HomeMy WebLinkAboutCOUNCIL - AGENDA ITEM - 02/09/2016 - CONSTRUCTION DEFECTSDATE:
STAFF:
February 9, 2016
Tom Leeson, Director, Comm Dev & Neighborhood Svrs
WORK SESSION ITEM
City Council
SUBJECT FOR DISCUSSION
Construction Defects.
EXECUTIVE SUMMARY
The purpose of this item is to provide information on Colorado's construction defect laws and the various issues
surrounding construction defects and to provide a summary of a recent legislation at the local level throughout the
state, as well as some options for the City of Fort Collins.
GENERAL DIRECTION SOUGHT AND SPECIFIC QUESTIONS TO BE ANSWERED
1. Would the City Council like to proceed with local legislation addressing the construction defects issue?
2. Are there other actions the City Council would like to take to address the construction defects issue?
BACKGROUND / DISCUSSION
Colorado’s Construction Defect Action Reform Act (C.R.S. § 13-20-801, et. seq.) (“CDARA” or “Act”) is a provision
of Colorado law that governs all claims and litigation where a party is claiming construction defects. CDARA was
passed by the Colorado General Assembly in 2001, and amended in 2003, with the intention of curbing frivolous
lawsuits affecting the construction industry and limiting the liability of construction professionals. CDARA governs
all actions in Colorado (including arbitration) brought against a “construction professional” that assert a claim
“caused by a defect in the design or construction of an improvement to real property.” Since CDARA defines
“construction professionals” as “an architect, contractor, subcontractor, developer, builder, builder vendor,
engineer, or inspector performing or furnishing the design, supervision, inspection, construction, or observation of
the construction of any improvement to real property,” CDARA is not limited to only those parties actually
performing physical construction; it governs claims against nearly everyone involved in the construction process.
In October 2013, the Denver Regional Council of Governments (DRCOG) published a comprehensive Denver
Metro Area Housing Diversity Study, which sought to identify factors influencing attached-housing construction
trends in the Denver metro area.
According to DRCOG, out of a total of 8,545 housing units under construction in downtown Denver at the time of
the study, only 193 units were for-sale product. The study also noted that there were no for-sale unit permits
issued for downtown Denver in 2012 and in 2013 by the time of publication. In its market study, DRCOG
estimated that because of additional costs related to construction defects, developers need to pay approximately
$15,000 more per unit for a condominium project than an apartment building, reducing the profitability of such
projects and making more affordable condominiums less viable for developers. DRCOG adds that in industry
interviews many national builders said they were no longer pursuing condominium projects in Colorado because
of the increased costs and heightened risk of litigation.
DRCOG's conclusions suggest that the most significant impact on the construction of for-sale attached products
has come from costs related to construction defects litigation. It notes that most developers believe that the
probability of being sued for a construction defect in Colorado is near 100 percent for projects involving an HOA.
DRCOG also states that construction insurance costs have grown significantly since the passage of HB 10-1394
as multiple carriers have left the state, although insurance company concerns over their ability to offer policies in
the Colorado contractor liability market appear to stem back further than the enactment of the bill.
February 9, 2016 Page 2
Construction of Owner-Occupied Units in Fort Collins
The lack of construction of owner-occupied multi-family units in Fort Collins is similar to Denver and other
communities in Colorado. The following table shows the number of residential units issued permits since 2005:
February 9, 2016 Page 3
February 9, 2016 Page 4
Colorado Communities with Construction Defects Ordinances
The City of Lakewood was the first Colorado municipality to adopt legislation intended to encourage construction
of “for sale” multifamily projects by mitigating the risks to developers and builders associated with construction
defect litigation in October of 2013. Since then, a total of nine municipalities have adopted construction defects
legislation.
The Town of Parker and City of Arvada passed local ordinances that only require a note to be added to the multi-
family plat that requires mandatory arbitration of construction defects claims if such a note was requested by
owner/developer. Arvada’s ordinance also requires that a disclosure be provided to the initial prospective
purchaser of the existence of the plat note requirement.
Effect of Local Legislation
At this time, it is unknown whether or not the multitude of local construction defects ordinances may be effective
to address the municipal interests articulated as the basis for their enactment, which appears to be primarily the
construction of more affordable condominium housing within the respective communities.
In addition, no information is currently available regarding the impact of such local ordinances on the costs related
to construction defects litigation, including availability and cost of insurance, which are considered to be an
economic impediment to construction of for-sale attached housing products (condominiums).
Finally, the legal viability of such local construction defects ordinances remains untested at this time.
Many municipal legal experts have suggested that local construction defect ordinances altering builder or unit
owner remedies would not survive a preemption challenge by the State, in view of the legislative intent of the
General Assembly in enacting CCIOA and CDARA. The State has declared construction defect resolution to be
an issue of statewide concern, and has enacted a body of legislation intended to be the exclusive rule of law on
the subject. The municipalities in adopting local provisions have cited the need to address discrete and unique
local impacts of state construction defect policy by the use of their home-rule authority.
Even without a local ordinance on the subject, the Villagio case noted above highlights self-help options available
to developers/builders that have only recently (May, 2015) been validated under state law, including recording plat
notes and covenant provisions that require arbitration of construction defect claims and prohibit modification of
such requirements by unit owners without the developer’s consent. If broadly adopted by developers, exercising
these options may provide a more sustainable solution than can be achieved by a municipal ordinance that is
subject to legal challenge on the basis of State preemption.
Legislative Review Committee
The LRC reviewed the attached Construction Defects White Paper on January 19, 2016 and provided direction to
proceed with a Construction Defects ordinance that addresses issues similar to the recently adopted City of
Denver legislation and similar to Option #2 below.
Direction was also provided to engage development community to provide education on existing self-help options
including the ability to record a plat note requiring binding arbitration prior to filing a lawsuit, and to continue to
work with state legislation to address construction defects law.
Additionally, the LRC requested information on construction defects legislation in other states and the impacts on
the housing market.
During the 2015 regular legislative session, the Florida Legislature made several key revisions to Florida's
Construction Defect Statute. These amendments, which became effective on October 1st, significantly
altered some of the provisions of the statute, which sets forth a procedure and numerous requirements for
an alternative method to resolve construction disputes prior to litigation.
February 9, 2016 Page 5
On June 17, 2015, Texas adopted amendments to the Texas Uniform Condominium Act by requiring
condominium unit owners’ associations to take specified procedural steps prior to initiating a construction
defect or design lawsuit or arbitration.
Arizona, Washington and Nevada are also looking to amending their construction defects legislation.
The impact of construction defects legislation on the housing market in other states has been difficult to find,
particularly at the state level The most relevant data point found was the 2013 DRCOG study referenced in the
white paper titled: Denver Metro Area Housing Diversity Study (Attachment 2).
Options for Fort Collins
1. Amend Land Use Code to require developers of owner-occupied multi-family housing projects
(condominiums) to record a Plat Note requiring binding arbitration prior to filing of lawsuit (similar to Arvada &
Wheat Ridge).
2. Adopt an ordinance similar to ordinances of Denver, Lakewood, and Littleton that:
a. Requires notification of defects and enhanced right to repair;
b. Prohibits the amendment of the governing documents to remove provisions requiring alternative dispute
resolution of construction defect claims;
c. Requires notification of homeowners of association legal action and majority vote of consent.
3. Engage development community to provide education on existing self-help options available under the
Villagio case noted above to determine whether such options may increase development of affordable owner-
occupied multi-family housing projects.
4. Take no action locally, but continue to work with state legislation to address construction defects law,
including cooperative efforts organized by CML.
ATTACHMENTS
1. 2016-1-13 Construction Defects_White paper_Council (PDF)
2. Denver FinalReport (PDF)
3. Powerpoint (PDF)
Construction Defects Legislation in Fort Collins
January 2016
Summary
This white paper provides information on Colorado's construction defect laws and the various issues
surrounding construction defects in Colorado. It summarizes the current construction defect laws in the
state, the original legislative intent of the legislation and the impacts of the real estate market, provides a
summary of a recent legislation at the local level throughout the state, and provides some options for the
City of Fort Collins with regards to the Construction Defects legislation.
Bottom Line
Colorado's construction defect law allows as few as two condo owners to bring a class-action suit
against a builder for construction defects. It was originally passed with the intent of protecting buyers
from poorly-constructed homes of any kind. However, one of the unintended consequences of this law is
that it has severely limited the construction of new condominiums, which has historically represented an
important segment in the real estate market by providing a more attainable option than single-family
detached housing.
The City of Fort Collins has the following available options with regards to Construction Defects
legislation:
1. Amend Land Use Code to require developers of owner-occupied multi-family housing projects
(condominiums) to record a Plat Note requiring binding arbitration prior to filing of lawsuit (similar
to Arvada & Wheat Ridge).
2. Adopt an ordinance similar to ordinances of Denver, Lakewood, Littleton that:
a. Requires notification of defects and enhanced right to repair;
b. Prohibits the amendment of the governing documents to remove provisions requiring
alternative dispute resolution of construction defect claims;
c. Requires notification of homeowners of association legal action and majority vote of consent.
3. Engage development community to provide education on existing self-help options available under
the Villagio case to determine whether such options may increase development of affordable owner-
occupied multi-family housing projects.
4. Take no action locally, but continue to work with state legislation to address construction defects
law, including cooperative efforts organized by CML.
Colorado’s Construction Defects Action Reform Act
Colorado’s Construction Defect Action Reform Act (C.R.S. § 13-20-801, et. seq.) (“CDARA” or “Act”)
is a provision of Colorado law that governs all claims and litigation where a party is claiming
construction defects. CDARA was passed by the Colorado General Assembly in 2001, and amended in
2003, with the intention of curbing frivolous lawsuits affecting the construction industry and limiting the
liability of construction professionals. CDARA governs all actions in Colorado (including arbitration)
brought against a “construction professional” that assert a claim “caused by a defect in the design or
construction of an improvement to real property.” Since CDARA defines “construction professionals” as
“an architect, contractor, subcontractor, developer, builder, builder vendor, engineer, or inspector
performing or furnishing the design, supervision, inspection, construction, or observation of the
construction of any improvement to real property,” CDARA is not limited to only those parties actually
performing physical construction; it governs claims against nearly everyone involved in the construction
process.
The Act requires that a homeowner provide a Notice of Claim to a construction professional as a
condition precedent to bringing any civil legal action or arbitration proceeding. For residential
construction defect claims, the Notice of Claim must be submitted no later than 75 days before an action
can be filed. Upon receipt, the construction professional may request access to the property to conduct
an inspection.
Once the inspection has been conducted, a construction professional has 30 days to make an offer to
resolve the claim, either by paying a settlement amount or providing a plan to remedy the defect. A
homeowner is under no obligation to accept any settlement proposal, and the construction professional
has no right to insist that it be able to make the proposed repairs. If the construction professional does
not make a settlement offer, fails to comply with its offer, or if the homeowner rejects the offer, then the
homeowner may elect to bring a legal or equitable action against the construction professional.
Under CDARA, as amended, a party claiming construction defects generally may not recover more than
“actual damages” in an action stemming from construction defects unless a violation of the Colorado
Consumer Protection Act and other specific circumstances are present. CDARA defines actual damages
as “the lesser of the: (1) fair market value of the real property without the alleged construction defect;
(2) replacement cost of the real property; or (3) reasonable cost to repair the alleged construction defect,
together with ‘relocation costs.’” CDARA further requires that a party claiming construction defects file
an initial list of construction defects in any litigation or arbitration, which may be amended if additional
defects are discovered.
1
Colorado Construction Defects Legislative History
• House Bill 91-1292: Created the Colorado Common Interest Ownership Act (CCIOA). CCIOA
established the right for unit owner associations in common interest ownership developments to
engage in litigation or administrative proceedings in their own names or on behalf of two or more
unit owners on matters affecting the common interest community. When filing construction defect
claims involving five or more units, CCIOA requires an association’s executive board to provide
specific notices to owners, but the power of the executive board to pursue such claims is not subject
to a favorable vote of the unit owners.
• House Bill 01-1166: Created the Construction Defect Action Reform Act (CDARA or Act). The Act
distinguishes construction defect lawsuits related to real property from common lawsuits, such as
1 Miller, Jessica A., Understanding Colorado’s Construction Defect Action Reform Act
2
negligence. The act requires claimants to create a list of property defects that must be filed with the
court and served on the defendant within 60 days of commencing legal action. It allows a
homeowners' association (HOA) to file a defect action for five or more units that are part of the
association, and requires it to notify unit occupants of the action.
• House Bill 03-1161: Made amendments and additions to CDARA, and was dubbed "CDARA II."
Many provisions of the bill were introduced in response to numerous class-action lawsuits that had
seen large damages awarded to claimants, which construction industry professionals argued were
above and beyond reasonable amounts. It initiated a "notice of claim" process, requiring residential
owners to notify the construction professional no later than 75 days before filing an action, provide
them with a list of alleged defects, and allow them the opportunity to inspect the defects and to
tender an offer to fix them. Damages were limited to $250,000 in any action brought against a
construction professional. The bill also defined the terms "actual damages" and "construction
professional," and expanded the act's scope to commercial construction.
• House Bill 07-1338: Voided the waiver of certain statutory rights and remedies by residential
property owners in their transactions with construction professionals. Specifically, the bill prohibits
clauses in contracts between home buyers and construction professionals from expressly waiving
any of the rights contained in either CDARA or the Colorado Consumer Protection Act. However,
these rights may be waived if a homeowner settles with a construction professional after the claim
for a defect accrues.
• House Bill 10-1394: Enacted following a number of contradictory Colorado Court of Appeals
rulings surrounding what constitutes an "occurrence" in a construction defect claim. The bill states
that insurance companies must broadly interpret their duty to defend the insured under a commercial
general liability policy in cases involving construction defect complaints. The act applies only to
insurance policies that were in existence at the time or issued on or after the effective date of the
legislation, and guides the pending and future actions of insurers in interpreting liability policies
issued to construction professionals.
2
• Proposed Bills Since 2010: Since 2010, a variety of bills have been introduced by the General
Assembly to amend or address construction defect laws in Colorado, but have not been adopted.
These bills have attempted to change the law to:
o Establish legal procedures and limitations related to construction defect claims to make
construction professionals involved in transit-oriented development (TOD) immune from
claims surrounding noise, odors, light, and other environmental conditions related to TOD;
2 Kiszka, Matt, Colorado Legislative Council, Construction Defects Laws and Issue; April 17, 2015.
3
o Provide insurance premium rebates for developers creating multi-family, owner-occupied
affordable housing;
o Require the Division of Housing within the Department of Local Affairs to collect and study
data on the effects of various factors on new owner-occupied affordable housing in Colorado;
and
o Require HOAs involved in a construction defect claim to use mediation or third-party
arbitration, and to send advance notice to all unit owners, before a lawsuit can be filed in
disputes involving construction defects.
