Commentary: DISC Remains a Commercial Project with Housing, Not the Other Way Around

When the city first issued its RFEI (Request for Expressions of Interest) for innovation centers way back in 2013, we were living in a very different time.   We had just come out of the Great Recession and the real estate collapse.  Housing was not an issue on the Davis radar and, in fact, with the thorough thrashing of the relatively modest Wildhorse Ranch Project in 2009, it was believed that housing would sink any proposed innovation center project.

As late as 2016, Will Arnold, as he announced his run for council, stated, “It’s my opinion that putting housing as part of the Mace Ranch project will reduce greenhouse gas emissions, it will reduce them to zero because there will be no project.”

That was only four years ago and, yet, the calculation has utterly changed.  In 2018, two housing projects won overwhelming support at the polls by the voters.  The need for housing, affordable housing and workforce housing is among the top issues in Davis.

In fact, we have had many commercial real estate folks tell us that the lack of housing in Davis is seen as a barrier to commercial development.

As Dave Nystrom, project manager for the University Research Park mixed-use development, told us, “one of the challenges (businesses in the park) face is hiring people because it’s so difficult to find housing in Davis.”

But there is another factor as well.  The cost of construction is also a challenge.  Commercial development is different from residential.  In residential, the buildout and sale occurs much more quickly.  In commercial, it can take years to fully build out a project.  The time horizon for DISC (Davis Innovation & Sustainability Campus) is around 20 to 25 years—and that might be an aggressive rather than a conservative estimate.

Putting things like housing into a commercial project allows for the developer and builder to use the revenue from housing sales to help finance the commercial.

The combination of factors here—shifting of political calculations, the housing crisis, changes in construction costs—have led the developers to come forward with a project that has shifted from commercial-only to one that is mixed-use.

On Wednesday, several commenters picked up on this shift and charged that this project has morphed from a commercial project to one that is primarily residential.  It is true that the project has shifted, but to say it is now primarily residential is false.

By any measure, this is a commercial project with residential, and not the other way around.

Let us start by looking at the footprint.  The entire project is about 189 acres.  Of that 138.9 acres is developed.  That includes 57 acres for advanced manufacturing, 27 for flex and R&D space, 17.5 for office and another 2 acres for retail and 7 for the hotel and conference center.

That is a total of 2.6 million square feet and 111 acres of commercial space with a FAR of .9.  This will nearly double the amount of vacant commercial space in the city and, remember, less than half of the 124 acres of commercially zoned land is even available and most of it is in parcels that are less than 7 acres.

By contrast, the residential land is just 27 acres.  That leaves it at less than 20 percent of the developed land on the project, which means that the commercial to residential ratio is 80 percent to 20 percent.

One of the commenters noted: “There are still 6000 spaces or allowed up to that amount, about 5000 of which are for non-residential usage.  It’s really more of a residential proposal and you can tell that from the phasing of the housing with most of it being built during the first two phases.”

Let us look at this claim.

The total number of parking spaces on the project is 5858.  Housing accounts for 1086 according to the latest projections.  That again comes to about 18 percent of the total number of parking spaces.  That means that just under 82 percent of the parking spaces are commercial rather than residential.

The issue of phasing has been put forward as well.

But included in the project baseline features: “Commercial development shall precede housing construction; there must be 200,000 square feet of job space before any homes. Housing construction will be contingent upon the construction of commercial space at a ratio of one home per 2,000 square feet of non-residential space.”

What that means is that the developer must build the first 200,000 square feet of job space before they can build a single home.  That means they have to build out about 8 percent of the commercial space on the project before they can start building any housing.

As Dan Ramos pointed out to the Vanguard in our interview in April, that actually negates the advantage of financing.  Usually, you build the housing up front to finance the commercial, but here they have to actually build commercial before they can produce that revenue stream.

To put this into perspective, 200,000 square feet is larger than the size of the Mori Seiki building (185,000).  That’s a substantial investment.

