The URL can be used to link to this page

Home My WebLink About233073-Water Ballot Initiative Slidedeck 9-23-251600 Stout Street, Suite 1850 Denver, CO 80202 303.623.3557 www.epsys.comThe Economics of Land Use FEASIBILITY OF WATER REQUIREMENTS BALLOT INITIATIVE September 16, 2025 Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 1 WATER BALLOT INITIATIVE Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 2 WHAT DOES THIS MEAN FOR DEVELOPMENT? •Feasibility –Less development revenue generated by for-sale and rental housing with an affordability requirement –Cost to build stays about the same •Development will need to purchase water rights if they do not meet the affordability requirements –Water is not sold in a “retail” market –Difficult lengthy process to purchase water rights for municipal use •The cost of development in Bozeman will likely increase •The supply of housing in Bozeman will likely not keep up with demand •Due to the laws of supply and demand, the cost of existing housing may also increase, reducing affordability for everyone Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 3 TESTING THE IMPACTS •Premise –A development project needs to generate enough profit/return to happen –Builders and developers need to earn a profit like any other business •What is a real estate proforma analysis? –Estimates development costs and revenues –Calculates profit margins and rates of returns –Planning tool to determine if a project will be feasible and worth doing •If housing development is not profitable (feasible), it will not occur Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 4 FOR-SALE AFFORDABILITY GAP •Difference between cost to build and affordable purchase price at 120% of AMI •Single-Unit Detached Home –Cost to build: $783,815 (1,500 sq. ft.) –120% Area Median Income (AMI) purchase price: $462,632 –Affordability gap: $321,183 •Ballot measure does not propose any means of closing this gap Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 5 SINGLE UNIT DETACHED SCENARIO •Assume a 30-unit project •Scenarios –Baseline: 30 homes, all market rate –Proposed: 10 affordable homes (33%), 20 market rate homes •Home prices –Market rate: $783,815 –Affordable 120% AMI: $462,632 •The weighted average price per home is $107,000 less in the affordable scenario Baseline Scenario Proposed Initiative Description All Market Rate 33% Affordable Market Rate Homes Units 30 20 Sale Price $783,815 $783,815 Revenue $23,514,451 $15,676,301 Affordable Homes Units 0 10 Sale Price $462,632 $462,632 Revenue $0 $4,626,316 Total Sales Revenue $23,514,451 $20,302,616 Weighted Average Price per Home $783,815 $676,754 Source: Economic & Planning Systems Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 6 SINGLE UNIT DETACHED PROFIT MARGIN •Profit = revenue minus cost •Baseline scenario (no affordability requirement) –10% profit or ~$78,000 per home –Total profit of $2.35 million on 30 market rate units •33% affordability requirement –Negative 3.7% profit –Loss of ~$25,000 per home –Total loss of ~$750,000 on 20 market rate and 10 affordable units SFD SFD Description Baseline 33% Set Aside Profit Margin per Unit Sale Revenues $783,815 $676,754 Land cost -$150,000 -$150,000 Construction costs -$528,000 -$528,000 Cost of sale -$27,434 -$23,686 Profit/Loss $78,382 -$24,933 Profit Margin 10.0%-3.7% Total Units 30 30 Total Profit/Loss $2,351,445 -$747,975 Source: Economic & Planning Systems Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 7 MULTIFAMILY RENT REVENUE •Rents –Market rent ~$2,100/month for a 2 bedroom –60% AMI affordable rent: $1,606/month for a 2 bedroom •Affordable Scenario brings in $177,840 less revenue annually •Net Operating Income (NOI) is derived from this after accounting for operating expenses Description Baseline 33% Set Aside Difference Market Rate Rent $2,100 $2,100 Market Rate Units 90 60 Market Rate Rental Income $2,268,000 $1,512,000 Affordable Unit Rent $1,606 $1,606 Affordable Units 0 30 Affordable Unit Income $0 $578,160 Total Rental Income $2,268,000 $2,090,160 -$177,840 Source: Economic & Planning Systems Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 8 MULTIFAMILY FEASIBILITY COMPARISON •The ratio of Net Operating Income to costs needs to be about 6.5% to 7.0% –This is the yield-on-cost (YOC) hurdle rate •Development Costs are the same for both scenarios: $26.8 million •The feasible development cost is NOI divided by the YOC rate •The NOI is lower in the affordable scenario due to less rental income –This results in a lower feasible development cost in an already challenging market –Neither project is feasible in the current market Description Baseline 33% Set Aside Difference Total Development Costs $26,820,000 $26,820,000 $0 Net Operating Income $1,344,600 $1,175,652 -$168,948 Yield on Cost Target 6.5%6.5%-- Feasible Development Cost $20,686,154 $18,086,954 -$2,599,200 Value/Profit or Gap -$6,133,846 -$8,733,046 -$2,599,200 per Unit -$68,154 -$97,034 -$28,880 Source: Economic & Planning Systems Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 9 MULTIFAMILY VALUE/PROFIT OR GAP •Baseline (market rate) project has a development feasibility gap of $6.1 million: not feasible in today’s market •High costs and high interest rates are making feasibility challenging in many areas of the U.S. •33% Set Aside project is even less feasible with a gap of $8.7 million –Almost $100,000 per unit –$2.6 million difference from baseline •The ballot measure does not provide any means for closing this gap Description Baseline 