http://paloaltoonline.com/print/story/print/2013/09/13/city-delves-into-economics-of-jay-paul-co-proposal


Palo Alto Weekly

News - September 13, 2013

City delves into economics of Jay Paul Co. proposal

Analysis shows developer would profit, even after paying for new police headquarters

by Gennady Sheyner

How much is a zone change worth?

That's the question Palo Alto is trying to answer as it contemplates the largest "planned community" project in the city's congested planning pipeline: a proposal by Jay Paul Company to build two four-story office buildings at 395 Page Mill Road. On Wednesday, the city unveiled a new tool for answering the question: a pro forma analysis that seeks to gauge whether Jay Paul has offered enough in "public benefits" to merit the requested zone change.

If Jay Paul's plan is approved, the developer would build a new police headquarters for the city in exchange for permission to construct 311,000 square feet of office development next to AOL's Silicon Valley headquarters. The report from the city's consultant, Applied Development Economics (ADE), suggests this is a reasonable tradeoff, at least economically speaking (a separate Environmental Impact Report will analyze potential parking and traffic problems).

The economic analysis is the first of its kind. It was prompted by a swell of community frustration about recent planned-community projects whose benefits didn't materialize as promised. The two most often cited examples are the public plazas that were offered by developers but that were later subsumed by Caffe Riace and Saint Michael's Alley. Earlier this year, City Manager James Keene and the City Council agreed that it would be useful to have a third party evaluate the values of the zone change and the proposed benefits, respectively.

In its report, which the City Council is scheduled to discuss Monday night, ADE estimates that Jay Paul can cover the $49 million cost of the new police building and still walk away with 17 percent profit over 30 years, though it acknowledges that the profit could drop dramatically if interest rates were to rise or the hot real estate market were to cool down. It assumes that the building would reach 98 percent occupancy and that interest rates will remain at their present low levels.

The report notes that developers "typically require a pro forma result in excess of 20 percent IRR (internal rate of return) so there is a margin to cover inevitable cost increases when projects are actually developed."

ADE also determined that if the city asks Jay Paul to reduce the scale of the project, it would significantly restrict its ability to provide a public benefit and still achieve the same rate of return. According to ADE, if the project were reduced by 25 percent, the public benefit would have to be reduced by about 60 percent to achieve the same return on investment. That's because construction would entail many fixed costs, including the land and the site development, which is "complicated under any development scenario" because of toxic contamination at the site. Because development of any sort would be expensive at this site, the public benefit would have to be reduced from $49.3 million to $26.9 million, the report states.

If the project were reduced by half, the report states: "There would be no possibility of any public benefit contributions and still achieve the same rate of return."

The economic analysis is being performed at a time when the council is weighing a range of options, including a bond measure and an increase in hotel taxes, to fund needed infrastructure improvements. Replacing the city's small and seismically deficient police headquarters in downtown Palo Alto is at the top of the city's priority list.

Even so, council members and planning officials have maintained that constructing the police building will not, in itself, win Jay Paul the city's approval. The company will also have to find a way to prevent potential parking and traffic problems at what is already one of the most congested sections of the city. Planners had expected to provide on Monday a preliminary analysis of the Jay Paul development's traffic impacts, but that report was delayed because of staff's concern that some of its assumptions may be incorrect.

The traffic analysis for the Jay Paul proposal is now scheduled to be released early next year, according to a staff report.

Staff Writer Gennady Sheyner can be emailed at gsheyner@paweekly.com.

Comments

Posted by Rich, a resident of Ventura
on Sep 14, 2013 at 11:51 pm

The City's economic analysis was done on the basis that the developer holds the project and never sells it. If the developer instead sells the project after leasing it, the results are quite different.

Using the same average rental rate of $5.40/square foot x 311,000 square foot equals monthly rental nome of $1,679,000 or $20,152,800 per year. Using a cap rate of 6%, the project would sell for approximately $335,880,000. After deducting the goal cost to construct the project (the City's consultant shows these costs at approximately $225,000,000), the developer would net a profit of $110,000,000.

This developer will make a killing and leave Palo Alto a traffic mess that will endure forever!


Posted by Wayne Martin, a resident of Fairmeadow
on Sep 15, 2013 at 7:32 pm

There are also a number of hard to define costs that the City would have to deal with, called externalities. These sorts of expenditures include the need for public safety head count, which includes fire suppression support.

Even though the building will add $200+M (probably) in terms of new property taxes, most of the new taxes will go to the PAUSD. The City will see only about 9% of any new taxes--$90K per $1M in asssessed value.

Given a building this size, there will doubtless be various calls for Staff services, which might not occur for a while.

There will no doubt be calls for more housing, both low-income, and market rate.

Companies leasing at this site that want their employees to use Caltrain Go-Passes will be transferring a significant portion of the cost of their employees transportatioh costs to the general public--via sales tax transfers to Caltrain.

It's not clear that there would be a direct demand for education services for employees of this building who do not live in Palo Alto, but there is always a possibility that future employees might try to illegally enroll their children into the PAUSD.

Some of these costs can be seen to exist, although they might be difficult to fully estimate at this time. If the City doesn't acknowledge these externalities, and make some accounting for them in their economic analysis--then this effort will not be of much value to the taxpayers as it could be.


Posted by Eyes opened, a resident of Green Acres
on Sep 17, 2013 at 10:55 am

By this sort of process, we could economically justify murder, euthanasia, and prostitution.

Why doesn't City Council start with asking whether any of this is a good or bad idea? Thinking about our town as a whole, and maybe (I know it's so hard) listening to what residents want for their town? (Rhetorical question - they don't because they aren't looking for answers, only justifications to do what they want to do to us for their developer friends.)

The guide for whether it's a good idea should be the General Plan. But, oh, that's right -- City Council and staff cherry pick it to support whatever they want to do and ignore everything that doesn't, failing to look for consistency. Failing that, they sneak things into the general plan to give them permission (like rezoning Maybell, or densifying South Palo Alto).

I want a City Council made up of people from representative districts around town! And at the moment, anyone but these $&()^$s.