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Home My WebLink AboutFS 2014-07-08 Item 2C - Discussion - Washington Place Fee Deferral� Jim Haggerton, Mayor INFORMATIONAL U��U�^��K� nn�n ��n'�n�n��n n��n��u~ n�o�~x�u��n�x��n��*��n�n T[): Finance and Safety Committee FROM: Derek Speck, Economic Development Administrator DATE: July 2.2O14 SUBJECT: Washington Place Fee Deferral Options ISSUE The property owner of 223 Andover Park East would like to develop a mixed-use project called Washington Place and has requested the City reduce or defer fees and taxes, BACKGROUND Omar and Christine Lee, as owners of the former Circuit City site at 223 Andover Park East have been working for the past few years to demolish the Circuit City building and construct a mixed-use building that would comprise 370 multi-family residential units, 189 hotel rooms and a small cafe. The Lee's are still working on pr ject design and financing. Currently, the total project cost is over $100 million. The Lee's have explained that financing the p ject is very challenging and have requested the City for any possible reduction or deferral in taxes and fees in order to increase the probability that the p je[t can be funded. They plan to use the Federal foreign investor program (EB-5) to provide at Ieast $50 million of the project ject funding. Given the repayment arrangements they would have with those investors, the Lee's have indicated they would have greater ability to pay taxes and fees starting five years after receiving certificate of occupancy. Currently, the Lee's have requested: (1) the development permit fees to be limited to $000.000. (2) the development impact fees to be reduced to the extent possible and deferred for payment in years five through eight after receiving a certificate of occupancy, and (3) to receive approval for an eight year property tax exemption on the multi-family residential portion of the project. Following is our most current estimate of the permit and impact fees and when they would be required to be paid per current City policy. The fees are based on the City's adopted fee schedules and are intended to cover the City's costs of providing the related services. INFORMATIONAL MEMO Page 2 Current Estimate of Development Fees Due at Permit Application Due at Permit Issuance Total Building $208,000 $336,000 $544,000 Mechanical 13,000 54,000 67,000 Plumbing 2,000 7,000 9,000 Electrical 16,000 67,000 83,000 Traffic Concurrency 12,000 0 12,000 Traffic Impact 47,000 47,000 Fire Impact 484,000 484,000 Parks Impact 546,000 546,000 Total $251,000 $1,541,000 $1,792,000 Fees are estimates based on 189 hotel rooms and 370 apartments. Actual amounts will be calculated based on the application when submitted or when permits are issued. Additional permit fees may apply such as pavement mitigation, fire hydrants and sprinkers, special inspections, etc. Fees from non -City agencies such as water, sanitary sewer, and power are not reflected in this analysis. Developer may be required to install or contribute to infrastructure such as sanitary sewer. DISCUSSION The primary question is whether the City needs to make adjustments to the fees in order to ensure the development can move forward. We do not have a definitive answer to this question. On the one hand, the fees are less than 2% of the total project budget. Projects of this magnitude and risk do not typically move forward with higher projected returns that 2% would not make the go or no -go decision. On the other hand, this is not a typical project. Under conventional financing arrangements, this project would not be feasible since the estimated market rents for multi - family residential in Tukwila do not justify the investment. Because of the EB -5 funding method, the property owners and investors are willing to accept lower returns in early years in expectation of greater returns in later years. As such, smaller costs can add up to become significant enough to affect the go or no -go decision. The second question is whether the City would like to do what it can to adjust or defer fees to facilitate the project. Following are a number of reasons why the City may want to do so: • Vision - The project supports the City's vision for future development of the urban center and would start new multi - family residential development with higher amenities (e.g. view, rooftop clubhouse) than market demand would traditionally support. • Unique Opportunity- New development is often financed based on comparable rents at other properties. Since Tukwila has not had new apartment or condominium construction in decades, traditional financial markets are cautious about our market. 