DO TAX CREDITS HELP PROMOTE HOMEOWNERSHIP?
AN ANALYSIS OF BALTIMORE CITY’S
HOMEOWNERSHIP TAX CREDIT PROGRAMS
Prepared for the Baltimore Economic & Efficiency Foundation
By AB ASSOCIATES
April 2002
TABLE OF CONTENTS
Executive Summary....................................................................................................................... | 1 |
Program Assessment ................................................................................................................... | 12 |
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Newly Constructed Dwellings Tax Credit............................................................................. | 12 |
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Historic Property Rehabilitation Tax Credit........................................................................... | 17 |
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Home Improvement Tax Credit............................................................................................ | 18 |
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Vacant Rehabilitated Dwellings Tax Credit........................................................................... | 21 |
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Waverly Stabilization Tax Credit.......................................................................................... | 23 |
General Issues Regarding Effectiveness.................................................................................... | 25 |
Lessons Learned From Other Cities........................................................................................... | 28 |
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Cleveland, Ohio................................................................................................................... | 29 |
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Missouri.............................................................................................................................. | 31 |
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Los Angeles, California........................................................................................................ | 34 |
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Portland, Oregon................................................................................................................. | 36 |
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Boston, Massachusetts........................................................................................................ | 38 |
Recommendations........................................................................................................................ | 41 |
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Administrative...................................................................................................................... | 41 |
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Packaging & Product Development...................................................................................... | 43 |
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Promotions, Publicity & Awareness..................................................................................... | 44 |
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Planning............................................................................................................................... | 45 |
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Rehabilitated Vacant Dwellings Tax Credit........................................................................... | 45 |
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Newly Constructed Dwellings Tax Credit............................................................................. | 46 |
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Historic Property Rehabilitation Tax Credit........................................................................... | 46 |
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Home Improvement Tax Credit............................................................................................ | 47 |
Acknowledgements....................................................................................................................... | 48 |
A. Newly Constructed Dwellings Tax Credit Application
B. Historic Property Rehabilitation Tax Credit Application
C. Home Improvement Tax Credit Application
D. Vacant Rehabilitated Dwellings Tax Credit Application
E. Waverly Stabilization Tax Credit Program Information
F. Summary Table of Tax Credit Incentive Programs in Other Cities
Across the country, governments are developing strategies to increase their tax base, raise housing values, strengthen communities and market the advantages of city living. These strategies often include incentive packages that provide substantial property tax relief for designated forms of housing and economic development.
Examples of these incentives can include tax credits, low interest loans, grants, payment in lieu of taxes (PILOTS) and tax abatements. These types of incentives tend to be most effective when they are part of a larger vision that incorporates community and economic development goals, quantifiable objectives, strategies that include recognizing the importance of integrating financial strategies with marketing techniques and an evaluation framework that incorporates both quantitative and qualitative measures.
Baltimore City has made five tax credit programs available to encourage homeownership and stabilize neighborhoods:
· Newly Constructed Dwellings Tax Credit
· Historic Property Rehabilitation Tax Credit
· Home Improvement Tax Credit
· Rehabilitated Vacant Dwellings Tax Credit
· Waverly Stabilization Tax Credit
These programs offer a credit against an individual’s property tax over a five- to ten-year period. The parameters of each tax credit are established through legislation. Only the Newly Constructed Dwellings Tax Credit is evaluated annually. There has not been a comprehensive analysis of these tax credits as a stimulus in promoting economic development or an evaluation of their effectiveness in promoting homeownership or stabilizing neighborhoods.
In 2001, the Baltimore Economic and Efficiency Foundation (BEEF) retained AB ASSOCIATES, a private strategic planning firm, to analyze the City’s homeownership tax credit programs and to suggest ways these programs could become more effective. BEEF is a private, nonprofit organization established in 1998 that engages citizens in developing innovative strategies to facilitate the revitalization of Baltimore City. BEEF’s primary activity is conducting independent reviews of various aspects of Baltimore City government’s management, operations and fiscal and tax policy. While it was recognized that recommendations might include new sources of funding, it was beyond the scope of this study to identify what those sources might be. In many instances, however, consolidation of existing efforts and resources are likely to prevent the City from tapping into an already strained financial base
Two questions lay at the heart of this analysis:
1. How effective are the tax credit programs?
2. What marketing and administrative recommendations could be offered to improve the programs’ effectiveness?
The analysis consisted of three components:
1. A review of existing tax credit data.
2. Interviews with representatives of city agencies, private organizations and historic tax credit users.
3. Reviews of similar programs in other cities.
AB ASSOCIATES reviewed data that was provided by the Collection Division of the Finance Department, Finance Department, Commission for Historical and Architectural Preservation (CHAP), Baltimore City Homeownership Institute and through the web sites of the State Department of Assessment and Taxation (SDAT) and the Live Baltimore Marketing Center (LBMC). Calculating and reporting functions are managed by the Collection Division, which provides annual reports detailing the property address and amount of credit given from July 1 to June 30 of each fiscal year. Additionally, CHAP maintains records for the Historic Property Rehabilitation Tax Credit, although the staff considers that information confidential. The Department of Housing and Community Development (HCD) monitors the Waverly Stabilization Tax Credit. Annual reports were available upon request from the Collection Division. The SDAT Real Property Database was used to compare values of nearby properties as part of the analysis for the Home Improvement and the Vacant Rehabilitated Dwellings Tax Credits.
