Presales, middle income rentals, using reserves
By Mark Reaman
Rising construction costs along with rising interest rates have thrown a bit of a wrench into the finances of Crested Butte’s proposed workforce housing projects on TP-3 at Sixth and Butte and the build-out of the town-owned parcels in Paradise Park. As a result, the Crested Butte town council on Monday, November 7 indicated they were ready to take some steps that reduce project risk, bring in some upfront cash and expand who might be renting some of the deed restricted units while continuing forward with the project.
Unlike market rate development, affordable housing developments cannot simply raise home prices to offset higher construction and interest costs. Sales prices are capped to help ensure that the housing is affordable, and that the buyer’s monthly housing costs do not exceed 30% of a household’s income, a metric that is set by HUD. As monthly interest payments increase, the sales price has to go down to stay within affordability limits. The double hit of higher construction costs and lower home sales revenue has resulted in a $8.4 million gap on what is estimated to be an $18 million project. The initial gap was estimated to be about $1.3 million.
Crested Butte housing director Erin Ganser indicated to council that that there are numerous strategies to close the gap.
Council agreed to determine if there was serious interest in preselling 10 of the approximately 30 units in Paradise Park and the so-called TP-3 parcel to governmental or quasi-governmental entities like Mountain Express, the local school district, fire district or Gunnison Valley Health. Staff indicated preliminary conversations with such partners resulted in the likelihood that 10 potential presales were probable.
Council is also amenable to allocating two parcels containing approximately six units to High Mountain Concepts, the selected general contractor of the development. Those parcels would be deed restricted as workforce rentals but would not have income restrictions. HMC is doing similar housing in Gunnison, particularly at the Lazy K and Van Tuyl developments. HMC would be given the land and fees would be waived so those units could be built affordably and rented to middle income earners.
The council agreed that the town was willing to fund construction on the project to avoid big interest charges and subsidize between $2 and $2.5 million of the project out of the town’s general fund reserves. The town staff said the fund balances were hefty enough to absorb that draw down.
Mayor Ian Billick said the town reserves were sitting in the bank gathering low interest rates so this could be a better place to invest public money. He also noted that the excise tax on vacation rentals is expected to bring in between $750,000 and $1 million annually so it could pay off that subsidy relatively quickly.
John Stock of High Mountain Concepts said another way to bring down the money gap was to build smaller units. “They can be designed to fit what is needed and reduce the space. Not every house needs a big sitting room,” he said. “We found it was hard in Gunnison to sell the three-bedroom units. People want smaller places. Our 600-square-feet houses were our fastest sellers.”
“Because we are using public money, they not only need to end up being affordable but not including income limits in the deed restriction is troubling to me,” expressed councilmember Mallika Magner.
Town manager Dara MacDonald reinforced town attorney Karl Hanlon’s position that the council could control the deed restriction on every unit but Stock, or whoever the developer was, might not then be interested in building and managing them.
Stock emphasized every unit would include a deed restriction for workforce housing. “But there are issues with every income level. The hospital wanted to buy four units at Lazy K but the deed restriction states the places have to be occupied by people making less than 140% of AMI. There aren’t the people that make under that for GVH to put in there. So we are talking to the city about adjusting the restriction.”
“I’ve seen it at the school where there is a need for higher income rentals,” said councilmember Beth Goldstone.
“As people in senior management positions retire, they won’t be leaving their homes so there isn’t much of an available market for such renters,” said Ganser.
Magner still expressed concern about not including income limits as part of the deed restrictions.
“Higher income workers can’t find housing either,” said councilmember Gabi Prochaska.
“I personally know people making more than 200% AMI that are housing insecure,” said Billick. “There seems to be a need for rentals for all income levels.”
“But this would allow a surgeon coming to town that makes $500,000 to rent a unit,” said Magner.
“Technically, yes,” responded Ganser. “But the idea in that case would be that it provides a landing pad and that too is valid. Most people then want to move on and buy something. I am worried we can get too worried about people gaming the system when the research shows it doesn’t happen.”
“I want to avoid reducing the square footage to the point density is lost through fewer bedrooms,” said councilmember Jason MacMillan.
“The bed count or unit count wouldn’t change,” assured Stock. “But you can make decisions based on the economics of what you are trying to achieve.”
“Maybe with smaller square footages you could build more units?” asked Billick.
“We would love that, and it is possible in some cases,” said Stock.
As for preselling some units, there was some concern that having a person’s housing tied to specific employment was not the best scenario. This was a particular concern of councilmember Anna Fenerty.
While agreeing with the concern, Billick said presales were an extremely cost-efficient way to get the project moving. “Given the financial gap, I’m a fan of presales,” he said. “I’d be comfortable with 15 of them if the demand was there.”
Councilmember Chris Haver said he did not want to be in the position of selling the units to private businesses like the town did with some Paradise Park units. “But I like the idea of having rentals for those type of essential jobs whether it be for entities like the school or the hospital,” he said.
Selling to governmental or quasi-governmental entities basically means the units go to essential workers,” said Ganser. “And there’s more of a compliance process involved with tenants than with private businesses.”
Magner and MacMillan said based on the interest and follow through at the latest Paradise Park housing development, there was some concern the town might build the units and no one would want to live in or purchase them if a recession hit the area. Stock suggested since no one had a crystal ball to predict the future that slowly phasing in the units was the best option.
Town staff will bring a predevelopment agreement with HMC to the town council at the next meeting on November 21. Ganser said that agreement will outline high level deal points for the project and confirm that town will fund predevelopment and construction costs.
The preliminary development schedule includes a community open house to share preliminary designs in mid-January and submittal of the designs for the first set of buildings to the Board of Zoning and Architectural Review (BOZAR) at the end of January. The first phase of construction is expected to start in May 2023.