Sedona may finally get a new apartment building in summer 2025.

On Dec. 12 of last year, the Sedona City Council entered into an agreement with HS Development Partners of Ohio to construct a three-story, 30-unit apartment complex on the vacant 1.2-acre parcel at 2250 Shelby Drive that the city acquired in December 2022, called the Villas on Shelby.

The council agenda noted that city staff have estimated that Sedona needs approximately 1,300 new housing units.

“We specialize in developing affordable housing using the low-income housing tax credit program. It’s a national program administered through the state,” HS managing member Matt Shoemacher said. “We found a piece of property that we wanted to work with the city on. Through that, the deal came — we submitted it for 9% tax credits, and then we didn’t — it’s a very competitive process — we didn’t get that awarded, so we moved forward with a 4% tax credit. It’s still a tax credit project.”

The Villas on Shelby, which have now been in development for a little over a year, will include 24 one-bedroom units and six three-bedroom units, which will be restricted to renters making no more than 60% of area median income. City staff estimate rents will range from $849 to $1,178.

“We tried to maximize the amount of units for the site, and with the tax credit program, we had to incorporate 20% three-bedroom units,” Shoemacher said. “It’s a small site and there’s limited parking, so we wanted there to be adequate parking, so that’s why we had to do the majority [as] one-bedrooms.”

The city of Sedona’s affordable housing action plan has proposed the creation of micro-units of around 300 square feet as a partial solution to Sedona’s housing issues, but Shoemacher said that such units are “not allowed in the tax credit program.”

The architect for the project is Athena Studio of Phoenix. The developers have not yet selected a contractor or begun the process of applying for building permits.

“We anticipate starting construction in early spring, mid-spring, and then it should be about a 14-month construction process, maybe sooner,” Shoemacher explained with regard to the project’s expected time frame.

Money Matters

Shoemacher said that the current estimated cost of the development “is right at $14 million,” or $466,666 per unit.

The city of Sedona has given HS Development Partners, through its subsidiary The Villas on Shelby LLC, a ground lease on the 2250 Shelby Drive parcel for the next 75 years in exchange for $50,000 down and annual rent of $1,200. The city will also extend the developers a $2.25 million loan at 5.3% interest, to be repaid by 50% of net cash flow from the project. The city’s loan will be subordinate to a $5 million loan that the project will receive from the Arizona Department of Housing’s State Housing Trust Fund.

The remaining funding for the Villas on Shelby will consist of small developer contributions, a $7.3 million loan from Redstone Investments — “the approximate original principal amount,” according to the land lease agreement — and $1,782,244 of low-income housing tax credit equity managed by Raymond James Affordable Housing Investments.

“The tax credit is a credit that’s sold off to institutional investors,” Shoemacher said. “The credits are paid a to tax credit investor over a 10- year period. In exchange for that, they make an upfront equity contribution to the project and that’s how you basically build it.” Investors in turn can benefit from the credits as a depreciating asset that they can write off on their federal taxes, dollar for dollar.

The development contract also contains a provision allowing the city to purchase the entire project after 30 years for $100. The council’s agenda stated “the residual value of the improvements in 30 years will greatly exceed the value of leasing the vacant land to The Villas on Shelby LLC and the city’s loan to the project.”

During council’s policy retreat in December, Councilman Brian Fultz said that the purchase provision made the project a great deal for the city.

When asked how long he expected it would take for HS Development Partners to break even, Shoemacher replied, “It could be 15 years.”