Records were reviewed for total credits granted, average and median tax credit amounts, geographic location and impact on local housing values. Because data was received from multiple sources, there are some inconsistencies and discrepancies in reporting procedures that made providing a uniform analysis difficult. Relying on the Finance Department to prepare reports presents a risk that conclusions will be biased against continuing, modifying or introducing new types of tax credits. The Department’s concerns regarding a declining revenue base and the consequences for essential services such as police, fire and schools are understandable. However, this type of argument tends to overlook the long-term value that tax credits can add both through incremental increases to the property tax rolls, increased property values that result when neighborhoods are stabilized and improved and the psychological value of seeing a neighborhood be revitalized. Therefore two potential administrative changes could be to develop consistent and regular reporting requirements that would provide a uniform information base for future analyses and assigning the reporting function to another agency.
AB ASSOCIATES also interviewed city officials, real estate professionals and tax credit customers to qualitatively assess the effectiveness of the tax credit programs. Interviewees were asked to address four subject areas:
· Are tax credits effective?
· How are tax credits used, marketed and perceived?
· What could be done to make existing tax credits more effective?
· What new types of incentives should the City consider?
AB ASSOCIATES researched incentive programs in other cities with similar demographics to Baltimore, such as Cleveland, as well as cities noted for their innovative housing initiatives such as Philadelphia and Portland. This research was followed-up with telephone interviews to obtain more detailed information about the programs’ effectiveness, rate of use, user demographics and impact on housing values. Many of the officials interviewed were unable to supply data due to its proprietary nature, thereby implying that their opinions regarding success rates were largely subjective.
Based on our interviews, data analysis and similar incentives in other cities, AB ASSOCIATES concluded that the tax credits could play a much stronger role in neighborhood revitalization efforts and in attracting new residents to the City. This is largely attributed to the lack of a coordinated marketing effort that reflects a comprehensive vision about the role tax credits can play in the overall revitalization and stabilization of the City. Subsequently, there are no coordinated strategies that utilize the credits as a community development tool, quantitative guidelines by which to measure its success, or cross-promotional efforts. Nor are there efforts to combine the tax credits with existing financial incentives such as low interest loans or grants that could increase their usage rate and therefore enhance their effectiveness. One repeated argument was the notion that tax credits were ineffective in a jurisdiction that continued to exhibit declining revenue trends. While this argument may hold short-term merit, it overlooks the long-term impact of creating incremental value and the ability to use these types of incentives to change the fundamental character of a neighborhood as well as preventing older neighborhoods from becoming destabilized.
Closely related to the question of using property tax credits in cash-strapped cities is the notion of relying more heavily on Federal and State income tax credits. In several instances when the Historic Property Rehabilitation Tax Credit was used, the value of the income tax credit was significantly greater than the value of the property tax credit. Income tax credits have the added advantage of reducing an individual’s overall tax liability, however, property tax credits provide an important psychological advantage of reducing the disparity between City and County tax rates. It may benefit the City to further study the comparative value of these two types of credits and under what scenarios each one is more advantageous and when it is appropriate to combine the two.
The Newly Constructed Dwellings Tax Credit and the Historic Property Rehabilitation Tax Credits were believed to be the most effective of the five programs offered by the City. A developer’s ability to market the tax credit to prospective buyers was identified as the key to the Newly Constructed Dwellings Tax Credit’s success, and was believed to be a significant factor in influencing the decision by buyers at both the Woodlands at Coldspring and Spicer’s Run developments.
The Historic Property Rehabilitation Tax Credit was believed to be most effective in essentially stable neighborhoods where residents have the capacity to meet the program’s cash requirement and the ability to undertake substantial renovations. One obstacle associated with the Historic Property Rehabilitation Tax Credit is the ability of the purchaser to easily identify eligible properties. This is part of a larger problem where a general lack of technology reduces the effectiveness of the credit, and which will be discussed in greater detail as part of system and administrative changes.
The Rehabilitated Vacant Dwellings Tax Credit and the Waverly Stabilization Tax Credit were generally regarded as the weakest of the tax credit programs. The former failed due to its lack of integration with grants and low interest loans and inability to encourage large-scale redevelopment. The Waverly program, which was intended as a pilot program, demonstrated the importance of selecting neighborhoods that were essentially stable rather than relying on using the tax credit as the primary stabilization tool.
This report set out to answer the question: Do the City’s tax credit programs fully promote and stimulate homeownership? Simply put, the answer is no. Remedying these problems will require changes in the way the City thinks about the value of tax credits, their use as a development tool, how they are packaged and their ability to be more broadly understood and utilized by a variety of constituencies. Tax credits alone cannot be expected to solve the real and perceived challenges faced by Baltimore as it continues to rebuild and redefine its neighborhoods, economic base and quality of life.
