GO Item 1
July 13, 2017
Worksession 3
MEMORANDUM
July 11, 2017
TO:
FROM:
SUBJECT:
Government Operations and Fiscal Policy Committee
Robert H. Drummer, Senior Legislative Attorney~
Worksession 3:
Bill 10-17, Recordation Tax-Rates-Amendments
Bill 10-17, Recordation Tax - Rates - Amendments, by Lead Sponsor Councilmember
Elrich and Co-sponsor Councilmember Leventhal, was introduced on April 4. A public hearing
was held on April 25 and Government Operations and Fiscal Policy Committee worksessions were
held on May 4 and June 22.
Bill 10-17 would modify the recordation tax rates levied under state law for certain
~
transactions.
Background
The "Recordation Tax Premium" went into effect in 2008. Bill 15-16, enacted on May 18,
2016, increased the Premium rate from $1.55 to $2.30/$500. Unlike the two elements of the base
rate paid on all transactions, the Premium applies only to the cost of a property or a refinancing
that is more than $500,000. Half of the proceeds from the Premium are allocated to County
Government capital projects (i.e., capital projects of departments in the Executive Branch); the
other half is for rent assistance for low and moderate income households.
Bill 10-17 would reduce the Premium for transactions that are more than $500,000 but less
than $1,000,000 from 2.30 to $1.55/$500. The Bill would increase the Premium for transactions
that are more than $1,000,000 but less than $2,000,000 from $2.30 to $2.55/$500. The Bill would
also increase the Premium for transactions that are more than $2,000,000 from $2.30 to
$3.55/$500.
Public Hearing
The lone speaker, Peg Mancuso, representing the Greater Capital Area Association of
Realtors, supported the Bill to the extent it lowers the premium recordation tax rate on transactions
greater than $500,000 and less than $1 million. See ©5-6. Ms. Mancuso also recommended that
the Bill be amended to lower all recordation tax rates. The Apartment and Office Building
Association of Metropolitan Washington (AOBA) submitted written testimony opposing an
increase in the recordation tax rates for commercial transactions greater than $1,000,000. See ©7-
12.
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May 4 GO Worksession
Councilmember Elrich also attended the worksession. Alex Espinosa, David Platt, and
Mike Coveyou, Department of Finance, represented the Executive Branch. Jacob Sesker, Senior
Legislative Analyst and Robert Drummer, Senior Legislative Attorney, represented the Council
staff. The Committee discussed the need to have a fiscal impact statement for the Bill before
acting. Finance representatives said they expect to have an estimate for the fiscal impact in 1
month. Mr. Elrich indicated that his intent was to make the Bill revenue neutral on the overall
recordation
tax
collected. The Committee agreed to wait for the fiscal impact before acting on the
Bill.
June 22 GO Worksession
Councilmember Elrich also attended the worksession. David Platt, Mike Coveyou, and
Dennis Hetman, Department of Finance, represented the Executive Branch. Mary Beck, 0MB,
also answered questions. Gene Smith, Legislative Analyst and Robert Drummer, Senior
Legislative Attorney, represented the Council staff. The Committee discussed the fiscal impact
statement for the Bill received on June 21. The Committee requested additional information from
Finance, including examples of the recordation tax due at different price points, a breakdown of
commercial and residential transactions greater than $500,000, and the possible tax rates if the
proposed reduction in the premium tax rates only goes up to $750,000.
Issues
1.
What is the fiscal and economic impact of the Bill?
The goal of the Lead Sponsor, Councilmember Elrich, is to change the premium rates so
that transactions valued at more than $1 million would be charged a higher tax rate than
transactions valued at less than $1 million. The intent of the Bill is to make this change without
changing the total amount ofrecordation tax revenue received by the County. However, the tax
rates in the Bill, as introduced, were not verified to be revenue neutral.
Since the May 4 worksession, Finance analyzed State assessment records for multiple years
to determine an estimate of the total revenue. Finance determined that the rates in the Bill, as
introduced, would result in additional revenue of $8,400,000 in FYl 8 and increasing over the next
5 years to $9,430,000 in FY23. See the FEIS at ©13-19. Finance also provided the following
alternative premium rates that would lower the premium rates for transactions less than $1,000,000
and raise the premium rates for transactions greater than $1,000,000:
Current rates
$2.30
$2.30
$2.30
Alternative rates Percent chan2e
$1.55
-32.61%
$2.55
10.87%
$2.75
19.57%
$SOOK to <$1M
$1Mto<$2M
$2M or more
These alternative rates would increase estimated revenue by $2.7 million annually and $16.2
million over 6 years to account for the 10-year average variability of the volatile greater than $2
million tier.
2
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2. Would the Bill increase the volatility of recordation tax revenue received each year?
Recordation tax is charged on real property transactions. The total revenue depends upon
the total number of transactions completed in each fiscal year. Historically, the number of
transactions between $500,000 and $1,000,000 each year varies less than the number of larger
transactions. The table below details the historical percentages for the Bill's proposed divisions
based on sales data from FY09-16. To the extent that more revenue is derived from fewer, larger
commercial transactions, the total revenue received each fiscal year is likely to vary more.
Tier
Percentage of Total
Transactions
78%
18%
4%
Percentage of Total
Premium Tax Revenue
20%
20%
60%
$SOOK to <$IM
$IM to <$2M
$2M or more
Finance concluded that 60% of the premium tax revenue comes from only 4% of the transactions.
3. Technical amendment.
The Bill, as introduced, inadvertently left no premium tax for transactions valued at
$1,000,000 or at $2,000,000. Council staff recommends the following technical amendment to
implement the intent of the Bill:
Amend lines 13-20 as follows:
(2)
if the consideration payable or principal amount of debt secured exceeds
$500,000[,];
®
(fil
an additional [$2.30) $1.55 for each $500 or fraction of $500 of the
amount over $500,000 but less than $1,000,000[,]~
an additional $2.55 for each $500 or fraction of $500 of the amount
equal to or more than [[over]] $1,000,000 but less than $2,000,000;
and
il}
an additional $3.55 for each $500 or fraction of $500 of the amount
equal to or more than [[over]] $2,000,000.
4. Additional information requested
by
the Committee.
a.
The Council staff worked with Finance to prepare sample recordation
tax
amounts
due for different size transactions under both the current rates and the proposed new
premium rates. These charts include percent of the
tax
as sales value and the percent
change in the amount of the
tax
under different scenarios. See the Recordation Tax
Sample Calculations at ©20-21.
3
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b.
Finance calculated potential revenue neutral rates changing the middle tier to begin at
$750,000 instead of $1 million. Finance concluded that keeping the premium rate for
transactions between $500,000 and $750,000 at $1.55 and changing the premium rate
from the current $2.30 to $2.25 for transactions greater than $750,000 up to $2 million
and increasing the premium rate for transactions greater than $2 million from $2.30
to $2.75 would result in the same revenue estimated under current rates over time.
Finance calculated the following alternate rates with the revised tiers.
Tier
$SOOK to <$750K
$750 K to <$2 M
2 Mor more
Current Rate
$2.30
$2.30
$2.30
Finance Suggested
·
Rate
$1.55
$2.25
$2.75
See the Finance Rates Analysis Summary at ©22.
c.
What is the breakdown between commercial and residential transactions in each tier?
Finance reviewed the last 10 years of transactions. Over the last 10 years, the commercial
versus residential split for each tier paying the premium rate was:
Tier
$SOOK to <lM
$1Mto<$2M
$2Mormore
Percent of Residential Transactions
98.4%
96.2%
55.8%
It is important to note that the $2M plus tier is a smaller percentage of a smaller total. There
are on average about 200 transactions in that category versus thousands in the other two. Tier three
is where most of the commercial transactions occur. Very few commercial transactions occur below
the $2 million threshold.
5. What are the policy issues for the Committee?
a.
Should the premium tax rates be split into divisions that create a higher premium tax
for larger transactions?
b.
If
yes:
(1)
how should the tiers be split; and
(2)
what should the tax rate be for each tier?
If
enacted, what should the effective date be? The Bill, as introduced, would take
apply to any transaction occurring on or after September
1,
2017. However, the Bill
c.
4
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was introduced on April 4, 2017 with the expectation that it would be acted on before
the Council finalized the FYl 8 budgets. As discussed earlier, the Committee
concluded that the Bill did not need to be acted on before the budget if the final rates
produced the same estimated revenue as the current rates. However, both Finance and
potential buyers and sellers would need time to either implement or adjust to the new
rates.
Finance requests the Committee to delay the effective date of the Bill, if
enacted, to January 1, 2018.
This packet contains:
Bill 10-17
Legislative Request Report
GCAAR Testimony
AOBA letter
Fiscal and Economic Impact statement
Recordation Tax Sample Calculations
Finance Rates Analysis Summary
F:\LAW\BILLS\1710 Recordation Tax Rates - Arnendments\GO Memo 3.Docx
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Bill No.
----------=-1-=-0-....:.1-=-7_ __
Concerning: Recordation Tax - Rates -
Amendments
Revised: April
7, 2017
Draft No.
~3_ _
Introduced:
April
4, 2017
Expires:
October
4, 2018
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date: _N~o=n~e~------
Ch .
....Ita__,
Laws of Mont. Co.
[year]
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
Lead Sponsor: Councilmember Eirich
Co-sponsor: Councilmember Leventhal
AN ACT
to:
(1)
(2)
modify the recordation
tax
rates levied under state law for certain transactions; and
generally amend the law governing the recordation
tax
By amending
Montgomery County Code
Chapter 52, Taxation
Section 52-16B
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.
10-17
1
Sec.
1.
Section 52-16B is amended as follows:
52-16B. Recordation Tax.
2
3
4
(a)
Rates.
The rates and the allocations of the recordation tax, levied under
Md. Tax-Property Code §§12-101 to 12-118, as amended, are:
(1)
for each $500 or fraction of $500 of consideration payable or of
the principal amount of the debt secured for an instrument of
writing, including the amount of any mortgage or deed of trust
assumed by a grantee;
(A)
$2.08, of which the net revenue must be reserved for and
allocated to the County general fund; and
(B)
5
6
7
8
9
10
11
$2.37, of which the net revenue must be reserved for and
allocated to the cost of capital improvements to schools; and
12
13
14
15
16
17
18
(2)
if the consideration payable or principal amount of debt secured
exceeds $500,000[,t
(A)
an additional [$2.30) $1.55 for each $500 or fraction of$500
of the amount over $500,000 but less than $1,000,000[.J~
_(fil
an additional $2.55 for each $500 or fraction of$500 of the
amount over $1,000,000 but less than $2,000,000; and
19
.(Q
an additional $3.55 for each $500 or fraction of $500 of the
amount over $2,000,000.
