M EMORANDUM
To: City of Anaheim
From: Economic & Planning Systems, Inc.
Subject: Financial Feasibility and Fiscal Benefit Assessment of ocV!BE; EPS #214021
Date: September 20, 2022
The City of Anaheim (City) retained Economic & Planning Systems (EPS), along with signage/sponsorship experts Victus Advisors, to assist with financial feasibility and fiscal benefit analysis of the 100-acre ocV!BE development application. The development is proposed to be a mixed-use entertainment district comprising a variety of uses, including residential, office, restaurant, retail, hospitality, entertainment, and open space amenities.
The City is processing the ocV!BE land use application and is negotiating with the applicant on public financing, with draft development agreement (DA) terms describing the use of advertising signage to fund capital improvements to the site. A myriad of issues associated with the DA, including consideration of business terms, project feasibility limitations, and needed public improvements necessitate analysis of the proposed project’s economic viability and benefits, including consideration of potential market value, development costs, and fiscal benefits generated for the City. This memorandum summarizes EPS analysis of the ocV!BE application.
EPS and Victus Advisors reviewed project data and financial assumptions provided confidentially by the applicant, including the development program, market assumptions, cost estimates, and financial underwriting metrics. Based on these data and additional market intelligence collected by EPS and Victus, the consultant team developed independent pro forma financial feasibility calculations, incorporating valuation of “spectacular” billboard signage rights which may be allowed at the discretion of the City.
As part of the effort, EPS also conducted a cursory review of the applicant’s project infrastructure and amenity improvement costs. The EPS analysis presented here considers current capital cost estimates for the project provided to EPS by the applicant. While ongoing operations and maintenance of public improvements will be funded through a Memorandum September 20, 2022
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Summary of Findings
This feasibility analysis finds that the ocV!BE development does not appear financially robust from a traditional real estate development economics perspective but does represent a unique opportunity for site ownership to leverage its stake in an existing arena facility to create a vibrant sports- and event-anchored mixed-use district that is accretive to the value of the Anaheim Ducks team. The ocV!BE proposal relies on a diverse mix of uses to create a dynamic live-work-play neighborhood at the Honda Center, a one-of-a-kind project that may exceed value expectations. In addition, the potential to build and hold these ocV!BE assets over a long time horizon, combined with the owners’ commitment to the site and the City of Anaheim are factors that may lower return-on-investment expectations for the project, below what is typical for comparable real estate development investments. And the contribution of digital signage revenues also helps improve project feasibility. The “upside scenario” discussed below posits project revenue and investment return conditions in which the project achieves financial feasibility.
The EPS analysis finds that the ocV!BE development program generates a residual value of approximately $250 million before site and amenity costs, based on real estate values observed in the market today. This valuation is sufficient to cover the estimated $70 million in land acquisition costs but is inadequate to cover all of the necessary site improvements and amenity costs associated with the project. When signage value of about $100 million is factored in, the expected residual value of the project increases to $350 million before site and amenity costs. While this signage value improves project economics, overall project value falls short of the total anticipated development budget by about $160 million.
Analysis of an “upside scenario” for the project’s real estate value combined with tempered requirements for return-on-investment reveal that the project is in the realm of financially viability. EPS financial analysis shows that market rate residential, the market hall, the Honda Center Entertainment District, and the hotels are strong contributors to project value. Creative office space and the concert hall are not likely contributors to land value but are important for drawing consumers to the site and contribute to the overall economic success of the project. Affordable housing is a critical social equity element in the project but also is a net cost to the development, even with low-income housing tax credits. The complementary suite of uses planned for the site and synergy with the Honda Center anchor could result in project revenues that exceed observable expectations. Furthermore, the unique investment entity backing the project may be willing to accept lower investment returns than is typical. In an analytical scenario where market-rate real estate revenue is 8 percent higher than expected, and investment return expectations are moderated slightly (a reduction in yield requirements of 15 basis points), the ocV!BE project development economics improve to the point that the value of the project justifies the full cost of development.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 3 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx The feasibility analysis includes approximately $440 million in net site development and project amenity costs, which reflect $576 million in total site and amenity costs and revenue offsets valued at about $136 million. Site and amenity costs include1:
- Shared parking structures containing more than 7,000 spaces; - Parks within the project (Meadow Park, Urban Park, and Wellness Park); - Infrastructure (including roads, bridges, and dry utilities); - Amenities (plazas, public spaces, and art);
- Information technology (data center); and
- Development impact fees (funding for City transportation, water and sewer, and other public facilities).
