Tag Archives: development

Corporate Welfare, Development, Economy, Marc Elrich, Metro

Elrich Vetoes WMATA Property Tax Bill

By Adam Pagnucco.

County Executive Marc Elrich has vetoed Bill 29-20, which would grant high-rise developers on Metro station projects payments in lieu of taxes in return for 15-year exemptions from property taxes. I wrote a three-part series on this legislation quoting the bill’s supporters in Part One, evaluating their arguments in Part Two and raising concerns in Part Three. The bill passed the council with amendments on a 7-2 vote, with Council Members Tom Hucker and Will Jawando voting no. Under the charter, the council may override a veto with 6 votes.

The executive’s veto message is printed below.

*****

October 16, 2020

TO: Sidney Katz, Council President

FROM: Marc Elrich, County Executive

RE: Veto explanation of Bill 29-20, Taxation – Payment in Lieu of Taxes – WMATA Property – Established, Enacted with amendments

I share the Council’s desire to find ways to spur smart growth and to broaden our tax base. However, I strongly oppose the approach used by the Council in this legislation. It is too costly and does not achieve my goal of increased affordable housing. Therefore, I am vetoing Bill 29-20, Taxation – Payment in Lieu of Taxes – WMATA Property.

Below is a description of the bill and my explanation of the veto.

Description of Bill 29-20

Bill 29-20 requires 100% exemption of the real property tax for 15 years. This exemption is known as a Payment in Lieu of Taxes (PILOT). The requirement applies to development that is higher than 8 stories on property owned by WMATA at a Metro station. The development must include at least 50% residential rental housing, and one-quarter of the moderately priced dwelling units (MPDUs) must be affordable for residents at 50% of area median income (AMI). The PILOT would begin no later than the second year after the property tax is levied. The law would sunset in 2032, but any existing PILOT would continue until the end of its 15-year period. To be eligible for a PILOT, a developer would be required to use contractors and subcontractors who have no more than two final penalties of $5,000 or more in the three prior years for violations of applicable wage and hour laws. At least 25% of the workers constructing the project must be County residents. Special taxing district taxes are exempt from the PILOT.

This Bill harms the budget without providing a meaningful public benefit.

At a time when the County is struggling to fund critical services, where the outlook for the next couple of years is uncertain at best, and where full economic recovery from this pandemic may take as much as ten years, it is certainly not prudent to reduce revenues coming into the County coffers.

During the Council’s deliberations on the Bill, supporters could only cite one potential development as being eligible for this 15-year, 100% tax break – the proposed Strathmore Square at the Grosvenor/Strathmore Station. Under the provisions of this legislation, Strathmore Square’s owners would receive a tax break of more than $100 million. As a member of the County Council, I supported the zoning changes that made this proposed development possible, but I simply do not believe it is a responsible use of County resources to supplement a market-rate housing complex at this level of expense.

Should similar developments occur at the other potential WMATA sites across the County, lost revenue would likely exceed $400 million. To be clear, I want more housing constructed in our County, and I see the significant benefit of housing that makes transit usage extremely convenient. However, I do not believe providing developers with $400 million in incentives is worth the 8,000 new housing units. Put another way, this Bill would provide a developer with a $50,000 per unit subsidy regardless of cost of rent. We simply cannot afford this cost.

Public benefit

Generally, PILOTs are used to incentivize production of more affordable housing that we would not otherwise get. Under current law, new residential development must include between 12.5% and 15% MPDUs (the minimum percentage requirement depends on the location of the project). Enactment of an entirely new program with such a substantial subsidy must do more than require one quarter minimum required number of MPDUs be affordable to those earning 50% AMI. In fact, we need more of these deeply affordable units, and I would support turning that provision into a requirement, rather than simply using it as part of an incentive package. Again, the public benefit proposed by this Bill does not warrant the expenditure.

Authority already exists to provide PILOTs

As you know, the County already has the authority to offer PILOTs. It makes sense to continue to allow them on a project-by-project basis – not all projects need the same PILOT term or value. Flexibility should be maintained to enable negotiation of the best possible agreement in the public interest.

Additionally, if we want to provide tax incentives that support commercial development to bring new businesses here, those incentives should go to the occupant of the building, not to the developer of the building. This legislation gives public funds to help build buildings not to incentivize businesses that would be tenants in those buildings.

