Seattle Property Owners Challenge Program That Charges 'Affordable Housing' Fees for Building New Homes

A new lawsuit alleges that the city's Mandatory Housing Affordability program unconstitutionally penalizes property owners just for trying to build housing.

Seattle property owners are once again suing the city over affordable housing fees they're required to pay just for adding an additional home on their properties.

Married couple Mehrit Teshome and Rocco Volker want to redevelop their single-family home into a smaller duplex and accessory dwelling unit. Local builder James Vert would like to construct four townhomes on his property.

The city's zoning code allows them to do this. But its Mandatory Housing Affordability (MHA) program would require them either to make two of their new units rent-restricted affordable housing or otherwise pay hefty affordable housing fees—roughly $36,000 in the Volkers' case and $126,000 in Vert's.

The MHA was created as a "grand bargain" between large developers, affordable housing groups, trade unions, and other stakeholders. Its "dual-approach" to housing supply allowed developers to construct larger residential projects across dozens of city neighborhoods. In exchange, projects in these upzoned neighborhoods would have to include rent-restricted affordable housing units or pay into an affordable housing fund.

Like other "inclusionary zoning" policies, Seattle's MHA program acts as a tax on new housing supply. Builders must absorb the costs of money-losing below-market-rate units into their projects.

A recent city-commissioned report found that the MHA's affordability mandates were acting as a "small but important" headwind on housing supply in Seattle's challenging building environment.

The Volkers and Vert assert in a new federal lawsuit that these mandates are not only financially burdensome but also unconstitutional.

"Seattle is taking the land use permitting process as an opportunity to extort land owners," says Suranjan Sen, an attorney with the Institute for Justice, which is representing the property owners. "Land use permitting demands are supposed to represent a public impact or harm mitigation. It's not supposed to represent the city's attempt to get something out of the land owner."

Their complaint, filed in the U.S. District Court for the Western District of Washington, asks that the court strike down the MHA's affordable housing mandates as an "unconstitutional condition" on the use of their property.

For decades, Seattle has had "incentive zoning," whereby developers could get permission to construct more units than what the zoning code allowed in exchange for providing affordable units—i.e., units reserved for lower-income residents where rents or sale prices were capped at below-market rates.

In the face of quickly rising housing prices, the city of Seattle, major developers, and affordable housing groups agreed to a framework that would make this system automatic and mandatory.

Under this agreed MHA framework, the city would proactively upzone dozens of neighborhoods, allowing developers to build larger projects "by right"—relieving them of the need to ask for special permission to build larger projects.

In exchange, any builder of a residential project that added new housing units would be required to include affordable units or pay in lieu affordable housing fees.

The MHA framework was officially adopted by the city council in 2016. Its paired upzonings and affordability mandates were applied to the city's downtown in 2017. This was followed by "citywide" MHA implementation affecting 27 "urban villages" in 2019.

The city's MHA program was, as the name "grand bargain" would suggest, at its core a political compromise. Affordable housing groups and trade unions agreed to support city-wide upzonings. In exchange, large developers agreed not to challenge the new affordable housing mandates in court.

This compromise held up well during the first years of the MHA's implementation. As the city-commissioned report describes, Seattle's booming real estate market from 2017 to 2019 offered developers "unprecedented favorable conditions."

But with the pandemic came falling demand, higher interest rates, tightened building codes, and ballooning construction costs.

The city-commissioned report says that these conditions by themselves are enough to render most development financially infeasible. Were market conditions to improve, however, the MHA's affordability mandates would become a more significant headwind in of themselves.

"When the modeled return on investment is closer to the 'go or no-go' threshold, the impact of MHA fees can be significant enough to prevent a developer from proceeding with a project," reads the report.

In any environment, the MHA would fall most heavily on the one stakeholder group that was not a party to the "grand bargain": smaller property owners and builders sponsoring smaller projects.

Most inclusionary zoning policies exempt smaller projects, the logic being that a duplex or garden apartment is less able to absorb the financial burden of affordability mandates.

Seattle's MHA program is atypical in that it does not exempt smaller projects. Even a development that adds just one unit of housing can be required to pay fees or include an affordable housing unit.

The Volker and Vert complaint argues that, at any threshold, the MHA's affordability mandates are unconstitutional.

The U.S. Constitution's Fifth and Fourteenth Amendments prevent the government from taking private property unless it's for a public use and the government pays just compensation.

Past U.S. Supreme Court rulings have said the government is engaged in a taking when it requires a property owner to turn over property or money as a condition of getting a land use permit.

To prevent governments from coercing property owners out of their property via the permitting process, the U.S. Supreme Court created the Nollan-Dolan test, named after the two Supreme Court decisions it is derived from.

The Nollan-Dolan test limits the government to only conditioning land use permits on conditions that bear an "essential nexus" and "rough proportionality" to a project's public impact.

The Supreme Court's decision in last year's Sheetz v. County of El Dorado affirmed that this test applies to categorical permit conditions created by local legislatures and not just ad hoc conditions created by local administrators.

The Volkers and Vert assert that because their construction of new housing does not make housing less affordable (in their complaint, they contend the additional supply makes housing more affordable), the city's MHA mandates fail the Nollan-Dolan test.

"None of the Plaintiffs' projects, nor any other project to which MHA-R [Residential] applies, would substantially impede any low-income person from accessing housing. Therefore, MHAR's demand did not share an 'essential nexus' with their projects' public impacts, nor will it share an 'essential nexus' with their future projects' public impacts, or with any other project's public impacts," reads the complaint.

Courts have generally been loath to strike them down on Nollan-Dolan grounds. In 2019, the U.S. Supreme Court declined to take up a lawsuit challenging a local California inclusionary zoning policy that the state courts had upheld.

In 2024, the U.S. District Court for the Western District of Washington dismissed another Seattle property owner's challenge to the MHA program on procedural grounds.

The court ruled that because the property owner, Anita Adams, had not sought an administrative waiver from MHA mandates, she could not proceed with a facial constitutional challenge to the law.

Adams, who is also being represented by the Institute for Justice, appealed the district court's dismissal of her case to the 9th Circuit Court of Appeals. It's scheduled to hear oral arguments in September.

Sen says that Adams' case could drag on for years. He says filing a second lawsuit gives the courts an opportunity to decide the constitutional merits of Seattle's MHA program more quickly.

"Even if we win, which we are optimistic that we're going to win, these things just take so much time," Sen tells Reason. "Meanwhile, every single day, the city of Seattle is extorting property owners across the whole city and in the process making housing more unaffordable for everyone."