Under a Multifamily Tax Exemption (MFTE), cities define residential target areas with insufficient housing opportunities where development is eligible for MFTE. State law sets specific standards as to what can qualify as a target area, detailed below. In these areas, approved multifamily projects are exempt from ad valorem property taxes for a period of eight or 12 years, per RCW 84.14. To secure the longer exemption period, the property must meet a minimum affordable housing standard. The required public benefit to obtain the eight year exemption is left to the city’s discretion, and affordable housing is not required, though a city may choose to do so.
Where it Works – Washington State Legal Context
MFTE programs serve to encourage a greater diversity of housing types, including rehabilitating existing housing and redeveloping vacant and underutilized properties. In Snohomish County, MFTE programs are allowed in cities with a minimum population of 5,000. To establish an MFTE program, cities must establish MFTE target areas that contain urban centers, defined under state law as:
“…a compact identifiable district where urban residents may obtain a variety of products and services. An urban center must contain: (a) Several existing or previous, or both, business establishments that may include but are not limited to shops, offices, banks, restaurants, governmental agencies; (b) Adequate public facilities including streets, sidewalks, lighting, transit, domestic water, and sanitary sewer systems; and (c) A mixture of uses and activities that may include housing, recreation, and cultural activities in association with either commercial or office, or both, use.” (RCW 84.14.010)
As with any incentive, regularly reviewing performance and adjusting the program as needed is essential. Several issues to consider include:
Appropriate targeted income level and income recertification. Affordable unit rents should be below market, but not so low that tax exemption is not a sufficient incentive. In addition, tenants in affordable units should be required to recertify their income on a regular basis. Tenants’ incomes can rise over time, but there should be a cap established. Once a household’s income rises to this point, they may stay in their unit, but their rent will rise to market level and the next available comparable unit reserved for an income qualified tenant. Careful research should be done to establish an appropriate income progression cap where market rents become accessible.
Unit mix and definitions. The percentage of affordable units reserved is another item to balance along with targeted income level. There may be some need to define units in some way – for example, a unit may be advertised as an “open one bedroom”, eligible for higher rents than a studio while still being in compliance with the program, but is in actuality essentially a studio that should have a lower rent.
Property management education. These programs are popular with for-profit developers, who may not be familiar with affordable housing processes. As a result, regular monitoring is important to identify noncompliance, whether by mistake or intent. Cities should ensure that standards are clear. The City of Seattle’s MFTE Compliance Guide provides a nice example of an effort to keep property managers informed of MFTE obligations.
Program outreach. MFTE units will be highly desirable and the supply will likely not meet demand. As a result, these units will rent quickly, and often to those households that are best informed about the MFTE program. In Seattle, for example, these households often seek out MFTE properties and apply for available units before they can be advertised. Identifying strategies to expand knowledge of this resource will be an ongoing challenge.
Can students qualify? There are many arguments for and against allowing students to qualify for MFTE units, and programs on both sides of the fence. The jurisdiction will have to weigh these arguments with their individual priorities.
Other monitoring concerns. New things can arise all the time, and will require nimble, well-informed staff – one recent development is the rise of AirBnb and other new types of home rental services. MFTE units should not be permitted to be rented with these services, as the public benefit is essentially helping to subsidize a private business. In this case, the property manager may have no idea this is happening, and it may be a good idea for city staff to monitor these kinds of sites for MFTE properties. These kinds of issues affirm the need for cities to develop clear goals and intended purposes when establishing incentives like MFTE, to help provide guidance when challenges arise as the market changes.
- Everett MFTE Program
- Lynnwood MFTE Program Overview
- Marysville MFTE Program
- Seattle MFTE Program
- Tacoma MFTE Program Overview
- City of Seattle: MFTE Compliance Manual
- HousingPolicy.org: Stimulate Construction and Rehabilitation through Tax Abatements
- MRSC: Affordable Housing (MFTE subheading includes links to sample MFTE code from Washington cities.)
- PSRC: MFTE