Battle of Midway

Tonight, Council will hold a special meeting at which the four finalists vying to be selected to develop the “West Midway” site at Alameda Point will make presentations.

Slideshows of proposed designs are banned.  Instead, expect to hear the presenters – and those on Council – blather on about how any development on the site should be “vibrant,” “robust,” “sustainable,” etc.

But what the Merry-Go-Round will be listening for – and what we were looking for as we read the written responses to the request for qualifications – is evidence of the developer’s ability to deliver, on schedule and on budget, a project whose economics are challenging, to say the least.

The economics are daunting primarily because the developer will be required to construct not just the backbone infrastructure for the 22.8 acres on which it will build its own 291-unit project but all of the backbone infrastructure for the entire 34-acre area south of Midway Avenue between Pan Am Way and Main Street.  This is necessary to make it feasible for a non-profit developer to build a 267-unit supportive and affordable housing facility on the 9.7 acres next to the West Midway site.

Constructing this much infrastructure will not be easy – or cheap.  As the RFQ disclosed, all of the utilities within the 32 acres “are old and deteriorated and will need to be replaced.”  At the City’s request, a civil engineering firm prepared a “preliminary cost estimate” for the area-wide backbone infrastructure work, which was attached to the RFQ.  The total tab came to $56.9 million.  But the RFQ went on to caution that this estimate was “for informational purposes only” and “not a guarantee.”

In addition, the City has imposed a couple of other requirements that adversely affect the economics for a developer, one on the expense side and the other on the revenue side of the ledger.

First, the developer will be required either to adopt the City’s “Project Stabilization Agreement” for public-works contracts or enter into its own project-labor agreement with the construction trades unions.  By whatever name, this type of agreement makes it difficult to employ non-union workers on a project, which results in an increase in labor costs of between 5 and 15 percent (to use the range cited by former City Manager John Russo).

Second, the RFQ specified that the 291 new housing units must include 31 “moderate-income” units (defined as housing affordable by households earning between 80 and 120 percent of area median income) and a minimum of 26 “workforce” units (defined as housing affordable by households earning between 120 and 180 percent of AMI).  The former requirement is derived from the settlement agreement between the City and Renewed Hope governing all new residential development at Alameda Point.  The latter arises from the “specific plan” for the Main Street Neighborhood (of which the West Midway site is a part) adopted by Council in March 2017.

Taken together, these requirements will ensure that the West Midway project will not become an exclusive enclave for the well-off.  But they also mean that the developer will not be able to charge top dollar for 57 of the 291 units, thereby diminishing project revenue and decreasing market value.

From our perspective, these economic challenges make it especially important for the decision-makers to scrutinize, very carefully, the track records of the four finalists.  Among other things, we would want to know not just how many multi-family residential projects the developer has built, but how many of these projects included below-market-rate housing (and how much) or were saddled with project labor agreements.  Most importantly, we’d want to know whether the developer ever has been responsible for completely replacing the backbone infrastructure in the area in which its project was located.  If so, was the work done on schedule and on budget?

Of the four finalists, the one about which Alamedans already know the most is Alameda Point Partners, the developer for the 800-unit Site A project for which ground was broken last May and infrastructure construction now is under way.  For better or worse, this means that APP’s track record is right out front for all to examine.

Both the configuration and the timing of the Site A project have changed since APP got the deal.  For example, the original proposal called for 72 moderate-income units to be interspersed among the market-rate units.  But in July 2017, APP told Council that this plan was no longer “feasible,” and it requested an amendment to the DDA allowing it to move 70 of the 72 moderate-income units out of the market-rate buildings and into a separate building, not part of the original scheme, that would be reserved for housing for teachers and other employees of the Alameda Unified School District.  Council approved the amendment, but it is worth asking what this change signifies about APP’s capacity to deliver the moderate-income units in the West Midway project.

Moreover, under the original DDA, Phase 1 of Site A was scheduled to close in December 2016, at which time the City would transfer title to the land to APP.  The backbone infrastructure work was supposed to begin 30 days after closing, but APP asked for, and received, three extensions of the closing date, the final one to April 9, 2018.  For each extension, APP offered good reasons – or at least reasons deemed satisfactory by Council – but, again, it is worth asking how APP intends to prevent a similar delay in commencement of the infrastructure work if it gets the West Midway contract.

We don’t mean to pick on APP, and maybe the events we’ve identified could be regarded as a “learning experience” that cuts in APP’s favor.  In any case, only one of the other four finalists appears to have performed infrastructure work akin to that which will be required of the West Midway developer:  Catellus, which developed the Bayport and Alameda Landing projects on the site of the former Fleet Industrial Supply Center on the northern waterfront in Alameda and, according to its response to the RFQ, is installing infrastructure at Mission Bay in San Francisco that includes new stormwater and sewer systems.  (Another finalist, Brookfield Residential, cites in its response to the RFQ a project involving the relocation of a U.S. Army Reserve base in Dublin and construction of a “master-planned community” on the vacated site, but the scope of the infrastructure work is unclear.)

We’d like to hear more on this subject from both of these firms.