The site development and amenity costs have a profound impact on project feasibility. In addition to signage revenue, additional sources of funding are likely to be needed to cover these costs, with ongoing discussions between the City and applicant concerning the potential for state/federal grant funding and local Anaheim Tourism Improvement District (ATID) revenues to be used to help defray a portion of the extraordinary site development costs at the project, especially those public facilities south of Katella Avenue that also benefit the ARTIC transit facility.
While not entirely compensating for the deficit between the value of the proposed land uses and the cost of horizontal development, the approval of signage rights (most notably the “spectacular” signage) has an important positive effect on project feasibility. The spectaculars include two advertising videoboards which are between 100 and 150 feet in height and require discretionary City approval. The value of the signage rights, when combined with additional static signage throughout the project, is expected to add approximately $109 million to value.2 After revenue sharing with the City, signage yields a net contribution of about $100 million toward project development. The ocV!BE financing strategy proposes to use revenue from these signage assets to service public debt (lease revenue bonds) issued by the City and secured by Honda Center revenues. Proceeds from these bonds are proposed to cover a portion of the project’s site development and amenities costs. The signage revenue and associated low-cost public financing makes a critical contribution to project viability.
If developed, ocV!BE could generate about $10 million (2022 dollars) in combined property tax, sales tax, transient occupancy tax (TOT), and signage revenue annually for the City of Anaheim. At roughly $4.8 million, over half of the estimated $9.2 million in recurring tax revenue benefit is from TOT generated by two major hotels proposed on the site, a combined 550 rooms with an expected average daily room rate of $200. Property tax that would accrue to the City’s General Fund is estimated to be approximately $3.0 million per year, while sales tax from the site’s retail and restaurant would generate approximately $1.4 million in City revenue. In addition to these tax revenues, it is anticipated that the project’s signage will produce approximately $1.14 million per year for the City starting in year 11 of signage program operations (an estimated $670,000 in 2022 dollars).
1 Note that signage costs and revenues are not included in here but are addressed separately by the analysis.
2 Appendix B provides a summary of Victus Advisors’ analysis.
Memorandum September 20, 2022
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Financial feasibility and value estimates could be significantly greater or less than projected. If the project underperforms its market potential, or if construction costs are higher than anticipated, or if macroeconomic conditions erode in the future, then the projected feasibility of development will weaken accordingly. The size and complexity of the site, infrastructure requirements, and other extraordinary costs serve as potential barriers to development. While this analysis seeks to acknowledge all of the costs associated with development, and cost contingencies have been included in the analysis, any higher cost and/or unforeseen costs will have a negative effect on development feasibility.
The analysis reflects professional opinions concerning market potential. While the value assumptions relied on by the financial analysis are rooted in current market realities, the ocV!BE project is expected to outperform typical local market conditions. If the market value potential that appears achievable based on real estate opportunities generated by the development plan fails to fully materialize, it will have a negative effect on the development feasibility relative to the findings of this analysis. Conversely, the project may outperform expectations. To illustrate this possibility, the analysis includes an upside scenario in which subsidy “gap” funding sources would not be required to achieve feasibility.
This analysis provides a planning-level assessment of overall feasibility at buildout but is insensitive to phase-level economics (i.e., the timing of revenues and costs). Moreover, unique and challenging development projects such as ocV!BE demand strategic execution. A successful project will require expert market positioning, branding, promotion, and operations to achieve financial feasibility.
Study Approach and Value Summary
This memorandum presents the results of the financial feasibility analysis of the proposed ocV!BE project. In this analysis, real estate market value assumptions, operations cost factors, and investment return requirements are coupled with development cost data to build a financial model that assesses economic value.