That is only part of it.  The baseline features require one home per 2000 square feet of non-residential.  That means to reach 850 housing units, they have to build out 1.7 million square feet of commercial space—that’s written into the baseline project features.  That’s about 65 percent of the project.

That leaves about 900,000 to be developed.  Some have suggested that the developer at that point will not have an incentive to complete the project, but look no further than Mace Ranch itself.  Housing was long since developed, but the last two commercial projects were Mori Seiki and now Nugget.

Basically, by the time all of the housing is built, there will be 39 acres left of commercial space to develop.  As we have seen from the Mace Ranch experience, that leaves open the possibility of some nice projects at the end.

Finally, as Matt Keasling pointed out, all of this stuff will be locked into the baseline project features—that includes the ratio, the amount of space, and the land that can be used for housing versus commercial.  This cannot morph into a residential-only project without another vote of the public.

It is not that housing isn’t important to this project.  The need to find ways to ensure that more people living on the site work at the site is important to reducing Vehicle Miles Traveled (VMT) and community housing impacts.  It is also still important for the purposes of financing the construction.

But this remains a project that is over 80 percent commercial and any residential construction is going to be triggered by the commercial build-out.

—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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6 Comments

  1. Matt Williams

    Let’s, for the sake of discussion, accept the basic premise of this article.  If in fact “DISC Remains a Commercial Project with Housing, Not the Other Way Around” then why is the project team and City staff so resistant to fixing the FBC’s concerns about the Internal Rate of Return (IRR) of the four phases of the project, as reported by EPS.  The FBC concerns were founded on the following information from the EPS report:

    https://www.davisvanguard.org/wp-content/uploads/2020/06/DISC-Pro-Forma-Analysis-Summary.png
    To quote Commissioner Ezra Beeman,

    Project sequencing that leads to loss making phases of the project (this goes against key tenets taught in Corporate Finance 101 at any leading university such as UCD. Economic theory tells us that a prudent investor will come back in the future with the loss making choice facing them and demand more concessions to make the project stage ‘pencil out’ on an incremental basis in order to move forward.

    The simple solution proposed by multiple FBC commissioners was/is to move some of the housing into Phases 3 and 4 from its currently front-loaded position in Phases 1 and 2.  That would raise the IRR of each of those phases fromm their current “loss making” level of 9% to a level above the 10% “minimum” described by EPS.

    https://www.davisvanguard.org/wp-content/uploads/2020/06/DISC-Pro-Forma-Analysis-Summary-Modified.png

    If this really is a “Commercial Project with Housing, Not the Other Way Around” then a revised Table 2 that looks like the one above should be more than acceptable.  However, if the project team and staff are unwilling to make that change, then the premise of this Vanguard article is as believable as a Donald Trump tweet.

  2. Alan Miller

    DISC Remains a Commercial Project with Housing, Not the Other Way Around

    What is the purpose of this commentary?  Someone else, like RO, will sayeth it’s a Housing Project with commercial.  And nothing new was learned today.  You might as well have slept in.

    1. David Greenwald

      The purpose was to put out numbers to show the breakdown of housing to commercial. Matt responded by looking at the Internal Rates of Return. You responded with a one-liner. Oh and we had 10 other articles today that will likely get 90 percent of the reads and 1 percent of the comments.

      1. Alan Miller

        Matt responded by looking at the Internal Rates of Return. You responded with a one-liner.

        Matt is retired.  I don’t have time to do an internal rates of return analysis by 9:00am, but I’ll work on doing that to satisfy your expectations of DV commenters.

        Oh and we had 10 other articles today that will likely get 90 percent of the reads and 1 percent of the comments.

        I literally have zero idea what the point of that comment is, in relation to what I said, or more globally.  What does the number of articles you poach from ultra-progressive online feeds, or the article/comment ratio for any particular ‘article’ have to do with anything?

  3. Richard McCann

    The baseline features require one home per 2000 square feet of non-residential.

    This is not yet the requirement. It is what the developer proposed and the Staff included in its report. However, as I pointed out, the NRC has proposed one home per 3,000 square feet of non-residential. We do not yet know what the Planning Commission or City Council will adopt.

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