33% Set Aside Difference Yield on Cost Target 6.5%6.5% Actual Yield on Cost 5.0%4.4% Value/Profit or Gap -$6,133,846 -$8,733,046 -$2,599,200 per Unit -$68,154 -$97,034 -$28,880 Source: Economic & Planning Systems Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 10 FINDINGS •For-Sale Residential –A 33% set aside requirement for SFD would make most development infeasible –All else equal, the sale price of a market rate single unit home would need to be just around $950,000 to cover the loss and hit 10% profit •Multifamily –Development is already challenging in current market –High interest rates requires higher rates of return (the YOC hurdle rate) –Construction costs have continued to increase since the pandemic –A 33% set aside requirement makes most multifamily development even more infeasible Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 11 MAIN TAKEAWAYS •It is unrealistic for most development to bring its own water, which would then trigger the 33% affordability requirement •Affordable housing typically needs free or heavily discounted land, and other incentives to be feasible •The proposed ballot measure is likely to restrict the housing market’s ability to keep up with labor force demand •The proposed measure creates an additional cost hurdle in an already challenging development market TECHNICAL APPENDIX Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 13 2025 BOZEMAN INCOME LIMITS •HUD sets Income Limits by AMI for For- Sale products annually –At 120% AMI, 1-person income limit is $100,000 in Bozeman –For a 2-person household, it is $114,400 •The Water Ballot Initiative sets the AMI at 120% for for-sale housing and 60% for rental housing –The rental analysis uses maximum rent in place of maximum income –For-Sale affordability is determined using 120% AMI for a 2.5-person household to approximate an average household size Description 1 person 2 person 3 person 4 person AMI HUD Income Limits 30%$25,000 $28,600 $32,150 $35,700 40%$33,300 $38,100 $42,800 $47,600 50%$41,650 $47,600 $53,550 $59,500 60% - Rent Limit $49,980 $57,120 $64,260 $71,400 70%$58,300 $66,700 $75,000 $83,300 80%$66,650 $76,200 $85,700 $95,200 90%$75,000 $85,800 $96,400 $107,100 100%$83,300 $95,300 $107,100 $119,000 120% - For Sale Limit $100,000 $114,400 $128,500 $142,800 130%$108,300 $123,900 $139,200 $154,700 140%$116,600 $133,400 $149,900 $166,600 150%$125,000 $143,000 $160,700 $178,500 200%$166,600 $190,600 $214,200 $238,000 Source: State of Montana; Economic & Planning Systems Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 14 2025 BOZEMAN AFFORDABLE RENT LIMITS •Defined by HUD •Rental scenario uses the 60% AMI Rent Limit for a 2-bed unit •In 2025, the limit is $1,606 per month rent in Bozeman •Rent Limits are updated annually using an inflationary factor that has led to rents and income definitions increasing faster than actual incomes and wages Description Studio 1-bed 2-bed 3-bed 4-bed AMI HUD Rent Limits 50%$1,041 $1,115 $1,338 $1,547 $1,726 60% - Rent Limit $1,249 $1,338 $1,606 $1,857 $2,071 65%$1,334 $1,431 $1,719 $1,977 $2,186 100%$1,448 $1,626 $2,087 $2,924 $3,453 Source: State of Montana; Economic & Planning Systems Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 15 SINGLE UNIT DETACHED AFFORDABLE PRICE •Affordable SFD Home Price for a 2.5-person household earning 120% of AMI is $462,632 •Estimated Sale Price for a new 1,500 sq. ft. SFD is $783,815 •Affordability Gap of $321,183 120% AMI Household Size Household Income 2.5-Person $121,450 Monthly Housing Cost at 30%$3,036 Affordable Monthly Payment Less: Insurance $2,500 / Year -$208 Less: Property Taxes 0.93% ass't rate 158.170 mills -$50 Affordable Mortgage Payment (Monthly)$2,778 Valuation Assumptions Loan Amount $439,500 Mortgage Interest Rate 6.5%6.5% int. Loan Term 30-year term 30-year term Down payment as % of Purchase Price 5.0% down pmt 5.0% Down payment amount $23,132 Single Family Detached Affordability Gap Estimated Sale Price for Single Family Detached (2025)$783,815 $783,815 Maximum Affordable Purchase Price -$462,632 Gap $321,183 Source: City of Bozeman; Economic & Planning Systems Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 16 FOR-SALE DEVELOPMENT COSTS •Single Unit Detached –Estimated Home Price: $783,815 –Home Size: 1,500 sq. ft. –Finished Lot Price at $150,000 –Hard Costs are estimated at $320 per sq. ft. –Soft Costs are estimated at 10% of Hard Costs –Profit is 10% of Sale Price –Cost of Sale is 3.5% of Sale Price Description SFD Market Rate Costs Finished Lot Price $150,000 Home Size Sq. Ft.1,500 Hard Cost per Sq. Ft.$320 Hard Cost $480,000 Soft Costs as % of HC 10.0% Soft Costs $48,000 Profit % on Sale Price 10.0% Profit $78,382 Cost of Sale % on Sale Price 3.5% Cost of Sale $27,434 Home Price $783,815 Market Rate Cost (No Land)$633,815 Source: Economic & Planning Systems Economic & Planning Systems, Inc.Bozeman Water Ballot Initiative 17 MULTIFAMILY DEVELOPMENT COSTS •Development costs total $26.8 million in both multifamily scenarios •90 units in both scenarios –$25,000 per unit for land –$210,000 per unit for hard costs –Soft costs are 30% of hard costs Development Costs Factor Total Land Costs Site Acquisition $25,000 per residential unit $2,250,000 Subtotal $25,000 per residential unit $2,250,000 Hard Costs General Hard Costs $210,000 $18,900,000 Subtotal $210,000 per residential unit $18,900,000 Soft Costs 30.0%% of hard costs $5,670,000 Total Multifamily Development Cost $26,820,000 Source: Economic & Planning Systems per residential unit