Effects of Construction Defects Legislation
Consumer Protections
Many of the standards and rules governing construction defect law in the State of Colorado arise out of
the public policy that a builder is in a better position than the consumer to ensure that the construction of
a residence is suitable. In the case of Sloat v. Methany, the Colorado Supreme Court remarked as
follows:
“the rule of caveat emptor [buyer beware]... was based upon an arms-length transaction between the
seller and buyer and contemplated comparable skill and experience, which does not now exist; they
are not in an equal bargaining position and the buyer is forced to rely on the skill and knowledge of
the builder. The position of the builder-vendor, as compared to the buyer, dictates that the builder
bear the risk that the house is fit for its intended use. Another rationale for the rule is to inhibit the
unscrupulous, fly-by-night, or unskilled builder and to discourage much of the sloppy work and jerry
building that has become perceptible over the years”
3
Residential Construction
In October 2013, the Denver Regional Council of Governments (DRCOG) published a comprehensive
Denver Metro Area Housing Diversity Study, which sought to identify factors influencing attached-
housing construction trends in the Denver metro area.
According to DRCOG, out of a total of 8,545 housing units under construction in downtown Denver at
the time of the study, only 193 units were for-sale product. The study also noted that there were no for-
sale unit permits issued for downtown Denver in 2012 and in 2013 by the time of publication.
In its market study, DRCOG estimated that because of additional costs related to construction defects,
developers need to pay approximately $15,000 more per unit for a condominium project than an
apartment building, reducing the profitability of such projects and making more affordable
condominiums less viable for developers. DRCOG adds that in industry interviews many national
builders said they were no longer pursuing condominium projects in Colorado because of the increased
costs and heightened risk of litigation.
4
3 Neider, Mark; Harris, Karstaedt, Jamison & Powers, P.C,; Colorado Construction Defect Law.
4 Kiszka, Matt, Colorado Legislative Council, Construction Defects Laws and Issue; April 17, 2015.
4
DRCOG's conclusions suggest that the most significant impact on the construction of for-sale attached
products has come from costs related to construction defects litigation. It notes that most developers
believe that the probability of being sued for a construction defect in Colorado is near 100 percent for
projects involving an HOA. DRCOG also states that construction insurance costs have grown
significantly since the passage of HB 10-1394 as multiple carriers have left the state, although insurance
company concerns over their ability to offer policies in the Colorado contractor liability market appear
to stem back further than the enactment of the bill.
5
Construction of Owner-Occupied Units in Fort Collins
The lack of construction of owner-occupied multi-family units in Fort Collins is similar to Denver and
other communities in Colorado. The following table shows the number of residential units issued
permits since 2005:
5 Ibid.
5
It is worth noting that the data for apartments and condominiums does not illustrate the breakdown
between for-sale and rental product, so it is difficult to determine the current mix of this type of
construction. However, in reviewing the completed projects, there has been one owner-occupied multi-
family project approved since 2008. The Arrowhead Condos were approved in 2010 for 20 units in two
buildings at the corner of Worthington Circle and Centre Avenue. Only one of the buildings (10 units)
was constructed (2011). There have been two projects recently submitted in which the developers have
indicated the intent to build owner-occupied units (Penny Flats and 320 Maple); however, these projects
are still in the approval process.
Owner-occupied multi-family units have historically represented an important segment in the real estate
market offering first time homebuyers entry into the real estate market, and providing a more attainable
option than single-family detached housing. This has become more important for communities trying to
develop residential housing in higher density settings, such as along transit lines and within urban
downtown areas.
Colorado Communities with Construction Defects Ordinances
The City of Lakewood was the first Colorado municipality to adopt legislation intended to encourage
construction of “for sale” multifamily projects by mitigating the risks to developers and builders
associated with construction defect litigation in October of 2013. Since then, a total of nine
municipalities have adopted construction defects legislation (See Attachment 1 for a list of Cities with
Construction Defects Ordinances – not all nine municipalities are included because of the similarity of
the ordinances). A majority of the local construction defects ordinances share three common elements:
• First, the ordinances provide “builders” (which are defined as any entity “including but not
limited to a builder, developer, general contractor, contractor, or original seller who performs or
6
furnishes the design, supervision, inspection, construction or observation of any improvement to
real property”) with an enhanced right to repair construction defects. The ordinances require
claimants to provide builders with notice of alleged construction defects, an opportunity to
inspect the alleged defects, and 30 days to make repairs.
• Second, the ordinances prohibit the amendment of the governing documents of any
condominium or planned community to remove provisions requiring alternative dispute
resolution (such as arbitration) of construction defect claims. Supporters argue that this provision
results in faster and less expensive resolution of construction defect disputes. (The Colorado
Court of Appeals decision in Villagio v. Metropolitan Homes (2015) found that covenants
containing such provisions are enforceable and not prohibited by CCIOA; therefore this
protection is already available to developers, irrespective of local ordinance provisions like this.
The court in Villagio upheld condominium covenants that required construction defect claims to
be submitted to arbitration and prohibited changes in those covenant provisions by unit owners
without the developer’s consent.)
• Third, the ordinances require any homeowners association considering initiating a construction
defect action to obtain written consent from a majority of the non-declarant owners prior to filing
a claim. The consent—generally referred to as an “informed consent” due to the required
disclosures to homeowners—must be obtained directly, and not via proxy voting. In obtaining
informed consent, homeowners associations must deliver notices to homeowners that include,
among other things: an estimate of the impact that the action will have on the values and
marketability of units in the community (including any effects on the ability of owners to
refinance their units during and after the action); an estimate of the duration of the action; an
estimate of the likelihood of success; and a statement indicating whether the builder has offered
to make any repairs.
The Town of Parker and City of Arvada passed local ordinances that only require a note to be added to
the multi-family plat that requires mandatory arbitration of construction defects claims if such a note
was requested by owner/developer. Arvada’s ordinance also requires that a disclosure be provided to
the initial prospective purchaser of the existence of the plat note requirement.
Effect of Local Legislation
At this time, it is unknown whether or not the multitude of local construction defects ordinances may be
effective to address the municipal interests articulated as the basis for their enactment, which appears to
be primarily the construction of more affordable condominium housing within the respective
communities.
In addition, no information is currently available regarding the impact of such local ordinances on the
costs related to construction defects litigation, including availability and cost of insurance, which are
considered to be an economic impediment to construction of for-sale attached housing products
(condominiums).
7
Finally, the legal viability of such local construction defects ordinances remains untested at this time.
Many municipal legal experts have suggested that local construction defect ordinances altering builder
or unit owner remedies would not survive a preemption challenge by the State, in view of the legislative
intent of the General Assembly in enacting CCIOA and CDARA. The State has declared construction
defect resolution to be an issue of statewide concern, and has enacted a body of legislation intended to
be the exclusive rule of law on the subject. The municipalities in adopting local provisions have cited the
need to address discrete and unique local impacts of state construction defect policy by the use of their
home-rule authority.
Even without a local ordinance on the subject, the Villagio case noted above highlights self-help options
available to developers/builders that have only recently (May, 2015) been validated under state law,
including recording plat notes and covenant provisions that require arbitration of construction defect
claims and prohibit modification of such requirements by unit owners without the developer’s consent.
If broadly adopted by developers, exercising these options may provide a more sustainable solution than
can be achieved by a municipal ordinance that is subject to legal challenge on the basis of State
preemption.
Options for Fort Collins
1. Amend Land Use Code to require developers of owner-occupied multi-family housing projects
(condominiums) to record a Plat Note requiring binding arbitration prior to filing of lawsuit (similar
to Arvada & Wheat Ridge).
2. Adopt an ordinance similar to ordinances of Denver, Lakewood, Littleton that:
a. Requires notification of defects and enhanced right to repair;
b. Prohibits the amendment of the governing documents to remove provisions requiring
alternative dispute resolution of construction defect claims;
c. Requires notification of homeowners of association legal action and majority vote of consent.
3. Engage development community to provide education on existing self-help options available under
the Villagio case noted above to determine whether such options may increase development of
affordable owner-occupied multi-family housing projects.
4. Take no action locally, but continue to work with state legislation to address construction defects
law, including cooperative efforts organized by CML.
8
Attachment 1
9
Final Report
Denver Housing
Economic Study
Prepared for:
City & County of Denver
and
City of Denver City Council
Prepared by:
Economic & Planning Systems, Inc.
March 2015
EPS #123099
Table of Contents
1. EXECUTIVE SUMMARY .............................................................................................. 1
Summary of Findings ............................................................................................... 1
Inclusionary Housing Ordinance Overview .................................................................. 5
Study Purpose ........................................................................................................ 5
Recommendations ................................................................................................... 5
2. ESTABLISHMENT OF NEED ......................................................................................... 7
Background ............................................................................................................ 8
Findings .............................................................................................................. 10
Housing Market Trends .......................................................................................... 13
3. CHALLENGES ....................................................................................................... 21
Challenges ........................................................................................................... 21
4. PROPOSED SOLUTIONS ........................................................................................... 25
Modified Structure ................................................................................................. 26
5. FEASIBILITY IMPACTS ............................................................................................. 33
Purpose & Intent ................................................................................................... 33
Methodology ........................................................................................................ 33
Results ................................................................................................................ 36
6. ALTERNATIVES ..................................................................................................... 40
A P P E N D I X : S U P P O R T I N G I N F O R M A T I O N ............................................................. 45
Supporting Tables and Charts ................................................................................. 46
List of Tables
Table 1 Inclusionary Housing Ordinances in Urban Markets .............................................. 9
Table 2 Proposed IHO Changes .................................................................................. 32
Table 3 Pro Forma Results ........................................................................................ 39
Table 4 Estimated Impact of Time-Limited Property Tax ................................................ 43
Table A1 Density Bonus Incentives in Current Denver Zoning Code ................................... 51
Table A2 Projects Paying Cash In-Lieu .......................................................................... 52
List of Figures
Figure 1 City/County of Denver Population Growth, 2000-2012 ....................................... 10
Figure 2 City/County of Denver Household Growth, 2000-2012 ....................................... 10
Figure 3 Median Household Income and CPI, 2000-2012 ................................................ 11
Figure 4 Households by Income, 2000-2010 ................................................................. 12
Figure 5 City/County of Denver Construction Activity, 2000-2012 .................................... 13
Figure 6 City/County of Denver Housing Sales Activity, 2000-2012 .................................. 14
Figure 7 City/County of Denver Housing Sales Prices, 2000-2012 .................................... 15
Figure 8 City/County of Denver Housing Sales Prices, 2000-2012 .................................... 16
Figure 9 City/County of Denver New Housing Sales Price Distributions.............................. 17
Figure 10 Affordability Gaps, 2000 and 2012 .................................................................. 18
Figure 11 City/County of Denver Foreclosures, 2000-2012 ............................................... 19
Figure 12 Neighborhood Map ....................................................................................... 26
Figure 13 30 Percent Fixed-Rail Coverage by Neighborhood .............................................. 27
Figure 14 50 Percent Fixed-Rail Coverage by Neighborhood .............................................. 28
Figure 15 Housing Cost Levels in 3 Tiers by Neighborhood................................................ 29
Figure 16 Affordable Housing Need Map by Neighborhood ................................................ 30
Figure A1 Existing and Proposed Stations Map ................................................................ 46
Figure A2 Predominance of Households at 80% AMI or Below, 2000 .................................. 47
Figure A3 Predominance of Households at 80% AMI or Below, 2010 .................................. 48
Figure A4 Neighborhood Average Sale Prices, 2000 ......................................................... 49
Figure A5 Neighborhood Average Sale Prices, 2010 ......................................................... 50
Economic & Planning Systems, Inc. 1 123099-FinalReport_031915 (1)
1. EXECUTIVE SUMMARY
Summary o f F i ndings
1. Household incomes have not kept pace with the cost of housing.
For the average Denver household (2.5-persons), median income grew by 28 percent, or 2.1
percent per year, from $52,800 in 2000 to $67,500 in 2012. After adjusting for inflation,
which grew at 2.2 percent per year, incomes and purchasing power actually decreased. By
contrast, the overall average housing price increased by 48 percent and new housing
increased by 69 percent, reflecting 3.2 percent and 4.6 percent rates of annual increase,
respectively. Additionally, the median price of a home increased by 95 percent, a 5.7
percent annual escalation.
2. The affordability gap has widened by $100,000 (or 169 percent) since 2000.
The affordability gap is a measure of the disparity between the median sales price of a home
and what a household earning the median income can afford to buy. In 2000, the median
sales price of a home was $225,000, but a household earning 100 percent of area median
income (AMI) could only afford a home at $166,000, making the affordability gap $59,000.
For a household earning 80 percent AMI, the affordability gap was an estimated $91,600. By
2012, whereas the median sales price had increased to $438,500, a household earning 100
percent AMI could only afford $279,500, making the affordability gap $159,000. For
households at 80 percent of AMI, the gap had grown to $215,400.
3. Extensive foreclosures during the recession artificially increased the supply of
affordable housing for a short time, but there is no reason to believe that low-
income households purchased any of these units.
High foreclosure rates were among the consequences of lending standards during the
housing boom. Between 2005 and 2012, there were more than 25,800 foreclosures in
Denver, approximately 15,300 of which were absorbed into the market at levels affordable to
households earning 70 percent AMI. While total housing sales at this affordability level had
averaged approximately 19 percent between 2000 and 2004, this portion doubled to 40
percent between 2005 and 2012 because of the influx. There is, however, no evidence or
data to suggest that these homes were actually purchased by households at that income
level, especially given tighter lending standards during the years following the housing
market collapse. It is important to note that this spike in the availability of moderately-
priced housing was temporary as a result of abnormal market conditions, and that the
magnitude of foreclosures has since receded.
4. The distribution of new for sale housing is increasingly concentrated at the higher
end.
In spite of the temporarily increased availability of moderately-priced housing units, the
portion of all new housing unit sales affordable to households earning 120 percent AMI or
more increased between 2002 and 2012. Analysis of sales shows that 41 percent of all new
housing sales in 2002 were priced for households earning 120 percent AMI or more. By
2012, that portion had increased to 49 percent.
Denver Housing Economic Study
March 2015
Economic & Planning Systems, Inc. 2 Final Report
5. Since establishment of the IHO, 1,144 on-site units have been built.1
With ever-increasing population base (2,600 new households per year), stagnating wages,
and housing price escalation that has been exceeding wage growth, the number of units built
on-site through the IHO represents less than 5 percent of the estimated for-sale units built in
the city between 2002 and 2012 (approximately 25,520) and only 4 percent of the number of
total new households to Denver to 2012 (nearly 27,000).
6. Except through developer agreements, the IHO has produced very few units.
Excluding the production of moderately-priced dwelling units (MPDU) through developer
agreements of large-scale projects, where affordable housing requirements were entered into
as an alternative path preceding or within the IHO, just 9 percent (82 units) of all MPDUs
have been built by developers of non-large scale projects. In contrast 91 percent (1,062
units) have been produced by large-scale projects. As these large-scale projects have
fulfilled their obligations, overall production of affordable homes has slowed.
