Sunday Commentary: Does Nishi Pass the Fiscal Test?

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Nishi-BWThis past week the Planning Commission forwarded the Nishi project to the Davis City Council for consideration. The council evaluation begins with a workshop on Tuesday. Despite the 5-2 vote to move it forward, the commissioners had a variety of concerns that they expressed, from air quality to traffic circulation.

While those are clearly issues that the council will now have to grapple with as they decide whether to put the project on the June ballot, one issue that might be more quickly resolved is the fiscal issue.

As staff notes, the fiscal and economic analysis by the EPS study “concluded that the Nishi Gateway development is estimated to produce an annual net General Fund deficit of approximately $78,000 at buildout, with $1,273,000 in revenues and $1,351,000 in service costs.” The analysis identifies “Managing for Fiscal Success” measures that could result in a fiscal surplus of up to $465,000 per year.

According to staff, this annual net deficit or surplus for the Nishi project rests on two key factors: “1) the inclusion of residential units; and 2) an assumption of approximately 80,000 square feet of public/nonprofit space (20% of total nonresidential space).”

EPS itself mitigates the damage of the negative fiscal analysis by noting that “the presence of housing is a positive attribute that will enhance the mixed-use character valued in innovation centers and will likely improve the internal economics of the project. Similarly, public/nonprofit space is estimated to be a net burden on a city’s General Fund because public/nonprofit uses are assumed to be exempt from paying property tax revenue and real property transfer tax revenue, and are not estimated to generate any onsite taxable sales tax revenue). However, this type of space has the potential to attract UC Davis-related users, capitalizing on the university’s research strengths and strengthening the local innovation ecosystem and local project economics.”

Staff goes further in noting that a potential hotel project on the site “may result in an annual net fiscal surplus for the City’s General Fund.” However, EPS noted that “the replacement of some R&D uses with a hotel in Nishi would need to be evaluated in light of the need to maintain a critical mass of Office/R&D space in the innovation center, which may be possible with an additional hotel, depending on specific project features.”

However, the need for a hotel is not established and the applicant has found another way to fiscal sustainability. Staff writes, “Through the Development Agreement and Baseline Project Features, the property owner has committed to mechanisms for ensuring positive fiscal impacts for the City, such as offsetting any foregone property tax revenue to the City as a result of purchase or lease of the non-residential properties by the University of California.”

In short, the developer is committing to “[n]et fiscal positive with or without hotel.” The baseline features note this “could include make-whole provision for UC leases, Landscaping and Lighting Assessment District, Community Facilities District, positive negotiations with Yolo County, or other.”

The advantage of writing these provisions in to the baseline features is that they cannot be altered without a subsequent Measure R vote. It does require accurate assessments of fiscal net positives and constant monitoring, but the bottom line is that the developer here is committing to a fiscal positive without a hotel.

The Vanguard was recently reminded that the city’s goals for Nishi in terms of revenue generation were somewhat different from the innovation parks.

In October of 2013, the city council approved city-specific goals for planning the Nishi property and nearby UC Davis campus property as a mixed-use innovation district:

  1. Jobs for Davis residents, space for Davis businesses, and furtherance of city-wide efforts to position Davis as an innovation hub;
  2. High-density urban residential development near downtown and employment centers;
  3. Improved appearance and function of the “front door” to Davis;
  4. Support for downtown Davis by providing customers for businesses, hotels, arts, and entertainment; and
  5. Revenue generation to support city services throughout the community.

In 2014 the city called for and sought proposals to “provide jobs for Davis residents and revenue for City Operations.”

While the EPS assumptions have repeatedly been called conservative, most recently by Mayor Dan Wolk at the State of the City Address, by relying on more conservative assumptions, we end up with fiscal conclusions that are likely to hold up even if some of the more rosy assumptions do not pan out.

