The Telluride region has a housing crisis. Demand far outstrips supply for full-time working households. The current deficit is estimated to be 400 units, and the demand from the workforce segment is 35 units per year.
Regardless of where you live, housing plays a critical role in people’s lives. It is a major consumption item, a source of safety and stability, and a nationally encouraged means for accumulating wealth. It also shapes where people access education and pursue employment.
In particular, for Telluride, this is a concern for the following reasons:
• Wage leakage – according to the San Miguel Regional Housing Authority, 2011 Housing Needs Assessment, of persons employed in the Telluride region, more than 30% commute; 50% of all wages earned in the Telluride region are spent outside the region. These wages earners are not only spending their discretionary funds on commuting expenses, but on purchasing goods and groceries and generating a tax base in other communities.
• Carbon commute – commuters contribute to clogged roads, decreasing the driving experience for all, and increasing the region’s carbon footprint. Vehicles are the single biggest contributor to our regional carbon footprint.
• Economic mobility – since the 1950s, a building block of household economic upward mobility and wealth creation has been investing in home ownership. The absence of home ownership opportunities and affordable rental housing options has been shown to be a major contributor to lack of family upward economic mobility.
• Human capital – people living where they work is critical to the vibrancy of a community. A healthy thriving community needs a diversity of residents who have the time to engage and invest in civic life, including, participating in government, boards and commissions, contributing to the community, volunteering, and attending community nonprofit, school, church and other activities.
• Regional issue –the impacts of a housing shortage and the benefits of additional housing units are truly regional issues, spread across Telluride, Mountain Village, and San Miguel and Ouray counties. The region must work together to benefit all, as well as build relationships and trust that can be applied to other regional projects, including transportation, economic development, broadband, etc. In addition, the lack of a serious housing plan “exports” our local problem to our neighboring communities, like Norwood and Ridgway, creating tension and the appearance that we are unwilling or unable to address our own issues.
Why Housing Now
As the middle continues to be squeezed out, land values go up, and housing prices increase, the importance of identifying creative, aggressive solutions becomes of critical importance. Key questions for the community include:
• What is the present value of housing?
• Why should we try and solve the housing shortage now versus waiting?
The cumulative benefits of building housing today vs. waiting is significant. By waiting an additional six years to build 20 units of workforce rental housing, the Town of Telluride would lose $103,950 in retail sales tax, the community would lose up to $2.3 million in local spending on goods and services, and 450,000 vehicle miles driven would occur as result of the workforce commuting.
What We Know About Housing
We know that housing in Telluride is a regional issue and that one government entity cannot solve alone. Currently all three governments and planning departments are looking at solutions to this issue.
We also know that the housing market in resort communities does not function normally. In a conventional market, demand drives supply in type, quantity and pricing. Because of the limited supply of viable land parcels, their associated high costs, and the relative higher cost of construction, due to labor and materials costs, the resulting supply is naturally driven to the upper end of the spectrum. While there is significant demand for lower cost housing, there is little to no new supply.
A variety of housing market types reflects the make-up of any community and its residents. While recognizing that not everyone wants to live where they work, it is important to provide the option for those that do. Telluride’s housing markets include:
a. Low income
• Service sector jobs
• Employees serving a tourism and construction based economy
b. Middle market
• Business owners
• Year-round employees
• Government employees
• Fire, Police and Healthcare professionals
c. Seasonal employees
• Ski resort
• Seasonal service sector
d. High end
• Second homeowners
How and what housing gets built depends on several factors, including the cost of land, the type of construction and materials, access to and cost of capital, government regulation, and market demand. For the four types of housing above, we understand the following about their markets:
a. Low income -requires grants and public subsidy and has been the traditional focus of government.
b. Middle market – there is significant demand and income from workers, but limited product because of marginal returns for private sector to build.
c. Seasonal employees – there is significant demand, but no private sector incentive to build.
d. High end – there is significant demand, notwithstanding a high cost to build, there is a proven track record for large financial returns.
e. Mixed income – mixed income developments can include factors from the low income, middle market, and high end (e.g. a development with market-rate luxury condos and below market rate condos). This scenario allows for average returns rather than high returns or marginal returns, grouped with other incentives, this becomes more attractive for the private sector.
We know that there are land parcels available that could provide opportunities to address the affordable housing crisis. The hope is that these parcels could be purchased below market rate or donated by one of the government entities. Regional planners identified 25+ parcels that could potentially be used to build significant for sale and rental workforce housing units.
