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Houses dot the landscape near Colorado's Steamboat ski area, Aug. 3, 2022, in Steamboat Springs. The city council passed a rule in June that could prove to be a model for other vacation towns: A ban on new short-term rentals in most of the city and a ballot measure to tax bookings at 9% to fund affordable housing. (AP Photo/Thomas Peipert)

Only 14 of the 336 local governments eligible for funding through a 2022 ballot initiative to support affordable housing have applied so far, and that worries one of the groups that helped pass the measure last fall.

“Local governments should opt in because it gives their communities access to funds to help solve the No. 1 problem in citizens’ minds,” said Zach Martinez, policy council at Gary Community Ventures, the philanthropic organization that introduced Proposition 123.

The deadline to opt-in for the first three-year funding cycle that will distribute more than $151 million to help lower the cost of much needed affordable housing units is Nov. 1. However, that budget estimate will likely change over time.

Participating governments must commit to increasing their affordable housing stock by 3% in each year of the three-year cycle of the program and must create a fast-track approval process for those developments. 

Martinez said he expects larger municipalities to begin opting in this week. Their applications are tracked on the Colorado Department of Local Affairs website.

“The hope is that every community in Colorado opts in, that money begins to flow to the actual process of building housing and that we start to see that we have enough affordable housing in Colorado to support all the people who need it, which means making sure that no one in Colorado has to pay 30% (or more) of their income to live here,” he said.

Colorado voters approved Proposition 123 in November, with 52.6% of Coloradans voting in favor of the measure. Voters in central Colorado cast ballots in favor of Proposition 123 and most of the municipalities in western and eastern parts of the state voted against it.

The initiative aims to tackle Colorado’s affordable housing crisis by allocating nearly $300 million each year in existing tax revenue to help local governments and nonprofits work on the issue. 

A stubborn affordable housing crisis

Housing affordability has become one of the state’s most pressing problems, and it is displacing families and making it hard for them to make ends meet, according to a letter that more than 40 affordable housing advocates and providers signed in late June urging local governments to opt into Proposition 123. 

An annual local survey that counts the number of people living in places not meant for human habitation released Monday shows that metro Denver’s homeless population grew 31.7% over the last year from 6,884 people to 9,065 individuals. However, the number of people who are homeless in metro Denver throughout the course of the year is likely closer to 28,000, according to the Homelessness Management Information System.

Data from the Colorado Health Foundation’s most recent annual poll released last week shows concerns about housing have increased, just as Denver’s new mayor declared homelessness a state of emergency. A gap between Black and white homeowners in Colorado has continued to widen since 1970.

There was a 40% drop in the number of homes built in Colorado between 2010 and 2020, while the state’s population increased 14.8% during that period, driving the cost of housing higher, according to a report by the Colorado General Assembly.

“There’s a lot of work left to do — for actual projects to start getting built and units to actually be occupied by families — but it feels like the process is working,” Martinez said of Proposition 123.

The legislation sets aside 0.1% of taxable income each year for affordable housing. That’s estimated to be $151 million in the last fiscal year — which ended June 30 — and nearly $300 million in 2023-24 and subsequent fiscal years. About 60% of the funds will help municipalities purchase land and develop affordable housing. About 40% of the funds will be used to support homeowners and homelessness initiatives, and about 6% of the funds will help local governments conduct permitting and approve affordable housing developments, Martinez said.

The measure gives grants and loans to local governments and nonprofits to acquire and preserve land for affordable housing development. Funds from Proposition 123 are meant to help develop affordable multifamily rental units, increase homeownership rates in the state and provide down payment assistance for first-time homebuyers. The law also addresses homelessness by providing rental assistance and eviction defense programs, proponents said.

State budget writers, both Democrats and Republicans, have expressed concerns about the measure potentially diverting money from the state’s budget in years when the Taxpayer’s Bill of Rights cap on government growth and spending, which is calculated based on inflation and population growth rates, isn’t exceeded. The legislature would still be on the hook to find $290 million in its budget to allocate to affordable housing. 

The legislature could also choose to forgo the spending, though lawmakers have said they would be reticent to do that since Proposition 123 was approved by voters.

Apprehension about opting in

Some municipalities are apprehensive about opting in because they’re fearful of the requirement to increase their affordable housing supply by 3% every year, Martinez said. 

