As I have already pointed out, the Department of Planning and Development has proposed design review for new microhousing projects as a way to assuage anger and fear of a band of neighbors opposed to the product. But why, in a city where it is liturgical for politicians to state their commitment to ‘affordable housing,’ would DPD and the City Council be considering a response that would raise the price of microhousing? That’s a difficult question to answer, but here’s how the imposition of design review would end up being paid for by the very people the Council claims it wants to help.
Design Review is Expensive
Here’s what design view costs look like for a 41 unit project forced into design review.
|Add’l Design Costs||$45,000|
|Increased Land Costs||$35,000|
|Permit Costs from DPD||$15,000|
Anyone who has attended a design review board meeting will agree that it is as just as drawn out as any other public process. The difference between design review and a town hall meeting is that the developer is paying for the process in fees and in billable hours charged by lawyers and architects. The longer the process, the more costly it becomes for the project.
The Cost of Money
“So what,” the NIMBY asks, “why shouldn’t the developer pay all these costs?” After all, they’d argue, it’s the developer’s desire to make money that has created the impact on the neighborhood. They should pay for all the additional costs.
All development projects, just like a new home or remodel, are financed. That means costs generate an obligation to create a return for a bank or investor. There is no set price to design review, but the costs associated with can climb based on the length and complexity of the process. Design review is what we’d call a “soft cost,” which means it isn’t a cost associated with materials or labor but other things related to the project that don’t necessarily have to do with bricks and mortar.
It’s kind of like getting ready to close on the purchase of new home and finding out that the title company finds a transaction fee of $25,000 owed by the buyer. Who pays? Where does that money come from? It’s too late to fold the cost into the mortgage. That bill would have to be paid from somewhere like an unsecured loan, maybe a credit card.
That kind of money for soft costs is very expensive and comes at price of up to 20 percent of the principle. And how does the developer pay back this big return? There is no pixie dust in a development project, the only income generated comes from rent. Here’s what the sticker shock of the extended design review process looks like for tenants.
|Total Cost||Cost Per Room|
|Yearly payback at 20%||$44,999.96||$1,097.56|
|Monthly payback at 20%||$3,749.99||$91.46|
Think 20 percent is too high? So do builders. But just like that emergency cash advance on your credit card, unsecured money is expensive. The charge on unsecured credit card debt can range as high as 24 percent,and late investor equity is just as expesive. Builders would love a lower priced source of money, and sometimes they can find it but there still is no way to pay that soft cost money back except from rents.
And why don’t microhousing builders just “eat” that $91 per room? They can’t. Just like the bank won’t let you borrow for a new house or car for a loan payment that equals your income. Lenders and investors expect to see coverage for borrowed money that exceeds the loan payment. That’s how our financial system works. Lenders and investors want to be sure there is money for other expenses so they don’t have to compete for their payment if things get tight.
A Minimum Wage Worker in Microhousing
Along with their continual genuflection at the altar of affordability, City Councilmembers (and those who want to be) all say they want a higher minimum wage. The Chair of the land use committee said this about the proposed $15 minimum wage:
So yes, I am standing with these workers to call for a raise to $15 to give them a better chance to provide for their families, to save enough to go back to school, and to be able to afford to live in Seattle. We cannot continue to push poverty to the suburbs, and I think raising the minimum wage is an important part of keeping Seattle affordable.
Let’s say we achieve consensus and Seattle becomes a worker’s paradise with a mandated $15 minimum wage. What would the imposition of design review do to the rent of minimum wage worker looking at microhousing?
That worker, let’s call her Cassandra, would earn, if she worked full time, about $31,200 a year, about half the city’s median income. Based on standards set by the Department of Housing and Urban Development and monitored by the City, Cassandra can afford to pay 30 percent of her monthly income on housing or about $780 per month.
Let’s say Cassandra liked microhousing and was willing to move into our 41 unit building and pay $900 a month (about 34 percent of her monthly income), something easier to do since she doesn’t own a car and her new place would be a quick bus ride to work. Cassandra’s new job covers bus fare. Spending a little extra won’t hurt considering other expenses she’s saving.
And Cassandra wants to get ahead. She’s planning to take 12 credits at Seattle Central Community College which is right down the street from her new home. After work her plan is to take classes there so she can get a promotion or even better a job with a company she’s heard is moving to town that is hiring people in her field. Education will cost her about $1,174.38 over the year for tuition. Cassandra’s life in Seattle is looking up.
Design Review: What does $1,097.52 buy?
Let’s say the Seattle City Council passes a design review requirement on microhousing to, as Councilmember O’Brien put it in a recent e-mail, “strike a balance . . . to see that development [is] done in scale with the existing neighborhood.”