Telluride’s Workforce Market Segment
In an ideal market, households are not spending more than 30% of their household income on housing. In Telluride, household income spent on housing exceeds 40% due to the lack of housing opportunities, high demand and market factors. As households spend more than 30%, other critical household spending gets squeezed out, including childcare costs, retirement savings, children’s higher education savings, preventive healthcare, etc.
The following chart shows the number of households in each of the area medium income (AMI) household income brackets and the forecasted growth over the next 25 years. Highlighted is the band of $75,000-140,000 AMI household income that represents the 100-200% of AMI markets. The lower part of the chart shows the percentage of the total AMI housing markets and the growth over time of the 100-200% AMI “middle market”.
Workforce housing households are defined as households earning between 100% and 200% of Area Median Income (AMI). In 2015, Telluride AMI equated to:
• 100% AMI = $75,000 per household
• 200% AMI = $140,000 per household
As the chart illustrates, this workforce market of $75,000 to $140,000 is the fastest growing segment of our population. Assuming housing for this workforce market could be priced at up to 30% of household income, the following target housing prices emerge:
• Home ownership: $337,000 to $714,000
• Housing rental: $1,750 to $3,500 per month
Public Private Partnership (P3) to Develop Housing
One approach, which the Telluride Foundation advocated for over a two-year period with local elected officials, was to use public private partnerships to develop more units. P3 housing is a proven approach in many resort towns across the country. The P3 approach solves the housing development challenges through a coordinated effort between the public, private, and nonprofit sectors. Local government, which controls entitlements (zoning, fees, and the approval process) and may own land, partners with the private housing development sector to deliver projects that meet the goals of the local municipalities while utilizing the expertise and financing of private housing developers. One advantage of P3 housing is that it allows workforce housing to be built by the private sector, allowing governments to simultaneously focus on developing low-income or seasonal housing. P3 housing leverages the resources of multiple parties and has the following benefits:
• Increases project feasibility and can accelerate the production of housing
• Private sector reduces or shares government sector risk
• Taps private sector expertise and attracts private sector creativity and capital
• Broadens target market to include moderate and middle income housing
• Aligns public sector incentives (i.e., land, up-zoning, fee rebates, etc.) with private sector experience
• Brings lower cost equity to finance the project (capital stack)
• Doesn’t necessarily require tax payer funding and minimizes public subsidy requirements
• Leverages and expands resources to produce housing (dollars and time)
• Leads to workers living in the community, and the accompanying multiplying benefits of that scenario
• Frees up affordable housing units as occupants upgrade and move into workforce housing
P3s are generally developer led and financed by private capital. Because P3 housing, by nature, calls for a partnership between the public and private sectors, the public-sector involvement often takes form in a contribution of land. Policy can come into play, too, with entitlements, reductions in some requirements (i.e., parking), waivers/reductions of fees, as well as modifications of restrictions related to the occupancy, sale and/or leasing of the units. Restrictions, including affordable housing requirements, can be applied to P3s and could also include the following:
• Live-work requirements
• Limit maximum return to the developer
• Buy-back conditions
• Target household income levels
• Financing layers (debt and equity structure) that distribute risk
As part of a P3 negotiation, governments would consider offering the following incentives:
• Donate land or low cost land lease
• Waive/reduce tap fees or other impact fees
• Waive/reduce permitting fees
• Donate legal and staff resources
• Build predictability into the approval process through shared investment and clearly articulated entitlement process
• Increase density in exchange for housing development
• Reduce parking requirements
• Allow a combination of mixed income units
• Consider other creative incentives that have been used elsewhere
Telluride has a robust and growing workforce housing market. Although there is a need for all types of housing from low-income and seasonal to high-end, the fastest growing segment of the workforce is between 100% to 200% of AMI, or $75,000 to $140,000 household income. These households can afford quality for sale and rental products, starting at a purchase price of $337,000 or monthly rental of $1,750
However, little is being built for this growing market. Currently, only the Town of Telluride is building product for this market at a rate of 3 units per year; only 10% of the annual demand. Based on other successful P3 housing projects in other resort communities, we know that P3s are an approach that can build product for this workforce housing market at their price point.
Housing will always be a challenge in an isolated geographically constrained community. However, it does not mean that you can’t help address the issue seriously with collaborative, innovative and intentional efforts.