When Providence hiked property taxes and slashed the exemption on multifamily homes in 2010, many apartment-building owners were blindsided by soaring tax bills that in many cases were double what they had once paid.
Providence’s unusually high, 50 percent homestead exemption for owner-occupied properties provided some refuge and was attractive because the city required hardly any proof of residency for those who claimed it.
Now that the city has cracked down on homestead-exemption abuse, as many as 4,000 Providence properties that took advantage of the homestead exemption last year may not have been eligible for it.
Since the city required all homeowners to register their car in Providence to claim the exemption (or provide other proof of residency), the number of homestead properties this year has dropped from 21,000 to 17,000, according to the Director of Administration Michael D’Amico.
As a result, the city is projecting at least $5 million in new revenue for fiscal 2013 from properties that no longer claim the exemption on their taxes and from new vehicle taxes from owners who used to avoid the city’s steep rates by registering elsewhere.
And that figure is likely understated. It assumes as many as 2,500 property owners will belatedly apply for the exemption, (the city is allowing late applications) although only a trickle of new exemptions are coming in, D’Amico said.
“It is our belief that many of these people weren’t entitled to the exemption and, as part of the new application process, knew they weren’t going to qualify,” D’Amico said.
The homestead crackdown, approved by the City Council last year, is a major element of Mayor Angel Taveras’ plan to balance next year’s budget without filing for bankruptcy or seeking a property-tax hike.
Especially when previous tax hikes are taken into account, the new rules have effectively added investor landlords to retirees, public-safety workers, colleges and hospitals digging deep to help keep the city solvent.
But although tightening the homestead rules is providing the city a boost in the short run, many in the real estate world say it overlooks an imbalance in Providence’s current property-tax system that is dragging down the already depressed multifamily housing market in ways that could hurt in the long run.
After initially eliminating the entire 33 percent multifamily exemption, the city restored it to 15 percent, but Kazarian said it has still chased away investor-owners.
“If the goal is to fill properties with owner-occupants, eventually you will have to raise the tax rate on everyone, because you will have fewer people paying the higher rate,” Kazarian said. “I personally didn’t buy an investment property that I had been looking at for years because with the taxes for a nonoccupant owner, it wouldn’t have been worth it.”
As an example, Kazarian said the property he was looking at was listed close to the assessed value of $448,000, but under current rates he would have had to pay $12,168 annually in property taxes while an owner-occupant would pay $7,155.
The property was eventually sold to a buyer who planned to live there.
Many Realtors say tax increases are partially to blame for holding back the multifamily market in higher-end neighborhoods, such as the East Side, which may have otherwise helped lead a housing-market recovery.
In 2010, when the multifamily exemption was cut, apartment-building sales on the East Side reached a 10-year low of 42, according to figures from the Rhode Island Association of Realtors.
In 2011, East Side multifamily sales picked up slightly, to 51, but the median sale price dipped again, by 1 percent, and in the first quarter of this year sales dropped by two transactions compared with last year, as the median price dipped 16 percent year over year to $300,000.
Citywide, multifamily sales plunged 26 percent in 2011, and the median sales price sank 3 percent to $84,700.
Not only have the new homestead-exemption rules driven away investors, but even buyers who plan to live in a property once they purchase it have to pay the full nonhomestead tax bill for a year before they can apply for the exemption, which drives down the price.
“It makes it very difficult when there is a property without the homestead – the downward pressure is huge,” said Rebecca Mayer, an agent with Residential Properties in Providence. “I have only a few investors who want to buy here anymore.”
Part of the reasoning for raising taxes on landlords is the idea that, unlike single-family owners, they can pass the costs along to their renters.
But Christopher Wall, who owns two-unit and three-unit buildings on the East Side, and is also an agent with Residential Properties, said that isn’t the case and rents have remained amazingly stable compared with purchase prices because of intense competition for tenants.
“You used to have investors buying apartment buildings and turning them into condos and when the condo market went south that stopped,” Wall said. “Then you had the creation of more rental units on the East Side and downtown as huge buildings that had been built for condos were converted back into rentals. If I had a vacant apartment and tried to raise the rent, I couldn’t fill it.”
Contrary to the belief that taxes don’t cause people to make drastic choices like fleeing a city, Wall said Providence has experienced a “flight of the earls,” as wealthy residents decamp for less-expensive communities, as evidenced by the population loss on the East Side that has triggered a nasty redistricting fight.
The debate about property taxes in Providence has also raised questions about whether owner-occupant landlords are inherently better for a community than absentees or investors.
“I think that there is a pride in ownership that does trickle down to keeping their property up when the owner lives there,” Greater Providence Board of Realtors CEO Michelle Caprio said. “You are going to be more attentive to the tenants that you choose, that trash has been picked up, that the house is painted, that there is no blight.” •