While $90 a month might not seem a lot to an angry neighbor worried about their property value, to Cassandra it’s the difference between being able to take those credits at SCC or having to wait. To pay to keep the neighbors happy, Cassandra will be paying an extra $1,097.52 in rent costs annually.
That great microhousing unit she had her eyes on will now consume 38 percent of her monthly income, and that means she’ll have to take fewer credits at the college. And this is assuming she’s getting the $15 minimum wage at one full time job. What is more likely is that Cassandra is working two jobs and making less in real wages than $15 an hour, even if that minimum wage legislation did pass and she was able to get enough hours.
So much for Councilmember O’Brien’s vision of people being able to live and Seattle an go back to school. Cassandra might have to work extra hours to cover tuition, or maybe get a third job. Or maybe she’ll move to Northgate, save extra on rent, and put her extra money into buying a car.
Microhousing: “Give them a better chance.”
The choice is now up to the City Council. It can impose a meaningless, expensive, time consuming process that will lead to no public benefits, will be paid for by renters, and reduce the supply of available microhousing units when developers build fewer units or have to raise rents. And where would all that extra money go? It would wind up in the City Treasury to pay for more plan reviewers at DPD and architects and lawyers. And remember, design review doesn’t impact any of the red herrings advanced by neighbors as reasons to slow down or stop microhousing development. Design review takes money out of the pockets of hard working people and puts it into the pockets of banks, lenders, bureaucrats, architects, and attorneys for little or no public benefit.
The City Council can make life easier for people like Cassandra who are trying to improve their circumstances and use microhousing as a launching pad for a whole new life. They can see microhousing as incubators for the future, places where people of all ages find a place to live sustainably and affordably and they can allow it to continue without the addition of any major changes. Or they can listen to angry neighbors and squeeze working people to the suburbs, out of a new career and into an expensive car and commute. Who will the City Council listen to, Cassandra or the NIMBYs that are crying wolf?
The latest chapter of the Department of Planning and Development’s (DPD) efforts to limit innovative housing solutions in response to angry neighbors is being drafted and will be presented at Friday’s meeting of the Planning, Land Use, and Sustainability (PLUS) Committee. After a lengthy appeal the legislation is back and will be considered by the City Council. The chief problem with the new proposal is the DPD is pushing for microhousing to go through design review. This is a recipe for higher rents, and very possibly fewer microhousing projects, exactly what angry neighbors have been demanding.
Here’s what the hearing examiner’s decision said about design review based on what DPD staffers testified during the appeal process:
The evidence fails to show that the proposed legislation would spur new development of micro-housing or congregate residences, compared with what occurs under existing regulation of micro-housing. Clearly, the Appellants fear that this will occur but the record does not demonstrate that this impact would likely occur. If anything, as DPD notes, it would seem more likely that the proposal’s addition of new requirements, such as design review for certain projects which are currently not required to undergo design review, … would tend to discourage new development [emphasis is mine]
So there it is, straight from the authors of the legislation. Imposing design review would limit the production of new microhousing units, a housing option that has zero vacancy rates because the demand for them is so high.
And an informal review of the costs of microhousing shows that when the additional costs of lengthy design review process is finished, it could add as much as $100 a month to a microhousing resident’s rent. That’s $1200 per year, which would cover tuition for about 13 credits at the Seattle Central Community College or six months of health care costs. That number could vary, but why would we want to add costs to microhousing, a housing choice that DPD itself says would help its own guiding principle to “Preserve affordability – continue to support micro-housing and congregate residences as housing options in Seattle?”
And what would we get for this additional cost? Not one single thing that angry neighbors are demanding. Design review wouldn’t affect the height of projects, parking, unit size, or even the number of sinks or people in the units. Subjecting microhousing would respond to exactly zero of their concerns — except, according to DPD, it would result in fewer projects, which, I guess, was the opponents goal all along.
Now is the time to let Councilmember O’Brien know what you think. Send him an e-mail You can e-mail atMike.Obrien@Seattle.gov or better yet, attend Friday’s hearing at City Hall at 2PM. Tell the Council to preserve microhousing as an innovative solution to meeting Seattle’s housing demand.
What follow is our detailed responses to some of DPD’s recommendations we offered last summer. The DPD recommendations are in bold followed by our response.
Define “Micro Dwelling Unit” as a subset of “Dwelling Unit” in the Land Use Code
Smart Growth Seattle supports the definition proposed by DPD with the exception of requiring a maximum size for micro dwelling unit. If the concern is that larger size will encourage more than one resident, the 8 person limit would prevent that.
If the concern is that some developers might be trying to create smaller apartments without full kitchens, we don’t see any reason to limit this if owners can fill units that are larger than 285 square feet and otherwise fit the micro dwelling unit definition proposed. Customers in search of housing should have every choice open to them and builders should be able to be innovative in responding to their choices.
