GO Item 1
May 4,2017
Worksession
ADDENDUM
MEMORANDUM
May 2,2017
TO:
Government Operations and Fiscal Policy Committee
FROM:
SUBJECT:
Robert H. Drummer, Senior Legislative
Attorney
!:d.
Circle #
1
Worksession-Addendum:
Bill 10-17, Recordation Tax - Rates - Amendments
We received extensive comments from the Apartment and Office Building Association of
Metropolitan Washington (AOBA) opposing the Bill after the packet went to print. See the AOBA
comments at © 1.
This packet contains:
AOBA Opposition to Bill 10-17
F:\LAw\BILLS\17 I 0 Recordation Tax Rates - Amendrnents\GO-Addendurn Merno.Docx
 PDF to HTML - Convert PDF files to HTML files
-
MtT-OOPOlJTAN WASHINGTON
QUJtDlNG ASSOCIATION
Of
Al"AR7Mf.Nr" A"ID OH:-CF.­
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
_______
areya!ll~<L~11}Qr~ th~n
!Lmillion.
J~Io~ert)'_o-'Yn(!r~c~uld_lhusfa~~, for_~xamRle~stagge
..
L~K_
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 ajust 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. AOSA supports across the board tax enhancements that are universally applicable
but cannot support a proposed structure that intentionally targets businesses.
 PDF to HTML - Convert PDF files to HTML files
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
goals and
primarily
CLOSED
recordation tax increase will undermine the County's economic development
serve as a disincentive to needed investment in the County. Annual tax increases
borne by businesses sends the wrong signal that MONTGOMERY COUNTY IS
FOR BUSINESS.
T AX INCREASES UNDERMINE THE COUNTY'S AFFORDABLE HOUSING GOALS
The proposal will increase the costs associated with the purchase and sale of rental housing.
Rising interest rates and higher transaction costs: AOBA 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
(Le. 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
.... houslog-b-y increasing thi-coSts-of pr()ducing new-a-nd- presernogexlsting-Iiousfng: 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%.
 PDF to HTML - Convert PDF files to HTML files
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
Q
I Office Market, Banister, April 4, 2017.
hour,:',:/
!\V\\~\::hi,~~,}(,)_~
.com/wash
i.!~gton-=-~~:/news/offtcc!fi
vc-
taken \Va vs-from-dcs-q 1
-0
ffic_c-m<l
rkct­
,::::::,~!3'?
"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
___reiiRancing_an.d~XP-QSun:Uo_a_high
.recordatioo_tax_rate_lLfr.e.ql!enLQccurtenc_t:..
SecQn91y,Jh~
__
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
11!l!1";:;'lilin
l,
i'IOI.'O,l'Om'3bout-IllI.'l'lk'"v],n-,'fc-:w;,f
"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."
2Real estate's ticking bomb: Who gets hurt. CNBC, Olick, Diana, March
102016
("Commercial mortgage backed
securities (CMBS) are bonds sold to investors"); US Commercial Mortgage Backed Securities FAOs ("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
CD
 PDF to HTML - Convert PDF files to HTML files
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 of2016
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 lO years ago may have been at 75 percent to 80 percent, loan to value. It's much harder to
borrow that much today.")
3Projected 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 10-year life span, at which point the debt matures and real
estate owners
have
to refinance the loans.")
4Real estate's ticking bomb: Who gets hurt ("CMBS tend to have a 10-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 ofloans this year and
29
percent ofloans 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 owi,.'ihese two years."
"We think some ofthesearegoingio be remonetlzeatlirough 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 2017,
more than $300 billion will need to be refinanced.")
5Wall 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.
o
 PDF to HTML - Convert PDF files to HTML files
commercial office market in Montgomery County, that this is a reality for many property
owners. In other words - the perfect storm.
BACKGROUND
Q12017 JLL
REPORT ­ SUBURBAN,
MD
VACANCY RATES6
.....
. i
.
"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 of2018.,,7
Submarket
Class C
Total Vacancy
Class B
Class A
Montgomery County
16.3%
15.4%
16.3%
17.3%
15.8%
Bethesda CBD
9.5%
7.5%
11.4%
N/A
28.1%
42.3%
Bethesda - Rock Spring
26.4%
N/A
Burtonsville
9.2%
N/A
9.2%
N/A
ChC!)' Chase
11.3%
16.7%
3.9%
N/A
Clarksburg
N/A
3.5%
3.5%
Gaithersburg
13.7%
13.3%
20.6%
13.7%
Germantown
15.8%
15.8%
26.1%
14.5%
Kensington
9.6%
N/A
2.5%
11.7%
North Rockville
9.9%
N/A
6.6%
15.3%
Shady Grove
18.6%
21.9%
10.9%
17.5%
25.1%
27.4%
28.5%
3.4%
Park Potomactrower Oaks
Rockville Pike Corridor
16.6%
20%
21.9%
9.3%
Downtown Silver Spring
14.6%
11.8%
20.7%
14.5%
North Silver Spring
16.5%
N/A
14.9%
23.8%
Wheaton
25.9%
N/A
N/A
25.9%
MONTGOMERY COUNTY COMPREHENSIVE ECONOMIC STRATEGY
MARCH 2016
• "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.")
6Q 1 2017 JLL Report - Suburban, MD Vacancy Rates, http://www.us.jll.com/united-states/en-us/ResearchIUS­
Suburban%20Maryland-Office-Insight-Q 1-20 17-JLL.pdf?705bc663-0f4c-4170-8ce8-5a8d7bOcc94d
7QI 2017 JLL Report- Suburban, MD Vacancy Rates, p. 1
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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 ofthe county, the City of Gaithersburg, and the City of Rockville."
