Why is Maryland rolling over for the EPA’s “Rain Tax” when Virginia successfully fought and won?

“The best things in life are free, but sooner or later the government will find a way to tax them.” Anonymous

The Federal Pollution Control Act of 1972 was a landmark decision to control pollutants pouring into our waterways from commercial and farming operations.  However, after decades of policing “point sources” the EPA did not realize its targeted reductions in water pollutants, and decided to begin regulating nonpoint source pollution “caused by rainfall or snowmelt moving over and through the ground.”

The EPA merrily passed down unfunded mandates on a state-by-state basis to regulate rain water runoff; in 2010 the EPA ordered Maryland to reduce storm water runoff (regardless of whether or not it contains pollutants) into the Chesapeake Bay in an effort to reduce phosphorus and nitrogen levels by 15% and 22%, respectively.

The cost to implement these programs in Maryland alone is estimated at $14.8 billion.  Of that amount $1.8 billion is Frederick County’s share to be met “by 2025, according to figures provided by the county.”

Virginia’s response to their mandate was to take the EPA to court, declaring the agency had overstepped its bounds in attempting to regulate rainwater as a pollutant.  Virginia won their case,  and the EPA elected not to appeal the decision.

Maryland’s response to the mandate should come as no surprise to anyone who lives here.

This past July, the Maryland State Legislature passed House Bill 987, titled the “Stormwater Management – Watershed Protection and Restoration Program.”  The law requires Maryland’s 9 largest counties (Anne Arundel, Baltimore, Carroll, Charles, Frederick, Harford, Howard, and Prince George’s) and Baltimore City  to establish a storm water utility fee by July 2013.

This “fee” is to be implemented on “impervious surfaces” such as roofs and driveways that prevent rainwater and melting snow from seeping back into the ground.  (Everyone from the EPA to local municipalities is adamant that this be called a “fee” so that it can’t be challenged as a disguised and unlawful tax.  But who are we kidding here.)

When faced with the gargantuan price tag, Governor O’Malley played “pass the unfunded mandate” without offering any meaningful plans or assistance to the 10 municipal administrations and staff tasked with raising funds to meet it.  “Please unleash that creativity” was about the only advice this presidential hopeful was able to muster.

What unleashed instead was a storm of controversy, as each of the counties named in the mandate began scrambling to find a way to make storm water management fees palatable in a state already burdened with taxes—or fight them altogether.

Frederick County Commissioner Kirby Delauter went so far as to say he would rather be jailed than impose this fee, but ultimately Frederick’s Board of County Commissioners voted to rebel by proposing a nominal fee of $.01 per year per eligible property owner across the board—thus meeting the letter of the law if not the intended spirit of the program.

The reluctance of Frederick’s county commissioners to adopt a more robust Stormwater Utility Fee structure as other Maryland counties have done isn’t a publicity stunt to fight more taxes from the O’Malley administration.  Maryland’s stormwater utility fee doesn’t make sense on a number of levels:

• It places an unfair burden on only part of our state, when all its citizens enjoy the fruits and recreation of the Chesapeake Bay.
• According to Frederick County Commissioner President Blaine Young, municipalities, which typically have a significantly higher percentage of impervious surfaces than non-incorporated areas within counties, are exempt from the state’s  regulation.  Mr. Young has a very interesting theory about why that came to pass, and it has nothing to do with saving the Bay from pollutants … more like saving the state from conservatives, he believes.
• It doesn’t regulate or solve the problem of massive amounts of pollution that flow into our waterways from states north of Maryland (I’m talking to you, Pennsylvania).
• Nonprofits and religious institutions were not exempt by Bill 987.
• In order for a “fee” to be regarded as a fee and not a tax, the government has to prove that the program cost is commensurate with the value of that service (which the EPA has failed to do, as there is no proof that reducing storm water runoff is going to generate the targeted reductions in nitrogen and phosphorus pollution) AND that the funds raised will be segregated for that program and not raided for other purposes (remember the raid of the Maryland Transportation Trust Fund?  Anyone? … Anyone?).
• There are no “opt-out” provisions for properties with large storm water management facilities on-site or credits for properties that don’t contribute to the public storm water system.

