They’re there in Oakland

For more than a while now, the Merry-Go-Round has been listening as the developers of Site A at Alameda Point and the Del Monte warehouse try to explain why their projects have not broken ground, more than two years after they were approved – with much fanfare – by the Alameda City Council.

The explanation is pretty much the same for both developments:  Construction costs have been escalating, and project financing has proved hard to get.

We’ve been inclined to believe this explanation when it’s offered by the Site A developer, Alameda Point Partners, primarily because one of the partners, Joe Ernst, is a local guy and a Minnesota native.  And we’re willing to give the Del Monte developer, Roseville-based Tim Lewis Communities, the benefit of the doubt.

Recently, however, looking out the window from our office at 20th and Harrison in downtown Oakland, we’ve noticed an interesting phenomenon:  there are residential developments going up all over the area – four of them within a three-block radius of our office:  1640 Broadway, 1700 Webster, 1721 Webster, and 301 19th St.  A quick check of the data published by the City of Oakland Planning Department shows that many more projects are in the works in the same general vicinity.  Here’s a map published by the San Francisco Business Times:

Downtown Oakland

Which caused us to wonder:  Presumably, construction costs have been rising in Oakland as well as in Alameda.  So how come the Alameda projects aren’t getting financed and built when multi-family residential development is booming in downtown Oakland?

We don’t hold ourselves out as experts in real estate finance, but we can suggest three reasons why the Site A project may be more costly to build, and therefore more difficult to get financing for, than the downtown Oakland projects.  But these reasons don’t appear to apply to the Del Monte warehouse.

First, land costs.  Other than initial deposits totaling $300,000, APP didn’t have to hand over any cash to the City for the 68 acres comprising Site A – but it is obligated to replace the deteriorating backbone infrastructure at the site and to provide funds for a new ferry terminal and sports complex.  According to the pro forma presented by APP to Council last June, the projected improvement costs for Phases 1 and 2, the two phases in which residential development will occur, amount to $106.4 million.

By contrast, the backbone infrastructure for the downtown Oakland projects already exists.  Of course, the developers did have to buy the land, but the price was far less than $106.4 million:  Lennar Multifamily Communities paid $18.5 million for 1640 Broadway, and Portland-based developer Gerding Edlen paid $5.1 million for 1700 Webster.  (We were unable to find reports of the sales prices for the other two downtown Oakland projects.)

Second, density.  The denser a project is, the more units the developer has to spread its land costs over.  And the downtown Oakland projects are definitely denser than Site A.

APP intends to build 800 units on its 68-acre site.  Based on the $106.4 million in projected improvement costs, the land cost per unit amounts to $133,000.

By contrast, three of the four downtown Oakland projects are high-rise buildings that will contain more than 200 units on an approximately half-acre lot:  1640 Broadway (254 units in a 33-story building on a .51 acre lot); 1700 Webster (206 units in a 23-story building on a .56 acre lot), and 1721 Webster (250 units in a 25-story building on a .52-acre lot).

Based on the sales prices for the two projects for which we found data, the land cost for 1640 Broadway is $72,835 per unit and for 1700 Webster it is $24,757 per unit.

Finally, construction costs.  All of the downtown Oakland projects are private developments that are not subject to the state “prevailing wage” law requiring payment of union wages on public works projects.  Nor, as far as we were able to determine, did any of the developers enter into a “project labor agreement” under which any contractor working on the project must agree not only to pay union wages but also to get workers exclusively through union hiring halls, adhere to union work rules, and contribute to union fringe benefit funds.

Site A, of course, also is a private development.  But our City Council insisted that APP enter into a PLA with the Building & Construction Trades Council of Alameda County, and the Disposition and Development Agreement between APP and the City so requires.  Moreover, as we understand it, the PLA is binding not only on APP but also on any developer to whom it sells an improved lot.

Developers and contractors argue that requiring a PLA for a project will increase construction costs because non-union contractors will be reluctant to bid on the job and the contractor who gets it will charge more in order to cover its union-related expenses.  For this contention, they can cite significant academic research, particularly studies by the Beacon Hill Institute at Suffolk University of the cost impact of PLAs for school construction projects in Connecticut, Massachusetts, New York, and Ohio (showing higher construction costs attributable to PLAs of between 13.12% and 20%), and by the National University System Institute for Policy Research of the cost impact of PLAs for school construction projects in California (showing higher construction costs attributable to PLAs of 13-to-15%).

