Click to Download Meeting Notes from the November 15, 2019 Mandatory URM Stakeholder Meeting — **Click to Download Meeting Notes from the Mandatory URM Stakeholder Meeting**

URM Retrofit Credits: Making Seattle a More Resilient & Sustainable City

Background

For the past half century, the City of Seattle has wrestled with the challenge of how to deal with the public safety risk posed by its most seismically vulnerable buildings. The most recent inventory identified over 1,100 of these structures, known as unreinforced masonry (URM) buildings, within Seattle. While they take many forms and can be found in many neighborhoods, these buildings are disproportionately located in lower-income, ethnically diverse communities, and many are landmarked or have historic significance. The next earthquake will impact the entire city, but it is these buildings and these communities that will be hardest hit.

The City has attempted to implement common-sense requirements for seismic upgrades to URM buildings since the mid-‘70s, but while the risks to life and property are well known, the projected cost for property owners to retrofit their URM structures has been a major impediment. To address that obstacle, we propose mandatory seismic upgrade legislation and a financing solution that will provide property owners with the means and incentive to upgrade the URM structures in our region thereby helping to save lives, protect affordable housing and preserve the historical and cultural fabric of our most cherished neighborhoods.

In addition to addressing seismic risk, the City of Seattle is also deeply concerned with environmental sustainability. In July the City Council passed an ordinance establishing the 2030 Challenge Pilot Program which offers incentives to building owners in the form of density bonuses if they undergo major renovations that achieve deep green building goals. In the ordinance, the Council directed City Staff to create a program that allows the transfer of development rights between urban centers if a building goes through a major building renovation and achieves the goals of the Pilot but does not want, or is unable, to add stories on to the building. The sale of these development rights will help pay for the environmental upgrades necessary to achieve the goals. Further, for URM buildings, the City has provided the extra incentive of an additional 5% FAR bonus.

In sum, the City of Seattle is committed to promoting dramatic improvements in the performance of its building stock from both a resiliency and sustainability perspective. In particular, in light of the clear public safety and environmental impact benefits, it is focused on significant upgrades to the seismic and environmental systems of existing buildings, many of which are constructed with unreinforced masonry (URM). Currently this may be achieved when an owner chooses to undertake a major renovation, thereby meeting the “substantial alteration” (or “sub-alt”) criteria. Under sub-alt, an owner is required to bring the building up to all current codes, including, but not limited to, seismic, energy, ADA, and fire safety codes; but, while compliance with sub-alt requirements clearly meets the City’s objective, it is typically very costly to the property owner, and existing incentives and subsidies are insufficient to adequately offset the expense.

Consequently, many owners have decided to either defer renovation, or limit their renovation to just below the sub-alt threshold. This means that there are a large number of buildings, particularly URMs, that are neither seismically sound nor nearly as energy efficient as they need to be in order for Seattle to achieve its emergency management and Climate Action Plan (CAP) goals.

Two current initiatives aim to address this challenge:

The first is the 2030 Challenge Pilot Program, described above, which provides additional density to existing building owners who voluntarily commit to meeting the 2030 standards for energy consumption, water use, and transportation emissions.
The second is the ongoing effort led by SDCI and OEM and supported by a coalition of developers, preservationists, neighborhood associations, structural engineers, and other concerned stakeholders know as ASAP! (Alliance for Safety, Affordability and Preservation) to pass mandatory retrofit legislation for URM buildings requiring compliance with a set of technical standards for seismic safety along with a financing solution.Proposed Integrated Retrofit Credit Program

A critical component of both of these initiatives is the mechanism for funding the respective upgrades.

The 2030 program provides additional density that may yield future revenue to offset the capital cost of environmental upgrades. There will be many cases however, where the owner does not have the upfront capital, is under landmark/historical restrictions, or just may not want to add space to the building yet wants to fund the environmental upgrades by monetizing the bonus density.

