Tax breaks helped fuel an apartment boom in downtown Olympia, with few strings attached
It’s hard to imagine now, but not so long ago downtown Olympia was struggling to attract new housing development.
As recently as 2010, the city’s leadership was so desperate to attract market-rate housing downtown that they were paying real estate consultants to prove that demand existed, as a Seattle Times article from that year notes. Meanwhile, The Olympian wrote an entire article in 2013 about a renovation that added just 14 units above an office building on Legion Way.
Those languid days now are a distant memory, as the 75-unit Westman Mill building nears completion and three more similar housing developments are in the works, including Market Flats and Malt House Lofts.
In the past five years alone, more than 600 units have been built downtown.
What’s not visible, however, are the city tax incentives that helped finance the new development.
Through a long-standing state program called the Multifamily Tax Exemption (MFTE), the new housing developments receive an eight-year exemption from paying property taxes on the value of the residential structure. They still pay taxes on the land and any commercial square footage.
Developers of the new buildings have benefited from $1.3 million in property tax exemptions since 2015, with the city expecting to forfeit another $2.9 million over the next five years, according to city documents.
‘All housing is good housing’
Economists and city planners typically argue that this is a good thing — that market-rate development, even the expensive kind, helps stabilize rental prices by adding supply to a tight market like Olympia’s, where the vacancy rate is currently 4%.
Or, as Cary Retlin, manager of the city’s affordable housing Home Fund and resident housing policy adviser, likes to say: “all housing is good housing.”
According to Retlin, the MFTE is just one “tool in the city’s toolbox” to incentivize housing downtown, which includes exemptions from parking requirements, grants for environmental remediation, and height and density bonuses that allow developers to build housing taller and with more units than the zoning code would typically allow.
The argument for subsidizing market-rate housing goes like this: there is a well-documented housing shortage in cities throughout the West Coast, as new residents and demand from especially hot markets like Seattle bleed into Thurston County. The way to address that, the theory goes, is for the government to provide incentives such as the MFTE to developers to increase supply, which will stabilize prices.
It’s a version of trickle-down economics that is promoted, of course, by developers, but also by economists, planners, housing policy analysts, and many housing advocates. The overriding presumption is that all new housing, no matter how expensive, benefits everyone by increasing supply.
But in a community that prides itself on its progressive politics, some see the MFTE as a giveaway to developers of luxury apartments buildings while downtown quickly becomes unaffordable for everyone else — especially as rents also climb in older, once-affordable rental units above downtown storefronts.
“I don’t see any examples of how more expensive homes lead to cheaper ones,” said Dan Leahy, a retired Evergreen State College professor who has religiously tracked and scrutinized Olympia’s MFTE projects, written critically of them in Works in Progress, Olympia’s alternative monthly paper, and made opposition to the program something of a personal hobby.
Leahy is not the only person wondering whether all this new city-subsidized development — which, with few exceptions, is priced above Thurston County’s average rent of $1,205 — is good for the people who already live in Olympia.
“I really value the diversity and mix of people who live in Olympia right now, and I’m concerned that with more high-cost housing being built, we’re going to see displacement,” said city council member Clark Gilman.
At a recent Land Use Committee meeting where city staff presented a draft of the countywide Housing Action Plan, Gilman questioned the “any housing is good housing” mantra.
“Some housing is much better for our community than others if we value preserving the diversity of people, household structures, and income levels in town,” Gilman said.
One type of housing that Gilman is unconvinced the city needs: more studio apartments downtown. According to the U.S. Census Bureau’s 2015-2019 American Community Survey, there were 435 vacant studios in Thurston County, a vacancy rate of 19%. Meanwhile, a new loft apartment project plans to add 39 more.
Downtown revival
The building most emblematic of new downtown development is 123 4th Avenue. Built in 2016, it’s the largest project of the bunch, a 138-unit building that looks like a typical five-story mixed-use building in Seattle or Portland. Its rents are reminiscent of those cities, too, featuring one-bedrooms between $1,365-$1,675.
By all accounts, 123 4th Avenue was a turning point for Olympia. The first market-rate development of its size in decades, it was proof of many things to many people. For the city, it was proof that people wanted to live downtown. For developers, it proved that even with the additional hurdles of building downtown, they could make a profit. And for folks like Leahy, it was proof that out-of-town investors were eager to speculate on Olympia’s emerging real estate market.