Use of limited public funds should be targeted for affordable housing production and meeting affordable housing goals, which is not the focus of this Bill

By the estimates developed by WMATA and some Councilmembers, about 8,600 units can be built on the properties covered by this Bill. Approximately 1,300 of those units would be the required MPDUs; approximately 7,300 would be market rate units. The recent regional housing study and the related housing goals were clear that our housing need was not simply about the total number of housing units. The report and the related goals specify income-based targets: three-quarters of the future projected 40,000 units need to be below 70-80% of area median income. Therefore, only one-quarter or 10,000 of the projected 40,000 units, are needed to be at market rate. If this legislation succeeded in producing the number of units estimated by WMATA, then about 7,000 (those on WMATA property) of the 10,000 market rate units needed would not produce property tax revenue for 15 years. The legislation would shift property taxes almost entirely onto below market rate units.

The remaining 3,000 market rate units are likely to be spread out at the 23 “activity centers” along with the more than 25,000 affordable housing units. It does not make sense to focus the market rate housing at Metro stations and push the other affordable housing elsewhere. As the recent Housing Preservation study points out, affordable housing units near transit are at greatest risk of being lost and are being lost.

Given the projected number of market units needed, there is no lack of zoning in the Metro Station areas in order to accommodate the needed units; while they may not be built on top of Metro property, they may be built nearby within easy walking distance of the Metro.

High rise housing is expensive to build and expensive to rent

Furthermore, a focus on high rise buildings ignores the fact that by its very nature, high rise development is the most expensive that can be built. Advocates want to maximize use of land but if density is used to build high rises, it will be unaffordable to most of the people identified as needing housing. Seventy-five percent of projected need is affordable housing – why would the focus be on subsidizing market rate housing? Zoning in central business districts for high rises far exceeds the zoning for types of housing that are generally affordable and more family friendly – including garden style and mid-rise apartments.

The Bill could increase the cost of WMATA land.

Under Federal law, WMATA must seek the highest and best price for their land. Land that is exempted from all property taxes for 15 years is more valuable because the calculation of its value includes the costs to acquire and develop, including taxes, weighed against market rents. If two properties are side by side, one exempt from taxes and the other not, and they were producing the same value of unit, the land value of the exempt property would be greater because its cost of development would be less than the cost to develop the tax-paying property. This would, in turn, likely raise the parcel’s appraised value. The Bill could potentially be counterproductive by raising the value of WMATA’s land.

The Bill sets a difficult precedent

It is not clear why there is a public need to specifically incentivize development on WMATA owned property. It is likely that other properties near Metro will ask for the same PILOT. Those properties offer similar value in providing transit proximate development – a residential walkshed is a radius of ½ mile from Metro; a walkshed is the area around a station that is reachable on foot for the average person – how far someone is willing to walk to their home or business from transit. Additionally, a commercial walkshed is ¼ mile from heavy transit, which would raise the question of whether commercial development should be favored closer to Metro. There does not seem to be a logic to the approach of this Bill.

The impetus for this Bill seems to be based on one project at one Metro site as evidenced by testimony and the Council packets. One project should not drive countywide policy.

The specific project was discussed during Council deliberations – at the Grosvenor Metro Station by FiveSquares Development which had been working with WMATA for about five years either directly or through their affiliate, Streetscape Partners.

The Bill is particularly focused on one project at the Grosvenor Metro. In December 2017, as a member of the County Council, I voted in favor of the Grosvenor-Strathmore Metro Area Minor Master Plan which allows for this development to proceed. WMATA documents that we reviewed show that the original assumption for their property was that about 500 units could be built. This Minor Master Plan up-zoned portions of the Plan Area to allow for greater density, particularly on the Metro site both to take advantage of the Metro location and to provide density to make the project feasible. This up zoning resulted in allowing more than 2,200 units to be built there, essentially quadrupling the density.

The documents show that FiveSquares was substituted for Streetscape as the developer and that the appraisal of the land would only be done after the completion of the rezoning process. So, the price was set based on the appraisal which, like all appraisals, took into account all of the costs and the market for units that would be needed to support those costs. One has to assume that FiveSquares fully understood what they were doing because had they thought the appraisal was wrong, they could have walked away from the project. FiveSquares agreed to the appraisal and signed a deal. The appraisal assumes that the property can be developed at the determined price and FiveSquares obviously concurred with that assessment. Having been personally involved as an Executive negotiating over the value of land, I know that it is common for buyers and sellers to differ in appraisals and then to reach agreements that attempt to accommodate the assumptions of both parties. One has to assume that FiveSquares knew what they were doing when they accepted the assumptions and the appraisals that went with it.