20
21
22
23
24
25
ill
The net revenue from the premiums payable under paragraph
ill
[of which the net revenue] must be reserved for and allocated
equally to:
(A)
the cost of County government capital improvements; and
rent assistance for low and moderate income households,
which must not be used to supplant any otherwise available
funds.
(B)
26
27
0
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BILL No. 10-17
28
(b)
Exemption.
The first $100,000 of the consideration payable on the
29
30
31
32
33
34
35
36
conveyance of any owner-occupied residential property is exempt from
the recordation tax if the buyer of that property is an individual and
intends to use the property as the buyer's principal residence by actually
occupying the residence for at least 7 months of the 12-month period
immediately after the property is conveyed.
Sec. 2. Effective Date.
This Act must apply to any transaction which occurs on or after September 1,
2017.
Approved:
37
38
Roger Berliner, President, County Council
Date
39
Approved:
40
Isiah Leggett, County Executive
41
Date
This is a correct copy ofCouncil action.
42
Linda M. Lauer, Clerk of the Council
Date
f:\law\bills\
1710
recordation tax rates
-
amendments\bill 3.docx
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LEGISLATIVE REQUEST REPORT
Bill 10-17
Recordation Tax
-
Rates
--
Amendments
DESCRIPTION:
Bill 10-17 would modify the recordation tax rates levied under state
law for transactions that are more than $500,000.
The premium rate for transactions that are more than $500,000 but
less than $1,000,000 is high. The revenue loss from lowering this
premium rate can be made up by increasing the premium rate for
transactions that are more than $1,000,000.
The goal is to lower the premium rate for transactions that are less
than $1,000,000.
PROBLEM:
GOALSAND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
Office of Management and Budget, Finance
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
To be determined.
NIA
NI
A
Robert H. Drummer, Senior Legislative Attorney
APPLICATION
WITHIN
MUNICIPALITIES:
applicable
PENALTIES:
NI
A
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TESTIMONY OF
THE GREATER CAPITAL AREA ASSOCIATION OF REALTORS®
BEFORE THE MONTGOMERY COUNTY COUNCIL ON
Bill 10-17,
"Recordation Tax-Rates
and
Amendments"
April 25, 2017
This testimony is on behalf of the Greater Capital Area Association of REALTORS®. GCAAR
represents nearly 10,000 REALTORS® and real estate professionals. We are also the voice for
thousands
of buyers, sellers and homeowners. GCAAR appreciates the Council revisiting the
issue of possible ways to lower recordation taxes, and we support lowering recordation taxes
from $500k to under $1 m within Bill 10-17.
1
Overall, GCAAR maintains a commitment to the inherent value of homeownership and the
consistent positive force it has in our communities. We believe homeownership is the best
opportunity for people to securely plant their roots into Montgomery County, maintain stability
and gain financial freedom. In the long term, homeowners across the economic spectrum
\\-1ll
contribute immensely to Montgomery County's revenue streams via the taxes they pay and local
businesses they support. This leads to greater resources for social services, transportation and
schools-to name a few.
Unfortunately, the rising cost of housing in the County have made it unaffordable for most
residents to purchase a home, especially in comparison to other local jurisdictions. GCAAR has
been seriously concerned that instead making homeownership viable, all we have seen over the
past
few
years are initiatives that move us further from this goal.
GCAAR must emphasize, if the recordation tax rate structure has more than the current number of tiers,
this may pose certain technical necessities that would need to be put in place by our industry to properly
administer the rates. GCAAR would like to have a more detailed conversation about ensuring accurate
implementation of a multi-tiered system with the Council and members of the real estate community on these
technical issues such as a later implementation date
to
allow the industry to make any necessary changes.
1
0
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Specifically, I caine before you last when this Council pushed through a nearly $200 million
recordation tax increase on homeownership in less than a month's time. To make matters worse,
the County's recordation taxes were already ainongst the
highest in the country.
That surge in
tax
rates presented immediate challenges to residents across the County, particularly those first-
time homebuyers who already found themselves having immense difficulty putting together their
final closing costs.
Today, we find ourselves evaluating a Bill whose effect would be to nominally reduce and return
the recordation tax rate to its' previous level prior to last year's increase for transactions more
than $500,000 but less than $1,000,000. We approximate this group the measure would reduce,:.
their recordation tax costs
by
a couple hundred dollars.
As we often stress, while a few hundred dollars may not seem like much for lawmakers dealing :
with millions of tax dollars, this adds up very quickly for working fainilies. In fact, the down
payment is often the greatest impediment for homeownership. GCAAR is supportive of the part
of Bill 10-17 that lowers recordation taxes from $500k to under$ Im because we firmly believe••
this relatively small benefit could have a worthy impact. The folks who are now tapping info the
last of their savings could find relief in saving even a small ainount of additional dollars.
Further, we recommend lowering recordation taxes for future homeowners across the board.
GCMR is able and willing to sit down and work with you and any another other interested
school stakeholders on finding funding mechanisms for our most critical priorities such as
MCPS.
If
the County needs more revenue, we can all work together on broader solutions.
In conclusion, GCAAR respectfully asks you to lower the high cost of the Montgomery County's
recordation taxes to make homeownership more attainable. Specifically, we believe returning
the rate to what it was previously for'recordation taxes at the $500k to under $Im price point is a
positive start.
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TO:
Councilmember Nancy Navarro, Chair,
Committee on Government Operations and Fiscal Policy
Councilmember Sidney Katz, Member
Committee on Government Operations and Fiscal Policy
Councilmember Hans Riemer, Member
Committee on Government Operations and Fiscal Policy
FROM:
Nicola Y. Whiteman, Senior Vice President of Government Affairs
Apartment and Office Building Association of Metropolitan Washington
May 2,2017
Oppose Bill 10-17 Recordation Tax
-
Rates -Amendments
DATE:
RE:
The Apartment and Office Building Association of Metropolitan Washington (AOBA) is a non-
profit trade association whose members include owners and managers of more than 112,000
apartment units and over 33 million square feet of office space in suburban Maryland, of which
more than
57,000 apartment units and over 24 million square feet of office space are located
in Montgomery County.
AOBA strongly opposes 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.
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.
(jJ
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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 ofrental housing.
Rising interest rates and higher transaction costs:
AOBA cautions 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.
See 14
Million Households "Priced Out" By Government Regulation, "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%.
(D
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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 Ql Office Market, Banister, April 4, 2017.
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"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."
How will the fairly new Montgomery County Economic Development Corporation, whose
mission includes business retention and expansion and removing barriers, respond to existing
and prospective businesses concerned about seemingly annual tax increases in the County?
1
Will
businesses continue to "Choose Montgomery?" Will they be able to afford to "Choose
Montgomery?"
THE PERFECT STORM:
Higher Recordation Tax and Troubled Financial Markets
Understanding the full impact of the proposed increase requires the Council to first carefully
consider how many commercial loans are structured as well as anticipated developments in the
financial market. First as noted, many of these loans are for 7 to 10-year terms, thus making
refinancing and exposure to a high recordation tax rate a frequent occurrence. Secondly, the
proposed increase comes at a time when financial markets are predicting additional challenges
ahead due to the storm brewing around commercial mortgage backed securities (CMBS) loans.
2
1ht1ps:l/tl1i11LirH•1.·o.ro1n!:1h11.1t
1n,y,k\vho-wc-are/ "Business retention and expansion efforts continue to be our
priority. We are engaging with businesses across the county to add value and remove barriers as needed,
knowing that the greatest job growth will be generated by those businesses already located in the region."
2
Real estate's ticking bomb: Who gets hurt. CNBC, Olick, Diana, March 10 2016 ("Commercial mortgage backed
securities (CMBS) are bonds sold to investors"); US Commercial Mortgage Backed Securities FAQs ("CMBS are
bonds, which are backed by commercial real estate collateral."); Refinancing CMBS loans could prove difficult,
Greater Fort Wayne Business Weekly, Lipp, Linda, March 30, 2017 ("While $6.7 billion in maturing CMBS debt is
(j)
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The Council should be mindful that many of these CMBS loans, which were hugely popular in
2007 and many of which are IO-year balloon mortgages, were due in the fourth quarter of 2016
and 2017 for refinancing.
3
Given the strict defeasance and prepayment penalties, the only time
to refinance is within the narrow 6-month period before maturation. A second, substantial
increase to the County's recordation taxes could stand in the way of, or change the structure of,
refinances for these commercial loans, and lead to catastrophic default.
If
unable to refinance
these properties, building owners may be forced to sell properties and at prices far below the loan
amount.
This will result in lower recordation tax collections and revenues earmarked for the
various capital projects and rental assistance programs.
AOBA also cautions the Council that owners planning to refinance CBMS loans already face a
challenged financial market. CMBS loans are essentially bonds and some industry analysts are
questioning whether there will be sufficient investor demand for these loans.
4
Additionally, the
ability to refinance assumes an owner has sufficient equity in a property. Those properties which
have not been able to sufficiently increase rents and income and thus increase property values
will find refinancing much more challenging.
5
We know, given the current state of the
coming due this month, the figure is minuscule compared to what's coming.
Over the next six months alone, about
$61. 1 billion in debt will come
due.
But almost 6 percent of the maturing debt is past due on payment and 10.5
percent is in special servicing, according to data from market research firm Trepp. Difficulty in refinancing is the
key culprit.
Tighter regulations in the financial markets have made it more difficult and more expensive to
refinance these loans,
said attorney Daniel Martin, a partner in McDermott Will
&
Emery in New York. Loans that
were originated more than 10 years ago may have been at 75 percent to 80 percent, loan to value. It's much harder to
borrow that much today.")
3
Projected CMBS Issuance for 2017 Under $80 Billion, Bell, Diana, Jan 19, 2017 ("While 2016 brought choppiness
to the CMBS market, rising interest rates and risk retention rules in 2017 may pose headwinds to the sector this year,
sources say .... Rising interest rates will be a concern for CMBS financiers watching their bottom line ...
Approximately 30 percent of $47 billion in Fitch-rated CMBS loans maturing this year could default. ... The firm
says expects "significant delinquencies" in those loans, citing high leverage levels .... About $112 billion in CMBS
loans is scheduled to come due in 2017, according to research firm Trepp, with another $17.6 billion slated to
mature in 2018. Office and retail loans account for the bulk of the balances, Trepp analysts say"); Banks to Fed:
We've Tightened Commercial Real Estate Lending, Drake, Martin, May 6, 2016 ("CMBS is also facing a looming
maturity wall - i.e. the wave of securitized loans that will need refinancing over the next six months."); Real estate's
ticking bomb: Who gets hurt ("CMBS tends to have a IO-year life span, at which point the debt matures and real
estate owners
have
to refinance the loans.")
