The Fort Collins Area Chamber of Commerce presents the Advocacy Newsletter. This regular email showcases issues impacting business and provides insight on key issues the Chamber is tracking at the local, state and federal level.
The Fort Collins Area Chamber of Commerce is a business advocate, attending every City Council meeting, standing up on key issues and sharing a pragmatic view point.
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Building Performance Standards (BPS)
Coming to a Building Near You
Since 1999, the City of Fort Collins has actively pursued strategies to measure and reduce communitywide greenhouse gas emissions (GHG), leading to the adoption of the Climate Action Plan Framework in March 2015. With estimates of GHG emissions in 2005 used as the benchmark, the headline objectives within the Plan are commitments to show a 20% reduction in GHG emissions, measured in metric tons, by 2020; 80% reduction by 2030; and achieve carbon neutrality by 2050. According to the most recent dashboard report, the City reports a 24% reduction to the benchmark as of 2021.
Now known as Our Climate Future (“OCF”), interim goals and new metrics have been plugged in to address, “climate, energy and waste goals while improving our community’s equity and resilience”. By 2030, we are now collectively committed to 100% renewable electricity with grid and local sources and 100% landfill diversion (“Zero Waste”).
The year 2030 is scheduled to appear in 5½ years. While tremendous advancements have been introduced, the next generation of technology required to achieve these objectives is in high demand, nascent or remains theoretical. Yet certain elements of the proposed solution are proving to be problematic with a growing recognition that many of the envisioned benefits merely shift the environmental burdens elsewhere.
Undeterred and with the proverbial low hanging fruit plucked, we’re now moving on to more advanced tactics. Tactics that will directly impact nearly every business located within the city. For now, efficiency standards under consideration only cover commercial buildings (which includes multifamily residential) between 5,000 and 50,000 square feet in size. The State has already established standards for larger properties. Smaller buildings, detached residential, industrial, manufacturing, and indoor agriculture are follow-on targets.
Known as Building Performance Standards, this policy will require all existing and future buildings meet heightened water, energy, and air quality standards to meet the energy-source transition timelines outlined in climate policies. Though the hidden tax of compliance is based upon models developed pre-pandemic, the stated benefits seem to lack any awareness of market dynamics. According to the City website, more efficient buildings can lead to:
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Lower utility bills (The electric meter may spin slower, but the cost of a kilowatt hour will double within 10 years[1]. To gain any savings, electric use would need to decrease by more than rate inflation each year with no loss in economic output.)
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Increased occupancy and tenant retention (All else being equal, occupancy and retention are inversely related to rent levels.)
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Higher property values (Commercial property valuation is a function of net operating income rather than cost. Since landlords generally don’t pay for utilities, higher rents and expectation of a lower return on investment are required to make this claim true. As a property owner, it’s very difficult to command higher rents if all other properties exhibit similar efficiencies, while requiring fresh investment will tend to raise, not lower, expectations of return.)
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Higher paying jobs and more competitive economic environment (If demonstrable, validity relates to the larger effort of energy source conversion rather than a specific tactic.)
For illustrative purposes, on May 5, City staff presented to Council a cost-benefit analysis for building owners based upon average renovation costs over the preceding 10-year period, as gleaned from permit applications. Background materials fail to acknowledge rapid inflationary pressure since 2020 and prevailing cost drivers such as acquisition of newer equipment and appliances, supply chain limitations, technical expertise, and skilled labor deficiencies. Nor does the background describe lifetime operating and replacement costs versus existing systems.
Economic benefits, on the other hand, included utility cost savings and massive communitywide cost savings attributed to a cleaner environment. As noted, any utility cost “savings” inure to tenants, not the party required to comply with the rules[2]. And while we may all enjoy better health outcomes as result, the notion of attributing that benefit to a property owner is patently absurd. Or perhaps it’s a harbinger of the day such benefit is required to be claimed as business income.
The presentation further outlined the preferred metric of Energy Use Intensity (“EUI”), which incorporates both natural gas and electricity sources. Greenhouse gas emissions may be introduced as a secondary measurement. At least initially, buildings between 5,000 and 10,000 s.f. will need to demonstrate a 15% reduction in EUI by 2035. Buildings between 10,001 and 50,000 s.f. must show a 25% reduction by 2030. Larger buildings subject to state oversight must show a 20% reduction by that date with additional interim benchmarking.
Locally, penalties for non-compliance have not been disclosed. However, the State has issued rules that establish a $2,000 penalty for not meeting interim reporting requirements or the final goal. Subsequent non-compliance elicits a $5,000 penalty. Each month of non-compliance constitutes a new violation, presenting property owners with a perplexing dilemma. “Do I accept an increase in overhead by $57,000 a year and wait for technology and skill sets to catch up, or invest $250,000 on the premise of recovery?”
For those that choose to move forward with improvements, a list of resources is provided as evidence of public support for the mandate. These include: provision of technical assistance, federal stimulus programs, and loan programs such as Commercial Property Assessed Clean Energy (learn more about C-PACE below).