If FiveSquares had a problem with the price and appraisal, they had an opportunity to reject the appraisal and the deal. At no point during the Council’s consideration of the Minor Master Plan was there any indication that additional public subsidies would be required to get a high-rise project “shovel ready,” let alone a 15-year abatement of all property taxes.

I would also note that others have commented that FiveSquares will pay for amenities; those amenities attract residents and make the project feasible. They would also have been included in the appraisal and are key in marketing the property.

Fiscal impact of a PILOT and the FiveSquares project

According to the Bill’s Fiscal Impact Statement that compared Strathmore Square with existing nearby buildings, the development’s approximate annual property tax bill upon completion would be between $5.8 million to $7.1 million a year. Over 15 years, the approximate loss of property tax revenue would be between $87 million and $106.5 million for just this single project.

No evidence that this Bill is necessary to stimulate market-rate (non-affordable) housing and this approach is not done region-wide

There is no evidence that this subsidy is required. In fact, if you look around the region, many of our neighboring jurisdictions have their highest taxes on property nearest Metro sites and the tax rates are substantially greater than in Montgomery County. If property taxes were the key to development, we would have won the development battle a long time ago because we are lower than most surrounding jurisdictions.

Furthermore, market housing is being built rapidly in Bethesda and is likely to spread to other densely zoned areas as Bethesda builds out. Rents in Bethesda are extraordinarily high, and it does not make sense to subsidize the construction of apartments that rent at prices far out of reach for most County residents. The Bill, coupled with a separate proposal from the Planning Board to reduce impact fees in most areas, will only deepen the obstacles to growing the tax base. While it is true that residents of these buildings will pay income taxes, the loss of property taxes is significant, and residents could live in other market rate housing where we collect both income taxes and property taxes. For the commercial sector, the only ongoing tax we receive to help provide infrastructure is the property tax.

This Bill was designed without a market analysis to establish whether this type of general legislation is needed. As noted above, the authority already exists to provide these PILOTS on an individual project basis, and a Countywide approach is not warranted.

Workers deserve prevailing wage

A majority of the Council voted against requiring the prevailing wage at these projects. The provision would have required that all contractors and subcontractors pay prevailing wages and be licensed, bonded, insured, and abide by wage and hour laws. Legislation that dedicates public funds to market-rate housing should, at least, also support the workers who build the housing. This provision was supported by the Baltimore-Washington Laborers’ District Council, an affiliate of LiUNA; United Association (UA), United Brotherhood of Carpenters, International Brotherhood of Electrical Workers (IBEW), CASA, Jews United for Justice, Progressive Maryland, Montgomery County Education Association (MCEA), SEIU 32BJ, SEIU Local 500, SEIU Local 1199, UFCW MCGEO Local 1994, and UNITE HERE Local 25. If WMATA was building a structure on the same property, current law would require them to abide by the prevailing wage. I believe the developments contemplated by this Bill should as well. The lack of such a provision to treat workers equitably and to share in the subsidy is another major deficiency in this legislation.

Using limited funds for market-rate (non-affordable) housing development means fewer funds for other services including affordable housing, recreation, and education, which has a racial equity/social justice impact

A Racial Equity and Social Justice (RESJ) impact analysis was not applied to this Bill, which was introduced before the RESJ requirement took effect. Because the Bill will have a significant budgetary impact, it deprives the County of tax dollars that could be used for other programs, including affordable housing that would benefit communities of color most. This Bill allows housing to be built for those who can afford it, not for lower income populations who are disproportionately Black and Latino.

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Adam Pagnucco, Corporate Welfare, Development, Economy, Metro

Smart Growth or Corporate Welfare? Part Three

By Adam Pagnucco.

Part Two examined the case made by supporters of Bill 29-20, which offers 15-year property tax breaks on Metro development projects, and found that they have a point: namely, that the economics of high rises at Metro stations likely deter many such projects from being built. But there are other issues with the bill that should be addressed. Some of them are:

Smart growth was supposed to make money for the county.

There are plenty of good reasons to channel economic development through smart growth principles, including transportation management, community building, agricultural preservation, environmental considerations and more. But one of the cited reasons has historically been its alleged impact on county finances. Concentrating development in existing downtowns means that new road and sewer infrastructure does not need to be built. Nor do new police or fire stations. Schools may need to be expanded but new ones are not necessarily required as they may be by remote greenfield development. And high property values in downtowns can generate lots of property tax revenues that can be allocated across the county’s many needs. That was the plan at any rate. White Flint, one of the county’s earlier smart growth plans, was projected to generate $6-7 billion in revenue over the next 20-30 years back in 2010.

