INCENTIVE ZONING: A REALITY CHECK February 2014 DSA Workforce Housing Subcommittee

Seattle’s affordable housing strategy is failing Seattle’s affordable housing strategy is failing. Seattle is focusing on the wrong problem, which leads to the wrong solution and limited outcomes.

Income disparity results in housing disparity 80% AMI 50% AMI Annual income for 2-person household in Seattle $56,480 $35,300 Hourly wage equivalent $27.06 $16.91 % of Seattle rental units affordable by income level 83.1% 37.3% Seattle’s real affordability gap is at 50% AMI and below, not at 80%.

Council assumptions about incentive zoning and affordable housing are wrong.

Assumption 1: Seattle Doesn’t Have Enough Workforce Housing Assumption: Seattle has an insufficient supply of workforce housing (meaning rents affordable to a single person making between $36,960-$49,280 per year, or to a family of 4 making between $52,800-$70,400 per year)  Fact: Seattle’s Office of Housing data indicates Seattle has more housing units available that meet affordability requirements in that income range (60%-80% area median income) than there are 60-80% AMI households in Seattle. Conclusion: The data indicates that Seattle’s real affordability problem falls on households making 50% of area median income and below. (Single person making less than $30,800 per year, or family of 4 making $44,000 per year.)   Just a note that all data throughout the deck must be properly footnoted and cited.  I’m wondering now if we want to add an additional conclusion or another slide. This might be an ideal opportunity to show the phenomenon of what happens when there is a shortage of supply at market-rate housing and how demand then shifts to lower rent units. I don’t think we have the data to back that up though, do we? The Facts: According to the most recent data available from King County - 83% of Seattle’s rentals were affordable to incomes at 80% area median (AMI) In contrast, only 37% of Seattle’s rentals were affordable to incomes at 50% AMI Conclusion:  There is no shortage of workforce housing, and Incentive Zoning’s focus on it neglects Seattle’s much greater affordability need for households at 50% AMI and below.

Assumption 2: Incentive Zoning fees are too low The Facts:  At current fees, 62% of eligible development in Seattle elected NOT to use the incentive since 2001 In South Lake Union alone, 14 of 20 projects did not use the incentive Significant public benefit was left on the table as a result of projects in downtown and South Lake Union building below zoned capacity: Conclusion:  Increased Incentive Zoning fees will lead to even less participation in the program, resulting in less housing supply, less revenue for affordable housing, and loss of many other significant public benefits. Assumption: The incentive zoning fees are too low. Fact: At the current fee, 42% of eligible development in downtown and South Lake Union elected NOT to use incentive since 2001. What was left on the table as a result?   • 3,811 residential units not built • 2,400 permanent jobs not accommodated 5,200 construction jobs not created • $49,500,000 not contributed to affordable housing and daycare programs • $10,300,000 worth of rural TDR’s not purchased • $1,000,000,000 of lost development investment • $74,000,000 construction sales tax revenue not collected (Seattle portion only) • $100,800,000 property tax not collected (20 yrs, Seattle portion only) Conclusion: Nearly half of new developments build below zoned capacity, limiting both housing supply and incentive zoning payments. It stands to reason that simply increasing the fee, without some other corresponding benefit or value, will further diminish utilization of the “incentive” – and thus further limit housing supply and incentive zoning payments.

The Facts: Over the past 12 years: Assumption 3: Incentive Zoning fees are an effective way to create affordable housing Assumption: Incentive zoning program is an effective and reliable way to generate affordable housing. Fact: In the past 12 years, the incentive zoning program has only generated the equivalent of less than 300  units of affordable housing out of a total of 46,000 new units developed in Seattle, even during the recent development boom. During that same period, the Housing Levy produced over 3,700 units and MFTE program produced 2,563 units, with another 4,312 units already committed. Conclusion: The amount of affordable housing the incentive zoning program is capable of producing is dwarfed by what the Housing Levy and MFTE programs, along with untapped strategies such as utilization of city-owned land and rehabilitation of existing structures, can produce.  That represents unleveraged incentive dollars combined at construction cost of $244k per unit. Housing levy figures are leveraged with other funding sources at same construction cost of $244k per unit. The Facts: Over the past 12 years: Incentive Zoning has resulted in funding for the equivalent of only 616 units of affordable housing, compared to 46,000 total units developed in Seattle.  The Housing Levy produced over 3,700 units and the MFTE Program produced 2,563 units, with another 4,312 units in the pipeline. Conclusion: Incentive Zoning accounted for less than 2% of Seattle’s new housing supply in the last 12 years. Under any approach, Incentive Zoning will supply only a fraction of Seattle’s affordable housing needs; other tools are needed.