The conclusion of this research is disputed, especially by the building trades unions, and one recent study by the UC Berkeley Labor Center of community college projects in California supports the view that PLAs do not result in fewer bidders or higher costs.  Former City Manager John Russo’s summary when he proposed a PLA for development at Alameda Point back in 2013 probably remains true today:  “Generally, the research, which is hotly contested by interested groups, suggests that PLAs increase project costs by 5 to 15 percent.”

Putting aside academic studies and partisan arguments, the impact of PLAs on construction costs is well-recognized in the real world.  For this piece, we were given a concrete example, drawn from recent local experience, of how a PLA affects costs:  if both union and non-union contractors are free to bid on a job without being subject either to the prevailing wage law or a PLA, construction costs for a residential project would be about $375-380 per rentable square foot; with a prevailing wage requirement, the costs would rise to $425-450 per rentable square foot; and with a PLA, they would jump to $525-530 per rentable square foot.

The downtown Oakland projects fit into the first category; Site A fits into the third.

In citing distinctions like these, we do not intend to act as apologists for APP.  After all, the developer knew when it went after the deal that it would be expected to build the backbone infrastructure for 68 acres with only 800 units to spread its costs over.  And it knew that our labor-friendly Council was likely to impose additional obligations that benefited the construction unions even if they also increased the developer’s costs and scared off potential buyers.  But we do think it would be unfair to condemn APP because – thus far – it has failed where the downtown Oakland developers have succeeded.  They’re not only playing in a different ballpark; they’re playing a different game.

The Del Monte warehouse project is another story.

Under its Development Agreement with the City, Tim Lewis is required to construct an extension of Clement Avenue and to build, or contribute funds toward building, the Jean Sweeney Open Space Park.  Nevertheless, Tim Lewis’s land costs consist primarily of the amount it paid for the 11.06-acre site.  Although the developer never has disclosed this price, we do know that it paid $12.5 million for the neighboring Encinal Terminals parcel.  It’s hard to imagine that it shelled out significantly more for the warehouse.

Taking the $12.5 million figure and dividing by the 380 units in the approved master plan yields a land cost per unit of $32,895.  If this figure is right, the per-unit land costs for the Del Monte project fall at the lower end of the range for the downtown Oakland projects, even though the density of those projects is much higher.

Likewise, the Development Agreement requires Tim Lewis to pay prevailing wages for work done on the Jean Sweeney Park and Clement Avenue extension, but it does not specifically mandate prevailing wages for the warehouse renovation, nor does it obligate Tim Lewis to enter into a PLA with the building trades council (or any individual union).  Accordingly, we can only assume that, in this regard, Tim Lewis again is more like the downtown Oakland developers than APP.  (Becca Perata, Tim Lewis’s PR rep, did not reply to our email asking about labor issues.)

The question that occurred to us as we gazed out our window – How come the Alameda projects aren’t getting financed and built when multi-family residential construction is booming in downtown Oakland? – thus seems to be a legitimate one to ask the next time a Tim Lewis representative appears before Council.  (Of course, someone other than Vice Mayor Malia Vella or Councilwoman Marilyn Ezzy Ashcraft should be the person to ask it, since both benefited from Tim Lewis’s largesse in the 2016 election.)

There may be a larger point here as well.  We hesitate to suggest to the pro-development crowd how to argue their case for Building More Housing Now, but they would be well-advised to consider steering their favorite Council members away from actions that lengthen the odds of a project actually getting built.

For one thing, the housing advocates might want to point out the consequences for project viability when the City requires a developer to provide too much new infrastructure or too many “community benefits.”

This is one of the lessons implied by the Site A experience, but it also came up recently in the discussion over the re-zoning of the North Housing site.  During his presentation, Greg Pasquali, the spokesman for the residential developer, Carmel Partners, told Council that both AMP and the City had imposed additional requirements – for undergrounding utilities and extending Moseley and Singleton Avenues – after the firm bid for the land.  “What we’re being asked is way beyond what the City told us six to seven months ago,” Mr. Pasquali said. “We wouldn’t do this project today.”  Any additional City-imposed mandates, he added, “would sink the ship.”

