Developers and others worry expiring tax credit could slow Baltimore city housing market

Jun. 24--When Avendui Lacovara, a Baltimore real estate agent, heard the Maryland General Assembly did not renew a property tax credit for newly constructed homes in the city in this past session, she called her city councilman and developers to see what could be done.

To the dismay of Lacovara and many in the city's development community, the 23-year-old program will expire on June 30 for the upcoming fiscal year after members of the legislature discovered too late in the session that the program needed to be renewed.

"It's another tool to help reinvest in neighborhoods," Lacovara said.

The tax credit, designed to encourage the construction and purchase of new or completely renovated homes, helped spur redevelopment efforts in city neighborhoods, developers and others say. Over the program's life, about 5,000 homes have received the tax credit.

The tax credit works by halving a property's tax obligation in the first year. The reduction declines by 10 percentage points each year, so it's a 40% cut in year two and just 10% in the fifth year before going away.

By saving buyers thousands of dollars, it encouraged home ownership and reinvestment in the city. But those homeowner savings meant millions in lost revenue for Baltimore, funds that could have been spent on a variety of needs from infrastructure and parks to schools or police.

The tax credit has cost the city approximately $2.1 million this past fiscal year and a total of $46 million since its inception.

According to the city's Fiscal Budget 2020 executive summary, funds used for the tax credit "constrain expenditures in areas such as public safety, education, recreation and parks, blight elimination, sanitation, and other basic services that enhance a home purchaser's desire to live within the City."

Aside from its cost, critics say it may be time to let the tax credit go away.

Peter Sabonis, a member of the Baltimore Housing Roundtable, said the credit likely fails to address issues of racial, gender and economic equity.

"Over the the last five years, I'd say the credits have contributed to higher property values which most likely pushed out renters," he said in an email.

In past years, the mayor's office brought the local tax credit to the General Assembly's attention. But Sen. Bill Ferguson, a Baltimore Democrat, said he wasn't notified about the tax credit's sunset provision until the second to last day of session.

"We're not gonna point fingers or play the blame game," Lester Davis, a spokesman for Democratic Mayor Bernard C. "Jack" Young, said, "we're just gonna work with our delegates and figure this out."

The mayor values any program that encourages investment and home ownership in Baltimore, Davis said. The Mayor's office is currently working with the city finance department to mitigate the potential impact of the program's expiration, he said.

Developers suggest the expiration of the tax credit will reduce home building in the city.

"There's going to be a tangible decrease in new construction activity in middle neighborhoods," said Jack BeVier, a partner at The Dominion Group, a residential real estate investment firm with properties across the city.

BeVier described "middle neighborhoods" as areas considered not the most competitive or the most distressed.

"It makes projects happen that otherwise wouldn't have happened," he said of the credit.

The impact of the tax credit has been far from evenly distributed around the city. It's only been tapped by homeowners in 33 of the city's 278 neighborhoods, mostly those around the harbor -- from downtown, east to Canton and into South Baltimore.

In recent years, however, its reach spread wider, with more of the credits going to construction projects in gentrifying ares such as Greektown in East Baltimore and Hampden. Uplands in West Baltimore, where a major new housing development was built along Edmondson Avenue, also used a large number of the tax credits.

Ferguson who represents Greektown, the neighborhood with the highest number of the Newly Constructed Dwelling Tax Credits in the past five years, said a number of home builders reached out to him with concerns after they heard the news.

Lacovara, who's with Monument Sotheby's International Realty and represents redevelopment projects in the city's Barclay neighborhood, said she was "very disappointed" that the program "fell through the cracks without a comment."

While the new construction tax credit is just one of 14 tax incentive programs offered in the city to spur development and encourage home ownership, Lacovara said it offers fewer eligibility requirements than most other programs, so it attracts a broader base.

She said the program's loss will hit small project developers hardest.

Justin Williams, a land use and zoning attorney at the Rosenberg Martin Greenberg law firm in Baltimore, said its absence also could affect where people choose to live. Because the city's property tax rate is higher than it is in neighboring counties, he said, the tax credit could be a significant factor for those deciding whether to build in Baltimore County or in the city.

The program's expiration is adding to the city's real estate woes at a time when the industry already is struggling with problems associated with May's ransomware attack.

Builders and home buyers are trying to rush to finalize paperwork and close deals before the tax credit expires at the end of the month, Lacovara said.

"The malware has added a level of complexity because it's taking longer to get things to close," she said.

While some developers and real estate professionals are hopeful that the program will be renewed in the upcoming General Assembly session, Ferguson wasn't so sure.

"We'll see if there's a whole lot of angry people," he said, "and if not, maybe we can better allocate this tax credit."

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