HALA R.4 Renew and Expand the Multifamily Tax Exemption Program

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

Wellington Lofts Update

The Wellington Lofts project is finally complete. A couple years ago, we helped renovate the existing building, adding 6 six new units in the basement. The recently completed alley building provides 3 new studio apartments on top of a re-built 6 car garage structure. All told, we raised the unit count from 16 to 25 and brought the existing defunct parking back into service, all while preserving the existing building.

The alley building roof slopes and overall massing are designed to step down in scale towards the alley, creating a more harmonious composition and limiting the amount of wall area facing the apartments across the alley. The massing scheme allows the sleeping lofts to be placed away from the west building facade, which improves privacy relationships across the alley

The alley building cladding features painted cement panels painted with a range of colors that complement the brick of the original building so the new addition fits more comfortably with the character of its immediate context, while using contemporary forms and materials.

The building has a consistent design concept and a material palette. Garage doors and apartment windows are aligned from top to bottom on the facade in order to provide a orderly composition, similar to that of neighboring masonry buildings.

Each unit has a large sleeping loft above the kitchen, bathroom and laundry at the apartment level. The living area takes advantage of the double height space. The thin floor plate and simple shed form provide each unit with access to good natural light. High windows provide individuals within the units views to the sky and maintain privacy from neighboring buildings.

Wellington is a great example of the kind of work we have been doing on existing apartment buildings since the new multi-family code passed in 2011.  We have done renovations like this on a couple dozen apartment buildings, adding needed units to our housing stock while preserving and rehabilitating existing building fabric.  Prior to 2011, density limits and parking requirements prevented building owners from fully utilizing their existing buildings

Reinventing Microhousing - Yobi Tour Follow-up

We had a great turnout for our tour of the Yobi Apartments last week.  About a hundred people came through, many of whom had never seen the inside of a micro-housing development. Our goal for the tour was to open people's eyes to what micro-housing can be: Good housing that provides opportunities for people to live in central locations and desirable neighborhoods, without any need for public subsidy.

In 2014, legislation virtually ended the production of micro-housing in Seattle. For the trickle of micro-housing that remains in the pipeline, further legislation this spring cut off micro-housing from participation in the Multi-Family Tax exemption program (MFTE), a program that provides property tax exemption in return for providing discounted rent on 20% of the units.

Prior to the shutdown, Seattle was producing about 1000 microhousing units per year, with market rents that generally range from about $700-$1000/mo.  That rent is affordable to people making 50%-65% of area median income (AMI).  Participation in the MFTE would drop that rent to $628/mo, which equals 40% of AMI, or put more simply, is affordable to someone making minimum wage.

A little context: Seattle will spend the next two years pulling out hair and rending garments in order to pass the up-zones needed to enact an inclusionary zoning plan that will build six thousand units of 60% AMI affordable housing over ten years.  In the same time, we could build ten thousand units of micro-housing that would serve incomes at 40%-65% AMI.  What do we need to do to build those ten thousand units?  Virtually nothing. Just pull out the cork.

This year, we will be pushing hard to correct the flawed policy on MFTE that excludes microhousing from the program.  Next year, when the majority of the HALA recommendations come before the council, we will be making the case for changes to zoning that will remove the de-facto ban on microhousing.  In the meantime, we'll just keep building the best housing that we can.

Some reactions to Yobi:

http://www.smartgrowthseattle.org/yobi-apartments-microhousing/

Facebook feeds below.  Note, Councilmember O'Brien missed the tour but made arrangements for a walkthrough later in the week.

Calling All Artists! - Reinventing Microhousing Part II

We need your input - Artist Survey!

We recently started design for ArtWorks, our latest design + development effort since completing our award winning Marion Green Townhomes. Artworks explores the intersection of affordability with livable communities.  We are continuing our earlier work on micro-housing, this time to serve the needs of the local artist community.

As Seattle struggles with affordability within the urban center there is a clear need to provide affordable housing for artists. There are various models for that to happen, including subsidized housing (slow and limited funding available) and co-op housing (difficult to coordinate financially and legally), but these models will never come close to meeting demand. The Artspsace program, for example, currently has a waiting list of over 1000 people for their 150 units. The model that our firm is exploring with Artworks is based on a congregate residence similar to what we designed for the Yobi Apartments, where each individual rents a small, affordable personal live/work space and enjoys access to a larger communal creative space. Artists are a group that both needs affordable housing and could benefit from a communal living arrangement that brings artists together to share work, ideas, events, and creative foment.

The Artworks site is located across the street from the Artspace Hiawatha Lofts at South Charles Street and Hiawatha Place South in the lower Central District.  This map shows some of the neighboring art facilities and institutions that will be part of the network of resources available to Artworks tenants:

The building is composed of 33 sleeping units over 3 floors plus a daylight basement. Each resident will enjoy a storage loft in their unit, a common kitchen on each floor, and a main floor commons including a lounge, kitchen and laundry. The street level space is dedicated for a tenant that can provide a facility that would provide an amenity useful to working artists.  At this time, we are hoping to find an organization that focuses on some aspect of digital arts, such as a computer lab, maker space, 3d printing and fabrication, or other related facility.  We are willing to provide space at below market rent in exchange for finding tenant that is a good fit and can be of use to our tenants. Please contact our office if you or an organization you know may be interested in renting the space when the project is complete.  

In addition to looking for a tenant partner from within the arts community, we are seeking feedback from the creative community and area stakeholders on the current Artworks proposal. Artists, please tell us what you think and share this survey with others who might be interested in the Artworks project.

