Agenda Item 6A
July 14, 2015
Action
MEMORANDUM
July 10,2015
TO:
FROM:
SUBJECT:
County Council
Jeffrey
L.
zyont
~or
Legislative Analyst
Action:
Bill 8-15, Taxation - Development Impact Tax - Exemptions
Government, Operations and Fiscal Policy Committee Recommendation (3-0):
enact
Bill 8-15 with amendments.
The Committee recommended an impact tax emptemption for the market rate dwelling
units in for-sale developments in addition to rental developments. The Committee also
recommended deleting the exception for development on publicly owned land. Finally, the
Committee recommended amending Bill 8-15 to allow any development that gets benefits under
the zoning ordinance for providing
more
than the minimum MPDU requirements to also get an
impact
tax
exemption if it provides at
least
25% affordable units.
In the Committee's opinion, the need for affordable housing demands an aggessive
approach. Development in Enterprise zones (and fonner Enterprise zones)
are
already exempt
from impact
taxes.
The Bill as amended would essentially create an enterprise zone anywhere a
developer was willing to provide at least 25% affordable housing. The Committee believes that
the fiscal impact ofBill 8-15 can
be
monitored by timely reporting without the
use
ofa dollar limit
or a
sunset
provision.
Background
Bill 8-15, Taxation - Development Impact Tax - Exemptions, Lead sponsor: Council Vice­
President Floreen, Co-sponsors: Council members
Riemer,
Rice, Katz and Navarro, was introduced
on February 3. Bill 8-15 would exempt the market-rate rental dwelling units in any development
which consists of at least 25% affordable housing units from the transportation and school
development impact taxes.
l
This Bill is similar to Bill 39-11 as recommended by the Government Operations and Fiscal
Policy Committee. On May 7,2013, the Council considered Bill 39-11 with the recommended
) Affordable units include MPDUs, and other units if the rent affordable to households earning less than 60% of the
area median income, adjusted for family size for a minimum 15 year term;
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revisions and laid the bill on the table. Bill 39-11 expired without further action on December 1,
2014.
On March 3, 2015 the Council held a public hearing on Bill 8-15. The Montgomery
Housing Partnership spoke in favor ofthe Bill (©19-20). In their view, the impact tax burden is a
burden on all new housing but has the most negative effect on those projects that provide affordable
housing. The Partnership encouraged the Council to expand Bill 8-15 to for-sale projects in
addition to rental projects. The Council held another public hearing on May 5, 2015 in order to
comply with noticing requirements. No one spoke at the Council's May 5 public hearing.
Fiscal impact
The Executive submitted a fiscal impact statement assuming that every rental project
beyond approved development would all make themselves eligible for the exemption under Bill
8-15 by providing 25% affordable units. Based on this absolute worst case situation, the Executive
estimated the potential for $48.6 million
in
lost revenue and a gain of 634 affordable units.
2
The exclusion of Bill 8-15 on projects
in
the development pipeline is significant All of
the projects that include those units will be excluded from the potential for fee relief. New projects
would take 3 years to go from preliminary to the point where impact fees become due. For the
next 3 years (FY 16
thru
FY 19), the fiscal impact would be zero.
Staff used the perimeters of Bill 8-15 when it wrote the memorandum to Council on Bill
39-11 (attached). Staff estimated the annual amount of reduced fees would
be
$2.1 million per
year starting 4 years after the date the bilI is effective, assuming one building per year takes
advantage of the exemption.
Both the 2013 staff analysis and the 2015 OMB fiscal impact statement were in the same
ballpark on one point. The permit cost for each additional affordable unit will cost the County
approximately $80,000 per unit.
3
The amendment proposed by the GO Committee increased the potential fiscal impacts of
the
Bill.
Publicly owned property would be exempt. Development that received zoning benefits
in exchange for increased affordable housing would also be exempt from impact taxes as proposed
by the Committee. Under the Committee's recommendation, both rental and for sale housing
would be allowed a tax exemption. Under Bill 8-15 as introduced, only rental development could
be exempt.
Issues
Should the incentive for additional affordable housing be a tax credit or a specific grant?
Worst case from the perspective of reduced impact fee revenue.
3
The 2015 OMB study estimate the cost at $76,619 per additional affordable unit; in 2013, staff estimated that same
cost to be $81,600 in Metro Station Policy Areas and $111,520 outside ofthose areas where multifamily construction
is less likely.)
2
2
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A reduction of impact fees does not relieve the County from the obligation to provide
infrastructure. Tax relief will ultimately require the burden of transportation and infrastructure to
be
bourn more by all tax payers and less by new development. To the extent that developers take
advantage of Bill 8-15, it is a tax expenditure.
4
Revenues are reduced by the amount of relief
automatically and thereby giving an automatic subsidy to the project. The applicant need not pay
the
tax
and then apply for a grant to receive a refund.
Compared to a grant, a tax exemption shifts the financial burden in a less transparent and
potentially uncontrollable manner. The tax exemption will cause the Council to write a bigger
check for infrastructure using tax payer funds or raise the tax for all other non-exempt projects. A
direct grant would cause the Council to write a check to a particular project using tax payer funds.
The
tax
reduction does not require specific Council or agency action. Grant requests would have
to be processed and approved.
If staffs assumption that only one project a year will provide more than 25% affordable
units then grants are a clear option instead of a tax exemption. If the Council is concerned about
the potential fiscal impact of Bill 8-15, the grants to refund impact fees would make the fiscal
impact controllable.
The Committee recommended a tax exemption for highly affordable housing projects.
In
the
Committee's opinion a tax exemption provided more certainty to potential affordable housing
providers.
Staff would recommend accomplishing the same results by grants. The Housing Initiative Fund
(HIF) is already established to provide such grants. The HIF could always benefit from additional
funding.
