When Dallas-based Trinsic Residential Group set its sights on Portland, it had hoped to replicate a 159-unit apartment project it was developing on the far side of Puget Sound. That $41 million development, now under construction, will have underground parking, high-end amenities and 20 percent affordable units. The Portland project will have those components too – except the affordable housing.

That’s because unlike a popular program in Seattle that rewards developers who include affordable housing in their market-rate projects with tax exemptions, a similar program in Portland effectively penalizes them, said Allison Finn, a development associate at Trinsic Residential. Portland city leaders are searching for new incentives to encourage inclusion of affordable housing in developments, but industry professionals say the first step should be to fix the disconnect between the existing tax exemption program and the free market.

“It’s too bad that the Portland program is what it is today just because there is a big multifamily housing boom going on and there are a lot of neat, cool, urban infill projects going on that could potentially have an affordable component,” Finn said. “But I just don’t see that same participation in Portland that I do here in Seattle … I hope they can craft or morph the program into something that’s more attractive to developers, and hopefully encourages more affordable housing in Portland in the close-in neighborhoods.”

Compare and contrast

Seattle implemented its Multifamily Tax Exemption (MFTE) program in 1998. It has since contributed to development of 148 projects featuring 4,477 affordable units in 33 targeted neighborhoods. Seventy-two of those projects are complete; 76 are in the pipeline.

In exchange for rent-restricting 20 percent of their units, developers in the MFTE program are excused from paying property taxes on the value of residential improvements for 12 years. Last year was the MFTE program’s busiest to date, as staffers enrolled approximately 40 multifamily projects.

By comparison, the Portland Housing Bureau approved just three: a 61-unit affordable apartment project in Gateway; a 142-unit project with 123 affordable units in the Pearl District; and a 196-unit project with 39 affordable units in downtown.

That’s largely because Seattle’s program has no financial limit on the amount of foregone revenue it can grant developers, while Portland’s Multiple-Unit Limited Tax Exemption (MULTE) program has an annual cap of $1 million. But that’s not the cap that bothers Finn.

READ MORE: Learn about the history, challenges and opportunities for affordable housing development in Portland. SEE: A new city program SEE: Dwindling funds and exemptions

Portland’s program also caps the performance of market-rate units at a 10 percent rate of return. If rents climb higher, developers participating in the MULTE program are not allowed to capture that income.

“Basically, if you went over their performance cap then they could essentially come back and require a claw-back of taxes or require you to designate more affordable units,”

Finn said. “We didn’t understand that. From our perspective it seemed we were getting punished in a way for having the affordable component … that was a big red flag for us.”

Finn has other qualms. Not only does the MULTE program not allow developers to opt out of the program (MFTE does), she said it also requires the PHB’s approval prior to changes in ownership (MFTE doesn’t). That adds significant risk to a property from an investment standpoint.

Those performance constraints have pushed away other developers too. Killian Pacific considered seeking MULTE aid for its 240-unit, mixed-use Goat Blocks project, but Noel Johnson, the company’s vice president, said it didn’t make sense.

“We looked into it and we can’t figure out how it would be worth it,” he said. “The program is supposed to be a carrot to induce developers to actually want to do it, but we couldn’t figure out how it would ever actually make sense … It’s more risk than it is reward; more headache than help.”

Johnson thinks that’s unfortunate because thousands of units are under construction throughout Portland, and thousands more are on the way.

“If Portland’s program was substantially similar to Seattle’s,” he said, “I think you’d get a significant amount of affordable housing being delivered by the free market.”

Look again

In 2012, following a policy review by the “Big Look” committee of regional stakeholders, the PHB ratcheted up its requirements for tax exemptions.

In addition to setting the $1 million cap on annual foregone revenue, the committee made the application process competitive. Suddenly things like minority participation and green building techniques were being weighed on the same scale as affordability. The idea was to get more bang for the city’s limited bucks.

Jill Sherman, a vice president at Gerding Edlen, was on that committee and said those requirements were put into place as a compromise to keep the MULTE program from disappearing entirely. She said that following the recession, county governments and school districts – though supportive of affordable housing goals – were reluctant to give up any more of their dwindling resources.

“They’d been through so much pain in terms of cutting really critical programs, so the idea of losing any additional revenue (was hard),” Sherman said. “The cap was a compromise so they could feel comfortable supporting the program at all.”

Gerding Edlen has used Seattle’s MFTE program numerous times, and Sherman thinks a similar one in Portland would be beneficial. But she would rather have a hobbled program than none at all.

“In an ideal world it would be like the Seattle program, but on the other hand if there isn’t the sort of political will because of other funding challenges …” Sherman said, trailing off.

Finn finds Portland’s current process overly ambiguous and subjective, and up until recently she couldn’t apply for a building permit while she waited for the results. The reason harked back to language in the original state statute that essentially said: but for the tax exemptions a building would not get built.

Andrea Matthiessen, neighborhood housing program manager for the PHB, said the bureau has begun to rethink some of those positions.

“The way we look at it now is: the affordability in that property wouldn’t happen ‘but for’ the property tax exemption,” she said. “… There are some other general changes that we are looking at, and they’re all grounded in how to make the tax exemption program more appealing to developers while simultaneously ensuring that the city is getting an acceptable return on our investment in foregone revenue, because it’s not just our foregone revenue. It’s foregone revenue we share with the school districts and the county.”

Portland City Council recently removed the building permit requirement from its application process, and Matthiessen said the PHB is considering eliminating others as well – such as the market-rate performance cap. That stems back to another broken line of thought that theorizes: but for the tax exemption, the development would not be profitable.

Finn thinks those changes could have a huge impact on Portland’s housing landscape.

“In Seattle it’s very common – all big multifamily developers know the MFTE program very well and most of them are using it,” she said. “… I think developers are very excited and happy to be a part of the (Seattle) program because it does work with our business model, and also provides a public benefit … It’s easier and more cost-effective to have private developers provide multifamily, affordable, close-in housing when they’re already building these big, beautiful projects. So it just makes sense that there’s a public-private partnership that takes advantage of that growth.”