By Jill Carstens
As the costs to build in Denver have risen significantly over the past few years, the city has stepped in to assist the completion of income-restricted housing.
Such a complex at 3501 and 3563 Chestnut Place in the RiNo Arts District is a partnership between Shanahan Development and Elevation Community Land Trust. This will be an eight-story complex with 49 units for sale and 5,100 square feet of commercial space on the ground floor.
A request for a $5 million loan, with a 12-month simple interest of 2%, was recently approved by the Denver City Council, which had previously approved a $3.18 million performance loan for the project, totaling about $8.18 million in loans from the city. The purpose of the new loan is to replace a portion of a high-interest bank construction loan, with interest that had increased 115% since the start of the project, according to city documents.
The construction loan had a floating rate, so as interest rates steadily increased, so did the interest rate on the old loan. The new loan also addresses increased construction costs.
“By taking out $5 million of the senior bank loan with a lower-interest city loan, we were able to eliminate the financial gap,” said Derek Woodbury of Denver’s Department of Housing Stability, (HOST). “The terms of this require this sum to be fully repaid with any accrued interest within 12 months.”
Jeff Shanahan of Shanahan Development said that as the eight-story buildings were being constructed, growing strain was hovering with the rising interest rates of the original loan. So far they have kept delays at bay, and the project is scheduled to be completed by October of 2023. Most of Shanahan’s projects are affordable housing developments.
“In order to apply for the original funding required to build these projects we needed to have a budget in place pretty early on in the process, sometimes over a year before the project starts,” Shanahan explained. ”The volatility in material and labor cost is a big challenge because we have locked in the budget. Any increases in cost is hard to overcome. And no one predicted the cost increases that have happened over the last two years. With that said the city has been very understanding and helpful in filling any gaps created by the rapid increase in cost.”
The recent increases in interest rates, Shanahan continued, have created great challenges to building income-restricted housing.
“The jump in rates over the last year had the potential to increase my project cost by over $400,000 in interest carry alone,” he said. “Thankfully I was able to source bridge debt with interest rates substantially below market (rates) so we will not incur this additional expense.
“Where interest rates can really hurt the project is when we sell the units to the homeowners,” Shanahan continued. ”We calculate our sales price based on a homeowner spending 30% of their income on their housing expense. So when interest rates go up it reduces the sales price a homeowner can afford, thus increasing the gap between the cost to build and what we can sell the units for. So again we needed more subsidies to cover the gap when interest rates rise.”
Waits on permitting can also get in the way of developments, but Shanahan said that the city is doing a great job of prioritizing income-restricted housing so that has not been an issue for his projects.
“Other challenges are just making sure all the different agencies talk to each other and stay on the same page with all of the legal documents required,” he added.
Closing a deal for affordable housing developers is not an easy feat. According to BuildersPatch. com, there are often an intimidating number of files to be collected per project, regulations to follow, and a number of tasks and details that need to be recorded.
Compiling documents and creating and tracking checklists are not only time consuming, but they’re tasks that are prone to human errors, which can significantly set back developers in their processes. Elevation Community Land Trust will manage and sell the units upon completion. The 80% area median income requirement will last for 99 years.
Planned amenities at the Chestnut Place condos include a rooftop deck, bike shop and bike storage, as well as access to the riverfront promenade nearby. Several artists have already purchased condos, said Shanahan, including the RiNo mural artist Detour.
The development is planned to have 14 one-bedroom units, 27 two-bedroom units and eight three-bedroom units, as well as one commercial space.