iStudios North is a multi-unit apartment development being built near the Tacoma Mall by Steve Novotny (left) and Roy Kissler, October 3, 2016. Peter Haley phaley@thenewstribune.com
iStudios North is a multi-unit apartment development being built near the Tacoma Mall by Steve Novotny (left) and Roy Kissler, October 3, 2016. Peter Haley phaley@thenewstribune.com

Politics & Government

Does Tacoma still need tax breaks to entice housing development?

October 05, 2016 05:00 PM

UPDATED October 10, 2016 09:29 AM

When someone questions the need for tax breaks to lure new development to Tacoma, Ricardo Noguera points to the sky.

The city’s economic development director says he won’t be satisfied until there are 20 to 30 cranes piercing the skyline downtown.

“There’s two cranes in Tacoma right now,” Noguera said recently as he pointed a city-owned Prius up a hill past The Grand on Broadway, a 139-unit residential development set to be completed next year.

As Noguera points out, Tacoma isn’t experiencing the building boom of its neighbor to the north. But there are a handful of high-density projects underway he’s excited about: Stadium Apartments at North G Street, which will eventually have 172 units and two stories of parking, and The Napolean downtown, which will boast 135 units.

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They have something in common: The owners of both apartment complexes will enjoy an eight-year tax break from the city of Tacoma.

Those tax breaks are available to developers of high-density housing in Tacoma’s 17 “mixed-use centers,” such as Proctor, downtown, the Lincoln District and Tacoma Mall, and are meant to keep density in those districts and out of more residential areas.

The program exempts property taxes for eight to 12 years on the improvements a developer makes to a piece of land, provided the project results in four or more additional housing units. The developer still has to pay property taxes on the value of the land, but not on the buildings they develop there.

If we were to do away with the multifamily tax exemption, you would more likely than not see many projects in this area go away, they wouldn’t occur.

Ricardo Noguera, city of Tacoma economic development director

Noguera and developers say if these tax breaks weren’t available, they wouldn’t be building here. Tacoma is not Seattle, Noguera says, and it’s harder to encourage development here because buildings can’t be as tall, developers can’t charge as much for rent, and yet construction costs are similarly high.

“The big challenge for Tacoma, Lakewood, Everett, all these cities — Renton, Kent — is we don’t have the density, we don’t have the height. We share in the same construction costs, but we don’t have the job growth you see in Seattle and Bellevue,” Noguera said. “If we were to do away with the multifamily tax exemption, you would more likely than not see many projects in this area go away, they wouldn’t occur.”

Whether pivotal or not, the tax breaks have helped add thousands of apartments and condos to Tacoma’s housing stock. What they haven’t done, at least not directly, is create a lot of affordable housing. Since 2007, when the city started offering longer tax breaks to developers who set aside a portion of their units for people below the median income, only one project that qualified has been built.

That could be changing.

LONG UNPOPULAR, AFFORDABLE OPTION SEES A BOON

The Legislature approved the multifamily property tax exemption incentive program in 1995. It was designed to give developers and condo owners a 10-year break from property taxes on apartments, condos and other multifamily developments built in certain neighborhoods. The building or condo owners still pay taxes on the property on which the buildings were constructed, but get a tax break on the value of the structures themselves.

On its website, Tacoma bills itself as the first city to adopt the program. It got a slow start in the late 1990s and early 2000s, but ramped up in the mid-2000s, with dozens of new developments getting the exemption between 2004 and 2007.

In 2007, state lawmakers tweaked the program to create the two options that exist now: the 10-year break was reduced to an eight-year exemption for market-rate housing, and the 12-year option was created for developments with units that qualify as affordable housing.

Developers must keep at least 20 percent of rental units affordable to people earning no more than 80 percent of the area median income, which in Tacoma would equate to roughly $40,000 for a one-person household. Condos must be affordable to buyers making no more than 115 percent of the area median income, or approximately $58,000 for a one-person household.

Since the program began, 116 projects with 3,342 units have been built. Of those projects, only one qualified for the longer 12-year tax break: A development near the Tacoma Mall that is required to rent two of its six units to tenants who meet the income requirements.

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Multifamily property tax breaks

Since the city of Tacoma began offering tax breaks to apartment and condo developers, it has extended them to 137 projects, 21 of which are not yet built. Thirty-one properties have joined the tax rolls after the expiration of their tax breaks, most of them in 2010 or later.

