Let’s do a more detailed comparison of housing produced under the City’s Multifamily Tax Exemption (MFTE) Program and the housing that might be produced under the Mandatory Inclusionary Zoning (MIZ) proposal that is part of the so called Grand Bargain.

Example: A 50 Unit Small Efficiency Dwelling Unit (SEDU) Project on Capitol Hill, near a transit station.

MIZ

50 Unit Project

If we start with roughly an extra floor the project could add 5 additional units. Since 7 percent of the whole building needs to be affordable (55 units x .07 = 3.85 units that you round up), 4 of those units would have to be rent restricted.

The 51 market rate units would be priced at about $1600 per month, so to meet the minimum affordability in the Bargain, the 4 rent restricted units would be priced at $942 per month to meet the 60 percent of Area Median Income (AMI) requirement. Based on the new rules, SEDUs need to be at 40 percent of AMI or $628 per month.

It is important to note, however, that as we’ve pointed out, nobody is building SEDUs using MFTE because participation at 40 percent AMI makes most projects financially infeasible.

So, for our example we’ll assume a total of 55 units with 4 rent restricted units. The total rent savings is $658 times the 4 units for $2,632 per month or $31,584 per year.

Here it is in a table format:

MIZ — Small Efficiency Dwelling Units (SEDUs)
Units	50	Low-Rise 3 Zone
Bonus Units	5	10 percent increase in FAR (Estimate)
Rent Restricted Units	4	7 percent of entire building (60 percent AMI)
Market Rate Units	51	$1600 per month
Total Units	55
Rent Savings
Market Rent	$1,600
Rent at 60 percent AMI	$942
Monthly Savings per Unit	$658
Total Monthly Savings (4 Rent Restricted Units)	$2,632
Total Annual Savings (4 Rent Restricted Units)	$31,584

MFTE

50 Unit Project

With MFTE the inclusion rate is higher, 20 percent so there would be 10 rent restricted units and 40 market rate units priced at $1600. We’re going to use the older rules for MFTE for this comparison, since, as I mentioned above, nobody is building SEDUs at the newly required 40 percent AMI requirement.

Not only that, the new requirement for SEDUs, it is 25 percent inclusion of the units (so 13 rounding up) at 40 percent of AMI, which is $628 per month. But the total loss of rents is $972 multiplied by the 13 units or $12,636/month and $151,632 per year!  The annual property tax savings granted by the MFTE program on this project is more like $43,680, nowhere near the total lost rents.. Typically the deferred tax value is calculated like this:

Total Units	Market Rent per Unit	Gross Annual Income	Net Income (subtract 35% of gross income)	Approximate Value of Improvements (7 Percent of net income)
50	$1,600	$960,000	$624,000	$43,680

Under the previous regime the 10 rent restricted units would rent for $1020 or 65 percent of monthly AMI, a rent savings of $580 per month multiplied by 10 units which is $5800 per month or $69,600 per year.

Here it is in a table format also:

MFTE — Small Efficiency Dwelling Units (SEDUs)
Units	50	Low-Rise 3 Zone
Bonus Units	0
Rent Restricted Units	10	MFTE Inclusion rate is 20 percent (65 percent AMI)
Market Rate Units	40	$1600 per month
Total Units	50
Rent Savings
Market Rent	$1,600
Rent at 65 Percent AMI	$1,020
Monthly Savings per Unit	$580
Total Monthly Savings (10 Rent Restricted Units)	$5,800
Total Annual Savings (10 Rent Restricted Units)	$69,600

When compared side by side, it’s hard to argue that the Grand Bargain will produce more rent savings for housing consumers or that it will create more units than the MFTE. In this example, renters more renters will benefit and will save $38,016 more than with MIZ.

True, the income levels are higher by 5 percent for the SEDU product in this example, and in reality the new standard has essentially killed production of SEDUs priced at 65 percent of AMI. So already, even without accounting for additional construction costs likely to make projects like this infeasible, it’s easy to see that the Grand Bargain will not be a big advance for so called “workforce” housing.

The problem isn’t the idea of upzones or value exchange. Upzones are good all by themselves because they create more housing supply that ameliorates scarcity in the housing market. The MFTE program creates lots of savings for housing consumers by locking in lowered rents for years, money that can go toward tuition or to pay student loans or in savings for other uses later.

Finally, zoning is a terrible way to create an affordability program. Tying something like percentages of inclusion and AMI an unchanging formula enshrined in the land use code is a recipe for inflexibility and suppressing new housing construction. The housing market changes (supply and demand aren’t stagnant and neither are construction or land costs) as do incomes. The MFTE provides lots of flexibility for the City and builders to incentivize the construction of rent restricted housing.

The MFTE program is a direct apples to apples exchange where the owner reduces rent in exchange for lowered expenses. No complicated math is needed to analyze what the “fair” discount should be. MIZ requires a fairly complicated translation of an FAR boost into an equivalent present land value into a future rent discount, all of which hangs on a set of assumptions that will change a lot over time and thus be quite difficult to administer.

Notwithstanding the fact that the City has been making mistakes in these percentages, they can fix them all across the city, legally and quickly. To adjust for changes in the economy and financial requirements, the Bargain would require zoning changes. Think adding one floor is going to be hard in the neighborhoods? Imagine going back to add more zoning capacity later to rationalize more affordable housing. The zoning code is hard to change, while the MFTE is comparatively easy to adjust.

And the impact of the MFTE program in lost tax revenue to city taxpayers is small, like $10 per year for a median priced home. Helping people save on rent is spread evenly across all property including big buildings downtown and single-family homes, not just new renters or homebuyers.

So we have a great way of building housing priced like City leaders want while we build new housing priced for the market. If we allow more market rate, and we adjust the tax deferral, AMI levels, and room sizes appropriately, MFTE can produce lots of housing units legally and cheaply all over the city. Also, changes to the MFTE program are being considered at the State Legislature that would provide a path for MFTE projects to continue on in the program once their original 12 year participation has expired, allowing them to continue on if they increase their participation to 25% at 60% AMI. That’s something EVERYONE can cheer about.