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The High Cost of Affordable Housing in Denver

University Station is affordable housing built by Mile High Development and Koelbel and Company.

McDermott Properties recently broke ground on a 98-unit Westwood Crossing project.

The Denver Housing Authority is the largest owner and developer of affordable housing in the city.

Ismael Guerrero is DHA executive director.

The buyer of the median home in metro Denver needs to make $68,436 a year to qualify for a mortgage.

Affordable housing is in high demand and short supply in Denver. As the city attracts more and more newcomers, how can costs be contained for the middle class?
The lack of affordable housing in Denver is a growing crisis that affects everyone, regardless of income.

One out of four renters in the Denver area now spends more than half of their income on housing -- that's 104,000 out of nearly 400,000 renter households, according to Mothers Advocating for Affordable Housing.

For those trying to buy their first home, the market also is challenging. A recent report from HSH.com found that a buyer of a median-priced home in metro Denver needs to make a salary of $68,436 a year to qualify for a mortgage and cover expenses like property taxes and insurance. That's $17,322 more than would be required for the U.S. median home price of $222,700. The median home price in metro Denver in the fourth quarter of 2015 was $353,500, up 12.3 percent from the same quarter the year before.

"It's a good thing the market is so strong, but it's moving so quickly that we can't keep up with the production needs," said Susan Powers, president of Urban Ventures and a co-founder of Mothers Advocating for Affordable Housing. "It's pushing people out of the city."

For Powers, the story is more than numbers. She questions how a public school teacher teacher making an average of $38,765 a year can afford to live in in Denver. It also puts a strain on businesses trying to recruit employees.

"People have jobs, but they still can't afford what's here because the rents have gone up so much that they're spending 50 to 60 percent of their income," says Powers, who is building 85 affordable apartments and townhomes as part of the first phase of Aria. "We have to decide what kind of city we want to be. If we don't address this issue, we won't have a middle class in this city, and that's who keeps this city going."

A market-rate mentalityMcDermott Properties recently broke ground on a 98-unit Westwood Crossing project.

Arthur McDermott knows what it takes to get an affordable housing project financed.

As president of Englewood-based McDermott Properties, he's been developing affordable housing projects since 1998. He says that over the years, the process hasn't changed much, but it has become a bit more complex.

"Many of the investors and lenders have become more risk averse and have really developed lots of legal documents that have to entered into in order to secure an investment in a tax-credit project or secure debt in a tax-credit project," says McDermott, who recently broke ground on a 98-unit affordable housing project in Denver's Westwood neighborhood. "We submit voluminous applications -- they're probably about a foot thick."

He also notes that when the recession hit in 2009, developers of market-rate housing migrated to affordable housing, increasing the competition for the limited tax credits available through the Colorado Housing Finance Authority (CHFA).

"Ten years ago when we made an application to CHFA, we would always get it because there were only five or six developers submitting," McDermott says. "That number has jumped to 26 or 32 applications."

The economic cycle determines what the tax credits are worth. During the recession, bidding for tax credits dropped to 74 cents on the dollar. Today, McDermott says he's getting bids for $1.13 on the dollar for a project he's planning in Fort Collins.

So why would an investor bid more than the tax credit is worth? "Investors get all of the write-offs, they get all of the depreciation and they get all of the taxable losses associated with it," McDermott says.

With $5 requested for every $1 of available tax credits, the market is extremely competitive, says Carl Koelbel, vice president of acquisitions and development at Koelbel and Company. And often, depending on the market, the tax credits sell for less than their worth. Koelbel sold its credits for 72 cents on the dollar for its first project. And while it got $1.05 for a more recent project, construction pricing had gone up by an equal or greater percentage.

"There's never an easy path to completion," says Koelbel, who did his first affordable housing project in 2008. "It took four rounds with CHFA before we got our first tax credit."

Despite the challenges, Koelbel has continued to develop affordable housing projects, primarily around transit hubs.

"Affordable housing is a great use around transit," Koelbel says. "Since we did learn how to do it, we figured we'd just keep on doing it. We bring a market-rate mentality to it."

In 2014, the Colorado General Assembly reauthorized the Low Income Housing Tax Credit (LIHTC), which enabled CHFA to increase the number of affordable housing units it can financially support.

Last year, CHFA supported the development of 816 affordable units in the city of Denver and 3,925 statewide. The agency is working with developers and real estate leaders to extend the LIHTC program, which expires this year, until 2019.

"We don't like to see good projects that are shovel-ready not proceed either," says Jerilynn Martinez, CHFA's legislative liaison.

An issue of supply and demandUniversity Station is affordable housing built by Mile High Development and Koelbel and Company.

The Denver Housing Authority (DHA), the largest owner and developer of affordable housing in the city,  provides more housing to more than 26,000 very low, low and middle-income individuals representing over 10,000 families. The authority owns and operates more than 3,900 conventional public housing units that are subsidized by the U.S. Department of Housing and Urban Development, nearly 700 subsidized multi-family units and about 200 other locally funded housing units.

"Fundamentally, it's a supply-and-demand issue," says Ismael Guerrero, DHA's executive director. "The demand for affordable to moderately priced rental and homeownership opportunities is substantial, but what's being produced is higher-end market rate and primarily rentals because of the challenges with the construction defects legislation."

Developers have been reluctant to develop condos, which typically are more affordable, because Colorado's construction defects law makes it too easy for homeowners to sue them.

Guerrero says that many families have been forced from the city's core to suburban neighborhoods to find affordable housing, but even that strategy isn't working any longer. "Families in older neighborhoods don't have places to go," he said.

That's one problem McDermott hopes to rectify in Denver's Westwood neighborhood with the previously mentioned $23 million Westwood Crossing apartment complex. McDermott, who spent more than two years putting the deal together, is putting two- and three-bedroom units into the project to accommodate families. He's also including retail space so people have a place to work in the neighborhood.

The Denver Office of Economic Development (OED) provided $1 million in financing from Denver's Revolving Affordable Housing Loan to support the project. The loan guarantees an affordability period of at least 30 years on all the units.

The revolving fund was established last year as a means to supplement the city's allocation of federal housing development funds, which have declined sharply in recent years. The fund is seeded with $6 million from the City and County of Denver, along with $3 million from the Colorado Department of Local Affairs and $1 million from CHFA, which also administers the fund.

The OED is currently funding a total of 13 developments that are either under construction or in the planning phase. The projects will deliver 1,308 affordable rental units to people across the income spectrum, from the homeless to residents earning up to 80 percent of the median income.

The Denver City Council last year passed revisions to the city's Affordable Housing Preservation Ordinance that strengthens its ability to preserve long-term affordability of existing rental units. The city also approved a construction defects reform ordinance in an effort to spur the development of condominium projects.

"We have made this effort around affordable housing a priority for the city," Mayor Michael Hancock said at the Westwood Crossing groundbreaking. "We need to let kids and their families stay in their neighborhoods and be able to walk to school. I don't want a city where people have to drive in to work every day."

The Denver Housing Authority and Koelbel and Company are both underwriters of Confluence.

Photos by Kara Pearson Gwinn.

Read more articles by Margaret Jackson.

Margaret is a veteran Denver real estate reporter and can be contacted here.
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