Tomorrow, Tuesday, November 14, the Olympia City Council will hold a hearing to expand the Multifamily Tax Exemption (MFTE) to the Capital Mall Triangle Subarea and other areas.
If they move forward to expand the MFTE, it would increase our property taxes to allow real estate developers to avoid paying theirs.
As I wrote in The JOLT in June, the MFTE is an incentive the city gives to some developers that results in all the other city property owners paying the developer’s property tax. The Department of Commerce calls this a “Tax Shift”.
As it typically works, the developer wins by paying no property taxes, the city, the schools and other governments break even, and the rest of the taxpayers pay more for the developer’s exemption.
Tail Wagging the Dog
An important point to remember is that the city’s use of the MFTE is not just exempting the city’s 18% of the property tax bill but also the remaining 82% that goes to the State of Washington, the School District, the County and other miscellaneous taxing districts.
You would think that schools and other jurisdictions that receive property tax revenue would have a problem losing money from a city’s unilateral action to exempt a developer’s multi-family building from paying any property taxes. And you would be right if that were the case.
But it is not the case because of the way the county calculates the tax rate. The county assessor sets the tax rate higher than it would be without the MFTE so that all other taxpayers have increased taxes to match the lost revenues due to the exemption for all the governments.
The Windfall: Olympia gains revenue, more than you would suspect
If the proposal before the Council on November 14 stopped here the city, like the other jurisdictions, would simply break even in terms of revenues. But the city proposes requiring new developments in some areas of the city to pay a “fee in lieu” -- where the developer pays a percentage of the value of their tax break for affordable housing.
In one scenario being considered by the city, developers in the Capital Mall Triangle area would pay 25% of their 8-year MFTE tax benefit to be used by the city for affordable housing. Now remember that the city already has 100% of what the developer would have paid by shifting the cost to the taxpayers. So, this 25% would be a bonus to the city, coming from developers, and would be net additional revenue to the city.
Now you might think, “The city got 100% of what it would have received had the MFTE not been in place, and they get 25% from the developer so they are getting 25% more than what they would have.” But if you thought that, as I did, you would be wrong. They are actually getting more than double.
Remember earlier when I said that the city’s tail wags the dog? That 25% “in lieu” fee is not based on just the city’s 18% share of the property tax (a tax rate of about $1.83 per thousand assessed value). It is the entire property tax charge that would have been charged for all the jurisdictions, which is about $9.97 per thousand assessed value.
Example
Take a $10 million dollar building in which the developer signs up for the 8-year MFTE as an example. Normally, the building developer would be taxed $99,700 per year and the city would get $18,300 of it. Except with the MFTE, other taxpayers, not the developer, are doing the paying. But then the developer is required to pay 25% of the full value of the exemption to the city; so in this example the city gets another $24,925.
That means the city now receives $18,300 because of the new building (paid by the taxpayers not the developer) PLUS the city gets $24,925 from the “in lieu” fee paid by the developer. The developer is still $74,775 better off and the city now has $43,225 in total revenue because of the new development. That is 136% more than if they did not give the exemption.
In this example, the developer saves $74,775 a year, the city gains $43,225 a year and taxpayers lose $99,700 a year.
Multiply the example by a factor of 100, which is what could happen if all 3,000 units planned to be built in the Triangle area received 8-year MFTEs, and you could theoretically have Olympians paying a $10 million tax increase each year that would not otherwise be permissible under state law.
In-lieu of what?
State law does not require the 8-year MFTE to provide any affordable housing units. Some cities make developers provide affordable units within their developments and some allow the developer the option to keep the building at market rate prices by providing a “in-lieu” payment. But Olympia’s proposal does not require the developer to provide affordable housing in their buildings, so it is a misnomer to call it an in-lieu fee.
Technically, Olympia’s “in-lieu” doesn’t exist because it is in-lieu of nothing. It is just a fee to be paid to create a modicum of public benefit (affordable housing) from the tax shift to everyone else.
