Property Tax Exemptions Promote Affordable Rental and Homeownership
Housing in Seattle
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
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
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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