Should there be a dollar limit on the exemption?
The Executive's fiscal impact creates the fear of a substantial loss of funds available for
school and transportation infrastructure. In 2013 the Committee's response to this concern was to
reduce the scope ofthe exemption in other ways. The advantage ofa dollar limit is that the revenue
gap created by the exemption would be controlled by the Council and not be the decisions made
by developers. There are already dollar limits on some tax credit programs such as historic
preservation and energy conservation.
The Committee did not recommend a dollar limit on Bill 8-15's impact tax exemption.
In the
Committee's opinion a dollar limit would prohibit long tenn planning by potential affordable
housing providers.
In
any event, the Council can monitor the fiscal impact of Bill 8-15 by timely
reporting by departments when the exemption is used.
"'Tax expenditures" are subsidies delivered through the tax code as deductions, exclusions, and other
tax
references. Tax expenditures reduce the amount of
tax
that households or corporations owe. To benefit from a tax
expenditure, a taxpayer must undertake certain actions or meet certain criteria.
4
3
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Should pipeline projects be excluded?
Reducing the number of potential projects that may earn an exemption is a means of
reducing the fiscal impact of Bill 8-15. There are more than 21,000 multifamily units in the
pipeline.
5
Dropping those projects that have preliminary plan or site plan from the proposed
exemption evolved from the following narrative:
The intent of Bill 8-15 is to make the economics of affordable housing a little bit better.
The fee relief would never fully make-up for lower rents. Projects that have paid for
processing costs for preliminary plan or site plan approval do not need that extra boost.
In 2013 staff estimated that in addition to the approved pipeline, there was zoning capacity
for 55,000 multi-family dwelling units. The new zoning code significantly increased that potential
by allowing commercial floor area to be used for residential purposes. There is a large pool of
potential beneficiaries of Bill 8-15 even when projects with preliminary plan or site plan approval
are excluded.
The Committee recommended retaining Bill
8-15
's exclusion of projects in the development
pipeline from the proposed impact tax exemption.
Should publicly owned projects be excluded?
The Bill as introduced would bar publicly owned land or land previously owned by the
public from being eligible for the tax exemption. The term publicly owned is much broader than
County owned.
It
includes the County, the State, and the Federal government as these are all
public entities. Publicly owned also includes all land titled to government agencies (Maryland­
National Capital Park and Planning Commission, Washington Suburban Sanitary Commission,
and Washington Metropolitan Area Transit Authority) and instrumentalities (Housing Opportunity
Commission (HOC) and the Revenue Authority).
Publicly owned land is sometimes sold at discounts to affordable housing providers.
It
was
the Committee's opinion in 2013, that such land be excluded from the exemption.
In
2013, staff
estimated that this exception to the exemption would affect 2,700 total multi-family dwelling units.
As noted, HOC is a public instrumentality. Bill 8-15 would bar HOC owned land from
benefiting from the tax exemption. The Committee considered allowing HOC to benefit from the
fee exemption, but decided that only allowing HOC to use the provisions of Bill 8-15 was
insufficient.
The Committee recommended deleting the publicly owned land exception to the impact tax
exemption.
HOC and any other public land owner can use the exemption to make the proforma on
521,439 units in mixed use projects - May 2015 Planning Staff Pipeline Report.
4
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marginal projects work. The Committee saw the benefits of more affordable development and
did not see any risk to allow development on publicly owned land to take advantage of the impact
tax exemption.
Staff recommends retaining the exclusion of publicly owned property.
It
requires such
projects to contribute to needed infrastructure and gives neighbors one less reason to complain
about new development. The sale price by the public entity to the developer could subsidize the
project without an additional impact tax exemption.
Should projects that are receiving zoning accommodation for additional affordable housing
be excluded?
The zoning code allows greater flexibility when a development provides Moderately Priced
Dwelling Units (MPDUs). The MPDU provisions for lower density residential zones allow a
greater variety of unit types, small sized developments, and smaller lot sizes. These benefits are
provided for any development that provides any MPDUs. Bill
8~
15 addresses situations where
developments are providing twice the minimum number of MPDUs.
The higher density zones allow floor area bonus density for the provision ofpublic benefits.
MPDUs above the required 12.5% can be one ofthe public benefits at the option of the developer.
Some zones allow greater density and greater height for the provision of affordable housing.
6
As
introduced, the provision for additional affordable units may only be exempt from impact fees if
the project does not get bonus density for the same attribute.
The Committee recommended deleting the exception to the impact tax exemption due to the
use ofzoning benefits.
The Committee recommended allowing as many benefits as possible to
affordable developments.
Staff recommends retaining the exemption. The public benefit requirement for CR and
CRT zoned properties provide attributes that might otherwise be constructed by the developer.
It
does not seem like a public benefit to neighbors if the developer is relieved from paying for
infrastructure through the impact tax exemption.
Should
25%
affordable dwelling units be the trigger point for the exemption?
In 2013 the Committee consulted with HOC who claimed that 25% was that maximum that
some "mission driven" affordable housing providers could accommodate. The Department of
Housing and Community Mfairs (DHCA) negotiates for 30% affordable units when it has the
opportunity to sell publicly owned land. Increasing the percentage of affordable units would
decrease the universe of applicants who may wish to take advantage of the fee exemption.
The
Committee recommendation retained the
25%
affordable unit trigger.
CR and CRT zoned properties with a
"T'
may exceed the otherwise maximum height and density ofthe zone if
more than 12.5% MPDUs are provided or workforce housing is provided. Section 59.4.5.2.C
6
5
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Should there be a sunset provision to the exemption?
The Committee rejected the inclusion of a sunset provision.
A sunset provision would
require the Council to judge the merits ofthe exception at a later date.
