Busting the cap

The Merry-Go-Round has read the “specific plan” for the Main Street Neighborhood that the Planning Board will be asked Monday to recommend to Council, and, having rescued our crystal ball from the dustbin to which it was consigned after forecasting electoral victories for Hillary Clinton and Tony Daysog, we have a prediction:

If the specific plan is approved, we’re going to see, very soon, a proposal for the City to bust the 1,425-unit cap on new residential development to which it agreed with the U.S. Navy as a condition of getting the site of the former Naval Air Station at no cost.

This prediction, we want to emphasize, isn’t based on any declaration of intent in the specific plan itself.  Nor do we claim to have discovered any hidden agenda by staff to get the politicians to circumvent the cap.  (“We are constrained by the 1,425-unit cap,” Jennifer Ott, the City’s Director of Base Reuse and Transportation Planning, assured us.)

Instead, it is based on our conclusion that, as a practical as well as a political matter, it will be extremely difficult, if not impossible, for the City to meet the goals stated in the specific plan without giving a developer the opportunity to build more housing units than the agreement with the Navy allows.

Here’s how we get to that conclusion:

We’ll start with the legal restrictions on new residential development at the Point.

First, of course, is the cap itself.  During the years in which the City was seeking a private master developer, the U.S. Navy insisted on being paid for the land it owned – and was cleaning up.  ($108.5 million was the price named in the 2006 term sheet.)  But after the City decided to become its own master developer, the Navy agreed to transfer the land to the City for free – as long as the City committed to develop it for the purposes stated in the original Community Reuse Plan and not with an eye toward making real-estate profits.

To enforce this commitment, the “no-cost conveyance” agreement imposed a $50,000 per unit penalty for any residential development exceeding the number of housing units allowed by the Reuse Plan.  When the deal was approved in 2011, this cap was stated as 1,435 units; since then, the number commonly used is 1,425.

The second legal restriction is the requirement that 25 percent of the new housing units built at the Point be dedicated to “affordable” housing.  This mandate was imposed as one of the terms for the settlement of a lawsuit brought against the City by Renewed Hope and other housing advocates.  Later, the 25 percent requirement was broken down further into six percent for “very-low” income households, 10 percent for “low”-income households, and nine percent for “moderate”-income households.  (Each of the income levels is defined by reference to area median income.)

Since the no-cost conveyance agreement was signed, the City has used up, or made plans to use up, most of the cap.

In June 2015, Council approved an agreement with Alameda Point Partners for development of the parcel known as “Site A,” 68 acres located at the heart of the former base.  The project will include 800 new housing units, of which 200 fall into the required “affordable” category.  This deal left 625 units remaining under the cap.

Originally, the City intended to replace the existing 200 housing units managed by the Alameda Point Collaborative and two other “supportive housing” organizations with an equal number of new units in a consolidated facility.  Last September, however, staff informed Council that APC and its colleagues believed that the new facility should contain 267 units, not just 200.  (The explanation was that more one- and two-bedroom units were needed to serve veterans with PTSD.)  No formal agreement has been signed, but the consensus on Council was to go along with APC’s request.  (The sole dissenter was former Councilman Tony Daysog, who wanted further study – and, for his troubles, found himself pilloried in a robo-call as an enemy of Alameda veterans and then lost his bid for re-election.)

Building 267 units of supportive housing will bring the number of units remaining under the cap down to 358.  And that was the number staff used when it “sought direction” from Council last September on the “specific plan” for the Main Street Neighborhood.

At that meeting, staff presented a scenario in which the new facility for APC and an additional 233 new housing units – 25 “affordable” and 208 “market rate” – would be built in the area of the MSN south of West Midway Avenue.  (Why 208?  “Essentially, we made some assumptions about how many units were left after Site A and the collaborative, and allocated some reasonable portion of the remaining units to the South of Midway parcel,” Ms. Ott told us.)

Under this scenario, the number of units remaining under the cap – and thus available to be built in the rest of the MSN or at any other location at Alameda Point – would fall to 125.  At the September Council meeting, Councilman Jim Oddie opined that these 125 units should be “kept in reserve.”  No one disagreed.

The specific plan the Planning Board will consider Monday does not commit the City, or a potential developer, to any of these numbers.  (When an earlier draft was presented to Council last November, staff insisted that the plan was intended only as a “framework”; actual numbers were negotiable.)  But it does set forth two goals that affect the quantity and type of residential development that can occur in the MSN.

