At the heart of the debate over Seattle’s proposed linkage fee is the question of whether it undermines its own intent to provide affordable housing by either raising rents or impeding the production of housing. A recent post by Owen Pickford at The Urbanist argues that a linkage fee would have no negative impact on the housing market, and therefore “urbanists must support it.” This post will explain why that position has no merit.

Other than cases of unique developments that have limited substitutes, a linkage fee will result in a reduction in land values rather than increased rents. So what we need to examine is the effect of depressed land values on the production of housing.

The most widely used metric for predicting whether a piece of property can be redeveloped is the ratio of the value of the improvements on the land, to the value of the land itself. The larger the ratio, the less likely a property will redevelop. Right away we can see that because a linkage fee reduces land value but not improvement value, it skews that ratio towards predicting no redevelopment.

To put a finer point on it:  Pickford’s position contradicts the standard methodology used by the City of Seattle, King County and countless other municipalities to estimate “buildable land,” that is, land that can be redeveloped. This alone should be enough to cast serious doubt.

Overall, on my assessment Pickford’s argument that a linkage fee would not impede housing production is flawed for two primary reasons:  It neglects the role of the property seller and existing uses; and it relies on supporting evidence that is highly tenuous, if not irrelevant.

The Role of the Seller and Existing Uses
Housing production in Seattle almost always involves redevelopment of property that has income-generating existing uses on it. The typical owner of a property that is being considered for redevelopment will evaluate an offer from a buyer based on the net present value of the property (i.e. including income from existing uses), compared to what the cash from the sale could earn if it was put into other investments. Add a linkage fee to this equation and the buyer’s cash offer will be lower, tipping the scales towards holding on to the existing income-generating use—that is, not selling. And not selling means no new housing.

A linkage fee’s level of impact on these hold/sell decisions will depend on the value of the existing uses relative to the land. And where it will have the greatest tendency to hinder sales for redevelopment is in areas with lower land values where feasibility is currently marginal, such as the Rainier Valley, Northgate, and the International District—in other words, the very locations where the City most needs new housing to meet its goals for sustainable development.

Furthermore, most larger-scale housing developments require the assembly of parcels with multiple owners. The reduced likelihood of a sale caused by a linkage fee will be compounded by every individual sale that’s necessary—and it only takes one refusal to kill the whole deal. Anyone with experience in development knows that land acquisition and assembly is one of the most challenging steps in the process.

Sellers can be motivated by numerous reasons, but one scenario that’s easy to understand is the owner who wants to sell out and retire: the higher the price, the sooner they can retire. Slap on a million dollar linkage fee, and maybe they’ll wait it out through the next development cycle—perhaps 7 years or more—until market rents rise enough to offset that million dollar hit to their nest egg caused by the linkage fee.

The relationship between land values and redevelopment can be readily observed in neighborhoods all over Seattle where the market has become hot. As localized demand for housing increases and market rents rise, developers can pay more for land. And that’s when you start to see an uptick in property transactions for redevelopment—it’s the reason there are too many cranes to count in Pike/Pine, but none in Rainier Beach.

Given that every development project is unique, and given how the market varies over both geography and time, it’s delusional to believe that the City could set a linkage fee rate in some kind of “sweet spot” that wouldn’t end up sabotaging land transactions for redevelopment. Pickford asserts that a linkage fee could actually increase housing supply by directing more funds to housing production, but the risk is that each typical midrise housing project made infeasible by a linkage fee will mean another couple hundred people competing for existing housing and pushing the poor out of Seattle. And for each project rendered infeasible, it would take roughly 25 feasible projects to create the number of affordable units equivalent to the market units not built due to the linkage fee.

Lastly, for cases in which the developer already owns the land, it is even more clear why a linkage fee would impede redevelopment. The decision to invest in redevelopment will be based on the risk versus the return, and the linkage fee will reduce the return. It’s really that simple. Even property owners with deep pockets can opt to do other things with their money if redevelopment becomes a less attractive investment. They can just wait it out until rents rise enough to offset the loss of returns caused by the linkage fee.

Debunking the Evidence
The first piece of evidence Pickford presents to make the case that the factors I describe above would not impede housing development is historical data showing that the number of homes and condos for sale in Seattle is not influenced by average sales price—that is, people aren’t more inclined to sell their homes when prices are high, and vice-versa. However, most people who are selling homes live in them, and therefore most will be purchasing (or renting) another home in the same housing market with the same price trends. Therefore it makes all the sense in the world that sales price wouldn’t effect sales volume—for homes.

In contrast, sales that lead to high-density housing development are most often commercial properties, and the owners are typically investors who have the option to put proceeds from a property sale into other investments that don’t follow the price trends of the housing market. For example, the hit in property value caused by a linkage fee might mean the seller could only buy 800 shares of stock instead of 1000 with the cash from the sale, such that keeping the property makes more financial sense. The upshot is that data on home sales tell us very little about the property transactions that matter most for housing production, and thus are not credible evidence to support Pickford’s argument.