In
the Committee's opinion,
the Council is perfectly capable of repealing or amending the Bill's provision after it is put into
practice. The Committee thought that a sunset provision would prevent long tenn planning by
affordable housing providers. The Committee recommended timely reporting by departments of
the exemption provided by Bill 8-15.
This packet contains:
Bill 8-15 (as recommended by the GO Committee)
Legislative Request Report
Fiscal and Economic Impact statement
May 7, 2013 Action Memo on Bill 39-11
Testimony of Montgomery Housing Partnership
Circle #
1
5
6
13
19
F:\LAW\BllL5\1508 Taxations - Development Impact Tax-Exemptions\Action Memo 7-14-15.Docx
6
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Bill No.
8-15
Concerning: Taxation -
Development
Impact Tax - Exemptions
Draft No.
_2_
Revised:
6-25-15
Introduced:
February
3,2015
Expires:
August 3,
2016
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effecwe: _____________
Sunset Date: _N:...!:o=n=e'--_ _ _ __
Ch. _ _, Laws of Mont Co. _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
Lead Sponsor: Council Vice-President Floreen;
Co-Sponsors Councilmembers Riemer, Rice, Katz and Navarro
AN
ACT to:
(1)
(2)
exempt certain housing units from certain development impact taxes; and
generally amend the law governing development impact taxes.
By amending
Montgomery County Code
Chapter 52, Taxation
Sections 52-49 and 52-89
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double boldface brackets]]
* * *
Heading or defined term.
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act:
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BILL NO.8-15
1
2
3
4
5
6
7
8
Section 1. Sections 52-49 and 52-89 are amended as follows:
52-49.
Imposition and applicability of development impact taxes.
*
*
*
(g) A development impact
tax
must not be imposed on:
(1) any Moderately Pricedpwelling Unit built under Chapter 25A or
any similar program enacted by either Gaithersburg or Rockville;
(2) any other dwelling unit built under a government regulation or
binding agreement that limits for at least 15 years the price or rent
charged for the unit in order to make the unit affordable to
households earning less than 60% of the area median income,
adjusted for family size;
(3) any Personal Living Quarters unit built under Sec. 59-A-6.15,
which meets the price or rent eligibility standards for a
moderately priced dwelling unit under Chapter 25A;
(4) any dwelling unit in an Opportunity Housing Project built under
Sections 56-28 through 56-32, which meets the price or rent
eligibility standards for a moderately priced dwelling unit under
Chapter 25A;
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
ill
any
non-exempt [[rental]) dwelling unit in
~
development in
which at least 25% of the dwelling units are exempt under
paragraph
ill
m
Q1
or
ffi
or any combination of them
[[~
if:
CA)
the development is not located on publicly-owned land or
land that was publicly-owned when the development was
proposed; and
11
[[ffi) the
development has not received other benefits under
Chapter 59 because the development includes more than
the minimum required affordable housing]); and
@\law\bills\1508 taxations - development
impact
tax-exemptions\1508 bill2.doc
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BILL NO.8-15
28
29
30
31
[(5)]
®
any development located in an enterprise zone designated by
the State or in an area previously designated as an enterprise
zone.
*
52-89. Imposition and applicability of tax.
*
*
*
*
32
33
34
*
(
c)
The tax under this Article must not be imposed on:
(1)
35
36
37
38
39
40
any Moderately Priced Dwelling Unit built under Chapter 25A
or any similar program enacted by either Gaithersburg or
Rockville;
(2)
any other dwelling unit built under a government regulation or
binding agreement that limits for
at
least 15 years the price or
rent charged for the unit in order to make the unit affordable to
households earning less than 60% of the area median income,
adjusted for family size;
41
42
43
44
45
(3)
any Personal Living Quarters unit built under Sec. 59-A-6.15,
which meets the price or rent eligibility standards for a
moderately priced dwelling unit under Chapter 25A;
46
47
48
49
50
(4)
any dwelling unit in an Opportunity Housing Project built under
Sections 56-28 through 56-32, which meets the price or rent
eligibility standards for a moderately priced dwelling unit under
Chapter 25A;
ill
any non-exempt [[rental]] dwelling unit in
~
development in
51
52
which at least 25% of the dwelling units are exempt under
paragraph
01 111
ill
or
ffi
or any combination ofthem
[[.1
if:
53
54
CA)
the development is not located on publicly-owned land or
land that was publicly-owned when the development was
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BILL NO.8-15
55
56
57
58
proposed; and ]]
[[(ID the development has not received other benefits under
Chapter 59 because the development includes more than
the minimum required affordable housing]]; and
[(5)]
59
60
61
62
®
any development located in an enterprise zone designated by
the State or in an area previously designated as an enterprise
zone.
*
*
*
63
64
65
Section 2. Applicability. County Code Section 52-49(g)(5) and Section 52­
89(c)(5), both inserted
Qy
Section
1
of this Act, do not
f!PPly
to
any development
which received preliminary subdivision plan approval or site plan approval (or
similar approval in
~
municipality) before this Act took effect.
Section 3. Reporting.
When a development proposes at least 25 percent
~
66
67
68
affordable dwelling
units
under Section 52-49(c)5 and Section 52-89(c)5. the
Department of Housing and Community Affairs must report to the Council the
location of the development. the total number of units in the development. and the
number of affordable units within 30 days from the date of the agreement to build
MPDUs. If a development with 25 percent of affordable dwelling units does not
obtain an agreement to build MPDUs with the Department of Housing and
Community Affairs. then the Department of Permitting Services must report to the
Council the use of any impact
tax
exemption under Section 52-49(c)5 and Section
52-89(c)5 within 30 days from the date the exemption is granted.
