For more than a year, conversations have been ongoing about both the promise and pitfalls of Seattle’s Housing Affordability and Livability Agenda (HALA) process. But in a significant moment at City Hall yesterday, advocates for housing affordability and development celebrated a major milestone when the Seattle City Council unanimously approved a Commercial Linkage Fee tied to all new commercial development. Adoption of the program represents the first legislative step in the HALA process, which seeks to increase development capacity and economic value while also providing commensurate social benefits through land value recapture programs like mandatory inclusionary housing.

Payment and performance areas. (City of Seattle)
Payment and performance areas. (City of Seattle)

Council Bill 118498, as it is known, codifies a new chapter in the land use code, that being Chapter 23.58B under the title of “Affordable Housing Impact Mitigation Program for Commercial.” And while the name is a bit clunky, the chapter is incredibly significant. The code gives developers three options in providing affordable housing: an onsite and offsite performance option, fee in lieu option, or combination of the two. The amount of affordable housing required is first determined by zone and then square footage of proposed commercial space1.

We previously covered how the Commercial Linkage Fee will work, but to recap:

  • The fee option ranges2 from $8 to $17.50 per square foot for commercial zones located in Downtown and South Lake Union. Elsewhere in the city, fees range3 from $5 to $10 per square foot.
  • The performance option works slightly different as a ratio of rentable affordable housing to chargeable commercial space. In Downtown and South Lake Union, the percentage of rentable affordable housing floor area required ranges2 from 5% to 10.6% of chargeable commercial floor area. Elsewhere in the city3, the ratio must be at least 5%. Additional strings come attached, including requirements that units are provided as rentals, be sized comparably to market-rate units, and have a rental cap at 60% of the area median income for 50 years.

Those numbers aren’t entirely picked out of thin air; they’re based upon a comprehensive study by David Paul Rosen & Associates to evaluate the economic impacts that commercial activity and jobs place on the local housing market. Their report recommended considerably higher impact fees in the range of $64 to $80 per square foot. Still, the fees are projected to rake in well over $195 million over the next decade for affordable housing.

The ordinance itself does not implement the Commercial Linkage Fee. As it is devised, the Commercial Linkage Fees will only become effective when formal changes to increasing zoning or development capacity in a targeted area directly refer back to the Commercial Linkage Fee ordinance (Chapter 23.58B), or are subject to certain contract rezones. South Lake Union and Downtown Seattle are the first likely locations where the this would be instituted, and according to Councilmember Mike O’Brien, that’s slated to happen in the first half of 2016. All new commercial development in those areas would then be required to provide affordable housing onsite or offsite, or through fee in lieu. Additional areas of the city will also be required to partake in the program, but the majority of those won’t be subject to the Commercial Linkage Fee until sometime in 2017. That’s because the requisite legislation for them won’t be ready in 2016.

In the lead up to final vote, Councilmember Mike O’Brien offered an amendment to the bill to include a new section. The proposed section did not alter how the Commercial Linkage Fee works, but it did add a reference to a lengthy (15 page!) attachment listing findings of fact. Those facts essentially explain how the Commercial Linkage Fee came to be, how it advances the goals of HALA, and how it is defensible under City and State law. Garnering full support of the Council, it was adopted to the amended bill. But before voting, Councilmembers took time to provide their thoughts on the bill.

Councilmember John Okamoto was first up to speak, and perhaps for one of the last times on the Council (he will retire later this month). He commended the City’s effort to engage in progressive policy to deliver affordable housing and expressed great pride in his privilege to vote for it. He also reminded the Council that Seattle isn’t the only place in the region that is adopting affordable housing policies. He pointed out that many other jurisdictions are implementing similar tools that serve as good examples.

The Council then turned their attention to Councilmember Kshama Sawant. While she expressed a clear desire to cast her vote in favor of the measure, Sawant felt that this legislation would not offer affordable housing soon enough and presented words of caution:

If we content ourselves with only demanding what big business agrees not to oppose, then we will not actually eliminate homelessness. We will never have enough affordable housing. And working people will never get out of the endless grind of living paycheck to paycheck. The goal has to be making housing affordable for all. The goal is not what big business is happy with.

