CASE STUDY

The development underway at Canyonlands (by Clark's Grocery Store) is financed in a more unusual manner for the Town of Telluride. The Town is leasing the land under a 30-year lease to a third-party developer who will build the project. The Town purchased the Canyonlands property for $3,000,000 a few years back, and already owned the Tower House land.

The total cost of the project is $26,575,000, which will be bonded against the property itself as collateral. The Town will own 0.1% of the project upon its completion. Since the Town is again building a project without assuming direct future liability for debt, there is no legal requirement for voter approval of this project.

The project will consist of 28 rentals, many of which are smaller, and 11 units for sale, including three Townhouses of approximately 2,220 sq. ft each. When the cost of the land is included, this project will cost about $1,040 per sf before any financing costs ($29 million / 28,575 livable sf). The THA document states the purpose of the units for sale "will be used to buy down the debt of the rental portion of the Project, to maintain affordability in perpetuity." Moreover, "both the rental portions and affordable for sale portions of the Project are required to be targeted at an average affordability of 120% AMI, within a range of 80% AMI to 150% AMI, and in no case can any units be priced at affordability exceeding 150% AMI. (p. 3)

Although no mention was made of market-rate sales in the originally approved documents, in a more recent Town Manager's update, the plan appears to be that three of the total of eleven units for sale will be sold at market rate.

It is undoubtedly possible that free market units will sell for more than their $2.3 million cost, but how much people will pay is not known. It is certainly true that the average price per square foot in Telluride is currently around $1,800 for the purchase of residential property, and this would mean a sale price of around $4 million for the Townhouses, meaning a profit of $1.7 million each or about $5,000,000 total if all goes well.

Assuming the sale of the free-market units reduces financing costs by $5 million, the overall monthly financing costs drop from about $155,000 per month to about $125,000 (at 6%). However, the rental units at 120% AMI will only bring about $63,000 per month (2/3 of the total finance cost of about $100,000).

The five other subsidized AMI units for sale will require additional subsidies to make them affordable to the 150% AMI buyers. A rough estimate of this subsidy is around $10,000 per month for the eight AMI units.

As the saying goes, the math does not appear to be mathing.

Town "Moral Obligation"

So, what happens if the math does not math, and there are substantial financing costs above the income generated every month? The answer is that the Town agreed to a "Moral Obligation" for the debt, but not a legal one. Sounds confusing because it is.

To avoid a vote of the electorate, which is triggered when there is a long-term debt obligation against the Town's general fund, the Town agreed to a “Moral Obligation” instead.  As stated by the Town, "pursuant to the Resolution, it is the intention and expectation of the Town Council to appropriate such funds as requested, within the limits of available funds and revenues, but this declaration of intent shall not be binding upon the Town Council or any future Town Council in any future year”, and there is no "general obligation or other indebtedness or multiple fiscal year direct or indirect debt.” (p. 5.)

So the Town can, but is not required to, step in and make the debt payments to avoid foreclosure by the bank and a loss of the property. The Town makes this "Moral Obligation" on all these debt deals, such as VooDoo, Sunnyside, and others.

Aside from the humor of having a "Moral Obligation" for a debt, which, we guess, means that failure to pay means the Town is acting "Immorally," it raises the question of how real this obligation is. Apparently, banks will give a better interest rate if Town agrees to this language, since they obviously believe the Town will, in fact, step in and pay the difference.

If, for example, the income on the Canyonlands property is nowhere near enough to pay for the monthly finance charges, the Town will face the prospect of either losing the property in foreclosure, which would be seriously embarrassing (and potentially "immoral," whatever that means), or stepping in to start paying the monthly debt balance.

If the Town decides not to step in under this Moral Obligation, thereby acting "immorally", do you think any lender would work with the Town again? Highly doubtful. Taken altogether, it seems as if the Town would have no choice but to step in and pay in the event of insufficient income.

Doomed to Fail?

Based on the numbers above, it seems unlikely the three market units will cover the financing costs of the rental units. For the AMI restricted units, given that individuals with an AMI income of 150% can only afford to spend about 1/4 of the monthly financing cost, they also appear to need substantial subsidies to be affordable.

If the Town plans to provide large future subsidies for the AMI restricted sale units, such a subsidy should be disclosed, as it would appear to bring the project under the law requiring a vote of the people for long-term debt approval.

The Town might have a magic bullet to make this math work, but requiring such projects to receive voter approval necessitates transparency on how the developer can spend over $1,000 per square foot and make it affordable without a substantial subsidy from the Town.

Of course, the unknown risk is whether a recession could cause all the math to go sideways, and the Town loses all its recently built affordable housing. Is this a serious risk?

Inquiring minds would like to know.