The Cost Side of the Net Revenue Equation Also Important at MRIC

Mace Ranch Innovation Center
Mayor Pro Tem Robb Davis
Mayor Pro Tem Robb Davis

The Vanguard has been critical of the fiscal analysis, questioning whether the $2.2 million in net revenue at build out is sufficient to justify the approval of the Mace Ranch Innovation Center (MRIC) proposal that could come before the voters in the fall of 2016. Most of the focus has been on the revenue side.

Some have suggested that revenue estimates represent a conservative approximation, with the potential for secondary effects, additional assessment fees and increases to density. Some of the sensitivity scenarios are concerning – for instance, there is a nearly three-quarters million dollar reduction in revenue if there is to be no hotel at Mace Ranch.

On the other hand, a more favorable split in the revenue between city and county might generate another nearly $200,000 in annual revenue to the city. The biggest factor is the increased taxable sales of $1.1 million, if the voters were to approve the renewal of the city’s sales tax measure.

The Vanguard spoke last week with Davis Mayor Pro Tem Robb Davis, who pointed out that there is a bigger picture than simply revenue.

Rather, he noted that the innovation part is “a huge opportunity for us to diversify our economic base.” He added that diversification “makes our revenue generation much more resilient if taxes from automobiles go down in the near future.” (for example)

The Mayor Pro Tem argues that “we went into this for a whole lot of reasons.” While revenue for the city was one of those reasons, “creating good jobs for the community was another. Diversification of our economic base may be the most important.”

“My point here is that merely looking at the 2.1 million net fails to account for the real benefit of the centers as well as the cost drivers that reduce the net benefit,” he said.

While we have focused our analysis on revenue, Mayor Pro Tem Robb Davis pointed the Vanguard toward the $1.5 million in city services that eat into the gross revenue of nearly $3.75 million in the conservative revenue projection model.

Some have seen this project as a panacea for the city’s finances. Others fear that the additional revenue may simply allow the city to increase spending. However, Mayor Pro Tem Robb Davis believes that cost control is necessary to generate any sort of revenue whatsoever.

Mr. Davis told the Vanguard, “We should examine the driving forces that mean that any revenue increase (whatever the source) gets eroded by escalating city costs (like all CA cities).”

The problem that the city faces going forward is that our revenue is currently going up by about 1.1 percent per year, but the costs are going up by 2 percent. This is not adequately addressed in the budget which the council passed last spring.

The Vanguard has remained concerned that, with the expiration of the sales tax measure, the city’s budget even in 2022 reverts to the red. That is with no commitment by the city manager to seek any additional concessions for employee groups. It also assumes the economy continues to grow for the next ten years.

Mayor Pro Tem Davis does not believe the city can answer the question about the need for revenue enhancement for the innovation center proposal. He told the Vanguard, “I want to see Phase III of the study that attempts to assess the benefit of MRIC to the developer.  Keep in mind that there will be some very costly mitigation costs to the developer.”

He added, “There will also be some additional city ‘asks’ in the DA [development agreement]. Both of these–mitigations and additional city asks beyond mitigations–will impact the City’s ability to request other revenue enhancements.”

There are naturally concerns about the impact of a CFD (Community Facilities District). Part of the concern is that the center must compete for companies to come in, in what is already an uneven playing field. The costs in other communities for real estate, and thus rent and other amenities, is lower.

The EPS (Economic & Planning Systems, Inc.) analysis notes that the city has generally featured lower vacancy rates and higher renters compared to regional averages. They surmise, “The Innovation Centers could help Davis gain a stronger competitive position in the region if the ultimate mix of space in the projects contributes to a strengthened innovation ecosystem.

“This ecosystem would offer opportunities for a mix of growing and more established firms relying on other specialized uses and support services that, while required by many innovative companies, are in short supply in the region. The development of multiple projects could help foster competition in the local market that facilitates lower lease rates and land values, thereby generating the ability to support a broad cross section of firms at different levels of maturity.”

While Davis has some advantages, higher costs could become problematic.

EPS finds, for example, “A comparison of the 2nd Street Corridor of Davis to key areas of regional competition indicates that combined impact fees, special taxes, and assessments are very comparable to the City of West Sacramento, but 35 percent to 100 percent higher than key areas in the cities of Folsom, Roseville, and Vacaville.”

As Robb Davis puts it, “If the developer passes on costs from additional revenue measures or if they directly impact costs of occupying the spaces, then the center may not succeed.  This is the caution that EPS lays out over and over in their reports–feasibility.”

He adds, “Davis may be able to command a premium on leases due to proximity to the University but these premiums are bounded and the margin for increasing per square foot leases is not great.”

