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October 25, 2000
City expands housing incentive program
Capitol Hill and Rainier Beach neighborhoods added to
the list.
By SAM BENNETT
Journal Staff Reporter
The Seattle City Council this week voted
unanimously to expand its multifamily property tax exemption
program to Capitol Hill and Rainier Beach, significantly extending
the reach of a program dedicated to affordable housing.
The program offers developers in 11 neighborhoods, including
Pike/Pine, Pioneer Square, South Park and Denny Triangle, a tax
break in return for providing a minimum number of units as affordable
units.
"The whole program is premised on encouraging new affordable
housing development," said council member Peter Steinbrueck,
who has sponsored tax exemption legislation. "Capitol Hill
and Rainier Beach fit the criteria of being of being underdeveloped
in terms of affordable housing."
Steinbrueck said the program has resulted in the addition
of 350 units of affordable housing. The tax break applies to
new construction, rehabilitation of a vacant building or improvements
to an occupied structure. In the Capitol Hill, International
District and Pike/Pine areas, the development must include 40
percent of the units set aside for those making 60 percent or
less of median income. The other neighborhoods require 25 percent
of the units be made available for those earning 80 percent or
less of the median income.
The jury is out as to whether developers will flock to the
program for the 10-year tax break, or avoid it when the cost-benefit
ratio doesn't pencil-out.
Mark Raabe, president of the Fortune Group, said his development
at 12th and Olive will take advantage of the tax exemption program,
though he has doubts whether he will come out ahead financially.
Fortune is developing the $9 million, 62-unit Carrington,
setting aside 25 of the units for affordable housing. "Ten
years is a significant benefit, yet there's a real cost associated
with it," said Raabe. "There was a perception that
the tax exemption was a free ride for builders, yet there's real
costs associated with it. The cost on those units is clearly
below market."
For example, the Carrington will rent out all of its approximately
520-square-foot studios at $740 a month or less, as required
by the program. At market rate, because the studios are large,
Raabe said they could fetch more in the area of $900 to $950
a month -- meaning Fortune will lose about $200 a month per unit.
At the same time, he estimates Fortune will save about $70,000
a year in taxes for 10 years. That equals a 10-year loss of about
$600,000 in rent versus a 10-year gain of $700,000 in tax exemption.
"The net benefit to us is certainly not a windfall,"
said Raabe. There is also the uncertainty that if the local economy
falters and median income drops, Raabe would be forced to lower
rents to reflect 60 percent of the downwardly revised median
income.
While Raabe plans to offer only his studios as affordable
units, legislation passed Monday will require that the number
of units that are affordable must be proportional to the total
number of studio, one- and two-bedroom units. The council also
will now require that the affordable units be "substantially
comparable in construction quality" to market rate units
in a project. And lastly, the council voted unanimously to add
the "right of first offer" to the program -- meaning
that, if a project is up for sale within the 10-year program
period, the city has first right to make an offer, most likely
on behalf of a non-profit housing group.
For the Pike/Pine area, the city also offers incentives such
as a reduced parking requirement and waiving density limits if
the developer provides 40 percent of the units as affordable.
Raabe said he passed on those incentives, fearing that a building
with 0.5 parking spaces per unit would be a difficult sell in
the future. "To me that affects the value of your building,"
he said. "A lot of people perceive (a reduced number of
parking spots) as a negative. Developers who take advantage of
the waivers "are going to give all of that back when they
sell the building," he said, referring to the financial
savings from developing fewer parking spaces.
Chuck Weinstock, executive director of Capitol Hill Housing
Improvement Project (CHHIP), said development pressures in the
Pike/Pine area are high.
"I do not believe that at this point we know if the current
incentives for Pike/Pine are powerful enough to induce anybody,
other than some entity like CHHIP, to choose the incentives and
requirements over the regular market rate path," he said.
Weinstock and members of the Pike/Pine Urban Neighborhood
Council said the city's recent proposal to ask developers to
construct one affordable unit for every one they tear down is
a mistake. The regulation would only apply to developers who
want to participate in the tax exemption or code waivers programs.
This proposal, Weinstock said, "will clearly decrease
the economics of the incentive option and make it less likely
any private developer would choose it over the traditional, unconstrained
option."
Jill Janow, chair of the neighborhood council, said the new
proposal would "disincentivize" developers to create
anything other than affordable housing. She said the so-called
anti-displacement proposal would have the added effect of "endangering
our efforts to attract some moderate-priced housing through the
incentives in place now."
Steinbrueck on Tuesday said the anti-displacement proposal
will be revised and presented in the Landlord/Tenant Land Use
Committee.
For Raabe, the cost analysis is only one part of the equation.
"Using a broad-brush calculation, we can see we might lose
money," he said. "But even if it was a wash, we would
still participate because there is another great reason to do
it, which is providing affordable housing."
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