That was then. Now we are being told that if we want development at Metro stations, taxpayers need to pay for it.

There is no evidence that corporate payouts have paid off for MoCo overall.

Bill 29-20 is far from the first corporate incentive proposal in county history. MoCo has handed out $67 million in incentives through its Economic Development Fund (EDF) over the last couple decades with millions more on the way. Most of this money has been expended for retention, not attraction. Four recipients alone – Fishers Lane (HHS), Meso Scale Diagnostics, Marriott and HMS Host – were allocated a combined $44 million in multi-year retention grants, of which $28 million remains to be paid. MoCo’s Democratic elected officials even gave a $500,000 subsidy to a subsidiary of Rupert Murdoch’s Fox Corporation. Despite all of these expenditures, the charts below shows how MoCo compares to its neighbors in employment growth and establishment growth since 2006, the county’s peak in the prior business cycle.

Here is the bottom line: we have been paying escalating amounts of corporate incentives for more than twenty years and it has not moved the needle on our economic competitiveness. Any time you do the same thing over and over and don’t get a positive result, you need to reconsider what you’re doing. Council members, think about it.

The county’s own actions make it a tough place for landlords.

Back in April, I wrote an article titled, “Why Would Anyone Want to Build Rental Units in MoCo?” summarizing the many deterrents to residential rental construction here. Among them were the time-consuming and expensive eviction process, the county’s moratorium policy (which does nothing to stop school crowding) and the election of a frequent development opponent as county executive. But little compares to the recent imposition of rent stabilization, which is supposed to be temporary but could always be extended. Many landlords were outraged at allegations of mass rent gouging when in fact there was little evidence to back that up. So are we now offering tax breaks in part to make up for all of this? Wouldn’t it be cheaper for taxpayers if the county simply stopped doing some or all of the above so that tax breaks aren’t necessary to get landlords to build units?

Property taxes by themselves are not the reason why MoCo can’t compete.

In waiving property taxes on Metro projects for 15 years, Bill 29-20 assumes that MoCo’s property taxes are a deterrent to development. But according to D.C.’s chief financial officer, MoCo’s effective property tax rate in 2018 was lower than in Prince George’s, Fairfax and Alexandria and not much higher than Arlington. And according to the General Assembly’s Department of Legislative Services, MoCo’s real property tax rate ranked 14th of 24 local jurisdictions in Maryland in FY20. On top of that, MoCo’s transportation impact taxes are far lower near Metro stations than they are in other parts of the county.

MoCo’s tax competitiveness challenge lies in its income tax (which is not charged by local governments in Virginia) and its energy tax. Bill 29-20 does not address either of those issues.

What are the consequences for income inequality?

High rises on top of Metro stations will be able to command some of the highest rents and/or condo prices in MoCo (and perhaps the entire region). In fact, such projects need to charge high rents and prices to pay off the costs of high rise construction and WMATA requirements. Bill 29-20 does not impose any additional affordable housing obligations beyond the 12.5-15% moderately-priced dwelling unit requirements in existing law. (Council Member Will Jawando introduced an amendment to raise the affordable housing requirement to 25% in committee but it was voted down.) So the bill in effect requires MoCo taxpayers to subsidize high-cost housing. Given the county’s long-standing problems with housing unaffordability and income inequality, that’s a hard pill to swallow.

And so Bill 29-20 presents a tough policy predicament. It’s true that high rise projects at Metro, the local Holy Grail for smart growth in the D.C. region, are not happening because of difficult project economics. It’s also true that sprawl and no growth are bad alternatives to transit-oriented development. But it’s frustrating that some of the architects and advocates of the county’s 15-year smart growth approach are now telling us it can’t happen without big tax breaks.

That said, corporate welfare can in rare cases be a necessary evil. If the county council wants to consider tax breaks for projects on a case by case basis, so be it. In doing so, the council can sort out projects that have a compelling public purpose from those that don’t. The council can also exercise leverage over a developer when public amenities like open space, child care, schools and other priorities are under consideration.

Bill 29-20 does not enable any of that. It creates an entitlement. Developers at Metro station properties will get tax breaks by right according to law. The council gives up most if not all of its leverage to influence such projects. And of course future developers might want to amend the law to get even longer tax breaks or other benefits. Developers of sites near but not on Metro stations might demand concessions too. As with the county’s Economic Development Fund, which began by handing out small grants to companies twenty years ago and eventually distributed 7-digit and 8-digit grants, the subsidies in the current bill may only be the beginning.

Metro station development was supposed to make us money. Now it seems we will have to pay for it, at least up front, to get the benefits that come later. Dear reader, this is your judgment to make. Is it worth it?

