HomeMy WebLinkAboutExhibit 1Exhibit 1
KMA Financial Feasibility
Analysis
1 °
ADVISORS IN:
REAL ESTATE
REDEVELOPMENT
AFFORDABLE HOUSING
ECONOMIC DEVELOPMENT
SAN FRANCISCO
A. JERRY KEYSER
TIMOTHYC. KELLY
KATE EARLE FUNK
DEPENE M. KERN
ROBEKTJ. WETMORE
LOS ANGELES
CALVIN E. HO W S. 11
KATHLEEN H. HEAD
JAMES A RAGE
PAUL C. ANDERSON
GREGORY D. 500 -HOO
KEVIN E. ENGSTROM
JULIE L ROMEY
SAN DIEGO
GERALD M. TRIMGLE
PAUL C. MARRA
>E�) s
KEYSER MARSTON ASSOCIATES
ADVISORS IN PUBLIC /PRIVATE REAL ESTATE DEVELOPMENT
MEMORANDUM
To: Brandon Nichols, Planner
City of Newport Beach
From: Kathleen Head
Andrea Castro
Date: January 2, 2008
Subject: 1703 West Balboa Boulevard — Financial Feasibility Analysis
At your request, Keyser Marston Associates, Inc. (KMA) evaluated C. Frank Zavala's
(Developer) proposal to demolish an existing 10 -unit apartment complex and construct
three single - family detached homes (Project) on the approximately 7,700 square foot
site located at 1703 West Balboa Boulevard (Site). The proposed demolition is subject
to the replacement housing requirements imposed by Government Code Sections 65590
and 65590.1 (Mello Act). The purpose of the KMA analysis is to determine if it is
financially feasible for the Developer to fulfill the pertinent requirements.
MELLO ACT OF 1982
The Mello Act was enacted to preserve affordable housing opportunities for low to
moderate income persons and families within the California Coastal Zone. The Mello
Act provisions apply to the demolition, conversion and construction of housing, and the
requirements are imposed on all jurisdictions located within the Coastal Zone.
The Mello Act requires the following:
Conversion or demolition of existing residential dwellings occupied by persons or
families of low or moderate income cannot be authorized unless provisions have
been made for the replacement of those dwelling units.
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To: Brandon Nichols, City of Newport Beach January 2, 2008
Subject: 1703 West Balboa Boulevard — Financial Feasibility Analysis Page 2
2. Replacement of dwelling units must be located within the same city in one of the
following locations, If feasible:'
a. On the site of the converted or demolished structure; or
b. Elsewhere within the Costal Zone; or
C. Within three miles of the Costal Zone.
3. The replacement dwelling units must be provided and available for occupancy
within three years following the commencement of work on the conversion or
demolition of the residential dwelling units.
4. The replacement dwelling unit is considered occupied by a person or family of
low or moderate income whether or not that unit Is affordable to the household.
5. A unit is deemed to be occupied by a low or moderate income household if the
tenant was evicted from the dwelling unit within one year prior to the filing of an
application to convert or demolish the units.
The Mello Act stipulates that a local government can create a program that allows
applicants for residential conversion or demolition projects to pay a fee in lieu of
providing the requisite income restricted units on -site. However, this option is a right not
an obligation, and cities that enact such a program must then accept responsibility for
fulfilling the Mello Act affordable housing obligations at an off -site location.
PROJECT SITE
The Site is currently improved with a two -story apartment building that was built in 1948.
The apartment complex includes 10 residential units, approximately 7,190 square feet of
building area and 1,800 square feet of garage space.
A survey completed by the City of Newport Beach (City) Planning Department In August
2007, in accordance with the Mello Act provisions, determined that eight units in the
existing apartment project are occupied by low and moderate income households.. The
income distribution is as follows:
Two moderate income households;
' Mello Act Section 66590 (g)(3) defines "feasible" as capable of being accomplished in a
successful manner within a reasonable period of time, taking into account economic,
environmental, social and technical factors.
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To: Brandon Nichols, City of Newport Beach January 2, 2008
Subject: 1703 West Balboa Boulevard -- Financial Feasibility Analysis Page 3
2. Three low income households; and
3. Three very-low income households.
METHODOLOGY
The Developer is proposing to build three market rate single - family detached homes on
the Site. As such, the first issue to consider is that the Developer's proposed project
does not include enough units to fulfill the Section 65590 replacement housing obligation
on -site, even if it is assumed that the replacement housing project it is financially
feasible.
The second issue for consideration is the fact that the existing 10 unit apartment project
is a legal nonconforming use from a zoning perspective; the Site's existing zoning limits
development to six units. Therefore, the eight unit replacement housing obligation
cannot be accommodated on the Site from a zoning perspective.
