“Seattle – Mirabella pano 01” by Joe Mabel. Licensed under CC BY-SA 3.0 via Wikimedia Commons

Since Frank last summarized the arguments, Owen Pickford has fired a couple of more shots in the linkage fee debate. It’s very interesting:

Both Bertolet and Roger Valdez (the director of Smart Growth Seattle) seem to agree with me that the cost of linkage fees would be passed to landowners. But we clearly disagree about whether reduced land values affect the supply of land. Cutting to the heart of the matter, Bertolet is making a claim about the economic nature of land. Do high prices mean there’s more land for sale? Do low prices mean there’s less?

Unlike the principals, I have no literature survey to bring to this debate. But I did wonder about the theoretical limits of a linkage fee policy. Intuitively, an arbitrarily large linkage fee would affect development. Indeed, if the fee is large enough to capture or exceed all potential profits from development, and Pickford’s model is correct, then the value of land should approach the value implied by the existing use. So it’s clear that in principle linkage fees can deter development. I also suspect that the real estate market isn’t quite so frictionless that all the impact will pass on to land values, although I can accept it as the primary result.

Mike O’Brien’s original legislation, of course, tries to allow profit on construction. So the argument for that linkage fee (as opposed to linkage fees in general) amounts to the assertion that, in areas where it is proposed, landowners are receiving a large windfall relative to the size of the fee. That ought to be answerable with local data.

Bertolet and Pickford also scuffle over whether bureaucrats can be trusted to properly set rates to mitigate disincentives to development. I’m not nearly as worried about the bureaucrats as the politicians. If market conditions demand a cut in the fee, voting against existing funds for affordable housing is tough. More importantly, last month’s events show that several Councilmembers aren’t particularly interested in making sure we maximize unit construction. Linkage fees could be another weapon to slow growth while wrapped in the flag of affordable housing.

On the other hand, even if Bertolet is right that the fee will reduce market-rate construction, the fee exists to construct low-income housing! Since we ought to be most concerned with the raw number of units rather than the details of those units, I’d like to see his accounting as to whether the low-income units built exceeds the numbers lost to the fee’s deterrent effect.

Today, a linkage fee seems more likely than ever, though its scope is very much in doubt. The Mayor’s Housing Affordability and Livability Agenda (HALA) committee proposed a linkage fee only on commercial projects, which in theory should discourage space for jobs and encourage space for housing. In the aftermath, Mike O’Brien withdrew his legislation, keeping it in reserve should developers renege on the compromise. Market-rate-development skeptics Kshama Sawant, Nick Licata, and Council candidate Jon Grant proposed a HALA alternative with, among other things, a more “robust” linkage fee at a higher rate even than O’Brien’s bill.

So where does all this leave us? I’m now inclined to believe that even the O’Brien linkage fee isn’t a big deal: the net impact on overall housing supply is likely to be small, although there is the potential for trouble down the road. As before, I wish we had a broader revenue source for affordable housing than one that potentially worsened the other end of the problem. But if the HALA compromise essentially puts a little drag on market-rate development to fund low-income housing, and enables a sweeping upzone that makes a real step towards addressing the housing shortage, that’s a deal worth making.

38 Replies to “Linkage Fee Evolves, Debate Continues”

  1. The politicians should be concerned about putting an expanded affordable housing levy to a city vote. For the single family homeowner who potentially was upper-middle class 10 years ago, but now has seen that cash-flow position erode due to substantial regressive tax increases (namely, property), then there is not much else to do but get on board the bandwagon of dis-assembling SFR and renting out your domicile, or, add a DADU to the backyard, and rent out both. Ultimately, I do believe the city will still maintain a relatively poor population and a relatively rich population, regardless if affordable housing units are increased or not. So why vote for an expanded levy? More homeowners will become landlords and move to a better managed municipality that doesn’t have the growth challenges, cost of the levy will be passed on to renters, that simple.

