MFTE Reauthorization Process is Looking a Lot Like the “Grand Bargain”

Last year, Seattle’s Office of Housing decided to break protocol — and the law — by not following the Department of Housing and Urban Development’s (HUD) income standard for calculation of rents in units in the Multifamily Housing Tax Exemption (MFTE) program. Why? Because incomes went up in 2017 and therefore so did the calculation of what households could pay. Not only is following  calculation a legal requirement it is also in the contracts the City signs with developers who build and finance MFTE projects.

Having the certainty of that contract sets the relationship between lenders and developers; if rents don’t keep up with expenses then the ratio of debt to money coming in from rents changes. It doesn’t take much to impact that ratio, usually called a Debt to Credit Ratio or DCR. Many projects lost money when rents didn’t keep up and that meant lenders could demand more equity — cash — be put on the table to get the DCR back to the typical 1.20 or 1.25. Who cares about dozens of dollars lost per unit, right? When that lost rent is multiplied across all the MFTE units and then again by 12 it means quite a hit. 

And now we understand the City is starting to look at reauthorizing the program without small and medium sized developers that build many of these projects. What we’re hearing is that a small group of big developers is working on getting what they want from the new MFTE — without anyone else in the development community being involved, including lenders and people who finance these projects. So, for the record, we wrote this letter. This time we want to be sure the City doesn’t claim a “bargain” at our expense. 

July 16, 2019

To: Steve Walker, Office of Housing
From: Roger Valdez, Director
Re: Multifamily Housing Tax Exemption Program (MFTE) Reauthorization

The City of Seattle’s Multifamily Tax Exemption (MFTE) program has been a quantitative success, generating more than 8,000 rent-restricted units in Seattle. To generate additional MFTE units at scale, the development community requires certainty that the Office of Housing will manage the MFTE program in a manner that is consistent with the Seattle Municipal Code and executed MFTE contracts. Seattle for Growth desires to help the Office of Housing improve the MFTE program to create these additional MFTE units.

Unfortunately, recent Office of Housing decisions have removed certainty from the MFTE program. As background, the Seattle Municipal Code indexes MFTE affordable rent to median family income for the Seattle area as published by HUD for the Section 8 program (see SMC 5.73.020, defining “affordable rent”).

• Last year, the Office of Housing removed certainty from the program when it artificially reduced the MFTE rent for all participants below the amount authorized by the median family income data published by HUD.
• This year, the Office of Housing removed certainty from the program when it established an “expectation” that rent increases for existing MFTE tenants fall below the amount authorized by the median family income data published by HUD.

Both actions are in violation of the Seattle Municipal Code, Director’s Rule 01-2009, and the many contracts that the Office of Housing executed with property owners. Both actions created uncertainty for the developers and builders who provide housing using the incentive created by the MFTE program. This uncertainty has also contributed to the unwillingness of some investors and property owners to participate in the MFTE program.

It is our understanding that the Office of Housing is now meeting with selected developers to amend and reauthorize the MFTE program. However, the Office of Housing has not engaged any developer or investor who is a supporter of Seattle for Growth. As you know, many small and medium sized builders and developers who participate in the MFTE program support Seattle for Growth. We are concerned, therefore, that the Office of Housing is revising the MFTE program without the necessary information. Developing affordable MFTE units at scale requires revising the program so that it works for Seattle’s broad development community, not just the developers hand-selected by the Office of Housing.

Seattle for Growth asks to be included in any conversations regarding the amendment and reauthorization of the MFTE program. Thank you for your work and please contact me this week with information about your process and how we can get involved.

Sincerely,

Roger Valdez
Director

Rent Control Rally: Will We Have Rent Control in a Year?

It was exactly four years ago this week that I took the stage with Councilmember Kshama Sawant. to debate rent control. What have we learned as a city in that interval? Not much. This weekend Sawant will rally rent control supporters. Her followers have already been gathering signatures on a petition. For anyone who knows what’s really going on in the city (if there is anyone else out there) the language the Sawant uses is hilarious. Here’s a paragraph from the petition page titled, “Shhh! Don’t tell the billionaires and corporate developers: Our rent control movement has early momentum!”

We will no doubt face massive opposition from billionaires, big developers, and corporate landlords and the establishment politicians who serve them. The developers and landlords are making untold profits by exploiting renters. And as we saw with the Amazon Tax fight, they will do everything possible to resist paying their share of taxes so that we can build more affordable housing.

Remember that the first two groups that are supposed to be giving rent control “massive opposition” capitulated on Mandatory Housing Affordability (MHA). Vulcan and other large developers downtown and in South Lake Union cut a deal for themselves that they could easily absorb, paid the fees they would have likely paid anyway, and moved on. Everyone else in town is stuck dealing with per square foot fees that have started tipping projects into infeasibility. And from what I’ve been hearing, the chickens are starting to roost with townhouse and small apartment builders getting big bills for fees they can’t pay.