It was also a turning point for city council member Dani Madrone.
“When the 123 4th building was being constructed, I was a low-income single mom in Olympia who really struggled to find housing,” said Madrone, who was elected to city council in 2019. “I looked at that building, and I looked at the rents, and I said, ‘That doesn’t meet my needs. That isn’t accessible to people who really, truly need housing in the community.’”
Her perspective on market-rate housing began to change, however, when she got a job that provided a middle-class income - and still struggled to find housing.
“If we have people who are at area median income or right around there who cannot find housing where they live, then we have an extreme shortage of housing on the private market that is going to drive people out of their communities,” Madrone said.
A changing downtown
One thing that’s certain is that the new buildings have changed downtown, which these days its consists of 77% market-rate housing. It’s hard to overstate what a major change that is from just five years ago, when the majority of housing downtown (57%) was either directly subsidized (721 units) or privately owned units rented out at below-market prices (210 units), what’s sometimes called “naturally occurring” affordable housing.
The city’s own data shows there is some truth to the fears of displacement: In the past five years, downtown has lost most of its privately owned affordable housing. Just 57 such units remain, a 75% decrease from 2016.
“Displacement is a big challenge in any city with older housing stock,” Retlin said. “Those older affordable units, there’s no doubt they’re going away.”
In Retlin’s observation, however, displacement is more often a result of older, historic buildings changing owners rather than simply the presence of more market-rate housing nearby.
“I think it’s a stretch to feel like those displacements are connected to other apartments going in downtown,” Retlin said.
While Leahy laments the loss of the downtown he’s known since he moved to Olympia in the 1980s, other longtime downtown residents — even those on the political left — see the city’s transformation as an inevitable byproduct of growth that city officials are largely powerless to control.
“I think that Olympia is consistently always going above and beyond and pushing the very limit of what a progressive agenda can accomplish,” said David Scherer-Water, an author and local historian. “And what that progressive agenda bumps up against time and time again isn’t lack of will or a good idea or large numbers of people wanting it, it’s just the reality of the American capitalist system.”
For two decades, Scherer-Water has worked as the superintendent of The Martin, a stately downtown apartment building built in 1923 by one of Washington’s wealthiest families. These days rent at The Martin is about $1,000 including utilities, on the lower end of downtown Olympia’s price spectrum.
The Martin’s evolution, to Scherer-Water, is evidence that the changes to downtown are part of a cycle of growth and decline in which once-opulent buildings eventually filter down in price (and quality) until middle-class people can afford them. While he shares Leahy’s belief that the housing market is unfair - most people don’t have 100 years to wait for affordable housing - Scherer-Water said he finds the “utopian” attitudes of some in Olympia who oppose all growth to be unrealistic.
“We live in a flawed capitalist system. I would prefer personally to live in a socialist situation where we are just building what’s needed, but we don’t live in that,” Scherer-Water said. “This is so much bigger than our city council or even our state officials.”
Reigning in sprawl
The Multi-family Tax Exemption (MFTE) program, which Washington state authorized in 1995, was expressly designed to give cities a tool to revitalize their downtowns, attract new residents, and encourage more vibrant, livable, mixed-use communities.
The MFTE came on the heels of the Growth Management Act, an ambitious framework for making metropolitan areas more sustainable and preserving green spaces by increasing density and reducing urban sprawl.
Years later, it was modified to include an option extending the exemption from eight to 12 years, if the project includes at least 20% affordable units for low- and moderate-income households, defined as making less than 115% of Area Median Income.
As the Puget Sound region’s housing crisis has intensified, cities like Seattle have used the 12-year program to leverage the inclusion of more affordable units into construction they know will happen anyway, given the city’s insatiable demand for new housing.
In Olympia, however, the tax credit has gone almost exclusively to market-rate housing developments — with four of the eight projects awarded so far going to one developer. One 12-year project has been created: Merritt Manor, 82 units reserved for people making under 60% of Area Median Income.
