CC 05-19-2020 Item No. 24 BMR Linkage Fee Strategic Economics_PresentationCUPERTINO
ECONOMIC FEASIBILITY
STUDY
CUPERTINO CITY COUNCIL
MAY 19, 2019
CC 05-19-2020 Item No. 24
ECONOMIC FEASIBILITY STUDY:
KEY QUESTIONS
RESIDENTIAL BMR PROGRAM
•Is it economically feasible to increase BMR requirements on residential
ownership and rental projects?
•What is the potential for including extremely-low income housing units in
rental projects?
•What is the potential for including median-income and moderate-income
units in rental projects?
NON-RESIDENTIAL BMR LINKAGE FEES
•Is it economically feasible to increase non-residential linkage fees on
office/R&D, hotel, and retail developments?
APPROACH/METHODOLOGY
Pro forma analysis is commonly used by cities to assess the impact of
public policy changes, like BMR requirements, on development in the short
term
•Analyzes costs of development in comparison to projected revenues to
see if the development generates sufficient returns for investors
•Data sources included commercial real estate data from Costar and
Redfin, interviews with local developers and brokers, and review of pro
formas from other projects and clients in nearby cities
•Tests “prototypes” that represent typical development projects, but
individual projects may have different results under certain
circumstances.
Generate Assumptions
About:
Development Prototypes
Development Costs
(land + hard construction
+ soft costs + financing)
Project Values/
Revenues
Net
Value/ Revenues÷=
Developer Return
(ROC or YOC)
Development Costs
Step 1:Step 2:
FEASIBILITY ANALYSIS STEPS
FEASIBILITY ANALYSIS STEPS
Step 1. •Develop “prototypes” that represent projects that would be subject to the BMR policy
Step 2.
•Develop assumptions about the % inclusionary requirement, income targets, and
affordable sales prices and rents for BMR units (for residential prototypes only)
Step 3.
•Collect key inputs for the pro forma model -rents, sales prices, land costs, hard
construction costs, soft costs based on variety of data sources
Step 4.
•Tally all development costs and subtract from project value to calculate net value
•Divide the net value or net operating income by total development costs to calculate return
•Compare the return to the minimum thresholds to determine if it is feasible
RATE OF RETURN (YIELD ON COST)
•Rates of return are pegged to
market cap rates
•Rising cap rates suggest a
riskier investment climate;
falling cap rates indicate a
healthier environment
•Market cap rates for office and
multifamily housing have been
extremely low in the last 2
years
•Investors and developers have
been willing to accept lower
rates of return because
perceived risk of investment is
low
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%2009 Q12009 Q42010 Q32011 Q22012 Q12012 Q42013 Q32014 Q22015 Q12015 Q42016 Q32017 Q22018 Q12018 Q42019 Q3Cap RateYear, Quarter
Market Cap Rate
Minimum Yield On Cost Threshold
Santa Clara County Office Cap Rates, 2009-2019
0.0%
2.0%
4.0%
6.0%
8.0%2009 Q12009 Q32010 Q12010 Q32011 Q12011 Q32012 Q12012 Q32013 Q12013 Q32014 Q12014 Q32015 Q12015 Q32016 Q12016 Q32017 Q12017 Q32018 Q12018 Q32019 Q12019 Q3Year, Quarter
Market Cap Rate
Minimum Yield On Cost Threshold
Santa Clara County Multi-Family Cap Rates, 2009-2019
Source: Costar, 2019; Strategic Economics, 2019.
FINANCIAL FEASIBILITY RESULTS
RESULTS: OWNERSHIP HOUSING
Inclusionary Housing Scenarios
Prototype 1 Prototype 2 Prototype 3
Single Family
Detached
Small Lot
SF/Townhouse Condominiums
20%Inclusionary Feasible Feasible Feasible
25%Inclusionary Infeasible Infeasible Infeasible
In-Lieu Fees Feasible Feasible Feasible
Source:Strategic Economics,2018.
•It is feasible to increase the BMR requirement to 20% on ownership
housing
•Increasing housing mitigation fees to the maximum amounts supported in
the 2015 nexus study in lieu of inclusionary requirements would also be
feasible.
RESULTS: RENTAL HOUSING
Inclusionary Housing Scenarios
Prototype 4:Prototype 5:
Lower Density
Rental
Higher Density
Rental
20%Inclusionary Infeasible Infeasible
25%Inclusionary Infeasible Infeasible
Source:Strategic Economics,2018.
•It is not feasible to increase the BMR requirement for rental housing
•Increasing mitigation fees to up to $30/sf in lieu of inclusionary
requirements would be feasible for higher density prototype
•Any change in requirements for lower density rental housing is
infeasible without either a 15% increase in revenues or a 15%
decrease in development costs
FEASIBILITY OF ELI UNITS IN
MARKET-RATE RENTAL PROJECTS
A combination of higher density, lower
parking requirements, and lower city fees
would allow market-rate rental projects to
include more ELI units
15% BMR units (5% ELI, 5% VLI, 5% LI)
Project density of 100 du/acre
City fees reduced by 50%
Parking ratio of 1 space per unit
RESULTS: R&D/OFFICE
Fee Scenario Office Feasibility
Linkage Fee $23.76/sf Feasible
$25/sf Feasible
$30/sf Marginally Feasible
•It is marginally feasible to increase the linkage fee to
$30/sf
Source:Strategic Economics 2019.
HOTEL FEASIBILITY
Fee Scenario Hotel Feasibility
Linkage Fee $11.88/sf Feasible
Linkage fee $15/sf Marginally Feasible
Linkage fee $20/sf Not Feasible
•It is marginally feasible to increase the hotel linkage fee
to $15/sf
Source:Strategic Economics 2019.
RETAIL FEASIBILITY
Stand-alone retail uses are challenged
without the linkage fee because of high
construction and land costs
Increase in linkage fee is not recommended
EFFECTS OF COVID-19
Results depend on assumptions about construction
costs, land prices, and rents/sales prices. If any of these
conditions change, the results would be different.
There is insufficient data to confidently predict the cost
and revenue impacts at this time.
Will housing prices and rents decrease and by how much?
Will construction and land costs continue to rise?
Will the trend towards telecommuting reduce the demand for
office in the longer term?
How soon will it take for business travel to resume and for
hotels to fill up again?