Tax-Exemption Program Isn’t Building Small Studios or Family Housing

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Critics of the city’s multifamily housing tax exemption program (MFTE for short), which gives tax breaks to developers who voluntarily set aside some new units for affordable housing, say it doesn’t produce enough affordable housing to justify the tax revenue the city loses from the giveaway. Nor, they say, does it produce much or any of the precise type of housing it’s supposed to incentivize–small, affordable units for individuals and large units for families.

The latest city update on the program, which the Office of Housing presented to the council’s affordable housing committee on Wednesday is agnostic on the question of whether the city loses too much revenue to the program (depends on your definition of “too much”), but it does make clear that the program has failed to build many small studios or three-bedroom apartments.

For the smallest units, known as “small efficiency dwelling units,” or SEDUs (the new housing type was created to replace microhousing or “aPodments,” and must be at least 220 square feet and include two sinks, among other new requirements), to qualify for the MFTE program, developers must make a quarter of the units affordable to people earning no more than 40 percent of the area median income, which works out to a maximum rent, including utilities, of $503 a month. [The slides the city used to present its report on Wednesday are inaccurate; according to an official citylist of income and rent levels for the MFTE program, the maximum rent for a small studio or SEDU is $628, unless a tenant pays utilities separately.] Previously, SEDUs were counted as studios, and had to be affordable to people making a much higher income, 65 percent of median, which works out to $895 a month. (Three-bedroom and larger units come with the most generous income requirement: 90 percent of median.)

Developers who build SEDUs say the new, lower income limits have made it financially impossible for them to participate in the MFTE program. Scott Shapiro of Eagle Rock Ventures, who built microhousing before the city placed new restrictions on the units and rebranded them SEDUs, tells me that “when you run the numbers and look at how much rent you have to give up, it makes it such that the tax benefit is not enough to cover that loss—not even close.” Committee chair Tim Burgess alluded to that cost-benefit analysis when he noted that “there’s been a pretty dramatic reduction in the amount of SEDUs applying for the multi-family tax exemption.”

Miriam Roskin, deputy director of the housing office, responded somewhat defensively to that charge: “It’s not like the spigot has turned off entirely, and it’s important to understand that this program, by design, has never been intended to capture every single project that gets built. Were you to do that, you would end up setting your affordability level so high that it would become what has been [described] in some places as a giveaway.

“We don’t want 100 percent participation,” Roskin continued. “It’s not meant for the highest-end product.” Shapiro, told about Roskin’s comments after the meeting, responds, “If this is a successful program, why wouldn’t you want to have 100 percent participation? It seems like what they’re saying is that the people [who develop in] poor areas are going to participate, because the rent differential there [between market rate and the discounted rate] is not that great.

Since the new rules went into effect, the number of developers taking advantage of the program to build affordable small studios has plummeted. According to Wednesday’s presentation, developers have proposed building seven affordable SEDU apartments (in a single project in Ballard) since the council created the SEDU designation in 2014. That project isn’t finished yet, and the developer still has the option of pulling out of the MFTE program if the numbers don’t pencil out. And there are no additional units in the pipeline.

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OH staffer Mike Kent said that was because developers rushed to get their applications submitted under the old, more generous guidelines, and Shapiro says that’s exactly right. In contrast, in the final four months of last year alone, the city approved 236 affordable conventional studio and one-bedroom units.

On the other end of the housing spectrum, the MFTE program has also failed to build many family-size units of three bedrooms or more, but for slightly different reasons. Although the city did include an incentive for developers to build these larger units when it updated the MFTE program last year—developers who build larger units need only set aside 20 percent of those units as affordable housing, rather than the usual 25 percent—the report shows that the city did not receive a single application to build any three-bedroom units under the new guidelines in the last four months of 2015. (Since the program’s inception in 1998, just 113 affordable three-bedroom apartments have been built or are currently in the pipeline to be built under the MFTE exemption; 22 of those are no longer part of the program, and 23 have not yet been built.)

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Committee member Lisa Herbold, a longtime tenant advocate and housing policy wonk in her previous role as legislative aide to former council member Nick Licata, asked the OH staffers why the new rules had produced no affordable family-sized housing. Kent responded by emphasizing that three-bedroom apartments are the most challenging apartments for developers to build. “I would stress that there was a very, very small number of three-bedroom units being created” since the rules changed last year, he said.

Herbold also wanted to know how much tax revenue the city had foregone, or redistributed to other property owners, since the MFTE program has been in place. Although OH didn’t have comprehensive numbers, they did offer that the 12 projects put in the pipeline between September and December would result in about $50 million in tax revenues either shifted or lost during the 12-year life of the tax exemption. Last year, they estimated, the city lost about $6.6 million in potential revenues to MFTE tax breaks, and shifted another $5.4 million from developers to the general taxpaying population.

The city estimates that by 2018, the program will have produced around 6,000 affordable units, or about 200 apartments a year over its 30-year history.

2 thoughts on “Tax-Exemption Program Isn’t Building Small Studios or Family Housing

  1. Pingback: City Doesn't Want 100 Percent Participation in MFTE - Smart Growth Seattle : Smart Growth Seattle

  2. I currently have four SEDU projects on the boards in my office with a total of about 220 units. All four of these clients wanted to do MFTE for their project and they have all concluded that the rent restrictions for SEDUs make it a money loser by a long shot. That’s 45 units this year of lost affordable housing in my little office alone.

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