Creating Affordable Housing with a Linkage Fee

Affordable Workforce Housing 

On October 20, 2014, the Seattle City Council moved forward with a plan to create an affordable housing linkage fee to preserve and create affordable housing in Seattle. The resolution directs City departments to develop legislation whereby new construction in multi-family and commercial zones would mitigate the cost of increasing rents by funding housing affordable to those households making $45,000 - $65,000 per year, which is 60% - 80% of area median income (AMI). 

"If we want Seattle to be an inclusive city for people of all incomes, then we need to see more housing produced that's affordable to more people.  Up until this point, the market has clearly not given us the housing we need," said Councilmember Mike O'Brien, chair of the Planning, Land Use and Sustainability Committee and the legislation's sponsor.  

Developers could either pay a per-square-foot fee, which is variable based on project's location in the city, or avoid the fee by dedicating at least 3% - 5% of the units in their project to households making less than 80% AMI.  The money generated from fees would be invested in workforce housing. 

"Our expert economic consultants suggest that at this fee level, development would absorb the fees without constricting new supply or significantly raising rents," Councilmember O'Brien added. 

The following map illustrates where the linkage fee would be applied in multi-family and commercial development in the city. 

The final legislation is anticipated to gradually phase-in over a three year period and would not affect existing projects or new projects with permit applications already submitted. 


Linkage Fee

This page includes the background information on where this proposal comes from, findings from the expert consultants Council enlisted to help analyze our affordability challenges we face in Seattle, a summary of the public engagement on the issue to date and the proposal that Councilmember O'Brien has advocated for. For the shorter version that just focuses on the proposal, please see Councilmember O'Brien's blog post on the Affordable Housing Linkage Fee.


Background - How we got here

Affordability in housing is one of the biggest issues we face in Seattle today. There are a few tools available to the City to help maintain the affordable housing stock that exists today and produce more affordable housing. Most of our tools and resources are dedicated to the demographic with the greatest need - that is, our low-income residents. Further, we know the resources we have to meet that need are insufficient.

My involvement in this issue goes back to the spring of 2013, when the Council started taking up the South Lake Union rezone. In that process, we learned that our current tools were producing too few new affordable units for the population growth we were seeing and expecting in that neighborhood, so I helped lead the effort to strengthen our incentive zoning program. Incentive zoning is a policy that says if developers want take advantage of extra height on a project, which increases the value of the development and the profits they can realize, they need to provide additional public benefit in exchange for the bonus height. One of the public benefits we ask for is for developers to either produce affordable units in the building they are building, or pay an “in-lieu fee” that goes into the City’s affordable housing trust fund to be spent on new affordable housing.

The City has had an incentive zoning program for commercial buildings downtown since 2001 and for residential multi-family buildings since 2006. Over time, the program has been expanded to new neighborhoods as the Council has passed new upzones, including around light rail stations, in Pioneer Square, in SODO and in South Lake Union.

In the South Lake Union rezone, I led the effort to increase the in-lieu fee because it was clear that it was too low - too few units were being created and projected for the future, and almost no developer was building affordable units on site. The theory goes that if we have the in-lieu fee at the right price, there is no economic incentive to pay the fee and we will see affordable units built into ongoing projects. But we were seeing little if any on-site performance, suggesting our in-lieu fee was too low.

After the South Lake Union rezone, the Council adopted Resolution 31444, which calls for a comprehensive review of our workforce housing programs and a specific look our programs aimed at households with income levels in the 60-80% of area median income (AMI) range (see this chart for AMI levels in Seattle). We know most of our resources are geared towards income levels below 60% AMI - the vast majority below 30% AMI actually because that is where we see the greatest need.

Resolution 31444 is about helping the City better understand how we are meeting the need for those lower- to moderate-income households who do not qualify for low-income housing but struggle to find market rate rents they can afford. The workforce I have in mind when I talk about “workforce affordable housing” are security guards, janitors, administrative assistants, retail and food service workers - all people who work in the city and perform important jobs in our lives, but who are in careers that typically have lower pay scales and less access to upward mobility. I believe that these folks have all the same rights to live in Seattle as I do or as a software engineer at Amazon does, but there are far less housing options available to them at rents they can afford.

Do we need more workforce affordable housing in Seattle?

Short answer: yes.

We need more housing at prices accessible to people at all levels of income in Seattle. The problem is that the market is only producing new housing for those with incomes at or above the median for the area. New studio and one-bedroom condos are going for $1,500 to $2,000 per month, hardly affordable to a recent college grad with tens of thousands of dollars of student debt, but nicely affordable to a newly employed software engineer in our growing tech sector.

