Even before the Denver City Council referred his affordable housing sales tax measure to voters, Mayor Mike Johnston was thinking big about what the city could do if it had the financial wherewithal to compete with big financial institutions.
Key to his pitch for Ballot Issue 2R is that if it passes in the Nov. 5 election, Denver will be able to open a new in-house investment bank for affordable housing — one fed by the billions of dollars in revenue the new tax will unleash in coming decades. By offering cheaper capital to developers, the city can require that more apartments be set aside for income-qualified tenants or set other conditions that help it meet its affordable housing goals.
“We’re like the bank, but we’re a much cheaper bank,” Johnston said in laying out the approach during a meeting with Denver Post journalists over the summer. The city’s setup would be akin to “a 1%-return bank,” he said, “instead of an 18%-return bank.”
Alex Renteria-Aguilar, right, smiles at her daughter Renee, 3, as she holds a sign in support of Ballot Issue 2R outside The Burrell Denver in Denver on Sept. 17, 2024. At left is her friend Erin Powell. (Photo by Helen H. Richardson/The Denver Post)
But several real estate professionals and observers question if Denver is ready to step into the gap by providing construction loans or becoming an equity investor in new projects. What exactly the city’s expanded direct investment will look like — and officials’ ability to deliver on the city-as-a-bank pillar of Johnston’s strategy — remain unclear ahead of the vote on the 0.5% tax increase.
“Without a lot of definition around this — and without a lot of independent underwriting of where this money is going to go — it is actually fraught with problems,” said Jeff Engelstad, a University of Denver real estate professor. “How much is earmarked for high-risk lending — which (means) we are probably not getting any of this back — versus how much will actually generate a cash return? You can’t have all of one and none of the other.”
He added: “I just don’t want politicians making the decisions about the finances. It just doesn’t seem like they are going to make prudent financial choices.”
There is not yet a formal spending plan for the dollars that would be raised by 2R, which is projected to generate $100 million in revenue per year at the start of the new tax’s 40-year lifespan. It would be the city’s largest sales tax dedicated to one purpose and would increase the city’s effective tax rate to 9.31%.
The road map for investing those dollars in year one would be due to the council for approval in January, should the measure pass. City officials would then develop longer-term plans in partnership with a strategic advisory group that works with the city’s housing department.
Johnston expressed confidence that his administration would have the capability and capacity to put the new tax dollars to work. His focus would be on assembling a management team that could keep up with the demands, he said in an interview this week.
“What we want is a fund and a team that can move at the pace of the market,” he said. “What we often find in these projects is that it’s so frustrating when people have to wait six months, 12 months (or) two years to get information on financing or funding. Public agencies move very slowly, and that kills deals.”
His hope is to give the city more leverage.
Johnston has talked about investing in projects and then encouraging developers to include a higher number of income-restricted apartments in their mixed-income buildings. The city also could ask its would-be partners to price more of the affordable-rated apartments they build at rents attainable for people on the very low end of the income spectrum — potentially much lower than is expected under the city’s existing inclusionary housing ordinance.
Questions about approach and oversight
The city’s role could take different forms. One would use the concept of a revolving loan fund — or a greatly expanded revolving loan fund, in Denver’s case — to provide some advantages to affordable housing developers, even beyond offering low interest rates, noted Todd Ely. He is a public affairs professor at the University of Colorado Denver and the director of that school’s Center For Local Government.
It starts with simply providing more access to financing in an affordable housing industry that struggles with intense competition for resources like federal low-income housing tax credits. Those are the U.S. Department of Housing and Urban Development’s primary tool for subsidizing affordable housing construction in communities.
But offering below-market interest could lead to the erosion of the city’s fund as inflation eats into returns, Ely wrote in an email last week. He also suggested Denver would face challenges in administering a much larger loan fund than it has before.
“Similarly, overhead expenses incurred to underwrite and monitor loans by an organization without the existing systems and personnel may erode the capital available for lending,” he wrote.
Robin Kniech, a former City Council member who steered much of the council’s policy on housing during her 12-year tenure, also sees potential trouble spots.
She has questioned why the ordinance proposed by Issue 2R would house the new dedicated tax fund under the city’s Department of Finance, rather than the city’s Department of Housing Stability, or HOST. That department oversees the city’s homelessness and affordable housing efforts today.
“You’re going to require new expertise to be hired. (There could be) duplicated infrastructure, perhaps. Probably a little more focus should be paid to what that really means,” Kniech, whose final term ended in 2023, said in an August interview. “Yes, there’s a question about capacity. HOST has a lot on its plate. But you’ve just traded challenges — you’ve traded a capacity challenge for an expertise challenge.”
Jamie Rife, the executive director of HOST, said her department plans to work closely with city finance officials to make sure affordable housing dollars are getting out the door quickly and meeting the housing crisis with the urgency the mayor often talks about.
Denver’s Department of Housing Stability director Jamie Rife speaks at the grand opening of the Clara Brown Commons at 3700 York St. in Denver on Friday, Jan. 19, 2024. (Photo by Andy Cross/The Denver Post)
In response to concerns her department would not be sufficiently involved in decision-making, she said: “We will work closely with (the Department of Finance) on how we work to do some of these more complex finance structures.”
