by Robert Davis
As a part of the city’s effort to spur development of affordable housing, which would drastically increase density in Denver, lawmakers are developing a pilot project to financially incentivize developers who build affordable and mixed-income units in Denver’s high-cost submarkets like Capitol Hill and Cheesman Park.
The pilot was developed by Community Planning and Development (CPD) and the Office of Housing Stability (HOST) to test the feasibility of offering incentives, like reductions in permitting fees, to support affordable housing projects that align with Denver’s Comprehensive Plan 2040 and Blueprint Denver, both of which provide recommendations to create a more expensive zoning code.
“Our goal with this pilot program is to identify ways we can help support critical projects that share our priorities of providing deep affordability as well as taking action to address climate change,” Laura E. Aldrete, executive director of CPD said in a press release.
However, some developers are unconvinced the plan would align supply-side and demand-side economic goals, especially when it comes to developing affordable multifamily units.
“It seems backwards,” said Jim Welland, a developer with Pallisade Partners, which sits on the city’s advisory committee for the plan. “The development costs in ‘high-cost’ submarkets are higher, which makes it difficult to develop more affordable housing. The goal could be met, but the incentive needs to be higher to match the costs.”
The plan is designed to work alongside other efforts such as the Group Living Proposal and including racially-sensitive language in the city zoning code. However, Annaliese Hock, the city planner in charge of developing the plan, said Denver residents should tamper their expectations because the plan is just one tool in Community Planning and Development’s (CPD) toolbox.
“We understand there are a lot of issues with the city’s zoning code that CPD is working to address. But, this plan shouldn’t be thought of as a one-size-fits-all solution. It’s just one tool we can use,” Hock said.
Incentives
Denver utilizes several zoning incentives to attempt to bolster its affordable housing stock. One example is allowing developers to add additional height to their buildings in exchange for affordable units in the development. The goal is to cross-subsidize the affordable units with the added square-footage.
Two others include inclusionary zoning ordinances and linkage fees.
But, these efforts have not produced the effect the city intended. Denver replaced its inclusionary housing ordinances (IHO) in 2016 with the Affordable Housing Fund. According to CPD, IHOs were the city’s “primary tool to facilitate home ownership opportunities of workforce housing” for people earning between 50 and 90% percent of average median income.
However, its new tool has proven to be far less effective in incentivizing the development of affordable units. The fund partially consists of linkage fees, a mechanism that “links” market-rate development with affordable and mixed-income housing. For example, developers may pay up to $1.61 per square-foot for a multi-unit commercial building versus just $.65 for a multi-unit residential complex based on the project’s building type. These fees are adjusted for inflation in an amount equal to the percentage change from the previous year in the national Consumer Price Index for All Urban Consumers.
The fund is designed to provide supplementary capital for affordable housing development projects that serve families earning 80 percent or less of the area median income (AMI) in 2016. According to the City’s website, “the fund is estimated to raise $150 million over the next 10 years to create or preserve 6,000 affordable homes for low- to moderate-income families.”
But, developers are not always required to pay the linkage fee, causing the fund’s revenue to vary greatly year-over-year. Single-family or duplex additions of 400 gross square feet or less, accessory dwelling units (ADUs), affordable housing, and rebuilding due to catastrophic events are exempt. Developers who build affordable units within a quarter-mile of a development without affordable units may be exempt as well.
As a result, the Affordable Housing Fund exempted “far more projects than originally anticipated,” according to a CPD study. In 2017, linkage fees generated just over $6 million for the fund. This sum grew to over $20 million in 2018. CPD currently projects the city to accrue $10 million from linkage fees in 2020.
Supply And Demand
Even with these incentives on the books, Denver has a hard time getting developers to build affordable multifamily units, primarily because the ratio of building costs to a project’s potential return don’t add up.
For example, granting developers height waivers to build above a maximum zoning height in exchange for affordable units often discourages development because of the extra associated construction costs.
According to the International Building Code, buildings taller than five stories must be built with steel frames. Since mid-March, the price of lumber has doubled and the price of steel has increased 10 percent.
On top of that, Denver’s increasing minimum wage and land values increase the risk for investors who back affordable housing projects. According to research by Realtor.com, the average land value in Denver is over $489,000. Coupled with increasing material and labor costs, developers say building multifamily affordable housing units is not a good investment.
The result is that over 75 percent of Denver’s affordable housing development goes toward building studio and one-bedroom units, according to data from CPD.
While the current pilot also includes incentives for developers based on the value of the land being developed, CPD says it does not have the ability to accurately track land value fluctuations in real time, making it nearly impossible for the incentive to have any real-world application.
“We need to consider that in the high-cost areas the different market rate and affordable thresholds is higher. Therefore, the incentive needs to be higher to account for the difference,” Welland said.
A Success Story?
As CPD and HOST continue to refine the pilot, they point to the 38th and Blake Overlay project as evidence of the plan’s success.
The project began in 2018 and provided developers height incentives that allowed buildings to stretch up to 16 stories in some areas of the Five Points, Globeville and Cole neighborhoods near the RTD A Line in District 9.
It brought 36 affordable units to the area, but spurred the growth of several office buildings, further increasing property values and tax assessments in the neighborhood. This led some to contend the project accelerated displacement and gentrification in the area.
“The affordability ‘incentive’ is unlikely to be utilized as the up-zone is substantial enough without the height incentives, and the most we can expect of the entire rezone is less than 100 affordable units,” District 9 representative Candi CdeBaca told Denverite at the time.
Since being elected in 2019, CdeBaca has committed herself to undoing Denver’s strategy to build its way out of its housing crisis. CdeBaca supports moving away from linkage fees toward the inclusionary housing ordinances of yesteryear. She also supports charging developers fees upwards of 10 percent to support affordable housing and restricting property tax increases for a given cycle.
“I think right now is the best time to tax the big builders, tax the corporations in a way that creates the padding for us to execute the plans,” she said.