To great fanfare, Seattle Mayor Ed Murray launched his housing advisory committee on September 23^rd, 2014, seeking recommendations on how to address Seattle’s housing affordability crisis. The 28-member Housing Affordability and Livability was created by a city council resolution, and the unpaid, volunteer committee includes private property developers, local housing experts, and advocates for tenants and low-income residents.

Yet, this process seems eerily familiar.

In March 2013, former Mayor Mike McGinn created the Advisory Committee on Affordable Housing Incentives to provide “input, guidance, and recommendations” on Seattle’s two primary affordable housing incentive programs: incentive zoning and the multi-family property tax exemption (MFTE). The committee had 20 members, who were unpaid volunteers and included private property developers, local housing experts, and advocates for tenants and low-income residents.

The McGinn committee met 14 times, with the first three meetings focused on changes to the MFTE program, and the next 11 concerning incentive zoning. Forgoing compromise, committee members found no agreement on any of the core policy issues before them. Privately, one committee member described the process as “very frustrating, similar to herding cats.” The committee agreed to publish 11 core principles, all of which are uncontroversial, summarized here:

1. Seattle is growing and needs new construction.
2. Equity is a fundamental value for Seattle.
3. Seattle has a housing affordability challenge.
4. Seattle desires a higher share of the region’s families.
5. Development should use maximum capacity while providing opportunity for affordability.
6. Incentive zoning has its strengths and limitations.
7. Incentive zoning should recognize public goals.
8. Incentive zoning presents developers with opportunities as well as new risks.
9. Incentive zoning should help create mixed-income development in transit- and service-rich areas.
10. Incentive zoning should create affordable units where growth is happening.
11. Incentive zoning policy should be predictable and simple.

Somewhat confusingly, rather than wait for the McGinn committee to publish their findings, the city council decided to start their own committee. The McGinn committee first met on March 22nd, 2013, but in May the city council began their separate investigation into housing incentives, hiring consultants to assist their efforts. The starting premise for this research was investigation into why the present incentive zoning scheme was producing so few subsidized units (roughly 55 per year since 2001). The consultants worked into 2014 and analyzed a variety of issues related to housing affordability, with this breakdown for their efforts:

1. Otak Inc., Paul Peninger. Workforce housing benchmarking and best practices report – $64,000;
2. Cornerstone Partnership, Rick Jacobus. Incentive and inclusionary housing – assessment of Seattle’s program, best practices report and development of policy recommendations – $50,500;
3. David Rosen and Associates (DRA). Pro-forma and market analysis; commercial and residential nexus study – $126,500.

Taken together, the data cost city taxpayers $241,000.

The consultants were hired on separate contracts, but their work was intricately linked. The central issue? Either to refine the current incentive zoning scheme or to create an entirely new fee. Using DRA economic analysis, Cornerstone maintained that a new affordable housing linkage fee would drastically increase the development of new subsidized housing units.

Previously, the McGinn committee also addressed the issue of a new mandatory fee. Again, there was no consensus on the matter, but they helpfully summarized their arguments:

1. A mandatory requirement would result in significantly more affordable housing, would encourage developers to build to maximum density, would be more predictable and simpler to administer, and has been implemented successfully, without legal challenge, by other cities in King County;
2. A mandatory requirement would effectively create an illegal tax on housing production, significantly increase the cost of development, and push housing prices even higher by restricting supply.

Rather than wade into this specific debate, I think it prudent to briefly look at the history of linkage programs in the U.S. in order to see if the fee will be the housing affordability panacea that city leaders envision it to be.

Background

In The Encyclopedia of Housing, Edward Goetz offers a short version of the history of linkage fees, writing:

Linkage programs emerged at the historical confluence of three trends in the political economy of U.S. cities. The first trend was the phenomenal growth in the office-based economy of major cities. From the late 1970s through most of the 1980s, cities across the country experienced a huge increase in the amount of commercial office space in their downtown cores…At the same time, in the United States, many urban areas were experiencing a severe housing affordability crisis.

