Montgomery County Proposes (and Adopts) Zoning & Tax Incentives to Convert Vacant Offices into Housing

This article was originally published on the website for the Washington Business Journal on April 1, 2025. Included here is the original article and an update.

UPDATE. Since the time of publication of the article below, the Montgomery County Council adopted ZTA 25-03 (unanimously) and Expedited Bill 2-25 (10-1 in favor) on April 8, 2025. As adopted, the criteria for meeting the Commercial to Residential Reconstruction use has been narrowed with a focus on office buildings that are 2 stories or taller and 50% vacant at the time of application (with some exceptions). For projects that have Site Plan approval as of the effective date of the legislation and meet the Commercial to Residential Reconstruction use standards, they may obtain the tax abatement by obtaining building permit within 2 years of the earlier of the effective date of Expedited Bill 2-25 or the date of the Planning Board resolution. Most other projects will have to obtain approval of the expedited Commercial to Residential Reconstruction plan to obtain the tax abatement. The by-right PILOT (tax abatement) for projects meeting the Commercial to Residential Reconstruction use standards requires a minimum of 17.5% of the total residential units to be subject to government regulation or binding agreement limiting rents to 60% Area Median Income for a period of 20 years. The project receives 20 years tax abatement (100% of County Real Property taxes) from the time of occupancy of the residential building. There is a 10-year sunset on the tax abatement (PILOT) program.

In recognition of the challenges faced by owners of underutilized and vacant office buildings throughout the County, a majority of the Montgomery County Council has sponsored several pieces of legislation intended to help spur replacement of these commercial buildings with much needed housing, including affordable housing.

Largely due to COVID-19, commercial property owners have watched office buildings empty and become increasingly more vacant, while at the same time related restraints (pandemic, inflation, and other economic conditions) restrict the commencement and viability of residential development projects.

The Proposed Legislation

Zoning Text Amendment 25-03 and Expedited Bill 2-25, introduced by the County Council on February 4th, represent a thoughtful approach to comprehensively address the challenges in the commercial office market, as well as barriers to the production of more residential units and affordable housing by facilitating and encouraging the conversion of increasingly unoccupied office buildings.

Zoning Text Amendment 25-03 (ZTA 25-03) would establish an expedited development approval process for the conversion or replacement of vacant (less than 50% tenant occupied) office or retail buildings that are at least two stories tall to residential uses (multi-family and/or townhouse units, depending on the location of the property).

As a companion to ZTA 25-03, Expedited Bill 2-25 would provide 100% tax abatement of County real property taxes for a period of 25 years, through a Payment In-Lieu of Taxes (PILOT). This PILOT would apply to property owners who (i) meet the definition of a Commercial to Residential Reconstruction (as defined by ZTA 25-03) and (ii) provide at least 15% of the dwelling units built, under a government regulation or binding agreement with the County, to households earning 60% or less of the area median income for a limited rental charge for at least 25 years.

How These Policies Incentivize Housing Conversions

The ZTA 25-03 and Expedited Bill 2-25, as introduced, are intended to work in tandem to provide incentives for removal of obsolete commercial spaces from the market faster and encourage replacement of these spaces with much needed housing. These legislative efforts, if approved, will be a step in the right direction for the County because: i) the removal of obsolete office space will serve to strengthen and stabilize the remaining office buildings to be responsive to market demands (simple supply and demand), and ii) not only will housing inventory (including affordable housing) for residents increase in desirable locations throughout the County, but also it will be a net-positive for the County tax base by creating a continuing revenue stream for occupied residential space that would not otherwise exist. In this respect, a 25-year PILOT and the resulting 25-year property tax exemption as per the pending legislation will result in increased income tax revenue to the County that will more than offset any foregone real property taxes provided through the PILOT.

Proposed Expedited Bill 2-25 is Not Enough

While there are synergies between the creation of an expedited approval process under ZTA 25-03 and the availability of a PILOT, it is important that Expedited Bill 2-25 be broadened; it should be available as well for property owners who do not need the expedited process to implement a Commercial to Residential Reconstruction (as defined by ZTA 25-03). There exist some properties for which conversion to residential uses are approved through more traditional regulatory review processes (e.g., sketch, preliminary plan, or site plan) and/or a building permit without any discretionary approvals. These properties should get the same treatment as properties that go through the expedited review process.

By way of example, there may be projects that have already been approved under the traditional regulatory approval process, but which have been unable to move forward with Commercial to Residential Reconstruction due to the cost of construction and financing or market conditions. Alternatively, there are scenarios where an existing office building can accommodate a Commercial to Residential Reconstruction through amendments to prior regulatory approvals or building permits alone in a more efficient manner than would be the case with an expedited plan approval process as proposed by ZTA 25-03.

The County Council should not assume a “one-size-fits-all” approach that all Commercial to Residential Reconstruction projects will benefit from an expedited plan approval process. The legislation must be broadened to make available a PILOT for projects that otherwise meet the definition for Commercial to Residential Reconstruction, but that can be implemented through other (simpler) means.

Considerations

The County Council held public hearings on both ZTA 25-03 and Expedited Bill 2-25 on March 11, 2025, and it is expected to hold work sessions on both legislative items over the next several months.

While this legislative package, if approved, will be a positive outcome for the County’s commercial office and infill residential markets, it is important to note the following. First, other nearby jurisdictions have already adopted similar tax abatement policies to encourage Commercial to Residential Reconstruction projects, and their policies provide greater incentives to property owners than those being proposed by the Montgomery County Council.

Second, Montgomery County’s attractiveness for private capital investment has already been diminished materially over the past 5+ years due to unfavorable economic development policies adopted by the County (e.g., rent stabilization, increases to recordation taxes, and other regulatory barriers more onerous than those in neighboring jurisdictions). Combined with general economic concerns impacting the economy, the County must be more cognizant of how competitive the County is relative to other jurisdictions in the region.

As a result, it is important that the County Council study and implement additional policies that will supplement ZTA 25-03 and Expedited Bill 25-02 if the goal is to be competitive for economic development and housing opportunities relative to neighboring jurisdictions.

If you have concerns, questions, or needs relating to this pending legislation, please contact Bob Dalrymple at bdalrymple@sgrwlaw.com or Matt Gordon at mgordon@sgrwlaw.com.

Bob Dalrymple and Matt Gordon are attorneys in the Land Use/Zoning practice of Selzer Gurvitch Rabin Wertheimer & Polott, P.C. They counsel developers, builders, governmental entities, nonprofit institutions and businesses on projects ranging from large mixed-use developments to individual residential properties throughout Maryland and the District of Columbia. They assist clients with their development projects from inception through the final stages of the development review and building permit processes.