The Side Effects of Mandatory Housing Affordability (MHA) in Seattle


My Hometown of Seattle, Washington. May 2016.

As I embark on a journey to develop housing, I can resonate with the challenges and complexities. Along the way, I see many one-sided opinions that depict real estate developers and providers of housing as creatures of evil.

Affordable housing is a hot topic in my hometown of Seattle. The City Council unanimously passed a Mandatory Housing Affordability (MHA) component to the Housing Affordability and Livability Agenda (HALA). As part of this plan, upzones are granted to certain areas. But upzoning has a cost.

Did you know the unit cost per square foot to build a taller building is higher?

Construction cost is already very expensive as-is. For some smaller sites, it becomes impractical to try to optimize to a higher floor-to-area ratio, so the upzone is essentially irrelevant.

Not only does it cost more to build, which results in additional risk, one has to either subsidize the rents for a number of units in the project or pay hefty upfront fees that cannot be financed.

In most development projects, the lender/bank makes the call on what they will and will not finance.

For option 1 (providing subsidized units), the reality will be higher construction costs and less overall rents collected. That would put more pressure on market-rate renters in the building, as the project would need meet certain ROI requirements set by the lender.

For option 2 (in-lieu fee), we need to take into account the opportunity cost of adding on the in-lieu fee. For many small developers like myself, we do not have unlimited capital to invest. The more capital we are required to put into a project, the more risk we have to manage, thus the more return the project has to offer in order to offset the risk.

I’ve lived in Seattle pretty much my whole life. I saw what happened a decade ago. When you commit to building new housing and sign that personal guarantee on the loan, you put your life at risk to the perils of the market and the policies being made.

For many large corporations or governments, a few hundred thousand or a million dollars here and there are quite negligible in the grand scheme of things. But that is generally not the case for most developers. We are small business owners, much like your local mom-and-pop store or restaurant.

Imagine yourself and your personal savings — the moment you start to build new housing for the people of Seattle — you realize you need to come up with another six figure amount of cash in order to start building.

For someone like me, that simply means I won’t be able to move forward with the project. And the net result — we don’t get new housing units.

If we collectively decided that more supply is what we need, then why are we embracing a policy that does the opposite?

What if we give people the freedom of choice of whether or not it makes sense to build more units for a particular project? For some projects, it may not make sense to build higher. For others, it would make sense to pay the fee and build more units. And the net result, we will have more housing units in Seattle than ever before.

This was previously published on Medium.


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