Multi-Family Property Tax Exemption. All real and personal property in the state is subject to property tax each year based on its value, unless a specific exemption is provided by law. The multi-family property tax exemption (MFTE) exempts real property associated with the construction, conversion, or rehabilitation of qualified, multiple-unit residential structures. Property owners must submit an application for the MFTE to the designated city or county. The city or county may include additional eligibility requirements for the tax exemptions. If the application is approved, the city or county must issue a conditional certificate of acceptance of tax exemption.
MFTEs authorized under the statute include:
A property that qualified for and used an 8- or 12-year exemption and is within 18 months of expiration may apply to extend the exemption for an additional 12 years if it meets minimum locally adopted requirements for affordability. To qualify, an applicant must be approved by the city or county and commit to rent or sell at least 20 percent of the housing units to low-income households.
No new MFTE applications may be approved on or after January 1, 2032, or any extensions of existing tax exemptions on or after January 1, 2046.
Residential Targeted Area. To qualify for a MFTE, the housing project must be located in a residential targeted areas (RTA) designated by a qualifying county or city. The RTA must be in an urban center that lacks sufficient residential housing, including affordable housing, to meet the needs of the public who would likely live in the urban center if housing were available and provide additional housing opportunity, including affordable housing, in the area. If designated by a county, the RTA must be located in an unincorporated area of the county within the Urban Growth Area (UGA) and the area must be:
For any multiunit housing located in an unincorporated area of a county, a property owner must commit to renting or selling at least 20 percent of the units as affordable housing units to low- and moderate-income households.
A governing authority must hold a hearing to consider RTAs and provide notice in a paper of general circulation where the proposed RTA is located 7-10 days before the hearing.
Reporting. All cities and counties must report annually by April 1st of each year to the Department of Commerce (Commerce) to offer certificates of tax exemptions. The report must include the:
Commerce must adopt and implement a program to effectively audit or review the compliance of the program.
Cancelation of an Exemption. If the property no longer meets the requirements, the tax exemption must be canceled, and the following must occur:
Multi-Family Property Tax Exemption. If application for MFTE is approved, the city or county must send the certificate of acceptance of tax exemption to the county assessor upon issuance.
For the 12-year exemption program:
For the 20-year exemption rental program:
For the 20-year exemption ownership program:
To qualify for a 12-year extension for a property that qualified for and used an 8- or 12-year exemption, an applicant must commit to rent or sell at least 20 percent of the living units net square footage as affordable housing units for low-income households.
A tenant within an income-restricted unit may increase annual household income up to 150 percent of the established unit income limit without eviction or penalty at lease renewal.
Each living unit will be measured to the inside furnished surface of the exterior wall and to the inside surface of walls separating living units from other living units and common areas to calculate the net living area. For the purpose of defining bedroom parity, market rate units with three or more bedrooms will be considered equivalent to three bedroom affordable units.
The 12- and 20-year exemptions include the value of new housing constructed and corresponding land. The exemptions do not include non-housing-related improvements.
In the case of rehabilitation of existing buildings or conversion of nonresidential buildings to multiple-unit housing, the exemptions do not include the value of improvements constructed prior to the submission of the application unless such improvements are integral to the use of the building for multiple-unit housing.
Residential Targeted Areas. If designated by a county, the RTA must be located in an unincorporated area of the county within the UGA and the area must be:
The requirement for a property owner commit to renting or selling at least 20 percent of the units as affordable housing units to low- and moderate-income households for any multiunit housing located in an unincorporated area of a county is removed.
In addition to providing notice of public hearing to consider RTAs in a paper of general circulation, the notice must be sent to the affected taxing district.
Reporting. The annual report to Commerce must include contracts executed, amended, or extended during the previous year. Commerce may develop rules to effectively audit or review compliance.
Cancelation of an Exemption. When a tax exemption is canceled, if the owner of an income restricted unit sells that unit at market rate and a penalty applies, the city or county may assign the highest penalty to the owner who caused a project to be out of compliance and a lesser or no penalty to the other owners.
Definitions. Definitions for the MFTE are updated.
City means any city or town, including a code city.
Conversion means either the conversion of an existing residential building, in whole or in part, or a nonresidential building, in whole or in part, to multiple-unit housing.
