Understanding the Seattle Waterfront LID

Seattle’s waterfront is undergoing a massive $4.7 billion renovation, including rebuilding the seawall, tearing down the Alaskan Way Viaduct and replacing it with a deep-bore tunnel, rebuilding Colman Dock and the ferry terminal, remaking the Alaskan Way surface street, and improving park and streetscape elements as part of the city’s $688 million Waterfront Seattle initiative. $200 million of the funds to pay for Waterfront Seattle are proposed to come from a new Local Improvement District: a special assessment on downtown properties that are expected to increase in value because of the project. But some residents who will be subject to the assessment are unhappy that they are being asked to foot part of the bill for a project they say will benefit the entire region.

Let’s look at how LIDs work, and how this one in particular is structured.

(5-21-18: updates below)

Local Improvement Districts are nothing new; they have been used extensively across the state to fund infrastructure and public works projects. A chapter of Washington State law described in detail the authority that local governments have to create LIDs:

“Whenever the public interest or convenience may require, the legislative authority of any city or town may order the whole or any part of any local improvement… to be constructed, reconstructed, repaired, or renewed and landscaping including but not restricted to the planting, setting out, cultivating, maintaining, and renewing of shade or ornamental trees and shrubbery thereon; may order any and all work to be done necessary for completion thereof; and may levy and collect special assessments on property specially benefited thereby to pay the whole or any part of the expense thereof…”

It also spells out the precise process that local jurisdictions must follow in order to create a LID. We’ll come back to that shortly, but first a quick history lesson on the Waterfront LID.

The waterfront renewal project officially goes back to 2009, when the City Council passed an ordinance establishing the Central Waterfront Partnerships Committee to advise the city on how to move forward. It followed that up in 2011 with a resolution creating a new committee and identifying public and private sources of funding. Out of that effort came the Waterfront Program Strategic Plan in 2012, which the Council adopted; it included a funding plan that specifically  endorsed the creation of a Local Improvement District to provide part of the funding.

The notion behind a LID is straightforward: if a public works project is expected to increase the property values in the surrounding area, then the government can  raise funds for the project by imposing an assessment on those properties up to the total amount that property values will increase. The government gives, and the government takes away (at least in part). The property value increase derived from the project is called a “special benefit.”

The first step in creating a LID is to assess property values, both with and without the project, to calculate the size of the special benefit it creates. The city began that process in 2013, but put it on hold when Bertha broke down partway through digging the SR99 tunnel. In 2016 it restarted the effort by hiring Valbridge Property Advisors, a large, national assessor with experience doing assessments for LIDs. Valbridge completed the first stage of the assessment, a “feasibility study,” in 2017, estimating between $300 and $420 million of total special benefit at the time. It’s a feasibility study because the city can only assess up to the total size of the special benefit; the study provides important information for the city in budgeting the project.

Based on the feasibility study, last year the City Council passed a resolution reaffirming its commitment to consider a LID, along with recognizing the Friends of the Seattle Waterfront as a key partner in the project; the Friends committed to operations and maintenance, and to raising $25 million in philanthropic donations to the project.

Earlier this year, Valbridge completed its Special Benefit Study. It concluded that the total property value in the proposed LID area (without the project improvements) would be $49 billion, and the total special benefit would be $415 million. Based on that, the city targeted the LID to raise $200 million — just under half of the special benefit created by the project. The remainder of the $688 million for the project comes from a combination of state funding, city funding, and philanthropy. The city funding is raised through commercial parking taxes and real estate excise taxes (REET).

To put this into perspective: the LID is intended to provide 29% of the total funding for the Waterfront Seattle project, and just over 4% of the entire $4.7 billion that is being invested in the waterfront.

The Special Benefit Study identifies 6,130 individual tax parcels in the proposed LID area. About 4,960 of those are residential condominiums spread across 54 projects and collectively worth about $4 billion. The remaining 1,170 are commercial properties, including apartment complexes, worth $45 billion. Accordingly, 87.5% of the total assessment is applied to the commercial properties ($175 million), and 12.5% to the condos ($25 million). That gets further divided among the individual properties based upon their share of the special benefit (i.e. how much their property value goes up).

