Does Mandatory Inclusionary Housing Work?

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I’ve been obsessed (as one Facebook commenter said) with trying to disentangle the recommendations of the HALA Committee from the Grand Bargain. The ideas in HALA are not dependent on the Grand Bargain’s mandatory inclusionary zoning scheme. And it is crucial as the Mandatory Inclusionary Housing requirements are discussed that everyone think the proposal all the way through. Are there better, more effective options like the Multifamily Tax Exemption (MFTE) Program?

But do mandatory schemes even work? Here’s what one study called, “Housing Supply and Affordability: Do Affordable Housing Mandates Work?” found:

Inclusionary zoning has failed to produce a significant number of affordable homes due to the incentives created by the price controls. Even the few inclusionary zoning units produced have cost builders, homeowners, and governments greatly. By restricting the supply of new homes and driving up the price of both newly constructed market- rate homes and the existing stock of homes, inclusionary zoning makes housing less affordable. Inclusionary zoning ordinances will continue to make housing less affordable by restricting the supply of new homes. If more affordable housing is the goal, governments should pursue policies that encourage the production of new housing. Ending the price controls of inclusionary zoning would be a good start.

Even better would be to never pass one of these schemes in the first place. This study was on mandatory programs for sales not rentals. But the same market principles apply; mandates to build price controlled housing of any kind make things worse. We still have a lot of work to do to demonstrate the negative impact of MIZ on supply of  housing to City leaders. Making housing harder and more expensive to build won’t lower its overall price.

But hopefully the more questions that get asked, the more people will try to use what’s already working, especially MFTE.

 

 

Cheerleading Won’t Help Confusion About HALA and Grand Bargain

HALA Yes

Yes, confusion. And being confused about the Mayor’s Housing Affordability and Livability Agenda (HALA) Committee’s recommendations is not the sign of being poorly informed or not that bright. It is confusing, especially if you’re not doing this work all day. Over the weekend I pointed out on the City Builders page on Facebook that even neighborhood and anti-growth advocates are confounding the recommendations of the HALA Committee (there are 65) and the Grand Bargain, the scheme that would force developers and builders to include rent restricted housing in their developments. Here’s what the Seattle Neighborhood Coalition (an anti-growth leaning group) said about the HALA recommendations and the Grand Bargain:

Elements of HALA are already in front of City Council.  Backyard cottages and mother-in-law units (Accessory Dwelling Units – ADUs) are getting a public airing and will likely see a loosening of requirements, including parking and owner-occupancy, in order to boost what is currently a very marginal production.   The cornerstone of the HALA recommendation however is the mandatory production of affordable units (or payment of fees) 

I was rebuked by a commenter on the page,

Roger. Most people on City Builders aren’t “confused.” They just don’t agree with your POV that Grand Bargain isn’t the cornerstone of HALA. That’s your personal opinion, and believe it or not, lecturing everyone who disagrees with you about how confused they are won’t make them come around to your way of thinking. They just disagree.

So I looked up the word, “cornerstone” in the dictionary.

An important quality or feature on which a particular thing depends or is based:a national minimum wage remained the cornerstone of policy

Hmmm. So this recommendation from the 50 page plus document “depends” on the Grand Bargain?

4. More Resources: Call on the State and City to Create Additional Resources for Affordable Housing

Strategy R.2 – Create a stable source of funding by enacting a Real Estate Excise Tax (REET) dedicated to affordable housing

Strategy R.6– Expand the size of the critically important State Housing Trust Fund • Strategy L.1 – Prioritize use of surplus and underutilized public property for affordable housing and promote co-development in conjunction with public buildings • Strategy R.7 – Dedicate property taxes derived from new construction to affordable housing by reinstating the City Growth Fund

I don’t think so. And as I pointed out in a earlier post, the HALA recommendations are, mostly, a disparate collection of ideas and proposals. And even if they were all put into effect today, it’s hard to say what impact they would all have on housing prices or on the housing economy as a whole. The Grand Bargain is just one of those proposals. That the NIMBY set is also saying that the Grand Bargain is essential for the all these ideas to happen is an indication, yes, of confusion about how all this might work.