69
70
71
72
73
74
75
76
77
78
Approved:
79
George Leventhal, President, County Council
Date
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LEGISLATIVE REQUEST REPORT
Taxation
DESCRIPTION:
Bill 8-15
Development Impact Tax
-
Exemptions
Exempts the market-rate rental dwelling units in any development
which consists of at least 25% affordable housing units from the
transportation and school development impact taxes.
Need to encourage provision of affordable housing.
To create further incentives to increase the share oflow- and moderate-
income housing in new developments
Department of Permitting Services, Department of Housing and
Community Affairs, Planning Board
To be requested.
To be requested.
To be requested.
To be researched.
Robert H. Drummer, Senior Legislative Attorney, 240-777-7895
Impact taxes apply County-wide.
PROBLEM:
GOALS AND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
ECONOMIC
IMPACT: .
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
APPLICATION
WITHIN
MUNICIP ALITIES:
PENALTIES:
Not applicable.
W:\law\biUS\1508 taxations - development impact tax­
exemptions\legislative request report.docx
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ROCKVILl.E, MARYLAND
MEMORANDUM
March 3 I • 2015
TO:
George Leventhal. President, County Council
FROM:
SUBJECT:
Jennifer
A.
Hughes, Director. Office of
Joseph F. Beach. Director, Department of
~e
~JJJf.dget
U"'"
LlU
FEIS for Bill 8-] 5, Taxation - Development Impact Tax - Exemptions
Please find attached the fiscal and economic impact statements for the above­
referenced legislation.
JAH:fz
cc:
Bonnie Kirkland, Assistant Chief Administrative Officer'
Lisa Austin, Offices ofthe County Executive
Joy Nurmi, Special Assistant to the County Executive
Patrick Lacefield, Director, Public Information Office
Joseph
F.
Beach, Director, Department of Finance .
Diane Jones, Department of Permitting Services
David Platt, Department of Finance
Alex Espinosa, Office
of
Management and Budget
Dennis Hetman. Office of Management and Budget
Felicia
Zhang, Office
of Management and Budget
Naeem Mia. Office of Management and Budget
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Fiscal Impact Statement
Council BiII8-1S Taxation - Development Impact Tax - Exemptions
1. Legislative Summary.
Bill 8-15 would exempt the rental market-rate dwelling units in any housing development
which consists of at least 25% affordable housing units from the transportation and
school development impact taxes they would otherwise have to pay.
2. An estimate of cbanges in County revenues and expenditures regardless of whether
the revenues or expenditures are assumed in tbe recommended or approved budget.
Includes source of information, assumptions, and methodologies used.
In response to a similar Bill (39-11) DPS examined several areas that have major rental
housing projects in the pipeHne and that
are
assumed to be moving forward. This
analysis assumes anticipated development in three planning
areas
(Great Seneca Science
Corridor (GSSC); White Flint; and Shady Grove-County Service Park West (CSWP»
and projects
the
lost impact tax revenue if
all potential
projects took advantage of the
proposed bill.
Potential Lost Impact Tax Revenues under Maximum-Loss Scenario
Total
Loss in
Master/Sector Rental Additional
Transportation
Units
MPDUs
Plan Area
Impact Taxes
Supplied
I
I
Loss
in
Scbool
Impact
Taxes
$8,112,700
Loss
in
Total
Impact
Taxes
$17,626,600
Cost per
Additional
MPDU
$91,330
$41,898
$383,891
$76,619
GSSC
White Flint
1,550
3,266
1,114
5,930
193
408
33
634
$9,513,900
N/A
$17,094,244 $17,094,244
$5,830,676 $] 2,668,408
$32,044,676 $48,576,308
CSPW
Total
$6,837,732
$16,351,632
Under the above scenario. the additional 634 affordable units provided under the waiver
would result in $48,576,308 in lost impact tax revenue at an average cost to the taxpayer
of$76,619 per eaeh additional MPDU constructed.
3. Revenue and expenditure estimates covering at least the next 6 fiscal years.
No additional expenditures are expected as a result of this Bill. Illustrative revenue
impacts are described above.
(j)
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4.
An
actuarial analysis through the entire amortization period for each bill that would
affect retiree pension or group insurance costs.
Not applicable.
5.
Later actions that may affect future revenue and expenditures if tbe bill authorizes
future spending.
Not applicable
6.
An
estimate of the staff time needed to implement the biD.
No additional staff time is needed from
DHCA.
DPS, and Finance to implement the Bill.
7.
An explanation of how the addition of new staff responsibilities would affect other
duties.
Not applicable.
8.
An estimate of costs when an additional appropriation
is
needed.
Not applicable.
9. A description of any variable that could affect revenue and cost estimates.
Revenues (or lost impact tax revenues) may
be
affected by changes in the impact tax rate.
The quantity of additional MPDUs developers elect to build may also affect revenues (or
lost impact tax revenues).
10. Ranges of revenue or expenditures that are uncertain or difficult to project.
The change in impact tax receipts is difficult to project. Impact tax revenues would vary.
depending on the number of developers that elect to build under this waiver.
Additionally. the market dictates whether projects will be condominium or rentals and it
is difficult to predict what future shifts will
be.
If expected development in different plan
areas changes from rental to fee simple sales, fewer projects would make use ofthe
provisions of this Bill. Projects in areas that are now, or were formerly, an enterprise
zone are not subject to development impact taxes. Therefore, there would not
be
lost
revenues in these areas. Conversely, the beneficial intent ofthe Bill would not
be
realized in these areas either.
11.
If
a
bill
is
likely to have
DO
fIScal impact, why that
is
the case.
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The fiscal impact of this
Bill
is difficult to detennine since
it
depends completely on the
number of developers who avail themselves of this credit.
12. Other fIScal impacts or comments.
Not applicable.
13. The following contributed to and concurred with this analysis: (Enter name and
department).