Although several redevelopment areas within the city remain (the former St. Anthony’s
Hospital in south Sloan’s Lake, the former CU Hospital at 9th and Colorado, south Broadway
between Alameda and Mississippi, and the Denver Post Building in Globeville), these
redevelopment areas are significantly smaller than the previous generation of large-scale
projects (Stapleton, Lowry, Green Valley Ranch, the Central Platte Valley),with the exception
of large tracts of undeveloped land near the Gateway Station in the DIA neighborhood.
Although the City is currently in the process of taking stock of its land supply, it is likely that
the opportunities for future large-scale projects and thus developer agreements to provide
affordable housing will be limited.
7. Few affordable units have been produced since the end of 2004.
Not only were the vast majority of IHO units built in large-scale projects, but the majority
were also built before the end of 2004 (an average of 280 units per year between 2002 and
the end of 2004), primarily as the fulfillment of previous years’ developer agreements.
Between 2005 and 2008, however, the average number of IHO units produced dropped to
less than 75 units per year. Since 2009, just 20 units have been built.
Ultimately, the IHO can produce units only as fast as the market and only to the extent that
developers choose to build them. In the last five years, specifically, three multifamily for-
sale developments have been built, and only one was large enough to trigger the IHO
requirements. While the drop in production of the past five years is attributable to the drop
in production of market rate projects altogether, other relevant market issues are also at
play, such as the heightened legal risks and costs associated with insuring against the threat
of construction defects claims.
1 Data regarding IHO unit production based on OED sources, August 2014. The City and County of Denver tracks both units
produced under the IHO and the developer agreements. This number reflects the total of both.
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8. Too few affordable units have been built in areas of greatest need.
Of the 1,144 units built, zero have been built in the Central Business District (CBD) of
downtown, and fewer than 3 percent have been built in central Denver. The remainder have
been built outside of Central Denver in areas of relatively less need. According to City
records, for example, more than 50 percent of IHO units for which a CIL was paid, occurred
in the CBD. While the construction of affordable units anywhere in the city may be desirable
to meet the overall need, this pattern indicates that a uniform structure regarding the cash
per unit incentive and cash in-lieu option is ineffective at addressing areas with greater need.
Modifications to the cash incentive amount and cash in-lieu could be more appropriately
calibrated to reflect the economic and market differences of the city’s neighborhoods. (Refer
to Appendix Table A2 for a report of projects by neighborhood that paid the CIL instead of
building affordable units onsite.)
9. In the past, it has typically been more feasible for developers to pay cash in lieu of
building units.
It has been indicated that it is more financially feasible for developers to pay the Cash In Lieu
(CIL) fee than to build MPDUs on site. A pro forma analysis conducted in this study on the
feasibility of four different development prototypes (given current estimated cost and
revenue assumptions) confirms that it has been generally more financially feasible for
projects to pay the CIL than to build units on-site, particularly in high cost areas.
10. Levels of affordable housing need differ by neighborhood.
The current IHO structure does not adequately respond to different levels of affordable housing
need by neighborhood. The analysis of housing costs by neighborhood illustrates the wide
spectrum of differences between housing costs throughout the city. In some neighborhoods
in 2012, for example, housing costs were nearly 75 percent below the citywide average of
$302,400, and in others, housing costs were more than 250 percent above the citywide
average. Moreover, trends suggest that housing in some neighborhoods has become more
expensive more rapidly than in others, pushing lower-income households out.
11. The current IHO structure does not adequately reflect the importance of creating
affordable housing opportunities in areas of greatest need.
The incentive and cash in-lieu structure of the IHO as applied uniformly throughout the city
does not reflect the level of priority the City would like to place on creating affordable
housing in areas of greatest need. Applied uniformly throughout the City, the subside and
CIL structures do not reflect the city’s priority to create more affordable opportunities in
areas of higher land value and housing costs. For example, because land and housing values
are high in the central city, development is most likely to target higher-priced housing
development, thus diminishing opportunities for more moderately-priced housing
development.
12. It is unclear to what extent large-scale developments may occur in the future.
While the City is currently in the process of taking stock of its supply of land, it is unclear
how many opportunities for future large-scale projects may exist.
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13. Denver has fewer incentives to offer than other peer communities and the IHO’s
cash incentive per MPDU does little to motivate a developer’s behavior.
While never truly effective in Denver, the density bonus is no longer comprehensively
available as a tool Denver can offer to incentivize construction. The only remaining incentive
with economic value is the per unit incentive, which is currently ineffective at influencing
developer behavior. Originally intended to effectively waive development review fees at
$5,500 per unit, it is insufficient at influencing the economics of development feasibility to
warrant consideration of building units rather than buying out, particularly in high cost areas.
14. A housing development of significant scale under the current IHO structure would
not be able to receive its full cash incentive at time of development.
The current IHO structure does not allow more than $250,000 to be disbursed to a single
project in one program year. This structure was put in place to limit large scale single family
home developers, building their affordable units at a fast rate, from depleting the fund.
Condo projects, however, are by definition free standing, single-structure projects and
cannot pace their production in the same way single family homebuilders can.
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I nclusionary Housing Ordinance Overview
Enacted by City Council in 2002, the Inclusionary Housing Ordinance is one of the primary
mechanisms by which the City seeks to ensure that affordable housing is simultaneously
provided with the construction of market rate ownership housing. While it is one small tool to
create homeownership opportunities for moderate income families, it is also one among Denver's
many other strategies to create opportunities for rental housing, homeless housing, supportive
services, etc., which are included in the City's Affordable Housing Plan, Housing Denver.
The Inclusionary Housing Ordinance (IHO) requires that the developer of a for-sale housing
development (detached or attached single-family or multifamily) of 30 or more units set aside 10
percent as affordable to households earning either 80 percent or 95 percent AMI, depending on
the type of construction. Currently, this 10 percent set-aside requirement applies uniformly
throughout the city.
As an incentive to developers that agree to build affordable units (called “moderately-priced
dwelling units” or MPDUs) on site, the City offers a cash incentive of $5,500 per MPDU up to a
maximum of $250,000 per development per program year. This incentive is granted to
applicable projects uniformly throughout the city.
For developments that determine that providing on-site MPDUs is not feasible, the IHO allows for
two types of alternative satisfaction. A developer is either permitted to build additional units at
one or more sites in the same or adjoining statistical neighborhood or to build units at one or
more sites within one half-mile of a light rail or commuter rail station. To date, only one
developer has successfully been approved to build off site. The second alternative option is for a
developer to pay a fee in-lieu (a “cash in-lieu” payment or CIL) of constructing units. The CIL is
equal to 50 percent of the MPDU sales price, and this also currently applies uniformly throughout
the city.
S t udy Purpose
Economic & Planning Systems (EPS) was retained to conduct an economic study to support the
City Council and Office of Economic Development in their efforts to update and improve the City's
Inclusionary Housing Ordinance. Following administrative updates in 2012, EPS was contracted
to evaluate the basis of need for the ordinance, changes in housing and economic conditions,
identify differences in affordable housing need in Denver's neighborhoods, and propose changes
to the structure of the IHO based on these findings. EPS then estimated the financial impact of
the proposed changes to developers of selected prototypical projects.
Recommendations
The analysis of economic, demographic, and affordability conditions provides a context for
establishing the need for the IHO and is the basis for EPS’ recommendations regarding
modification of the IHO. It is the intent of the following recommendations that they directly
address the problems and reflect the City’s desire to use the IHO structure more effectively and
target areas of greatest need.
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1. The IHO structure should reflect different levels of need as they occur across the
city.
With its requirements applied uniformly throughout the city, the IHO does not reflect or
adequately address the priorities of creating affordable housing opportunities in areas of
greatest need.
2. Use data to identify affordable housing need by neighborhood.
Grounded in an objective analysis of housing conditions, EPS recommends that the City
determine need by neighborhood on the basis of two variables—housing costs and proximity
to fixed-rail transit. These variables were chosen because of their representativeness,
applicability, and accessibility. Such an analysis by neighborhood also standardizes the IHO
process with other evaluations conducted by the City at a neighborhood level.
3. Adopt a tiered cash incentive per-MPDU by neighborhood.
In areas of high housing costs and high land values, it is unlikely that affordable housing will
be built without access to greater incentives. Conversely, in areas of lower housing costs and
lower land values, the City does not need to provide as great an incentive given that some
existing markets contain relatively affordable housing. That is, the City should place more
resources in areas of greater need and eliminate inefficiencies.
4. Adopt a tiered cash in-lieu structure by neighborhood.
While changing the cash incentive is intended to incentivize building units on site, a varied
CIL amount by neighborhood is also intended to discourage developers from selecting the
buy-out option, particularly in areas of greatest need. EPS recommends the City increase the
CIL in neighborhoods with great need and lower it in areas of low need. Where moderately-
priced housing is commonly found, EPS does not believe it is a good use of resources to
financially incentivize construction of units in low need areas.
5. Periodically update the data to ensure the IHO reflects changing need.
Because economic conditions change, data used to determine levels of need should be
updated every three to five years. This will ensure that the IHO is reflective of relatively
current conditions, and maintains a general level of predictability for developers, as opposed
to updating and thus changing the map each year.
6. The City should consider alternative mechanisms for funding affordable housing.
Discussed in a separate chapter, it is recommended that the City separately evaluate the
political and market feasibility of implementing a variety of different programs to generate
additional funding and create a broader base for development of affordable housing. These
recommendations are also suggested in light of the substantial debate surrounding crafting a
solution for the city that does not unduly burden a small portion of the community for the
benefit of a much broader set of the community.
Economic & Planning Systems, Inc. 7 123099-FinalReport_031915 (1)
2. ESTABLISHMENT OF NEED
The data and information contained in this chapter are a review of demographic, economic, and
housing market trends, which established the basis of need for the City’s IHO. This chapter
documents the changes in those trends and provides a basis for the continued civic benefits
provided by the IHO.
Original Basis of Need
At the time of passage, the analysis found the following reasons as the basis of need for the
ordinance. The following statements are found at the beginning of the ordinance language (Ord.
No. 617-02, § 1, 8-5-02):
1. Demographics and analyses of new housing indicated that a large majority of private
development is geared toward high-priced housing development and does not serve
households earning less than one hundred percent AMI.
2. Developer practices produce the undesirable and unacceptable effects of limiting housing
available to moderate and low-income households.
3. The continuing high level of unmet demands for housing, allows for housing to be highly
priced discourages developers from offering a more diversified price range of housing, and
contributes to the unwillingness of developers to create moderately priced housing.
4. Rapid regional growth and a strong housing demand have combined to make land and
construction costs higher, causing a rise in the price of housing and causing affordable
housing to be located in limited areas.
5. Income has not kept pace with this rapid and significant increase in the cost of housing in
Denver.
6. Housing problems have escalated due to population increase and a limited supply of
developable land. The city seeks to assure that the limited supply of developable land
provides housing opportunities for all incomes.
7. Providing incentives to developers will assist developers in providing a minimal percentage of
affordable housing units as an integral part of new developments.
8. Developers of new housing are not meeting the need for moderately priced, affordable
housing. The provision of only higher priced housing contributes to the lack of affordable
housing.
9. Developers of new for sale housing are not meeting the need for dispersed, affordable
housing. In reviewing public records for 1998 to 2000, the city council has determined that
less than 2 percent of the new housing is affordable in projects of 30 or more for sale units
without any incentives from the city. These units were constructed primarily by one
developer and concentrated in the far northeast sector of the city. The provision of only a
small number of affordable for sale units in only a single limited area contributes to the
citywide lack of dispersal and availability of affordable housing; and
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10. Without a program requiring moderately priced housing to be built, it is unlikely based on
current trends that developers will provide such housing on their own initiative, leaving
Denver citizens without sufficient affordable housing.
Background
There are hundreds of communities throughout the U.S. that have adopted some form of
inclusionary housing ordinance (IHO). An IHO refers to a municipal or county ordinance that
requires a portion of new housing development be set aside for households at specified income
levels. They are generally enacted by home rule cities or counties as land use regulations under
health, safety, and welfare provisions. In Colorado and the Rocky Mountain West, for example,
the IHO is most commonly a cornerstone of many resort communities’ housing programs, but
has been adopted in larger urban centers where housing markets are constrained and prices are
high.
Set-aside requirements generally range from 10 to 30 percent, and income levels generally
range from 60 to 100 percent of AMI.2
Under most ordinances, a developer can comply with its
requirements by building the units on site as a part of the overall project and/or by building
them off-site. Many IHOs, like Denver’s, allow for all or a portion of the set-aside requirement to
be met by a cash in-lieu (CIL) payment. To encourage development of units on site, IHOs are
structured with a common array of incentives such as bonus density (or FAR bonuses), increased
height allowances, fee waivers, expedited approval, or other potentially economically valuable
mechanisms such as the ability to reduce the size of the affordable units.
Among the ten IHOs summarized in Table 1, half are triggered at a threshold of 10 units,
whereas the other half has a lower threshold. Within this group, three of them – Burlington,
Chapel Hill, and Davis, are triggered by a project of 5 units or more, and two of them – Boulder
and New York, have no threshold at all. Also, except for communities in California where
applying an IHO to new rental projects has been prohibited (i.e. impermissible “rent control”) as
it is in Colorado, most communities apply their IHO requirements to both for-sale and rental
developments.
On the issue of applicability of IHO standards to rental and ownership projects, Colorado courts
found IHO standards for rental properties to be a form of rent control in violation of state
statutes, according to the Telluride decision. Since that decision, the legislature has made
limited provisions for local governments to enter into voluntary agreements with developers for
deed-restricted rental housing under HB10-1017.
2 The AMI defined by the Department of Housing and Urban Development is the standard used by most public agencies.
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Table 1
Inclusionary Housing Ordinances in Urban Markets
Boulder Boston Burlington Cambridge Chapel Hill Chicago Davis San Diego
San
Francisco
New York
Applicability Threshold No threshold 10 units 5 units
10 units
(or 10,000 sqft)
5 units 10 units 5 units 10 units 10 units No threshold
Tenure
For-sale;
Rental
For-sale;
Rental
For-sale;
Rental
For-sale;
Rental
For-sale
For-sale;
Rental
For-sale For-sale For-sale
For-sale;
Rental
Set-Aside 20% 15% 15% to 25% 15%
15% (10% in Town
Center)
10% (20% for project
receiving city
financial assistance)
12.5% to 25% 15%
12% to 15% on-site
or
20% off-site
20%
Affordability Level ~ 65% AMI 50% to 100% AMI
a) Less than 140%
AMI
b) 140% to 180%
AMI
c) More than 180%
AMI
65% AMI (income
eligible 50% to 80%)
65% AMI (50% of
units);
80% AMI (50% of
units)
100% AMI 80% AMI 100% AMI 90% AMI
80% AMI;
125% AMI;
175% AMI
Incentives
Affordable units may
be 80% of market
rate unit size
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F i ndings
Demographic Growth
Demographic growth, defined by the following trends of population and households since 2000,
remains strong in spite of two major recessions. Figure 1 illustrates that since 2000, the
population of City and County of Denver has grown at a rate of 1.1 percent (or approximately
6,700 persons) per year. Population increased from a base of approximately 546,000 in 2000 to
more than 634,000 in 2012.