The second type of supporting evidence provided by Pickford is national studies showing that Inclusionary Zoning (IZ) has had no effect on the production of housing. Most of these studies look at cities in California where IZ is common. But a critical difference between a linkage fee and the IZ programs in California is actually emphasized in one of the papers cited by Pickford:

“It is worth reiterating that the programs we analyzed offer housing developers numerous cost-offsets, in accordance with California’s Density Bonus Law, to help make the inclusionary requirement revenue-neutral.”

If an IZ program is “revenue neutral” it means that it would not cause any reduction of land value, and therefore no impacts on housing production would be expected! In contrast, Seattle’s proposed linkage fee offers zero in the way of cost-offsets. Thus the results of all of the California IZ studies should be presumed to have no relevance to linkage fees.

Another shortcoming of the IZ studies cited by Pickford is their focus on single-family houses. For one thing, Seattle’s proposed linkage fee wouldn’t even apply to single-family, but more importantly, suburban single-family home development tends to involve land transactions that differ significantly from those involved in high density urban infill. In any case, perhaps not surprisingly, the one cited analysis for single-family homes outside of California (suburban Boston, where minor cost-offsets are typical) found “some evidence that IZ has constrained production and increased the prices of single-family houses.”

Pickford also highlights a result in one of the studies that multifamily production increased after IZ was imposed, yet neglects to mention that the reason this happened was that production shifted from single-family to multifamily—a process that could not possibly happen in the case of Seattle. This same study found that single family house prices increased under IZ, which, of course, is the expected effect of a linkage fee if it doesn’t push land values down.

Ironically, evidence that a linkage fee would impede housing production is inadvertently provided by one of the papers cited by Pickford:

“The passage of the 1986 Tax Reform Act is associated with a sharp drop in new housing production. The act ended favorable tax treatment of market-rate rental housing, which effectively subsidized that housing. In almost all jurisdictions surveyed, housing production figures dropped significantly after 1986.”

In terms of the impact on land values, eliminating a tax subsidy for multifamily is effectively the same thing as imposing a linkage fee. So it’s completely reasonable to expect the result of a linkage fee to be the same:  significantly less housing produced.

Lastly, Pickford’s citation of two impact fee studies as evidence is even more tenuous than the IZ studies, because the effects are attributed to other factors, as the authors explain:

“The finding that land values fall, despite the fact that the increase in new home prices exceeds the total value of the fees, can be attributed to developer uncertainty regarding future increases in fees.”

“Our theoretical model shows that impact fees may expand housing construction within suburban areas by reducing exclusionary regulations and increasing the percentage of proposed projects receiving local government approval.”

Housing Supply and the Precautionary Principle
In assessing the potential impact of a linkage fee, it is important to remember that the root cause of Seattle’s housing affordability crunch is that housing production has not kept up with demand. Therefore, any proposed policy such as a linkage fee ought to be highly scrutinized to ensure that it won’t hinder the development of new housing.

Given the well-founded reasons a linkage fee can be expected to impede housing production (see above), the burden of proof falls on those who support the fee to prove that it would do no harm—a.k.a. the precautionary principle. By this measure, Owen Pickford’s attempt is clearly a failure, and reads more like a predetermined answer grasping for straws of evidence. And not only does Pickford’s argument lack evidence, it ignores fundamental human nature: In what universe does the option of getting more cash sooner for an asset not incent an investor to sell, and vice-versa?

It would be great if the linkage fee was a “free lunch” solution to fund affordable housing, but as is always the case in the real world, there is no free lunch. And what’s even worse with a linkage fee is that it’s greatest negative impact on housing production will occur precisely in the locations where redevelopment economics are already marginal—the very places where Seattle needs new housing most. There are better solutions to address affordable housing in Seattle, and that is where urbanists should be focusing their effort.

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Dan Bertolet is an urban planner with VIA Architecture, a firm that consults to clients who could be impacted by a linkage fee. This post was originally published at Smart Growth Seattle, and has been edited for clarity and emphasis.

Most Seattleites understand that the public has an obligation to subsidize housing for the city’s most needy, and residents have voted twice to tax themselves to that end through the housing levy. What’s far less appreciated is the essential role of the private sector in sustaining affordable housing.

It’s probably safe to say that the average Seattleite-on-the-street believes that expensive new housing is a major cause of declining affordability. And that is a regrettable thing. Because under current conditions of high demand for housing in Seattle, the reality is that new housing—regardless of price—actually abates displacement of those on the lower end of the income spectrum.

How can this be?

Consider the simplified case of a city with a total of five rentals ranging from cheap to expensive, and five people living in them with corresponding incomes. Along comes a wealthy newcomer who offers more for the most expensive unit, so the landlord raises the rent and the newcomer gets the unit because the current tenant can’t afford to pay that much.

