Tacoma continues to give tax breaks to apartment developers even as COVID-19 saps budget
The city of Tacoma has approved tax exemptions to apartment developers at an increased rate in 2020 compared with 2019, even as the coronavirus pandemic saps the city’s budget and municipal employees are being laid off.
The city has granted 12 multifamily tax exemptions so far in 2020 as compared to four over the same time in 2019.
The 2020 projects will cost the state an estimated $12.5 million in property taxes, and the city roughly $2.8 million at a time when the city if facing a $40 million deficit related to the COVID-19 outbreak.
City officials say the trade-off is more than worth it in construction jobs, projected sales taxes generated by the new apartment dwellers, construction taxes and the addition of desperately needed new housing.
“When we take this action, what we’re doing is we’re fostering much-needed development,” Tacoma City Council member Lillian Hunter said at a meeting May 5. “While there is a tax abatement included here, there’s also much to be gained with the increase of units for people to live in.”
An economist contacted by The News Tribune questioned whether the city’s estimates still work during the current economic downturn.
“Forecasts made prior to the pandemic that relied on projected sales, which often could be tied to economic activity, are most likely no longer valid,” said Neal Johnson of Sound Resource Economics.
WHAT A DIFFERENCE A YEAR MAKES
Through 2019 and the early days of 2020, it seemed Tacoma was on its way to revising its multifamily tax exemption program for developers.
“Tacoma can’t wait,” Mayor Victoria Woodards declared at the Dec. 10 council meeting.
That battle for now seems to be on an indefinite pause, with the city determined to keep construction going amid the coronavirus global pandemic and the resulting economic tailspin.
City spokesperson Maria Lee told The News Tribune via email in response to questions about possible revisions for the MFTE program in late April: “It’s safe to say that those conversations have been put on hold given that so much of the City’s operational capacity has been devoted to organizational and community response to the COVID-19 crisis.”
So far, Tacoma is on a pace to approve more of the exempted projects in the first five months of this year than it did during the same period last year.
Of 14 proposed so far in 2020, 12 have been approved. The other two are set to go up for consideration later this month.
On April 28, Tacoma’s City Council approved four new MFTEs for projects totaling nearly $7.6 million in estimated completed assessed value. The projects are all in the Tacoma Mall Mixed Use area.
Meanwhile, questions about the program remain largely unchanged: Are the projects worth the value of their exemptions, particularly with the immediate budget strains brought on by the pandemic?
Local officials and developers have insisted they are, given Tacoma’s shortage of housing.
More objective answers probably aren’t coming anytime soon.
Even before the pandemic, the state had not determined an answer to MFTEs’ worth moving forward, and a move to establish a panel to do further review was vetoed for lack of funds.
How we got here
As reported in The News Tribune in January, a 2019 legislative audit of the multifamily property tax exemption program could not determine if the program was working as intended.
The state’s original version of the exemption was created in the mid-1990s to help spur development in targeted areas as part of the Growth Management Act.
The original legislation created a 10-year property tax exemption. That was revised in 2007 to the current versions, 8-year and 12-year.
The 8-year version offers an exemption on the creation of four or more units, while the 12-year includes an affordability component for the creation of units to serve lower income levels. Local governments can create additional requirements or restrictions.
The property tax exemption can be applied to new housing construction or the increased value of a building due to rehabilitation. The exemption does not apply to the land or non-housing related improvements.
The Joint Legislative Audit and Review Committee found 424 developments statewide had been approved for an exemption since 2007, creating 34,885 new housing units — 82 percent of those in Seattle, Tacoma, Spokane and Renton.
Of that, 21 percent are designated as affordable.
The review called for further study, noting inconsistencies in data reporting among municipalities, making the program hard to track.
Rachel Murata, research analyst with JLARC, told The News Tribune in January, “Tacoma is one of the cities that has used (MFTEs) the most, but Tacoma also was low with the number of affordable units created.”
Of the 12 projects approved so far in 2020, 538 units are deemed market rate with 48 listed as affordable.