Diane Schwartz Jones, Department ofPenrutting Services
Hadi Mansouri, Department of Permitting Services
Timothy Goetzinger, Department of Housing and Community Affairs
Dennis Hetman, Office of Management and Budget
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Economic Impact Statement
Bill 8-15, Taxation - Development Impact Tax - Exemptions
Background:
This legislation would exempt the market-rate rental dwelling units in any development
which consists ofat least
25
percent affordable housing units from the transportation and
school development impact taxes.
1.
The sources of information, assumptions, and methodologies used.
Sources of information include:
• Department of Permitting Services (current school and transportation
development impact
tax
rates),
• Department of Housing and Community Affairs (sample ofproperties with
250
units
including market rates, number of moderately priced dwelling units
(MPDUs), and rental rates for MPDUs),
• McGraw-Hill Construction, Dodge Local Construction Potentials Bulletin
(construction costs in Montgomery County for multi-family housing),
• National Apartment Association
(,'2013
Survey of Operating Income
&
Expenses in Rental Apartment Communities"), and
• Department of Planning.
2. A description of any variable that could affect the economic impact estimates.
The variables that could affect the economic impact estimates are:
• Current market rental rates,
• Current rental rates for MPDUs,
• Current number of MPDUs in the sample of properties provided by DHCA
• Construction costs,
• Gross operating profit margin for rental units provided by
the
National
Apartment Association, and
• The number of unbuilt multi-family dwelling
units.
3. The BUl's positive or negative effect,
if
any on employment, spending, saving,
investment, incomes, and property values in the County.
Bill 8-15
could have an impact on the profitability ofa new rental development. The
impact is based on the assumptions presented in the previous paragraph. Those
assumptions include changes to:
• current market rental rates,
• cwrent MPDU rental
rates,
• the difference between current market rental rates and current MPDU rental
rates,
• construction costs,
• school and transportation development impact
tax
rates, and
Page
(fj)
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Economic Impact Statement
Bill 8-15, Taxation - Development Impact Tax - Exemptions
gross profit margin.
Incorporating data provided by DHCA on three sample properties and the National
Apartment Association on gross profit margin, Finance estimated the economic effect
on business income for new rental property resulting from raising the percent from
12.5 percent to 25 percent.
Under the current policy of providing 12.5 percent rental units at MPDU rates, the
benefit to the developer/owner of not incurring both school and transportation
development impact taxes in return for charging lower rental rates for MPDU units
varies by property. For example, given the three sample properties provided by
DHCA. the benefit would expire between six and ten years. That is, for the
developer/owner the number of years that the developer/owner would benefit from
the exemption of paying the school and transportation development impact taxes
versus the loss of revenues from MPDU rental units is a benefit between six and ten
years. After that period, the amount of annual rental income earned by the
developer/owner over the remaining life to the property is less than the annual rental
income if all units paid the market rental rate.
For one of the sample properties, there are
43
MPDUs out of a total of
347
units or
12.6 percent of the total units pay MPDU rental rates. Based on the difference
between the current market rental rate and the MPDU rental rate, the development
loses approximately
$963,000
per year due to the difference in the rental rates. With
the exempted amount of
$6.3
million in school and transportation development
impact taxes, the exempted amount will cover nearly seven years in lost rental
revenues. The coverage in the loss of revenues depends on the difference between
the development's market rental rate and the MPDU rental rate and the number of
units qualifying
as
MPDUs.
Under the proposed policy ofproviding 25.0 percent rental units at MDPU rates, that
coverage of lost rental revenue and the exemption from the school and impact
development impact taxes is between three and five years based on the sample
properties and on the current rental rate differential and the number of MPDU units.
Using the same example as in the previous paragraph, the number ofMPDUs would
increase from the current
43
units to
86
units and would result in an annual loss of
approximately
$1.9
million in rental revenues. With the
same
exempted amount of
$6.3
million, the exemption would cover only three years of the lost revenue.
Therefore, over the short period oftwo to three years, Bill
8-15
would have a positive
economic benefit to rental property developers and owners. However, that benefit
would end after that period because the amount of lost rental income would be greater
than the amount saved from the exemption of development in1pact taxes.
The impact of Bill
8-] 5
is based on the sample of properties provided by DHCA and
the inability and lack thereof of increasing market rental rates compared to MDPU
Page
2)1.~
(fj)
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Economic Impact Statement
BillS-IS, Taxation - Development Impact Tax - Exemptions
rental rates such that the difference remains constant over the life of the property. If
the developers/owners of the rental property had the ability, or market power, to raise
market rental rates such that the difference between market rates and MPDU rates
increased, then the developers/owners would not incur a loss of rental income
(assuming operating expenses remaining cOnstant) and the developers/owners would
maintain their current operating profit margin offifty-five percent.
Finally, data provided on the Department of Planning's website state that the number
ofunbuilt multi-family units in the pipeline is 27,899. Under the current policy of
12.5 percent set aside, the number ofMPDUs is approximately 3,490
units.
Increasing that percentage to 25 percent would increase the number of units by 3,490
for a total of6,980. Therefore, Bill 8-15 would increase
the
number ofMPDUs by
providing low-income families an increase in the number ofaffordable rental housing
and thereby providing an economic benefit to low-income families.
4.
If
a Bill is
likely
to have no economic impact, why is that the case?
Bill 8-15 would have an economic benefit to the developer/owner over a short period
of time. But that benefit period is reduced compared to the current policy of 12.5
percent and assumes that the developer/owners do not have the ability
to
raise market
rental rates above the current difference between those rates and rental rates for
MPDUs. To offset the estimated deleterious financial effect on the developers'/
owners' revenues, there is an economic benefit to low-income families due
to
an
increase in the number ofaffordable rental
units.
