Reprinted with the permission of Phil Brown, Publisher,from the October 25 edition of the Daily Journal of Commerce and
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October 25, 2000

City expands housing incentive program

Capitol Hill and Rainier Beach neighborhoods added to the list.

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." 

Get Copyright Clearance Copyright 2000 Seattle Daily Journal of Commerce 
Click for permission to reprint. (PRC# 1.4227.11115275) 

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