AAron Ontiveroz, The Denver Post
Denver city officials looked ahead with optimism in the early 2000s as developers selling the first batches of income-restricted houses, townhouses and condos in new communities jump-started a nascent affordable homeownership program.
But that optimism came with a big assumption of responsibility on the city’s part. For most of the homes, the city took on the role in private sales, and later resales, of verifying the buyers’ income eligibility, calculating the allowed below-market sales prices and, perhaps most important, creating a centralized record-keeping system to track the fast-growing stock of homes in the program.
“There’s no obvious person or new industry to oversee everything that needs to be managed,” Jacky Morales-Ferrand, then the city’s director of housing and neighborhood development services, told The Denver Post in a May 2004 story. “That’s why we’re stepping in.”
Today, the city still is supposed to play those roles to ensure compliance with the rules of the program.
But in hundreds of instances, it hasn’t. Over the past decade, compliance staffing for the program dwindled to just one person, and notifications to owners of homes in the program were sent out only three times from 2007 to 2017.
City officials disclosed late last month that nearly a quarter of the 1,302 homes that remain in the program have suspected violations, with almost 200 now in the hands of owners whose income eligibility wasn’t verified, and who likely paid market prices. There are indications some didn’t know they made too much to buy their homes. The city has warned homeowners that those who are out of compliance may have to sell.
The problem raises questions about the city’s flagging oversight, but also about failures by real estate industry professionals who are charged with advising homebuyers about the program’s title and deed restrictions. Those affect a property and its selling price, which the city requires to be below-market level, with limited appreciation allowed each year. But the industry apparently missed the restrictions in scores of title documents, allowing for market-rate sales, and the transactions got by a small city compliance staff, The Post found.
A healthy portion of the blame goes to city officials’ response to the Great Recession, which prompted massive city budget cuts from 2009 through 2012, bridging the administrations of then-Mayor John Hickenlooper and current Mayor Michael Hancock, who was first elected in 2011. The city’s Office of Economic Development, which by 2009 oversaw the housing division, confirms that it shouldered more than its share of cuts, with more than 30 jobs eliminated across all divisions.
Morales-Ferrand, now the housing director in San Jose, Calif., and a veteran of running affordable housing initiatives, said adequate staffing is key to a successful program. She left Denver in 2007, several years after developers began implementing their affordable housing agreements in Green Valley Ranch, Stapleton and Lowry. At the time, the city provided repeated training for real estate professionals unfamiliar with how the new restrictions should work.
“It is staff-intensive to do this kind of work, because you have to track people down and figure out where they are, and who’s actually living there,” she said in an interview last week. “And if you have to enforce it, it’s all very time-consuming.”
Hancock is now pushing for the real estate industry to shoulder some of the blame for missing affordability restriction covenants in sales. But he’s also taking his lumps, acknowledging too many years of too-little staffing — as he and city officials figure out how to resolve the mess.
“This is a phenomenal program, notwithstanding the challenges,” Hancock said in an interview last week. “The city recognizes that we have to address this with empathy and with sympathy. Again, we’re not about disrupting people in a housing crisis, and we’re going to do everything we can to help resolve this and bring some peace of mind” to homeowners who acted in good faith.
Denver’s tax revenues began rebounding about five years ago. Around the same time, Denver voters in 2012 approved a referendum that removed shackles placed on the city budget by the statewide Taxpayer’s Bill of Rights. That allowed Denver to keep more property tax revenue permanently.
“So starting in 2013, we’ve had four years of solid budgets,” said Councilwoman Robin Kniech, among the council’s strongest affordable-housing advocates. “We can’t say that whatever has occurred in the last four years was due to not having enough city budget — it was due to not allocating that budget to this function.”
Markers show the often-clustered locations of 301 homes whose owners have received letters outlining potential violations of Denver’s affordable homeownership program rules. Some are single-family homes, but some markers represent multiple condos or townhomes at the same address with potential violations.
As they sort out the problem, Hancock and top lieutenants know they face serious complications, chief among them that some of the current owners were unwitting participants in purchases that flouted rules. It’s possible others knew — and if so, they could face a tougher approach.
Some homes are approaching the end of affordability covenants that typically last 15 to 20 years, and officials may seek changes to policy or city ordinance to allow lenience. Their competing objective will be to return those homes to the program, even if not immediately, City Attorney Kristin Bronson said.
Since last summer, a city review of hundreds of homes, along with news reports by Denver media, have uncovered that 301 homes, as of Thursday, may be in violation of the city’s affordable homeownership rules.
Two letters have gone out to homeowners with suspected violations in the last nine days, with the second letter sent after Hancock agreed with criticism that the first sounded too threatening.
The new letter makes clear that a compliance program being offered will be voluntary. It sets a May 31 deadline to sign up and provides the rest of the year to get right with the rules. That could be as simple as providing documents to verify income eligibility — or it could require difficult conversations with city employees.
“We are looking at this creatively, in terms of trying to find solutions that are not necessarily just the remedies in the ordinance, or just compliance with the requirements,” Bronson said, calling the plan an enforcement moratorium.
Of the 301 properties, 83 are suspected of being rented out to tenants or on short-term rental sites like Airbnb, both of which are forbidden in the program. Public records for two dozen more suggest the deeds were transferred by buyers to another person or a company illegally.
The economic development office says the bulk of those homes –194 —were sold without any record that the city monitored the transaction or verified the new buyer’s income.
