Category Archives: Development

Why Would Anyone Want to Build Rental Units in MoCo?

By Adam Pagnucco.

Left largely undiscussed during the debate over MoCo’s recently passed rent stabilization bill was the overall condition of the county’s rental market. Yes, Council Member Andrew Friedson brought up our recently published data showing that rents are declining in MoCo and are projected to continue falling for the rest of the year. But there’s a lot more to this issue, especially when considering the long-term needs of tenants and the associated implications for the county’s economy.

The bottom line is that MoCo is emerging as one of the most unattractive places in the D.C. area to build rental units.

Put yourself in the shoes of a regional developer, real estate investor or creditor and consider the following facts.

1. MoCo’s rental market is one of the slowest growing in the region.

This is the first sign that not all is right in the county. MoCo has a relatively affluent population, 11 Metrorail stations, a nationally recognized school system, a new light rail route (the Purple Line) under construction and is planning several bus rapid transit routes. Developers should want to build here, but disproportionately, they are not. If Downtown Bethesda were removed from the county’s unit statistics, one wonders how poorly the rest of the county would rank in the D.C. region.

2. Rents in MoCo are also growing slowly.

With the exception of Loudoun County, every other major jurisdiction in the region has seen more growth in average rent than MoCo. That’s good for tenants but not so good for investors looking for an adequate return. That is especially the case given the level of uncertainty in MoCo’s real estate market, which would normally demand higher returns to compensate investors for dealing with it. More on that in a bit.

Here is an interesting fact. Loudoun, Arlington and Howard have been the three fastest-growing large jurisdictions in the area in terms of renter occupied units. They are also three of the four slowest-growing jurisdictions in terms of rents. That’s how a market should work – rapidly expanding supply should keep prices down even with substantial demand, and Loudoun has been one of the fastest growing counties in the nation. But MoCo has seen slow growth in both construction and rents, making it an outlier.

3. No other major jurisdiction in the area has experienced a larger increase in rental vacancy since 2010 than MoCo.

You might think that with MoCo’s relatively stagnant construction demand for housing would push vacancy down. Instead, it’s gone up – by more than any other jurisdiction in the region. In 2010, MoCo’s rental vacancy rate was 2.7%, the second-lowest of 10 large area jurisdictions. In 2018, MoCo’s rental vacancy rate was 4.9%, tied for the third-highest rate. The vacancy rate gain (2.2 points) was the largest in the area. This is going to get worse as vacancy rates for Class A and Class B units are projected to approach 7% in coming years.

4. Evictions in MoCo are time consuming and expensive.

In 2018, the county’s Office of Legislative Oversight (OLO) studied evictions in MoCo and stated, “The Montgomery County Sheriff’s Office reports that on average it takes 12-13 weeks to evict a tenant for nonpayment of rent, though the process can sometimes be significantly longer.” OLO also found that the cost to evict a tenant can range from $5,700 to $16,600, landlords “are often unable to recover lost rent” and “costs and process delays discourage small property landlords from renting out.”

Landlords with lots of units and market power might be able to spread these costs to other tenants in the form of higher rents. Other landlords might choose to avoid the county altogether if they believe its procedures are more onerous than its neighbors.

5. The county executive is an open housing skeptic.

Before becoming executive, Marc Elrich built his political career by opposing development, voting against seven different master plans (six centered near transit stations) and famously comparing growth to a tumor. He has not changed much since then. Over the last three years, he has compared gentrification to ethnic cleansing, said he doesn’t believe in missing middle housing, said he doesn’t want to lose affordable units “to build housing for millennials” and opposed regional targets for housing construction. His opposition to accessory dwelling units even attracted criticism from his fellow socialists. The executive doesn’t control county land use policy, but he does control the Department of Housing and Community Affairs, the county’s principal regulator of landlords.

6. The county’s moratorium policy is a major source of uncertainty for residential builders.

MoCo stops new applications for housing development in school clusters that exceed certain capacity thresholds. Last year, the county imposed moratoriums on four high school clusters and 13 individual elementary school service areas that accounted for roughly 12% of the county and included parts of high-profile housing markets like Downtown Silver Spring and North Bethesda. This year, more areas could be at risk. The moratoriums do nothing to stop school crowding but they do create serious uncertainty for the real estate industry. Who wants to spend millions on design, architecture, planning reviews, public outreach and land use attorneys only to see a project stopped dead in its tracks by an arbitrary moratorium?