4
Real estate's ticking bomb: Who gets hurt ("CMBS tend to have a IO-year life span, at which point the debt matures
and real estate owners have to refinance the loans. These maturities are expected to surpass $400 billion annually
this year and in 2017, according to CBRE, a real estate services firm. That is $100 billion more than last year.
CBRE
"conservatively" estimates that 18 percent of loans this year and 29 percent of loans next year could have problems
refinancing, due to lack of investor demand for the bonds. This translates into about $43 billion in potentially
troubled loans over these two years."
"We think some of these are going to be remonetized through asset sales, but
some will certainly hit the foreclosure list ... ""); Coming Due: How CMBS Market Will Handle $300B Maturing
2015-2017, January 7, 2015, Colomer, Nora ("The amount of commercial mortgage debt maturing is set to spike this
year, when loans taken out during the height of the real estate bubble start coming due.
Between 2015 and 20 I
7,
more than $300 billion will need to be refinanced.")
5
Wall of CMBS Loan Maturities Shrinks, Remains Daunting, Commercial RealEstate Direct, January 19, 2016,
("Healthy real estate market fundamentals have enabled many owners to increase rents and income, which has
contributed to an increase in property values and made refinancing easier than it otherwise would be. Borrowers
have taken advantage of the strong market fundamentals, the availability of debt capital and relatively low interest
rates to defease CMBS loans and refinance properties before their underlying loans mature.") While owners of
challenged properties will still be able to refinance a property, they might face, for example, higher interest rates.
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commercial office market in Montgomery County, that this is a reality for many property
owners. In other words - the perfect storm.
BACKGROUND
..
Ql 2017
JLLREPORT-SUBURBAN,
MD
VACANCY RATES
6
"No office buildings were under construction in Montgomery County and only one office
development was under construction in the Suburban Maryland region in the first quarter. No
office buildings will be completed in 2017; the next office building isn't scheduled to deliver
until the third quarter of 2018."
7
Class C
Submarket
Total Vacancy
Class A
Class B
16.3%
17.3%
15.4%
Montgomery County
16.3%
7.5%
11.4%
15.8%
9.5%
Bethesda CBD
NIA
42.3%
28.1%
26.4%
Bethesda
-
Rock Sprine
NIA
9.2%
NIA
9.2%
Burtonsville
NIA
3.9%
16.7%
Chevy Chase
11.3%
3.5%
3.5%
NIA
NIA
Clarksbure
20.6%
13.7%
13.7%
13.3%
Gaithersbure
26.1%
15.8%
14.5%
15.8%
Germantown
2.5%
11.7%
9.6%
NIA
Kensineton
NIA
15.3%
North Rockville
9.9%
6.6%
10.9%
Shady Grove
18.6%
17.5%
21.9%
28.5%
3.4%
Park Potomac/Tower Oaks
25.1%
27.4%
16.6%
21.9%
9.3%
20%
Rockville Pike Corridor
14.5%
Downtown Silver Sprine
14.6%
11.8%
20.7%
North Silver Spring
16.5%
14.9%
NIA
23.8%
Wheaton
25.9%
NIA
25.9%
NIA
. ..
MONTGOMERY COUNTY COMPREHENSIVE ECONOMIC STRATEGY
MARCH2016
"It
is clear, however, that diversifying the County's business sector portfolio beyond
those tied to the federal government while exploring new opportunities to better leverage
federal institutions for private sector investments will strengthen the economy. For this to
happen, a full commitment to private sector success is required. Businesses must not be
seen as an afterthought; the County must wholeheartedly embrace the success of its
private sector. This must involve existing businesses, ensuring that they are satisfied with
the County's commitment to them and to their expansion.")
Q 1 20 I 7 JLL Report - Suburban, MD Vacancy Rates, http://www. us.j II .com/united-states/en-us/Research/US-
Suburban%20Maryland-Office-Insight-Q 1-20 l 7-JLL.pdf?705bc663-0f4c-4170-8ce8-5a8d7b0cc94d
7
QI 2017 JLLReport-Suburban,MDVacancyRates,p. l
6
@)
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STRATEGY 1.1.4. Tax and Regulatory Policies: Ensure County Tax and
Regulatory Polices are Supportive of Business Attraction and Expansion, Especially
as They Affect Targeted Markets.
SOBERING NEWS
State of the Commercial Real Estate Market in Montgomery County
Excerpts: Montgomery County Planning Department's June 2015 Office Market Assessment
"High vacancies also threaten the financial viability of individual buildings.
They pressure
each landlord who has vacant space to lower rents or increase concession packages in order to
lure tenants, undercutting the building's cashflow and thus its market value.
As more buildings
are affected, these depressed values could have negative implications for the property tax
base of the county, the City of Gaithersburg, and the City of Rockville."
Page
I.
'Projected occupancy rates do not suggest any near-term relief in these problems.
Only
significant increases in office-based employment, office building demolitions or conversions to
other uses could make a dent in the county's nearly 11 million square-foot vacant office
inventory." Page 2.
®
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· - - - -
..
·····-······--···
ROCKVILLE, MARYLAND
MEMORANDUM
June
21, 2017
TO:
Roger Berliner, President, County Council
~
FROM:
SUBJECT:
Jennifer
A.
Hughes, Director, Office of Management
~~tf}'
·~;..,.»
Alexandre
A.
Espinosa, Director, Department of F i n a n ~
f
.
FEIS for Bill 10-17, Recordation Tax - Rates - Amendments
Please find attached the fiscal and economic impact statements for the above-
referenced legislations.
JAH:fz
cc: Bonnie Kirkland, Assistant Chief Administrative Officer
Lisa Austin, Offices of the County Executive
Joy Nunni, Special Assistant to the County Executive
Patrick Lacefield, Director, Public Infonnation Office
David Platt, Department of Finance
Dennis Hetman, Department of Finance
Jane Mukira, Office of Management and Budget
@
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Fiscal Impact Statement
Bill 10-17
-
Recordation Tax Rates
-
Amendments
1. Legislative Summary
The "Recordation Tax Premium" went into effect in 2008. The
tax
premium applies to
property sales or refinancing transactions greater than $500,000. Bill 15-16, enacted on
May 18, 2016, increased the premium rate from $1.55 to $2.30/$500 in the sale. Half of
the proceeds from the premium are allocated to County Government capital projects (i.e.,
capital projects of departments in the Executive Branch); the other half is for rent
assistance for low and moderate income households.
Bill I 0-17 would reduce the premium for transactions that are more than $500,000 but
less than $1,000,000 from $2.30 to $1.55/$500 (33% reduction). The bill would increase
the premium for transactions that are more than $1,000,000 but less than $2,000,000 from
$2.30 to $2.55/$500 (11 % increase). The bill would also increase the premium for
transactions that are more than $2,000,000 from $2.30 to $3.55/$500 (54% increase).
2.
An estimate of changes in County revenues and expenditures regardless of whether
the revenues or expenditures are assumed in the recommended or approved budget.
Includes source of information, assumptions, and methodologies used.
Sales data was analyzed from the Maryland Department of Assessments and Taxation for
the past ten fiscal years from fiscal year 2008 through fiscal year 2017. The analysis
quantified the volatility of the number of transactions occurring in each tier and the
number of taxable units charged historically.
The share of realized sale prices from the past ten fiscal years yields the following
blended commercial and residential percentages for the taxes collected annually for each
tier:
Bill 10-17 Proposed Tiers
$500,000-$1m
$1m-$2m
>$2m
Total
Proportion of premium collected
(ten-year average)
19.6%
20.8%
59.6%
100%
Aligning these percentages to the FY18 projected recordation
tax
premium revenue of
$29,722,676 yields an estimated increase of $8,402,622 in the amount likely to be
collected in FYl 8. The percentages or shares of sales value for each of the three tiers is
expected to change over the years affecting the fiscal impact estimates.
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3. Revenue and expenditure estimates covering at least the next 6 fiscal years.
It is estimated that revenues will increase by $53,728,922 over the next six years
assuming the percentages of the taxes collected for each tier maintain their percentage
averages over the past decade:
FY2018
FY2019
current
$29,722,676 . $30,456,841
$ 8,402,622 . $ 8,610,171
FY2020
$31,199,015
$ 8,819,985
FY2021
$31,959,906
$ 9,035,088
FY2022
$33,358,698
$ 9,430,528
FY2023
$33,358,698
proposed-=--$38---'-,1_2.-:.5,_29_8_$:....3--'9,'-067~,0_12_--'$'-40--','-01_9_,_,ooo_---'-$_40...:.,_994___._,994_---=-$_42_,_,7_8...:9,'-22_6_$ 4_2....
__ ,7_8...:9,_22_6 _
_ t_o_ta_l_6y.,__r_
$
9,430,528
$53,728,922
Bill 10-17 increases the recordation tax premium rate for properties above $1 million.
Properties in that category have experienced a high degree of volatility in sales value and
volume. Volatility could increase further with the increased recordation tax premium
rates. Moreover, the number of properties subject to the premium is a small share of the
total recordation tax base (less than 22% historically), which adds to the volatility. As a
proxy for the volatility, the average absolute deviation of properties valued over $2
million is $2.7 million annually over the past ten years assuming current rates and $3.5
million assuming the proposed $3.55/$500.
The six-year estimates are based on Bill
IO-I
7's currently proposed recordation tax
premium rates:
Current Rates
$500,000-$1m
$1m -$2m
>$2m
$2.30
$2.30
$2.30
Bill 10-17 rates
$1.55
$2.55
$3.55
Percent Change
-32.61%
10.87%
54.35%
The intent of Bill 10-17 is that it would be revenue neutral. Revenue neutrality is
impossible to achieve given the number of macroeconomic and microeconomic variables
fluctuating over the course of the estimated calculations. However, the following rates
would achieve closer to revenue neutral estimates for FYI 8 and beyond:
Current Rates Alternative rates Percent Change
$2.30
$500,000-$1m
$1.55
-32.61%
$1m-$2m
>$2m
$2.30
$2.30
$2.55
$2.75
10.87%
19.57%
The alternative rates allow for one standard deviation worth (68% of values within the
mean) of excess revenue or approximately $2. 7 million annually. Over the six-year time
horizon this amounts to $16.2 million to account for the ten-year average variability of
the volatile $2 million plus tier. There are no additional expenditures as a result of the
bill over the six-year period.