Neil O’Toole poses for a portrait at his home in Green Valley Ranch on Thursday, March 5, 2018. O’Toole bought his Green Valley Ranch home in 2016, not realizing it was part of the city’s affordable housing program. He paid more than he should have and he wasn’t income qualified. Now he may be forced to move, while also taking a loss as the home Ð due to its low-income restrictions Ð may only be sold at a capped amount.
Many of the suspected addresses are clustered in Green Valley Ranch and Stapleton and in neighborhoods near downtown. Lowry, the former Air Force base that was redeveloped into a neighborhood with a land trust overseeing affordable properties, has 11 suspected violations across all three categories — but the land trust disputed the city’s records Friday.
Denver Public Schools teacher Neil Patrick O’Toole was excited in the summer of 2016 when he purchased a Green Valley Ranch home near the high school where he works.
Now, though, he feels like he stepped into a minefield, with no clear path out.
A few months ago, O’Toole said, he received a city notice informing him his home was part of the affordable homeownership program. He says he had no clue. Aside from paying more than he should have to buy the home, he learned he made too much income anyway.
“I didn’t qualify for it then and I still don’t qualify for it,” O’Toole said.
When he went back to the sale documents, he found a hyperlink under the list of excluded items that his title policy wouldn’t cover. That link took him to an addendum in the original deed that was signed by the sellers, confirming the affordability restrictions.
The previous owners had bought the home new, at a discounted price, in the early years of the program. They began renting the home out in 2009, in violation of the rules. Efforts to reach the couple, who have moved to California, were unsuccessful.
City-initiated training for developers and industry professionals has continued off and on in recent years, with a ramp-up recently, a city spokesman said.
But only in the last year have city officials responded in a big way to years of City Council pressure for more housing-oversight staffing.
A year ago, one person in the housing division handled compliance. As the city has launched a new affordable housing fund with $15 million a year in added local money for various programs, the city has filled four more compliance positions. It has plans for one or two more, said Eric Hiraga, Hancock’s economic development director.
As a safeguard for the homeownership program, the city long relied on title insurers not to issue policies in transactions unless they followed the rules.
Morales-Ferrand, the former Denver housing director, recalled that even in the early days, some sales or transfers occurred without a notification to the city. To try to keep that from happening, her office used a much larger font in title documents to make the restrictions harder to miss.
Soon before she left the city, she recalled, she initiated what she hoped would become an annual notification process to remind homeowners of the restrictions. But city officials told The Post that after 2007, subsequent reminder letters went out only in 2011, 2014 and at the start of this year — after Denver’s widespread compliance problems were discovered.
The city now plans to send annual reminders, Hiraga said.
Denver’s requirement that large for-sale housing projects set aside 10 percent of units for income-qualified buyers was put in place by the city’s 2002 Inclusionary Housing Ordinance. For new projects, IHO requirements were replaced more recently by development impact fees that apply to building projects.
While affordability covenants will be expiring on 255 units in Denver’s program by the end of 2023, it’s different in Lowry, which has had fewer compliance problems with its 200 restricted homes. There, the Lowry Community Land Trust — now operating as the Colorado Community Land Trust — long has leased the land beneath restricted homes to the homeowners, who pay a monthly lease fee, in a perpetual model that self-renews.
The nonprofit has so much influence that it requires sellers to list their homes with a designated Realtor and has a seat at the table during home sale closings.
“The city’s moving in the right direction,” said Jane Herrington, the land trust’s executive director. “It’s a hard lesson to learn. But deed restriction is not a passive activity. It’s got to be checked all the time.”
Avoiding a repeat
Already, Bronson, the city attorney, says officials are considering one route taken by both Lowry’s land trust overseer and the city of Boulder: placing a second, nonmonetary or low-dollar lien on some program properties. That triggers a notification in the event of a financial transaction.
Another way to reduce the chances of a repeat: making a home’s inclusion in the city’s affordable homeownership program more visible.
A proposal before the Colorado Real Estate Commission would change the sales contract and require that the exceptions in the title policy be transferred into the deed itself, where real estate agents would be more likely to notice it. And still another possibility: tagging the property tax records of affordable homes.
But Hiraga, the city’s economic development director, said that last idea raised privacy concerns for homeowners.
At least one of the solutions being pushed by the city is meeting with industry resistance. Denver wants title insurers to make title coverage contingent on compliance with affordable housing rules, something many insurers have chosen not to do over the years.
Kelli Klein, president of the Land Title Association of Colorado, said title companies cannot provide legal advice to the buyer regarding the existence of any covenant, or interfere with the contract between the buyer and seller.
But that perceived shifting of responsibility frustrates O’Toole, the teacher in Green Valley Ranch, and his attorney.
For homeowners in the current predicament, there may be cases in which the title insurance policy entirely missed the affordable housing program. That could trigger coverage, said Robert McGough, a Denver lawyer who is representing O’Toole and other homeowners who may be out of compliance with the program.
O’Toole, a first-time buyer, had to take on mortgage insurance to protect his lender, he said, and paid down a $3,000 car loan so he could get a mortgage loan. Even if the city gives him more time to sell, he probably won’t be able to find a new mortgage with the rate he got in 2016 or find a home at those prices.
Unless the city shows him mercy — either by excluding his home from the program or him from its income requirements — the financial consequences will be painful. He said he feels like nobody in the real estate industry was looking out for his interests.
“So much to protect other people,” O’Toole said, “but not a lot to protect my investment.”
Here are sample letters sent April 5 to homeowners for three different suspected violations of Denver’s affordable homeownership program: