A tax break program derided as “welfare for the well-to-do” when it was first proposed in the Legislature two decades ago is beginning to pay big dividends to local governments in Tacoma and helping to launch a new burst of multifamily residential construction in the city.
The program, approved by the Legislature in 1995 and implemented in Tacoma and other cities, originally gave developers and condo owners a 10-year exemption from property taxes on apartments, condominiums and other multi-family structures built in designated city neighborhoods. The building or condo owners still paid taxes on the property on which the buildings were constructed, but they enjoyed a decade-long tax holiday on the value of the structures themselves.
The program helped prompt the construction of some 2,550 housing units throughout Tacoma, many of them downtown, where only a few dozen new housing units had been built in the two decades before the tax exemption went into effect.
Now, local governments are beginning to see significant new property tax income from those buildings as their exemptions expire, and a rash of new developments using the tax-exempt program are on the drawing boards.
Proponents of the tax-exemption program say Tacoma and other cities that used the tax holidays to spur development didn’t forgive much in taxes that would have been collected otherwise, because the buildings in most cases would not have been constructed without the tax exemption program in place.
A city study projected that by 2018, when all of the structures built under the initial 10-year tax exemption are on the tax rolls, total yearly property tax income will jump by $6.1 million.
That payoff is just now beginning to roll in as some of the major buildings built during the tax-exemption program drop off the exempt rolls.
Next year’s tax bills will include multifamily projects assessed at $48.8 million that are paying taxes for the first time on the value of the buildings, not just the land on which those buildings are stand.
“Next year is the first year we’re seeing such a large addition to the tax rolls,” said Mike Lonergan, Pierce County’s assessor-treasurer. In 2010, properties assessed at $10 million aged out of the exemption program. In 2011, the number was $2.5 million. In 2012, the properties whose exemptions expired were assessed at $10.5 million.
The tax-exemption program was born of necessity in Tacoma, where new multifamily housing developments were scarce until the program gave developers an incentive to move forward, said J.J. McCament, a Tacoma real estate consultant.
The city of Tacoma says nearly 2,000 residential units in multi-family buildings now are in the planning stages. Many of those plan to use the multifamily exemption to make their projects financially doable.
“The tax-exemption program provided the extra margin that developers needed to begin building,” said Ernie Carino, whose firm was one of the pioneering apartment and condo builders in downtown Tacoma after the program went into effect.
Those units are in the first wave of new multifamily residential construction since the Great Recession put development on ice in 2008. Those new units include the first major residential project on the Thea Foss Waterway, the Henry, since the recession. That 168-unit apartment project will break ground this fall at a site just north of the cable-stayed bridge over the waterway.
That site was once slated for a mixed-use building proposed by Prium, a Tacoma development company that encountered financial problems during the recession. The new apartment will be built by the same consortium of developers who built the first major tax-exempt structure on the Foss, Thea’s Landing.
The program isn’t without its detractors, said government officials.
“To some it seemed inherently unfair,” said Lonergan, a former member of the Tacoma City Council that oversaw the exemption program within the city. “People living in brand new apartments and condos weren’t paying much property taxes, while those in single-family homes and older buildings were.”
But Lonergan believes that, on balance, the program generated new development, and, ultimately, new taxable structures that wouldn’t have been built without it.
“What does that old song say? ‘Nothin’ from nothin’ leaves nothin’?” said Lonergan. “If we didn’t have the tax-exemption program, we probably wouldn’t have these properties to tax now.”
THE CRASH AND TAXES STILL GENERATED
Did the program encourage what turned out to be overbuilding of multifamily buildings in the middle of the last decade?
The program might have been part of the problem, say some experts, but the overwhelming cause of the rash of foreclosures and bankruptcies that hit the housing market here was the collapse of the mortgage market nationwide.
Tacoma, like most cities nationwide, saw the market for condominiums crash. Among the major buildings built in the city in 2005, 2006 and 2007, few escaped foreclosure or a freeze in the midst of construction.
While the city, port and school districts didn’t collect taxes on the new buildings for a decade, the buildings’ construction did generate other tax revenues.
Through the first decade of the program, for instance, governments collected $1.7 million in sales and business and occupation taxes on construction. Local governments also saw real estate excise tax collections of $519,800 from condo sales during that decade on buildings that might not have been built without the property tax-exemption program, a city study says.
That same study says recurring utility and sales taxes generated by those new residents amounts to $541,000 a year.
Some of the buildings covered by the tax exemption program housed deluxe view apartments and waterfront condominiums.
The tax-exempt program was slow in getting up to speed, but in the early 2000s, dozens of structures were built under its provisions in Tacoma. Most of the multifamily structures built in downtown Tacoma, on the Thea Foss Waterway, in the hillside above the University of Washington Tacoma campus and in the area between downtown and the Stadium business district are utilizing the tax-exemption program.
