A proposed tax exemption program meant to spur the development of affordable multi-family housing units in the city of Oak Harbor may face some logistical difficulties, should city council members choose to implement it.

The Washington state Multi-Family Tax Exemption program allows municipalities to offer private developers property tax exemptions for the construction, conversion or rehabilitation of eligible multi-family units. The program was established in 1995 but recently expanded and made more flexible so that communities like Oak Harbor can participate.

The purpose of the program is to support local housing goals, encourage infill development and promote construction of affordable housing. A presentation on the tax waiver program by Anthony Hemstad and Cheryl Swab of Hemstad Consulting at a Sept. 5 Oak Harbor City Council meeting, however, drew reservations from council members who questioned the feasibility of implementing the tax exemption in Oak Harbor.

At the meeting, Hemstad and Swab explained that there are three types of Multi-Family Tax Exemption programs the city could implement under state law. An eight-year exemption does not include an affordable housing requirement; all developed units could be sold at market rate. The purpose of this program is to encourage construction of housing in areas of the city that have not seen adequate development and increase housing supply.

A 12-year exemption requires at least 20% of developed units to be set aside for low to moderate income households and must have a minimum density of 25 units per gross acre. This program is intended to encourage affordable rental housing development.

The final type of property tax waiver is a 20-year exemption. It has the same density requirements as the 12-year exemption, and it requires 25% of the units built to be permanently affordable. The 20-year program has a focus on homeownership and requires developers to partner with nonprofit developers such as Habitat for Humanity.

For all program types, the units must be built within designated Residential Target Areas to be eligible for the exemption. Residential Target Areas are areas of a city located within an urban center that lack sufficient housing to meet the needs of public growth.

Consultants suggested that the triangle of land between Pioneer Way, Midway Boulevard and Highway 20 identified by the city Public Works department as an area in need of serious infrastructure rehabilitation could also serve as a starting point for Residential Target Areas in the city.

Because the city would not receive property taxes from units constructed under this program, the consultants recommended implementing a tax shift, which is what other Washington municipalities with multi-family tax exemption programs have done. The tax shift would transfer property taxes from exempt developments to other taxable parcels in the city at a prorated rate.

According to Hemstad, if 100 new tax exempt units were constructed, the average property owner in Oak Harbor would owe another $23.13 in taxes annually.

The consultants recommended that Oak Harbor implement a multi-family tax exemption program without additional stipulations beyond the state’s minimum requirements. According to Hemstad, the program would benefit the city in myriad ways beyond simply incentivizing more housing development; it would also bring in more people to the city, thus expanding the tax base and the number of people shopping at local businesses.

Construction of the new units would also create business for local contractors and generate revenue for the city through permitting fees and sales taxes.

Council members brought forth several reservations about the program in a discussion following the presentation.

Councilmember Jim Woessner noted that the city’s code currently only allows for a maximum of 22 units per gross acre due to height limitations, meaning that the council would have to redo parts of the city’s code to implement the 12-year or 20-year exemption programs.

Only the eight-year exemption could be implemented without changing the code, but since the eight-year program does not include an affordable housing stipulation like the other two programs, that would amount to creating private development “on the backs of other ratepayers” without providing any affordable housing, Woessner said.

The best the council could hope for in that scenario, he continued, would be that the increased supply of housing units would help decrease the demand and eventually lower housing prices across the board.

The council could add an affordable housing stipulation to the eight-year program, but Woessner worried that the numbers wouldn’t pencil out for developers, who might need the longer tax exemption to make up for the cost of selling some of their units at below market rate, and the program would go unused.

“I think before we look at that, we really need to look at whether or not we can take advantage of this entire program the way it’s currently written,” he said.

Councilmember Beth Munns concurred.

“If we can’t offer the whole package, then it isn’t going to pencil out,” she said.

Councilmember Eric Marshall said that he would have a difficult time supporting putting an additional tax burden on city residents while providing tax incentives for market rate housing, but changing the city code to accommodate the 12- and 20-year programs would require serious consideration and talks with the police and fire departments about the implications of the increased density.

Councilmember Shane Hoffmire said he would like to see data from other municipalities that have implemented the tax exemption. In theory, an increased housing supply should drive down housing prices, which would ease the impact of the tax increases other city residents would have to shoulder, he said.

Ron Chaszar of the Oak Harbor Planning Commission said that as an Oak Harbor resident, he is opposed to the multi-family tax exemption.

“You’re asking taxpayers to pay extra money to decrease the value of the property that they have,” he said.

He said he also opposed the program as a member of the planning commission because of the risk to the taxpayers if no developers chose to utilize it, which he worried they wouldn’t; private developers don’t often jump at the opportunity to develop units they will have to sell below market rate, he said.

Woessner said that should the council choose to implement a multi-family tax exemption, no additional taxes would be collected unless there was an eligible project.

“Let’s face it — taxes are going to have to be generated from somewhere to create housing at below market value,” he said. “The market’s not going to create it. Contractors are not going to come in and create below market housing.”

The council did not take any action on this proposal at the Sept. 5 meeting.