Technical assistance must be a mandatory offering as approximately 1,100 properties within the city are estimated to be out of compliance with the proposed standards. Whether there are a sufficient number of experts available within our market to assess that many properties within a confined timeframe is a concern.
Federal stimulus programs don’t appear relevant to most property owners as those funds are depleting quickly and unlikely to reach most property owners by the time awareness is achieved. That leaves loan programs and owner equity as the most viable financing mechanisms. Either way, the cost of doing business will rise, which means consumer-level inflation will stick around for the foreseeable future.
[1] In a November 2023 forecast, Fort Collins Utilities projected electric rates to increase 5% annually through 2030. That preceded the most recent forecast from Platte River Power Authority suggesting wholesale electric rates will increase between 6% and 9% annually through that date. At a 7% retail rate, the compounded rate would double the monthly electric bill in 10 years, 3 months.
[2] While the property owner must comply, the actual energy consumer – occupants – are held harmless. This sets up another flash point between private parties.
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What is C-PACE?
On the heels of a similar residential loan program, C-PACE was introduced in 2009 by the U.S. Department of Energy as an alternative for commercial property owners. However, C-PACE is not a federal loan program with a credit backstop as with the Small Business Administration. It’s a loan structure that must be adopted by local property taxing authorities due to its repayment feature. Like SBA, borrowers shop among public or private entities willing to offer long-term financing.
Envisioned as an incentive for commercial property owners to join the efficiency movement, access to long-term financing (typically 20-30 years) theoretically allows property owners to offset monthly payments with anticipated utility expense reductions. On paper, it may sound attractive. In practice, the program has very limited appeal.
According to the C-PACE Alliance, there are active programs in 32 states and the District of Columbia as of December 2023. Since inception, a total of 2,322 loans have been issued in the amount of $7,251,480 nationwide. Though $2M of that total was issued last year, a casual observer might wonder why the program that is so highly touted by public officials has very little uptake within the private sector.
Primary impediments revolve around the repayment structure and exclusive use of loan proceeds.
A C-PACE lender will require a lien interest in the subject property that may be subordinate to one of more existing commercial mortgages. However, the local taxing authority – the county treasurer in Colorado – bills for and collects loan repayment astride property tax assessments. In essence, prioritizing C-PACE ahead of senior lienholders. Most banks do not offer subordinate financing on commercial properties and therefore prohibit their borrower from using the C-PACE program. Even those that might consider the possibility recognize their loan was priced and structured as a first lien instrument, not a 2nd mortgage with its higher risk profile.
Another key impediment is how C-PACE loan proceeds may be used. Acquiring more efficient equipment, solar panels, and other efficiency measures are acceptable, rebuilding the roof to support solar panels is not. Nor can other property improvements that may be contemplated in conjunction with an efficiency retrofit. Those elements would require separate financing, thus lowering attraction to the program.
Further, because C-PACE presents significant conflicts with their own loan products, few commercial banks offer the program. As result, there is a much smaller universe of lenders active in this space. Less competition translates into higher interest rates and fees for C-PACE borrowers. Higher costs tend to diminish the value proposition of lower utility costs projections.
Finally, there are no assurances that lower utility usage will be actualized, whereas loan obligations are legally certain. Though improving the energy efficiency of commercial properties appears to be inevitable, C-PACE, in its current form, offers very little solace for property owners struggling to meet the demands of those flogging the program.
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What Does “Affordable Housing” Mean To You?
“There’s plenty of housing being built, but none of it is affordable.” (gleaned from public testimony)
Opponents of the most recently adopted City land use code continue to stress that for all its intent to the contrary, there are no provisions within the document that requires new housing units to be affordable.
If you ask business owners, residents, and civic leaders to name the most pressing issues facing our community, most will cite “lack of affordable housing” at the top of their list.
So what does the term “affordable housing” actually mean and how is it achieved? “It’s all very complicated” is the short answer. Another short response might be, “if the property is occupied, there’s a good chance it’s considered affordable to someone.”
The longer answer incorporates federal standards and programs, state and local regulations, market dynamics, economic principles, and personal perspective. For many people, it seems the latter is most relevant. After all, it’s far easier to apply opinion based upon personal circumstance than dig into, absorb, and reconcile all the other factors. But let’s try.
If you ask an industry practitioner, “affordable housing” refers to the provision of rental housing to households at or below 60% of area median income (“AMI”), such that no more than 30% of their gross monthly income is spent on rent and utilities. For-sale housing should be priced such that households at or below 80% of AMI are not spending more than 30% of their gross monthly income on principal, interest, property tax, insurance, and homeowner association fees.
In Larimer County, 60% AMI means a 4-member household earning no more than $71,280, while 80% AMI equates to $95,040. These annual income limits are published by the U.S. Department of Housing & Urban Development each year and adjusted for household size, meaning the threshold increases in relation to the number of members within the household. You can find a more detailed schedule here.
Aside from industry norms, the practical answer is that if a household is spending no more than 30% of gross monthly income for housing, it’s considered affordable regardless of AMI classification. However, personal preference may dictate a lower portion of income dedicated to housing cost, which may be ideal.