However. without precise data on
the revenue loss to developers/owners and the economic benefit to low-income
families, it is difficult to detennine with any accuracy the totaJ economic impact.
either positive or negative, on the County.
s.
The following contributed to or concurred with
this
analysis:
David
Platt,
Mary
Casciotti,
and
Rob Hagedoorn, Finance.
Date
t
3/1-0/,£
I
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Agenda Item 5
May 7, 2013
Action
MEMORANDUM
TO:
FROM:
County Council
Michael Faden, Senior Legislative Attorney
Glenn Orlin, Deputy Council Staff Director
Linda McMillan, Senior Legislative Analyst
SUBJECT:
Action:
Bill 39-11, Taxation Development Impact Tax - Exemptions
Government Operations and Fiscal Policy Committee recommendation: enact with
amendments.
Bill 39-11, Taxation - Development Impact Tax - Exemptions, sponsored by
Councilmembers Floreen and Rice, then-Council Vice President Navarro, and Councilmember
Ervin, was introduced on December 6, 201 L Bill 39-11 would exempt the market-rate rental
dwelling units in any development which consists of at least 25% affordable housing units from
the transportation and school development impact taxes.
A public hearing was held on January 24,2012 (see testimony, ©17-24). Representatives
of the Housing Opportunities Commission, Maryland-National Capital Building Industry
Association, and Montgomery Housing Partnership all urged that the Bill be broadened to cover
sale as well as rental units. Attorney Jody Kline also urged that the Bill exempt productivity
housing units in non-residential zones. Jim Humphrey of the County Civic Federation opposed
the Bill, suggesting that the Council revisit it when the County's fiscal situation improves. Also
see the letter from the Walter Johnson cluster PTA on ©25-26, opposing the diversion of school
impact tax funds.
Government Operations and Fiscal Policy Committee worksessions were held on
February 25 and April 4, 2013. At the first worksession, Committee members directed Council
staff to develop estimates of foregone impact
tax
revenue, assuming that the bill would not apply
to already approved subdivisions or to any development on public land, and assuming various
limits on the exemption available in a given year and various sunset provisions.
Fiscal impact estimates
OMB
An
OMBlFinance Department fiscal and economic impact statement (see ©5-14)
concluded that the exemption allowed under this Bill could result in an impact tax revenue loss
(jj)
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of as much as $56.7 million. Council staff believed that this estimate may be substantially
overstated because, among other reasons:
• it assumed that no transportation impact tax credits would be granted on account of the
housing built in specific areas with major transportation programs; and
• it
appears not to take into account a provision in current law (County Code §52-90(d))
which reduces the school impact tax by 50% for any non-exempt dwelling unit located in
a development where at least 30% of the dwelling units are MPDU's or other affordable
units.
The OMB fiscal impact statement calculated that the impact tax revenue loss per added
affordable housing unit in selected areas would range from $38,525 to $446,227, and would
average $89,449. The breadth of these estimates suggests the difficulty of generating them. This
also assumes, as OMB noted, that this exemption will give developers sufficient incentive to
actually use it, about which Finance Department staff in the economic impact statement was
skeptical (see
©
11-14).
Council staff
Using a simple method, Council staff initially estimated the impact tax
revenue loss from a hypothetical lOO-unit 2-bedroom garden apartment development, not located
in an enterprise zone, in which the developer would increase the number of MPDU's from 15%
to 25% to take advantage of the exemption in this Bill. We calculated the impact tax lost per
each ofthe 10 added MPDU's, at current impact tax rates, to be $163,744.
1
At the February 25 worksession the Committee asked for Council staff's best estimate of
the fiscal impact of Bill 39-11 if the Bill were amended to exclude both already-approved
subdivisions and developments on public land (where the value of the land
was
reduced as part
of a development agreement that requires a certain number of affordable units.) from its impact
tax exemption. Council staff conferred with staffs from M-NCPPC (Richard DuBose and
Roberto Ruiz), the Departments of Permitting Services (Reggie Jetter) and Finance (David Platt
and Mike Coveyou), and the Office of Management and Budget (Mary Beck) in deVeloping our
assumptions and analysis.
One assumption we made is that the only developments that would take advantage of the
exemption would be multi-family residential or multi-family mixed-use projects. The Bill as
introduced exempts only rental units from the impact tax, and it is unlikely that a development of
rental attached or detached single family homes would use this provision.
Another assumption we used is that no additional affordable housing units resulting from
Bill 39-11 would occur in the next 3 years. Data from M-NCPPC and DPS indicate that 3 years
is the average time between site plan approval for multi-family residential buildings and the time
their impact tax payments would be due. If this Bill is enacted this spring, it likely would have
no effect - and so, would not reduce impact tax revenue -- in FY s 14-16. The revenue loss
would begin in FYI7, the second-to-Iast year of the current CIP.
IThe calculation was: impact taxes per unit (school $11,358
+
transportation $7906
=
total impact taxlunit $19264) x
85 tax-forgiven units
=
$1,637,440 total impact tax revenue loss/lO added MPDU's $163,744 revenue loss per
addedMPDU.
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M-NCPPC's Center for Research and Information Systems estimated that, under current
master plans, about 55,000 multi-family units yet to be built are not already in the pipeline of
approved subdivisions. During 2001-2010 only 5.3% of the units were built in what are now
State-designated Enterprise Zones (EZ's), where impact taxes are not collected: Wheaton CBD,
Long Branch, and Gaithersburg Town Center. However, this percentage does not include Silver
Spring CBD, which is no longer an EZ but is treated as one for impact tax purposes. The State is
considering establishing an EZ in Glenmont, and the County has already exempted the White
Flint special taxing district from payment of the transportation impact tax.
