In just the past three years, for-profit apartment developers, often building in vogue neighborhoods, have received nearly $100 million in tax breaks. That isn't what the city intended when it created the program in 1998 to encourage new apartments in the city's poorest neighborhoods.

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You probably didn’t know your taxes are subsidizing new one-bedroom apartments that rent for $1,295 in one of Seattle’s hot spots, Lower Queen Anne.

Under an obscure city program, the developer building the apartments across the street from Seattle Center will get a 12-year property-tax break of $5.9 million.

In return, Bruce Knoblock will set aside 55 of his 275 apartments — not for low-income tenants but for renters earning slightly less than Seattle’s median income.

In just the past three years, for-profit apartment developers, often building in vogue neighborhoods, have received nearly $100 million in tax breaks.

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That isn’t what the city intended in 1998 when it created the program to encourage new apartments in the city’s poorest neighborhoods.

But after city officials sweetened incentives in 2008 to try to generate even more affordable housing, the Multi-Family Tax Exemption exploded in popularity and geographic reach. Developers wanted in, and subsidies financed apartments in neighborhoods such as Ballard and Capitol Hill that already were exceeding growth targets.

And the city is subsidizing “affordable” rents that sometimes run higher than market rents in the same building.

In one case, at Uwajimaya Village, a tenant last year paid $135 more per month for an “affordable” studio apartment than a tenant with an income of $138,000 renting a market-rate studio.

The tax breaks leave many “suspicious,” as City Councilmember Sally Clark recently said, “that we’re leaving too much money in developers’ pockets.”

Some affordable-housing advocates said taxpayers aren’t getting enough for their subsidies.

Tim Harris, executive director of Real Change, said the program at first was “arguably a good thing.” But, he added, developers and city officials “busted it wide open into a giveaway.”

City officials acknowledged they’ve been too generous. They tweaked the program in February, slightly lowering the incomes and rents considered affordable.

Councilmember Nick Licata argued the city should have gone further.

At his request, the program will be examined by City Auditor David Jones.

State Sen. Maralyn Chase, D-Shoreline, has asked state Attorney General Rob McKenna to look into the legality of the tax breaks. Chase contends the program is unfair in the way it shifts the tax burden to other property owners while offering “questionable public benefit.”

Most council members, including Clark, maintain the tax breaks are doing good.

They guarantee stable, somewhat affordable rents in a volatile housing market. A subsidy for an apartment that doesn’t seem affordable today may look a lot better in 10 years if rents escalate as some experts expect.

Tax breaks also have been a catalyst for new apartments in places that weren’t getting them, Councilmember Tom Rasmussen said, such as West Seattle Junction.

And the 16 exemptions granted in the past year would cost the average Seattle homeowner a little more than $5 annually, noted Councilmember Tim Burgess, about the same as a “low-fat marionberry muffin and a latte.” (That homeowner, however, will pay about $180 over 12 years for exemptions granted thus far.)

But concerns linger.

Despite the public money at stake, the program runs on an honor system.

Developers report to the city every year that they are setting aside the required number of apartments for people with eligible incomes. Their reports never have been audited by the city; and some lack key details.

Tenant incomes, often listed in round numbers, such as $42,000, have not been verified. And if tenants in rent-controlled apartments get a raise, or have a roommate move in — in one instance increasing household income to $102,492 in an apartment renting for $995 — that’s OK. They keep the rent-controlled apartment until they move out.

Licata doesn’t think developers are breaking the rules, though. “The rules themselves are the problem.” he said.

Who pays for breaks?

The voluntary program works like this: In exchange for a 12-year property-tax exemption, a developer agrees to set aside 20 percent of the apartments in a new building for moderate-wage tenants.

Eligible income levels depend on the size of the apartment. They’re lower for a studio, higher for two bedrooms. They now average 75 percent of Seattle-area median income, which is $44,950 for a single person.

Controlled rents then are set so eligible tenants don’t pay more than one-third of their gross income for housing and utilities.

Foregone taxes are shifted to all King County property taxpayers. From Shoreline to Enumclaw, everyone pays more for Seattle’s tax breaks.

Most of the 17 exemptions granted in the program’s first decade went to nonprofits, which built mostly in the Central District, Rainier Valley and the Chinatown/International District.

Combining local tax breaks with state and federal subsidies, nonprofits often have provided more than the minimum number of apartments, at lower rents than required.

Some said the sluggish program needed to entice more developers. Former Mayor Charles Royer, lobbyist Randy Bannecker and developer Bruce Lorig, among others, testified at City Hall, urging the council to increase affordable rent levels and the program’s reach. Construction costs had gone up, they stressed, but income and rent levels had not.

The council expanded the exemptions, which started in 11 parts of town, to 39 neighborhoods. Eligible incomes were expanded from 60 percent of median income for a studio apartment ($35,950 today) to 80 percent of median income ($47,950). Affordable rents ballooned to $1,199 for a studio.

Market rents lower

Results were dramatic.

Of the next 36 apartment projects approved for tax exemptions, all but one went to for-profit ventures.

City officials had found the sweet spot at which for-profit developers believed the tax breaks were worth the trade-off in controlled, or “lost” rents. It helped that developers, who had been converting apartments to more lucrative condos, suddenly were seeking renters and help in financing their projects as the recession took hold.

Critics contend affordable rents sometimes appear to be higher than market rents in the same neighborhood. Some developers’ reports confirm that.

At Uwajimaya Village, a 480-square-foot apartment — set aside under the program as affordable — rented last year for $1,022 a month; another studio that size, and on the same floor, had a market-rate rent of $887.

A glitch in the city rules is to blame, according to the city’s program manager Amy Gray.

At first, city rules required developers to rent a certain number of apartments to tenants below median income. But the rules didn’t specify affordable rents; so developers who participated under the old rules could charge whatever rents they wanted.

The city fixed that in 2004, but Uwajimaya Village and others were grandfathered under the old rules.

Problems persist under the revised rules. At newer buildings in West Seattle and Northgate, for example, developers last year charged affordable rents specified by the city. But they still were higher than some market-rate rents in their buildings.

That’s because the housing market crashed and developers wanted to fill units even if it meant charging less than planned, Gray explained.

Recognizing the city had gone too far, Mayor Mike McGinn late last year proposed a small reduction in rents. Four new for-profit projects — in Ballard, West Seattle, Lake City and First Hill — quickly applied under the new rules.

Catching fraud

Prominent developers who’ve received exemptions frequently contribute to election campaigns of city officials, but Licata doesn’t see any quid pro quo or impropriety. He said there’s no need to influence council members to gain a tax break. A developer receives an exemption if he or she meets program criteria; individual applications are first screened and approved by the Office of Housing.

Clark said she doesn’t see a need to beef up the city’s enforcement. If caught submitting fraudulent data, she said, a developer would have to reimburse exempted taxes, pay a penalty and suffer a severely damaged reputation.

It’s not clear, though, how a developer would get caught under an honor system.

One thing about the program could be improved, Clark said. Qualified renters now have virtually no way to know rent-controlled apartments are sprinkled around Seattle.

The city doesn’t advertise the program; nor do most landlords.

Stay tuned, housing director Rick Hooper said. The city is working with landlords and others to offer a Web-based, real-time apartment locator before the year ends.

Bob Young: 206-464-2174

or byoung@seattletimes.com