Commentary: A Look at Our Redevelopment Challenge

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One of the biggest debates we have over development projects is whether or not a developer can afford to do more – more in the way of costly requirements, more in the way of affordable housing, etc.  Time and time again, we are told by people who oppose a specific project, that the developer can do more and that we cannot simply rely on their representations about what pencils out.

The reality is that we actually have a fairly good idea of what pencils out and what doesn’t.  We don’t have access to the exact costs and the exact rents – but then again, it’s a model and it is built on estimates and assumptions.

For example, the city hired Plescia & Company to do the feasibility analysis of the Nishi site (see the article here).

They noted: “This memorandum summarizes an initial development economic analysis of the currently proposed student housing project at the 47-acre Nishi site. The primary purpose of the initial analysis is to identify what amount of investment, if any, in off-site public infrastructure the project can feasibly support under an assumption that approximately 12 percent of the housing units are allocated for affordable housing.”

They concluded that “the requirement of payment for off-site infrastructure and provision of 12 percent of the beds for affordable housing suggests the developer will obtain a lower return on investment than is typically targeted for new development in Davis. Assuming the developer is willing to accept a lower return on investment, the proposed infrastructure and affordable housing requirements are reasonable.”

The pro forma from the Bay Area Economics (BAE) group that we reported on yesterday suggests we can make a whole lot of assumptions and calculations about both costs and income that help us determine whether a project is viable or not.

Some of the costs they project are costs for acquisition of land, costs for demolition (if it’s a redevelopment site), new construction costs, costs for parking (again, if it is downtown), infrastructure costs, and fees and permits.  If it is a site like Nishi, there are costs for off-site public infrastructure and costs for affordable housing units.

And then they can project potential income.

The bottom line is the developers have to show that their project is viable in order for them to attract investors.  For the downtown space, BAE established feasibility targets as 8.5 percent for income-producing projects and 10 percent return for for-sale projects.

For a project like Nishi, they might have to show about a five percent return.

There are two key takeaways here.  The first is that, unless someone has done the analysis on the costs versus expected returns, they are not really in the position to state what the developer can and cannot take on.  The second is that we can in fact come up with reasonable estimates on cost – that’s why the city contracts with firms like Plescia or BAE to do their fiscal analysis.

The findings from BAE are not exactly encouraging.  As Matt Kowta of BAE pointed out in an email yesterday, “While variance from project to project could be significant, I think the financial analysis demonstrates that it will be challenging for developers to put together feasible projects in the downtown area, particularly if they have to acquire sites in the open market that most likely include an existing structure with some economic life left.”

This is one reason among many that larger projects are going to be more viable than smaller projects.

Mr. Kowta pointed out, “All other things being equal, if developers can increase the amount of rentable or sellable square footage that they can put on a site through increases in allowable density/intensity, this will help improve the economics in many cases, because it will allow them to better distribute the cost of site acquisition.”

BAE concludes: “These results indicate that under current conditions, it will be very difficult for developers to undertake projects similar to the prototype projects, with a few exceptions. As mentioned previously, it appears that a medium-sized mixed-use project incorporating high density for-sale residential units could be feasible.”

However, they do caution that “the pro-forma analysis models project feasibility strictly from the standpoint of investor/developers, and not from the standpoint of owner/users.”

They note: “For the owner/user, the evaluation of ‘feasibility’ may be influenced by considerations of establishing control of the premises where they operate their business…”  They specifically cite the mixed-use office/laboratory over residential project on C Street between 2nd and 3rd Streets as well as the Coldwell Banker real estate office.

And they also identify ways that the city can positively influence development feasibility:

  • Reduce project risk and project timelines by establishing clear planning guidelines for the desired development types and reducing or eliminating discretionary review processes;
  • Allow increased densities, so that developers can achieve greater efficiencies of scale on the limited number of available sites, including better spreading the high cost of site acquisition;
  • Limit requirements imposed on downtown development projects which would translate to increased costs that do not bring corresponding revenue increases; and
  • Consider entering into public-private partnerships with developers to help put together feasible development projects that attract new businesses to downtown. This could include utilization of City-owned land on terms that help to bridge feasibility gaps where there is an expected return on the City’s involvement.

