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MFTE, Levy, More Efficient Than Linkage Tax

What follows is a comparison of two existing housing subsidy programs that are lowering people’s rents and housing costs in Seattle today, at this very moment, the Multifamily Tax Exemption (MFTE) and the Seattle Housing Levy (Levy) with Councilmember Mike O’Brien’s “linkage” tax.  Right up front I am going to say that supporters of the linkage fee won’t like this comparison.

They’ll say:
The MFTE is a developer “giveaway” because the builder of the housing units gets an exemption from property tax in exchange for lower rents.

My answer:
The fact that the tax savings is passed on to the renter means it’s kind of a renter “giveaway,” isn’t it? Don’t we want to save people money on housing costs? The MFTE program does that, and at a reasonable cost. Just like Councilmember Burgess said, for the price of a muffin and coffee.

They’ll say:
Your math is wrong.

My answer:
Show me how it’s wrong and we’ll reassess the relative value of either the MFTE or the Levy program. My guess is that either of these programs is already far more efficient than the “linkage” tax could ever be and neither raises rents unfairly on new people moving to the city, many of which are already struggling to make ends meet.

By the way, the Office of Housing didn’t return a few phone calls asking for clarification about the math of the program.

They’ll say:
The MFTE program only lasts 12 years, and it high end renters who earn 60 to 80 percent of Area Median Income (AMI).

My answer:
Well, yeah, isn’t that what all the fuss is about, people who need “workforce” housing? And it is true that the number of MFTE units changes, new ones coming on line and others dropping off. But this is something that we can look at if we want to improve the program.

They’ll say:
Your projections of rent increases are way too high, and besides rents won’t go up because land values will drop exactly in the same amount as the tax.

My answer:
We won’t know the true impact on rents until the tax is imposed, but it’s hard to argue that such a tax won’t create costs since it’s likely the tax will be paid at time of permitting. It will have to be financed and that will have to be off set somehow. The argument about land values dropping is too long to get into here, but I’ve addressed it elsewhere. Most people who know real estate agree that it’s highly unlikely the drop would equal the tax, and if the drop in value is too much, people won’t sell land, which means no project, which lowers supply.

Comparisons of “Linkage” Tax with Existing Funding Sources for Housing

Assumptions

The City’s Office of Housing and consultants hired by the City to make recommendations on a linkage tax, project that of the 70,000 housing units we’ll need to accommodate coming growth, 28,000 would need to be affordable[1] to people who earn between 0 and 80 percent of Area Median Income (AMI). The consultants further project a total cost per unit of $95,000.[2] The following comparison assumes a production rate of about 1400 units per year.

Multifamily Tax Exemption Program (MFTE)

The MFTE program grants a property tax exemption to housing projects that set aside at least 20 percent of its units for housing for people who earn between roughly 60 and 80 percent of AMI.

There are currently 4,369 units in the MFTE program. The total annual cost of the program in deferred property tax is $3.6 million. That means that, on average, an MFTE unit costs the city under $900 per year. [3]

Costs to Produce 1400 Units Using MFTE

  • $860 X 1400 = $1,204,000
  • Cost: $10 for a median valued single-family home per year[4]

Seattle’s Housing Levy

The Seattle Housing Levy is a property tax on all property in the City and generates funding for new housing, operations, and rehabilitation of existing affordable housing. The Levy typically funds housing for people who earn 0 to 60 percent of area median income. In 2013, the Levy produced 314 new housing units costing $13.4 million in Levy funds. Those funds were more than matched by other sources, including the largest source of capital, Low Income Housing Tax Credit equity; this enabled the City’s contribution to be $42,675 per unit.[5]

Costs to Produce 1400 Units Using Levy Funds

  • Levy $42,675 x 1400 = $59,475,000
  • Cost: $65 for a median valued single-family home per year[6]

O’Brien/Jacobus “Linkage” Tax

The linkage tax would generate money for housing by taxing, at variable rates (very likely in conflict with Article VII, Section 1 of the State Constitution requiring “uniform taxation”) across the city, each square foot of new construction. New and existing single-family construction would be exempt. The assumptions by the consultant Rick Jacobus is that the 1400 units would be built new at a cost of $250,000 with the city covering more than a third of that cost, or $95,000 per unit.[7]

Costs to Produce 1400 Units Using the “Linkage” Tax

  • Linkage tax $95,000 x 1400 =$133,000,000
  • Cost: $420 rent increase per year for a midsize multifamily rental unit[8]

Here’s a table showing the analysis for the predicted rent increase.

