Impact Fees: Herbold’s Plan to Save Money for Homeowners and Raise Rents
The following is a slightly edited version of a fundraising email I sent out yesterday. Seattle For Growth is the only group in town that calls this stuff out. It’s amazing to me that the Seattle City Council will keep utility rates for single-family home owners low at the expense of raising rates for renters. Just another day at the office of Lisa Herbold.
Have you gotten a call from Councilmember Lisa Herbold asking you what you think about impact fees? Has she reached out and included you in her process for making new housing pay for infrastructure? I don’t think so.
She’s made up her mind. Here’s something from her most recent email newsletter:
Other jurisdictions utilize these charges in order to hold new development accountable for increased costs for the utility, rather than spreading the costs of this infrastructure to general ratepayers (emphasis is mine).
First, Herbold and the City Council think that you need to be held accountable for all the damage you do when you build housing. That’s right, for too long you’ve gone unpunished for trying to meet growing housing demand in the city. Time to pay up!
Second, Herbold and her colleagues seem clueless to the fact that you already pay for water, drainage, sewer, and transportation. Ever written a check for a water hook up? Has your project paid surface water management fees to King County? How about those street use fees? For Herbold and the Council this simply isn’t enough.
Third, Herbold claims she wants to save the ratepayers from having to pay these costs. First of all, they don’t. You pay these costs first, then pass them on to your customers who are often first time home buyers and renters. And Real Estate Excise Taxes (REET) collected pays more than $76 million into the Cumulative Reserve Fund (CRF), a fund that pays for infrastructure in the city. What happened to all that money?
If Herbold’s plan goes through, single-family homeowners lower rates will be subsidized by higher rents for people living in newly built apartments. Herbold doesn’t want to believe basic economics; when she adds higher costs to building rental housing it isn’t “development” that gets stuck with the bill but renters and poor people.
You may have seen the bumper sticker somewhere, “If you’re not outraged, you’re not paying attention.” I’m asking for your attention.
In spite of being rebuked by the public for trying to shake down businesses with a tax on jobs the Council has not learned its lesson. And for those that think setting up a 20 minute meeting with Councilmember will dissuade them from imposing fees (really fines) on your projects I say, “Good luck with that!”
Seattle For Growth is the only organization that gets under the skin of people at City Hall. They don’t like being held accountable. Seattle For Growth is the only organization that advocates for you, not just legislation or Directors Rules. What you do is the heart and soul of what makes this a great city, building and managing the housing for people who live, work and seek more opportunity in this city.
This is from my editorial in the Seattle Times about a year ago on the topic of impact fees:
Housing development also pays lots and lots of fees, taxes and charges that contribute to infrastructure (e.g. sidewalks and drainage) all over the city. Take a look at Seattle’s Cumulative Reserve Subfund (CRS), funded by Real Estate Excise Taxes (REET), taxes charged whenever land changes hands in the city. This year the REET will generate more than $80 million that will be spent on projects like maintaining bridges ($2.6 million), roads ($1.1 million) and even funds the city’s Tenant Relocation Assistance Ordinance (TRAO) with $382,000. And the fees builders and developers pay when they get an alley or right of way vacated by the city will generate $16 millionfor infrastructure needs. And this doesn’t count sales tax and property tax that fund city programs.
What will impact fees do to the cost of housing? A recent study by the city of Portland estimated that on average, “government fees” add 13 percent of the total development cost of housing.
Seattle For Growth doesn’t back down from the principle that adding costs to projects makes them infeasible, and when they do work it is because the price had to go up. You already pay as much as 25 percent in fees and taxes on every project you build. Do you want to pay more? And that doesn’t consider all the costs of accumulating regulatory overreach by the city.
Then, when your prices go up to pay all these costs, you’re blamed for building and operating luxury housing!
We will be a relentless voice, one you need to push back against costly and destructive policy this year and into 2019. You are too busy building housing to be outraged; leave that to us!
