Site A: The economics

If you’ve been attending or watching the videos of the various meetings at which Alameda Point Partners’ plan for Site A at Alameda Point has been on the agenda, you’ll know that nary a public speaker – all right, maybe one – has offered anything but praise for the project.  Even the elected officials have effused enthusiasm.

As much as the Merry-Go-Round covets our role as a contrarian (maybe even a curmudgeon), we won’t try to be the first to find fault with the proposal.  But, based on documents recently released by the City (and supplemental information supplied by the developer), we do want to bring up two cautionary notes.

First, to those of you who are counting on the A.P.P. project to ease the burden on local residents suffering from rising rents, or to satisfy the desire of employers for nearby housing for their workforce, you may be a bit disappointed.

And second, to those of you who believe that development at the Point should generate significant ongoing revenue in order to bolster the City’s long-term financial picture, you might find the A.P.P. project a little wanting on that score as well.

To his credit, Joe Ernst, the Minnesota native and Alameda resident who is one of the managing partners of A.P.P., has not oversold the project.  You won’t hear Mr. Ernst claim that his proposal will solve the “rental crisis” or cure the City’s financial woes.  So we hope that he won’t mind when we present the data and leave the hyperbole to others.

Let’s start with housing.

The development plan approved by the Planning Board last Tuesday calls for construction of 800 housing units in two phases.  The first phase includes a 128-unit apartment building managed by Eden Housing and restricted to very-low or low-income households.  (It remains undecided whether half of the units will be reserved for “seniors”).  In addition, the developer will build 139 townhomes and two other apartment buildings, including a 65-foot high structure looking out over the Seaplane Lagoon, containing an additional 402 units.  Of these, 40 apartments will be reserved for “moderate” income households.

The second phase, which is not expected to begin until February 2020, encompasses 27 more townhomes and another building with 104 condos (of which 32 are “moderate”-income units).

Here’s the current site plan:

Local “affordable housing” advocates raved about the proposal as soon as it was announced – and well they should have.  As far as we know, the 128-unit apartment building will be the largest housing development for very-low and low-income households in Alameda.  (By way of comparison, the “Park Alameda”/Islander Motel building contains 62 low-income units, the Breakers at Baypoint 52, and Shinsei Gardens 39).

But the market-rate residential component of the project – the 139 townhomes and the 362 apartments in phase one and the 27 townhomes and 72 condos in phase two – has received acclaim as well – and not just from the coterie who are convinced that housing is the Holy Grail.

At various meetings, Council heard support for A.P.P.’s proposal from:

• Tenants who said they were being forced to move out of Alameda because rents had risen so dramatically;

• A mother who imagined her daughters, a teacher and a social worker, being able to move back to Alameda, which now was too expensive for them;

• A business owner who wanted her staff to be able to “live in town, [so] that I don’t have to worry about them coming from 20 miles away, 30 miles away, whatever.”

• Chamber of Commerce officials and other prominent business people who argued that, “If we are to attract the type of companies that all of us want out there at the base, we need housing for their employees.”

To all of these speakers, the market-rate housing at Site A promised to solve a problem, meet a need, or confer a benefit.  Yet implicit in all of their arguments was the assumption that, even though the new apartments, townhomes, and condos will cost more than the units designated as “affordable” housing, they still will be within the reach of what used to be called the middle class (and which the politicians, depending on their party, now refer to as “everyday” or “ordinary” citizens).  If they are not, there will be no problems solved, needs met, or benefits conferred.

Leave it to Mayor Trish Spencer to bring this issue to the forefront.  From the very first Council meeting she chaired, the Mayor has pressed for information about the price ranges contemplated for the residential development.  Picking up on the public comments, Ms. Spencer wanted to know whether the potential rents for the Site A apartments really would be “attainable” by teachers and retail store workers.  “They’re not all making six figures,” she said.  “How will they be able to afford the rentals?”

Well, now that staff has made public the pro forma cash flow analysis prepared by A.P.P., we actually have some data to answer the Mayor’s question.

