"Giving money and power to government is like giving whiskey and car keys to teenage boys."
-- P.J. O'Rourke
SMAASH!!! Hear that? Sounds a lot like egg hitting the faces of our five esteemed council members. But more likely, it's the sound of these same smug elected representatives being played like a fiddle.
Despite the efforts of numerous citizens to put the kibosh on the ill-conceived subsidized housing project at 488 Castle Creek Road late last year (See Issue #138), council elected to ignore the facts and dire warnings about the inappropriate location, the density, and especially the presented finances, and approved the project, reducing it to 24 units versus the originally proposed 28.
With said approval, Aspen Housing Partners (AHP), the developer (in a public-private partnership with the city), was off to the races in its development of not only 24 units at 488 Castle Creek Road, but two other subsidized housing complexes, at 517 Park Circle (11 units) and 802 West Main Street (10 units) as one multi-property project. According to the developer agreement between AHP and the city, money has likely already changed hands, with AHP receiving the upfront 20% of its $2.7 million (12%) developer fee. (If it hasn't, it will soon.)
HOW WE GOT HERE
AHP was selected as the developer in late 2016 (beating out numerous local developers), ostensibly as it came in as the low cost provider with promises of obtaining tax credits to lower the city's out-of-pocket costs. The pitch was enticing. The city would "off load" the entirety of building, owning and operating the three subsidized housing rental projects for 15 years, at which point the city would have the first right of refusal to purchase the projects back for "whatever debt is on the property and whatever taxes have incurred to the property." In the meantime, the lease on the land will be $10 per year. Yep, $10. The deal was a stinker from the get-go, and today, merely weeks later, the chickens are already coming home to roost.
THE TAX CREDIT HOAX
AHP's federal low income housing tax credits (LIHTCs) proposal of optimistically 9% and otherwise 4% was dangled before council as much to reduce costs as to expedite approvals. (Did AHP know that city staff and the lemmings on council are notorious for negligible due diligence - or were they just lucky?) At the direction of Barwick and city staff (because that's how it works with this council), Mayor Skadron obediently ran the "hurry up" and rushed the approvals right along, never once asking about per unit costs and the resulting public subsidies, nor listening to anyone outside of city hall who knows far more than all five of them combined about development. Council, not knowing what they were doing or how to evaluate the deal, continued to focus on the most optimistic financial assumptions (9% tax credits) for political purposes instead of demanding a realistic estimate of the project's ultimate cost. Nor did they think about a contingency plan if the 9% tax credits did not materialize. Why they didn't consider any of this BEFORE signing the development agreement last July or providing development approvals in late 2017 only further illustrates how ill-prepared they are to make this type of financial obligation on behalf of the public.
Alas, what AHP (complicit with city staff) didn't tell council, other than their grandiose promises of doing all the work to secure tax credits for all three projects and thus earning their 12% development fee, was that a 9% tax credit for such projects was never anything more than a red herring.
For some unknown reason, it wasn't until after the three complexes were granted development approvals that city staff and AHP revealed to council that they had met with the Colorado Housing and Finance Authority (CHFA), the administrators of the LIHTC program, earlier in the fall. When they did meet with CHFA, take a guess what they learned? You got it - the AHP projects would have "very little chance" of ever receiving a 9% tax credit (yet they waited to tell council until after the development approvals were granted). Why? It's simple, and those of us who railed specifically against 488 Castle Creek knew it all along because we did the simple due diligence and looked it up. Turns out that in recent years, just 30% of applications received the 9% tax credit, and these projects had rental units specifically set aside for the 30% AMI income level (equivalent to the lowest half of the lowest APCHA housing category) AND provided accommodation specifically for the homeless, disabled, seniors and veterans. Oops. Furthermore, given Aspen's well-known ability to pay its own way, it would be highly unlikely that Aspen would ever receive a LIHTC award at this level. Oh yeah, and one more thing, the 9% tax credits have NEVER been granted to a multi-property application. (Surely AHP knew this going in; they're the experts in getting these tax credits, right?) But that's not all, here comes the bait and switch.