A most inefficient use of taxpayer money
This proposed program would require a 25% in-lieu fee for projects in the Triangle Mall Subarea, a paltry 5% in the Downtown and Eastside (see map), and no fees in the areas near neighborhood centers. Yes, some of this will contribute towards an affordable housing fund. But it is an incredibly inefficient program where only 25% the taxpayers’ higher taxes are earmarked to contribute to the costs to build new affordable housing.
Even in the most favorable result possible, other taxpayer would be asked to pay $1.00 in higher taxes to get, at best, up to 25 cents of public benefit for affordable housing.
I and most Olympia voters have supported higher taxes for housing programs in the past. Would the voters approve an affordable housing tax increase where 75%, 95% or 100% of the money didn’t go to affordable housing?
How much is at stake?
The proposed ordinance that would expand the area eligible for the 8-year MFTE to the Triangle project area and to other areas of the city has the potential to shift up to $10 million a year in higher property taxes per year to all property owners not fortunate enough to have an MFTE deal with the city. A typical homeowner would see a several hundred dollars tax increase.
The benefits that come from the 5% and 25% and 0% “in-lieu fee” rates are far too low to justify the program and perhaps worse, they serve to exclude lower-income people from renting in the new tax subsidized development.
Alternatives the city should consider
Instead, the city could require new buildings to have some of the units be affordable like other cities require. Or the city could go to the voters with an efficient tax increase where 100% of the money goes to affordable housing.
The city has scheduled final action on this for December 12.
Editor's Note: To register to attend the city council meeting on Tuesday, November 14 at 6 p.m., click here.
The opinions expressed above are those of the writer and not necessarily those of The JOLT's staff or board of directors. Got something to say about a topic of interest to Thurston County residents? Send it to us and we’ll most likely publish it. See the Contribute your news button at the top of every page.
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Southsoundguy
End property tax. Stop looking to mommy government to fix all of our problems.
Monday, November 13, 2023 Report this
pheong
let us also consider the city's latest money grab from business owners in addition to PBiA, some similar |"improvement district" tax as if PBIA wasn't that? bunch of thieves.
Tuesday, November 14, 2023 Report this
Bigjules
Good job Larry, thanks for bringing the light.
Tuesday, November 14, 2023 Report this
AugieH
At the same hearing, the City of Olympia will consider (and solicit comments) on a municipal statute that would require the landlords of rental housing properties to register with the city (at $35 per rental unit) and get a business license. Another money grab.
Tuesday, November 14, 2023 Report this
Claire
As a property owner in the Shitty of Olympia, I am tired of subsidizing housing, cleaning, development, loos, homeless, and small homes for the Socialistic government of Olympia. Enough is enough. We can only 'give' so much. New governance is needed, however the Socialists have spoken with the most recent election. They will regret this as elections have consequences.
Tuesday, November 14, 2023 Report this
KarenM
Larry, I appreciate the research you do and the careful explanation here. Since there has only been one project that used the 12 year option, we are likely primarily looking at the continuing use of the 8 year option. That will result in no new low income housing units or very few.
I would like to see an estimate from staff that shows how much projected low income housing revenue may come from this program. How much can be achieved with that amount of money?
The City has not shown how much this program is costing in staff time to administer. Is that administration going to eat up all of the fees that are collected?
Tuesday, November 14, 2023 Report this
zingZap33x
Larry thank you so much for your critical thinking and detailed analysis on the MFTE. I agree, I think it would be far better to just ask tax payers if they want to be taxed for more affordable housing, instead of giving money away to developers, to only in some instances, build quasi affordable housing. That way we could get truly affordable housing at a much lower average median income (AMI). Right now 80% of the AMI is the City’s definition of affordable and that is 57K a year for a single person. Many people have much lower incomes than that and couldn’t afford this “affordable" housing.
Seattle just passed a ballot measure for housing. It will build low income housing, support rebuilding deteriorating housing units, and give rental assistance.