If a local government chooses not to meet these requirements, or if it fails to achieve its affordable housing goals, developments in that municipality or county will be temporarily ineligible for funding, according to the measure

“Some local governments are saying the baseline number is too high,” he said. “It’s really hard to set these baselines because there isn’t reliable data and up-to-date data on housing. Housing has changed a lot since COVID with people moving, and we all know rental prices have gone through the roof over the last handful of years.”

However, Martinez said, there’s no downside to applying for the funding. The Division of Housing, which reviews applications from local governments, has been flexible about helping municipalities find a baseline number that works for them, he said.

“Affordable housing is a problem everywhere in Colorado, so it makes sense to opt in, get access to the funds for the first three years and make sure that the developers and nonprofit leaders in their communities have access,” he said.

“If you don’t hit your baseline commitment over the first three year period, then you sit out of funding for one year, and then you can apply again and get access to the last two years of that three-year cycle,” he said. “So it’s really, opt in and get access or don’t opt in and don’t get access, which is actually worse than the penalty.”

Funding for the program will be renewed annually and the measure will likely be in place until state leaders decide Colorado’s affordable housing gap is closed, Martinez said. “We’re a long ways away from solving this, so I anticipate that this will go on for a good amount of time.”

Land banking funds are already available 

Applications for “land banking funds,” which will help nonprofits and local governments purchase land that could be used in the future for affordable housing developments, are already starting to roll in, Martinez said.

“This (legislation) is really game-changing for those developers who are trying to build affordable units for people but have traditionally had to rely on state funds,” Martinez said. “Those developers are a community that knows each other — it’s a lot of nonprofit developers or developers whose missions are to build affordable units.”

Brad Dodson and Sarah Harman, who work for Urban Land Conservancy — a Denver-based nonprofit focusing on preserving and managing affordable real estate on the Front Range — hope to build one or more developments the first year Proposition 123 funds are available across metro Denver in their target areas where needs for affordable housing are greatest, such as in the Westwood neighborhood or the East Colfax corridor.

Sarah Harman, vice president of real estate at Urban Land Conservancy, and Brad Dodson, chief financial officer at the Urban Land Conservancy, are pictured at Walnut Flats in Denver’s RiNo neighborhood. The Urban Land Conservancy, a Denver-based nonprofit, focuses on preserving and managing affordable real estate on the Front Range. The Conservancy hopes to build one or more developments the first year Proposition 123 funds are available. (Olivia Sun, The Colorado Sun via Report for America)

It’s unclear how many units Urban Land Conservancy will build but “the interest and pent-up demand” for lower-cost housing across Colorado means the state will likely receive many applications from local governments and developers who will apply for funds through Proposition 123, Dodson said.

The organization focuses on purchasing land in communities that are in danger of losing those properties to help maintain affordability. Often, the organization then holds the land while it determines what the community’s needs are before partnering with other developers to create affordable housing or renovating. 

Urban Land Conservancy often invests in properties near light rail or other transit stops in communities that haven’t historically had a lot of investment and where longtime residents are at risk of being displaced, Harman said. 

“I think there’s a great opportunity for those funds flowing through Proposition 123 to help us continue to take that type of approach,” she said.

Building affordable housing is difficult, expensive and time-consuming, Dodson said. Construction costs are increasing, the pandemic created supply chain issues, interest rates keep climbing and federal emergency housing funds are ending, making it even harder to build affordable units.

For a housing unit or development to qualify as affordable under Proposition 123, rent or mortgage payments must not exceed 30% of the household’s income.

Affordable housing developers spend a significant amount of time applying for funding to cover the cost of building units that are usually priced between 20%-80% of the area’s median income, Harman said. Area median income, or AMI, is defined as the midpoint of a region’s income distribution, meaning half the households in the region earn more than the median and half earn less. The number changes based on the number of people in a household.

Sarah Harman, vice president of real estate at Urban Land Conservancy at Walnut Flats in Denver’s RiNo neighborhood. Urban Land Conservancy, a Denver-based nonprofit, focuses on preserving and managing affordable real estate in on the Front Range. The Conservancy hopes to build one or more developments the first year Proposition 123 funds are available across metro Denver. (Olivia Sun, The Colorado Sun via Report for America)

Affordable housing building costs typically exceed what residents can cover in rent, and affordable housing developers don’t have the option of simply raising rent or sales prices if construction costs go up, she said.

Proposition 123 will reduce two key elements that make affordable housing so hard to create: the high cost and long length of time it takes to build, Dodson said.

