Will Boulder’s real estate “experiment” work?

 

Boulder, like many areas in metro Denver, has an affordability problem.  The median home price in Boulder is more than one million.  To counteract the steep rise in housing costs, Boulder has started a grand real estate “experiment”.  In this experiment, the city just raised fees 250%.  How will this impact real estate in Boulder?  Will other cities follow through with similar “experiments”?

 

What is the experiment?

Boulder many years ago created an affordable housing fund.  To generate funds for affordable housing, the city created a “linkage fee” for developers.  This fee is a flat fee based on the square footage of the proposed development.  For example, if a developer were building a ten-thousand-foot warehouse the fee in boulder would be ten dollars a foot.  So in this case the developer would pay approximately a hundred thousand dollar linkage fee to the city of Boulder.

What Changed?

In the past Boulder charged twelve dollars per foot for a commercial development.  The city council voted to increase this fee to thirty dollars per foot.    This is a big change!  For example, under the new policy if Google were building its space in Boulder today they would face an affordable housing fee of three million (assuming 100k space at $30/ft fee).  This is $1.8 million higher than they paid last year. Remember this fee is on top of already high land and building costs.

Why is this so unique?

Denver recently created a linkage fee which ranges from $0.4 /ft to $1.7/Ft; this is 15 times lower than the new fee in Boulder.  Boulder is now the second highest fee in the country just slightly behind Palo Alto (Silicon Valley) at $35/ft.

What is the impact? Basic economics wins

Real Estate like general economics is a zero-sum game.   The raising of fees so high will create winners and there will be losers.   In this case the winners and losers is not what the city had intended:

Who are the winners?

Anyone who owns property will “win” as property values continue to rise.  The new development fee will restrict development making ultra-high end projects the only viable projects that could absorb the cost.  Lower/middle income projects will be mothballed due to the huge increase in expenses.  This will create more demand for properties as supply is constrained in the market.

Who are the losers?

Anyone who rents commercial or residential real estate.  As supply is constrained prices will increase.  The increased costs of new development will be passed on to the tenants.  Furthermore, with less supply property owners will have more leverage to further increase rents on existing properties as well.  Ironically, the biggest loser will be affordable housing.  Builders will no longer build affordable housing since the fees make it impossible which will in turn place a higher burden on the subsidized housing fund (which ironically is being funded by developers)

 

Carrot vs. Stick

I always find it interesting how many cities like Boulder use a big stick to try and “prod” developers into building affordable housing when a carrot could likely accomplish more.   The stick approach being used by Boulder will not change the affordable housing situation in Boulder (or anywhere else) as prices to build affordable/market housing is too expensive with the increased development costs.   The huge jump in linkage fees is having the opposite effect of what was intended by the city.  If Boulder were truly interested in more affordable housing they would take steps to increase density and reduce barriers on developers to focus on housing that fits the market demands.  Until the market can work efficiently, affordable housing will remain a gold pot always on the other side of the rainbow that can never be reached.

 

 

 

 

Resources/Additional Reading

 

1. http://www.dailycamera.com/news/boulder/ci_31813621/boulder-sets-affordable-housing-linkage-fee-at-30
2. https://coloradohardmoney.com/2016/06/09/denver-housing-crisis/
3. https://www.denvergov.org/content/denvergov/en/denver-development-services/help-me-find-/Development-Services-updates/affordable_housing_fee.html

 

I need your help!

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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.

Fairview is the recognized leader in Colorado Hard Money and Colorado private lending focusing on residential investment properties and commercial properties  both in Denver and throughout the state. We are the Colorado experts having closed thousands of loans throughout the state.

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