That is no surprise when boosters of upzones without inclusion for big downtown developers like Vulcan keep cheerleading the HALA recommendations as if it was one piece of legislation or a single, monolithic proposal that the Seattle City Council could act with a single vote. As I’ve pointed out, the cheerleaders, even some who are in the press and media, are putting HALA and the Bargain together. What does saying “HALA Yes!” really mean? Does it mane supporting the Grand Bargain even though it’s probably infeasible and maybe even illegal or does it mean supporting

Provide assistance to homebuyers between 80-120% AMI. With the current median home value in Seattle at $468,900, many middle-income homeowners are also becoming locked out of the homeownership market. However, there are limited resources to help these middle-income homebuyers. The state constitution prohibits public funding to households above 80% AMI, so these homebuyers cannot access direct assistance such as the City’s down payment assistance program. This strategy is not about changing the state constitution, but instead about exploring other ways to provide assistance that work within the current constitutional limits.

Hard to fit that paragraph from Appendix F-16 of the HALA document on a handy sticker, isn’t it?

We need to stop cheerleading the HALA document as if it was a uniform and fully vetted proposal. It simply isn’t. We’re not helping solve the problem of real people by trying to shove every single hope and every single fear in to a document that can’t possibly define and solve our housing issues. We have to do that together, and that starts with asking questions, not slapping stickers on everyone. 

Doing the Math: MFTE Creates Many More Housing Units Than Grand Bargain

Let’s take a super quick look at a couple projects that participated in the City’s Multifamily Tax Exemption (MFTE) Program, a very successful program that has produced thousands of units of rent restricted housing for people earning between 60 and 80 percent of Area Median Income (AMI). The MFTE works by giving a property tax exemption to developed properties in exchange for a 20 percent inclusion of rent restricted units. It has created thousands of units over the years. You can read more about the program and how it works in this post.

Let’s compare two larger housing projects that are participating in the MFTE program. My assumptions are based on the Final Framework document and other media that pegs the Grand Bargain inclusion rate at 7 percent of the total project. That may end up being bonus area, not units. Also, another limiter on my comparison is the fact that we don’t know what the projects would look like exactly with a boost of Grand Bargain upzones since those upzones aren’t proposed yet.

But if we just compare the existing number of units and apply the percentages we get a comparison of what the two programs would look like hypothetically all things being held constant. One other note, the Stackhouse Apartments are in South Lake Union, and under the Grand Bargain that project would have zero units of included affordable housing since SLU is not likely to perform but would instead pay an in lieu fee. I welcome alternative scenarios from smarter people than me.

But here they are:

Joule Location

 

MFTE Joule

Joule Apartments

With MFTE
295 Total Units
59 Units at 60 – 80 Percent AMI (20 percent inclusion)

Under Grand Bargain
295 Total Units
21 Total units at 60 – 80 Percent AMI (7 percent inclusion)

Assuming 10 percent increase in units with upzones

325 Total Units
23 Total units at 60 – 80 Percent AMI (7 percent inclusion)

Stackhouse Location

 

Stackhouse MFTE

Stackhouse Apartments

With MFTE
278 Total Units
56 Units at 60 – 80 Percent AMI (20 percent inclusion)

Under Grand Bargain
278 Total Units
19 Total units at 60 – 80 Percent AMI (7 percent inclusion)

Assuming 10 percent increase in units with upzones

306 Total Units
21 Total units at 60 – 80 Percent AMI (7 percent inclusion)

I’m a philosophy major and I’ve avoided math my whole life, but it sure looks like MFTE dramatically outperforms the Grand Bargain even if additional units are feasible, which are often aren’t. There are a lot of fair criticisms of this analysis that could be offered. Some might say it’s a comparison of the number of apples to the number of oranges created by each program. They would have a different methodology so that’s a really good point and one that I simply don’t have enough information to fully calculate. Since the projects everywhere will vary a lot in terms of square footage, it’s going to be hard to figure out how the Grand Bargain would check out in terms of units. The costs of additional construction would also have to be calculated.