Design Review. Apply Threshold for Micro Dwelling Units and Congregate Residences by Building Size
We appreciate DPD developing a threshold for design review that is based on building size not number of units. Building size is what is visible to the neighborhood, not individual units, and the size threshold is consistent with principle behind SEPA thresholds.
However, there is almost universal sentiment—not just among developers but residents, as well—that the current system of design review—including so-called Streamline Design Review—is broken. The process is open-ended, too costly, and has no impact on the concerns surfaced by neighbors. Design review has no effect on parking, for example.
Even City staff made the observation that after going through the design review process “projects showed little evidence of substantial modification” (see page 3 of the recent report written by DPD at http://clerk.seattle.gov/~public/meetingrecords/2013/plus20130628_4b.pdf).
We believe that before microhousing projects are subjected to this expensive, time consuming, and ineffective process it should be fixed so that design review becomes a useful, predictable, and more affordable process for all projects in the city. And if notice is an important issue to microhousing opponents, we think a mailed notification to residents within 800 feet of a project during permitting would make more sense than requiring design review.
SEPA Thresholds and Growth Targets
We agree with the DPDs proposals on SEPA thresholds for microhousing. We are concerned, however, that in areas that have reached their growth targets, microhousing and all other housing would be exposed to the costs and uncertainties of SEPA review. As we pointed out in our last memo, growth targets should be floors not ceilings for growth.
Prohibit new Micro Dwelling Unit development in single-family zones
We see this as a potential loss of housing supply and choice in Seattle’s single-family neighborhoods. Our view is that if there is demand for microhousing in single-family neighborhoods, it should be allowed.
Adjust refuse collection areas in Micro Dwelling Units and Congregate Residence developments
As we pointed out in our last memo, garbage is an issue in every neighborhood and for every housing type. Educating people and managing how they dispose of their garbage is an ongoing issue in cities of all sizes. However, we feel this proposal is a reasonable one and would allow an evolving solution based on interaction between staff at Seattle Public Utilities, developers, building managers, and customers.
Size minimums for Micro Dwelling Units and Congregate Residences
We agree with DPD that the existing building code and the housing market should set the size of Micro Dwelling Units. Imposing a size requirement is forcing microhousing customers to buy more housing than they want to buy, driving up their monthly housing costs. Customers and developers should be allowed to set the size based on the existing limits, costs, and what customers are able to pay for housing.
Restricted Parking Zone (RPZ): Clarify regulations or rules for Micro Dwelling Units and Congregate Residences
As we have pointed out (and has been reported in the media), microhousing is actually a parking solution, since most residents of microhousing don’t drive and microhousing buildings, because they have fewer qualifying units, actually use fewer RPZ permits. We welcome a closer look at how microhousing supports fewer cars and fewer parking problems in neighborhoods.
This post originally appeared in the Spring edition of The Voice, NAIOP’s semi-annual government affairs newsletter.
Recently, the City of Seattle has placed an emphasis on what it calls incentive zoning, a program that charges a fee in exchange for granting additional Floor Area Ratio (FAR) for new housing and non-residential development. This idea is paradoxical: charge a fee for taking on more risk and costs? That’s an incentive? City leaders, who see additional FAR like allowing a fisherman to increase his catch, do not share the incredulity. Smart Growth Seattle has engaged on this issue with data, making the argument that we need a better way.
Explaining the economics
Councilmember Mike O’Brien invited noted local real estate expert Mike Scott to the Council table recently to explain the real estate market trends for multifamily housing. Scott shared a chart showing that, yes, the rules of supply and demand do indeed actually apply to the multifamily housing. When apartment vacancies increase faster than demand, apartment prices drop. When vacancies fall in the face of rising demand, prices go up.
“It doesn’t work like that,” is often the response by many affordable housing advocates and those suspicious of growth. Persuading the Council to accept the real estate business cycle is a first step toward helping them understand that if their concern is high prices, the best thing they can do is reduce rules and regulations that slow housing production.
Where is the problem?
The crisis of housing supply for people who make 60 to 80 percent of Area Median Income (AMI) is something of a mirage. Workforce housing, as it is usually called, is actually in excess supply in Seattle. We’ve cited King County and other data that consistently show a surplus of housing priced for people who earn from $37,000 to $44,000 annually. Rents for older housing stock, something supported by Scott’s presentation to Council, are cheaper; while rents are higher for new construction. It is that new construction that attracts the most attention (and irritation) from opponents of growth who argue that, “all this new housing is making housing more expen- sive.” This simply isn’t the case.
What is the best tool?