The assumptions accompanying the cash flow analysis show that the “value” of a townhome included in phase one will be $888,502 at the time of sale.  For the townhomes in phase two, the assumed sales value is $1,032,022; for the condos, it is $698,961.

At the same time, the model posits that the rent for the 362 market-rate apartments will be $3.50 per square foot.  Based on the assumed average unit size of 899 square feet, this works out to an average rent of $3,146.50 per apartment.  Mr. Ernst told us that this figure was higher than the rent for a newly constructed one-bedroom apartment in Oakland but lower than the rent for a similar unit in San Francisco.  (He said A.P.P. had not yet established the exact mix of units for the apartment buildings at Site A).

We then plugged these numbers into a few affordability calculators.  According to the one on the Zillow Website, it would take an annual income of around $175,000 to afford one of the new townhomes in phase one and about $200,000 to afford one of the phase-two townhomes.  You’d need to make approximately $90,000 a year to handle the average rent for an apartment.

Undoubtedly, there are plenty of people in the Bay Area who meet these standards.  For example, under the MOUs recently approved by Council, a “Step 7” Alameda firefighter earns, in base salary alone, $97,621 a year (a “Step 7” captain makes $121,096).  If she were to rent an apartment at Site A, she could even walk or bike to work after the City builds the new Alameda Point fire station included in the Master Infrastructure Plan.

But we wonder how many of the local residents who have been telling their stories to Council (and the Rent Review Advisory Committee) about being priced out of Alameda can afford to rent, much less buy, at Site A.  And we wonder how many of the people who will be working as sales clerks at the new retail stores or servers in the new restaurants can manage the monthly housing expense that would enable them to live close to their jobs.  If the housing being built at Site A is beyond the reach of people like this, it truly will benefit only those in the lower and upper ranges of the income scale.  Was that you, Elizabeth Warren, we hear saying something about “income inequality”?

Let us be clear:  We are not suggesting that Mr. Ernst and his partners shouldn’t charge whatever prices the market will bear for the “market-rate” townhomes, condos, and apartments.  Indeed, if they weren’t allowed to do so, it is doubtful they’d have taken on the Site A project in the first place – and there go the 128 very-low and low-income units.  But we do agree with Mayor Spencer that the public ought not to expect something the project is unlikely to deliver.

(Before we leave this topic, we can’t help but comment on the argument we’ve been hearing recently from housing advocates about how building market-rate housing at Site A actually creates opportunities for lower-income households elsewhere in Alameda.  We call it the “trickle down” theory:  A renter now paying $2,500 a month who aspires to live in a waterfront apartment will move when one becomes available at Site A, leaving her old apartment available for a renter now paying $2,000 a month who herself is eager to move up to nicer digs.  The $2,000-a-month apartment is then snapped up by an upwardly mobile tenant currently paying $1,500 a month.  And so on until we reach the level of “affordability.”  How many people really act this way?)

Next, the fiscal impact.

Now that City Manager Russo has left town, we feel free to pay him a compliment:  Were it not for him, our elected officials still would be holding town meetings about what to do with Alameda Point.  Not only did Mr. Russo jump-start the planning effort, he also paid attention to the economic aspects of development.  Sure, he could match the politicians platitude-for-platitude in proclaiming a “vision” for the Point, but he never lost sight of the bottom line.

Consistent with that approach, Mr. Russo commissioned a consulting firm known as Willdan Financial Services to prepare a “fiscal impact analysis” estimating the revenues and expenses to the City upon full build-out of the 1996 Community Reuse Plan.  The Willdan report, made public in January 2014 but largely ignored, concluded that, at build-out, development at the Point would produce an annual positive net fiscal impact – i.e., the taxes and fees received by the City would exceed the costs of providing municipal services – of $2,789,000.

As the planning progressed, staff asked Willdan to update its work.  The updated version of the report retains the assumption of 1,425 housing units but reduces the assumed commercial space from 5.5 million to 3.5 million square feet.  More significantly, it incorporates the Site A project into the analysis.