Staff, with its tail between its legs, and in the heavily-conflicted role of being both partner in the development and "boss/advisor" to city council, had to recently inform them of this little snafu. But don't worry, they say, a 4% tax credit is a better fit for the AHP projects anyway. Chances are indeed better (there was ZERO chance of 9%) because these credits have been awarded to similar projects to what AHP is proposing, but still, historically only "some" of the applications for 4% credits have been approved. It all depends on who else is applying in a given year. In other words, the 4% tax credits are FAR from a sure thing. In fact there are two 4% scenarios: federal and state 4% credits or just federal 4% credits, and the competition will be robust.
But that's not the only "new" wrinkle. With the better of the 4% tax credit scenarios (federal + state credits) comes some other restrictions, such as the initial compliance period of 15 years PLUS a required extended use period of an additional 15 years. Yep, suddenly it's now 30 years before the city will be able to buy back the complexes and sell or rent them through APCHA. (You didn't really think the city was building much-needed rental units for our transient workforce, did you?) Staff's recommendation to get around this inconvenience? Just apply for the 4% tax credits at 488 Castle Creek Road. The 21 units at the other two locations will now be built and managed as rentals by AHP for 15 years, totally unencumbered by the tax credit program mandates. Staff proudly told council that this latest change "simplifies management" and, despite the obvious drawback of "segregating people based on income more so than originally intended," these impacts are less significant "than the downstream flexibility gained."
FOLLOW THE MONEY
The consequence of a decreased tax credit? It's not like council asked or staff was terribly forthright, but of course the city will now financially make up the difference. The quick switch from 9% credits to 4% means that the city's financial contribution to the project development budget goes up at least $4.7 million and could go up $5.7 million, depending on which 4% credit (state and federal, or just federal) is awarded. It will obviously go up even further if no tax credit is awarded.
Depending on which city or developer document you use (as you can imagine, there are several), the numbers are different. Other than an out-of-date pro-forma included as an exhibit in the council-approved developer agreement from July 2017, one is hard pressed to find a comprehensive pro-forma that shows all sources of income and expenses on a single page. Without a summary that compares current financials to the originally approved options, it's very difficult to understand what changed and why.
Here is The Red Ant's best effort at compiling a comprehensive snapshot of the AHP project financials for your information, in order to demonstrate how the city subsidy changes now that the 9% tax credit option for the entire project is out of the question. Using the council-approved development agreement, exhibit D (HERE) as a baseline:
Originally:
- Total development cost: $25.728 million
- The 9% tax credit equity: $11.498 million
- City of Aspen: $9.927 million
- Private Mortgage: $4.302 million
Based on my best understanding of the July 2017 pro-forma, the $3 million in estimated remaining debt that will need to be paid off by the city in 15 years was included in these totals.
- Total City Contribution: $9.9 million, or $220k per unit in development costs
But now that 9% is out of the question:
Since approval of the development agreement, city council has reduced the number of units at 488 Castle Creek from 28 to 24, reducing the total number of units at all three parcels from 49 to 45. So the estimated total development cost has actually declined to $24.59 million, according to an AHP spreadsheet dated December 10, 2017 (HERE). These changes in the total number of units and the number of tax credit units being applied for make it impossible to compare the current proposal to the original agreement without a comprehensive summary pro-forma in the same format as the one in the agreement. In most places, the decision makers would demand such information, but not the Aspen city council.
Extrapolating from a table provided in a city staff memo dated January 5, 2018, (since no other option exists to derive a comparison to the original agreement), the estimated tax credit contribution to the project in the best case scenario where the city receives both federal and state 4% tax credits, decreases to $8.4 million. These changes increase the city's contribution from the originally estimated $9.9 million to $14.59 million, a $4.69 million increase ($4.3 million for the lost tax credits and an additional $390K in increased project costs). These changes drive the city's per-unit subsidy up 60.4%, from $202,040 for 49 units to $324,222 for 45 units, and the project is not even out of the planning stages yet.