But it doesn’t take a math major to get that 20 percent is more that 7 percent of any number except zero, the number of units that will be built under the Grand Bargain Downtown and in South Lake Union and the number that will be built if other areas can’t make the financing work. Also, how could MFTE and upzones actually work together rather than separately? I don’t know. We need to stop this whole process and ask a lot more questions. And do the math! 

 

 

City Doesn’t Want 100 Percent Participation in MFTE

MFTE Joule

The City of Seattle has a mystifying but ultimately understandable attitude toward one of it’s most successful housing programs, the Multifamily Tax Exemption (MFTE) Program. The MFTE program has efficiently created thousands of units of rent restricted housing by reducing property taxes on a new housing project and that deferred tax is passed on to 20 percent of the renters in the participating project. When the Mayor touts the Grand Bargain as the first program that would create affordable housing along with market rate housing, he’s just plain wrong. The MFTE has been doing just that for years. But why would the City’s Miriam Roskin say, as she did at a presentation to the City Council on the program recently, that 100 percent participation is not desirable?

The reason is a profound resentment at all levels at the City (even, ironically among the people who manage the program) that the MFTE is a voluntary and incentive based program.

Yes, you can see it and hear it when the Council discusses the program. They wish that they could force builders to include housing in their projects at lower rent levels and at greater percentages of inclusion. They also want three bedroom apartments. But as we have pointed out before, dialing up inclusion and room sizes and income levels down does not mean a bunch more three bedroom apartments priced for families at 40 percent of Area Median Income (AMI) — it means fewer units of units at 60 percent of AMI or higher, the general level of income in the program because it is no longer an incentive to participate.

You can look at the math in a letter we sent to Council last year. So the City, through the Grand Bargain, is going to try and do this, force developers to include 7 percent set aside of their buildings for people earning 60 percent of Area Median Income. Obviously, if every building in town was built using MFTE, 100 percent participation, the program would produce lots more housing than through forcing (a legally questionable requirement) builders to set aside 7 percent. Rather that use a really successful program and expanding it, the City is embarking on a legally questionable and controversial and infeasible effort to force upzones with inclusion. We don’t need it. All we need is a wider use of MFTE.

Scott Shapiro who builds Small Efficiency Dwelling Units responded last week to a post written by Erica Barnett about the latest report on MFTE. In response, Shapiro hits some of these same points in order clarify some of these points. But if you want to understand why production is down, it’s simple: when the Council dials up inclusion rates, and lowers income levels they lower participation. But maybe that’s exactly what they want anyway.  

Pictured above is the Joule Apartments with 59 out of 295 units rent restricted thanks to the MFTE Program. Check out the City’s last report online to find the MFTE units near you. There are lots of them.

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Erica, I read your MFTE article and have a few comments:

  1. Participation– It confounds me that the City doesn’t want 100% participation for the most successful and cost-effective program to create affordable housing.  Where did the Mayor and Council say they didn’t want 100% participation?  Where in the code is that?  Where in the Office of Housing’s policies does it say they don’t want 100% participation?  If not 100%, then what?  It appears from OH’s comments that they don’t want MFTE use and therefore the affordable units in the most expensive neighborhoods like downtown, SLU, and Capitol Hill where you find the “highest-end product” because land costs are higher there.  So is the City saying they want the affordable units in the middle-income and lower-income neighborhoods only?  How is that good public policy let alone fair and equitable?  Is that what the Mayor and Council wanted when they passed the MFTE renewal last year?  Does that align with their goal to create 6,000 new units of affordable housing over the next 10 years?
  2. Tax Revenue– The MFTE forgoes future property tax revenue for new projects for 12 years.  The City is not giving up existing revenue.  That is an important distinction.  In addition, the City doesn’t collect the tax dollars if the project isn’t built anyway.  To get affordable units, the City will forgo future property tax revenue by reducing the tax bill during the period that the owner sets aside 20% of the units (or 25% in the case of SEDUs) as affordable.  Your statement that “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…” is misleading.  It makes it sound like the developers are getting $5.4 million and the taxpayers are paying for it.  That is not correct.  The taxpayers are in effect subsidizing the market rents for the affordable units.  There is little or no financial benefit to the developer/owner.  The owner is giving up the revenue between market rents and the affordable rents.  In return, the owner reduces their expenses by having less property taxes.  Another way of looking at it is that the owner, instead of getting $500 more in rent per month and having $500 more per unit in taxes resulting in no new net income, the owner by having the affordable units doesn’t get the $500 more in rent for those units but also doesn’t have to pay the $500 more in property taxes, so the net effect is zero.  Simply put, the owner doesn’t get the financial benefit, the low-income tenants living in the affordable units do.  That is the point of this successful program.  The people who need lower rent get it by a successful City program that voluntary incentivizes property owners to set aside a certain percentage of their units at affordable levels in exchange for a similar reduction in property taxes.
  3. Maximum MFTE SEDU Rent– It is $503 per month excluding utilities at 40% of AMI.  With utilities it is $628.  See the attached 2015 OH MFTE matrix.
  4. Rent/Pricing Matrix– The matrix that the City put out has two errors that you can see when comparing to the MFTE attachment:
  5. Studio 1 Person is $40,820 at 65% of AMI.  $46,605 is for two people.
  6. 2-Bdr 3 Person is $68,595.

As always, let me know if you have any questions or would like to discuss further. Regards, Scott 2015_Income_and_Rents_MFTE

The Lawyers: Linkage is Illegal but What About the Bargain Part 2

my_cousin_vinnie

Yesterday, I posted the text of a letter signed by a group of respected land use lawyers concerning linkage taxes. They thought linkage was illegal and said so in a very bold statement. But how do their comments apply to the Mandatory Inclusion Zoning (MIZ) element in the Grand Bargain. I’ve gone through the letter to see if there might be some connections worth drawing. Maybe, by extension, the same legal views expressed by the lawyers about linkage also apply to the MIZ element of the Grand Bargain. I am not a lawyer. I’m just going through this using logic and what’s rubbed off on me over the years about land use law. Hardly worth very much. These questions will get answered one way or another either through the legislative process or eventually, when MIZ gets challenged in court, by judges. My comments are all inset and in italics. 

October 10, 2014

Via Email

Councilmember Mike O’Brien
Chair, PLUS Committee
Seattle City Council

Re: Legality of Proposed Development Tax in “Linkage Fee” Resolution

Dear Councilmember O’Brien:

As members of Seattle’s land use legal community, we have serious concerns about the Council’s rush to adopt the resolution without significant public discourse regarding the legality of a new tax on development–one which has never before been utilized in Washington State.

Sounds a lot like what’s happening with the Grand Bargain. While the Mayor says the adoption of HALA recommendations will take years, there seems to be a great deal of urgency coming from non-profit housing developers, “urbanists,” and Vulcan to rally lots of support for HALA. There is an effort to characterize any skepticism of the Grand Bargain, just one of 65 HALA recommendations as rejection of HALA. It isn’t. It’s healthy skepticism by people who will have to build thousands of units using a still undefined and vague mandate. There certainly feels like there is a “rush to adopt” without “significant public disourse.”

It is likely that this tax, as the centerpiece of the City of Seattle’s “affordable housing strategy,” will actually increase the cost of housing.

We’ve said this about Mandatory Inclusionary Zoning (MIZ) consistently throughout the whole discussion of how to address the “crisis” in housing. We’ve pointed out again and again that efforts to force rent restricted units as part of new housing will either make those projects infeasible, meaning they don’t get built and thus lower supply which adds to price pressures or to be feasible, projects will have to raise rents in other units. In any case, none of this has a salutary effect on price. On the contrary, as these attorneys point out, it will “actually increase the cost of housing.”

Seattle should not be so motivated to follow San Francisco’s lead, where housing prices continue to skyrocket either in spite of, or because of, similar square footage taxes.