There are more rosy projections as well. Dan Carson of the Finance and Budget Commission analyzed various economic and fiscal consultant reports, as well as the project EIR, and concluded that “we find the economic analysis showing that the Nishi Gateway project would have a significant positive economic impact to be credible and reasonable,” saying as well that a “mid-range analysis shows that the project could have a direct net fiscal benefit to the city of more than $2 million annually with additional one-time fiscal benefits in the millions of dollars.”

While Mr. Carson often tends to be more optimistic in his evaluations than others, at the end of the day we do not need the Nishi project to exceed $2 million in annual revenue for the project to be viable from a fiscal perspective – a small positive fiscal effect should be sufficient to check this concern off the list.

That is not to downplay other concerns, but the commitment by the developers here should be sufficient to put fiscal concerns to rest.

—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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20 thoughts on “Sunday Commentary: Does Nishi Pass the Fiscal Test?”

  1. Ron

    I have no desire to even consider a development that does not create a significant, permanent, financial gain for the city.  I’m sure that we’ll hear all kinds of reasons (and numbers) regarding the reason that this proposed development is the “greatest thing since sliced bread”.  A long, argumentative fight ahead (but hopefully not from me).  (I’m hoping that I don’t allow myself to get sucked into a debate.)

  2. Matt Williams

    Ron, as noted last night by Mark West in the current Davis economic realities, it is a simple mathematical reality that if you inflate costs at a rate that is higher than the rate you inflate revenues it is impossible not to reach a point where costs exceed revenues.  Therefore, until the City gets realistic about getting its costs under control, absolutely no developments (or individual residential lot construction) will ever produce a permanent financial gain for the City.

    The City of Davis has been operating in a rapid inflation of costs environment for at least a decade, probably longer, while at the same time operating in a very slow inflation of revenues environment.  For example, the year when the Council granted a 36% raise to the Davis firefighters, the revenues of the City grew at a rate of 2%.  The numbers do not lie.

    So, from a straightforward mathematical perspective you are arguing for no developments, no building permits for new housing on existing lots, and no home renovations.  Is that your intention?

    1. Ron

      No – that is not my intention.  My point is that commercial development can (at least) create positive, permanent financial gains for the city.

      I understand that Nishi does not have much planned commercial development.  As you and others have pointed out, residential development creates a deficit for the city, over time.  With Nishi, it appears that we wouldn’t even have to wait for a deficit to occur.

      I understand that SACOG requirements (eventually/continually) force the city to add residential development.  However, I also understand that we are currently meeting (and perhaps slightly exceeding) those requirements (through the Cannery, development of the old farm next to the cemetery, etc.).  I also understand that if we exceed the SACOG requirements, we may be forced to accept even more residential development during the next cycle.

      It is unfortunate that the city has apparently been irresponsible with its funds (and is now promoting commercial development as a solution).   If the MRIC commercial development passes, I hope that the city learns from past mistakes.  (But, I’m not counting on it.)

       

      1. Mark West

        Keep in mind Ron that we will have to pay the bills one way or the other.  We can do so through business growth and in the process, increase economic activity in town and build wealth in the community, or we can pay more in taxes, reducing economic activity in town and making us all just that much poorer.

      2. Matt Williams

        Thanks for your answer Ron . . . and your engagement on these issues.  This multi-person dialogue does a good job of illuminating both the complexities and the consequences of both housing and economic development . . . and also makes it very clear that our poor management of costs is a fundamental issue that is eroding both the quality of life and the affordability of Davis.

        With that said, I would like to reflect on your observation about the SACOG Regional Housing Needs Allocation (RHNA).  My knowledge comes from the thorough job that Bob Wolcott did in both educating the 2007-2008 Housing Element Steering Committee (HESC) about RHNA and answering the multitudinous questions posed by the HESC members.

        First, it is important to understand that RHNA is not a requirement to build housing, but rather a sufficient supply of land that is either (A) already entitled/zoned for housing, or (B) identified as being logical for rezoning and entitlement for housing.  For example,

        — when the HESC convened its first meeting in March 2007 there were 148 building permits that had been issued in the 2006-2007 two year period, and all of the lots associated with those past two years of permits count toward meeting the City’s RHNA.