Within the commercial properties there are 15,000 individual apartments. About 3,500 of those are subsidized, under contractual agreements with the Office of Housing that prohibit redeveloping the property or raising rent. Accordingly, they are not expected to receive any special benefit and are not assessed. For the remaining 11,500, the median assessment per unit is about $1300.

The assessment is a one-time charge; however, property owners can choose instead to pay it over 20 years instead of up-front, with an interest rate based on the interest rate on the LID bonds issued by the city (which fluctuates, but is very low given the city’s excellent credit rating). The city calculates that if the LID assessment on apartments is passed through to tenants, it would lead to an increase in rent of $5-6 per month.

For the condos, the median assessment is $2400, and 85% of the units would be assessed less than $10,000 (though there are a handful of outliers — the top assessment is $171,000). $2400 would be $120 per year (plus interest) over 20 years.

Since the State Constitution requires all property to be assessed uniformly, the city may not exempt certain properties from the assessment. They may, however, take advantage of state-authorized deferral programs that allow senior, disabled, and economically-challenged property owners to defer payment of some or all of the assessment up to 20 years or until the property changes ownership.

The city has taken all the individual assessment information and loaded it into a web site so that property owners can see what their special benefit and proposed assessment would be if the LID is created.

What the City Council is currently deliberating is a resolution that would officially declare the city’s intention to create a LID. If passed, there are several state-mandated steps that must be followed before the LID is officially created. The first is that those property owners subject to the LID assessment must be officially notified, followed by a series of public hearings and an opportunity for people to submit written comments. All of the feedback will then be collected and distributed to  the City Council members. Once that is done, the Council can then take up an ordinance officially creating the LID.

The Council’s resolution tasks the Hearing Examiner with managing the public hearings and delivering the public comments back to the Council. That is considered a “quasi-judicial” process, which means that from the time that the process begins (at the first public hearing on July 13) to the conclusion of the public comment period, the Council members may not discuss the LID with outside parties; all comments and feedback must go through the Hearing Examiner’s office.

If the Council does pass an ordinance creating the Waterfront LID, the process is still not over. Property owners will then have 30 days to officially protest the LID. If property owners collectively representing at least 60% of the total assessment ($120 million) protest, then the Council may not move forward with creating the LID.

At the end of the 30 day protest period, there is another 30 day period in which legal challenges may be filed in court against the LID. If no legal challenges are filed in that time, then the lid becomes official — and state law is very clear that it may not be challenged after that point.

Here’s the projected timeline for the LID formation process:

The Council voted the resolution out of committee this afternoon, so it will come up for approval with the full Council next Monday afternoon. Assuming it passes, the public hearings will be held on July 13, 17, 18, and 28.

As with the first committee discussion on the LID two weeks ago, today’s meeting attracted dozens of property owners from the proposed LID area to register their opposition. Some were clearly misinformed about the size of the assessment that they would have to pay, whether the resolution currently under consideration would actually create the LID (it doesn’t), and/or the constitutionality of a Council-enacted LID. State law is clear that city councils have the power to create LIDs, and there is plenty of precedent for that in Seattle alone, including the South Lake Union Streetcar in 2008 and Portage Bay Place in 1998. They grumbled about “taxation without representation” (clearly forgetting that they were speaking to their elected representatives), and argued that because the waterfront is a city-wide and regional resource they should not be subject to a LID (ignoring that nearly $200 million is being paid for by the city, and another almost $200 million by the state).