The final trend that led to local housing solutions such as linkage (fees) was the almost complete withdrawal of the federal government from housing assistance during the 1980s. Under the Reagan administration, the U.S. Department of Housing and Urban Development (HUD) budget authorization fell by more than 80% from its high mark in 1978. At the same time that housing conditions were worsening in inner cities, the federal government was dramatically reducing its contribution to assisted housing for low-income persons.  

In 1981 San Francisco became the first major area to adopt a housing linkage program. Housing activists that backed the linkage fee anticipated a drop in the rate of downtown construction following its introduction, but office development actually was not deterred and the program was deemed successful, earning millions in revenue and effectively building subsidized units.

Success in San Francisco led to Boston and Miami adopting linkage fees in 1983, and by the mid-1990s, approximately ten to 15 percent of medium- to large-sized cities had some type of linkage program in place. The cities that adopted the fees were characterized by strong nonresidential development markets, and were coastal, with California, Florida, and New Jersey having a number of cities using the new fee scheme.

Much like the design of inclusionary zoning programs, linkage fee ordinances also come in a variety of shapes and sizes. The majority of programs require commercial developers to provide affordable housing. By the end of the 1980s, these programs dealt more inclusively with other types of nonresidential developers, including industrial developers, entertainment, research labs, and hotels. Most commonly, linkage fees apply to ALL nonresidential development.

The linkage fee requirement can be fulfilled a number of ways. Just like inclusionary zoning, developers can pay into a fund, or provide rental (and ownership) units on-site to fulfill their obligation. Some cities have developers pay into a fund as well as provide new units.

As the first city to enact a linkage ordinance, San Francisco deserves attention. The city created their “Jobs-Housing Linkage Fee” by ordinance and put it in their city planning code. The fee applies to all commercial developments (and expansions) greater than 25,000 square feet, and the city collects revenue on the basis of net additional square feet of commercial development. City code mandates that all funds collected be deposited into the same fund as inclusionary zoning fees. In 2014, fees ranged from a low of $16.01 for research and development space to a high of $24.03 for offices.

A major influence on the results of the San Francisco linkage program is the impact of growth control measures that have effectively neutralized the ability of high fee levels to contribute to housing programs. Total revenues collected have gone through eye-raising feast or famine periods. From 1981 to 1985, the housing linkage fee yielded $28.1 million; from 1986 to 1992, the linkage fee yielded $7.2 million; and from 1992 to 1999 the linkage fee yielded $5.8 million.

In San Francisco total units and revenue for the linkage fee and inclusionary zoning are lumped into the same category, and date only to 2002. From that year until 2011, the city has created 1,052 on-site units on revenue of $117.6 million.

For those cities considering the implementation of linkage programs, two potential fears weigh heaviest on the mind of policymakers. First, is the legal question, with developers loudly declaring such fees as an unjust taking. Possible court challenges may await. Secondly, city stakeholders hope that linkage programs do not deter nonresidential development. However, in The Encyclopedia of Housing, Goetz survey of U.S. linkage programs did not find a decrease in total supply. Instead he found that developers merely planned to pass all added costs from the linkage fee onto tenants. Undoubtedly, this development is problematic for both housing activists and city leaders, forced to contend with the double-edged sword of angry citizens and a higher priced housing stock.

Hope in Seattle

Seattle leaders are eyeing the linkage fee as a way of raising more funds for affordable housing, and in structuring the fee, they hope to avoid the pitfalls seen with the current incentive zoning policy, namely, that it is voluntary and developers choose not to use it. Indeed, only 38 percent of eligible developers took advantage of incentive zoning, either paying into the fund or by building housing on-site.