    1. Their taxes are still low because Washington doesn’t have an income tax. Property taxes are “high” because all essentials have to be put on the property tax or sales tax. If somebody owns a house, good for them because they’re protected from the rent increases that might force them to leave Seattle someday. If they have a cash-flow problem, then it’s probably more than just the property taxes, and perhaps they just can’t afford the house. The rising prices are the same thing as higher property values, so they’re getting a return on their investment. If they choose to leave Seattle when they could afford to stay, why should we be concerned about that? They’ll have a lot of money from their house sale, which will go farther wherever else they move to. Somebody else will buy the house. Again, why should we be concerned about that? The total population is unchanged, and somebody who more values living in the city is living in the city, so that’s great. What I’m concerned about is the people who can’t buy a house and are concerned about rising rents and dwindling supply. That’s why we should build more units, both multistory and things like ADUs and row houses.

      1. I think you need to acknowledge that even though there are no WA State income taxes, the tax burden on households in Seattle is not insignificant. We were lucky enough to remodel our house recently and saw the tax bill go from $3500 per year to $8000. Sure the house is worth more but we need to pay for it for many more years before we can hopefully realize a gain upon sale. But unless we move to somewhere cheaper than Seattle, we will have to rent or buy something else in town which will be expensive too.

        I would be very happy to impose a progressive income tax and lower sales and property taxes, remove business tax loopholes and subsidies (Boeing).

        I am willing to pay for more social housing and transit, but there are tons of voters who see the increasing tax burden and don’t see any commensurate wage/income growth.

        I would hope we can sell voters on cost effective transit plus smart land use changes that maximize our existing road infrastructure — dedicated lanes for transit, smart signaling, protected bike lanes, etc.

      2. Smart land-use changes is precisely what we (urbanists) want to do: the upzones. Street improvements are not really “land use” (which is more a zoning/real estate term); they’re just things SDOT can do to the road. They’re most commonly called “complete streets”.

      3. I have a hard time taking property tax complaints very seriously. You can write them off your federal taxes and most homeowners are already taking a deduction on their mortgage interest which doesn’t technically make sense but is never going away. Its a similar concept to the subject of the post – I’m sure at some point property taxes are so high that they don’t act as a federal to local transfer, but I’m not sure where that is.

      4. @Keith — Not everyone itemizes. If your house is paid off, then you typically don’t. For many, this is a burden, and can lead to Proposition 13 type reactions (which aren’t good).

        In general it makes sense to have a better tax system, and property taxes should be part of it. But so too should income and capital gains taxes. I mean holy how, the fact that you can earn a billion dollars in this state and not pay a penny to the state is astounding, considering that the guys that first did that would tell you that the state — specifically the UW — played a big part in making that money.

        That being said, folks who feel like their property taxes are too high should remember that this is because the auditor thinks the property is worth a lot of money. If you disagree, then ask for a review. If you agree, then there are other options (such as a reverse mortgage).

      5. It’s interesting that the most complaints about taxes high taxes come from Clark County, where people can avoid both income tax and sales tax.

        If we had had higher zoning and high-capacity transit forty years ago, we wouldn’t need such high taxes now.

      6. The tax burden in Washington is rapidly decreasing relative to other states. We’ve gone from the 15th highest tax state to 37th since the 1990’s, and we’re still among the very most regressive. So no, “pity the poor overtaxed rich Seattleite” isn’t a reality-based or serious narrative.

  2. While development is booming, why not try to benefit from it as much as we can? Hell, throw in some extra transit and infrastructure taxes too while they’re at it. I know it’s blasphemy on this blog to suggest asking the Glorious Developer to throw us a bone, but we have a City to maintain and they’ll just pass the buck to the chumps already paying way too much for new development.

    We could consider waiving the fees if the development is priced to rent or sell at non grossly-inflated rates affordable by us mortal humans.

    1. “We could consider waiving the fees if the development is priced to rent or sell at non grossly-inflated rates affordable by us mortal humans.”

      The housing affordability report recommends exactly that. I don’t know the details but it’s a promising start.

      “they’ll just pass the buck to the chumps already paying way too much for new development”

      Housing is not a luxury like iPads or pizza; it’s a necessity. Some of those chumps would prefer to live in an older less expensive building, but there’s a limited number of them and they’re full of non-chumps, so the vacancies are getting toward zero. You can’t build new old buildings because time machines haven’t been invented yet, so you have to build new new buildings. This also shows the huge problem past generations gave us: they built low density between 1945 and 1995. One- and two-story buildings when they could have built four and six (and did in the early 1900s). Setbacks that become unused dead space (not a real garden or usable yard) and push everything apart. The main good thing about this low density is that a new building can dramatically increase the number of units rather than just making them more expensive.