4.
An actuarial analysis through the entire amortization period for each bill that would
affect retiree pension or group insurance costs.
Not applicable.
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5. An estimate of expenditures related to County's information technology (IT)
systems, including Enterprise Resource Planning (ERP) systems.
Not applicable.
6. Later actions that may affect future revenue and expenditures if the bill authorizes
future spending.
Bill 10-1 7 does not authorize future expenditures.
7.
An estimate
of
the staff time needed to implement the bill.
It is estimated that there will be some minimal staff time necessary to implement this bill
to accommodate changes to accounting information.
8. An explanation of how the addition of new staff responsibilities would affect other
duties.
The additional workload can be absorbed within the department's current resources.
9. An estimate of costs when an additional appropriation is needed.
No additional appropriation is needed.
10. A description of any variable that could affect revenue and cost estimates.
See number 3.
11. Ranges of revenue or expenditures that are uncertain or difficult to project.
See number 3.
12.
If
a
bill is likely to have no fiscal impact, why that
is
the case.
Not applicable.
13. Other fiscal impacts or comments.
Not applicable.
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14.
The following contributed to and concurred with this analysis:
Dennis Hetman, Department of Finance
David Platt, Department of Finance
Jane
Mukira,
Office of Management and Budget
Date
(o
I
2(
I
7-
I
@)
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Economic Impact Statement
Bill
10-17,
Recordation Tax
-
Rates -Amendments
Background:
This legislation would reduce the Recordation Tax Premium (Premium) from $2.30 to
$1.55/$500 for transactions that are over $500,000 but less than $1,000,000.
Bill I
0-17 would
also increase the Premium from $2.30 to $2.55/$500 for transactions equal to or more than
$1,000,000 but less than $2,000,000 and would increase the Premium from $2.30 to $3.55/$500
for transactions equal to or more than $2,000,000.
1. The sources
of
information, assumptions, and methodologies used.
Source of information is monthly sales data from the Maryland Department of Assessments
and Ta,xation. The Department of Finance (Finance) analyzed the real estate sales data from
fiscal year 2008 to fiscal year 2017 in preparation for the economic impact statement. The
analysis included the value of sales for each of the three categories referenced in Bill 10-17.
Finance calculated the percentage of sales value for each of the three categories as a share of
the total sales value.
2.
A description
of
any variable that could affect the economic impact estimates.
Since Finance used data from fiscal year 2008 to fiscal year 2017, the percentages or shares
of total sales for each of three categories can be expected to change over the forecast period
although the degree of that change cannot be accurately estimated. Therefore, such a change
would affect the economic impact estimates. For example,
Bill l
0-17 increases the Premium
tax rate for properties equal to or more than $1 million. Properties in these two categories
have experienced a higher degree of volatility in sales compared to sales greater than
$500,000 but less than $1 million and, therefore, revenue volatility can be expected to
increase with the increase in the tax rates for the two high-end categories. For example, the
average absolute deviation of properties equal to or more than $1,000,000 but less than
$2,000,000 is $440,000 annually over the past ten years and the average absolute deviation of
properties equal to or more than $2,000,000 is $2,700,000 annually over the past ten years
under the current rate structure. For properties equal to or more than $2,000,000, the average
absolute deviation is $3,500,000 based on the proposed rate of $3.55/$500
3.
The Bill's positive
or
negative effect, if any on employment, spending, savings,
investment, incomes, and property values in the County.
· Due to the combination of lower premium recordation
tax
rate for properties under $1 million
but a higher rate for properties at $1 million and above, there may be positive economic
impact for the former but a negative economic impact for the latter. The initial analysis
confirms that revenues from the category under $1 million would be reduced which may
stimulate more economic activity in that much larger category. However, that same analysis
also confirms that revenues would increase sharply for the much smaller category, in terms
of number of transactions, starting at $1 million, which may have a deleterious economic
impact for that segment of the real estate market.
It
is not possible to accurately estimate to
Page
1
of 2
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Economic Impact Statement
Bill 10-17,
Recordation
Tax
-
Rates
-Amendments
,,,,,,.---
what degree these two impacts will offset each other and therefore it is uncertain whether Bill
10-17 would have
an
economic impact on the County's economy.
4.
If
a Bill
is
likely to have no economic impact, why
is
that the case?
See
#4.
S. The following contributed to
or
concurred with this analysis:
David Platt, Dennis
Hetman,
and Robert Hagedoorn,
Finance.
Alexandre A. Esfdsa,
Director
Department of
Finance
Date
Page 2 of2
®
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Recordation Tax Sample Calculations
The County's recordation tax has three components. Below is a table comparing the current recordation
tax rates for each component and the rates suggested by the Department of Finance (DOF) after analyzing
the fiscal impact from Bill 10-1 7.
Recordation Tax Component
Base
School Capital Improvements
Premium
$500,000 to $1,000,000
$1,000,000 to $2,000,000
Greater than $2,000,000
Current Rate
$2.08 per $500
$2.37 per $500
$2.30 per $500
$2.30 per $500
$2.30 per $500
Proposed Rate
$2.08 per $500
$2.37 per $500
$ l.55 per $500
$2.55 per $500
$2.75 per $500
Change
$0.00
$0.00
- $0.75
+ $0.25
+$0.45
Notes:
1) The recordation tax applies to each $500 or fraction of $500 of consideration payable or of the principal
amount ofthe debt securedfor an instrument ofwriting. When refinancing, the recordation tax only applies to the
principal that exceeds the unpaid principal of the existing mortgage.
2) The.first $100,000 of the sales value is exemptfrom the recordation tax/or any property that is used as a
primary residence.
3) The premium component applies only to the portion of the sales value that exceeds $500,000.
Below is a table that details the amount of tax for each component of the recordation tax at certain sales
values based on the current rates.
Recordation Tax Components - Current Rates
Base
School Capital
Premium
Improvements
$1,290
$1,469
$0
$2,704
$3,081
$1,150
$4,576
$5,214
$3,220
$9,984
$11,376
$9,200
$208,000
$237,000
$227,700
$438,880
$500,070
$483,000
Sales Value
$410,000
$750,000
$1,200,000
$2,500,000
$50,000,000
$105,500,000
Total
$2,759
$6,935
$13,010
$30,560
$672,700
$1,421,950
Percent of Tax
as Sales Value
0.7%
0.9%
1.1%
1.2%
1.3%
1.3%
Notes:
1) $410,000 was the median sales price in the County for FY16, and $105.5 million was the sales price of the
Apex property in Bethesda in 2015.
2) The.first $100,000 exemption was not considered for the $50 million and the $105.5 million example because
these properties are considered commercial.
@
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Below is a table that details the amount of tax for each component of the recordation tax at certain sales
values based on DOF's suggested rates.
Recordation Tax Components - Sue:e:ested Rates
Premium
Base
School Capital
Improvements
$1,290
$1,469
$0
$2,704
$3,081
$775
$5,214
$3,570
$4,576
$11,000
$9,984
$11,376
$208,000
$237,000
$272,250
$438,880
$500,070
$577,500
Sales Value
$410,000
$750,000
$1,200,000
$2,500,000
$50,000,000
$105,500,000
Total
$2,759
$6,560
$13,360
$32,360
$717,250
$1,516,450
Percent of Tax
as Sales Value
0.7%
0.9%
1.1%
1.3%
1.4%
1.4%
Notes:
1) $410,000 was the median sales price in the County for FY16, and $105.5 million was the sales price of the
Apex property in Bethesda in 2015.
2) The first $100,000 exemption was not considered for the $50 million and the $105.5 million example because
these properties are considered commercial.
Below is a summary table comparing the differences in total recordation tax collected based on the
current rates and DOF's suggested rates.
Sales Value
$410,000
$750,000
$1,200,000
$2,500,000
$50,000,000
$105,500,000
Current Rates
Total Tax Collected
$2,759
$6,935
$13,010
$30,560
$672,700
$1,421,950
Suggested Rates
Total Tax Collected
$2,759
$6,560
$13,360
$32,360
$717,250
$1,516,450
Difference
$0
-$375
$350
$1,800
$44,550
$94,500
Percent
Difference
0.0%
-5.4%
2.7%
5.9%
6.6%
6.6%
F:\LA W\BILLS\l 710 Recordation Tax Rates - Amendments\Updated Version Of Recordation Tax Sample Calculations.Docx
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Bill 10-17 Recordation Tax- Rates Analysis Summary
Bill 10-17 would reduce the premium for transactions that are more than $500,000 but less
than $1 million from 2.30 to $1.55/$500 {33% reduction) and increase the premium for
transactions that are more than $1 million but less than $2 million from $2.30 to $2.55/$500
(11% increase). The bill would also increase the premium for transactions that are more than
$2M from $2.30 to $3.55/$500 (54% increase).
1.)
Perform same analysis with the following bands: $SOOK to $7SOK, $7SOK to $2M, $2M
plus
2.) Provide scenario estimated tax for different valued properties under the current rates
versus the proposed
Problems to solve remain the same:
1.) Quantify the volatility across two dimensions with respect to number of transactions
occurring and the number of taxable units charged historically
2.) Suggest rates that would theoretically keep the changes as close to revenue neutral as
possible with the understanding that it cannot be perfectly neutral given the number of
fluctuating micro and macro variables at play
Conclusions:
1.)
Shares for new bands continue to be consistent over ten years with minimal variability:
$SOOK to $1M - 78%
$1M to $2M
$2M plus
-18%
- 4%
$SOOK to $7SOK - 56%
$7SOK to $2M - 40%
$2M plus
- 4%
2.) Estimated taxable$ shares have more variability over the same time horizon but
average out to (shift 11% to second tier):
$SOOK to $1M - 20%
$1M to $2M - 20%
$2M plus
- 60%
$SOOK to $7SOK - 9%
$7SOK to $2M - 31%
$2M plus
- 60%
Under the new $7SOK tier, additional homes will be included in the second tier where
rates are increasing by 11% therefore intuitively the estimated net revenue to the
County annually will increase by approximately $1M per year to $3.8 million (or one
standard deviation plus $1M) from the mean over the ten-year period for the most
volatile $2 million plus tier
A rate of $2.25 (2% decrease from current) for the middle $7SOK to $2M tier would
achieve similar one standard deviation revenue neutrality
Scenario differentials scale from a 2.7% increase in total tax for a $1.2M properties up to
6.6% increase for $SOM and above
@
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GO Item 1
July 13, 2017
Worksession 3
MEMORANDUM
July 11, 2017
TO:
FROM:
SUBJECT:
Government Operations and Fiscal Policy Committee
Robert H. Drummer, Senior Legislative Attorney~
Worksession 3:
Bill 10-17, Recordation Tax-Rates-Amendments
Bill 10-17, Recordation Tax - Rates - Amendments, by Lead Sponsor Councilmember
Elrich and Co-sponsor Councilmember Leventhal, was introduced on April 4. A public hearing
was held on April 25 and Government Operations and Fiscal Policy Committee worksessions were
held on May 4 and June 22.