Some people took this all to mean that the answer is simple, we just don’t have developers and investor-initiated projects downtown.

The reality is that the owners and occupants are not going to develop the buildings downtown necessary to generate the type of economic development we need to improve the revenue and viability of our downtown.

There are three key takeaway points here.  First is that we can reasonably estimate costs and viability.  Second is that we are going to have challenges doing the type of redevelopment we need downtown.  And third, the way we are going to overcome these challenges is by re-examining the processes and constraints we place on projects.

—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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41 thoughts on “Commentary: A Look at Our Redevelopment Challenge”

  1. Ken A

    The main reason that BAE concludes: “it will be very difficult for developers to undertake projects similar to the prototype projects, with a few exceptions.” is that Davis is a relatively small town that will probably not be growing much and it has a shrinking number of middle age people that spend the most money (and rent the most office space).

    1. David Greenwald Post author

      I’ve looked over the report and do not find any mention of that.  Their conclusions are mainly looking at the cost-size.  On the contrary, their view: “Downtown growth has not kept pace with community growth.”  So please quote where  they conclude as you suggest that the “main reason” is because Davis ” is a relatively small town that will probably not be growing much and it has a shrinking number of middle age people that spend the most money…”  I see no reference to any of this in their report.

      1. Ken A

        BAE didn’t mention growth, but if Davis was grading to build more SFHs at the Mace Curve, Covell Village, West Davis and South Davis there would be more demand for retail and office downtown and BAE would have a different conclusion.  With rare exceptions college students and old people don’t rent office space and spend big money at retailers (except those that sell pizza & beer and denture cream & Depends)…

    2. Richard McCann

      At the last Downtown Planning meeting, BAE presented a study that showed there had been substantial job growth in Davis since 2005, but that it had been disproportionately in the peripheral areas. So there’s sufficient economic activity to generate new development downtown if we can redirect it from the peripheral areas.

  2. David Greenwald Post author

    Found this interesting comment from BAE: “As mentioned previously, it appears that a medium-sized mixed-use project incorporating high density for-sale residential units could be feasible. It is likely that a similar project that omits the retail component and replaces it with additional for-sale residential units would also be feasible; however, in both cases, feasibility would be tenuous and imposition of significant affordable housing requirements or other requirements that increase project costs could tilt the projects away from feasibility.”

  3. Alan Miller

    We have a town where everyone wants everything from a new development, more than most jurisdictions, and Bay Area Economics (sounds so official) says we should have less so developers will make more money or be more incentivized to build/invest.

    Well, yup, sort of, and good luck with that.

    1. Ken A

      Who will build all the electric car and electric bike charging stations and new housing for the poor if the city can’t force the developers to do it?

    2. David Greenwald Post author

      Actually what they are saying is that there is a bottom line that projects need to show in order to pencil and that we are requiring so much at the moment, that we have made it difficult if not possible for projects to pencil out.

    3. Mark West

      “We have a town where everyone wants everything from a new development…”

      And a town where City Staff and the CC have for years rolled over to appease those demands. Fortunately, the most recent past CC managed to stand up to the noise and reduced some of the exactions and approved projects despite the opposition (and the lawsuits). Now with a new City Manager, and soon a new Community Development Director, we have the opportunity to move further towards a more rational approach to development planning. We will have to wait and see if this new CC/CM/CDD combination will show a backbone and continue moving us in the right direction or simply fall back to the status quo ‘spanking machine’ of old.

        1. Mark West

          Yes, but in reality, a good CM and CDD can influence the direction by educating the CC. They also have the responsibility of implementing CC priorities and have leeway in how those implementations occur. How well that all works will depend on the quality of the CC, and often, the character (and ego) of the Mayor. Good ones will listen and learn, others…not so much.

          If it doesn’t work, a good CM may just move a few miles away and find a better gig.

