Why Does Seattle Have a Multi Family Tax Exemption Program?

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Seattle's multi-family tax exemption (MFTE) program has come under fire recently. It has been suggested that the program subsidizes apartments that are too expensive, and that the program effectively serves as a subsidy to developers to build projects that they would have built anyway.

As is often the case, the reality is more complex. The MFTE program is one of the few tools provided by the legislature to the City to encourage the private sector to build housing that is affordable to the "in-between households" – those who make too much to be served by low-income housing programs but make too little to be served by market-rate developers. One goal of the program is to assist developers in funding new moderate income housing in areas where market rate housing is being built, but more affordable residential development is not. Another key goal is to assist developers in financing new housing in areas where little to no residential construction is happening. The MFTE program can act as a stimulus to economic development in such areas by assisting with the production of not only low and moderate income housing but also market rate housing.

The MFTE program provides a 12-year property tax exemption, which was designed to be a component of the financing packages for multifamily housing projects in times when interest rates were relatively high and developers were having difficulty financing anything other than high income units in choice neighborhoods. The tax exemption also provides some additional resources to finance projects in revitalizing areas that may be perceived by some financial institutions to be risky investments. To qualify for the MFTE program under the City's current rules, at least 20% of the residential units in a multifamily housing project must be affordable to households earning between 65% and 85% of area median income (AMI).

Through the MFTE program, property owners are provided an exemption on the value of their project's residential improvements only; they continue to pay full property taxes on the land and non-residential portions of their property. Tax exemptions for MFTE projects remain in place assuming the property stays in compliance with the rules of the program. The City Auditor is currently reviewing the MFTE program to make sure we have good compliance checks in place.

In 2008, because the economy was booming and housing was becoming increasingly scarce, even for median income households, legislation was adopted that raised the income thresholds for the MFTE program. The examples cited in the news articles, where MFTE rents even exceed market rents for some buildings, were generally built under these provisions. In 2011, new legislation was adopted by the City to modify the affordability requirements to reflect the rapid changes in the market resulting from the recession. Projects built under the current regulations will be below current rents, and will stay so as rents rise with the economic recovery.

The MFTE program has been revised five times to address changing conditions in the rental real estate market and to strengthen required elements of the program. In current times, when the recession has reduced rents and interest rates are very low (although credit is still tight), the units produced under the MFTE don't look as worthwhile as they did during the mid-2000's. However, there are good arguments that over its twelve year history the program has successfully met many of its goals, and that it will look even more valuable when the economy recovers and rents begin to escalate again.

Over the past 12 years, the MFTE Program has contributed to developing almost 7,300 housing units, about 2,500 of which are affordable. Of the 2,500 affordable units developed, about 1,500 are affordable at or below 80% of area median income (AMI) and 1,000 are affordable at 80-90% AMI. While current market-rate apartment rents may serve these households much more commonly than was forecast, the affordability of MFTE apartments will still be guaranteed through the next economic cycle.

In addition, the program has helped to spur private development in Seattle neighborhoods that have not seen much new, multifamily residential construction for the past several years, such as Interbay, Rainier Valley, and Lake City. The MFTE program has also supported the construction of about 1,600 housing units in distressed or revitalizing areas of the city: Southeast Seattle, West Seattle, Bitter Lake, Lake City, Chinatown/ID, 23rd and Jackson. About 1,200 of those units are affordable at or below 80% AMI. Nearly 400 are affordable at 80-90% AMI. The program has also created affordable units in high-growth areas (Capitol Hill, Belltown, Eastlake, Queen Anne) that would not otherwise exist. This has allowed moderate-wage workers to live in or near their places of employment.

Providing affordable housing is one of the most difficult challenges facing growing cities like Seattle. The housing market is complex and can change abruptly. The MFTE program is an attempt to provide affordability to moderate income households. The plummeting of our housing market over the last several years took everyone by surprise, and the benefits delivered by the program during this time period were less than optimum.

Because of the volatility of the housing market, the City now reviews the MFTE program every year to determine if changes are needed. As a result of these reviews, changes to the program have been made to address unanticipated developments in the housing market and the economy. These changes and the ongoing review allow us to continue to improve upon a program that over its history has proved beneficial in providing affordable housing for our moderate income citizens. We are confident that we will once again see such benefits.