Linkage Fee “Scare” Tactics Debunked: The Halloween Edition

By Lauren Craig and Howard Greenwich

A City Council Committee just recommended a promising new policy approach to Seattle’s housing crisis, authored by Councilmember Mike O’Brien.  Called a “linkage fee,” the policy establishes a reasonable city-wide fee on construction of new buildings that links job growth associated with development to increased demand for affordable housing.  Many cities in the U.S. have adopted linkage fees for affordable housing and multiple studies show such a fee can work in Seattle.  Listening to critics, you would think that a linkage fee is the scariest thing since Nightmare on Elm Street, and will frighten away the timid investors who have been paying above top dollar for property in Seattle.

The policy was voted out of the Planning, Land Use and Sustainability Committee yesterday and is headed to Council next week.  However, it’s only a resolution that directs staff to write the final ordinance for adoption next Spring, which is two seasons away.  So, we though it ‘twas the season for a little debunking of scare tactics being employed by critics of anything asking developers to pay their fair share.

MYTH #1: Developers are being unfairly demonized. They pay taxes just like everyone else.

The best part about the linkage fee is that that the City must demonstrate – for both legal and policy reasons – a causal connection between new job growth associated with a project and the need for affordable housing that it creates.  In other words, the fee is used to mitigate an impact that can be “linked” back to the developer, hence the term linkage fee.  The policy calls on developers to pay their fair share towards the public bill of creating adequate affordable housing for our growing low- and moderate-wage workforce.   Yes, developers pay taxes like everyone else, but their impact on affordable housing is basically an “externality” – a cost they don’t have to bear in making a profit.  This is also why it is a mitigation fee, and not an illegal tax.

MYTH #2: A linkage fee will result in less affordable housing being built, not more.

This myth is premised on a simplistic explanation of housing markets and why they contract or expand.  Even amidst one of the biggest real estate expansions in Seattle history, for-profit developers are simply not building housing affordable to low-wage workers (60% median income and below).  Why build at the lower end when so much profit is available at the higher end?  How can linkage fees result in less affordable housing when private, unsubsidized production is already near zero?

Furthermore, fees and regulations have a marginal effect on housing markets – market swings drive real change in supply and demand.  David Paul Rosen and Associates conducted a study over a twenty year period in California to determine the impact of inclusionary housing programs (which, like linkage fees, require developers to contribute to affordable supply) on housing production.  In larger cities, housing production increased, sometimes dramatically, after the passage of similar ordinances.

The report also found that in no case did the adoption of an inclusionary housing program slow housing production.  Based on the City’s own economic analysis, Councilmember Mike O’Brien has designed the proposed linkage fee so that developers will still make significant returns on equity.  For example, a tiered fee model is built into the resolution so that slower-growth areas will be subject to a lower fee.  Also, the fee level will be reassessed regularly and adjusted for market conditions.

MYTH #3: Over-regulation is strangling housing supply. If we got rid of regulations, the private market could build our way out of the crisis.

This “invisible hand” argument assumes that developers and investors would be willing to build in the lower-end of the housing market if only costs were cheaper. However, housing prices in strong markets are mostly determined by high-end demand.  Most new market rate buildings target well-off urban professionals, such as Amazon, Google and bio-tech workers, because those consumers are willing and able to pay top dollar for housing.   As a result, Seattle’s overall market is skyrocketing, with average rent increases of 33% just since 2010.  As long as Seattle continues to attract and sustain high-paid professionals, developers and investors will continue rational, profit-maximizing decisions to cater to their housing needs.

Moreover, developers will never be able to build enough new supply to a point where prices will meaningfully drop.  Even if they could build a fictional, unlimited supply of housing, other counter-forces can slow investment just as lower-end housing becomes interesting to investors.  For example, interest rates often rise to cool hot markets, making it more expensive for developers to finance new construction. Production of housing is just as likely to slow for reasons unrelated to local regulations and prices will remain high.

As we have most recently seen with the massive housing market crash, a lack of regulation is often the problem, not more regulation. Regulation can act as a buffer to unpredictable and imbalanced markets.  In fact, regulatory requirements to protect the environment, workers and consumers have often led to an increase in economic activity.

With a reasonable amount of funds to build affordable housing, the City can provide assistance to those negatively impacted by the swings of financial markets and the gross inequality they create.  Even in San Francisco.

MYTH #4: If you increase costs for developers, they will just pass that onto renters.

Suppose there are two developers building identical buildings with the same market-rate rents.  All costs are equal, but one developer took a higher interest loan than the other.  Will the higher interest loan developer pass the cost onto renters?  If she did, her rents would be higher and tenants would go to the second developer.  The term “market rent” is precise – it represents the most a landlord/developer can charge for a given product.  If a landlord could charge more in a given market, they already would – a City linkage fee will not change market rents or housing prices.

Further, over time, the cost of the regulation is largely absorbed into the price of land, not the cost of development on top of the land.  When cities impose new requirements on buildings – such as safety, health or environmental regulation – it puts a damper on the increases in commercial land value.  The property owner does end up absorbing the cost; however, landowners in Seattle have been enjoying exponential growth in value and benefit from business expansion, population growth and massive public investment in infrastructure.

MYTH #5: Linkage fees are a tax on density. Developers now have less incentive to build up, resulting in lower-density growth.

Currently, developers can gain bonus density to build higher and bigger through the City’s multiple incentive zoning programs.  The linkage fee does not take away any of these incentives – developers would be allowed to continue to access the bonus density.  Also, existing incentive zoning ordinances will be amended with a provision allowing for the payment of the linkage fee as satisfaction of the incentive zoning program.

Additionally, the relative cost of a linkage fee reduces as developers build to a greater density.  Here’s why:  shorter buildings (under 85ft) are built primarily with wood.  Above that, much more expensive materials are used – concrete and steel.  For example, say that a developer is choosing between a seven story, wood-frame residential project and a 24 story concrete and steel structure in South Lake Union.  The linkage fee per square foot would be the same for both buildings.  As the developer builds higher, the fee decreases as a proportion of total construction costs per square foot.  In other words, the linkage fee becomes relatively cheaper the higher you build.

While I am on the subject of the environment, the linkage fee will actually help reduce our carbon footprint by preventing displacement of low-income households from the city to the suburbs.

MYTH #6: Developers did not have time to weigh in. We should slow down.

Developers have not been left out of the discussion or debate.  Consultants have been studying how to improve on the City’s Incentive Zoning policy for an entire year with many occasions for public review and discussion.  The economic and financial feasibility assumptions forming the basis for the linkage fee have been informed by developers in multiple venues.

More importantly, growth is happening now and we need more affordable housing now.  There is no time to wait. City Council should adopt the strongest linkage fee feasible and the fastest timeline possible.

Martin Luther King once said something that is scarier than these scare tactics: “we must learn to live together as brothers or perish together as fools.”