        — In addition there were 65 vacant single family lots in the City as of July 1, 2007 that all counted toward meeting the City’s RHNA.  I suspect that 50 of those 65 lots are still vacant today, and as such are available for credit in future RHNAs. 

        — Then there was the new second story housing above existing neighborhood shopping centers (12-50 units), all of which counted then, and because none of them have been built, will count again in future RHNAs. 

        — Then there was another 94 units from potential Downtown renovations and potential accessory dwelling units on existing residential lots, the vast majority of which have not happened, and therefore will count again in future RHNAs. 

        — Then there were another 250 units that were on sites already zoned for residential use, which did not require a General Plan amendment or rezoning but may require a final planned development and / or design review approval.  Some of these have been built, but even more have not been built, and therefore will count again in future RHNAs.

         

         

        To put all of the above into context, the City’s total 2008 RHNA allocation was 498 units for the 2006-2013 planning period, and the existing supply of “qualified units” was 516-569.  For the 2013-2021 planning period Davis has added the 40+ units at Grande, the 70 units at Verona, the 15 units at Willowbank Park, any additional units at 8th and Wake, the 100+ units at Chiles Ranch, the 547 units at Cannery, the units at New Harmony.  Bottom-line, Davis’ inventory of entitled properties legally ready to be built far, far exceeds our historical RHNA allocation.

  3. Davis Progressive

    The $78K was never a deal breaker for me.  It’s not going to make/ break the city.  The bigger problem is that of access, circulation, and apparently air quality.

  4. Davis Progressive

    Question: are they committing to fiscal neutral/ positivism or just the “mechanisms” by which we will project fiscal neutrality/ positivism?  It seems like there is a difference between the two.

    1. Ron

      And – how long would the promised “fiscal neutral/positivism” last?  Perhaps a year or two, before it becomes a progressively worse drag on the city’s finances?

      1. Mark West

        Please remember that it will only a ‘drag on the city’s finances’ if we choose to make it so. It is a false narrative to say that we are locked into a situation where residential development is a fiscal drag. We, as a community, have made the active choice to be irresponsible with our money and allow our costs to skyrocket out of control, thereby swamping the financial gains from development. We are free to make a different choice.

      2. Matt Williams

        Ron said . . . <em>”And – how long would the promised “fiscal neutral/positivism” last?  Perhaps a year or two, before it becomes a progressively worse drag on the city’s finances?”</em>

        Ron, if we don’t do something about the City’s ever increasing costs, then the erosion of the fiscal position of any and all projects will begin deteriorating the very first year, and then get progressively worse each year thereafter.  That is a very simple reality when you have Revenues increasing only 2% per year, and Costs increasing at rates like the ones shown if you click on the link below.

        https://www.davisvanguard.org/wp-content/uploads/2016/01/Comp-and-FTE-numbers-2006-2015.jpg

  5. skeptical

     
    The City has a duty to make responsible decisions whether to develop and to develop responsibly.  A critical part of this duty is to approve projects that produce a positive cash flow to the City.  Those who declare “residential development doesn’t pay for itself” are WRONG.  Such projects can and should be designed to do so.  The trouble is that the City has never had the interest or the talent to do this work.
     
    Nishi is just another example, and the developer is not foolish enough to assume the negative cash flow liabilities created by staff’s poor planning.  The developer can agree to a mechanism for “assuring” a positive cash flow.  However, that mechanism will be crafted by the same inept staff that created the poorly planned project in the first place.  How could that possibly be a good idea??? 
     

  6. Frankly

    We, as a community, have made the active choice to be irresponsible with our money and allow our costs to skyrocket out of control, thereby swamping the financial gains from development. 

    From the US Department of Labor: total employer compensation costs for private industry workers averaged $31.53 per hour worked in September 2015.

    Compare that to our city’s average $150,000 per employee cost.

    $150,000 divided by 2080 hours in a year is $72.12 per hour.

    That is asinine.  We are paying WAY TOO MUCH for city labor.