7. The county just passed temporary rent stabilization.

The council made major changes to Council Member Will Jawando’s rent control bill, allowing rent increases up to the county’s voluntary guidelines and extending the bill’s duration to 90 days after a catastrophic health emergency. The direct economic impact of the bill may be mild because it is temporary, allows small increases and takes effect in an environment in which rents are declining. But it could be extended at a later time, a possibility that adds to the uncertainty of investing in MoCo. It also has tremendous symbolic importance. Let’s remember that Takoma Park has had rent stabilization for decades and has suffered absolute losses of rental units.

Consider this. It’s hard to find two terms that are more hated by the residential rental industry than “moratoriums” and “rent stabilization.” At this moment, MoCo is the only jurisdiction in the Washington region that has both of them.

MoCo is still seeing residential construction from projects that were approved before the current downturn, before the current round of moratoriums, before the approval of rent stabilization and before the current executive took office. But after that wave (a rather small wave) of construction wraps up, what will come next?

Imagine that you are a regional developer, real estate investor or creditor and you are evaluating a jurisdiction that has had slow rent growth (and now falling rents), slow unit growth, rising vacancy, expensive and time consuming evictions, a moratorium policy, temporary rent stabilization that could be extended and a county executive who is an open skeptic of housing construction. Right next to that jurisdiction are several others with fewer or none of those drawbacks.

Given all of the above, why would anyone want to build rental units in MoCo?

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Improving the Accessory Dwelling Units (ADU) Bill

Councilmember Hans Riemer’s proposal to greatly ease restrictions on accessory dwelling units (ADUs) has a lot of flaws, as I have detailed in previous posts. The presentation of inaccurate information also undermines confidence that it has been well thought out. The county’s very poor enforcement of existing housing law further reduces trust. Moreover, recent legislation designed to promote ADU construction is just now going into effect.

Fortunately, two easy fixes to Hans’s proposal can assure that it will better accomplish his stated goals of increasing smart-growth oriented affordable housing and minimize any negative effects on the county finances and residents.

Fix #1: Locate ADUs Near Transit

The county wants to promote transit-oriented growth so let’s limit ADUs to within a three-quarters mile radius of Metro, MARC, and future Purple Line stations. As one can rarely walk directly in a straight line to transit from a single-family neighborhood, a three-quarter mile radius is really greater in terms of travel distance and provides a very generous zone. (This would include my Metro-walkable single-family neighborhood.)

The bus network is also largely oriented towards these nodes, so people living in these areas will have maximal public transit access. Transit accessibility will also likely reduce the share of ADU residents who have cars, or at least a second car. This simple fix will assure that we continue to promote growth where smart growthers claim to want it—away from car dependent neighborhoods.

Fix #2: Reduce, Rather than Increase, ADU Size

Hans’s zoning text amendment (ZTA) proposes to allow ADUs larger than the current 1200 square foot maximum up to the one-half of the size of main home. This is a disastrous idea as it encourages the construction of larger, and therefore less affordable units. It also incentivizes the construction of bigger homes, which also runs counter to the idea of smart growth.

While Hans has repeatedly spoken about his ZTA in terms of promoting “cottages” and as part of the “tiny house movement,” the legislation runs directly counter to this idea. According to The Tiny Life, a publication promoting tiny homes, tiny homes have a maximum of 400 square feet, and the average tiny home has just 186 square feet.

At 1200 square feet, Montgomery’s current limit is already three times the maximum size for a tiny home and over six times the average tiny home size. (Scouring the web, the most generous maximum for a tiny home was 600 but this was on a builders’ website and is still only one-half of what the county already permits.)

Instead of increasing the size limit and encouraging the construction of less affordable ADUs, we should be reducing it to 750 square feet. This smaller size would assure that new ADUs would be truly fit within the affordable, smaller home ideal, instead of large second homes or apartments out of the range of people struggling to find housing.

Additionally, it will minimize any negative impacts on neighborhoods and the county. Smaller homes mean it’s less likely that schools will face as substantial an additional burden as if we amp up the home size instead. Fewer people also usually means fewer cars. Existing units larger than 750 square feet would be grandfathered.

The smaller size also reduces any additional hardscape, especially important since the chance of the county adopting more meaningful storm water control standards is about nil. Smaller homes cut down the added burden on existing aging infrastructure not to mention on dumping water into neighboring basements.

