Vail Daily column: Workforce housing success
October 6, 2016
Most of us who have lived in this valley for some time have experienced the challenges of living in a rural resort community. The financial challenges are many, beginning with the high cost of real estate, which eventually impacts the cost of everything we need and do. We rationalize our high cost of living by emphasizing the incredible lifestyle available in this remarkable community.
Topping the list of challenges is how to effectively provide and sustain an adequate supply of affordable housing for our growing workforce. While the inherent shortfall of workforce housing has abated slightly a couple of times in my 35 years in the valley, I think we all agree that resort communities tend to suffer a chronic shortfall of affordable housing, negatively impacting a multitude of issues. We agree that affordable housing is a very high priority, but we fail to solve the problem.
Lack of suitable sites, high land and construction costs, lack of political will and inconsistent government incentives have all played a role in the collective failure. We want to believe that out-of-town developers have better chances of success because they have succeeded elsewhere. This misconception has resulted in many failures. It ignores the fact that building in a resort community is often different than elsewhere and presents unique challenges.
The only formula for success that I have found has been identifying and engaging the various stakeholders in our community to join in a collaborative effort to overcome the inherent challenges. This formula has resulted in more than 800 new rental units in the Vail Valley over the past 25 years. These include EagleBend Apartments, Kayak Crossing, Buffalo Ridge, Lake Creek Village, RiverEdge and the Tarnes at Beaver Creek. Others have used this approach with the development of LionsRidge and Middle Creek in Vail. These properties represent more than 80 percent of the stock of traditional affordable rental apartments in the valley. We must be doing something right.
Lack of suitable sites, high land and construction costs, lack of political will and inconsistent government incentives have all played a role in the collective failure.
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The list of local stakeholders has included landowners, developers, affordable housing corporations, resort operators, other employers and local governments. Collaborators have included Colorado Division of Housing, Colorado Housing and Finance Authority, Housing and Urban Development, local lenders, consultants, underwriters and interested community leaders. Many of the traditional structures used for affordable housing don't work very well in resort communities for a variety of reasons, such as roommates, seasonality, lack of economic development data and high construction costs. The successful projects that have navigated this quagmire of regulation, impact fees, design review, land use, financing and competing development initiatives have produced sustainable workforce housing that has remained relatively affordable over time (through deed restrictions and financing structures that put no upward pressure on rental rates).
By taking advantage of low-cost tax exempt financing, property tax exemption or abatement, exemption from sales and use tax on construction and supplies, fee waivers or deferrals, and eliminating the long-term profit motive through public/private ownership structures, several projects have become a reality. In most cases, land sellers were paid from future cash flows resulting from these successful projects. While developers were paid a fair development fee commensurate with the financial risk undertaken, a portion of these fees were deferred and paid from future cash flows, as long as debt service covenants with lenders were achieved. Other participants (employers, stakeholders) invested real cash in return for subordinated bonds that paid off over time. These properties set rental rates at the minimum level necessary to pay debt service and maintain the properties.
Absent was an inherent profit motive traditionally used to raise rents to whatever the market would bear. In traditional multi-family development, an owner will maximize cash flow in order to sell the property to an investor seeking to make a profit, at capital rates that will perpetuate a rent increase cycle again and again.
Rental rate increases for the workforce properties I have been involved with have averaged 2.1 percent over the past 20 years. Throughout the past seven years (including the economic downturn), these rental rates have been essentially flat, with a nominal rent increase in 2016 to support increasing maintenance and replacement expenditures. Compare that to the Denver metropolitan area where rent increased 8.5 percent for the past five years, compounding to an aggregate rental rate increase of 50 percent.
While normally I am a strong believer in allowing market forces to drive development decisions based on future home values and rental rates, sometimes the public sector needs to intervene with appropriate regulations and incentives, especially here in a rural resort community. Several federal and state housing advocates have promoted such incentives, but they don't always work as well in resort communities because of the extreme market forces that have traditionally driven real estate values in this valley.
The nonprofit/public/private rental property initiatives and collaboration that started in this valley some 25 years ago have worked. Unfortunately, we have not kept up with demand for a variety of reasons beyond most of our control. Free market forces would typically respond to this imbalance with dramatically increasing market rents. That has not happened here. There is no question we need to add to the supply of workforce housing in this valley. We can certainly embrace new ideas that might help this happen, but we should not abandon those mechanisms that have worked very well for the past 25 years.
Eagle County is committed to using a new proposed funding source in the form of a 0.3 percent sales tax to assist with these public/private partnerships. The sales tax is scheduled to sunset after 20 years. If successful, the projects partially funded by this new funding source should create a permanent funding source by paying back the assistance they receive into a county housing fund that becomes self-sustaining. With the challenge of high cost of land, high construction costs and other challenges we face, this new source of funding could go a long way towards addressing the supply side of our workforce housing challenge.
Gerry Flynn is managing member of Polar Star Properties in Edwards, which manages more than 500 workforce housing units in Eagle County. Flynn has been involved in the development of more than 1,200 apartment units in resort communities, mostly in Vail Valley.
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