Over the past ten years, Colorado has seen a population growth of almost 15 percent, with many residing in Denver. In fact, in 2020, Denver ranked among the top five cities for inbound growth in the United States. At the same time, from 2010 through 2020, the state’s production of new housing decreased by 40 percent. The decrease in supply, coupled with the increase in demand has exasperated the already rising cost of housing in the state. This, along with other external factors such as job loss due to the COVID pandemic, has resulted in a statewide housing crisis.
The City of Denver is proposing a revision to the municipal code that would expand affordable housing through three main tools: (1) increasing “linkage fees,” (2) requiring new multi-family development to designate a percentage of units to be affordable, and (3) offering zoning and financial incentives. The proposal addresses both rental housing and ownership opportunities. Although it is essential to combat the housing crisis and increased homelessness in the region, it is equally important to understand the impacts the proposed affordable housing ordinance would have on developers, if and when enacted.
Increased Linkage Fees
In addition to funds received through donations and tax-based contributions, affordable housing permanent funds are raised from the affordable housing linkage fee revenue fund. These funds are set to be used for the production and preservation of rental housing as well as rental assistance. The amendment proposes increasing the linkage fee paid before the issuance of a building permit for any new construction or improvements that increase the gross square footage of an existing structure. The fee, which applies to residential, commercial, and industrial construction, is calculated per square foot, at a rate depending on structure type. For example, the proposal increases the linkage fee for low-density residential from $0.66 to $1.77 per square foot, whereas the fee for buildings with industrial or agricultural uses increases from $0.40 to $0.96 per square foot. Fees for mixed-use development are to be proportioned based on the square footage for each use. The proposal estimates that the linkage fee will go into effect on July 1, 2022, and increase each year based on the rate of inflation.
Linkage fees do not apply to the construction of contractual commitments dated and properly recorded prior to July 1, 2022. This exception only applies while original development continues; any redevelopment contracted after such time will be subject to the proposed rates. Additionally excluded from the linkage fee requirement are construction projects including (1) those that provide required affordable housing on the property, (2) affordable housing projects built with federal, state, or local funding, (3) charitable projects aimed at providing housing assistance, (4) buildings used solely for government or education purposes, (5) projects due to involuntary demolition, (6) additions of 400 square feet or less to single-unit or two-unit dwellings, and (7) accessory dwelling units. Additionally, linkage fees may be waived upon an applicant showing that the required amount of fees exceeds the amount that would be needed to mitigate the actual demand for affordable housing created by the development.
Mandatory Affordable Housing
The proposed amendment affects multi-family residential development. New residential developments consisting of 11 or more units at one location must develop a minimum percentage of income-restricted units (IRU) within the structure. The minimum percentage of IRUs depends on location. High market areas are neighborhoods in the top quarter of highest rent or sales prices and land values, and typical market areas are all other regions not recognized as high market. To comply with mandatory affordable housing, a high market area development must designate a minimum of 10 – 15 percent of the units as income-restricted. Development in a typical market area must designate a minimum of 8 – 12 percent of its units as income-restricted. These development requirements apply to both rental units and for-sale properties. If developers choose to forgo the minimum IRU requirements they will be subject to the alternative fee-in-lieu requirements. Fee-in-lieu costs range between $250,000 and $478,000, depending on the location of the new development and the type of dwelling structure. The fee is then multiplied by the required number of IRUs excluded from the development. For example, if an apartment complex proposed for a typical market area only designates 10 units out of 200 to be income-restricted, the applicant would be required to pay a $2.5 million fee-in-lieu before receiving a building permit. However, if an applicant can show its proposed development meets the city’s five-year housing plan and comprehensive plan goals, the developer may negotiate an alternative to the mandatory affordable housing requirements.
The proposal allows for permit fee reductions, reduced minimum vehicle parking requirements, and linkage fee exemptions for street-level commercial structures to incentivize developers to comply with minimum IRU requirements. The proposal provides added incentives for developers which choose to include a higher percentage of IRUs than required by the ordinance. Such developments will be entitled to an increase in building height and floor area ratios than is regularly provided for in zoning laws, in addition to increased vehicle parking exemptions. Developed IRUs must be maintained for a minimum of 99 years to qualify.
One downfall of the City’s housing affordability proposal is that it fails to alleviate the pressures and added costs that construction defect litigation places on developers and contractors. Developers have expressed a need for relief from these added costs to successfully and affordably complete affordable housing projects. The Colorado General Assembly briefly touched on the constraints of construction defect laws in its 2022 affordable housing tasks force report. The task force expressed concerns that exemptions from construction defect laws would displace the balance between consumer and developer rights. However, as developers continue to raise concerns regarding the effects the state’s strict construction defect litigation has on the affordability of development, it increasingly becomes important for the City to address such matters. Developers who wish to see such exemptions included in the proposed affordable housing ordinance may submit comments during the public review process.
The proposed affordable housing ordinance is currently available for public review. Interested parties may submit comments and concerns to the City of Denver from now through March 14, 2022. Comments are accepted through the City’s open forms, which can be found here. The City will review the comments and release an updated proposal by the end of March 2022, after which interested parties will be allowed to speak at a public hearing held in front of the Denver Planning Board and the Denver City Council. The proposal will not go into effect until a final version is adopted by the Denver City Council. Additional information on the proposed expansion of affordable housing requirements can be found here.
For additional information regarding Denver’s affordable housing initiative, or Construction law in Colorado, you can reach Taylor Ostrowski by telephone at (303) 653-0047 or by e-mail at Ostrowski@hhmrlaw.com.