It looks like Missoula’s new workforce housing funding mechanism has a few things that need to be worked out.
On Tuesday afternoon at a special meeting, the Missoula Redevelopment Agency’s board of commissioners deferred making a decision on whether to approve spending up to $1.3 million in Tax Increment Financing to help a development team build 13 rental apartments that would be income-restricted at 85% of Area Median Income for a 30-year affordability period.
The decision to hold off on taking a vote came after two hours of debate about how much the city should subsidize a private housing project and what rents the developers should be able to charge if they get that subsidy.
It's the first time this type of project has been proposed in Montana, according to MRA director Ellen Buchanan.
"This is a guinea pig project," she said.
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The proposal in front of the board was complicated.
The yet-to-be-built four-story building, in downtown Missoula at 333 East Front Street across the street from the Missoula Public Library, would include 13 income-restricted units and 13 market-rate rental apartments for a total of 26 new dwelling units.
“Without TIF support for vertical construction the project is not feasible,” said Annie Gorski, the deputy director of the MRA, in her memo to the board recommending the funding. “This is the first Workforce Housing Program application for rental housing.”
In April of 2017, the MRA board approved $257,924 in TIF funding for public infrastructure improvements on public property and building deconstruction to support the creation of a 26-unit apartment development at the site. Since then, developers Matt Sullivan and Caroline McCauley of MC Real Estate decided to put their project on hold because of rising construction and financing costs.
“We wouldn’t be here today if construction and financing costs hadn’t changed so radically,” Sullivan said. He said they thought the total build cost would be about $4.4 million when they started, but now the total cost is around $6.9 million.
He described the project as infill development near downtown where people work. The project would use solar power for common areas and will utilize local contractors, he said. There would be a small commercial space on the ground floor. Each one-bedroom unit will be about 640 square feet have a private balcony and its own washer and dryer.
In September of 2023, the MRA Board approved a new Workforce Housing Pilot Program, which allows tax increment financing to help fill a construction funding gap on income-restricted for‐sale or for‐rent projects that serve households earning between 60‐140% of Area Median Income. In the past, the MRA has never actually contributed TIF funding to the buildings built by private developers. Rather, the TIF has only been used for upgrades to public infrastructure around the site of new construction, including new sidewalks or utilities. The TIF has also been used for deconstructing aging buildings to make way for new development.
The TIF funding of $1.3 million would have required the developers to rent 13 of the 26 units to households earning an average of 85% or lower of Area Median Income, with a 15% variability built in, meaning the developers could in theory rent to people earning 100% of AMI. Although the AMI is always changing, if the units were rented today at 85% they would be available for about $1,300 a month. That rental rate represents what a household earning around $51,000 a year can afford while not paying more than 30% of household income for rent.
The remaining 13 units would be rented at market-rate, but none are planned to be rented at a rate that a person earning 140% of Area Median Income couldn’t afford.
Gorski said that construction workers, health care technicians, early-career police officers, K-12 teachers and firefighters in Missoula all earn between $51,000 and $68,000 a year.
“Without MRA assistance at this level, the project is required to take on more long‐term debt than is feasible without significantly increasing rents,” Gorski said. “The developer is not charging a developer fee and does not have external investors."
Their projected 3.69% rate of return is considerably lower than the 10% that the MRA Workforce Housing Program allows, she said.
The income-restricted units will be virtually identical to the market-rate rentals.
The developers said the project wouldn’t be financially feasible if they were to make more rentals income-restricted or lower the income-restriction amount on the 13 units.
The project is expected to increase the property tax revenue to the Missoula Redevelopment Agency by $34,000 a year when it’s completed.
“There is already a large number of housing units in the downtown that are rented to households earning 60% of AMI and below,” Gorski said. “This project adds more middle‐income housing in the downtown core. The project is centrally located for commuting to work, shopping and restaurants, and recreation, adding vibrancy to downtown.”
Sullivan said there have been a lot of new housing units added to the Missoula market recently, which has increased the vacancy rate. That’s good news for renters who’ve been squeezed by housing prices lately, but Sullivan said developers are more reluctant to build now.
One point of contention was a provision in the contract that allows the developers to increase the income-restriction rate to 100% of Area Median Income if they choose. Sullivan said they asked for that because there’s uncertainty about insurance costs and property taxes in the future.
“We’re basing the subsidy based on your charging 85%, but in reality (the developers) can go all the way up to 100% of AMI,” said board chair Karl Englund, who was asking the fellow board members whether they thought it was a good idea to allow the developers to raise rents in the future. The developers would be required to contribute funding to the city’s Affordable Housing Trust Fund if they raise the rents above 100% of AMI. Englund calculated that in today’s dollars, the rents would be raised by about $200 a month if the developers go from 85% to 100%.
Sullivan said that the economic climate for building housing projects right now isn’t great. He claimed that he could walk into a bank, get a Certificate of Deposit that pays around 5%, and get a risk-free rate of return that’s 2% higher than the rate of return he’s anticipating getting on the housing project.
There was a long debate among the board members about whether they should authorize the $1.3 million in TIF given the fact that interests rates could go down, meaning the developers could refinance their loan and get a better rate of return. Board member Jack Lawson, who is also the president and CEO of Clearwater Credit Union, said the city’s subsidy would theoretically need to be less if the developers take advantage of lower interest rates in the future.
Sullivan argued back that they’re taking risks on the project, and that the city is also taking a risk.
Ultimately, the board decided to send the project back to the MRA's working group and hammer out more details.