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Home My WebLink AboutPCD 2023-04-17 Item 1C - Discussion - Multi-Family Tax ExemptionTO: City of Tukwila Allan Ekberg, Mayor INFORMATIONAL MEMORANDUM Planning and Community Development Committee FROM: Derek Speck, Economic Development Administrator Brandon Miles, Business Relations Manager CC: Mayor Ekberg DATE: April 11, 2023 SUBJECT: Multi -Family Property Tax Exemption (MFTE) ISSUE This item is intended to summarize policy considerations related to renewing and/or expanding the City's multi -family property tax exemption program. BACKGROUND On February 6, 2023 the Planning and Community Development Committee reviewed the Economic Development Division's 2023 workplan and requested to expedite discussion on the City's efforts related to the multi -family property tax exemption program (MFTE). This staff report is intended to provide context for that discussion. Multi -family property tax exemption programs are property tax waiver programs enacted by cities and counties to support local housing goals. Under Chapter 84.12 RCW, local governments can give property tax exemptions for new construction, conversion, and rehabilitation of multi -family residential improvements with at least four units. Under these exemptions, a property owner does not have to pay property taxes on the residential improvements for a given number of years which serves as an incentive to attract the development. The property owner still pays tax on the land and on non-residential improvements like the commercial portion of a mixed-use building. The State allows an exemption of 8 years for all qualifying projects and up to 12 and 20 years if the project meets affordability requirements based on Area Median Income (AMI). See attachment "State Affordability Requirements" for detail on the minimum required criteria based on duration of exemption. In addition to the State's criteria for a project to qualify, the local government enacting the program may set additional criteria. See attachment "What is MFTE?" for a brief overview of MFTE. The staff report from the City Council meeting of April 25, 2022 provides a description of the MFTE program in the City of Tukwila. DISCUSSION There are a number of benefits, costs, and other considerations a local government should consider when deciding whether to implement a MFTE program. It is a balance of achieving certain goals in exchange for accepting some potential drawbacks. 73 INFORMATIONAL MEMO Page 2 Potential Benefits of MFTE Program 1. Supply of Housing: Our region has a shortage of housing and the City may simply want more multi -family housing for a variety of reasons. Some new multi -family developments may not occur without the exemption. 2. Housing Targets: The program could help the City meet its housing targets under the Growth Management Act. See attachment "Housing Targets and MFTE" for a more detailed explanation. 3. New Affordable Housing: The program could be an incentive to developers to accept income and rent restrictions to achieve more affordable rental or ownership housing. 4. Preserve Existing "Affordable" Housing: The city has many apartment complexes that provide market rate rents that have been more affordable compared to the region but also have been increasing rents. There may also be complexes providing affordable rents under subsidy programs that are expiring. The program could be an incentive for property owners to accept or extend rent and income restrictions. 5. Quality of Existing Multi -family Housing. The program could subsidize renovations to existing multi -family housing to improve the quality of existing housing. 6. Better Design: The program could be an incentive to developers to accept more expensive project designs such as structured parking. 7. Unit Type and Size: The program could be an incentive for developers to create residential units with more space or bedrooms. 8. Neighborhood Benefits: Multi -family housing can bring benefits to their surrounding neighborhood such as additional customers to attract and support businesses, redeveloping properties that no longer conform to zoning or vision for that area (such as motels), attracting other development, concentrating development near transit, etc. Potential Costs of MFTE 1. Forgone Property Tax: Depending on the timing of the construction of the project, the city may receive less property tax during the exemption period. See attachment "City Tax Revenues for New Construction". 