Posts Tagged ‘ Taxes ’

Tax Tempest in a Teapot

It may only be raining pennies, but Frederick County is doing its share to Save the Bay.

We often hear local politicians complain that Frederick is treated like a redheaded stepchild in Annapolis.

It doesn’t help being a county that stands out red in a sea of blue come election time, or that Frederick’s conservatively-leaning political leaders don’t hesitate to wage war against the seemingly endless regulations and taxes raining down from a governor with his eye on the White House.

The Rain Tax is a prime example of a negative perception of Frederick County cultivated through political posturing and brinkmanship of both sides.

If you aren’t familiar with Maryland’s Storm Water Remediation Fee (or “rain tax” as the development community has affectionately dubbed it), you can read the MacRo Report post “Rain, Rain, Go Away–Before O’Malley Taxes Us Another Way.”

In brief, the State of Maryland passed a bill last year that requires 10 of Maryland’s most populated counties to establish a “fee” to fund storm water mitigation retrofits.  These retrofits are one of a number of strategies adopted by the Maryland Department of the Environment (MDE) to meet the unfunded mandate set forth by the EPA to clean up pollution in the Chesapeake Bay and surrounding watershed.

It should come as no surprise that Maryland is the only state in the Chesapeake Bay watershed to pass legislation establishing mandatory fees to fund unfunded EPA mandates.

Frederick’s Board of County Commissioners struck back at what they felt was an unnecessary piece of legislation when they set Frederick’s storm water remediation “fee” at one penny per eligible taxpayer per year.  The BoCC made their point (and garnered a good deal of publicity) but created a storm of controversy in the process.  Frederick County has since been falsely accused of being anti-environmental and of putting it’s water quality–and by extension the Chesapeake Bay–in jeopardy.

The truth is, Frederick County is in fact contributing a great deal of effort and money toward keeping local streams and watersheds clean.

Frederick County’s Department of Business Development & Retention recently gathered the real estate and development community for a Rain Tax Forecast.  A panel of three presenters gave an overview of how taxpayers and developers alike will be impacted by Maryland’s implementation of the unfunded mandate sent downstream by the EPA.

Panelist Shannon Moore made some very interesting points during her presentation at the Rain Tax Forecast.  Moore is the manager of the Frederick County Office of Sustainability & Environmental Resources.  This department is charged with executing “practical solutions for protecting the environment, conserving energy, and living sustainably in Frederick County, Maryland.”

First, and most importantly, Moore highlighted the fact that while Frederick’s penny fee will generate only about $490 per year, Frederick County has in fact spent $2.5 million per year on storm water permit compliance and retrofits during the past 10 years (a total of $25 million), allocated from the county’s general fund.  In fiscal year 2014, the county increased that allocation to $3.5 million per year (or about $73 per eligible tax account).

In other words, instead of raising taxes to fund water quality improvement and protection measures, Frederick County has been allocating money currently in the budget.  This approach is similar to that adopted by Carroll County , as well as by other states impacted by the EPA mandates to clean up the bay.

Moore also explained the MDE has multiple goals–the MDE’s Watershed Improvement Plan calls for nutrient pollution reduction, whereas its Stormwater Permit program goal is impervious surface area reduction–and these goals don’t align.  In fact, impervious surface area reduction has evolved into a program of retrofitting urban properties that lack stormwater treatment systems, or have systems installed prior to 2002 (which was the year stormwater management systems were required to filter out pollutants and sediment as well as decrease runoff).

Moore broke down the costs per tax account of MDE goals to mitigate pollution from nutrient pollution and stormwater runoff.  If Frederick County were to pay for these goals through a stormwater utility fee, these charges would amount to:

  • Annual Cost of Frederick County’s current MS4 Stormwater Permits:  $72.96
  • Estimated annual Cost of Frederick County’s next MS4 Stormwater Permit (draft): $524.12
  • Estimated annual Cost of including all MDE 2017 Watershed Improvement Plan goals (including nutrient pollution reduction) in the next permit:  $1,678.45

Retrofitting existing urban development to meet EPA/MDE goals for runoff and water quality is VERY expensive.  According to Moore, “Maryland has set the bar higher than any other state in the country.  No where else are we seeing the same amount of urban retrofitting that Maryland is requiring because of the bay.”