The person who was displaced then offers more for the next cheapest rental, and so that landlord raises the rent, displacing the current tenant, who then bids up the next cheapest rental, and so on. In the end the person left without a place to live is the one with the lowest income of the five original renters.

Now consider how that scenario changes dramatically when there is one simple difference: a newly built expensive rental is available. The wealthy newcomer rents that unit, and that’s it—nothing changes for any of the existing five renters. No rents are raised, and no one is displaced. As counterintuitive as it may seem, the creation of a new expensive rental prevented displacement of the poorest renter.

Today in Seattle, the scenario of the lacking new unit is the fundamental process behind declining affordability and increasing displacement. And that’s why the ever popular sport of bashing “greedy developers” for building “luxury” housing is actually doing more harm than good.

Yes, of course Seattle’s housing system is far more complex than the above thought experiment. But none of those complexities negates the fact that the root problem is we’re not making enough room for newcomers. Still, this idea tends to encounter remarkably spirited resistance in progressive circles. Here are five common objections and why they are misguided:

1. New housing causes displacement because older, cheaper housing is demolished to make way for it.

In recent years the ratio of new to demolished housing in Seattle has been about eight to one, which means that displacement prevented by new housing far outweighs any displacement caused. For high density housing the ratio is more likely in the range of 50 or 100 to one. That’s because a lot of new high density housing is built on parking lots or spent commercial buildings, as is readily observed in the city’s growing neighborhoods such Capitol Hill, Ballard, or downtown.

2. New expensive housing drives up rents of surrounding housing; owners of new housing keep their units vacant to drive up rents; outside investors are buying up housing in Seattle and jacking rents to cover the inflated prices they pay.

The simple reason all of these related claims have no merit is because the primary determinant of rents is demand. And neither the existence of expensive housing, nor vacant units, nor inflated rents can create demand. These factors may introduce short-term marginal upticks, but over the long-term, rents always fall back in line with demand. This is simply indisputable reality, as verified by decades real estate market data.

3. Housing consists of multiple bifurcated markets, so new expensive apartments do not affect prices of any other type of housing.

Regarding price, the thought experiment discussed above illustrates that in a large housing market there is a continuum of prices that allows renters to easily move up and down the market as needed—in other words, there is no financial bifurcation. Regarding housing type, bifurcation can be a factor, but the fact is, every new apartment added to the stock absorbs demand from a household that otherwise may have been forced to compete for other options. For example, a person who can’t find a cheap enough apartment may end up renting a room in a shared single-family house. Ultimately, every unit built relieves the entire market.

4. The market cannot provide affordable housing.

It is no secret that the raw costs of production are simply too high for new housing to be affordable to a significant swath of the lower end of the income spectrum. But to claim that the market doesn’t provide affordable housing is highly disingenuous. Past census data and market surveys show that about three quarters of Seattle’s rentals were affordable to households earning 80 percent of the area median income. Today’s new housing becomes tomorrow’s affordable housing as it ages. Furthermore, because new housing absorbs demand, it reduces market pressure to renovate older, cheaper housing, thereby helping to preserve these low-rent options and reducing displacement.

5. It’s a lost cause because we can’t build fast enough to get ahead of demand.

Even if production isn’t keeping up with demand, each new unit still has the potential to prevent one poor household from being displaced. It’s far from a lost cause to the person who can afford to stay in his or her home because just one additional unit of housing was built. This is not to say that building new housing will solve the whole problem. Subsidies will always be necessary to provide decent housing for the poorest households, as has been true in cities for centuries. But when so many people want to live here, the less new housing we build, the bigger the subsidy problem becomes.

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If Seattle hopes to successfully tackle affordability, the critical role of market housing must be given more weight in policymaking. Take for example Capitol Hill, one of the city’s most in-demand neighborhoods, for which a policy choice has been made to not allow high-rise buildings, a policy that will curtail the creation of new housing by hundreds, if not thousands of units. And that translates to hundreds if not thousands more lower-income residents displaced from the neighborhood. Limiting height or density in places where there is strong demand is putting aesthetics before social equity.

In the public conversation about housing affordability in Seattle, rigid progressive ideology all too often leads to the demonization of private developers. But this can only lead to failure, because it will encourage policies that attempt to solve the problem at the expense of market production, such as the City’s proposed linkage fee.

Again, to be clear, no one is saying that market production alone will solve Seattle’s affordability problem.

There will always be some level of subsidy necessary, but that level will be determined by the balance of supply and demand. If market production continues to fall behind demand, the need for subsidy will balloon to the point where it becomes essentially unsolvable, as it has in San Francisco. And even if some households are protected from displacement through subsidized housing, the displacement caused by housing scarcity will simply shift to the next poorest households not protected.