Summary of Residual Value Estimates
The financial analysis estimates the “residual value” expected to result from the proposed ocV!BE development program. Discussed in more detail below, the residual value perspective considers whether supportable real estate investment value (i.e., market value less return requirement) is sufficient to cover anticipated development costs. Figure 1 presents “residual land value” before site costs (i.e., supportable development value less vertical development cost). As shown, market rate housing, cube office, hotel and most entertainment uses generate significant positive residual value for the project, while below-market-rate apartments must be cross subsidized by the value-generating uses. In addition, the anticipated value of project signage also serves to buoy the value of the site, but not enough to cover site development and amenity costs. Figure 1 shows a residual land value of negative $90 million, including signage rights and the full site development and amenity cost estimate. Ultimately, feasibility is established by subtracting land costs from estimated residual land value of the project.3 The resulting “project residual” indicates whether there is a value shortfall or alternatively, potential for developer investment
3 The land cost basis includes approximately $70 million in site acquisitions.
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Figure 1 Residual Value Estimates
Consideration of the Upside Scenario
Strong market approval of the project combined with tempered developer/investor return on investment expectations improve the project’s feasibility outlook (assuming costs remain unchanged). If, for example, uptake on the development is strong enough that market rate real estate revenues increases by 8 percent in real terms, and the developer/investor is willing to accept a yield-on-cost 15 basis points lower (i.e., 0.15 percentage points below typical threshold yields), the project generates a positive residual land value after development costs of about $73 million, and a bottom-line project residual of about $2 million after land acquisition cost is taken into consideration. Figure 2 shows the results of the upside scenario analysis.
Use
Supportable
Development Budget
($ million)
Estimated Cost
($ million)
Residual Land Value
($ million)
Residential
Market Rate $581.5 ($498.9) $82.6
Moderate Affordable $24.7 ($24.9) ($0.1)
Low & Very Low Affordable1 $13.6 ($49.7) ($1.3)
Office
Cube $168.6 ($129.8) $38.8
Creative $94.4 ($96.2) ($1.8)
Hotel $237.5 ($182.9) $54.6
Retail and Entertainment
Honda Center District $120.4 ($70.5) $49.8
Restaurant Row $28.1 ($15.6) $12.6
Fine Dining $23.6 ($21.0) $2.6
Concert Hall $114.6 ($114.5) $0.1
Market Hall $85.4 ($73.3) $12.0
Total Vertical Development $1,492.4 ($1,277.3) $249.9
Signage / Sponsorship Asset2 N/A N/A $100.1
Residual Land Value with Signage $350.0
Site and Amenity Costs3 $136.0 ($576.0) ($440.0)
Residual Land Value After Site Costs ($90.0)
Estimated Land Cost Basis ($70.4)
Estimated Project Residual ($160.4)
[2] Estimate from Victus Advisors' 2022 valuation of ocV!BE's signage program. [3] Excludes signage capital investment, which is captured by the RLV with Signage calculation. [1] Affordable housing cost is presented here before low income housing tax credits. The analysis estimates the net cost of low and very low affordable housing after tax credits is about $14.9 million.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 6 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx Figure 2 Residual Land Value Estimates Under Upside Scenario
Use
Supportable Development
Budget
($ million)
Estimated Cost
($ million)
Residual Land Value
($ million)
Residential
Market Rate $648.8 ($498.9) $149.8
Moderate Affordable $25.5 ($24.9) $0.7
Low & Very Low Affordable1 $14.1 ($49.7) ($0.8)
Office
Cube $187.0 ($129.8) $57.2
Creative $104.4 ($96.2) $8.3
Hotel $262.1 ($182.9) $79.2
Retail and Entertainment
Honda Center District $133.2 ($70.5) $62.6
Restaurant Row $31.1 ($15.6) $15.6
Fine Dining $26.1 ($21.0) $5.1
Concert Hall $126.3 ($114.5) $11.8
Market Hall $96.4 ($73.3) $23.1
Residual Land Value Before Site $1,655.1 ($1,277.3) $412.5 Signage / Sponsorship Asset2 N/A N/A $100.1
Residual Land Value with Signage $512.6
Other Site and Amenity Costs3 $136.0 $576.0 ($440.0)
Residual Land Value After Site Costs $72.6
Estimated Land Cost Basis ($70.4)
Estimated Project Residual $2.2
[2] Estimate from Victus Advisors' 2022 valuation of ocV!BE's signage program. [3] Excludes signage capital investment, which is captured by the RLV with signage calculation. [1] Affordable housing cost is presented here before low income housing tax credits. The analysis estimates the net cost of low and very low affordable housing after tax credits is about $14.9 million.
Memorandum September 20, 2022
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The ocV!BE program will be negotiated and entitled through a Development Agreement with the City. The applicant team is actively pursuing the development program shown below. Figure 3 provides a summary of the dwelling unit counts and commercial real estate square footages included in the proposed program and financial analysis.