      The point being, the housing crisis is not the developers’ fault. It’s a citywide problem, so really everyone in the city should paying for a solution, not just the ones who buy/rent new units. If you spread the burden across everybody, it would be less for each person. And we are doing that with the housing levy, but the levy isn’t enough to address low-income people’s needs, much less middle-income people’s. The waiting list for subsidized housing is a decade. So a uniform tax would be fairer than linkage fees. But the rich have been making windfalls with their tax cuts and outsourcing jobs and union-busting and real estate ownership and taking worker-generated productivity gains for themselves, so it’s fairer to tax them for the problems these have caused. Both developers and non-developers. But, linkage fees are better than doing nothing, and if they’re the most politically feasable then they’ll have to be part of the solution.

      1. Exactly. It is important to remember that anything that pushes up the cost of new housing also pushes up the cost of old housing. Imagine if new cars cost twice as much. Suddenly used cars would go up in price as well. So they won’t just “pass the buck to the chumps already paying way too much for new development”, every chump that rents in this town will pay more.

    2. Clarification: the housing affordability report recommends tax breaks for landlords who keep rents reasonable. That’s more general than linkage-fee waivers, and allows older buildings to participate. Whether it’s better or worse than waiving linkage fees depends on the amount.

  3. I feel like there is a big disconnect between the timeframes of politicians/activists and reality. No matter what we do today, rents will be rising for many years to come, simply because of the inability to meaningfully change the pipeline of residential projects in development pipeline over the next 3 years. From land acquisition through design and construction, it takes a long time to build.

    Unfortunately, politicians will get restless that whatever chosen plans are failing when in reality it just takes a long time to change course on something like housing policy. Decades, probably.

    As for rents going down, short of an economic depression, that’s not going to happen anytime soon, unless people start to move away.

    1. Of course rents won’t go down: prices are sticky. We know this for sure. What we’re talking about is slowing the rate of increase.

      1. You can’t artificially slow the rate of increase without controls, even if you want to stick it to the developer with linkage fees. The purpose of the linkage fee is a tool for the city to protect a certain number of rental units from market rate pricing. Since the chances of getting the state legislature to change the rent control laws are minimal, this is Seattle’s only alternative to “rent-control”: either raise enough money to buy units/buildings from developers, or incentivize developers to include below market rate rentals in new buildings. But why would most developers voluntarily include affordable housing? Most will pay into a fund to add more market rate units to a larger building, or not at all, leaving the city government to figure out how to protect enough target units from market price changes. But so long as the city is willing to up-zone current zoning (whether within and/or outside of the Urban Village zones), the notion that a developer will provide “affordable housing” is false. The market rate is the market rate, you can’t change the market rate.

      2. Right, we agree. Even slowing rent increases to the general inflation rate would be a major yet very difficult achievement.

        Unfortunately, some people continue to argue that because new developments have not stopped rent increases, development must be causing rent increases. Others contend that the only successful policy will be one that makes rents decrease significantly, a situation that is incredibly unlikely.

        Unrealistic goals yield unrealistic policies.

      3. “The purpose of the linkage fee is a tool for the city to protect a certain number of rental units from market rate pricing.”

        It’s more likely to build new affordable units than protect existing ones. Because new buildings are invariably higher density, protecting old buildings won’t be enough units to go around, especially with all the middle-income people who don’t qualify for affordable housing crowding into the remaining old buildings.

      4. It is impossible to tell. Rent increases are being driven by high demand. If that demand levels off, then prices could easily go down. A few months ago (maybe a year or two) there was an article stating that many in the business community feared a rent price bubble (in Ballard in particular). From the businesses perspective, this was a bad thing. From a renters perspective, this was a good thing.

        Let’s not forget that a key provision (if not the key provision) will not require the usual process you are referring to (acquire, design, construction). I’m talking about low rise or ADU changes. In many cases, it is simply a matter of making very minor construction changes (convert a house to an apartment or add a basement apartment). This can happen very quickly (within a few months, if not sooner).

