Unanswered Questions from Durkan’s Housing Announcement

On Wednesday, city staffers, supporters of Mayor Jenny Durkan, and members of the media crowded into a  small black-box theater at the 12th Avenue Arts building on Capitol Hill to hear what was billed as a major speech outlining the mayor’s vision for affordable housing in Seattle. (Press, many of whom had expected the event would include an opportunity to ask questions, were relegated to a “reserved” row in the very back.)

Ultimately, the event—which consisted of a State of the City-style address outlining what the city has done on housing recently, followed by an announcement of two initiatives that were already in the works—didn’t make much news. Durkan said that Seattle plans to take advantage of a new state law allowing cities to use a portion of existing state sales tax for housing, by bonding against future revenues to get about $50 million for housing for formerly homeless people up front. And she said the city would extend the multifamily tax exemption program that gives developers a property tax exemption if they agree to set aside 20 percent of new units for low-to-middle-income renters for 12 years. (The city renews the tax break every three to five years).

In fairness, the MFTE announcement did include a bit of real news: Under Durkan’s plan, the city will cap rent increases at MFTE units at 4.5 percent a year. Under federal rules, potential (though not necessarily actual) rent increases for these units track to area median income—when median income goes up, say, 10 percent because a bunch of high-paid tech workers move into the city, rents for low-income people living in tax-exempt buildings can go up 10 percent as well, even though the people living in those units obviously aren’t seeing their incomes rise 10 percent every year. (In practice, huge annual rent increases for existing units would be out of scale with the overall market in many parts of town, although it does happen). Last year, the city used some creative math to freeze rent increases at MFTE properties to prevent apartment owners from raising rents at the rate of median income increases, but the 4.5 percent cap puts a firm limit on how much landlords can charge.

Otherwise, though, Durkan’s “Seattle Housing Now” announcement raised more questions than it answered. Here are some of those questions, along with a few potential answers.

• What’s going on with the pending sale of the Mercer Megablock?

Durkan provided a few sparse details about the pending sale of the Mercer Megablock, a three-acre city-owned site in South Lake Union that could bring in upward of $100 million. The mayor will likely announce a plan and buyer—reportedly Alexandria Real Estate Investment, Inc., a real estate investment trust that focuses on life science campuses—in the next two weeks. The mayor’s office recently briefed council members on the deal, sort of: Staffers reportedly showed council members a PowerPoint that contained few specifics, and took the document with them when they left.

What we do know from the mayor’s speech is that the new development will include some housing on site (the request for proposals for the project called for at least 175 rent-restricted units), and that the city will use some of the revenues from the sale to buy properties in areas with a high risk of displacement, to provide low-interest loans to struggling homeowners who want to build cottages in their backyards, and to fund homeownership opportunities.

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What was unclear from Durkan’s pre-announcement announcement was how she will propose splitting up those revenues among programs that help low-income renters, middle-income workers (the “teachers, nurses and firefighters” that are a frequent Durkan talking point) and higher-income homebuyers and homeowners. Some housing advocates had argued that the city should hang on to the megablock property and build affordable housing on the site, or, failing that, invest heavily in housing for low-income people who are being driven out of the city by rising rents. It remains to be seen how much Durkan took their pleas to heart, but programs for homebuyers and homeowners tend to be aimed at people making as much as 120 percent of median income, or about $130,000 for a family of four. (For a single person, 120 percent of median works out to $91,000). If Durkan’s plan for the megablock money is skewed toward subsidizing people making six-figure salaries, it will likely come under fire from the council; on seeing an early draft of the mayor’s ADU plan, council member Lorena Gonzalez reportedly responded that the high-income subsidy (a loan product aimed at people making up to 120 percent of median) would end up disproportionately benefiting  white homeowners, not people of color facing displacement in areas like the Central District. Her office says they’ve asked the mayor’s office to do a race and social justice analysis of the proposal, and that they’ve said they will.

The mayor will likely announce a plan and buyer—reportedly Alexandria Real Estate Investment, Inc., a real estate investment trust that focuses on life science campuses—in the next two weeks.