The first is that market-rate housing should pay not just for the infrastructure associated with the market-rate units themselves but also for the infrastructure required for the new supportive-housing facility.  This goal emerged last September after the consortium seeking the new facility reported that, although the chosen non-profit housing developer (Mid Pen Housing) would be able to finance construction of the buildings through traditional means such as tax credits, it could not fund the infrastructure needed for the project.

The second is that at least 10 percent of residential development should consist of so-called “workforce housing” (defined as units “designed to be affordable to households with a household income between 120% and 180% of area wide median income”).  This goal was not part of the first draft of the plan; rather, it was added after both Mayor Trish Spencer and Vice Mayor Frank Matarrese insisted that the MSN specific plan should include housing for people who earned too much to qualify for “affordable” housing but who couldn’t afford the kind of “luxury” housing being offered at developments like Alameda Landing.   (A week earlier, three members of the Planning Board – the two Spencer appointees, Sandy Sullivan and David Mitchell, and the Board’s longest-serving member, Lorre Zuppan – had made a similar point.)

(As written, the workforce housing provision contains an exception that may swallow the rule, since it allows the Planning Board to exempt any project that qualifies for a waiver under the density-bonus ordinance – which almost every residential development project proposed for the Point probably will.  But that’s the subject for another column.)

The task then becomes to figure out how many new housing units, and of what type, will need to be built in the MSN for the City to meet the goal of paying for all of the necessary infrastructure while at the same time providing “workforce housing.”

Fortunately, we’re not writing on a blank slate.  Last year, staff engaged Willdan Financial Services to examine the feasibility of using market-rate housing to finance the infrastructure required for the site under a variety of development scenarios.

According to Willdan, the total cost of the infrastructure needed for the area in the MSN south of Midway is $53.3 million ($36.3 million in “allocated backbone infrastructure costs” and $17 million for onsite demolition and site preparation).  This is the target that market-rate housing must hit.

Of the 358 units remaining under the cap, not all can go toward market-rate housing in the southern half of the MSN.  First, the 125 units Mr. Oddie (and others) want to reserve for other locations at the Point should be subtracted.  That leaves 233 units.  Then, we need to subtract the units that, under the Renewed Hope settlement, must be dedicated to the “moderate” category of “affordable” housing.  For a 233-unit development, that comes to 21 units, so we’re down to 212 market-rate units.

Different types of market-rate housing generate different amounts of what Willdan calls “residual value” – i.e., the amount of sales proceeds left after deducting the developer’s costs and profit (and therefore available to pay for infrastructure).  According to the financial consultants, single-family homes (assumed to contain 2,800 square feet and sell for an average price of $1,316,000) produce the greatest “residual value,” and “market[-rate] high density apartments” (1,600 square feet and $752,000 average sales price) the least.  Moreover, “affordable high-density apartments” (1,600 square feet and $499,728 average sales price) have a negative “residual value” – which means that they cannot be expected to contribute anything toward infrastructure costs.

This last observation assumes special significance in light of the specific plan’s requirement that 10% of residential development be designed for “workforce housing.”   Willdan did not run any numbers for this type of housing – it hadn’t been proposed yet – but one might adopt its figures for “affordable high density apartments” as a surrogate, since those apartments are assumed to be priced in the “workforce” range.  If so, the “workforce housing” requirement actually may impede the goal of using market-rate housing to pay for all of the infrastructure needed south of Midway.  Under the specific plan, a 233-unit development should include 24 “workforce” units among its 212 market-rate units.  But if none of those units will contribute anything toward infrastructure costs, the entire burden falls on the remaining 188 market-rate units.

So now let’s look at various development scenarios using the Willdan numbers.

We’ll bet that there are members of the Planning Board and Council who would prefer that multi-family apartment buildings supply all of the market-rate units for the MSN.  Unfortunately, that won’t meet the goal of the specific plan, since, using Willdan’s numbers, a project consisting of 188 market-rate apartments would generate only $36 million for infrastructure, far short of the needed $53.3 million.

Okay, what about a development consisting entirely of market-rate townhomes?   Close, but not still not enough:  Willdan ran two townhome-only scenarios; under one, a 188-unit project would generate $48 million for infrastructure; under the other, $49.8 million.

Which, of course, leaves single-family homes.  Lo and behold, this scenario would work:  using Willdan’s numbers, 188 market-rate single-family homes would generate $68.4 million for infrastructure, more than enough to cover the $53.3 million cost.

