Town home developers lobby for changes to Seattle housing fee

Seattle developers are hinting at potential legal action against the city as they claim a mandated affordable housing fee is making it harder for them to build town homes in a fast-growing city with a dire need for more housing.

In a letter delivered to Mayor Jenny Durkan and the Seattle City Council last week, the Master Builders Association of King and Snohomish Counties argues town house developers are often unable to take advantage of extra density they’re supposed to be able to tap in exchange for fees they pay toward affordable housing. 

The association says the situation has contributed to a drop-off in new applications for town home construction permits and put the housing affordability program “in jeopardy.” The city’s building department agrees permit applications are down but disputes whether the fee is to blame.

The letter comes as Seattle grapples with rising home prices, a shortage of houses to rent or buy, and ongoing calls for denser neighborhoods in the face of climate change. At the same time, the affordability crunch and rise in homelessness create an ever-growing need to raise funds for affordable housing.

In 2016 and 2017, city officials created the Mandatory Housing Affordability, or MHA, program as a way of boosting density and raising new money for affordable housing. Seattle then up-zoned 27 neighborhood hubs in 2019, offering developers the ability to build taller or larger buildings.

In exchange, the city requires developers to either include affordable units in their projects or pay fees toward affordable housing. The vast majority opt to pay the fee instead of including affordable housing on-site. State law allows those types of fees when cities offer a benefit such as allowing taller buildings. 

Although the city says the fees have not discouraged overall development, townhome builders say they’re not getting much out of the deal. Often, the denser zoning allows them to add a fourth floor to town homes, but developers contend many homebuyers are not interested in walking up and down four stories. And paying the fee up front can complicate efforts to get construction loans, they say.

The Master Builders Association estimates Seattle developers pay an average of about $32,700 per town house unit, based on a survey of its members.

“MHA’s problems put the program in legal jeopardy. … The increased development capacity in lowrise zones cannot always be achieved by townhome builders,” wrote Nancy Bainbridge Rogers and Maxwell Burke, two attorneys representing the group. “Where that additional capacity cannot be used, townhome builders must pay a substantial fee upfront without receiving any meaningful incentive.”

Seattle has reported a drop-off in the number of permit applications for new town home projects. 

The Master Builder’s Association projects the city will accept 139 project applications (with 556 town houses) by the end of 2021, a 69% decrease from applications in 2018.

The builders association used data it received directly from the city to produce its analysis. Other publicly available city data shows a similar trend, though the exact numbers vary.

“The vast majority of the projects we did before the MHA fee were town homes. The vast majority we do now are single family,” said Roque Deherrera, a developer at Legacy Group Capital.

The trend of declining town home permits may feel counterintuitive to Seattleites who notice a proliferation of new construction in their neighborhoods. But the permitting, financing and construction process takes months, meaning projects going up today were permitted in previous years. 

“If you fast forward 12 to 18 months into the future, there is going to be far less town home product,” said Erich Armbruster, a town house developer with Ashworth Homes.

The Seattle Department of Construction and Inspections agreed that applications to build town homes are down but pushed back on the Master Builders’ interpretation. 

“There are fewer permit applications for townhouses/rowhouses in 2021, but this is largely in line with impacts seen from the pandemic and an expected softening in the business cycle,” spokesperson Bryan Stevens said in a statement.

The local housing market was showing signs of cooling before the pandemic supercharged demand for new homes. Permit numbers in 2018 and 2019 were “bloated” as developers rushed to apply before the affordability fees kicked in, Stevens said.

The city expects the number of permit applications for all types of housing — including single-family homes, town homes and apartments — will be down about 20% to 30% this year from levels seen between 2015 and 2019, Stevens said.

For development overall, the city reported that MHA outpaced expectations for the amount of money it would raise for affordable housing last year. At the same time, Stevens said, other changes such as allowing more backyard cottages “have allowed developers to build other types of housing that increase capacity and access to neighborhoods.”

Still, at least one City Council member signaled an interest in revisiting the MHA rules. 

“The Master Builders report shows a concerning reduction in permit applications for townhomes, the kind of ‘missing middle’ housing we need to bring [gentle] density and housing options to our neighborhoods,” Councilmember Dan Strauss, who represents Ballard, said in a statement.  

Strauss said he “pushed hard for Mayor Durkan to send me legislation that would take steps to address the challenges facing townhome builders” and believes “an in-depth evaluation of the challenges to townhome construction is needed in 2022.”

A spokesperson for Durkan, who leaves office next month, said city departments already regularly evaluate the effects of the mandatory affordability program.

Row houses and town homes play a role in Seattle’s housing market, though they will not address the city’s vast need for housing for people with the lowest incomes.

Town homes are cheaper than detached single-family homes, allowing some buyers to access homeownership in the city without the same levels of cash it takes to buy a detached house. They also allow for more density in residential neighborhoods, key to the city’s climate and housing-supply goals.

The median Seattle town home sold in November for $726,975, compared to $915,000 for detached single-family homes in the same month, according to an analysis from Seattle real estate agent Sol Villarreal. New single-family homes sold for a median $1.4 million between August and October, compared to $699,950 for new town homes, according to the Master Builders report, which used data from Redfin.

Prices for all types of homes have climbed sharply in the last decade, but town house prices have climbed more slowly than detached homes, Villarreal found, using data from the Northwest Multiple Listing Service, which tracks home sales across Western Washington.

Even so, town houses are not affordable for everyone.

Most new town homes in the city are affordable only to those making more than $102,000 for a three-person household, with affordable defined as spending no more than a third of income on housing, according to a city-commissioned analysis. 

If the city is unwilling to exempt town homes from the fee, the Master Builders Association of King and Snohomish Counties proposes allowing the fee to be paid in yearly installments, which would then be passed on from the developer to the homebuyer, similar to a King County sewer charge already on the books.

Deherrera said he and other developers have met with incoming Mayor Bruce Harrell but did not discuss the issues in detail.

Currently, Deherrera said, his company’s recent town home projects have been mostly in Eastlake and Capitol Hill, where “units cost more. They’re more valuable, so they can make up for the fee.” The firm aims to make about 12% profit on a project, he said.

Given the hot housing market, he said, “we would build as many town home projects as we could right now if they made sense.”