AOBA sent a letter to Montgomery County Council members strongly opposing Montgomery County Bill 10-17 Recordation Tax - Rates – Amendments, which proposes to increase the recordation tax premium component of the recordation tax. This measure will almost triple the recordation tax premium for commercial and multifamily properties as most are valued at more than $1 million. Property owners could thus face, for example, a staggering increase from $1.55 (2015 rate) to an additional $3.55 for each $500 or fraction of $500 of the amount over $2,000,000 in a just a few years.
AOBA stated in its letter that the proposal will unfairly impose a second, significant increase to the recordation tax rate on AOBA members and other businesses that already bear a disproportionate share of the County’s tax burden. The non-residential sector, for example, accounts for approximately 67.1% of energy tax revenues. AOBA supports across the board tax enhancements that are universally applicable but cannot support a proposed structure that intentionally targets businesses.
The 2017 proposed tax hike follows the Council’s 2016 decision to significantly raise both the school increment and recordation tax premium in addition to a record increase to the property tax rate. The 2016 increase was a shock to the real estate market, especially a weak commercial office market, and the 2017 proposal is pending as the market continues to struggle.
A second recordation tax increase will undermine the County’s economic development goals and serve as a disincentive to needed investment in the County. Annual tax increases primarily borne by businesses sends the wrong signal that MONTGOMERY COUNTY IS CLOSED FOR BUSINESS.
TAX INCREASES UNDERMINE THE COUNTY’S AFFORDABLE HOUSING GOALS
The proposal will increase the costs associated with the purchase and sale of rental housing.
Rising interest rates and higher transaction costs: AOBA cautioned the Council that the impact of this misguided proposal must also be considered along with other changing market conditions. Notably, the loan period for many multifamily properties averages 7 to 10 years, making refinancing a frequent, and if this proposal passes, more expensive occurrence. Higher recordation rates, in addition to projected increases to interest rates and rising operating expenses (i.e. increases to electric and water rates in addition to numerous surcharges, among others) should raise alarms about the ability to preserve and operate the County’s existing rental housing stock.
Draft Rental Housing Study Policy Recommendations – Tax Incentives: At the same time a tax increase is before the Council, the same government is also considering real property tax abatement and exemptions as a tool for preserving and incentivizing affordable rental housing. (See Policy Recommendation, page 32.) Real property taxes can account for 22% of operating expenses so real property tax credits not increases can serve to preserve existing and incentivize the development of new rental housing.
Tax proposal paints bull’s eye on real estate investment trusts (“REITs”): Many of the apartment communities in Montgomery County are owned by REITs and other investment ventures that rely on stable markets so that they can buy and sell properties quickly. REITs are already hesitant to invest in this County, given the high taxes and uncertainty regarding the future of the County’s rental housing laws. An increase to recordation taxes could further dissuade REITs from investing in the County.
Government regulation and policies, such as the current proposal can limit access to housing by increasing the costs of producing new and preserving existing housing. “NAHBV Economics estimates that 14 million American households are priced out of the market for a new home by government regulations that, on average, increase the new home price by 24.3%.” This does not include, for example, costs such as the impact fee here in the County. For multifamily properties, the percentage can be as much as 30%.
TAX HIKE PUNISHES NOT HELPS ALREADY FRAGILE OFFICE MARKET
The struggling office market is already facing high vacancy rates that create the risk of declining property values and tax revenues. Another proposed recordation tax increase will thus do little to address the challenges plaguing the office market sector and may in fact result in a net decrease in projected revenue. For example, the proposal could scare away potential purchasers already skittish about acquiring challenged properties. Adopting a second recordation tax increase will encourage many to instead look to neighboring jurisdictions where the tax burden is more reasonable, making development and reposition deals more attractive.
Montgomery County is not an island. Consider, for example, that Prince George’s County is aggressively working to attract new residents and businesses through a variety of regulatory policies and incentives. The County is also an increasingly attractive market due to a number of factors including, for example, cheaper land and the availability of jobs for persons choosing to relocate to the County. Prince George’s County is indeed “Primed for Business.” See, for example, Five Key Takeaways from DC's Q1 Office Market, Banister, April 4, 2017. https://www.bisnow.com/washington-dc/news/office/five-takeaways-from-dcs-q1-office-market-72927. "The relative lack of affordable metro-centric developments in other locations may be a catalyst for Prince George's County …," JLL director of U.S. office research Scott Homa said. "Natural economic forces are driving government tenants to Prince George's and will likely continue to do so over the long term, especially with this [Trump] administration focused on reining in the cost of government."