Monday, March 2, 2009

Thousands of tax bills will arrive in the mailboxes of D.C. property owners this week, and some taxpayers no doubt will recoil from the large increases staring them in the face.

The D.C. government doubled the annual property tax rate from 5 percent to 10 percent for unoccupied residential buildings and vacant lots known as “Class 3” properties. The new tax rate will be reflected on the bills, which cover the period from October 2008 through March 2009.

The tax rate isn’t the only big change in D.C. real estate. Housing market conditions have changed drastically since the D.C. Council first considered legislation to address nuisance properties in 2007. Many of the people about to be hit by the new tax rate said it does not make sense when home prices are plunging and credit is hard to obtain.

The D.C. Council passed the Nuisance Properties Abatement Reform and Real Property Classification Amendment Act in October, ostensibly to reduce blight and promote renovation of dangerous, decrepit buildings into marketable real estate. The legislation was signed by Mayor Adrian M. Fenty, a Democrat, whose office declined to comment for this article.

Council member Mary M. Cheh, the Ward 3 Democrat who introduced the nuisance-abatement legislation, worried that “a wide variety of [tax] exemptions” allowed property owners to “game the system and not put their vacant property to productive use.”

“If you don’t hit [property owners] in the pocketbook, they’re not going to respond,” said Kwame Brown, the at-large Democrat who co-sponsored the legislation that doubled the Class 3 tax rate to 10 percent.

But mortgage lenders, investors and people with decades of experience redeveloping buildings and land in the District say the law likely will have the opposite effect. It will lead, they say, to massive foreclosures and uncollected tax revenue. Some say the real estate tax is so high that it amounts to a de facto government “taking” of property without due process.

The 10 percent rate is “confiscatory,” Ed Wilson, who said he has renovated more than 100 properties in the District, told the mayor and the council in a letter. “You are stealing other people’s property, savings and hard work.”

The new tax rate “strikes me as an end run around eminent domain and a grab for tax revenue,” said Tad DeHaven, a budget analyst at the Cato Institute, a Washington think tank. “This isn’t the message you want to send to potential investors in D.C.,” he said. “It sets a bad precedent for a city that desperately needs business investment.”

Beyond the idea of a 100 percent tax increase, Mr. Wilson expressed outrage over its timing.

“In a time when undeveloped land cannot be sold at any price, and when building rates are at 45-year lows, why do we attempt through tax policy to force immediate development? It makes no sense at all - unless the city wants to own all the land,” Mr. Wilson said.

He said he can’t imagine a worse time to assess owners of unoccupied buildings at the Class 3 rate of 10 percent. In this depressed housing market, nobody can get a loan to renovate, and people can’t sell their properties, he said.

“There are no buyers buying fixer-uppers,” Mr. Wilson told The Washington Times. “I know because I have a dozen, at least.”

After the real estate market plunged in the District, experienced lenders, investors and rehabilitators lost properties to foreclosures that never would have occurred during the boom years.

Those losses were precipitated, they say, by the 5 percent Class 3 tax rate in a down market, and they fear that the 10 percent rate will be a catastrophe for both the District and for the people who have used their life savings and hard work to renovate thousands of homes in the nation’s capital.

Eric Deyale, a Nigerian immigrant who became a U.S. citizen several years ago, said the 5 percent tax caused him to lose a property to foreclosure in October. He said the 10 percent rate likely will cost him another property before he can sell it.

Over the previous 10 years, he said, he renovated and resold nearly 30 properties in the District.

In June 2006, at the peak of the real estate market, Mr. Deyale bought a property on C Street Northeast for $362,000, including a $40,000 down payment. He spent an additional $60,000 gutting and renovating the home.

As the economy soured, renovations began to take longer than the 12-month exemption period allowed. His construction exemption allowed him to pay a tax rate of 0.85 percent, which applies to residences occupied by non-owners.

When his construction exemption expired, the 5 percent tax rate took effect. He was still working on the home, but the D.C. government refused to extend his construction exemption. His annual tax bill jumped from less than $3,000 to more than $17,000 on the house, which was assessed at nearly $350,000. Although the work was 95 percent complete, he lost the house to foreclosure in October, Mr. Deyale said.

For an unoccupied property on P Street Northwest assessed at $440,000, Mr. Deyale now is taxed at the 10 percent rate, or $44,000 this year, according to D.C. property records. He has been trying to sell the house since April. Sellers of unoccupied houses are entitled to a 12-month exemption from the 10 percent rate, but Mr. Deyale said the District would not grant him the exemption. After spending $70,000 to renovate the property, he now expects to lose it to foreclosure.

Joel Martin, who has lived in the District since 1970, has owned a property on 11th Street Southeast since 1986. The home has been vacant since 2000 and will need about $65,000 of work before it can be rented, he said.

The property, which is assessed at $314,000, has been “totally secure and never had a break-in in all these years,” he said. “It is not ‘house beautiful,’ but there is nothing wrong with this property.”

But the District classifies it as Class 3 property, and early next month Mr. Martin expects to receive a $15,700 tax bill for the six-month period ending March 31. He expects another tax bill for the same amount six months later. Taxes for the year will total $31,400, or 10 percent of the property’s assessed value, he said.

“The city has decided, because there are a few bad apples, everybody with vacant property will be treated like criminals,” Mr. Martin said. “Decent people who have a few pieces of property are going to be nailed by the D.C. government because they are unable to quickly renovate their building, even though the building may be completely secured and nuisance-free.”