PRO: Washington is experiencing a housing crisis and we need to implement all the tools we can to build as quickly as we can to provide housing. This is a different approach to the MFTE that is a work in progress. Support having a third MFTE option to help developers make more units that are affordable for longer periods. Appreciate the consideration of our comments to include the value of existing improvements as eligible for the tax exemption and providing a clear path for conversion of nonresidential buildings to multifamily residential.
OTHER: Encouraged to see that this proposal preserves the 8 and 12 year programs that have been successful and added more than 1000 rent restricted units across the state in 2021 alone. Support the changes related to conversions and believe that they will increase the likelihood that adaptive reuse projects will participate in MFTE. Extending MFTE to include existing buildings will help convert more market rate units into work force housing bringing affordable units online quickly. Do have some technical suggestions to improve the language. Would like to see the bill provide MFTE to an existing buildings that dedicates 30 percent of units to households making 80 percent AMI or less which is a higher percent of units and deeper level of affordability than what is required for the current exemption for new construction. Encourage you to provide the exemption to buildings that are not older than 15 years to ensure that market rate units being converted into affordability are new units and align with the policy of the existing 12 year exemption. Signed in other on the underlying bill but understand that the sub does retain the 12 year as an option which we support.
Concerned that the proposed 99 year program will not be used by market rate developers because our evaluation indicates that the market rate project would have better returns than if the project were to participate in the 99 year tax exemption. Ask that the Legislature review the program to ensure that there are appropriate incentives for participation.
Supportive of local jurisdictions retaining the authority to tailor the MFTE program to best meet the needs of their communities. We continue to hear that MFTE is one of the more effective solutions to continue to provide affordable housing so we support the effort.
PRO: Mary Hull-Drury, Washington Realtors.
OTHER: Tim Cavanaugh, Urban Housing Ventures; Marc Angelillo, Urban Housing Ventures; McKenzie Darr, NAIOP Washington; Michael Ennis, Association of Washington Business.
The committee recommended a different version of the bill than what was heard. PRO: The goal is to encourage a broader variety of affordable housing types, particularly multiple bedroom units. Using the unit measurement has resulted in a lot of one bedrooms and our families need more. To achieve affordability we need to address capacity, drive down the cost of housing and be able to finance it. This MFTE bill meets two of those by making these units more affordable and attract investment by making it more financeable. Housing costs have not gotten better since last year. We've had a drop in 90 percent in starts for projects of 100 units or more in the Seattle area and think that is true across the state. We need all of the options available in order to address this problem and MFTE is an important component of that. This will help more nonprofits and hybrids to build more affordable units. When you look at the cost being given up under the exemption you get a 14 to 1 return in that investment.
CON: Concerned with the shift toward square footage because buildings have to become homogeneous and I think that requirement it may have the opposite effect. For example if a building has a penthouse with 5 bedrooms this would require a 5 bedroom affordable option which matters because the revenue generated for any unit in that building helps to inform the cost of that building so by generating more revenue from one penthouse unit will help create better furnishings in other units. Request a definition be added to clarify what square footage is and think it should be the net rentable square footage because variable interpretation could have a large impact. If other spaces are included then it would reduce the opportunity for participation in the program. MFTE works when the costs pencil out.
OTHER: Support the conversion language in the bill. Allowing residential buildings to be converted allows you to take urbanized areas already built out and create more affordability in those areas. Nonresidential conversions into affordable housing is another concept we are supportive of as it would add more supply to the market. There are many provisions in the MFTE bill that are similar to another bill that will be dropped and so we would encourage you to consider whether it should be handled via MFTEs or another mechanism.
PRO: The property tax exemption program helps address the significant need for multifamily housing. The requirement that 20 percent of housing units be set aside as affordable is enough for developers to recoup costs over the exemption period. The exemption allows developers to build more units in a timely fashion. The city of Portland recently passed a new tax exemption on their multifamily projects. Studies have shown that children who grow up in mixed income communities have a 31 percent higher average salary than those who are in 100 percent low-income housing.
PRO: Robert Pantley, Natural and Built Environments; Angela Rozmyn, Natural and Built Environments .