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N. Denver communities & raw water considerations

Aerial photo of downtown Denver
Eric Roth First vice president, Land Services|Capital Markets, CBRE, Greenwood Village

Eric Roth
First vice president, Land Services|Capital Markets, CBRE, Greenwood Village

As the residential building boom for single-family homes is occurring for much of the metro area, some of the Interstate 25 northern metro areas have not enjoyed the positive momentum due to their reliance on Colorado-Big Thompson as a raw water source.

Many communities require developers and builders to contribute C-BT to the municipality or water provider, in addition to purchasing a water tap, for water service. C-BT is the most widely accepted raw water share in the market and is preferred by most communities in the northern I-25 corridor. Due to the increasingly high price of C-BT, which trades between $25,000 to $30,000 per share, residential development in many of the C-BT-dependent communities is at alarmingly low levels. Many of the new homes built in these areas over the last four years were on real estate owned lots that already fulfilled the raw water requirements and were acquired by investors or builders at deeply discounted prices.

Now that the area is enjoying a stabilized real estate market, traditional underwriting must be considered. The price point and corresponding buyer demand of the home must be high enough to support a line item for raw water costs. When a developer or builder underwrites land costs, historically high horizontal infrastructure and hard costs, impact fees and margin requirements, it is very challenging to add another line item for a full share of C-BT if the finished product is below $475,000.

However, some communities have intelligently considered these onerous costs and are now taking a responsible position to proactively spur residential growth. Adding rooftops to these communities will help support the existing services and attract additional retailers, which in turn make a community more enjoyable. One such example is the city of Dacono. In December, the city passed a resolution regarding water rights dedication. Prior to the resolution, the city required one share of C-BT per lot/house regardless of the lot/home size. Therefore, a large 6,500-square-foot house on a 1-acre lot with a significantly high amount of manicured grass would be treated the same as a 3,000-sf house on a 6,000-sf lot, which includes a significantly smaller yard. Under the new resolution, the C-BT requirement would be in concert with the lot’s size. This allows for smaller “production” lots to dedicate a more reasonable amount of water to the city, therefore allowing the financial metrics to work.

As the metro area continues to attract new residences, it is possible that the municipalities that do not adopt a reasonable raw water policy will be left behind as others thrive as vibrant communities.

Featured in the July 2016 issue of Land & Development Quarterly

Edited by the Colorado Real Estate Journal staff.