Taking these factors into account, Council staff believes that about 15% of all multi­
family units would not be subject to impact taxes, reducing the number of units in developments
where impact taxes would be levied to 46,750. Assuming that each ofthese developments must
meet the minimum 12.5% MPDU requirement - and knowing that the MPDU's themselves are
already exempt from impact taxes, as the law provides -the impact tax would apply to about
40,900 units. Finally, the number of units in known multi-family dwellings to be built on
County land - County Service Park West (Shady Grove) and the Public Service Training
Academy (Great Seneca Science Corridor) - is about 2,700, bringing the number ofunits where
the tax would
~e
apply down to about 38,200.
The loss of impact tax revenue also depends on the split between garden apartments and
high-rise units, since the rates differ between them. The rates that will apply on July 1, when the
8.7% inflation index takes effect, are:
!
i
School Impact Tax
Tran~portation
Impact Tax
Metro Station Policy Areas
General District
Garden apartments
$
12,346/unit
H!gh-rise apartments
$5,234/unit
$4,297/unit
$8,594/unit
$3,090/unit
$6,181/unit
During 2001-2010, about 20% of multi-family units were garden apartments with two or
more bedrooms, and 80% were high-rise units (which, for impact tax purposes, also include
studio and one-bedroom garden apartments). We assumed that only 25% of the 38,200 units
would be located in the remaining, non-exempt Metro Station Policy Areas: Friendship Heights,
Bethesda CBD, Grosvenor, Twinbrook, Rockville Town Center, and Shady Grove; and that the
rest would be built elsewhere. Therefore, if all future multi-family developments were to take
the exemption offered by this Bill, amounting to about 5,500 more affordable units over the rest
of the County's buildout, the exemption would result in an aggregate impact tax revenue loss of
$477 million, or about $87,000 of revenue for each added affordable unit. (Calculated in a very
different way, OMB's Fiscal Impact Statement estimated a revenue loss of about $89,000 for
each added affordable unit.) Our calculations are shown below:
New affordable units:
38,200 total units x
0.125/0.875
=
5,457 - 5,500 affordable units
School tax lost:
38,200 total units x 0.20 garden units x
$12,346/unit
==
$94.3 million
38,200 total units x 0.80 high rise x
$5,234/unit
=
$160.0 million
Total
=
$254.3
million
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Transportation tax lost:
38,200 total units x 0.25 Metro x 0.20 gardens x $4,297/unit
=
$8.2 million
38,200 total units x 0.75 General x 0.20 gardens x $8,594/unit $49.2 million
38,200 total units x 0.25 Metro x 0.80 high rise x $3,090/unit
=
$23.6 million
38,200 total units x 0.75 General x 0.80 high rise x $6,1811unit $141.7 million
Total
=
$222.7
million
Of course, for other reasons not every developer will increase its share of affordable units
in return for an exemption on its impact taxes. So the challenging part of any fiscal impact
estimate is to hypothesize how many developers in a given time period would
be
likely to take
this option.
In
our educated guess, not more than one building a year is likely to do so, and its
developer is likely to be a mission-driven organization rather than a conventional developer.
Thus an alternative way to estimate this Bill's fiscal impact is to make an assumption·
about how many developments that use this option might be completed in any fiscal year and
what a likely building might consist of. For example, if a 175-unit multi-family building has 6
efficiency units, 115 one-bedroom apartments, 50 two-bedroom apartments, and 4 three­
bedroom apartments (this distribution is modeled .after a building in Wheaton), the minimum
requirement for MPDU's is 22 units (12.5%). The impact tax revenue loss would be $1.8
million if the building were located in a Metro Station Policy area, or $2.45 million if it were in
the General District. The cost for each added MPDU (22) in the Metro Station Policy Area
would be about $81,600, and in the General District about $111,520. Assuming that the impact
tax for one such building would be due in FY17, we would reduce the impact tax revenue
estimates by about $2.1 million in FY17 and in FY18 (and every year thereafter), split
between the transportation ($1 million/year) and school ($1.1 million/year) taxes.
Issues and options/Committee recommendations
At the Committee worksessions held on February 25 and April 4, the Committee
discussed the following issues and recommended several amendments to the Bill, which are
incorporated in the Committee redraft on ©1-3A:
Balance
In
Council staffs view, the central issue this Bill raises is how best to allocate
scarce County funds to promote affordable housing. The Draft 2012 County Housing Policy,
now before. the Planning, Housing, and Economic Development Committee, includes action
plans and recommendations for increased incentives such as this Bill would provide. The Policy
recommends that the County should "explore financial and other incentives for high-rise rental
development to make the construction of MPDU's more feasible, especially for projects
providing more than the minimum number of MPDU's and for those providing units with more
bedrooms", that the County should "create and design incentives that will lead to the
construction of well-located affordable rental housing", and that the County should "consider
incentives such as increased heights, additional density, waiver of transportation and school
construction impact taxes and fees from the Washington Suburban Sanitary Commission
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(WSSC), and other fees and taxes that contribute to increased cost of developing affordable
housing."
The critical question then is whether an estimated $2.1 million each year is best spent to
increase the number of MPDU's in any single applicable rental building, or to send the same
amount of funds to the Housing Initiative Fund (HIF), where they could be targeted as a grant or
repayable loan for a specific project. The same funds could also be allocated to increase the
ceiling on non-HOC Payments in Lieu of Taxes (PILOT's). Many projects where the HIF is
used to provide interim or low cost financing in exchange for additional MPDU's result in
additional affordable housing at no or low cost to the County. Conversely, creating permanent
affordable housing that does not depend on an ongoing subsidy for very-low-income people can
be costly on a per-unit basis. Very-low-income people are not generally able to be housed in an
MPDU without an ongoing subsidy, and those units are unlikely to be built without a County
contribution.
