AgdaPkt 2000-11-13 - Laserfiche WebLink

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Redwood Shores Child Care Report 11/13/00 /ó-B3 Page 3 of 7 market interest rate, stems from these and other economic considerations. These considerations limit the willingness of Mr. Keech to invest in an asset that produces a below-market return. Mr. Keech very firmly conveyed that his minimum return, as measured by the net cash flow to equity partners in the first year upon full rent-up, is 23% of the equity invested.' If this return seems high, it is justified by the limited use of the asset (for child care only), his inability to own the land (and therefore control the cost of owning the asset during the term of the lease and therefore realize the full potential of the sale value of the asset), and the risks associated with development (principally, higher-than-anticipated development costs). Mr. Keech also informed staff that this was the return that the hotel developer for Mr. Keech's adjacent hotel site required to participate in the development of that site. Mr. Keech was unable to produce his minimum return with the rental rate he negotiated with his prospective tenant, Children's Creative Learning Centers. Mr. Keech informed staff that he could not develop the facility without additional square footage. This would lower the total cost per square foot and allow a potentially higher rental rate on part of the facility. His financial analysis determined that 5,000 additional square feet of commercial use above the childcare facility would allow him an acceptable return. Staff agreed to take this proposal to the Council for its consideration as long as the City could place restrictions on the additional square footage to require any tenant to be compatible with its location over a child care facility. As a result of this larger facility and a revision in his cost estimates to reflect more up-to-date information regarding his development costs, Mr. Keech initially requested an increase in the City's financial commitment from $2.6 million to $2.95 million, and then subsequently requested a further increase to $3.2 million. A commitment in this larger amount would represent approximately 76% of the current estimated $4.2 million cost of the facility. Staff agreed to the initial increase in the amount to $2.95 million, and to recommend to the Council that the commitment be further increased to $3.2 million. Mr. Keech was initially confident that he could personally provide all of the equity necessary to complete the project; however, as the project has evolved through the negotiation process it has become more expensive. Mr. Keech now requires an equity partner, and decreasing the required equity (by increasing the commitment) will increase the likelihood that Mr. Keech will be successful in obtaining the equity capital necessary to complete the project. In the event of default, even with the larger City commitment amount staff is reasonably confident that the City would be . I Other ways of measuring the project's value are discussed in Attachment 1. 'I--~'~T--"