32 INFORMATIONAL MEMO Page 3 Given the property owner's knowledge and history in the region, alignment with the City's vision, and contacts with potential foreign iOV8GtorS, this is a unique opportunity. • Renovation - New, quality market rate multi-family residential would garner higher rents than other apartments in Tukwila. Those higher rents may help other multi-family properties in Tukwila justify redevelopment and renovation. • Image - This would be the tallest building between Seattle, Bellevue, and Tacoma. It will be very visible and can improve Tukwila's image and solidify Tukwila's Southcenter District as the premier location to live, work, and play between Seattle and Tacoma. • Public Safety - May increase public safety with more "eyes on the Street" fl the urban center. • Housing Options - Offers a type of housing that some Tukwila residents may desire. As units convert to ownership, it can encourage greater residential stability. • Tax Revenues — The proposed project has a significantly much higher property value than would be ikely under traditional market conditions. The property valuation for the proposed development is probably ten times greater than as a single story retail building. That additional valuation can result in higher construction sales tax and property taxes. Even if the City approves a multi-family property tax exemption, the one-time construction sales would be approximately $600,000 and annual property tax, sales tax, and real estate excise tax would range from $95,000 in year one to nearly $150,000 in year eight (See attached exhibit). It is important to remember that the City will incur costs to provide police, fire, parka, and public infrastructure services. We have not quantified those costs but believe they would be Iess than the revenueS. • Attracts Investment— Some of the EB-5 investors have significant wealth and may want to invest in future projects based on the success of this one. • Stimulates Development— If this project is aucoeaefu|, it provides an example that will facilitate other multi-family p jects to develop and may stimulate development of other types in the urban core. • Capacity to Defer— The City has some discretion as to when to incur the costs related to impact fees. For instance, if the fees are deferred, the City can choose to defer the related capital improvements to match with when the fees are received. Or, the City could borrow to complete the p jects and repay the debt as impact fees are collected. Even if the Council agrees with the above reasons to support the adjustments, there are a number of considerations why the City may not want to adjust or defer fees such as: • Precedence — The City cannot sustainab!y function if it reduces or defers fees on all projects. Approving adjustments for this project can encourage other property owners to make similar requests. INFORMATIONAL MEMO Page 4 • — As mentioned before, it is not completety certain that adjusting the City's fees would be the deciding factor in the success of the project. The third question is what method would be most acceptable. State law provides for cities to provide multi-family property tax exemptions and some fee adjustments or deferrals. Attached is some information from the Municipal Research and Services Center (MRSC) on those programs. If the Council is interested in considering adjustments or deferrals, staff would return with specific options. The attached spreadsheet shows the fee and revenue cash flows assuming the City makes no adjustments to the fees but defers the impact fees to be paid over years five through eight after the pr jectrRceiveaaondificateofoocupancyandaeaumingtheQtvapproveeono|ghtyear multi-family property tax exemption. The Administration is interested in seeing what the City can do to encourage this development while ensuring our costs related to the development are covered. Staff is still researching the fee deferral and multi-family property tax exemption program and will be prepared to make a recommendation in August. Staff would like to hear Council discussion of this item to help guide the research. FINANCIAL IMPACT An estimate of the city's tax and fee revenues for the project is attached. It is important to remember that the City will incur costs to provide pO|iCe, fire, parks, and public infrastructure services. We have not quantified those costs but believe they would be less than the revenues. Revenues and cost savings related to development stimulated by this project are difficult to quantify and are not included in the analysis. RECOMMENDATION The Committee is being asked