What about the “corporate landlords?”

We’ll see. I’ve been hearing a very unsettling buzz that a deal should be struck like the one reached in Oregon which established rent control statewide with a high ceiling for the price control. Why would landlords want this? Just like developers and most business people, as I’ve said, landlords want certainty more than they want lots of extra profit. The logic is that a high allowance for increases plus allowing the increase to include a setting for the Consumer Price Index (CPI) would have no effect on rents. After all, rents aren’t going up all the time and more importantly the increase across the housing economy is largely attributable to new product hitting the market, the so-called “skew of the new.”

My more pessimistic side tells me that this is, indeed, what will happen. I would guess that Sawant’s efforts will result in some kind of direction from the City Council to it’s lobbyists in Olympia to pass an Oregon like measure. The thing is that billionaires and big developers really don’t care all that much about rent control. I wish they did because if they did, we’d have a chance to stop it. As for landlords, there simply is no political clout there. The landlord lobby simply can’t muster votes to do anything other than break their fall in Olympia, usually with their own head. I think the Council will lean hard on the legislature which has already promised to pass a measure in 2020.

The truth is that like MHA and changing the purpose of the REET, there just isn’t much backbone in the real estate community. The prevailing wisdom is that it is better to choose the least painful form of public humiliation rather than reject the underlying premise that housing is bad and an impact and that the only solution to housing price increases is price controls and more regulation. If there were billionaires and corporations that could think beyond the edge of their pro formas and portfolios I do think we could not just stop rent control, but turn this whole thing around with solid data, good policy ideas, and a determination to change the narrative. Will that come together in the next six months? We can dream, right?

I Had a Dream: What if Seattle Actually Made Good Housing Policy?

A Dream

Once a dream did weave a shade
O’er my angel-guarded bed,
That an emmet lost its way
Where on grass methought I lay.

Troubled, wildered, and forlorn,
Dark, benighted, travel-worn,
Over many a tangle spray,
All heart-broke, I heard her say:

‘Oh my children! do they cry,
Do they hear their father sigh?
Now they look abroad to see,
Now return and weep for me.’

Pitying, I dropped a tear:
But I saw a glow-worm near,
Who replied, ‘What wailing wight
Calls the watchman of the night?

‘I am set to light the ground,
While the beetle goes his round:
Follow now the beetle’s hum;
Little wanderer, hie thee home!

William Blake, Songs of Innocence and Experience, 1789.
Featured image, Milton’s Mysterious Dream, William Blake, ca 1820

I’ve written all about what went wrong over the last 5 years with housing policy in Seattle; the folly and pride of the Mandatory Housing Affordability (MHA) scheme, killing small-lot and microhousing, the obsession with rent control and design review and senselessly bigger garbage rooms and redundant water mains. But what if it all worked out? What if it had all gone perfectly and somehow the Seattle figured it out, matched its policies to the reality of supply and demand, and took seriously the notion that efficiency is compassionate? What if a strong, charismatic leader emerged? What if urbanists, YIMBYs, developers, and environmentalists actually supported policy consistent with their stated values? It might have looked something like this.

Councilmember Louisa Delgado steered her bike out of the busy bike lane down the hill toward City Hall. She was coming in from her north Seattle office to accept an award from Growing Seattle, a pro-growth housing group. She was going to be honored for her efforts to turn the tide starting back in 2013 and 2014 away from growing sentiment against growth and new housing and toward embracing both.

It was a long trip from the day she first moved into an apartment — a very expensive apartment — in Seattle’s Capitol Hill neighborhood with her girlfriend who took a job at Amazon. They were both amazed at how welcoming the neighborhood was to a mixed race lesbian couple but how many mean things were being said, in front of them, about tech workers. There was even a story in the Seattle Times about roving bands of bros bent on beating up gay people.

“Louisa,” her girlfriend Daphne looked up from the paper and her breakfast and asked, “What the fuck are they talking about?”

Most of Daphne’s co-workers weren’t bros or even white. Louisa’s new job at the co-op was serving a very diverse set of customers, and everyone she worked with was a lefty or even socialist. At the University of Washington where she was working on the last parts of her degree in psychology, she felt mostly welcome — except when it came to talk about “all those new techies killing the neighborhood.”

It wasn’t too long before her curiosity turned into aggravation; she was one of those people they were trashing all the time.

She started attending meetings and speaking at them. She did this often. She took a lot of abuse. She supported ground floor retail in the low-rise zones, microhousing, and worked against efforts by other neighbors for downzones and more difficult design review standards.  She got noticed.

One day she got a call from a big developer, Klingon Development. The voice on the other end of the phone praised her work and then asked one question, “Do you believe in supply and demand?”