The recommendations that follow are organized around the major issues that were revealed during our analysis and interviews. Several represent a compilation of ideas; others are ideas to improve a specific aspect of a program. Baltimore has historically adopted innovative public policy programs; the myriad of these programs are a testament that the time has come to implement a systematic consolidation to increase their efficiency and effectiveness.
RECOMMENDATIONS
Remedying these problems will require changes in the way the City thinks about the value of tax credits, their use as a development tool, how they are packaged and their ability to be more broadly understood and utilized by a variety of constituencies. The recommendations that follow are organized around the major issues that were revealed during our analysis and interviews. Several represent a compilation of ideas; others are ideas to improve a specific aspect of a program.
1. Use the continuation of the Newly Constructed Dwellings Tax Credit to close the gap between City and County tax disparities. House Bill 125 extends the Newly Constructed Dwellings Tax Credit through June 2005. This presents the City and its partners with an ideal opportunity to develop a strategy that integrates the Mayor’s Vacant House Initiative, provides extensive outreach to developers and complements efforts underway by existing organizations.
2. Introduce uniform reporting requirements for all of the tax credit programs. Currently, only the Newly Constructed Dwellings Tax Credit legislation includes an annual reporting requirement. The City should immediately require an annual report for each of the tax credit programs. At a minimum, these requirements should include:
· number of credits approved
· annual and cumulative value of the credit
· impact on surrounding residential values
As part of this process, the reporting requirements for the Newly Constructed Dwelling Tax Credit should be revised to include average and median sales prices. This will provide a more accurate picture of the credit’s effectiveness. In addition, data should be collected to determine how the use of tax credits affects values in surrounding areas and what other types of investment results from the tax credits.
3. Reassign the reporting on tax credit usage. Legislation should be amended to transfer the reporting function to an agency that may be able to present a more balanced look at the tax credits, including their long-term benefits and their effect on stimulating spin-off development.
4. Provide one central contact for the City. In conjunction with strengthening LBMC’s role, the City should designate one agency that acts as a liaison with LBMC, the general public and for coordinating efforts between those agencies that are involved with the tax credit.
5. Use Citistat to map locations where the tax credits are used. One of the difficulties in determining the tax credit programs’ effectiveness is the lack of visual tools, such as maps, that make it easier to determine where tax credits are used, if there is a clustering of applications that may have potential marketing implications or if there are higher rates of usage due to other incentives. The City should use its Citistat capabilities to map this information on a regular basis and allow it to become the foundation for developing and evaluating marketing strategies.
6. Link historic properties to computerized mapping systems. The database being developed by LBMC should be integrated with the City’s GIS system, LBMC’s existing neighborhood maps and other computerized mapping systems. Ultimately, this effort should be expanded to expand SDAT’s link with Maryland Regional Information System (MRIS) to include Baltimore City properties that will result in an integrated database in the form of a MRIS, which includes regional real estate listings. This is a long term project that will require coordinating with SDAT, Maryland Historical Trust and MRIS and most important the identification of a central contact that can be responsible for coordinating and planning how these databases will be linked and the types of information that should be included. In addition to identifying location, maps should link to neighborhoods, information about schools and transportation, permitting requirements and resources such as contractors and architects.
7. Coordinate public and private involvement. City, State and private agencies should, at a minimum, meet annually to review their experiences with tax credit incentives, including marketing expectations, customer service and improving usage.
8. Expand the Live Baltimore Marketing Center’s role. LBMC’s role could be expanded so that it becomes the primary contact and technical assistance provider for all of the tax credit programs. Additional activities could include: working with City and private agencies to develop a comprehensive and integrated marketing strategy, organizing workshops for realtors, developers, homebuyers, community associations and homeowners, contacting realtors on a regular basis to let them know which of their listings are tax credit eligible, providing more detailed web pages to include sample forms, examples of how a tax credit is applied against a tax bill and financial resources, technical assistance in completing an application and compiling required documentation. This would allow LBMC to act as the central contact for the City for all programs. LBMC could also be responsible for implementing an evaluation process that included a quantitative analysis, user surveys and inter-agency reviews.
9. Evaluate income tax credits as both an alternative and a supplement to property tax credits. One of the Waverly Stabilization Tax Credit’s stronger features was its use of the State income tax that equaled the property tax. If marketed and packaged properly, income tax credits can be an especially strong incentive to revitalizing and increasing homeownership in targeted neighborhoods.
1. Combine tax credits with cash incentives to increase their effectiveness in selected neighborhoods. Neighborhoods where tax credits could have a significant impact are believed to be the ones that have the lowest participation rates. This includes largely outer city neighborhoods such as Hamilton, Greektown and Forest Park. One reason for low participation rates may be a homeowner’s lack of access to cash. By combining tax credits with low interest loans or grants that can be forgiven and guaranteeing the property’s assessed value based on the model developed by the Patterson Park Neighborhoods Initiative, tax credits can be more effective in achieving their original goal of stabilizing and increasing property values. It will be important that this type of product is targeted to neighborhoods where there can be a demonstrated impact and should also include historic neighborhoods to help residents meet the 25% cash requirement. Criteria used to determine neighborhoods could include sales values, assessments, community association structure and permit data.