Given the economic challenges facing the developer of the West Midway site, we think it is also vital to pin down the finalists on their ability to finance the project from pre-development through construction to certificate of occupancy.  The last thing the City – and advocates for supportive and affordable housing – need is for Council to approve a developer based on a presentation that pushes all the right buttons – and then see nothing happen on the site because the chosen firm can’t come up with the dough to start, much less finish, the job.  One Del Monte warehouse project is quite enough.

As it happens, all of the finalists for the West Midway project have solid financials:

  • APP is backed by Trammell Crow, which, according to APP’s response to the RFQ, has assets under management exceeding $15 billion across the United States.
  • Catellus is owned by TPG Capital, which has more than $70 billion of assets under management around the world.
  • The Jamestown/Cypress Equity Investments partnership is made up of Jamestown, which has more $10 billion of assets under management, and Cypress Equity Investments, which has amassed a real-estate portfolio worth $5 billion.
  • Brookfield Residential is – relatively speaking – the piker in the group.  Its total assets at the end of 2017 amounted to a mere $4.2 billion.

Financial credentials like these may earn the four finalists the enmity of the City of Alameda Democratic Club ideologues eager to rail against “global conglomerates,” but they show that each of the developers has the resources to put its own cash into the West Midway project.  It would be useful to know, however, just how much of an equity stake each finalist intends to take, since the more a developer is willing to put at risk, the less likely it is to walk away.   (We note that, by the time ground was broken at Site A, APP had sunk $15 million in equity funds into the project.)

But equity is only one element of project financing, and each finalist also needs to be asked:  Where’s the rest of the money going to come from?

We’d be particularly wary of any developer who proposes to rely on public, rather than private, financing for the West Midway project.  One way to pay for infrastructure is to create a community facilities district, which then issues bonds to be repaid by taxes assessed against subsequent property owners.  The problem is that this approach, by increasing property taxes on new housing units and commercial buildings, makes them more expensive – and thus less desirable – to potential buyers or renters, which in turn may compromise the marketability of the project.  Indeed, the RFQ cautions that the City will authorize formation of a CFD designed to pay infrastructure costs only of it “determines that the resulting total annual tax burden on the property . . . is not unduly burdensome.”

Of the four finalists, Catellus appears to have depended most heavily on public sources of funds.  Its response to the RFQ stated that, for both Alameda Landing and Mission Bay, infrastructure costs were “reimbursed through public financing.”  For another project located in Mueller, Texas, a special district similar to a CFD was an “essential tool in funding the development.”  By contrast, the only CFD created – so far – for Site A is the one established to shoulder the annual costs of the transportation demand management program and related items.

But private financing is not always easy to get.  Indeed, when APP sought extensions of the Site A closing date, it usually cited the need for additional time to “secure” and “finalize” funding commitments from third parties.  What funds are available from what sources, and at what price, for the West Midway project depends on a host of factors affecting real-estate investments in particular and the economy in general.  In their responses to the RFQ, none of the developers delved into the financing for any of its prior projects, but we’d be interested in getting more details about where the developer got the money – and whether it thinks it can go back to the same well again.  It surely would be nice – although highly improbable – if one of the finalists was able to offer the same assurance Carmel Partners did when it was pitching the North Housing project to Council: “Our money is already in place!”

We have to confess that we are not confident that all, or perhaps any, of our questions will get asked tonight.  The staff report directs Council’s attention to three “important considerations” in selection of a developer:  “diversity of developer base,” “commercial vision,” and “job creation/training.”  None of these has any bearing on the developer’s ability to deliver a project on schedule and on budget.  Moreover, at least a couple of our Council members probably consider the developer’s financial resources and management skills less important than its willingness to build a LEEDS-certified transit-oriented development with an ample supply of bike racks.

But if the practical issues are ignored entirely, the City will be proceeding at its peril.

Sources:

Site A: 2017-01-17 staff report re amendment to Site A DDA; 2017-01-17 staff report re amendment to Site A DDA; 2018-03-06 staff report re Site A DDA amendment

Main St. Neighborhood: 2017-10-24 Ex. 1 to staff report to P.B. – Main Street Neighborhood Specific Plan

West Midway project: 2019-02-05 staff report; 2019-02-05 Ex. 1 to staff report – Request for Qualifications; 2019-02-05 Ex. 4 to staff report – Statement of Qualifications

About Robert Sullwold

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

4 Responses to Battle of Midway

  1. NYBORN2012 says:

    Solid observations and information here. Council members are about gaining popularity and attention from Sacramento politicians, thus your questions are far to relevant for the council to ask. If Frank were still on Council, he would ask them. Maybe Tony will this time? Catellus has supported the Alameda community in many ways over the past few years and has invested in many programs and non profit organizations here. All things considered, I’d lean in their favor.

  2. Steve Gerstle says:

    You raise some interesting questions, Robert; however, I disagree with this conclusion, “But if the practical issues are ignored entirely, the City will be proceeding at its peril.”

    What would be the greater peril for their political careers, approving a project that meets political standards that does not get built, or approving a project that does not meet political standards but does get built? To rephrase Calvin Coolidge, “The business of America is politics.”

    • carol says:

      Steve, i Don’t think he means the Council, but the City itself. The Del Monte has been tied up for decades by developers who cannot seem to develop it.

  3. Mike McMahon says:

    The last iteration of developing the Del Monte project has so many pre-conditions that the developer ran out of money to develop the actual project, which I believe is the point of this current post.

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