What followed her answer, “Of course,” was a whirlwind, with Klingon funding a major effort to support not just Louisa’s voice but for her to expand that to a chorus. The message of Growing Seattle was simple, “We need more housing of all kinds everywhere for people of all levels of income.”

At first it was brutal. The left didn’t like the message because it didn’t promise outcomes for people of color or protect sacrosanct single-family neighborhoods. Louisa understood that rent control would limit supply. She opposed it. They hated that. She was called a shill, a sell out, and a lot worse. But she persisted.

Klingon’s resources bought ads and a social media presence. Before she new it this housing thing was a full time job. She had a research staff and a communications officer. It turned into a war room, hitting back hard at every red herring and hair brained statement, challenging bad use of data, even if it came from the Mayor or a Councilmember or member of the press.

Growing Seattle also proposed smart policies like deregulation of the housing economy, ending zoning, incentivizing new housing and renovating old housing and direct cash benefits for poorer households.

Every day, Louisa would start the day’s stand up meeting with, “How are we doing?”

At first the answers weren’t good. Almost everyone was against them. She was being attacked. Important people — Councilmembers, the Mayor, and non-profit housing agencies — were complaining, even calling Klingon. She heard second hand that Grow Seattle’s criticism of the City’s efforts to add more limits to housing while complaining about its price was starting to strike a nerve. “Make it stop!” she heard one Councilmember had said.

One day her phone rang. It was the head of Klingon.

“This is it,” she thought. “I’ve gone too far.”

She let it go to voicemail. She called Daphne and explained her worries.

“I think we’ve been too hard on the Council and Mayor,” she said. “I think they’re going to shut us down.”

“Have you been telling the truth?” Daphne asked. “I mean, have you ever said anything that isn’t real, and do you believe in what you’re saying?”

Of course she did, with her whole heart. She figured she’d just go back to what she was doing before. Nothing ventured, nothing gained, right. Maybe she’d just carry on the fight alone.

“He’s a smart man,” Daphne said. “Call him back. He’s not going to shut you down.”

She’d never actually met the man. Just calls of appreciation now and then. Maybe and email or two. Now she heard the ringing and waited for his answer.

“Hello, Louisa,” the voice said.

“Hello,” she said. She started to say something. He kept talking.

“Listen, I don’t have a lot of time,” the voice said. “You’ve crated quite a bit of controversy. Lots of people want me to pull the plug. The neighbors are furious and say you want to end single-family housing. The Mayor and the non-profits want to tax all new housing and use the money for subsidized housing, you know, tax credit stuff.”

She kept listening.

“They want a tax on jobs, Louisa. They say we don’t have an income tax so we need to tax business, us, to make up for it. They want to hand all that cash to the non-profits. The Speaker of the House wants this to happen. He’s threatening everyone.”

She knew about all this. The neighbors were organizing. The socialists wanted the tax.

“And here’s the thing, Louisa,” the voice said, seeming to be winding up for the shutdown. “I’m hearing from developers and landlords too. They’re afraid. They say we should go along with this, we should agree to something, anything, just to create more certainty.”

“Wow,” she broke in. “They’re all supportive when I’m in the room.”

“Here’s the deal,” the voice said. “They’ve all come to me and offered a deal. We stop attacking them, back off and agree to a compromise, a tax on every square foot of housing. In exchange, they back off on anymore rules. They’re also going to agree to statewide rent control because they trust the state more than the City.”

Her heart sank. That wouldn’t help at all. Adding more costs to housing would just make things worse. Rent control? That would be fatal. Housing is a good thing, we should be incentivizing it not taxing it. That was Growing Seattle’s whole message.

“So I’ve lined up my car to head down to City Hall,” the voice said.

Shit! He’s going to give up just like that?

“I’m going to stop by and pick you up,” the voice continued. “You’re coming with me.”

She wasn’t sure what she was hearing. This was one of the richest men in the world.

“My answer is, ‘No!’” the voice said. “It’s, “Hell no! And I need you to come with me to explain to them exactly why we’re going to keep doing what we’re doing and why you’re going to run for Council to be sure they do it.

———-

She heard the applause but she was lost in her memories.

“Councilmember Delgado,” her staffer said. “They’re waiting.”

She took the podium.

“When I started this work 5 years ago, we had a growing animus against developers, landlords, and tech workers. We were hearing that markets don’t work. We heard that adding more housing supply to our community would just make some people rich and displace others. We heard that every time we added jobs people became homeless. We heard that some houses were too small. We heard some houses were too big.”

She paused.

“You know what we did?” she said, a catch in her throat. “We ignored all that. We didn’t listen. We didn’t pay attention to that genuine but confused din of frightened people. We grew anyway. We got rid of design review, we abolished SEPA requirements, we rolled back charges for infrastructure, and we expanded incentive programs that created this biggest building boom in the country — they called it, “The Big Bang.” And it wasn’t easy. There was panic. There were threats. There was worry.”