2. Encourage wholesale improvements. Tax credits, such as the Home Improvement Tax Credit, have the greatest neighborhood impact when used on a wholesale basis. One way to encourage blocks to undertake this type of improvement is by negotiating discounts with suppliers in return for volume order.
3. Incorporate tax credits as part of the City’s neighborhood typology efforts. The Planning Department is preparing a neighborhood typology, based on “Plan Baltimore,” the City’s comprehensive plan that classifies neighborhoods into four areas based on their level of stability: preservation areas, stabilization areas, reinvestment areas and redevelopment areas. The goal of the typology is to allocate resources more effectively. Tax credits should be included in the resource pool and further enhanced with grants and loans.
4. Develop a compendium of resources. One deterrent to using the tax credits is identifying the resources required to undertake improvements. Homeowners that might be encouraged to undertake improvements or renovate a vacant dwelling frequently experience uncertainty in selecting architects and contractors. Developing a program that gives certain architects and contractors preferred status in exchange for discounted rates could help alleviate this uncertainty by providing a known and reputable pool of service providers.
5. Provide worksheets demonstrating how credits positively effect a tax bill. As part of a larger marketing effort, worksheets should be available that demonstrate how each of the tax credits impact a tax bill. This could be made available on-line to help potential users calculate the value of their credits.
1. Make information consistent and uniform. Information that is available on the tax credit programs is not uniform. For instance, important regulations, such as an annual application requirement for the Rehabilitated Vacant Dwelling Tax Credit is not listed on the LBMC website. Instead, the user is referred to the City’s Homeownership Institute for additional information. Consistently including all regulations reduced misperceptions regarding program benefits in addition to meeting most individuals’ needs to receive information in an efficient fashion.
2. Distribute information more broadly. Reports and other information regarding tax credits should be shared with all those involved in its marketing or administration, in both the public and private sector. This information should also be posted on the City and LBMC’s web sites. In addition, a brochure rack should be part of the redesign of the permit office into a one-stop shop for homeownership assistance information.
3. Incorporate survey efforts of LBMC and the Finance Department. The Finance Department conducts an annual survey of recipients only of the Newly Constructed Dwellings Tax Credit. LBMC conducts a Follow-up Survey of Home-Buying Fair and Trolley Tour participants. Surveys should be modified to include uniform demographic questions to provide more consistent information regarding actual and potential homebuyers. LBMC should consider including questions to determine a prospective buyer’s awareness of the tax credits and their interest in obtaining additional information or assistance. The Finance Department should also consider adding questions to determine how a purchaser learned about a tax credit as well as other incentives that might be available.
4. Make applications available online. All applications should be available on the Internet. This has the potential to increase usage rates by making information more accessible.
5. Work with the State Department of Assessments and Taxation to expand general awareness of the tax credits. The State’s real property database should be integrated with City systems to more easily identify eligible historic tax credit properties as well as those properties that are currently receiving a credit.
6. Work with the Greater Baltimore Board of Realtors to develop an ongoing outreach strategy with the real estate community. Examples could include:
· notification of members when a new historic district is approved.
· notification of grant and loan opportunities that could be combined with credits.
· contacting individual realtors to let them know which of their listings are tax credit eligible.
· work with the Maryland Regional Information Systems (MRIS) to include tax credit eligibility on historic properties and with the media and real estate companies to structure advertisements in a way that allows tax credits to be used in their advertising strategies.
7. Work with the Home Builders Association to develop an outreach strategy. In addition to traditional techniques such as a newsletter column and e-mail alerts, a special effort should be made to encourage developers to invest in Baltimore City, such as a repeat of the recently sponsored HCD tour of development opportunities.
8. Combine development and tax credit opportunities. This could include a report of the recently sponsored HCD tour with an emphasis on neighborhoods with high rates of deteriorating or vacant housing.
1. Incorporate tax credits as part of a larger marketing strategy. Tax credits should be an important part of an overall strategy that focuses on attracting and retaining homeowners, attracting new developers and stabilizing existing neighborhoods.
In addition to the above, the following are recommendations related to the specific programs:
1. Amend the Rehabilitated Vacant Dwellings Tax Credit to include developers and CDC’s. This tax credit should be the centerpiece of efforts to encourage wholesale revitalization for ownership and market rate rental efforts. A modified tax credit would ideally offer two components. Developers would be entitled to a State income tax credit that could be used to offset what are frequently higher development costs. Homebuyers would be entitled to a property tax abatement to help develop a market in what are traditionally underserved or overlooked areas. This type of amendment would work best if incorporated into a larger incentive package that addressed issues associated with title clearance and parcel assemblage. Additionally, CDC’s should be entitled to file any unused portion of the credit for a cash refund, similar to the historic tax credit. In order to further stimulate development, this extended tax credit could apply to targeted areas where the Administration is interested in fostering development.
2. Extend the duration of the tax credit. The costs associated with significant rehabilitation are generally so high that extending the length of the tax credit may make more projects feasible for a wider variety of homeowners.
3. Repeal the regulation requiring that an application be filed annually. Requiring that an application be filed annually in order to receive the Rehabilitated Vacant Dwellings Tax Credit could be a deterrent to encouraging use of the program. Additionally, it is likely that recipients do not receive the full benefit of the tax credit, due to missing the application deadline.
