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To jumpstart affordable development in the Emerald City, Seattle
has created a property tax exemption for multifamily housing. The
goals of the program include:
- Encouraging the construction of multifamily buildings in selected
target neighborhoods;
- Increasing the supply of affordable housing in those areas;
- Contributing to neighborhood development and community revitalization;
- Encouraging the creation of rental and homeownership workforce
housing; and
- Developing mixed-income housing.
A project approved under this program would receive a certificate
of tax exemption for residential improvements, while the value of
land and any non-residential components (including retail, commercial,
and office spaces) would not be eligible for the exemption. These
elements would be taxed based on their full-assessed value.
Details of the Program
If a project is approved for the program and remains in compliance,
the property tax exemption will remain in place for a maximum of 10
years. The tax exemption is transferable to a new property owner as
long as the new purchaser continues to meet the compliance requirements.
Before Seattle will grant a property tax exemption, the owner must
apply to the program, demonstrate that the property falls within a
target area, and agree that at least 50 percent of the development
be residential. Under this program, the City established three choices
of affordability requirements for rental projects. Builders can choose
to make:
- 30 percent of units affordable at 70 percent of Area Median
Income (AMI);
- 25 percent of units at 65 percent AMI; or
- 20 percent of units at 60 percent AMI.
“Giving builders of rental housing the option to choose which
set of affordability requirements to follow often increases that
builder’s ability to participate in the program, and is often
crucial to project feasibility,” said Rick Hooper of Seattle’s
Office of Housing. The tax exemption is only available for homeownership
if new units are sold to families with income at or below 80 percent
of median income.
The program has designated 17 target neighborhoods where the City
is interested in encouraging development. “These specific
communities were chosen out of 33 identified in Seattle’s
Comprehensive Plan as urban villages,” said Hooper. These
communities include those which:
- Are behind in meeting 20-year residential growth targets;
- Need housing to stimulate economic growth, and to create a
healthy jobs/housing balance; or
- Are areas experiencing residential development, but need affordable
units in the mix.
Since the program’s inception in 1998, Seattle has received
applications for and approved 15 projects. Of the five projects
currently in progress, three are with private developers and two
are with non-profit organizations. “Developers support the
program because it has a streamlined application process and is
relatively easy to use,” said Hooper. Seattle realized that
the project economics go a long way toward determining a developer’s
interest. “If a project becomes feasible to a developer because
of the tax exemption,” said Hooper, “they are more likely
to create that development.” Developers often tell the Office
of Housing that the program helped them decide to move forward with
an otherwise marginally feasible project.
Maria Barrientos, a for-profit developer who has successfully used
the program for three projects and is about to break ground on a
fourth, speaks highly of Seattle’s tax exemption incentive.
“Without this program, the projects I have developed just
would not work. In these economically distressed areas, rents are
not very high, but the cost to build is the same,” said Barrientos.
Since her involvement with development in Seattle’s International
District, there have been three new projects in the last six years;
further evidence that economic opportunity and willingness to build
are increasing.
Barrientos initially used the program because it enabled her to
build in economically distressed areas. “[The projects] have
been very easy,” said Barrientos, adding, “The application
process has been very easy.” Barrientos concluded by saying,
“This program is a fantastic idea to serve as a catalyst to
get multi-family housing built, especially in certain areas with
high need. Without this program, these projects just would not be
feasible.”
Program Under Reform
The tax exemption program currently in use is a revised version
of a program initiated in 1998, when Seattle enacted an ordinance
that allowed a tax exemption on certain affordable residential units.
The original ordinance included a four-year sunset clause that ended
the initial program in 2002. After the original ordinance expired,
Seattle began developing a revised ordinance to reinstate the tax
exemption program; a process that took just over a year. The City
increased the number of target neighborhoods from 11 to 17 and made
several changes to the program based on its performance during the
first four years. “What hampered interest in the past in certain
areas was a more stringent affordability requirement,” said
Hooper, “so in the revised 2004 ordinance, we eased back on
some neighborhoods in terms of the affordability requirement, and
increased it in other areas.”