Here’s another fun fact: new development projects with Maryland’s required state-of-the-art stormwater management systems in place actually generate LESS pollutants than raw land, an outcome that the State of Maryland did not anticipate, nor quite knows how to deal with.

Frederick’s cost to meet the 2017 stormwater requirements in the MDE’s Watershed Implementation Plan (WIP) is $342,938,004.  If that cost were to be placed squarely on the shoulders of Frederick’s eligible property tax payers, each would pay an additional $1,678.45 extra per year.  The total for Frederick to meet the MDE’s stormwater WIP goals for ALL permit holders by 2025?  A shocking $1.5 billion.

It quickly becomes clear that whether the county is collecting $0.01 per taxpayer, or like Baltimore City levies $144 per taxpayer (the highest stormwater fee levied to date), these “fees” are a mere drop in the bucket towards meeting the lofty goals of the EPA and the MDE.

All of this tempest in a teapot over Frederick County’s stubborn refusal to toe the line on the rain tax has served to camouflage a far more urgent concern:  Maryland’s governor may look like a hero in Washington for his environmentally friendly stance, but he has passed the buck to the counties and municipalities he serves.  How will Maryland’s taxpayers ever begin to shoulder the burden of saving the bay?

The author: Kathy Krach is a commercial sales and leasing agent with MacRo.

Rain, Rain, Go Away—Before O’Malley Taxes Us Another Way

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.

Taxing Questions: Capitalizing Real Estate Development Costs

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.

5 Top Frederick Commercial Office Sales of 2012

With the looming loss of Bechtel jobs, Frederick’s commercial office market needs new employers more than ever.

“If you didn’t like 2012, you probably aren’t going to like 2013.”

CoStar analyts opened their 2012 office market recap with that somewhat dubious statement, but in the end they delivered a mixed bag of good and bad news.

The U.S. office market is more or less reflecting the U.S. economy:  hot in some spots, a sluggish recovery overall, but moving in the right direction at least.

  • Absorption overall in the U.S. office market has improved, meaning that more space is being leased up than is becoming vacant.   Not surprisingly, office markets with high concentrations of technology and energy businesses are red-hot right now:  Seattle, San Jose, and Pittsburgh (which posted the lowest vacancy rate among the 20 top markets in the U.S. due to it’s coal and shale industries).
  • The Washington D.C./Maryland/Northern Virginia market has already seen the negative effects of government spending cutbacks.  Absorptions in that market dropped.  In fact, northern Virginia had the steepest decline (4 1/2%) in net absorption of any major market nationwide.  Interestingly, despite the increase in vacant office space there rents are continuing to climb in northern Virginia (perhaps because private businesses continue to flee Maryland for Virginia’s business friendly tax structure).
  • REITs are now buying portfolios of office buildings (as opposed to single purchases of large iconic buildings in top markets like New York and Washington, D.C.)  In fact, CoStar declared “the window for top-dollar deals in D.C. has closed.” REITs are shopping instead in secondary and tertiary markets for buildings that offer better yields than top markets will bear.
  • Bechtel is vacating 123,000 SF of office space in Frederick this year.  That is a blow to the Frederick market, and is nudging Frederick’s office vacancy rates up to almost 15%, which otherwise would have remained stable around 13.5%.

The loss of a major employer like Bechtel and higher vacancies in Bethesda and Rockville will likely put some pressure on the Frederick office market this year.  And we don’t yet know what the fallout of government spending cuts will be.

There’s really only one solution to the problem, as MacRo Report Blog has covered repeatedly:

MARYLAND NEEDS MORE PRIVATE EMPLOYERS IN MARYLAND.