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Adam Pagnucco, Corporate Welfare, Development, Economy, Metro

Smart Growth or Corporate Welfare? Part Two

By Adam Pagnucco.

In making the case for Bill 29-20, which would grant developers at Metro stations 15-year property tax breaks, supporters claim that Metro high-rise development is not currently happening. And they say that’s the case for the entire region.

Is it true?

WMATA had a spate of development projects at Metro stations from 2002 through 2007, when the region’s real estate market was hot. There are much fewer proposals in the works now. They include:

Grosvenor-Strathmore, Montgomery
WMATA selected Fivesquares Development as its ground lease development partner at the Grosvenor-Strathmore station. In 2018, the Montgomery County Planning Board approved a sketch plan for 1.9 million square feet of mixed use development at the site. The original plan was supposed to include seven buildings, two of which would be 300 feet tall and another 220 feet tall. However, Fivesquares subsequently claimed that it needed tax breaks to finance the high rises, thus giving rise to Bill 29-20. Fivesquares wrote the following in its testimony about the bill:

Simply put, but for this legislation, Montgomery County’s goals to promote high density growth at transit accessible locations and, specifically, to implement the Grosvenor-Strathmore Minor Master Plan Amendment that the Montgomery County Council and Montgomery County Planning Board unanimously approved in 2017, would not be feasible due to the prohibitive economics of building high-rise projects. There is a significant gap in building high rise projects due to the gap between costs and revenue and the unique infrastructure requirements of Metro sites.

In the absence of this legislation, instead of the potential at the WMAT A property at the Grosvenor Strathmore Metro station for over 2,100 units, including over 350 Moderately Priced Dwelling Units (MPDUs), the only feasible development would be lower density, stick-built housing that would dramatically underutilize the site, resulting in less than half the number of total housing units and MPDUs.

New Carrollton, Prince George’s
WMATA plans to replace the parking on the station’s south side with hundreds of thousands of square feet of office, retail and multi-family space. At full build-out, the site could have a dozen buildings ranging in size from five to fifteen stories. Construction of a new garage is also planned for the station’s east side. Along with Grosvenor-Strathmore, this is easily the most aggressive of WMATA’s current development plans.

A rendering of development on the south side. Credit: WMATA.

College Park, Prince George’s
WMATA is planning a 5-story project at this station with more than 400 housing units.

A rendering of development at College Park. Credit: WMATA.

Capitol Heights, Prince George’s
WMATA would like to place a 6-story residential building with ground retail at its Capitol Heights station parking lot. This project was terminated in 2018 but WMATA staff asked for a new solicitation last year. KLNB is advertising the project’s retail component.

Deanwood, D.C.
In 2018, the WMATA board approved a joint development project to replace its Deanwood station parking lot with a mix of residential and retail and a garage. The project is not high-rise; rather, it envisions four-story buildings.

That’s about it. The project in D.C.’s Takoma neighborhood looks stalled as does the Greenbelt site in Prince George’s, which was once considered for the FBI. Amazon’s arrival in Northern Virginia could eventually stimulate development at Metro stations there but that seems quite a ways off.

Other than the Grosvenor-Strathmore site (which led to Bill 29-20) and New Carrollton (which might not have been viable without the relocation of the state’s housing agency), none of these projects has a high-rise component. That’s not an accident. Developers at Metro station sites have to deal with replacing existing parking (either with a garage or underground), station access issues, bus circulation issues and even possible amenities like park space. There is also WMATA’s time-consuming approval process on top of any local planning approvals. Developers of private sites don’t have to deal with these problems. Combine the construction costs of high rise as opposed to wood frame with the extra costs of building at WMATA sites and the economics of such projects get difficult, even with high rents and condo prices.

DC Urban Turf, a website that tracks residential development, lists hundreds of new residential projects that have been delivered, are under construction or are planned in the area. Many of them are high rises. High rises are being built in the region. They are just not being built, for the most part, on Metro stations.

So if high rise construction at Metro stations requires huge tax breaks to work, are the bill’s supporters right? Should Fivesquares and other developers get 15-year property tax exemptions? There are lots of other considerations to be discussed. Let’s do that in Part Three.

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Adam Pagnucco, Andrew Friedson, Corporate Welfare, Development, Economy, Hans Riemer, Metro

Smart Growth or Corporate Welfare? Part One

By Adam Pagnucco.