2. Cost of City Services: With new construction, there will be more residents who need city services. Even without the MFTE, it is possible the revenues from residential (both single family and multi -family) don't cover the cost of city services. Moreover, State law allows the city's property tax levy to be increased to reflect the assessed value of new construction but then property tax growth is limited to 1`)/0 annually. Due to inflation, the cost of city services is likely to grow faster than property tax. 3. Administrative Cost: It will take administrative time to adopt or revise the program, process applications, issue exemptions, monitor compliance, submit annual reports. The administrative time can be very significant to monitor affordability, especially affordable ownership. If the program includes affordability the City would need to hire or reallocate staff or contract with a service provider. Other Considerations 1. Tax Shift: Depending on the timing of the construction of the project, the city may still receive property tax during the exemption period. In this case, the tax is shifted to other property taxpayers in the city. See attachment "What is Tax Shift". 2. Displacement: Depending on how a program is implemented, it can lead to displacement of residents or businesses. 74 INFORMATIONAL MEMO Page 3 3. Other Taxing Districts: The multi -family property tax exemption applies the exemption to property tax from all taxing districts that cover the qualifying project. 4. Other City MFTE Programs: The cities around Tukwila have some form of a MFTE program. See attachment "Multi -Family Property Tax Exemption Programs". 5. Sunset Clause: The City may want to limit the application period for a MFTE program so that it is used to stimulate development and the subsidy does not become a permanent necessity for development. The city included a sunset clause in the current program. If the City implements a MFTE program, State law requires us to determine eligible geographical areas ("residential targeted areas"). The City can also add additional criteria. Potential Criteria 1. Household Incomes and Affordabilty: The staff report on middle housing at the Planning and Community Development Committee meeting on April 3, 2023 provides a good overview of housing affordability needs in Tukwila. Please note that if a new development provides housing for vulnerable populations without providing social services then it may increase demand on city services. The incentive could be used require projects to provide a certain level of social services. However, developments that service populations below 60% of AMI are unlikely to need the MFTE because they would qualify for property tax exemptions under other State provisions. 2. Risk of Displacement: The City could include criteria to avoid displacement, or require the developer to provide assistance in cases of displacement. 3. Rental or Ownership: The City could include criteria related to either of these scenarios. 4. New Construction, Conversion, Redevelopment, or Renovation: The City could include criteria related to any of these scenarios. 5. Design: The program could include criteria for the site or building design such as structured parking, number of bedrooms, number of units (minimum or maximum), mix of uses (e.g., retail, small business space, etc.) 6. Financial Necessity: In 2019 the State's Legislative Auditor completed an analysis of the MFTE program across the state and was not able to conclude whether the exemptions resulted in a net increase in housing or affected the decision to develop. The Legislative Auditor recommended cities include financial analysis as a criteria. FINANCIAL IMPACT No impact because this item is discussion only. RECOMMENDATION Information Only. ATTACHMENTS State Affordability Requirements What is MFTE? Housing Targets and MFTE City Tax Revenue for New Construction What is Tax Shift? Multifamily Property Tax Exemption Programs 75 76 W i City of Tukwila State Affordability Requirements For Multi -Family Property Tax Exemption 8 Years 12 Years 20 Years Rental Ownership Rental Ownership Minimum Set Aside % None 20% 20% 20% 25% Maximum Income % AMI None 80% - 115% 115% 80% 80% 1 Person Household None $75,440 TBD $75,440 $75,440 2 Person Household None $86,160 TBD $86,160 $86,160 3 Person Household None $96,960 TBD $96,960 $96,960 4 Person Household None $107,680 TBD $107,680 $107,680 Note: 1. The 20 -year exemption requires affordability for 99 years and a non-profit or government agency sponsoring the transaction. The 20 -year rental option may no longer be available. 2. AMI = Area Median Income. Incomes shown above were based on Washington State Housing Finance Commission Income Limits effective 4/18/22. 