Who should pay for affordable housing?

In late March, The Milestone Companies, the developer behind a multifamily housing project known as

In late March, The Milestone Companies, the developer behind a multifamily housing project known as West Bay Yards, made a “final offer” to the city of Olympia.

The offer, a $250,000 contribution to the city’s affordable housing Home Fund, came a few days before city council was scheduled to vote on a 15-year development agreement for the largest new housing project downtown Olympia has seen in decades. It was approved, allowing the project to move forward.

More recently, the city sold a long-vacant and fire-damaged downtown property at a steep discount to Urban Olympia, on the condition the prominent developer do something it’s never done before: create rent-restricted units.

While each deal was cut under different circumstances, both are examples of for-profit companies deciding that contributing to affordable housing development is worth the price of doing business in Olympia — especially if it affords favorable terms in return.

Both the West Bay Yards and Griswold’s developments share another quality, too: If they took place in Seattle, those affordable housing contributions would be mandatory.

In Seattle, Boston, and several Bay Area cities, developers of market-rate housing (and in some cases, commercial office buildings) pay so-called linkage fees, which charge a per-square-foot price meant to offset the impacts of market-rate housing growth on affordability.

“When a new development like West Bay Yards goes in, there is a directly linked increase in need for additional affordable housing in the community,” said Jeff Sowers, chair of that Thurston County Democrats and a frequent voice at Olympia’s public meetings.

As new development brings an influx of wealthier residents, Sowers argues, it drives an attendant need for more service workers to staff new wine bars and chocolatiers. But baristas and budtenders by and large cannot afford housing at current market rates.

Proponents of mandatory housing affordability policies — including three candidates in upcoming Olympia city council races — believe that as Olympia continues to grow, some of the profits generated by that growth ought to be channeled into meeting the overwhelming need for housing that existing residents can afford.

“It’s not benefiting the city when these high rises are being built and no one can afford to live in them,” said Talauna Reed, who is running for incumbent Lisa Parshley’s council seat and includes linkage fees in her platform. “At least no one locally.”

Sarah Destasio, who is running for the Olympia council seat being vacated by Renata Rollins, said that requiring at least 20% affordable units in all new market-rate construction is “the least we could do.” She also has called for ending tax exemptions for market-rate housing developers, including the 8-year and 12-year Multi-family Tax Exemption (MFTE).

Like impact fees, linkage fees are premised on the idea that affordable housing is a community need equal to schools, roads, and parks — all things Olympia currently charges developers impact fees to support.

“The logic is really similar: that new development creates a need for an expansion of infrastructure and community facilities,” said council member and Mayor Pro Tem Clark Gilman. The city has a responsibility to look after a balance of housing types, Gilman said, and linkage fees are one way to do that.

“Impact fees have been debated but they’ve been paid by developers of new construction projects for a long time,” Gilman said. “And I think, similarly, contributing to affordable housing just as you contribute to parks, and schools, and streets, just seems really reasonable.”

Cities in the San Francisco Bay area have empirically measured the relationship between new market-rate housing and the need for affordable housing for service workers using what’s called a “Nexus” study.

Seattle’s approach

Seattle first introduced linkage fees in 2014. In response to a series of lawsuits, the city retooled its approach in 2017 toward what is now called the Mandatory Housing Affordability (MHA) program, which in 2019 was expanded to 27 more multifamily neighborhoods.

The MHA is Seattle’s approach to inclusionary zoning, which pairs upzoning (allowing developers to build at higher densities) of specific neighborhoods with affordability requirements. Seattle’s approach offers developers a choice: reserve a percentage of units (between 5%-11%, depending on the zoning density of the neighborhood) as affordable for low-income households or pay a linkage fee into the city’s housing trust fund. Most choose to pay into the fund.

The West Bay Yards example involved a development agreement, which is a different and more complex process than the average new apartment building goes through. But the lesson Sowers drew was that developers, especially of large multifamily buildings, could afford to pay a linkage fee if Olympia wanted to charge one.

“I think (West Bay Yards) is a demonstration that something is viable — what I don’t know is how much,” said council member Dani Madrone, who chairs the Land Use Committee. “That’s one of those things, it’s like how much could we have asked for before they said no and walked away.”

Those in the real estate community argue that new fees or affordability mandates will make housing harder to produce and more expensive — discouraging development of all new housing and increasing the price of housing that is built.

“It’s simple math,” said Zach Kosturos, president of Prime Locations, which manages more than 1,500 apartment units across Thurston County. “If we keep adding costs to development projects, those costs will get passed on to consumers and at some point stop production.”

Seattle’s MHA program brought in $68.3 million in 2020 from development projects that built 4,432 market-rate units, according to a 2020 report from the city’s Office of Housing.

Under Seattle’s program, something like West Bay Yards, which is about one-tenth the size (478-units) of Seattle’s new units, might generate about $6.8 million.

Gilman, who was the sole dissenting vote on the West Bay Yards development agreement, said that while the donation is fine, it’s also a drop in the bucket compared to both the project’s size and the price of construction. According to a 2020 report from the Washington State Housing Finance Commission, $247,000 is the average cost to build one single unit of low-income housing.