Page 1.
'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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GO Item 1
May 4,2017
Worksession
ADDENDUM
MEMORANDUM
May 2,2017
TO:
Government Operations and Fiscal Policy Committee
FROM:
SUBJECT:
Robert H. Drummer, Senior Legislative
Attorney
!:d.
Circle #
1
Worksession-Addendum:
Bill 10-17, Recordation Tax - Rates - Amendments
We received extensive comments from the Apartment and Office Building Association of
Metropolitan Washington (AOBA) opposing the Bill after the packet went to print. See the AOBA
comments at © 1.
This packet contains:
AOBA Opposition to Bill 10-17
F:\LAw\BILLS\17 I 0 Recordation Tax Rates - Amendrnents\GO-Addendurn Merno.Docx
 PDF to HTML - Convert PDF files to HTML files
-
MtT-OOPOlJTAN WASHINGTON
QUJtDlNG ASSOCIATION
Of
Al"AR7Mf.Nr" A"ID OH:-CF.­
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
_______
areya!ll~<L~11}Qr~ th~n
!Lmillion.
J~Io~ert)'_o-'Yn(!r~c~uld_lhusfa~~, for_~xamRle~stagge
..
L~K_
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 ajust 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. AOSA supports across the board tax enhancements that are universally applicable
but cannot support a proposed structure that intentionally targets businesses.
 PDF to HTML - Convert PDF files to HTML files
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
goals and
primarily
CLOSED
recordation tax increase will undermine the County's economic development
serve as a disincentive to needed investment in the County. Annual tax increases
borne by businesses sends the wrong signal that MONTGOMERY COUNTY IS
FOR BUSINESS.
T AX INCREASES UNDERMINE THE COUNTY'S AFFORDABLE HOUSING GOALS
The proposal will increase the costs associated with the purchase and sale of rental housing.
Rising interest rates and higher transaction costs: AOBA 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
(Le. 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
.... houslog-b-y increasing thi-coSts-of pr()ducing new-a-nd- presernogexlsting-Iiousfng: 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%.
 PDF to HTML - Convert PDF files to HTML files
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
Q
I Office Market, Banister, April 4, 2017.
hour,:',:/
!\V\\~\::hi,~~,}(,)_~
.com/wash
i.!~gton-=-~~:/news/offtcc!fi
vc-
taken \Va vs-from-dcs-q 1
-0
ffic_c-m<l
rkct­
,::::::,~!3'?
"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
___reiiRancing_an.d~XP-QSun:Uo_a_high
.recordatioo_tax_rate_lLfr.e.ql!enLQccurtenc_t:..
SecQn91y,Jh~
__
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
11!l!1";:;'lilin
l,
i'IOI.'O,l'Om'3bout-IllI.'l'lk'"v],n-,'fc-:w;,f
"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."
2Real estate's ticking bomb: Who gets hurt. CNBC, Olick, Diana, March
102016
("Commercial mortgage backed
securities (CMBS) are bonds sold to investors"); US Commercial Mortgage Backed Securities FAOs ("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
CD
 PDF to HTML - Convert PDF files to HTML files
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 of2016
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 lO years ago may have been at 75 percent to 80 percent, loan to value. It's much harder to
borrow that much today.")
3Projected 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 10-year life span, at which point the debt matures and real
estate owners
have
to refinance the loans.")
4Real estate's ticking bomb: Who gets hurt ("CMBS tend to have a 10-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 ofloans this year and
29
percent ofloans 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 owi,.'ihese two years."
"We think some ofthesearegoingio be remonetlzeatlirough 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 2017,
more than $300 billion will need to be refinanced.")
5Wall 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.
o
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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
Q12017 JLL
REPORT ­ SUBURBAN,
MD
VACANCY RATES6
.....
. i
.
"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 of2018.,,7
Submarket
Class C
Total Vacancy
Class B
Class A
Montgomery County
16.3%
15.4%
16.3%
17.3%
15.8%
Bethesda CBD
9.5%
7.5%
11.4%
N/A
28.1%
42.3%
Bethesda - Rock Spring
26.4%
N/A
Burtonsville
9.2%
N/A
9.2%
N/A
ChC!)' Chase
11.3%
16.7%
3.9%
N/A
Clarksburg
N/A
3.5%
3.5%
Gaithersburg
13.7%
13.3%
20.6%
13.7%
Germantown
15.8%
15.8%
26.1%
14.5%
Kensington
9.6%
N/A
2.5%
11.7%
North Rockville
9.9%
N/A
6.6%
15.3%
Shady Grove
18.6%
21.9%
10.9%
17.5%
25.1%
27.4%
28.5%
3.4%
Park Potomactrower Oaks
Rockville Pike Corridor
16.6%
20%
21.9%
9.3%
Downtown Silver Spring
14.6%
11.8%
20.7%
14.5%
North Silver Spring
16.5%
N/A
14.9%
23.8%
Wheaton
25.9%
N/A
N/A
25.9%
MONTGOMERY COUNTY COMPREHENSIVE ECONOMIC STRATEGY
MARCH 2016
• "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.")
6Q 1 2017 JLL Report - Suburban, MD Vacancy Rates, http://www.us.jll.com/united-states/en-us/ResearchIUS­
Suburban%20Maryland-Office-Insight-Q 1-20 17-JLL.pdf?705bc663-0f4c-4170-8ce8-5a8d7bOcc94d
7QI 2017 JLL Report- Suburban, MD Vacancy Rates, p. 1
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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 ofthe county, the City of Gaithersburg, and the City of Rockville."
Page 1.
'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.