Figure 1
City/County of Denver Population Growth, 2000-2012
More reflective of housing demand, Figure 2 shows that the number of households between
2000 and 2012 grew from approximately 239,000 in 2000 to more than 270,000 in 2012, at 1.1
percent per year (approximately 2,600 households). Although the two trends would suggest that
the average household size of those moving to Denver has held constant at approximately 2.5
persons per household, it is important to recognize that on average, this trend masks the fact
that many of the households were single-person.
Figure 2
City/County of Denver Household Growth, 2000-2012
525,000
550,000
575,000
600,000
625,000
650,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Population
Source: U.S. Census, Colorado Department of Local Affairs; Economic & Planning Systems
1.1% / yr
(~6,700 persons / yr)
545,656
634,619
220,000
235,000
250,000
265,000
280,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Households
Source: U.S. Census, American Community Survey, 1-Year Estimates; Colorado Department of Local Affairs; Economic & Planning Systems
1.1% / yr
(2,600 households / yr)
239,235
270,439
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Incomes
In the administration of the City’s Inclusionary Housing Ordinance, households are qualified
according to measures of AMI based on HUD standards and adapted further by the City’s Office
of Economic Development to determine maximum sales prices by AMI category (i.e. 80 percent,
95 percent, etc.) and bedroom size (i.e. studio, one-bedroom, etc.). Figure 3 illustrates
information from HUD and the Bureau of Labor Statistics and shows the trend in household AMI
(as shown, 100 percent AMI) and the consumer price index from 2000 to 2012.
Between 2000 and 2012, AMI for a household of 2.5 persons increased 28 percent from $52,800
to $67,500, an average of 2.1 percent per year.3
During the same period, the Consumer Price
Index (CPI) increased by 33 percent, or 2.2 percent per year, according to the BLS. Adjusted for
inflation, this means household median incomes (thus, purchasing power) actually decreased
between 2000 and 2012, a decrease of 0.3 percent per year.
Figure 3
Median Household Income and CPI, 2000-2012
3 Data are published in household size increments of one person. These metrics are interpolated from those published numbers
based on the proportionality between household size increments. Data are available at:
http://www.huduser.org/portal/datasets/il.html.
90%
100%
110%
120%
130%
140%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Median Income & CPI as % of 2000 Base
CPI
Median HH Income (2.5-person)
[Note]: Percentages represent annual average rates; in parentheses, percentages represent inflation-adjusted rates.
Source: U.S. Census; Economic & Planning Systems
$52,800
2.1% / yr
(-0.3%)
$67,500
2.2% /yr
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Households by Income Levels
Figure 4 illustrates the shift in Denver households by income level using decennial Census data.
Between 2000 and 2010, the number of households earning 80 percent AMI increased from
approximately 125,500 to approximately 141,000, an increase of nearly 15,600. Of this group,
91 percent earn less than 70 percent AMI, and the remaining earn between 70 and 80 percent
AMI. Households earning 95 percent AMI or more increased by approximately 5,600, but the
number of households earning between 80 and 95 percent fell by approximately 6,200, revealing
a trend in increasing income disparities among households.
Figure 4
Households by Income, 2000-2010
14,209
1,364
-6,257
5,572
-10,000
-5,000
0
5,000
10,000
15,000
20,000
Less than 70% 70 to 80% 80 to 95% Greater than 95%
Change in Households, 2000-2010
Source: U.S. Census; Economic& Planning Systems
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Housing Market Trends
Construction Trends
Information on residential construction activity indicates that more than 43,000 housing units
were built between 2002 and 2013, averaging 3,600 units per year, as shown in Figure 5. The
magnitude of construction activity remained fairly constant through 2008, during which the
average number of units permitted by the City was approximately 3,900. In 2009, the official
year marking the end of the recession, there were approximately 1,000 units permitted, a
majority of which were rental. In the following year, activity remained at a similar level—1,300
units. Since 2011, however, activity has increased and exceeded pre-recession levels of more
than 5,000 units per year.
According to data from the City, there have been 12,399 permits issued since 2009 for projects
with five or more attached units, or units classified as a part of mixed-use developments. Of
these, just 190 (or 1.5 percent) have been ownership projects.
Figure 5
City/County of Denver Construction Activity, 2000-2012
0
3,000
6,000
9,000
12,000
15,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Residential Construction Activity
Source: U.S. Census, Economic & Planning Systems
~3,600 / yr
(average)
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Sales Activity
Unlike construction activity, which reflects the recession, sales activity did not decline as
markedly during the recession or following years as much. As shown in Figure 6, annual activity
averaged approximately 10,000 sales per year between 2000 and 2012. In 2009, annual activity
dropped to approximately 9,900 per year with slight increases year over year since 2010.
In terms of age, new units, defined as those which were newer than five years at the time of
sale, averaged 500 sales per year between 2000 and 2003. During the housing boom between
2004 and 2008, that average increased to nearly 800 per year, but since 2009 has declined to
approximately 700 per year.
Figure 6
City/County of Denver Housing Sales Activity, 2000-2012
0
3,000
6,000
9,000
12,000
15,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Existing & New Home Sales Activity
Sales of Units 5 Year or Newer Sales of Units Older than 5 years
Source: Genesis Group; Economic & Planning Systems
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Sales Prices
The average sales price of a home in Denver was $204,000 in 2000 and by 2012 had increased
to more than $302,000, as shown in Figure 7. While this trend reflects an overall increase of 48
percent, or an annual increase of 3.2 percent per year, the average price of new housing
increased 69 percent from approximately $307,000 in 2000 to more than $518,000 in 2012, or
an annual increase of 4.6 percent.
Further analysis of the data reveals that the median sales price (not shown), increased from
$225,000 in 2000 to $438,500 in 2012, reflecting an overall change of 95 percent, or an average
of 5.7 percent escalation per year.
Figure 7
City/County of Denver Housing Sales Prices, 2000-2012
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Average Sales Prices
New Unit Sales
Overall Average
Source: Genesis Group; Economic & Planning Systems
4.6% / yr
$306,675 3.2% / yr
$518,170
$302,442
$204,413
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Overlaying a few of the previously documented trends illustrates housing market affordability.
Figure 8 illustrates that, since 2000, while median income has increased 28 percent over 2000,
overall housing prices have escalated 48 percent and new housing prices have escalated 69
percent. It should be noted that although this trend shows a relative decline in sales prices
during 2008 and 2009, these were two of the years officially associated with the Great Recession
and years during which there were an unusually high number of foreclosed units.4
Since that
time, the rate of overall housing price increase has begun again to exceed that of household
median income increase.
Figure 8
City/County of Denver Housing Sales Prices, 2000-2012
4 According to the National Bureau of Economic Research, the official arbiter of U.S. recessions, the Great Recession as it has been
called, began in December 2007 and ended in June 2009.
80%
100%
120%
140%
160%
180%
200%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Index (2000 = Base Year)
New Unit Sales Prices
Overall Housing Sales Prices
HUD Median Income
Source: U.S. Census; HUD; Genesis Group; Economic & Planning Systems
+69%
+48%
+28%
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New Sales Distribution
Figure 9 displays the change in distribution of new housing sales prices by AMI category. Data
used in this analysis include three years of new sales data for the period leading up to adoption
of the original IHO in 2002, as well as the three final years of data used for this analysis, 2010
through 2012.5
Analysis shows that recent sales of new housing are concentrated on the higher-
income end. Whereas 41 percent of new unit sales were priced for households earning 120
percent AMI or more between 2000 and 2002, that portion had increased to 49 percent by the
2010/2012 period. Although there was an increase in the portion of sales affordable at 80
percent AMI or below, this increase was primarily caused by the resale of foreclosed units at
discounted prices. Most significantly, the portion of new unit sales in the 80 to 100 percent AMI
category decreased substantially. These sales accounted for 30 percent of market activity
between 2000 and 2002, but only accounted for 14 percent in the distribution of new unit sales
between 2010 and 2012.
Figure 9
City/County of Denver New Housing Sales Price Distributions
5 Sales prices for each period are escalated to 2002 and 2012 respectively for the purpose of direct comparison to AMI categories
using the same affordability metrics. Furthermore, average mortgage interest rates from each respective period have been held
constant to reflect the conditions of 2002 and 2012.
16%
30%
13%
41%
22%
14% 15%
49%
0%
10%
20%
30%
40%
50%
60%
Less than 80% AMI 80% to 100% AMI 100% to 120% AMI More than 120% AMI
Percent of New Sales
Distribution of New Sales (2000-2002)
Distribution of New Sales (2010-2012)
Source: Economic & Planning Systems
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Affordability Gap
The affordability gap is defined as the difference between the median sales price of a home and
what a household earning 100 percent AMI can afford. Figure 10 illustrates how this gap has
widened between 2000 and 2012, using information on housing prices, incomes, and purchase
price assumptions.6
In 2000, a household earning 100 percent AMI ($52,800) could afford a home for approximately
$166,000, but the median sales price in 2000 was $225,000, reflecting an affordability gap of
$59,000. For households at 80 percent of AMI (household income of $42,200), the affordability
gap was an estimated $91,600.
By 2012, the affordability gap had widened by $100,000, where a household earning 100 percent
AMI ($67,500) could afford to buy a home for approximately $279,500, but median sales prices
had increased to $438,500, implying a 169 percent increase of the affordability gap to $159,000.
For households at 80 percent of AMI (household income of $54,000), the affordability gap
expanded by 135 percent to $215,400.
Figure 10
Affordability Gaps, 2000 and 2012
6 Per housing industry analysis standards, and as calculated by HUD, these calculations reflect an affordable target purchase price
where a household spends no more than 30 percent of its gross annual income on housing (not including utilities). Principal,
interest, taxes, and insurance, as well as average annual HOA dues are factored into this estimation. Mortgage interest rates also
are reflective of the respective time period.
$166,000
$279,500
$133,400
$223,100
$225,000
$438,500
$0 $100,000 $200,000 $300,000 $400,000 $500,000
2000
2012
Affordable Price at 80% AMI
Affordable Price at 100% AMI
Median Sales Price (New Sales)
Source: Economic & Planning Systems
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Economic & Planning Systems, Inc. 19 Final Report
Other Factors
Foreclosures
During several years preceding the recession, it had been recognized that lending practices had
become much more lenient than historically experienced. The practice of issuing mortgages with
little to no documentation as well as adjustable rate mortgages with balloon payments had
become more common. Not only were the risks of default not being adequately assessed, but
borrowers were being offered unsuitable and deceptively attractive loan products. One of the
consequences of this pattern was an increased rate of foreclosure.
Figure 11 illustrates the magnitude of foreclosures in the City and County of Denver between
2002 and 2012. Overall, there were nearly 30,800 foreclosures, of which approximately 15,300
units were sold at levels that would have been affordable to households earning 70 percent of
AMI or less. Although information is not available prior to 2005 at this level of detail, data show
that from 2005 to 2012, approximately 15,300 foreclosures were affordable to households
earning 70 percent of AMI. As a result, housing at this affordability level doubled from 19
percent of sales between 2000 and 2004 to 40 percent between 2005 and 2012.
Although this trend appears to suggest that a considerable supply of affordable housing was
available, the affordability was made possible by the loss of equity from previous home owners.
Moreover, there is no evidence to suggest that these homes were actually purchased by
households at lower income levels, especially given tighter lending standards during the years
following the housing market collapse. The data imply that this was just a temporary and
artificial increase in the availability of moderately-priced housing, given that the number of
foreclosures has recently returned to lower historic levels.
Figure 11
City/County of Denver Foreclosures, 2000-2012
0
3,000
6,000
9,000
12,000
15,000
2002* 2003* 2004* 2005 2006 2007 2008 2009 2010 2011 2012
Foreclosures [See Note 1]
Affordable at 70% AMI
Withdrawals
[Note 1]: These estimates are calculated as the difference between reported Notices of Election & Demand and reported Withdrawals.
* Denotes that detailed data on loan amounts were not available, such that affordability by AMI level is estimable.
Source: Denver Office of the Clerk & Recorder, Economic & Planning Systems
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Economic & Planning Systems, Inc. 20 Final Report
Insurance and Financing Costs
While the magnitude of effects caused by the threat of construction defects claims on the
residential construction industry are difficult to quantify and even correlate, the perception of the
problem represents a reality. This problem affects communities throughout the state and is
complicated by the entanglement of legal, financial, and insurance issues. Although not the sole
cause for the lack of for-sale multifamily housing construction, developers and builders view the
risk of exposure to lawsuits and the cost of insuring against such risks as a significant deterrent
to developing condominium projects.
During the 1990s and up to the early 2000s, construction defects claims affected predominately
single-family housing. As the state’s population boomed and, as a result, housing construction
increased in the early 2000s, demand for multifamily housing became more commonplace.
Multifamily (for-sale) developments soon became a more frequent target of construction defects
lawsuits.
Passage and modification of the Construction Defect Action Reform Act (CDARA) in the early
2000s, which was enacted to streamline construction defect litigation, providing an opportunity
for pre-suit settlement (remedy of the defects). According to some in the construction
community, however, the process does not adequately encourage pre-suit settlement. At the
end of the decade, Passage of HB 10-1394, called “Concerning Commercial Liability Insurance
Policies Issued to Construction Professionals” potentially exacerbated an already weakening
market for new multifamily for-sale construction The intent of this bill was to provide courts
clarity on how to interpret commercial general liability insurance (CGL) provisions and claims.
Although not directly attributable to the passage of the bill, a number of insurance providers left
the state, leaving a potentially more competitive and costlier environment for developers to
acquire CGL insurance policies.7
Today, the City of Denver is not alone in experiencing a shortage of for-sale multifamily
construction, and it is also not the only community to perceive the threat of construction defect
litigation to be a component of the development industry’s aversion to building for-sale
multifamily housing. Because the development of for-sale multifamily housing offers one of the
more likely opportunities for increasing supply of affordable housing, overcoming this challenge
could play a role in reducing the risks associated with multifamily construction and increase the
opportunities for affordable housing development.
7 The bill’s intent is to clarify the definitions of a construction defect for claims purposes, and to generally provide greater certainty.