Sawant suggested that developers should not simply be trusted to play kindly with the City through this process and pointed to the fight for a $15 minimum wage, where business sued the city over the law despite a similar grand bargain, as an example of bad faith. And she went on to reiterate that “we should not stop here” when it comes to affordable housing policies.

Councilmember Mike O’Brien wrapped up the conversation on the proposed bill by summarizing his excitement for it and the work yet to do:

This is a good and important step. That this alone will not do anything, there’s a lot more work to do. And the work has to be much broader than just what we’re talking about. It’s great that we’re almost there to take this step that will require all new development in our commercial and multi-family zones will be contributing toward providing affordable housing for the first time in the city’s history. That is something to be really excited about. Yet, we heard today that the challenges around affordability, throughout the income spectrum, for folks that have experienced homelessness or currently experiencing homelessness, to folks that are going to school, to working full-time jobs. We’re all struggling with how we manage to afford the city. And we need to do a lot of work around this and the other recommendations that came out of HALA.

The City Council approved the legislation on a 9-0 vote, and upon doing so was met with a standing ovation from the crowd gathered.

Implementation areas for mandatory inclusionary housing. (City of Seattle)
Implementation areas for mandatory inclusionary housing. (City of Seattle)

The Council also reaffirmed their commitment, in a unanimous vote, to moving full steam ahead on a host of remaining HALA legislative proposals. As adopted, Resolution 31612 establishes a breadth of key policies for consideration, including:

  • Establishment of a mandatory inclusionary housing program for residential development targeted for households at or below 60% of the area median income;
  • Additional development capacity through adjustments to the land use code;
  • Increased height limits and straight rezones of commercial and multi-family zoned property;
  • Rezoning up to 6% of single-family areas to multi-family residential or mixed-use zones;
  • Establishment of additional impact fees for transportation, parks, and childcare wherever increased development capacity is unlocked; and
  • Full implementation of Commercial Linkage Fees on new commercial development and mandatory inclusionary housing on mutli-family residential development when rezones have become effective.

The resolution sets a very robust timeline for policy proposals with full adoption anticipated by September 2017.


Footnotes

  1. A series of exemptions are carved out for the first 4,000 square feet of ground-floor commercial space depending upon the development proposal and scope.
  2. No fee applies to the DH-1, C2-40, SM 85-240, SM 85/65-160, and PMM-85 zones.
  3. No fee applies to residential and industrial zones as well as the Yesler Terrace (MPC-YT) zone.

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14 COMMENTS

  1. What is confusing is how many of the HALA reccomendations are called out in the Resolution 31612 timeline; and how many of them aren’t. Any bead on where things like the ADU / DADU changes, and owner occupancy requirements and small lot changes would be advanced? Separate work product? Or are they “in the ether” at the moment?

  2. This is a special business tax (operating through higher rental prises) with revenues dedicated for needs of low income households. It works through two channels: a) limiting the business growth in downtown Seattle, and b) by lessening the impact of income inequality. I would instead prefer to play with the good old progressive income tax and housing subsidies to needy families, and leave the businesses untouched.

    It is unclear to me whether it actually creates any more housing. It seems to make condos less affordable and simple apartments more affordable, potentially helping to squeeze more people in the same are. But it also lowers the developers’ profits and in this way also their willingness to build.

    • Woh. Disqus says your comment is 7 days old on an article published today. Anyway, the program has been set up to not result in property value losses to avoid a takings lawsuit at the state level. Not sure how reliable the estimates are but that was the stated intention of the policy.

      It creates more housing by capturing land value created through the (1 story) upzones and then funneling that money into the housing trust fund to build non-market housing. Developer profits stay the same, land owner profits stay the same, (market-sector supply stays the same or goes up depending,) and more housing in the non-profit sector.

      • If I understand you correctly, it captures part of the housing (land) value increase and funnels it to affordable housing. This also means that either “non-affordable” housing is more expensive, or there are less of it. Agree, this may not be considered a problem.

