Analysis: Cannery Developer Stood to Make a Large Profit Even Before CFD

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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

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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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49 thoughts on “Analysis: Cannery Developer Stood to Make a Large Profit Even Before CFD”

  1. hpierce

    Ok… David, please explain how, if the report was “public” in November 2013, you are only “sharing” this in March 2015, on the ‘eve’ of the CC approving the CFD?

    Check spelling of “Plescia”

      1. hpierce

        Good… focus on the minutiae, ignore the main point.  Meant the last as a helpful suggestion.  I have a thing about “name” typos, as opposed to other typos.  Excuse me for posting.  Maybe Holder should look into my transgression.  Probably a Federal crime of some sort.  kinda…

        1. Napoleon Pig IV

          “Probably a Federal crime of some sort.”

          Well, if it’s not, it should be! We clearly need a law making all citizens automatic felons at all times so that selective enforcement by the Pigs in Power can be more easily wielded (I mean applied) as deemed desirable for optimal sheep control by the Porcine Pinnacle. Oink!

      1. David Greenwald Post author

        To keep this conversation on the main point, the bottom line here is that the developers stand to make at least 10 to 12 percent and probably based on my back of the envelope calculations, a lot more than that. They certainly don’t need a gift of public funds on top of that.

        1. hpierce

          They don’t “need”, for sure.  Have you ever played ‘blackjack’, been dealt a K-A, facing a dealer with a 6 showing, and “doubled down’?  I have.  The outcome was “sweet”.  Dealer ‘busted’, and I caught another face card (yeah, I was a card counter, and figured the odds).  Was a 10 count card rich deck.  Might apply to the current issue.

        2. Napoleon Pig IV

          Ah, what luxurious wallowing ahead! Rich profits AND a gift of public funds. Pigs deserve no less from mere sheep. Happy, happy, sheep. Oink!

      2. hpierce

        Thanks… I get it… I’ll look it up on the City’s website… Nov 13, 2013, right?  Please thank whoever flagged it to you.  And thank you for “getting the info out there”.  Happy St Patrick’s Day!  This whole thing has been ConFounDing.  Got my “Irish up”.

        1. hpierce

          Thanks again… I hereby bestow upon you and yours “honorary Irish”, and a blessing that comes from my culture:

          May the road rise to meet you.
          May the wind be always at your back.
          May the sun shine warm upon your face.
          And rains fall soft upon your fields.
          And until we meet again,
          May God hold you in the hollow of His hand.

          May you live as long as you want,
          And never want as long as you live.

          Always remember to forget
          The things that made you sad.
          But never forget to remember
          The things that made you glad.

          And this applies to to all the readers/contributors to this venue…
           

  2. gunrock

    I continue to marvel at the relationship the ConAgra team has with our city council…

    Not only have the council gifted them tens of millions of dollars in the first case, but they continue to be willing to shower this corporation with almost endless gifts of public funds.

    The council is under zero oblication to provide this transfer of funds from future users to their corporate overlord, but I am sure they will do it anyway…

    1. hpierce

      Methinks ConAgra has transferred all of their interests to New Homes… might be wrong on that… substitute “New Homes” for “ConAgra”, and 100% agree.

  3. Davis Progressive

    the cfd looked like a bad idea, now it looks absolutely criminal.  to recap – the builders stand to make a killing without the cfd, there was a city analysis that showed a healthy return on investment and that return was underestimated by the company the city hired to do the analysis.  now the cfd throws in another $12 to $13 million for the developer with little chance that the homebuyer will save on the front end.

    1. hpierce

      “…  with little chance that the homebuyer will save on the front end.”  And, to be possibly politically incorrect, for 30 years, they’ll “be taking it” somewhere other than the ‘front end’…

  4. dlemongello

    This is getting uglier by the minute.  Actually David, Davis home prices are well over $300 a square foot.  Last average I saw was $324 and a friend of mine just got $387 in a bidding war.  They do not even close-to-need this CFD, it’s disgusting and if the Council approvers it…

    1. David Greenwald Post author

      I intentionally chose a lower number because I didn’t want to be accused of hyperbole but still illustrate the point of how much just a small change in the square foot costs impact revenue.