Public commenters did raise two other concerns that are more valid:

  • Under state law, if a $200 million LID is created, the city is then legally obligated to deliver $200 million of improvements to the waterfront, regardless of economic downcycles and any potential revenue shortfalls in the city budget. Given that the entire project is $688 million, that’s actually a pretty low bar to hit, but it still means that they can’t cancel the project once the LID is in place.  UPDATED 5-21-18: in the packet of information distributed this morning to respond to constituent concerns, the city has clarified that it is  legally required to deliver the full set of components as defined in the “local improvement.”
  • There was concern that the LID property owners would be responsible for any cost overruns on the project. City officials explained today that under state law the city was allowed to issue a supplemental assessment, but their intent is to note in the resolution — and in the legally binding final ordinance creating the LID — that the city is prohibited from doing so. That still leaves open the question of where the money would come from to cover any cost overruns, and no good answers were given today. The most likely answer is that they would come from the city’s Real Estate Excise Tax (REET) fund. REET revenues tend to fluctuate wildly from year to year because it’s impossible to predict when an office tower downtown will change hands and deliver a windfall of REET to city coffers. Because of that, the city tends to budget very conservatively for spending REET, which by state law can only be spent on specific kinds of capital infrastructure projects (like the waterfront). It also maintains $10 million of collected REET funds in its Cumulative Reserve Subfund as an additional hedge.

Despite the vocal opposition from a group of property owners (Council member Gonzalez said today that she has received hundreds of messages about the LID), the Council will likely vote to pass the resolution on Monday and start the ball rolling. As always with Seattle politics, the outcome of the protracted “Seattle process” is unclear, but at the moment the smart Vegas money is betting that they’ll go ahead with the LID this fall.

A side note: Council member Bagshaw, who represents the vast majority of the proposed LID area and owns a condo there, has been required to recuse herself from the deliberations on the waterfront LID so far. But a separate bill also up for final approval on Monday afternoon would modify the city’s ethics law to exempt Council members from recusing themselves for legislative matters related to taxes and assessments when their personal assessment is undifferentiated from others’. Various forms of this change have been proposed and rejected over the past several months, but it appears that this one will get the nod and then Bagshaw will be able to fully participate in crafting the LID legislation.

UPDATE 5-21-18: Council member Juarez distributed a packet of memos this morning to respond to several concerns raised by constituents about the proposed LID.

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  1. Thanks for the analysis.

    It’s good to take a closer look at the numbers however. The LID components total 328 million for the ‘park-like’ features. So properties in the LID are contributing 200 million, or 61% of the cost.

    Let’s look at the most expensive element, the Overlook Walk at 100.15 million. 60.48 million comes from the LID, just 7.31 million from city, and the remainder from ‘philanthropy’ at 32.36 million.

    What happens if the 100 million of Philanthropy money doesn’t materialize? What happens when the cost of these projects overrun? The estimates were generated a few years ago and construction costs have increased.

    By law, the city can take 100% of the ‘special benefit’. Regardless of what they stated their intentions were when forming the LID.

    At yesterday’s council meeting, 41 speakers, with just one speaking in favor of a LID.

    I agree, it was unfortunate some commenters stated ‘taxation without representation’ to the elected council.

    But using a LID to fund a regional project simply seems like a way for the city to get around the standard levy process. After all, in 2014 we did vote on, and pass, the Seattle Park District levy. (Another question is why isn’t money from this levy being used on the waterfront?)

    So let’s put the Waterfront Park to a vote!

    1. I would argue that it makes no sense to subdivide the parts of the project like that when arguing for or against the project. The city has to do that on paper because there are legal restrictions on what REET money can be used for, but it’s not an “a la carte” plan where you can just pick or choose pieces. It silly to build a park without building the infrastructure to get people to and from the park.

      And you do get to vote on it. You voted for your elected representatives (and you will again next year), and if 60% of LID property owners file protests then the LID is dead.

      1. But a LID is designed for a ‘specific’ improvement. So the items paid for by the LID must be targeted and not just a part of a ‘general’ improvement. For instance the new Alaskan Way is nearly entirely paid for by the state, which was part of the viaduct replacement/tunnel project.

        We do not get to vote on the creation of the park actually. We can ‘protest’ the formation of the LID. And it is 60% of the ‘special value’ which has to protest against the LID formation. So even if 100% of the condo residents in the LID protest, their ‘special value’ is still not enough to block it.