For example, Proposition 123 includes a concessionary debt program, which offers much lower interest rates on loans. If they took a similar loan from a bank, the developers would pay more money per month in interest, he said.

Brad Dodson, chief financial officer at the Urban Land Conservancy, at Walnut Flats in Denver’s RiNo neighborhood. The Urban Land Conservancy, a Denver-based nonprofit, focuses on preserving and managing affordable real estate on the Front Range. The Conservancy hopes to build one or more developments the first year Proposition 123 funds are available. (Olivia Sun, The Colorado Sun via Report for America)

The legislation also includes a “fast-track review process,” to reduce the time it will take to build the units. For example, a local government can only receive funding for affordable housing if it establishes a process to provide a final decision on any application for a permit within 90 days of when the application is submitted. 

“Proposition 123 is a transformational, unprecedented opportunity. It requires an all-hands-on-deck approach to keep Colorado affordable,” Dodson said. “For us, this is about allowing us to continue to do what we’ve done for 20 years, when it is increasingly difficult to do so.”

Salida jumped at the opportunity in Prop 123

Salida was the first jurisdiction to opt into receiving funds from Proposition 123, filing a commitment in early May to build 33 units over the next three years, city development director Bill Almquist said.

“I think it’s very feasible for us (because) we’re in a very fortunate position,” he said.

Salida has an inclusionary housing policy built into its municipal code that requires certain types of developments — generally those with at least a couple of units — to dedicate one out of every six units to affordable housing. The units must be deed restricted for members of the county’s workforce and by household income.

In Salida, that means rental units must be priced so they are affordable to people making 60% to 100% of the area median income for the household. The area median income for a four-person household in Chaffee County, where Salida is located, is $87,000.

“We have a fairly high area median income here in the county and we found that some of our greatest needs are between 60% AMI and 160% AMI, so that’s what we’re targeting,” Almquist said

Salida is one of the “recently discovered attractive mountain communities” that has seen an influx of new tourists and residents over the past three to five years, which has driven up home prices, he said.

The remote location is challenged by a shortage of construction workers and a lack of materials. The closest Home Depot, for example, is more than an hour away.

Mountains hang over the buildings in the town of Salida, Colo., in the state’s southwestern mountains on Saturday, Dec. 6, 2014. (AP Photo/David Zalubowski)

Over the last few decades, most developers have opted to build single-family homes, which traditionally yield higher profits than smaller rental units. But the local workforce has struggled to afford those. And now, there’s a shortage of studios and one-bedroom apartments and rental units in general, Almquist said.

“We got a low income housing tax credit project that was built and finalized last year and there was a huge waitlist for that,” he said. “Those were the first rental apartments that have been built in Salida in over 20 years.”

The city is also struggling financially. The city repealed its property tax in 2008 and replaced it with a 1% sales tax.

Salida also doesn’t have a real estate transfer tax, a one-time tax or fee on the sale of real estate. Twelve communities in Colorado have real estate transfer taxes, and many of them use the proceeds — in some cases millions of dollars — for affordable housing, Almquist said. 

“Because of TABOR, we’re not allowed to have one of those,” he said. “The state passed a constitutional amendment in 1992 freezing all real estate transfer taxes and prohibiting any new transfer taxes being imposed. We couldn’t even vote for one if we wanted to. So we don’t have a ton of money to build affordable housing with.”

Creating more affordable housing has been the top priority for the city council over the past three to four years, he said. 

“And we are turning over every rock that we can to try to make it happen, especially given our limited resources,” he said. “And so when we heard Prop 123 was coming down the pike, we wanted to position ourselves well for receiving some of that funding. That’s why we were quick on the trigger to commit.”

Salida will likely apply for more funding through Proposition 123 after the first three year cycle ends, he said. “This is a decade or multidecade process, to try to get us back to a place where there are units available at affordable rates for a substantial portion, if not the entire population of the workforce.”

CORRECTION: The story was updated at 10:17 a.m. Tuesday, Sept. 5, 2023, to correct the name of the agency that tracks applications from local governments applying for Proposition 123 funds and to clarify that the budget estimate for the bill will change over time. The story was previously updated at 10:47 a.m. Saturday, July 29, 2023, to state that funding through Proposition 123 will be in the form of repayable loans or investments in developments and not grants.

Tatiana Flowers is the equity and general assignment reporter for the Colorado Sun and her work is funded by a grant from the Colorado Trust. She has covered crime and courts, plus education and health in Colorado, Connecticut, Israel and Morocco....