Bottom Line: Make this an Affordable Housing Bill

These changes to Hans’s ZTA would turn it from a bill that undermines affordable housing by incentivizing big into one that would encourage the building of smaller, more affordable units in transit-accessible areas. It would retain the proposed elimination on the construction of an ADU in close proximity to another one, allowing for substantially more construction in zones near transit.

As bill proponents claim loudly that they are promoting small development and favor smart growth, adopting these amendments to gather community support ought to be easy. A special exception process could be included to accommodate unusual circumstances that require more space or location away from transit. But any such process should require real scrutiny and difficulty in order to keep the focus on affordable.

The bottom line is that adopting these changes would turn the bill into one truly focused on transit-oriented affordable housing and a genuine win for Hans. On the other hand, if self-proclaimed proponents of affordable housing continue to argue for larger rather than smaller units, it will reveal plainly that they are simply interested in promoting development rather than affordable and that this is really an effort to undermine recently adopted zoning codes and Master Plans.

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Riemer Admits ADU Error and Responds

Even if a reply on twitter isn’t quite the same as a publicly-funded email blast, this is the first time I’ve seen Hans correct the record, so that’s a positive step. Except the inaccurate 133 number has been bandied about and propagated a lot, including by Hans at his own forum on ADUs, if memory serves, and without correction by either Casey Anderson or Lisa Govoni from Planning at the meeting.

Additionally, Hans continues to underestimate the number of ADUs. As Andy Harney points out, the number on the county website arbitrarily excludes many ADUs given a different classification but that are ADUs. While 473 is over 3.5 times the figure given by Hans, the 1268 identified by Harney is over 9.5 times Hans’s inaccurate numbers.

I don’t why Hans ended up inadvertently using incredibly outdated information – there were far more than 133 ADUs even in 2012. But the existence of nearly 10 times more ADUs than he claims exists would seem to be an important difference to many, though reasonable people can disagree on this as on so many issues.

Moreover, I have had both detractors and supporters of ADUs point out that the count excludes many illegal or unregistered ADUs. As a result, the legal ADU count greatly underestimates the number of ADUs in reality. The unknown true number is well off from Hans’s erroneous representation.

ADU supporters hope that Hans’s legislation will make it easier to legalize illegal units. While perhaps so in some cases, I’d hope that units that, say, don’t meet the fire code would not be legalized. Either way, the presence of many illegal units reinforces the truth of claims regarding the total inability or unwillingness of the County to enforce its laws.

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Riemer Massively Understated Number of Existing ADUs

In his effort to push forward his zoning text amendment on accessory dwelling units (ADUs) that would radically alter building conditions and Master Plans throughout single-family neighborhoods, Councilmember Riemer has lamented the lack of existing ADUs, claiming that only 133 exist throughout Montgomery County.

Except that figure is completely false. It greatly understates the number of existing ADUs by a factor of at least 3.5 and probably more. The information showing it’s untrue is readily available on Montgomery County websites. Indeed, memos provided to the Council in the past directly contradict the claims made by Hans in his publicly funded communications.

The county’s own website says that there are 473 existing ADUs – over three times more than advertised by Hans Riemer and other advocates of his ZTA.

Look at the teeny-tiny print on the bottom left for the total count

A look at requests for ADU approvals under existing rules reveals 257 applications in recent years with only a small minority withdrawn or denied. The number of applications refutes Hans’s claim that virtually no one can legally build them under existing rules in Montgomery County. And this is before rules adopted just a few years ago to make it easier to build them have gone into effect and had a chance to have an impact.

In devastating follow-up testimony sent to Council President Nancy Navarro, Andy Leon Harney, explained in more detail that even these higher figures sorely underestimate the number of existing legal ADUs:

The figure often quoted that there are only 133 ADUs for a county of 1 million is simply false. In 2012, when the Council was considering ZTA 12-11, the Board of Appeals, which approved special exception accessory apartments said that between 1983 and 2012, they had approved 605 accessory apartments. Mr. Zyontz in memos to the Council at the time (10/8/12 p. 7 and 10/22/12 page 10) reported there were either 413 or 431 (probably a typo). At the same time, there were also 698 Residential Living Units—that is rent free accessory apartments approved for use by a relative, elderly parent or caregiver which are still legal and over time may well have been converted to rental units.  That would mean there were at least 1,111 ADUs plus guest houses which are no longer allowed but were grandfathered in with the passage of ZTA 12-11. The 133 number so often quoted is not accurate, and in fact there are 157 ADUs that have been approved since 2012, making the total ADUs closer to 1268, with others in the pipeline. If the Council is data driven, these facts should matter. If the Council allows itself to be persuade by an inaccurate number of “only 133 ADUs in a County of 1 million”, they are being misled.

