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Tucson OKs affordable housing subsidies to for-profit developers, hopes for quick results

For-profit developers now have a green light to claim subsidies from the city of Tucson to build affordable housing after the City Council voted unanimously Tuesday in favor of an immediate waiver of impact fees. The move is meant to be an incentive for affordable housing development, though few developers have been seeking waivers for eligible construction or restoration projects, officials said.

Tucson collects impact fees on housing development projects to help cover the cost of bringing in more services and infrastructure such as roads, parks, police or fire services.

Before Tuesday’s vote, only nonprofit organizations were eligible to have those fees waived through city reimbursements. The waivers, “in essence” as city documents describe, are “a subsidy paid by the city.” Receiving an impact fee waiver also qualifies developers for the Low-Income Housing Tax Credit, or LIHTC, the main federal subsidy program for affordable housing.

Nonprofits alone, city officials said, would struggle to build a large enough inventory of affordable units to impact the housing crisis. For-profit developers are needed too, so the city identified — in their affordable housing strategy — the expansion of their impact fee subsidies as short-term relief from the costs of developing new housing.

The impact fee subsidy is meant to quickly create more units that are in the price range of families that are at 100 percent of the area median income, or AMI, a figure set by the U.S. Department of Housing based on household size and geographic area.

“This is creating an opportunity for us to be able to partner with both nonprofit and forprofit developers and to create more opportunities to build affordable units in the city of Tucson,” Mayor Regina Romero said Tuesday. “And be much more competitive with other cities like Phoenix and Tempe and others throughout the state… we should be right there and as competitive as possible to be able to create these units.”

There are few for-profit developers already working on affordable housing projects, city officials said, but there is an active call for developers to team up with the city to build affordable housing in Menlo Park and Dunbar Spring, two West Side neighborhoods on either side of Interstate 10.

The application window for developers who want to join the project closes on April 11, so the development, which will start shortly after, could be the first example of a for-profit developer using the impact fee waiver, city officials said.

Menlo Park and Dunbar Spring communities, according to a city survey, have asked for housing that’s affordable for families making at least 80 percent of AMI. The city’s plans for the project suggest raising the price of some units to affordability for families at 100 percent of AMI, which would create more revenue.

The city expects to create 20 one-story, three-bedroom townhouses in Menlo Park, which will be on North Westmoreland Avenue and south of St. Marys Road and neighbor Menlo Park from the northwest side. The Dunbar Spring site, which will be on the corner of North 11th Avenue and West 1st Street, calls for 10 one-story townhouses, including three two-bedroom units and seven three-bedroom units.

80 percent of AMI for the Menlo Park and Dunbar Spring units means home prices at $205,072 for a household of three and $227,715 for a household of four. Rents for families at that income level would be $1,142 and $1,253 a month for households of three and four, respectively.

The Menlo Park site is expected to cost developers $4.5 million, and in Dunbar Spring, $2.2 million. Aware that developers typically seek 10 percent profits, the city is planning to let developers keep $453,201 in profits from Menlo Park and $215,271 from Dunbar Spring.

However, developers make more when fewer units are set aside for affordability. If the city requires that all units from these projects be affordable to families at 80 percent AMI, the gross sales revenue, or the grand total from selling units, can end up between $200,000 - $600,000 less than if it allows a quarter of them to be affordable to families closer to median income.

The impact fee subsidy would lower the cost of Menlo Park by $113,000 and Dunbar Spring by $43,000. The LIHTC federal subsidies are also meant to significantly reduce the developer’s cost burden, city officials said.

Cost and revenue projections will likely change though, city officials said, as developers who join the two projects are expected to offer any ideas that could improve affordability or increase the number of units.

There are also questions of how much the city wants to offer in impact fee subsidies. Originally, the City Housing Department suggested capping the subsidy at $150,000 per project, but several Council members spoke in opposition to any kind of cap on Tuesday.

The city has about $500,000 budgeted to pay out through the subsidy, but Midtown Councilman Steve Kozachik recommended they increase it to $1 million, saying “we shouldn’t limit ourselves.”

The budget is meant as a starting point, however, City Manager Mike Ortega told Kozachik, as the city hasn’t yet received enough requests for the subsidy in the past to justify saving more, and Ortega said he'd be ready to increase the budget for the impact fee waivers as soon as Council approves a motion to do so.

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“We’re not going to walk away from projects that come through this because we’re out of money,” Ortega said. “We just have not been as successful in the past,” in terms of having enough projects to spend what’s on the budget.

The Housing Department also recommended a 20-year expiration period on affordability, which would require developers to keep the price of their units affordable at 100 percent AMI during that period or repay the entire impact fee.

The city pays for the impact fee subsidy with money from their general fund or from Highway User Revenue Funds, which come from state tax collection.

Bennito L. Kelty is TucsonSentinel.com’s IDEA reporter, focusing on Inclusion, Diversity, Equity and Access stories, and a Report for America corps member supported by readers like you.

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A design of the housing project at Menlo Park

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