1. Combine the Newly Constructed Dwellings Tax Credit with focused revitalization efforts. This should include a partnership between the developer, community associations and City and State agencies so that adjacent properties in need of improvement are undertaken at the same time. Similarly, this strategy should also address quality of life issues such as neighborhood planning that impact a purchasing decision and how the community is perceived.
2. Provide a more detailed analysis of using this tax credit with subsidized housing. One of the conclusions drawn by the Finance Department’s Annual Summary was that a high percentage of recipients fell into the category of low- and moderate-income buyers. Homes that were purchased were already receiving substantial public subsidies, thereby offsetting tax benefits. A more detailed analysis should be provided that compares the level of public subsidy tax credit against the tax benefits. The methodology should also evaluate tax benefits received with subsidies against the benefits received if the development were not built. The evaluation should address the changes in property values in the area in order to determine if tax credit usage had an effect. The Department should also evaluate the probable condition of the area without the project in order to compare it to the state of the neighborhood once the project has been undertaken and/or completed.
3. Evaluate extending the tax credit period. Portland and Cleveland have experienced considerable success with their tax credit programs by allowing a ten-year abatement period. City officials should be encouraged to evaluate the benefits of extending the Newly Constructed Dwellings Tax Credit to a ten-year period as a way to further equalize the discrepancies between City and County taxes.
1. Provide low interest loans to encourage greater use of the Historic Property Rehabilitation Tax Credit in less affluent neighborhoods. During the interviews, it was noted that historic neighborhoods with a less affluent population were less likely to take advantage of this tax credit based on residents’ inability to meet the requirement that the rehabilitation cost meet or exceed 25% of the property’s value. By offering low interest loans, reduced rates on contractors and other incentives, it is likely that participation rates in these neighborhoods could be increased and the housing stock would be preserved. In addition, CHAP could administer a loan program designed to maintain homes and stabilize housing values.
2. Restructure requirements so the tax credit is granted when values do not increase. One deterrent to using the tax credit is that it only becomes eligible if there is an increase in a property’s assessment. This may discourage homeowners who live in neighborhoods where property values are flat or depressed.
3. Provide trended data. CHAP currently provides annual data on the number of applications that have been received, the value of the improvements and the value of the tax credit. Trended data would provide a more effective analysis of where the program is being used and its fiscal impact. Additional useful information could include assessment values and resale prices where appropriate.
1. Integrate the tax credit as part of a broader financial incentive program. As with the Historic Property Rehabilitation Tax Credit, the Home Improvement Tax Credit is less likely to be used where it could have the greatest impact, namely neighborhoods that are in varying stages of deterioration. By including the tax credits as part of a comprehensive financial package, and by providing resources such as contracting and architectural resources, it is likely that these neighborhoods will experience increased property values and rising homeownership rates.
PROGRAM ASSESSMENT
The Newly Constructed Dwellings Tax Credit (Ordinance No. 464) became effective in February 1995. The intent of this legislation was to attract and retain middle class homeowners in Baltimore City. This is a five-year tax credit that provides a 50% tax credit in the first year, decreasing by 10% increments to a 10% tax credit in the fifth year. This credit applies to permits issued for residences after October 1, 1994.
The original legislation was to expire in June 2000, but was renewed by Ordinance No. 588. It is due to expire again on June 30, 2002. House Bill 125 was introduced in the 2002 Maryland General Assembly and extended the program until June 2005. The bill, which passed third reader, retains the existing levels of the credit.
To qualify for the tax credit, an individual is required to purchase a newly constructed dwelling that becomes their principal residence. A newly constructed dwelling is defined as a residence that has not been occupied since construction or a vacant property with a maximum of four units that has been vacant or abandoned for one year. It also includes property owned by the City for at least one year and in need of substantial repair in order to comply with applicable City codes. The tax credit application must be filed a maximum of 90 days after settlement along with a copy of the building permit, notarized copy of the settlement worksheet and City application form. The application asks if a State income tax return has been filed, but does not require a copy to be submitted. (Appendix A)
One of the initial uses of the program was Montgomery Square in Federal Hill. After the original legislation became effective, the developers for Montgomery Square sought an amendment to include their development, which did not originally qualify for the tax credits under the initial permit deadline. The developers successfully amended the State’s enabling legislation to include a retroactive exception for permits issued before October 1 but after July 1, 1994. This amendment allowed a 30% tax credit allocated over three years. Approximately 34 Montgomery Square properties qualified, receiving a total of $55,670 in tax credits for the 1999 and 2000 tax years or an average credit of $818 per dwelling unit.
