AgdaPkt 2015-03-23 Closed and Joint SA PFA

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November 26, 2014 9.A. - Page 20 icentive Zoning/Community Benefits Program Page 4 Building Value The analysis assumes achievable lease rates based on market data from CoStar Group (office) and Real Answers (multifamily rentals) as well as correspondence with local experts and EPS knowledge of the local and regional commercial real estate landscape. The analysis assumes that commercial office rents (for new product) range from about $3.00 per square foot per month to $6.25 per square foot per month (full service). Residential rental rates range from $3.75 per square foot per month to $4.50 per square foot per month (about $3,200 to $3,800 for a typical unit). The lease rate ranges reflect new, high-quality, well-positioned projects in desirable locations within the City. Capitalization rates reflect data from IRR Monitor, a third- party market data provider, as well as available data concerning recent market transactions. Project Costs Project costs include construction, soft costs, and other project costs. Construction costs include basic site work (which covers the cost of any surface parking) and vertical development of parking and building spaces. Building costs are based on cost estimates from RS Means (which reports costs at union wage rates) and include construction-related overhead costs. The analysis assumes structured parking costs at $20,000 per space, which is typical for above-ground parking structures. Soft costs include professional services associated with planning, design, and project approval; permits and fees (based on data provided by the City); assumptions regarding taxes and insurance and financing costs; as well as general and administrative (overhead) costs borne by the project developer. Finally, other project costs include a development contingency of 10 percent, land cost equal to 20 percent of the project's market value, and the developer's required return on investment (ROI). Note that the assumption regarding land cost assumes that the project site is suitably improved with the backbone infrastructure (e.g., sewer, water, streets) required for the project. Figure 3 through Figure 8 present the "base" pro forma analysis for each prototype. Next Steps Based on the research and findings to date the consultant team is seeking feedback and guidance from City staff, including general staff review of the prototypes and financial analysis. We believe that the analysis presented here offers a good framework for further study and policy investigation. Going forward, the analysis may be adjusted to determine surplus value associated with more refined/well defined development incentives (e.g., specific density increases) as the study proceeds. A critical next step is to determine the incentives that are likely to be most attractive to the development community. Following that, the consultant team will consider the adjustments that would have to be made to City zoning regulations and adopted plans to offer the desired incentives. Currently the analysis considers the value creation associated with development (versus no development). That is, the "incentive" offered by the City is the right to develop. Additional guidance is needed to identify/clarify other potential development incentives (e.g., an increase in the allowable Floor-Area Ratio) for analysis. However, it may be that in the Downtown, where commercial development is close to reaching a development cap, the incentive offered by the city could be the entire value associated with the right to develop. Given this incentive opportunity, it is notable that the analysis finds significant potential for value capture from the Mid-Rise Office Center prototype, a prototype that mirrors recent development in the Downtown area. P:\141000s\141053RedwoodCity\Deliverable\Financial Analysis Memo 11 2614.docx