Story and photo by Cyndy Hardy

Sedona, AZ - May 25, 2008 – Unforeseen complications surfacing in at least one local development project may throw a wrench in the wheels of the city’s efforts to conjure affordable housing.

National and local market factors may significantly reduce measurable benefits of the project.

Scott Cole, the developer for the 158-unit Cole Sedona Preserve condominium project on both sides of Hwy. 89A in Uptown, including the former site of Hawkeye RV Park on Art Barn Road, successfully requested a 24-month extension for his development agreement with the city on May 13.

Sedona city codes allow a developer to request a one-time extension, which the City Council may approve if the developer has diligently pursued the project and circumstances beyond the developer’s control prevent timely completion of the project.

Mr. Cole met the criteria, according to city staff, having spent about $3.95 million in soft and hard costs including construction plan drawings; city, county and state fees; land-carrying costs; third-party reports; and feasibility work related to the affordable housing condition.

Mr. Cole said one major obstacle is he cannot get loan financing to do the project unless he can pre-sell up to 50 percent of their projects. The local condo market was good when he began the Preserves project more than two years ago, but he is not so excited about today’s market.

Laurence Ross, an investment sale broker with Bensen & Associates in New York, spoke about national lending trends for condo construction projects.

“Banks have completely turned their backs on new condo projects so I am not sure an advance sellout of even more than 50 percent will turn bank heads at this point with the general softness in the market,” Mr. Ross said.

By the time Mr. Cole can start his project, his contribution to Sedona’s affordable housing crisis may be watered down by forces beyond his and the city's control.

Mr. Cole’s must either provide affordable housing units or pay an in lieu fee based on the value of those units “if the city develops an in lieu fee program” for affordable housing, according to the development agreement.
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The city’s in lieu fee program is part of the Housing Policy; which was adopted by the City Council on Dec. 11, 2007.

The amount Mr. Cole must pay is calculated according to a complicated formula in the Housing Policy that “makes up” the monetary difference between the market-rate cost of a Sedona housing unit and the price of an affordable housing unit for a household earning 100 percent of area median income. ‘Affordable’ is defined as monthly housing costs not to exceed 35 percent of a household’s total income.

The in-lieu fee is determined by establishing a median cost for market rate units, a sales price for affordable housing units, and a percentage multiplier based on the total number of units proposed, according to the policy.

If Mr. Cole chooses to provide physical units, the city can require him to post a bond for 20 percent of the in lieu fee. If he opts for the in lieu fee, the city can require him to post part or all of it.

Whether bond or in lieu, the purpose of the fee is to make sure the affordable housing component happens.

Some residents believe the city was burned by developers at least twice in the past. The Nepenthe and Fairfield Resort projects in West Sedona were built years ago with developer promises of affordability. However, the city didn't have legal means to enforce those promises.

Fairfield built 12 rental units and offered them for the 'affordable' rate of $3,000 per month. They've sat empty for about 10 years. In 2006, Fairfield's then-owner Cendant applied for additional time-share units. The city took the opportunity to renegotiate for affordable housing; which led to a Community Plan amendment, but Cendant sold its interest and nothing has happened.

By the time the Cole project was ready for its development agreement, the city was clearer about how to negotiate a better, more enforceable deal. The Housing Policy was still being developed, but the Housing Commission had gathered enough data about affordability; and city staff had worked out some incentives and formulas.

According to the Housing Policy, the fees are calculated when the first building permit is issued.

Cole applied for his first building permit in September 2007. According to city documents, the permit will not be issued until the City Council approves the final plat for the project. The final plat is currently under review by Sedona Department of Community Development staff, said Audree Juhlin, assistant to the director.

No date has been set yet for council approval.

So – yes – the city gets affordable housing money, but only if Mr. Cole chooses to pay the in lieu fee rather than construct the 12 affordable housing units, in which case the amount will be based in part on the median market value of Sedona housing during the 12-month period before Mr. Cole’s building permit is issued.

Experts say Sedona home prices have dropped 20 percent or more in the past 18 months.

The in lieu fee was about $1.8 million when last calculated in 2005 or 2006, according to Director of Community Development John O’Brien. Based on a 20-percent decrease in home prices, a current in lieu fee might be about $360,000 less.

The value of Mr. Cole’s fee towards actual affordable housing will be impacted by how quickly Sedona home prices recover.

Many condo developers have sought creative solutions including joint ventures that mix mezzanine and bridge money, which Mr. Ross sees as a short-term fix. “It is like putting a band aid on top of a band aid,” he said.

Nationally, some say the condo market was particularly attractive to speculators.

“What I have seen over the last few years is a ton of amateurs – fly-by-nights – who are now on the losing side of the game of hot potato; and are scrambling for dollars after paying astronomical numbers on a price per buildable square-foot,” Mr. Ross said.

Mr. Cole rejected the idea that most local condo buyers are speculators, saying many of his prospects intend to occupy his units.

Mr. Cole said most experts think it may turn around this year. Mr. Ross agreed. “In the end this shakeout will make for healthier times,” Mr. Ross said.

But unless Mr. Cole finds a creative funding source, it would seem he wouldn’t be in much rush to get his building permit until the market improves and conventional lenders open their pockets.

The benefit to the city could be born on the cusp – in lieu fees calculated on data from a poor market. How far that money will go towards affordable housing in a better market seems watered down by forces beyond Mr. Cole’s or the city’s control.

© 2008 Cyndy Hardy. This article may not be reproduced, republished or distributed without written permission from the author.