Seattle officials neglected for years to collect a $3.4 million contribution for affordable housing from the developer of a high-rise condo project. That’s one of many findings from an audit of the city’s Incentive Zoning program.

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For almost four years, Seattle officials neglected to collect a $3.4 million payment for affordable housing from the developer of a high-profile, luxury condominium project.

They secured the money with interest from the Insignia Towers project last year only after auditors reviewing the city’s Incentive Zoning program discovered the oversight.

In the meantime, two 41-story towers were built, condos began selling for more than $500,000 each and Seattle struggled with a painful affordable-housing shortage.

The lapse in the Insignia Towers case is one of several significant findings in a new report that City Councilmember Mike O’Brien calls disappointing and embarrassing.

“The idea there was that kind of money sitting out there is pretty crazy,” O’Brien said.

Scrutinizing the Incentive Zoning program and affordable-housing contributions at O’Brien’s request, Office of the City Auditor identified missing developer contributions, late payments, documentation discrepancies, uncollected fees and other issues.

Officials have acknowledged the issues, adding a quality-control supervisor and working to install new project-tracking software — and there’s urgency in their efforts.

The audit report comes as Mayor Ed Murray and the council roll out a new, streamlined program that involves upzoning more than two dozen neighborhoods in order to mandate contributions for affordable housing from developers across the city.

Aside from the Insignia Towers money, developers made or committed $87.5 million in Incentive Zoning payments from 2006 through 2015.

“The $3.4 million is a headline grabber and an important thing,” O’Brien said in an interview. “But the story is broader than that. How do we move forward into this world where we’re going to have more developers contributing to affordable housing?”

The council member added, “It’s unacceptable that a program producing millions of dollars didn’t have the proper controls in place.”



$3.4 million left on the table

Under the Incentive Zoning program, which has existed in some form in Seattle since the 1970s, developers provide public benefits in exchange for the permission to build larger projects than zoning would otherwise allow — bonus square footage.

Since the 2000s, the program has mostly been active in downtown and South Lake Union, while the public benefits have mostly been affordable-housing contributions.

Developers who opt into the program can make the contributions by building affordable units on site, off site or by making payments.

O’Brien became interested in an audit in 2015 when a hotel-workers union raised an alarm about the city letting a developer make a smaller payment than it should have.

The union, UNITE HERE Local 8, came across the case while investigating the development of a new hotel in the Denny Triangle neighborhood. Local 8 realized the city was planning to demand a $9 million payment when it could have charged $12 million.

The city ultimately agreed to seek $12 million after a legal challenge by the union. But the case raised questions about Incentive Zoning, says Stefan Moritz, Local 8’s director of strategic affairs. The city wasn’t calculating developer contributions in a very transparent way.

Local 8 was interested partly because most of the union’s members are low-wage workers who qualify for the subsidized housing generated by the program.

“This audit is important because it’s a look behind the scenes,” Moritz said.

How could the city leave $3.4 million uncollected from a developer adding nearly 700 homes to Seattle’s skyline? Officials say the error involved unusual circumstances.

The city’s construction department is supposed to secure the contribution before issuing a building permit to the developer.

But when the staffer assigned to review the Insignia Towers went on an extended medical leave, another stepped in at the very end of the permit process, says Bryan Stevens, a spokesman for the department.

The project came at a time when the program’s regulations were being revised to allow an option for some developers to defer their payments until later, Stevens says.

There were no notes in the department’s permit-tracking system telling the new reviewer to collect the payment. Mistakenly, the new reviewer issued the permit, the developer went ahead with the project and the department never looked back.

A spokeswoman for Bosa Development, the project’s developer, declined to comment. The construction department was to blame, not the developer, Stevens says.

The department says the Insignia Towers were a special case — the only project among 65 covered in the audit where a permit was issued with a missed payment.

But the auditors argue — and the department agrees — that the multimillion dollar oversight also speaks to an overall lack of clear procedures and quality controls.


Wide-ranging findings

The auditors began by asking the city’s construction and housing departments for an index of all Incentive Zoning projects from 2006 through 2015, and they were unsatisfied with the result. The departments each had their own lists, and the lists were inaccurate and had conflicting data, according to the report.