In the updated report, the annual net fiscal impact of the overall development at the Point changes from positive to negative:  an annual deficit of $871,000.  (It would be interesting to explore the reasons for this change, but our present focus is on Site A).  Phase I of the Site A project will produce a $440,000 deficit, but the cumulative net impact will be a positive $455,000.   Here’s the chart:

According to the updated report, the biggest revenue-generator from Site A will be property taxes ($1,674,462 or 43% of total revenue).  But the report warns that this amount will be reduced significantly if the City forms an Infrastructure Financing District to fund a portion of the infrastructure costs.  The staff report and the pro forma cash flow analysis in fact show that formation of a Community Facilities District is part of the financing plan, but Alameda Point Chief Operating Officer Jennifer Ott told us, in an email after publication, that a CFD, unlike an IFD, does not reduce the property tax revenue received by the City.

The other revenue item of interest in the updated report is sales taxes.  Back in September 2013, when Mr. Russo pitched his disposition and development strategy to the former Council, he insisted that development at the Point should focus on attracting retailers and other businesses that would generate sales tax revenue.  “The glaring hole in Alameda’s revenue package is retail, it’s sales tax revenue,” he said.  “Staff believes strongly that the recruitment of retail, and business-to-business sales tax generators, is a major priority for the City.”

Mr. Ernst and his partners appear to have a different goal for Site A.  When Mr. Ernst presented A.P.P.’s “retail strategy” to Council in April, he emphasized that its goal was “job creation.”  In his view, this goal could be achieved “by focusing on . . . say, 10 companies with 10 employees [each] rather than one company with 100 employees.”  The “core” of the new businesses would be what Mr. Ernst called “creator/maker” enterprises like specialty manufacturers. “There’ll be art, design, engineering,” he added.  “The retail is going to be destination, it’s going to be neighborhood, it’s not formula.”

Whatever its success in creating jobs, this strategy won’t go very far toward filling the “glaring hole” identified by Mr. Russo.  According to the Willdan report, the Site A project will produce only $387,500 annually in sales tax revenue (about 10% of the total revenue).  By way of comparison, South Shore Center generated $312,752 in sales tax revenue in the last quarter of 2014 alone.

Not surprisingly, the updated report shows that the biggest expense item for Site A is public safety ($1,842,000, or 54% of the total costs).  But here, too, the updated report adds a caveat.

The new fire station included in the MIP will cost $6 million to construct and will be staffed by a full engine company at a net annual cost of $3.6 million.  But the updated report assumes that the new station will not be built or staffed before the build-out of Site A is completed and thus its estimates for Site A do not include the costs of either the new station or the new engine company.  Instead, the analysis assumes that fire services to Site A will be provided by current personnel.  If the fire department isn’t willing to wait till December 2023 to get its new facility, Site A expenses will go up accordingly.

In short, the fiscal impact report shows that, on a cumulative basis, development of Site A will meet the City’s stated goal of “fiscal neutrality,” but it is not likely to constitute a significant future revenue source for the City.

Mr. Ernst takes a more optimistic view.  When we asked him for comment on the Willdan analysis, he responded that the report was “very conservative.”  He added:  “Unless we fail to deliver on our business plan, or the economy goes into some protracted and/or more frequent down cycle, the performance using more reasonable assumptions show far more benefit to the City.”

Nevertheless, having reviewed the recently released data, it’s fair to conclude that the A.P.P. project for Site A may not achieve all of the results one may want it to (or its proponents claim it will).  This is not to say that Council should reject the proposal.  There are advantages – and disadvantages – to the project that we haven’t touched on.  (For an objective view, read Richard Bangert’s letter to the editor in The Alamedan).

All we ask is that – for once – Council take a close look at the economics before it signs off on a deal that will affect the wellbeing of the City and its residents for years to come.

Sources:

Development plan: 2015-05-11 Ex. 1 to staff report to PB – Draft Development Plan

Annual cash flow analysis: 2015-05-19 Ex. 8 to staff report – Annual Cash Flow Analysis

Fiscal impact analysis: 2015-05-19 Ex. 9 to staff report – Fiscal Impact Analysis of Alameda Point and Site A Development