AUSD to the rescue?

If you’re one of those hoping that the development approved for Site A at Alameda Point actually will come to pass, you’d better be nice – very nice – to the Alameda Unified School District, because, without AUSD’s assistance, the project might crater before it even gets off the ground.

That’s the Merry-Go-Round’s takeaway from the staff presentation and Council discussion last Wednesday about the request by the developer, Alameda Point Partners, to amend its Disposition and Development Agreement with the City and its Development Plan for Site A.

Here’s how we come to that conclusion:

Under the DDA approved by Council in June 2015, Site A is supposed to include 200 units of “affordable” housing:  128 units for “very-low” and “low”-income households and 72 units for “moderate”- income households (i.e., those earning up between 80% and 120% of area median income – which works out to a range of $80,400 to $116,900 for a four-person household).  The 128 very-low- and low-income units will be located in two separate structures built and managed by Eden Housing, a non-profit developer.  According to the originally approved Site A development plan, the 72 moderate-income units will be “interspersed throughout the market-rate housing.”

Development of Site A is scheduled for three phases.  According to the pro forma presented by APP to the Planning Board in May 2015, 40 of the 72 moderate-income units would be apartments built as part of Phase 1, and 32 would be condos built as part of Phase 2.  The pro forma showed that the Site A project would generate positive cash flow for the developer – after paying the costs of backbone infrastructure – in all three phases and would produce an overall profit of $12,248,024, resulting in a 22.2% internal rate of return.

But economic conditions have changed since May 2015.

According to APP’s Bruce Dorfman, “due to increased construction activity in the Bay Area and lack of competitive subcontractor bids for vertical construction (i.e., buildings), we continue to face significant challenges with rapidly rising costs.  This directly impacts the value of the improved land for potential investors in and buyers of the townhome, commercial, and multi-family parcels.”  The result was that, less than two years after it signed the DDA, APP had concluded that the numbers in the pro forma weren’t valid anymore and the Site A project no longer was financially feasible.

Prior to Wednesday’s meeting, staff presented Council with an updated pro forma prepared by APP that detailed the bad news:  If the developer went ahead with a Phase 1 that included the moderate-income units as originally planned, it would lose $6.5 million on that phase alone.  Which raised the question:  If APP was projecting that kind of loss on the first phase, why wouldn’t it just pull the plug on the entire project?

It was time to call AUSD to the rescue.

This was the idea:  Instead of “interspersing” the 72 units of moderate-income housing throughout the market-rate residential development, put only two moderate-income units in Phase 1.  Then, get AUSD, which regularly argues that housing in Alameda has become too expensive for its teachers and staff, to finance construction of a separate apartment building containing the remaining 70 moderate-income units.  Unlike the original plan, where any household earning between 80% and 120% of AMI could apply, only School District employees would be eligible to rent these units.

The first reference we could find to this brainstorm appeared in Mr. Dorfman’s April 13 letter to the City in which APP responded to the notice of default served after the developer failed to meet the contractual requirements for taking title to the Phase 1 land.  “If amenable to the City, [the School District] and the community,” Mr. Dorfman wrote, “the Developer proposes to develop a standalone teacher multi-family building with up to 70 moderate units. . . .”

An affiliate of APP known as Education Housing Partners followed up by submitting a proposal that was presented to the AUSD Board at its June 27 meeting.  Under the proposal, the School District would issue “Certificates of Participation” – i.e., bonds – to pay the estimated $25 million cost of constructing  a 70-unit apartment building for AUSD employees on a 2.5-acre site “donated” by EHP and located just south of the so-called “Main Street Neighborhood.”  Rents would be set at 25% to 33% below the market rate for comparable units, which, “roughly translated,” would allow the apartments to be considered moderate-income housing.

The advantages of this idea for APP were clear:  Assuming the City agreed to treat the EHP-AUSD project as discharging the developer’s obligation to build moderate-income housing, APP could replace 70 moderate-income units currently slated for the Site A residential blocks with market-rate units, thereby making those parcels more attractive to third-party buyers.  And if those buyers were willing to pay more for those parcels, APP’s projected $6.5 million loss on Phase 1 would become, according to the pro forma, a $400,000 profit.  In addition, APP would make $2.6 million on Phase 2.

(If you prefer bureaucratese, we give you the staff report:  “The AUSD Project also improves the feasibility of the Site A Project by leveraging public financing mechanisms through AUSD to help pay for the moderate units without any financial impact to AUSD.  This public finance leverage increases the land value associated with Blocks 9 and 11 that are no longer responsible for supporting moderate income units.”  We’re pretty sure this says the same thing we just did.)

And if AUSD doesn’t bite?

The staff report put it bluntly:  “The Phase 1 project is not feasible with [any number of] moderate income units [greater] than the two units included in the very-low and low-income affordable housing project being financed and constructed by Eden Housing.”  Likewise, “the Phase 2 project is feasible with 70 moderate income units as part of the AUSD Project. . . .  The amount and type of development planned in Phase 2 does not support the financing of the moderate income units without the AUSD Project.”

In other words, if AUSD takes a pass, the Site A development will not, as the lingo goes, “pencil out.”

So now we come to the $500 million question:  What are the odds that a deal between APP and AUSD that would rescue Site A is going to take place?