“If the promise is to assist in developing one affordable unit for each 500 luxury units, it’s not a recipe for maintaining balance in our community,” Gilman said. “I think in a time of great profits and great growth that we can and we should be asking for more to benefit the people and the community.”

Madrone, like Kosturas, cautioned that costs from linkage fees can ultimately get passed on to renters, and fees can only be raised so much before they start to stifle new construction.

“We do need market-rate housing to address general issues of supply, but we also need affordable housing,” Madrone said. “And if we set some kind of rate that is too much and don’t get the market-rate housing, we’re also not getting funding for affordable housing and further exacerbating general affordability issues.”

Madrone said the process would need to start with a study to figure out “what the market can bear.”

“We’re not Seattle,” she added.

Jim Cooper, who chairs the city’s Finance Committee and the Regional Housing Council, said that when he joined city council in 2012, there was a push for inclusionary zoning that ultimately did not move forward, in part because the housing market was just beginning to recover from the 2008 financial crisis.

“We need to make sure, whether it’s linkage fees or inclusionary zoning or some other tool, that we don’t kill the market-rate housing market,” Cooper said. “It’s as important that we get more units as it is that we build affordable units directly in my opinion, because of the long-term impacts on the housing market.”

Cooper acknowledged that “we’re getting further and further away” from service workers being able to live in Olympia, but that we have to be careful and do more research to determine if a linkage fee could work without stifling market-rate housing development.”

“I’m open to any and all of those conversations, I just need to see that it will work,” Cooper said.

Cooper and Madrone have advocated for a countywide Home Fund, which would finance construction of units for the lowest-income people, those making less than *60% of Area Median Income (AMI), which is about $48,000 for a two-person household in Thurston County, according to the U.S. Census Bureau’s 2019 American Community Survey. By contrast, the type of units produced by inclusionary zoning policies or incentive programs like the MFTE are sometimes targeted at higher-income people making 80%-100% of AMI — what’s sometimes called “workforce housing.”

Cooper’s preferred policy approach is direct cash transfers to low-income people — things like a universal basic income, which Tacoma and several other cities are now piloting, or free child care, which he says would go a long way towards helping low-income people pay for housing on the private market.

“To me, the answer is in how much income people make,” Cooper said. “It’s going to be a long time before we undo the capitalist housing market, and what we really need to do is put enough wages in people’s pockets to be able to pay their housing bills. And that’s a lot simpler policy conversation and employer conversation for me.”

Who picks up the check for affordable housing?

In their Housing Action Plan, the cities of Lacey, Tumwater, and Olympia recently affirmed the need for a permanent revenue source to fund affordable housing construction.

That readiness to declare housing a priority, however, quickly dries up when faced with the prospect of raising taxes to fund it.

A 2017 survey of residents in Tumwater found that while a majority support subsidized housing, homeless shelters, and rent assistance in theory, less than 40% would be willing to pay more sales tax to fund them, and only 1 in 3 residents was ready to fork over more property taxes to help house others.

After nearly a decade of consideration, Tacoma took such a step in April, approving a 0.1 percent sales tax increase to fund affordable housing.

Olympia is the only jurisdiction in Thurston County with a sales tax levy that supports affordable housing. City residents voted to increase their own sales taxes in 2018 to create the Home Fund, which generates about $2.3 million per year, although recent changes in state law allow city councils to create a housing levy without voter approval.

“Olympia just cannot bear the full weight of the crises of housing and housing affordability and homelessness on our own,” Madrone said. “There’s so much focus on our little city to fix a problem that is regional in nature. We’ve got to be thinking bigger.”

About $1 million of Home Fund money each year is put toward affordable housing construction, with the rest going to homeless shelters and services or held as reserves. Home Fund manager Cary Retlin says it’s not nearly enough.

That money doesn’t build anything on its own; rather, it’s a way to get some momentum behind projects so they can compete for state and federal low-income housing tax credits, which finance the bulk of construction costs.

Two recent projects — Interfaith Works’ 2828 Martin Way and Family Support Center’s new development for homeless families in west Olympia, each of which are budgeted at nearly $20 million — are primarily funded by state and federal tax credits.

Linkage fees were not included in the Housing Action Plan’s list of 52 ideas to promote housing affordability, although council members described it as a “living document” and said that doesn’t mean asking developers to pay more is off the table necessarily.

To people like Sowers, taxing developers of market-rate housing is a more politically appealing option than a sales tax increase, which would be regressive and paid by everyone. In Sowers’ reading, approving something like West Bay Yards without addressing the impact of more need for affordable housing “externalizes” the costs onto lower-income residents.

“To me what I find so egregious is that they’re just moving forward without a plan,” Sowers said. “In the end who pays for it is the service worker living on the street.”

*Correction: This article previously stated that if enacted, a countywide Home Fund would finance construction of housing units for people making less than 50% of Area Median Income. Olympia’s Home Fund currently finances housing for people making less than 60% of Area Median Income.

Brandon Block is The Olympian’s Housing and Homelessness Reporter. He is a Corps Member with Report For America, a national service program that places journalists into local newsrooms.