• Why didn’t the MFTE plan go further?

One perennial question about the multifamily tax exemption program is whether it results in enough  affordable housing to justify the cost, which amounts to about $26 million in lost taxes every year, according to the most recent program status report. The program ensures that between 20 and 25 percent of new units are available to people making between 65 and 85 percent of median income (a number that varies depending on the size of the unit and where it is in the city). The idea behind the 12-year tax break is that by the time the tax expires, new development elsewhere will have been built to meet demand at the top of the market, and the MFTE units will have depreciated in value to the point that rents will be affordable relative to the rest of the market. Because housing development hasn’t kept up with population growth, this hasn’t happened, raising the question of whether the subsidy is deep enough to justify the tax break for developers.

One perennial question about the multifamily tax exemption program is whether it results in enough  affordable housing to justify the cost, which amounts to about $26 million in lost taxes every year,

Options the mayor and her middle-income advisory council, which advised Durkan on the plan, could have proposed include lowering the income eligibility so that lower-income people could participate in the program, which would lower rents (currently, MFTE landlords can charge someone making 80 percent of median income $1,737 for a one-bedroom apartment, which is basically market rent); placing a more stringent cap on rent increases; or limiting the program to larger “family” units, on the grounds that the market is already producing lots of small units at rents basically equivalent to the units the program subsidizes with tax breaks.

• What’s up with the Uber/Lyft tax?

Durkan has been working since last year on a plan to tax Uber and Lyft rides to pay for a laundry list of transportation and housing programs, but the proposal has been slow to get off the ground. Uber and Lyft generally have opposed the plan, arguing that it won’t reduce congestion downtown, because ride-hailing services only amount to a small percentage of car trips downtown and because of a phenomenon called induced demand, where small reductions in congestion lead people to drive when they ordinarily wouldn’t have. The ride-hailing companies have called for broad congestion pricing on all downtown drivers, which (unlike a tax targeting them specifically) would require voter approval.

Durkan’s latest plan would reportedly fund new investments in housing with the tax. But  it’s unclear when—or whether—the mayor will actually release a final proposal. Another question, if Durkan does end up proposing the tax, is whether the revenues will go to capital investments (building new units) or operations and maintenance (the less flashy but critical work of running them). Permanent supportive housing units for very low-income people (like the ones that would be funded through the new sales tax revenues) are expensive to run because they (unlike regular apartments) require full-time staffing and case management. If the ride-hailing tax passes, that money could be used to build housing around transit stations (providing a nexus, sort of, to justify using a transportation tax to pay for housing) while the money from the sales tax can go toward O&M. Without the Uber/Lyft tax, that equation becomes more challenging.

Durkan’s latest plan would reportedly fund new investments in housing with a new tax on ride-hailing services. But  it’s unclear when—or whether—the mayor will actually release a final proposal.

• When is Durkan going to announce a new Office of Housing director?

Durkan told OH director Steve Walker (whose final day is today) he was out back in March. His deputy director, Miriam Roskin, went on sabbatical shortly after that and is not expected to return. Durkan has had four months to appoint a replacement for Walker, but has not yet done so. It’s unclear when the mayor will announce Walker’s replacement. In June, 30 housing advocacy groups sent a letter to the mayor outlining their values and recommendations for the hiring process—an effort, according to Puget Sound Sage policy and research analyst Giulia Pascuito, to “push back on [the] narrative we’ve seen from the Mayor’s office around ‘middle-income housing’ and to let the city know that advocates are paying attention” to the appointment.

• Why didn’t Durkan acknowledge state Rep. Nicole Macri (D-43), in her speech?

An oversight, perhaps—her official press release mentions Macri by name—but it was somewhat jarring that Durkan didn’t shout out one of the prime sponsors of HB 1406, the legislation that made it possible for the city to use sales tax revenues to fund housing, during her speech, which included praise for Macri’s co-sponsor, June Robinson, as well as house speaker Frank Chopp and state Sen. David Frockt.

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


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.


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.)

lisa h

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.