In the first part of the legislation, it is stated that “insurance policies issued to construction professionals have become increasingly
complex, often containing multiple, lengthy endorsements and exclusions conflicting with the reasonable expectations of the
insured.” In response, the act declares that insurance coverage and an insurer’s duty to defend shall be interpreted broadly in
favor of the insured. It also ensures that a court still consider application of any exclusions to coverage, because it was not
intended to “create insurance coverage that is not included in the insurance policy.” It also places extra burden on the insurance
providers. One provision requires that insurance providers have a duty to defend the policy holder in the event of a notice of claim
process even if the insurer owes a duty to defend or not. The idea was to reduce defect litigation by encouraging pre-suit
settlements.
Economic & Planning Systems, Inc. 21 123099-FinalReport_031915 (1)
3. CHALLENGES
This chapter summarizes EPS’ understanding of the challenges that economic conditions seem to
present for the City in effectively addressing affordability needs with the current IHO structure.
Market Context
Policy makers, industry professionals, and stakeholders have expressed concerns that the City’s
IHO has failed to produce as many affordable units as hoped since its establishment in 2002. As
a policy tool that leverages market rate, for-sale construction only, the tool will always be
inherently limited by the pace of the market. While the economic conditions of the past 12 years
have created a sometimes challenging environment in which to pursue development
opportunities, it is helpful to frame the various chapters of the recent past to understand the
circumstances under which the IHO functioned.
2002. At the time of the IHO’s passage, the nation and region were still recovering from the
effects of the technology industry downturn and a recession.
2002-2007. The nation and region then experienced a housing boom, during which housing
construction activity peaked and housing prices escalated at unsustainable rates.
2007-2009. This rate of rapid growth ended in the housing and financial market collapse and
recession lasting until 2009. While many projects were completed during this period, based
on financing acquired before the crash, new projects did not emerge to follow them.
2009-2014. More recently, while the region’s employment base has been recovering, the
foundations of the housing market have been slower to recover, as multiple factors, including
financing and CGL insurance, have created cost uncertainty and instability among the
development industry particularly as they relate to the construction of multifamily ownership
housing, which is the substantial market segment subject to IHO requirements.
Challenges
The following are the most relevant market and policy problems EPS believes relate to the
structure of the IHO and its responsiveness to applying uniformly throughout the city.
1. Household incomes have not kept pace with the cost of housing.
For the average Denver household (2.5-persons), median income grew by 28 percent, or 2.1
percent per year, from $52,800 in 2000 to $67,500 in 2012. After adjusting for inflation,
which grew at 2.2 percent per year, incomes and purchasing power actually decreased. By
contrast, the overall average housing price increased by 48 percent and new housing
increased by 69 percent, reflecting 3.2 percent and 4.6 percent rates of annual increase,
respectively. Additionally, the median price of a home increased by 95 percent, a 5.7
percent annual escalation.
2. The affordability gap has widened by $100,000 (or 169 percent) since 2000.
The affordability gap is a measure of the disparity between the median sales price of a home
and what a household earning the median income can afford to buy. In 2000, the median
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Economic & Planning Systems, Inc. 22 Final Report
sales price of a home was $225,000, but a household earning 100 percent of area median
income (AMI) could only afford a home at $166,000, making the affordability gap $59,000.
For a household earning 80 percent AMI, the affordability gap was an estimated $91,600. By
2012, whereas the median sales price had increased to $438,500, a household earning 100
percent AMI could only afford $279,500, making the affordability gap $159,000. For
households at 80 percent of AMI, the gap had grown to $215,400.
3. Extensive foreclosures during the recession artificially increased the supply of
affordable housing for a short time, but there is no reason to believe that low-
income households purchased any of these units.
High foreclosure rates were among the consequences of lending standards during the
housing boom. Between 2005 and 2012, there were more than 25,800 foreclosures in
Denver, approximately 15,300 of which were absorbed into the market at levels affordable to
households earning 70 percent AMI. While total housing sales at this affordability level had
averaged approximately 19 percent between 2000 and 2004, this portion doubled to 40
percent between 2005 and 2012 because of the influx. There is, however, no evidence or
data to suggest that these homes were actually purchased by households at that income
level, especially given tighter lending standards during the years following the housing
market collapse. It is important to note that this spike in the availability of moderately-
priced housing was temporary as a result of abnormal market conditions, and that the
magnitude of foreclosures has since receded.
4. The distribution of new for sale housing is increasingly concentrated at the higher
end.
In spite of the temporarily increased availability of moderately-priced housing units, the
portion of all new housing unit sales affordable to households earning 120 percent AMI or
more increased between 2002 and 2012. Analysis of sales shows that 41 percent of all new
housing sales in 2002 were priced for households earning 120 percent AMI or more. By
2012, that portion had increased to 49 percent.
5. Since establishment of the IHO, 1,144 on-site units have been built.8
With ever-increasing population base (2,600 new households per year), stagnating wages,
and housing price escalation that has been exceeding wage growth, the number of units built
on-site through the IHO represents less than 5 percent of the estimated for-sale units built in
the city between 2002 and 2012 (approximately 25,520) and only 4 percent of the number of
total new households to Denver to 2012 (nearly 27,000).
6. Except through developer agreements, the IHO has produced very few units.
Excluding the production of moderately-priced dwelling units (MPDU) through developer
agreements of large-scale projects, where affordable housing requirements were entered into
as an alternative path preceding or within the IHO, just 9 percent (82 units) of all MPDUs
have been built by developers of non-large scale projects. In contrast 91 percent (1,062
units) have been produced by large-scale projects. As these large-scale projects have
fulfilled their obligations, overall production of affordable homes has slowed.
8 Data regarding IHO unit production based on OED sources, August 2014. The City and County of Denver tracks both units
produced under the IHO and the developer agreements. This number reflects the total of both.
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Although several redevelopment areas within the city remain (the former St. Anthony’s
Hospital in south Sloan’s Lake, the former CU Hospital at 9th and Colorado, south Broadway
between Alameda and Mississippi, and the Denver Post Building in Globeville), these
redevelopment areas are significantly smaller than the previous generation of large-scale
projects (Stapleton, Lowry, Green Valley Ranch, the Central Platte Valley),with the exception
of large tracts of undeveloped land near the Gateway Station in the DIA neighborhood.
Although the City is currently in the process of taking stock of its land supply, it is likely that
the opportunities for future large-scale projects and thus developer agreements to provide
affordable housing will be limited.
7. Few affordable units have been produced since the end of 2004.
Not only were the vast majority of IHO units built in large-scale projects, but the majority
were also built before the end of 2004 (an average of 280 units per year between 2002 and
the end of 2004), primarily as the fulfillment of previous years’ developer agreements.
Between 2005 and 2008, however, the average number of IHO units produced dropped to
less than 75 units per year. Since 2009, just 20 units have been built.
Ultimately, the IHO can produce units only as fast as the market and only to the extent that
developers choose to build them. In the last five years, specifically, three multifamily for-
sale developments have been built, and only one was large enough to trigger the IHO
requirements. While the drop in production of the past five years is attributable to the drop
in production of market rate projects altogether, other relevant market issues are also at
play, such as the heightened legal risks and costs associated with insuring against the threat
of construction defects claims.
8. Too few affordable units have been built in areas of greatest need.
Of the 1,144 units built, zero have been built in the Central Business District (CBD) of
downtown, and fewer than 3 percent have been built in central Denver. The remainder have
been built outside of Central Denver in areas of relatively less need. According to City
records, for example, more than 50 percent of IHO units for which a CIL was paid, occurred
in the CBD. While the construction of affordable units anywhere in the city may be desirable
to meet the overall need, this pattern indicates that a uniform structure regarding the cash
per unit incentive and cash in-lieu option is ineffective at addressing areas with greater need.
Modifications to the cash incentive amount and cash in-lieu could be more appropriately
calibrated to reflect the economic and market differences of the city’s neighborhoods. (Refer
to Appendix Table A2 for a report of projects by neighborhood that paid the CIL instead of
building affordable units onsite.)
9. In the past, it has typically been more feasible for developers to pay cash in lieu of
building units.
It has been indicated that it is more financially feasible for developers to pay the Cash In Lieu
(CIL) fee than to build MPDUs on site. A pro forma analysis conducted in this study on the
feasibility of four different development prototypes (given current estimated cost and
revenue assumptions) confirms that it has been generally more financially feasible for
projects to pay the CIL than to build units on-site, particularly in high cost areas.
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10. Levels of affordable housing need differ by neighborhood.
The current IHO structure does not adequately respond to different levels of affordable housing
need by neighborhood. The analysis of housing costs by neighborhood illustrates the wide
spectrum of differences between housing costs throughout the city. In some neighborhoods
in 2012, for example, housing costs were nearly 75 percent below the citywide average of
$302,400, and in others, housing costs were more than 250 percent above the citywide
average. Moreover, trends suggest that housing in some neighborhoods has become more
expensive more rapidly than in others, pushing lower-income households out.
11. The current IHO structure does not adequately reflect the importance of creating
affordable housing opportunities in areas of greatest need.
The incentive and cash in-lieu structure of the IHO as applied uniformly throughout the city
does not reflect the level of priority the City would like to place on creating affordable
housing in areas of greatest need. Applied uniformly throughout the City, the subside and
CIL structures do not reflect the city’s priority to create more affordable opportunities in
areas of higher land value and housing costs. For example, because land and housing values
are high in the central city, development is most likely to target higher-priced housing
development, thus diminishing opportunities for more moderately-priced housing
development.
12. It is unclear to what extent large-scale developments may occur in the future.
While the City is currently in the process of taking stock of its supply of land, it is unclear
how many opportunities for future large-scale projects may exist.
13. Denver has fewer incentives to offer than other peer communities and the IHO’s
cash incentive per MPDU does little to motivate a developer’s behavior.
While never truly effective in Denver, the density bonus is no longer comprehensively
available as a tool Denver can offer to incentivize construction. The only remaining incentive
with economic value is the per unit incentive, which is currently ineffective at influencing
developer behavior. Originally intended to effectively waive development review fees at
$5,500 per unit, it is insufficient at influencing the economics of development feasibility to
warrant consideration of building units rather than buying out, particularly in high cost areas.
14. A housing development of significant scale under the current IHO structure would
not be able to receive its full cash incentive at time of development.
The current IHO structure does not allow more than $250,000 to be disbursed to a single
project in one program year. This structure was put in place to limit large scale single family
home developers, building their affordable units at a fast rate, from depleting the fund.
Condo projects, however, are by definition free standing, single-structure projects and
cannot pace their production in the same way single family homebuilders can.
Economic & Planning Systems, Inc. 25 123099-FinalReport_031915 (1)
4. PROPOSED SOLUTIONS
The following recommendations are tailored to address the noted problems and respond to the
City’s desire to use the IHO framework more effectively through targeting areas of need.
1. The IHO structure should reflect different levels of need as they occur across the
city.
With its requirements applied uniformly throughout the city, the IHO does not reflect or
adequately address the priorities of creating affordable housing opportunities in areas of
greatest need.
2. Use data to identify affordable housing need by neighborhood.
Grounded in an objective analysis of housing conditions, EPS recommends that the City
determine need by neighborhood on the basis of two variables—housing costs and proximity
to fixed-rail transit. These variables were chosen because of their representativeness,
applicability, and accessibility. Such an analysis by neighborhood also standardizes the IHO
process with other evaluations conducted by the City at a neighborhood level.
3. Adopt a tiered cash incentive per-MPDU by neighborhood.
In areas of high housing costs and high land values, it is unlikely that affordable housing will
be built without access to greater incentives. Conversely, in areas of lower housing costs and
lower land values, the City does not need to provide as great an incentive given that some
existing markets contain relatively affordable housing. That is, the City should place more
resources in areas of greater need and eliminate inefficiencies.
4. Adopt a tiered cash in-lieu structure by neighborhood.
While changing the cash incentive is intended to incentivize building units on site, a varied
CIL amount by neighborhood is also intended to discourage developers from selecting the
buy-out option, particularly in areas of greatest need. EPS recommends the City increase the
CIL in neighborhoods with great need and lower it in areas of low need. Where moderately-
priced housing is commonly found, EPS does not believe it is a good use of resources to
financially incentivize construction of units in low need areas.
5. Periodically update the data to ensure the IHO reflects changing need.
Because economic conditions change, data used to determine levels of need should be
updated every three to five years. This will ensure that the IHO is reflective of relatively
current conditions, and maintains a general level of predictability for developers, as opposed
to updating and thus changing the map each year.
6. The City should consider alternative mechanisms for funding affordable housing.
Discussed in a separate chapter, it is recommended that the City separately evaluate the
political and market feasibility of implementing a variety of different programs to generate
additional funding and create a broader base for development of affordable housing. These
recommendations are also suggested in light of the substantial debate surrounding crafting a
solution for the city that does not unduly burden a small portion of the community for the
benefit of a much broader set of the community.
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Modified Structure
The following section outlines the analysis and determinations for modifying the IHO’s cash
incentive and cash in-lieu fee structures on a neighborhood basis. The discussion summarizes
how the two major variables were decided through considerable stakeholder involvement and
public meetings, and how they are used and evaluated.
Neighborhood Level Housing Costs
The purpose of a neighborhood level analysis was to delineate different levels of affordable
housing need throughout the city. Degrees of affordable housing need were defined by two
variables: different levels of housing costs and by proximities to fixed-rail transit.9
Figure 12
shows the city’s statistical neighborhoods.
Figure 12
Neighborhood Map
Economic Variables
The following discusses how the variables were used to determine which neighborhoods fall in
low, medium, and high categories. Each variable was overlaid and analyzed at the neighborhood
level, after which trigger points were determined, i.e. points at which the economic conditions
9 During the study process, several other variables were evaluated and debated. Significant policy debate, however, occurred
around a few other factors, such as proximity to employment centers and jobs. In the final analysis, the jobs variable was
eliminated because its results were determined to be largely redundant of the results of the fixed-rail transit and housing cost
variables.
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changed substantially. This discussion also illustrates how the two variables were overlaid to
create the final low/medium/high neighborhood map.
Fixed-Rail Coverage
The first variable, the presence of fixed-rail transit or a development’s proximity to transit, is
important because it provides access to major employment centers and saves moderate income
families money compared to owning and/or always using a car.10
Because market forces have
generally raised housing prices near fixed-rail transit, these areas suffer from lower availability of
housing for moderate income families. Figure 13 illustrates the fixed-rail transit proximity
variable.11
,12
Shown in circles are half-mile buffers from each of the existing and proposed
fixed-rail transit stops throughout the city. It also illustrates the 21 neighborhoods identified as
having higher affordable housing need, according to the trigger point, i.e. 30 percent or more of
a neighborhood is covered by a half-mile fixed-rail transit buffer.13
Figure 13
30 Percent Fixed-Rail Coverage by Neighborhood
10 Consideration was given to and significant debate surrounded high-frequency bus service. Because, however, high-frequency
bus lines are dispersed fairly equidistantly throughout the City, the resulting analysis indicated that nearly all neighborhoods would
be characterized as having high affordable housing need and, thus, was not differentiable enough to be use in the final analysis.
