Last week I wrote about architect Mark Hogan’s analysis of housing costs in San Francisco. Hogan found that roughly 20 percent of unit costs in multifamily housing are attributable to the permitting process and fees. I suggested that if we could reduce some of those costs for non-profit, subsidized housing, we’d get more housing for our tax dollars.

Locally, I asked a private town home developer to give me a sense of what he paid for fees and other payments to local government. What affect do permits, fees, and taxes have on production costs, and does it make sense to add more costs using a linkage tax? After looking through his construction budget for a 4 unit project I found fees and taxes account for 18 percent of costs.

	Base Costs		Sales Taxes		City/County Costs		Total
A. General Conditions	$48,498.21	89.5%	$4,607.33	9.5%	$-		$53,106.54
B. Site Work	$56,544.32	53%	$5,371.71	5%	$44,979.93	42%	$106,896.54
C. Exterior	$415,128.16	89.5%	$39,437.18	9.5%	$-		$454,566.34
D. Interior	$385,318.75	89.5%	$36,605.28	9.5%	$-		$421,925.03
E. Soft Costs	$23,634.55	47%	$2,245.28	4%	$24,432.78	49%	$50,313.13
F. REET					$38,087.94		$38,087.94
G. Sewer Capacity					$224.70		$224.70
H. County Taxes					$1,423.10		$1,423.10
	$929,123.99	82%	$88,266.78	8%	$109,148.45	10%	$1,126,543.31

A few notes about the numbers.

The areas where sales tax is lower than 9.5 percent, it’s because taxes aren’t charged on things like fees or permits. The fees to the City are primarily fees for inspections and permits and street restoration. These fees, paid to City departments, account for roughly 10 percent of this project’s cost.

One substantial part of the costs are Real Estate Excise Taxes or REET. This year’s City Budget document describes REET this way:

Spending from the Cumulative Reserve Subfund (CRS) is primarily supported by Real Estate Excise Taxes (REET), which have experienced considerable volatility in recent years. The City collected a record $71.8 million in 2007, but experienced a 68% decline in 2009 from that record level. While still projected to be 50% less than peak revenues in 2007, REET revenues for 2013 are estimated at $6 million above 2011 actual revenue collections, with an additional $4 million bump in 2014.

In 2014 the City will collect about $40 million in REET and about $986 million in over all revenue. The REET rate is 1.78% in Seattle and is levied on the sale price of real estate that is paid by the seller. That means $1,780 on the sale of a $100,000 property. The State portion of that is 1.28% and Seattle takes 0.5%. Funds collected from REET have limited use however and can only pay for:

Park trails
Parks
Streets, roads, highways
Sidewalks
Street lighting
Traffic signals
Bridges
Domestic water systems
Sewer systems
Administrative facilities
Law enforcement facilities
Fire protection facilities
Recreation facilities
Libraries
Judicial facilities

Currently the REET cannot be used to fund housing. And even though this project paid REET it still has to pay for sewer charges an connections even though those are covered by REET funding. In fact, pays for a lot of what people consider the impacts of growth. Here’s the opening paragraph of a helpful analysis of REET funds.

The City relies heavily on the real estate excise tax, commonly known as REET, to help fund its ongoing general government major maintenance program. REET revenues fund projects such as roof repair, playfield replacement, and street paving in the Parks, Seattle Center, Library, Transportation, and Fleets and Facilities departments. Growing maintenance demands and tightened revenue sources have prompted an increased focus on REET revenues. The following provides a background of this tax and examines general characteristics of the transactions that have generated this revenue for the City since 1982.

The City also generates substantial revenue from sales taxes, about $170 million in 2014, about 18 percent of the overall budget. The City’s collects 3.5 percent  sales tax and the State collects the remaining 6 percent. Sales tax goes into the general fund and is unrestricted. Fees like the ones charged on this project are about half what’s collected in sales tax or about $85 million. The City’s Department of Planning and Development (DPD) collected 42,670,435 in 2013 alone. It’s pretty hard to argue that new development projects are NOT contributing to the overall financial position of the City as it grows, paying taxes and fees that help improve infrastructure.

But what would a $10 per square foot linkage tax do to this 8000 square foot project?

	Base Costs		Sales Taxes		City/County		Total
A. General Conditions	$48,498.21	91%	$4,607.33	9%	$-		$53,106.54
B. Site Work	$56,544.32	53%	$5,371.71	5%	$44,979.93	42%	$106,896.54
C. Exterior	$415,128.16	91%	$39,437.18	9%	$-		$454,566.34
D. Interior	$385,318.75	91%	$36,605.28	9%	$-		$421,925.03
E. Soft Costs	$23,634.55	47%	$2,245.28	4%	$24,432.78	49%	$50,313.13
F. REET					$38,087.94		$38,087.94
G. Sewer Capacity					$224.70		$224.70
H. County Taxes					$1,423.10		$1,423.10
I. Linkage Tax			$80,000.00		$-		$80,000.00
	$929,123.99	77%	$168,266.78	14%	$109,148.45	9%	$1,206,543.31

A linkage tax would almost double the amount of money the project is paying to the City and it would add as much as $30,000 in costs to the four units. But isn’t $80,000 divided by 4 $20,000 per unit? Since this is a for sale project, transaction costs would increase as the over all price goes up. This would include an increase in REET as well once the units are all sold.

And think about it, assuming that an additional charge paid at permitting wouldn’t be a deal breaker for the buyer and the bank, the fee would end up having to be financed at least in through the mortgage. With a down payment of $100,000 and rate of 5 percent, a $500,000 unit would end up paying $373,023.14 in interest over 30 years, while a $530,000 with the same down payment would pay $399,029.04, a $26,000 dollar difference.

Obviously this is a tiny project compared to all the building we’ll need to do over the next 20 years. But two things are clear: new development pays a lot to cover infrastructure already and other costs associated with growth and increasing those costs would increase housing prices. And as I’ve pointed out before, we already have some great, fair, and efficient tools, the Multifamily Tax Exemption program and the Housing Levy, to fund a spectrum of housing choices for people who need help.