Blackhawk by the Bay

Yes, it’s true:  If we build more housing in Alameda – at least of the type planned for places like Alameda Landing – Those People will be the ones flocking to the Island.

Now, don’t start getting your dander up.  As the Merry-Go-Round uses the term, “Those People” has nothing to do with ethnicity – but with economics. What we’re referring to are families with household income exceeding $200,000 per year.

If you do the math, it’s only Those People who will be able to afford to buy houses priced – and taxed – at the level set for Alameda Landing.  And when housing eventually gets built at Alameda Point, the same is likely to be true for residential development at the former Naval Air Station as well.

Let’s take a look at Alameda Landing.

As approved by the Planning Board last May, the residential portion of the development will comprise 276 housing units – a 23-unit “affordable” apartment building; 91 two- and three-story single-family homes, and 25 three-story multi-family buildings containing 84 condominiums, 56 townhomes, and 22 single-level flats.  Last week, the residential developer, TRI Pointe Homes – apparently you can’t have a “point” without an “e” in the residential real estate world – announced that it had acquired 141 lots at Alameda Landing: 74 lots on which it will build condos and townhouses and 67 lots on which it will build single-family homes.

What caught our eye was the last sentence in the press release: “Sizes will range from 1,000 square feet to 3,700 square feet, with prices anticipated to start in the mid $900,000s.” (Italics and boldface ours).

Coincident with TRI Pointe taking title, City Council started the process of forming two so-called “Community Facilities Districts” (“CFDs”) for Alameda Landing, both of which have since come into being:

• The first (CFD 13-1) will issue $20 million of bonds to pay the cost of building infrastructure – sewer, stormwater, drainage and water systems; parks; roadways, streets and sidewalks — for the residential portion of Alameda Landing.  Principal and interest on the bonds will be paid from a special tax assessed against homeowners;

• The second (CFD 13-2) will impose a second special tax on homeowners and businesses at Alameda Landing to pay the costs of “maintaining” the infrastructure as well as providing “public safety services” (Did we hear someone say, “We’ll need more firefighters”)?

Both of special taxes will show up on Alameda Landing homeowners’ annual property tax bills.  For the first tax, as the chart below shows, the amount will depend on the type and size of the housing unit:

For the second tax, as the chart below shows, the amount will depend, for homeowners, on the type of housing unit, and for businesses, on square footage:

Now to the numbers.  Let’s assume that a buyer is interested in one of those “starter” homes, say a two-story, 2,500-square-foot single-family model priced at $950,000.

Suppose our hypothetical buyer will be able to find a bank to lend 80% of the purchase price at a 4.25% annual interest rate and one or more insurance companies to provide homeowners and earthquake insurance.  If so, her annual tab for mortgage and insurance will be about $48,500:

• Debt service: $44,865.
• Homeowners insurance: $1.050.
• Earthquake insurance: $2,523.

(See the box below for how we got these numbers).

Next comes property taxes.  Under state law, the base ad valorem rate is 1% of assessed value — $9,500 for our hypothetical buyer assuming the assessed value equals the purchase price.  But then we’ve got to add the special taxes she’ll pay for the privilege of living at Alameda Landing.

Using the charts above, that’s an additional $3,836 for the infrastructure bonds (CFD 13-1) and $1,200 for maintenance costs (CFD 13-2) – a total of $5,036.  So our hypothetical buyer’s property tax bill will come to $14,536, and her total annual housing costs now are up to about $63,000.

Who can afford to pay that much for a home?

To get the answer, we need to use what’s called the “front-end ratio” – i.e., the ratio between total housing costs (including mortgage, insurance, and taxes) and total pre-tax income – to convert total housing costs to total pre-tax income.  There is no uniform agreement about the “appropriate” front-end ratio, but the figure that kept cropping up when we skimmed the sources is 31 per cent.  (This was said to be the maximum front-end ratio permitted to get a loan eligible to be insured by the Federal Housing Administration).  So we’ll use that number for lack of any better alternative.

On to the last step:  If $63,000 in total housing costs represents 31% of our hypothetical buyer’s total pre-tax income, then she must be making $203,226 per year to be able to afford a home at Alameda Landing.

We don’t want to overstate the case.  The 23 rental units designated as “affordable housing” will be exempt from both special taxes.  And the 16 flats and townhomes reserved for “moderate income” households will be charged only half of the special tax for the infrastructure bonds and a discounted special tax for maintenance.  But the rest of the new residents – occupying 237 housing units – will pay full freight for both taxes.

