One Lakewood Progress: Impact Of New Tax Abatements

Property tax abatements are subsidies that lower the cost of owning real and personal property by reducing or eliminating the taxes paid on it. 

In response to concerns from the community about affordable housing, Lakewood City Council, on December 2nd, adopted a resolution to amend an existing ordinance (Ordinance 58.04), to include “fostering the investment and development of affordable housing in new multi-family and mixed-use construction projects in Community Reinvestment Area #1…[and] #2,”  by utilizing tax abatements to encourage the development of affordable housing in both single unit residential and multi-family and multi-floor residential units.

In order to qualify for the tax abatements, developers of *new* multi-unit and mixed-use residential units must abide by the affordable housing stipulations set forth in the policy. Also stipulated in the policy is that the abatements can apply retroactively to the Rockport Square incentive district on Lakewood’s east end by signature of the mayor. Slated new mixed-use developments like One Lakewood Place, and residential developments being planned at the Steve Barry Buick site, and others would qualify for the abatement if they decide they want to include affordable housing units in their developments.

The tax abatement rates for these new developments are of a “15-year duration at 100% exemption on the improved value of the new structures only.”

The policy establishes that a baseline tax value for these developments will be maintained throughout the abatement. Generally, baseline taxes are estimates of assessed real property (land and property attached) value at the outset of a development project. 

So, developments who take advantage of the abatement will pay no taxes on the appreciation in value of the property for 15 years, but will still pay taxes on the real property value established at the outset of the abatement period.

This means that if the property value appreciates from $300,000 to say, $2 million, the city would only collect taxes on the $300,000 and not the appreciation value of $1.7 million during the duration of the abatement. 

That could prove to be a significant loss for the City of Lakewood and Lakewood Schools, especially if the outcomes for which the abatements exist, affordable housing, are elusive, as the calculations included in this analysis seem to suggest. 

Considering that Lakewood Schools are projected to spend into a deficit in 2020 and just announced the inclusion of a $3.9 million operating levy on the March 2020 ballot, the passage of these abatements could not have come at a less favorable time.

According to the Governmental Accounting Standards Board (GASB), tax abatements cost Ohio schools at least $125 million in revenue each year. According to Good Jobs First, an economic development non-profit which tracks subsidies' losses and works closely with the GASB, Lakewood Schools lost nearly $800,000 from subsidy programs in 2017, the latest data available. 

With the majority of Lakewood’s economy made up of service businesses and organizations who employ service workers (who are, in fact, essential to all communities), the need for affordable housing legislation is as critical as ever. Service workers, according to Pew Research, make up 71% of Americans on a nonfarm payroll. Service workers run the gamut from teachers, to firefighters, police officers, to paramedics, city employees, to landscapers, to cashiers and restaurant employees.

Many communities in the United States struggle to ensure that service workers have safe, affordable housing opportunities within a reasonable distance from where they work. 

Many people not only passively accept this reality, but also actively oppose policy proposals that provide an avenue for real affordable housing. When people hear “affordable housing,” they often think of government-funded, low-income housing. But the picture is much broader; individuals with steady jobs and salaries too high to qualify for housing assistance are being priced out of cities across the United States. The opposition to the local development of affordable housing may not serve the interests people believe they are protecting. 

The policy passed by Lakewood City Council is not so much an affordable housing policy solution as it is an economic development policy that attempts to establish a foundation upon which future policy addressing affordable housing can be based.

It is an ambitious economic development policy, banking on Lakewood’s current housing marketability to attract new businesses and new real estate development for a revenue payday 15-years into the future. That, in and of itself, is not inherently negative. But it is a risk, and reduces the budget capacity for Lakewood city schools for the foreseeable future, which could ultimately negatively affect home values. 

As written, the policy does not currently address or make housing any more or less affordable than it is currently. The updated policy states that for new developments to qualify for tax abatement, “(i) 10% of units must be set aside for households making up to 80% Area Median Income (AMI) and (ii) 10% of the units must be set aside for households making up to 120% AMI."

As I reported in my last column, the policy states in its own interpretive guidelines, that the AMI of Lakewood should be set at the median income of the Elyria-Cleveland Metropolitan Statistical Area (MSA).

The Area Median Income set by the U.S. Department of Housing and Urban Development (HUD) for the Elyria-Cleveland MSA, as of this writing, is estimated to be $73,700. That’s $25,000 more than the widely reported, and accepted, median income estimate for the city of Lakewood of $48,700.

Also Average Medium Income (AMI) fluctuates: the AMI of the Cleveland-Elyria Statistical area has seen steady, significant growth since 2014, with 2019’s AMI nearly 18% higher than it was five years ago.

True housing affordability for Lakewood residents (who are mostly employed in the service sector at lower tax brackets) under this policy is unlikely unless amendments to the policy are passed that lower the percentage of AMI from 80% and $120% down to a level more comparable with Lakewood residents’ income, or that take into account the actual median income of Lakewood when setting rental limits.

Since the abatement established by the policy is voluntary, so are the terms. There is nothing in the policy stipulating that all new residential and mixed-use developments include affordable housing. That decision is left up to the developers. 

Cities struggle with affordable housing legislation all over the country. Without subsidies, it is difficult to balance the profitability requirements of real estate developers and the high cost of building housing with the often income-diverse needs of communities. Cities across the U.S. are considering or committing to establishing affordable housing trust funds, or even incremental increases in taxation of multi-million-dollar commercial and residential real estate transfers to fund investment in affordable housing. 

This policy has thrust affordable housing into the lexicon of codified ordinances in Lakewood. And that is a great first step to continuing  to push for the affordable housing our residents need.