77 78 1 GROWTH MANAGEMENT SERVICES SHORT GUIDE FOR COUNCILS AND STAKEHOLDERS What is MFTE? MFTE (Multifamily Housing Tax Exemption) programs are property tax waiver programs enacted by cities and counties to support local housing goals. Under Chapter 84.14 RCW, local governments can give exemptions for new construction, conversion, and rehabilitation of multifamily residential improvements with at least four units. Under these exemptions, a property owner does not have to pay property taxes on the residential improvements for a given number of years. The property owner still pays tax on the land and on non-residential improvements like the commercial portion of a mixed-use building. With respect to the annual property taxes collected on a development.. Commercial Land Improvements Residential Improvements ...an exemption under MFTE removes the residential portion of property value from taxation for an eight- to 20 -year period. Advantages O Cities and counties can give financial incentives to meet housing goals without the need for direct funding. This can support affordable housing but can also incentivize market -rate housing in a way that complies with state constitutional requirements. o Requirements in state law can be flexible and let cities and counties tailor programs to meet policies. Some programs consider on-site improvements, building requirements, or mandates for services. O MFTEs are commonly used by developers across Washington, who are often familiar with how they operate and how to use them with projects. V3.0 Who Uses MFTE? As of 2022, 55 communities in Washington have active MFTE programs, and 19 communities issued final certificates in 2021. The exemptions issued in 2021 resulted in: • 67 new rental properties and 97 owner -occupied housing units • 7,759 new housing units, including 1,058 rent -restricted units for low- income households Recently, conditional certificates have also been issued for the 20 - year MFTE for permanently affordable housing as well. Agency contact: Mary M. Reinbold, AICP SENIOR PLANNER Growth Management Services mary.reinbold@commerce.wa.gov Phone: 509.638.5449 .link Washington State V40 Commerce We strengthen communities 1 1111101111111111 Types of MFTE MFTE programs are usually divided according to the length of the program: For an 8 -year MFTE program, there are no requirements for affordable housing, although some cities provide their own requirements. Many communities use this to promote market -rate housing construction in neighborhoods where new housing investment is needed. A 12 -year MFTE program must set aside at least 20% of housing units for low- and moderate -income households. Under the statute, household income is based on Area Median Income (AMI), with households with incomes at 80% of AMI or less considered "low income", and households at 115% of AMI or lower "moderate income". This MFTE is used for providing affordable rental housing options, including choices in market -rate private housing projects. A 20 -year MFTE program requires that 25% of units be sold as permanent affordable housing for households at 80% AMI or below, with a nonprofit or government agency sponsoring the sale and restrictions in place for resale to ensure long-term affordability. This is a new option implemented in 2021 and is intended to be used to encourage affordable housing homeownership. There is an option for permanent affordable rentals (20% of units for 99 years at 80% AMI or less) but a deadline for passing this program restricts new programs. Note that communities can also choose to impose higher affordability requirements and include other requirements for MFTE projects as well. Considerations O MFTEs can result in either a Toss of tax revenue to the community, or a tax shift where other property owners will pay more in taxes. O MFTE programs require staff time to conduct regular monitoring, oversight, and reporting. O Regular updates can be necessary to make sure the program provides a sufficient incentive to maximize public benefits. For an 8 -year MFTE... tax exemptions are provided as a general incentive for new residential investment. 11111111 Tax exemption for 8 years O 0000000 ❑ ❑ 0 0 ❑ ❑ 0 ❑ nnnnn New mu tifami y development (rental or homeownership) For a 12 -year MFTE.. tax exemptions are provided in exchange for at least 20% of units being set aside as affordable for 12 years (rentals or units for sale). Tax exemption for 12 years 01111111111 Affordable rents for 12 years (20% of units, low -/moderate -income) OR 003030 nnnnnn 0 0 0 0 ❑ ❑ ❑ 4 tHnn Affordable units for sale (20% of units, short-term restrictions) For a 20 -year MFTE... tax exemptions are provided in exchange for permanently affordable rental housing / homeownership. #NNN4#NIINIINI Tax exemption for 20 years Affordable rents for 99 years (20% of units for low-income HH) OR 00000000 Fl Fl Fl Fl FlFlnn Affordable units for sale (25% of units, permanently affordable) WHAT IS MFTE? 2 80 City