Rob Lang wrote an excellent explanation of how this bill was passed seemingly right under our noses. But how is it that a state with supposedly “the best schools and most educated workforce in the country” can’t develop a more equitably-funded and effective solution to phosphorus and nitrogen pollutants?

When you look closely at the holes in this program it begs the question:  is Bill 987 really about saving the Chesapeake Bay?  Or is it a political play that puts a bid for the White House squarely in Governor O’Malley’s sites?

After all, it would make more sense (and ultimately prove far cheaper) to develop a phosphorus-free fertilizer for use by the Eastern Shore farms.  Fertilizer run-off is a huge part of the pollution problem, yet southern Maryland’s huge farming operations are not being levied with fees under this program—that would be political suicide for the O’Malley administration and fiscal suicide for the farms themselves.

Why can’t the brilliant environmental scientists at the EPA come up with something more effective than attempting to corral the rain?

A public hearing will be held on Thursday, May 30, 2013 at 10 a.m. in Winchester Hall regarding the proposed Stormwater Utility Fee of $.01 for Frederick property owners.

Is agreeing to pay even a penny in “rain tax” sending Frederick down a slippery slope that will eventually put us all on the hook for millions, if not billions, of dollars of stormwater mitigation programs we cannot begin to afford?

Let your voice be heard, lest Governor O’Malley will be taxing the wind.  Oops…too late.

The authors: Rocky Mackintosh is President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He also writes for TheTentacle.com.  Kathy Krach is a commercial sales and leasing agent with MacRo.

Is the Land Market Heating Up?

The following MacRo Report entry is written by Dave Wilkinson, Vice President of MacRo, Ltd. regarding the current factors that can influence the market price of land in Frederick, Maryland.

Spring is officially here – the vernal equinox occurred on March 20th.  But through early April, winter didn’t want to let go.  The market for land has been behaving similarly.   While there are signs that the market is warming up, it’s difficult to determine yet if the cold headwinds that have suppressed the market for the past few years have abated or not.

The spring 2011 MacRo Report included an overview of the market for land in Frederick County.  At that point in time, the market was still trending down and it was hard to see many positives.  How do things stand today?  In summary, it appears that the market for land has hit bottom and may be ready to rise.  The number of land sales reported by Metropolitan Regional Information Systems, Inc. (“MRIS”) experienced a steady downward trend between 2000 and 2008, dropping from 287 sales to 50 over that time.  Between 2009 and 2011 the number of sales effectively ‘bounced along the bottom’.  In 2012, sales increased to 86, an increase of 72% above the low point experienced in 2008, but still only 30% of the peak in 2000.

Of further interest is the behavior of prices.  Since prices are dependent on acreage and whether the lot is “buildable” or not, we’ll only consider lots between 1 and 2 acres in size that are perc approved for one residence.  In 2000, the median sale price was $73,000.  Prices then increased rapidly reaching a peak of $257,000 in 2006.  Then the real estate bubble burst and demand dropped.  As the number of sales fell, the median price plummeted; by 2011, the median price was down to $103,250.

Now the good news: in 2012, the number of sales increased AND the median price had risen to $111,500.  It appears that prices have finally hit the bottom of their cycle and could be firming up.  It will be interesting to see if an  “upward” trend takes root in 2013; while it’s very early in the year, both the number of sales and median prices are above 2012 levels. At MacRo, we’re not predicting a substantial escalation in prices anytime soon, but we do feel that the market is improving.

We know that the sultry days of summer will be here soon enough, but it’s much harder to predict when the market for land will experience a sustained recovery.  If you’re thinking of buying or selling land or a farm, please give me a call and let me assist you in your evaluation.

Dave is a licensed Realtor and brokers many of MacRo’s real estate building lot listings, using his knowledge of zoning and subdivision regulations, real estate market conditions, and land development options to help MacRo’s clients achieve their goals. Contact Dave at 301-748-5670 or dave@macroltd.com

Click here to download the complete PDF version of this spring’s MacRo Report!