Ron Edlavitch, a lawyer who has worked with renovators and lenders for 40 years, said he has been “spending full time foreclosing on houses that investors have abandoned. The biggest problems are Class 3 properties.”

Renovators, he said, have been abandoning buildings in droves as real estate prices have plunged and tax charges have soared, making their projects unprofitable. He expects the problem will increase dramatically with the new Class 3 tax rate of 10 percent.

A renovator unable to sell a $500,000 house before his 12-month sales-period exemption expires will see his tax rate rise from 0.85 percent to 10 percent. His annual property taxes on the project will skyrocket from $4,250 to $50,000, Mr. Edlavitch said.

Theodore Gale, a real estate agent and renovator, spent several years gutting and remodeling a building in Columbia Heights. He has been paying the 5 percent tax rate because his renovation project was so extensive. It lasted much longer than his exemption.

“The government never gave me a chance to renovate the building before it started charging me the 5 percent rate,” he said. “Every time I had enough money to finish the project, I got socked with the 5 percent tax.”

On Oct. 1, the District began charging him the 10 percent rate, or more than $41,000 per year.

“The District is taking all the profit out of the project,” Mr. Gale said. He plans to put the building on the market soon.

Patricia Sweeney, a retired lawyer and former civil engineer, has spent the past eight years lending money to renovate distressed properties in disadvantaged neighborhoods such as LeDroit Park and Anacostia. She said she has bought and sold more than 50 houses in the District.

“Last year was a horrible experience with Class 3 properties, and I am no longer doing rehabs in D.C.,” she said. “I have been stung really bad in D.C., and I will be avoiding it forever.”

Ms. Sweeney has been trying to liquidate a dozen properties in the city, including houses and vacant land. All of them are foreclosures abandoned by renovators and investors. A lot of the properties have been for sale for more than a year, and they are now subject to the 10 percent tax. “But none of them are selling in this market,” she said.

“The 5 percent tax was a horrific outrage,” she said. “Nobody has ever taxed real estate at 10 percent.”

Jack Merwin, of Chevy Chase, who said he has renovated more than 40 homes in the District in the past 10 years and built at least eight homes on vacant land, recently lost three vacant properties in Anacostia and is in danger of losing others.

During the boom years, the 5 percent Class 3 tax rate posed little problem because rehabilitation money was flowing, home values were rising 15 percent to 20 percent a year, and housing turnover was rapid.

That is no longer the case.

“It’s impossible to get money from lenders today because they are terrified of the 10 percent tax rate,” which they must pay in the event of a foreclosure, Mr. Merwin said.

Echoing a complaint increasingly heard throughout the city, Mr. Merwin said the city’s assessments are “totally unrealistic.” Factor in a 10 percent tax rate on a property worth $200,000 but assessed at $400,000, and a renovator or investor could be facing a $40,000 annual tax bill that is 20 percent of the property’s value, he said.

“The few times I have tried to appeal the assessment, I received the classic D.C. runaround,” Mr. Merwin said. “Forms are lost, and there’s never any recourse.”

To protect his rights, one lender said, he had to pay Mr. Merwin’s Class 3 taxes on a vacant lot. He had planned to build on the lot after the market rebounded. The new 10 percent rate has made that option impossible.

“Lot owners are so desperate to sell to stop the bleeding from the taxes,” Mr. Merwin said.

Ms. Sweeney said vacant land historically takes two years to sell. In a bad market, it takes much longer.

“Right now, you can’t give a lot away,” said Mr. Wilson, the housing renovator.

“This isn’t the best time for unoccupied housing,” said Mr. DeHaven of Cato, who predicted that the number of unoccupied buildings would rise as the economy continues to slow.

“The D.C. government is taking advantage of this situation,” both to raise revenue and to grab land, he said.

But once the District takes control of abandoned properties, it will have to maintain them.

“Neighbors will complain when the city finds itself unwilling or unable to carefully maintain all the properties that their tax policy forced to be abandoned,” Mr. Wilson predicted. “Trash will pile up, causing eyesores, and rats and vermin will accumulate in the trash, and neighbors will rightly complain of the city’s failure. It will be their own fault it ends up this way.”

D.C. Council member Jack Evans, Ward 2 Democrat, told The Washington Times that he opposes the 10 percent tax rate even though he voted for the final version of the bill containing it. Even if the rate brings unintended consequences, he said, he has no intention of proposing legislation to reduce it because it was Mr. Brown’s amendment that raised the rate from 5 percent to 10 percent.

Mr. Brown did not respond to detailed e-mail inquiries. Neither did other co-sponsors of the bill: David Catania, at-large independent; Ms. Cheh; Jim Graham, Ward 1 Democrat; and Tommy Wells, Ward 6 Democrat.

Other well-intentioned housing policies have backfired for the District.

In December 2000, the council passed a bill to discourage predatory lending. After the law went into effect 10 months later, several mortgage companies - including Chase Manhattan, Wells Fargo, SunTrust and Bank of America - stopped offering several types of loans in the city. Within weeks, the D.C. Council had to pass emergency legislation suspending the law until it could be rewritten with less onerous provisions.

Ms. Sweeney predicted that the same will happen to the “nuisance abatement” legislation once property owners receive their new tax bills and react as she has: quit doing business in the District.

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