Summit County Citizens Voice

A map of the Valley Brook affordable housing project in Breckenridge shows the units under contract. Slow pre-sales of the units aimed at people making 120 percent of the Area Median Income have prompted Mercy Housing to request an early opt-out option.

Changing market conditions prompt developer to ask for up-front sales guarantees and an early out option; one council member says it could be time to take another look and find ways to keep more of the development money local

By Bob Berwyn

Breakdown of Valley Brook unit prices
Two-bedroom, 1,154 square-foot units:
$165,000 for people making 80 percent of AMI
$267,000 for 120 percent of AMI
Three-bedroom, 1,384-square-foot units:
$187,500 for people making 80 percent of AMI
$302,000 for 120 percent of AMI

SUMMIT COUNTY — The final step to approving a development agreement for 42 affordable housing units on the Valley Brook property in Breckenridge may not be a slam-dunk.

According to a memo from town planners, Mercy Housing believes that the market has changed since the project was launched in late 2007 with regard to absorption and sales risks. To mitigate those risks, Mercy won’t start construction of any building that is not 100 percent pre-sold.

Under a proposed supplemental agreement to be discussed at a March 9 work session, the town would put its money on the line and pre-buy units to keep construction rolling. The town would take the risk of covering the carrying costs for units that don’t sell within 90 days of going under contract. Mercy is also requesting a way to opt out of the deal next year if sales are slow.

Some of the options have been reviewed favorably at the level of a housing subcommittee, but it’s not clear what level of consensus there is among town council members.

“Why is Mercy able to up and walk away without any skin in this?” Rossi said. “They’re not taking any risk in this,” he said.

The deal has become so complex that it’s a “poster child” for why people are skeptical of government involvement in housing programs,” Rossi said.

Currently, all 22 of the units priced for people making 80 percent of the area median income are reserved, but only one of the higher-priced units in phase one, targeted to buyers with incomes of 120 percent of the area median income, has been reserved on a contingency basis. Marketing of the 120 percent of AMI units was turned over from the Summit Combined Housing Authority to Slifer, Smith, and Frampton last month.

As part of a supplemental agreement to be discussed at a March 9 town council work session, Mercy wants the town to commit to to buying up to four units at a time. Mercy also wants  up-front payment of  of part of the town’s subsidy for the project —  specifically the $725,000 developer fee and an overhead payment of $150,000 — at closing.

The supplemental agreement also finalizes the town’s subsidy for the project needed to cover the gap between anticipated revenues and expenses.

According to a proforma included in the staff report, the total subsidy amounts to $2.6 million based on $9.36 million in project revenue (including $71,000 in miscellaneous grants) and $12.04 million in project expenses. The total includes photovoltaic panels that could be eliminated to reduce the subsidy by $265,000, to $2.3 million.

The subsidy includes a $750,000 developer fee, a developer overhead of $150,000 and a hard cost contingency of 5 percent. Other support includes the donation of $297,000 in building and water tap fees, $749,000 in sewer tap fees (town and Summit County) and the donation of the land, valued at $1.3 million.

The project also includes up to $1 million in grant revenue covering the town’s estimated cost for the infrastructure($845,664.36).

So far, the town has paid $739,447 to reimburse Mercy for direct, third-party, out of pocket expenses through December 2009, including the cost of design, plans and specifications.

Town officials said the up-front purchase requirement might not sit well with some town council members, while others appear to be committed to finalizing the agreement with Mercy. The work session may include a lively discussion about the nuts and bolts of the agreement.

The discussions will mark a watershed in the process, as the town at this point has the option to proceed with the project or to walk away after paying Mercy’s reimbursable costs, including “all costs and expenses incurred or paid by Mercy in connection with the project.”

Rossi said it could be a good time to take another look at the overall deal to make sure that more of the development money goes to local contractors and subcontractors.

Following is the summary of the staff report on the supplemental agreement. Read the full document, including proformas, in a Scribd.com window at the end of the story.

The intent of the Supplemental Agreement is to memorialize the deal specifically to establish the maximum subsidy, the amount of permissible overhead, the developer fee, and the draw schedule, and to outline project specifics that address phasing, sales risk and early termination. These are summarized below:
␣ Maximum subsidy is $2,613,144 with PV panels and $2,348,144 without PV panels. This subsidy includes the developer fee and developer overhead.
␣    In order for the subsidy to hold true all units in Phase 1 must be pre-sold prior to the land conveyance to Mercy. If all units are not pre-sold prior to the land conveyance there may be an increase in overall project costs due to delayed construction. Prior to land donation, the Town will have the option to consider the price increase and either proceed with the land donation and the project, or opt to terminate. In case of termination prior to land donation Mercy would be compensated their reimbursable expenses as provided in the original Development Agreement plus their overhead which is agreed to be $150,000.
␣    The developer fee is agreed to be $825,000, less $100,000 assuming the Town acquires 4 units. The agreed upon developer overhead is $150,000.
␣    Mercy is not obligated to start a building without binding purchase contracts and sales contracts on all units in that building with qualified, eligible buyers without contingencies.
␣ The Town commits to forward purchasing, at any one time and on a rolling, continuous basis, up to four (4) Town Committed Unit to allow building starts and purchasing (or covering carry costs) for up to 8 units (inclusive of the Town Committed Units) that fail to close.
␣    At time of closing, the full subsidy (including full developer fee and overhead) will be paid into a bank account established with and controlled by Mercy’s construction lender and completely disbursed before any disbursement of
2270345_1.docconstruction loan proceeds. The Committee has asked for additional discussion
regarding this issue. ␣ Mercy has an option to terminate the contract relative to unsold buildings in
Phase 1 and/or Phase 2 as of March 1, 2011 in which case they will receive or will have received overhead of $150,000, reimbursement of all direct, third party out-of-pocket costs and expenses, and a prorated share of the developer fee on units completed and sold. The minimum amount of developer fee to be earned is $350,000. In the event of termination the land will be conveyed back to the Town.
␣    The Town retains the right under the Development Agreement to terminate the contract for any reason prior to land donation
␣    The Town will receive all profits. ␣    Income eligibility requirements have been modified, per the deed restriction, to
require 22 units at 80% of AMI and 20 units at 120% of AMI ␣    The Town should have a commitment from Mercy to proceed with the project
prior to commencing the Infrastructure Phase in April. Under the current structure, if the Town initiates Infrastructure Mercy still has the option to terminate without any reimbursement or fee until the infrastructure is complete and the land is donated. Staff has asked for additional clarification regarding this issue.
Staff supports moving forward with Mercy Housing to execute the project and create housing opportunities for local employees. We would like to discuss the project, the subsidy, and the key terms of the deals as outlined in these bullet points with the Council and with Mercy. We look forward to your input as we finalize the terms of the deal and draft a Supplemental Agreement for your consideration on March 23rd.

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