Downtown’s housing lull
Olympia began offering the MFTE in 1997, but with the exception of the Boardwalk Apartments, a building for low-income seniors financed mostly with state and federal funding, it was mainly used for small-scale renovations of walk-up apartments. Then followed a decade between 2004 and 2014 where Olympia’s tax incentives failed to attract a single new multifamily housing development.
“We were desperate for housing downtown for a long time,” Retlin said.
Part of that desperation came from the small business community, which was struggling without the nighttime and weekend foot traffic that comes with people living downtown.
Permitting trends contained in the recent Housing Needs Assessment report offer a glimpse into the stagnant nature of downtown housing development during that time: between 2000 and 2015, building permits issued in the three zoning districts that make up Olympia’s downtown totaled exactly 75 units.
Of course, the financial collapse and economic recession in 2008 contributed to the lull in new housing construction. Yet over the same period, 1,378 new homes were built in Olympia’s single-family neighborhoods. That development was in turn dwarfed by the neighboring city of Lacey, where 4,636 homes were built in neighborhoods zoned low-density residential.
Lots of new housing was built during that time, just not downtown.
Things began to change in 2015. A spurt of development began with Franklin Lofts, a project widely praised as a creative re-purposing of a mid-century modern office building, with a popular brewpub on the ground floor and 19 units of loft-style apartments in several floors above.
Within two square blocks of Franklin Lofts, there’s now also Annie’s Artist Flats, a red-brick renovation with an industrial-chic warehouse aesthetic; 321 Lofts, a sleek, collegiate-looking building raised on stilts with a V-shaped roof. This summer, another loft apartment, Malt House, named after an adjacent brewery, will begin construction. It’s the type of development cities love — mid-rise buildings with a few floors of apartments and ground-floor retail that make for a walkable, vibrant downtown.
No one has benefited more from the tax exemption than Walker John, a prolific local developer whose company, Urban Olympia LLC, owns all of the buildings just listed. John’s three active projects will save $1.4 million over their 8-year exemption period, with two more set to begin their exemption period soon: The Lurana and Westman Mill. The latter is advertised as “luxury living from start to finish.”
John, who did not respond to multiple calls and emails requesting comment for this story, has three more downtown developments planned, Market Flats, Malt House, and 401 Union Avenue.
Density and climate goals
Retlin and Madrone both describe the MFTE program as a win-win: building more housing for a growing population is necessary, and cities want to channel that growth into downtown cores, where residents can live close to jobs and amenities.
“Sometimes [the MFTE] is brought forward as, you know, incentives for developers for luxury housing,” Madrone said. “But it can also be framed as an incentive to achieve our growth management goals, and our climate change goals, and be able to provide housing that’s accessible to people of area median income.”
Incentives like the MFTE are necessary, Retlin said, because downtown Olympia has several qualities that drive up costs for developers. For example, downtown’s soil is so muddy and unstable that large pilings need to be driven into the earth to anchor the foundation. Many sites require environmental studies and remediation. And until recently, parking requirements meant building large garages (though the city now exempts downtown housing).
Many of the MFTE-supported apartments sit on what were empty parking lots. Retlin said that without the tax credit, much of the housing construction wouldn’t have happened, and the properties would continue to be empty lots, which do not generate much tax revenue either. In the case of The Lurana, the most recently completed MFTE development next to Percival Landing, the site was formerly a Les Schwab.
“Certainly in my estimation, a restaurant and housing, a multifamily building that has retail on the first floor and housing upstairs, is a better use for that space than auto repair right by the water,” Retlin said.
Whether The Lurana would have been built without the MFTE, Retlin admits, is near-impossible to prove.
Does MFTE make a difference?
“It seems like the program relies on empirical data that doesn’t exist,” said Renata Rollins, who has provided the lone no vote on the last several MFTE projects to come before the city council. “To me, development happens more due to broader market conditions that are outside of the city’s direct control or influence.”
Rollins’ skepticism about the math is backed up by a 2019 report from the state’s Joint Legislative Audit and Review Committee (JLARC), which found that the effect of the tax credit on development is inconclusive. While lots of housing has been built with the tax credit, it’s not clear how much would have been built without the incentive.
The only thing the JLARC report found conclusively is that the eight-year exemptions added a 1-3% profitability bump for each project. Depending on the level of profit that a given developer is seeking and local market conditions, it’s possible that the 1-3% bump pushed some projects into feasibility.