In addition to changing the affordability requirements, Seattle
now permits developers to apply for the program any time before
picking up the first building permit. Previously, developers had
to apply before beginning their land use permitting process. This
change was made to increase the program’s flexibility. The
ordinances that allow for this tax exemption include Chapter
84.14 of the Residential Code of Washington (RCW) and Chapter
5.73 of the Seattle Municipal Code.
Other Countries Experiencing Similar Barriers to Affordable
Housing |
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Regulatory barriers to affordable housing can be found in
many countries, as can debate about how to best address these
potential obstacles to development. While the degree of regulation
differs among countries as well as between local and national
governments, it’s clear that many nations struggle with
providing affordable housing. This article discusses three
countries with similar economies, each facing housing challenges
like those in the United States: Canada, the United Kingdom,
and Australia.
Declining Housing Affordability Not a Unique
Issue
The United States is not the only country where increasing
housing costs are placing a growing burden on low- and moderate-income
households. According to a 2001
report by RMIT University in Melbourne, Australia, no
low-income households could afford to buy an average-priced
three-bedroom home in any part of Sydney, Melbourne, or Adelaide
in June 2000. An October
2002 report by the Canada Mortgage and Housing Corporation
states that Canada has an estimated need for 45,000 new rental
units each year from 2001 to 2010. The researchers found that
half of those units need to be affordable units. The construction
of new rental units decreased 67 percent from 1989 to 1993
compared to 1994 to 1998. Existing affordable housing is decreasing
because of decay, conversion, and demolition.
Types of Barriers that Increase Housing Costs
Regulatory barriers can be found at the local level in other
countries, just as in the United States. The main barriers
fall into three categories: zoning and land use restrictions,
fees, and administrative delays. Zoning restrictions often
promote large lot development and larger, more expensive housing.
Another common problem in these countries is that many communities
charge impact or development fees on new construction that
increase the cost and decrease housing affordability. Finally,
developers in all of the countries discussed below are experiencing
difficulties related to the administrative processing of development
requests.
United Kingdom
In the United Kingdom, affordable housing is of increasing interest
because the cost of housing in some cities has begun to price
out valuable members of local economies. According to research
undertaken by the University of Sheffield and the University
of Cambridge, one of the barriers is the result of Section 106
agreements. These binding agreements are between the local planning
authority and a developer. They are required by the national
government. These requirements attach conditions to the planning
permission process as a means of ensuring an element of affordable
housing in each development. Problems arise mainly from trying
to determine the level of a developer’s contribution.
The negotiation between the local government and the developer
can last for six months, and can increase the cost of development.
Australia
In Australia, significant barriers to development are administrative
delays, land use, and fees and tax policies that serve as
financial disincentives. On
Line Opinion (an Australian journal of social and
political debate) argues that an administrative approval process
fraught with delays frequently deters Australian developers.
The article indicates that limited land use planning has caused
housing development to outpace the creation of adequate infrastructure.
As a result, developers are charged fees to create new units.
These extra costs deter development and raise the cost of
the units that do get built. The article suggested that the
cost of infrastructure could be covered by bonds instead of
development fees. As bonds are repaid over a longer period
of time, this method of raising revenue more accurately reflects
the long life of the infrastructure being created.
Canada
Barriers to affordable housing in Canada are related to the
tax and zoning codes. A housing
development analysis written by TD Bank Financial Group,
a local economic development consultancy, finds that tax breaks
are not an effective means of spurring development. They instead
suggest that direct capital grants are a more effective means
of encouraging such development, and the Group also notes
that the Canadian tax code creates specific barriers to housing
affordability. Higher property taxes on multiple-unit residential
dwellings discourage the development of such higher-density
(and often lower-cost) housing.
The report goes on to cite local development codes as a barrier
to the development of affordable housing for very low-income
families. The authors state that rooming houses and single-room-occupancy
(SRO) units, often the most important source of housing for
those with the lowest incomes, are often prohibited by municipal
development codes.
Regulatory Barriers and Solutions Have No Boundaries
Housing developers, city planners, and politicians in these
three countries face many of the same barriers encountered
by their counterparts here in the United States. By reviewing
problems identified and solutions proposed, policymakers in
all of these countries may identify approaches that have applicability
in their home countries.
