Roger Marolt: Roger this | AspenTimes.com

# Roger Marolt: Roger this

Roger Marolt
The Aspen Times

Proof that employee housing is a better investment than free-market homes. Really!

An employee-housing unit in Aspen is a better investment than an equivalent free-market home. And I’m not talking in esoteric, feel-good terms either. I’m talking real numbers ” the kind that economists, accountants, financial analysts and all other sorts of people who look at facts and figures through thick glasses use, the kinds you find in textbooks ” not the ones scribbled on Realtors’ golf scorecards.

To reach my never-before-imagined-by-anyone conclusion, I sat down with a pad of paper and calculator one morning to kill some time while waiting to shoo away the neighborhood dog that has lately been mining my yard with preowned Alpo bombs. The Saturday morning paper had not yet arrived to offer any other diversion.

As it turns out, the total annual investment return on a 2,500-square-foot, three-bedroom, two-bath employee housing unit in Aspen or Snowmass is about 16.33 percent. An equivalent home on the free market returns a relatively paltry 11 percent.

Okay, stop laughing, and I’ll prove it.

First of all, it is important to understand what your house, free market or deed restricted, is worth to live in on a yearly basis. The best measure that economists can come up with for estimating this is what they call a “rental equivalent” ” the value of your house on an annual “cash-flow” basis. It measures in dollars the annual worth of living where you live.

Are you with me so far? Good. To continue with the example, let’s estimate that the free-market monthly rental amount on the 2,500-square-foot home I described above is \$5,000. That’s \$60,000 per year, or what “the market” has determined it is worth to live in our example home through four consecutive seasons. Now divide this amount by the \$450,000 that a person hypothetically might have spent on the house if it is employee housing. This translates to an annual cash-flow return of 13.33 percent on investment. On top of this, add the 3 percent annual appreciation allowed by employee-housing rules, and we get a total return on the employee housing unit of 16.33 percent per year. Not too shabby!

Now we’ll go through the same exercise with a free-market home of the same description. The big difference, of course, is that somebody has invested about \$2 million in it. If you divide the same annual rent, \$60,000, by this much larger number, the annual cash-flow return is just 3 percent. Add that to an annual expected appreciation rate of around 8 percent, and the total investment return on the free-market home comes out to 11 percent, almost a third lower than the employee-housing return.

Before you pooh-pooh the rental equivalent measurement of a home’s annual cash worth, understand exactly what it is saying. The figure attempts to determine what it is worth to live in your house, not how much it costs you. The actual cost of owning similar homes is extremely variable; some are deed restricted, some are not, most have unique mortgage terms, and some don’t have mortgages at all. The out-of-pocket cost of owning similar homes varies greatly, too. The rental equivalent number is an equalizer. It is the best guess that anyone can come up with to determine what the average person thinks it is worth to live in a particular house, not considering any of the above-mentioned variables. And, no, the value of living here is not “priceless,” no matter what the glossy ads in Aspen Magazine say or what you tell your friends back in the city to make them jealous.

The obvious question, then, is if employee housing provides such an excellent rate of investment return, why aren’t employee-housing owners getting rich from it? The answer is because they are spending all the annual rental equivalent income on the hypothetical “rent,” just like the free-market homeowner is doing. There is no discount for living in deed-restricted housing in this calculation. It’s the same product, at the same price, for everyone. In the end, the difference between employee housing and free-market homes is in the appreciation portion of the investment. That’s the component of the annual return that each homeowner is actually saving as equity in their homes. For the free-market owner, this is a bigger percentage on a larger investment.

This might lead the employee homeowner to say, “Ah, I knew it. I’m still getting screwed, just like I have always thought.” But the reality is he’s not. Living here is a choice, and, one way or another, every single one of us who wants to live in that 2,500-square-foot home must pay the \$60,000 annual rent to accomplish it. What the employee-housing restrictions do, in effect, are to allow the employee-housing owner to tap into the equivalent of his annual free-market appreciation instead of saving it each year so he can pay the real “rent.” He is using it to pay the cost of living here. If the subsidized homeowner is smart, he recognizes that the 3 percent statutory appreciation he is allowed, which boosts his overall return to an amount higher than the free-market owner receives, is a gift from the local tax coffers.

Now this column was certainly not written to end any arguments. To the contrary, I see that it may serve both sides in the affordable-housing debate. The taxpayers who subsidize employee housing may use this to say, “Enough is enough. We’re giving away too much already!” On the other side, employee-housing proponents may say, “This stuff is a better deal than we thought. Give us more!”

All I can say for sure is that if my neighbors had kept their dog on a leash, I would not have brought it up.

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