Bill 10-17 would modify the recordation tax rates levied under state law for certain
~
transactions.
Background
The "Recordation Tax Premium" went into effect in 2008. Bill 15-16, enacted on May 18,
2016, increased the Premium rate from $1.55 to $2.30/$500. Unlike the two elements of the base
rate paid on all transactions, the Premium applies only to the cost of a property or a refinancing
that is more than $500,000. Half of the proceeds from the Premium are allocated to County
Government capital projects (i.e., capital projects of departments in the Executive Branch); the
other half is for rent assistance for low and moderate income households.
Bill 10-17 would reduce the Premium for transactions that are more than $500,000 but less
than $1,000,000 from 2.30 to $1.55/$500. The Bill would increase the Premium for transactions
that are more than $1,000,000 but less than $2,000,000 from $2.30 to $2.55/$500. The Bill would
also increase the Premium for transactions that are more than $2,000,000 from $2.30 to
$3.55/$500.
Public Hearing
The lone speaker, Peg Mancuso, representing the Greater Capital Area Association of
Realtors, supported the Bill to the extent it lowers the premium recordation tax rate on transactions
greater than $500,000 and less than $1 million. See ©5-6. Ms. Mancuso also recommended that
the Bill be amended to lower all recordation tax rates. The Apartment and Office Building
Association of Metropolitan Washington (AOBA) submitted written testimony opposing an
increase in the recordation tax rates for commercial transactions greater than $1,000,000. See ©7-
12.
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May 4 GO Worksession
Councilmember Elrich also attended the worksession. Alex Espinosa, David Platt, and
Mike Coveyou, Department of Finance, represented the Executive Branch. Jacob Sesker, Senior
Legislative Analyst and Robert Drummer, Senior Legislative Attorney, represented the Council
staff. The Committee discussed the need to have a fiscal impact statement for the Bill before
acting. Finance representatives said they expect to have an estimate for the fiscal impact in 1
month. Mr. Elrich indicated that his intent was to make the Bill revenue neutral on the overall
recordation
tax
collected. The Committee agreed to wait for the fiscal impact before acting on the
Bill.
June 22 GO Worksession
Councilmember Elrich also attended the worksession. David Platt, Mike Coveyou, and
Dennis Hetman, Department of Finance, represented the Executive Branch. Mary Beck, 0MB,
also answered questions. Gene Smith, Legislative Analyst and Robert Drummer, Senior
Legislative Attorney, represented the Council staff. The Committee discussed the fiscal impact
statement for the Bill received on June 21. The Committee requested additional information from
Finance, including examples of the recordation tax due at different price points, a breakdown of
commercial and residential transactions greater than $500,000, and the possible tax rates if the
proposed reduction in the premium tax rates only goes up to $750,000.
Issues
1.
What is the fiscal and economic impact of the Bill?
The goal of the Lead Sponsor, Councilmember Elrich, is to change the premium rates so
that transactions valued at more than $1 million would be charged a higher tax rate than
transactions valued at less than $1 million. The intent of the Bill is to make this change without
changing the total amount ofrecordation tax revenue received by the County. However, the tax
rates in the Bill, as introduced, were not verified to be revenue neutral.
Since the May 4 worksession, Finance analyzed State assessment records for multiple years
to determine an estimate of the total revenue. Finance determined that the rates in the Bill, as
introduced, would result in additional revenue of $8,400,000 in FYl 8 and increasing over the next
5 years to $9,430,000 in FY23. See the FEIS at ©13-19. Finance also provided the following
alternative premium rates that would lower the premium rates for transactions less than $1,000,000
and raise the premium rates for transactions greater than $1,000,000:
Current rates
$2.30
$2.30
$2.30
Alternative rates Percent chan2e
$1.55
-32.61%
$2.55
10.87%
$2.75
19.57%
$SOOK to <$1M
$1Mto<$2M
$2M or more
These alternative rates would increase estimated revenue by $2.7 million annually and $16.2
million over 6 years to account for the 10-year average variability of the volatile greater than $2
million tier.
2
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2. Would the Bill increase the volatility of recordation tax revenue received each year?
Recordation tax is charged on real property transactions. The total revenue depends upon
the total number of transactions completed in each fiscal year. Historically, the number of
transactions between $500,000 and $1,000,000 each year varies less than the number of larger
transactions. The table below details the historical percentages for the Bill's proposed divisions
based on sales data from FY09-16. To the extent that more revenue is derived from fewer, larger
commercial transactions, the total revenue received each fiscal year is likely to vary more.
Tier
Percentage of Total
Transactions
78%
18%
4%
Percentage of Total
Premium Tax Revenue
20%
20%
60%
$SOOK to <$IM
$IM to <$2M
$2M or more
Finance concluded that 60% of the premium tax revenue comes from only 4% of the transactions.
3. Technical amendment.
The Bill, as introduced, inadvertently left no premium tax for transactions valued at
$1,000,000 or at $2,000,000. Council staff recommends the following technical amendment to
implement the intent of the Bill:
Amend lines 13-20 as follows:
(2)
if the consideration payable or principal amount of debt secured exceeds
$500,000[,];
®
(fil
an additional [$2.30) $1.55 for each $500 or fraction of $500 of the
amount over $500,000 but less than $1,000,000[,]~
an additional $2.55 for each $500 or fraction of $500 of the amount
equal to or more than [[over]] $1,000,000 but less than $2,000,000;
and
il}
an additional $3.55 for each $500 or fraction of $500 of the amount
equal to or more than [[over]] $2,000,000.
4. Additional information requested
by
the Committee.
a.
The Council staff worked with Finance to prepare sample recordation
tax
amounts
due for different size transactions under both the current rates and the proposed new
premium rates. These charts include percent of the
tax
as sales value and the percent
change in the amount of the
tax
under different scenarios. See the Recordation Tax
Sample Calculations at ©20-21.
3
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b.
Finance calculated potential revenue neutral rates changing the middle tier to begin at
$750,000 instead of $1 million. Finance concluded that keeping the premium rate for
transactions between $500,000 and $750,000 at $1.55 and changing the premium rate
from the current $2.30 to $2.25 for transactions greater than $750,000 up to $2 million
and increasing the premium rate for transactions greater than $2 million from $2.30
to $2.75 would result in the same revenue estimated under current rates over time.
Finance calculated the following alternate rates with the revised tiers.
Tier
$SOOK to <$750K
$750 K to <$2 M
2 Mor more
Current Rate
$2.30
$2.30
$2.30
Finance Suggested
·
Rate
$1.55
$2.25
$2.75
See the Finance Rates Analysis Summary at ©22.
c.
What is the breakdown between commercial and residential transactions in each tier?
Finance reviewed the last 10 years of transactions. Over the last 10 years, the commercial
versus residential split for each tier paying the premium rate was:
Tier
$SOOK to <lM
$1Mto<$2M
$2Mormore
Percent of Residential Transactions
98.4%
96.2%
55.8%
It is important to note that the $2M plus tier is a smaller percentage of a smaller total. There
are on average about 200 transactions in that category versus thousands in the other two. Tier three
is where most of the commercial transactions occur. Very few commercial transactions occur below
the $2 million threshold.
5. What are the policy issues for the Committee?
a.
Should the premium tax rates be split into divisions that create a higher premium tax
for larger transactions?
b.
If
yes:
(1)
how should the tiers be split; and
(2)
what should the tax rate be for each tier?
If
enacted, what should the effective date be? The Bill, as introduced, would take
apply to any transaction occurring on or after September
1,
2017. However, the Bill
c.
4
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was introduced on April 4, 2017 with the expectation that it would be acted on before
the Council finalized the FYl 8 budgets. As discussed earlier, the Committee
concluded that the Bill did not need to be acted on before the budget if the final rates
produced the same estimated revenue as the current rates. However, both Finance and
potential buyers and sellers would need time to either implement or adjust to the new
rates.
Finance requests the Committee to delay the effective date of the Bill, if
enacted, to January 1, 2018.
This packet contains:
Bill 10-17
Legislative Request Report
GCAAR Testimony
AOBA letter
Fiscal and Economic Impact statement
Recordation Tax Sample Calculations
Finance Rates Analysis Summary
F:\LAW\BILLS\1710 Recordation Tax Rates - Arnendments\GO Memo 3.Docx
Circle#
1
4
5
7
13
20
22
5
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Bill No.
----------=-1-=-0-....:.1-=-7_ __
Concerning: Recordation Tax - Rates -
Amendments
Revised: April
7, 2017
Draft No.
~3_ _
Introduced:
April
4, 2017
Expires:
October
4, 2018
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date: _N~o=n~e~------
Ch .
....Ita__,
Laws of Mont. Co.
[year]
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
Lead Sponsor: Councilmember Eirich
Co-sponsor: Councilmember Leventhal
AN ACT
to:
(1)
(2)
modify the recordation
tax
rates levied under state law for certain transactions; and
generally amend the law governing the recordation
tax
By amending
Montgomery County Code
Chapter 52, Taxation
Section 52-16B
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.
10-17
1
Sec.
1.
Section 52-16B is amended as follows:
52-16B. Recordation Tax.
2
3
4
(a)
Rates.
The rates and the allocations of the recordation tax, levied under
Md. Tax-Property Code §§12-101 to 12-118, as amended, are:
(1)
for each $500 or fraction of $500 of consideration payable or of
the principal amount of the debt secured for an instrument of
writing, including the amount of any mortgage or deed of trust
assumed by a grantee;
(A)
$2.08, of which the net revenue must be reserved for and
allocated to the County general fund; and
(B)
5
6
7
8
9
10
11
$2.37, of which the net revenue must be reserved for and
allocated to the cost of capital improvements to schools; and
12
13
14
15
16
17
18
(2)
if the consideration payable or principal amount of debt secured
exceeds $500,000[,t
(A)
an additional [$2.30) $1.55 for each $500 or fraction of$500
of the amount over $500,000 but less than $1,000,000[.J~
_(fil
an additional $2.55 for each $500 or fraction of$500 of the
amount over $1,000,000 but less than $2,000,000; and
19
.(Q
an additional $3.55 for each $500 or fraction of $500 of the
amount over $2,000,000.