Here’s the latest news…

Now Recorded: 20 Exclusive Estate Lots at Manor at Holly Hills

Site construction has begun on Manor at Holly Hills, a one-of-a-kind community situated on 185 idyllic acres just east of Frederick City.  The community includes 20 custom building lots ranging in size from 1.2 to 26 acres, with mature forest areas, streams, and untouched natural rock formations preserved.  MacRo has already received contracts on half of these lots, and continues to field a steady flow of inquiries from prospective buyers.

Visit www.manorathollyhills.com for sitemaps, amenities, and frequent updates on the project status.

To arrange a personal tour of the lots and for additional information, contact Rocky Mackintosh at 301-698-9696 ext. 202 or rocky@macroltd.com.

Kathy Krach Joins MacRo’s Sales Team

 This past November, Kathy Krach made the transition from MacRo’s strategic marketing consultant to licensed commercial real estate agent.  She’ll still be contributing articles for the MacRo Report Blog, but with a new perspective now that she’s active on the sales side of the business.  Her consultative approach with clients is already proving quite successful and we’re happy to welcome her to MacRo’s sales team!

Click here to download the complete PDF version of this spring’s MacRo Report!

With only 11 building lots remain to be sold, it’s time to begin site construction for the new public road.

It has been a long wait for those who have been planning to build their dream home upon the 185 acres of the rolling countryside of the former estate of M. Robert Ritchie, Jr. and his wife Harriet.

Just in time for Mr. Ritchie’s 100th birthday, the movement of dirt on the highly touted development of 20 estate home sites will begin next week.

Located a few miles east of the City of Frederick, the Manor at Holly Hills was envisioned nearly a decade ago by Mr. Ritchie as a legacy project to the family.  It will surely be one of  the most exclusive high end communities in Frederick County, Maryland. 

All the lots and roadways have been staked by the engineers, and installation of sediment control barriers are scheduled to begin tomorrow.  Weather permitting; the ground will be broken for the three quarter mile divided entrance road to be called Ormonds Terrace, which was named after the builder of the original stone house built on the property in the late 1700′s.

The road is planned to be substantially complete in the late summer early fall of this year.

Several of the lot purchasers have already selected their custom home builders with architectural drawing in the works.  Most of the current 9 lot purchasers plan to begin construction this fall, some are considering starting sooner.

It is expected that the typical homes will range in size between 3,000 and 7,000 square feet of living space and the total values will fall between $1,000,000 and $5,000,000.

The remaining 11 home sites continue to generate strong interest and it is expected that the project could be sold out this summer.  In addition the Ritchie Manor Estate on 25 acres has been placed on the market at a price of $1,550,000.

For further information, please contact Rocky Mackintosh at 301-748-5655 or via email at rocky@macroltd.com.

There are only a couple of weeks to go before Uncle Sam gets his share of your hard earned money … so we thought we would rerun one of our more popular and taxing articles from 2011

To capitalize or to deduct property development costs?

Land and real estate developers, regardless of size, are faced with tax issues that can have a significant impact on their resources and profits. Some of these issues relate to tracking and capitalizing property development costs. It is important for any real estate developer to be familiar with basic tax concepts regarding capitalization, in order to ensure they are following the required tax rules and are not taking deductions for costs that should be capitalized.

Brokers that acquire real estate with the intent to resell it in a short period of time as well as developers that acquire real estate with the intent to build, improve or develop the property can incur costs that may not be deductible in the current period. Such costs will be recouped either through depreciation deductions over time or recovered upon sale by increasing the cost basis of the property.

What types of costs are subject to capitalization?

Costs incurred to produce the property are not currently deductible. Taxpayers must capitalize all the direct costs of producing the property and the real property’s allocatable share of indirect costs. “Production costs” include the cost to construct, build, develop or improve real property. Processes such as grading and clearing of land, excavating for the purpose of roads, laying foundation or lines for utilities, plumbing and/or electrical work, qualify as production costs. Labor costs such as standard wages, overtime, employee benefits or payroll taxes are also included in direct costs. All indirect costs allocatable to the construction activities, such as rent, repairs and maintenance, insurance utilities and depreciation, should be capitalized as well.