MHA, Lies, and Video Tape
As we discuss and prepare for a sustained legal challenge of Mandatory Inclusionary Zoning (MIZ) or Mandatory Housing Affordability (MHA) as the City calls it’s program, I’ve been digging around for time I remember the City characterizing MHA. There are a fair number of what might be called “smoking guns” laying around in the public record. Here’s three examples that I have collected over the years. One is quite recent. In each instance, the City is attempting to explain what the MHA program is and how it works. And each time they expose a key weakness exposing the scheme to legal challenge. We’ll look at them one by one.
An Illegal Exaction
In January of 2016 then Mayor Ed Murray held a meeting at City Hall at which, among other things, he tried to calm single-family neighbors worried about their neighborhoods being upzoned. This was something he clumsily suggested he was in support of then just as clumsily backed away from. The genie having been let out of the bottle, angry neighbors showed up in force to pounce on the Mayor to be sure his climb down from changing zoning in single-family zones stayed climbed down. In this effort to assuage the angry mob he said something very telling at minute 25:00 of this video (sorry I can’t get the code right to take you right there)
Here’s the text of what he said, and the emphasis is mine:
The heart of HALA is you don’t get to develop housing in this city, multifamily housing, unless you build affordable housing as part of it. That is the key piece to it. We have developed . . . Wait, wait, wait. . . We have grown as a city, but we have not grown affordably. What we are saying is, if you are going to build a multifamily unit in an urban village, you are going to build affordable housing, or you are going to pay penalties that will go into a fund for building affordable housing.
Now no legal challenge is going to be won with this video clip. However, it does help make the point that the guy at the top viewed the MHA program as a stick program: you do what we tell you to do or we’ll make you pay a fine. This is illegal under both Revised Code of Washington (RCW) 82.02.020 and 36.70A.540.
What RCW 82.02.020 allows is voluntary payments by developers but it specifically prohibits taxes and fess for the development of land or buildings. The notion of fining a property owner for not building housing priced at a certain level is certainly a form of rent control which is prohibited by state law ( ) But charging for development of land by the square foot for not building units at a certain price sure seems like a clear violation of RCW 82.02.020. In RCW 36.70A.540, the word “incentive” is clear before laying out the various conditions and rules for a program that could require performance (building price controlled housing) and charging a fee in lieu of that performance. But even more explicit is this in Section 1(c)
If a developer chooses not to participate in an optional affordable housing incentive program adopted and authorized under this section, a city, county, or town may not condition, deny, or delay the issuance of a permit or development approval that is consistent with zoning and development standards on the subject property absent incentive provisions of this program.
Even if you don’t think the word “mandatory” is antonymous of “incentive,” that section makes clear that a developer or builder is not required to “build affordable housing, or you are going to pay penalties that will go into a fund for building affordable housing.” The Mayor at a weak moment simply blurted out what he’d intended all along: punish builders with fines and pay off non-profits with the cash. That is illegal.
Inflationary: “A valid way to view the program.”
I feel sorry for Geoff Wendtland at the City. He’s a smart guy like most of the people who have been dragooned into the service of this boondoggle. What’s tough about smart people as opposed to politicians, is that they sometimes have a hard time spinning things. Smart people often just tell the truth. I was supposed to be on a panel with Wedtland and Faith Pettis, an attorney who makes profit from legal fees on non-profit housing and, in a blatant conflict of interest, served as chair of the Mayor’s Housing Affordability and Livability Agenda (HALA) Committee. But she vetoed that. Her reason was that I might be involved in litigation with HALA. Well she is right about that.