It came as no surprise when Mr. Dorfman, speaking for the developer, told Council that he was “comfortable” and “confident” that EHP and AUSD would agree on terms for the employee housing project.  “We can do this,” he stated.  “We’ve done it with other school districts.  It’s our way of giving back to those communities.”

But it was somewhat surprising to hear Alameda Point Chief Operating Officer Jennifer Ott, who is known for keeping her eye on the ball, express similarly rosy views.  When Councilwoman Marilyn Ezzy Ashcraft lobbed one of her trademark softballs – “Is it all looking good, like it’s headed in the right direction?” – to Ms. Ott, she responded affirmatively.  Later, under cross-examination by Councilman Jim Oddie, Ms. Ott told Council that the AUSD board “took a vote” and picked the EHP proposal over another developer’s as the one to pursue to achieve its goal of providing affordable housing for teachers and staff.  The School District had “hired an economic consultant,” she said, and it was now “reviewing the Site A proposal in more depth.”

Well, not really.  The EHP proposal indeed had received a warm reception at the School Board’s June 27 meeting.  “If the District moves forward with this, we’re helping to solve a problem at Site A as well in order for it to work and move forward,” Board member Anne McKereghan said.  “That’s a great benefit to our community, which I’m very excited to be part of.”  But in fact the Board did not take any vote, and its direction to staff was simply to prepare a financial analysis of the proposal.  The economic consulting firm that would assist staff had been retained in 2015.

The results of the financial analysis are by no means a foregone conclusion.  Several of the School Board members made clear that they would not support any project that failed to generate revenue sufficient to cover operating expenses and debt service on the COPs.  But total revenue is a function of demand and rental rates, and at this point no one knows how many of the 70 units AUSD employees would want to occupy or how much they’d be willing to pay in rent.  If the building ends up half full, or if rents are so high teachers and staff can’t afford them, or if the rents are so low they don’t cover expenses, neither the City and its residents nor the School District and its employees would get any benefit from an EPH-AUSD project – even if it did allow APP to make its Site A numbers work.

Once again, Mr. Dorfman told Council not to worry.  All of EHP’s three previous residential projects for school districts had been “virtually 100% occupied,” he said, and the rents proposed for the AUSD building – $1,500 for a one-bedroom apartment, $2,000 for a two bedroom, and $2,500 for a three bedroom – would “cover 100% of operating costs, principal and interest on the bonds, and a reserve.”

Council approved APP’s request to amend the DDA and Site A  development plan by a 4-to-1 vote.  The members of the leftist/labor triumvirate now calling the shots at City Hall were in classic form:  Mr. Oddie offered an odd extended analogy, likening the City’s position in its dealings with APP to a “person in marriage counseling who’s asked to take a chance”;  Ms. Ashcraft delivered an avalanche of aphorisms, the best of which was her description of the “three qualifications for being a Council member” as “tough skin, a sense of humor, and a backbone,” and Vice Mayor Malia Vella proclaimed self-evident, if awkwardly articulated, truths, such as that “the guarantee about going back to square one means we don’t know what the future holds.”   Councilman Frank Matarrese joined the majority, and Mayor Trish Spencer voted no.

So we’ll have to see what happens with the EHP-AUSD proposal.  In response to a question from Mr. Oddie, Ms. Ott declined to speculate about a “Plan B” if the proposal was rejected, but she noted that the settlement agreement between the City and Renewed Hope mandated 72 moderate-income units at Site A, so alternatives are limited.  But from the back of our mind arose the whisper that we first heard when it was revealed that multi-family residential development wouldn’t pay for the infrastructure required for the Main Street Neighborhood:  The way to solve the problem is to bust the cap – i.e., let the developer build more units than the reconveyance agreement between the City and the U.S. Navy allows without penalty.

If that, rather than the EHP-AUSD project, turns out to be the solution ultimately relied on to keep the Site A development alive, well, you know where you read it first.

Sources:

APP pro formas: 2015-05-19 Ex. 8 to staff report – Annual Cash Flow Analysis(May 2015);  2017-07-05 Ex. 7 to staff report – Alameda Point Partners Projected Financial Proformas for Site A by Phase  (June 2017)

DDA:  Site A DDA Final Executed + Exhibits2017-07-05 staff report re extension of closing date

EHP proposal: 2017-04-13 APP letter to City of Alameda2017-06-27 AUSD staff report re housing project

 

About Robert Sullwold

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

2 Responses to AUSD to the rescue?

  1. nyborn2013 says:

    There is always a problem. As people get priced out the Bay Area and Alameda, the developers get priced out or get placed in a position of having to adjust and revise pricing. It never fails. Council Member Ashcraft may have missed one obvious condition for council members. “eye on Sacramento.” Beyond “tough skin, a sense of humor, and a backbone,” the three council members who seem intent on discussing Trump and other issues that are not in their job title, have the want to get to Sacramento one day. I wish they’d stop that practice.

  2. Steve Gerstle says:

    ” If the building ends up half full, or if rents are so high teachers and staff can’t afford them, or if the rents are so low they don’t cover expenses, neither the City and its residents nor the School District and its employees would get any benefit from an EPH-AUSD project – even if it did allow APP to make its Site A numbers work.”

    Seems like the project is also based upon keeping teacher salaries so low that they cannot afford market rate housing.

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