Cost-saving modifications The Committee considered ways to more narrowly channel
this kind of exemption in order to make it a more efficient use of County funds. No Committee
member expressed interest in broadening the Bill's scope to include sale units, as several
speakers at the hearing proposed.
Applicability
Should this exemption, if enacted, only apply to developments that have
not already received preliminary subdivision approval or site plan approval? The Committee
agreed with Council staff that developments which have gone beyond those points arguably have
already "made their pro forma's" and don't need further County assistance.
Committee recommendation: exclude developments that received subdivision or site
plan approval before this Bill takes effect.
Publicly owned land
Should developments on publicly owned land be eligible for an
exemption? (Publicly-owned land, rather than only County-owned land, would include, for
example, school or WMATA property.) The Committee concluded that the tax exemption
should not apply to any development on publicly owned land where a lower value of the land
was part of a negotiated development agreement that required more than the minimum number of
affordable housing units.
Committee recommendation: exclude developments on publicly-owned land.
Zoning credits
Similarly, should developments which receive extra density for
furnishing more affordable housing units be eligible for this kind of exemption? Committee
members considered whether to exclude from this exemption developments that receive a zoning
benefit, such as extra credits under a CR zone, for providing more affordable housing.
Committee recommendation: exclude developments that have received a zoning benefit
for providing more units of affordable housing.
Higher thresholds
Is 25% the optimal amount to trigger an impact tax exemption? HOC
and others who were consulted when this Bill was drafted concluded that
25%
was the highest
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the exemption could go and still let the numbers work to move forward with a development.
HOC staff noted that the 25% ceiling came from "mission driven" developers. On the other
hand, in Bill 11-12 last year the Council selected 30% as the level of affordable housing that
would be substantial enough to shorten the property disposition process, and DHCA generally
seeks at least 30% affordable housing in projects developed on publicly owned land.
2
Committee recommendation:
leave the affordable housing threshold at 25%.
Dollar or unit limits
Should the law limit the number of units eligible for this exemption
each year, or the amount of County funds allocated, much like the current system to set the level
of payments in lieu of taxes (pILOT's)? Committee members discussed setting either an annual
unit limit or revenue loss limit, or both, but did not decide on any specific limits.
Committee recommendation:
do not set any specific dollar or unit limits on this
exemption.
Sunset
If
this exemption approach (or any variant of it) is used, should it be sunset after
several years to see whether it has in fact accomplished its goals at a reasonable cost?
Committee recommendation
(2-1,
Councilmember
Ervin
dissenting):
do not sunset
this exemption, but review it periodically.
This packet contains:
Bill 39-11 with Committee amendments
Legislative Request Report
Fiscal and economic impact statement
Current County impact tax rates
Public hearing testimony
Walter Johnson cluster PTA letter
F:\LAW\BILLS\l139 Impact Tax - Exemptions - Affordable Housing\Action Memo.Doc
Circle
#
1
4
5
15
17
25
2Since the Bill's language refers to "a
development
in which at least
25%
of the dwelling units are exempt" (see
({;)2,
lines
19-20,
and ({;)3, lines
50-51)
(emphasis added),
if
more
than
25%
of the units
in
a single building in that
development are affordable units, that fact would not make the market-rate units in that building or those
in
the
entire development exempt from the impact tax under this Bill.
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nMHP
March 3, 2015
The Honorable George Leventhal
President
Montgomery County Council
100 Maryland Avenue
Rockville, MD 20850
Dear Council President Leventhal:
On behalf of Montgomery Housing Partnership
(MHP),
please allow me to take the opportunity
to share some thoughts on Bill 8-15 Taxation - Development Impact Tax - Exemption. MHP
fully supports the Council's continued focus on the critical need to address the affordable
housing crisis in Montgomery County.
Many of you are familiar with MHP' s role within the County as a developer of affordable rental
multi-family communities, but just to give a couple of updates: Five months ago we broke
ground on The Bonifant in downtown Silver Spring. We are on schedule and budget to bring
almost 150 affordable rental units for seniors to the downtown area. Additionally, 93 of the 114
homes at Olney Springs have been bought and occupied, with another 11 sold.
The most recent projections show a need for an additional 60,000
~
100,000 housing units by
2030 to meet demand, with a majority of these units serving low-to-moderate income
households. Currently, Montgomery County is issuing building permits for only about 3,000
units annually - a rate we'd need to double to meet the projected demand. The County needs to
think outside of the box on how we can fill this gap. Bill 8-15 does that, by providing incentives
to developers to voluntarily produce more moderate income units.
Exempting rental projects that provide a minimum of25 percent Moderately Priced Dwelling
Units overcomes one of the major obstacles to affordable construction in the County. As it
currently stands, each dwelling unit has an approximate $30,000 price tag from Impact Taxes
alone. Adopting Bill8-IS increases the supply ofMPDUs and concurrently reduces the costs,
and subsequently the price, of market rate rental units.
We strongly support a program that will eliminate or reduce the Impact Tax burden on new
housing through the provision of additional affordable units, helping the County to meet its
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repeatedly stated goal of addressing the affordable housing shortage, and increasing the supply of
housing for low and moderate income households. Additionally, we encourage the Council to
consider the feasibility of expanding this exemption to for-sale projects also.
Thank: you for taking the time to consider these thoughts and for always keeping the needs of
Montgomery County citizens at the forefront of your mind. We look forward to the opportunities
to continue to work with the County ensuring all our residents live in quality, safe, affordable
communities.
I welcome the opportunity to discuss this issue with you further. Please feel free to reach me at
rgoldman@mhpartners.org or 301-812-4114.
Sincerely,
Robert A. Goldman, ESQ.
President
Montgomery Housing Partnership
Bill8-1S
2