The following series of charts is taken from an analysis conducted by Council Central Staff to help provide baseline of existing availability of workforce affordable housing.

The first two charts below describe the income ranges of the households we are looking to provide more housing for. The first chart provides the income levels we are talking about when we say X% of area median income (AMI). As you can tell from the chart below, even if you work full-time at minimum wage, you are still ‘very low income’ for the area. The second chart shows the income distribution of existing households. We can see that about 40% of households fall below the 80% of AMI. Typically, our Housing Levy funded projects are geared towards the lowest end of the spectrum, i.e., less than or equal to 30% of AMI, because that is where we see the greatest need. But some 25% of our households are in the 30%-80% of AMI range, and we have previous few resources to address the need for housing affordable to those households.

Workforce Housing

Workforce Housing

Affordable is a relative term. But in the context of housing, the federal government has set the standard that affordable means that your rent that does not exceed 30% of your income. The next chart illustrates what rents are affordable for the lower income brackets.

Workforce Housing

When your rent is greater than 30% of your income, you are said to be cost-burdened. For extremely and very low income households, the vast majority of folks are cost-burdened.

Workforce Housing

Part of the answer for this cost burden lies in the fact that, while the market does provide some affordable studio and one-bedroom units, there are very few affordable family-sized units. This means that low-income families are faced with committing more of their precious resources to housing (and less on food, utilities and other necessities), or they have to move outside of Seattle. I think everyone agrees that Seattle should be a family-friendly city, and not just for the affluent.

Workforce Housing

Another reason low-income households become cost-burdened or become forced to move is because of the phenomenon known as down-renting. This is when people rent cheaper units than they can reasonably afford. It is not a bad thing, it is perfectly rationale behavior to be looking for a better deal. But it does mean that there is less affordable housing for the people who can truly only afford lower rents. The chart below demonstrates this down-renting. Looking just at the bar on the right, which represents units affordable to people making more than 80% of AMI, we can see that 60% of those units are occupied by people making more than 100% of AMI. Just half of the units affordable to people making between 50%-80% of AMI are actually occupied by people in that income range (second chart from the right). The numbers get better the further down the level of affordability you go, but the take away is clear - there is insufficient access to workforce affordable housing in Seattle for the people who need.

Workforce Housing

We also know from our baseline data report that we need a significant increase in the number of affordable units we need in the city to meet the projected need based on our city's growth. Our current projections state we will need to produce some 70,000 additional housing units over the next 20 years to meet our expected growth. In order to meet the need for affordable units, about 28,000 of those new units (40%) will need to be affordable to people making 80% or less of AMI.

Workforce Housing

The baseline data is clear, if we want Seattle to be an inclusive city for people of all incomes, than we have to do a lot more than we are now in order to produce more units that are affordable to more people.


Consultant reports

To help Council grapple with how to meet this affordability challenge, we hired a team of expert consultants to conduct research and provide recommendations. Resolution 31444 called for “a thorough review and update of Seattle's incentive zoning and other affordable housing program and policies focused on creating affordable Workforce Housing by establishing an Expert Advisory Team that will advise and make recommendations to the City Council.” That Expert Advisory Team was composed of three teams of consultants who were tasked with the following:

  • Documenting the current Seattle housing landscape
  • Reviewing the efficacy of existing affordable housing programs
  • Comparing Peer Cities to Seattle
  • Determining best practices in Incentive Zoning and Inclusionary Zoning
  • Evaluating best practices for other programs and policies meant to produce affordable housing
  • Performing economic analyses to measure impact of possible actions

Each of these areas is addressed in the following reports:

Public engagement

On February 13, 2014 the City Council hosted a half-day forum featuring experts from around the country discussed best practices in affordable housing production in growing urban centers like Seattle. The forum drew about 250 attendees to City Hall to learn more about what is going on in Seattle and what we can learn from other cities going forward. Presenters fromMassachusettsDenver and Washington, D.C. shared their areas' experiences with inclusionary zoning programs. Additionally, presenters from MinneapolisDenver (again) and Silicon Valley offered learnings from their other approaches than incentive/inclusionary zoning, such as engaging large employers in helping to fund workforce affordable housing for their employees, such as they do in Silicon Valley.

In June of 2014 we held a listening session to hear from residents here in Seattle about their experiences in finding housing that fits their budget. We heard a number of concerns from people struggling to find affordable places to live and still have money available to spend on food, utilities and school clothes for their kids. This is particularly true for families, as much of the new construction we are seeing is of one-bedroom and studio condos it is increasingly hard for families to find right-sized units that they can afford.

