profoundly damaged not only the economics of housing development but our own reputation as well. As evidence, consider our redlining by real estate financiers across the country and our branding by one of the nation’s largest housing CEOs as “increasingly hostile to housing providers.”
We need a total rethinking of our housing policy. We need to adopt a tax and regulatory framework that matches or exceeds our regional competitors to end our pariah status. If not, we will go down as a national model for figuring out how to stop housing construction once and for all.