TRI Pointe undoubtedly will be marketing the condos, townhomes, and single-family homes to be built on the lots it just acquired to people like our hypothetical buyer, since it is that group, and only them, who will be able to buy homes priced at $950,000 and up.  If so, it is Those People who will become the new residents at Alameda Landing.

And they probably won’t be moving there from elsewhere on the Island.  According to estimates made by the U.S. Census Bureau, the median household income in the City of Alameda in 2012 was $77,249.  Only 9.8% of the City’s households had income of $200,000 or more.  (The figures for Alameda County are similar: $71,516 median household income; 9.8% with incomes of $200,000+).  So it’s likely that we’ll be welcoming an influx of well-off people from wherever to Alameda Landing.

Don’t get us wrong.  We have nothing against the well-to-do.  In fact, some of our best friends make $200,000 a year or more (and, perhaps surprisingly, they’re not all Romney Republicans).  But it does strike us as inevitable that the character of the City may change as the (socioeconomic) characteristics of its residents change.  Blackhawk by the Bay, anyone?

We also can’t help but wonder about the implications of the Alameda Landing experience for residential development at Alameda Point.

The first special tax imposed on Alameda Landing homeowners is designed to pay off bonds to be issued to finance infrastructure costing $20,000,000 (or really $17,206,135 – the rest goes to fees, costs and reserves).  According to the Master Infrastructure Plan (“MIP”) just approved by Council, the “backbone infrastructure” at Alameda Point is estimated to cost nearly 30 times as much – i.e., $560,280,000.  And even if, as proposed, construction at the Point proceeds in “phases,” the “backbone infrastructure” for the phase including the “centerpiece” of the development – the Waterfront Town Center –is estimated to cost $57 million.

The “conceptual financing plan” in the MIP proposes that one of the ways to finance backbone infrastructure costs at the Point is to create CFDs – the same device used to pay for infrastructure at Alameda Landing.  But if you’re going to rely on special taxes on homeowners to pay off the bonds issued by a CFD to construct the infrastructure, you’re going to need to build housing units, not retail stores.  And if you’re going to rely on those special taxes to fund an amount in the tens, or even hundreds, of millions of dollars, you’re going to need either to set the tax rate pretty high or to put a lot of houses on the site.

Simply stated, relying on CFDs as a financing mechanism for infrastructure costs necessarily will affect the mix of uses between residential and commercial at Alameda Point.

We’re pretty confident that the City Manager and the City Planner – as well as the Chief Operating Officer for Alameda Point – understand these issues.  And the politicians?   We can’t be so sure.  Let’s just hope the Mayor is aware that she’ll need to bring a bottle of Dom Perignon when she christens the first house at Alameda Landing (or Alameda Point).  The residents would turn up those noses at a generic Chablis.

Here’s how we derived the estimates for mortgage and insurance expense: Debt service of $44,865 ($3,738.34 per month times 12).  We used the interest rate (4.25%) quoted by Wells Fargo Home Mortgage, the state’s largest lender, for a 30-year, fixed-rate mortgage in the principal amount of $760,000 (i.e., 80% of $950,000). Homeowners’ insurance premiums of $1,050.  We used the online 2013 Homeowners Premium Survey provided by the state Department of Insurance to get estimates for $750,000 worth of coverage  — that’s as high as the calculator goes – and picked the Farmers Insurance quote because Farmers is the second largest homeowners’ insurer  in California  (the largest, State Farm, did not provide an estimate). Earthquake insurance premiums of $2,523.  We used the online calculator provided by the California Earthquake Authority to get estimates for a CEA earthquake policy providing $750,000 in dwelling coverage, $50,000 in personal property coverage, and $10,000 in loss of use coverage.

Sources:

Alameda Landing residential development: 2013-05-13 staff report to PB re residential design review; Tri Pointe press release

Alameda Landing CFDs: 2013-12-03 staff report to CC re CFDs; 2014-01-06 staff report re CFD 13-1; 2014-01-06 Notice of Special Tax Lien – CFD 13-1; 2014-02-04 staff report re CFD 13-2; 2014-02-04 Notice of Special Tax Lien – CFD 13-2

Alameda Point Master Infrastructure Plan: 2014-01-13 PB Exhibit 4-A (MIP)

Household income: Alameda household income; Alameda County household income