        The big thing is, all other things being equal, these changes will lead to lower housing prices. Of course we don’t know what the other things will be. If Amazon continues to hire, rent will probably be high, no matter what we do. If they don’t (or do the opposite) we will probably have a bubble (or at least a leveling off). The changes put in place will put downward pressure on the market (if you are willing to build a backyard cottage, then it doesn’t matter that much if rent is $1,000 or $1,500, either way you are going to build). I don’t think we should get our hopes up too high, but if this passes, I think it will lead to a substantially better housing situation in this city.

      5. Rent increases are being driven by a low vacancy rate. House prices are being driven by an extremely low inventory, which is essentially the same thing.

  4. There’s a finite number of people who want to live in Seattle, but they’re more than the currently available housing units. Rent rises started in 2010, faster than previous waves. The first group of new apartments opened in 2011, another in 2012, another in 2013, etc. Every year the experts predicted that demand would level off and ease the following year but they’ve been wrong every time. Eventually it must reach a ceiling, but we have no idea where. At minimum we need enough units to match the number of new jobs each year. Factors such as people already having a place or commuting from the suburbs are canceled out by other people doing other things, so if we just start with the number of jobs and add a percent, that’s a reasonable target.

    More units may not be able to stop the rent increases for several years, but it will give people more choices immediately. The number of people coming is still finite. More housing would attract people from the suburbs, but I think that’s a smaller factor that we can keep up with, because some of them will just stay rather than moving again, and those that move won’t move all at once. So people will have more choices with rising prices, and eventually they’ll have more choices without rising prices.

    And if the entire housing affordability policy is implemented, there will be a greater variety of choices, and especially more on the low end: those that used to be common but have been outlawed or red-taped to death for several decades.

    1. The overall majority of people that go to the suburbs are families with children. That being said, there is a larger percentage of families that are newcomers in the last 10 years that are starting out in Seattle. But unless families are included in the housing equation to convince them to move back from the suburbs to a city with mixed results when it comes to planning basically anything, I don’t see the attractiveness of that. Transporting multiple children to multiple events, and coordinating those times on the same day, is unachievable within a reasonable amount of time in Seattle. Developers will also chase the lowest denominator: more units/per building. So building large units over 1000 sq. ft. equipped for a family of four isn’t profitable. What the Seattle city council should really do is require a certain percentage of units to be a certain size targeted for families.

      1. That could easily backfire. Require a certain number of big units and all units, everywhere, get more expensive. With costs so high, the big unit get rented out to people willing to be roommates. Instead of two incomes (the parents) chipping in for the apartment, there are four.

        In general I don’t see the trend you are talking about. Seattle is growing much, much faster than the suburbs. The schools are having to struggle with the growth. For everyone family that wants a big house in the suburbs, so they can drive everywhere, there is a family happy living in a duplex, apartment or condo, and walking everywhere.

        What will make things a lot easier on families is cheap or free day care. It is very had to afford to raise a family while spending a substantial amount of time at home taking care of a three year old. Unfortunately, day care is very expensive, and the city doesn’t want to (or can’t) spend the money necessary for this to make a substantial difference. Recent efforts are a solid step in the right direction, but too small. Like all programs of this nature, it is hard for the city to solve the problem alone (imagine if public schools were paid for on a city by city basis — wait, they were, and then the state was sued, over and over again). Personally, I think the city (and the schools) should just approach this from the other end. Make all day kindergarten free, then do the same with 3 and 4 year old school (pre-kindergarten and pre-pre-kindergarten ). Day care for babies is really expensive (and a major burden on parents) but if you can reduce half the cost (from new born to first grader) then you really make things a lot better for families.

  5. I think that Alan Durning’s post about HALA and the move away from a “linkage fee” to mandatory inclusionary housing is a must read on this topic that this post doesn’t fully capture. The key is the alignment of outcomes into the “more housing, more affordability” frame.

    http://bit.ly/1gCq9S1

    1. We can always improve the policy later. This is a start.

      I was puzzled by the difference between linkage fees and inclusionary zoning in newspaper reports. But the difference seems to be that linkage fees are a surcharge to fund affordable housing, while inclusionary zoning seems to mean that all new buildings have to have some affordable housing. That sounds OK and probably better overall, but the important thing is to just do something now, Especially since it would take years for the zoning changes to be completed, and thus for any inclusioned housing to be built.