During a recent roundtable of Frederick’s commercial real estate professionals, my colleague Gary Large of Ausherman Properties said it best: ”We can’t fill 3 million square feet of unoccupied office space with companies from Frederick.”

2012 TOP 5 COMMERCIAL OFFICE SALES IN FREDERICK, MARYLAND

1) $16,511,000            PNC Bank Building – 110 Thomas Johnson Drive

Greenfield Partners purchased this office building in a portfolio sale of 23 properties worth $161,900,000 from Corporate Office Properties Trust (COPT) in July.  The building is 122,491 SF in size ($134.79/SF).

2)  $3,350,000           North Ridge Professional Center – 130 Thomas Johnson Drive

This 13,204 SF medical office building with multiple tenants sold in June ($253.71/SF).

3)  $950,000              45 East All Saints Street

An investor purchased this 5,585 SF office building that backs up to Carroll Creek in downtown Frederick ($170.10/SF).

4)  $714,010             Conley Farm Building 1 – 7101 Guilford Drive, Unit 100

A Square Investments, LLC. purchased this office condominium in September from Clagett Enterprises.  The property is 3,097 SF ($230.55/SF).

5)  $670,000             New Market Professional Center – 164 West Main Street, Units E & F

Lighthouse Financial Advisors sold this property in July.  The two office condominums total 2,897 SF ($231.27/SF).

There were a couple of office buildings that sold in Frederick that qualified for this list based on recorded selling price, but as they appear not to be non-arms length transactions and not necessarily representative of true market value, they were not included.

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 Want2Dish.com.

 

Obamacare to Reap Rewards from Real Estate Sales

Capital gains taxes on real estate transactions could increase by as much as 8.8% in 2013!

Contemplating the sale of a tract of land, commercial real estate, or even a personal residence?

A property owner may want to consider taking action sooner rather than later.

There are two changes on the horizon that could significantly impact profits on residential, Land and Commercial Real Estate transactions: new Medicare surtaxes and the expiration of the Bush tax cuts.

The Patient Protection and Affordable Care Act (PPACA) (a.k.a. Obamacare) has been front and center in the news for the past couple of years since it became law in March of 2010.   Buried within the nearly 1,000 page document are any number of regulations and new taxes … more than one can imagine.

The good or bad news (depending on one’s perspective) is that over the last two years the grim truth about PPACA has been surfacing, as former Speaker of the House Nancy Pelosi revealed in her now infamous statement, You have to pass the bill so you can find out what’s in it!”

Consider Section 1411 of the bill, where the Medicare surtax is addressed.

What does the healthcare bill have to do with real estate, one may ask?

For the first time, a 3.8% Medicare payroll tax will be applied to investment income — including rents and net gains from disposition of Real Estate – of single taxpayers with adjusted gross income (AGI) above $200,000 and joint filers over $250,000

One may think that this only impacts the very wealthy … It may be worth taking another look.  Consider the small farmer or investor living on a meager income, but sells a tract of land or building that yields a capital gain of over $200,000.  Is such a sale subject to the 3.8% tax?

Perform a Google search “The 3.8% Tax: Real Estate Scenarios & Examples” to find a detailed informational brochure available from the National Association of REALTORS® (NAR) that lays out helpful scenarios calculating Medicare surplus taxes on a variety of real estate transactions.

According to NAR, “This new tax was never introduced, discussed or reviewed until just hours before the final debate on the massive health care legislation began.”

And that’s not all.  The healthcare reform legislation also imposes an additional 0.9% hospital insurance (HI) tax on wages in excess of $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers.

Assuming the Supreme Court doesn’t reject Obamacare in its entirety, both of these taxes take effect in 2013.  Taxpayers in the highest brackets could see income tax increases of as much as 4.7% due to the PPACA legislation!