Between FY96 and FY01, the City issued a total of 629 credits representing $1,421,196 in tax credits. These are summarized as follows:
|
Fiscal Year |
Annual Applications |
Cumulative Applications |
Annual Tax Credit |
Cumulative Tax Credit |
||
|
1996 |
30 |
30 |
$20,925 |
$20,925 |
|
|
|
1997 |
114 |
144 |
$133,333 |
$204,258 |
|
|
|
1998 |
111 |
255 |
$229,663 |
$383,921 |
|
|
|
1999 |
122 |
377 |
$309,237 |
$693,208 |
|
|
|
2000 |
149 |
526 |
$314,317 |
$1,007,475 |
|
|
|
2001 |
103 |
629 |
$413,721 |
$1,421,196 |
|
|
The enabling legislation also requires the Director of Finance to submit an annual report to the Mayor and Board of Estimates that analyzes the public costs and benefits of the tax credit. The legislative requirements of this report include:
· Establishing baseline data on new residential construction, housing tenure and net migration trends.
· Measuring the baseline data against the costs and benefits of the tax credit, including administrative costs.
· Estimates of benefits from property income and transfer tax revenues.
Reports are available for FY99, FY00 and FY01 and include information on building permits, tax credits and the results of a questionnaire that was sent to tax credit recipients to gauge program awareness, usefulness and influence on the purchasing decision. The unfavorable consideration that the tax credits received is due in part to the Finance Department’s bias against tax credits that is likely to influence many of the findings that are described below. While their concerns are understandable in light of shrinking city and state revenue sources, AB ASSOCIATES believes that the arguments against the tax credits may be short-sighted in overlooking the long-term value that tax credits can add both through the incremental increases to the property tax rolls, increased property values that result when neighborhoods are stabilized and improved and the psychological value of seeing a revitalized neighborhood.
The reports consisted of two parts: an analysis of the tax credits and other data such as building permits and the results of a survey. The Finance Department generally concluded that the tax credits failed to achieve their objective of increasing middle-income homeownership, based on four findings:
1. The credits did not play a significant role in influencing the purchasing decision.
2. The credit did not play a significant role in encouraging the development of new, middle class, market-rate housing.
3. Based on the disproportionate number of credits approved for low- and moderate-income buyers, the program did not achieve its original objective of retaining a middle class tax base. Low- and moderate-income is defined as 60-80% of the Area Median Income.
4. During the program’s first year of operation, the Finance Department spent $75,000 on initial marketing efforts that included media briefings, brochures targeted to homeowners and other direct mailings to homeowners, realtors and community groups. In the FY00 report it was noted that publicity had been integrated into HCD’s promotional efforts for the City’s Homeownership Institute but that additional efforts should be made to work with commercial real estate interests. This recommendation was further supported by the questionnaire, which found that the majority of applicants learned about the tax credit through a realtor or developer.
The report also suggested that marketing efforts should be more fully integrated with organizations such as the Home Builders’ Association and the Greater Baltimore Board of Realtors and other similar organizations.
Questionnaire results reinforced the need for an enhanced marketing effort. The FY96-98 summary concluded that 58% of buyers had no prior knowledge of the tax credit before purchasing their home. This figure increased to 73% in the FY00 report, and decreased to 71% in the FY02 summary. In addition, less than 25% of purchasers in all of the summary reports felt that the tax credit impacted their purchase decision. The responses to the questionnaire indicate that there are other factors attracting new residents to the City, which should be examined further. In the FY01 summary, 38% of respondents and 33% of the respondents in the FY02 summary were aware of the credit, but could not estimate the financial benefit that they received. There were no questions determining if the impact of the credit on a monthly payment influenced the purchase decision.
The Finance Department’s reports also found that the tax credit did not contribute to an increase in net migration figures. For example, the FY02 Summary Report noted that, of those individuals using the tax credit, 74% of purchasers had confined their housing search to the City, and would have purchased in the City without the added benefit of an incentive. Only 22% of those who responded to the survey were new City residents, which was approximately 13% less than in previous surveys. This question fails to take into account the psychological impact that this credit can have when a potential buyer compares Baltimore’s tax rates with the surrounding jurisdiction.
These questions also fail to take into account the psychological impact that this type of credit has on a developer’s decision to build in the City, as well as whether the impact that a tax credit might have on a monthly payment was an important factor in making the purchase decision. The significant number of buyers’ inability to estimate the financial benefit they received from the credit reinforces the need for additional and ongoing educational and technical assistance.
As part of its reporting methodology, the Finance Department compared residential building permits filed before 1995, when the Newly Constructed Dwellings Tax Credit became law, to those filed in subsequent years. According to building permit data for new housing construction maintained by the Baltimore Metropolitan Council (BMC), an average of 307 annual permit applications for new single-family homes were filed during the 1980’s. Between 1990 and 1994, this average dropped 22% to 169 annual average permits. Between 1996 and 2000 a total of 547 permit applications were filed, representing an annual average of 132 permits. In 2000 this number increased slightly to 174 annual permits.
|
BUILDING PERMITS FILED 1990-2000 |
|
|
YEAR |
NUMBER FILED |
|
1990 |
109 |
|
1991 |
244 |
|
1992 |
77 |
|
1993 |
165 |
|
1994 |
197 |
|
1995 |
245 |
|
1996 |
93 |
|
1997 |
73 |
|
1998 |
202 |
|
1999 |
55 |
|
2000 |
174 |
Of greater concern to the Finance Department were the multiple levels of subsidies that the tax credit was providing. According to the Department, over half of the buyers that applied for the tax credit met the criteria for low- and moderate-income and were purchasing homes already receiving a substantial subsidy, such as Pleasant View Gardens and the Townes at the Terraces. The FY00 report, while not providing specific numbers, stated, “credits were given to a high percentage of owners purchasing already highly subsidized low-moderate income housing.” In FY01, two-thirds of those receiving the tax credit purchased housing that received other forms of subsidies and in FY02 over half of new residents moving into the City and receiving the credits were classified as low- to moderate- income purchasers that were not influenced by the availability of the tax credit. From the Finance Department’s perspective this not only defeated the legislative intent of encouraging middle class housing, but more importantly raised the question of how much, if any, additional subsidy should be available when other subsidies were already in place.