 

City of Seattle
Impact of Linkage Fee (proposed) on Rents
Assumptions Amount
Building Size  22,400 gsf
# of Units  48
Linkage fee/gsf $10.00
Weighted Average Cost of Capital (WACC) 9.00%
Expected Rent/Mo $1,395 pre-linkage
Impact
Total fee $224,000
Fee/unit $4,667
x WACC 9.00%
Additional Rent/unit/yr $420.00
Additional Rent/unit/mo $35.00
Percentage increase 2.5%
Expected Rent/Mo $1,430 post-linkage

It may not seem like much, but $420 might mean a lot so some people; if the charge was at the higher end, say the $22 figure that Councilmember O’Brien has outlined in the resolution, that number might be twice that or more.

What Does the MFTE Look Like at the Project Level?

The program generates different actuals depending on the size of the project and the number of units. But here’s simple example of the bargain the City gets through the MFTE program (depending on your browser, you may have to click on the image to see the whole table).*

MFTE Project Level

Yes, the developer’s pro forma benefits from some extra savings from taxes every year. In this case the developer gets a savings of $12,000; but so do the dozen renters in the building. And what does the City pay in lost tax revenue for achieving this policy goal of affordable “workforce” housing: $.50 for each renter dollar saved. The County and other jurisdictions pick up the rest. You can see this play out over all the units in Attachment D: Tax and Revenue Impacts for 2014 in the City’s report I’ve already cited.

Why is MFTE so Efficient? Can We Expand and Improve it?

My view is that this program is so effective because it comes with a real incentive: it lowers costs for builders who are creating housing and it takes advantage of existing construction. The MFTE is actually inclusionary in the way that advocates of forced inclusion want; in fact a look at the MFTE program roles will show that fancy pants new buildings like the Stack House and Amli in South Lake Union, and Lyric and Joule on Capitol Hill, have dozens of these units—totaling well over 100 units of subsidized, rent controlled units.

The advantage is that the City or non-profits doesn’t have to buy the land, go through financing, lease up, or deal with the myriad of challenges getting a project entitled. The units are built and ready to go. There’s no management cost and no capital costs either. The renter gets a lowered rent, the developer saves some money, the public gets the benefit of an affordable unit for someone earning 60 to 80 percent of AMI in a new, market rate building, in an awesome neighborhood.

And yes, we can expand on this program. Perhaps there might be ways to lock in the savings for a longer period. Maybe there might be more incentives to lower the threshold below the 60 percent level. There are probably many ideas the development community could think of that would produce even more cost savings that could be passed on to the renter.

The point with MFTE is that it is already doing what advocates say they want: inclusionary, affordable housing for people earning 60 to 80 percent of Area Median Income. Why impose a tax that will raise rents for people earning that same amount (as much at $420 per year) in the name of building very expensive housing ($133,000,000 a year!) for other people earning 60 to 80 percent AMI? That just doesn’t make sense. It’s time to look at the tools we know are working well, and MFTE is one of the best.

* I made an error in this table. The rent savings in this hypothetical example would be $14,400 per year and the cost per dollar of savings $.42.


[2] From Jacobus presentation on incentive zoning, slide 19, http://clerk.seattle.gov/public/meetingrecords/2014/plus20140213_1b.pdf

[3] From Office of Housing’s 2013 MFTE Report, http://www.seattle.gov/housing/incentives/MFTE2013report.pdf. The cost to a median household changes from year to year based on assessed valuation and the amount of tax not collected.

[4] Median home price, according to the County Assessor, is about $350,000

[6] ibid

[7] From Jacobus presentation on incentive zoning, slide 19, see above

[8] Taken from an analysis by a builder of costs and rents after paying fee.

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