But in the past three years, there has been a shift. Of the 21 projects approved by the City Council but not yet built, 12 of them have agreed to meet the affordable housing requirements. They tend to be in lower-rent areas — near the Tacoma Mall, the McKinley mixed-use center, or the Lincoln District — and usually are smaller, with fewer than 20 units.

The 12-year tax break had been unpopular, some developers and city officials said, because of regulations that made it seem like heavy penalties — including retroactive tax payments — would be levied against those who didn’t perfectly comply with the affordable requirements. Auditing required to make sure that building managers were renting to income-eligible tenants also were seen as a burden.

“I’d done some of these where I only did an eight-year program, and there’s two reasons why we went with the eight-year — I was worried about all that auditing, and they had so many regulations that if I messed up one little thing, that all of the tax savings would go retroactive and I would have to pay it all back,” said Steve Novotny, a developer who has several 12-year projects under construction, including in South Tacoma near the Tacoma Mall and on Pacific Avenue.

Hearing developers’ concerns, city officials changed the language in the regulations to give developers a year to get in compliance. Now, those penalties are more geared toward developers who abuse the program and try to get the 12-year tax break without maintaining affordable units, and not those with minor bookkeeping errors.

Novotny said he noticed when he started building projects in cheaper parts of town that the majority of his tenants had lower incomes anyway.

85 Developments currently receiving tax breaks under multifamily property tax exemption

21 Projects approved by City Council since 2013 but not yet built

31 Developments in the MFPTE program that are back on the tax rolls

“This makes me decide, OK, I’ll take less of a location and improve the area,” Novotny said, “so I’m taking a little risk and the city is taking a risk with me, and it’s like the rising tide lifts all ships.”

Connie Brown, executive director of the Tacoma-Pierce County Affordable Housing Consortium, said she would like to see more developers take advantage of the 12-year break.

About half of the people making between 30 and 50 percent of area median income in Pierce County are spending more than 50 percent of their income on rent, she said. The rule of thumb is that households should have to spend no more than 30 percent of their income on housing.

Seattle, she pointed out, doesn’t offer the eight-year tax break. If developers want a tax break, they have to include affordable housing in their mix.

“They say if you want to get a property tax exemption, you can have it for 12 years and you include affordable housing in the development,” she said. “So our having the eight-year is probably working against our goals for affordable housing.”

CITY SAYS TAX BREAKS STILL NEEDED

But city officials say they still need both options to entice developers to locate their projects in Tacoma, where they fill not only a need for more housing, but help boost the city’s tax base.

Thirty-one properties have joined the tax rolls after the expiration of their tax breaks, most of them in 2010 or later. Since 2015, the tax breaks on 15 developments have expired, pushing the total assessed value of those properties from $4.3 million for just the land to $33.4 million for the land plus the new buildings.

Another 20 properties are on their last year of the tax holiday and will return to paying full taxes at the beginning of 2017. They are among the 85 Tacoma developments currently receiving tax breaks. Twenty-one more have been approved by the City Council since 2013 but haven’t been built yet, according to the city. They range from small projects — four or 10 units in south and east Tacoma — to nearly 200-unit upscale condos and apartment buildings on the waterfront downtown.

116 Total projects built since MFPTE program started

3,342Units built as part of MFPTE program

Most City Council members applaud the tax breaks as a way to eventually reap big tax revenues from properties that once sat lifeless. But Councilman Joe Lonergan has pressed city staff at recent council meetings about whether developers considering projects in popular, up-and-coming areas such as Proctor and Point Ruston need tax breaks.

In August, the City Council approved an eight-year tax break for 178 units at Point Ruston, the first multifamily property tax exemption granted for any development at the urban village near Point Defiance Park. Lonergan pointed out that the lack of tax breaks in the past have not stopped developers from building residential properties there: Upscale apartment buildings and a condominium development are already in place.

“That perhaps answers to some extent the question of whether this would have been built otherwise,” he said.

But economic development officials say they only know what they hear as they try to lure new development to Tacoma.

“Every developer will tell you ‘without this exemption, I can’t do my project,’ and we can’t really assess whether that’s true or not,” said Debbie Bingham, an economic development specialist for the city, in an interview. “I think Tacoma is still in a place where we have such low vacancy rates ... we feel like we need more development in housing.”

Candice Ruud: 253-597-8441, @candiceruud