In the case of the URM retrofit program, building owners would be required to seismically retrofit their buildings to meet defined technical standards over a period of seven to thirteen years. Unlike the 2030 program, where participation is voluntary, seismic retrofits would be mandated. To offset the cost of the retrofits the program would enable owners to finance them through the sale of density credits, as described below.

The proposed mechanism is a new Retrofit Credit (“RC”) program created through the amendment of Title 23 of the Seattle Municipal Code to establish credits that will be sold on behalf of owners of buildings that undergo mandatory seismic and/or voluntary environmental retrofits. Purchasers of these credits will apply the RCs to achieve greater density on their development/rehabilitation projects, while the sellers will be required to apply the proceeds toward seismic upgrades of their properties and/or the upgrades necessary to achieve the defined 2030 environmental goals. The life of the seismic retrofit credits will be tied to the timeline for the mandatory completion of required seismic retrofits, providing an incentive for property owners to meet the deadlines or bear the cost themselves.

Given that the 2030 program is voluntary, while seismic retrofits under the proposed legislation will be mandatory, some URM building owners may choose to only do what is required to meet the seismic standards without performing environmental upgrades. There are compelling advantages to doing both at the same time, however, since they both require removing walls and performing substantial structural modifications, including:

Reduced cost through economies of scale in construction;
Significant reduction in the period of displacement for residents and businesses;
More efficient and rational building systems design.

Therefore, the RC program, while providing for two types of RCs, is designed to provide strong incentives for URM owners to commit to doing both – yielding significant private and public benefit through the reduction in the risk to public safety and the reduced impact on the environment.

This proposed program bears some similarities to existing transfer of development rights (TDR) programs, but the current TDR market is extremely limited, only allowing development rights to be traded in the same neighborhood and sometimes just the same block. The current price of development credits is also way below the market value, currently at $15-$20 a square foot, well below the incremental value of the bonus floor area. The proposed RC program would address these issues by creating a robust market for credits that would trade at prices closer to their development value as described below.

Recommendations:

1) Create two classes of RCs – RC(S) for URM seismic retrofits, and RC(E) for 2030 environmental retrofits.

Both classes of credits would confer the same benefit, namely one square foot of bonus density per credit, but proceeds from the sale of RC(S)s could only be used for seismic upgrades and those from RC(E)s for environmental upgrades (see below). As the program unfolds and more is learned about the impact of these incentives on property owners’ upgrade decisions, the allocation of these credits could be tuned to achieve the desired mix of seismic and environmental retrofits.

2) Classify all URM and 2030 Pilot properties as “sending” lots and all other properties as “receiving” lots.

All assessed URM structures will automatically qualify as “sending” lots, enabling owners of vulnerable masonry buildings to finance essential life-safety upgrades. All of the potential 2030 Pilot projects will also become “sending” lots, allowing flexibility of how much an owner will or can add density to the building. While ideally all properties across the city, not just those within the zoning district where the URM or Pilot project “sending” lot is located, would be eligible to buy and use the credits, we recognize the challenge of adding density in certain neighborhoods.

However, we believe that there are at least three neighborhoods that can/should be in a position to absorb additional density. Specifically, the industrial neighborhoods of SODO and Interbay, and the Belltown residential, mixed use area. Based on some rough calculations, at a reasonable price per credit, allowing the sale of RCs into these three neighborhoods could provide over 60% of the cost to seismically retrofit every unmodified URM building in the City. Such a designation will be unlike traditional Landmark TDRs or Open Space TDRs, which may be transferred only within the property’s respective zoning district. Making these properties eligible to use RCs should stimulate demand and significantly expand the number of potential consumers. Under this model, a property owner in SODO, Interbay or Belltown, as a “receiving” lot, could theoretically achieve greater density by purchasing RCs from a qualified URM and/or 2030 “sending” lot in Pioneer Square.