So Pettis and Wendtland had their own panel, and when I prompted a builder in the audience to ask a pointed question about how and whether MHA would cause prices for housing to increase, here’s what Wendtland said:
How would [paying fees] not increase the rate of the, increase the price of the market rate units on that development? And that’s a great question. And it is, um, a trade off and I think part of the policy and it may be the case that the market rate units have to, to some extent subsidize the inclusion of the affordable units and that it is a valid way to view the program. But uh, the proposal and the fees that are being proposed and set are such that we feel pretty confident that development will still be feasible and we would work with the development community that we wouldn’t be over impacting feasibility (the full exchange is in this video starting at about 49:45)
So right there, in March of 2016, the City is making it clear that it plans on all housing prices going up to pay for inclusion and fees. While this admission itself doesn’t make the program illegal, it does point to a lack of nexus and proportionality. If making more housing causes an impact that requires more housing, how is boosting prices to pay for subsidized housing mitigating that impact? The notion that new housing itself raises prices of housing and thus requires City investment in subsidized housing is laughable, but it is especially so if the City is admitting it’s program actually raises prices.
Previous legal interpretations of programs like MHA have held that there must be some clear connection between the action, in this case building housing, and the requirement to offset that impact, in this case fees. If housing causes the need for more housing, how is more housing created under the MHA program going to offset the impact of housing, especially when the program will pay for all the fees and subsidies by boosting the cost of market rate housing.
“Developers are required to make a contribution for whatever they build.”
Now there is a statement that would make even Don “An offer he can’t refuse” Corleone proud. A required contribution. This is also called “extortion.” But I’m getting ahead of myself. The quote is from somewhere in the City after I requested an account of all projects that have paid the MHA fees or that are subject to fees. I added that I wanted to know how much additional square footage or floor area ratio (FAR) the projects paying the fee were getting. Someone at either Seattle Department of Construction and Inspections (SDCI) or at the Office of Housing (OH) must have pushed back on the request when the person processing the disclosure request asked for it. Here’s what that person said:
The MHA program does not generate additional FAR for projects. Developers are required to make a contribution for whatever they build; the contribution does not gain them extra floor area. So we will not be able to provide that.
This struck me as yet another slip by a person working at the City. The City’s own “How MHA Works” document says this:
By enacting affordable housing requirements and increasing development capacity at the same time, MHA is consistent with a state-approved approach used in other Washington cities.
There’s a one sentence explanation or rationalization of why MHA is legal: it is an exchange of money for inclusion for additional “development capacity.” So why would the bureaucrat on the other side of the disclosure staff person say something in direct contradiction to state City policy?
My guess is that the way the City conceives of MHA is that zone X was upzoned to X+1 which is now Y zone. The Y zone has a performance requirement of 6% percent inclusion in their project of price controlled units. A developer doesn’t have to do that on site performance and can pay an in lieu fee instead. But to the bureaucrat, there is no way to do a before and after analysis because in zone Y there is no “extra floor area” granted.
This is subtle, but what it signals, I think, is the hazard of the City establishing the fee schedule separate and parallel to the zoning changes. That is, MHA is built with a fee schedule that links up to zones. But the fee schedule is not part of the land use changes, those are legislative upzones. The City is saying, “here is the fee schedule showing what we charge per square foot for the various new zones (the “Y zone”) we created. There is no additional development capacity granted. The fee, or “contribution,” is just part of a requirement of the zone.
If it is true that this is how the City views this, then it seems to make the violation of 82.02.020 and 36.70A.540 more obvious. The first lines of 36.70A.540 say:
Any city or county planning under RCW 36.70A.040 may enact or expand affordable housing incentive programs providing for the development of low-income housing units through development regulations or conditions on rezoning or permit decisions, or both, on one or more of the following types of development: Residential; commercial; industrial; or mixed-use.
But remember section I cited above, that the City “may not condition, deny, or delay the issuance of a permit or development approval that is consistent with zoning and development standards on the subject property absent incentive provisions of this program?”
Weirdly, whoever was reviewing my request is either sealed off from the bigger picture and is just looking at code compliance, or this is the City’s official position: these are just contributions to the cause of affordable housing, there is no exchange going on here. But that would mean it was a voluntary program. But it isn’t. In order to get a permit the city is conditioning that permit on making the “contribution.” Confused? So am I. I’ve asked for the identity of the person at the department responding and their full response. The point is, if there is no before and after picture of MHA then how does the City know what the “contribution” is worth? In other words, MHA is either a value exchange or it is a tax. If it is a tax with no incentive (more FAR) it is plainly illegal. If it is a value exchange, then the City seems obligated to know what the proportional value it is exchanging for the fee, er, um “contribution?