Efforts to Reduce Regulatory Barriers Capture State
Legislatures’ Attention |
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In response to growing public awareness and demand,
state legislatures are attempting to reduce the impact
of regulatory barriers on the cost of developing housing.
In Texas, representatives have introduced legislation
that would streamline the development process. In New
York, lawmakers are considering legislation to exempt
certain personal property from sales and use taxes if
the property becomes part of the affordable housing.
Working to Streamline the Development Process
Currently, Texas’s municipalities and counties are
not limited in the amount of time they can take to approve
a building permit. According to Aubrey Colvard, who works
for Texas Representative Wayne Smith, “Talking with
consumers, counties, and municipalities revealed that
the permitting processes were… lengthy, confusing,
and often cause developers to lose money on projects,
which in turn discourages development of much needed housing
– particularly affordable housing.”
In an attempt to implement a consistent process and
to minimize lengthy and costly delays, the Texas House
of Representatives introduced House Bills 265
and 266.
These Bills describe uniform timelines for processing
building permits at the municipal and county levels,
respectively. Both Bills would amend the local government
code and would only apply to permits required by municipalities
and counties to construct or improve a building or other
structure. According to the Bills, a municipality or
county will be required to do one of the following within
45 days after the permit is submitted:
- Grant or deny the permit;
- Provide written notice to the applicant explaining
the reasons why the county or municipality has been
unable to act on the permit application; or
- Reach a written agreement with the applicant providing
a deadline for granting or denying the permit.
If the county or municipality is unable to act on the
permit application within the 45-day window, then it
must grant or deny the permit within 30 days of the
notice. If a municipality or county does not respond
to an application within the additional 30 days, it
cannot collect any permit fees related to the application
and must refund any permit fees that have been collected.
If enacted, this legislation would apply only to permit
applications submitted on or after September 1, 2005.
The Texas House of Representatives passed both bills
on March 30, 2005. They have been referred to the Texas
Senate Committee on Intergovernmental Relations, where
they are currently being considered.
Attempting to Reduce Taxes to Aid Affordable
Housing Development
If passed, State of New York Senate Bill S770
would exempt tangible personal property from sales and
use taxes if that property is used to create affordable
housing. The bill was created at the urging of State
Senator Carl Marcellino in response to the statewide
problem of available affordable housing. According to
sponsors of the Bill, many families and individuals
cannot find high-quality affordable housing in New York
State, despite reasonable construction costs and historically
low mortgage rates. This legislation would amend the
real property tax law to provide tax incentives for
the construction, rehabilitation and purchase of affordable
housing. Senator Marcellino’s legislative director,
Kirk Ives, commented that “To increase affordable
housing, we were looking to incentivize involvement
at a variety of levels, including the locality.”
This Bill creates incentives through tax exemptions
for those involved in the process of building affordable
housing. The tax exemption will apply to property sold
to a contractor, subcontractor, or repairman for use
in maintaining, servicing, or repairing property used
to provide affordable housing. The Bill provides a sliding
scale exemption, with a 100 percent tax exemption on
the property for the first year of ownership, along
with 20 percent decreasing exemptions for the next five
years. If the exempted property were sold during those
six years, owners would have to repay the taxes that
were exempted. Before the tax exemption may be used
through this program, each local government would have
to enact local legislation authorizing such a program.
Any contractor who fails to use this exempt tangible
personal property to create affordable housing would
be subject to a civil penalty.
As of early April 2005, this Bill is before the Senate
Investigations and Government Operations Committee.
According to Senator Marcellino’s office, the
Bill has garnered strong political support.
Conclusion
These bills propose ways of eliminating regulatory
barriers that reduce the growth and production of affordable
housing. Each legislative effort emphasizes changing
local ordinances in an effort to significantly increase
the amount of affordable housing being produced. Texas
lawmakers hope that by streamlining the development
and permitting process, they will increase the density
and quantity of development in communities with specific
needs. Members of the New York Senate are targeting
an increase in the production of affordable housing
by reducing taxes on certain properties and reducing
the overall cost of such development.
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