Relative to meeting the housing needs for those that cannot reasonably afford prevailing rents or home prices, financial subsidy is necessary. Though the private sector does participate, the vast majority of subsidies derive from taxpayers at federal, state and local levels. The workhorse in the rental housing arena is Low Income Housing Tax Credits (“LIHTC”, pronounced as “Ly Tek”).
Essentially, the program allows a developer to offer a reduction in state or federal tax liability to a corporation in return for cash that can be used to lower the amount of debt the project has to service. This allows the developer to lock in “below market” rents to income-qualified households for a fixed period of time.
Though developers in Colorado can access both state and federal LIHTC programs, the amount of credits available are finite and not pegged to inflation. Consequently, the process to secure an award of tax credits is highly competitive and requires a developer-applicant to meet lofty standards for livability, energy efficiency, resident amenities, and access to transit, schools, and services. Moreover, these same programs are utilized to bring fresh subsidy to older income-restricted properties in need of rehabilitation.
The combination of these factors has steadily reduced the number of new units that can be brought online as demand ratchets up with population and uneven growth in household incomes. In Fort Collins, there are currently enough income-restricted rental housing units available to serve roughly 5% of households, though approximately 30% of all area households would qualify for such housing.
While there is no equivalent program to subsidize for-sale housing, there are financial models and public funding sources to deliver a minimal number of homes for qualified households. Most prominently, organizations such as Habitat for Humanity marry significant levels of private-sector capital, volunteerism, and discounted materials with public subsidy to lower the amount of debt a select number of families can afford. Under most execution structures, the amount of equity a homeowner can retain upon subsequent sale is lower than a typical fee simple transaction. While this seems fair and reasonable, it does limit the ability to build generational wealth normally associated with homeownership. However, the model does offer long-term housing stability.
“The City doesn’t dictate the price of housing. The market does. Cost does not equal price. The City can lower its cost burdens, but that doesn’t mean the price will be lower. Besides, it’s not the responsibility of the City to make certain everyone who wants to live in Fort Collins can afford to live in Fort Collins.” [paraphrasing a member of City Council]
Technically, these statements are correct. What is missing, however, are important distinctions. Our local housing market reflects the time-honored economic principle of supply and demand. Where supply is unable to meet demand, the price of housing will increase proportional to the level of unmet need. In that sense, the market does dictate price regardless of the underlying cost to build a home.
According to a report released by Common Sense Institute in 2023, the City would need to permit between 1,580 and 2,197 new housing units each year through 2028 to close the current supply deficit and meet future demand attributed to population growth. From January 2022 through April 2024, a total of 1,904 residential permits have been issued. Clearly, inadequate supply is a major contributor to our housing affordability challenge.
Here’s the rub. A well-functioning and disciplined financial marketplace discourage Fort Collins, or any municipality, from fully balancing the supply of housing with demand. The closer the market gets to equilibrium, the higher the risk exposure to developers, lenders, and capital providers. Since none of these players want to be left holding the bag should supply exceed demand, they will look for deeper markets elsewhere as that gap shrinks. Nonetheless, our economic health is severely compromised by the stark imbalance in our current housing portfolio.
While your Chamber has pressed the City to reconsider its schedule of fees and hidden costs attributed to regulatory requirements, we’ve been even louder about reducing and/or eliminating barriers to increasing the supply of housing. We have been very clear that improving processes and relaxing our high standards must apply to all housing types and configurations regardless of price point. We further believe it should not be the role of the City to make housing less affordable for people who do, in fact, live here.
Until we reach a point where the cost of housing better reflects the capacity of households to reasonably afford shelter under prevailing wage and income levels, increasing supply is paramount. Embracing greater density and encouraging private-sector innovation are key elements for offsetting the demands of public subsidy to achieve housing affordability, however you might define the term.
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CIVIC Conversation:
Issues of Statewide Concern vs Local Control
Monday, June 24, 2024
4:30 - 6:00 p.m.
Horse & Dragon Brewing Company
124 Racquette Dr.
Fort Collins, CO 80524
With insufficient inventory of housing development, Governor Polis and our legislative leadership have decreed increased opportunity as a matter of statewide importance. In so doing, four pieces of legislation have been signed into law which preempts local zoning restrictions deemed to be overly restrictive.
Join us for a CIVIC Conversation on Monday, June 24, at Horse & Dragon Brewing Company to share your perspective while considering those of fellow residents.
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CIVIC Conversation Extended:
Housing!
Wednesday, July 31, 2024
4:30 - 6:00 p.m.
Elevations Credit Union
Community Room
221 E Mountain Ave, Fort Collins
CIVIC Conversations Extended provides business community members with the opportunity to learn more about key community issues and the intersection of government and business.
Our July 31 session will feature a conversation about Housing with Landmark Homes CEO Jason Sherrill and Fort Collins Downtown Development Authority Executive Director Matt Robenalt. Join us to learn about the opportunities and challenges related to creating housing in Fort Collins and the region.
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Is your business ready for Building Performance Standards?
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Absolutely. We've been saving and are ready to invest.
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We might be - we need more details.
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We are terrified by the size, scope and expense. We need help!
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