The city says buildings worth some $300 million have been built under the program since its beginning.
While some legislators criticized a program that would give the biggest dollar tax breaks to those who had the most expensive properties, the city said attracting those high income individuals back to the core city from the suburbs ultimately has its benefits as their waterfront and view properties return to the tax rolls and local merchants benefit from the higher spending habits.
The program allows tax exemptions for buildings constructed in 17 areas within Tacoma. Most of the buildings that took advantage of the program are located in or near downtown or near the Tacoma Mall, although others are scattered throughout the Tacoma community.
Even the Lincoln Business District on South 38th Street is seeing some action under the program with a new development being planned for that area.
McCament, a former city of Tacoma economic development official and now a real estate consultant, said the tax-exemption program not only gave developers an incentive, it produced hundreds of units of housing in urban settings that helped bring people to those business districts.
“The majority of the residential projects went forward because the developers had that incentive that brought their debt to income ratio on those projects into line,” she said.
“A bad project wouldn’t have been built just because of the tax exemption,” said McCament. “But the exemption made some good projects bankable.”
The tax-exemption program made housing more affordable for those who bought condos or rented apartments covered by the program.
A 2007 study for the city of Tacoma calculated that an average apartment that would have rented for $1,020 without the program cost $890 a month under the tax-exempt deal. A high-end apartment that would have cost $1,900 monthly without the tax exemption was $200 less with the exemption.
The study found that the same kinds of savings applied to condos. A purchaser who could afford to pay $261,000 for a condo without the program could afford to pay $276,000 with the tax benefit.
Cecilia Hogan, a longtime resident of Thea’s Landing, which loses its tax-exempt status this year, said she thinks many nonresidents think condo owners have paid no taxes on their homes.
“We pay hundreds of dollars every year for taxes on the property itself,” she said.
Hogan thinks the tax exemption should continue because the vision that the developers and the city presented to pioneering residents hasn’t been fulfilled.
“We were supposed to have a hotel and other buildings down here by now,” she said. “I’m still looking out my window at the hole in the ground where the hotel was supposed to be.”
Three different developers have planned a hotel for the Foss Waterway site, but economic conditions and litigation from a rival hotel owner have kept that project on hold.
Joe Guizzetti, longtime president of the Thea’s Landing Homeowners Association, said next year’s tax bill will be a shock for some condo owners in the building. The building’s tax exemption runs out next year.
“It will be a big hit for some,” he said.
But Guizzetti, who also owns condos in Seattle, said the tax-exemption program has been a necessity in Tacoma where incomes are lower and the demographics are different.
“You can build a condo, open a retail shop in Belltown in Seattle,” said Guizzetti, “and it’s an instant success.”
“In Tacoma, that isn’t always the case,” he said.
The procession of retailers through the shops along Tacoma’s Dock Street is evidence that Tacoma’s redevelopment needs the kind of help that the tax exemption provides and more, he said.
KEY INGREDIENT IN THEA’S LANDING
Scott Carino, a local developer whose family is a major owner in Thea’s Landing, the first major multifamily project built on the Foss Waterway since the city launched its redevelopment two decades ago, said the tax exemption program was a key ingredient in the Thea’s Landing project financial plan. That same program, now modified to grant an eight-year tax exemption for market-rate projects and a 12-year tax exemption for projects that include low-income housing, likewise is a necessary ingredient in the Carino’s latest project, the 168-unit Henry apartments soon to rise on the south end of the Foss Waterway.
“Neither of the buildings would work without the exemption,” said Carino.
“When similar buildings in Seattle are renting for $4 a square foot, and rents in Tacoma are $1.80 to $1.90 a square foot, you have to have something that will reduce your costs,” he said.
Thea’s Landing’s tax exemption will end in December, triggering new property taxes for both the 46 condo owners in the building and the owners of the structure’s 161 apartments.
Carino said the 10-year tax exemption has allowed the owners to raise rents gradually to compensate for the new tax expenses due next year.
The owners also recently refinanced the building into a 35-year, lower-interest loan. Those cost reductions have also helped to compensate for the additional tax expenses.
Near the Tacoma Mall, Mike Cohen, an Olympia developer who built two high-rise multifamily buildings north of the Tacoma Mall, said one of the buildings at his Apex Apartments is due to lose its tax-exempt status soon.
According to Pierce County tax records, the Apex pays taxes only on the $1.18 million value of the land on which the building stands. The building itself is appraised at nearly $10 million.
Cohen said the tax increase will amount to about $100 per apartment per month, a cost that he has long planned to pay.
In spite of the hit he will take when the tax exemption expires, Cohen says he favors the program.
“I think its been good for Tacoma,” he said. “Think of all of the new properties it helped create.”
John Gillie: 253-597-8663 firstname.lastname@example.org