Amid a crushing housing crisis, Providence developers say they need tax breaks to build more
PROVIDENCE − Should housing developers get a tax break in the city with the third-highest commercial property-tax rate in the country?
That was the question underlying proposed tax-stabilization agreements for three proposed housing projects in Providence that developers say they need to make the projects financially work because interest rates and construction costs have soared since the pandemic.
The agreements for three projects were heard in front of the City Council's finance committee on Tuesday night as council members grilled developers about the number of parking spaces, complained about the lack of income-restricted housing, railed against tax breaks and said they were missing key financial data.
Developers make their pitch: Could tax stabilization agreements make a comeback in Providence?
At issue were three developments:
A 133-unit four-building apartment complex on Gano Street
A 75-unit conversion of the Tockwotton Home in Fox Point
Multi-family properties with six or more units are taxed at the city's commercial rate while five and lower are taxed at the much lower residential rate.
No new tax stabilization agreements have been approved since December 2022.
Getting projects to be profitable
Dylan Conley, representing two of the three developers, told the finance committee members that since 2021, the stabilization agreements have been structured so there are no more "sweetheart" deals.
Until three years ago, a developer could get a tax bill based on the assessed value of the property before it was developed – and then maintain a rock-bottom tax rate. But the new deals ramp up taxes so that by the eighth, ninth or 10th year, an owner is often paying more in taxes than they will after the agreement expires.
With the third-highest property tax rate in the country, developers said they need the relief in the first few years from a spiking tax payment to make projects profitable enough to get loans.
Interest rates have more than doubled they hit record lows in 2021, getting above 7%. That means a development needs to at least cover the cost of its mortgage, while the amount that needs to be borrowed has been driven higher by rising materials and labor costs.
"I have one client telling me, they may just pull the pipeline and go somewhere else," Conley said.
What happens next?
Conley, who represented two of the three projects, said he has been working with a contractor hired by the city to professionalize the tax-stabilization agreements process and provide council members with the financial data to assess for themselves whether they are necessary.
While that process wrapped up two weeks ago, it wasn't presented at the meeting, leaving Conley and Councilman Miguel Sanchez a little surprised.
While no future meeting has been set, Conley said he is optimistic it will be soon, while Chairwoman Helen Anthony said they would deliberate and look at more documents at another meeting.
How does a tax stabilization deal work?
Here's how the deal works: in the first few years, the property is taxed at whatever the land, or unrenovated building, was worth at its last assessment.
By year three, it's the base tax assessment multiplied by a percentage of the new assessed value of property, 12.5%. The percentage keeps rising over the rest of the agreement, which lasts 10 years.
By year 10, the last year of the deal, the owner pays based on the base value of the property plus 95% of the value of the new property.
Pencil out your own project
Developer Eric Edelman created a spreadsheet-based calculator to analyze when a housing project would become profitable, with, or without, a tax stabilization agreement, and how much of a profit margin is required to get investors when they could instead park their money in supremely safe bet, a 30-year treasury bond.
Variables include building size, average size of units, the mortgage rate, the average rent per square foot and the hard costs per square foot.
The calculator is made with a Google Sheets spreadsheet. Make a copy of the spreadsheet with your own account to see how a project would pencil out.Try it out here.
Tax revenue vs principals
Conley said that without the agreements, the developers he represents won't be able to build because Providence's commercial tax rate squeezes their margins too much.
If nothing gets built on those lots, Providence doesn't get the tax revenue from an empty lot with a minimal valuation getting turned into a new building that pays its full tax rate in 10 years, he said.
If developers can't get their projects financially to work and they don't build them, Providence's housing crisis continues to worsen as new supply doesn't come onto the market.
State Rep. Enrique Sanchez, D-Providence, spoke against the agreements, citing the lack of income-restricted units proposed for the apartment buildings.
"So many of my constituents are struggling to pay their mortgage, rent, to pay for the high cost of living in general, and it's not fair to be giving [developers] tax breaks when our residents don't get tax breaks," Sanchez said.
Councilman James Taylor said the city sees a net gain from the agreements because the tax revenue from developed properties will be higher than if they continue to sit empty.
What housing crisis?
Councilman Justin Roias, a renter who is not on the finance committee, told his fellow council members he is against the agreements because he is "firmly against tax breaks" but also because the housing proposed, specifically at Gano Street, would be "high-end for-profit housing."
While the tax stabilization agreement for Gano Street might spur housing development, he said, it would "only line the pockets of wealthy developers" and he could not go to his constituents and tell them that they won't get a tax break, but the developer would.
On social media, asked what the difference between "high-end" housing and any new housing is, he wrote that "the lines between what defines standard market rates and high-end market rates have become increasingly blurred in this housing crisis."
While the Gano Street apartments would be on the city's East Side and in a desirable location, there are few amenities other than some parking.
Renters or owners? Providence's housing market is 'cutthroat.' Even City Council members are caught in the middle.
Providence, and the whole of Rhode Island remains in a crushing housing crisis, with rents year-over year up 8%, the highest in the country, according to the real estate website Zillow.
When state Housing Secretary Stefan Pryor tried to convince legislators to get on board with a $100-million housing bond, he made it clear that there is only one true solution to the state's housing crisis: Build more units.
Pryor said the state would need to start producing 2,000 to 3,000 housing units per year just to prevent the current crisis from getting worse, while the state is currently producing fewer than 1,000 a year.
Who deserves tax breaks?
While Roias, a renter, decried tax breaks for developers proposing to build dense multi-family housing, tax breaks for homeowners are already baked into Providence's property tax rules.
Residential property is taxed at a lower rate of 1.83%, compared to the residential 3.51%. In 2003, both residential and commercial properties were taxed at the same high rate of 3.8%. In 2004, both rates dropped, but residential went down to 2.9% while commercial went down to 3.7%.
The city's homestead exemption reduces the assessed value of owner-occupied buildings by 43%. That means the city's most expensive homes, like the $4.3 million Moses Brown Ives House, get the same 43% tax break (if they're owner occupied) that $250,000 starter homes do.
With the homestead exemption tax break, a $4-million house is taxed like a property worth $2.3 million, reducing a yearly tax bill from $73,200 to $42,090.
For a $250,000 starter home, it means the taxed value is $142,500, shrinking a yearly tax bill from $4,575 to $2,607.
The homestead exemption, which sets no cap on how much tax an owner can save, creates some of the cheapest residential tax rates for mansions in the state, Conley said.
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Reach reporter Wheeler Cowperthwaite at wcowperthwaite@providencejournal.com or follow him on Twitter @WheelerReporter.
This article originally appeared on The Providence Journal: Housing developers say they need tax agreements to build more housing
