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Appendix A: CET Supplemental Memo
to City of Lake Oswego
from Kate Rogers and Matt Hastie, MIG
Brendan Buckley,Johnson Economics
re Lake Oswego Housing Production Strategy
Supplemental Information about Construction Excise Tax
date February 8, 2024
Introduction
This memorandum provides additional information about Construction Excise Tax(CET) and is intended
to supplement the Initial Housing Strategy Recommendations memo dated February 8, 2024. An initial
version of this memo was presented to the Lake Oswego Planning Commission as part of their January 8,
2024 work session agenda packet.The memo has since been expanded to include additional
information.
This memo provides further information about how a handful of other cities in Oregon are implementing
CET programs to support affordable housing.The memo looks at CET programs in Tigard, Bend, Newport,
Eugene, and Milwaukie. In addition, the following cities have also adopted a CET: Grants Pass, Medford,
Corvallis, Cannon Beach, Hood River, and Portland (and likely others).
This memo also provides an estimate of potential revenue generation from a CET if established in Lake
Oswego, based on past permit data.
Case Study Examples
NOTE: According to state statute, all cities are required to exempt the following types of development
from CET: regulated affordable housing, public buildings, places of worship, public and private hospitals,
agricultural buildings, nonprofit facilities, long-term care facilities, residential care facilities, continuing
care retirement communities, and housing replacing homes destroyed by a wildfire or similar event.'
Tigard
Adoption and Tax Rate:The City of Tigard adopted a CET in 2019,which levies a 1%tax on most
residential and commercial construction within the city to fund affordable housing programs.
'Oregon Revised Statute 320.173.
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Exemptions: In addition to the required exemptions,Tigard exempts the following types of development
from CET:2
• Accessory dwelling units of 1,000 square feet or less.
• Construction or improvements having a total improvement value of less than $50,000.
• Construction or improvements to a residential structure that was partially or completely
destroyed by unintentional means,such as fire or act of nature,where such construction or
improvement results in a net increase of living area of 10%or less over the living area of the
destroyed structure.
• Cottage clusters, courtyard units, and quadplexes are exempted from 75%of the CET.
Revenue Expenditure: Tigard's Municipal Code outlines the following CET revenue expenditure—this is
the general expenditure structure required by state statute, and is also applicable to CET in other cities.
• Retain up to four percent of the tax collected for payment toward administrative expenses.
• Residential CET revenues will be expended in accordance with state statute, as follows:
o 15%of net revenue will be remitted to the Oregon Department of Housing and
Community Services to fund home ownership programs.
o 50%of net revenue will fund incentives for the development and construction of
affordable housing.
o 35%of net revenue will fund programs and activities related to affordable housing.
• Commercial CET revenues will be expended as follows:
o 50%of the net revenue will fund programs of the city related to housing.
o The remaining revenues can be spent flexibly to support affordable housing.
• Projects:The City's share of revenues goes towards a program administered by Proud Ground
for community land trust and affordable home ownership programs in Tigard.The revenue is
also used to backfill the transportation and parks SDCs from which affordable housing projects
are exempt.
Bend
Adoption and Tax Rate:
• Affordable Housing Fee:The City of Bend adopted a construction tax, referred to as the
"Affordable Housing Fee," in 2006, at a rate of 1/3 of 1%on residential,commercial, and
industrial development.This tax was adopted prior to the State Legislature's authorization of
CET for affordable housing in 2016 (via Senate Bill 1533). Although it does not meet all the
current statutory requirements for CET expenditure, Bend's program was "grandfathered in,"
and has remained in effect.
• Commercial/Industrial CET:Then, in 2021 the City adopted an additional CET of 1/3 of 1%for
new commercial and industrial development, with revenues dedicated toward housing
programs to support extremely low-income households.This amounts to a total CET on
commercial and industrial development of 2/3 of 1%.