Incentive zoning, as it is currently construed, is no incentive. The data we have presented to Council and in the press is pretty clear, too. Almost two-thirds of projects eligible to take the so-called incentive didn’t. That means that all that additional capacity that the City was essentially selling, was priced too high. Lost in the failed transactions were additional housing supply and the benefits that would accrue to the public through the fee and additional sales tax, jobs, and wages created by building the additional housing.
The future of multifamily housing
Seattle currently has no aggressive strategy to broadly increase housing supply, and to strategically and efficiently direct subsidies for lower-income level housing. Instead it has fees and taxes for new growth through its incentive program, the housing levy, and useful programs like the Multifamily Tax Exemption.
The Council should not discourage innovation in the single-family realm, in microhousing, or in the production of other multifamily products by mak- ing more rules, imposing more process, and charging more fees. If, with the help of NAIOP and others, Smart Growth Seattle can fend off additional burdens, we can start making the case for a more positive and constructive set of policies to welcome growth of all kinds and encourage new housing development of all types in all neighborhoods in the city.
I was asked to write an opinion piece for Publicola yesterday comparing the reaction the Seattle City Council had to ride sharing programs to the reaction they are contemplating to small-lot housing. The truth is I already did that in a post not too long ago. To me, the comparison is obvious. Small-lot housing is an innovation, taking smaller lots and turning them into real houses for a lot less money than developing a big house on a full size lot. This is a lot like the entrepreneurs finding a new way to meet the demand for easy, cheap, and safe transportation alternatives.
But I couldn’t resist a comparison that came to me when I saw a guy walking out of a Safeway in West Seattle one day.
If the city of Seattle regulated hot dogs one can only imagine what the advent of the corn dog would provoke at City Hall. How do we define a corn dog? Is it safe? And about that breading made of corn as opposed to a bun—what have other cities done?
After lots of hand-wringing, committee meetings and confabulations with staff and members of the hot dog community, one can imagine the solution: legalizing corn dogs, but limiting them to sale three days a week and only in Pioneer Square.
I know I was mixing metaphors, but when I read the Wikipedia page about corn dogs I think the comparison makes sense.
Newly arrived German Texan sausage-makers, finding resistance to the sausages they used to make, have been credited with introducing the corn dog to the United States, though the serving stick came later. A US patent filed in 1927, granted in 1929, for a Combined Dipping, Cooking, and Article Holding Apparatus, describes corn dogs, among other fried food impaled on a stick.
Human beings have a remarkable and admirable ability to innovate and find opportunities to meet demands for basic things like food, transportation, and shelter in innovative ways. Why not make that easier? In the case of small-lot legislation offered by the Department of Planning and Development innovation is stymied, and even people who want to add on to their own homes will be limited.
Read the full Publicola post, and be sure to contact Councilmember Mike O’Brien at Mike.Obrien@Seattle.gov or attend and speak a the hearing this Friday at 2PM in Council chambers. Urge him to rethink the City’s approach to housing, especially small-lot and microhousing. Shouldn’t the City be encouraging new ideas to meet basic needs? There are lots of ways to eat a hot dog, and even more ways to meet Seattle’s growing demand for housing. Shouldn’t we try them all?
We’ve been hearing about the problems with small-lot legislation being considered by the City Council. Here’s what David Neiman a local architect says about the problems created by the legislation because of it’s efforts to placate a small group of angry neighbors:
These defects are known to the planners at DPD. They understand them and fully appreciate them. I suspect if their mandate in writing this proposal was to come up with a way to facilitate better small lot development, the outcome would be quite different. Instead, the City leadership has a pitchfork mob at their door with a list of demands, and they have directed DPD to take dictation.
A complex code is made more complex and homes get harder to build.
And Matt Gangemi writes about the downzone created by the legislation which penalizes innocent by standers, owners of existing single-family homes.
If you live on a lot less than a 3,200 square feet in size, the maximum height has effectively gone from 35 feet down to 23 feet. That addition you dreamed of will never happen, and even if you never planned to expand your house, your home value just went down. The pool of buyers will look more favorably at your neighbor’s slightly larger lot, knowing that they can either build up or at least keep the value in case the next owner wants to build up. Even if the physical home you live in is the same, the potential square footage of your home just went down.
Now people who might have saved themselves a move and the purchase of new home will have their quality of life and finances impacted if the legislation passes.
Your opportunity to weigh in comes this Friday at 2PM at City Hall in Council Chambers. Please make an effort to attend or write Councilmember Mike O’Brien, chair of the PLUS Committee.
Small Lot Development
Legislation: Council Bill 118052
Committee Review Schedule:
- Friday April 18, 2014, 2:00pm – Public Hearing and committee discussion
- Tuesday May 6, 2014, 2:00pm – Committee deliberation and possible vote