Sedona council approves ground lease for 30‑unit Villas on Shelby affordable housing project

Sedona City Council approved a resolution to authorize a ground lease, land use restrictions and related financing for the 30‑unit Villas on Shelby affordable housing project at 2250 Shelby Drive on a 5‑2 vote.

City staff and the developer told council that the project has been under development for roughly two years and moved to closing after bond issuance in January. Jeannie (city staff) told council the lease is now in compliance with Internal Revenue Code Section 42 and other tax‑credit requirements and recommended approval so the project can close and begin construction. City Attorney Kurt (last name not provided) summarized prior approvals and recent required changes to the deal’s structure.

Why it matters: Councilors said Sedona has very limited rental housing stock and that the project would create 30 affordable units in a market with few multifamily units. Several councilors urged caution because key lease and affordability terms changed in recent weeks and some long‑term economic consequences for the city remain uncertain.

Developer and financing details Developer Matt Schmacher, of HS Development Partners, said the project was originally structured as a 9% low‑income housing tax credit (LIHTC) deal and later moved to a 4% LIHTC structure. Schmacher said the city’s loan and the ground lease are only part of the financing; he told council “we have 30 years of 100% affordability with compliance, with high quality housing” and said roughly $20,000,000 in outside funding is committed to the project.

City Attorney summary of changing terms Kurt told council that the city had earlier approved different combinations of lease lengths, affordability periods and loan amounts while the project pursued varying tax‑credit and bond structures. Council was told that over the last several weeks the deal changed in three material ways: (1) an option that previously would have allowed the city to acquire improvements for a nominal amount at year 30 could not be included; (2) the required affordability period for tax compliance was limited to 30 years; and (3) the ground lease term had to be 99 years (rather than the 75 years previously discussed) to meet investor and tax‑opinion requirements. Kurt and staff described those changes as necessary for LIHTC and bond compliance.

Council debate and concerns Several councilors expressed frustration that the changes were revealed late in negotiations and said they wanted time to obtain independent advice before committing the city to long‑term obligations. Councilor Pete said he was uncomfortable that definitions and certain clauses in the agreement were not settled. Councilor Kathy and others asked whether a short delay (one to two weeks) could preserve the financing timeline; the developer and staff said delays beyond roughly two weeks to 30 days risked losing the tax credit and bond packaging and the project’s construction pricing.

Motions, votes and conditions Councilor Brian (mover) introduced the resolution to approve the ground lease agreement, land use restriction agreement, deed of trust and promissory note for the Villas on Shelby project (agenda item AB3210). Melissa seconded. A friendly amendment made approval “subject to the city attorney’s approval of the lease,” which the mover accepted. The motion carried by a recorded voice vote of 5 in favor and 2 opposed. The council also approved a separate motion to waive plan review and building permit fees of $18,924.26 and to allocate $312,245.41 from the city’s affordable housing fund to pay wastewater capacity and development impact fees for the project; that motion passed by the same recorded margin.

Implementation timeline and contingencies The developer said the construction contract and permits are in place and that the team has set a closing date; he stated the project could break ground in about two weeks and estimated a 12‑month construction timeline to completion. Councilors asked staff to consider reserving city funds over time to address any future buyout or other city obligations that might arise after the affordability term expires.

What remains unresolved Councilors requested clearer explanations of who negotiated specific changes and whether any future city financial responsibility could fall on the budget; several suggested the council address longer‑term contingency funding as part of upcoming budget discussions. Staff said the substantive tax‑credit and investor requirements are unlikely to change, and that the city attorney’s approval condition would allow final minor definitional edits before execution.

The council’s approval authorizes staff to finalize and sign the lease, subject to the city attorney’s review, and to proceed with closing and construction activities for the Villas on Shelby project.