It’s really not that complicated. Seattle has a housing shortage. Every occupied new unit of higher cost housing translates to one less higher income household competing for a limited amount of existing housing. And whenever there are more people who want housing than there are housing units, it will be the poorest who lose.

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This post originally appeared on PubliCola.

Concerns over rising housing prices in Seattle have once again provoked heated public debate over what to do about it. In response, City Council’s proposed solution for funding subsidized affordable housing is a so-called linkage fee—a extra tax on all new development based on the amount that’s built. As I have argued previously, the linkage fee has serious shortcomings and is likely to exacerbate the very problem it is intended to address by either increasing the cost of new housing, or slowing its production.

What most Seattle policymakers appear to be overlooking is that Seattle’s projected affordable housing needs could be met by simply strengthening existing, proven programs, without resorting to an untried, complicated linkage fee that is both unfair and counterproductive. The true solutions staring us all in the face are the Housing Levy and the Multifamily Tax Exemption (MFTE), combined with robust production of market housing that will help keep prices in check by absorbing demand.

What is Seattle’s need for affordable housing?
According to the Seattle Office of Housing, over the next 20 years there will be a demand for 28,000 new units of housing affordable to households with incomes at or below 80% of area median income (AMI). That’s equivalent to an annual average of 1400 units, or, to put it in perspective, about $350 million worth of new rentals per year. Separated by household income range, the Office of Housing’s projected average annual need is as follows:

• 0 – 30% AMI: 525 units/year
• 30 – 50% AMI: 380 units/year
• 50 – 80% AMI:  479 units/year

What do Seattle’s affordable housing programs produce?
Seattle’s current Housing Levy generates about $20 million per year from property taxes to fund affordable housing. During 2010 – 2013, Levy funds were applied to projects that have created an average of 417 units per year for households with incomes of 60% AMI and below. The Levy costs the owner of a median-value Seattle home $60 per year.

The MFTE offers a 12-year property tax exemption on multifamily buildings if they set aside at least 20 percent of the units for incomes in the range of 60-90% AMI. As of 2013 there were just over 3,000 MFTE units in active operation and another 1300 units approved. That corresponds to an average of 291 units created per year, though over the past two years the rate has been higher at about 700 – 800 per year. The tax exemption that enables the production of these affordable units corresponds to an additional annual tax impact of a mere $10 per median home.

Additional income-restricted units are produced by the Seattle Housing Authority using primarily federal funds, and by other non-profit affordable housing developers not relying on Housing Levy funding. The City of Seattle does not keep an inventory of these units, but they can be expected to make a significant contribution. For example, at Yesler Terrace the Seattle Housing Authority has plans to build 390 new units of housing for <60% AMI.

How affordable are Seattle’s market rentals?
The most current analysis available from the Office of Housing (2006-2010 data) shows that about three quarters of Seattle’s total rental units are affordable to a household with income of 80% AMI. Broken out by income range, the percentage of units affordable are as follows:

• 0 – 30% AMI:  11%
• 30 – 50% AMI:  22%
• 50 – 80% AMI:  42%

Because some households choose to rent units cheaper than what they can “afford” based on the standard formula, market housing that’s affordable still may not be available to lower income households. The Office of Housing data show that there is a surplus of over 7000 units affordable and available in the 50-80% income range, while there are deficits in the lower income ranges.

The Solution: Build on Success
The information presented above reveals that the combination of the Housing Levy, the MFTE, and existing affordable market rentals is already meeting a large portion of Seattle’s projected future need for affordable housing. For simplicity, let’s assume that over the next 20 years the City will need about 1000 units per year in the “low-income” range of 0 – 60 % AMI, and about 400 units per year in the “workforce” range of 60 – 80% AMI.

In recent years, Levy-funded projects have been producing two fifths of Seattle’s future low-income housing need. If the Levy was increased by 2.5 times, it could be expected to meet the entire need for 1000 units per year (assuming similar leveraging of other funding sources). That would translate to a tax of $150 per year for the median homeowner, or $13 per month. Factoring in the anticipated rate of low-income units produced without Levy funds, and the potential for affordable housing development on City-owned land, the necessary increase in the Levy would probably be closer to 2X than 2.5X.

That leaves the workforce housing need, which can can be readily met by a combination of the MFTE and existing market rentals. On average, the MFTE has been producing nearly three quarters of Seattle’s projected workforce housing need. Note also that these units are inclusive—that is, they are in the same building and neighborhood as the market units—and they come at a tiny cost to the average taxpayer. In short, the MFTE is a highly successful program. Two refinements that could improve it are an extension of the 12 year expiration, and easing requirements for applying it to existing housing and renovations.

