CB council moves toward $10 million debt for housing

Seeking analysis on construction cost differences…

By Mark Reaman

While not being able to obtain as much capital as originally intended and thus not being able to construct as many units as originally thought, the Crested Butte town council agreed Monday to begin the steps to issue $10.1 million in debt to construct 17 units of affordable housing in Paradise Park and near the Gas Café over the next three years. A public hearing and second reading of an ordinance entering into a so-called Certificate of Participation (COP) will be held at the April 15 council meeting. 

Before that hearing, the council also wants to see a financial analysis of why affordable housing construction costs are so much more in the North Valley. The project is expected to come in at about $550 per square foot while the county’s Sawtooth housing project is coming in at $340 per square foot.

The town’s vacant lots in those two areas would allow for 32 workforce housing units. Earlier this year the town had expected to be able to issue a $12 million, 20-year tax exempt bond that would pay for 20 units. Upon consultation with municipal finance firm Stifel Municipal Finance and bond counsel Butler Snow, the direction changed to instead pursue the COP. Crested Butte housing director Erin Ganser said the COP worked better as a financing mechanism given the significant interest rate increases over the last three years and it is not subject to state TABOR (Taxpayer Bill of Rights) restrictions. 

Ganser also said that under the parameters set by voters in 2021, a bond could only borrow $8.9 million so the COP allows another $1.2 million in capital.

Under the COP, the town will be obligated to repay $600,000 annually for 30 years with an interest rate of 4.259%. If carried for the entire 30 years, that would result in a repayment of $18 million. But the town could refinance or consider selling some of the units after 10 years if interest rates improve. The loan would be guaranteed by offering town-owned property, like the town hall, as collateral. In a report to the council, Ganser said Gunnison County has used the COP financing mechanism successfully for several projects and, for example, the courthouse was used as the collateral.

Construction would take place over three years in two phases. The first phase would include nine units and is expected to be fully rented in 2025. The eight-unit phase two would be fully leased in 2026. Some general or capital fund money will also be needed to subsidize the early repayment before rents start coming in to help pay the debt. It is anticipated that rents will be in the 80% to 100% area median income (AMI) range. Ganser said that if the Town is successful in securing grant funds from the Department of Local Affairs, the units will have income restrictions at 140% AMI. When sold, the units would be targeted to members of the local workforce who earn 140% AMI and below.

“This approach produces the most housing units in the shortest period of time while preserving the town-owned land (that can accommodate 15 more units) as a resource for future development of deed restricted housing,” Ganser’s memo to the council concluded. “Additionally, assuming the sale of units over time, the total fiscal impacts are cash positive, and these units can be transitioned from rental to home ownership when the COP is refinanced or paid off.”

With the coming Mineral Point affordable housing apartment complex starting this year, the action will consume pretty much all of the town’s affordable housing budget so there will be no money for things like the Green Deed or Good Deed programs. This made some of the town council uncomfortable. Councilmember Kent Cowherd wanted to know the earliest the town could recoup some of its investment to perhaps fund the Green Deed-type programs. Ganser said it would be 10 years.

“I don’t like losing the ability to fund the Green Deed program and things we’ve talked about a lot,” said councilmember Jason MacMillan. “But I don’t see an alternative.”

“So, in 10 years we can relook at the interest rates and possibly refinance?” asked councilmember Gabi Prochaska. “The 30-year timeframe straps that money for a very long time. Hopefully we can sell some sooner.”

Ganser said depending on financial circumstances at the time, it would be possible after the first decade to have the town collateral released and some units could be sold.

Councilmember Mallika Magner expressed frustration with being “blindsided” by the rising cost of building such projects.

Mayor Ian Billick asked town staff to compile an analysis of the construction costs associated with the project. He noted the lower per square foot cost of the county’s Sawtooth housing project. “From a due diligence side, we should understand the costs. Is it regulatory? Is it because of the design,” he said. 

“These are expensive units so I agree with that,” said councilmember Beth Goldstone. “At $10 million, that’s $588,000 per unit and more with the interest. That is a lot of money. I’m getting a lot of questions so that analysis would be helpful.”

Cowherd asked if there was any history of a COP failing and a town losing the collateral. Dalton Kelley of Butler Snow said it only happened once in an unusual circumstance in Sheridan, Wyoming in 1997. 

Town attorney Karl Hanlon, who represents several other Colorado government entities, said the COP is as common as issuing bonds. “It is becoming the norm,” he said.

“The real question I see is the opportunity cost,” said Billick. “I don’t see us having a problem making the payments, but we are giving up other things like Green Deed. Something like the skatepark project we just did wouldn’t probably happen.”

Councilmember Anna Fenerty said the units would be expensive when sold and had concerns they wouldn’t really qualify as being affordable. Ganser had roughly projected the town could get $12 million for all 17 units if sold after 30 years.

“When they sell, the intention is that they would still be deed restricted,” said town manager Dara MacDonald.

Billick emphasized that the town would be subsidizing a financial gap no matter what in order to keep them affordable. “How much depends on interest rates and the numbers in 10 years,” he said.

Fenerty admitted she was somewhat “uncomfortable” with the situation since a future council could sell the units and they might not be affordable in 30 years.

A future council could indeed change the restrictions, admitted Ganser.

“We need to think about other projects like transit,” said MacMillan. “We have a lot of work to do that will take money.”

“It’s expensive but the housing situation is urgent,” said Billick. “It keeps the project moving and there is a premium for getting housing in the town. I don’t see us getting more units with the other mechanisms. I too wish interest rates were lower and construction costs were lower.”

“Not being flexible for 30 years gives me pause,” said Prochaska. “But to Anna’s point, at least if a future council sells them at, say, market rate, the money earned comes back to town.”

“The cost of the units in incredibly high but barring a way to bring down interest rates and construction costs this is the best alternative at the moment,” said Goldstone.

“The Fed keeps talking about lowering interest rates,” noted Magner.

“That is hard to predict,” responded Ganser. “And construction costs keep going up. Will waiting a month make a difference? Will a year make a difference?”

Council voted 6-1 to set a public hearing on the issue at the April 15 meeting. Fenerty voted against the motion. Billick reiterated his desire for council to have at least a draft analysis on the construction cost differentials before the public hearing and second reading of the ordinance.