20
21
22
23
24
25
ill
The net revenue from the premiums payable under paragraph
ill
[of which the net revenue] must be reserved for and allocated
equally to:
(A)
the cost of County government capital improvements; and
rent assistance for low and moderate income households,
which must not be used to supplant any otherwise available
funds.
(B)
26
27
0
f:\lawlbills\1710 recordation tax rates-amendments\bill 3.docx
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BILL No. 10-17
28
(b)
Exemption.
The first $100,000 of the consideration payable on the
29
30
31
32
33
34
35
36
conveyance of any owner-occupied residential property is exempt from
the recordation tax if the buyer of that property is an individual and
intends to use the property as the buyer's principal residence by actually
occupying the residence for at least 7 months of the 12-month period
immediately after the property is conveyed.
Sec. 2. Effective Date.
This Act must apply to any transaction which occurs on or after September 1,
2017.
Approved:
37
38
Roger Berliner, President, County Council
Date
39
Approved:
40
Isiah Leggett, County Executive
41
Date
This is a correct copy ofCouncil action.
42
Linda M. Lauer, Clerk of the Council
Date
f:\law\bills\
1710
recordation tax rates
-
amendments\bill 3.docx
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LEGISLATIVE REQUEST REPORT
Bill 10-17
Recordation Tax
-
Rates
--
Amendments
DESCRIPTION:
Bill 10-17 would modify the recordation tax rates levied under state
law for transactions that are more than $500,000.
The premium rate for transactions that are more than $500,000 but
less than $1,000,000 is high. The revenue loss from lowering this
premium rate can be made up by increasing the premium rate for
transactions that are more than $1,000,000.
The goal is to lower the premium rate for transactions that are less
than $1,000,000.
PROBLEM:
GOALSAND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
Office of Management and Budget, Finance
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
To be determined.
NIA
NI
A
Robert H. Drummer, Senior Legislative Attorney
APPLICATION
WITHIN
MUNICIPALITIES:
applicable
PENALTIES:
NI
A
F:\LA W\BILLS\1710 Recordation Tax Rates - Amendments\LRR.Docx
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TESTIMONY OF
THE GREATER CAPITAL AREA ASSOCIATION OF REALTORS®
BEFORE THE MONTGOMERY COUNTY COUNCIL ON
Bill 10-17,
"Recordation Tax-Rates
and
Amendments"
April 25, 2017
This testimony is on behalf of the Greater Capital Area Association of REALTORS®. GCAAR
represents nearly 10,000 REALTORS® and real estate professionals. We are also the voice for
thousands
of buyers, sellers and homeowners. GCAAR appreciates the Council revisiting the
issue of possible ways to lower recordation taxes, and we support lowering recordation taxes
from $500k to under $1 m within Bill 10-17.
1
Overall, GCAAR maintains a commitment to the inherent value of homeownership and the
consistent positive force it has in our communities. We believe homeownership is the best
opportunity for people to securely plant their roots into Montgomery County, maintain stability
and gain financial freedom. In the long term, homeowners across the economic spectrum
\\-1ll
contribute immensely to Montgomery County's revenue streams via the taxes they pay and local
businesses they support. This leads to greater resources for social services, transportation and
schools-to name a few.
Unfortunately, the rising cost of housing in the County have made it unaffordable for most
residents to purchase a home, especially in comparison to other local jurisdictions. GCAAR has
been seriously concerned that instead making homeownership viable, all we have seen over the
past
few
years are initiatives that move us further from this goal.
GCAAR must emphasize, if the recordation tax rate structure has more than the current number of tiers,
this may pose certain technical necessities that would need to be put in place by our industry to properly
administer the rates. GCAAR would like to have a more detailed conversation about ensuring accurate
implementation of a multi-tiered system with the Council and members of the real estate community on these
technical issues such as a later implementation date
to
allow the industry to make any necessary changes.
1
0
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Specifically, I caine before you last when this Council pushed through a nearly $200 million
recordation tax increase on homeownership in less than a month's time. To make matters worse,
the County's recordation taxes were already ainongst the
highest in the country.
That surge in
tax
rates presented immediate challenges to residents across the County, particularly those first-
time homebuyers who already found themselves having immense difficulty putting together their
final closing costs.
Today, we find ourselves evaluating a Bill whose effect would be to nominally reduce and return
the recordation tax rate to its' previous level prior to last year's increase for transactions more
than $500,000 but less than $1,000,000. We approximate this group the measure would reduce,:.
their recordation tax costs
by
a couple hundred dollars.
As we often stress, while a few hundred dollars may not seem like much for lawmakers dealing :
with millions of tax dollars, this adds up very quickly for working fainilies. In fact, the down
payment is often the greatest impediment for homeownership. GCAAR is supportive of the part
of Bill 10-17 that lowers recordation taxes from $500k to under$ Im because we firmly believe••
this relatively small benefit could have a worthy impact. The folks who are now tapping info the
last of their savings could find relief in saving even a small ainount of additional dollars.
Further, we recommend lowering recordation taxes for future homeowners across the board.
GCMR is able and willing to sit down and work with you and any another other interested
school stakeholders on finding funding mechanisms for our most critical priorities such as
MCPS.
If
the County needs more revenue, we can all work together on broader solutions.
In conclusion, GCAAR respectfully asks you to lower the high cost of the Montgomery County's
recordation taxes to make homeownership more attainable. Specifically, we believe returning
the rate to what it was previously for'recordation taxes at the $500k to under $Im price point is a
positive start.
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TO:
Councilmember Nancy Navarro, Chair,
Committee on Government Operations and Fiscal Policy
Councilmember Sidney Katz, Member
Committee on Government Operations and Fiscal Policy
Councilmember Hans Riemer, Member
Committee on Government Operations and Fiscal Policy
FROM:
Nicola Y. Whiteman, Senior Vice President of Government Affairs
Apartment and Office Building Association of Metropolitan Washington
May 2,2017
Oppose Bill 10-17 Recordation Tax
-
Rates -Amendments
DATE:
RE:
The Apartment and Office Building Association of Metropolitan Washington (AOBA) is a non-
profit trade association whose members include owners and managers of more than 112,000
apartment units and over 33 million square feet of office space in suburban Maryland, of which
more than
57,000 apartment units and over 24 million square feet of office space are located
in Montgomery County.
AOBA strongly opposes 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.
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.
(jJ
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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 ofrental housing.
Rising interest rates and higher transaction costs:
AOBA cautions 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.
See 14
Million Households "Priced Out" By Government Regulation, "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%.
(D
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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 Ql Office Market, Banister, April 4, 2017.
htt_ps://,vw,v.h
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nfv,.:a sh ington-dc/ncws/ officelfi ve-takc:iwa
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"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."
How will the fairly new Montgomery County Economic Development Corporation, whose
mission includes business retention and expansion and removing barriers, respond to existing
and prospective businesses concerned about seemingly annual tax increases in the County?
1
Will
businesses continue to "Choose Montgomery?" Will they be able to afford to "Choose
Montgomery?"
THE PERFECT STORM:
Higher Recordation Tax and Troubled Financial Markets
Understanding the full impact of the proposed increase requires the Council to first carefully
consider how many commercial loans are structured as well as anticipated developments in the
financial market. First as noted, many of these loans are for 7 to 10-year terms, thus making
refinancing and exposure to a high recordation tax rate a frequent occurrence. Secondly, the
proposed increase comes at a time when financial markets are predicting additional challenges
ahead due to the storm brewing around commercial mortgage backed securities (CMBS) loans.
2
1ht1ps:l/tl1i11LirH•1.·o.ro1n!:1h11.1t
1n,y,k\vho-wc-are/ "Business retention and expansion efforts continue to be our
priority. We are engaging with businesses across the county to add value and remove barriers as needed,
knowing that the greatest job growth will be generated by those businesses already located in the region."
2
Real estate's ticking bomb: Who gets hurt. CNBC, Olick, Diana, March 10 2016 ("Commercial mortgage backed
securities (CMBS) are bonds sold to investors"); US Commercial Mortgage Backed Securities FAQs ("CMBS are
bonds, which are backed by commercial real estate collateral."); Refinancing CMBS loans could prove difficult,
Greater Fort Wayne Business Weekly, Lipp, Linda, March 30, 2017 ("While $6.7 billion in maturing CMBS debt is
(j)
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The Council should be mindful that many of these CMBS loans, which were hugely popular in
2007 and many of which are IO-year balloon mortgages, were due in the fourth quarter of 2016
and 2017 for refinancing.
3
Given the strict defeasance and prepayment penalties, the only time
to refinance is within the narrow 6-month period before maturation. A second, substantial
increase to the County's recordation taxes could stand in the way of, or change the structure of,
refinances for these commercial loans, and lead to catastrophic default.
If
unable to refinance
these properties, building owners may be forced to sell properties and at prices far below the loan
amount.
This will result in lower recordation tax collections and revenues earmarked for the
various capital projects and rental assistance programs.
AOBA also cautions the Council that owners planning to refinance CBMS loans already face a
challenged financial market. CMBS loans are essentially bonds and some industry analysts are
questioning whether there will be sufficient investor demand for these loans.
4
Additionally, the
ability to refinance assumes an owner has sufficient equity in a property. Those properties which
have not been able to sufficiently increase rents and income and thus increase property values
will find refinancing much more challenging.
5
We know, given the current state of the
coming due this month, the figure is minuscule compared to what's coming.
Over the next six months alone, about
$61. 1 billion in debt will come
due.
But almost 6 percent of the maturing debt is past due on payment and 10.5
percent is in special servicing, according to data from market research firm Trepp. Difficulty in refinancing is the
key culprit.
Tighter regulations in the financial markets have made it more difficult and more expensive to
refinance these loans,
said attorney Daniel Martin, a partner in McDermott Will
&
Emery in New York. Loans that
were originated more than 10 years ago may have been at 75 percent to 80 percent, loan to value. It's much harder to
borrow that much today.")
3
Projected CMBS Issuance for 2017 Under $80 Billion, Bell, Diana, Jan 19, 2017 ("While 2016 brought choppiness
to the CMBS market, rising interest rates and risk retention rules in 2017 may pose headwinds to the sector this year,
sources say .... Rising interest rates will be a concern for CMBS financiers watching their bottom line ...