The fact that over two fifths of Seattle’s total inventory of market rentals are affordable to 50 – 80% AMI clearly demonstrates that the private market can play a major role in meeting Seattle’s workforce housing need. And the way to keep the prices of older market rentals down is to maximize the production of new market housing, which absorbs demand from higher income people moving to Seattle. In contrast, a linkage fee is likely to slow market rate production and drive up prices of Seattle’s existing stock. Seattle’s workforce housing need could also be better supplied by the market if the City would remove overly restrictive regulations on accessory dwelling units and backyard cottages in single-family zones.

Share the Burden
A key advantage of the property tax-based approach described above is that it spreads the burden across all property owners, as opposed to a linkage fee that extracts only from the relatively small fraction of properties that redevelop. Owners of high value properties that won’t be redeveloped for decades—the half a billion dollar 76-story Columbia Center, for example—would contribute nothing to affordable housing through a linkage fee. With a property tax, owners of the most valuable properties pay the most.

In addition, when the burden is shared through a uniform property tax, the impact becomes relatively small on individual property owners—and the additional expense is a tiny fraction of what owners have been gaining in appreciation in recent years. On the market housing side, the cost to the City for encouraging private development is essentially zero, and new development enlarges the tax base.

In retrospect, Seattle has done a good job addressing affordable housing, and has effective subsidy programs already in place. San Francisco’s housing prices are still about 50% higher than Seattle’s, which has everything to do with the fact that Seattle has had a lot more private market housing development over recent decades.

Seattle has work to do to address affordable housing, but it’s not a crisis—yet. If we can keep cool heads and avoid politically driven, counterproductive quick fixes such as the linkage fee, we can succeed by sharing the burden and building on success.

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Dan Bertolet is an urban planner with VIA Architecture, a firm that consults to clients who may be impacted by a linkage fee.

Seattle City Council asked for a reality check on Incentive Zoning (IZ) and now they have their smoking gun:  Since the Program’s inception in 2001, 62% of eligible development projects declined to participate. That outcome demonstrates that the IZ Program is not only fundamentally broken, but also has resulted in the loss of significant public benefits, and hindered progress towards the City’s own sustainable development goals.

It’s pretty simple:  Most developers said “no thanks” to IZ because the incentive offered by additional development capacity was not sufficient to offset the additional risk and cost. And one component of that additional cost is the requirement to include subsidized affordable housing in the project, or to pay for its construction elsewhere, a.k.a. an in-lieu fee.

Given the historic low participation rate in IZ under its existing encumbrances, it would seem obvious that increasing the requirements for affordable housing will only tip the scales further toward non-participation, in which case zero affordable housing is produced. When the toll is raised, the gains made from the projects that still opt in to the Program will be offset by the increasing portion of projects that decline. And this inherent “diminishing returns” aspect of IZ is why it should never be expected to have a consequential impact on Seattle’s affordable housing needs.

I wrote “would seem obvious” above because apparently it is not obvious to Seattle City Council, and all indications are that some Councilmembers will be seriously considering either raising the IZ in-lieu fees (again), or more likely eliminating the in-lieu fee option altogether and thereby requiring developers to subsidize the full cost of including affordable units in their projects.

In the South Lake Union neighborhood, Council recently imposed in-lieu fees that are up to 43% higher than the historic fees in downtown, and what is the result so far?  Of 20 eligible development projects in the pipeline, 14 are not participating—a no thanks rate of 70%. South Lake Union could be considered a best case scenario for IZ, since it is one of the hottest real estate markets in the country. But even under ideal market conditions, for most projects the incentive was insufficient to overcome the encumbrance.

Based on the estimates of Council’s affordable housing consultant, mandating inclusion of affordable units in projects would be equivalent to jacking the in-lieu fees by a factor between about two and four.* It’s hard to conceive how this would not lead to a precipitous drop in IZ program participation. And again, that would result in even less affordable housing produced, along with underdevelopment in urban centers that runs counter to Seattle’s Comprehensive Plan, as well as regional goals for sustainable growth. Same goes for tweaking IZ to require affordability levels deeper than 80%AMI (i.e. where the real need lies)—the opportunity cost to developers will rise significantly due to the greater requisite subsidy, and the IZ participation rate will drop.

Since 2001, IZ in Seattle has generated about $27 million from in-lieu fees, which resulted in the production of about 600 affordable rental units, if the effect of leveraging funds from other sources is included. Council’s consultant predicts that because funding sources that have been leveraged in the past are drying up, from here on out the City should anticipate about a doubling of their expenses to produce affordable housing*—in other words only about 300 units could be produced from that $27 million. For reference, $27 million would cover the turn-key production costs of only about 110 typical multifamily units. To put those numbers in perspective, during that same time period, some 46,000 multifamily units were built in Seattle.