11 Data used for this analysis are half-mile buffer zones around existing and proposed fixed-rail transit stations. The half-mile
buffer zone was chosen because it is commonly understood to be the maximum distance a person is willing to walk to a transit
option, such as fixed-rail.
12 See also Appendix Figure A1.
13 Significant debate surrounded discussions of this transit variable. High-frequency bus lines throughout the City were also
mapped, but resulted in nearly all neighborhoods being selected.
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A higher degree of sensitivity to this variable is illustrated in Figure 14, which shows the 16
neighborhoods selected when the trigger point is set to 50 percent coverage by a half-mile fixed
rail transit stop buffer. This second trigger point was essential in crafting a three-tiered
incentive/CIL structure for the recommended IHO changes.
Figure 14
50 Percent Fixed-Rail Coverage by Neighborhood
Housing Costs
The second variable is housing cost or “need”. It was determined that housing costs by
neighborhood were an appropriately detailed and objective measurement of levels of need. The
data source used for determining the level of need based on this variable was median sales
prices for homes by neighborhood.14
14 Other data sources, metrics, and time periods for analysis were explored and rejected during discussion and debate over the
use of housing cost data for this analysis. Due to the magnitude of foreclosures distorting the housing market in many
neighborhoods, and due to the foreseen complexity and difficulty in administering and generating future updates to this analysis,
these other time periods and metrics were eliminated.
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Using three categories of sales prices, Figure 15 illustrates the three tiers associated with this
variable. The categories used were determined by parsing the range of sales prices by three
segments separated by percentiles. As opposed to using the median, which identifies the point
at which 50 percent of sales are above and below, this analysis uses 2 percentile separation
points based on where the bottom 33 percent of sales fall, the middle 33 percent of sales, and
the upper 33 percent of sales. In the top 33 percent of sales, prices were higher than $306,546;
in the middle 33 percent of sales, prices fell between $160,560 and $306,546; and in the bottom
33 percent of sales, prices fell at or below $160,560.
Figure 15
Housing Cost Levels in 3 Tiers by Neighborhood
Neighborhood Classification
Methodology
Figure 16 illustrates how the two variables result in a map of zones that indicate low, medium,
and high need. For this analysis, a “low” neighborhood is a zone with a surplus of lower cost
housing. Alternatively, “high” neighborhoods are those with high costs, close proximity to
transit, and typically good proximity to jobs. Neighborhoods were assigned their respective
values based on the degree to which each variable was present. For the fixed-rail transit half-
mile buffer, neighborhoods that had less than 30 percent coverage received 0 points;
neighborhood that had between 30 and 50 percent coverage received 1 point, and
neighborhoods that had more than 50 percent coverage received 2 points.
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Housing cost variable values were determined by where a neighborhood’s median sales price fell.
Neighborhoods where median sales prices fell in the lower 33 percent of the distribution of sales
prices received 0 points, neighborhoods where the median fell in the middle 33 percent of sales
prices received 1 point, and neighborhoods where the median fell in the top 33 percent of sales
prices received 2 points.
Combined, neighborhoods that had 0 points were categorized as neighborhoods with “low” need;
neighborhoods with 1 or 2 points were categorized as neighborhoods with “medium” need; and
neighborhoods with 3 or 4 points were categorized as neighborhoods with “high” need.
Zones
This map does not suggest that the IHO’s 10 percent set-aside requirement be changed. It does
suggest where need is greatest, and where the cash incentive and CIL should be modified to
reflect that degree of need. When all neighborhoods are categorized according to the above
methodology, the following distribution results:
Low: 24 percent of neighborhoods throughout the city are characterized as having low
affordable housing need.
Medium: 60 percent of neighborhoods in the city are characterized as having medium
affordable housing need.
High: 15 percent of neighborhoods are characterized as having high affordable housing need.
Figure 16
Affordable Housing Need Map by Neighborhood
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Proposed Changes
The intent is to provide the City with an objective approach for distinguishing areas of low,
medium, and high need. It is with these distinctions that EPS recommends adopting (and testing
through the pro forma in the following chapter) a tiered cash incentive (for on-site construction)
and cash in-lieu (for the buyout option).
While augmentations and changes to many other components of the IHO were discussed and
debated in the stakeholder process, this tiered approach retools the IHO framework in such a
way as to use the City’s limited resources to leverage and incentivize the construction of units to
the greatest extent possible.
Cash Incentive
In areas of high housing cost and high land value, it is unlikely that affordable housing will be
built without greater incentive. Conversely, in areas of lower housing cost and lower land value,
less incentive needs to be provided where the market is characterized by relatively low land
value and is more likely to produce housing at or near affordable targets. As such, the
recommended cash incentive adjustments are based on the following objectives:
Fund the cash incentives in such a way to influence behavior
Steward limited City resources
Raise the cash incentive in high neighborhoods to the greatest extent possible
Preserve the existing level of cash incentive for a majority of the City
Lower the cash incentive in areas where increasing the affordable inventory might compete
with the market
Table 2 shows the modified cash incentive amounts. In high neighborhoods, which account for
15 percent of all neighborhoods, the cash incentive is increased to $25,000. In medium
neighborhoods, which accounts for 60 percent of neighborhoods, the cash incentive is $6,500 to
reflect the development review fee offset adjusted for inflation.15
In low neighborhoods, the
cash incentive is reduced to $2,500. It should also be noted that these recommendations are
based on the assumption that the incentives are funded exclusively from CIL payments.
Cash In-Lieu Payment
While a modified incentive structure is intended to influence developer behavior in favor of
building units, modifying the CIL structure is also intended to influence behavior regarding a
decision not to consider building affordable housing units, particularly in areas of greatest need.
The proposed solution is to increase the CIL in neighborhoods of greatest need and lower the CIL
in areas of lowest need. The rationale for raising the CIL in high-need neighborhoods is not
based on the mere intent to make “cashing-out” more costly, but to bring the proposed project’s
profitability more in line with the anticipated performance (profitability) of a project that builds
units onsite. That is, in high-need neighborhoods, a higher CIL amount is anticipated to lower
profitability by increasing costs, incentivizing a developer to consider the onsite building
requirement. In low need neighborhoods, because moderately-priced housing is more commonly
15 The current IHO cash incentives are funded through the IHO itself and were originally intended to offset the cost of development
review fees in 2002 (which, at the time, were estimated at $5,000). In 2006, the cash incentive amount was adjusted to account
for inflation and raised to $5,500 per unit. In this effort, the baseline cash incentive has also been adjusted further to reflect
inflation since 2006.
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found, a lower CIL is not necessary to disincentivize a developer to the fullest extent from opting
out of the affordable housing requirement.
As such, the CIL amount has been increased to 70 percent of the sales price for high
neighborhoods, remains the same in medium neighborhoods at 50 percent, and has been
reduced to 25 percent in low neighborhoods.
Table 2
Proposed IHO Changes
Updating the Maps
It is suggested that, because economic conditions change, that the data used to determine levels
of affordable housing need be updated periodically, e.g. every three to five years, to reflect the
changing needs by neighborhood. While it is unlikely that the location of fixed-rail transit will
change, it is recommended that median sales prices should be recalculated for every
neighborhood every three to five years based on at least three years of data, or at least a period
of time sufficient to provide an adequate data sample size.
Neighborhood Cash In-Lieu Cash Incentive
High
70% of Sales Price
($135,500 @ 80% AMI)
$25,000 per unit
Medium
50% of Sales Price (Existing)
($96,800 @ 80% AMI)
$6,500 per unit (Existing adjusted for
inflation)
Low
25% of Sales Price
($48,400 @ 80% AMI)
$2,500 per unit (Except within 1/2 mile of
transit, which receives a medium incentive)
Source: Economic & Planning Systems
H:\123099-Denver Housing Economic Study\Data\[123099-Proposed IHO Changes.xlsx]Summary
Economic & Planning Systems, Inc. 33 123099-FinalReport_031915 (1)
5. FEASIBILITY IMPACTS
The preceding analysis has demonstrated that housing affordability conditions have not improved
since adoption of the original IHO. Affordable housing supply in Denver has decreased while
demand has increased and affordability gaps have widened. Some neighborhoods in Denver also
show much greater need than others. The current IHO structure does not directly incentivize
affordable development in areas of greatest need, and it gives neither greater incentive for
building affordable inventory nor greater disincentive for buying out of the build requirement.
This chapter provides information on the purpose and development of the pro forma model, its
inputs, assumptions, and results. The findings illustrate the extent of the proposed changes’
impacts and provide guidance for discussions surrounding the likelihood that such changes
(outlined in the previous chapter) might result in more affordable units being built in areas of
greatest need.
Purpose & I ntent
The primary objective of the pro forma analysis was to test the impact of the proposed IHO
changes on the feasibility of representative and prototypical development. It was not the intent
to identify a specific project’s feasibility, but to use credible inputs and assumptions on current
market cost (land, hard cost, and soft costs) and revenue conditions to identify levels of impact
that the proposed changes would have on prototypical developments in Denver. Specifically, the
feasibility model was designed to:
Estimate the impact of the proposed IHO changes on four prototypical development types;
Contrast the impacts that the existing and proposed IHO have on feasibility;
Identify the magnitude of impact the proposed changes have on project feasibility;
Facilitate discussions regarding the likelihood that the proposed changes would influence
developer decision-making; and
Test the sensitivity of project feasibility levels to different degrees of incentive/buyout
amounts.
In broad terms, this effort was designed to identify whether the changes might reasonably be
anticipated to alter developer decisions to build units in areas of greatest need.
Methodology
Feasibility Model
The feasibility model was built to compare the magnitude of feasibility impact of proposed IHO
terms against scenarios under the existing IHO framework. Under this methodology, individual
metrics measuring the feasibility of each prototype (such as estimated project profit) become
less important than the difference between the estimated profit levels.
Model Structure
Two basic model structures are available: the static and dynamic (i.e. time-series) pro forma.
While the original intent was to use a static model, EPS ultimately made the following
considerations when responding to questions and comment regarding the pro forma analysis:
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Static Model: These models are used for higher level planning efforts, when exact hard and
soft costs estimated by actual contractors are unavailable. An advantage to using a static
model is that its complexity is intentionally limited, which avoids the pitfalls of results based
on artificial precision. The static model also avoids additional complexity of certain variables,
because the focus turns to the analysis of the difference between feasibility levels under the
existing versus proposed IHO framework. On the other hand, its disadvantage is that it does
not often reflect the risks and sensitivity to time-value of money associated with projects of
larger scale and developed over a longer period of time.
Dynamic Model: Dynamic models, on the other hand, are used when greater detail and
specificity about the market and project are known. Its main advantage is the measurement
of an internal rate of return (IRR). Because the development community ordinarily assesses
a project on the basis of an IRR, which requires making a number of assumptions regarding
timing, it can reflect the level of risk that the development and investment community
consider before pursuing a project. The disadvantage is that the additional factors add a
layer of complexity to the analysis that do not substantially alter the results of the
comparative policy analysis for which this modeling effort was intended.
Ultimately, EPS designed a model that struck a compromise between both structures. The model
incorporates a few critical elements of the dynamic model, such as levels of risk and associated
time-sensitive cost and revenue assumptions. As such, the model is built to evaluate the
sensitivity of and magnitude of impact on/from:
Four development prototypes
Different affordable unit AMI levels
Different cash incentive levels
Different CIL payment levels
Prototypes
Testing the impact of proposed changes on prototypical development types was a key feature of
this model. In considering which prototypes to test, it was determined that they should
represent a broad spectrum of development types, and that they reflect different construction
types. As a result, this spectrum of prototypes accommodates an assessment of how the
proposed changes would impact projects with different economies of scale and different levels of
risk. The following prototypes were determined to be representative of prototypical
developments:
2-story (18 units on 1.5 acres): This prototype was included in the feasibility model to
test the impacts to a project under the IHO’s current 30-unit threshold. Such a project would
be reflective of a townhome project developed at approximately 12 units per acre and would
be stick-built. In this model, all parking is assumed to be surface.
5-story (136 units on 1.5 acres): This prototype generally reflects a construction quality
where 4 floors of residential units are (stick) built over 1 floor of structured parking. The
modeled prototype reflects an efficient layout of approximately 90 units per acre, and where
it is assumed that approximately 90 percent of parking is structured.
8-story (178 units on 0.75 acre): This prototype reflects concrete construction where 100
percent of parking is structured. This prototype reflects a density of approximately 240 units
per acre.
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20-story (254 units on 0.75 acre): This prototype reflects concrete construction where
100 percent of parking is structured. This prototype reflects a density of approximately 340
units per acre.
Development of Inputs
Refinements to the model’s inputs were completed with the assistance of developers and made
use of actual development project pro formas. To compensate for the fact that the pro forma
shared represented projects 5 to 7 years old, EPS escalated basic hard and soft construction
costs, as well as particular line item expenses, such as insurance, to reflect the current market.
Cost & Revenue Inputs
Three categories of cost inputs were used for the model, including land acquisition, hard costs
(i.e. labor and materials), and soft costs (i.e. architecture and engineering, financing, insurance,
legal, development fee, contingency, etc.). Revenue inputs include the projected sales price
points of market-rate units, as well as MPDU pricing as stipulated by OED. The following
information and research was conducted to calibrate inputs appropriate to Denver’s market and
the various prototypical development categories:
Land Costs: EPS used City and County of Denver Assessor records and research from
CoStar to identify parcels of land sold for various scales of residential development. EPS also
compared this information against other data points from developers and research to identify
the most appropriate land value cost inputs. Determinations of appropriate value were made
to reflect neighborhoods in which these prototypes were likely to be built and vetted with
developers. (Range of inputs: $30 to $200 per square-foot)
Hard Costs: Among the more important cost inputs are the hard costs of construction,
including the actual vertical construction costs (hard costs), as well as the cost per space of
structured parking. In EPS’s analysis, this input includes the cost of all contractors’ labor and
materials, but excludes the cost of parking (which is calculated as a separate cost of
construction). As a result, the values used for each prototype reflect a gross cost per
square-foot of development.16
For construction costs based on past projects, EPS made
inflation adjustments based on the BLS producer price indexes for residential construction.
(Range of inputs: $120 to $210 per square-foot)
Soft Costs: This category of costs includes: a) architectural and engineering services; b)
development fees and administration; c) permits, fees, and entitlement; d) construction
financing (cost of carry); e) contractor general liability insurance; f) legal; g) marketing; h)
the cost of sale; and i) a contingency. Many of these soft costs are scaled according to the a
particular development prototype. In the case of larger projects, they are scaled to reflect
different (and increasing) levels of risk associated with costs such as the costs of carry,
insurance, legal, marketing, and contingencies, etc. (Range of inputs: 33 to 40 percent of
hard costs, which resulted in all-in construction costs, less land, of $163 to $280 per square-
foot).