Again, something we’ve pointed out and called the San Francisco Death Spiral when local governments impose inflationary interventions in the name of lowering prices, and when prices don’t go down but predictably go up, the redouble their efforts with more inflationary measures blaming developers for being “greedy” and workers for having too much money to spend on housing. Seattle is careening headlong in this direction, all the while singing campfire songs about supporting HALA. However, the reality is nobody is answering the question about the impact on overall housing prices of the Grand Bargain.

In our collective experience practicing land use law in Washington, we fail to find any legal authority for this tax on development. We urge the Council to slow down, fully consider this significant policy shift and its implications, and ultimately choose a course that complies with the law. This letter provides a brief overview of some of our legal concerns.

Ummm. Yeah. We urge everyone slow down too, recognize the difference between HALA recommendations and the Grand Bargain and answer the many questions that remain about how the Bargain will work. Even the Mayor seems poorly briefed on his own proposals saying at one point in a public meeting that developers would pay “penalties” if they didn’t build affordable housing. That’s very close to pushing for an exaction, something that is illegal based on State law. Those comments would be helpful in a future lawsuit to establish that what City policy really intended to do was tax new development. He needs better briefing from his staff.

The consultants advocating for the development tax have relied heavily on their California experience, but have failed to note the key difference between the states. California has a state law that allows this type of tax. Washington does not. In fact, Washington explicitly prohibits cities from imposing taxes, fees, or charges, either direct or indirect, on development: RCW 82.02.020.

In my last post, I pointed out the outlines of how California has informed the City’s efforts to squeeze money and value out of new development without triggering due process challenges or running into problems with Washington State law. The lawyers set out to describe the issues in Washington law that makes linkage problematic. Do these issues apply to MIZ in the Grand Bargain?

None of the few exceptions to the prohibition, discussed below, applies to the proposed development tax.

  • Growth Management Act (“GMA”) Impact Fees: The exception for GMA impact fees only applies to the statute’s list of “public facilities,” which does not include affordable housing. Therefore, the GMA impact fee exception does not apply.

This is something of an apples and oranges comparison since making developers build housing isn’t exactly an impact fee. Fees aren’t allowed except where they pay a pro rata share of public infrastructure needs created by and benefiting new development. As I have pointed out before, impact fees aren’t a freewheeling penalty for building new housing that can be transferred to the general fund.

But would imposing a housing requirement with a fee be a violation of this exemption? Maybe. There is no provision for fees that cover housing, even with the absurd claim that building new housing creates the need for subsidized housing. So if a builder doesn’t want to build then she can pay the fee, but maybe she could challenge the fee itself on GMA grounds offered here.

  • Voluntary Agreement: Developers may make voluntary payments in lieu of a dedication of land or to mitigate direct impacts. However, the proposed tax is not voluntary, there is no dedication of land, and the nexus study establishes only indirect impacts (and no project-specific impacts). The tax is not a voluntary agreement.

Fees, however, can be charged if part of a voluntary program. The idea is that there is some exchange of value. A developer works with the City to offset impacts by giving something voluntarily to the public in exchange for increased zoning, for example. But it’s difficult to understand what part of “Mandatory” inclusion of rent restricted housing units is voluntary. Maybe I’m missing something, but I don’t think applying for a building permit can be construed as volunteering to pay a fee or build housing. This seems like a big weakness in the Bargain.

  • Incentive Zoning Provisions: The City’s existing incentive zoning program is based on RCW 36.70A.540, which allows cities to incentivize private development of affordable housing. As the Council’s public documents repeatedly note, however, there is no incentive component to the proposed development tax. It simply adds a cost to development while providing nothing in return. Thus, the tax is not incentive zoning.

Again, a bit of apples and oranges. This bullet is addressing a straight up, per square foot tax or fee on everything built with no exchange of value whatsoever. City lawyers (and lawyers for the companies that signed the Bargain) might argue that the additional zoning is the incentive. But is it if it makes a project infeasible or the in lieu fees make it infeasible? Doesn’t it become and exaction under state law making it illegal? I don’t know, I’m not a lawyer and certainly not a judge. But it’s hard to see how the MIZ scheme in the Bargain is either voluntary in the common sense of that word or an incentive in the common sense of that word. In fact, from our perspective, the Grand Bargain is both mandatory and a disincentive to build; that’s bad housing policy and probably illegal too.