We’re pretty sure that the City wouldn’t have much trouble finding a residential developer willing to build 188 single-family homes in the MSN.  But imagine the outrage such a proposal would provoke from housing advocates like Renewed Hope and the Alameda Home Team!  Or from Inner Ringleader John Knox White and his Planning Board sidekick, David Burton (assuming he hadn’t recused himself).  Or from those Council members who seek the favor of the Enlightened Ones.

As we see it, there’s a greater chance that Council would vote to name Donald Trump grand marshal of the Fourth of July parade than that it would vote to approve a single-family-home-only development proposal for the MSN.

But what’s the alternative?  You’ve already guessed it:  bust the cap.  After all, building just a few more market-rate townhomes would generate enough money to pay for the necessary infrastructure.  And while, using Willdan’s numbers, it would take 278 market-rate apartments to meet the $53.3 million target, what’s wrong with building another 90 apartments, which, as everyone knows, are morally superior to any other type of housing?

This approach, of course, may run into a hitch if economic reality intrudes.  Busting the cap carries a $50,000 per unit penalty.  The City surely doesn’t want to pay the fine itself.  But will a developer be willing to do so?  Maybe a single-family home builder could eat an additional $50,000 per home.  But the developer of a 20-unit apartment building would see her costs go up by $1 million.  And if no developer is going to bite, what’s the point in busting the cap?

When and if a proposal is floated to build more than 1,425 units at the Point, we’d like to be able to take credit for having predicted the move here first.  But, since this is a column, not a tweet, we don’t want to lie.  In reviewing the videos of the Council meetings on the MSN plan, we saw that the idea already had occurred – to Councilwoman Marilyn Ezzy Ashcraft.  “There’s a suggestion that we go higher than 1,400 because we’re saying, let’s do more workforce housing,” Ms. Ashcraft told her colleagues.  “But we know we still have to have [market-rate] units to finance all of the infrastructure needs we have out there.  Is that an argument for building more?”

To which Mayor Spencer quickly responded: “I didn’t hear any suggestion to have more units.”

Maybe not yet, Madame Mayor.  But we’d advise you to keep your ears open.

Sources:

Main Street Neighborhood specific plan: 2017-01-23-ex-1-to-staff-report-to-pb-draft-main-street-neighborhood-specific-plan

Staff report: 2017-01-23-staff-report-to-pb-re-main-st-neighborhood

Previous Council meetings: 2016-09-20-staff-report-re-main-st-neighborhood2016-09-20-cc-minutes-excerpt2016-11-01-staff-report-re-main-st-neighborhood-specific-plan2016-11-01-cc-minutes-excerpt

Willdan financial analysis: main-street-feasibility-analysis-083016-v2

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Alameda Point, City Council, Development, Housing and tagged , , , , , , , , , , , , . Bookmark the permalink.

One Response to Busting the cap

  1. The $50,000 penalty, surcharge, whatever-you-want-to-call-it, on units exceeding the 1,425 was included in the No-Cost Economic Development Conveyance deal with the Navy because the Navy was realistic enough to see that the economic development and job creating focus of the deal may not be financially feasible if the number of units is limited to 1,425. As a matter of base reuse law, the Navy, or any branch of the military, cannot artificially impose conditions on an approved community reuse plan that would make it impossible to achieve. They cannot willfully frustrate the intent of the community. After all, the 1,425 number was simply resurrected from the original 1996 Reuse Plan. That plan did not contemplate $500-$600 million in infrastructure costs.

    As for who pays the $50,000 – the city would only be paying the penalty as an administrative act, acting more or less as broker/planner for the project(s). And a developer is not simply going “eat” $50,000. Either the market will bear the premium, or it won’t. Simple as that.

    It should be noted, too, (for whatever it’s worth) that the $50,000 penalty does not apply to affordable units.

    The main reason, in my opinion, that we are talking about doing Main Street in two phases is so that we can now, after 20 years, move forward on providing the consolidated and much improved facilities for the Alameda Point Collaborative without having to go through a contentious and acrimonious debate about exceeding the 1,425 units. If the entire Main Street Neighborhood was going to go out for a Request for Proposals from developers right now, we would hearing, as you rightly predict, about the need to increase the number of units. Why continue to treat the Collaborative as second-class citizens as we debate land use plans? They need these new facilities more than the people who will be buying million-dollar homes. The current plan will accomplish the immediate goal of creating a new Collaborative complex, while at the same time complementing the pending work at adjacent Site A.

    If this Phase One concept goes forward, it should be noted that the Collaborative will be surrendering something like 15 or 20 acres of prime land that will then be freed up for the city to entertain new uses.

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