The key then to this equation may be, in addition to looking to maximize revenues, keeping costs under control. By doing that, we improve net revenue but we also mitigate the concern that some have that this project is simply a way to free up additional money for employee compensation.

—David M. Greenwald reporting

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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8 Comments

  1. Alan Pryor

    Rob Davis is quoted as saying

    “There will also be some additional city ‘asks’ in the DA [development agreement]. Both of these–mitigations and additional city asks beyond mitigations–will impact the City’s ability to request other revenue enhancements.”

    This will only happen if the Council demands that Dept of Community Development stiffen its spine and starts demanding concessions from developers from the beginning of discussions. Right now the mantra in City Hall seems to be that “Davis is Open for Business” which translates into very few “asks” being imposed on the developers and very weak development agreements.

    From my viewpoint, the only real concessions that have been wrung from developers of late have been from the citizen activists and groups that have become involved from the sidelines rather than by Staff. Case in point was the Conference Center proposal generated by Staff and introduced to the Council in late August. Initially, it has virtually  no advanced sustainability features but was touted otherwise by Staff. It was an embarrassingly complete green-washed project meeting only the minimum environmental standards of the City.

    Then the private sector of the Community stepped in and pointed out obvious areas of sustainable improvements that actually saved the applicant money. Lo and behold, when the proposal came back to the Council 3 weeks later for the 2nd reading of the ordinance to amend the Plan, the project had added a huge number of new solar panels and claimed it would meet energy efficient standards equivalent to LEEDs certification.

    This “ask” is certainly something that should have easily been initially done by Staff, but wasn’t. I don’t know if this weakness is due to the attitude of Staff or their lack of the necessary skill sets to get the job done. In either event, we need a Council that demands that Staff  step up their game if we ever hope to get large-scale, truly sustainable development that provides the economic benefits needed by the City.

     

     

     

    1. hpierce

      Unless you come from Chicago, belong to the Mafia, etc., it’s inappropriate for staff to do “asks” that have any weight.  Staff is obligated to follow the ordinances, policies, etc., in place.  That is good government.  The council is free to modify the rules the staff operates under.

      The “asks” can come from electeds, special interests (to gain support and/or avoid opposition), etc.

      Unless you want staff to be “ho’s” or line their own pockets based on their temperment, etc., staff shouldn’t be doing “asks”, except maybe as trial balloons.  Even then, it should be trial balloons authorized by CM or CC.

       

  2. Davis Progressive

    this is a crucial article that people are not paying enough attention to because what it says is unless the city gets its finances together, the mric will not generate the type of revenue (net revenue) we need to pay our bills.  this doesn’t become an excuse to expand employee compensation – it becomes a way to place city costs in a more sustainable policy.

    1. hpierce

      BTW… only 3 months until most existing MOU’s expire.  Not much time to open MOU discussions and come to agreement, given holidays, etc.  Surprised David hasn’t covered this issue.  Have seen a few indications where CC had a chance to discuss parameters in closed session(s), but have not heard anything about even initial discussions with employee groups.

      I’ll wager that actual discussions will not REALLY take place until January-February.

  3. davisite4

    What about the added costs of adding so many employees, visitors, and residents to the city — the added burden on our roads, police, and firefighters, maintenance, etc. Are these costs being taken into account?

    1. Robb Davis

      davisite4 – the short answer is “yes.”  I am asking staff for a summary of the approach they utilized to provide cost estimates to EPS to do the analysis.  There are clear statements about additional costs of the sites but I am asking for clarification on the assumptions staff made in this regard.

  4. Anon

    This “ask” is certainly something that should have easily been initially done by Staff, but wasn’t. I don’t know if this weakness is due to the attitude of Staff or their lack of the necessary skill sets to get the job done. In either event, we need a Council that demands that Staff  step up their game if we ever hope to get large-scale, truly sustainable development that provides the economic benefits needed by the City.”

    I am absolutely baffled by this statement.  If the developer puts forth a project proposal, and the proposal meets all the city’s requirements, what right does city staff have to demand “more” from the developer?  The City Council can, Commissions can, citizens can – but city staff is supposed to remain neutral… not push any particular agenda other than pre-established city requirements!

    As hpierce put it:

    Unless you come from Chicago, belong to the Mafia, etc., it’s inappropriate for staff to do “asks” that have any weight.  Staff is obligated to follow the ordinances, policies, etc., in place.  That is good government.  The council is free to modify the rules the staff operates under.
    The “asks” can come from electeds, special interests (to gain support and/or avoid opposition), etc.
    Unless you want staff to be “ho’s” or line their own pockets based on their temperment, etc., staff shouldn’t be doing “asks”

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