In reaching these conclusions, the Finance Department did not appear to analyze these trends or their implications within a regional economic, planning or policy context. Their analysis fails to discuss or recognize the policy issues that were shaping the City’s planning initiatives. For instance, the report failed to mention the former administration’s policy of promoting low- to moderate-income housing, which tends to require large levels of subsidy and the effect that this had on their analysis. Further, this conclusion fails to address the effect this credit can have in jump-starting a market, as was the experience with Spicers Run, or the possibility that it is better to subsidize developments with the goal of building community value over time. While many of the projects that received tax credits also received substantial subsidies including the two HOPE VI projects, Pleasant View Gardens and the Townes at the Terraces, as well as Sandtown Winchester, it is equally important to acknowledge that these were communities with excessively high rates of vacancies, deteriorating housing stock and severe social problems including homelessness and addiction. The decision to rebuild these communities through homeownership was based on the belief that by de-concentrating poverty and creating homeownership opportunities, neighborhoods would regain their value and ultimately could become attractive to middle class homeowners who were interested in returning to the City.
Even with this type of incentive, average sales prices for City real estate transactions remained far below the regional average. For instance, in 1995 Baltimore City’s average sales price was $73,718. In Baltimore County the average sales price for 1995 was $131,779. And, while the City generally benefited from the real estate boom that was apparent throughout the late 1990’s, prices continued to lag behind its regional counterparts. Between 1995 and 2000 the average sales price in Baltimore City increased from $73,318 in 1995 to $82,228 in 2000. In Anne Arundel County the average sales price increased from $166,200 in 1995 to $206,205 in 2000. In Howard County the average sales price increased from $171,870 in 1995 to $212,721 in 2000.
While these types of comparisons are important for their regional planning significance, it is important not to overlook price increases and trends within the City that exceed the average figures for certain properties recently using this tax credit. These include a $275,900 purchase price for 6217 Green Meadow Way in Cheswolde, $145,337 purchase price for 405 Chadford Road in the Villages of Homeland, and $282,483 for 2113 Essex Street in Canton. These and similar sales indicate that the legislative intent of attracting middle-class buyers may be being achieved.
Despite the Finance Department’s conclusions, the development community feels that the Newly Constructed Dwellings Tax Credit program is a success by leveling the playing field between tax rates in the City and the surrounding counties. The program is hindered only by the low number of units that are on the market. This does not indicate that the program, in and of itself, will not encourage homebuilding. By taking on marketing responsibility and acting as a middleman with the City, the developer has made the process consumer friendly. In the case of two middle-income developments, Coldspring at Woodlands and Spicers Run, this tax credit was instrumental in reaching sales goals and played a strong role in the decision to purchase a home.
Future success of the Newly Constructed Dwellings Tax Credit is clearly linked to the City’s strategy to attract developers and new investment. The tax credit should be regarded as the City’s best opportunity to compete with suburban products by offering an opportunity to help developers lower costs. Those interviewed recommended developing a stronger relationship with the City and State chapters of the Home Builders’ Association and in particular using the tax credit as the centerpiece for a marketing effort targeted to small and mid-size development companies. Additionally, it was suggested that the City also needed to reevaluate its outreach strategies to developers. For instance, it was noted that information about tax credits is not included in developers’ packages, and that City officials frequently convey the attitude that the market does not need the type of assistance that a tax credit can provide.
The Historic Property Rehabilitation Tax Credit was passed in January 1996 (Ordinance No. 668) and was intended to preserve neighborhoods by encouraging commercial and residential rehabilitation of significant historic structures. This is a ten-year property tax credit that is granted on the increase in property taxes that directly results from eligible improvements. In order to be eligible for the credit, the total rehabilitation cost must equal or exceed 25% of the property’s full cash value prior to rehabilitation. For instance, if a property’s cash value were $80,000, improvements would be required to represent a minimum $20,000 investment. Improvements can include exterior and/or interior renovations. The initial legislation was due to expire in January 2001 but was extended through January 2006 through Ordinance 103. This credit is transferable; however, it can be revoked if the property is later converted in a way that does not meet historic standards. The credit applies only to buildings that are in a local or national historic district, or listed as a local or national landmark. The credit cannot be used in conjunction with any other local tax subsidy, except State and Federal historic tax credits unless the property is considered commercial and is located in an Enterprise Zone.