For many years, MoCo has focused its land use and economic development policies on transit-oriented development. Since 2006, the county has adopted eight master plans centered on Metro stations, another four centered on Purple Line stations and one more centered on Corridor Cities Transitway stations. Another plan is in the works for Downtown Silver Spring.

The capstone for the Metro-based plans is development on top of the Metro stations themselves, which requires joint development agreements with WMATA. Placing the highest density on Metro stations, along with nearby parcels, enables the county to balance growth, transportation and environmental priorities in its march towards the future. For fifteen years, that’s what we have been told.

Now we are told that this approach won’t work without taxpayer subsidies.

The problem is that most, if not all, development on top of Metro stations is not proceeding. And that is because of economics. In order to be economically viable, Metro development projects must charge rents or condo prices sufficient to not only cover construction costs, financing and investor returns but also the unique costs associated with Metro station sites. The economics are particularly difficult with high rise projects, which have higher material and construction costs than wood-frame projects. And so the county council has proposed Bill 29-20, which would eliminate property taxes on Metro station development projects for 15 years and replace them with undefined payments in lieu of taxes to be set later.

In justifying the bill’s purpose, consider these remarks by Council Members Hans Riemer and Andrew Friedson, the lead sponsors of the bill, and Planning Board Chairman Casey Anderson at the council’s first work session.

Riemer
I want to say that this is a smart growth proposal. This is about making development feasible where decades of inactivity has demonstrated it is not feasible. If you look at Montgomery County and our Metro stations, you will almost universally see empty space on top of the Metro stations and despite efforts by WMATA over many years to support development at those stations, to solicit development on their property, there is very little that has happened. And there is very little that has happened recently, in the last ten years or so. Very little high rise, especially, and because of a shift in the market, I think which is driven by regional economic shifts and global economic shifts that have made the cost of high rise construction prohibitive except in the most high rent communities…

I think very broadly speaking, we have sought to channel all of our development, almost all of it, through a smart growth framework. We want to get housing that is high rise. We want to discourage sprawl. But the problem is we have not – the market isn’t producing the high rise that we have zoned for, that we want. And so the end result is we’re not getting much development. We’re not getting very much housing. We’re not even getting much commercial development.

Friedson
The idea that we’re forgoing revenue and that has a direct cost, that we’re leaving money on the table, we’re not leaving money on the table – the table doesn’t exist currently. That is the issue. There is no development, there is no investment. At best, the table is going somewhere else. It’s been shipped to another region of the country. It’s been shipped to another county. The whole point here is to create the opportunity. You know, the idea that we would be serious about transit-oriented development, that we would be serious about meeting our significant housing targets to address the housing crisis that we currently face but wouldn’t be willing to do anything about it is troubling. And we need a game changer. We need something to change the economic development path that we’re on, we need something to change the housing path that we’re on, that currently does not work. And I will say our housing situation, that is our version of a wall in Montgomery County. What we do with housing is a decision that we make on whether or not we want new residents here or not. That’s the local government version of whether we put up a literal or proverbial wall to say who can and who can’t live here, who we want and who we don’t want here.

Anderson
Will the development happen anyway? And I think the market is not just speaking, it’s screaming that the answer is no. Because you don’t have to take any particular real estate developer’s word for it, you can see what’s happening in the real world. It’s not just in Montgomery County, you can look at what market rents are at every Metro station in the region and you’ll see that there’s a few, particularly in Northern Virginia and in Bethesda, where rents can justify new high-rise construction there. Everywhere else, the answer is no, and that’s not just true of Grosvenor, or for that matter Forest Glen, as you mentioned, it’s also true of White Flint.

In considering these remarks, let’s remember who is saying them. It’s not County Executive Marc Elrich, who voted against numerous transit-oriented development master plans when he was on the council. It’s Casey Anderson, who has served on the Planning Board for nine years and chaired it for six; Hans Riemer, who has served on the council for ten years and is the current chair of its planning committee; and Andrew Friedson, who has emerged as the council’s principal champion of economic development during his first term in office. These are not development critics as Elrich has been. Anderson in particular, and Riemer to a lesser extent, are two of the architects of the county’s Metro-oriented land use policy and they are saying that it has failed.

They are also saying that the only way to rescue it is through what may ultimately become the biggest application of corporate tax breaks in the county’s history.

Are they right? We’ll discuss it in Part Two.

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Adam Pagnucco, Development, Economy

Why Would Anyone Want to Build Rental Units in MoCo?

By Adam Pagnucco.