        But why do you claim the profits and land value remain the same? Construction is more expensive now, hence there is less interest for it.

        I don’t want to say it is bad idea, just to understand where the additional resources are coming from.

        • So first, yes, the way you describe it is the way the policy makers have (implicitly) described it as working. They don’t often talk about the transfer from the for-profit sector to the non-profit but sometimes they do and when they do they say the costs outweigh the benefits (because it’s a program that benefits the needy at the expense of the less needy).

          But if you dig into some of the policy documents used to study this program like last year’s Rosen & Assoc. report, the program is justified on other economic grounds — particularly that an upzone that creates more value to the land owner can then be captured back through through linkage fees even though they are ostensibly paid for by developers. This works because land holds the value of the potential use of a property and developers have to balance expenses, market value, and their own profit when paying for land. The developers bid less on the land because they know their expenses will go up with the fee.

          So to answer the last part, the additional resources come out of the capital gains on the sale of the land for development. Land owners lose. Renters and people who want more housing supply in the city — for-profit or non-profit — win.

          In this linkage fee legislation, though, the idea has been to balance all the losses of the fee with the increased value of the upzone. Developers are still going to bid less on land commensurate with the expected linkage fee but land owners will be able to charge more because their land now has a higher potential use (extra floor). In the end it should balance out. Profits stay the same. I believe there is also language in the leg (but I haven’t read it, so…) to review the market to reset rates if, as you point out, constructions or other costs change dramatically. The idea is to always keep everything balanced and this leg away from the state supreme court.

          • Pardon my ignorance but what is “upzone that creates more value to the land owner”? Does the city now allow to build more (higher?) Does it mandate to build more? In first case the city is essentially selling construction rights. In the second case it is an obligation, not unlike tax.

            I simply cannot understand how the money can come from the blue air. But I agree that redistribution may be worthwhile sometimes.

          • You said, “I simply cannot understand how the money can come from the blue air.”

            Money is not coming from nothing. Upzoning creates value. A parcel that can be built higher or more densely is worth more than a parcel with less allowable square footage. Developers know this which is why they like upzones. Landowners also know this which is why land values are higher in areas with upzones.

            ‘Land value capture’ comes in many flavors but the linkage fee is an example. The fee is applied with the upzone so as to capture some of the value created by the upzone and use that money for public benefit. This also avoids the legal problem of the law being classified as a ‘taking’ because owner’s property is not worth any less, possibly it’s worth more, than it was prior to the upzone.

          • OK,
            thanks, now I understand. So the city upzones, but only allows to build on condition that the developers throws some money in the affordable housing pot. This is what I call “selling construction rights.” It is similar to a tax on new developments, earmarked to affordable housing. In a way it is redistribution from those who buy/rent new developments, to the needy.

            May make sense.

          • Yep, that’s basically right. I would add one caveat.

            The point that Michael makes above is that the fee ultimately comes from people who own land. The counter-factual is that developers would’ve bid more if the upzone happened without the fee. This means the lower bid is coming out of the landowners pocket, not renters.

          • Good point. So the rights are not sold to developers but given to landowners in the first place. And with the linkage fee, the right is worth less.

            Now I understand 🙂

          • Owen, thanks for this explanation. It covers why so many SF homeowners don’t want their land upzoned == their homes’ values increase and so do their property taxes. They only benefit if/when they sell out and move, which many/most of them don’t want to do.

          • Property taxes might but don’t necessarily increase with upzones.

            Land values would likely increase but property taxes only change if your assessed value changes relative to other properties. So if there is a huge increase in property values in another part of the city (South Lake Union), your tax bill might actually get smaller even with an upzone.

            To simplify a little, an individual’s property taxes only increase if their property value increases faster than the average property value.

        • This particular change (the commercial linkage fee) isn’t capturing money from housing. It’s capturing money from new offices and retail (although there is some exemptions for the first 4,000 feet of commercial space) and funnels that money to affordable housing, As I understand it, new residential buildings won’t face a linkage fee so they shouldn’t be effected.

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