Where Is Seattle’s Housing Future? Maybe In the Past.
I was writing up some broader thoughts about housing and as part of that spent some time going through things on this website. I had mixed feelings when I clicked on the menu item called “Seattle’s Housing Future.” My feelings were mixed because I realized how I still completely agree with everything on this list of ideas and solutions. They are so simple and straightforward. My feelings were mixed because this approach was offered at the same time the Seattle City Council was in the process of killing small-lot housing in single-family neighborhoods and then microhousing soon after. These ideas were offered to try and steer them away from doing both of those things, but also away from downzoning the low-rise zones and imposing a linkage tax on all new development. They ended up doing the downzone, and instead of a linkage tax we got something just as bad, Mandatory Inclusionary Zoning (MIZ). This page was well ahead of the Housing Affordability and Livability Agenda (HALA) Committee.
What is so strange is that most “urbanists” out there would embrace these ideas. And anyone reading who builds housing certainly would approve. Even City staff in moments of lucidity, away from Councilmembers who can’t see any solutions to housing issues that don’t involve punitive measures against landlords and builders and taxes, would probably agree this is a good way to get started. But the City marches on with rules, taxes, restrictions, and bad ideas like MIZ. Building housing is complicated, risky, and expensive. But the ideas I compiled for this page are simple and straightforward approaches. Local policy makers and advocates have gotten the discourse on housing completely fouled up, turning it into tribal warfare between neighbors angry about homeless camps, so called YIMBYs weirdly pushing for taxing housing and modest upzones, and lefty progressives who call some others “hate groups.”
Also strange is that angry neighbors are helping to stop the MIZ disaster by appealing the City’s Mandatory Housing Affordability (MHA) proposal. These are the same people who killed small-lot housing, microhousing, downzoned the low-rise zones. Other groups are pushing for sweeps of homeless people. On the other side are “urbanists” who are obsessed with upzoning single-family neighborhoods and pushing for MHA, a proposal that will certainly push up housing prices. And non-profits keep pushing for more and more money from every possible source rather than seeking, along with market rate developers, regulatory relief. It’s a mix of people doing the right things for the wrong reasons, and the wrong thing for the right reasons. And the press has largely only produced story about average rents rising or falling.
All of this is so unnecessary. Pretty much it is all right here. There are even links to more details on reducing rules and innovative financing options. The only thing I can figure is that all our political discussions have gotten less and less rational and more and more about blame. Someone has to pay, I guess. There can’t be win and win and win solutions and turf has to be protected. People have to have the “right” ideas and belong to the correct groups or they shouldn’t be listened to. Anyway, it’s still good stuff after more than four years. Maybe, when we’ve completely driven the city into a ditch, somebody will dust this list off and use it.
Δ IDEA: KEEP SEATTLE’S SINGLE-FAMILY NEIGHBORHOODS A VIABLE OPTION BY ALLOWING MORE NEW HOMES IN SINGLE-FAMILY NEIGHBORHOODS.