Based on the previously Identified factors, it can be fundamentally concluded that the
eight unit replacement housing obligation cannot be fulfilled on site. However, for the
purposes of the evaluating the economic feasibility component of the Mello Act
requirements, KMA created a prototype eight unit project (On -Site Replacement
Alternative). The KMA analysis of the On -Site Replacement Alternative is presented in
the attached tables, and it includes the following components:
An order of magnitude estimate of the cost to develop eight townhome units.
2. A projection of sales revenues based on the allowable sales price for three very-
low income, three low Income, and two moderate income units based on the
affordability standards imposed by California Health and Safety Code Section
50052.5,
3. The profit or loss generated by the development being analyzed.
PROJECT DESCRIPTION
Notwithstanding the existing zoning requirements, the eight unit On -Site Replacement
Alternative development scope is based on the following assumptions:2
Each unit includes 700 square feet of gross living area (GLA);
2 See Table 1.
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To: Brandon Nichols, City of Newport Beach January 2, 200E
Subject: 1703 West Balboa Boulevard - Financial Feasibility Analysis Page 4
2. Each unit includes one bedroom and one bathroom; and
3. Each unit includes 350 square foot attached tandem configured garage.
FINANCIAL ANALYSIS
Total Development Costs
KMA estimated the development costs for the On -Site Replacement Alternative using
the following information sources:
Estimated property value of the Site under its current use s ;
2. Construction cost estimates based on industry standards for the prototype
development scope.
The development costs have been estimated based on the following assumptions:
The Site acquisition costs total $2.1 million, or $274 per square foot of land area;
and
2. The direct construction costs are estimated at $211 per square foot of gross
building area (GBA) .4
3. The indirect costs and financing costs are based on the following assumptions:
a. The Developer estimated the public permits and fees costs at $13,300
per unit. The City staff should verify the accuracy of this estimate.
b. KMA estimates that the balance of the Indirect and financing costs will
equal 40 %D of the direct construction costs.
As can be seen in Table 2, the construction costs are estimated at $2.59 million or
$323,000 per unit. When the $2.1 million in land costs are included the development
costs are estimated to total $4.69 million.
3 An appraisal has not been commissioned for the Site. The estimated property value is based on
2007 rent roll submitted by the Developer. See memorandum "1703 West Balboa Boulevard -
Mcllo Act In -Lieu Fee Analysis" for details regarding the current property value of the Site.
4 Based on direct cost estimates for multi- family projects in Orange County.
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To: Brandon Nichols, City of Newport Beach January 2, 2008
Subject: 1703 West Balboa Boulevard — Financial Feasibility Analysis Page 5
Total Sales Revenue
Market Rate Sales Prices
KMA compiled recent home sales comparables for attached one - bedroom units to assist
in projecting the achievable market rate prices for a 700 square foot attached unit.
Based on the oomparables KMA reviewed, the median market rate sales price for a one -
bedroom and one -bath unit is approximately $393,000 and the median prioe per square
foot is $553. When the price per square foot is applied to the prototype 700 square foot
one - bedroom unit, the estimated market rate safes price is $387,000.
Restricted Sales Prices
Section 50052.5 defines the methodology that must be employed to calculate the
restricted sales price for units being sold to moderate, low and very-low income
households. The benchmark standards identified in Section 50052.5 are:
The income available for all housing related expenses is calculated as follows:
a. The household size used for affordable housing cost calculation purposes
is always set at one more person than the number of bedrooms In the
unit. For instance, the household size for a one - bedroom unit is set at
two persons.
b. The household income is set based on data published by the State of
California Housing and Community Development Department (HCD).
The applicable 2007 Orange County median income (Median) for price
setting purposes is $63,000.
C. The affordable housing costs are calculated based on 35% of the defined
gross household income for Moderate income households and 30% of the
defined gross household income for Low and Very-Low income
households.
2. The ongoing housing related expenses are estimated as follows:
a. KMA estimated insurance and maintenance expenses at $2,700 per year
for one- bedroom units.
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To: Brandon Nichols, City of Newport Beach January 2, 2008
Subject: 1703 West Balboa Boulevard — Financial Feasibility Analysis Page 6
b. Utility expenses are estimated at $924 per year for one - bedroom units,
based on the allowance published by the Orange County Housing
Authority.6
C. Property taxes are calculated at 1.1 % of the estimated affordable price for
the units.
3. The following assumptions were applied to determine the maximum affordable
sales price:
a. The interest rate for the first trust deed mortgage is estimated at 6.22% 6,
and the amortization period is set at 30 years.
b. The homebuyer down payment is set at 5% of the units affordable price.