        2. Howard P

          Have only known a handful of CM’s were willing to risk their career (employment status) when the CC fails to heed advice/education from CM and his/her key staff, including Department Heads.

          But, theoretically, it would be “right” for a CM to walk, on principle… a successor would have to think twice before accepting the position.

          Senior staff and CM warned and attempted to educate the CC frequently regarding street maintenance funding issues since the mid 80’s… that worked out great, right?

  4. Ron

    From article:  “For example, the city hired Plescia & Company to do the feasibility analysis of the Nishi site (see the article here).”

    Interestingly enough, the Affordable housing program described in the referenced article does not address the Very-Low-Income, or Extremely-Low-Income components of the Nishi Affordable housing program (which have since been discussed on the Vanguard).

    Was the Nishi Affordable housing program modified, after it was analyzed?  Also, did the city’s Finance and Budget Commission ever have a chance to review the analysis (see Matt’s comment, below the referenced article.)

    1. Ron

      Also, why does the chart in the referenced article show 2-3 bedroom units?  Doesn’t Nishi consist of 2 and 4-bedroom units?  (Basing that on memory, so please correct me if I’m wrong.)

      1. David Greenwald Post author

        Why would you question the fiscal analysis done by a professional, based on your memory rather than looking it up? No, you’re wrong. Nishi was 700 two and three bedroom apartments.

        1. Ron

          Thanks – I was just asking, regarding the rooms.  No, I’m not questioning the analysis, regarding the number of rooms.

          Regarding your chart (in the article you referenced), why on earth would you “blend together” the Very-Low-Income and Extremely-Low-Income categories into one category (and “average out” the rent), I presume?

          You’ll recall that another commenter noted that the Very-Low-Income category (which is apparently about 2/3 of the Nishi Affordable housing program) does not appear to be subsidized/Affordable.

          The chart in the other article makes it difficult to determine this.

        2. Ron

          To clarify, this comment provides the apparent percentage breakdown at Nishi (between very-low and extremely-low income bedrooms):

          Rik:  “To add insult to injury, these rates for the designated VLI double-occupancy bedrooms ($672 x 2 = $1,344) are even more than the projected single-occupancy room lease rates for the project for the “market rate” units” ($1,000). In a very real way and in an ironic twist, the majority of low-income students will thus be subsidizing the ‘market rate’ students;

          The remaining 1/3 of the ‘affordable’ bed (for the Extremely Low-Income (ELI)) students will be paying per-room lease rates of $808 rent ($404 x 2)–all while crammed in at two students per bedroom–compared to Davis existing average rents when converted to per-bedroom rates of $830 (2-bedroom), $757 (3-bedroom), and $715 (4-bedroom). So, only the tiny number of ELI beds have projected rents around current Davis market rate rentals (and are at the high end of the averages)”

          https://www.davisvanguard.org/2018/08/monday-morning-thoughts-public-policy-questions-rarely-yes-no-answers/#comment-390798

        3. Ron

          Craig:  Unless David provides a complete breakdown of the monthly rental amounts for very-low, vs. extremely low, it is not possible to determine if the chart David referenced is accurate, or its relationship to what Rik noted.

          It certainly is worth exploring, don’t you think? I would think that David has easy access to such information – more than either you or I.

        4. Craig Ross

          So what you are doing is admitting that you’re posting unverified information.  You are misrepresenting it as fact.  That’s dishonest.  You have no idea if that information is true and now you’re admitting as much.

          1. Don Shor

            An entire, referenced article regarding the Nishi Affordable housing program, from Rik.

            It was published on June 4 for an election being held on June 5, with an obvious intent. In the world of politics, that’s called a last-minute hit piece. So it didn’t seem worth bothering to verify, since there wasn’t time and the motive seemed apparent.
            I have come to conclude that Rik is not actually a political operative, and probably actually has relevant expertise on this topic. But the timing of the publication certainly called that into question. The developers have no incentive whatsoever to discuss this issue at this point. So I suggest that you are posting unverified information, as noted, and that it’s probably your obligation to verify it if you’re going to keep posting it.