        However the city of Bellevue lost in court when they created a LID, because it was too general. So I am hopeful a similar legal challenge will succeed in blocking the Waterfront LID as well.

        1. We will indeed see whether the court agrees that the Waterfront Seattle plan is specific enough. In fact, the Hearing Examiner may even have something to say about that before it makes it in front of a judge.

  2. You are misinformed in one important aspect. If the LID is adopted, the City is obligated to deliver all of the improvements which are assumed completed in calculating the so called “special benefit”. Those improvements are described in pages 104 through 109 of the Valbridge Special Benefit Study delivered on May 9. The City’s estimated cost for those improvements is almost $700M, not $200M. And that estimate is based on designs which are only at the 10%-30% complete for the most of the LID funded improvements. The safeguards which the City is using against cost overruns are no better than those on other City projects notorious for overruns. Therefore the inability of the City to modify the plans because it has incorporated them into an LID creates a very large potential liability to the City. It cannot modify the described improvements to reduce the cost and it cannot fail to deliver them.

    1. You may be right, but I’m having trouble finding legal citations to back that up. There’s nothing in state law on the point, and I was reporting based on what Marshall Foster said in the Council hearing. If you can point to relevant case law, I would be happy to read further and revise my post.

  3. Regarding the assertion regarding the constitutionality of this particular LID, I believe the fact pattern here would present a case of first impression in Washington state courts.

    While it is true that the LID process is authorized by state law, and past LIDs by resolution in Seattle have been upheld by courts, all of those cases came before the city moved to a district representation model.

    So the current situation finds a group of voters on whom this assessment will be imposed by a city council, a supermajority of which (6) they will never get to vote either for or against.

    This will represent the first time in the history of this state that the basic principle of “consent of the governed” to have been tested in this way. Normally in a representative democracy, voters can express their disagreement with the decisions of elected officials by ultimately casting votes for or against those officials. That will not be the case here. The affected voters have no political recourse. They cannot vote against six members of the council. They can only beg for mercy.

    Thus, this particular fact pattern is untested in Washington courts and may in fact violate Article 1, Section 1 of the State Constitution.

    1. That argument makes no sense. The logical conclusion of that would be that district-based elections could NEVER be constitutional at any level of government, because legislative bodies will inevitably write all sorts of legislation specific to particular geographical areas in the jurisdiction — like zoning.
      The state constitution makes it clear that first-class cities get to write their own charter and in so doing decide on their own form of government within certian parameters. State law says that city councils are permitted, but does not specify how council members are to be elected. It does however specify the rules for how elections are to be carried out, and those rules anticipate district-based representatives.

      Also, state law outlines the process for protest for a LID. That is a form of political recourse which can result in invalidating the LID.

  4. A couple comments on taxation without representation:

    The city council is representative but its decision to create the LID is conflicted by the offer of private donations conditional on this action. Maggie Walker (co-chair of Friends of Waterfront Seattle) noted at the 5/16 that FOWS signed an MOU with the City in September 2017, agreeing to raise $100 million in donations contingent on the passage of a $200 million LID. To date FOWS has raised $28.8 million, much of which she says is contingent on the LID.

    She notes that it is unusual for people to contribute money to a public project. Yes this is unusual, and it is also unusual for this money to be conditioned on some official action which acts as a 2-for-1 match with the private contributions.

    I think people also object to the lack of representation because condo owners represent 12.5% of the LID property value while 87.5% is commercial (including rental apartment buildings). The condo owners may have different interests from the commercial owners, but since the LID formation counts objections with 1 dollar being 1 vote, they have little chance of a successful objection even if they outnumber the commercial owners.

  5. I have been looking into this LID some more and I noticed something very surprising about the budget.

    The LID is $200 M which is paying for 6 listed improvements. However in the budget detail for Waterfront Seattle, each of the 6 items costs more than the LID is paying, so the “LID share” is less than the total cost. The actual amount budgeted for the 6 improvements is $328.3 M. So the LID is raising only 61% of the cost of the improvements listed as being due to the LID.