Assumption 4: Requiring affordable housing in on-site performance in high-rise buildings makes sense The Facts:  High-rise construction costs 1/3rd more per unit than mid-rise “5-over-2” For the same amount of money, 1/3rd more affordable units could be produced in mid-rise construction Conclusion:  Requiring affordable housing in high-rise buildings results in fewer homes for workers, as 1/3rd fewer affordable housing units could be provided than what could otherwise be produced for the same resources in mid-rise construction. Assumption: On-site mandatory performance in high rise zones will result in additional affordable units. Fact: High-rise construction costs 30% more per unit than low rise 5-over-2 construction. This additional cost per unit in construction plus added risk of a significantly larger project makes on-site performance very difficult to pencil. Conclusion: For every dollar of incentive fee collected, 9 units could be produced in 5-over-2 construction in mixed income neighborhoods on high capacity transit corridors to job centers. This considerable trade-off means building housing for hundreds of Seattleites living in poverty instead of a lucky few households making 80% of median income.

Assumption 5: Incentive Zoning supports the city’s comprehensive plan goals There is an inherent tension within the conflicting policy goals of incentive zoning. On the one-hand, the program is a means to allow developers to build higher than what would otherwise be permitted – providing more housing units or commercial space in the urban centers designated to accommodate this density. On the other hand, incentive zoning increases the cost of the project by charging an additional fee for height. A true incentive program would encourage construction of additional residential and commercial capacity to meet the City’s stated environmental and economic goals, while simultaneously creating additional resources for affordable housing and other public benefits. Fact:  Incentive Zoning charges an extra fee for zoned capacity that increases the cost and risk to produce the housing supply established by the Comp Plan. Incentive Zoning taxes housing supply, ironically, in an effort to produce housing supply. Conclusion:  By increasing the cost to produce additional housing, Incentive Zoning is a deterrent to building the housing supply envisioned by city policy.

Incentive Zoning is not working – so what should we do? Fix the incentives:  Establish true incentives to encourage developers to build to maximum capacity and increase housing supply. Re-examine fee rate and the base height to increase participation in the program – leading to more housing supply and contributions to the program. Focus on more productive tools: Incentive Zoning accounts for less than 2% of the housing supply while other tools (Housing Levy, MFTE) have been 10X more productive Use of City-owned property Up-zone around transit areas Expanding the MFTE program Purchase/conversion of multi-family properties Encourage market innovations such as Micro-housing, ADU’s, etc. Using the right tools to tackle the right job, we can meet the policy objectives driving zoning increases in designated urban centers. Given the original goal and reasons why our city needed to increase zoning capacity, the incentive zoning program could still be an effective tool to encourage property owners to take additional risks to build to the full zoned capacity. Similarly, our city’s affordable housing goals could also be met with existing successful tools such as the Housing Levy and the MFTE program, plus a host of proven strategies that Seattle currently does not implement. Using the right tools to tackle the right job, we can meet the three main goals that compelled our city to increase zoning in strategic areas. Doubling down on a failing strategy is a certain way to not meet any of our goals as the track record shows.

Citations Slide 3 City of Seattle Office of Housing – Income and Rent Limits – MFTE 2009 King County Benchmarks: Affordable Housing Slide 5 Slide 6 Data accumulated from City of Seattle Department of Planning and Development and Office of Housing Slide 7 Given the original goal and reasons why our city needed to increase zoning capacity, the incentive zoning program could still be an effective tool to encourage property owners to take additional risks to build to the full zoned capacity. Similarly, our city’s affordable housing goals could also be met with existing successful tools such as the Housing Levy and the MFTE program, plus a host of proven strategies that Seattle currently does not implement. Using the right tools to tackle the right job, we can meet the three main goals that compelled our city to increase zoning in strategic areas. Doubling down on a failing strategy is a certain way to not meet any of our goals as the track record shows.