Olympia should dump the MFTE. With the MFTE: developers win, the City wins BIG time, and taxpayers lose.
Tuesday, November 14, 2023 Report this
jimlazar
Larry hit the nail on the head.
First, the City gives the developers a gift of $1 million. This is paid for NOT by the City, nor by the county, the school district, the library, the Port, or the PUD, but by the taxpayers who face higher property taxes to cover the $1 million in avoided taxes over and above what would be allowed by the normal operation of state law.
Then the developer gives the City a kickback of $250,000 on the gift of the MF tax exemption.
The City is better off by $250,000 than if the developer had built the project without the MF tax exemption. The developer is better off by $750,000 than if the developer had built the project without the MF tax exemption.
And the public is worse off by $1 million than if the developer had built the project without the MF tax exemption.
What's not to like here (if you are a developer or the City manager)?
Tuesday, November 14, 2023 Report this
jhender
As is the case in many, if not most, municipalities, real estate developers have captured local government. What this story makes patently clear is: Olympia's government is planning to increase property taxes without commensurate, offsetting benefits to the tax payers. Developers pay less, city government gets more revenue, and the tax payers get the shaft.
Tuesday, November 14, 2023 Report this
Yeti1981
First, that's the way the economy works. No matter how you slice it, any costs added to development will get passed on to the homebuyer or renter. Second, the term "affordable" has been conflated to mean subsidized. And it sounds like the author is unfamiliar with the much more excessive expenses involved in creating subsidized housing than in typical development. The truth is that there are hundreds of developers in this community who are not the wealthy fat cats that this author portrays them as. They often have to carry costs through up front loans and such, which often contribute to the outrageously expensive development costs enacted by many of the local jurisdictions. In fact, National Association of Home Builders has found that as much as 25% of the costs incurred on a project are development costs and the cost of meeting the many requirements and regulations implemented by local jurisdictions. Everybody says they're for "affordable" housing. Yet, it is nearly impossible to build what many consider "affordable" when it cost $130k per home to go through the process and overcome all the obstacles. The MFTE is a small relief to keep local builders competitive. If you keep going down this road of making it difficult for them, then your prophecy of wealthy developers taking on the housing really will be true.
Tuesday, November 14, 2023 Report this
bobesan
The socialization that's now going on is subsidizing the rich to build ever more market-rate housing to cont. the gentrification problem here:
Vadas, B. 2023. Eco-social activist/scientist sees dysfunction in the Olympia City Council. Works In Progress (Olympia, WA) 33(5): 13 (https://olywip.org/eco-social-activist-scientist-sees-dysfunction-in-the-olympia-city-council).
Those of us who oppose the MFTE (mo-fo tax exemption) do so b/c it won't effectively benefit the 12-yr. program for affordable housing, but rather cont. to promote the 8-yr. program for "yuppie" housing. Until the homeless problem along I-5 and b/w Martin Way & Pac. Ave. is solved (& that won't be accomplished w/ an 80% AMI criterion), the OCC is just re-arranging deck chairs on the Titanic. We need better City prioritization, so that developers can afford to build low-income housing.
Wednesday, November 15, 2023 Report this
Pkt3154
I think the key point the article makes is about the fee in lieu. It is kind of a sneaky mechanism to make it look like the program is providing a bigger incentive than it is while giving the city a new funding source.
While many folks are not aware, the property tax has always worked as described in the article. A levy value is set and gets collected. Various state and local tax exemptions re-distribute the amounts due by taxpayers but the amount levied is collected from the the base of property owners by increasing their share. This has always been done that way.
This expansion of the Multifamily Tax Exemption (MFTE) to questionable projects with no guardrails to ensure there actually is a benefit for the remainder of the taxpayers who are shouldering the load is weak at best. The fee in lieu makes it worse- like a secret tax increase done behind the scenes.
Wednesday, November 15, 2023 Report this
TonyW33
unincorporated Thurston County beckons.
Wednesday, November 15, 2023 Report this