    The special benefit is calculated as $415 M (as the article notes). So one might say that 61% of the special benefit, or $253 M, is produced by investing the LID funds, with 39% being produced from other funding sources. This means the LID property owners are actually being assessed for 79% (200 / 253) of the value produced by their investment, so the materials are misleading. 79% sounds like a lot worse deal than “just under half” of the special benefit.

    Looking at it another way, let’s say we reorganized the funding so there is a smaller list of projects funded entirely by the LID and costing $200 million in total. Then the special benefit would be less, because there would be fewer beneficial improvements in the analysis. It doesn’t seem fair to assess the LID owners for the whole thing. Unless there is some special discount being figured into the special benefit calculation for this, but it doesn’t sound like it. I’d be interested if anyone has a clue about this.

    My source for the budget detail is p. 4 of this document:

    1. So here’s the thing: it’s an integrated project with many components, but restrictions on the use of certain funding sources (especially REET) means that they can’t just peanut-butter the funding sources across all the components. That doesn’t mean it makes sense to just separate out the components that get LID funding and calculate the “special benefit” based on just those components. For example, big chunk of the $688 million is going to redo Alaskan Way through state funding specifically allocated for that purpose under contract; without that work, the Promenade makes no sense And without the Promenade, the proposed redesign of Alaskan Way makes no sense.

      1. Understood but then I feel a LID isn’t appropriate for this purpose. Because the LID structure depends on the ability to clearly assess the LID vs. non-LID scenarios.

        1. no, it depends on the ability to assess the “special benefit” from the public improvement project vs. if it isn’t done. The LID is a funding mechanism; it isn’t the project itself.
          Nevertheless, I encourage you to submit your comments to the Hearing Examiner for the official record.

      2. I’m going to disagree with you here. Page 6 of the Valbridge study states the value of the LID improvements.

        “The total cost for the above LID improvements is approximately $320 million”

        And on page 115,

        “Major changes assumed to be in place in the “before” condition include:

        • The Alaskan Way Viaduct Replacement project is assumed complete; the viaduct has been removed and Alaskan Way is reconstructed at conventional street level.”

        So I believe the difficulty here is to separate out the special benefit from the viaduct removal with the LID improvements and the ‘rest’ of what Seattle describes as the Waterfront project..

        Majority of special benefit clearly comes from the viaduct coming down. But the city cannot claim credit for this special benefit.

  6. A LID seems fair and appropriate – but have to say – I don’t fully understand the logic behind the boundary map on this one.

    Example 1:
    most of the ‘central’ piers seem to be included but not 69 + 70 – why?

    Example 2:
    I-5 feels arbitrary as a boundary. e.g. easternmost tip of LID boundary (Denny @I-5 property owners) will have to pay – but nobody across I-5 – even though they may actually be closer to the ‘central benefits’.

    It’s not like Freeway park is some insurmountable pedestrian challenge, or that Sorrento tourists aren’t going to be headed to the waterfront, right?

    Convention Center also seems to be excluded. Curious if correct and about the math on that one.

    To make it simpler: why not just swing a simple arc from the epicenter of the project (+/- @Pike Place Market, in this case) and tax any property owners falling within that arc.

    We could then argue re: the appropriate radius of that arc – and property owners within N distance of the benefits would pay into the post-viaduct improvements.
    a) Larger radius = faster and nicer.
    b) Smaller radius = scrappier, slower, more lightweight.
    c) N radius = ???? choose your own adventure

    I haven’t yet figured out what the orange ‘trunk’ lines up/down Pike & Pine are meant to represent – but my fingers are crossed: https://en.wikipedia.org/wiki/Skyway_(Disney)#/media/File:DisneylandSkyway.jpg

    I tried (but failed) to find the S.L.U. Streetcar boundary map as a comparable. Not sure if any readers might have the link from archive docs?

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