When the council originally voted to approve the Cannery project in November 2013, the city commissioned respected real estate analyst Andrew Plescia of A. Plescia & Co. to run a pro forma on the proposed development in order to “evaluate the reasonableness of the projected project economics, and provide input related to the general financial ability of the project to support potential costs and / or financial contributions for certain public improvements / facilities that may be considered in the context of the proposed Development Agreement.”
In addition, they sought to determine if the “amount of the estimated supportable project cost for required site development” was “reasonable based on: a) proposed land use plan; b) existing Davis real estate market conditions; c) various estimated cost, revenue, financing and investment assumptions; and d) various applicable residential and commercial real estate development industry standards.”
The draft memo, included in the November 13 staff report, found that the estimated overall cost which included both off-site and on-site public infrastructure was roughly $59.1 million, including $41.3 for direct construction costs and $17.8 million in general contractor, contingency, engineering and financing costs.
This equates to about $590,500 per acre and $14 per square foot.
They concluded, “The extent of the estimated overall site development improvements (off-site and on-site public infrastructure / improvements) cost ($59.1 million) appears to be financially supportable, while still yielding a positive net land value for the Project.”
Mr. Plescia estimates that the developer would see about 10 to 12 percent estimated residential sales revenue for the residential ownership and upwards of 15 to 20 percent for the mixed-use land components. He writes that these “are considered to be reasonable and not excessive given the extent of the entitlement risk, market risk, estimated costs of development and estimated timing to deliver and complete the proposed development.”
However, there is reason to believe that this analysis may underestimate the amount of projected profit by the developer.
Mr. Plescia’s analysis, for example, is, “For the proposed residential ownership units we have assumed the base unit sales prices to be approximately $250 to $290 per square foot for the proposed detached single family units, and approximately $230 to $245 per square foot for the proposed attached units. This range of base unit sale prices is consistent with the estimated income figures included in the Fiscal Impact Economic Model prepared by the City of Davis for the Project. In addition there is estimated upgrade income based on 2% of the estimated base unit sale prices, and estimated sale, closing, commission and title / escrow costs (approximately 4.5% of the unit sale prices).
“The proposed residential ownership units (463) are estimated to generate approximately $251.4 million in net sales income or approximately an overall blended average of $543,000 per unit. The Project includes a large variety of residential ownership product / unit types with a wide range of unit sale prices from the high $300,000s to the high $700,000s with the median unit sales price (not including the affordable units) being approximately $479,500.”
The projected per square foot cost was just $250 to $290. However, real estate people have told us that the average house price is probably closer to $300 per square foot right now and expected to rise as the real estate market continues to recover from the collapse
Just bumping up the average square foot cost from $270 up to $300, would yield around a $279.3 million in sales income or an additional $27.9 million in profit. And $300 per square feet may well be a low number.
The bottom line here is that the developer had significant room to pay for the necessary communities amenities even before the CFD (Community Facilities District) entered the picture.
The Cannery project consists of 547 residential units, and 463 of the 547 would be eligible for CFD special taxes. The total public infrastructure costs for the Cannery project are approximately $21 million, slightly higher than the original analysis of around $17.8 million.
The CFD would authorize a levy of “of a maximum annual tax on taxable residential units ranging from $904 per unit to $3,223 per unit depending on the size of the actual home.” The maximum tax would be $.026 per square foot.
The Cannery originally proposed a 40-year term, however, council has reduced that to 30 years. Staff writes, “The combined ad valorem, assessment and CFD tax burden for homes in The Cannery, including the DJUSD CFD’s represent an overall effective tax rate of 1.75% of estimated market value for homes in The Cannery.”
While the total cost of the public infrastructure is around $21 million, the city believes, based on current market conditions, that between $11.8 to $13 million could be financed by a serious of bonds.
The New Homes Company, therefore, would gain another $11.8 to $13 million in financing for the public infrastructure, which would be on top of the already project 10 to 12 percent estimated residential sales revenue, which, as we note above, appears to be relatively low estimate.
If we believed that the market would allow the residents to subtract their CFD taxes from their purchase price, we might still be able to argue this was a fair shift.
The problem is that that the market is such that that does not appear likely to happen.
Mayor Pro Tem Robb Davis argued in his op-ed that this is “a highly inelastic demand function” where “TNHC is essentially a price setter in this market.” He argues, “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.”
He argued, “Given the foregoing, I believe that home buyers moving into the Cannery face the risk of overpaying for the infrastructure there.”
In essence, the problem is this. In a more equitable market, the home buyer could negotiate the cost of the CFD off of the cost of the initial purchase. But the problem in Davis, with limited supply and large amounts of demand, the seller doesn’t have to agree to reducing the cost to offset the future CFD costs; instead, they can simply find someone willing to pay their asking price and eat the cost of the CFD later.
—David M. Greenwald reporting