An Assessment of the Financial Feasibility of Developer Contributions to Affordable Housing Obligations for Oak to Ninth Avenue

July 21, 2006

The Oak to Ninth Avenue Project involves rezoning approximately 64 acres of underutilized public waterfront on land currently owned by the Port of Oakland to enable a private mixed use residential development.  Under proposed entitlements, the developers can build 3100 market-rate condominiums and 200,000 sq feet of commercial space on 32 acres of the site.  Another 32 acres of the site, largely tidelands subject to the public trust, will remain as new public parks.

Because the project is in a redevelopment area, it creates a new legal obligation to build 465 units of below market rate housing.  Under the development agreement, the City will not require the developer to fund this housing obligation.  Instead, the City Council has committed to paying the full costs of subsidizing affordable housing construction on the development site.  The development agreement obligates the City to use about $85 million of pubic housing funds for the up-front subsidy required to build the affordable housing at Oak to Ninth.   Oakland affordable housing providers have raised concerns that the proposal for onsite housing is an inefficient use of public housing funds, requiring Type I construction techniques and adding $75-100 per square foot to building costs. According to City officials and affordable housing providers, the development agreement will severely restrict to opportunities to build affordable housing in other parts of Oakland .

The City has also agreed to purchase about 4.45 acres of land (Parcels F and G) back from the developer after he purchases the land from the port.  While the developer is purchasing the entire 32 acres of developable land for $18 million, the city has agreed to purchase back Parcel’s F and G for their future market value less 2 million dollars.  (Reference:  Oak to Ninth Development Agreement. Attachment L1)   The market value of parcels F and G is currently estimated to be $29 million. 

A good deal of evidence suggests that the development plan for Oak to Ninth Avenue should include sufficient revenue to ensure adequate developer profit and pay a significantly greater share of the needed community benefits.  Overall, based on current area housing prices, the project has expected revenue of at least $2,000 million.   In theory, new commercial and residential uses and the high density entitled by the City Council substantially increases the value of the property relative to the purchase price.  Such entitlements thus should generate enough new wealth for the developer for him to make a significant contribution to the development’s affordable housing obligation. 

In adjacent cities with inclusionary zoning laws that require developer affordable housing contributions, development of market-rate housing in the San Francisco Bay Area is profitable even allowing for expected rates of return of 28%. (Reference: Keyser Marston Associates, Inc. San Francisco Inclusionary Housing Program Sensitivity Analysis, 2006) In addition, most cities require developers to fund transportation impact fees and other public infrastructure costs.  For example, in approving new zoning rules for the 6000 unit Rincon Hill Area in San Francisco , developers agreed not only to surpass the City’s existing 12% inclusionary housing requirement by 50% but also to pay an additional $25 per square foot fee for affordable housing, community economic development, street improvements, parks, and community centers. 

Even though the developer of Oak to Ninth, Signature Properties, will be purchasing the land for $18 million—a land purchase price is significantly less that what would be expected given the approved use, the developer has claimed that any contribution would make the project financially infeasible.   While a consultant for the City used confidential revenue and expense information provided by the developer to conclude that the developer’s rate of return was acceptable, the Oakland City Council did not ask the developer to make his financial data available to the public. The city accepted the consultant’s findings even though the public did not have a chance to learn the actual rate of return or scrutinize the developer’s cost and revenue assumptions.   The City Council similarly used the developer’s cost and revenue assumptions to justify their decision to allow demolition of the Ninth Avenue Terminal.

A simple way to look at the ability of the developer’s minimum ability to contribute to Oak to Ninth’s affordable housing obligation is to evaluate whether the land is priced fairly relative to the proposed entitlements and developer obligations. This calculation involves estimating the value of the land under the new entitlements and then subtracting the purchase price of the land, costs of meeting obligations of the development agreement, and any other extra-ordinary costs such as those for environmental clean up.   Given that the Oak to Ninth proposal is planned for public lands, differences between the land value under the entitlements and the developers up front costs to gain those entitlements should be considered a public subsidy.

Considering the developer’s profit under this short-term scenario is appropriate from a public finance perspective for the following reasons:

•  The City of Oakland does not actually require the developer to build the housing. Instead, the developer has the option of selling entitled parcels to other developers and builders. The developer can exercise his option with the Port to purchase the property, incur all short term costs including demolition and site remediation, meet future obligations under the development agreement including offsite improvements and park construction, and sell the entitled but undeveloped parcels to third parties at a fair market value.