Some would argue that even though IZ produces a miniscule amount of affordable housing relative to the need, it’s still better than nothing. But this argument becomes indefensible when you consider the negative impacts of the underdevelopment that IZ can cause. The Downtown Seattle Association has published estimates of a wide range of public benefits that were forgone based on 25 projects in downtown and South Lake Union that opted to not participate in the IZ program, illustrated below:

City Council must be held accountable for putting this magnitude of public benefit at risk through the imposition of IZ. Granted, the added encumbrance of providing affordable housing is only one of many reasons developers might opt to forgo the maximum development capacity allowed through IZ. But those other factors will always be part of the development equation. And in any case, piling on affordable housing is guaranteed to tip the scale in the wrong direction, especially if the requirements are made more onerous, which is the direction the political winds are blowing.

The potential sacrifice of 3,811 new housing units is the most glaring illustration of how IZ is an intellectually bankrupt policy. The biggest driver of Seattle’s current housing affordability crunch is demand outstripping supply. When thousands of new housing units go unbuilt, that means thousands more households competing for existing housing, and at the end of the day, it will be the poorest households that get priced out. And it also means thousands more housing units likely to end up built in sprawling outlying areas.

To sum it up with bad cliches, Incentive Zoning is like trying to squeeze blood from a stone, and robbing Peter to pay Paul, and shooting yourself in the foot, all rolled into one. Given that in this case the stone is such a politically expedient scapegoat, there is no question that City Council’s life would be easier if the above cliches weren’t so apt. But the sooner Council accepts the inherent futility of IZ, the sooner they can get on with the hard work of developing better housing affordability strategies—that is, strategies that—unlike IZ—encourage market production of housing supply to help ease prices, have the potential to generate funds for subsidy commensurate with the need and cost, and place the tax burden on all property, not just new development.

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*The Cornerstone Partnerhip’s estimates provided to City Council: Opportunity cost to developer of affordable units built in project = $100k – $200k/unit; In-lieu fee = $56k/unit; Historic cost to City = $44k/unit; Future cost to City = $95k/unit

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This post originally appeared at Smart Growth Seattle.

For the better part of the past decade, both advocates and policymakers have been decrying Seattle’s perceived lack of housing affordable to people with incomes in the lower-middle range—so-called “workforce housing.” As a result, Seattle has implemented and is continuing to expand a program known as Incentive Zoning intended to create subsidized workforce housing through fees imposed on new development.

But there’s one rather important thing wrong with this picture:  Available data show that there is no shortage of workforce housing in Seattle.

For reference, workforce housing is typically defined as housing that is affordable to households with incomes between 60 and 100% of area median income (AMI). In Seattle, 80% AMI corresponds to $49,440/year ($24/hour) for a single-person household. Assuming the standard that 30% of income is spent on housing, that translates to an “affordable” rent of up to $1342 per month.

For all the attention workforce housing gets, there’s surprisingly little up-to-date, hard data available on how much housing is out there priced at workforce affordability levels, compared to how many households there are that need it. King County analysis based on a 2009 survey of market-rate rentals found that a whopping 83% of units in Seattle were affordable to a household earning 80% of AMI. For 50% AMI, 37% of Seattle’s rental units were affordable. Across King County and the greater region, data reveal a similar pattern of excess housing supply at workforce income levels, along with a sharp increase in need the further income drops below workforce levels.

Based on the raw numbers there would seem to be plenty of existing workforce rental housing in Seattle, but one complicating factor is that some households may be renting housing that is cheaper than what they could afford according to the standard 30% formula. This “downrenting” has the effect of reducing the availability of housing that is affordable to lower incomes. The affordable housing advocacy group Housing Development Consortium has published some analysis by the Seattle Office of Housing on downrenting, and the results are summarized in the table below:

Looking specifically at households with incomes between 50 and 80% of AMI (yellow column)—which is the lower portion of the workforce range—there was a surplus of over 32,000 housing units with affordable rents. Put another way, for every 100 households in the 50-80% AMI range, there were 219 affordable rentals in Seattle.

After subtracting the number of units being rented by households earning more than 80% of AMI, there is still a surplus of 4,745 rental units affordable and available to 50-80% AMI households; for every 100 households in the 50-80% AMI range, there were 118 affordable and available rental units in Seattle. In other words, even when downrenting was accounted for, there was still no shortage of workforce housing.

Since 2009 housing costs have risen faster than incomes, so current data would likely show some reduction in affordability. And rents vary significantly between different neighborhoods. But even with those caveats, it’s hard to imagine how anyone could interpret the available data as proof of a dire need for programs to subsidize workforce housing in Seattle. Yet currently Seattle City Council’s affordable housing efforts are focused on an extensive examination of how to do exactly that using Incentive Zoning. Here’s how Council justifies it:

For example, a public school teacher’s starting salary of $42,000 suggests that he or she should not pay more than $1,050 per month (30%) for housing. Yet the average rent in Seattle for a 2 bedroom / 1 bath apartment is $1,466.