There are costs a developer may incur in the pre-production phase that are also subject to capitalization, if it is more than likely the property will be subsequently developed. Some of these costs include property taxes, government permits, zoning variances or engineering and feasibility studies.

Marketing, selling and advertising costs, although very important to the sale of the property, are not considered construction related costs and can be expensed in the year incurred.

Internal Revenue Service (IRS) regulations may also require the capitalization of interest on debt incurred with respect to a property during the production period. The production period is considered to begin on the first day that any physical production activity is performed (i.e. clearing, grading, demolition, etc.). Production ends when the property is ready to be placed in service or is ready for sale. Completion date can be a problematic subject for those involved in the construction of multi-unit buildings. From a tax perspective, each unit is considered to be independent of others as long as each unit is not contingent on another in order to be sold or placed in service. Capitalized costs, in this case, must be allocated to particular units using some reasonable method accepted by the IRS.

There are other considerations that brokers or real estate developers should take into account before investing.  Knowledge of the capitalization rules and regulations should be a priority for companies as these rules affect the timing of deductions with regards to income taxation.

Article provided by Anca Stradley, MKS&H.

About: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick, Maryland.  MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and management needs. Please visit www.MKSH.com for more information.

MacRo shares a campaign platform wish list from a commercial real estate perspective.

In “Mayor, Mayor, on the Wall, Who’s the Strongest of Them All?” I gave an overview of the candidates for the 2013 City of Frederick mayoral election.  This is the second part of that post.

In follow up, here are the goals I believe the next mayor of Frederick should pursue:

1.  Bring the City of Frederick’s fiscal house to order.

Post-employment benefit and pension obligations: This line item is a tremendous burden on the budgets of municipalities across the country. While the current administration has made adjustments during the past year—by  increasing participant contributions, changing the calculations for retirement age and salary basis, increasing the age of early retirement, and dropping a several hundred thousand into the city’s OPEB and pension funds—it seems to me that there is a lot more work to do to tame this albatross.  This is one Can that can not be kicked any more.

Tax equity between the city and the county: A reasonable effort was made between these two jurisdictions over the issue of the double taxation of city residents and businesses for services provided by the county for the benefit of the city.  While a tax-differential calculation is a good concept, is a $0.04 reduction in property taxes enough to resolve this issue?

Merge city and county services where appropriate: For several years I wondered if there was a cost efficiency to local government if the city were to annex all of Frederick County in under its umbrella, a strategy adopted by many cities throughout the country—Jacksonville, Florida and Indianapolis, Indiana to name two.  But after further review, I realized that creating bigger bureaucracy does not necessarily make for a more efficient government.  That said, the idea of merging the departments of the city and county water and sewer services, among others, could make sense.

2.  Serious pursuit of economic development.

We all know about the plans to complete the next phase of the Carroll Creek Linear Park, and hats off to the current administration for finding the funding to do so, but that alone is a mere fresh coat of paint to what else could be done.

Adjust expectations on hotel/conference center: The city has placed a great focus and expense on laying out guideline to attract a hotel/conference center for downtown.  And while studies that have been produced show how a 200 plus room hotel and 15,000 square foot conference center  will bring tremendous economic benefit to downtown, from the commercial real estate developer perspective none of the studies prove something of that size to be a worthy investment risk.  Lowering the sites on what is feasible now will make sense.

Complete airport runway expansion: According to my calculations, nearly $20 million has been invested in tower construction and property acquisition around the airport … not including the costs associated with the extension of Monocacy Boulevard.  That’s more than a big investment.  But still nothing has been done to complete acquisition of the easements required to lengthen the runways.  Imagine the economic benefit and revenue boost the city will gain from expanding Maryland’s second busiest airport!  This may be a challenge giving that the FAA is facing cuts from sequestration, but still worth pursuing.

Resolve unrealistic land use plans: Back in 2005 (I like to refer to the years around that time as the “Fantasy Years”), the City adopted a masterful novel called the Land Management Code.  Upon reflection and subsequent application (or lack thereof), it has become clear that many parts of that volume established unrealistic expectations that do not work for the new world order.  Consider the residential density formula for vacant downtown parcels … from a multifamily development perspective an increase could be warranted for certain core areas of downtown, which could provide the additional benefit of bringing more workforce housing to Frederick.