She paused and let the applause go for awhile.

“You’re applauding now,” she said. “But I remember when it looked like we’d have four socialists on the City Council and five NIMBYs. I remember when we could number our supporters on two hands. But we did it.”

The crowd was silent.

“We made a promise,” she said. “We’d do anything we had to to build. We said, yes lots of people would make money but prices would go down. And they did!”

Applause.

“We said we’d use socially responsive investment to address chronic homelessness, capturing the value of compassion to pay for housing and services. We did that!”

Applause.

“We said we’d use tax revenue to buy down household cost burden with cash payments. We did that, and we eliminated almost all the cost burden in the market. We did that!”<

The crowd was getting more excited.

“We allowed the housing market to thrive. Prices flattened and fell. Instead of rents, “skyrocketing,” returns for investors did. People earning 50, even 40 percent of area median income didn’t need subsidies anymore. Permits were ready in six months; today it takes four.”

The audience was on its feet, cheering.

“We did that!” she said over the cheers.

“Today in San Francisco and Los Angeles there are people living in tents. The President said he’d intervene.”  She paused and there was laughter.

“He doesn’t need to. We’ve showed them how we can expand opportunity and abundance by making fewer rules, being more efficient, and getting out of the way of a good thing.”

As she spoke she thought about how things could have turned out. But she pressed on.

“How’d we do it? We stuck to the principle that jobs and housing are good things we need more of. We stood up against angry neighbors and the greed of the status quo, including non-profits who didn’t want to change their business model. We kept going even when it wasn’t fashionable or cute or popular. This room could have been filled with cheerleaders for the status quo, or more taxes, or more rules, fueled by resentment and entitlement. But it isn’t.”

Daphne stood in the back of the room. She thought about how the whole thing had grown. It didn’t seem like this could have happened so fast. She couldn’t help but admire the woman she loved.

“So today, when someone in the country, on social media, in a newspaper, on the radio, or at dinner time says, ‘show me a city where this supply argument worked to solve the problem,’ people can say, “Seattle!”

“And when people ask, ‘Where did they make progress on generational poverty and chronic homelessness by building more housing?’ what will they say?!”

“Seattle!” the crowd shouted.

“Where did they find a solution to the housing crisis by building more housing?”

“Seattle!” they shouted. People got to their feet.

“Where is the future?!” she shouted with her fist in the air.

“Seattle! Seattle! Seattle!”

Words of Wisdom from Victoria on Mandatory Inclusionary Zoning

At Forbes today I have a post about a really smart editorial in Victoria’s paper, Times Colonist. The editorial board had this to say about Mandatory Inclusionary Zoning (MIZ), a scheme we call Mandatory Housing Affordability (MHA) in Seattle:

It’s a case of ideology winning over practicality, of wishful thinking winning over reality. It could also be argued that there are no winners here, because Victoria city council’s decision to force more affordable rentals into all new large residential complexes is so misguided it’s hard to comprehend the logic.

Developers — the people who are doing all that they can to make new buildings happen — say the 20 per cent requirement is too high, and could push them out of Victoria.

I don’t care for the words, “too high.” Once schemes like this are in place the percentage of inclusion or the rate of taxes or costs of fees only goes in one direction: up. One line I love in the editorial is one that characterizes the knowledge of people who are making housing policy in Victoria. You’ll have to go to Forbes to see what I am talking about.

Waiting for the Cottage Building Elves

After a long enjoyable weekend away, I came back to Seattle thinking about what would I say this week in this space. My first thought was to address (again) the fact that recent legislation passed by the City Council will not, in my estimation, add lots of new supply of backyard cottages. Why? Households that have eligible backyards can’t pay for the process and costs associated with building cottages. And why is this? It is by design. As I pointed out on Twitter, Councilmember Sawant who opposes the idea of profit or return on investment on anything said she supported the legislation specifically because she so no potential for anyone to make money. That’s right, most of the momentum behind this legislation was built because the Council could claim a “win” for density in single-family neighborhoods while at the same time knowing that it wouldn’t happen. It’s called politics, and it is what has caused our “crisis” is housing. 

So before I even got here, I had a response on Facebook from a cottage advocate suggesting that the financing piece (which I’ve written about a couple of times) would be part of a “phase two.” Here’s my lecture. Yes, I am as tired of hearing my voice on these topics as you. But we just can’t seem to get beyond landscaping and new curtains when what we need is to knock down the whole house and rebuild it. Maybe I’m mixing metaphors and cottages and housing and whatever. Here’s the response. 

That sounds fine. But I think you need to understand that the idea that “nobody can make money at this” while a selling point for people like Sawant et al is at the heart of why the legislation won’t lead to a realization of the potential.