Tacoma’s City Council decided earlier this year it would wait to see what action came from the Legislature before pursuing any of its own changes to the program, a push that gained steam in 2019 as part of Tacoma’s Affordable Housing Action Strategy.
At the end of a Jan. 7 study session, Woodards said a measure would be back for council consideration after the state Legislature ended its session in March.
The Legislature, via Senate bill 2950, extended the exemption for properties where it was about to expire to preserve those affordable units.
According to Murata: “Anything that would have expired in 2020 or 2021 will now expire at the end of 2021.”
Additionally, she noted, “The bill also created a work group to advise the Legislature on the broader issues, which would have implemented the recommendation of the Citizen Commission.”
Those broader issues included reporting guidelines to make up for lack of or inconsistent reporting and tracking to better analyze how the tax preference affects low-income housing supply.
“But that section was vetoed by the governor,” Murata noted.
The measure was one of many that fell by the wayside amid the fiscal pressures of the pandemic.
Three other bills related to the exemption never made it out of committee.
Now, according to Lee, the city media representative, “There is no schedule currently in place for bringing forth any policy revisions related to MFTE at this time.”
One change did emerge from Tacoma’s MFTE discussions.
The city implemented changes earlier this year to better inform residents of permitted projects and their possible impacts. The modification requires builders of projects that could have potential environmental impacts to post signs on the work site with the project’s permit numbers, general duration of construction, a site plan and contact information.
Tax implications
Council members, while vowing to give the MFTE program another look, also have argued it is a valuable tool for Tacoma to add housing in a time of shortage.
The 12 projects approved so far in Tacoma for 2020 add up to $12,477,400 in total property taxes to be exempted over the span of the exemptions, with the city’s portion of that at $2,848,700, based on estimates provided to the City Council.
The formula for property taxes in Pierce County covers many items, from municipal taxes to school levies and bonds, according to county assessor-treasurer Mike Lonergan.
In Tacoma’s tax calculation area, “The total 2020 levy rate for all properties ... is $13.52 per thousand dollars value (rounded). This is the combined total of regular taxes and excess taxes (which includes all voted levies and bonds),” he explained in response to questions via email.
Well over half of total property tax goes directly or indirectly to K-12 education (Tacoma School District and state school levies).
On the plus side of the ledger, the projects are expected to generate a combined $44,728,900 in sales taxes over eight years, with the city’s portion being about $4,853,600.
Projected sales taxes from construction totals $12,341,700, with the city’s portion of that about $1,340,500.
To council members, that’s more than fair.
“In reality, this creates potential housing that is desperately needed in our community,” Council member Robert Thoms said in the council meeting April 28, where four were approved. “... From an economic development standpoint, I think it’s a good sign that we’re trying to create jobs and invigorate the economy.”
Indeed, the mayor last year repeatedly stated at council meetings that the projects were meeting a critical need, noting, “We don’t have 50 cranes in the sky building housing in Tacoma.”
“Frankly, we need as much housing as we can get,” Woodards said at an October council meeting. “ ... And while we especially need workforce housing, we need all kinds of housing.”
Projections vs. pandemic
But are the economic projections realistic, with so much uncertainty in our new pandemic-filled world?
The city calculates its figures based on an estimated increase in households the project creates, using the average sales tax revenue generated per household in Tacoma, while the projected sales tax generated from construction is estimated by multiplying the construction costs by the sales tax rate.
“In the past there was a pretty good statistical relationship between, say, building permits, and sales tax revenues related to building materials,” said Johnson, the economist interviewed by The News Tribune. “That prior relationship is probably not suitable for the current situation.
“I do know that some cities are making revenue forecast adjustments. The difficulty is that shutting down parts of the economy has a different impact (both in timing, pattern across sectors and severity) compared to a recession.”
He gave two examples of how the pandemic can affect projections.
“For example, Portland’s Bureau of Planning and Sustainability gets some of its revenue from a fee on commercial garbage tonnage. That tonnage has dropped off dramatically,” Johnson said. “While building permits and general measures of economic activity might have sufficed in the past for making those forecasts, any relationship based on prior data isn’t really applicable in this situation.