That’s right, we have a workforce housing crisis because a single person earning far less than the City’s average income can’t afford the City’s average rent for an apartment with an extra bedroom, never mind the half of the housing stock that rents below the average. And so apparently therefore we need to exact a toll on new development through Incentive Zoning so that someone making up to $49k can live in a subsidized apartment in a brand new downtown high rise. Seriously—if any of you reading this were in those shoes, would you feel entitled to that?

Meanwhile Council balks when it comes to solutions that would support meeting workforce housing needs through private development—no public expense necessary—such as microhousing, accessory dwelling units, meaningful upzones in lowrise zones, removing off-street parking requirements, and other strategies that could reduce the cost of producing housing.

In previous posts I have pointed out the numerous flaws in Incentive Zoning—how it defeats its own purpose by restricting supply and increasing the cost of housing production, how it’s based on an outdated paradigm that sees dense development as negative impact to be mitigated rather than a critical sustainability solution, and how its inherent limits preclude it from ever generating more than a drop in the bucket relative to the need.

Now we can add to that list of flaws the fact that Seattle’s Incentive Zoning Program was designed to subsidize workforce housing, even though the data indicate that the City already has enough. Available workforce housing may not be brand new housing. But even if new housing has rents higher than workforce affordability levels, it will still help preserve the availability of workforce housing by absorbing demand from a high-income renter who would otherwise be competing for, and driving up the prices of existing housing.

The City’s real housing need is at the deeper affordability levels, as the data clearly show an increasing deficit of affordable rentals as incomes drop below 50% AMI (see data table above). And yet another pitfall of Incentive Zoning is that even though it doesn’t address the real need, it creates the false impression that electeds are taking meaningful action to solve a housing problem. That is, Incentive Zoning is a politically expedient distraction.

To sum it up succinctly: Why are we applying an counterproductive tool to solve a problem we don’t have? We can and must find better solutions to address Seattle’s actual affordability needs.

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P.S. For brand new info on the ineffectiveness of Seattle’s Incentive Zoning Program, check out this presentation by the City’s consultant, who found that 62% of of projects eligible for the incentive have opted not to develop the additional floor area. In other words, for most projects the Program is not an incentive because the fees are already too high.

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This post originally appeared at Smart Growth Seattle.

With the latest reports of surging housing prices in Seattle, affordable housing is once again a hot topic in wonkland. Both the Mayor’s office and City Council have recently convened committees to explore affordable housing strategies, but unfortunately these efforts are largely focused on approaches that place the burden of providing affordable housing on new development. The problem is that exacting additional fees on new buildings discourages development and increases the cost of production, both of which run counter to the original intent of making housing more affordable.

If Seattle aspires to be truly progressive on affordable housing—and hopes to avoid the fate of insanely priced cities like San Francisco—a serious reassessment is in order, a key component of which must be proper consideration of the housing supply side.

First of all, it cannot be overstated that creating new multifamily housing in Seattle’s urban centers is a public benefit in itself. That a sustainable future depends on concentrating growth in dense urban centers is arguably the most agreed upon and defensible concept in the history of modern urban planning. That means when housing sites are developed below their potential in places like Seattle’s South Lake Union urban center, it’s a 50 to 100 year lost opportunity.

The stupid simple reason the supply side matters for affordability is that increasing housing supply puts downward pressure on prices. This relationship can be obscured, because in growing, high-demand cities prices may rise even as gobs of new housing is built, as is currently the case in Seattle. But despite claims that housing gets a magical exemption from basic principles of economics, it is an indisputable fact that housing prices are heavily influenced by supply and demand, as is verified over and over again by direct experience, e.g:

“More buyers and a limited supply of available homes have lifted prices in most cities across the country…”

Or closer to home:

“Whitworth manager Chris Garvin said the increases … are reflective of a high demand/low supply rental market in Capitol Hill. With a slew of new apartments coming online next year, Garvin said he expects rents in older buildings to level out.”

When housing demand is very high, it may not be possible to increase supply fast enough to completely turn around rising prices. But even in such cases, greater supply will keep prices lower than they would have been absent that increased supply, and that benefits everyone in the housing market, those on the lower end of the income spectrum in particular.

Still, some affordable housing advocates balk at the supply side because they know that even with limitless supply the private market cannot deliver housing at deep affordability levels. What they are missing is that it doesn’t have to be an either/or scenario:  Supply and subsidy can be mutually beneficial. When supply keeps prices in check, it reduces the amount of subsidy required to make up the difference between market rents and rents that lower-income households can afford. The availability of new units also reduces competition for older housing, thereby helping to preserve that lower-cost option.

What those who are inclined to ignore the supply side are also missing is that trying to maintain sufficient affordable housing through subsidy when housing supply is constrained in a high-demand market is like trying to hold back the incoming tide with a broom. How much does suppressing supply aggravate affordability? Consider San Francisco:

Over the last 20 years, San Francisco has added an average of 1,500 new housing units per year— to keep up with demand, we should have built two or three times that many. The inevitable result is a matter of high school economics: With too few apartments and too many people, prices keep going up.