The housing advocates also might want to warn about the downsides of the City forcing private residential developers to enter into PLAs.

Again, Site A serves as the prime example of this danger, but the issue arose in the discussion of the North Housing site as well.  In response to questions by Councilwoman Ashcraft, Mr. Pasquali reminded her that Carmel Partners was proposing a project on private, not public, land, and stated that the firm used its own general contractor, which ran an open shop.  We held our breath for Ms. Ashcraft’s reply, but she contented herself with admonishing Mr. Pasquali to make sure Carmel’s subcontractors paid “appropriate” wages.  Who knows how fast he would have run for the exits if she had asked him to commit to a PLA instead?

During the 2016 election, the PAC calling itself “Alamedans United” took money from both real-estate developers ($20,000, $5,000 of which came from a Tim Lewis affiliate) and building trades unions ($15,250), and spent it to elect a slate that included Ms. Vella and Ms. Ashcraft.  But there may come a point at which the interests of these two well-heeled backers of our local politicians conflict.  And those who prioritize housing above all else may find themselves caught in the middle.

If this happens, it will be interesting to see which group our self-proclaimed progressives deem the most worthy.

Sources:

Oakland development projects: List of Oakland development projects

APP pro forma: 2017-07-05 Ex. 7 to staff report – Alameda Point Partners Projected Financial Proformas for Site A by Phase

Staff report re Alameda Point PLA: 2013-12-03 staff report re PLAs

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
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3 Responses to They’re there in Oakland

  1. Paul Foreman says:

    Congratulations on another excellent piece of journalism. Anybody who has an interest in Alameda City Government (including our elected officials and City staff) who doesn’t read you regularly is leaving a huge gap in their knowledge base. My only fear is that those who favor unlimited building of market rate housing in Alameda will now be advocating the need for 33 story buildings in order to attract developers.

    I would make one small clarification. While Site A at Alameda Point does consist of 68 acres, 15 acres of the parcel is park and open space and 600,000 sq. ft. of commercial space whih I think was going to house one story big box retail stores. Thus, commercial acreage would be a little under 14 acres, leaving about 39 acres for residential, which works out to about 20.5 units per acre, still a rather low density number, so it does not really change the point you are making.

  2. Steve Gerstle says:

    I do not think that this is a fair comparison. Downtown Oakland is at the center of a transportation hub and Alameda Point is a transportation dead end. There are good things happening at Alameda Point. Entrepreneurs such as Admiral Maltings have made the area come alive. The problem is not the financing; the problem is that the wrong projects are seeking financing. Call it an industrial zone or call it a makerspace, but Alameda Point wants to be a place where new ideas flourish and not worn out residential models. If the right ideas come along, the financing will find its way there.

  3. barbara thomas says:

    The developers’ pictures of the new shoreline Alameda developments show beautiful relaxed waterfront lifestyles. The reality proposed has been between 5 and 14 story buildings on landfill, at high risk to liquefaction, adjacent to a multitude of earthquake faults, and guaranteed to survive 60-75 years of global warming and sea level rise. How many such buildings are currently being built on Oakland, or San Francisco’s waterfronts? Not something most investors want to invest in, or bankers want to finance, insurer’s want to insure, let alone home buyers wanting to leave to their children. Not only is Alameda Point a transportation dead end, but so is the rest of Alameda. In Oakland, one can get on a freeway in a few minutes from most anywhere. Alameda has not adopted the little Brooks Act, Government Code sections 4525 et seq. requiring bidding for professional work. City staff repeatedly recommends ESA to do the California Environmental Quality Act compliance work for all projects without any bidding. This selection process lacks transparency or reviewable standards. The EIRS from Encinal Terminals to Alameda Marina state there are no traffic queues anywhere in Alameda. Not a single studied development (disregarding the cumulative 4800 new residences planned) will add more than 25 outbound trips in the AM and 30 trips inbound in the PM. No one at the City has questioned why ESA’s figures don’t match CALTRANS and MTC’s which show a 40% increase in traffic by 2040. Sometimes when it sounds too good to be true, it is.

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