    2. hpierce

      Please share those thoughts with the CC.  Not sure I can, directly, for the same reasons that I post anonymously.  Have felt like I was the proverbial “voice crying out in the wilderness”…

  5. DanH

    Exactly as I thought. The issue is some CC members want to institute local government control of Davis new housing prices by denying a CFD for construction of public infrastructure. Hope these guys don’t want to limit the profit I’ll make when I sell my mortgage-free house. I’ll be watching the CC meeting tonight.

    1. Robb Davis

      DanH – I actually want to keep the City out of a transaction between a home seller and a home buyer.  Period.  TNHC has committed to install every piece of infrastructure and amenity the City required of it.  It did so when it signed the development agreement (DA).  The DA came with no commitment to a CFD.  By signing that agreement, the developer agreed to provide everything needed, in a known time frame, WITHOUT recourse to a CFD.

      Why, now, should the City interpose itself in a private transaction?  If you want the City to stay out of your transaction then you should be heartened by a decision which keeps it out of a private transaction between a developer (seller) and a purchaser.  I have NO interest in influencing the transaction price.

      In creating the DA, the city assured that the future homeowners would have every piece of infrastructure necessary.  No CFD was required to achieve that.

      1. DanH

        I will look at details of the CFD as they develop. The CFD may benefit prospective buyers and prevent a lot of inconvenience to all Davis residents by assuring that public infrastructure is completed in a timely manner. I have no details regarding all of the public infrastructure that may be involved (including bike path connections) because the City and Cannery have either not decided in this matter or have chosen not to disclose an agreement at this time.

        1. Davis Progressive

          i had previously believed that frerichs was most likely to switch his vote.  rochelle is going to support everything from the developers, wolk wants developer money to fund his assembly run, that left lucas.  the problem is that lucas has carried the water on this issue.  a lot of people think he wrote the enterprise editorial on sunday or at least played a large role in it.  that leaves a bad deal with no clear swing vote.

        2. hpierce

          Gee, DP, Lucas as the swing vote? He can’t change from his stand because “he carried the water”?  News to me.  Wish I had thought of those concepts.
          But, then again, I can be “kinda dumb”.

    2. hpierce

      Not understanding your post… the CFD will pass, probably on a 3-2 vote… I hope neither Davis nor Lee will “cave”.  It’s “a lock”.  Lucas will “struggle”, at least in his rhetoric tonight, but he probably feels that if he “flips”, he’ll lose any credibility he has.  Rochelle and Dan are “locked in”.  You’ll get your CFD for the Cannery.  Can’t figure out why you’d WANT it.  At this point, I just expect those that vote for it take full responsibility for their action.  It’s a “done deal”, no matter how bad.

      1. DanH

        I suspect that you are correct regarding the CC vote this evening. The City of Davis will keep the ball rolling on a nice new infill development and show prospective developers that business can be done in Davis, boding well for the upcoming innovation parks. Some CC members will oppose but they raked in a lot of ink in the process. Win-win.

    3. Michelle Millet

       

      My impression was that some city council member(s) were trying to protect future Cannery homeowners from over paying for their homes, just so the developers can increase their profits. As negotiations move forward I hope all the council member choose to represent the community, not the developer, in these interactions.

      1. hpierce

        Only two CC members “were trying to protect future Cannery homeowners from over paying for their homes, just so the developers can increase their profits. ”  I predict that they will be in the minority tonight.

