Arlington has become the first Washington area municipality to tax most rental apartment complexes at higher condominium values, making it still more costly for landlords to resist the profits of condominium conversion.
The change, which is mandated by state law, has increased assessments on some Arlington rental apartments between 30 and 47 percent, compared with an average 18 percent rise in county assessments this year. Some landlords said they will take the county assessor to court, while county politicians who said they are powerless to stop the trend are considering going to the state legislature for special tax breaks for apartment owners.
The condominium craze that has swept Washington and its suburbs in recent years has created a serious housing problem in many communities, as elderly and moderate-income tenants find themselves forced out of their apartments. Maryland, Montgomery County in particular, has enacted legislation to protect tenants. But in Virginia the power of local government is limited, and relatively few restrictions are placed on condominium developers. In Arlington, which has so far lost 20 percent of its rental stock to condos, the new higher assessments come at a particularly difficult time.
"It's causing a serious problem," said County Board Chairman Stephen Detwiler, "It can only encourage landlords to sell to condo converters. It may not be the only factor, but it is one more contributing factor."
"We feel that those projects that wish to continue renting are being penalized," said Elliott Burka, manager of the Fillmore Gardens, where the assessed value jumped from $7.9 million to $11.2 million.
"They either have to pass it on to the tenants and raise rents or convert," said Hugh Cregger, attorney for the Fillmore, "It's Catch-22."
The sudden assessment increases came about this year after the Arlington assessor began to appraise apartment complexes on the basis of prices paid in recent years for buildings bought for condominium conversion. The traditional method of valuing rental property relies on the income produced by rents.
By relying on recent sales data, the assessor's office insisted it is conforming to a state law requiring that property be assessed according to its "highest and best use." And if a market is created that directly tests the value of a property -- such as a concentration of building sales for condominium conversions -- then the assessor is obligated to follow the market trends. The apartment assessments are based on the market value of a comparable building about to be sold to a condominium developer.
So far, the phenomenon of skyrocketing increases in apartment values is limited to Arlington. Other assessors in Washington and its suburbs said they still rely on the income-producing method of calculating the value of rental apartments. "It's our policy to value on current zoning and use, not what it could be," said Robert L. Rudnik, state supervisor of assessments in Montgomery County.
But several assessors said they might be forced to appraise apartments by comparable sales if their communities experience the same rush of condominium conversions seen in Arlington. "If apartment buildings in my region are being gobbled up for condominiums, then that's going to be my market," said Fred Byrne, senior appraiser in the Alexandria assessor's office, where already some smaller apartment buildings are valued according to recent sales.
"It's a disastrous course to take," said John O'Neill, vice president of the local Apartment and Office Building Association. "What the Arlington assessor has done is open the door, and sooner or later all assessors are going to pass through the same door."
Attorneys for the landlords oppose Arlington's approach, arguing that rental properties are not actually comparable to buildings sold for condominium conversion. They point out that not all apartments are legally or economically ready for conversion.
"In treating every apartment house as a condo, the assessor is forgetting that if everyone of these properties came on the market at the same time then you couldn't get any price for them at all," said Gilbert Hahn Jr., attorney for Charles E. Smith, the developer of Crystal City and a major Arlington landowner who is appealing the new assessments on seven large buildings.
But the more serious question --apparently out of the hands of assessors and local government -- is the question of penalizing landlords who have not converted their buildings to condominiums, particularly those who now provide the remaining moderate-income apartments.
"This has a tendency to encourage just the thing that a government oughtn't to encourage," Hahn said. "If people have to pay real estate taxes as though they were condominiums, then there's a tendency to say, 'Fine, let's make them condominiums.' "
For most of the landlords hit by high assessments, the actual dollar increase in the tax bill this year is low, cushioned in part by a drop this year in the county tax rate from $1.12 to $.96 per $100 valuation.
For tenants, the higher tax bills have meant only small rent increases. For example, the higher taxes were responsible for about $3.10 of an average $50 rent increase at the 1,318-unit Barcroft Apartments, according to the tax assessor's calculations. Although Barcroft president Thomas DeLashmutt said the added tax burden will not be the deciding factor on the future of the complex, it doesn't help.
"I understand the assessor's position. They're just following the law," said DeLashmutt, "but what concerns me is what happens next year -- when they look at the prices apartments are going for this year."
The dilemma posed by taxing rental apartments at condominium prices is comparable to the problem of taxing farmland around high-development areas. In the early 1970s, Virginia and other states moved to protect farmland from higher assessments by allowing farmers to pay lower taxes, provided they agreed not to develop the land.
Arlington is now looking at similar remedies for apartments that agree to stay in the rental market. "We all recognize that garden apartments are facing a squeeze," said County Board member John Milliken. "We would like to find any way we can to encourage their retention as garden apartments."
"We have a community goal of preserving moderate-income housing," said County Board member Ellen Bozman. "That has to be highest on our list."