Now that election season is behind us we can reflect on the ballot issues that might impact our real estate investments. Luckily, voters in Denver overwhelmingly denied the “Free Evictions for All” ordinance, which would have provided funds for free legal defense to any tenant facing eviction and would have increased costs to both landlords and thus tenants by a staggering amount. It’s also a service currently provided by the state to qualifying tenants facing unfair eviction practices. That said, it remains a bit unclear whether those state services will be expanded and become troublesome to landlords (and tenants) with the passing of Proposition 123, so named “Dedicate Revenue for Affordable Housing Programs.” Further explained below, the funding provided by this measure will provide an undefined portion of about $54 million to be dedicated to eviction defense within the funding provided for “Homelessness.”
What is Prop 123 and how does it “Dedicate Revenue for Affordable Housing”? In all, Prop 123 provides an interesting and innovative approach to address the growing problem surrounding housing affordability in Colorado but ultimately seems to fall short of addressing anything that will drive change when applied in the real world. In essence, the measure will dedicate a portion of the state’s general tax fund to affordable housing programs administered by the Office of Economic Development and International Trade (OEDIT) and the Department of Local Affairs (DOLA). While the measure doesn’t technically raise taxes, it will lower the amount of refunds for taxpayers during TABOR surplus years and complicate the allocation of funds in years without a TABOR surplus. I’d call this tax increase adjacent and the way it was presented on the ballot was pretty sneaky in my opinion. It’s estimated that the fund will accrue around $290 million+ each year which is an almost sixfold increase over the $50 million per year currently utilized to fund affordable housing initiatives (not including the $400 million in federal funds dedicated to affordable housing from the American Rescue Plan Act). This signifies a major shift in focus toward housing affordability in Colorado. Uses for these dedicated funds are outlined as follows:
Land Banking (up to $43.5 mil)- grants and loans to local governments and nonprofit organizations to acquire and preserve land for affordable housing development;
Affordable Housing Equity (up to $121.8 mil) - assistance to develop affordable, multi-family rental housing;
Concessionary Debt (up to $60.9 mil) - equity investments in affordable housing projects, including a program to share home equity with tenants;
Affordable Home Ownership (up to $58 mil) - homeownership programs and down payment assistance for first-time homebuyers;
Homelessness (up to $52.2 mil) - a program addressing homelessness through rental assistance and eviction defense; and
Local Government Capacity Building (up to $5.8 mil) - grants to increase the capacity of local government planning departments to introduce a 90-day fast-track approval process for these developments.
For counties to receive funding from this new program they would be required to opt-in, but first must present a plan to the state showing how they will be able to grow affordable housing for both rentals and ownership by 3% each year. The Common Sense Institute has provided an excellent, non-partisan review on this measure in which they highlight many of the strengths and weaknesses behind this proposition, but in my opinion, they do not address some glaring issues in the real world application.
Where I think This Measure Falls Short While the bulk of this measure takes a very exciting approach to address the need for immediate action on improving the housing supply and reducing the barriers to entry for low-income or first-time homebuyers, it retains some very constraining government standards around what can be considered “affordable housing” and who can be considered a candidate. In line with current affordable housing programs, the measure stipulates that for-sale affordable housing should be considered based on a combined mortgage and utility payment below 30% of household annual income at or below 100% of the area median income (AMI). The current AMI for Denver is broken down as follows:
2-Person Household - $80,000
3-Person Household - $90,000
4-Person Household - $100,000
And so on up to $124,000 for a 7-person or more household
While that might look reasonable on paper, the limitations that it creates don’t become obvious until you really break it down and consider all parts involved and how they apply in the real world. So, a single mother with one child making $80,000 per year can purchase an affordable housing unit as long as her payments (including utilities) are $2,000 or less, BUT a single mother making $40,000 per year can only purchase an affordable housing unit if she can keep her payments under $1,000 per month. When you work the math on this, the first mom can pay about $300,000 for one of these units while the second can only pay about $150,000, and that’s using very generous estimates while assuming mortgage rates at 4.5%. Developers would obviously build their units tailored to the first mom, while the second mom would be left behind. Looking at the most extreme end of this, if you work to build an affordable home for a 7-person household making $124,000 per year, that family would be limited to paying around $500,000 for a unit. Again, not bad, but that price is only available to applicants with two adults making less than $62,000/year each with 5 children in their household (or some other combination that adds up to a 7-person household). With the realities of our housing market, even with land banking, developer grants, down payment assistance, and all other proposed incentives, it seems highly unlikely that developers would be able to so much as break even in urban counties. That alone would create a situation where counties are simply unable to opt in (unable to show a plan for 3% growth) or somehow change how affordable housing is defined by the state. The latter is very unlikely if you understand even a little bit of how government works. It gets even more impossible if you try to fit someone into the boxes that they’ve set for affordable rental housing. By those standards our single mother making $40,000 per year would actually make too much money for rental housing, so her only option is to remain outside affordable housing altogether and pay market rents at well over 30% of her monthly income. Point being, government-mandated “affordable housing” is an already broken system that has to be gamed in such a way that few who need it are able to qualify and the people who end up benefiting are people who can manipulate the program. Further, even IF someone is able to game their way into an affordable housing purchase they’ll be barred from participating in the things that make homeownership the most beneficial. Through affordable housing programs, home appreciation is kept artificially low through deed restrictions that require the government to set the home value at the time of sale. This, coupled with down payment assistance (which is required to be paid back in full, usually with interest, at the time of sale), actually traps these homeowners in their purchase and in many cases can cause people to remain upside-down in their home for several years. Affordable housing programs do absolutely nothing to help with an exit plan for these situations and many people end up worse off than if they simply did not participate to begin with. Knowing all of that, from my perspective this measure is dead on arrival, but I’ll hold out hope that I am proven wrong.
What Could We Do Better? What I would ultimately like to see is some stripped-down version of this measure that heavily incentivizes local governments to create a fast-track approval process and pathways for more affordable housing, without the additional restrictions of an “affordable housing program” which will likely create more issues than it will solve and effectively increase wasted spending with little no results. It should also completely remove what I feel is a very concerning amount of money being pumped into DOLA for “homelessness” and eviction defense which runs the risk of subsidizing these issues in the same ways that have failed in other states where the homeless problem AND housing costs have only been compounded exponentially via increased government funding with no oversight or public input. It's certainly refreshing to see housing affordability become a larger part of the conversation, but I remain skeptical that these issues can be solved through this particular brand of government intervention. As real estate investors, we should be watching the decisions made by DOLA very closely over the coming years as they work to appropriate this massive increase in funding. Should they follow the path that certain other states have followed, the life of a landlord in Colorado could start to get a lot more complicated.
Stay tuned here for updates as they become available!! And of course, don’t hesitate to reach out for free sound advice and direction specific to your investment properties. There’s never any cost or obligation until you’ve made the decision to hire me to help you buy or sell AND I get the job done for you!