Tag Archives: Corporate Welfare

Adam Pagnucco, Corporate Welfare, Development, Economy, Metro

Smart Growth or Corporate Welfare? Part Two

By Adam Pagnucco.

In making the case for Bill 29-20, which would grant developers at Metro stations 15-year property tax breaks, supporters claim that Metro high-rise development is not currently happening. And they say that’s the case for the entire region.

Is it true?

WMATA had a spate of development projects at Metro stations from 2002 through 2007, when the region’s real estate market was hot. There are much fewer proposals in the works now. They include:

Grosvenor-Strathmore, Montgomery
WMATA selected Fivesquares Development as its ground lease development partner at the Grosvenor-Strathmore station. In 2018, the Montgomery County Planning Board approved a sketch plan for 1.9 million square feet of mixed use development at the site. The original plan was supposed to include seven buildings, two of which would be 300 feet tall and another 220 feet tall. However, Fivesquares subsequently claimed that it needed tax breaks to finance the high rises, thus giving rise to Bill 29-20. Fivesquares wrote the following in its testimony about the bill:

Simply put, but for this legislation, Montgomery County’s goals to promote high density growth at transit accessible locations and, specifically, to implement the Grosvenor-Strathmore Minor Master Plan Amendment that the Montgomery County Council and Montgomery County Planning Board unanimously approved in 2017, would not be feasible due to the prohibitive economics of building high-rise projects. There is a significant gap in building high rise projects due to the gap between costs and revenue and the unique infrastructure requirements of Metro sites.

In the absence of this legislation, instead of the potential at the WMAT A property at the Grosvenor Strathmore Metro station for over 2,100 units, including over 350 Moderately Priced Dwelling Units (MPDUs), the only feasible development would be lower density, stick-built housing that would dramatically underutilize the site, resulting in less than half the number of total housing units and MPDUs.

New Carrollton, Prince George’s
WMATA plans to replace the parking on the station’s south side with hundreds of thousands of square feet of office, retail and multi-family space. At full build-out, the site could have a dozen buildings ranging in size from five to fifteen stories. Construction of a new garage is also planned for the station’s east side. Along with Grosvenor-Strathmore, this is easily the most aggressive of WMATA’s current development plans.

A rendering of development on the south side. Credit: WMATA.

College Park, Prince George’s
WMATA is planning a 5-story project at this station with more than 400 housing units.

A rendering of development at College Park. Credit: WMATA.

Capitol Heights, Prince George’s
WMATA would like to place a 6-story residential building with ground retail at its Capitol Heights station parking lot. This project was terminated in 2018 but WMATA staff asked for a new solicitation last year. KLNB is advertising the project’s retail component.

Deanwood, D.C.
In 2018, the WMATA board approved a joint development project to replace its Deanwood station parking lot with a mix of residential and retail and a garage. The project is not high-rise; rather, it envisions four-story buildings.

That’s about it. The project in D.C.’s Takoma neighborhood looks stalled as does the Greenbelt site in Prince George’s, which was once considered for the FBI. Amazon’s arrival in Northern Virginia could eventually stimulate development at Metro stations there but that seems quite a ways off.

Other than the Grosvenor-Strathmore site (which led to Bill 29-20) and New Carrollton (which might not have been viable without the relocation of the state’s housing agency), none of these projects has a high-rise component. That’s not an accident. Developers at Metro station sites have to deal with replacing existing parking (either with a garage or underground), station access issues, bus circulation issues and even possible amenities like park space. There is also WMATA’s time-consuming approval process on top of any local planning approvals. Developers of private sites don’t have to deal with these problems. Combine the construction costs of high rise as opposed to wood frame with the extra costs of building at WMATA sites and the economics of such projects get difficult, even with high rents and condo prices.

DC Urban Turf, a website that tracks residential development, lists hundreds of new residential projects that have been delivered, are under construction or are planned in the area. Many of them are high rises. High rises are being built in the region. They are just not being built, for the most part, on Metro stations.

So if high rise construction at Metro stations requires huge tax breaks to work, are the bill’s supporters right? Should Fivesquares and other developers get 15-year property tax exemptions? There are lots of other considerations to be discussed. Let’s do that in Part Three.

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Adam Pagnucco, Andrew Friedson, Corporate Welfare, Development, Economy, Hans Riemer, Metro

Smart Growth or Corporate Welfare? Part One

By Adam Pagnucco.

For many years, MoCo has focused its land use and economic development policies on transit-oriented development. Since 2006, the county has adopted eight master plans centered on Metro stations, another four centered on Purple Line stations and one more centered on Corridor Cities Transitway stations. Another plan is in the works for Downtown Silver Spring.

The capstone for the Metro-based plans is development on top of the Metro stations themselves, which requires joint development agreements with WMATA. Placing the highest density on Metro stations, along with nearby parcels, enables the county to balance growth, transportation and environmental priorities in its march towards the future. For fifteen years, that’s what we have been told.

