Local apartment and office building owners are protesting a new bill under consideration by the County Council that would adjust the recordation tax premium to place much of the burden on those who own buildings valued at more than $2 million.
The Apartment and Office Building Association of Metropolitan Washington sent a letter to the council Tuesday that said passing the bill “will undermine the county’s economic development goals and serve as a disincentive to needed investment in the county.”
“Annual increases primarily borne by businesses sends the wrong signal that MONTGOMERY COUNTY IS CLOSED FOR BUSINESS,” the letter says.
The recordation tax premium is only applied to the sale or refinancing of a property valued at over $500,000. The tax payment is often split between the buyer and seller or based on sale negotiations.
The bill sponsored by council member Marc Elrich that was introduced April 4 would create tiers in the recordation tax premium based on a property’s value—with lower value properties paying a lower rate than higher value properties.
It would restore the recordation tax premium applied to properties that range in value from $500,000 to $1 million to $1.55 per $500 in value. That was the rate before the council increased it in 2016 to $2.30 per $500 in value.
To make up for the lost tax income resulting from the rate decrease, Elrich’s bill would increase the premium applied to buildings valued at $2 million or more from $2.30 per $500 in value to $3.55 per $500 in value. That would mean the tax premium on a $2 million building would be $14,200 as opposed to $9,200 under the current rate.
The bill would also slightly increase the rate for properties valued at $1 million to $2 million from $2.30 to $2.55.
The recordation tax premium is one of three parts of the recordation tax—which also includes the base rate ($2.20 per $500) and the school increment ($2.25 per $500).
Last year, the council voted to increase the recordation school increment and tax premium. Council members said at the time the additional $200 million in projected revenue over the next six years would be used to pay for school construction and affordable housing.
Elrich proposed the bill as a way to reduce the tax burden on low- or moderate-income residents who are selling their homes.
It was designed to be revenue neutral, but Elrich said Thursday that the county plans to study how the proposed rates in his bill and other potential options to lessen the burden on less expensive properties would impact the funds raised by the tax. He said the study is going to examine 10 years of future revenue and may recommend adjusting the rates to shift some of the burden back onto the more residential, less expensive properties that provide predictable year-to-year revenues because there are much more transactions involving them than the $2 million-plus properties.
“The big stuff is the least predictable,” Elrich said. “We don’t want too much of the revenue depending on the big stuff, because it could fluctuate year-to-year. We’re going to try to minimize that.”
Elrich called the reaction from large property owners “totally predictable.”
“They don’t like any taxes,” Elrich said. “They’ve made that clear. They expect us to provide the infrastructure and have the middle class pay for it. They’re the ones benefiting enormously from public investments.”
At an April 25 public hearing on the bill, Peg Mancuso, representing the Greater Capital Area Association of Realtors, said her group would support the bill and viewed the move to lower the rate for properties valued at $500,000 to $1 million as a “positive start.”
“We approximate for this group the measure would reduce their recordation tax costs by a couple hundred dollars,” Mancuso said. However, she also pointed out that when the council raised the recordation tax rate last year, the rates “were already amongst the highest in the country.”
Meanwhile, the office and apartment building association said the increase would significantly impact refinancing expensive buildings. Multifamily properties typically have loan periods that last seven to 10 years, according to the group, meaning refinancing happens frequently and would become more expensive for owners.
The group also cautioned that the increased tax rate could endanger an already fragile Montgomery County office space market in which no office buildings were under construction in the first quarter of this year and the vacancy rate stood at about 16 percent.
“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,” the association wrote. “For example, the proposal could scare away potential purchasers already skittish about acquiring challenged properties.”
Fairfax County is also facing similar office vacancy rates—the county government’s 2017 budget plan noted 2015’s 16.5 percent vacancy rate was the highest recorded since 1991.