The other grim reaper lurking in the shadows is the fast-approaching expiration of the Bush-era tax cuts.  If those tax cuts expire at the end of this year, capital gains tax rates generally will increase from 15% to 20% (0% to 10% for lower-income).  This increase affects all taxpayers, including small businesses.

“The bulk of these changes will affect individuals, but they will also have a major impact on businesses,” said Jennifer Fair, a CPA with McLean, Koehler, Sparks and Hammond.  “In particular, the highest income tax rate on individuals will increase to 39.6% percent, which is 4.6 percentage points higher than the highest tax rate on corporations. Therefore, although there has been a move in recent years toward pass-through entities, such as LLCs, the C corporation may again come back into favor as individual rates are increased.”

“We don’t expect any legislation on these tax cuts to be passed until after the election,” continued Fair.  “We are planning as if they are expiring, until we hear otherwise.  It is possible the legislation could be passed as late as early 2013 and made retroactive.”

So what is the bottom line of all of these tax increases in the pipeline?

A real estate seller could be facing a combined increase in capital gains taxes of 8.8% next year!

“If all of this hits at the same time, it could send shivers up people’s spines,” said Bill Castelli, Vice President of Government Affairs with the Maryland Association of REALTORS®.  “It’s not clear what is going to happen in Congress.  On one hand, Republicans want to hold out to extend the Bush tax credits, but they have to pass something.  The election results will have a role to play in this, and the economy will have a role to play.  If the economy doesn’t pick up so revenues can fund some of the deficit, it gives Congress less of a choice.”

So what’s a seller of Land and Commercial Real Estate to do?

Sell that property before 2013.  That’s the only sure way to avoid these taxes.

If that is just not practical, one may choose to wait (for what could be several years) for a more robust real estate market, it is highly recommended that one find a competent accountant or financial planner to help with capital gains planning.  Tax planning strategies (including reporting capital gains on the sale of property on an installment basis) can help reduce or defer capital gains income

An additional thank you goes out to Catharine Fairley, CPA and Principal at Draper & McGinley, PA for her guidance and expertise in providing information for this article.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes for TheTentacle.com and Want2Dish.com.

In the Crosshairs: Blighted and Vacant Real Estate

AD-Hoc Committee recommends tiered tax system, escalating fines, and receivership on unkempt real estate within the City Frederick.

So great moreover is the regard of the law for private property, that it will not authorize the least violation of it; no, not even for the general good of the whole community. 

~William Blackstone

Sir William Blackstone was an English jurist, judge, and pre-eminent legal scholar during the eighteenth century. He wrote the Commentaries on the Laws of England, one of the most influential legal texts written during colonial times.

Blackstone’s Commentaries played a large part in shaping both our nation’s Constitution and the Declaration of Independence.

Blackstone and his contemporaries held fast to the belief that the right of property ownership is a moral right, much like life, liberty, and the pursuit of happiness.

And while many argue that Americans often have difficulty distinguishing between the pursuit of things and the pursuit of happiness, I leave it to more philosophical minds than mine to debate that point …

Suffice it to say that Americans take property rights very seriously, and only under extreme circumstances and as a means of last resort will the government act through eminent domain to impinge upon those rights and seize property – for example, when major laws are broken by a property owner.

(Most of the time when we hear the words “eminent domain” we think of property that has been acquired because it was interfering with efficient traffic patterns … and that is because Americans also take the right to travel everywhere swiftly by automobile very seriously.)

For the most part this system works very well … except when it doesn’t.

There is always going to be a percentage of the populace who don’t know how to be, or don’t care to be, good neighbors and property owners:  refusing to maintain or repair properties, allowing façades to deteriorate, leaving properties in premier locations vacant … the list goes on.

In a residential setting, this is generally a problem only to those who live within the impacted neighborhood. Over the last 40 years most new residential real estate developments have been encumbered by covenants that often go deeper to reinforce property maintenance as well as zoning laws.

When it comes to commercial real estate, however, the ripple effect of a “bad neighbor” can have a much larger – and far more economic – impact.