The City of Seattle’s general zoning authority cannot override the state’s prohibition of taxes, fees, or charges on development. Washington courts have read RCW 82.02.020 broadly and we believe will not hesitate to strike down the new tax, if adopted. If the City believes an exception to that prohibition does apply, then that needs to be explained in public, with a meaningful opportunity for comment.

So this was, at the time, a very sure and certain statement from lawyers who usually always, as they should, hedge. “We believe will not hesitate to strike down” sounds like something they were willing to take to the bank, so to speak. Where are the legal pronouncements on the Grand Bargain? We haven’t seen any other than the Mayor implying the other day in a phone town hall that lawsuits wouldn’t happen here as they have in California because developers agreed not to sue.

But, officially there isn’t a single for profit developer signature on the Grand Bargain document. Not one. There is one representative of Vulcan, one developer, but that’s it. How that represents a Grand Bargain with the development community is beyond me.

Even if the City could establish that the tax is allowed under RCW 82.02.020, however, the development tax raises serious constitutional concerns. And, to be clear, according to the rules set forth in Washington cases, this is a “tax,” not a “fee,” because its primary purpose is not to regulate development, but to raise funds to accomplish a desired public benefit. The Washington State Constitution prohibits cities from adopting taxes without express legislative authority, and the legislature has not authorized this tax. This tax also raises Federal Constitutional concerns under the United States Supreme Court’s recent decision in Koontz v. St. John’s River Water Management District.

Using simple logic, not legal logic, it would appear this is also an exposure for the MIZ scheme. What is the in lieu fee for? Arguably, the scheme is supposed to regulate development. But the harder the City argues makes that argument it pushes the more toward something more like an impact fee, not a method of generating housing units. The scheme would have legislative authority, so maybe that would solve this issue. But still, it’s puzzling how MIZ regulates development without including a penalty (like there would be for failing to meet inspection, for example); but what rule has the developer broken by opting out of the requirement to build? I won’t go much further, but it’s odd.

Our state courts have a history of protecting constitutional rights, and have invalidated City ordinances on constitutional grounds. The legal foundation of this development tax is at least as flawed as that supporting the City’s 1980’s-era housing preservation ordinances the Washington Supreme Court struck down in multiple decisions, and we fear the Council is rushing to adopt California policy that will fare just as poorly in Washington courts.

The affordable housing shortage presents a major challenge for the City, and we look forward to working with the Council to find creative, lawful solutions that actually deliver more housing to the hardworking women and men who make our City function. However, as the Washington Supreme Court has written, the shortage of affordable housing is a societal burden to be borne by society at large. There is no legally supportable justification for imposing this tax on those who seek to develop the housing, office, and commercial space necessary for our City to grow and thrive. We strongly urge the Council not to adopt the proposed development tax resolution as its significant policy shift deserves a much closer and more deliberative review.

I can’t find anything to disagree with in the last two paragraphs, and they perfectly describe my views about the Grand Bargain. I wonder why the attorneys that signed this letter about the linkage tax have gotten so quiet about similar concerns with the Grand Bargain. Who knows. I guess time will tell.

Sincerely,

 

 

 

 

 

 

 

 

 

 

 

 

 

cc:        Councilmember Sally Bagshaw (sally.bagshaw@seattle.gov)

Councilmember Tim Burgess (tim.burgess@seattle.gov)

Councilmember Sally Clark (sally.clark@seattle.gov)

Councilmember Jean Godden (jean.godden@seattle.gov)

Councilmember Bruce Harrell (bruce.harrell@seattle.gov)

Councilmember Nick Licata (nick.licata@seattle.gov)

Councilmember Tom Rasmussen (tom.rasmussen@seattle.gov)

Councilmember Kshama Sawant (kshama.sawant@seattle.gov)
Ketil Freeman (ketil.freeman@seattle.gov)

City Attorney Peter Holmes (peter.holmes@seattle.gov)