On Monday the Maryland General Assembly finished a session shaped by urgent efforts to accelerate the COVID-19 recovery, initiate social justice reforms, restore the Chesapeake Bay and mitigate the effects of climate change.
The NAIOP Maryland legislative committee carried 268 bills on its bill list – more than ever before. The committee, chaired by Tom Pilon of St. John Properties, took positions on legislation related to building and energy codes, forest banking, carbon trading markets, taxes, stormwater management, commercial leases and legal standing to appeal permits. Managing the volume and breadth of the legislative proposals was, at times, a challenge but one the committee and working groups embraced from before opening day until the last bills were resolved near midnight on Sine Die.
Energy and Building Codes
The potentially most impactful bill for commercial real estate was a sweeping rewrite of the state’s greenhouse gas reduction law sponsored by Prince George’s County Senator Paul Pinsky. Encouraged by the Maryland Chapter of American Institute of Architects, Senator Pinsky wrote the building code provisions of the Climate Solutions Now Act, Senate Bill 414, in the image of the architects’ 2030 Challenge. Beginning in 2024, new private buildings of 25,000 square feet or more would have to be 30% more energy efficient than the 2018 International Energy Conservation Code. Efficiency requirements would drop to 40% below code in 2027, 60% in 2030 and reach net zero energy beginning in January of 2033.
Implementation of Senate Bill 414’s buildings-related provisions would have required integration of locally sourced renewable energy at high levels as well as changes to utility market structures that the Assembly and Public Service Commission are studying but have not been ready to make. Mandating net zero energy buildings would also redirect the focus of current climate mitigation efforts in Maryland which emphasize reducing greenhouse gas emissions from on-site combustion of fossil fuels and increasing the percentage of building electricity generated by zero-carbon sources.
The House of Delegates led by Kumar Barve of Montgomery County and Dana Stein of Baltimore County made significant changes to the Senate bill. They altered the building-related provisions to align with policy recommendations made by the Maryland Commission on Climate Change and introduced provisions designed to reconcile differences between the House and Senate over whether ground-based or rooftop solar should be emphasized. Over the last 12 hours of the session, the sides exchanged proposals and negotiated through a conference committee but in the end, the Senate would not agree to the House amendments and the bills died when the session ended at midnight.
Coast Smart Siting
House Bill 512 would require private projects in and adjacent to tidal areas of the state to comply with minimum flood elevations, construction guidelines and administrative procedures for project application, review and approval that were developed by the Coast Smart Council for state agencies and local governments. [Coast Smart Siting program requirements linked here]. These construction requirements and administrative procedures were not developed within the existing federal, state and local floodplain management structure which would put the Coast Smart Council, an appointed advisory panel, in the position to conduct review and approval of private development projects. This raised the possibility of bureaucratic inconsistency and confusion.
The requirements would be applied in an overlay zone mapped in the Coastal Ready Action Boundary [CRAB Map linked here] that both intersects with and expands areas currently designated as floodplain and critical areas. An initial GIS analysis showed the requirements would expand beyond current tidal floodplain areas by 96,000 acres, including areas in and around the Port of Baltimore as well as shoreline areas in Baltimore City and County.
The bill died in committee as stakeholders discussed the possibility of incorporating similar requirements into local floodplain ordinances. Anticipate reintroduction in 2022.
Standing to Appeal Permits
The Constitutional Amendment for Environmental Rights, House Bill 82 and Senate Bill 151, would have created broad new undefined rights to clean air, water, land and a stable climate. The bill also proposed an individual right to enforce these rights through court action based, not on scientific standards adopted through laws and regulations, but on the plaintiff’s personal tastes and their personal definition of the new, constitutionally guaranteed air and water rights.
The bill is very different than current state and federal rights to citizen suits and would mark the end of carefully balanced approaches to existing rights to appeal land use and environmental permits. It would also allow private parties to intervene in agency enforcement actions and sue government entities for perceived inaction.
The bill raised serious concerns that routine functions of state and local governments would become chaotic and some ungovernable. Activities performed under state and local permits would never really be vested and reliably carried out because virtually any opponent could use the broad language of the bill to initiate tactical litigation to oppose legitimate work under government permits. The bills died in committee.
House Bill 76 clarified the public’s standing to intervene in Clean Water Act enforcement actions initiated by the Maryland Department of Environment in state court. The bill was passed into law with clarifying amendments offered by NAIOP and the Maryland Building Industry Association.
Carbon Markets and Forest Banks
Senate Bill 737 would have established the framework for a carbon trading market in Maryland. Private equity funds that aggregate large scale environmental restoration projects, certify the benefits, and sell credits into voluntary carbon markets are oversubscribed and seeking new locations to develop credits. The bill would have allowed the state to contract with ecosystem credit brokers to install water quality practices related to the state’s Chesapeake Bay restoration plan and permitted those contractors to keep carbon reductions that result from those practices, certify them as credits and sell them into international carbon trading markets. The bill was supported by private equity, credit aggregators, 25 environmental groups and three state agencies. The bill passed the Senate in the final weeks of the session but did not receive a vote in its House committee.