Because men like Blackstone were able to articulate and defend so eloquently “that sole and despotic dominion which one man claims and exercises over the external things of the world,” municipal governments often feel that their hands are all but tied when it comes to dealing with irresponsible commercial landlords.

But the winds have been shifting. Voters are steadily granting state and local governments greater responsibilities for stewardship over the health of regional economies. The trend now is to take a harder look and a more creative approach to solving the problem of commercial blight on a local level.

The City of Frederick formed the Blighted and Vacant Property Ad Hoc Committee in January of 2012. This group was charged with developing alternatives to remedy some of the eyesores and under-utilized gems that prevent our precious and vibrant downtown area from reaching its full economic potential.

The committee delivered their report to the City of Frederick Aldermen on Friday, July 6, 2012. In that report, the committee carefully defined blight and vacancy, and recommended that the city develop the means to better report and track vacant and blighted commercial properties to better enforce code violations on said properties.

More importantly, the committee recommends developing and adopting some intermediate “tools” between the extremes of mere code enforcement and eminent domain, including:

  • Adopt a blighted building property tax which assesses a city property tax of 5 times the base rate on properties that fall under the city’s definition of “blighted” for longer than 1 year. To put that into concrete terms, a “blighted” building assessed at a value of $800,000 would be taxed $29,200 per year ($3.65 per $100 property value) instead of $5,840 ($0.73 per $100). This would put a significant dent in any future profits a real estate speculator would realize when (if?) the market turns.
  • Adopt a compounding or escalating fine system for repeat code violators. Ditto for “significant dent in profits.”
  • Provide lien or fine waivers for new owners of blighted property who agree to rehabilitate and rent the buildings.
  • Adopt property tax credit programs as an incentive for investment in blighted and vacant commercial properties.

And in the event that no recourse is left to the City but to take blighted properties from uncooperative or incapable owners…

  • Adopt a real property receivership program. This is a “faster, cheaper, and lower liability” alternative than traditional seizure under eminent domain, which place expensive liabilities on a city’s balance sheets.  It instead allows a third party to manage, rehabilitate, demolish, market and sell distressed commercial assets.

Our fair city has an overall commercial vacancy rate that is low relative to comparable cities, but we all know the most notorious examples of urban blight and vacancy in Frederick…the so-called “dragon lady” who owns the decaying Asiana Building in the 100 block of North Market nestled smack in between Zoe’s Chocolate Co. and Acacia … and there are other long-time offenders.

The Aldermen of the City of Frederick will hold a workshop to discuss the Blighted and Vacant Property Committee’s findings tomorrow, July 11.

I expect interesting questions to be raised regarding the degree of power city officials will seek over Blackstone’s definition of real property rights.

While it is clear that this task force recommendation was initiated by the lack of cooperation of a select few downtown property owners, the larger goal here is intended for the greater good over the long haul.

The Frederick community has had a very lively history of debating Blackstone’s version of real property rights over the last twenty years relating to use and zoning regulations. This matter addresses issues from a somewhat different angle and in my opinion a very worthwhile debate for our citizenry to take on.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

Maryland, the New Michigan?

Economic Insight from Anirban Basu on Maryland and Frederick County

In Part 1 of MacRo Report’s blog post The Economy and U.S.: Insight from Anirban Basu, MacRo’s Kathy Krach asked Basu to shine a light through the murk of conflicting economic data that makes it difficult to determine whether or not the U.S. is in fact experiencing a sustained economic recovery.

One of the greatest unknowns currently exerting downward pressure on our nation’s economy stands to hit Maryland very hard:  whether Congress will take action to prevent automatic massive spending cuts that begin in January.  MacRo Report has already covered Maryland’s heavy dependence on federal jobs:  Maryland ranks third in the nation for federal employment, and 24% of all new jobs created in Maryland in 2010 were federal jobs.