  6. Tia Will

    I came into this issue not having the vaguest idea what a CFD was. I thank those of you who have written and posted information about this process, what it means for the developers, what it may mean for the homebuyers, and what it means for the city. With this new, very slightly elevated level of understanding, I am even more baffled. Since we are talking about multiple millions of dollars in anticipated revenue, I think we can dispense with the $750,000 dollars to the city as a strong incentive.  I would love for any of the three council members  favoring the CFD to explain to me ( in very simple terms ) how they see this proposal as being beneficial in any way to the city the citizens of which are purportedly their constituents.

    It seems quite a simple request to me.

    1. hpierce

      Simple request, yes. Reasonable, yes.   A “happening thing”?  Hell no.  My prediction is, the CC members in favor, all 3 of them (counting on Robb’s and Brett’s integrity) will explain their votes in vague, waffle-ly, terms, and spend a bunch of time doing so.  Bottom line… the train is about to arrive in San Jose.  It’s a “done deal”.

      Lucas, Rochelle, Dan… please prove me wrong, or take full responsibility for the consequences.

  7. David Greenwald Post author

    One other interesting note.  When I did the back of the envelope calculations, the average house size was just over 2000 square feet.  Using Donna’s figure, that comes to about $650,000 as an average cost to the house.  So much for the idea of workforce housing here.

    1. Tia Will

      So much for the idea of workforce housing here.”

      As had been pointed out repeatedly when I was arguing against the need for more houses in the ( underestimated ) $400,000-$600,000 range and when Don Shor has repeatedly posted about the need for more apartments.

      1. Don Shor

        Anyone want to bet these will average over $700k, plus the CDF fees? And will they be solar powered? Well, the news stories said things like
        — “Additionally, the homes will be energy efficient and solar powered, according to Carson.” (Aggie, May 8 2014).
        — “The homes, the offices and even the open spaces in the 100-acre Cannery project in Davis will feature solar panels.” (BizJournal, April 18 2014)
        But what is the reality? You can “Solar power your pre-wired home.” (http://thenewhomecompany.com/neighborhood/cannery)
        Lots of great amenities! Right from the start? Well, assuming the city council approves the CDF. If not, well, you will see those great amenities as the houses sell.
        Sell the sizzle, not the steak. This will be a charming little neighborhood of high-end small-lot houses for retirees. Workforce housing for people in higher income brackets. A farm-like area that might make money, or not. The developers knew what to say to get it approved. After all, they only needed three votes.
        Meanwhile, apartment vacancy rate at 0.3%. Please, Rochelle, Dan, and Lucas, will you at least address this issue in some kind of public comment?

  8. Anon

    DG: “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.

    Does not “appear likely to happen”.  In other words you don’t really know for certain if your speculation is correct or not.

    DanH: “The issue is some CC members want to institute local government control of Davis new housing prices by denying a CFD for construction of public infrastructure. Hope these guys don’t want to limit the profit I’ll make when I sell my mortgage-free house.

    Spot on!

    Robb Davis: “TNHC has committed to install every piece of infrastructure and amenity the City required of it.  It did so when it signed the development agreement (DA).

    Yes, the Cannery developers have to install every piece of infrastructure and amenity the city required – BUT it does not have to do it upfront and can choose to do it in a phased approach, the very mistake made at Mace Ranch; and it does not have to include enhanced amenities/extras it plans to provide if not granted the CFD.

    DanH: “The City of Davis will keep the ball rolling on a nice new infill development and show prospective developers that business can be done in Davis, boding well for the upcoming innovation parks.”

    Exactly!