    2. That is a good Durning post, his writing is better than ever too.

      I am way more in favor of mandatory inclusionary zoning rather than development and linkage fees. If fees are done on a regional level (i.e suburbs too) that would be OK, but without regional participation it can distort the market during the next recession.

      The HALA proposals should result in a more livable and affordable city. We also need more road diets, protected bike lanes and transit exclusive right of way.

      1. +1 “We also need more road diets, protected bike lanes and transit exclusive right of way.”

  6. The commercial development linkage fee I would say is a decent compromise as it puts a price on developing job generators which in part is causing the housing crunch. Slowing office moves into Seattle while some would say is job killing might actually help in truly slowing growth.

    I have not read the entire HALA recommendation but there has to be someway if parking isn’t included that funds go into capital for transit infrastructure.

    Many are beginning to realize stop growth and rent control simply will not bring about desired outcomes. In the case of Austin, Texas they built enough units and rents finally stabilized. Seeing Columbia City at 3k/month is quite astonishing and makes me wish they had higher zoning let alone grade separated but what is done is done.

    1. Linkage fees are a tiny footnote in a company’s budget. They’re moving to Seattle because the boss likes Seattle or they need to recruit workers of the kind who like Seattle. A linkage fee is unlikely to stop then, but a hard cap on growth would, simply because they won’t find any suitable office space available. In that case they’ll move to the suburbs or another city. But that won’t be feasable if they can’t find enough workers willing to live there. So capping growth would cause some companies to locate in Tacoma or Dallas or Atlanta, while other companies just wouldn’t grow at all.

  7. Still seems to me that the free market should work just fine for this one. Take care of “Affordability” by putting everyone into productive jobs wages high enough for a good life, including a thorough education and a decent place to live.

    The two of which are inseparably connected by the nationwide fact that the quality of everyone’s education is a hundred percent by the quality of the schools in their school district.

    If no private employer can provide this work and wages, have them pay taxes for public employment. Country gets rebuilt and banks bailed out. Worked for WWII. And really really conservative.

    Mark Dublin

    1. This is the flip side of the housing crisis, that some workers are now half as competitive for housing than others, because the wealth that the former used to have the latter now have in addition to what they had before. But that won’t change until the politicians promoting union-busting and right-to-work laws are voted out of office, and that doesn’t appear to be happening any time soon. Maybe the great progressive wave will occur in 2016, but it has been predicted before and hasn’t happened yet. (Although maybe it did happen but gerrymandering and voter-suppression canceled it out? :)

      1. Mike, I’m doing my best trying to propagate what’s probably the only solution: get people age 12 on up to get active in grassroots politics. Both major parties have one thing in common, in addition to leadership every one of whose ideas is forty years out of date:

        Think of two large and expensive buildings whose basement contains the controls to our government’s machinery. With the locks rusted off the basement doors- but entry discouraged by the sewer pipe left broken for the last forty years. And hazmat suits unavailable for back-to-school.

        After short angry conversation after almost running my “900” series trolleybus over Mike Lowry and his car on Capitol Hill, I got invited to a ceremonial breakfast at the real Capitol in Olympia. Guests of honor were from several high school student governments.

        A young woman asked the governor: “We can’t even vote yet. Why should politicians pay any attention to us? Someone past voting age then asked the Governor: “What would happen if every high school student in the district volunteered for somebody’s campaign?”

        Answer: “If that happened, I could take any election in the State.” After age 18? Doubt the Koch Brothers are going to fund very many fights for precinct committeeman. Five like-minded people can take most precincts. Many positions are unfilled, not just non-contested.

        That’s how the Southern Democrats got the Republican Party in ’68- and how George Wallace won the Democratic primary in Michigan same period. Sauce for the buzzard, sauce for the cordon-blieu.

        Mark

  8. Public radio this morning gave absolute evidence of major economic benefit of high-wage public employment in an area far worse depressed than Seattle’s, with probably same population: the State of New Mexico.

    In absolute obedience to President Obama’s promise not to build any new nuclear weapons, we the taxpayers are making it possible for an experienced and respected contractor to modify an existing nuclear warhead so it can be guided from ground or aircraft.

    So a well-funded government work program is saving an entire state from having to become part of Arizona or Texas. Talk about badly needed defense!