The Commission for Historical and Architectural Preservation (CHAP) administers the Historic Property Rehabilitation Tax Credit. In order to qualify for the tax credit, a property owner submits an application to CHAP, which includes a summary of the work to be done, cost estimates, plans, materials list and photographic documentation along with a $50 filing fee prior to starting the project (See Appendix B). CHAP must approve the application and the owner must have a Notice to Proceed before work can begin. Once the renovations are complete, CHAP staff conducts a final inspection, approves the application and submits it to the State Department of Assessments and Taxation (SDAT). In order to receive the credit, the owner is required to provide CHAP with copies of receipts and a notarized statement regarding project costs as well as providing SDAT with a copy of approved permits. As part of the application, owners are also asked to complete a survey similar to the one used for the Newly Constructed Dwellings Tax Credit. The survey asks for information regarding income, ownership status, property use and the role of the credit in the decision to undertake renovations.
Since the program’s inception in 1996, CHAP has received a total of 288 applications, representing $42,108,673 in improvements. 256, or 89%, are residential projects. 110 projects (both residential and commercial) are complete, representing 38% of the applications received and $9,620,301 in approved tax credits. Applications were received from 26 historic districts and landmark designations. The greatest number of applications, 40, was received from Fells Point followed by Mount Vernon (28), Butcher’s Hill (22) and Roland Park (21). Upton’s Marble Hill, Northwood and Ten Hills submitted the fewest applications. This may be attributed to their recent historic designation status and the time required to plan renovations. The number of applications is expected to increase significantly with the recent historic designations of Guilford, Homeland, Cow Hill, Washingtonville, Lauraville, Stone Hill and Tuscany-Canterbury.
As part of this process, we interviewed property owners, selected by CHAP, who had used the Historic Property Rehabilitation Tax Credit. The application and review process as well as the technical assistance provided by the staff was considered excellent. There were some concerns about the process used by SDAT, which included sending a tax bill with the updated assessment followed by an adjusted bill that reflected the credit. All parties interviewed believed that the tax credit was important to encouraging improvements.
Two concerns about this tax credit repeatedly emerged during the interviews. First, historic districts with the highest participation rates were home to residents who had the financial capacity to satisfy the requirement that improvements represent 25% of the dwelling’s total cash value. This supports the argument to combine tax credits with financial incentives to make them more readily available to middle and lower income neighborhoods. Higher rates of participation may also reflect community-based marketing efforts. Neighborhoods such as Charles Village, Mount Vernon, Roland Park and Bolton Hill have established associations and a leadership that has a high awareness of the tax credits. Higher participation neighborhoods also tend to attract residents that are either professionally or personally attracted to renovation projects. Finally, the effect of a steadily increasing market, particularly in waterfront areas such as Canton and Fells Point, is likely to have played a role in encouraging residents to invest in their properties.
A second concern was the difficulty in determining a property’s eligibility. This may be remedied in the future by LBMC, which is developing a database that can be accessed by address to determine a property’s eligibility.
The difficulty in determining a property’s eligibility is part of a larger problem where the City’s general lack of technology reduces the effectiveness of the program. For instance, the Collection Division has only recently installed a program that will automatically calculate the credit. Prior to the installation of this program, staff calculated the credit manually. It is not clear whether this program will be able to track the cumulative tax credit by property. Additionally, there are no connections between real estate listings for historic properties and “fixer uppers” and tax credit information. Neighborhood web sites do not include photographic testimonials that could encourage additional investment, and rarely provide general information on the tax credit programs.
Home Improvement Tax Credit
The Home Improvement Tax Credit became effective in January 1995 (Ordinance No. 234) and applies to properties that have been owner-occupied for a minimum of six months and which undergo exterior and interior improvements. Projects of any dollar amount may qualify, but the credit is limited to the value of the improvements that are below $100,000. This is a five-year tax credit that begins with a 100% credit against the increased value in the first year and decreases by increments of 20% through year five. The credit may be transferred if the property is sold.
Application is made to the Collection Division and includes a copy of building permits along with proof from SDAT that the increased assessment is due to the value derived from the improvements (See Appendix C). The application is approved by the Collection Division, which is also responsible for calculating the credit.
A total of 41 applications have been received for the Home Improvement Tax Credit, representing $52,768 in total credits. Credits ranged from $23 to $3,003 with an average credit of $1,287. 39 of the properties are located in South and Southeast Baltimore including Federal Hill, South Baltimore, Locust Point and Canton. Again, this indicates the role that a strong market can play in encouraging investment absent of other incentives. AB ASSOCIATES interviews with representatives from the Finance Department revealed that applications for the Home Improvement Tax Credit have increased since August 2001 to approximately six or seven per week.
In order to better determine what impact improvements can have on a neighborhood’s value, AB ASSOCIATES conducted an informal survey. Using the SDAT Real Property Database, AB ASSOCIATES identified the assessed value and, if available, the sales prices for randomly selected properties that received the tax credit. Comparable information for the adjacent properties was reviewed along with one randomly selected property in the same block as the selected tax credit property.
Address |
Base Value |
Current Value(as of January 2000) |
Sales Information |
|
Tax Credit |
|
|
Date |
Price |
203 S. Chester Street |
$143,180 |
$203,980 |
NA |
NA |
Comparable |
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