    Michelle Millet: “My impression was that some city council member(s) were trying to protect future Cannery homeowners from over paying for their homes…

    When I listened to their previous concerns from the dais, they talked about wanting half the proceeds from the CFD (Councilmember Robb Davis proposal); and/or wanted to eke out more amenities from the developers (Councilmember Brett Lee proposal).  Apparently their positions have evolved to outright opposing the CFD, and I don’t find their arguments particularly compelling (the developer will make too much profit; there will be unequal “taxation”).  So my question to them is if a CFD is not approved, how do you address the following problems: the developer phasing in amenities over time, the very mistake made at Mace Ranch; the developer just giving Cannery development bare minimum amenities required and no more; the perception to innovation parks that doing business in Davis is extremely difficult every step of the way, even down to tough negotiations after ground has broken; a developer bending over backwards to accommodate the city is not worth while and/or puts the developer in a weak bargaining position because there will still be attempts to squeeze out more and more and more – almost a death of “innovation”/”attractiveness” by a thousand cuts?

    1. Michelle Millet

      Michelle Millet: “My impression was that some city council member(s) were trying to protect future Cannery homeowners from over paying for their homes…

      When I listened to their previous concerns from the dais, they talked about wanting half the proceeds from the CFD (Councilmember Robb Davis proposal); and/or wanted to eke out more amenities from the developers (Councilmember Brett Lee proposal).  Apparently their positions have evolved to outright opposing the CFD, and I don’t find their arguments particularly compelling (the developer will make too much profit; there will be unequal “taxation”). 

      I hate speaking for anyone, and I’m not going to claim that am, because I do not know Brett and Robb’s thoughts on this, but I will give you MY interpretation. I think Brett and Robb realized that the CFD had three votes, and thus were attempting to negotiate better terms for the city. I appreciate their efforts.

  9. Tia Will

    Yes, the Cannery developers have to install every piece of infrastructure and amenity the city required – BUT it does not have to do it upfront and can choose to do it in a phased approach, the very mistake made at Mace Ranch; and it does not have to include enhanced amenities/extras it plans to provide if not granted the CFD.”

    Now before everyone piles on, I want to reiterate my lack of knowledge in this area. But, it seems to me that these initial contractual “fine points” would have been the optimal place for the city to assert itself. Would it have been within the legal authority of the city to make as a part of the agreement, the stipulation that the amenities had to be built in up front ?  If not, why not ? It would seem to me that this is the flaw that should be addressed by any community that knows that there will be adverse consequences to the current inhabitants from a proposed development. It would seem only sensible to lock in the amenities and/or mitigating features at the beginning of the contract, not once building has already started. Those who favor the developers in this seem to be those who frequently also champion developers and businessmen as “risk takers” and therefore defend their right to profits on the basis of their risk. If the city then comes along and offers them a huge advantage ( as I see it based on my limited understanding) where then is the value inherent in their “risk” ? Are we not just subsidizing their profits by our assumption of the risk or acceptance in delay in obtaining the promised amenities ?

     

    1. DanH

      In the best of worlds it would have been better to have all public infrastructure items and timelines specified in the DA. As we know, things don’t happen that quickly in Davis. As an example, bicycle experts from the Netherlands had to be imported to provide their opinion on E. Covell crossing safety and other traffic studies had to be made. Remember the Dutch Intersections? In fact, no one knows at this time how the southwest bike traffic will be configured to the Cannery or how much it will cost.

    2. Dave Hart

      I’m no expert either, but I seem to recall someone on the CC who is in favor of the CFD asserting that the economics of all the riskiness of investing in the construction of the Cannery meant that there would be no financing up front for the parks and amenities, so it would have to be funded through the CFD to avoid a delayed build out.  That sounds much like the developer’s argument and to the extent that they could only get their hands on $10 cash to provide $12 of amenities it may be fact.  But, I would rather see the area sit completely undeveloped and let another better-financed developer do it the right way without the CFD than create another Tier 2 community like Mace Ranch where people pay higher taxes on new homes plus the CFD add ons.  That undermines their willingness to support really needed tax measures that benefit the entire community.

      I’m glad Brett Lee and Robb Davis are on the council and it can’t be fun to watch this thing go down in pre-ordained style with their cogent analysis on the record.