First, the proposed linkage fee would apply to all new offices, hotels, retail stores and labs, in addition to multi-family developments. Single-family homes are not subject to the fee. Every urban center and urban village could potentially be targeted, and the fee does not need to be limited to only the current incentive zones. Thus, if applied citywide, the fee could raise significant sums. Secondly, developers would still have access to the bonus density incentive. Moreover, building on-site would satisfy the fee requirement. Lastly, any new fees would be phased in gradually – likely a three-year period – with city leaders optimistic that as a result, land prices would adjust accordingly, taking the brunt of costs.

Councilmember Mike O’Brien, chairman of the Planning, Land Use and Sustainability Committee, says the linkage fee proposal would use one of two fee structures:

Option 1:

Low-cost neighborhood: $7 per square foot

Medium-cost neighborhood: $12 per square foot

High-cost neighborhood: $22 per square foot

In this scenario, a South Lake Union developer building a rental property would pay roughly $4.5 million, or 4.3 percent of the total development cost.

Option 2:

Low-cost neighborhood: $5 per square foot

Medium-cost neighborhood: $10 per square foot

High-cost neighborhood: $16 per square foot

A South Lake Union developer building a rental property pays roughly $3.2 million, or 3.1 percent of the total development cost.

Unsurprisingly, the city-hired consultants are bullish on the linkage fee, speaking confidently on its potential impact. Now the issue is being fast tracked for an October city council vote. The consultants maintain that a linkage fee would collect ten times more revenue than incentive zoning. In turn, Councilmember O’Brien says that the fee would generate five to ten times as many subsidized units than did incentive zoning. Most illuminating is that for either statement, no timescale is given in which these targets are to be reached.

Further analysis of these claims is necessary. First, if the proposed fee produced ten times the amount of revenue as incentive zoning, that figure is: $31.2 million x 10 = $312 million. By comparison, this city record shows that the San Francisco linkage fee raised only $56 million in 23 years.

Next, if the linkage fee were to produce five times the amount of units now produced by incentive zoning, that would be: 714 x 5 = 3,570. Ten times the amount of units is: 714 x 10 = 7,140. On the low end of estimates, 3,570 is fewer units produced than the multi-family tax exemption (MFTE), a market-based city incentive program that stimulates production of new multi-family developments by exempting property owners from tax on residential improvements for 12 years. Since 1998, the MFTE helped create 4,477 units. Additionally, I have learned that the development community is firmly behind the MFTE because, unlike incentive zoning, it helps greenlight projects that are on the cusp of penciling out. In sum, the controversy that is attendant with incentive zoning or the proposed linkage fee is simply nonexistent for the MFTE. If only city leaders paid more attention to it…

On the high end of linkage fee production estimates, 7,140 units created would be a great success. No figure exists for San Francisco on the amount of off-site housing units created, but between 2002 and 2010, the city created 1,052 on-site rental and ownership units.

Seattle policymakers are hopeful that consultant estimates come to fruition. Yet as I sat in a media briefing at City Hall, listening to Rick Jacobus of Conerstone Partnership, I found one of his statements particularly troubling:

“We are confident that the new fee will be completely absorbed without an effect on cost.”

Certainly, Seattle property developers and policymakers will offer different opinions on the veracity of this assertion, but no doubt mainstream economic theory objects to the bold claim.

In future, it might be necessary to approach future linkage fee debates with far more skepticism. Despite the lessons provided from other cities, the mood of Seattle councilmembers seems fairly easy to discern. New fees of some sort appear to be imminent. Councilmember Tom Rasmussen recently stated, “We are already using a variety of taxes, some of them at quite a high rate. What we’re hearing from the public is, let those who are causing congestion, who are creating a demand for more housing, let them pay for the cost to the city.”

Is Seattle truly in the midst of a “San Francisco Death Spiral?” A debatable contention.

But additional fees do impact development price, which has knock on effects throughout a housing market. Interesting, though, is that the same year (1981) San Francisco debuted its linkage program, it also enacted its Transit Impact Development Fee. Presently, Seattle leaders are discussing the introduction of both impact fees and a linkage fee.

A worrisome facet of contemporary San Francisco history may be repeating itself 858 miles to the north.