Based on the preceding assumptions the affordable purchase prices for the replacement
units are as follows:
Income
Number
Affordable
Sales
Level
of Units
Price
Revenue
Moderate
2
$254,400
$509,000
Low
3
$118,600
$356,000
Very-Low
3
$71,500
$215,000
Total
8
$1,080,000
Developer Pront /(Lass)
KMA estimated the total development costs at $4.69 million and the sales revenue at
$1.08 million. Thus, the development costs exceed the projected sales revenues by
$3.61 million.
CONCLUSIONS
The KMA analysis indicates that the development costs for the On -Site Replacement
Alternative exceeds the revenues that could be anticipated to be received from the
Project before any consideration of Developer profit. It is therefore, the KMA conclusion
that it would be financially Infeasible for the Developer to undertake such a project.
Furthermore, given that the affordable purchase prices for the very-low, low and
moderate income units are all less than the cost to construct the units, KMA concludes
6 Published in October 2006.
6 Based on Fannie Mae 30 -year fixed rate mortgage; published November 8, 2007,
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To: Brandon Nichols, City of Newport Beach January 2, 2008
Subject: 1703 West Balboa Boulevard — Financial Feasibility Analysis Page 7
that the development of any replacement units on site would not be financially feasible
under any affordable/market rate scenario. As such, the Developer should not be
required to fulfill the Section 65590 obligation on -site.
It is important to understand that the City has the obligation to fulfill the replacement
housing obligations generated by the Mello Act. To assist in fulfilling the obligation, the
City has the option to impose an in -lieu fee on the proposed Project.
In an accompanying memorandum, KMA quantifies the in -lieu fee that the City could
reasonably impose on the Developer in lieu of requiring the Developer to fulfill the
Section 65590 obligations on -site. The in -lieu fee analysis is not based on the feasibility
analysis. rather, the analysis is intended to identify the in -lieu fee amount that would be
required to allow the City to fulfill the Mello Act replacement housing obligations in an off -
site location within the City.
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TABLE 1
ON417E REPLACEMENT ALTERNATIVE: ASSUMPTIONS
FINANCIAL FEASIBILITY ANALYSIS
1703 WEST BALBOA BOULEVARD
NEWPORT BEACH CALIFORNIA
.
Land Area (Sf) 7,088
# of Units 8
Density (Units/Acre) 46
Product Type TwoStoly Building
Grass Building Area tStfUnit1
Gross Living Area (GLA) 700
Tandem Garage Space 360
Total Gross BuiWmg ArealUnk 1,050
Unit Mix (1- Bedroom Units?
Market Rate Units
0
Moderate Income Units
2
Low Income Units
3
Very -Low Income Units
3
II. Average Market Rate Price
$387,000
Per Square Foot GLA
$553
Ill. Affordable Safes Price °
Moderate Income Units
$254,400
Law Income Units
$118,800
Very-Low income Units
$71,500
1 Calculated based on Califomia Health and Safety Code Section 60052.5 standards.
Prepared by: Kayser Marston Assodatft, ins
Filename: 7703 _Balbos_Feasrbiityj�nalysts_t 02 OB.zIs;Tabie 1 & 2; aft
TABLE 2
ON -SITE REPLACEMENT ALTERNATIVE: FINANCIAL ANALYSIS
FINANCIAL FEASIBILITY ANALYSIS
1703 WEST BALBOA BOULEVARD
NEWPORT BEACH, CALIFORNIA
Estimated Development Costs
Land Costs i
$274/Sf of Land Area
$2,100,000
Direct Costs 2
$211 rd of GBA
1,772,000
Permits & Fees'
$13,400/Unk
107,000
Indirect/Financing Costs °
40% of Direct Costs
700,000
Total Development Costs
$586,000/Unit
$4,688,000
Total Construction Costs
$323,600/1)nk
$2,688,000
II. Est, meted Sales Revenues
Market Rate Units $0
Moderate Income Units 2 Units @ $254,40011Jnit 509,000
Low Income Units 3 Units @ $118,600Nnft 356,000
Very Low Income Units 3 Units @ $71,5001Unit X000
Total Sales Revenues $1,080,000
III. Developer ProfftltLossl Calculation
Total Sales Revenues $1,080,000
(Less) Total Development Casts (4,688,000)
IV. or Profiti Logs 808 OOD
I Based 2007 rent roll submitted by the Developer.
2 Based on industry standards for multi-family projects developed in Orange County.
a Based on Developer's estimate of $13,3001unit,
° Based on 40% of the direct costs.
Prepared by: Keyser Marston Raeodate% Inc.
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APPENDIX A
FINANMAL FEASIBILITY ANALYSIS
1703 WEST BALBOA BOULEVARD
NEWPORT BEACH, CALIFORNIA
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