Tax delay expected to spur home building

BUILT ON SPEC: Tom McNulty, co-owner of E.A. McNulty Real Estate, in front of a spec house his company built in Lincoln. He said the property tax exemption is
BUILT ON SPEC: Tom McNulty, co-owner of E.A. McNulty Real Estate, in front of a spec house his company built in Lincoln. He said the property tax exemption is "a good thing for the economy, because there's a trickle-down effect." / PBN PHOTO/ MICHAEL SALERNO

A new law enacted in July that grants property tax exemptions on unoccupied new construction or renovations permitted after July 1 could help spur speculative construction short-circuited by the Great Recession, Rhode Island builders say.

“It’s great; long overdue,” said Bob Baldwin, owner of RB Homes Inc. in Lincoln and a past president of the Rhode Island Builders Association. “The cost of housing in Rhode Island is way too high, and if we want to attract people and companies here and keep our own kids here, we have to lower the cost of housing.”

This new law has the potential to do that, said Baldwin and John V. Marcantonio, RIBA’s executive director.

Despite May’s broad rebound in economic momentum, Rhode Island was still lagging in late spring in the number of single-unit permits issued, which fell 15.2 percent year over year, according to Leonard Lardaro, an economist at the University of Rhode Island.

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Since the Great Recession, builders have built predominantly high-end or subsidized housing, leaving the middle-class homes previously built “on spec” out of the equation, said RIBA, which is based in East Providence.

The reason is, thanks to the recession, middle-class model houses built on spec would sit unoccupied for long stretches as potential buyers avoided the market. At the same time, the contractors who built the homes were unable to afford to pay the taxes not only on the land but on the improved property values, Marcantonio and Baldwin said. The high end of the market remained healthier, while subsidized housing was built with supportive financing.

“Without the middle-class housing stock being built in the marketplace, you have that dysfunctional setup,” said Marcantonio. “People can’t afford [homes here], and they typically leave the state.”

That’s where the new exemption comes in.

The exemptions apply to the cost of the improved value of the house or dwelling unit until it’s sold or rented, and occupied. The development designation cannot be extended past two tax years.

Towns continue to collect taxes, building and utility fees and the like, but have to wait to get the full improved value, said Baldwin.

Otherwise, he noted, “You put the house up and the developer sits on it for a year and has to pay taxes.” And that can cost thousands of dollars – costs that get passed on to the consumer, said Baldwin and Tom McNulty, co-owner of the family business E.A. McNulty Real Estate in Cumberland.

But for every single-family home built, one construction job is added to the industry, said House Majority Whip and Rep. Jay Edwards, D-Tiverton, the lead sponsor of the legislation in the House.

RIBA requested the bill, Edwards pushed the House version and Senate Judiciary Committee Chairman Michael J. McCaffrey, D-Warwick, provided a substitute bill, the one that ultimately became law. Former Gov. Lincoln D. Chafee had rejected prior versions of the bill three times but Raimondo signed this one.

“This will encourage house building on spec,” Edwards said. “If you don’t have to pay added taxes while you’re building it, you get a benefit there. You can put all your money into building the houses or improving [them].”

McNulty said, “It’s a good thing for the economy, because there’s a trickle-down effect.”

Edwards and Marcantonio cited the multiplier effect of that added construction job: it creates 1.8 ancillary jobs in other industries, they said.

Both McNulty and Baldwin are considering undertaking development that would benefit from the new law. But it’s not without having weathered challenges before now, they said.

Prior to the recession, Baldwin was building 10 to 12 single-family homes, either on spec or for a given customer, in any given year. Now, he said, he’s building two a year.

“The purpose of this bill was to spur builders to take a shot and build inventory by constructing spec housing,” he said. “Second and equally critical was to lower the cost of building houses that makes housing more expensive than it should be.”

McNulty, who is “always putting up a spec house” because he likes to have that in his inventory, has subdivision projects now in Burrillville, Lincoln and Cumberland. Some years he has done up to 10 homes on spec, but that number has recently been cut in half, to five a year, he said.

“Sometimes we furnish them and it acts as a sales tool,” McNulty said. “People are very visual; they like to see and touch it. It’s something in your toolbox for someone needing to relocate quickly, so this [exemption] is most helpful. It may be the difference between putting one up and two up.”

Ethan Sluter, director of development and principal of Bourne Avenue Capital Partners, a division of his father David’s firm, New England Construction of East Providence, is involved in commercial real estate, but also large residential development.

BACP built the Rumford Center between December 2007 and January 2009, remaking a former baking powder factory into 118 residential units of two-bedroom, one-bedroom and studio apartments. There is also some commercial space in that building, he said.

Unfamiliar with the new law, Sluter hailed the details as promising.

“It doesn’t hurt,” Sluter said. “I would think it helps. And it also helps municipalities to enact longer-term deals. [A] project needs to stand on its own merits anyway. What I would use it for would be to start a discussion with a city or town about a longer-term deal. It’s great there’s an incentive available.” •

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