The city of Sedona’s partnership with the MK Company of Scottsdale to construct workforce housing on a vacant parcel located at 220 Sunset Drive is still lingering below the horizon, but the developers are hopeful that Sunset Lofts will finally begin to rise this fall after the remaining permitting and financing details are worked out.

The city, on the other hand, may reconsider its commitment or financial contribution to the project in the coming weeks.

Project Evolution

Sunset Lofts LLC, a subsidiary of the MK Company, submitted a letter of intent to construct a 46-unit affordable housing complex on the 2.22-acre parcel on July 7, 2021. The city and Sunset Lofts subsequently entered into a development agreement for the property on July 22.

To facilitate construction, the city of Sedona agreed to extend the developers a 50-year, $4.2-million loan. In exchange, the developers will pay the city 1% of the outstanding balance of the loan annually, which will not be counted towards reduction of the principal, plus 50% of the project’s annual net operating cash flow, which will decrease the principal amount of the loan.

According to the development agreement, the developers were also seeking approximately $8.4 million in U.S. Department of Housing & Urban Development funding to finance the project. The agreement stated that construction would commence at the time of funding of the bank loan after permits had been obtained and was expected to take 14 months.

The agreement was amended on March 9, 2022, to apply commercial height and setback requirements to the entirety of the site and to reduce the required number of parking spaces. In a May 3 letter of intent, the developers stated they had hoped to start construction the previous month.

Public comments at the time that the Planning & Zoning Commission undertook a development review of the proposal were almost entirely negative. Residents of the neighboring Casita Tranquil condos in particular objected that Sunset Lofts would obstruct their views and that the retaining wall planned for Sunset Lofts’ border with Coffee Pot Creek would risk redirecting floodwaters into their properties. Neighbors also disliked the architecture of the lofts, especially their use of vinyl siding.

In spite of complaints, the Planning and Zoning Commission approved the development review for Sunset Lofts by a unanimous vote on Sept. 6. Six months after the developers received planning permission, and 11 months after they planned to start construction, ground has yet to be broken on the site.

“We are in the final design phase of the project; we expect to be submitting our application for building permits by the end of April,” said M. Keith Holben, president of the MK Company. “Tentatively, construction will commence late third quarter of this year, when fully permitted.”

“HUD has provided what they term concept approval,” Holben added, addressing the status of the project’s federal funding. “We are working through the application process currently and expect full loan approval approximately end of the third quarter of this year.”

“The developer, who is still the same, has been waiting on HUD financing for the project, which has taken longer to secure than originally anticipated,” city Communications Manager Lauren Browne stated. “Additionally, rising interest rates, rising construction costs and lack of contractor availability has delayed the project and resulted in projected increases to overall costs and the city contribution needed to complete the project. Final costs will not be known until June or July 2023, but because we anticipate those being significant, we will be facilitating a discussion with City Council on March 14 or March 28, regarding a reconsideration of the development agreement.”

Square Footage

The Sunset Lofts project documents specify that the development will include 20 one-bedroom apartments and 26 two-bedroom apartments in three buildings. The one-bedroom units will be a minimum of 600 square feet and the two-bedroom units a minimum of 900 square feet, for a total of 34,500 square feet of housing area.

The city of Sedona’s development incentives and guidelines for affordable housing recommend a minimum size of 500 square feet of area for studio apartments, 600 square feet for one-bedroom units and 800 square feet for two-bedroom units.

“Rather than focusing on traditional affordable units that depend on restrictive covenants or state or federal programs for financing, innovations in design and construction are focusing on ‘naturally’ affordable units,” the city’s affordable housing action plan reads. “These concepts depend on lowering costs through smaller unit sizes, economic construction techniques, and flexible zoning standards.” The report suggested tiny homes of less than 500 square feet and “micro units” of about 300 square feet as alternatives to conventional development.

“It was not seriously considered to design and build micro units,” Holben said. “The reason being it lacks the ability to house any more than one or two people, limiting your demographic of renters, such as families or multi-member households. The other issue micro-housing can face is the ability to economically finance because of the narrow renter pool.”

The project plans also include 59 parking spaces for cars and three for motorcycles, although the developer’s letter of intent claims that the development will promote a “highly walkable” area.

Affordability

According to the city’s announcement on Nov. 23, 2021, of the Sunset Lofts partnership, onebedroom apartments were expected to be priced between $1,058 and $1,275, and two-bedroom units between $1,184 and $1,534, depending on whether tenants earn between 80% and 100% of “area median income.” The city also stated that the apartments will be deed-restricted “to limit rents and utilities to 30% of gross income” for tenants in this income bracket.

Median individual income in Sedona is $33,284, or $2,774 per month before taxes; thus 80% of area median income for an individual would be $26,627, or $2,219 per month before taxes. Thirty percent of this income range works out to a rental cap of between $666 and $832 per month, or closer to half of the city’s calculated rents for the units. It would also correspond to typical Sedona rents prior to the city’s post-2016 short-term rental boom.

City housing manager Shannon Boone explained that the actual rents for Sunset Lofts will be determined by a “complicated” income qualification formula that takes into account both an individual renter’s income and the area’s median income.

Boone ran a sample calculation on the basis of a single individual renting a one-bedroom apartment. A renter making $58,000 a year, she said, “wouldn’t pay more than $900.” For a renter making $29,000 a year, however, “the rent isn’t half,” Boone added. “It’s more like a $100 to $200 difference.”

If the development agreement defines the qualifying income levels as between 80% and 100% of area median income, Boone said that someone making $29,000 a year, which is minimum wage, will probably not have an affordable rent at Sunset Lofts.

“It’s not something I’ll worry about until a private developer starts building the buildings,” Boone said.