Follow-up: Unit sizes range from small basement units at around 150sf to lofted units ranging from 200-300sf.  Small units are expected to rent for around $700/mo.  Lofted units are expected to rent from $850-$1000/mo.  If the city follows the HALA recommendations and changes the rules to allow congregate housing to participate the Multi-Family Tax Exemption program, seven units would have rents capped at $620/mo.

Reinventing Microhousing - Yobi Apartments Open House Tour Aug 25th 5:30-7:30pm (NEW DATE)

NOTE - DATE HAS CHANGED: AUGUST 25TH 5:30-7:30PM  - 1219 E MARION ST

The Yobi Apartments is finally ready.  This project has been much discussed as a new model for how to build microhousing in Seattle.  The Yobi was designed from the ground up with the conviction that congregate housing can be a desirable housing option where the architecture and the shared features can support chance interaction and help to build community among the residents.  For microhousing proponents and critics alike, we welcome you this open house to learn more about microhousing and what it can be.

Event Invitation and RSVP:
https://www.eventbrite.com/e/reinventing-microhousing-come-tour-the-yobi-apartments-tickets-17914814693

Some related reading:

Our original post describing the project:
http://neimanarchitects.blogspot.com/2013/03/re-inventing-microhousing.html

A review of microhousing code issues and basic metrics:
http://www.theurbanist.org/2014/09/18/an-architects-perspective-the-details-of-microhousing-projects/

A discussion of the The Yobi's sustainable features and energy use:
http://neimanarchitects.blogspot.com/2015/02/re-inventing-microhousing-yobi.html


Should the Seattle City Council revisit restrictions on micro-housing?
http://www.seattlemet.com/articles/2015/7/17/hala-report-calls-for-modifying-barriers-to-pod-apartments

Marion Green Wins 2015 PSRC Vision 2040 Award

We had a little party today to accept a Puget Sound Regional Council Vision 2040 award for our Marion Green Townhouses. The homes were completed a few months ago, but this is a project that has been more or less nine years in the making.

In 2006, Scott Clawson and Todd Allan walked into my office with a piece of land. They wanted to build a little townhouse project, keep one unit for themselves & hold the other two as rentals.  At the time I was just starting to get into development projects.  I knew very little about townhouses, just enough to be aware that virtually every project was built in the same way:  Build units in the front, units in the back, and the center of the site is a driveway zone that gets you to the parking garages.  Scott and Todd asked me if I could design them one of these. I took one look at the cross section of the building & said "well, you could, but this is a really bad housing design.  Why not just cover the center with a deck?  That would hide all of the car parking & the center of the project becomes a community open space that you all enjoy."   Simple, right?

Turns out why not is because this concept violated about a dozen development standards of Seattle's land use code.  To do this simple little project we had to volunteer go through the design review process to get permission to depart from all of the various standards that we’d need to get the project done.  All told it took over two years to get our permit approvals, and by the time we work our way through the process, it was the fall of 2008, which you may recall was when the entire economy collapsed.  Bank financing dried up, the project foundered, and never got built.

I was upset that we didn’t get this little jewel of a project built but even more so that as a city, our codes were wound so tight that it was a “good ideas to the back of the line” kind of situation.  As it turned out, the Department of Planning and Development was of a similar mindset, and beginning to study a re-write of the multi-family code.  It was becoming clear that we needed to liberalize our land use code if we were going to make good housing possible.  I spent the recession organizing a group architects to work with the city on the code language, and also to go out into the community to give presentations, explain the code changes and why they were necessary.

By 2011, we had a new code in place, and as it turned out I was the person who had spent the most time reading it.  This gave me an opportunity to meet a lot of developers who came to me to ask what was possible under the new code.  This is how I met Joe Paar.  He was one of the first people that recognized the value of combining technical code knowledge and design skill to develop more successful projects, in every sense.  When I decided to develop my first project, I needed a partner to help make the finances work.  Joe was the guy that I asked for help & within a couple minutes discussion we were off to the races.  Joe was a true partner at every step of the way, and he deserves a lot of credit for getting this project successfully to the finish line.

All told it took nine years from the first sketch to where we got to stand in the courtyard with the project team and take a victory lap.  From the outset my goal was to build a better mousetrap:  Provide a replicable model for a better way to do infill housing in Seattle. I truly believe we’ve done that.  We’ve found a way to hide the cars, create more open space, break down project scale, bring more natural light into the homes, and most importantly, provide a commons that helps facilitate and build community among the families that share this little plot of land.  I'm also happy to say that other people have started to pick up on this model.  There are now four other courtyard lid projects in the works, two by our office, but two others by different architect/developer teams. It is my hope that the recognition that we are received today will help to spread the word and speed the adoption of this new housing archetype in the marketplace.

Thank you to the residents of Marion Green for sharing you home with us today. I hope you enjoy living in Marion Green as much as we enjoyed making it for you.

Project Team:

Architect:  David Neiman and Juan Vergara - Neiman Taber Architects

Developer:  David Neiman and Joe Paar - Paar Development
Structural Engineer:  Jim Harriott and Benjamin Bird - Harriott Valentine Engineers
Landscape Architect: Patricia Lenssen - Philbin Landscape Architects

Geotechnical Engineer: Rob Ward - Geotech Consultants
General Contractor:  Peter Ottele and Doug Scheer - Village Builders
Strategy and Marketing:  Joe Paar - Paar Development
Sales Agent:  Jacob Menashe - Berkshire Hathaway