Revenues: EPS used developer pro formas as a guide for calibrating the market-rate unit
pricing (per square-foot), but used an analysis of MLS data on new product sales to guide up
to date pricing assumptions and how those related to levels of absorption. (Range of inputs:
16 Many developers often use a “net leaseable area” cost per square-foot when speaking of hard construction costs. EPS’s model
uses a gross area cost per square-foot.
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$300 to $480 per square-foot on average, escalated to point in the future where sales
begin.)
Results
The model results are presented in Table 3 and are organized into two categories: impacts of
the existing IHO framework, and impacts of proposed IHO framework. The results also
distinguish between estimated profit of the four different prototypes across the low, medium, or
high zones.
Existing IHO Build vs. Buyout
It has been the general perception that buying out of the existing IHO’s “build” requirement is
more financially feasible for developers than meeting its “build” requirements, and the results of
this analysis confirm that. Column references [A] and [H] illustrate the estimated profit for each
alternative. Column [A] shows that building units on site results in estimated profit levels of
approximately 16, 20, and 15 percent, referring respectively to the estimated profit for the 5, 8,
and 20-story prototypes.17
Column [H] shows that under the buyout option, estimated profit
levels would be higher than the onsite construction option. Profits are estimated to be 18, 22,
and 17 percent, respectively.
While levels of return differ among prototypes, reflecting different levels of project risk, return
requirements also exhibit a degree of variation among investors. Generally, however, the larger
the project, the greater return generally sought, a trend which the results generally reveal.
Under ordinary market conditions, larger development prototypes are subject to higher risk
because of the scale of the development and the magnitude of carrying costs. Under current
conditions, however, larger projects are also subject to greater increased general liability
insurance costs associated with protecting the developer and/or contractors against the
eventuality of a construction defects claim.18
Proposed IHO Framework vs. Existing
The model results illustrate that the proposed changes impact feasibility levels in a generally
consistent fashion. Row references 22 through 25 illustrate how profit as a percent of overall
costs differs from the existing IHO framework.
Build Scenario
Under the build scenario, estimated profit generally decreases 0.1 percent among the prototypes
in low zones, remains neutral in the medium zones, and increases between 0.5 and 0.8 percent
in the high zones. In actual dollars, profit under the “build” scenario in low zones is estimated to
decrease by between $9,000 and $78,000 and increase by $59,000 to $508,000 in high zones.
This variation in profit reflects variation in cash incentive from $2,500 in low zones to $25,000 in
high zones.
17 The 2-story prototype is excluded from the present discussion because it characterizes a project which the IHO does not
currently apply to.
18 While EPS worked with developers and other cost experts to identify the best possible cost and revenue inputs, there remained
little clarity or consensus among the development community as to the likely costs an ownership condominium project under the
current environment would need to assume to move forward.
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Buyout Scenario
Under this alternative, the magnitude of impact is greater because of the scale of the per unit
CIL amount. In low zones, the buyout is reduced to 25 percent of the sales price of the MPDU
(ranging from approximately $48,000 per unit at 80 percent AMI to approximately $63,000 per
unit at 95 percent AMI). In medium zones, the buyout is approximately $96,800 at 80 percent
AMI and approximately $126,400 at 95 percent AMI. In high zones, the buyout is increased to
70 percent of the sales price (ranging from approximately $135,000 at 80 percent AMI to
approximately $177,000 per unit at 95 percent AMI). As a result, the estimated profit increases
1.8 to 2.3 percent, or between $148,000 and $1,488,000 in low zones. In high zones, project
profit is estimated to decrease by 1.4 to 1.8 percent, or between $118,000 and $1,190,000.
Analysis of Findings by Zone
This section briefly describes the differences between estimated project profit under each zone
(low, medium, high) for a developer of a 2, 5, 8, or 20-story prototype as applied to the existing
IHO framework versus the proposed framework. The issue is whether and to what degree might
these proposed changes impact a decision to build or buyout.
Low Zone
The objective in low zones was to place less burden on development where more affordable
inventory was not needed. As such, the proposed lower CIL places a lower burden on
development, and the lower cash incentive reflects the City’s priority to preserve its limited
resources for neighborhoods where affordable housing inventory is needed. The results of the
model indicate that reducing the CIL to 25 percent of the sales price of the MPDU increases
estimated profit for the 2, 5, 8, and 20-story (in the unlikely event such density were to be built
in the outer lying areas of the city) prototypes by approximately 2.5 to 4.0 percent.19
Medium Zones
The objective of the proposed changes for medium zone neighborhoods was to have a neutral
effect on development that occurs in most of the City’s neighborhoods (approximately 60
percent). The only change that occurs is very small increase in estimated profit from the
inflation adjustment to the cash incentive. As a result, the proposed change for developments in
medium zones is neutral.
High Zones
Where affordable housing inventory is needed the most, the proposed changes were intended to
influence behavior to the greatest extent possible by providing as much incentive as possible to
developments choosing to build affordable units and steer developments away from choosing to
buy out.
While it is less likely that a 2-story development would occur in a high zone, the results of the
model indicate that, whereas the decision to buyout was generally more profitable than building
affordable units by 0.2 percent (approximately $50,000), the proposed change to the CIL and
cash incentive per unit make building units more profitable than buying out by more than 2.0
percent (approximately $118,000).
19 Currently, the IHO does not apply to projects under 30 units. The 2-story prototype, which is scaled at 18 units, remains in the
analysis because of EPS’ recommendation to reduce the 30-unit threshold.
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For a 5-story prototype, whereas buying out under the current IHO framework is an estimated
2.0 percent more profitable (approximately $830,000), the proposed changes make building
units slightly more profitable than buying out by an estimated 0.2 percent (approximately
$430,000).
For an 8-story prototype under the current IHO framework, buying out was estimated to be more
profitable than building units by approximately 1.3 percent ($1.2 million). The proposed
changes make building units more profitable by 0.9 percent (approximately $840,000).
For a 20-story prototype under the current IHO framework, buying out is estimated to be more
profitable than building units by an estimated 2.1 percent (or $2.4 million). In this case,
however, although the proposed changes do not make building units more profitable, the gap
between the alternatives is significantly narrowed. Under the proposed changes, the profitability
of buying out is an estimated 0.2 percent greater (approximately $748,000).
Economic & Planning Systems, Inc. 39 123099-FinalReport_031915 (1)
Table 3
Pro Forma Results
Column References [A] [B] [C] [D] [E] [F] [G] [H]
(Existing IHO) (Existing IHO)
Current Current
Row Subsidy LOW MED HIGH CIL Amount LOW MED HIGH
1 Subsidy per MPDU $5,500 $2,500 $6,500 $25,000
2 Cash In-Lieu (CIL) 50% 25% 50% 70%
3 @ 80% AMI (two-bdrm) $96,762 $48,381 $96,762 $135,467
4 @ 95% AMI (two-bdrm) $126,423 $63,211 $126,423 $176,992
5
6
7 Project Profit
8 2-Story 12.9% 12.8% 12.9% 13.7% 13.1% 15.4% 13.1% 11.3%
9 5-Story 15.6% 15.5% 15.7% 16.4% 17.6% 19.4% 17.6% 16.2%
10 8-Story 20.3% 20.2% 20.3% 20.9% 21.6% 23.7% 21.6% 20.0%
11 20-Story 14.8% 14.7% 14.8% 15.3% 16.9% 18.8% 16.9% 15.5%
12
13 Project Profit
14 2-Story $907,404 $898,404 $910,404 $965,904 $957,225 $1,105,313 $957,225 $838,754
15 5-Story $5,323,736 $5,284,736 $5,336,736 $5,577,236 $6,163,177 $6,701,171 $6,163,177 $5,732,782
16 8-Story $12,102,304 $12,045,304 $12,121,304 $12,472,804 $13,344,694 $14,395,754 $13,344,694 $12,503,846
17 20-Story $13,780,770 $13,702,770 $13,806,770 $14,287,770 $16,225,310 $17,713,383 $16,225,310 $15,034,851
18
19
20
21 Profit Over / Under Existing
22 2-Story -0.1% 0.0% 0.8% 2.3% 0.0% -1.8%
23 5-Story -0.1% 0.1% 0.8% 1.8% 0.0% -1.4%
24 8-Story -0.1% 0.0% 0.6% 2.1% 0.0% -1.6%
25 20-Story -0.1% 0.0% 0.5% 1.9% 0.0% -1.4%
26
27 Profit Over / Under Existing
28 2-Story -$9,000 $3,000 $58,500 $148,088 $0 -$118,471
29 5-Story -$39,000 $13,000 $253,500 $537,994 $0 -$430,395
30 8-Story -$57,000 $19,000 $370,500 $1,051,060 $0 -$840,848
31 20-Story -$78,000 $26,000 $507,000 $1,488,074 $0 -$1,190,459
[Note 1]: Some projects are likelier than others. For example, there w ill likely not be a 20-story project in a neighborhood designated LOW; there w ill also likely not be a 2-story
project in a neighborhood designated HIGH.
[Note 2]: Project profit is not an IRR and does not reflect a rate of return. Project profit is defined as (Total Revenues - Total Costs) ÷ Total Costs
Source: Economic & Planning Systems
H:\123099-Denver Housing Economic Study\Models\[123099-Feasibility Model-Aug 18 2014.xlsm]Table 8 - Results (2)
Onsite MPDU Construction IHO Buyout Option
(Proposed IHO Structure) (Proposed IHO Structure)
Neighborhood Neighborhood
Economic & Planning Systems, Inc. 40 123099-FinalReport_031915 (1)
6. ALTERNATIVES
Beyond the intent of this study, it should be acknowledged that the IHO is not and should not be
the only tool which the City uses to ensure or invest in the production of affordable housing.
This section summarizes a few other policy tools that have been identified by Council members
or stakeholders as potential alternatives to, or complements to, the IHO for funding affordable
housing.
Commercial Linkage
Commercial linkage fees are a form of impact fee assessed on new commercial developments or
major employers based on mitigating the need for workforce housing generated by the new or
expanding commercial business or development providing commercial space for new business.
Revenues collected from fees are then used to help fund the development of affordable housing
within the community.
Because they are an impact fee, linkage fees legally require a nexus study to establish the basis
for the fee. The study quantifies the cost of the capital facilities needed to address the estimated
impacts, allocates these costs to the new development, and sets the required payments. The
commercial impacts are most often calculated as a cost per square foot of commercial space
based on the number of employees estimated to occupy the commercial space. As a result there
are different rates calculated for retail, restaurant, office, hotel, and industrial space. It is
important to note that commercial linkage, like all impact fees, can only be used to pay for the
impact of new development on housing demand going forward. They cannot be used to address
existing capital deficiencies in the community.
Some communities combine an IHO with commercial linkage fees to allocate a portion of the
affordable housing burden to both new residential and commercial development. Cambridge,
MA, for example, has a form of commercial linkage fee as part of its housing program, though it
is regulated as a component of its IZO/IHO. In resort settings, commercial linkage fees are used
jointly with IHOs in Aspen, Telluride, and Park City.
Case Study: Cambridge
Cambridge, Massachusetts’s incentive zoning ordinance (IZO) requires developers seeking
certain Special Permits to comply with the Incentive Zoning provisions. Incentive zoning applies
to commercial developments of more than 30,000 square feet of gross floor area. The provisions
apply when a developer seeks: an increase in the density or intensity use, such as increased
floor area or height; waiver or reduction of parking requirements; changes in dimensional
requirements; or additional uses that result in an increase in density or intensity of use.
Developers with projects that are subject to the IZO are required to make a housing contribution
(HC) or create affordable housing units. The HC is currently $4.44 for every square foot of gross
floor area over 2,500 square feet of the portion of the project authorized by the Special Permit.
The amount of the HC may be adjusted annually by the Cambridge Affordable Housing Trust.
Payment of the HC is required before the issuance of certificates of occupancy for developments
subject to the IZO.
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Developers may instead elect to create affordable units or donate land to be used exclusively for
the development of affordable housing in the city. Affordable units or land donation must be of
equivalent benefit as the HC toward addressing the City’s affordable housing needs.
In terms of the administration of this IZO, its provisions are reviewed and recalculated every
three years by the City Council based on consideration of current economic trends including but
not limited to development activity, commercial rents per square foot, employment growth, and
housing trends measured in terms of vacancy rates, production statistics, and prices for units.
In general, Cambridge’s Affordable Housing Trust (AHT) receives significant financial support
from the Community Preservation Act (CPA), a voter approved funding mechanism that allow
Massachusetts communities to leverage funds to support pres. Of OS, list preservation, and
income supply of affordable housing. Adopted voluntarily by communities wishing to participate,
the CPA is funded by a small property tax mill levy. Between 2002 and 2014, City Council
approved $105 million in CPA funds for the AHT leveraging property tax, as well as local and
state funds. In 2012, the city’s AHT received $7.68 million in appropriations from CPA funds.
Since 1989, the AHT has provided financing for creation or preservation of 2,600 rental and
ownership units.
Residential Linkage
A less common practice, and more relevant in high-end and resort markets, is the adoption of
residential linkage fees. These fees are assessed against residential developments to mitigate
the affordable housing needs created by the permanent employment they are estimated to
generate. In Teton County, Wyoming, these fees are imposed on large vacation homes (e.g.
greater than 2,500 square feet of habitable floor area) to mitigate the demand for employees to
provide property management, landscape maintenance, cleaning, road maintenance, and snow
removal services. In Telluride, these fees are applied to resort lodging developments to mitigate
the requirements for accommodations related to employment such as retail, restaurant, maids,
and other service workers.
Case Study: Aspen
Today the requirement to construct affordable and workforce housing is controlled through the
City’s Growth Management Quota System (GMQS). The system affects any new residential and
commercial construction in the city. Though the City characterizes its affordable housing
requirements as more general employee housing requirements, the City has each of the major
affordable housing tools: an IHO for multifamily residential construction, residential linkage
program for single-family and duplex construction, and a commercial linkage program for non-
residential development.
The GMQS requires residential development provide a total of 30 percent of total floor area as
affordable. Commercial development must provide affordable housing for 60 percent of the
anticipated employees through commercial mitigation. Overall, the program has overseen the
construction of approximately 2,800 affordable residential units, approximately 1,500 for-sale
units and 1,300 rental units.
As with most IHOs or linkage programs, a developer may construct units off-site or pay a fee in-
lieu of the construction requirement. The in-lieu payment, however, must be approved by Aspen
Pitkin County Housing Authority (APCHA). The CIL differs by housing category, from $264,228
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for a low-income unit (Category 1) to $130,213 for a middle income unit (Category 4). Each
year the CIL is increased by 3 percent or the Consumer Price Index (CPI), whichever is greater.