• A rational developer will choose to undertake longer term risks of development only if he judges that the rate of return from the long term investment is greater than that from the short term investment. 

Publicly available comparable land value estimates exist in the Port’s 2003 appraisal of the site. (Reference:  Port of Oakland Appraisal of Oak to Ninth 2003)

Based on this 2003 comparison, the undeveloped land should have a value of at least $139 million.   Given the trends in the housing market between 2003 and 2006, the actual land value is likely to be much higher that an estimate based on comparisons from 2003. 

Based on the more recent proposed offer of $60 million for 8.25 acres of Oakland School District property (conditional on zoning for 1388 units), the Oak to Ninth land has a value of at least $134 million.  Because the School District Property would have a higher density than the Oak to Ninth project (168 d.u./acre vs. 139 d.u./ acre) and because inclusionary zoning laws may soon be in place in Oakland , this $134 million estimate based on the school property offer is likely to underestimate the Oak to Ninth land’s actual value. 

Based on information in the City of Oakland staff report and other public records, the developer has an option to purchase the property from the Port for $18 million.   The developer’s estimates of costs associated with the entitlements, including costs of required environmental remediation, park development, offsite improvements, and other agreed upon community benefits in the development agreement, is $76 million.  These costs do not include costs not documented in the public record, such as costs associated with pre-development design and environmental review.  The developer will also be gaining a contribution of about $29 million from the repurchase of parcels F and G. This simple analysis based on entitled land value tells us that the developer is getting an immediate subsidy on the land sale of not less than $74 million.  Without compensating expenses, this subsidy is translated into immediate profit for the developer if he sells the land to others.

Overall, the gross profit on the acquisition of the land, securing development rights, and meeting obligations of the development agreement thus appears to suggest that the developer can feasibly contribute a significantly greater share of the revenues associated with the development for City affordable housing obligations and / or other community planning needs for this project.  

Developer Profit on Land Entitlements based on Comparable Per Unit Values and One-Time Extra-ordinary costs and Exactions

Current Summary of the Oak to Ninth Mixed Use Development Project

Sources: Staff report for June 20th, 2006; City Council Hearing

• Current owner:  Port of Oakland ; Signature properties has an option to buy for $18 million expiring November 2006

• Total land: 63.82 acres

• Total Developable land: 32 acres excluding open space

• Land dedicated for Roads and other Public Right of Way: 9.18 acre

• Land offered for affordable housing at cost; 4.4 acres

• Net land available private residential and commercial development. 17.8 acres

• Land dedicated as Public Open Space: 32.3 acres

• Division into 29 parcels: eighteen (18) developable parcels to accommodate future residential and commercial development; two (2) parcels for the marinas; five (5) parcels for the public streets; three (3) parcels for the public parks; and one (1) parcel for the Estuary and Lake Merritt Channel waters (the City boundary extends into the water).

Mix of residential, retail/commercial, civic, and parks and open space uses

• Dwellings: 3,100 residential units

• Commercial: 200,000

• Building Heights : 86-240 feet

• Parking; 3,950 onsite parking spaces: about 3,500 in enclosed parking structures, about 375 spaces along public streets within the project area, and about 75 spaces in surface lots in proximity to the proposed open space areas

• Rehabilitation of 15,000 Sq Ft of Ninth Avenue Terminal

• Renovation of marinas (total 170 boat slips

• City to purchase ~4.45 acres of land from developer (parcels F and G) for affordable housing construction from developer at market value.  (Estimated at $29 million)

• Developer to purchase commercial shell and parking shell on parcel G

• City to build using redevelopment bond funding to build affordable housing obligation on-site

• Developer to fund other offsite community benefits (itemized above)

Summary of Fee Simple Land Valuation by Carneghi-Bautovich Partners
(March 31, 2003)

Other Assumptions and Notes for this appraisal

• Land zoned for multifamily 1700 multifamily units.

• Market land value of $45,000 per unit based on analysis of comparable land sales for developable land at similar density (Unit Value Range 40,000 to 51,000)

• This land value not anticipate the cost of ~18 million of  environmental remediation work

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