By Robb Davis
When I ran for office I promised myself and the community that I would do my best to explain the rationale for decisions I was to make as a City Council member. I have found that it is important to do so for many issues, but especially the more complex ones that require a more detailed description of factors that lead to a particular decision.
In that spirit, I want to provide some understanding of my thinking on the CFD (Community Facilities District) at the Cannery project and what led to my opposition to it. Most of what I am writing here I addressed in my comments on Tuesday evening. However, I wanted to summarize my thoughts and hopefully clarify a few points.
First of all, I do not at all question New Homes’ (TNHC) right to request a CFD. The option was clearly provided for in the Development Agreement (DA) and I would never suggest that this right be limited in any way. Both they and the City have, to date, followed through on the commitments in the DA and their request is fully consistent with it.
My concerns about the request are based on other issues and summarized in questions that, to date, have not been responded to to my satisfaction. They are also based on some assumptions I make about the Davis new homes housing market.
First, my question to the New Homes representative about what would happen if we did not approve a CFD was met with a two part response (as I understood it): 1) Mr Feeney stated that TNHC had always wanted a CFD and had expected it; and 2) he stated that without it TNHC would not be able to bring forward in time certain infrastructure and that TNHC was interested in providing the best quality for certain amenities and would not be able to do so without the CFD.
It is important to point out the the City was not requesting TNHC to bring any infrastructure forward nor was it requesting any change in the quality of improvements agreed to in the DA. In my periodic conversations with staff they have seemed quite satisfied with the pace of implementation. I feel that Mr Feeney’s responses did not provide a clear description of any negative consequences for the City (or for TNHC) if the CFD were not granted. In other words, there is no clear rationale for concern because TNHC has agreed to a timeframe for all critical infrastructure in the DA and Mr Feeney did not suggest that a lack of CFD would cause them to have to renege on any commitments. I think this is very important to our decision making process: there is nothing to suggest any harm to the City if the CFD does not go forward.
And this brings me to a second key issue that, to date, has not been addressed to my satisfaction. TNHC is a well-known and respected, publicly traded, company. In the development agreement they agreed to construct all the critical infrastructure in question without recourse to a CFD. Up until now I simply do not understand why they would have taken the risk of not being able to raise enough money through the sale of the homes to cover the costs of their commitments. I have had the occasion to negotiate many (much smaller) contracts in my professional career and I must say that I have never agreed to terms that I was not certain I could meet within my costs. If TNHC was relying on the CFD to meet their commitments then I must ask why they did not negotiate it as part of the DA? Why leave to chance (especially with looming and unpredictable changes to the City Council composition) what is critical to a successful project?
These issues are troubling but they do not stand alone. They must be analyzed in light of the reality of the Davis housing market. I feel it is important to put on the table the assumptions I am making about this market because they are germane to the discussion in ways that I hope will become clear. Fundamentally, I do not believe the Davis new home housing market can be characterized as competitive.
If it were there would be a large supply of, largely undifferentiated, new houses available for purchase from a variety of suppliers. Home buyers would (by definition) be rational and have full information about prices. The demand function for houses would be downward sloping and fairly elastic through a broad range of prices. In such a market the addition of a CFD by one seller would force that seller to reduce prices by an amount equal to the net present value of the CFD (with adjustments for the interest rate of the bond rate versus the mortgage rate as Mark Northcross made clear on Tuesday). In such a market all buyers would pay the full price of their home and a proportionate share of the infrastructure around it either through the price of the home or through the CFD.
The Davis new home market is not competitive. Indeed, I believe a very good argument can be made that pricing in the market is characterized by monopolistic or highly concentrated oligopolistic pricing (probably, at this point, a duopoly). This is a result of several factors including decisions we have made as a community to limit growth on the periphery. I am not criticizing these decisions but we must acknowledge that they do have the consequence of offering developers we do entitle clear pricing advantages.
Beyond this, I would argue that there are no close substitutes to new Davis homes in surrounding communities. This is true because of what we might call the “Davis premium,” which is a function of schools, low crime, proximity to the University and great public amenities. The result of this is a highly constrained supply. Davis is also a desired location for many people outside town (including the Bay area) and new homes in Davis are in high demand among current residents in older homes.
The result of all of this is a highly inelastic demand function. These factors mean that TNHC is essentially a price setter in this market. Monopolistic pricing does not mean they can ask any price the want but it does give them latitude to set prices. In such a market they very well may be able to set a home price and not have to reduce it if a CFD is included. In other words, unlike in a competitive market, they will not have to reduce the price by the full amount of the CFD. Indeed, if you consider that a certain number of purchasers will not act rationally—in the sense that they will not seek to bid down prices (even if they could)—TNHC may not have to reduce prices with a CFD at all. (Recent experiences in the region suggest that many buyers do not account for CFDs but rely on the “sticker” price and, thus, act non-rationally in an economic sense.)
Obviously, I am not privy to the cost or pricing information that TNHC is using and I acknowledged this on Tuesday when I lamented the challenge of making decisions of this nature in the face of asymmetric information. I have written about the problem of asymmetric information in the past and argued that its effect is a much more conservative and cautious decision making process concerning land use issues.
Given the foregoing, I believe that home buyers moving into the Cannery face the risk of overpaying for the infrastructure there. Whether they will pay for it twice is not the issue. I feel there is evidence to suggest that they will pay more than they should and that the TNHC will reap a windfall from the CFD as a result. Of course stating such a conclusion might strike some as impolitic but it is my conclusion after much careful consideration. In addition, there are risks associated with a implementing a CFD, as was noted on Tuesday night and previously in presentations by Mr Northcross and staff. We have experienced these risks in Davis.
I want to conclude these thoughts with a response to the issue of whether I, or others, are trying to extract certain extra benefits from the TNHC by “negotiating” with them over the CFD. I will note two things in this regard. First on Tuesday night, after I ascertained that my colleagues would vote to move the CFD forward (though no final decision has, as yet, been made), I proposed an amendment to the motion to split the CFD benefits 50/50 between TNHC and the City. I did this under the assumption that TNHC does NOT need the CFD to cover its costs (for reasons laid out above). 2) In retrospect, I feel that my proposed amendment (which was not accepted) was misguided and I regret it. If I oppose the CFD, and at this point I do, then I should simply try to work to deny it. Or, following the words of a wise man: I should simply let my “yes” be yes and my “no” be no.
I hope this helps, in some way, lay out my concerns about the CFD and the rationale for my vote. As always I am very happy to have any of these points challenged and alternatives provided. I am not hardened in my position but, as a whole, the points I raise here lead me to doubt the wisdom of allowing the CFD to go forward.