The Finance and Budget Commission met for over three and a half hours on the Aggie Research Campus (ARC) on Monday night, listening to a consultant presentation, asking dozens of questions and taking nearly one and a half dozen public comments before deciding to push further discussion off for later in the month after a subcommittee has a chance to ask questions and further evaluate the fiscal impacts of what was described as a key project.
Consultant David Zehnder from EPS (Economic & Planning Systems) Consultants explained that “this project is I think a very important regional project for not just Davis, not just Yolo County but for the entire region—we believe it’s a well founded leveraging of UC Davis’ longstanding investment in not just Davis, but the entire region.”
This taps into the university’s economic spinoff potential in a region that is starting to diversify to be more resilient and more robust.
“This project leads the way in that regard,” he said.
One of the key concerns that many commissioners and members of the public expressed was the lack of analysis of COVID-19 and the current downturn.
David Zehnder called this period “unprecedented” and acknowledged “we don’t know what the next six months holds.”
But he noted that they were looking at 20 markets, they have evaluated many projects, and “this is right up there with the most innovative and important that exist today.”
One of the downfalls of the Mace Ranch Innovation Center (MRIC), he said was, “We look back and it really struggled because it was really a single-use center. That is the antithesis of what we see in today’s market, the trend’s fully toward integrated multi-use projects.”
The 2015 work, he said, “it came up short in terms of financial feasibility and a big reason for that was, it was a single use project and it really didn’t adhere to the best practices in the industry.”
Overall, he noted, the project should diversify the economy.
“It provides a means by which there can be predictability in the market,” he said, with the current problem in Davis being a lack of land assets available to commercial interests looking to move Davis. “This project would go a long way toward providing more certainty.”
Land and space constraints have led to “volatility with the periodic loss of large tenants” but the city in general faces low vacancy rates and higher rents compared to the regional averages. University Research Parks in isolated and small college towns suffer from low demand, however, Davis has the added benefit of a strategic location along the I-80 corridor between the dynamic Bay Area and growing Sacramento economy.
He was asked about the ability of the ARC to repair and replace its own infrastructure.
David Zehnder explained that the combination of the two line items takes you to $220,000 per year at buildout, which he said “is absolutely sufficient in our opinion to cover those types of road maintenance and pavement management expenditures.”
In explaining the difference from 2015 to now, he noted the addition of Measure Q, which wasn’t in place before. However, they did also attach “a somewhat higher sales per square assumption in this version.”
In 2015, they had $175 per square foot, which in 2015 “that mirrored the average for the city.” Now they believe “retail is going to be pretty current state of the art, should command better than average result.” So they made the decision “to bring those numbers up a bit. That’s reflected in some of the higher numbers you see.”
It was also pointed out that they have both Nishi and West Davis Active Adult Community, where they have negotiated tax-sharing agreements to guide the assumptions here, “whereas in 2015, we didn’t have those numbers at that time.”
There were also questions about the pricing for the real estate and the “significant premium that’s included here that’s not consistent with current regional reporting.”
As Commissioner Ezra Beeman pointed out, “If the actual development value is significantly below the estimate, then that will have a significant impact on the property taxes.”
David Zehnder explained of the average office R&D rent, “our numbers are coming in higher than that.” He said, “This is going to be state of the art space so we’ve modeled both the cost and rent assumptions based on state of the art projects.” He argued this was the most appropriate comp that’s available.
Not the top of the market, “but the top 20 percent.”
He was also asked about the assumption that 25 percent of operating costs for the city are fixed costs.
“It was determined that there was likely a fixed price component here based on the fact that certain aspects of the operation aren’t going to be affected,” he said. He called this “a judgment call that we’re always engaged in.”
There were a number of questions about the impact of COVID-19.
“Is there a risk that if the project moves forward and values are lowered due to COVID and the present reduced demand, that could have an effect on the ongoing financials for the project as a whole?” a commissioner asked. The idea being that with lowered property values “we would end up with an ongoing reduction in revenue just because the building that was $1 million… is going to be $900 due to the effects of COVID.”
David Zehnder responded, “There’s no way that we can say with any certainty about what the effects of COVID are with where we stand today.
“There’s just so many unknowns that it would be folly for me to just sit here and say that there would be no impact,” he said. He acknowledged, “How we emerge from this crisis is going to have effects on every project across the US and across the world.”
Ashley Feeney added, “With COVID, we likely see this project remain as it stands today—continuing farm operations until it makes sense to move forward with the project. I don’t see them building and financing a project and infrastructure and doing that kind of investment… We’re talking about the opportunity to zone land… for future business use.”
But David Zehnder noted that the sectors most resilient right now “are both included in this plan.” Multifamily and tech industrial.
Chair Michelle Weiss asked the question about market demand and sensitivity. “We just assume that there will be the demand for this at a very good market rate,” she said, and wanted to know the sensitivity on that. “Everything is a bit rosey.”
David Zehnder explained, “We did not seek to come in high or low on this, we aimed for what we thought would deliver.” He said they matched that to current development. “We did not do extensive sensitivity analysis in a formal sense,” but he said they could do that in response to the current discussion.
Ashley Feeney added that the key here is that these assumptions result in “a very positive fiscal benefit.”
He argued, “If it was right on the margins of neutrality, I’d say we’d want to learn a lot more about sensitivity.”
He added, “When we do a model for fiscal analysis, we are really looking at is it positive, is it neutral or is it going to be a drag on the city in terms of costs and services.”
—David M. Greenwald reporting