A teardown house on Takoma Avenue in Silver Spring. Image by Dan Reed.

This past Tuesday, Montgomery County Councilmember Evan Glass introduced the Housing Impact Fairness Act which would apply impact fees to newly-rebuilt homes, sometimes called “teardowns.” Glass claims the bill could raise $100 million in new revenue for school construction and affordable housing.

A teardown is a single-family home that’s been demolished and rebuilt into a much larger structure. There have been a little over 2,000 teardowns in the past 10 years, on average 219 per year, especially in high-demand neighborhoods.

According to data from the Montgomery Planning Department, the average teardown is 1,700 square feet and purchased for $700,000. It is then demolished, more than doubled in size to 4,200 square feet, and sold for $1.75 million. Roughly 70% of teardowns are done by builders, not individuals.

Teardowns are largely concentrated in the greater Bethesda area, where there has been a proliferation of this housing type. Half of the demolition permits since 1990 have been in the Bethesda area, followed by Silver Spring (8%), Chevy Chase (8%), Potomac (6%), and Rockville (6%).

Teardown map from page 55 of "Montgomery County Trends — A Look at People, Housing, and Jobs Since 1990." Image by Montgomery Planning.

Currently Montgomery County levies a schools and transportation impact fee on new development. School impact fees are based on housing type, while transportation fees are based on geography. Townhomes and apartment buildings incur some of the highest school impact fees. A low rise apartment building pays $21,000 per unit in school impact fees, while a townhome pays $27,598—the highest amount.

Impact fees were first created in 1986 as a way to help pay for growing infrastructure needs. Approximately two-thirds of Montgomery’s housing stock was built prior to that date and did not pay impact fees. This has put much of the burden of infrastructure on new, multifamily development, and has made it more expensive for new renters or homeowners to buy into the county. While older single-family homes have not contributed directly to an impact fee fund, they have paid property taxes and recordation fees (which were raised in 2016).

So what would this legislation do?

The bill would end an impact tax exemption for newly-rebuilt homes. The new impact fees would only apply to homes that never paid one. If Montgomery County had applied current impact tax rates to these homes annually it would have raised $5.7 million for schools and $4.3 million for transportation.

Approximately two-thirds of Montgomery’s 390,000 homes were built prior to the 1986 when impact taxes were first implemented. The bill’s sponsor claims it would raise roughly $100 million over 10 years for school construction and affordable housing, $5.7 million annually for school capacity, and $4.3 million for the Housing Initiative Fund. The existing impact tax rate for schools would remain unchanged, but the bill would replace the transportation fee with a new affordable housing fee.

The affordable housing fee would apply a $9/square-foot surcharge for each additional foot above the existing footprint. A 2,000-square-foot home that was demolished and turned into a different 2,000-square-foot home would not pay the additional affordable housing fee. However, it would be subject to a school impact fee.

The school and affordable housing fees would be triggered by a full demolition or a partial demolition of 50% or more of the existing structure. It would not apply to additions, extensions, dormers, or bump outs.

The average teardown is 1,700 square feet and valued at $700,000, and then is transformed into a 4,200-square-foot home valued at $1.75 million. Under the bill, the average teardown would have to pay $26,607 towards schools and $22,500 towards the Housing Initiative Fund. That average $1.75 million home would instead cost $1.8 million and provide funding for schools and affordable housing(the fees adding 3% to the cost of the house).

Theoretically, depending on the strength of the market, the proposed fees may result in fewer tear-downs overall, encourage replacement homes to be built to a more modest size or with less expensive amenities, or they could have little effect and the fees might simply be passed on to the consumers. It is unclear the impacts of essentially a 3% fee would be on a $1.75 million home.

What about the impact on schools?

GGWash has written before about what drives enrollment in schools, and it isn’t new one-bedroom apartments. According to data from the planning department, student generation rates from newly-rebuilt homes are 20% higher than the countywide average for single-family homes, but are nonetheless exempt from direct impact payments.

This data shows that single-family homes generate more students than multi-family housing. Image by Montgomery Planning.

This legislation has come at a time when four school clusters have been placed in moratorium due to overcrowded schools. This means many high opportunity neighborhoods are off limits to development.

Could this bill shift the conversation about what actually drives new enrollment? Homes built prior to 2004 were not subject to school impact fees but impact fees now make up one-eighth of the public schools capital budget. The burden of the fee is predominantly placed on new multi-family development, even though most new students don’t live there.