“The information available did not provide us with certainty that all projects that provided or should have provided affordable housing were included in the departments’ records,” the report says.

For projects the departments had records for, the auditors found problems with how the bonus square footage and affordable-housing contributions were calculated.

On some projects, the bonus square footage on the developers’ plans differed from the amount in their affordable-housing contribution agreements.

“Because we lacked complete and accurate information about these discrepancies, we were unable to measure their impact,” the report says.

And in 10 cases, the city collected payments late — after issuing building permits. In one case, a permit was issued on Nov. 22, 2013, and a payment wasn’t collected until April 27, 2015. On average, the payments for those 10 projects came nine months late.

Stevens, the construction department spokesman, says the payments were technically late but only due to a quirk in city law that didn’t make sense on the ground.

In another case, officials issued the permit for a project on Dexter Avenue North and were working on an agreement with the developer to build more than $1 million worth of affordable housing on site, but they had yet to finalize the agreement when the auditors came calling.

Taken together, the missing Insignia Towers payment and missing Dexter Avenue North agreement totaled about $5 million worth of affordable housing

Missing contributions, unreliable lists, calculation problems and late payments weren’t the audit’s only findings, however. The auditors also say the city lacked:

• A program management framework to ensure accountability and collaboration between departments

• Internal controls to minimize and correct errors, ensure timely payments and reduce the risk of fraud (which the audit found no evidence of)

• Adequate oversight, reporting and transparency in the permit-review process

• Resources to help developers understand and participate more efficiently in the Incentive Zoning program

Additionally, the auditors say, the city should be using a construction-cost index to annually adjust what developers pay, rather than a consumer-price index. A construction-cost index would rise faster, boosting payments to the city.

And the report, which makes 22 recommendations, says the construction department in 2013 simply stopped collecting a $500 program-application fee from developers.


Addressing problems

The construction and housing departments have responded to all 22 of the recommendations, concurring in most cases and, in many, saying work already has begun on improvements.

New software launching this year will allow both departments to track building permits and Incentive Zoning contributions through the same system.

A standard template for calculating contributions is being created to increase consistency. And the construction department has hired a new quality-control supervisor to apply new protocols and act as a gatekeeper before permits are issued.

Considering how complex and confusing the city’s Incentive Zoning laws are, thanks to 30 years of continuous revisions with different aims, the departments have been largely successful in limiting mistakes, officials argue.

O’Brien says he understands why Incentive Zoning may have suffered from some administrative neglect in past years. In 2010 and 2012, with very little building happening in the city, the program generated zero affordable-housing payments.

But that excuse no longer applies, the council member says. The program netted $6.6 million in payments in 2013, $21 million in 2014 and nearly $26 million in 2015

And Murray’s upzones are poised to increase exponentially the number of projects generating affordable-housing contributions. Raising maximum heights by one or more stories, the upzones are triggering the mayor’s Mandatory Housing Affordability program, which requires developers to contribute whether they build higher or not.

While the Incentive Zoning program  since 2004 has resulted in more than 1,200 affordable units through developers building units and through their payments, according to the city, Murray’s goal is to have the new program — a recommendation from a 2015 mayoral task force —  create 6,000  in 10 years.

The council already has upzoned the University District, downtown and South Lake Union, but proposals for less-dense neighborhoods may encounter more pushback.

The construction department has been preparing for the Mandatory Housing Affordability program to ramp up, making changes in response to the audit and working with the council to consolidate and clean up relevant land-use laws, Stevens says.

The department’s new software will allow it to make project-specific program information available on its public website by the end of 2017, the spokesman said.

That will be key as the council weighs additional upzones, O’Brien says. To support the changes, Seattle residents need to have confidence in the system, he says.

“People tend to like the idea of affordable housing, but many don’t trust it,” the council member said. “They say, ‘It’ll be a few bucks and nothing actually happens.’”

The city is successfully tapping development to create affordable housing, O’Brien is quick to stress. But officials need to better manage and demonstrate that, he says.