- Small-lot homes
- Cottages
- DADUs and ADUs
- Flex housing
- Corner lots
Δ IDEA: PRESERVE AND EXPAND HOUSING IN DENSE, TRANSIT RICH NEIGHBORHOODS
- Expand the Multifamily Tax Exemption (MFTE) Program
- Support continued microhousing development
- Keep the LR3 Zone as a growth zone
- Reduce barriers for more housing
- Create real incentives for developers to build more housing
- Subsidize housing where people want it and need it most
Δ IDEA: USE EXISTING FINANCIAL TOOLS AND RESOURCES MORE EFFECTIVELY AND DEVELOP NEW ONES
- Make existing affordable housing funds easier to access and use
- Develop more land acquisition funds and loan programs for land purchase
- Tax underutilized land to fund subsidies
- Partner with private entities for financing, land acquisition, and technical assistance
- Offer more relocation assistance
- Explore versions of value capture (Tax Benefit Districts and Public Development Authorities)
- Push for Tax Increment Financing in Olympia
Reform, Reformat, Reduce, and Rethink Rules and Regulation
Δ IDEA: REVIEW WAYS IN WHICH CURRENT REGULATION COULD BE PARED BACK TO ALLOW MORE HOUSING, BOTH MARKET RATE AND AFFORDABLE
- Use public lands for housing
- Fix design review
- Create new NDM position
- Explore Lean Urbanism
- Promote and incentivize innovative solutions to welcome growth
- Try a zero based zoning experiment
When Bad Ideas Start Commuting: Will MIZ Go to Tacoma?
Rumor has it that the Tacoma City Council is now considering using Mandatory Inclusionary Zoning (MIZ) to address housing issues there. This is why it is so important to not make bad policy for whatever reason. It has a tendency to spread. As I’ve pointed out about a million times before, the idea of taxing new housing to pay for subsidized housing is bad economics and it is illegal. But politicians and some “urbanists” like MIZ because it appeases powerful non-profits and grants a tiny increase in density. The MIZ policy is notable for the fact that it stirs up angry neighbors, and that is confirmatory to urbanists, somehow that MIZ is a good idea. Meanwhile, the policy introduces uncertainty into the housing market and raises prices. Here’s the email I sent to Tacoma Councilmember Mello to persuade him to reconsider considering MIZ as an option for Tacoma.
Dear Councilmember Mello,
I understand that there has been some discussion of Mandatory Inclusionary Zoning (MIZ) for Tacoma.
Seattle has gone down that path and there are several reasons why we’ve concluded that it is not a good policy. I’d like to talk with you about this in general and offer whatever resources we have to help get you more information, including sharing thoughts from builders and developers here on how it is impacting their work.
First, MIZ often makes projects infeasible. We’ve already seen in Seattle that the very possibility of MIZ being imposed citywide has created confusion in the land market. Sellers assume that the added FAR is more valuable. Buyers think the fees make the property less valuable. The City has assumed, wrongly, that land value will drop perfectly in the same amount as the fees. That’s not happening. Meanwhile some projects simply aren’t happening or land is remaining under developed because the fees simply don’t pencil out in projects.
Second, when projects do become feasible it is because rents or prices can be raised to offset the additional construction costs and fees. That means that a few people, years from now, will be subsidized by higher rents today. This is bad policy and it serves only to make the price problem worse today for very little benefit sometime in the future with non-profit subsidized housing.
Third, MIZ is illegal under Washington law. The Constitution only allows cities to impose taxes and fees when the legislature authorizes them to do so. Cities aren’t authorized to extract value per square foot for mandatory inclusion or in lieu fees. We’re planning a legal challenge to Seattle’s proposal and think that it will eventually be sustained.
Finally, cities in the region are struggling to measure quantitatively what they hear from constituents and read in the press: housing is too expensive!
The temptation to take aging census data and compare rents and Area Medium Income as the measure of the problem is real. It yields the formulation, “X thousands of households under Y AMI are paying Z percent of their household income on housing.”
This isn’t a good way to measure this. And even if it was, the answer is to give those households cash assistance now rather than wait for very expensive units to be built sometime in the future.
These are internet numbers and you ought to have City staff dig deeper into this but you’ll get the idea:
| Average Ren | $1,156.00 |
| Median Income | $61,672.00 |
| 30 Percent AMI | $18,501.60 |
| 30 Percent/month | $462.54 |
| 50 Percent/month | $770.90 |
| Gap | $385.10 |
| Gap for 10K HH | $3,851,000.00 |
| Annual Burden | $46,212,000.00 |
| Average cost to build a unit | $250,000 |
| Cost for 10K Units | $2,500,000,000 |
The City could offset cost burdened households at very low levels of income for decades for the same price as building 10,000 units, something that would take years and billions of dollars. This is not an exaggeration. Building housing is expensive and risky. It’s better to have the market absorb most of that risk and the operating costs. At the annual cost of operation standard for housing, about $5000 per year, even when built would cost about $50 million per year to operate. And those costs as well as construction costs are rising.
