The city of Denver is considering using funds from the local marijuana industry to support affordable housing. While marijuana tax dollars could provide a new revenue source for much-needed housing, there are concerns about the stability of such funding.

A proposal unveiled last month would double the city’s Affordable Housing Fund — from $15M to $30M annually — and generate an estimated $105M in new funding for affordable housing in the next five years.

Mayor Michael Hancock’s proposal would increase the city’s 3.5% special tax on recreational marijuana sales to 5.5%, which would bring the total state and local taxes on cannabis purchases to 25.25%. The increase is expected to generate about $8M annually.

The proposal also calls for an additional $7M general fund contribution to the Affordable Housing Fund, which is expected to create or preserve at least 750 units and serve at least 1,000 more households over the next five years through programs such as displacement assistance. Affordable housing will be a hot topic of discussion at Bisnow’s Denver State of the Market event June 14.

The city also will partner with the Denver Housing Authority, which would issue $105M in bonds to subsidize affordable housing projects and acquire new land across the city for income-qualified housing. The bonds would be supported by the appropriation of an existing half mill property tax from the city, or 50 cents levied per every $1K of a property’s determined tax value. In 2016, Denver approved a property tax and development impact fees to raise more than $150M over 10 years to address affordable housing.

Denver City Councilwoman At-Large Robin Kniech said while the proposal is promising, there are questions that need to be addressed. First, council must remove the sunset clause from the 2016 code. It also needs to create some form of governance, she said.

“To give $105M to a partner — even with DHA being a good partner — we need to make sure there’s adequate oversight,” Kniech said.

Zocalo Community Development CEO David Zucker applauds the thinking behind Hancock’s proposal, but says it is not enough to solve the problem.

“I think it is a bold use of a new fund,” Zucker said. “But I think that like other cities, I think Denver should have a durable fund beyond simply the marijuana, which we don’t know how durable that flow of dollars would be.”

East West Partners recently released the 33 affordable condos it has for sale at The Coloradan.

Zucker, who is working on affordable housing projects in Denver and Boulder, said it is more expensive now than it has ever been to build housing, affordable or otherwise, because labor and material costs have never been higher. The compound annual growth rate of construction costs is 11%, but rent has only increased an average of 3.5% over the last 10 years, he said.

Zucker strayed from developing affordable housing to develop market-rate housing several years ago. He said he has gotten back to developing affordable housing, like the micro-apartments on Broadway, because of a sense of responsibility. But difficulty in securing financing for affordable housing projects can create setbacks.

“First and Broadway would have been so much easier if we did not commit to an affordable housing project,” he said. “Based on increased construction costs, we would have saved ourselves $2.5M — because of that 11% — if we had started last year."

East West Partners Managing Partner Amy Cara said the competition for marijuana tax dollars may make it impractical to rely on them for affordable housing.

“I think it’s great that we have that source out there,” Cara said. “But there are a lot of competing desires for funds like that. It could be used for education. But affordable housing is a really big problem.”

East West recently released the 33 one- and two-bedroom affordable condos it has for sale at The Coloradan, a $200M, 334-unit project under construction in the Union Station neighborhood.

Cara said all businesses should be contributing to solving the problem, and the solution should include a mix of both for-sale and rental units.

Zocalo Community Development is redeveloping the old First Avenue Hotel on Broadway as affordable micro-apartments.

“What’s causing the need for more housing is new businesses moving here and more people moving here in general,” she said. “The burden of affordable housing was put on new residential construction. No offices are helping, and they’re the ones creating the jobs that are bringing people here. All of us need to come to the table and figure out ways we can be part of the solution."

The influx of people to Colorado has pushed the state’s population up 8.5% over the last five years to 5.6 million today, according to the State Demographer’s Office. Colorado is expected to add another 2.2 million people by 2040. That influx of people is one of the factors that has caused housing prices to skyrocket, but it is not the only one.

The average price of a single-family home or condo was $487,082 in April, up 11.38% compared with the same month a year ago, according to the Denver Metro Association of Realtors. The average price of a single-family home reached $538,050, while the average price for a condo was $351,488.

The overall average rent has increased from around $800 a month in 2002 to $1,396 during the fourth quarter, according to the Apartment Association of Metro Denver’s Denver Metro Apartment Vacancy & Rent Q4 2017 report.

Representatives from All In Denver, a nonprofit organization that works on affordable housing issues, recently met with city officials to discuss the proposed framework for the Affordable Housing Fund. They found both strengths and weaknesses in the plan, as well as ambiguities that need to be addressed.

“We need more resources dedicated to affordable housing — there’s no question about that,” All In Denver board member Will Kralovec said. “We’re not married to any particular revenue source or idea about where the money comes from. We just need a heck of a lot more money. $15M a year is not even going to chip away at our affordable housing crisis. If it can be done through marijuana taxes, more power to the city to do that."

Hear from Zucker, Cara and other experts at our Denver State of the Market event June 14 at Republic Plaza.

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