How Denver will figure out what to charge developers for affordable housing

When you try to figure out how much new construction is contributing to a need for affordable housing, you get some really big numbers.
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Construction in LoDo. (Kevin J. Beaty/Denverite)

To find out how much new construction is contributing to Denver's affordable housing needs, you start with the average building size for an office or a store or a hotel and determine how many employees are likely to work there. Then you figure out how many are likely to live in Denver and how many would earn 120 percent or less of area median income and by how much their income would fall short of covering their housing costs.

What you get are some really big numbers: $5.5 million for a 66,700 square foot hotel. $4.2 million for a 75,000 square foot office building.

Then you look away from those numbers because no one (well, no one who holds elected office) wants to deal with the political and economic fallout of those sorts of fees.

And you look at how much adding a fee of a few dollars per square foot would affect the return on equity – and the ability to get financing – for new projects. Oh, that's much better.

Denver is doing this math because it needs money to pay for affordable housing programs.

Mayor Michael Hancock has proposed a major affordable housing initiative that would raise $150 million over 10 years to "create or preserve" 6,000 units of affordable housing.

The ordinance establishing the program would phase out the inclusionary housing ordinance that requires larger residential developers to make 10 percent of their units permanently affordable for 15 years.

Instead, everyone – existing property owners, commercial developers, residential developers – would pay some money toward affordable housing, and the city would use that money to expand existing housing programs and invest in new ones.

Officials think they'll get a lot more housing this way than under the old rules. That money can be used to leverage state, federal and private money to build new affordable housing. It will be distributed between housing for homeless people who have very little income and need services, "workforce" rental housing for people who work but don't earn enough to keep pace with rising prices and support for homeownership for moderate-income people.

Most of the programs will help people who earn at or below 80 percent of area median income - $63,900 for a family of four - and ensure they don't spend more than a third of their income on housing.

Denver City Councilwoman At-Large Robin Kniech speaks at a committee meeting in the City and County Building on June 8, 2016.
So who is paying how much for what?

City officials are working that out.

The property tax piece is relatively simple. The city has up to 5 mills of property tax capacity without going back to the voters, and the city is looking at an increase of up to 1 mill, or $4 for every $50,000 of assessed value.

Whether the city charges the full mill is a political decision tied up in values. Whose job is it to pay for affordable housing? How should the burden be distributed between existing owners (and the renters who cover their costs) and between developers of new projects that are changing Denver?

Enter... the linkage fee.

A fee is not a tax. You can't just slap it on whatever you want because you need money. You have to show that the fee is connected to some impact and that you're collecting money to offset that impact.

The city hired DRA Consultants to perform a nexus study, the results of which were presented Wednesday at the City Council's Safety and Well-being Committee.

The purpose of the study is to find the highest fee that could be justified legally. For businesses that employ a lot of low-wage workers, the fees could be really high, $83 a square foot for a hotel or $119 a square foot for a large retail business, while fees for manufacturing and warehouse construction would be less than $30 a square foot using the same methodology.

But the city only tested the feasibility of fees as high as $7 per square foot and Councilwoman Robin Kniech, who presented the information to her colleagues, said repeatedly that the proposed fee – whatever it ends up being – will be lower than that.

"Our goal is to find the most modest way to implement this, but we have to generate the revenue to support the affordable housing program or we won’t have the next generation of business tenants," she said. "There is a cost to not doing this."

Lots of other cities collect linkage fees. In San Diego, it's between 80 cents and $2.12 per square foot; in Oakland, $4 per square foot; in San Francisco, up to $22.42 per square foot.

Nora Lake-Brown, a principal at DRA Consultants, said the city should take claims the fees will be passed on to tenants and buyers in higher housing costs with a grain of salt. The market determines the cost of real estate, and sellers are already getting the highest prices they can, she said. Higher fees might actually push down land prices because that's where the give is.

A too-high fee, though, could discourage building or scare off lenders, which isn't really the city's goal. The analysis looked at the impact of various fee levels on return on equity for different building types and flagged anything that would put return below 8 percent on residential projects for the rental market and commercial projects and below 10 percent for residential ownership projects.

Most buildings types performed just fine – maintaining double-digit returns on investment – under all the fee scenarios. (Lower-end five-story office buildings performed terribly with or without fees, and five-story apartment buildings had narrower margins, though still "passed" in many scenarios.)

The linkage fee will be assessed and collected at the time building permits are issued. Because it's tied to new construction, the revenue generated by the linkage fee would go up and down with the economy, while the property tax levy would provide a more stable source of revenue for affordable housing. But the linkage fee also makes sure developers pay a share of the cost in a political environment where many perceive them as profiting at the expense of long-time residents.

These are VERY rough estimates, but, according to the city's calculations, if we assume the next 10 years of growth and development look roughly like the last 10 years of growth and development (again, a big IF), a 0.5 mill property tax increase and a $1.50 a square foot linkage fee would generate around $165 million over 10 years and distribute the cost equally between existing property owners and new construction. Moving the mill levy and the linkage fee up and down changes that distribution and the amount of money collected.

There are a bunch of confounding factors: Many cities exclude non-profits from paying these fees along with government buildings, but that would let hospitals – huge employers, including of many low-wage workers – off the hook. How should the new ordinance treat those properties?

And how should affordable housing projects be treated? How does the city make sure affordable housing meets the needs of families and not just single adults or that it is included in projects near transit stations? And is it fair to charge a high-end retailer in Cherry Creek and a neighborhood store in Westwood the same per-square-foot fee? Are they really having the same impact?

What happens next?

The council's Safety and Well-being Committee will see a more refined analysis and proposal at its July 13 meeting, which will include opportunity for public comment.

There's a public meeting from 6 p.m. to 8 p.m. July 21 at North High School, 2960 Speer Blvd., to talk about the fees.

The committee will meet again to take action on a fee proposal in August, and then it goes to the full City Council, where Kniech said she will ask for a public hearing at first reading.

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