Andy Harney is the Village Manager of Chevy Chase Section 3.

As I’ve previously explained, Hans’s legislation is deeply flawed for a number of reasons. In a post later this week, I hope to present a couple of easy amendments that would shift the focus back to the creation of smart-growth affordable housing and virtually eliminate most of the likely harms stemming from the misguided approach in the proposed ZTA.

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Update from Reader on Illegal AirBnB

A reader has also been curious about the illegal AirBnB that I profiled yesterday and contacted the Montgomery County office of the Maryland Department of Assessment and Taxation asking that the property be reclassified as commercial. (Note: this is a state, not a county office.) Here is the reply they received:

We have researched and found that the property is zoned R-60 for residential use and does not have any type of special use agreement with the Montgomery County Department of Permitting Services, Zoning and Site Plan Division .  Therefore we will not reclassify the account as commercial property.  Our records also show that the property is not owner occupied, so there is no further action to be taken by the State of Maryland. 

The owner doesn’t live there but continues to run a commercial youth hostel out of the house. The lack of commercial classification on the property seems woefully unfair to hotels engaged in the same business–renting out spaces in non-owner occupied structures. It is also quite different from an owner renting out a room or two in their own home, as AirBnB was originally conceived and presented.

In any case, it has been over a year since a county resident made a complaint about this illegal ADU and it’s still going strong. The use is not remotely consistent with the zoning code.

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It’s No Myth that AirBnBs arrive with ADUs

Supporters of accessory dwelling units (ADUs) claim that it’s a “myth” that they will be turned into AirBnBs or other short-term rentals.

Unfortunately, the law is not always a good guide to what happens.

Portlandia

Portland is often cited as the promised land by ADU supporters. Like Montgomery County, Portland’s ADU guidelines state that they are “designed for residential occupancy independent of the primary dwelling unit.”

But according to a survey prepared for a 2018 report prepared by the Institute for Sustainable Solutions (ISS) at Portland State University, 31% of ADUs are for short-term housing, defined as stays as less than one month. Only 56% are being used as someone’s primary residence. ISS is staunchly pro-ADU, so it’s hard to throw dirt on the statistics as part of a nefarious anti-ADU plot.

While intended as residential dwelling units, many are used as AirBnBs or the equivalent. The survey did not present statistics on what percentage were in compliance with Portland’s permitting requirements for short-term rentals.

Illegal AirBnBs

Councilmember Hans Riemer laudably wants to focus ADUs on housing rather than hotel space. In a recent email blast, he touted “the units could not be used for short-term rentals (i.e., Airbnb)” under his proposed legislation.

Unfortunately, illegal AirBnBs already exist with impunity in Montgomery County. Here is a photo of one operating in Bethesda:

A complaint was filed about this illegal AirBnB with the County last April. The complaint was “resolved” by kicking it over to the Department of Housing and Community Affairs (DHCA).

The county database shows no sign of an ongoing investigation. Apparently, they got a license after the complaint was filed but the current usage is not in compliance for these sorts of rentals. One also wonders if the county or the state is even capturing the appropriate tax from this usage since they don’t know it exists despite advertisements on AirBnB.

Increasing the burden on county enforcement authorities through the addition of hundreds of ADUs per year seems an unlikely way to solve the problem. As the County fails to keep on top of existing situations with complaints, it’s hard to have faith that a ban on AirBnBs in ADUs will be anything other than totally meaningless.

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Andy Leon Harney’s Testimony on ADU

Andy Leon Harney is the Village Manager of Chevy Chase Section 3. At the bottom of the post, you can find her testimony expressing concerns regarding Councilmember Hans Riemer’s efforts to loosen substantially the requirements for accessory dwelling units (ADUs).

Harney points out that the spread of impermeable surface due to building can cause storm water drainage problems. This may sound like some minor issue to some on the theory that it all just ends up in the drains but it’s not. When there is less land to absorb water, it has to go somewhere and that place can be your neighbor’s basement.

Unfortunately, we had experience with this problem in the Town of Chevy Chase due to people building larger homes and the county laws are very lax and don’t address the problem. We now require that people who add over a certain amount of square footage of impermeable surface must also build a water retention system to keep the water on the property until gradually absorbed into the ground.

