Seattle is experiencing a luxury real estate boom, with thousands of new luxury residential and rental units in different stages of development. A decade from now, Seattle’s skyline and population demographics will be fundamentally altered by decisions being made today.
This boom does have benefits, providing jobs in the building trades and increasing property tax revenue for the city. But the boom poses numerous perils for a city like Seattle and is not helping address Seattle’s acute affordable housing crisis. This report encourages policy makers to look beyond the promotional hype and ask critical questions about the disruptive impact of Seattle’s luxury real estate boom.
These challenges are not unique to Seattle. In fact, the city’s existing affordable housing problem is being supercharged by global capital seeking a stable and safe haven. These are not investors looking for a home, but to use Seattle real estate as a “wealth storage unit.” This problem is much worse in cities like New York, Boston, Vancouver and San Francisco, but Seattle is attractive and not immune from these trends.
This report takes a preliminary peak at the challenges posed by Seattle’s luxury boom by looking at a snapshot of luxury condominiums and their ownership and occupancy trends. We look at eight fully sold luxury buildings to see what we can learn. From this, we encourage the city and policymakers to monitor the thousands of new luxury units in the pipeline and consider increased transparency requirements around ownership. We identified, for example, five new luxury-building projects with 1,664 units in development, most coming on market at much higher prices.
+ These 8 residential developments in our sample, totaling 1,635 residential units, have an average condominium taxable property value of $2 million. This is more than 23 times higher than Seattle’s median household income, and nearly 28 times that of the median black family’s income.
+ Across our sample, 12 percent of these units are owned by limited liability companies (LLCs) or trusts that obscure the real owners and beneficiaries, but in one building this is as high as 47 percent. Out of 1,635 residential units, 116 are LLCs and 73 are owned by trusts.
+ At the 99 Union condominium development, 47 percent of the units are owned by trusts, trustees, LLCs, and corporations. In only 19 percent of units is the owner registered to vote there.
+ The more expensive the unit, the more likely it is to be owned by a trust, trustee, LLC, or other corporate entity. We confirmed that 3 percent of the LLCs owning Seattle luxury properties have organized themselves in the state of Delaware, the premiere secrecy jurisdiction in the United States. In a great number more, we could not trace the registration to a level where we could exclude Delaware, making the 3 percent figure the “floor.”
+ To understand whether or not the units are owner-occupied, we compared property ownership to voter records. In the 1,635 units, only 39 percent of owners are registered to vote at the property, a figure nearly 40 percent lower than that of Washington State as a whole.
Higher Land and Housing Costs. The luxury building boom is driving up the cost of land in central neighborhoods, with a ripple impact on the cost of housing throughout the city and into surrounding municipalities. Affluent, but not superrich, households in Seattle find themselves pushed to outer neighborhoods, increasing competition for scarce affordable and moderately priced housing.
A More Unequal City. The luxury housing boom will exacerbate Seattle’s already extreme inequality of income, wealth, and opportunity and worsen the city’s racial wealth divide.
Wealth Storage and Phantom Capital. Luxury real estate is a form of anonymous wealth storage and exposes the city to criminal activity ranging from international money laundering to tax avoidance. The increase in cash sales and anonymous property ownership is a “red flag” of potential criminal activity. Because of this, King County was added in November 2018 to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) watchlist. Cash transactions, LLC ownership, and EB-5 fraud mark Seattle are both the result of and further facilitate Seattle’s inflated housing market.
Greening Luxury. The City has made admirable efforts on setting and achieving climate goals. But when it comes to buildings, this often takes the form of positive incentives for the most profitable developers. This represents a lost opportunity to simply increase standards and use those positive incentives subsidize less-profitable green affordable housing programs.
An Unequal Immigration Welcome Mat. Destitute asylum seekers fleeing persecution and danger are currently facing family separation and deportation. But wealthy foreign investors are buying their citizenship through the EB-5 visa program by investing in luxury properties such as the $440 million “Fifth & Columbia”, or the $190 million “Potala Tower.” EB-5 recipients receive a two-year green card and a pathway to apply for full citizenship in exchange for their cash. Nationally, the EB-5 program is notorious for its opacity as well as fraud and abuse, and this is no different in Seattle. Lobsang Dargey’s $24 million EB-5 fraud case is just one example of many abuses in Seattle wrought by a broken EB-5 visa program.
Neighborhood Apartheid. Seattle’s luxury buildings function as vertical gated communities, walling off their residents from surrounding neighborhoods and communities. Developers are even constructing privatized recreation facilities. As one Architectural Digest article about luxury buildings put it: “Who Needs a Neighborhood When You Can Have These Wild Amenities?” Seattle’s luxury condos openly advertise themselves in this way. One development, “Nexus,” even bills itself as a “vertically integrated neighborhood.”
A More Vulnerable Future. If the luxury real estate market crashes, will the people of Seattle be stuck holding the bag? After the bubble of 2008, cranes stopped in mid-air for years in luxury housing havens like New York City. What will be the impact on Seattle in the event of a global slowdown or depression in real estate? What will happen with these dozens of behemoth buildings that require extraordinary amounts of energy and maintenance? Seattle taxpayers may end up subsidizing luxury white elephants long after the developers, with profits already in their pockets, have walked away.
Recommendations
We urge the City of Seattle to monitor luxury housing activities. This report provides a window into several existing buildings. But the city should monitor the thousands of new units coming on the market and analyze their ownership patterns.
Require Municipal Disclosure of Beneficial Ownership in Real Estate. It is in the public interest to know who is buying Seattle. Seattle should require property owners, as part of recording deeds, to disclose the actual human being who owns the property. Getting a Seattle Public Library card — a task that requires full disclosure of identity and a real address — should not be more onerous than creating a shell company and possibly using criminally obtained funds to purchase a luxury condo in Seattle.
Leverage Washington’s Real Estate Excise Tax to capture more value. Global capital is flowing into Seattle and the rest of Puget Sound because of its stable and appreciating market, public investments, and other public and cultural amenities. In April 2019, the Washington state legislature revised the Real Estate Excise Tax, creating a progressively tiered system and enabling cities and counties to levy a local option for affordable housing and homeless services. Prior to this action, only six states had a progressive real estate excise tax structure.
Institute a Vacancy Tax and Ordinance. Seattle could discourage high-end vacant properties by taxing buildings that sit empty for more than six months a year. We can learn from other jurisdictions such as neighboring Vancouver that have created incentives to use their city’s housing stock to house people, not wealth.
Require New Buildings to be Carbon Emissions Neutral. All future luxury properties should be state of the art “net zero carbon emissions” green construction, not requiring any additional fossil fuel inputs.
Support State and National Transparency Policies. Seattle should be back Washington Attorney General Bob Ferguson and his partnership with other attorney generals around real estate ownership transparency as well as other national efforts to increase oversight of potential criminal activities. We should join national efforts to scrutinize the weak corporate transparency laws in Delaware.
