Voters making Denver more expensive and your taxes will increase

There is a new initiative heading to the ballot in Denver that could drastically increase prices in Denver.  It is ironic that there have been many tax increases to help affordable housing yet on the other hand an initiative that will substantially increase the cost of construction.  The new initiative requires new buildings to have green roofs (solar gardens, landscaping, etc…) which would substantially increase the cost of building.

What is in the initiative:

The ballot measure would require most new buildings of at least 25,000 square feet to have gardens, solar panels or other “green roof” components cover at least 20 percent of their roofs’ surface, depending on a building’s size. Roof replacements on existing buildings also could trigger the requirement.  I would assume any large remodels, etc.. will also trigger an update to the roof just like other code upgrades.

What is the benefit:

Various studies have come out that a green roof reduces run off and reduces heating and cooling costs.  Depending on the construction a green roof also could reduce hail damage.  I haven’t seen long enough studies that show what the actual payback/financial return on a green roof is.  I would suspect a building owner would get much higher return on more efficient heating/cooling, light automation, etc…

What are the Costs:

According a report from the state of Minnesota a green roof costs over double a traditional roof.   I would suspect it would be considerably higher.  With the snow load in Denver, a building would have to radically increase the framing for the roof to accommodate the huge increase in weight.   This new cost will no doubt be passed through in higher building costs, rents, etc… therefore further driving up the building cost throughout the metro area

Impact on affordable housing:

This new initiative will have a large impact on affordable housing/ lack thereof.  The more costs are increased the less profitable are projects aimed at lower price points.  With another fixed cost like a green roof thrown in the mix, it is almost impossible to effectively build at lower price points.  This initiative will further erode affordable housing in the metro area

Impact on prices:

Increasing the building costs (which are already high in Denver) will further drive up prices.  For example, if no new product is coming on at the lower price points, anything at the lower price points will have increased demand. This ordinance will impact multifamily properties like condos, townhomes, and any attached properties over 25k feet.  Basically, anything under about 400k will increase in value substantially as demand continues to outstrip supply.  Other commercial properties will also increase in price as rents are increased to compensate for the new costs and existing rents will also increase as the market no longer offers lower rents due to the increased building costs.

Why will taxes increase?

Taxes are based on assessed values.  As prices increase assessed values increase and taxes also increase.  There will be a double “whammy” of the increased costs as well as higher taxes.  This will make it more expensive to buy a property or rent a property.  These taxes also will be “passed through” to commercial tenants.

What does this all mean?

I think this initiative has a good chance of passing based on the changing demographics of the metro area.   There is no doubt Denver will get more expensive as building costs further increase.  The increase in costs will ripple through both commercial and residential properties by increasing values and taxes.  The million-dollar question is what is the market able to absorb and what projects are scrapped or radically changed in order to accommodate this initiative?

Sources/Additional reading

1. http://www.denverpost.com/2017/09/05/denver-green-roof-initiative-ballot/
2. http://www.thedenverchannel.com/news/politics/green-roof-measure-makes-denvers-november-ballot
3. https://stormwater.pca.state.mn.us/index.php?title=Cost-benefit_considerations_for_green_roofs
4. http://www.deeproot.com/blog/blog-entries/the-costs-and-benefits-of-green-roofs

Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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