And consider, if the city only receives the 4% federal credits and is not awarded the 4% state credits, the city's subsidy increases another $1 million, according to the same memo. This outcome increases the city's development subsidy from $14.59 million to $15.59 million, and the per-unit subsidy goes up to $346,444 for 45 units, 71.4% higher than the 9% scenario in July's development agreement.
Notably, none of these numbers include the land costs for each parcel. According to the Pitkin County Assessor, land costs (all parcels were purchased eleven years ago by the city during Mick Ireland and Steve Barwick's land-banking spree) add another $12.332 million (517 Park Circle - $3.242 million, 802 West Main - $3.69 million, and 488 Castle Creek - $5.4 million). And don't forget, the city is ADDITIONALLY on the hook for the cost of construction over-runs when these inevitably occur.
What does this mean in terms of per-unit subsidy? $12.332 million for the land, plus as much as $15.59 million in city subsidies for development cost totals, divided by 45 units is $620,489/unit in city subsidies. (By comparison, the controversial per-unit subsidy paid by the city to develop the for-sale units at Burlingame Ranch back in 2007 was around $330,000.) And of note, in 2017, the Assessor valued the three parcels at $6,589,000 (517 Park Circle at $2.5 million, 802 West Main at $2.671 million, and 488 Castle Creek at a cool $1.418 million), a mere 53% of the $12.332 million the city paid A DECADE AGO!! Nice use of taxpayer dollars, Steve and Mick.
A recent email from AHP to city council places the total per-unit cost at $977,211. If accurate, this puts the total cost for all 45 units on the three parcels, including land, at $43,974,445.
In the end, it's anyone's guess what the actual costs will end up being. City staff and the developer have created a smokescreen of ever-changing numbers, presented in varying formats and employing multiple assumptions. As a result, it is nearly impossible to nail down exactly what they are estimating the final costs and subsidies to be for comparison and accountability purposes.
In any case, it's a far cry from the developer's pitch to council in August 2016, "We are taking the city off the hook for everything." Yeah, right. Did AHP ever even intend to apply for the tax credits for all three parcels? Or was this just a ploy to win the contract? And, with the new financials, how does AHP stack up now against the other developers who bid on the contract? Remember, the total project cost is estimated to be $24.59 million. AHP's cut of that total, according to its summary of development costs dated December 10, 2017, is $2,709,522, or 12%.
AHP: STILL MAKING THE BIG BUCKS FOR FAR LESS WORK
According to the development agreement, despite the enormous change in tax credit application plans and a greatly diminished scope of work, AHP apparently still gets its entire 12% development fee. Not only have they contracted with Shaw Construction to physically build the complexes, there is no longer the substantial work of navigating CHFA's cumbersome 9% federal tax credit application, and the application for 4% credits is now just for one site, not all three. Furthermore, AHP, using an outside management company, now only has to operate one of the three complexes, 488 Castle Creek, as a tax credit compliant project, significantly reducing its operating costs and compliance risk until the city buys it back.
Yes, the development agreement contemplated the possibility that AHP could only be awarded the 4% credits, resulting in a higher city subsidy. But my question is, why did council not demand that the developer fee be tied to the construction cost of the units for which tax credits are actually awarded, perhaps even linked to the specific level of credit? The 4% federal credit application for the 24 units at 488 Castle Creek is now a far simpler and less costly "fill in the blanks" process. And it comes with a minimum $4.7-$5.7 million increase in the city's development cost. The Red Ant has additionally been told that operating a tax credit compliant property is no trivial matter, so doing so for just one complex versus three is another notable reduction in the developer's risk in comparison to their original proposal.
Why on earth should AHP continue to get the same $2.7 million developer fee under these new circumstances?
COUNCIL DOESN'T GET IT; PUBLICLY DENIES FINANCIAL REALITIES
We all know that city staff considers price to be irrelevant, especially when it comes to subsidized housing. But so does council, obviously. They are so unbelievably naïve that they have been manipulated by both sides of the AHP partnership. By presenting an implausible 9% tax credit scenario, AHP led our oblivious council down the tax credit primrose path. City staff, with its "subsidized housing at any cost" mentality and financial obfuscation designed to confuse council and thwart oversight, selectively spoon-fed incremental information and continues to do so to this day.