2 Tigard Municipal Code, Chapter 3.90 Construction Excise Tax.
https://library.gcode.us/lib/tigard or/pub/municipal code/item/title 3-chapter 3 90
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Exemptions: Bend's Commercial CET exempts only the types of development required by state law.
Estimated Revenues:
• Affordable Housing Fee: According to a 2017 report,the program had collected $6.4 million
since adoption in 2006, which had leveraged an additional $106 million in public and private
funding.'
• Commercial/Industrial CET:As of 2021, the tax was estimated to collect$1.1M over the following
two years, the majority of which will be distributed by a formal request for proposal process.4
Revenue Expenditure:
• Affordable Housing Fee: Funding received from this tax are deposited in Bend's Affordable
Housing Fund and targeted for housing opportunities for residents at or below 100%of area
median incomes 6
• Commercial/Industrial CET: Revenues from this tax will be dedicated toward funding programs
for housing, and support, services, and other programs for people making up to 30%of area
median income,which in 2021 was $22,980 for a family of four.
• Projects: Bend reports that "[p]roceeds from this fund have been employed to develop a wide
variety of housing throughout Bend. Currently,the Affordable Housing Fund is used to acquire
land for deed restricted affordable housing, develop the land, construct homes, or rehabilitate
homes.All funded developments are required to undertake a deed restriction, guaranteeing the
homes will be affordable to lower income residents well into the future."'The City estimates
that the funding has helped the creation of 770 affordable housing units.
Newport
Adoption and Tax Rate: The City of Newport adopted a CET in 2017, with a tax rate of 1%for both
residential and commercial construction.'
Exemptions: Newport's CET exempts only the types of development required by state law.
Estimated Revenues: As of 2023,the CET has collected a little more than $540,000 since its adoption.'
'City of Bend,Affordable Housing. https://www.bendoregon.gov/government/departments/housing/affordable-
housing
4 News from the City of Bend, https://www.bendoregon.gov/Home/Components/News/News/4296/
'City of Bend, Financial Tools. https://www.bendoregon.gov/government/departments/housing/affordable-
housing/developer-resources#FinancialTools
6 Bend Municipal Code,Ch.9.40 Affordable Housing Fee. https://bend.municipal.codes/BC/9.40.040
'City of Newport, Resolution 3787, 2017.
https://www.newportoregon.gov/dept/cdd/documents/CET Res3787SettingCETRates.pdf
8 City of Newport, Housing Production Strategy, 2023.
https://www.oregon.gov/Icd/UP/Documents/20230616 HPS Newport.pdf
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Revenue Expenditure: Information about how Newport expends its CET revenues was not available.
However,the City's 2023 Housing Production Strategy outlines potential uses for these revenues to
support affordable housing development and programs.8 The Housing Production Strategy implies that
the City's share of the funding has accrued since the program's inception and recommends that the City
undertake planning to decide how exactly to allocate it.
Eugene
Adoption and Tax Rate: Eugene adopted a CET in 2019,with a tax rate of 0.5%for both residential and
commercial construction.
Exemptions: In addition to exemptions required by state law, Eugene exempts residential dwellings sold
for$250,000 or less and projects granted a multi-unit property tax exemption (MUPTE) by the City.
