Modular homebuilders are rallying to create affordable Colorado housing. Financial barriers are shutting some out.

Nick Lemmer and Ethan Deffenbaugh turned to state loans for the $8 million they needed to get their automated modular housing startup, Higher Purpose Homes, up and running. But urgency for units and high competition left the community-minded innovators lacking.

Nick Lemmer and Isaque Martinez build the wall of a modular home inside Lemmer's workshop outside Durango, Colorado, on Monday, February 12, 2024. Lemmer and his business partner Ethan Deffenbaugh founded the startup Higher Purpose Homes, which they hoped to get funding to move forward on from the state, to help curb the housing crisis in southwest Colorado. (Nina Riggio/Special to the Colorado Sun)

By Tracy Ross 4:22 AM MST on Feb 22, 2024 Updated 12:25 PM MST on Feb 23, 2024

from The Colorado Sun

DURANGO — Nick Lemmer and Ethan Deffenbaugh knew they had an idea that could change lives and communities in southwestern Colorado — there was evidence all around them. 

The men were at the top of their game work success-wise. Lemmer is an engineer who has designed and implemented automated systems used around the world to manufacture everything from lock cylinders to EpiPens and other medical devices. Deffenbaugh has owned multiple startup companies and done finish carpentry, concrete, drywall and siding work on home building sites. 

Each also worked at Ska Fabricating, a division of Ska Brewing, in Durango, where Lemmer designed brewery equipment and Deffenbaugh closed $6.7 million in sales in 2020. (Lemmer still works as a consultant for the company and Deffenbaugh subcontracts for Sub Sea Sonics, an underwater equipment recovery service.)

But both recognized a wound that needed tending in their community, like it does in so many communities across Colorado: a lack of affordable housing that was degrading everything from children’s education to Durango’s police force to the restaurants that couldn’t stay open more than five days a week, according to Lemmer. 

Lemmer’s “pivotal moment” arrived when his wife, a teacher who was on the interview committee for Durango High School, told him that after asking 10 candidates for three open positions if they had looked into housing, “nine of the 10 hadn’t and none of them scheduled interviews,” he said. That came at a time when the number of housing units accessible to the lowest-income residents had increased by less than 100 in the previous decade and the going price for some of the “dumps” in town was $500,000, he added.   

He asked a builder friend, “Why are we not building houses with robots in a factory? Like, why are we not pumping them out after looking at the problem and realizing we don’t have a supply chain here?” he said.

“So that kind of started this whole thing and you know, years of research later,” Lemmer has created a model that’s “not quite robots making houses but close.” He says he will be able to build houses that range from 1,000 to 2,000 square feet and, “making a lot of assumptions about variables,” would cost in the $300,000 range. “And I do believe modular can provide the scalability and supply of homes that we need in our region to start bringing the market back to normal,” he said. 

Lemmer’s big vision was creating a company to build modular housing in a place where housing was desperately needed, so people like him, who loved southwest Colorado and wanted to put down roots, could achieve their dream. 

Like any dramatic idea, however, it had a catch. He and Deffenbaugh needed money — big money — to get themselves up and running. They needed money to the tune of $12.5 million to buy land, build a warehouse and start constructing their homes. They would be modeled on a computer with data sent to a machine Lemmer created called a cut station that pushes lumber into the correct position to create the components of a house. Workers assemble the pieces using Lemmer’s jig and based on the shop drawings. The homes would then be outfitted with the customer’s chosen finishes and wrapped for transport — all in between six to eight weeks.

Modular construction would also allow Lemmer and Deffenbaugh to build with less waste and emissions than traditional construction, have more quality control, because they would build in an indoor, climate-controlled environment, and offer an estimated 160 above-living-wage jobs. What’s more, Lemmer said, because a machine cuts all of the wood and pieces are assembled on a jig, the company would create jobs for people “that don’t normally have the skill to build houses” including women, who make up a significantly higher rate of employees working in offsite factories and prefab shops than on traditional job sites, construction consultant Daniel Small wrote in Colorado Builder, a trade publication.

Too many applicants, too little funding? 

In late January, Deffenbaugh sat at the restaurant inside the Durango Doubletree Inn describing the business-in-the-making, Higher Purpose Homes. He was feeling cautiously optimistic that an $8 million loan he and Lemmer had applied for through the state Office of Economic Development and International Trade might come to fruition. 

But that’s where the story gets complicated. Because there was a vast difference between how much money the state Innovative Housing Incentive Program and the Proposition 123 Affordable Housing Finance Fund allocated for modular housing construction loans and the amount of money modular housing manufacturers requested.

Loan recipients were selected based on criteria including the number of total units and affordable units they projected they could build per year, the economic impact or jobs created, the applicant’s experience and track record, their readiness to proceed and the estimated date units would be produced, according to OEDIT. 

But requests exceeded available funding by a ratio of more than 2-to-1, said OEDIT’s senior communications manager Alissa Johnson, with 16 businesses applying for the factory loan programs. “The IHIP program received over $60 million in loan requests and the Proposition 123 loan program received over $50 million,” she added. But there was also overlap. “Some projects applied for both funding sources,” she said. 

Both programs offer low-cost financing options for innovative housing manufacturing facilities, including panelized, tiny homes, kit homes and offsite 3D-printed homes. 

On Feb. 13, OEDIT announced the companies that did get funding for their projects, with timeframes for completion varying by manufacturer. 