3) Exempt all chargeable floor area for URM sending sites

to maximize the number of RCs that an owner of an assessed URM structure may sell. Such an exemption will be similar to those already applied to vulnerable masonry structures under SMC 23.48.620.C.6, or residential use under SMC 23.49.011.B.1.f, and apply notwithstanding whether the owner of the sending site has previously sold otherwise qualifying TDRs. Exempting the chargeable floor area for all assessed URM structures will allow the owner to sell one hundred percent of its development potential up to the maximum FAR. For example, the owner of a 10,000 square foot lot with a single story, 10,000 square foot building in an area with a maximum FAR of 4.5, can sell all 45,000 square feet of the owner’s development potential under the new RC program. This flexibility to sell all development potential is critical to maximizing revenue from RC sales to finance the URM policy goals.

4) Apply all RC proceeds toward funding the seller’s retrofit.

A newly formed, City-sanctioned entity would be created that would be responsible for holding and selling the retrofit credits allocated to each URM property. As a condition of allowing owners of assessed URM structures or 2030 Pilot projects to benefit from the sale of one hundred percent of their development potential up to the maximum FAR and/or any additional bonus FAR gained from the 2030 Pilot, the City would mandate that the proceeds from such sales be applied towards the seismic and/or environmental retrofit of the sending site until it is certified complete. Proceeds of the RC sales will be directed to a Retrofit Fund (“Fund”), to be administered by the entity, from which the property owners will be reimbursed for documented and validated costs of upgrades. This entity will be responsible for tracking the balance of RC(S) and RC(E) credits and the proceeds associated with the sale of either on a property-by-property basis.

5) Provide incentives for property owners to perform both types of upgrades.

In order to motivate URM building owners to go beyond the mandatory seismic retrofit and perform comprehensive environmental upgrades:

1) successful URM applicants to the 2030 Challenge Pilot Program will receive an additional 5% FAR bonus;

2) URM building owners that commit to making the upgrades to meet the 2030 goals, whether in the pilot program or not, will be granted additional RC(E) credits equal to those granted under the terms of the 2030 Challenge Pilot; and

3) the City (SCL) will form a task force that assesses URM buildings and provides priority access to energy-related rebate and subsidy programs.

6) Exempt the sale of RCs from real estate excise tax.

Because the primary purpose of the RC for URM is public safety and the 2030 RC is helping the City of Seattle achieve its CAP goals, the sale and purchase of these credits should be exempted from transfer taxes, such as the real estate excise tax, to ensure the full value of the credits may be applied to the needed seismic retrofits and/or building efficiency upgrades.

7) Allow RC receiving sites to increase their density.

Receiving sites will be permitted to purchase RCs to gain additional floor area beyond the otherwise maximum FAR and/or height limitation of the receiving site’s zoning regulation. Extra FAR or structure height available through the purchase of RCs shall be in addition to any bonus, extra, or otherwise additional floor area available according to any other provision of Title 23.

8) Provide additional benefits to RC receiving neighborhoods to mitigate impact of added density.

In recognition of the impact of the additional density on neighborhoods with receiving sites, the City will commit to investing in additional open space. The receiving site will also be required to achieve the City’s LEED Gold plus standard, which is 15% better than code, which provides an environmental benefit to the community receiving the greater density.

9) Use increased tax revenue from the “receiving” lot for
public use.

In addition to the above policy recommendations, the City and King County will enter into an agreement that will direct a portion of the increased tax revenue specifically generated by the additional density of the RC “receiving” lot to the Fund. Such an agreement between the City and County to redirect property tax revenue to address a public concern is not uncommon, as the City already receives approximately 17% of increased tax revenue from the County for projects in South Lake Union that use rural TDRs to help finance public parks and public transit improvements. In this case, the City can use the tax revenue collected from benefiting “receiving” lots to help finance the restoration of publicly-owned, vulnerable and costly URM structures by contributing these tax revenues to the Fund.

10) Grant URM structures with historic significance and/or containing affordable housing units top priority as sending sites for the purchase of RCs.

Receiving sites seeking to use RCs will need to purchase them first from a list identifying the “sending sites” as either historic sites and/or sites containing affordable housing units (in addition to being URM), until all such credits are exhausted.