to forward this item to the July 14th, 2014 Committee of the Whole meeting for discussion. Based on the discussion at COW, staff will return to a future council meeting with a recommendation. ATTACHMENTS MRSC Information on Multi-Family Property Tax Exemption MRSC Information on Fee Deferrals Projected Tax and Fee Revenues Spreadsheet 34 Municipal Research Service Center (MRSC) Multi-Family Tax Exemption Under RCW 84.14, Washington cities with a population of 15,000 or more may establish a tax exemption program to stimulate the construction of new, rehabilitated, or converted multi-family housing within designated areas of the cities, including affordable housing. (Cities in "Buildable Lands" counties under RCW 36.70A.215, and the largest city in a GMA county where no city has 15,000 or more population may also utilize the tax exemption program.) When a project is approved under this program, the value of eligible multifamily housing improvements is exempted from property taxes for 8 or 12 years. Land, existing improvements, and non- residential improvements are not exempt. Only multiple unit projects with 4 or more units are eligible for either the 8- or 12-year exemption, and only property owners who commit to renting or selling at least 20 percent of units as affordable housing units to low and moderate income households are eligible for a 12-year exemption. If the property use changes in a manner inconsistent with program requirements before the 8- or 12-year exemption ends, back taxes are recovered based on the difference between the taxes paid and the taxes that would have been paid without the tax exemption. • Bellingham Municipal Code Ch. 17.82.030 - Tax Exemptions for Multi-Family Housing in Targeted Residential Areas • Kirkland Municipal Code Ch. 5.88 - Multifamily Housing Property Tax Exemption • Moses Lake Municipal Code Ch. 18.23 -Multi-Family Housing Tax Exemption • Olympia Municipal Code Ch. 5.86 - Multi-Family Dwelling Tax Exemption • Spokane Municipal Code Ch. 8.15 - Multi-Family Housing Property Tax Exemption • Tacoma Municipal Code Title 6A, Ch. 6A.110 (2) - Tax Exemption for Multi-family Housing in Target Areas - Eight or Twelve-year property tax exemption • Vancouver Municipal Code Ch. 3.22- Multi-Family Housing Tax Exemption • Wenatchee Municipal Code Ch. 5.88 - Property Tax Exemptions for Eligible Improvements in Residentially Deficient Urban Centers • Yakima Municipal Code Ch. 11.63 - Downtown Redevelopment Tax Incentive Program 35 36 Municipal Research Service Center (MRSC) Impact Fee Payment Deferral Programs Introduction Local jurisdictions have taken different approaches regarding when to collect impact fees. Most jurisdictions in Washington do not issue building permits, or in other cases, subdivision or development permits, until impact fees have been paid. A developer then has a major incentive to pay up, since the developer may not proceed with the project until fees are paid. Once permits are issued, some fear that it may become more difficult to collect the fees. Also, collection at earlier stages provides more lead time for planning and construction of facilities before the new demand is realized. However, impact fees collected at these earlier stages represent a significant upfront expense which a developer must pay before the project is generating any revenues. As a result, developers have pushed for state legislation to require jurisdictions with impact fee programs to allow deferred payment. Initial attempts to pass such legislation failed. More recently, in large part to assist a building construction industry in recessionary times, a number of jurisdictions have adopted new ordinances allowing deferment of impact fee payment. Both Pierce County and Olympia have fashioned new deferred payment programs despite concerns with earlier programs. In April 2013, the legislature approved ESHB 1652, which would have required local jursidictions to adopt a fee collection deferral system. However, the legislation was vetoed by the Governor. For more information about impact fees in Washington, see our webpage: Impact Fees. Deferred Impact Fee Payment Code or Ordinance Examples • Kitsap County Code Ch. 4.110 - Impact Fees - See especially Sec. 4.110.020(E) and (F) - Impact fees must be paid before issuance of certificate of occupancy • Olympia Municipal Code Sec. 15.04.040(H) - To defer impact fee payment, a developer is required to execute an impact fee deferral agreement, which is recorded and creates a lien on the property. Note, however, that some lenders have required that the impact fee deferral agreement lien be subordinated to their