Other cities such as Lakewood have done profitability analyses of projects before deciding whether to grant the tax credit, but Olympia has no such vetting process.
Part of the reason the JLARC report couldn’t assess if the program is working is that many cities, including Olympia, were neglecting to report data to the Department of Commerce, as is required by the program. The city has since submitted all the required data on the program.
Rollins’ opposition is also rooted in fairness, she said. Washington’s tax system is already regressive and provides cities with few options to raise revenue. Unlike sales taxes, property taxes are one of the few that don’t fall disproportionately on the poor, Rollins said.
“I voted against the last few MFTE proposals because I believe that people who make their money through property investments can afford to contribute more to the city in order to make the community more affordable,” Rollins said.
Gilman, who chaired the city Land Use Committee several years ago, said he tried to attach affordability requirements to the eight-year MFTE for market-rate development, but the other two members of the committee at the time — Lisa Parshley and Nathaniel Jones — were opposed to the idea, so it never came up for a vote.
Cheryl Selby, who served on Olympia’s city council for two years before becoming mayor in 2015, declined to comment for this article.
“I have nothing to add to the conversation at this time,” Selby wrote in an email to The Olympian.
However, she addressed the MFTE in a 2019 election questionnaire published in Works in Progress, where she credited the program with helping to revive downtown and attract new residents, while also saying she would support additional affordability requirements that the Land Use Committee was considering.
“I support an ‘inclusionary zoning model’ MFTE where a certain percentage of units would be set aside as affordable in perpetuity,” Selby wrote in response to the questionnaire, which was sent out to numerous city council candidates. Selby confirmed that she stands by those comments.
The future of the MFTE in Olympia
Under the current MFTE program, cities have the ability to increase affordability requirements or attach other conditions to the program, but they cannot lower requirements.
Olympia already has enacted additional rules that disqualify projects that displace tenants. After public outcry over 123 4th Avenue apartments being listed on Airbnb, Olympia made a rule prohibiting beneficiary projects from turning units into short-term rentals.
The city also could choose to do away with the eight-year market-rate exemption entirely and only offer the 12-year version with the affordability requirement.
Madrone, who currently chairs the Land Use Committee, said she supports expanding the eligibility map to encourage more developers to create affordable units with the 12-year program.
Gilman, who tried to increase affordability requirements for the 8-year before, has nonetheless voted for each individual project as it came up on the city’s consent calendar, which is for routine items and usually gets passed without discussion. Gilman said that while he’s opposed to the current policy, he has voted for each one because he doesn’t believe that the consent calendar vote is the appropriate venue to oppose it.
“If we want to change it, we change the policy,” Gilman said. “The actual item that comes before council isn’t about the merits of the project, it’s whether or not the application complies with the policy we have in place right now.”
Gilman said that while growth is inevitable, the city has control over what types of housing projects it wants to incentivize.
“We are going to reach a point where it doesn’t make sense to put very limited city energy and money into trying to create [market-rate] downtown residential projects,” Gilman said. “I think more will happen and more buildings will be renovated without subsidy or special accommodations from the city.”
Asked when exactly that point is, Gilman nodded.
“That’s the debate we’re not having.”
What is the Multifamily Tax Exemption?
- The Multi-family Tax Exemption (MFTE) program, which Washington state authorized in 1995, was designed to give cities a tool to revitalize their downtowns, attract new residents, and encourage more vibrant, livable communities.
- Cities can target specific zones (usually a downtown core) where developers of multifamily housing receive an eight-year exemption from paying property taxes on the value of the residential structure. They still pay taxes on the land and any commercial square footage.
- In 2007, the MFTE was modified to include an option extending the exemption to 12 years, if the project includes at least 20% affordable units for low- and moderate-income households, defined as making less than 115% of Area Median Income.
- Cities have the power to increase requirements, attach other conditions to the exemption, and approve or reject individual projects.
- Across Washington state, over 34,000 units of housing have benefited from the exemption program as of 2019. 82% of those units are located in Seattle, Tacoma, Renton, and Spokane. 21% are reserved as “affordable.”
This story was originally published March 7, 2021 at 5:45 AM.
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