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Missoula City Council’s affordable housing requirement in condo project leads to fears of inflation

Posted at 8:31 PM, Jan 15, 2020
and last updated 2020-01-16 09:14:29-05

MISSOULA — The city will require a local developer to dedicate 20% percent of its downtown condominium project to affordable housing in exchange for the vacation of right of way under an agreement struck Wednesday by members of the Missoula City Council.

But several members of the council believe the high threshold placed upon the project, proposed for South Fourth Street East, could artificially inflate housing costs across the city by subsidizing affordable units on the backs of other buyers.

Still, all council members said that approving the housing project with the conditions agreed to Wednesday offers guarantees the city would not otherwise get if it denied the project completely.

“Voting no is the worst outcome we can see,” said council member Heidi West. “This is where our leverage lies.”

The developers, Papaw LLC and Cade LLC, could build the project at lesser density under existing zoning and therefor avoid City Council oversight. But they’re asking the city to vacate right of way and rezone the property to accommodate their plans, which requires City Council approval.

That gives the council what it sees as leverage to shape a project that meets a number of outcomes, including the potential relocation of several historic buildings, the salvaging of native grasses and the construction of affordable housing.

“We’re getting affordable housing, and we’re preserving these affordable homes,” said council member Stacie Anderson. “We’re pushing the developer with the 20% requirement past their comfort zone. We’re trying to achieve the best good for the most people.”

The project has been before the council since October and has undergone a number of iterations based on public input. Among the changes approved Wednesday, the developers will be required to contribute up to $12,000 per building to relocate several historic structures currently located on the property.

The number of units dedicated to affordable housing also has ticked up in recent weeks, from 10% to the current 20%. Council member Bryan von Lossberg, who offered the motion to increase the number, said that provides more assurance to the city than the property’s current use.

“We have units operating as affordable housing, not because they’re structured that way, but because of the way they haven’t been maintained,” he said. “If we say no, that affordable housing is going to go away. Saying yes affords us an opportunity to negotiate to maintain affordable housing on this site.”

Nick Kaufman with WGM Group said developers had agreed to set aside 15% percent of the units as affordable housing. He urged the council not to increase that to 20%, saying it could make the project untenable and leave the city without an increase in dedicated affordable housing.

“We know we can do it at 15%, but we don’t know if we can at 20%,” Kaufman said. “You take the upper units and they’re the ones that subsidize the lower units. Those people who are buying those higher units are also getting a mortgage, so they’re paying for that subsidy twice, once in principle and once in interest.”

Several members of the council agreed and offered an amendment to reduce the number of affordable housing back down to 15%.

Council member Jesse Ramos said the city’s steep requirement could backfire, inflating housing prices across the city by tampering with the free market. Getting 15% of something was better than getting 20% of nothing, he added.

“A lot of these affordable units are going to have to be subsidized by the other units,” he said. “Even if we build homes at a $500,000 price point and people from those lower price points sell their homes and move up into those homes because they’ve had some success, it opens up their starter homes to people looking for starter homes, and that has an impact on the reduction in price.”

Eran Pehan, director of the city’s Office of Housing and Community Development, didn’t disagree, saying there’s a risk in increasing the number of affordable units required by the developer. The dedication of affordable units would likely push the price of other units higher, and that could have ripple effects across the city.

“If the percentage gets pushed to a point where the project is no longer feasible without dramatically increasing the cost of the other units, you start to impact the market,” Pehan said. “That impacts comparables across the entire community, especially in the downtown core. As units get inflated in price, that inflation carries over into the entire market. It’s something we need to be really cautious about.”

Pehan said the city’s housing experts have cautioned around the 20% figure, saying Missoula hasn’t conducted an in-depth fiscal analysis to determine where the breaking point lies.

“We don’t know what that is for this project,” Pehan said. “There’s a risk without that knowledge that we’re pushing those higher-end units even higher, and if that will have an inflationary response on the market.”

Wednesday’s approval sends the project to the full City Council for a vote later this month. And while Ramos’ effort to keep the number of affordable units at 15% percent failed, other members of the council could reconsider it in the weeks ahead if statistics support it.

“I have no interest in creating more luxury condos in Missoula. That’s a market that will take care of itself,” said council member Gwen Jones. “But I want to be basing a decision like this on numbers and analysis, and not on theory, and right now it’s theory. I want to see the true impact of 15% versus 20%.”