In part two of Ms. Krach’s interview, Mr. Basu outlines the actions Maryland leadership should be taking in the face of looming federal spending cuts, and shares how Frederick County has positioned itself to succeed.

Ms. Krach: How vulnerable is Marylands job market to the upcoming cuts in the federal budget?

Mr. Basu: When the federal government begins in earnest their austerity program, Maryland, D.C., and Virginia stand to be massively impacted and not in a good way. Maryland could stand to lose 150,000 jobs.

Thats why when you hear that Exxon Mobil is moving 2,100 jobs from Virginia to Houston its so problematic. We need MORE private sector jobs in this area, not less.

My very strong feeling is that Maryland in particular has not done what it needs to do to attract private sector jobs. Maryland has serially added additional taxes and raised tax rates. The business climate here has become significantly less attractive than in recent years.  This is a point in time when Maryland needs to be doing the opposite. [Note: According recent research by Basu's firm Sage Policy Group, Inc., Maryland ranks 44th in the nation in terms of business tax climate friendliness.  Virginia ranks 12th.]

This is very scary because Maryland should be, needs to be, the economic vanguard of America. It is home to so many federally-funded technology, research and medical laboratories; it could be a highly innovative business incubator, a force to move the U.S. economy forward. But Maryland has not positioned itself to carry its own weight. States like California, Texas, and Washington cannot continue to be asked to carry everyone elses weight economically.

Marylands largest budget expenses are K-12 education, higher education, transportation, and Medicaid. We dont WANT to cut investment in any of these things, but that doesnt mean we SHOULDNT cut themand they should be cut with the precision of a surgeons scalpel, not bluntly. But because its hard to do that, Annapolis hasnt done it. They continually turn to the taxpayer to solve the problem, but we are now past that point in my opinion. For example, the latest round of tax increases targets taxpayers earning more than$100,000. But $100,000 in Maryland equates to $75,000 in other regions of the U.S., which means Maryland is now effectively taxing the middle class as though they are affluent.

To really solve the nations budget issues, Congress will need to use budgeting cuts and revenue enhancements. If that happens, when it happens, Maryland could be the hardest hit state. Marylands dominant industry is the federal government. Maryland could be the new Michigan.

Ms. Krach: How will Frederick fare in all of this, especially given that our county leadership has already taken an austerity approach with the budget?

Mr. Basu: In terms of austerity, at the local level, the county commissioner level, we are seeing that the pendulum has swung too radically in the other direction in some cases. What the taxpayer wants is some semblance of fiscal stability. Baltimore County has provided incredible amounts of fiscal stability year over year. It makes doing business more attractive there.

Frederick losing BP Solar was tragic; those were high wage, private sector jobs. 

However, Frederick County is still in an enviable position. The county is solidly middle class, with one of the deepest labor markets in the region.  And Fredericks location near I270 doesnt hurt.

And Frederick has done an excellent job of creating a livable community with a beautiful focal point. Other Maryland municipalities look to the work Frederick has done in the past 20 years to revitalize and advance the downtown area.

Downtown Frederick gives the county its ambiance and reputation. When you visit Fredericks downtown, you see that its vibrant and amazing, that there are young people and boutiques and excellent restaurants. You dont see that in Hagerstown, Cumberland, or Salisbury. It is a huge asset, and should be cherished and nurtured!

Basu’s concerns are not at all unfounded. The Bureau of Labor Statistics has since reported that Maryland posted one of the worst job losses in the country this spring—13,500 total jobs lost from March through May. The downward slide has already started in advance of the expiration of the Bush tax cuts and the automatic spending cuts, in large part because federal policy makers have yet to make decisions regarding these issues.

In light of the vulnerability of our global and domestic economies, there is no time to waste in creating a business-friendly climate in Maryland. If the idea of sharing the same fate as Detroit doesn’t scare the likely 2016 presidential hopeful Governor O’Malley into taking meaningful action—now—nothing will.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes for TheTentacle.com and Want2Dish.com

Austerity: A Bitter Pill or a Prescription for Frederick’s Fiscal Health?

