The MFTE program is a vitally important tool that leverages market rate
development participation in the effort to increase the supply of affordable
housing units in Seattle. Over the last
couple years, the city has struggled to incorporate small unit development
into the program. City policy has been at turns
overly permissive and punitive, with the result that the current legislation effectively
prohibits participation by small unit development. Given the inherent ability of small units to reach deeper levels of affordability, we must change the MFTE program to incorporate SEDU and congregate housing while ensuring fair
public benefit is returned.
Currently we are working on three congregate housing projects
with a total of over 200 units of housing.
Each of these projects wants to participate in the MFTE program,
but under current rules this is not possible.
Below are our suggestions for improving the MFTE program:
1) Create and publish an explicit methodology for how
the MFTE rent is calculated.
The calculation is not difficult, and relies on only a few
variables, all of which are readily available through public records and
published data sets. The variables are:
- Value of the property tax relief as a percentage
of the building rental income. This
number is available through Dupre & Scott as part of their standard
reporting.
- Percentage of units that you want to
discount. Policymakers get to choose the number,
for example 20% or 25%.
- Typical market rent for new construction. Again,
this number is available through Dupre & Scott.
Once the proper data is collected, calculating the
appropriate discount is quite simple:
|
Step 1: Calculate the appropriate discount
|
Note
|
A
|
Property tax as % of the building income.
|
6.50%
|
Obtain from Dupre and Scott
|
B
|
% of units subject to MFTE participation
|
20%
|
Policy choice
|
C
|
Appropriate discount (C=A÷B)
|
33%
|
Calculated value
|
|
Step 2: Calculate MFTE
Rent
|
|
|
D
|
Typical Market rent
|
$1,000
|
Obtain from Dupre and Scott
|
E
|
MFTE Discount (E=D*C)
|
$325
|
Calculated value
|
F
|
MFTE rent
|
$675
|
Calculated value
|
In the above example, all of the data needed can be obtained
from market surveys that are widely available and easily verified. The
math is explicit, clear, and unassailable in terms of representing a fair value
for value exchange. Publishing a formula
like this would both explain to the public how the program works and provide a
clear way forward for future council members to steward the program in a way
that is objective, responsible, and fair.
2) Use the official methodology
to calculate an appropriate MFTE rent for a given type of unit.
The recent adjustment of MFTE rents for SEDUs is an example
where the appropriate rent and percentage of units required to participate does
not stand up to an objective study of market rents and the value of the
property tax relief.
The current MFTE proposal from the Mayor’s office for congregate units appears to be closer to
the mark, but the rents proposed for SEDU’s remain strangely disconnected from
reality. Based on the current system of
classifying units by type and bedroom count, the following values are roughly
in line with market rents, using either 20% or 25% participation.
Housing type
|
Avg. Market Rent*
|
MFTE Unit %
|
Value of tax waiver
|
Discount
|
Fair MFTE Rent
|
Current Law
|
Congregate
|
$890
|
25%
|
6.5%
|
$231
|
$659
|
N/A
|
SEDU
|
$1,350
|
25%
|
6.5%
|
$351
|
$999
|
$628
|
Housing type
|
Avg. Market Rent*
|
MFTE Unit %
|
Value of tax waiver
|
Discount
|
MFTE Rent
|
Current Law
|
Congregate
|
$890
|
20%
|
6.5%
|
$289
|
$601
|
N/A
|
SEDU
|
$1,350
|
20%
|
6.5%
|
$439
|
$911
|
N/A
|
3) Change the way unit
types are classified to remove incentives to game the system.
The current system of classifying units by the number of
bedrooms creates an incentive to provide the smallest possible unit within a
given category in order to give the least possible discount in exchange for
MFTE participation. This formula encourages
developers to game the system, creates odd unit designs, and diminishes the
value returned to the public. The
example below shows three units from one of our current projects. These units are not significantly different from
one another, but due to the coarse steps inherent in the current classification
system, they behave very differently under the MFTE program.
One Br
Apartment
|
|
Size
(sf)
|
300
|
Market
Rent
|
1350
|
MFTE
rent
|
1434
|
Discount
|
None
|
Studio
Apartment
|
|
Size
(sf)
|
290
|
Market
Rent
|
1300
|
MFTE
rent
|
1020
|
Discount
|
-285
|
SEDU
Apartment
|
|
Size
(sf)
|
253
|
Market
Rent
|
1150
|
MFTE
rent
|
628
|
Discount
|
-522
|
Another factor to be considered is that as units get
smaller, relatively minor differences in the size of units have a big effect on
price as a percentage of the rent. A
review of market data for micro-housing shows that the variation in size between a small congregate unit and a large congregate unit is over 50%. Treating all size units the
same has the effect that the projects with larger and more livable units are
the least likely to participate, while the projects with smallest units are the
most likely.
These perverse incentives can be solved by using a simple
table similar to the ones that every American uses to calculate their income
tax. The table has a few gradations of
unit size and rent per square foot. Each value would be created using market data. Calculation of the appropriate market rent
for a given unit and the corresponding MFTE rent is a simple process, as
illustrated below:
Market Rent Calculation Table
|
Unit Size
|
200sf
|
300sf
|
400sf
|
500sf
|
600sf
|
700sf
|
800sf
|
900sf
|
1000sf
|
$/sf1
|
$5.00
|
$4.50
|
$4.00
|
$3.50
|
$3.20
|
$2.95
|
$2.90
|
$2.80
|
$2.80
|
Example: Calculate market rent for a 230sf unit
|
Market rent and MFTE rent calculated based on market data and
individual actual unit sizes cannot be gamed.
|
Market rent = 200 * $5.00
+ 30 * $4.50 =
|
$1,155
|
|
|
|
|
|
Example: Calculate MFTE rent for a 230sf unit
|
MFTE rent = $1135 -33%
discount2 =
|
$780
|
|
|
|
|
|
|
1 The rents listed in the above table are rough estimates of today's housing market. They are not derived from a formal market study.
2 The 33% discount is taken from the formula we developed in recommendation #1.
4) The MFTE is a
voluntary program. The family size unit
“incentive” will not work.
One of the defining features of the MFTE program is that
participation is voluntary. Because of
this feature, a fair value for value exchange must be offered in order to
encourage participation. If policy
makers ask for more in rent concessions than is warranted by the value of the
property tax exemption, developers simply choose not to participate. Attempts to “extract” more value from
developers than the tax exemption is worth makes for a great applause line, but
doesn’t actually work in practice. To
the contrary, it simply drives potential participants away from the program,
resulting in fewer affordable units.
The recent proposal to incentivize family size units by
mandating a higher percentage of affordable units unless developers provide at
least 4 two bedroom units in their projects is an example of a misguided
extraction attempt. The result of this
policy will be:
- Larger projects, where provision of a few larger units is customary, will get a benefit in exchange for doing nothing more than what they were planning to do in the first place.
- Smaller projects where provision of a few large units is difficult will find that MFTE is bad deal & simply will not participate.
The section intended to encourage two-bedroom units should be removed from the legislation. Family sized housing is an important issue, but cannot be effectively incentivized using a voluntary program like the MFTE. Attempting to do so is counter-productive and makes it harder to responsibly administer and steward the MFTE program in a way that maximizes participation and public benefit.
*Thanks to Dylan Simon and Jerrid Anderson of
Colliers International for providing the market data on rents for SEDU and congregate housing