        5. Craig Ross

          Ron: Are you going to either talk to the city or the developer to see if he did it right?  Otherwise you’re wasting both of our time.  You haven’t verified the numbers, yet you represent them as true.

        6. Ron

          Craig:  Wow – you must be a fast reader!  Rik’s article is quite detailed.

          Which of the references/sources/citations that Rik used in that article (which were not created by Rik) do you think are “wrong”, and can be verbally corrected by the developer?

        7. Craig Ross

          Ron: your question and comment suggest you have no idea my point or the objection.  Don Shor above frames it more diplomatically than I can.  For now on, every time you post the quote from Rik, I will remind readers the information has been unverified and you refuse to take any steps to do so, and leave it that.  I will not be drawn into a senseless discussion on it further.

        8. Ron

          Don:  I haven’t even had a chance to look over all of the citations/documents that Rik referenced, including those from the city itself.  Have you?

          There’s quite a few independent references, especially at the end of that article.

          Until you actually review those references (presumably for the sole purpose of disputing the analysis), responses such as your 12:35 p.m. comment are in the same category as Craig’s.  (Politically-motivated garbage.)

          Based upon Rik’s prior comments, I believe he has an honest interest (and perhaps some expertise) in Affordable housing programs. (He might have addressed that, elsewhere.)

          David is the one holding up the Nishi analysis as essentially a model, in today’s article.

        9. Craig Ross

          There is a very basic fallacy in his analysis – he is comparing the cost of a single – occupancy market rate unit to the cost of a double – occupancy affordable unit and completely drawing his conclusion from that analysis without figuring out whether those are comparable.

        10. Ron

          Don:  It’s not about the election, and not necessarily limited to Nishi.  It’s about future proposals as well, including those in which developers might (also) propose to operate their own Affordable housing programs – similar to those at Nishi and Lincoln 40.

          This is unchartered territory, at least in Davis. And, the city is apparently still operating under a temporary policy, at this point. (Which I recall was essentially tailored to match the Affordable housing proposals at Nishi and Lincoln 40 – to get them approved in a timely manner.)

          1. Don Shor

            Don: It’s not about the election, and not necessarily limited to Nishi. It’s about future proposals as well, including those in which developers might (also) propose to operate their own Affordable housing programs – similar to those at Nishi and Lincoln 40.

            Then perhaps Rik can do an analysis of those proposals when they come forward, and publish it with plenty of time for discussion before they come to a vote of the council or the public. Until then, you’re posting unverified information that was published the day before the election. Each time you do that, I suspect someone here will point that out.

        11. Ron

          Don:  “Someone” is certainly free to do so.  But, unless they actually read, analyze and comment on that detailed/referenced article, then they’re the ones who are refusing to do the work necessary to spew anything (other than “ask the developer” for his opinion). That article already references the location of applicable data/sources. It’s right there, for anyone to see and dispute. And frankly, I haven’t seen anyone even dispute the analysis, or the independent references/citations that are included.

          As a side note, haven’t you previously confirmed that you oppose Affordable housing programs?  (I wouldn’t expect you to have much interest in the topic.)

  5. Mark West

    “And third, the way we are going to overcome these challenges is by re-examining the processes and constraints we place on projects.”

    This is the important point. We have the power to change the situation simply by altering or reducing the list of demands and exactions we place on projects. Reducing demands means lower costs and lower risk for development projects, and that means more projects. If we really want redevelopment downtown, we have the power to make it happen, and just like Dorothy, it is a power we have always had…

     

  6. Ron

    From article above:  “For a project like Nishi, they might have to show about a five percent return.”

    How is this being calculated?

    The following quotes are from the article that David referenced above, discussing the Plescia and Company analysis for Nishi:

    “This is based on an annual rate of return requirement of 18 percent on equity investment.”

    So, is Nishi “exceeding” the minimum threshold by 13%?