“That didn’t have to happen,” says Enrico Moretti, a UC Berkeley professor whose book, The New Geography of Jobs, argues that restrictive zoning and land-use policies are a prime reason for San Francisco’s housing affordability crisis. He likes to cite a study by economists at the University of Pennsylvania’s Wharton School of Business, which found that, of nearly 2,500 municipal areas across the country, San Francisco is the most restrictive large city of all. That’s no surprise to anyone who follows local politics, where every new development is subject to endless lawsuits, petitions, and NIMBY-funded opposition.”

Many Seattle policy makers like to point out that San Francisco has more stringent requirements on developers to provide affordable housing—including “inclusionary zoning” that requires low rent housing units in new development—not to mention rent control. The implication is that San Francisco is doing a better job than Seattle at tackling affordable housing, and therefore Seattle needs to catch up by emulating them. How’s that working out for ya down there, San Francisco?

What’s lacking in Seattle’s assessment of San Francisco is a recognition of the blatant truth that, with the exception of a tiny percentage of residents who are lucky enough to score a subsidized unit, San Francisco has failed spectacularly at maintaining affordability. And that has everything to do with neglect of the supply side. The suppression of supply has led to an increase in housing prices across the board that dwarfs any gains that may have been made through subsidies derived from “incentive” fees on development or inclusionary units. This is not an outcome a smart city would want to emulate.

Addressing the supply side means rezoning to allow greater development capacity, easing onerous development regulations, cutting fees and delays on permitting, reducing construction costs and developer risk, and generally allowing for more flexibility, options, and variety in the housing market. It also means having the backbone not to pander to naysayers who will always find some reason to oppose pretty much any proposed development project.

Requiring subsidized units or increasing the “incentive” fees charged in exchange for allowing the development of larger buildings are perfect examples of how to work against the supply side. In the best case, these requirements result in the production of a relatively small number of low-rent units with a commensurate price increase in the market-rate units, and that offsetting of expense from one unit to another does not make for a net improvement of overall affordability.

More typically, however, we can expect such encumbrances to constrict housing production because they undermine financial feasibility. Currently there are at least half a dozen proposed multifamily projects in South Lake Union that are opting to leave significant development capacity on the table because the “incentive” fees are in reality a disincentive. Again, when housing sites are underdeveloped, the sacrificed supply sets back progress on both affordability and sustainable growth.

And given all there is to be gained, do we really need to be worried about developers making money? If potential profits are high, it will attract more private developers into the game and more housing will get built, providing the dual benefit of putting downward pressure on price while also helping us meet our smart growth goals. If development is allowed to respond to the market, eventually supply and demand will move toward a healthy balance, and profits will fall accordingly.

As is widely recognized, even if the supply side is cultivated, subsidies will still be necessary to provide housing that is affordable to very low income households. Seattle’s affordability mission should be to establish innovative new funding sources for subsidy that (1) don’t restrain supply, (2) don’t favor existing residents over newcomers, and (3) don’t sabotage smart growth. Seattle’s Housing Levy and Multifamily Tax Exemption are good existing options. In contrast, taxing new development with “incentive” fees fails on all three counts.

I believe that one appropriately fair new tax revenue source for subsidizing affordable housing would be an additional assessment on single family homes. Seattle has about 2/3 of its land area zoned for single family houses only, which amounts to a huge constraint on increasing housing supply that pumps up prices across the board. Or how about a capital gains tax on the sale of land, which would have the added benefit of tempering land speculation? Seattle is overflowing with smart people. Let’s avoid repeating the mistakes of other cities, accept the challenge to think outside the box, and get this figured out.

Efforts to provide affordable housing are motivated by the desire to foster equitable access to all the valuable advantages offered by vibrant cities such as Seattle. But if the supply side is left out of the equation, you can be sure that equity is going to take the hit.

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Dan Bertolet lives in Seattle and is a socialist at heart.

Note:  Gerding Edlen’s “Pine + Minor” market-rate apartment building shown in the photo above is participating in Seattle’s Multifamily Tax Exemption program. Twenty-three of its 111 total units are required to be rent-restricted. Sixteen of its 75 studios must be set aside for households earning less than 65%AMI at a total housing cost of less than $986/mo. Seven of its 36 one-bedroom units must be set aside for households earning less than 75%AMI at a total housing cost of less than $1,301/mo. The market-rate units are expected to rent for an average of $1,487 (studios) and $1,792 (1-bedrooms). Thanks to reader Mike Kent for pointing this out. It is also important to remember that the building is also playing a positive role for affordability in Seattle by simply providing new market-rate supply to help meet Seattle’s voracious demand for housing.