Better use of parking meters and decks, and onsite parking requirements: I could and should devote an entire blog post on this issue.  Meager efforts have been made in addressing how to generate enough revenue from meters to be able to finance the parking structure planned behind the headquarters of Frederick County Public Schools.  Imagine the incredible boost in property tax revenues the City of Frederick could realize from expanding development along the Carroll Creek … and the secret lies in two things: density and parking.

Resolve the sewer and water tap fees issue: Water and sewer tap fees are a significant hurdle to new service-sector businesses trying to locate downtown. Every commercial real estate agent in Frederick knows this is a common roadblock the stops prospective tenants and buyers cold. Even restaurateurs with the clout of Bryan Voltaggio struggle to overcome the expenses involved in opening new locations downtown.

3.  Fearless leadership and decision making:

For far too long the proverbial can has been kicked down the road from City Hall.  Much has been said about what has been accomplished; our next leader must be willing to truly address issues head on as the very fragile recovery continues.

At this point, I will give Mayor Randy the benefit of the doubt as a first term elected official, but I do think that he could have taken a stronger position on several of the issues listed above.  I believe that of this year’s crop of declared and would-be candidates all have the ability to lead.  But as the campaign gets more heated and the blood bath begins, let’s hope the strongest and best leader will emerge!

The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He also writes for TheTentacle.com and for Want2Dish.com.

Fall 2012 Land Market Update

The following MacRo Report entry is written by Dave Wilkinson, Vice President of MacRo, Ltd. regarding the current land market in Frederick, Maryland

Recent data indicates that residential real estate has hit the bottom of its cycle and is improving. My clients are asking how, and when, this will aect the market for land in our region.

Home prices are trending upward while the number of foreclosures are down. September data for Frederick County shows the average home sale price is up 8.5% from the previous year, while the number of active listings is down 29%. While most housing experts are forecasting an extended period of modest price increases, a recent report from Barclays Capital indicated that housing prices could rise between 5% and 7.5% annually through 2015 due to robust demand coupled with constraints in supply.

Typically, land lags behind the residential sector, and the market for land hasn’t been affected by the improving residential market yet. While CoStar reports that 2012 may be the first year since 2005 that the national volume of land sales will be higher than the previous year, buyers are proceeding with caution. Builders and developers require well located properties with low development risk, and all buyers are motivated by low prices.

The market for individual lots in Frederick County is still soft. The number of “buildable” lots sold thus far in 2012 and the median sale price are on target to match the low levels experienced over the past five years. One area of concern is the market for large properties: while four properties over 100 acres sold in 2011, only one has sold in 2012, and the number of active listings has swelled to twenty. Demand from investors and ‘gentleman farmers’ has all but evaporated and ‘full time farmers’ are only willing to purchase at prices that yield a positive return from agricultural activities. Agricultural preservation programs can reduce the cost of acquisition for established farmers, but government funding for these programs is down substantially over the past few years.

Regardless of the economic climate, opportunities always exist for buyers and sellers. Rocky and I have each been in the land business for over 20 years and are well-qualified to assist in the acquisition or disposition of farms, development land and buildable lots.

Please give us a call if we can help you in any way.

Dave is a licensed Realtor and brokers many of MacRo’s real estate building lot listings, using his knowledge of zoning and subdivision regulations, real estate market conditions, and land development options to help MacRo’s clients achieve their goals. Contact Dave at 301-748-5670 or dave@macroltd.com

Click here to download the complete PDF version of this fall’s MacRo Report!

The Manor at Holly Hills, a future luxury residential community of estate lots east of Frederick City, has reached the next set of milestones. Additionally, we have received six non-binding letters of interest on the project from people interested in purchasing lots once recorded.  More letters are anticipated from several recent showings. Visit the website for more information on  the current status of development.

Visit www.manorathollyhills.com for sitemaps, amenities and frequent updates on the project status.

To arrange a personal tour of the lots and for additional information, contact Rocky Mackintosh at 301-698-9696 ext. 202 or rocky@macroltd.com.