    ” . . . the developer will obtain a lower return on investment than is typically targeted for new development in Davis.”

    Please clarify:  Is an 18% (annual) return “lower” than normal?

     

     

    1. Ken A

      I know Ron does not care about understanding this stuff since if he really wanted to learn about real estate development and economic forecasting he would turn to the many good resources online and not just troll the Vanguard (posting negative stuff about EVERY residential project that comes up).

      I don’t think Rik is trolling and like Don I don’t think he is a paid “political operative” just a guy that really wants to see more low income housing without a strong grasp of market forces (including the facts that no one knows what the rent will be years from no when Nishi opened and if it was possible to get two people to pay rent for every bedroom in town landlords would already be doing it)…

       

      1. Ron

        Ken:  The comment you’re responding to is in reference to the rate of expected returns for Nishi and other developments in Davis. Do you have anything to say regarding those questions (vs. commenting on your views of me)?

      2. Ron

        Here’s an example of a person who isn’t going to be helped by “building our way” to affordability.  Compare this with the expected returns of development proposals – and those fighting to eliminate or limit Affordable housing within proposed developments:

        https://www.pressdemocrat.com/news/8538530-181/low-income-renters-face-difficult-search?artslide=0

        Developers are often some of the wealthiest folks in the region, state, and country. (Certainly not all, but some are.) Isn’t our “commander-in-chief” one of them?

  7. Jeff M

    This topic always frosts me.  I cannot help but see the topic through an ideological framing.

    If we could turn the dial back in time, many of the people inserting themselves into the topic today would not be party to the decisions of “to build or not to build”, and what features should be required or not.  Certainly I would agree that this past was not all good just as it was not all bad; but it was more good and illustrative of the point in my irritation.

    People without financial skin in the project have no business inserting themselves into any debate about what is a reasonable return and challenging the opinion that a project pencils out or does not pencil out.  It, frankly, demonstrates great ignorance of capitalism and capital investment.

    It is like playing MD without being educated and certified as an MD.

    Here is the principal seemingly lost on many: “leverage rules, cities without it drool.”

    The lack of adequate housing in Davis and throughout California is directly related to this bonehead practice where too many people lacking business and money sense, and also lacking anything but wants to bring to the table, end up with a seat at the table.

    But, if you have capital to invest, you are going to invest it where you can get the greatest returns relative to time and risk.  No amount of dreaming of a collaborative utopia is going to change that fact.  The only other ham-handed government option is for Bernie and Jerry to confiscate all the wealth and private property and turn over all the decision to the people lacking business and money sense.   We are certainly heading that way in California… and all the Venezuelan cracks are starting to form… however, as they say “we ain’t there yet.”

    But big government is the root of the problem.  It foments this entitlement mentality that people lacking capital and understanding of how and why people invest in real estate development… get to decide how and when people can invest in real estate development.  Big government generally has no leverage to force people to give up their capital and returns.  It is like a bunch of mosquitoes feeding off a body that grows weaker and eventually stops coming around. Big government also will not be successful thinking it can pre-calculate what it believes to be an adequate ROI so that it can feed off the excess in the form of community goodies.

    Here is the simple way for big government and those made to feel entitled to directing those with capital to invest to frame their malady of thinking…  If your desired interest does not exist in other comparable communities, then it isn’t real.  If it isn’t real then you are either too uninformed on the topic to be inserting yourself into the debate, or you have a hidden agenda to oppose the development project above and beyond fake toxic air claims.

  8. Alan Miller

    > It is like playing MD without being educated and certified as an MD.

    Frankly, because you are, I don’t believe it is chance that you used that particular profession as your example.

    > Here is the principal seemingly lost on many: “leverage rules, cities without it drool.”

    That’s an odd principal.

    1. Jeff M

      I like to use MDs for an example, since they are impressively accomplished.

      With respect to leverage, if a city has something like RDA, or the city owns the land… or can provide some offsetting incentives to the developer, then the city will have a better chance of getting something done.  Otherwise they can only dream about the goodies they want to see.

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