“In comparison, the revenue that Portland gets from a franchise fee on residential garbage and recycling collection is not likely to be impacted much, and the impact is most likely going to be due to households being unable to pay their bills. That, in turn, affects the garbage companies’ revenues and the franchise fee revenues.
“The bottom line is that some forecasts made before the pandemic may still be good, while others are no longer valid.”
Those types of revisions aren’t possible yet, according to Debbie Bingham, project manager for the City of Tacoma’s Community and Economic Development Department.
The city uses previous year totals of taxable sales from the Department of Revenue in its calculations.
“The problem is for now there’s not enough data,” Bingham told The News Tribune in response to questions. “It’s a guesstimate even in the best of times.”
She said she imagines revisions to the formula will happen once more data are in.
Budget woes
Amid the multifamily tax exemption approvals, the city is pulling together rental assistance for residents facing their own budget constraints via layoffs or furloughs from the COVID-19 pandemic.
The city redirected $1.2 million meant to seed its Housing Trust Fund to use instead for its rental assistance program. The funds will award up to $1,000 per household for residents who meet 50 percent of Area Median Income and can demonstrate unemployment since March 12.
Applications for the program closed Wednesday this week, with more than 600 people applying as of Tuesday. The city is working to identify additional funding to dedicate to the program.
The projected $40 million hit to the city’s budget already has impacted multiple departments. Cuts have been made to various projects to make up for the shortfall, in addition to using $10 million from the city’s reserve fund.
In the area of affordable housing, cuts were fairly minimal, with canceled 2020 projects totaling $38,000, including hiring an affordable housing strategy analyst and launching a neighborhood planning program. Continuing affordable housing projects total $3.2 million and include the Landlord Tenant Information Campaign and Tenant Legal Defense Fund Pilot
Other city departments, by comparison, have it worse.
Capital projects will cut more than $5 million in projects, with government performance cutting $3.3 million.
The city will also lay off 150 employees across departments, with more projected to follow, staff announced this week.
2020 by the numbers
While many of the apartment projects approved for the tax exemption this year are small, offering fewer than 10 units each, two have been much larger.
In early March, a 156-unit development by Koz Development bringing a mix of market rate and affordable units was approved.
Two weeks later, a project including 283 units plus six live/work units, all market rate, at 1011 Martin Luther King Jr. Way was approved for an 8-year MFTE. It has a completed assessed value of $55 million.
That project is being developed by ADG MLK, LLC. The project is a continuation of one originally approved, also for an 8-year credit, in 2017. The difference now is the project added a parcel “and substantially changed the number of units, so they were required to re-apply,’ according to Bingham.
The original plan called for 247 units.
Council members said last week the Tacoma projects will help put people back to work in light of the pandemic and businesses shutting down.
The four projects approved April 28 are expected to provide more than 35,000 hours of local labor.
“(That) is going to be extremely important for our economic recovery once we’re through this most interesting time,” Hunter said during the meeting.
Council member Robert Thoms said the MFTE program is working for cities like Tacoma that struggle for development because of lower rents and pricier markets nearby.
“We take a parcel that is neutral from a revenue perspective, and we put it into production for housing (a known need), and it creates jobs, commerce and ongoing tax base revenue and after a short period of time the exemption goes away entirely,” Thoms said in an email to The News Tribune. “We are seeing such development projects coming off the exemption over the last number of years, and it really has a bolstering effect on our revenues.”
As an example, Thoms pointed to the projects passed by the council on Tuesday. Total sales taxes generated for the city will be $767,800, with exempted taxes at $236,800.
“The sales tax generated by the projects mitigates the tax exemption,” Council member Hunter said.
For now, there’s no slowing down of proposals, even in the pandemic.
“There are several other applications that I am waiting on as well,” Bingham told The News Tribune via email last week.
This story was originally published May 9, 2020 at 7:00 AM.