of Tukwila Allan Ekberg, Mayor INFORMATIONAL MEMORANDUM TO: Planning and Community Development Committee FROM: Nora Gierloff, Community Development Director CC: Mayor Ekberg DATE: April 11, 2023 SUBJECT: Housing Targets and MFTE ISSUE This memo is intended as a brief summary of housing targets as they could relate to a multi- family property tax exemption (MFTE) program. BACKGROUND King County, and the cities within it, are required by Washington State's Growth Management Act (GMA) to update their comprehensive plans every ten years. In 2021 the state legislature amended portions of the GMA to mandate that jurisdictions that plan under the GMA must "plan for and accommodate housing affordable to all economic segments of the population" rather than just "encourage" affordable housing. In combination, all the comprehensive plans of King County jurisdictions must create policies to meet the existing and projected housing needs of the county over a 20 -year period. In 2022 the King County Affordable Housing Committee of the Growth Management Planning Council (GMPC) administered a process to develop a recommended approach to allocating need by jurisdiction consistent with Commerce's guidance. Between 2019-2044, Tukwila's housing target allocation for new net housing units is 6,500 units. Based on housing production in Tukwila between 2019 and the present, approximately 250 new net units each year would need to be produced to meet this target. The chart below shows the housing target allocation by household income. 2044 Net New Unit AlI 2,000 1,000 471 274 214 Tukwila 610 692 1,242 0-3046 AMI 31-5096 AMI 51-8096 AMI 81-10096 AMI 101-12096 AMI 121+96 AMI Emergency Housing Under the 2021 adopted Countywide Planning Policies (CPP) Housing Chapter policies and additional CPP amendments recommended by the Affordable Housing Committee (AHC), jurisdictions must demonstrate that they have sufficient land capacity to accommodate their housing needs in their 2024 comprehensive planning update. Jurisdictions should also create or adjust the zoning, strategies, tools, and incentives in their plans and development regulations to accommodate the projected housing need. Tukwila will need to provide the Department of 81 INFORMATIONAL MEMO Page 2 Commerce with a checklist identifying our Plan's compliance with Growth Management statues and our adopted Comprehensive Plan is required to be certified by the Puget Sound Regional Council. King County will monitor jurisdictional progress to plan for and accommodate housing needs annually. Five years after the major comprehensive plan update, the Growth Management Planning Council (GMPC) or its designee will review each jurisdiction's progress and identify any significant shortfalls in planning for and accommodating housing needs, provide findings that describe the nature of the shortfalls, and make recommendations that jurisdictions take action to address shortfalls. Actions could include a potential expansion of capacity beyond what was included in the land capacity analysis though what actions to take would be at each jurisdiction's discretion. A jurisdiction will not be penalized for underproduction of housing if they sufficiently plan for and accommodate their share of countywide housing need in their periodic comprehensive plan update. Sufficient planning and accommodations are those that comply with the Growth Management Act requirements for housing elements in Revised Code of Washington 36.70A.020 and 36.70A.070, that outline regulatory and nonregulatory measures to implement the comprehensive plan (Washington Administrative Code 365-196-650), and that comply with CPP Housing Chapter policies. DISCUSSION The City Council may want to renew or expand the city's multi -family property tax exemption (MFTE) program as an incentive to encourage construction, conversion, or rehabilitation of multi -family housing. The city is not required to adopt a multi -family property tax exemption program in order to meet state or county requirements under the Growth Management Act or Countywide Planning Policies. However, the property tax incentive is a useful tool and one the City could use to achieve its housing targets. In addition to housing targets, the 2021 King County Countywide Planning Policies also include job growth targets with the same review process. The job growth targets are not discussed here because this memo is focused on housing. FINANCIAL IMPACT None RECOMMENDATION Information Only. ATTACHMENTS None 82 City Tax Revenues for New Construction With Eight Year Multi -Family Property Tax Exemption The example estimates City revenue on a new $30 million development, if the project receives an eight year property tax exemption. Tax