Approximately 30 percent of $47 billion in Fitch-rated CMBS loans maturing this year could default. ... The firm
says expects "significant delinquencies" in those loans, citing high leverage levels .... About $112 billion in CMBS
loans is scheduled to come due in 2017, according to research firm Trepp, with another $17.6 billion slated to
mature in 2018. Office and retail loans account for the bulk of the balances, Trepp analysts say"); Banks to Fed:
We've Tightened Commercial Real Estate Lending, Drake, Martin, May 6, 2016 ("CMBS is also facing a looming
maturity wall - i.e. the wave of securitized loans that will need refinancing over the next six months."); Real estate's
ticking bomb: Who gets hurt ("CMBS tends to have a IO-year life span, at which point the debt matures and real
estate owners
have
to refinance the loans.")
4
Real estate's ticking bomb: Who gets hurt ("CMBS tend to have a IO-year life span, at which point the debt matures
and real estate owners have to refinance the loans. These maturities are expected to surpass $400 billion annually
this year and in 2017, according to CBRE, a real estate services firm. That is $100 billion more than last year.
CBRE
"conservatively" estimates that 18 percent of loans this year and 29 percent of loans next year could have problems
refinancing, due to lack of investor demand for the bonds. This translates into about $43 billion in potentially
troubled loans over these two years."
"We think some of these are going to be remonetized through asset sales, but
some will certainly hit the foreclosure list ... ""); Coming Due: How CMBS Market Will Handle $300B Maturing
2015-2017, January 7, 2015, Colomer, Nora ("The amount of commercial mortgage debt maturing is set to spike this
year, when loans taken out during the height of the real estate bubble start coming due.
Between 2015 and 20 I
7,
more than $300 billion will need to be refinanced.")
5
Wall of CMBS Loan Maturities Shrinks, Remains Daunting, Commercial RealEstate Direct, January 19, 2016,
("Healthy real estate market fundamentals have enabled many owners to increase rents and income, which has
contributed to an increase in property values and made refinancing easier than it otherwise would be. Borrowers
have taken advantage of the strong market fundamentals, the availability of debt capital and relatively low interest
rates to defease CMBS loans and refinance properties before their underlying loans mature.") While owners of
challenged properties will still be able to refinance a property, they might face, for example, higher interest rates.
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commercial office market in Montgomery County, that this is a reality for many property
owners. In other words - the perfect storm.
BACKGROUND
..
Ql 2017
JLLREPORT-SUBURBAN,
MD
VACANCY RATES
6
"No office buildings were under construction in Montgomery County and only one office
development was under construction in the Suburban Maryland region in the first quarter. No
office buildings will be completed in 2017; the next office building isn't scheduled to deliver
until the third quarter of 2018."
7
Class C
Submarket
Total Vacancy
Class A
Class B
16.3%
17.3%
15.4%
Montgomery County
16.3%
7.5%
11.4%
15.8%
9.5%
Bethesda CBD
NIA
42.3%
28.1%
26.4%
Bethesda
-
Rock Sprine
NIA
9.2%
NIA
9.2%
Burtonsville
NIA
3.9%
16.7%
Chevy Chase
11.3%
3.5%
3.5%
NIA
NIA
Clarksbure
20.6%
13.7%
13.7%
13.3%
Gaithersbure
26.1%
15.8%
14.5%
15.8%
Germantown
2.5%
11.7%
9.6%
NIA
Kensineton
NIA
15.3%
North Rockville
9.9%
6.6%
10.9%
Shady Grove
18.6%
17.5%
21.9%
28.5%
3.4%
Park Potomac/Tower Oaks
25.1%
27.4%
16.6%
21.9%
9.3%
20%
Rockville Pike Corridor
14.5%
Downtown Silver Sprine
14.6%
11.8%
20.7%
North Silver Spring
16.5%
14.9%
NIA
23.8%
Wheaton
25.9%
NIA
25.9%
NIA
. ..
MONTGOMERY COUNTY COMPREHENSIVE ECONOMIC STRATEGY
MARCH2016
"It
is clear, however, that diversifying the County's business sector portfolio beyond
those tied to the federal government while exploring new opportunities to better leverage
federal institutions for private sector investments will strengthen the economy. For this to
happen, a full commitment to private sector success is required. Businesses must not be
seen as an afterthought; the County must wholeheartedly embrace the success of its
private sector. This must involve existing businesses, ensuring that they are satisfied with
the County's commitment to them and to their expansion.")
Q 1 20 I 7 JLL Report - Suburban, MD Vacancy Rates, http://www. us.j II .com/united-states/en-us/Research/US-
Suburban%20Maryland-Office-Insight-Q 1-20 l 7-JLL.pdf?705bc663-0f4c-4170-8ce8-5a8d7b0cc94d
7
QI 2017 JLLReport-Suburban,MDVacancyRates,p. l
6
@)
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STRATEGY 1.1.4. Tax and Regulatory Policies: Ensure County Tax and
Regulatory Polices are Supportive of Business Attraction and Expansion, Especially
as They Affect Targeted Markets.
SOBERING NEWS
State of the Commercial Real Estate Market in Montgomery County
Excerpts: Montgomery County Planning Department's June 2015 Office Market Assessment
"High vacancies also threaten the financial viability of individual buildings.
They pressure
each landlord who has vacant space to lower rents or increase concession packages in order to
lure tenants, undercutting the building's cashflow and thus its market value.
As more buildings
are affected, these depressed values could have negative implications for the property tax
base of the county, the City of Gaithersburg, and the City of Rockville."
Page
I.
'Projected occupancy rates do not suggest any near-term relief in these problems.
Only
significant increases in office-based employment, office building demolitions or conversions to
other uses could make a dent in the county's nearly 11 million square-foot vacant office
inventory." Page 2.
®
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· - - - -
..
·····-······--···
ROCKVILLE, MARYLAND
MEMORANDUM
June
21, 2017
TO:
Roger Berliner, President, County Council
~
FROM:
SUBJECT:
Jennifer
A.
Hughes, Director, Office of Management
~~tf}'
·~;..,.»
Alexandre
A.
Espinosa, Director, Department of F i n a n ~
f
.
FEIS for Bill 10-17, Recordation Tax - Rates - Amendments
Please find attached the fiscal and economic impact statements for the above-
referenced legislations.
JAH:fz
cc: Bonnie Kirkland, Assistant Chief Administrative Officer
Lisa Austin, Offices of the County Executive
Joy Nunni, Special Assistant to the County Executive
Patrick Lacefield, Director, Public Infonnation Office
David Platt, Department of Finance
Dennis Hetman, Department of Finance
Jane Mukira, Office of Management and Budget
@
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Fiscal Impact Statement
Bill 10-17
-
Recordation Tax Rates
-
Amendments
1. Legislative Summary
The "Recordation Tax Premium" went into effect in 2008. The
tax
premium applies to
property sales or refinancing transactions greater than $500,000. Bill 15-16, enacted on
May 18, 2016, increased the premium rate from $1.55 to $2.30/$500 in the sale. Half of
the proceeds from the premium are allocated to County Government capital projects (i.e.,
capital projects of departments in the Executive Branch); the other half is for rent
assistance for low and moderate income households.
Bill I 0-17 would reduce the premium for transactions that are more than $500,000 but
less than $1,000,000 from $2.30 to $1.55/$500 (33% reduction). The bill would increase
the premium for transactions that are more than $1,000,000 but less than $2,000,000 from
$2.30 to $2.55/$500 (11 % increase). The bill would also increase the premium for
transactions that are more than $2,000,000 from $2.30 to $3.55/$500 (54% increase).
2.
An estimate of changes in County revenues and expenditures regardless of whether
the revenues or expenditures are assumed in the recommended or approved budget.
Includes source of information, assumptions, and methodologies used.
Sales data was analyzed from the Maryland Department of Assessments and Taxation for
the past ten fiscal years from fiscal year 2008 through fiscal year 2017. The analysis
quantified the volatility of the number of transactions occurring in each tier and the
number of taxable units charged historically.
The share of realized sale prices from the past ten fiscal years yields the following
blended commercial and residential percentages for the taxes collected annually for each
tier:
Bill 10-17 Proposed Tiers
$500,000-$1m
$1m-$2m
>$2m
Total
Proportion of premium collected
(ten-year average)
19.6%
20.8%
59.6%
100%
Aligning these percentages to the FY18 projected recordation
tax
premium revenue of
$29,722,676 yields an estimated increase of $8,402,622 in the amount likely to be
collected in FYl 8. The percentages or shares of sales value for each of the three tiers is
expected to change over the years affecting the fiscal impact estimates.
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3. Revenue and expenditure estimates covering at least the next 6 fiscal years.
It is estimated that revenues will increase by $53,728,922 over the next six years
assuming the percentages of the taxes collected for each tier maintain their percentage
averages over the past decade:
FY2018
FY2019
current
$29,722,676 . $30,456,841
$ 8,402,622 . $ 8,610,171
FY2020
$31,199,015
$ 8,819,985
FY2021
$31,959,906
$ 9,035,088
FY2022
$33,358,698
$ 9,430,528
FY2023
$33,358,698
proposed-=--$38---'-,1_2.-:.5,_29_8_$:....3--'9,'-067~,0_12_--'$'-40--','-01_9_,_,ooo_---'-$_40...:.,_994___._,994_---=-$_42_,_,7_8...:9,'-22_6_$ 4_2....
__ ,7_8...:9,_22_6 _
_ t_o_ta_l_6y.,__r_
$
9,430,528
$53,728,922
Bill 10-17 increases the recordation tax premium rate for properties above $1 million.
Properties in that category have experienced a high degree of volatility in sales value and
volume. Volatility could increase further with the increased recordation tax premium
rates. Moreover, the number of properties subject to the premium is a small share of the
total recordation tax base (less than 22% historically), which adds to the volatility. As a
proxy for the volatility, the average absolute deviation of properties valued over $2
million is $2.7 million annually over the past ten years assuming current rates and $3.5
million assuming the proposed $3.55/$500.
The six-year estimates are based on Bill
IO-I
7's currently proposed recordation tax
premium rates:
Current Rates
$500,000-$1m
$1m -$2m
>$2m
$2.30
$2.30
$2.30
Bill 10-17 rates
$1.55
$2.55
$3.55
Percent Change
-32.61%
10.87%
54.35%
The intent of Bill 10-17 is that it would be revenue neutral. Revenue neutrality is
impossible to achieve given the number of macroeconomic and microeconomic variables
fluctuating over the course of the estimated calculations. However, the following rates
would achieve closer to revenue neutral estimates for FYI 8 and beyond:
Current Rates Alternative rates Percent Change
$2.30
$500,000-$1m
$1.55
-32.61%
$1m-$2m
>$2m
$2.30
$2.30
$2.55
$2.75
10.87%
19.57%
The alternative rates allow for one standard deviation worth (68% of values within the
mean) of excess revenue or approximately $2. 7 million annually. Over the six-year time
horizon this amounts to $16.2 million to account for the ten-year average variability of
the volatile $2 million plus tier. There are no additional expenditures as a result of the
bill over the six-year period.