Lastly, the City would be much better off using the Multifamily Tax Exemption (MFTE) program to create new, rent restricted units in the city. This incentive program creates maximum benefit for the tenants, the builder of housing, and the tax payer. The value is lower rents for people with lower incomes, inclusion in market rate projects, and finally, the efficiency of faster and less risky production of units for people that need them.
I appreciate you considering this and I hope you’re open to the thoughts of someone who has been battling against this policy for years now. It will be a disaster for Seattle if fully implemented, slowing production, raising prices, and creating very little benefit at very high costs. And it’s simply illegal. Don’t make the Seattle mistake. There are many other tools and innovations available and Tacoma can lead the region rather than following a city like Seattle that is making countless errors in housing policy.
I’d be very happy to meet and discuss this topic.
City of Seattle: Still No Movement on Reducing Costs of Housing
Later today we’ll convene an initial meeting to talk about approaches to legally challenge the City of Seattle’s Mandatory Inclusionary Zoning (MIZ) program they call Mandatory Housing Affordability (MHA). And we’re well underway, on more than one front, with a review of costs of non-profit housing. It’s pretty simple: non-profits are running out of money because their costs are enormous, and MHA siphons money out of the market to pay for those costs. We’re the only voice in the City that consistently and publicly points this out. We have to continue. The solution? Also pretty simple: make MHA a voluntary program and work with all housing producers to reduce costs that will lower prices for people who need housing.
This is my latest email to Deputy Mayor David Mosley and head of the Seattle Department of Construction and Inspections (SDCI) asking them to take on the task of finding ways to lower costs on things the executive departments have control over. No response yet.
The photo is of Compass Housing Alliance’s Broadview project. Based on the Consolidated Funding Application for the project, the total cost is $21,663,414 for 59 units or $367,177 per unit.
Hello David and Nathan,
I thought I’d check in with you about getting together to talk about reducing costs.
Recently the City received a pretty stiff rebuke from the public on the head tax. A big part of that backlash was over costs.
Non-profit housing is way too expensive and the wider public is going to wake up o this. We have done a disclosure on non-profit projects and are in the process of analyzing those. If you want to see one example of inflated costs read my blog post on Plymouth Housing’s project at 501 Rainier. Market rate builders can complete projects like this for about $14 million, yet the City and others funders are spending $30 million to build this project.
Consider Mercy Housing’s rehab of Building 9 at Magnuson Park: $73 million for 148 units, a cost of about $493K per unit. We’re looking into how that compares with what a private developer would spend to complete a similar project. The Masonic Landmark on the Sound sold for $14 million a couple years ago. Maybe not a fair comparison, but why is nobody asking about the price tag for Building 9?
Also, the Joint Legislative Audit and Review Committee (JLARC) will have results from its study in December, just in time for the beginning of the legislative session in Olympia.
The time is now to follow through with the cost reduction elements of the Housing Affordability and Livability Agenda (HALA) Committee recommendations. Can we begin the process of doing this across both market and non-profit housing sectors?
And we need to open up discussions on significantly changing the City’s proposed MHA program which is intended to feed cash to non-profits with fees.
The MHA program is illegal and we’re considering a sustained legal challenge.
Both MHA and the Housing Trust Fund are vulnerable because self-imposed regulatory costs are pushing up costs and prices. People in Seattle and all over the state are demanding more efficiency and fairness in how subsidies are used.
It’s time to talk and then act.
If we find ways to reduce all housing production costs, become more efficient with the use of subsidies, and expand programs that already work like MFTE, we can solve many of the housing issues being faced by people in Seattle today. The days of more and more revenue and more and more rules to solve housing, I believe, are coming to an end.
Please consider starting and leading this process.
