A proposed 24-unit mixed-income townhome development in Five Points is a drop in the bucket when it comes to addressing Denver’s affordable housing shortfall. But the project illuminates a very real challenge of building for-sale housing within reach of those who make less than area median income.
Tremont Place Townhomes will feature 16 market-rate units and eight affordable units in a row home-style development at 22nd Street and Tremont Place. The market-rate units will start in the mid-$500,000s, while the income-restricted units must be affordable to households earning no more than 80 percent area median income or AMI.
In Denver, that is $64,100 for a family of four, meaning the three-bedroom units can sell for no more than $248,959, according to U.S. Department of Housing and Urban Development income limits and Denver Office of Economic Development guidelines.
The problem: That’s less than what it will cost developer Boxcar Denver to build them.
“It’s very challenging to develop affordable for-sale housing, particularly larger family units as we are going to see with this development,” said Ryan Tobin, director of real estate development for the Denver Housing Authority, which owns the land. “Quite frankly, the cost of building is almost as high if not higher than what you can sell them at.”
The project penciled out because of a creative financing agreement between the DHA and Boxcar, Boxcar president Brad O’Neil said. The housing authority agreed to provide 100 percent seller financing for the land sale and will be paid back with interest as the units are sold.
In return for seller financing, Boxcar has agreed to reinvest the profit it would have paid to the capital partner it needed to buy the land upfront back into the property to build a total of eight affordable townhomes, O’Neil said. The DHA’s affordable housing plan for the property required just two units.
“I’d love to be able to replicate this with other transactions,” O’Neil said. “There is such pressure on providing affordable housing.”
By O’Neil’s rough estimate, his direct construction costs for the affordable units will be $270,000 a pop, including the insurance related to construction-defect issues.
Add in the land and the “soft” costs of financing, design and engineering, and the all-in cost sails north of $370,000 per affordable unit — or about $120,000 above the maximum price at which O’Neil can sell the income-restricted three-bedroom townhomes.
“There has to be something that fills that gap,” O’Neil said. “The traditional method is to go out and get subsidies. I was just trying to figure out a creative way to do it on a market basis. This is one way to do it.”
(The all-in costs for the market-rate units, not surprisingly, are estimated to be “substantially higher,” O’Neil said, because of lot premiums and the cost of high-end finishes including granite countertops, hardwood floors and stainless steel appliances.)
By using seller financing from the DHA, Boxcar was able to fill the gap and build more affordable units than required, O’Neil said.
It works, he said, because if Boxcar doesn’t have to pay for the land upfront, it also doesn’t have to bring on a capital partner, a partner that would expect a not-insignificant return on its investment on the back end.
And without that capital partner in the mix, the profit from selling the 16 market-rate units will subsidize a total of eight affordable units, with enough left over for the project to make financial sense for Boxcar.
The Denver Office of Economic Development publishes an annual list of maximum sales prices for income-restricted for-sale homes.
Any affordable for-sale unit developed under an agreement between the city and a third party is subject to the caps, according to a city spokesman. That includes the now-sunsetted Inclusionary Housing Ordinance, rezone agreements or large-scale development agreements.
In determining the maximum prices, the city operates on the basis that no more than 30 percent of household income should go toward housing costs, an industry standard for affordability. HUD area median incomes, HOA fees, insurance costs and current interest rates are also considered.
At 80 percent AMI, that puts the current cap at $170,561 for a one-bedroom unit, $220,041 for two bedrooms, $248,959 for three and $262,822 for four.
“I haven’t seen a lot of developers sell for less than the published prices in this market,” said city housing program manager Doug Selbee.
In the case of Tremont Place Townhomes, a city affordable housing plan on the property triggered the price cap, city officials said. The DHA recorded the plan as a covenant to ensure at least 10 percent of all units built were affordable.
The property is one of five development sites that the DHA set aside years ago for affordable for-sale housing as part of its Park Avenue/Benedict Park Place HOPE VI redevelopment, Tobin said.
Since 2004, the DHA has completed multiple phases of mixed-income rental housing in the area but the economic downturn delayed the for-sale component until recently, he said. (The housing authority only develops rentals itself.)
Tremont Place Townhomes is not the first for-sale project for which the DHA has provided seller financing, but Tobin said it is, by far, the largest deal in recent history. The board of directors has already signed off on the concept, but details of the low-interest deal still need to be ironed out.
To protect DHA interests, the land will not change hands until the project is construction-ready and deed restrictions will ensure long-term affordability of the income-restricted units, he said.
“We’re always looking for unique tools that can advance affordable housing,” Tobin said. “This is just one way where we’re able to be patient on some proceeds to create the opportunity for the qualified buyers we’ll be seeking.”
Boxcar expects to break ground on the project this fall, with delivery scheduled for late 2018.
The affordable units will have three bedrooms, while the market-rate units will have two bedrooms plus a guest/bonus room. All 24 units will be three stories with a rooftop deck and access to community solar-powered electric cars.
Every developer needs to take a serious look at how they can provide affordable housing, O’Neil said.
“Just because it’s not required doesn’t mean you shouldn’t do it,” he said. “I used to live in San Francisco. I know the high cost of housing drives families further and further out from the urban core and makes it difficult to sustain an economy. I see the trajectory of Denver right now. I don’t like seeing more and more families priced out of the market.”