Now we are told that this approach won’t work without taxpayer subsidies.

The problem is that most, if not all, development on top of Metro stations is not proceeding. And that is because of economics. In order to be economically viable, Metro development projects must charge rents or condo prices sufficient to not only cover construction costs, financing and investor returns but also the unique costs associated with Metro station sites. The economics are particularly difficult with high rise projects, which have higher material and construction costs than wood-frame projects. And so the county council has proposed Bill 29-20, which would eliminate property taxes on Metro station development projects for 15 years and replace them with undefined payments in lieu of taxes to be set later.

In justifying the bill’s purpose, consider these remarks by Council Members Hans Riemer and Andrew Friedson, the lead sponsors of the bill, and Planning Board Chairman Casey Anderson at the council’s first work session.

Riemer
I want to say that this is a smart growth proposal. This is about making development feasible where decades of inactivity has demonstrated it is not feasible. If you look at Montgomery County and our Metro stations, you will almost universally see empty space on top of the Metro stations and despite efforts by WMATA over many years to support development at those stations, to solicit development on their property, there is very little that has happened. And there is very little that has happened recently, in the last ten years or so. Very little high rise, especially, and because of a shift in the market, I think which is driven by regional economic shifts and global economic shifts that have made the cost of high rise construction prohibitive except in the most high rent communities…

I think very broadly speaking, we have sought to channel all of our development, almost all of it, through a smart growth framework. We want to get housing that is high rise. We want to discourage sprawl. But the problem is we have not – the market isn’t producing the high rise that we have zoned for, that we want. And so the end result is we’re not getting much development. We’re not getting very much housing. We’re not even getting much commercial development.

Friedson
The idea that we’re forgoing revenue and that has a direct cost, that we’re leaving money on the table, we’re not leaving money on the table – the table doesn’t exist currently. That is the issue. There is no development, there is no investment. At best, the table is going somewhere else. It’s been shipped to another region of the country. It’s been shipped to another county. The whole point here is to create the opportunity. You know, the idea that we would be serious about transit-oriented development, that we would be serious about meeting our significant housing targets to address the housing crisis that we currently face but wouldn’t be willing to do anything about it is troubling. And we need a game changer. We need something to change the economic development path that we’re on, we need something to change the housing path that we’re on, that currently does not work. And I will say our housing situation, that is our version of a wall in Montgomery County. What we do with housing is a decision that we make on whether or not we want new residents here or not. That’s the local government version of whether we put up a literal or proverbial wall to say who can and who can’t live here, who we want and who we don’t want here.

Anderson
Will the development happen anyway? And I think the market is not just speaking, it’s screaming that the answer is no. Because you don’t have to take any particular real estate developer’s word for it, you can see what’s happening in the real world. It’s not just in Montgomery County, you can look at what market rents are at every Metro station in the region and you’ll see that there’s a few, particularly in Northern Virginia and in Bethesda, where rents can justify new high-rise construction there. Everywhere else, the answer is no, and that’s not just true of Grosvenor, or for that matter Forest Glen, as you mentioned, it’s also true of White Flint.

In considering these remarks, let’s remember who is saying them. It’s not County Executive Marc Elrich, who voted against numerous transit-oriented development master plans when he was on the council. It’s Casey Anderson, who has served on the Planning Board for nine years and chaired it for six; Hans Riemer, who has served on the council for ten years and is the current chair of its planning committee; and Andrew Friedson, who has emerged as the council’s principal champion of economic development during his first term in office. These are not development critics as Elrich has been. Anderson in particular, and Riemer to a lesser extent, are two of the architects of the county’s Metro-oriented land use policy and they are saying that it has failed.

They are also saying that the only way to rescue it is through what may ultimately become the biggest application of corporate tax breaks in the county’s history.

Are they right? We’ll discuss it in Part Two.

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Adam Pagnucco, Economy

MoCo After Discovery

By Adam Pagnucco.

Word of Discovery Communications’ exit from Silver Spring has exploded like a bomb in local politics, prompting attacks by the state Democrats on Governor Larry Hogan and two outsider County Executive candidates on the county government.  But the answer to the real question is not to be found in political soundbites: where does MoCo go from here?

Let’s start by acknowledging the unusual nature of Discovery.  The only reason the company was in MoCo to begin with is that its founder, John Hendricks, moved here in his 20s and started it at age 30.  If Hendricks had instead lived in, say, Philadelphia, the company would have been started there.  Discovery was largely a stand-alone organization that was not surrounded by peers.  When Hendricks retired as Chairman three years ago, it was probably inevitable that the company was going to move with media-packed New York City as a prime option.  Accordingly, no one your author knows who has been associated with Discovery is surprised at its exit.  While the company was important to Silver Spring, the departure of a firm like United Therapeutics, a key player in the local bio-tech industry, would have been more troublesome because of the county’s long-time efforts to build up that sector.