Housing affordability in Montgomery County. Image by Dan Reed.

New revenue could help end the moratorium and work toward eliminating a $340 million backlog of school needs, allowing desperately needed housing to be built. The $5.7 million that could be raised annually represents a 30% increase above annual impact funding for schools.

Could this be an opportunity to build better housing policy?

A landmark rental housing study in 2017 recommended doubling funding in the Housing Initiative Fund from today’s $46 million to $100 million to preserve affordable housing. The county committed to putting $100 million in Montgomery’s Housing Initiative Fund, but no proposal to fund it has come forward except for this bill.

The report also made a number of other recommendations, including implementing a demolition tax. Demolition fees seek to mitigate the loss of affordable housing by requiring property owners to pay a fee and/or tax for every demolished residential unit.

The report states, “While demolition taxes are rarer than other forms of developer impact fees, these taxes are getting a closer look in hot housing markets where single-family “tear-downs” or the demolition of older apartment buildings are impacting the availability of affordable housing.”

Teardowns of apartment buildings have been very limited in Montgomery County. There have been only six multi-family demolitions since 1990( housing advocates have asked demolition fees be charged on those as well). Two of those instances involved public-private partnerships to redevelop affordable housing, and the other four increased the number of Moderately Priced Dwelling Units. Meanwhile, there have been over 4,000 single-family home teardowns since 1990.

And teardowns can have a major impact on affordability. Look at these examples from GGWash contributor Dan Reed.

When we don’t build enough homes to meet our growing population, affordable(ish) modest homes get turned into expensive luxury homes. https://t.co/Qg2LCduuTL pic.twitter.com/QPIAxwWPLJ — dan reed, 100% that gourd (@justupthepike) February 11, 2019

A $575,000 Bethesda home built in 1953 had an estimated $2,196 mortgage. It was torn down and rebuilt, becoming a $1,425,000 home of nearly 5,000 square feet. The new mortgage was $5,443.

The changes in home price can shut out a middle class family, and can be the difference between having a diverse community or not. The $4.3 million in new revenue from the new bill could cut in half Montgomery’s waiting list for rental assistance or help fund affordable housing on public land.

A severe housing shortage requires both preservation and production

The answer to the housing crisis isn’t either just preserve more or just produce more. Policy makers must do both. Montgomery county has a big housing shortage and it must consider re-zoning approaches similar to Portland’s. This means upzoning areas around future Purple Line stations to allow for more density and permitting “missing middle” housing types like duplexes and fourplexes. Without these changes, the county can never fully solve the housing shortage.

At the same time, the county’s demographics have changed and a large portion of households will not be served by the market alone. According to recent council briefing by the Metropolitan Washington Council of Governments, ”By 2030 we estimate that 119,000 households in Montgomery County will need housing in the low and lowest cost bands (under $1,300 a month in 2016 dollars). As most new housing stock produced at this level requires deep public subsidies, preserving the existing affordable housing stock, whether already subsidized or not, is essential.”

Demographics from page 24 of "Montgomery County Trends — A Look at People, Housing, and Jobs Since 1990." Image by Montgomery Planning.

A full 48% of people who live along the Purple Line route earn below 60% Area Median Income, and the county has promised substantial housing investment along the Purple Line to prevent displacement—promises yet to be fulfilled. A Montgomery County Planning Department study suggested a number of tools to preserve affordable housing, from increasing housing vouchers to providing financial education for renters, and all of them cost money.

Household income in Montgomery County. Image by Montgomery County Council.

Some research indicates that impact fees aren’t great, but if impact fees are going to be applied, they should be applied equally. Montgomery currently charges more in impact fees for housing types that house lower-income residents, like apartments and townhomes, than it does for newly-rebuilt $1.75 million homes. The tax structure should be reversed. 74% of Montgomery renters earn under 100% Area Median Income. Our housing crisis is going to take both more production and more subsidy. It isn’t one or the other.

The county, like the rest of the region, is facing a shortage of low-income housing. Montgomery must build 23,100 rental units that cost less than $1,300/month by 2030—the most of any jurisdiction in the region. And a housing need not served by the market, making a robust housing trust fund more essential than ever before.

This bill should be the first step in a bigger conversation about creatively tackling a housing crisis. If a studio in a lowrise garden apartment is charged $21,000 per unit for school impact fees, a 4,200-square-foot newly rebuilt home can pay as well. The county has evolved dramatically since 1986, now is the time to align zoning and tax policies with the needs of 2019.