Perhaps the County should include a similar requirement into the ADU law? After all, if most units will be small, then it won’t negatively impact building ADUs. To the extent it does, it prevents people from literally dumping a problem on their neighbors. (The Town also passed ordinances that I supported requiring greater setbacks, especially in the rear, and limiting home size more than the County.)

Proponents of the ADU changes assure us that “most” of the new homes will be small and thus not be a problem. But then why does the new legislation do away with the current limits on ADU size in favor of allowing the ADU to be 50% of the size of the house?

Harney also agrees with the county executive that the ADU proposal will not result in affordable housing. Again, if you want affordable, why allow bigger than now? Rents will be driven by the open market in any case and, as Harney points out, someone who just invested in building one will want to get their money back quickly.

Finally, and perhaps most importantly, Harney contends that the ADU plan is the thin edge of the wedge in an attack on existing single-family home neighborhoods. While I generally don’t rush to slippery slope arguments, there is some real justification in this case.

Beyond my arguments that people will circumvent the law legally or just ignore it due to lack of enforcement, this is a revision to expand ADUs when the previous legislation has just barely been implemented. Councilmember Riemer has long been a proponent of allowing higher density.

Many key proponents of this plan would like it just fine if it led to permitting multi-unit developments or apartment buildings in existing neighborhoods. (See Just Up the Pike or Greater Greater Washington for examples.) Residents are not in accord with this vision.

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County Executive Elrich Testifies Against ADU Bill

While County Executive Elrich is not opposed to accessory dwelling units (ADUs), he is opposed to this zoning text amendment (ZTA) for several reasons. You can read his testimony in full at the bottom of post.

Interestingly, Elrich points out that the changes made from the previous effort to encourage ADUs just went into effect in October of last year, so it is too early to see its effect and Councilmember Hans Riemer is jumping the gun in calling the previous legislation a failure.

Additionally, the ZTA does nothing to encourage more ADUs in areas near transit where we higher density and thus isn’t smart growth. Nor are there any tests or been any effort to make sure that existing streets and other infrastructure can accommodate them.

Most importantly to Elrich, a huge advocate for affordable housing, ADUs won’t serve the population that needs affordable housing. As the proposed ZTA eliminates the current cap on the maximum size of ADUs, the ZTA actually encourages the construction of larger ADUs with higher rents.

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Former Takoma Park Director of Housing Services Expresses Serious ADU Concerns

Sue Present, the former Director of Housing Services of Takoma Park, has submitted testimony to the County Council on the proposed zoning text amendment (ZTA) that would substantially relax requirements for accessory dwelling units (ADUs).

In particular, she suggests two amendments to the proposal: (1) buildings that are already out of compliance with code requirements or exist due to the granting of a special exception should not be eligible for conversion to ADUs, and (2) parking for ADU occupants must be independently accessible and the absence of sidewalks should disqualify a unit from off-street parking waivers.

Like myself, Present is distressed by the failure of either the Planning Board or the County Council to properly evaluate the impact on infrastructure, rents, and taxes. On infrastructure, Present raises concerns about the added burden on aging water and sewer lines, school capacity, and street capacity for parking and emergency vehicles. Similarly, she asks whether ADU rents near employment or transit would be affordable and whether they would reduce the property value of neighboring homes.

Read her testimony in full below:

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Former Takoma Park Director of Housing Services Expresses Serious ADU Concerns

Sue Present, the former Director of Housing Services of Takoma Park, has submitted testimony to the County Council on the proposed zoning text amendment (ZTA) that would substantially relax requirements for accessory dwelling units (ADUs).

In particular, she suggests two amendments to the proposal: (1) buildings that are already out of compliance with code requirements or exist due to the granting of a special exception should not be eligible for conversion to ADUs, and (2) parking for ADU occupants must be independently accessible and the absence of sidewalks should disqualify a unit from off-street parking waivers.

Like myself, Present is distressed by the failure of either the Planning Board or the County Council to properly evaluate the impact on infrastructure, rents, and taxes. On infrastructure, Present raises concerns about the added burden on aging water and sewer lines, school capacity, and street capacity for parking and emergency vehicles. Similarly, she asks whether ADU rents near employment or transit would be affordable and whether they would reduce the property value of neighboring homes.

Read her testimony in full below:


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