4.
An actuarial analysis through the entire amortization period for each bill that would
affect retiree pension or group insurance costs.
Not applicable.
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5. An estimate of expenditures related to County's information technology (IT)
systems, including Enterprise Resource Planning (ERP) systems.
Not applicable.
6. Later actions that may affect future revenue and expenditures if the bill authorizes
future spending.
Bill 10-1 7 does not authorize future expenditures.
7.
An estimate
of
the staff time needed to implement the bill.
It is estimated that there will be some minimal staff time necessary to implement this bill
to accommodate changes to accounting information.
8. An explanation of how the addition of new staff responsibilities would affect other
duties.
The additional workload can be absorbed within the department's current resources.
9. An estimate of costs when an additional appropriation is needed.
No additional appropriation is needed.
10. A description of any variable that could affect revenue and cost estimates.
See number 3.
11. Ranges of revenue or expenditures that are uncertain or difficult to project.
See number 3.
12.
If
a
bill is likely to have no fiscal impact, why that
is
the case.
Not applicable.
13. Other fiscal impacts or comments.
Not applicable.
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14.
The following contributed to and concurred with this analysis:
Dennis Hetman, Department of Finance
David Platt, Department of Finance
Jane
Mukira,
Office of Management and Budget
Date
(o
I
2(
I
7-
I
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Economic Impact Statement
Bill
10-17,
Recordation Tax
-
Rates -Amendments
Background:
This legislation would reduce the Recordation Tax Premium (Premium) from $2.30 to
$1.55/$500 for transactions that are over $500,000 but less than $1,000,000.
Bill I
0-17 would
also increase the Premium from $2.30 to $2.55/$500 for transactions equal to or more than
$1,000,000 but less than $2,000,000 and would increase the Premium from $2.30 to $3.55/$500
for transactions equal to or more than $2,000,000.
1. The sources
of
information, assumptions, and methodologies used.
Source of information is monthly sales data from the Maryland Department of Assessments
and Ta,xation. The Department of Finance (Finance) analyzed the real estate sales data from
fiscal year 2008 to fiscal year 2017 in preparation for the economic impact statement. The
analysis included the value of sales for each of the three categories referenced in Bill 10-17.
Finance calculated the percentage of sales value for each of the three categories as a share of
the total sales value.
2.
A description
of
any variable that could affect the economic impact estimates.
Since Finance used data from fiscal year 2008 to fiscal year 2017, the percentages or shares
of total sales for each of three categories can be expected to change over the forecast period
although the degree of that change cannot be accurately estimated. Therefore, such a change
would affect the economic impact estimates. For example,
Bill l
0-17 increases the Premium
tax rate for properties equal to or more than $1 million. Properties in these two categories
have experienced a higher degree of volatility in sales compared to sales greater than
$500,000 but less than $1 million and, therefore, revenue volatility can be expected to
increase with the increase in the tax rates for the two high-end categories. For example, the
average absolute deviation of properties equal to or more than $1,000,000 but less than
$2,000,000 is $440,000 annually over the past ten years and the average absolute deviation of
properties equal to or more than $2,000,000 is $2,700,000 annually over the past ten years
under the current rate structure. For properties equal to or more than $2,000,000, the average
absolute deviation is $3,500,000 based on the proposed rate of $3.55/$500
3.
The Bill's positive
or
negative effect, if any on employment, spending, savings,
investment, incomes, and property values in the County.
· Due to the combination of lower premium recordation
tax
rate for properties under $1 million
but a higher rate for properties at $1 million and above, there may be positive economic
impact for the former but a negative economic impact for the latter. The initial analysis
confirms that revenues from the category under $1 million would be reduced which may
stimulate more economic activity in that much larger category. However, that same analysis
also confirms that revenues would increase sharply for the much smaller category, in terms
of number of transactions, starting at $1 million, which may have a deleterious economic
impact for that segment of the real estate market.
It
is not possible to accurately estimate to
Page
1
of 2
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Economic Impact Statement
Bill 10-17,
Recordation
Tax
-
Rates
-Amendments
,,,,,,.---
what degree these two impacts will offset each other and therefore it is uncertain whether Bill
10-17 would have
an
economic impact on the County's economy.
4.
If
a Bill
is
likely to have no economic impact, why
is
that the case?
See
#4.
S. The following contributed to
or
concurred with this analysis:
David Platt, Dennis
Hetman,
and Robert Hagedoorn,
Finance.
Alexandre A. Esfdsa,
Director
Department of
Finance
Date
Page 2 of2
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Recordation Tax Sample Calculations
The County's recordation tax has three components. Below is a table comparing the current recordation
tax rates for each component and the rates suggested by the Department of Finance (DOF) after analyzing
the fiscal impact from Bill 10-1 7.
Recordation Tax Component
Base
School Capital Improvements
Premium
$500,000 to $1,000,000
$1,000,000 to $2,000,000
Greater than $2,000,000
Current Rate
$2.08 per $500
$2.37 per $500
$2.30 per $500
$2.30 per $500
$2.30 per $500
Proposed Rate
$2.08 per $500
$2.37 per $500
$ l.55 per $500
$2.55 per $500
$2.75 per $500
Change
$0.00
$0.00
- $0.75
+ $0.25
+$0.45
Notes:
1) The recordation tax applies to each $500 or fraction of $500 of consideration payable or of the principal
amount ofthe debt securedfor an instrument ofwriting. When refinancing, the recordation tax only applies to the
principal that exceeds the unpaid principal of the existing mortgage.
2) The.first $100,000 of the sales value is exemptfrom the recordation tax/or any property that is used as a
primary residence.
3) The premium component applies only to the portion of the sales value that exceeds $500,000.
Below is a table that details the amount of tax for each component of the recordation tax at certain sales
values based on the current rates.
Recordation Tax Components - Current Rates
Base
School Capital
Premium
Improvements
$1,290
$1,469
$0
$2,704
$3,081
$1,150
$4,576
$5,214
$3,220
$9,984
$11,376
$9,200
$208,000
$237,000
$227,700
$438,880
$500,070
$483,000
Sales Value
$410,000
$750,000
$1,200,000
$2,500,000
$50,000,000
$105,500,000
Total
$2,759
$6,935
$13,010
$30,560
$672,700
$1,421,950
Percent of Tax
as Sales Value
0.7%
0.9%
1.1%
1.2%
1.3%
1.3%
Notes:
1) $410,000 was the median sales price in the County for FY16, and $105.5 million was the sales price of the
Apex property in Bethesda in 2015.
2) The.first $100,000 exemption was not considered for the $50 million and the $105.5 million example because
these properties are considered commercial.
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Below is a table that details the amount of tax for each component of the recordation tax at certain sales
values based on DOF's suggested rates.
Recordation Tax Components - Sue:e:ested Rates
Premium
Base
School Capital
Improvements
$1,290
$1,469
$0
$2,704
$3,081
$775
$5,214
$3,570
$4,576
$11,000
$9,984
$11,376
$208,000
$237,000
$272,250
$438,880
$500,070
$577,500
Sales Value
$410,000
$750,000
$1,200,000
$2,500,000
$50,000,000
$105,500,000
Total
$2,759
$6,560
$13,360
$32,360
$717,250
$1,516,450
Percent of Tax
as Sales Value
0.7%
0.9%
1.1%
1.3%
1.4%
1.4%
Notes:
1) $410,000 was the median sales price in the County for FY16, and $105.5 million was the sales price of the
Apex property in Bethesda in 2015.
2) The first $100,000 exemption was not considered for the $50 million and the $105.5 million example because
these properties are considered commercial.
Below is a summary table comparing the differences in total recordation tax collected based on the
current rates and DOF's suggested rates.
Sales Value
$410,000
$750,000
$1,200,000
$2,500,000
$50,000,000
$105,500,000
Current Rates
Total Tax Collected
$2,759
$6,935
$13,010
$30,560
$672,700
$1,421,950
Suggested Rates
Total Tax Collected
$2,759
$6,560
$13,360
$32,360
$717,250
$1,516,450
Difference
$0
-$375
$350
$1,800
$44,550
$94,500
Percent
Difference
0.0%
-5.4%
2.7%
5.9%
6.6%
6.6%
F:\LA W\BILLS\l 710 Recordation Tax Rates - Amendments\Updated Version Of Recordation Tax Sample Calculations.Docx
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Bill 10-17 Recordation Tax- Rates Analysis Summary
Bill 10-17 would reduce the premium for transactions that are more than $500,000 but less
than $1 million from 2.30 to $1.55/$500 {33% reduction) and increase the premium for
transactions that are more than $1 million but less than $2 million from $2.30 to $2.55/$500
(11% increase). The bill would also increase the premium for transactions that are more than
$2M from $2.30 to $3.55/$500 (54% increase).
1.)
Perform same analysis with the following bands: $SOOK to $7SOK, $7SOK to $2M, $2M
plus
2.) Provide scenario estimated tax for different valued properties under the current rates
versus the proposed
Problems to solve remain the same:
1.) Quantify the volatility across two dimensions with respect to number of transactions
occurring and the number of taxable units charged historically
2.) Suggest rates that would theoretically keep the changes as close to revenue neutral as
possible with the understanding that it cannot be perfectly neutral given the number of
fluctuating micro and macro variables at play
Conclusions:
1.)
Shares for new bands continue to be consistent over ten years with minimal variability:
$SOOK to $1M - 78%
$1M to $2M
$2M plus
-18%
- 4%
$SOOK to $7SOK - 56%
$7SOK to $2M - 40%
$2M plus
- 4%
2.) Estimated taxable$ shares have more variability over the same time horizon but
average out to (shift 11% to second tier):
$SOOK to $1M - 20%
$1M to $2M - 20%
$2M plus
- 60%
$SOOK to $7SOK - 9%
$7SOK to $2M - 31%
$2M plus
- 60%
Under the new $7SOK tier, additional homes will be included in the second tier where
rates are increasing by 11% therefore intuitively the estimated net revenue to the
County annually will increase by approximately $1M per year to $3.8 million (or one
standard deviation plus $1M) from the mean over the ten-year period for the most
volatile $2 million plus tier
A rate of $2.25 (2% decrease from current) for the middle $7SOK to $2M tier would
achieve similar one standard deviation revenue neutrality
Scenario differentials scale from a 2.7% increase in total tax for a $1.2M properties up to
6.6% increase for $SOM and above
@