In July we started to receive our first reports back from our consultants, so we held an evening meeting in City Hall to give the public a chance listen, ask questions and provide feedback to our consultants. We had presentations on the economic analysis and draft policy recommendations for strengthening our affordable housing efforts in the city.


Recommendations - What is a housing linkage fee?

City Council is currently considering a new way to help fund workforce affordable housing in Seattle. It is called the Affordable Housing Linkage Fee. The basis of the proposal is that the rapid growth and new development we are experiencing in Seattle is causing an even greater need for more affordable housing. This new fee asks new development to help pay to mitigate the increasing demand on our affordable housing stock. I am proposing that we replace our current incentive zoning program with this new housing linkage fee program, which has the potential to significantly grow our resources for affordable housing in the city.

In order to explain how the change to a linkage fee will bolster our resources for affordable housing in the city, we need to start by explaining how our current incentive zoning program works. From our Department of Planning and Development: “Incentive zoning is a set of requirements that property owners in certain zones must meet to achieve the full potential of their building site. Property owners are required to provide public benefits, such as affordable housing, historic preservation, and open space, in exchange for larger buildings.” To meet the affordable housing requirements, a developer can either produce affordable units in the building they are developing or they can pay into the City’s affordable housing trust fund (in land use terms we call this “producing on site” versus “paying the in-lieu fee” to the trust fund).

The City has had an incentive zoning (IZ) program for commercial buildings downtown since 2001 and for residential buildings downtown since 2006. The program has been expanded to additional neighborhoods concurrently with upzones in Pioneer Square, SODO and South Lake Union, as well as around light rail stations. The fee-in-lieu was increased downtown and in South Lake Union in 2014. After the South Lake Union rezone, the Council adopted Resolution 31444, calling for a comprehensive review of our workforce housing programs, with a particular look at 60-80% AMI households, to better understand how we were meeting the need in Seattle.

The consultant found that while the IZ program has provided significant resources for affordable housing ($31 million from 2001-2013), the program is limited in its ability to provide significantly more affordable housing because (a) IZ is geographically limited in scope and (b) it is a voluntary program even in the areas it applies. So the consultants’ recommendation is simply to expand the geographic scope of the program and make it apply to all commercial and multi-family residential projects. The consultants also recommend increasing the fee, and their analyses suggest it can be done without significantly slowing down growth and development.

MapThe proposal I am putting forward is right in line with the recommendations we got from our consultants. My proposal would replace the IZ program with the housing linkage fee for all commercial and multi-family residential development. The fee would be based on the square footage of the project and would be set at the level required to produce 3%-5% of the units being created at an affordable level. Developers will still have the choice they have today - produce 3%-5% of the units in the building as affordable units (with a 99-year period of affordability) or pay the housing linkage fee. The fee would apply in all urban villages and centers, commercial zones and low-rise zones. The fee will not apply in the single-family zones or to single-family home development. This map shows where the fee will be applied across the city (click for larger version).

Critics of the linkage fee approach are saying that the broader scope and increased fee will slow down development and prevent more housing supply from coming online in the market. They also say the fee will get passed on to renters. But we have good reason to believe that both concerns will not come true.

First, the report on policy recommendations explains how rents will not increase due to the linkage fee. This is because developers are already charging the highest rents that the market will bear. If developers could raise rents and pass on more costs to their tenants, they would do it already. I do not believe this will happen. The theory is that the cost of the linkage fee - with the predictability of a three-year phase in and the certainty that comes from applying it to all commercial and multi-family residential projects - will actually be built into the cost of the land and not passed on to future tenants. In a competitive market with all developers bidding on a project and paying the linkage fee, the land price will adjust to reflect the market reality for development.

From our review of affordable housing best practices and incentive-/inclusive-zoning programs from around the country, we see that the most successful programs in other cities are mandatory. This creates a level playing field for developers across neighborhood, the city and various housing types, and imbeds the cost of the program into the land, so that it is less likely that it is passed onto renters.

Second, the economic analysis conducted by DRA shows that Seattle's jobs, real estate and development markets are so strong that we could raise our fees significantly without halting the growth we are experiencing. The more modest fees that Council are considering are below the level that the analysis suggests would slow development. So I do not believe we will halt more housing from being built than under our current IZ program.

Now, there is a risk in setting the price of the linkage fee too high, beyond the recommendations of the consultants, because that could lead to a situation where projects do not get built and there is not enough supply being created. In that scenario, rents could go up as available space becomes scarcer. But the economic analysis is convincing - if we get the price right we won't hinder development and we will significantly increase the resources we have to help meet the growing demand for housing at all levels of affordability.

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