Two downtown developers have filed legal complaints challenging the city's incentive zoning policy, part of the affordable housing program that makes developers pay a fee to build taller than existing height limits allow.  

The developers, Clise Properties and Greg Smith, identify themselves as "The Koontz Coalition"—a dramatic reference to the 2013 U.S. Supreme Court decision in Koontz v. John River Management District, which put strict parameters around the government's ability to attach fees to permitting. [Full disclosure, Smith was an original investor in PubliCola. He is no longer involved in the web site, though, since we were purchased by SeattleMet in 2012.] 

In late 2013, the city council amended its incentive zoning rules by increasing the amount developers must pay into an affordable housing fund if they want to build taller than height limits allow in South Lake Union.

The fee-in-lieu, as the payment is known, went from $22 per square foot to $26.85 per square foot of additional density (a 22 percent increase). Smith and Clise have taken their complaints about the increase to the Growth Management Hearings Board (GMHB) and to Seattle's United States District Court.

In their GMHB complaint (the GMHB is an appointed panel that adjudicates zoning and planning disputes under the state's Growth Management Act, the GMA), the developers argue that in order to increase fees, the city must also increase incentives (i.e., give the developers additional square footage).

"The city has flipped [the Growth Management Act] on its head," the plaintiffs' attorneys from Seattle firm McCullough Hill Leary say in their brief, arguing that "the statute requires that any expanded affordable housing programs provide increased residential development capacity ... Instead, the [incentive zoning] ordinance codifies that the city will annually adjust (e.g. increase) the costs of achieving the maximum development potential ... The fee-in-lieu provisions will increase while the value of the existing incentives will—at best—remain static."

If the developers show that the city has strayed outside the bounds of the GMA, then the developers can go after the 2013 incentive zoning in more sweeping terms.

Additionally, the developers argue that the new fee is out of sync with the city's comprehensive plan guidelines—de facto putting it out of sync with the state's GMA. (The city's comp plan is the document that governs development and is required by the state GMA.)

Specifically, the developers complain that the city's comp plan calls for increased development in downtown, yet, they argue, the incentive zoning policy discourages downtown development with the higher fees. After quoting comp plan goals to "direct the greatest share of future development to centers and urban villages" they write: "The Ordinance is inconsistent with this goal. The Ordinance imposed a substantial, immediate increase ... of the fee-in-lieu payments for residential bonus floor area in the Downtown Urban Center."

The Koontz Coalition argued their case in front of the GMHB last month and a ruling is expected this month in advance of their hearing in federal court, which isn't scheduled until next spring. 

And that brings us to the real point—and the real threat to one of the city's tools for creating affordable housing (though, admittedly, not the best-performing tool, creating just 616 affordable units in the last 12 years as opposed to the 3,700 units created by the housing levy): The developers want to secure a judgment from the GMHB that the city's ordinance doesn't square with comp plan guidelines about incentive zoning (knows as 540 rules), and thus, is not covered by the Growth Management Act.

Under 540, the GMA allows the city to tax development, providing a safe harbor, as lawyers put it, against a constitutional challenge. However, if the developers show—as they argued in their GMHB case—that the city has strayed outside the bounds of the GMA and 540 by unfairly raising fees without raising incentives and by abandoning comp plan goals, then the developers can go after the 2013 incentive zoning in more sweeping terms. 

The U.S. Supreme Court's Koontz decision established conditions for extracting money for permitting. If the fee isn't a straight-up tax (a get-out-of-jail-free card against the Koontz standard) then, according to Koontz, the government must show a nexus (a relationship between the fee and the permit ... such as a liquor license fee to cover drunk driving enforcement). And second, the government has to do the actual math, identifying a number for the true cost of that nexus; that concept is known as proportionality.

In addition to the GMA, there's another relevant state law at play, RCW 82.02.020, here, which, similarly to the new Koontz standard, demands that the city show a relationship between the fee and the impacts of the development. The rule is both a blessing and a curse for the city in this case; 82.02.020 identifies a clear exemption from the prohibition against taxing development, but it does so, only if the city can show the nexus. 

This is where the GMHB case becomes relevant. If the city successfully shows that its incentive zoning ordinance was kosher with the GMA than its fee can be considered a tax (again, state law against taxing development allows for a GMA exemption under 82.02.020.) But if the city loses the GMHB case, they'll have to meet the Koontz (and state) nexus and proportionality test.

The city hopes to torpedo the District Court challenge with a favorable ruling from the Growth Management Board this month.

And the fact is, as the developers argue in their federal court briefs, the city did not do a new nexus study for the 2013 ordinance. The city relied on extrapolations from previous nexus studies that were done from earlier incentive zoning rules from 2005 and 2001. Nor did they do a proportionality study specific to the new fee-in-lieu increase. The city acknowledges this, but maintains that Koontz only requires that there is a nexus and proportionality (which they say they'd established with earlier studies and simply updated this time around)—not that there needs to be a brand-new study every time they amend the rules.

If the court doesn't agree: The city will say, okay, but Koontz is irrelevant because our incentive zoning fee is a tax as defined by the GMA exemption. And this brings us full circle back to the significance of the GMHB case.

The city  hopes to torpedo the whole District Court challenge with a favorable ruling from the GMHB: In response to the charge that the city didn't increase incentives when it increased developer fees, they simply say the developers are misreading the statute, maintaining that no such requirement exists. In its argument to the GMHB, the city argues [emphasis theirs]: "Petitioner's argument ignores the critical term  ... The statute requires that program include an incentive ... It does not require that every change to a requirement of such a program must independently provide an incentive."

For example, according to the city's own data, 62 percent of eligible developments since 2001 did not use the incentive. In the incentive zoning incubator, South Lake Union, only six of 20 projects used the incentive zoning program.

As to the developers' charge that the incentive zoning update violated the city's own comp plan guidelines to build density in urban centers, the city maintains that the comp plan is flexible enough to weather any vacillations in downtown development.

The developers' attorneys at McCullough Hill Leary did not return several calls from PubliCola, though plaintiff Smith did. (The GMHB complaint and the federal lawsuit come at a time when the tensions between downtown development and affordable housing is a trending issue in Seattle. Many see the cranes and skyscrapers around the city as obvious indicators that Seattle is becoming too expensive for middle class families, while others see increased development as the answer to the city's affordability challenges.)   

Smith tells me he's actually for developers fees, saying developers "should pay for mitigation when there's causality" between a project and a specific impact. But he adds: "As a society at large there's a problem [with affordable housing], and I should be part of that mitigation, but so should single-family neighborhoods that want to stay single-family neighborhoods, and developers who aren't building near transit hubs, people who are developing in the hinterlands."

His point is that urban density and transit are priorities for the region and the new incentive zoning fees in the downtown core are "counterproductive because housing is not being developed that would otherwise be developed. The risk/reward [ratio]," he says, "disincentivizes me." 

For example, according to the city's own data, 62 percent of eligible developments since 2001 did not use the incentive. In the incentive zoning incubator, South Lake Union, only six of 20 projects used the incentive zoning program.

Low-income housing developers—strong supporters of incentive zoning fees—however, point out that development is booming downtown and call the so-called Koontz Coalition argument about stifled development "speculative."

The GMHB is supposed to make a ruling by August 25. Meanwhile, the city has filed to have the federal case dismissed on procedural grounds, arguing, that the developers don't have standing because they haven't paid any fees yet.


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