That said, Discovery will leave a big hole in Downtown Silver Spring.  Its 1,300 employees are hugely important to Silver Spring’s lunch scene and happy hour crowds.  (Anyone who sees the sheer number of people walking through the Georgia Avenue crosswalk near the building to access Ellsworth Place can appreciate this.)  The building itself was constructed to house one tenant.  Subdividing it for multiple tenants could be costly and challenging, thereby complicating its reuse.  Discovery is looking to sell it but it may not be occupied for a while.  Finally, the viability of Silver Spring as an employment center may be questioned by developers and tenants alike.  Will the central business district continue to be a jobs base or will new development be overwhelmingly residential, thereby cementing Silver Spring as a bedroom community for D.C.?  And could that worry be applied to most of the rest of the county?  It’s telling that the two most prominent new office buildings in the pipeline, the Park and Planning headquarters in Wheaton and the new Marriott headquarters in Downtown Bethesda, are supported by public money.

Aside from the usual political elbow-throwing, the reaction of the county has focused on the financial incentive it offered to Discovery to stay.  County Executive Ike Leggett said in a statement, “The County and State made a substantial proposal designed to accommodate Discovery’s challenges. Together, we were ready to provide considerable incentives to retain their presence in the County.”  Bethesda Magazine quoted Leggett as saying, “The incentive package was one of the largest offered to a company during his time in office, although he did not reveal specific details about the package Tuesday.”  We hear it was in the same ballpark as the $22 million offered by the county to retain Marriott with more money coming from the state.  Notably, New York State offered no incentives to attract Discovery.

The county’s reliance on corporate welfare for economic development is one of the great untold local stories of the last few years.  Business incentives, usually contained in grants convertible to loans when job targets go unmet, are disbursed through the county’s Economic Development Fund (EDF).  They are approved in secret under an exemption from the state’s Open Meetings Act.  Residents do not learn of the amounts spent or the recipients’ identities until after the agreements are signed.  Summary details are available only in annual EDF reports released during the County Council’s budget process.  Aggregations of those reports show that the county has approved 49 incentives totaling $88.3 million between 2012 and February 2017, of which 35 incentives worth $79.7 million were used for retention.  That’s right, folks – over the last five years, the county agreed to pay almost $80 million to existing employers to stay.  Six of those incentives consist of annual disbursements payable over periods ranging from six to fifteen years, thereby continually weighing on the tax base.  For the sake of comparison, the county is spending $80 million for libraries and recreation combined this fiscal year.  Just this month, the County Executive has proposed a mid-year savings plan of $60 million, including a $25 million cut for MCPS, while corporate welfare remains untouched.

Since 2012, MoCo’s corporate welfare has skyrocketed.

Is this really working?

MoCo should be an economic development leader.  We have tremendous advantages, including a large federal presence, a highly educated workforce, good schools, lots of investment in transportation projects (including the Purple Line), substantial wealth in some of our neighborhoods, low crime and virtually no public corruption.  Few localities in the nation can say they have all of these things.  But instead of being a growth leader in the Washington area, the county’s total employment growth of 3% between 2001 and 2016 ranked 20th of 24 Washington-area jurisdictions measured by the U.S. Bureau of Labor Statistics.  MoCo’s jobs base and its real per capita personal income have not recovered from the Great Recession.  And now our economic problems have contributed to a $120 million budget shortfall.  We’re not leaders, we’re laggards.  We must do better.

Discovery is headed out the door, but if we want to create the next generation of Discoveries, we are going to need a more creative and disciplined economic development strategy than relying on bribes to retain big employers.  We are going to have to save tax hikes for desperate times and not pass them simply because we’d like to spend money.  We are going to have to invest more in transportation and education and pay for it by restraining growth in the rest of the budget.  We are going to have to do things like ending the liquor monopoly, directing more of our county reserves into community banks where they can finance local job creation, cutting impact taxes near Metro stations to encourage transit-oriented development and raising them elsewhere to pay for it, and getting rid of redundant bureaucracy.  (Fun fact: we are the only local jurisdiction that requires two different independent agencies to sign off on every record plat, which drives developers banana-cakes.)  And after passing numerous employment laws, we should give employers time to adapt to them rather than immediately introduce more mandates.  If we implement this kind of agenda, maybe we could attract and retain businesses without handing out tens of millions of dollars in corporate welfare.

Economic development is tough.  It’s about more than one big employer.  It takes time.  It takes multiple components.  Most of all, it takes discipline.  If our next generation of elected leaders learns these lessons from Discovery’s departure, we will come back stronger than ever.  If not, Discovery won’t be the last high-profile employer to say adiós.

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