January 27, 2020

State can't tell if housing tax exemption is working

TACOMA — It's hard to tell whether a tax exemption used to build more than $4 billion in multifamily housing projects across Washington over the past four years is working as intended as a prime motivator to drive development, both affordable and market rate.

A 2019 legislative audit of the multifamily property tax exemption program blames the lack of clarity, in part, on inconsistent tracking of the program by some of the cities that use it.

“It is inconclusive whether this use represents a net increase in development,” the report states. “Cities have opportunities to maximize the impact of the exemption and improve reporting on results.”

Local jurisdictions, including Tacoma, Olympia, Auburn and Pierce County, use the program as a means of encouraging the development of badly needed housing.

Cities and counties making use of the tax are required to report results of their programs to the state, but an audit finalized in December by the state Joint Legislative Audit and Review Committee found inconsistent reporting methods, and, in some cases, no reporting at all for a year or more.

Among some of the different standards noted:

Auburn, for example, requires audited expense records before granting the exemption, according to the report, while Lakewood is one of the few cities to analyze the effect of the exemption on a development's profitability.

In some cases, applications of the exemption have drawn questions, including granting it to a building with some units reportedly used for a time as an Airbnb. In at least two cases, the exemption was granted to assisted-living facilities.

The report also notes the bulk of the units created thus far serve small households.

“State law does not limit the type or size of units that may qualify. About 75 percent of the units created between 2007 and 2018 are studios or one bedroom,” the report states. “The median Washington household is 2.6 people.”

It will be up to the state Legislature to determine what, if any, fixes need to be made.

All of this comes at a time with the city of Tacoma is reviewing its use of the exemption, and Olympia is facing a court challenge over its use of the program.

In the meantime, the audit noted that in 2018 owners of exempt developments saved an estimated $80 million in property taxes, the bulk of that in local as opposed to state taxes.

“Over the past four years, an average of $1.1 billion in new property value became exempt each year. In 2020, approximately $232 million in property value will lose the exemption and become taxable,” the report noted. “If the development trend continues, JLARC staff expect new exemptions to outpace expiring exemptions.”

MFTES THROUGH THE YEARS

The state's original version of the multifamily property tax exemption was created in the mid-1990s to help spur development in targeted areas as part of the Growth Management Act.

Among the GMA's top goals are reduction of urban sprawl, concentrated urban growth, economic development and affordable housing.

The original version of the program created a 10-year property tax exemption. That was revised in 2007 to the current two versions, 8-year and 12-year.

The 8-year version offers an exemption on the creation of four or more units.

The 12-year includes an affordability component for the creation of units to serve lower income levels. Local governments can create additional requirements or restrictions.

The property tax exemption can be applied to new housing construction or the increased value of a building due to rehabilitation. The exemption does not apply to the land or non-housing related improvements.

Under the population thresholds in the statute, 102 cities in Washington are eligible to offer the exemption. Of those, 49 have adopted a program. Of those, 26 have gone on to approve projects using it.

The Joint Legislative Audit and Review Committee found 424 developments had been approved for an exemption since 2007, creating 34,885 new units — 82 percent of those in Seattle, Tacoma, Spokane or Renton.

Of that, 21 percent are designated as affordable.

Affordable units have steadily remained a low percentage created by the program, notably in Tacoma.

A Commerce report reviewing the program in 2010 noted that between 2007 and 2010, 10 cities issued 193 tax exemption certificates during the reporting period, producing 6,326 housing units, of which 1,625 were considered affordable housing, about 26 percent.

None of the affordable units created in that time frame were in Tacoma, but 968 new market-rate units were.

The 2010 report stated: “Property tax exemptions appear to generate affordable housing units only when municipal ordinances require that they do and with additional incentives added.”

The Commerce report's conclusion, which came not long after the Great Recession, was that the policy goals of creating affordable and market rate were being achieved based on cities' objectives.

“Some, including Renton, Tacoma and Burien, are developing market rate housing in targeted areas and others, like Seattle, are producing affordable housing,” the report states. “The program is achieving both policy goals included in the 2007 legislation.”

Flash forward to the 2019 JLARC report.

“It is unclear whether and how (MFTEs) affected decisions to develop,” according to the report. “Without financial analysis by cities on proposed developments, some projects may be unnecessarily subsidized.”

Meanwhile, Tacoma still lags in creating affordable units.

Of the projects currently under the exemption in Tacoma, 2,034 units have been created, with 59 (2.9 percent) developed as affordable in the 12-year version, according to figures cited by planning and development staff at the Dec. 10 City Council meeting.

“Tacoma is one of the cities that has used (MFTEs) the most,” Rachel Murata, research analyst with JLARC, told The News Tribune, “but Tacoma also was low with the number of affordable units created.”

INCONSISTENT REPORTING BY CITIES

The report cites a lack of complete or consistent filing as a problem with tracking the performance of the exemptions.

“As a result, the state lacks critical information such as the exemption value and units created,” according to the JLARC audit.

The audit looked at the participating 26 cities and Pierce County, which is eligible along with other counties (but is the only participating one).

JLARC staff collected data from city staff and county assessors.

