At current rate, the city will dish out $270 million in “MFTE” developer tax breaks over the next 12 years – $54 million of that is lost tax revenue for Seattle

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developer tax breaks too!

We just took a closer look at the City’s 2015 annual report on the performance of the City’s multi-family tax exemption (MFTE) program. In 2015, over $16 million in annual tax breaks were given away to about 120 residential developments.  

But remember, the developer for each of these projects under program rules receives up to 12 years worth tax breaks. For example a 100 unit development might receive somewhere around $2-$3 million in total over the 12-year term. What it means is that given the rising number of residential projects tapping the MFTE program, the City easily will dish out anywhere from $200-$270 million in tax breaks over the next 12 years to developers.

While some of these current projects, built years ago, will exhaust their benefits in any given year, a far greater number of new projects now are coming on line and tapping the MFTE program. That’s because the City has eased rules and removed restrictions allowing developers building anywhere in the city to tap the program, not just in a few selected areas.

That $270 million in our tax dollars – given away, passed on, or lost – it rivals the amount of our most recent housing levy. But unlike the housing levy – a special tax voters agree to have layered on their regular tax bill – voters get no say in this MFTE giveaway program.

And where most of these special levy tax dollars will go to non-profit developers to produce very low income units serving those at or below 30 percent of area median, the MFTE program subsidizes mostly private developers doing market rate development. A developer under the MFTE need only set aside 20-25 percent of their units at so-called affordable rates (at rents generally affordable to those between 65 and 85 percent of median which is well above what low and very low income households could afford).

This year one third of that $16 million given out was passed on to other taxpayers county-wide in the form of higher taxes, while the other two-thirds of the total represents tax revenue not collected at all – meaning it was altogether lost to county, state, city coffers. If this breakout holds over the next 12 years, it means as much two-thirds of $270 million or $180 million, would be lost to all layers of government. For Seattle alone, fully $54 million ($4.5 million per year) wouldn’t wind up in the city’s general fund.

A program the state legislature approved about 20 years ago – ostensibly to encourage new construction in areas of the state getting little of it, our city leaders now hand out these tax breaks like candy to nearly all housing developers.

From the annual MFTE report, here’s what leaps out at me:

* In total, about $16.8 million was given out in MFTE tax breaks to developers this last year (from all projects awarded these tax breaks dating back to 2006.)

* and $9.4 million of that total was “not captured”: meaning it represents lost revenue to all layers of government. $2.7 million of that total is lost revenue to the city.

* since developers get 12 years of tax breaks, if we assume every year for the next 12 years, $16.8 million is given away…. that means the total value of tax breaks awarded would amount to $201.6 million dollars. Assuming an annual value not captured of $9.4 million, then at the end of 12 years, it means a loss of $112.8 million for all layers of government. And a loss to the city of $32.4 million

* But consider that the program has been expanded from Urban Village areas to all areas of the city now zoned multi-family. More developers soon will be taking advantage of the program. And consider that the cumulative running annual total includes annual totals from projects receiving the tax break all the way back to 2007, when program rules were more restrictive and fewer projects were receiving MFTE tax breaks. For these reasons, to get a more accurate picture of future impacts, we should be basing our projections on current annual allotments, and projecting these out 12 years.

* In 2014, the annual value of tax breaks to projects awarded that year was over $3.5 million, roughly 2/3rd was not captured and represents lost revenue to all layers of govt. Since these projects will receive this value for 12 years, from these projects alone that translates into a total giveaway of $42 million over the period. About 28 million of that would represent lost revenue to all layers of govt,

* So let’s say in 2016, 3.5 million is given away to projects applying that year, In year two 2017, 7 million is given away (3.5 for 2016 projects plus another 3.5 million for 2017

projects), in 2018 10.5 million is given away (3.5 million for projects getting the 12 year tax breaks in 2016, another 3.5 for those getting breaks 2017, plus 3.5 for 2018 awards) and so on ..out 12 years. What’s the value of this total after 12 year? It would be: $270 million!

* The City continues to attempt to justify this colossal giveaway by pointing to the additional tax revenue these projects will add to the tax base eventually when they do come back on line at the end of year 12, and by pointing to the value that is eventually captured and adds to the tax base. This is baloney because in most cases, these are projects that would have been built anyway and otherwise added to our tax base immediately not 12 years down the road. Most MFTE projects are being built in hot neighborhoods, where for years there has been record levels of growth and where until only recently, most of these projects coming on line didn’t have access to MFTE. In fact, until the program was recently expanded to every part of the city, an equal or greater number of comparable non-MFTE projects were being built throughout the city.

* Further the city says “look at all the units set aside at below market rates we’re getting, tenants are saving ‘x’ millions of dollars in rents”.  To arrive a ‘x’ the city takes the market rate for a newly constructed unit, then subtracts rents on the set asides from this hypothetical market rent. This is completely bogus given that in many cases, the rents on the set asides are higher than or near the average rent or going rate in the area where they are built. The comparison should be made subtracting rents on the set asides from average rents (not rents on new construction) in the area where they are built. How can a tenant save ‘x’ amount when they could have walked across the street and rented a similar nonmfte unit at the same rent. Even subtracting rents on the set asides from what actually is the going rental rate for newly constructed units built within last 5 years (new buildings always offer some lower priced rentals in less desireable locations in their building and well below market rate) – even that would have been a fairer comparison.

Keep in mind, Mayor Murray and a bunch of others in city government, backed of course by a bevy of development interests, have been down in Olympia lobbying for a bill that would expand the MFTE tax break program to owners of existing rental buildings, not just new construction. Of course they’re arguing this would help preserve units in these buildings at lower priced rents – a bogus claim. We’ve written already about how in fact their bill might actually accelerate loss of existing lower priced rentals. But we know one thing for sure such a bill would do. Extending tax breaks to owners of existing buildings would greatly multiply the number of speculators, real estate interests, and developers taking advantage of this program – and greatly multiply by tens of millions amounts now being drained from city coffers or passed on in the form of higher rates to the rest of us taxpayers.

About John V. Fox

Director, Seattle Displacement Coalition
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