affordable housing incentive program pro forma...
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Affordable Housing Incentive Program Pro Forma Analysis
City Council Presentation July 21, 2014
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Approach/Scope of Study
1. Background Review 2. Market Sub-Area Analysis 3. Pro Forma Economic Analysis 4. Findings and Implications for
Incentive Housing Program
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Market Sub-Area Analysis Purpose
§ Understand market for new residential and office development
§ Generate assumptions for economic/financial analysis
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Market Geographies § Apartment, Condo and Office
§ Downtown Urban Center/First Hill § South Lake Union Urban Center
§ Apartment and Condo Only § Zip Codes Outside of Downtown § Urban Centers outside Downtown and Urban
Villages Citywide § Divided into “high”, “middle” and “low” cost
areas for economic analysis 4
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Analysis and Assumptions § Uses 12 development prototypes,
with and without incentive § Development cost assumptions
(developer interviews and available data)
§ Rent and operating cost assumptions (from market analysis and interviews)
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Technical Advisory Committee
§ Technical Advisory Committee (TAC) composed of local for-profit and non-profit developers
§ DRA facilitated three meetings with the TAC 1. Review draft development prototypes 2. Review draft cost and revenue assumptions 3. Review preliminary analysis
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Net Impact of Incentive Program
§ Net value of bonus floor area § After cost of meeting affordable housing
requirements (in lieu fee, onsite units)
§ Return on Equity Analysis § With and without incentive
§ Residual land value § With and without incentive
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R SProgram Options (Scenarios)
§ Current in-lieu fee payment § $21.68 DT & SLU residential; $15.15 other residential;
$24.95 commercial (plus TDR, childcare if applicable)
§ Scenario 1: § Current performance requirement for residential:
Approx. 5% of total units affordable @ § 80% AMI for renters § 100% AMI for owners
§ $40/SF in lieu fee for commercial
§ Scenario 2 (residential only): § 10% of total units affordable on-site for residential
§ same income levels as Scenario 1
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Total Development Cost (TDC) Estimates Include:
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§ Land acquisition costs § Hard construction costs (including contractor
fees) § 5% contingency § 9.5% Washington State sales tax § Soft costs at 16% of hard costs (architectural/
engineering, permits/fees, legal, taxes during construction, interest during construction, financing fees, marketing and leasing/sales)
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Return on Equity (ROE) Analysis Approach
Market value of prototype Less: Total development costs of prototype (including land) Equals: Net project value of prototype Return on equity (ROE) equals net project value annualized over the estimated term of investment, divided by the total amount of the equity investment
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Market Value: Rental Prototypes
Rental prototypes (apartment and office) Calculated at stabilized occupancy Gross rents less vacancy less operating costs Equals: Net operating income (NOI) NOI divided by capitalization (cap) rate Equals: Market value of prototype
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Cap Rates § Ratio of net operating income (NOI) to
sales price exhibited in sales in the market. § Tracked by land use and market area over
time § Rates used for analysis:
§ Apartment: 4.25% (low); 5.00% (high) § Office: 5.00% (low); 5.50% (high)
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Land Residual Analysis Market value of prototype Less: Total development costs of prototype (EXCLUDING land) Less: Minimum return on equity Equals: Residual land value (RLV) Residual land value is compared to market land prices based on sales in the market
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Feasibility Thresholds § Return on equity analysis:
§ Residential: 6% to 9% § Commercial: 10% to 12%
§ Residual land value: § RLV equal to or greater than market sales
prices for land
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Estimated Cost of Performance Requirement
§ Cost of providing affordable units on-site measured using “affordability gap analysis” approach
§ Estimates amount of mortgage supportable from affordable rents
§ Estimates affordable sales prices (affordable mortgage plus 5% downpayment)
§ Supportable mortgage or affordable sales price subtracted from total development cost of affordable unit to estimate “gap” cost
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Sensitivity Analysis § Lower and higher cap rates § Economic scenarios
§ Version A (Baseline): middle scenario § Version B: conservative underwriting § Version C: higher rents/sales prices
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Key Findings 1. Comparison of in lieu fees and cost
of performance options 2. Estimated value of the incentives 3. Impact of program on prototype
financial feasibility
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Comparison of In Lieu Fees and Cost of Performance
§ Estimated cost of performance option substantially exceeds current in lieu fee for all Downtown and SLU prototypes
§ Indicates developers in Downtown and SLU will almost always choose to pay in lieu fee
§ Estimated cost of performance option lower than current in lieu fee for low-rise and mid-rise prototypes
§ Suggests developers of low/mid rise prototypes would often select, and are not disadvantaged by, current performance requirement
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Intangible Factors § Economic analysis does not take into account
other factors that may influence developers’ decisions to take the incentive and/or to pay the in lieu fee rather than build units on-site
§ Such as: § Level of market demand for, and risk of, larger
prototype (with incentive) § Developers’ expertise with various construction types § Assessment of future escalation of market vs. affordable
rents § Marketing and operational issues
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Value of Incentives § Value of incentive exceeds cost of in lieu fee and
current performance option for Downtown rental and condo prototypes under certain assumptions
§ Value of incentive exceeds in lieu fees for commercial prototypes in Downtown and SLU prototypes
§ Indicates Downtown developers and SLU commercial developers may find incentive program attractive
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Value of Incentives (2) § Value of incentive is negative for SLU residential
prototypes, even before consideration of in lieu fee
§ Value of incentive is positive in a few instances, but negative in more instances, for low- and mid-rise prototypes
§ Indicates residential developers in SLU and of low-rise/mid-rise prototypes are not likely to use incentive program
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DAVID PAUL ROSEN & ASSOCIATESD E V E L O P M E N T, F I NA N C E A N D P O L I C Y A DV I S O R S
Impact of Program on Financial Feasibility
§ Findings are mixed, depending upon the economic scenario
§ In general, at lower cap rates, there is some room to raise the in lieu fee to approximate the performance cost of current program (Scenario 1)
§ In few cases do the prototypes remain feasible under the higher performance cost of Scenario 2 (10% affordable units)
§ In most cases, prototypes infeasible at higher cap rates, indicating financial feasibility dependent on market and investment conditions
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