Left largely undiscussed during the debate over MoCo’s recently passed rent stabilization bill was the overall condition of the county’s rental market. Yes, Council Member Andrew Friedson brought up our recently published data showing that rents are declining in MoCo and are projected to continue falling for the rest of the year. But there’s a lot more to this issue, especially when considering the long-term needs of tenants and the associated implications for the county’s economy.

The bottom line is that MoCo is emerging as one of the most unattractive places in the D.C. area to build rental units.

Put yourself in the shoes of a regional developer, real estate investor or creditor and consider the following facts.

1. MoCo’s rental market is one of the slowest growing in the region.

This is the first sign that not all is right in the county. MoCo has a relatively affluent population, 11 Metrorail stations, a nationally recognized school system, a new light rail route (the Purple Line) under construction and is planning several bus rapid transit routes. Developers should want to build here, but disproportionately, they are not. If Downtown Bethesda were removed from the county’s unit statistics, one wonders how poorly the rest of the county would rank in the D.C. region.

2. Rents in MoCo are also growing slowly.

With the exception of Loudoun County, every other major jurisdiction in the region has seen more growth in average rent than MoCo. That’s good for tenants but not so good for investors looking for an adequate return. That is especially the case given the level of uncertainty in MoCo’s real estate market, which would normally demand higher returns to compensate investors for dealing with it. More on that in a bit.

Here is an interesting fact. Loudoun, Arlington and Howard have been the three fastest-growing large jurisdictions in the area in terms of renter occupied units. They are also three of the four slowest-growing jurisdictions in terms of rents. That’s how a market should work – rapidly expanding supply should keep prices down even with substantial demand, and Loudoun has been one of the fastest growing counties in the nation. But MoCo has seen slow growth in both construction and rents, making it an outlier.

3. No other major jurisdiction in the area has experienced a larger increase in rental vacancy since 2010 than MoCo.

You might think that with MoCo’s relatively stagnant construction demand for housing would push vacancy down. Instead, it’s gone up – by more than any other jurisdiction in the region. In 2010, MoCo’s rental vacancy rate was 2.7%, the second-lowest of 10 large area jurisdictions. In 2018, MoCo’s rental vacancy rate was 4.9%, tied for the third-highest rate. The vacancy rate gain (2.2 points) was the largest in the area. This is going to get worse as vacancy rates for Class A and Class B units are projected to approach 7% in coming years.

4. Evictions in MoCo are time consuming and expensive.

In 2018, the county’s Office of Legislative Oversight (OLO) studied evictions in MoCo and stated, “The Montgomery County Sheriff’s Office reports that on average it takes 12-13 weeks to evict a tenant for nonpayment of rent, though the process can sometimes be significantly longer.” OLO also found that the cost to evict a tenant can range from $5,700 to $16,600, landlords “are often unable to recover lost rent” and “costs and process delays discourage small property landlords from renting out.”

Landlords with lots of units and market power might be able to spread these costs to other tenants in the form of higher rents. Other landlords might choose to avoid the county altogether if they believe its procedures are more onerous than its neighbors.

5. The county executive is an open housing skeptic.

Before becoming executive, Marc Elrich built his political career by opposing development, voting against seven different master plans (six centered near transit stations) and famously comparing growth to a tumor. He has not changed much since then. Over the last three years, he has compared gentrification to ethnic cleansing, said he doesn’t believe in missing middle housing, said he doesn’t want to lose affordable units “to build housing for millennials” and opposed regional targets for housing construction. His opposition to accessory dwelling units even attracted criticism from his fellow socialists. The executive doesn’t control county land use policy, but he does control the Department of Housing and Community Affairs, the county’s principal regulator of landlords.

6. The county’s moratorium policy is a major source of uncertainty for residential builders.

MoCo stops new applications for housing development in school clusters that exceed certain capacity thresholds. Last year, the county imposed moratoriums on four high school clusters and 13 individual elementary school service areas that accounted for roughly 12% of the county and included parts of high-profile housing markets like Downtown Silver Spring and North Bethesda. This year, more areas could be at risk. The moratoriums do nothing to stop school crowding but they do create serious uncertainty for the real estate industry. Who wants to spend millions on design, architecture, planning reviews, public outreach and land use attorneys only to see a project stopped dead in its tracks by an arbitrary moratorium?

7. The county just passed temporary rent stabilization.

The council made major changes to Council Member Will Jawando’s rent control bill, allowing rent increases up to the county’s voluntary guidelines and extending the bill’s duration to 90 days after a catastrophic health emergency. The direct economic impact of the bill may be mild because it is temporary, allows small increases and takes effect in an environment in which rents are declining. But it could be extended at a later time, a possibility that adds to the uncertainty of investing in MoCo. It also has tremendous symbolic importance. Let’s remember that Takoma Park has had rent stabilization for decades and has suffered absolute losses of rental units.