Estimated Revenues: In fiscal year 2021,the CET generated $300,000 in revenue. In fiscal year 2022, it
generated $1,140,000.9
Revenue Expenditure: Money collected from the CET goes into the City's Affordable Housing Trust
Fund, which pays for projects and programs that increase availability and access to owner-and renter-
occupied housing that is affordable to lower income community members. Most of the AHTF(75%)goes
toward housing development; 25%goes toward direct assistance to renters and homeowners to help
increase access to housing. Examples of how these funds are used include:
• Gap financing for the development of new affordable housing;
• Acquisition of existing housing that will become affordable;
• Acquisition of land for future affordable housing development;
• Down payment assistance for home buyers; and
• Rental or security deposit assistance for people who rent their homes.'°
Projects: In the 2022/23 year, Eugene's Affordable Housing Trust Fund contributed to five
development projects and services, providing 178 new affordable homes.These include:
• 70 tiny homes for homebuyers
• 10 transitional housing units for veterans
• 38 units with supportive services for former convicts
• 56 units with supportive services for the chronically homeless
• 4 new homes for low-income homebuyers
• Foreclosure assistance ($150,000)
• Homebuyer assistance ($281,000)
• Rental assistance ($100,000)
'City of Eugene,Affordable Housing Trust Fund. https://www.eugene-or.gov/4232/Affordable-Housing-Trust-Fund
Zo City of Eugene, CET FAQ. https://www.eugene-or.gov/DocumentCenter/View/46871/Affordable-Housing-
Construction-Excise-Tax-FAQs
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Milwaukie
Adoption and Tax Rate: Milwaukie adopted a CET in 2017, with a tax rate of 1%for both residential
and commercial construction.'
Exemptions: In addition to exemptions required by state law, Milwaukie's CET exempts any building
permits with a value of$100,000 or less. Initially,the CET also exempted accessory dwelling units;
however, that exemption expired in 2022 (5 years after the ordinance was adopted).12
Estimated Revenues: As of 2022,the CET had accumulated $2 million in revenue.
Revenue Expenditure: In 2022,the City released a competitive request for proposals to award up to $2
million in CET funds for qualifying income-restricted housing projects.As of 2023,the funds were
awarded to a development of 275 units,to be affordable at 30%-60% MFI, and a community land trust
courtyard development for affordable homeownership.As funds continue to accumulate over time, the
City will release subsequent rounds of funding. CET funds generated from within Milwaukie are also
utilized by the State to provide first-time homebuyer assistance for residents.'
Lake Oswego CET — Potential Revenue Generation
The following is an estimate of potential revenue generation from a CET if established in Lake Oswego.
These calculations assume the maximum 1%excise tax rate, but a CET may be adopted at a lesser rate.
The estimated permit values for the last five years were provided by the City of Lake Oswego, and
include those permits for new construction, or additions or alterations resulting in additional square
footage. Estimates are based on the last five years and are subject to fluctuations year-to-year depending
on the amount of development activity, the real estate market, and general economic factors.
As shown in the following table, a CET based on average annual residential permit valuations of the last
five years could generate annual revenue of roughly$770k for housing programs, or over$3.8M over
five years. Commercial permits could generate revenues of$850k per year, or$4.2M over five years.
The table shows how revenues might be broken down based on the division of funds described in
statutes.
11 Milwaukie Construction Excise Tax. https://www.milwaukieoregon.gov/communitydevelopment/milwaukie-
construction-excise-tax-cet
1z Milwaukie Municipal Code, Ch.3.60 Affordable Housing Construction Excise Tax.
https://library.gcode.us/lib/milwaukie or/pub/municipal code/item/title 3-chapter 3 60
13 City of Milwaukie, Housing Production Strategy 2023.
https://www.oregon.gov/Icd/UP/Documents/20230802 HPS Milwaukie.pdf
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Table 1: Hypothetical Five-Year CET Revenue Generation, Lake Oswego
Res.&Mixed Use Commercial
2019 $93,030,000 $176,680,000
2020 $42,400,000 $30,020,000
2021 $46,390,000 $48,650,000
2022 $134,470,000 $92,960,000
2023 $68,300,000 $75,570,000
5-Year Tota I: $384,590,000 $423,880,000
Annual Average: $76,918,000 $84,776,000
CET(1.00%Rate)
Annual Average Revenue: $769,180 $847,760
5-Year Total Revenue: $3,845,900 $4,238,800
DIVISION OF FUNDS(5 YEARS)
4%Progra m Admi n $154,000 $170,000
Of remainder:
50%Development Incentives $1,846,000
35%Other Aff.Hsg.Programs $1,292,000
15%to OHCS for Homeownership $554,000
50%Housing-Related Programs $2,034,000
50%Unrestricted $2,034,000
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