Tax Break for Elderly Housing Provider in Maryland Raises Questions

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April 4, 2013; Source: Baltimore Sun

In the beautiful Chesapeake Bay community of Havre de Grace in Maryland, a debate over a payment-in-lieu-of-taxes (PILOT) deal concerning a nonprofit elderly housing provider raises some questions for us. Typically, if a housing development (such as an elderly housing development) had some sort of affordability requirement, usually built in as a deed restriction, the property tax payment faced by the development would be based, at most, on the reduced value of the property. Essentially, the tax assessor’s thinking would be that the affordability deed restriction reduces the market value of the property. If, for example, the market rate for rental apartments were $1,500 a month, but the deed restriction established the maximum rent of the units at, say, $1,000, the property value would be accordingly reduced. Moreover, in many states, affordable housing developments qualify for specific state-authorized tax abatements and exemptions, in that developing affordable housing is frequently considered a purpose that addresses a significant public policy concern.

The Baltimore Sun’s reporting on Havre de Grace’s PILOT deal with St. John’s Commons, an elderly housing developer, suggests a somewhat different calculation. According to its Form 990, St. John’s Commons develops HUD-subsidized affordable elderly housing through the well-known Section 202 program. St. John’s Commons already has a PILOT deal with Harford County that dates from February 2012, but the deal with Havre de Grace is new.

The county charges the nonprofit developer PILOT payments at $175 per unit in its development, rather than some negotiated figure for the development as a whole. The payment per unit rises in $25 dollar increments each year until 2016, after which there is an annual increase of 3%. The city’s deal doesn’t specify the per-unit charge, which has yet to be negotiated, but the City Council also enacted new PILOT rules that limit the maximum term of PILOT agreements to 20 years and require property owners to pay full water and sewer connect charges, provide the city with an audit, and agree to a PILOT deal that includes agreed-upon annual increases. The notion that a property could be guaranteed a flat rate over a period of time without an escalator clause or that a housing development might be deed-restricted as affordable for longer than twenty years isn’t in the city’s plan. 

Havre de Grace isn’t Boston, Philadelphia, or Pittsburgh, where some of the big PILOT battles have been fought between municipalities and large nonprofits like hospitals and universities. Both St. John’s Commons and its affiliated 501(c)(3) St. John’s Towers are small nonprofits, with less than $1 million in annual revenues and expenditures. But the appetite of municipalities for PILOTs doesn’t necessarily focus just on deep-pocketed nonprofits anymore.

A recent report of the Indiana Nonprofits: Scope and Community Dimensions Project, sponsored by Indiana University’s School of Public and Environmental Affairs, Indiana University’s Public Policy Institute, and the School of Philanthropy at IUPUI, discusses the survey responses of almost 1,150 local government officials on the subject of PILOTs (or SILOTs—services in lieu of taxes). Clearly, they are interested in taxing the “eds and meds”—half of the surveyed officials think that PILOTs should be required of colleges and hospitals, as opposed to voluntary decisions by the nonprofits. Almost a third of the respondents favor churches making PILOTs or SILOTs; fully one-fourth favor PILOTs for church property owners. Amazingly, half of local officials favored PILOTs or SILOTs on state-owned properties, and nearly half on federal properties.  Only six municipalities appear to be exacting PILOTs, but the appetite is clear.

Havre de Grace is not Baltimore, but it is no less interested in PILOTs than its big city neighbors. In Indiana, small cities will be looking for the same. And it won’t just be hospitals and universities targeted, but small affordable housing developers like St. John’s Commons.—Rick Cohen