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— Multifamily Properties Quarterly — August 2016
T
he multifamily rental market
no doubt has experienced
strong growth over the last
five years. This growth has
included a large number of
new units built in the Denver metro-
politan statistical area, and with the
growth has come rent inflation. The
focus recently provided by many of
our elected officials is on the rental
growth that has occurred since 2008.
As a housing provider and developer,
it should be noted that for the first
time since 2000, current rents have
exceeded the rents being charged in
the Denver MSA after adjusting for
inflation.
The overall strength in the rental
market has created a sentiment
by some that the landlord is tak-
ing advantage of the renters and, as
such, has created housing that is no
longer affordable in metro Denver,
which is leading our elected offi-
cials to take it upon themselves to
artificially address affordability via
increased taxes and development
impact fees.
Specifically, the city of Denver
decided that in order to address its
affordability concerns, the city needs
to raise $150 million over 10 years.
The affordable housing initiative is
not the only undercurrent that is
in the public domain with regard to
affordable housing. There are dis-
cussions that rent control should
be allowed in Denver, which would
require state law to be amended by
removing the current statute that
preempts rent control in Colorado.
If the proposed affordable housing
impact fee as well as the undercur-
rents regarding rent control are not
enough to raise an eyebrow in regard
to the cost of pro-
viding housing, the
city of Denver also
has been working
on a plan called
Energize Denver
for the purposes
of benchmarking
commercial and
multitenant resi-
dential buildings to
force building own-
ers to make certain
retrofits so build-
ings consume less
energy.
The affordable
housing initiative
is at the forefront of the headwinds
facing the multifamily rental market.
The initiative proposed outlines rais-
ing $150 million over a 10-year peri-
od for the purposes of building 6,000
additional affordable units in Denver.
The funding sources comprise a pro-
posed one-half mill levy increase on
all properties as well as impact fees
on all new construction in Denver,
but no impact fees will be charged
on federal, state or local buildings.
The impact fee proposed ranges
from 60 cents to as much as $1.70
per gross square foot with the pro-
posed fee as outlined in the draft
ordinance charging multifamily
communities a fee of $1.50 per gross
sf. Based on an infill five- to 12-story
community with an 850-unit average
and an 80 percent efficient building,
on average, new apartments will be
assessed $1,500 per unit.
As outlined, multifamily rental
units will be charged a fee equal to
a single-family home, based on a
single-family home averaging 2,500
sf, whose owners pay the 60-cents-
per-sf fee, even though multifamily
rental is the solution to affordable,
efficient housing.
The bigger issues are the gover-
nances in the proposed ordinance
are very open, without a real plan
for how the revenue will be spent;
nor has the city really explained
the justification for the fees, which
are based on the recently published
nexus study prepared for the city of
Denver.
However, based on the prevailing
winds, the City Council and mayor
seem to be charging toward pass-
ing the legislation to increase taxes
on all existing real estate as well as
fees for new development without
a great deal of explanation for how
the money will be spent because
they have the votes. It feels a lot like
the Inclusionary Housing Ordinance
that was passed 16 years ago during
Mayor Wellington Webb’s adminis-
tration.
When the IHO was implemented
it said it would solve for-sale afford-
able housing issues. Sixteen years
later, the program has built 82 for-
sale affordable housing units, out-
side of the large-scale developments
that have their own contracted
agreements for affordable housing,
according to the Denver Office of
Economic Development IHO 2015
interim report. The large-scale devel-
opments are Green Valley Ranch,
Lowry Redevelopment and Staple-
ton. The total number of units with-
out the outside agreements for the
large-scale developments provided
by the IHO is 82, or 5.125 units per
year. This does not embody a suc-
cessful plan.
However, the city is embarking on
another program without a solid
plan that could be a disaster on Day
One since it does not appear to be it
well-thought-out by the city or the
developers of housing within the
city.
Energize Denver and rent control
are two more costly propositions.
Based on the lobbying efforts by the
Apartment Association of Metro
Denver and other real estate organi-
zations, Energize Denver has yet to
be fully vetted but, as it stands today,
the costs associated with retrofitting
a building will outpace any cost sav-
ings or rent increases a landlord can
afford.
For example, on a current new
build, I opted against numerous
LEED items because the payback,
even after reviewing with Xcel
Energy, took 25-plus years. Several
of these items happen to be some of
the same retrofits put forth by Ener-
gize Denver. This slow rate of pay-
back does mean, in the end, deferred
maintenance on buildings will be
neglected. As of press time, the Ener-
gize Denver initiative is being stud-
ied further.
Neglect is the most prevalent out-
come of rent control and in every
municipality in which it has been
implemented, the affordability index
within that community has never
come to fruition. The local media has
interviewed some of the city’s lead-
ers who think rent control should be
looked at as a means of solving the
affordability problem.
The facts are rent control has been
studied by numerous institutions,
Lauren A.
Brockman
Principal,
Convergence
Multifamily Real
Estate Group,
Denver
Legislative