City of Frederick Has Tough Choices Ahead Regarding Pensions and Post Employee Benefits

 ”Austerity” was named the word of the year by Merriam-Webster Dictionary in 2010. (It’s nice to know that the global economy has a stronger influence on Webster’s top words than the urban dictionary.)

Wikipedia provides a more robust definition of austerity, as it relates to economics:

“In economics, austerity refers to a policy of deficit-cutting by lowering spending often via a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency to creditors.”

Austerity policies are controversial, even among economists, and can be tricky to impose.

Unfortunately, extreme austerity measures are often enforced as a last resort to prevent imminent government defaults. By and large, if a government has already spent itself to the brink of bankruptcy, the opportunity to effectively leverage massive spending cuts has passed. In a poorly performing economy, austerity can result in contraction instead of expansion, which triggers the type of public outrage we witness in Spain and Greece.

Given a lighter approach and the right timing, however, spending cuts can encourage private consumption and trigger economic growth.  At the very least, they go a long way to ensuring a government’s future fiscal solvency.

So what does the unfolding austerity drama in the European Union have to do with the economy in Frederick, Maryland?

Everything, actually… like it or not, this is a global economy we are operating in.

Frederick County government has taken its approach to reining in spending. As controversial as it has been, there is no question that the county now sits with a surplus versus the serious deficit it was faced with two and a half years ago.

On May 17th the Frederick Board of Aldermen adopted a budget for fiscal 2013 that increased both spending and debt service by double digit percentages.  The budget passed with a 4-1 vote, with Alderman Shelley Aloi providing the lone dissenting vote.

“At the time we were discussing and voting on this budget, there was a run on Greek banks resulting in 700 million euros leaving Greece, and investors also took 1 billion euros out of banks in Spain. We don’t know what the future holds for the global economy. And yet, the City of Frederick just passed a budget that is not remotely conservative,” said Aloi.  “Spending increases by 18%, debt service increases by nearly 68%, and the pension and OPEB liabilities continue to be the gorilla in the room that we ignore. I am committed to completing the Carroll Creek project, but can’t we fund it with dollars left over when we close other projects? As it stands, it is 100% funded by bond debt.”

She’s not saying it was all bad. Alderman Aloi was pleased with the agreement reached with Frederick County for the new tax differential system, and with changes to water and sewer impact fees.

“We campaigned to end double taxation, and there is still more to that conversation, but we have taken a significant step in the right direction.

“We’ve been moving forward with changes to the water and sewer impact fees by allowing individuals to pay over time and switching from fixture unit count to flow rate.

“However, we need to take a closer look at line items in the Water and Sewer Enterprise Fund and how the calculations are made on bond payments. We can’t continue to impose these burdensome fees and expect businesses downtown to flourish. And at some point, we need to start telling the State of Maryland ‘no’. It’s unreasonable for the MDE to keep passing mandates requiring our citizens to empty their pockets to fund the Chesapeake Bay clean up. Mandates should come with equivalent dollars to fund them.”

By far one of Aloi’s biggest concerns is the massive liability the city faces from underfunded pensions and Other Post Employee Benefits (OPEB). Currently, OPEB is underfunded by $128 million and pensions are underfunded by $92 million.

That’s $3,372 for every man, woman and child who reside within the city, or about a four cent ($0.04) onetime property tax on the six billion dollar taxable base of all the residential, industrial, land and  commercial real estate within the city limits.

“Actuarial recommendations are that the city should be funding OPEB by $11.7 million per year to sustain it, but we are able to fund less than half of that annually. We need to look at the entire budget, and decide what we can contribute to OPEB, and then tailor OPEB to meet what we can afford.  Otherwise, we will have to take dollars from other city services to fund it,” said Aloi. “My dissenting vote is in part that we haven’t yet addressed this issue.”