When it comes to having the staffing necessary to run a large fund, Johnston noted that the 2R ordinance would allow for up to 3% of tax revenues to be spent on administration. That’s roughly $3 million annually if collections meet projections — providing the flexibility to hire 20 to 30 additional full-time staff members if necessary, he said.
Ely suggested it might be in Denver’s best interest to form a partnership with other institutions, such as state authorities or community development financial institutions, for some of the work.
Denver Councilman Darrell Watson, who is supporting 2R, says he is open to strategies that involve outside help if the city’s finance and housing department staff recommend doing so.
The lack of a hard-and-fast plan now leaves the door open for decisions like that in the future.
Tax would turbocharge city’s spending on housing
Johnston said the possibility of borrowing against all or some of the money the tax is expected to bring in is also very much on the table.
The tax’s sunset date is set in 2064, fully four decades away — allowing the city to ramp up its investment capacity by issuing bonds. That could better equip the city to tackle its housing challenges more immediately.
The mayor’s aims might be ambitious, but he doesn’t see any of the approaches he is suggesting as novel or untested. There are examples locally and across the country.
The city launched a $10 million revolving loan fund under Johnston’s predecessor, Michael Hancock, in 2016. It’s focused on supporting low-income rental housing projects.
At that time, an estimated 35% of households in the city were cost-burdened by their housing costs, meaning they were shelling out at least 30% of their monthly income to keep up with their rent or mortgage. Now city officials estimate that 50% of all Denver individuals and families are cost-burdened by their housing expenses.
Denver also has a dedicated affordable housing fund fueled by property taxes and linkage fees on virtually all new developments within city borders.
Those and other resources allow the city to contribute to the creation of 1,500 units of affordable housing per year for people at set-out income limits, Johnston says. But that’s not near-enough to keep up with the need, advocates say.
According to a recent assessment by the Denver Regional Council of Governments, Denver would need to add 44,000 units of affordable housing over the next 10 years to keep up with demand. More than half of those apartments and other housing units would need to be heavily subsidized so that they were attainable to people making 60% or less of the area’s median income, according to that assessment. That threshold is currently $54,780 for an individual or $70,440 for a three-person household.
Denver’s existing loan program is making a mark on the city — even if it’s too small for the mayor’s liking.
Nonprofit affordable housing provider Archway Communities received $4.85 million through two city loans as part of the financing stack for its $72 million project on the Mosaic Community Campus, according to Katie McKenna, that organization’s housing development manager. The Mosaic campus occupies the former Johnson and Wales University property in South Park Hill.
Presidents Hall, front, Founders Hall, left, and two former dormitory buildings on the Mosaic Community Campus in Denver on April 9, 2024. Several former dormitories are being renovated into about 150 units of affordable housing. (Photo by Hyoung Chang/The Denver Post)
Archway’s 154-unit project, which is reserved for households making 30% to 60% of the area median income — or $27,400 to $54,780 for a single person and higher for multiple-person households — saw its first move-in last month.
McKenna is urging voters to approve 2R and give the city more financial power.
“Different tools work for different projects,” McKenna said, referring to developers’ attempts to put together financing stacks for affordable housing projects in an environment where the cost of materials, labor and investment capital have all risen significantly over the last handful of years. “Having as many options available as possible will help bring more homes into the market in Denver — and a bunch of different kinds of homes.”
Similar housing efforts in other cities
Denver isn’t the only metro community asking voters for help this fall.
Adams County also is asking its voters to weigh in on an affordable housing sales tax measure. It would raise the sales tax rate countywide by 0.15%, bringing in a little over $22 million per year, according to county records.
That would provide the capital needed to create 6,000 or so units of affordable housing over the next 20 years, according to a fact sheet prepared by Maiker Housing Partners, the county’s housing authority.
Other communities around the country have executed large affordable housing loan funds, providing models Denver can learn from. Examples include Montgomery County, Maryland, and Wake County, North Carolina.
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The latter county was praised by Vice President Kamala Harris this summer as the Democratic nominee ran for the presidency. Harris has made expanding opportunities for innovative construction financing a plank in her housing plan and holds up Wake County, which includes the state capital of Raleigh, up as an example.
It pays for its housing investments largely using a property tax increase approved in 2018, according to Alicia Arnold, the deputy housing director there. That generates more than $15 million per year. The county also plowed more than $60 million in federal pandemic recovery dollars into its housing efforts.
Wake County has patched together approaches geared toward specific needs, Arnold said. That includes buying and preserving existing income-restricted housing that is aging out of its deed restrictions — another idea Denver has talked about — and asking that 10% of the units in any project it invest in be set aside for residents who may be using federal rental assistance vouchers.
It went from building just shy of 3,000 new units of affordable housing between 1994 and 2018 to a faster pace that has seen 4,476 units built or preserved in the last six years alone, Arnold said.
Generating at least some returns is a part of the equation.
“We set up our funds as loans — so, typically, there are payments on the loans,” she said, “and while it’s not substantial, we are revolving that back into (the fund). So we are reinvesting our dollars.”
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