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‘Fee in lieu’ has spurred development in Santa Fe

Copyright © 2019 Albuquerque Journal

A provision in city law designed to stimulate rental housing development in Santa Fe is set to expire at the end of the year, raising concerns among builders and city officials that a push to encourage the construction of more apartments in Santa Fe could be stalled.

The Broadstone Rodeo apartments are under construction on Santa Fe’s Rodeo Road. Developers took advantage of paying a fee in lieu of providing “affordable” units in the complex. (Eddie Moore/Albuquerque Journal)

In 2016, the city adopted an ordinance that allows developers to pay a fee in lieu of meeting a requirement to allocate 15% of newly constructed single-family rental units to affordable housing, with rents that meet city guidelines.

Most developers have opted to pay the fee instead of offering units at cheaper rents considered “affordable” for lower-income individuals or families.

Not everyone thinks that’s been good for Santa Fe, including Rick Martinez, chairman of Keep Santa Fe Beautiful and an activist on the board of the Santa Fe Neighborhood Network.

“Everybody is complaining that we’re in a crisis for affordable housing and yet they are letting these developers pay a fee in lieu,” Martinez said. “It lets them buy their way out instead of doing affordable housing, which is what’s needed.

“And what bothers me the most is that these developments are usually backed by out-of-state investors. They should be a part of the community and investing in the people that make up the community, yet they are going to build 2,000 units without one affordable unit? Give me a break.”

But officials emphasize that the ordinance did stimulate construction of – or at least plans to build – “market-rate” rental housing.

“It did exactly what it was intended to do,” Alexandra Ladd, director of Santa Fe’s Office of Affordable Housing, said of the fee-in-lieu provision.

“It was a deliberate, focused, strategic initiative to get multi-family development going in this community. It was designed to get market-rate housing approved, permitted and built.”

City records indicate there are now more than 1,500 multi-family residences in the pipeline for development, 1,378 of them assigned to nine projects that have committed to paying the fee in lieu and are subject to a Jan. 1, 2020, deadline for payment, regardless of whether the city Planning Commission has approved the project.

One, the 52-unit Railyard Flats, has already been built. The 139-unit Capitol Flats and the 188-unit Broadstone Rodeo developments are under construction. That leaves six other developments totaling nearly 1,000 units that have been approved and are subject to the payment deadline.

An official at Albuquerque-based Titan Development says his company would never have gone ahead with the 188-unit Broadstone Rodeo apartment complex on Rodeo Road without the fee-in-lieu provision.

“There was no way prior to the fee-in-lieu to make a multi-family apartment complex like that one work,” said Josh Rogers, director of multi-family housing for Titan. “We could not have done that project under the original ordinance (requiring that 15% of the units are considered ‘affordable’). The numbers don’t work.”

It’s complicated, Rogers says, but the simplified explanation is that developers project a 15% profit when they do a development. So if a company makes 15% of the units affordable instead of the fee in lieu, “all the profit is gone,” he said.

The city calculates “affordable” rental rates based on area median income. Housing is considered affordable if a renter pays no more than one-third of household income for housing costs.

Titan has been criticized for not including affordable housing in its development. But Rogers says the payments – Broadstone paid $232,500 instead of creating 28 affordable units out of the 188 total – are a necessary incentive.

“From what I can tell, there’s about 1,500 new units planned or in the process, and there’s anywhere from 3,000-6,000 units needed to bring housing back into balance in Santa Fe,” Rogers said.

“Everybody wants to have more affordable housing in Santa Fe, but you can’t stifle the development of market-rate housing in the process. Because if supply is fixed, demand will rise and prices will rise along with it.”

City Councilor Mike Harris spent a career working in the construction business, providing development and management services, and he also served on the city’s Planning Commission for many years.

He said he has heard developers have a hard time financing projects that include the “affordability quotient.”

“It’s harder to develop than it ever used to be, quite frankly,” he said, adding that high land costs and difficulty obtaining financing make it difficult. But he still wants to know why so many projects in the development pipeline haven’t broken ground.

“I’m wondering what’s going on in the marketplace. What’s holding them back?”

The city is working on amendments to the ordinance with an eye toward keeping the fee-in-lieu provision in place, but likely at an increased rate.

“There is no one way to solve this,” Ladd said of the housing shortage in Santa Fe in general. “You have to come at it from all angles.”

Managing units a burden

City Land Use Director Carol Johnson said uncertainty about what the city will do could have an impact on residential construction projects in the near future.

“The ‘in lieu’ program expires at the end of this calendar year, and those fees are collected at the time of building permit issuance. So, if you’re one of these projects that just recently got your land use entitlement, you still have to prepare your architectural construction drawings, all your site development – grading and drainage – and infrastructure plans and bring those in for review by the city,” she said.

