Multifamily Property Tax Exemption
At their meeting on May 4, 2021, the City Council directed staff to continue creating a City Multifamily Property Tax Exemption (MFTE) program that would encourage developers to build multifamily and affordable housing in exchange for a partial property tax relief for a partial property tax relief for 12 or 20 years.
During the May 11 business meeting, the Council scheduled a public hearing for June 8 to gather input from the community on the following proposed MFTE eligibility locations:
- The 12-year MFTE program requires that, for rental projects, a minimum of 20% of housing units rent to low- or moderate-income households or below and, for home-ownership projects (e.g., condominiums), 100% of housing units are sold to moderate-income households or below.
- The 20-year exemption, adopted in late April by the Washington State Legislature (SB 5287) requires at least 25% of the units to be sold to a qualified nonprofit or local government partner and requires those units to provide permanent affordability. Permanent affordable homeownership units or rental units must be sold or rented to low-income households. Under the MFTE state law, Chapter 84.14 RCW, a household with income up to 80% of the Area Median Income (AMI) qualifies as a low-income household, and a household with income up to 115% of AMI qualifies as a moderate-income household.
Adopting a MFTE program has been planned and recommended over the last four years, as referenced in the attached documents:
- 2017 Comprehensive Plan Housing Element Policy HO 4.4
- 2018 Affordable Housing Task Force Final Report Recommendation 1.C
A Joint City Council/Planning Commission land use subcommittee met in the Summer and Fall of 2020 presented a list of recommended priority code changes to the Council on October 13, 2020 that included adopting a 12-year MFTE Program. The Council approved the list and recommended it be forwarded to the Planning Commission for immediate legislative work.
State MFTE Program Overview
Washington State provides for local governments to adopt a MFTE program as described in (RCW 84.14). The purpose of this program is to encourage the development and redevelopment of multifamily and affordable housing by granting a property tax exemption for qualifying projects for a period of 8, 12 or 20 years. Projects must create at least 4 multifamily residences. The exemption is a partial property tax exemption for qualifying projects, on the value of residential improvements for qualifying MFTE housing developments and does not apply to the value of land or any non-residential development. The tax exemption is a financial incentive to build multifamily and affordable housing.
How does the program achieve affordable housing?
The 3 different MFTE programs authorized under state law vary by duration of tax exemption and affordability requirements.
- 8-Year MFTE Program: No state minimum for affordable housing, local governments may add additional requirements.
- 12-year MFTE program would require that:
- For rental projects: 20% of housing units rented to low or moderate income households or below.
- For home-ownership projects, such as condominiums: 100% of housing units required to be sold to moderate income households or below.
- 20-Year MFTE Program: WA Legislature Newly Approved for nonprofits that requires 25% of units to be permanently affordable housing
In addition, MFTE programs can improve overall housing affordability in an area by promoting the development of multifamily housing, which is usually more affordable compared to single-family homes.
The City could adopt any or all of MFTE programs above. City Council had directed staff to develop a 12-year MFTE program. Since then, a new 20-year program is available for nonprofits that require permanent affordability.
MFTE Is A Property Tax Shift During Exemption Period (8, 12 or 20 years)
If the City adopts this program, qualifying multifamily projects would be partially exempt from property taxation and would not pay property tax on the residential improvement for a period of eight, 12 or 20 years, depending on the program adopted, after construction is complete. Property taxes on land and any commercial development is not exempted. The amount of MFTE property tax relief would be shifted to other property taxpayers through a tax increase divided among property owners Islandwide.
MFTE is Only a Financial Incentive to Develop Multifamily Housing
Although local governments often have other programs that also incentivize building affordable housing, a MFTE program is only a temporary financial incentive to build multifamily housing. A MFTE program does not:
- Modify City zoning or environmental regulations;
- Modify City development standards such as building height or density;
- Modify or reduce required land use permit processes.
Planning Commission Recommendations
1. MFTE designation or eligibility areas- where should program be available to properties?
2. MFTE project threshold- what is minimum number of multifamily units that will be required to enroll in a future MFTE program?The state minimum project eligibility threshold is four multifamily residences.
3. Should a City MFTE program be available to both rental and homeownership projects, as allowed under state law?
In general, the consensus by the Planning Commission was to make a MFTE program as widely available as possible (see motion below), recognizing that the City’s housing supply is lacking available rentals, multifamily units, and designated affordable units. On February 11, 2021, the Planning Commission finalized their transmittal memo to the City Council and then unanimously passed the motion below related to recommended MFTE program elements.
Motion: I move to forward the following policy recommendations and attached supporting memo to the City Council related to adopting a Multifamily Property Tax Exemption program:
1. That the following areas be considered for the MFTE designation/eligibility areas:
All properties either within:
- The Winslow Master Plan Study Area or the Winslow Sewer System Service Area, or both and;
- The Lynwood Center area, which have zoning of Neighborhood Center (NC), NC/R-12 and R-5.
2. That the project eligibility threshold be four multifamily residences.
3. That a future City MFTE program be applicable to both rental and ownership units.
Next steps in developing the program are:
- Begin Outreach for Eligibility Area Public Hearing
- Hold Public Hearing on Eligibility Areas
- Draft Ordinance for New MFTE Chapter in Bainbridge Island Municipal Code (BIMC, Title 3 Revenue and Finance)
- Ordinance Review and Adoption by City Council (estimate Q3 2021)