  10. Frankly

    CFD or no CDF… it does not have a damn thing to do with the price of housing in Davis.  The price of housing is whatever the market says the price of housing is.  If you are looking to buy, you will look at all available inventory and then make a value judgement on what to offer or what you are willing to spend.   If there are additional costs from a CFD, then the base price of the home will have to decline to meet price equilibrium.  With no CFD the base price would increase to meet price equilibrium.

    The CFD cost impact to each new Cannery property owner will be nada.   Unless you have that opinion that the purchasers of these new properties are all going to be victims of their own inability to do math.  I don’t buy that.

    The REAL concerns here are two:

    1. The city had an agreement and the city failed to demand that the other party hold up their end of the agreement.  That failure then leads to ongoing lack of confidence that development agreements will be enforced… and that impacts future Measure R votes for innovation parks.

    2. The risk of future whining from the Cannery residents that their tax burden is unfair and demanding that the city absorb these costs.

    In addition, as a water-under-the-bridge, process-improvement learning opportunity… the agreement was poorly written.  It should not have left the door open for a CFD.

    But then this gets to the root cause of the problem.  It is greed.  Some more politically active citizens and leaders want every amenity they will eventually think of.   And to hedge the risk that there will be no funding for it, they like the CFD because it:

    1. Provides money upfront.

    2. Makes it easier to demand new amenities that the developer has to accommodate within terms of the agreement.

    Bottom line is that the CFD is not a good move for the city.

  11. Tia Will

    Frankly

    Well we do seem to be in agreement that one aspect of the problem is greed.

    It just seems that I am willing to spread the concept of “greed” around more evenly than you are. I am presuming that the developer wants to get as much profit out of the development as possible. This could be seen as greed. The potential homeowners want the best value they can get for the lowest price. This could be seen as greed. Some citizens did indeed want to extract as many amenities as possible from the developer and were in various positions of influence and or power to get their favorites included. This could be seen as greed. And then there were those of us who simply did not see the Cannery as a good project given our vision for Davis. This could be seen as greed.

    Or every one of these instances could simply be seen as people looking out for their own best interests based on their values which you have often defended as each individual’s right to do……except of course when you do not like the outcome in which case it becomes labelled as “greed”.

     

     

  12. TrueBlueDevil

    I go back to, why wasn’t this hashed out before the final approval was given?

    To add in a $10M + fee at the end of the process on a separate vote seems odd and misplaced. This may also have a small effect when / if the city tries to pass a yearly fee to help pay for road work, etc., this people will already have a large extra burden. And at $600-700,000 per home, this isn’t your typical middle-class community.

    1. Frankly

      TBD – the median house price in Davis is just south of $600k.  Considering new with lots of amenities, $600-700k is typical middle-class Davis.  Just like $1 million is the median home price in S.F. and the median home price in Woodland is just south of $300k.  The median is where the middle-class buy.  It just depends where you live.

  13. Anon

    “I go back to, why wasn’t this hashed out before the final approval was given?”

    City Councilmember Rochelle Swanson explained it very well at the City Council meeting last night.

  14. Tia Will

    City Councilmember Rochelle Swanson explained it very well at the City Council meeting last night.”

    Giving a good explanation of why something occurred unfortunately does not make that particular occurrence either right or wrong, it simply lays out the process. In my opinion, a contract should be laid out in advance without the “may” that was provided here that only had one potential beneficiary, the developer. I am still awaiting the explanation of how that “may” could have possibly worked to the advantage of anyone but the developer. How this was good for the city as a whole, or any other entity or group has never been explained to me. I am still waiting, but as hpierce pointed out wisely, not holding my breathe, since I am sure that the majority, having held, will feel no need for further explanation on this issue and will just wait for the controversy to go away.

    1. TrueBlueDevil

      I’m with Tia on this one. First, let me say I’m not against profit, and if they can get $800,000 or $1M a home, go for it. But to go through a detailed process for years, and then at the end have this subjective after-the-deal added assessment / fee, it seems complicated and unneeded.

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