Adoba Design, in Pueblo, received $4 million through Proposition 123 for 370 affordable housing units using a panelized production and building information modeling software to “streamline the process with an emphasis on doing well while doing good,” the announcement said. 

Azure Printed Homes, in Denver, received just shy of $4 million in Proposition 123 funds to continue printing complete small prefab homes using primarily recycled plastic polymer materials with a patented 3D process — they’re projected to create 352 units. 

Fading West, in Buena Vista, received $2 million in cash collateral support to enable private bank lending for them to continue producing two-story homes in less than 18 days, with site work completed at the same time, speeding up projects by as much as 50% and cutting costs up to 20% compared to traditional site-built homes — they’re on tap for 450 units. 

Guerdon, based in Boise, Idaho, received $8.5 million to produce an expected 665 housing units per year in Colorado. 

Littleton-based Huron Components received $7.8 million in IHIP funding and $800,000 in Proposition 123 funding to build panelized framing and floors for multifamily rental housing projects on the Front Range. They expect to produce 2,000 units per year, according to OEDIT. 

Timber Age Systems, in Durango, received $3.8 million in Proposition 123 funding to continue manufacturing panelized homes using timber harvested responsibly from wildfire prone forests in the Durango area — they project 122 unit builds per year. 

The startup Verderra Modular, in Aurora, received $2.5 million in Proposition 123 funding and $3.5 million in cash collateral support from IHIP to build a projected 500,000-plus square feet of housing, or 316 units annually. 

And VillaLife, in Florence, received $1.8 million to install and operate a manufacturing facility that will produce 480 units annually ranging in size from 300 to 1,200 square feet and using reclaimed steel and structural insulated panels. 

Higher Purpose Homes was not on the list of businesses receiving funding, even though “there’s a huge issue with skilled labor,” the company wanted to address, “in that we don’t have enough,” Lemmer said. “So that causes two main problems. One: you can’t build as many houses as we need in our area because you don’t have enough people that know how to do it in the traditional way, and two: the cost of those people is insane.” 

A startup struggles 

If Higher Purpose had received the $8 million they requested, Lemmer believes they could have had a 49,000-square-foot warehouse “built out and ready to start production in around nine months” on the Montezuma County site they’ve been eyeing. 

If that site was — or is — no longer available if and when they do get funding, it could be longer, he added. “That being said, best case, we’d be able to produce up to six homes in the remaining three months of the year.” They plan to ramp up to 250 homes over a course of five years, including the nine months to build the factory. 

But Lemmer said the loans were “very competitive. We had asked for the same as pretty much everyone else, but when they came back and asked us if we would be willing to accept any less, our response was, ‘Yes. However, it’s going to greatly hinder our ability to get up and running this year.’”

Like Higher Purpose, many of the winning applicants were builders just starting up or expanding their operations to new locations. But Lemmer believes “everyone else that applied or got money was currently in operation, so everyone else was expanding their operations. (OEDIT) looked on that favorably for everybody else, because one of the initiatives is to get as many homes (built) as soon as possible. So everyone else is going to be able to expand and get things done faster than we are since we had to start a new facility.” 

Deffenbaugh also pointed to an article in which he says Timber Age CEO Kyle Hanson “flat out states they are not trying to build affordable housing.”

But Johnson emphasized that state programming “is intended to support a broad range of companies and the growth of the innovative housing manufacturing industry as a whole.” As the release indicated, she said, “the awards support Colorado-based housing manufacturers, Colorado startups, and companies recruited from out of state.” 

“Requests for funds were competitive, with them outpacing resource availability by approximately $3 to $1,” Matt Lynn, spokesperson for the Colorado Housing and Financing Authority, added. “Following the initial application round, 11 of the 16 applicants were invited to a final application round, and eight applicants were selected to receive funding.”“Finally, it’s important to note that selections were informed by the input of third-party consultants with expertise in the modular housing industry,” Lynn said.

An expert parses Colorado’s housing paradigm

Peter LiFari, executive director of Maiker Housing Partners, a socially conscious public housing authority in Adams County, says the fact that there was so much competition for funding — and, in fact, that there is this kind of funding — is a good thing. 

“First and foremost, it’s wonderful that the state took this step a couple of years back,” he said. “As a proof of concept, the state has demonstrated that it has a meaningful and material input and influence on how supply can come to market in a cost-effective, labor-availability-adjusted paradigm.” 

But there is the question of “why are we introducing OEDIT into housing,” he added.  

The answer, he said, is because “OEDIT is really closest to the speed of the market when it comes to governmental entities or state entities. So we need to bring OEDIT to the table in a more meaningful way, to help the division of housing, to help the division of local affairs to complement, supplement, enhance what we’re doing with our political subdivisions, like (the Colorado Housing and Finance Authority).”  

“At the end of the day,” he added, the loan program Lemmer and Deffenbaugh applied for “is a resounding success. It really is where we’re being the most innovative in this sector. And it’s deeply tethered to the governor’s roadmap and the investment when it comes to this discussion of housing.” 

Still fresh off learning they didn’t get the loan they applied for, Lemmer and Deffenbaugh are focused on other things. 

They’re brainstorming how to find the funds they didn’t receive and to move their vision forward. 

“We’re actively seeking private investors,” said Lemmer. “We are pursuing another grant in partnership with Southwest Colorado Education Collaborative. We’re trying to get creative on how to potentially structure ourselves to make it easier to get funding. You know, our No. 1 goal is to help the community.”