Revenues Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Property Taxes $ 3,750 $ 3,788 $ 3,825 $ 3,864 $ 3,902 $ 3,941 $ 3,981 $ 4,021 $ 4,061 $ 95,008 $ 95,958 Utility Taxes - 7,200 7,416 7,638 7,868 8,104 8,347 8,597 8,855 9,121 9,394 Sales Tax on Construction 191,250 B&O on Construction 18,488 REET 7,500 - - - - - 190,016 - Total $ 220,988 $ 10,988 $ 11,241 $ 11,502 $ 11,770 $ 12,045 $ 12,327 $ 12,618 $ 12,916 $ 294,144 $ 105,352 Tax Shift/Forgone Revenue Property Taxes $ - $ 71,250 $ 71,963 $ 72,682 $ 73,409 $ 74,143 $ 74,884 $ 75,633 $ 76,390 $ - Assumptions (1) Land value is $1.5 million (5% of total project cost). City property tax levy rate is $2.5 per thousand ($0.0025). Annual levy increases 1%. (2) New residents spend $100 per month for their utilities increasing 3% annually. City utility tax rate is 6%. (3) Construction starts and is completed in year 0. Property tax exemption starts in year 1. (4) City sales tax rate is $.0085. Taxable construction is $22.5 million (75% of the $30 million total project cost). (5) Real estate excise tax (REET) assumes a rate of 0.5% and that the property is sold in year 0 and year 9. (6) Property market value increases 3% annually. Notes (1) This example is a general estimate of a new 100 unit apartment building built over one level of parking. (2) The property taxes on the land would likely be paid even without the development or the exemption. (3) The additional residents may generate additional tax revenues for the city such as sales tax on their purchases. (4) The project may generate parks, fire, and transportation impact fees to be used for capital projects related to new development. (5) Tax Shift/Forgone Revenue shows the amount of property taxes that would either be shifted to other property taxpayers or would be revenue the city would not receive. It assumes $9 billion total assessed value. If fully shifted, the example project would increase property taxes on other properties by approximately $0.79 per $100,000 annually (approximately $5 for a $600,000 house). (6) This example only shows revenues. It does not show the city's costs of providing services to the new development. Office of Economic Development 2023-4-11 84 1 GROWTH MANAGEMENT SERVICES SHORT GUIDE FOR COUNCILS AND STAKEHOLDERS What is Tax Shill? MFTE (Multifamily Housing Tax Exemption) programs can be an effective way of incentivizing market -rate and affordable housing options. To understand how it works stakeholders often ask, "Where does the money come from to pay for the exemption?" This question can be hard to answer because of how property taxes work in Washington State. When making decisions about an MFTE program, it is important to consider possible tax and revenue impacts. Generally, these impacts can be distributed in two ways: O Foregone tax revenues that are not collected, which reduce total revenues for a city and other taxing districts (e.g., the port, county, school district, state, etc.). O A shift of tax obligations to all other payers of property taxes in these districts, where there is an increase in taxes collected to offset the losses from the exemption. How these costs are distributed depends on two things: O Levy limits provided under RCW 84.55.010 mean that property tax levies are restricted to no more than a 1% increase in revenue from the assessed value from the previous year. This restricts how much cities and other districts can raise property taxes on these properties to make up this difference and can mean that deferred taxes will be foregone revenue for these jurisdictions. O However, projects that receive MFTEs could still increase that total levy. Under WAC 458-12-342, county assessors must assess building value during construction and add it to these levy limits, which may not be removed from the total levy amount before the final certificate for exemption is received and the exemption begins. The amount of tax shift versus deferred revenue depends in part on the practices of the county assessor. However, there are currently no requirements for assessors to consider MFTE in these levy limits. If cities do not consider these effects, an MFTE can shift most or even all of the exempted tax obligations to other properties. What is MFTE? MFTE (Multifamily Housing Tax Exemption) programs are property tax waiver programs enacted by cities and counties to support local housing goals. Under Chapter 84.14 RCW, local governments can give exemptions for new construction, conversion, and rehabilitation of multifamily residential improvements with at least four units. These exemptions can be provided for different lengths. The eight-year exemption does not require affordable housing, but the 12- and 20 -year options have additional requirements to provide