Already, nearly 40% of the city’s annual budget is allocated to pensions, OPEB, and debt service. If even more city taxpayer dollars are funneled into liability payments, there will be little left to fund the services Frederick’s city government is meant to provide.

Local governments that are able to do little beyond paying employees and servicing debt with tax revenues are simply not sustainable. Just ask any number of municipalities in California. That leaves a reform of pension and OPEB benefits as the most viable solution.

According to Alderman Aloi, at the direction of the board an ad-hoc committee was appointed by city staff this year to analyze OPEB, and is expected to come back in June or July with recommendations for restructuring and cost savings.

“It is my hope that we act quickly to follow through with the committee’s recommendations,” said Aloi. “There has not been consensus or a strong political will to address the reform of these liabilities. The lack of decision making and follow through is costing city taxpayers several million dollars each year that we put it off.  We can’t keep kicking this can down the road.”

Frederick, watch carefully as our city officials weigh their options regarding funding and restructuring of the OPEB liability. Making tough, smart choices about this issue could well be the single most important legacy this Board of Aldermen will leave behind. Fiscal austerity is least painful when it is a measure we take because we can, not because we have to.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes for TheTentacle.com and Want2Dish.com.

What You Need to Know About Capitalization and Property Development

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.

9 Must Read Land and Commercial Real Estate Blog Posts of 2010: MacRo Report

It was nine months ago that we launched the MacRo Report Blog to discuss topics relating to land, commercial real estate, industrial property, apartments and the housing market.  We also kept a sharp eye on local government actions that could impact the value of real estate for sale or for lease.

This happens to be our 185th post, all of which were found by our readers on the web through various links including Facebook, Twitter, LinkedIn, The Tentacle.com, Want2Dish?, and a number of bloggers who picked us up around the globe.  We’ve received hundreds of comments – both positive and negative through all these channels.

We’ve established a readership base of over three thousand loyalists who receive our weekly Thursday update … and we always looking for more so sign up today!

As a year-end review, we thought we’d share nine of our most active posts that put focus on the land, commercial real estate, industrial property, the housing market, land development and building lots:

  1. Time to Lower Real Estate Taxes and Consolidate City, County Governments? 
  2. Seeking a “Normal” Real Estate Market: Using Housing as the Barometer
  3.  Industrial Real Estate Market Update 
  4. 6 Planning Assets that Build a Local Economy 
  5. Adding Insult to Injury: Selling Commercial Real Estate in a Down Market 
  6. Residential Real Estate’s Future: For Better or Worse?
  7. Commercial Real Estate Market Update: Neighborhood Shopping Centers
  8. Saving Farmland with Transferable Development Rights
  9. 4 Sectors of Land and Commercial Real Estate: a MacRo Outlook

The blog has hosted nine terrific guest writers, for which we are very grateful.  Have you noticed, it’s all about the NINES?  Many thanks to:

  1. Donavon Corum, RLA, AICP, and LEED AP, Managing Member of Design Core Studio, LLC, a Maryland Planning and Landscape Architecture Firm.
  2. Thomas E. Lynch, III, Esq., principal of Miles & Stockbridge, P.A.
  3. Jennifer P. Dougherty, former Mayor of the City of Frederick (2001-2005) and owner/operator of Magoo’s Pub and Eatery
  4. Michael P. Pugh, Certified General Real Estate Appraiser with the Pugh Real Estate Group, LLC.
  5. David Wilkinson, Vice President, MacRo, Ltd.
  6. Bruce Bigelow, Senior Partner at Charitable Development Consulting
  7. Paul Steckel, CPA and tax partner with McLean Koehler Sparks & Hammond
  8. Jeremy Holder, President of the Land Use Council of the Frederick County Builders Association, and Vice President of Development with Ausherman Development Corporation II.
  9. Steven P. O’Farrell, MAI Appraiser and Vice President of William G. Bowen, Inc.

We look forward to a bright and exciting 2011, and wish you all the best as we close out 2010!

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 Want2Dish.com

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