In October 2020, Maryland Attorney General, Brian Frosh issued an opinion that concluded, in part, that acquisition of credits in a “forest retention bank” that preserves existing forest does not qualify as mitigation under the Forest Conservation Act. According to the opinion, to qualify for mitigation, a forest bank must have been intentionally planted expressly for the purpose of providing credits as opposed to preserving existing forest.
The practice of mitigation via protection of existing forest offsite has had clear policy support from the General Assembly since the Forest Conservation Act was first passed. Nevertheless, the somewhat narrow legal inconsistency between mitigation via easement and mitigation via purchase of credits in a forest mitigation bank halted approval of projects using forest retention banks to meet mitigation requirements.
With no qualifying forest banks in Montgomery County and few others available anywhere in the state, the compliance options available for private development and public works projects were narrow and uncertain. A number of counties, industry groups, and the Department of Natural Resources successfully supported passage of House Bill 991, which was introduced by Delegate Jim Gilchrist of Montgomery County to reestablish forest retention banks as a mitigation option.
Several tax bills were introduced that sought creation of a state capital gains tax, increases on higher income passthrough entities and that decoupled state law from federal tax deductions and exemptions. Senate Bill 288 was titled as a carried interest tax but was simply a 17% surcharge on income of passthrough entities that managed real estate and other financial assets. The bill died in its House and Senate Committees.
Senate Bill 113 / House Bill 262 would have retroactively required a person to add back the amount of capital gains that are deferred or excluded under the federal Qualified Opportunity Zones Program, making these gains taxable for State income tax purposes. Investment already made in Opportunity Zone development projects would have been retroactively affected. The bill passed the House but died in the Senate Budget and Taxation Committee.
House Bill 33 / Senate Bill 76 would have established a carbon tax on heating and automotive fuels of up to $60 per ton of carbon emissions. Greenhouse gas reductions from carbon tax schemes depend on governments spending the proceeds on practices that reduce emissions and on the adoption of climate friendly behavioral changes by households and businesses who receive the negative pricing signal and make changes to avoid paying the tax. HB33/SB76, however, directed the proceeds to increased education spending which does not reduce carbon emissions and muddled the pricing signal by rebating the tax proceeds to all but the wealthiest households. The bill also contained a provision that prohibited energy companies from passing the tax through to consumers. First provisionally endorsed by the Attorney General’s office in a letter of advice in 2020, the concept was incorporated into separate legislation imposing a tax on digital advertising sales that was passed into law this session. House Bill 33 died in committee but received 16 votes in the two committees with jurisdiction, indicating a likely return in 2022 as pressure for education funding and climate mitigation increases.
House Bill 528 affected only St. Mary’s County but displayed most of what is wrong with local infrastructure finance. The bill repealed the St. Mary’s County authorization to impose an impact fee on new construction and replaced it with the authority to impose a building excise tax. In doing so the bill did several things that raised concerns. Important taxpayer protections that had required a relationship between the amount of the fee and the county’s cost of providing public services to new development were removed. Instead of dedicating the proceeds to specific development-related infrastructure the bill allowed proceeds of the tax to be used for “any lawful purpose.” The bill expanded the taxing authority to include a new construction excise tax on commercial construction and authorized the County to impose different tax rates on different classes of real estate without regard to the net fiscal impacts of the development. Many counties have converted impact fees to excise taxes to remove limits on the amount of the tax and requirements that those who pay the fee benefit from how it is spent. Because of the customary courtesy given to local bills, the St. Mary’s change easily passed.
The COVID-19 related closures and layoffs prompted dozens of bills intervening in the relationship between landlords and tenants. The majority involved residential rental property, but a number were directed at invalidating common provisions in commercial leases. After considerable debate in both House and Senate Committees about the importance of and whether to limit enforceability of personal liability clauses, House Bill 719 was passed. Legislators were fully aware of the constructive role personal liability clauses play in qualifying small companies for leases but were cognizant of the damage done to non-essential businesses by COVID-19-related executive orders. House Bill 960 would have disallowed use of estoppel certificates, subordination, non-disturbance and attornment agreements in commercial leases but received an unfavorable report from the House Environment and Transportation Committee.
Currently there are no federal standards or recommendations for airborne concentrations of mold or mold spores. House Bill 129 would have created a uniform state standard for testing and remediation of mold modeled after the regulation of lead-based paint. Practical difficulties related to the scientific uncertainties and the scale of annual testing requirements led to its unfavorable report.
Diversity in corporate leadership
House Speaker Adrian Jones of Baltimore County sponsored House Bill 1210 which was ultimately passed by the House and Senate. It requires minority participation in the board or executive leadership of businesses and nonprofits that have state contracts or tax credits valued at $1 million or more.
The provisions also apply to companies that locate in a tax increment financing district or enter into a payment in lieu of taxes agreement with a local government. As an alternative, affected entities may demonstrate support for underrepresented communities in the mission of the company. The Department of Commerce and the Office of Small Minority and Women Business Affairs are charged with adopting regulations to carry out the requirements of the bill.