    It’s a shame that no conceivable public transit system, or the density to serve it, can compare with the means to put into a wastebasket a weapon that could level the Greater Puget Sound region. Which would definitely reduce the need for housing, and definitely decongest what’s left of I-5 coming in from Everett.

    Can’t luck out and get a flipped fish truck every day!

    Mark

    1. Or just wait a few more years for the “Big One – Rip 9.0” to do the deed. They’ll be plenty of opportunities to rebuild Seattle then.

      1. It’s happened before, Mic. In these budgetary times, though, it’s too bad we’re not zoned for either cows are oil lamps, like Chicago was. Seems like many cities had same urban renewal- including Seattle. In addition to earthquakes.

        If the next Really, Really Big One makes everything east of 405 plunge into the Atlantic, however, our renewal will be hugely helped by one resulting benefit: another view beachfront all the way from San Diego to Vancouver BC.

        Though another possible geological event could actually bring serious density-related transit benefits:

        There’s enough volcanic magma under Yellowstone to blow the park into orbit, creating a thirty mile high ash cloud which with the help of prevailing winds could make a lot of the US uninhabitable. Though probably missing the Northwest.

        Generating the enough refugees to more than create enough density to quadruple Seattle Subways’ wildest with every single corridor alternative at once. New York City built its first subway in four years with the techniques of 1900 when walking completely gridlocked on it’s own Broadway.

        Since our Broadway is shorter, and there could be more people…give us about a week.

        Mark

  9. So the solution for affordable housing is apparently to make housing more expensive for everyone but the handful of selected people who get to pay well below market rate for housing in MFTE units or stand alone affordable housing buildings. Obviously the rich can afford the higher cost of housing through taxes and fees and market rate, but all these well intentioned but misguided policies do is harm the people who make too much for subsidized affordable housing and too little to afford the crazy rates of market rate housing. Surprise surprise, that cities are now only for the really rich who happily pay lots of taxes to live where they choose and the poor who get all the free and reduced price services courtesy of politician’s who want their votes, meanwhile the middle class gets screwed.

      1. I can’t speak for poncho, but I don’t think the answer for middle class housing is subsidized housing. To be clear, subsidized housing has a place — it has always had a place. It had a place fifty years ago, when housing was a lot cheaper. It has a bigger role to play now, as the society has become a lot more stratified. Simply put, there are a lot more poor people, and this increases the need for subsidized housing.

        But the problem now is a housing shortage, relative to the demand. This makes it tougher on the poor, but it also makes it much tougher on the middle class. The answer is a change in regulation, which is what this does. So while the linkage fees may be annoying, the key here is the zoning change, and from everything I’ve read, it is a very big step in the right direction.

  10. I agree completely with your last paragraph. If this is what it takes to get improvements to the zoning code, I’ll take it.

    As for linkage fees, my guess is they will be relatively small, and will have a very small impact on development. I find the argument for linkage fees to be an interesting one, and quite similar to the debate about raising the minimum wage. At first glance, it is easy to assume that raising the minimum wage will reduce the number of jobs. After all, some employers won’t be able to pay their employees a raise, and will cut the number of employees. But in a robust market, it actually works out to be the opposite. Many employers can afford to pay the extra money, as profits are fine. When salaries rise overall, spending rises with it (a stronger middle class leads to a stronger economy). This boosts employment, overall. So you might lose a few jobs, but get back more. Of course, there is a limit. Increase the minimum wage too high, and net employment actually goes down. It also depends on how profits are doing. The more profitable the companies are, the more that minimum wages can be raised.

    The same is true for linkage fees. There are a lot of people sitting on property that is ready to be developed. The land is bound to make a huge profit for those involved. The linkage fees are similar to a raise in the minimum wage for a profitable business, they can handle it, and it won’t change their plans. At the same time, there is plenty of property that is on the edge. This is property that makes money as a warehouse, or a parking lot, or some other small structure. Rents haven’t gotten high enough yet to justify redevelopment, or rents are just barely high enough. In this case, development won’t occur. If there are a lot of properties in the first group, and not many in the second, then overall, the linkage fees (if applied properly) would lead to a positive outcome (for those seeking affordable housing). But if not, then it will be a net negative. I have no idea if the linkage fees can be set in this sweet spot, but I think there is a good chance. I don’t think it will have the same kind of positive impact as a change in zoning, but I doubt it will have a hugely negative impact either.

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