A change in the ordinance now could affect developers who are building projects over time in multiple phases, Johnson said.

“And, especially if you’re doing a phased project where you’re pulling permits and building one phase at a time, if you are going to end up pulling permits after the first of the year right now, it’s uncertain about whether or not you can pay the in-lieu fee or whether you have to go back to the old program (requiring that 15% of the units have affordable rents).

“That old program was set up more like our single-family program, where those units have to be included in the project. Then the property owner or management firm has to do income verification and manage all those (affordable) units in a similar sense to a public housing project, because they have to be restricted to certain income groups and you have to go through that whole process to verify that tenants actually do meet those income requirements.”

Johnson said builders don’t want to do that kind of detailed management of their tenants’ incomes.

“My understanding is (the fee-in-lieu provision) was a response from the development community because having to manage these affordable housing units was a burden that they weren’t equipped to address – the income verification and all of that – and that was what was preventing more apartments from being built in Santa Fe,” said Johnson, who came on board as city land use director last July.

“So there was a stretch of time where we really weren’t getting any larger scale developments that could make a substantial dent in the housing needs. The fee in lieu was a response by the governing body at the time to try to incentivize larger scale apartment buildings.”

Payments go to trust fund

The revenue generated from the payments goes into an affordable housing trust fund.

Affordable Housing Director Ladd said that since 2014 the city has collected more than $800,000 in fees that have been deposited in the trust fund for home ownership and rental programs. She said at least half of that amount was generated through the fee in-lieu-of provision from the construction of rental units since 2016.

Ladd said the trust fund has been used to support mortgage principal buydown loans through such groups as the Santa Fe Community Housing Trust, Homewise and Habitat for Humanity; home repair loans; facility repair or construction at St. Elizabeth Shelter, Presbyterian Medical Services and Hopewell Community Health Clinic; and for rental assistance allocated through groups like Life Link, Adelante and Youthworks.

Nearly $500,000 has been approved for distribution during the upcoming fiscal year. Of that, $150,000 will go to the Santa Fe Civic Housing Authority for the rehabilitation of the Villa Consuelo apartments, $157,000 to the Santa Fe Community Housing Trust and $80,000 to Habitat for Humanity to assist with mortgage principal reduction, $60,000 to Life Link for rental assistance, and $27,500 to the Santa Fe Recovery Center for sober living rental assistance.

More ‘flexibility’ needed

Mike Loftin, executive director of Homewise, which develops affordable housing, agrees that the fee-in-lieu provision has helped stimulate construction, even if it’s not in the affordable category.

“There has been a lot more rental development now than before, so it did accomplish that objective to build market-rate housing,” he said.

Loftin, who chaired Mayor Alan Webber’s task force on affordable housing and presented a report to the City Council in November, said he hopes the city keeps the fee-in-lieu provision in some form so as not to discourage the construction of market-rate residences.

The task force he chaired made several recommendations, including finding a dedicated funding source to provide $3 million annually to the trust fund. Some of that money could be used for rental assistance that may help keep residents in their homes.

Another recommendation was promoting new construction to create a larger inventory.

“The supply of market-rate housing helps,” said Daniel Werwath of the New Mexico Interfaith Housing Corp., who also served on the task force. “But we also must recognize that it will never trickle down to the low-income family.”

Werwath’s Interfaith group received good news last week when it was notified of a preliminary award of just shy of $10 million worth of low-income tax credits through a federal grant for the Arts + Creativity Center, a 65-unit live/work affordable housing development intended for artists on Siler Road.

In addition, the Santa Fe Civic Housing Authority received a preliminary award of $7.6 million worth of tax credits for a 45-unit affordable housing complex in the same general neighborhood. For both developments, no in-lieu payment was involved.

Both Werwath and Loftin said raising the fee-in-lieu rate is something the city should consider. Werwath said creating other forms of compliance, like creating rent-controlled units at a slightly higher price, or giving housing preferences to voucher holders, could also work.

Ladd said various incentive ideas are being considered. She agrees that there needs to be more “flexibility” for developers.

“There should be more than one way of compliance to meet developmental needs and options provided. It needs to be more flexible, not easier,” she said.

Activist Martinez acknowledged the city may have succeeded in adding to the inventory of housing in Santa Fe, but said “still they are ignoring the need of the people that need to be paying affordable rent.”

Martinez suspects the city will want to keep the fee-in-lieu provision. He thinks the city should consider lowering the percentage of required affordable units from 15% to 10% or even 5%.

“That way we get something, rather than nothing,” he said.

Ladd said several meetings are planned to discuss possible amendments to the ordinance, but the public will have an opportunity to chime in, likely in June.

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