Consider this. It’s hard to find two terms that are more hated by the residential rental industry than “moratoriums” and “rent stabilization.” At this moment, MoCo is the only jurisdiction in the Washington region that has both of them.

MoCo is still seeing residential construction from projects that were approved before the current downturn, before the current round of moratoriums, before the approval of rent stabilization and before the current executive took office. But after that wave (a rather small wave) of construction wraps up, what will come next?

Imagine that you are a regional developer, real estate investor or creditor and you are evaluating a jurisdiction that has had slow rent growth (and now falling rents), slow unit growth, rising vacancy, expensive and time consuming evictions, a moratorium policy, temporary rent stabilization that could be extended and a county executive who is an open skeptic of housing construction. Right next to that jurisdiction are several others with fewer or none of those drawbacks.

Given all of the above, why would anyone want to build rental units in MoCo?

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2018 Montgomery County Executive Race

Marc Elrich Has a Mandate

Mason-Dixon conducted a poll for outside groups supporting Marc Elrich’s campaign for Montgomery County executive at the end of September. Beyond predicting the outcome accurately, it indicates that Marc Elrich not only won the election but also a mandate for his development agenda.

One of Marc Elrich’s central issues has long been making developers pay more towards the county infrastructure needed to support the expanded population that development brings. Indeed, voters are quite mistrustful of the existing relationship between government and developers.

Developers Have Too Much Influence

Mason-Dixon asked voters, “Do you feel there is or is not a ‘quid pro quo’ relationship between county politicians and the development industry, where campaign contributions from developers result in county approval of development projects without proper planning for infrastructure, such as roads and schools?”

Notwithstanding the endless handwringing by the Washington Post as well as Councilmember Nancy Floreen that Elrich would kill economic growth in Montgomery, voters were far more worried about developer influence than limitations on them. Fully, 60% said there is a quid pro quo compared to just 14% who said there is no and 26% who weren’t sure.

As the following graph shows, this is a widely shared belief with far more people thinking that there is a quid pro quo relationship among all groups, including Republicans and supporters of both Nancy Floreen and Robin Ficker.

Infrastructure is Overburdened

Unsurprisingly, 72% of all voters agreed that the “current pace and type of growth in Montgomery County has overburdened our roads, schools and other infrastructure and public services.”

Again, there was wide agreement on this question across gender and party lines with 68% of Republicans and even 56% of Floreen supporters concurring.

Developers Need to Pay their Fair Share

Fifty-four percent agreed that “developers don’t pay their fair share.” Here, there was greater disagreement:

At 67%, Elrich supporters were much more likely to think developers need to pony up more than the 50% of Ficker supporters, and 35% of Floreen supporters. Sixty percent of Democrats agreed as opposed to 51% of independents an just 37% of Republicans. There was also a gender gap with women agreeing 5% more than men.

Conclusions on Development

Marc Elrich ran on this issue directly, highlighting it in campaign literature and his campaign commercials. Voters strongly agree with County Executive-Elect Elrich that insufficient infrastructure in a major problem and a majority like the idea of developers kicking in more money to help pay the costs associated with development.

People who disagree with Elrich need to ask why they have utterly failed to convince voters. It’s especially striking because incredible sums of money have been spent trying to persuade them otherwise. Even leaving aside the millions spent to support pro-developer candidates in the primary and the general, blogs like Greater Greater Washington, lobbyists, the region’s dominant newspaper, politicians and many others have argued mightily against far less well-funded opponents.

One problem is the false narrative about Elrich regarding development. As he regularly points out, there is plenty of buildable space in Montgomery County already under existing Master Plans. He supports higher density and smart growth development centered near transportation.

Elrich’s BRT plan will greatly expand development opportunities by easing transportation bottlenecks. It’s a positive sum solution that helps expand economic growth, get people – especially poorer residents – around the county, and helps take cars off the road – good for the environment and traffic. It’s also spending smart because it is just a fraction of the cost of either light rail (e.g. the Purple Line) or heavy rail (e.g. Metro).

So maybe it’s time to throw the “Elrich hates development” meme into the bin along with all those campaign flyers.

The idea that voters want developers to chip in more for the infrastructure needed to maintain the high quality of life that makes Montgomery County so attractive strikes a majority of voters as utterly reasonable. Here’s a radical thought: if we have more of that infrastructure, then voters would be less likely to oppose additional development.

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