The audit noted: “At least 11 cities have failed to report in one or more years, while others submitted incomplete reports that make the data unreliable overall.”

Olympia was one of the 11 cities, along with Bellingham, Ellensburg, Tukwila, Yakima, Auburn, Seattle, Everett, Shoreline, Vancouver, and Lakewood.

Some of the cities have since pushed back on that characterization. Cities are required to report to Commerce each year that they approve exemptions.

CHALLENGE IN THURSTON COUNTY

In Thurston County, a case filed in November in Superior Court argues that tax-exempt projects are created there without the proper accounting.

Arthur West filed complaint against the city of Olympia and its City Council, along with “John Does 1-5,” saying the city failed to collect data and report their exemption information to the Department of Commerce.

Failing to do so, West argued in the filing, “undercuts the intention of the Legislature in authorizing cities to grant MFTEs ...”

He contends that since 2015, Olympia has issued multifamily tax exemptions totaling more than $34 million without collecting the necessary data the state needs to monitor the program and has “recklessly and negligently granted special privileges and immunities to certain favored developers, which will increase the tax burden on citizen landowners,” such as West himself.

The defendants' response filed with the court called for dismissal of the complaint and said that to the extent state law “creates any obligation for the City to report to the Department of Commerce, the Department of Commerce has exclusive authority to remedy any omission by the City in filing such reports.”

Olympia also “denies that it has failed to collect information from recipients of MFTEs issued by the City.”

Its filing states that the city “did provide the required report to the Department of Commerce for 2019, but admits that it has not provided the required reports to the Department of Commerce for 2016, 2017, or 2018.”

It further states the city “has provided much of the information sought by the Department of Commerce for 2016, 2017 and 2018 along with its 2019 report.”

It contends no MFTEs were issued in 2015 and denied “that the City has granted any special privilege or immunity to any person or persons.”

QUALIFIED FOR EXEMPTIONS?

One property receiving the exemption in Olympia was reported to be renting out units on Airbnb.

JLARC said they learned of the Airbnb case after it was brought to light in reporting by The Olympian in March 2019.

“At the time of this report, the city stated it was investigating the matter and that the question of short-term rentals was not clearly addressed by statute,” JLARC's report stated.

Since then, the listings appear to have been taken down.

In another case, the report found a different use of the 12-year “affordability” version.

Under the 12-year exemption, a project must make at least 20 percent of its units affordable to low- and moderate-income households; only one unit is required at minimum as a low-income unit to meet the requirement, according to the Department of Revenue.

The report found that “at least one city allows the requirement to be satisfied if units are affordable only to moderate-income households.”

That city is Spokane.

Teri Stripes with Spokane's Planning and Development Services told The News Tribune via email that its affordable level in the 12-year version is set up to 115 percent of AMI and pointed to the city's shortage of units.

“At the time and we still do, have only about a 1 percent vacancy rental rate, and rents were and still are rising rapidly for our market,” Stripes said. “… Until our supply and demand problems resolve, the intent is to spur construction of multifamily units and to keep a portion of them in the affordable range and not at market driven rent levels. Market rate projects (not income qualified) can still qualify for MFTE but only for the 8 year exemption.”

RECOMMENDATIONS AND HURDLES

The legislative auditor recommended to the Legislature that the program be modified to make cities include analysis of profitability “as a consideration in offering or approving exemptions.”

That would include:

• Analysis of a development's profitability with and without the exemption.

• For affordable housing, city-specific income and rent limits.

It also recommended that the Department of Revenue report on which “statutory ambiguities” could be resolved through guidance and which ones required actual statutory changes.

“These include items such as the timing of new construction, eligibility of assisted living facilities, composition of low- and moderate-income households in affordable units, and inclusion of short-term rental units,” the report states.

Those recommendations weren't fully embraced by Revenue or Commerce.

The Department of Revenue, in a response included in the report, contends that “local jurisdictions ... are in the best position to report to JLARC and the Legislature “ in how to move forward to address the ambiguities in MFTE program, but it will, “upon request,” provide guidance to local jurisdictions and county assessors.

The Department of Commerce noted it didn't have the staff, budget or authority to create reports on compliance but was considering revisions to the MFTE reporting form “to request additional information from reporting cities for the 2019 reports.”

It also noted it was open to working with the Legislature if amendments were considered.

Tate of Auburn had his own suggestions moving forward as far as how cities provide MFTE project information to the state.

“One suggestion that I would make for this process is that it should be easier to figure out how to report to Commerce,” Tate said. “I would also mention that Commerce (and other State departments) do a really good job of sending cities and counties annual emails that prompt us to report a variety of other types of information (housing unit surveys, population estimates, etc.). Perhaps there is a way for cities to receive an annual email that prompts us to file an annual MFTE report?”

Tacoma has put on hold an overhaul of its MFTE program, after seemingly moving ahead in December with changes.

At the end of a Jan. 7 study session, Mayor Victoria Woodards said a measure will be back for council consideration after the state Legislature ends this year's session in March.

“We'll wait until after the session ... it's not going away but it makes sense to wait for the state to finish doing what it may do,” Woodards said.