February 27, 2019

House committee debates bill eliminating tax break for apartments

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The seal of the state of New Mexico in the House

The elimination of a property tax break for apartment owners would lead to higher rents and force some owners out of business, representatives of the rental industry told a committee of state lawmakers Tuesday.

But supporters of legislation to wipe out the tax break countered that the potential effect on rents is unclear, that property taxes would decline for some apartment owners and homeowners, and that the bill would encourage development of new rental housing.

“There will be some winners and losers here, but overall it will be a fairer system and more rational system” for levying property taxes, said Mike Loftin, CEO of Homewise, a Santa Fe nonprofit that works to get families in affordable homes.

The House Local Government, Land Grants and Cultural Affairs Committee didn’t act on the legislation, House Bill 647. The committee is scheduled to resume consideration of the bill Thursday morning.

The legislation would roll back some of the property tax breaks the state enacted in 2001 to protect longtime homeowners in neighborhoods like Santa Fe’s east side from being taxed out of their residences because of rising property values.

Homes that are primary residences for their owners would continue to get the tax breaks, but tax cuts would be eliminated for multifamily properties and for homes that aren’t the primary residences of their owners. Starting in 2020, those properties and homes would be taxed at full market value.

Under the law enacted in 2001, the market value of any residential property cannot be increased more than 3 percent a year as long as the property owner remains the same. Newly purchased residential properties are taxed at full market value.

The law has resulted in longtime owners of residential properties paying less in property taxes — in some cases, substantially less — than owners of more recently purchased similar properties.

The legislation to limit the tax breaks to owner-occupied primary residences is the result of stories in The New Mexican on Feb. 10 that highlighted the inequities of the 3 percent cap nearly two decades after it was imposed.

The newspaper reported that an out-of-state owner of an apartment complex on the city’s south side received a tax break of about $42,000 in 2018, while owners of 81 other multifamily properties in Santa Fe received no tax cut.

The New Mexican also reported that out-of-state owners of several million-dollar-plus homes received substantial tax cuts.

Chuck Sheldon, CEO and president of T&C Management & Brokerage of Albuquerque, told the House committee that the 3 percent cap has created a “scab,” but that it shouldn’t be torn off all at one time.

Apartment owners whose taxes increase will pass along those costs to renters, Sheldon said. “We’re going to increase rates quickly all at one time,” he said.

Bobby Griffith, chief financial officer of JL Gray Properties and president of the Apartment Association of New Mexico, said owners of multifamily residential properties that have received federal tax credits or subsidies to provide affordable housing would be particularly hard hit. Rents at those properties generally couldn’t be raised to offset property tax increases, he said.

Joshua Smith, commercial division manager for Washington Federal bank, which makes loans for multifamily properties, said eliminating the tax break for apartments “would be bad for tenants, bad for owners and bad for our bank because we would see an increase in delinquencies and foreclosures.”

Rep. Matthew McQueen, a Galisteo Democrat and the bill’s sponsor, said he didn’t believe apartment owners would raise rents “dollar for dollar” to offset a property tax increase.

An analysis of the bill by legislative staff said claims that rents would increase “may or may not be true, since all markets are subject to supply and demand forces.”

“This increase in property taxes for some properties will not alter to any great extent the amount of personal income from which renters have the resources to pay rent,” the analysis says.

McQueen and Loftin said eliminating the tax breaks for some multifamily properties and homes that aren’t owner-occupied would mean additional tax revenue for counties and would lead to reductions in property taxes for other multifamily properties and owner-occupied primary residences. State law prevents counties from reaping large windfalls from sharp increases in taxable property value.