on-site affordable units. Agency contact: Mary M. Reinbold, AICP SENIOR PLANNER Growth Management Services mary.reinbold@commerce.wa.gov Phone: 509.638.5449 ® 11' Washington State '40 Commerce We strengthen communities Vel Tax Shift Considerations If an MFTE is supported through tax shifts, there are some important policy considerations: O Communities may be less likely to support incentives for market -rate development that use property tax increases, especially for high-end projects that do not seem to provide public benefits. O Shifted tax obligations are not usually calculated, meaning that the full impacts of this program may not be transparent, especially to affected property owners. O Depending on the popularity of the program, the total increases in property taxes could be equivalent in magnitude to affordable housing levies that would require voter approval and have tighter requirements (RCW 84.55.150). Foregone Revenue Considerations On the other hand, if a city foregoes tax revenue to support MFTEs, there may be other policy concerns: O Communities will have reduced Tong -term tax revenues from the MFTE program, especially if they will be foregoing most or all of the exempted tax revenue. This can have a significant fiscal impact on local budgets. O Other taxing districts may be impacted by tax exemptions but are not in a position under the statute to object to a community's MFTE program. This can have some significant effects on special districts that cannot make up for this lost revenue in other ways. O The total budget impacts may be more unpredictable, especially without limitations on the number of exemptions issued by the community. However, placing limits on the number and value of exemptions could affect the ability of the MFTE program to meet housing goals. 86 Under typical situations, total property tax levies will increase by 1% over the previous year (plus new development): Total Property Tax Levy New construction is added to the total tax base by the assessor... Total Tax Levy Amount 1% increase/year ...increasing the value of the tax base. Year !f new construction value is added to the levy limit but exempted from property taxes through the MFTE, property tax obligations will be shifted to the rest of the tax base: Tax exempted properties add to the property tax levy limit... Total Property Tax Levy ...but these tax obligations will be covered by non-exempt properties. Year However, if exempted value is taken out of the levy limit in some way, the tax levy amount will decrease. This will reduce tax revenue, but note that this is not usually done by assessors in practice. Tax exempted properties that do not contribute to the levy lid... Total Property Tax Levy would not shift tax obligations but will result in foregone revenue. Year Multi -family Property Tax Exemption Programs Cities Adjacent to Tukwila The chart below provides a very basic comparison of multi -family property exemption programs in the cities that are adjacent to Tukwila. Notes: 1. The number of certificates issued data is taken from the annual reports on MFTE issued by the Washington State Department of Commerce. In 2019 through 2021 Tukwila issued three certificates. 2. Examples of additional criteria are larger units (more bedrooms), higher density (units per acre), larger developments (minimum number of units), public benefits, mixed-use structure, age of residents (55+), structured or underground parking, 24-hour onsite management, other financial subsidy programs, replacement of residential units, and more. 4/7/2023 87 Burien Kent Renton SeaTac Seattle 8 Year Exemption Yes Yes Yes Yes No 12 Year Exemption Yes Yes Yes Yes Yes 20 Year Exemption No No Yes No Yes Geography Downtown commercial zone Portions of downtown and Midway Downtown, Rainier/Grady, South Lake Washington, Sunset Urban Center All areas zoned multi- family Additional Affordability Criteria No Yes Yes No Yes Additional Criteria Yes Yes Yes Yes Yes Displacement Protections Yes No No No No Relocation Assistance No No No No Yes Sunset No No Yes No No Certificates Issued in 2021 0 0 1 0 21 Certificates Issued in 2020 0 1 1 0 9 Certificates Issued in 2019 0 0 0 0 32 Notes: 1. The number of certificates issued data is taken from the annual reports on MFTE issued by the Washington State Department of Commerce. In 2019 through 2021 Tukwila issued three certificates. 2. Examples of additional criteria are larger units (more bedrooms), higher density (units per acre), larger developments (minimum number of units), public benefits, mixed-use structure, age of residents (55+), structured or underground parking, 24-hour onsite management, other financial subsidy programs, replacement of residential units, and more. 4/7/2023 87