REAL ESTATE LAW
BY BEN DOYLE
There is no Colorado statute defining the nature of affordable housing covenants, and there are few reported decisions on point. Therefore, practitioners must carefully draft regulatory covenants to capture the intent of the government and the grantor. This article considers the terms these covenants should include.
This two-part article aims to assist public and private sector practitioners with negotiating affordable housing covenants, with a focus on agreements imposed as a condition of local land use approval.
Part I of this article, published in the July 2019 issue, described the most common ways affordable covenants are created in Colorado, how each type of covenant is affected, if at all, by the rent control statute, and the exception in the rent control statute that allows for "voluntary" agreements.
This Part II is a transcript from a hypothetical pre-application meeting between a developer and a town planner, along with each party's counsel, to discuss the terms a voluntary affordability covenant might include.
Meeting at the Town Planning Department
Developer: Thanks for meeting with us today to discuss our project. We're really excited about our plans and we think the town will be as well.
Planner: Sure thing. We're glad you've come in to talk about our land use process before submitting your application.
Developer: Maybe it would help if we start with an overview of our project. We own about an acre of land near downtown. We'd like to redevelop it with a mix of housing and a few small commercial spaces, with most of the housing affordable to people making 60% of area median income or less. We know the town has a well-documented need for more workforce housing. We're new to Colorado, but we've talked with our counsel and we understand that the town code encourages affordable housing.
Planner: That's right, we adopted an inclusionary housing program several years ago. Our program requires that anyone building residential units contribute to our affordable housing goals, with a variety of ways to comply.
Inclusionary Housing Compliance Options
Developer: I've heard a little about inclusionary housing, but tell us more about how your program works.
Planner. Well, a residential developer can choose to create affordable units off-site, either by new construction or by deed restricting an existing building. Alternatively, you can find vacant land to dedicate to the town for affordable housing. If none of these options is feasible, you can make a cash-in-lieu payment to the town. Are you planning on building rental or for-sale units?
Developer: Apartments for rent.
Planner: OK. We ask because if you were building for-sale units, you could choose to deed restrict a portion of those units to satisfy the ordinance. But if you're building rentals, state law prevents us from mandating rent control on-site as a condition of granting land use approval.
Developer. My lawyer mentioned something about this—is that the Telluride1 case?
Town counsel: That's the one. In 2000, the Colorado Supreme Court held that Telluride could not require developers to deed restrict rental units on-site as part of its inclusionary program.2
Developer: I see. The thing is, we don't own any other property in town, and we don't really want to pay cash-in-lieu. It's expensive enough to build here already. We'd rather get credit for deed restricting the affordable rental units on-site that we're planning on building.
Planner. Hmm. Are you working with any of our local housing authorities by chance?
Developer. Not yet. I've been meaning to reach out to see if they might be willing to partner with us. It would be great to have them on board to help identify potential tenants and provide services to residents.
Planner. That makes sense. Another tiling to consider is that, in some circumstances, if an authority has an ownership interest in your project, your project is eligible for exemption from property and sales and use taxes.3
Developer. Good to know. I will follow up with Them separately. For purposes of today's discussion, assume they are not involved in our project.
Planner. Understood. By the way, we asked because the rent control statute contains an exception that says, in essence, it is not intended to prohibit municipal rent control on properties in which a housing authority has an ownership interest.4
Developer. Ah, I see.
Planner. There is another exception in the rent control statute for "voluntary agreements."5
Developer. Yes, my counsel mentioned something about that. Before you go on, I should mention that I don't think I can make my project work financially under the current building envelope and density limitations. Is there any flexibility there?
Planner. We might have some options. As a planning staff, we acknowledge that a bit more density on this site could work given the character of the surrounding area. But we're not the deciders, and our elected officials are so busy that they haven't had time to tackle a major update to our zoning code to allow that. The good news is that you could apply under our current planned unit development (PUD) regulations. That would avoid the delay and uncertainty associated with a comprehensive rezoning.
Developer. We wondered about a PUD. We've had success with that approach elsewhere. Tell me more.
Planner. You mentioned that you will likely need more density permitted on-site to make your project work financially. Our regulations allow for a "density bonus" if the developer elects to provide additional affordable units.
Developer. Great, that sounds like something we'd be interested in. If we go that route, does that mean we'll also satisfy the inclusionary housing requirements?
Planner. Unfortunately, no, those are separate requirements in our code. For a project like yours, the density bonus is optional; compliance with inclusionary housing is mandatory.
Developer. Got it. I should mention, one development scenario we are strongly considering—if we can find suitable financing—is making 100% of the units affordable.
Planner. Are you applying to the Colorado Housing and Finance Authority (CHFA) for tax credits?
Developer. Yes, we intend to submit an application in the next round.
Planner. That's great to hear. We're familiar with these projects. So if you receive an allocation of tax credits, you will have to execute and record a land use restriction agreement (LURA) to comply with the federal tax code, right?
Developer. Yes, that's correct.6
Planner. So let's assume for the sake of discussion that you move forward with a tax credit project, and all of your residential units will be deed restricted by CHFA as affordable. In that situation, would you be open to making a commitment to the town as part of the entitlement process that you are going to build affordable housing on-site?
Committing to the Town
Developer. Possibly. In fact, it could help my application to CHFA if I have the support of the town for an affordable project. CHFA will need to see that I have my zoning and other enticements in place as part of the application. What would that look like?
Planner. Well, it could take a couple of different forms. Typically, we address all the key land use issues in our PUD agreement. And if it's an affordable housing project, we require the developer to sign a separate covenant that addresses the issues unique to the affordable units, like maximum income, maximum rents, and so forth.7
Developer. OK, yes, we have seen similar approaches in other jurisdictions. What are the terms of your affordability covenant?
Planner. Here's a copy of our form. We updated this after the 2010 amendments to the rent control statute, which clarified that "voluntary agreements" are not prohibited.8We brought a copy today because you'd mentioned you wanted to talk about affordable housing. Can I point out a few key sections?
Developer. Please do.
Planner (turning to Town counsel): Do you want to cover this?
Town counsel: Sure. First of all, the covenant recites who the parties are. We said earlier that the developer signs the covenant, but to be more accurate, the property owner will sign the document for the benefit of the town. Sometimes the developer is the owner; sometimes the owner is a different entity. In any case, the town is the beneficiary, that is, the party with the right to enforce the...