Dedicated Property Tax
One of most powerful alternatives and/or additional affordable housing funding mechanisms is a
dedicated and time-limited property tax. Such a funding source must be approved by voters and
is currently in use in Seattle and Cambridge, as well as Boulder and Pitkin County. Typically
brought to voters in the form of a bond issue, an additional mill (generally around 0.50 mills) is
typically proposed to be time-limited and accompanied by a plan to build or rehabilitate, require
ore preserve units. Communities bring such initiatives to voters in the form of a bond issue or
the ballot, proposing to raise a certain amount of funding to build, rehabilitate, preserve ore
acquire affordable housing units via an additional time-limited (5 to 10 years) property tax mill
levy, which in these four examples ranges between 0.17 and 0.80 mills. The ballot question may
also include an estimate of average impact to local households’ annual property tax liability.
Case Study: Seattle
Seattle has had remarkable success in the use of a dedicated property tax to fund affordable
housing needs of a wide variety. With its first voter-approved housing levy in 1981, Seattle has
funded four additional bonds and/or levies for these purposes. In 2009, the City passed its fifth,
a 7-year dedicated property tax mill of approximately 0.17 to fund $145 million for affordable
housing opportunities for low-income residents.
Since the first housing levy, Seattle has funded more than 10,000 affordable apartments for
seniors, formerly homeless individuals and families, and low- to moderate-income wage earners,
as well as provided loans to more than 600 first-time homebuyers and rental assistance to more
than 4,000 households. The 2009 levy is estimated to produce nearly 1,700 rental housing
units, 175 housing units through acquisition and rehab, preserve 220 rental units, facilitate
homebuyer assistance for 180 home purchases, and provide rental assistance and homelessness
prevention for more than 3,000 households. To date, the City is on target with its housing levy
goals and will likely exceed them.
According to the City’s latest Abstract of Assessment, there was approximately $9.4 billion in
residential and commercial property valuation in the City/County of Denver in 2013.20
Table 4
reports the estimated mill levies needed to generate hypothetical total revenue amounts, as well
as the estimated property tax liability impact to households with a median value home.
The table shows the mill levies needed to generate $5 million, $10 million, or $100 million over a
one- or three-year period of time. According to the Gallagher Amendment, residential property
generates no more than 45 percent of total property tax revenues. As such, the following
calculations show the estimated mill levy amounts for residential property.
To generate $5 million, for example, of which residential property would generate approximately
$2.3 million (or 45 percent), and which is roughly equivalent to the balance of the current IHO
special revenue fund, the City could establish a one-year property tax mill of 0.503 or a three-
year mill levy of 0.168. Generating $10 million would require a doubling of those mills: i.e.
1.007 mills for a one-year levy and 0.336 for a three-year levy; and generating $100 million
would require a mill 10 times those levels.
20 Available online at: https://denvergov.org/Portals/2/documents/Denver%202013.pdf
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In terms of impacts to households, it is estimated that a property tax mill of 3.356 (generating
$100 million over three years) would add approximately $67 to a household’s annual property
tax liability (or $26 per $100,000 of market valuation).
Table 4
Estimated Impact of Time-Limited Property Tax
As with the pursuit of a dedicated and time-limited sales tax, EPS would recommend that the
City pursue a time-limited property tax dedicated to housing as a component of a longer-term
funding strategy. If it took this path, EPS recommends that a very small mill levy of 1 mill or
less be pursued, because this option would also result in potentially higher burden to non-
residential property owners.
Excise Tax
As with a sales or property tax, the excise tax more broadly distributes the burden of providing an
alternative funding source for affordable housing to the entire development community, rather
than one segment as is the case with the existing IHO. The excise tax is also a preferable option
by comparison to a linkage fee, because it does not require a complicated nexus study to
establish its basis, and it does not require that collected funds be allocated to a specified set of
improvements. It does, also however, like a sales or property tax, require voter approval.
Excise taxes are paid at the time specific goods are purchased. Common examples include
gasoline, diesel fuel, liquor, wine, cigarettes, airline tickets, tires, trucks, etc. There are also
excise taxes on activities, such as on wagering or on highway usage by trucks. For the purposes
of affordable housing need funding and mitigation, excise taxes are commonly placed on
construction materials on new development, residential and/or non-residential. A couple
examples of regional excise taxes are:
Boulder: The excise tax is a tax on construction materials for all new development.
Boulder’s excise tax, for example is $230 per 1,000 square feet of residential development
and $510 per 1,000 square feet of commercial development.21
21 http://www.colocode.com/boulder2/chapter3-9.htm
One-Year Three-Year One-Year Option Three-Year Option
Residential & Commercial Assessed Valuation (AV) in 2013 $9,356,216,090 $9,356,216,090 --- ---
Residential AV $4,469,705,810 $4,469,705,810
AV of Median Home Value (2012) --- --- $19,996 $19,996
Residential Mill to Generate Hypothetical Revenue Goals [1]
$5,000,000 0.503 mills 0.168 mills $10.07 / yr $3.36 / yr
$10,000,000 1.007 mills 0.336 mills $20.13 / yr $6.71 / yr
$100,000,000 10.068 mills 3.356 mills $201.31 / yr $67.10 / yr
Source: City/County of Denver; Economic & Planning Systems
H:\123099-Denver Housing Economic Study\Data\[123099-Property Tax Impact.xlsx]TABLE 1 - Property Tax Impact
Property Tax Mill
Estimated Property Tax Liability Impact on
Households with a Median Value Home
[Note 1]: Based on the requirements of the Gallagher Amendment, residential property provides approximately 45 percent of total property tax revenues, assessed at approximately
7.96%.
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Parker: Although its excise tax is treated like a capital expansion fee (or development
impact fee), Parker’s excise tax is paid by the builder at the time a building permit. It
applies to all new residential construction (ranging from approximately $3,200 to
approximately $4,400 per single-family unit) and non-residential construction ($0.32 per
square-foot).
Appendix:
Supporting I n f o rmation
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Economic & Planning Systems, Inc. 46 Appendix
Supporting Tables and Charts
Figure A1
Existing and Proposed Stations Map
Denver Housing Economic Study
March 2015
Economic & Planning Systems, Inc. 47 Appendix
Figure A2
Predominance of Households at 80% AMI or Below, 2000
Denver Housing Economic Study
March 2015
Economic & Planning Systems, Inc. 48 Appendix
Figure A3
Predominance of Households at 80% AMI or Below, 2010
Denver Housing Economic Study
March 2015
Economic & Planning Systems, Inc. 49 Appendix
Figure A4
Neighborhood Average Sale Prices, 2000
Denver Housing Economic Study
March 2015
Economic & Planning Systems, Inc. 50 Appendix
Figure A5
Neighborhood Average Sale Prices, 2010
Denver Housing Economic Study
March 2015
Economic & Planning Systems, Inc. 51 Appendix
Table A1
Density Bonus Incentives in Current Denver Zoning Code
Category of
Zoned Land
Applicability in City of Denver
Affordable Housing Zoning
Incentives or Removal of Barriers
to Affordability
Comments
1. Properties
with form-based
zoning under
DZC
Applies to 57,285 acres of the city’s land
area (not including DIA):
• About 77% of total city land area
• Parking reductions for affordable housing
units, small units, residential units on small
lots, transit proximity, mixed-use buildings
• No minimum dwelling unit size in
residential zones
• Smaller lots (as small as 3,500 sf) are
allowed for new single-unit or two-unit
development
• Accessory Dwelling Unit (ADU) use allowed
in more zones
• No specific floor area bonuses*1 for
provision of affordable units
• This is the majority of zoned land in Denver
2. Properties
with FAR-based
zoning under
DZC
Applies to 365 acres of the city’s land area
(not including DIA): • 0.6% of total city land
area • D-C, D-TD, D-AS, and D-GT zone
districts (see attached map for more detail)
• Additional floor area* for provision of
affordable units. Bonus ranges from 40%-
100% of the subject zone lot area.
• Parking reductions for affordable housing
units, small units, units on small lots
• There are no plans at this time to convert D-
C (Downtown Core) and D-TD (Downtown
Theater District) zones to DZC form-based
zones • 2014-2015 CPD/Planning Services
work program includes conversion of D-GT
(Golden Triangle) and D-AS (Arapahoe
Square) zones to DZC form-based zones
3. Properties
with FAR-based
While 16,640 acres (22%) of the total land
area in city (not including DIA) retain FC59
zoning, only 2,190 acres are zone districts
that include FAR premiums:
• 3.0% of total city land area
• FC59 business zones (e.g., B-1, B-2, B-3)
Denver Housing Economic Study
March 2015
Economic & Planning Systems, Inc. 52 Appendix
Table A2
Projects Paying Cash In-Lieu
Project Name Neighborhood IHO Requirement
2500 Walnut Loft Condos (Benjamin Moore Lofts) Five Points 4
Museum Residences Civic Center 6
Manor Homes @ Platte Park Platte Park 4
Zi Lofts Five Points 4
Ajax Lofts Five Points 5
Watermark Village Condos Baker 9
Spire Central Business District 49
Teatro Towers Residences (Four Seasons) Central Business District 10
Montrechez Southmoor 7
One Lincoln Park Condos Five Points 18
250 Columbine Cherry Creek 7
Total 123
[Note 1]: Approximately 52.8% of the units that paid cash in lieu w ere from "dow ntow n".
Source: City/County of Denver Assessor; Economic & Planning Systems
H:\123099-Denver Housing Economic Study\Data\[123099-CIL Projects.xlsx]Summary
1
Construction Defects
Tom Leeson, CDNS Director
02-09-16
Construction Defects
Direction Sought and Questions to be Answered
1. Would the City Council like to proceed with local legislation
addressing the construction defects issue?
2. Are there other actions the City Council would like to take to
address the construction defects issue?
2
Construction Defects
Colorado’s Construction Defect Action Reform Act (CDARA)
Colorado law governing claims and litigation related to construction
defects.
CDARA was passed in 2001 (amended in 2003) with the intention of
curbing frivolous lawsuits affecting the construction industry and limiting
the liability of construction professionals.
3
Construction Defects
Colorado’s Construction Defect Action Reform Act (CDARA)
CDARA governs all actions (including arbitration) brought against a
“construction professional” that assert a claim “caused by a defect in the
design or construction of an improvement to real property.”
CDARA is not limited to only those parties actually performing physical
construction; it governs claims against nearly everyone involved in the
construction process.
4
Construction Defects
Consumer Protection
• Builder is in better position than consumer to ensure construction of a
residence is suitable
• Protect buyers from poorly-constructed homes of any kind
5
Construction Defects
Unintended Consequences
Severely limited the construction of new condominiums
DRCOG published a comprehensive Denver Metro Area Housing
Diversity Study
8,545 housing units under construction in downtown Denver (2013) -
193 units were for-sale product
6
Construction Defects
Unintended Consequences
DRCOG added that builders said they were no longer pursuing
condominium projects in Colorado because of the increased costs and
heightened risk of litigation
“the most significant impact on the construction of for-sale attached
products has come from costs related to construction defects litigation”
7
Construction Defects
Construction of Owner-Occupied Units in Fort Collins
8
Construction Defects
Construction of Owner-Occupied Units in Fort Collins
9
Construction Defects
Construction of Owner-Occupied Units in Fort Collins
• Owner-occupied multi-family units are an important segment in the
real estate market
• Offering first time homebuyers entry into the real estate market
• Provide more attainable option than single-family detached housing.
• Important higher density settings - along transit lines and within
urban core.
10
Construction Defects
Options for Fort Collins
• Require a Plat Note requiring binding arbitration prior to filing of
lawsuit (similar to Arvada & Wheat Ridge).
• Engage development community to provide education on existing
self-help options.
11
Construction Defects
Options for Fort Collins
Adopt an ordinance similar to City of Denver with 3 primary
components:
• Building Code Violation
• Informed Consent
• Alternative Dispute Resolution
12
Construction Defects
Options for Fort Collins
• Take no action locally
• Continue to work with state legislation to address construction
defects law, including cooperative efforts organized by CML
13
Construction Defects
Options for Fort Collins
The LRC reviewed Construction Defects January 19, 2016
• Proceed with a Construction Defects ordinance that addresses
issues similar to the recently adopted City of Denver legislation
• Engage in all options presented
• Construction defects legislation in other states and the impacts on
the housing market
14
Construction Defects
Direction Sought and Questions to be Answered
1. Would the City Council like to proceed with local legislation
addressing the construction defects issue?
2. Are there other actions the City Council would like to take to
address the construction defects issue?
15
and mixed use residential zones (e.g., R-3,
R-4)
• Additional floor area* for provision of
affordable units. Bonus ranges from 20-40%
of the subject zone lot area.
• These retained FAR-based FC59 zones
often have attached waivers or conditions
that could limit the application of these
affordable housing incentives (e.g., reduced
building height or FAR than otherwise
allowed)
• 2015-17 CPD/Planning Services work
program includes conversion of remaining
FC59 zones to DZC form-based zones
Source: Economic & Planning Systems
H:\123099-Denver Housing Economic Study\Data\[123099-Proposed IHO Changes.xlsx]CPD Housing Incentives
[Note 1]: While “floor area ratio” (FAR) and “density” are sometimes used interchangeably in conversation, technically “density” refers to the number of residential dw elling units
allow ed per acre of land (e.g., 15 du/acre), w hile FAR refers to the total amount of buildable floor area allow ed per square foot of subject land area (e.g., 1 to 1). A “bonus” given
in the form of additional floor area could be devoted to any purpose in a development project (e.g., a bigger lobby or common areas) and w ould not necessarily result in increase
residential density or the total number of dw elling units on the subject land.
Increased height and
FAR
Fee waivers;
15% to 25% density
bonus;
Lot coverage bonus
30% density bonus
Density bonus;
Expedited approval
and permitting
process
Density bonus (in
certain downtown
districts); negotiated
Allows a 1-for-1
(unit) density bonus
for each affordable
unit provided
None Fee waivers
up to 20% and 33%
density bonus
Alternative Satisfaction Options
Off-site construction;
Existing units off-site
dedicated as
permanently
affordable;
dedication of vacant
land
Off-site construction
requires a 15% set-
aside
Off-site construction
of units at 125% of
on-site requirement
Land dedication;
Dedication of
existing units;
Off-site construction;
Fee in-lieu
No off-site provision Land dedication
Off-site construction
allowed
Off-site units must
be sold at 70% AMI
Off-site allowed in
same community
district or within 1/2-
mile
CIL Amount (if applicable)
$132,000 (attached
product);
$157,000 (detached
product);
additional 50% if
fewer than 50% of
required units are
constructed on site.
approximately
$200,000 per unit
Not allowed
Only allowable under
determination of
"significant hardship"
$85,000 per unit
(inflated by cost of
housing price
increase)
$100,000 per unit
(2013) inflated with
CPI
Costs updated on
annual basis,
according to
ordinance ($37,500
per unit as of 2013)
Gap between
affordable unit sales
price and cost to
construct ($171,000
for Studio unit in
2013)
Not allowed
Source: Economic & Planning Systems
H:\123099-Denver Housing Economic Study\Data\[123099-Housing Program Matrix.xlsx]Table 1 - US IZO Programs