financing before approving loans. Ordinance includes sunset clause. • Pierce County Code Sec. 4A.10.080(D - H) and Pierce County Ordinance No. 2010-65s - This ordinance allows owners of residential properties being constructed or improved for resale to request a voluntary lien to defer paying traffic and park impact fees until a property is sold, but no later 37 than 2 years from the date of building permit issuance, whichever comes first. Also, the webpage for the ordinance includes links to documents related to adoption process • Redmond Ordinance No. 2501, 11/2009, and Ordinance No. 2469, 06/2009 - Impact fees must be paid at time of drywall construction for individually permitted single family and detached residential construction. Ordinance includes sunset clause. • Renton Development Regulations §4-1-190(G)(6) - (12) - Fees for some types of development can be delayed until after sale of unit or 18 months from date of building permit issuance, subject to a lien • Woodland Municipal Code Ch. 3.41 - Development Impact Fees— Fire and Park, Recreation, Open Space or Trail Facilities - Woodland allows payment deferral for parks and fire facilities, but not for schools, or for its newly adopted transportation impact fees Impact Fee Deferral Programs and Documents • Sammamish Affidavit of Impact Fee Deferral • Kitsap County o Deferred Impact Fees (#5) - Handout explaining program in Q & A format o Deferred Impact Fee Acknowledgement form - Scroll down to form • Olympia Impact Fees, Community Planning and Development, 01/01/2013 - Brochure • Pierce County Impact Fee and Connection Charges Deferral Program - Includes link to brochure with questions and answers, and Request for Deferral Lien form 38 Projected City of Tukwila Tax and Fee Revenues Washington Place Paid at Time of Year After Certificate of Occupancy Application Issuance C of O 1 2 3 4 5 6 7 8 Ongoing Permit Fees Building $ 208,000 $ 336,000 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 544,000 $ Mechanical 13,000 54,000 - - - - - - - - - 67,000 Plumbing 2,000 7,000 - - - - - - - - - 9,000 Electrical 16,000 67,000 - - - - - - - - - 83,000 Traffic Concurrency 12,000 - - - - - 12,000 Traffic Impact - - - - - - 11,750 11,750 11,750 11,750 47,000 Fire Impact - - - - - - 121,000 121,000 121,000 121,000 484,000 Parks Impact - - - - - 136,500 136,500 136,500 136,500 546,000 Subtotal $ 251,000 $ 464,000 $ - $ - $ - $ - $ - $ 269,250 $ 269,250 $ 269,250 $ 269,250 $ 1,792,000 $ Construction Sales Tax - 600,000 - - - - 600,000 Property Tax - - 75,000 75,750 76,508 77,273 78,045 78,826 79,614 80,410 621,425 239,582 Real Estate Excise Tax - - - - - - 50,000 50,000 50,000 50,000 200,000 50,000 Sales Tax on Hotel 20,000 40,000 41,200 42,436 43,709 45,020 46,371 47,762 326,498 50,000 Total $ 251,000 $ 464,000 $ 600,000 $ 95,000 $ 115,750 $ 117,708 $ 119,709 $ 441,004 $ 443,096 $ 445,235 $ 447,422 $ 3,539,924 $ 339,582 Subtotal Notes: (a) This table estimates taxes and fees the City of Tukwila would receive if Washington Place is completed with 370 apartments and 189 hotel rooms as a total deveopment cost of $100 million including $75 million in "hard" costs. (b) Current City policy requires impact fees to be paid at time of permit issuance. This table reflects a deferral of impact fees until years 5 -8 after issuance of a CofO. (c) Permit fee assumptions listed on separate exhibit. (d) Construction sales tax estimated based on $70 million in taxable construction costs. (e) Property tax estimated at $0.00295 per dollar of valuation. Year 1 property tax based on $25 million of assessed valuation for hotel. Increased at 1% annually. (f) Property tax assumes City approves a multi - family property tax exemption for years 1 through 8 resulting in no additional property tax for the multi - family portion until after year 8. After that, the multi - family valuation is assumed to be $50 million escalated at 1% annually. (g) Real estate excise tax assumes property sales start in year 5 with 25 residential units per year at $400,000 per unit. (h) Sales tax assumes 189 hotel rooms rented at 70% occupancy at $100 /night with phasing during year 1. (i) This table includes revenues only and does not reflect the City's associated costs of providing services. (j) This table does not reflect taxes and fees paid to other government agencies, even if collected by the City. (k) This table does not reflect what the taxes and fees would be if the Washington Place development did not occur. (I) The City would receive loding tax but that is not included in this table due to its restricted use. Mayor's Office - Economic Development Updated: July 2, 2014