Negotiated Tax Abatement Creates Affordable Housing

Maryland’s Montgomery County tax abatement program has created real affordability for renters over decades with negotiated participation.

getty

Reducing or eliminating the property tax consequences of building new housing in exchange for affordable housing requires a method of facilitating the exchange through policy and assessment for both the developer and the local government. How much will reduced rental income cost the developer? How much will forgone tax revenue impact the local government? Both parties have to ask themselves, “Is it worth it?” Another factor is how the exchange is operationalized. Montgomery County Maryland has a Pay In Lieu of Taxes or PILOT program to facilitate the creation and preservation of housing with lower rents. A PILOT program typically grants a tax exemption in exchange for a reduced tax payment and some set aside of reduced rental housing. What follows is a closer look at Montgomery County’s program.

Montgomery County’s program goes back to at least 1979 and is authorized under Maryland’s state tax code. It is worth quoting a summary of the Montgomery County’s program which is straightforward.

“Following the legal, budgetary, and procedural review of a negotiated PILOT agreement, the County Department of Housing and Community Affairs (DHCA) recommends a PILOT to the Director of Finance for approval. The Department of Finance computes the fiscal impact and, subject to the guidelines and an annual funding limit, either approves or denies the recommended PILOT. This exemption is applied to the real property tax bills once the agreement is executed. The County Council sets the maximum annual funding amount for PILOT programs for a 10-year period only for properties that are not owned or controlled by the Housing Opportunity Commission (HOC).”

A central feature of Montgomery County’s program is negotiation. The relevant section of the Maryland code, Maryland Code, Tax-Property § 7-502, reads, in part, that the property can be exempted from taxes if,

“(1) the governing body of the subdivision where the real property is located approves an agreement between the subdivision and the owner; and

(2) under the agreement the owner pays the subdivision a negotiated amount in lieu of property tax.”

Montgomery County has three kinds of PILOT options. The first is called the Standard PILOT which is “based on each affordable rental unit in the rental project” and “the County’s specific requirements for receiving the PILOT, including among other things, the affordability requirement of the rental units and the reporting requirements that must be met during the term of the PILOT.”

The second, the “by right” abatements through a PILOT, “County real property taxes are abated for a term of at least 15 years for a rental property owned or controlled by a non-profit if at least 50% of the units in the rental property are leased to households with incomes no greater than 60% of the area median income (AMI)”

The third, a Washington Metropolitan Area Transit Authority (WMTA) PILOT, is considerably more complex, requiring that half of the project must be a high-rise, at least 8 stories tall and located on land leased from the WMATA. The set aside for affordable housing is 25% at 50% of AMI and 25% of the workers building the project must live in the county.

An assessment of the Montgomery County PILOT program was included in a 2020 report, Montgomery County Preservation Study, which found that “the County’s provision of PILOTs is consistent with national best practices, is regarded by practitioners as an important component of the local affordable housing financing stack.” According to this assessment, Montgomery County PILOTs used only about half of the capacity, $18 million in forgone tax revenue, from about 3,205 tax accounts. The assessment didn’t measure how many units were created, but did include a topline recommendation to expand the program.

The most important aspect of the Montgomery County PILOT program is the word “negotiate.” While there are caps on lost tax revenue and other formulaic requirements, both the state statutes enabling the program and the local ordinance, conceive of a process of bargaining rates of taxes paid and rates of inclusion over time. The language from the County’s website makes it clear that “the amount of the tax abatement and its terms are negotiated based on the number of affordable units and the duration of their affordability.”

It is probably impossible to perfectly quantify, rate, and compare abatement programs across the country, but the longevity of Montgomery County’s program and the number of participating accounts indicate that it is functioning as an incentive. That is, changes is property values, taxes, construction costs, rents, and the myriad of variables in financing and developing housing haven’t dampened participation because private developers and local government can adjust their terms based on economic conditions on the ground. Incentive programs using tax abatement to create rent restricted, multifamily housing, ought to include some room for negotiating rates of abatement and inclusion. This means a higher level of complexity in terms of implementation, but Montgomery County’s program demonstrates this is does not make negotiated abatement programs prohibitive or infeasible.