PROVIDENCE –– Landlords say they were blindsided in July when the City Council voted to plug part of the city’s $50-million budget deficit by eliminating the 33-percent property-tax exemption for non-owner-occupied residences of up to five units.

According to Ward 7 City Councilman John Igliozzi, eliminating the exemption has brought the city an additional $26 million in the current fiscal year.

The change meant that an investor now pays twice as much tax as an owner-occupant for the same property. Owner-occupants get a 50-percent exemption.

Coupled with a 25-percent increase in the tax rate, and a shift in assessed values, the change delivered tax spikes of up to 80 percent for some properties.

Now, four months later, the new City Council may revisit the issue. The policy affects about 12,000 properties in the city.

For landlords and real-estate agents, who are already seeing the effects of the change in the marketplace, relief can’t come fast enough.

“There are some people who are throwing in the towel and selling,” said Marty Saklad, an owner of Samson Realty, which operates a rental business. “Others are hoping for a reversal or a partial repeal.”

For many owners, the elimination of the credit “was the last straw,” said Sue Erkkinen, a real-estate agent with Coleman Realtors. Erkkinen also owns one investment property, a two-family house in Elmhurst.

Erkkinen said her office is listing a multifamily at 266 Brown St. this week that has been put up for sale, in part, because of the tax-policy change. She said other owners have told her they’d like to sell their properties, but are holding off because of the current state of the market.

On the buying side, several clients have decided to invest elsewhere, in other cities in Rhode Island or in Massachusetts, she said.

One thing most landlords aren’t doing is raising rents, said Ed Kazarian of Patriot Realty, a real-estate agent who also owns a dozen apartment buildings in Providence.

Kazarian said although his leases allow him to raise rents if taxes escalate, he does not plan to do so because it could drive tenants away. It could cause other tenants a financial hardship, making them more likely to default on their rent, he said.

“I would never raise the rents in this economy,” Erkkinen said.

“There is so much rental competition out there … we’ve actually adjusted the rents downward,” Realtor Ian Barnacle said of a 15-unit apartment building at 375 Lloyd Ave. that he recently listed for sale.

Barnacle, who is the son of Sally Lapides, president of Residential Properties Ltd., said his family bought the building in 2008.

Although, as a larger building, only five of the units had been eligible for the tax credit, Barnacle said the annual tax bill for the building has increased from $23,000, when his family bought it in 2008, to $42,000 this year. Barnacle said about $10,000 of the increase is due to the tax-policy change.

The increased tax burden is the major reason for his family’s decision to sell the property, Barnacle said. The house, the former Sheffield mansion, is listed for $4.25 million; the listing information said the gross annual rents are $285,500.

Barnacle, Erkkinen and Kazarian are members of a group formed after the policy change, the Providence Apartment Association ( www.fixprov.com). Kazarian said the association has been able to convince some councilors that the change was fundamentally unfair. At first, he said, some councilors seemed to view all landlords as “fat cats.”

Kazarian said that’s not true. Most landlords in Providence are small-business owners, he said. The current policy rewards the owner-occupant of an East Side mansion, for instance, while punishing someone who may have bought a foreclosed two-family on the West Side as their first investment.

Today, he said, these smaller landlords are competing with the big businesses that received tax breaks to build large downtown condo developments that are now being rented out.

In September, the City Council’s finance committee proposed to grant non-owner-occupied houses of five units or fewer a 15-percent reduction on their assessed value through a tax abatement. If approved, the city would have to find a way to cover about $10 million in lost revenue.

Igliozzi said the problem is “finding the $10 million to make up for the loss of revenue.”

“We need to revamp the entire city’s tax structure,” he said, and develop a “multi-tiered” system that would more equitably distribute the tax burden.

Whatever happens, Saklad said, it “will have a very real impact on multifamily housing prices in Providence.”

Barnacle said he recently wanted to buy and renovate a two-family house in Fox Point that was listed for $350,000, but the lender would not agree to a price above $250,000 “because the taxes were so high.”

“There are so many multifamily houses for sale in Providence, right now,” Barnacle said. “And none of them are selling.”

The apartment-rental business is “a business that you want to encourage, not discourage,” Kazarian said. “Not everybody can own a home.”

cdunn@projo.com