    When we add residential development we will need more staff to cover the related city services. But, because that staff is so expensive, we end up with a net negative revenue situation.

    Reduce the cost of city employee labor and even residential development would turn net positive.

    1. CalAg

      “even residential development would turn net positive”

      Frankly: Residential is already net positive. Repost from previous thread …

      Single family homes are not a fiscal net negative for the City. This canard was created by the no-growth proponents. It’s more complicated than the sound bite.

      The City’s fiscal model that was put in place under Navazio (remember he was a finance guy) showed that the break-even point was about $450K. That may have risen in the last few years, but it is probably safe to say (until that model is updated) in approximate terms that homes over $500K are a net fiscal positive and homes under $500K are a net fiscal negative.

      Accordingly, the City could theoretically build its way out of the fiscal deficit with only high-end single family housing.

      1. Frankly

        Thanks CalAg.  I am familiar with this difference.  But because we are short of rental housing, and because of the “we-must-cram-everyone-into-tiny-spaces-to-preserve-farmland-and-to-save-the-world-from-man-made-global-waming” people in power in this town, I always base my assumptions for residential housing on a high-density model.

        Also, there is the “I-want-to-protect-my-inflated-residential-property-values” crowd.

        It is funny what you get when developers try to comply with this stuff while also trying to build high-end single family housing.  Visit the Cannery and see the large homes with zero yard-space.  I understand they are selling like cold-cakes.

  7. CalAg

    I agree with Rob Hoffmann, Chair of the Planning Commission – Nishi should be 100% tech park.

    It would then have a large positive fiscal benefit to the General Fund and over-sized positive indirect fiscal benefits because of its location.

    Since the developer has committed to a timeline that precludes occupancy before 2022, there is plenty of time to get it right.

    1. Matt Williams

      CalAg (and Rob), let’s drill down into the 0% housing, 100% tech park alternative.

      The reality between now and 2020 . . . probably 2030 is that UCD will be adding 600 beds per year of additional active rental housing demand t0 the Davis housing market.  The EPS analysis lists 1,043 additional employees at Nishi and 5,479 additional employees at MRIC, both of which will add incremental housing demand over and above the added 600 per year from UCD.

      So how is Davis going to deal with that incremental housing demand?

      My Plan A is for UCD to modify the LRDP to add a minimum of 600 incremental beds per year to the on-campus housing stock.

      Knowing that my Plan A has as much chance of happening as a Power Ball win in its recent $900 million incarnation, my Plan B is to get UCD to not add the 600 students they currently plan to add each year between now and 2030.

      However my Plan B probably has an even lower chance of happening than my Plan A does, so that takes me to my Plan C, which is to reluctantly recognize that the students competing for the current existing supply of rental units will be able to outbid the existing single family renters (mostly in the 25-54 year-old age bracket) and we will continue to see the shrinkage of both the number of 25-54 year-olds by 500-1000 people per year and the number of DJUSD age children by 250-750 children per year.  In addition we will see an acceleration of the conversion of neighborhood single family residences into mini-dorms of UCD students.

      Do you see any other alternatives when you drill down into the 0% housing, 100% tech park alternative?

  8. CalAg

    “let’s drill down into the 0% housing, 100% tech park alternative.”

    Let’s not. It’s becoming increasingly clear you’re in the tank for Whitcombe’s project. Your torturous logic always leads to the same inevitable (but conveniently reluctant) conclusion – that Davis voters should support Nishi.

     

     

    Nishi is not a solution. The damage of the 2020 plan will be largely done before Nishi is even occupied.

     

    1. Matt Williams

      All I am doing is looking objectively at the available data.  I work hard to leave the logical analysis of the data to each individual, knowing that each individual will come to their own personal conclusions.  My job is not to tell anyone.  It is to listen to everyone.

      With that said, you are absolutely right that the 2020 plan poses challenges to all the scenarios.  However, UCD’s plans for adding students don’t end in 2020.  They continue on unabated until 2030, and the challenges continue on into that extended period.

      You are correct.  Nishi is not a solution.  It is Plan D.

       

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