MFTE: case study on an economic incentive

The Council heard an update on how the Multi-Family Tax Exemption (MFTE) is doing today, and it was full of lessons on what an economic incentive sometimes can — and sometimes can’t — achieve.

The MFTE, amended and renewed last October,  provides a property tax exemption for multi-unit housing property owners who set aside a minimum number of units as affordable housing. The exemption lasts for up to 12 years, assuming all the conditions continue to be met.  Among those conditions: not only must the rent be set below a maximum level (a percentage of median income in the Seattle area) but the tenants must also verify that their income level falls below a certain threshold to ensure that the units are actually rented to low-income tenants.

MFTE income requirements
MFTE income requirements

In its original version, the ordinance set a uniform 25% for the number of units that must be set aside in order to qualify. But the Council recognized that the vast majority of new affordable housing being created were for essentially single occupancy: “small efficiency dwelling units,” studios, and 1-bedrooms; and that the severe shortage of family affordable housing (2 or more bedrooms) was seeing no relief. So they amended the MFTE to lower the set-aside to 20% if a certain number of the units were 2-bedroom or more.

So how’s it going?  According the their most recent report (the Office of Housing presents to Council member Tim Burgess’s Affordable Housing, Neighborhoods and Finance Committee every four months) they continue to see applications to participate in the program. Upon its taking effect on November 2nd, some stricter regulations were in place for new applications so there was a spike in applications just before that, and a commensurate drop immediately after. But the Office of Housing claims that they are now seeing applications return to their normal level. There are currently 130 buildings and 4,000 affordable units participating in the program, and expectations that it will rise to over 6,000 by 2018.

MFTE participating housing units
MFTE participating housing units

The sweet-spot for unit size seems to be 1-bedroom, with far more of those in the system than other sizes and far more continuing to be built. The bad news is that the change in the ordinance to incent affordable 2- and 3- bedroom units has not moved the dial at all; 3-bedroom units are being built at an anemic rate.  According to the Office of Housing, this is not limited to affordable housing, as overall 3-bedroom apartments are not being built by developers.

MFTE stats for September-December 2015
MFTE stats for September-December 2015

In other good news, though, the units that are being created are spread throughout the city (though admittedly there is a concentration in the central part of the city). Also, the demographics of the renters in MFTE housing match the overall demographics of Seattle renters, meaning that the affordable housing is not racially skewed — though it would also be good to compare the racial demographics of MFTE renters with the low-income population as a whole.

Now it’s appropriate to place a caveat on this discussion: it’s still very early days since the ordinance was amended late last year, and there may be many more projects in the pipeline that have not progressed far enough to apply for participation in the MFTE program. Hopefully their next report in May will bring better news for low-income families.  But an important take-away from this discussion is that creating effective economic incentives is hard work. A tax break is  incentive to allocate more affordable housing, but apparently not enough to skew it towards family housing. It would be interesting to hear from developers on this: do larger units simply not pan out, is the tax incentive below a threshold where it would be more attractive, or are there other issues (like parking, or schools) that work against the attractiveness of affordable family housing?  The quantitative aspects are nearly impossible to judge; “quants” can run all sorts of models and analyses, but it’s difficult to know where the thresholds are, beyond which the market dynamics are very different. If the tax break got 5% cheaper, would projects suddenly become profitable enough to justify the investment? 7%? If buildings with 2- and 3-bedroom apartments could be one floor taller (and thus contain more units, spreading the cost of the land out more) would that make them more attractive to developers? How do you package the right set of incentives together that will drive a desired effect? Urban planners will talk your ear off about this all day, but at the end of the day they are guessing based upon historical precedent and numerical modeling. Whereas organic systems, including those populated by people, are notoriously difficult to predict.

The renewed MFTE expires in 2019. It will be interesting to see whether the Council decides to tinker further with it before then.

 

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