The craziest thing is that when notified (yes, by the public) that they had been embarrassingly played, council became indignant. But not at staff or AHP. They shot the messenger. Adam boldly stated that "the city's numbers (on the project) are better" than those from people who build for a living. No, Adam, they're not. He still obviously hasn't quite figured out what happened! And Steve, who grew indignant and emotional when the 488 Castle Creek project was approved for 24 but not 28 units, simply doesn't care. Like staff, he is fundamentally hell-bent on housing at any cost. It's hard to tell what Ward thinks. He pushed for the excessive density at 488 Castle Creek, emphatically stating, "Density is environmentally friendly," regardless of cost, quality of life or context, yet also noted the inappropriate location of the project . With regard to the tax credit bait-and-switch issue, it's likely that his inability to synthesize complex issues prevents him from understanding the dynamics at play.
Unfortunately, Bert was alone in recognizing the mess. He did recognize it, but inexplicably still voted to approve it!! He recently asked his fellow councilmen what they understood the per unit cost to be when they approved the project. Was it $900K? $600K? 400K? 200K? The four declined to answer a question they had clearly never contemplated. It's too bad that Bert is so out-numbered by incompetence. This dynamic has unfortunately resulted in his timid and complacent "go along to get along" votes, despite writing to The Red Ant, "I sensed the financials were not supportable when this first came to us and now that the land use is approved, I'm absolutely certain the financials are off the charts." Yes, Bert, they most certainly are! I am still scratching my head. He later told me, "I didn't want to be the one to blame for their failure," meaning that he was afraid that a no vote might somehow send the whole thing back to the drawing board where it belonged, upsetting his pals at the council table. Seriously.
And Ann, ever hyper-political and condescending, dismissed developer Dick Butera (who has forgotten more about development than this council will ever know), when he told council last week that the per-unit cost had now risen to at least $900K/unit. She curtly deemed his figures "incorrect," and rudely called Mr. Butera's public comments "inflammatory." Watch it:
|
|
| Ann Dissing Dick Butera |
Well Ann, you should be ashamed of yourself, and you owe Mr. Butera an apology. Your typical "put it in writing" so staff can tell me why they're right and you're wrong is horribly insulting. (Recall that the APH principal emailed each council member the very next day and stated that the per unit cost is now $977,211. Oh, and you can bet that number is going nowhere but up!)
WHY YOU SHOULD CARE
Housing at any cost is a dangerous and irresponsible trend. Our current council has subscribed to it, as did every council before them. The only difference? The dollars are bigger each round. And the new densities reflect the much higher costs.
Consider the case of the complex at 488 Castle Creek, where council was all too happy and eager to re-zone and combine parcels, bought at a premium a decade ago, for an unprecedented 24 housing units on a mere half acre**. Just think, (realtors and buyers beware) the city and council have just demonstrated that they are willing and able to easily pay above-market prices for ANY parcel, anywhere in town, re-zone it, buck all the rules and build another grotesquely dense subsidized housing project right there. Yes, even next door to you.
There is an alarming undercurrent afoot toward ever more dense workforce housing development, irrespective of urban growth boundaries and existing zoning. Apparently, this is the new environmentalism. No longer is open space valued over development density. It's all about "infill" and building taller, denser buildings in order to reduce the number of commuting workers. Stack 'em up, right in town. Auden Schendler, SkiCo's in-house greenie, recently penned a manifesto for Outside Magazine (read it HERE) calling for "a new YIMBYism -- Yes In My Back Yard" that prioritizes (the workforce) community over self interest (those who dare to care about their private property values). Apparently Auden, who is also a Basalt councilman, has discovered that trees don't vote. Now he's pandering to the working men and women who aspire to the mountain life, all but promising that if they come, we will build it (really dense housing, right in town, just for them).