Figure 3 ocV!BE Development Program Overview
Use Units / Square Feet
Residential (Units) 1,500
Market Rate 1,305
Moderate Affordable 65
Low and Very Low Affordable 130
Office (Square Feet) 472,534
Cube 324,737
Creative 147,797
Hotel (Rooms) 550
Retail and Entertainment (Square Feet) 344,891
Honda Center District 156,973
Restaurant Row 26,515
Fine Dining 18,397
Concert Hall 66,006
Market Hall 77,000
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 8 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx Analytical Approach
This analysis relies on the well-accepted static
(stabilized-year) pro forma financial feasibility
framework to estimate the land value supported by
each of the development alternatives. The approach
compares real estate development value at project
stabilization (i.e., after project lease-up and sales are complete) with the cost of project development, in
constant 2022 dollars. The analysis estimates finished
real estate value based on assumptions concerning
market-supportable sale values, lease rates, operating
costs, and capitalization rates.4 The analysis seeks to provide an initial indication of feasibility but does not contemplate phasing or temporal cash flow
considerations.
Development cost assumptions reflect current (location- adjusted) construction costs, typical project soft costs (e.g., architecture and engineering), local fees and
permits, and a required developer return on investment.
The assumptions reflect EPS research, third-party data
(e.g., CoStar Group market), and correspondence with
the ocV!BE applicant team, City staff, and industry
sources.
This analysis estimates residual land value and a
bottom-line project residual. When real estate market
value exceeds total development cost, the difference
represents what a developer is able to pay for land. The calculation yields a value measure commonly referred to as “residual land value,” which is a primary output of
this financial analysis. A landowner would not
reasonably be expected to accept zero or negative land
value, thus a positive land value is needed for a
proposed project to be considered "feasible.” In the
case of ocV!BE, the project is considered feasible when the residual land value estimate is in excess of the
estimated land cost basis of $70 million. If residual land value exceeds the site cost basis, there is a project
residual that indicates additional return on investment may be achieved.
4 The capitalization rate is equal to annual net property income divided by total property value. This market-based factor indicates the multiple of net property income that a buyer will pay for a property.
Summary of Key Terms
Market Value – The estimated
sale price of a real estate asset,
assuming current market
conditions.
Vertical Construction – The
development of buildings and
structures.
Horizontal Construction – The
development of the project site,
including backbone infrastructure
(e.g., streets, sewer, water) and
landscaping.
Hard Costs – Direct construction
costs including labor, materials,
and associated overhead.
Soft Costs – Indirect development
costs such as architecture,
engineering, permits, and fees.
Contingency – A development
cost provision for unforeseen
events or circumstances.
Residual Land Value – The
estimated financial contribution
that a project developer can make
for land, given the site program
and financial assumptions
considered.
Project Residual – The surplus
value created by a project after all
development costs and required
investment returns.
Memorandum September 20, 2022
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Market Value
This analysis builds on market conditions established by the ocV!BE applicant team and assumes achievable lease rates based on market research conducted using sources including CoStar Group, Redfin, Smith Travel Research, and EPS knowledge of the local and regional commercial real estate landscape. The financial analysis relies on assumptions that are representative of the local and regional markets, the ocV!BE site, and specific program parameters. Figure 4 summarizes key market value factors calculated for each land use. Below-market-rate housing values reflect the mix of affordability levels included in the development program.
Figure 4 Revenue Assumptions Summary
Rental Housing – The multifamily rental market rate housing is expected to have a monthly lease rate of $3.20 per square foot (about $2,700 per month for an average unit). The housing format would be primarily mid-rise buildings, with potential for high-rise as well. This analysis reflects mid-rise housing development economics, as the market for high-rise residential in Anaheim currently appears aspirational.
The project meets below-market-rate housing goals by providing affordable housing, including in stand-alone buildings that benefit from low-income housing tax credits. The below-market-rate rental housing will be priced for very low- to moderate-income households.5 The analysis assumes that below-market-rate housing for very low- and low-income households may be developed in separate structures and that these projects take advantage of tax credits that offset eligible development costs. Monthly rent for a below-market-rate unit is $2.16 per square foot (about $1,900 per month for an average unit).
5 The proposed program includes below-market-rate housing for 65 very low-income, 65 low-income, and 65 moderate-income households.
Use Value
Residential (Per Unit)
Market Rate $445,624
Moderate Affordable $380,279
Low and Very Low Affordable $104,779
Office (Per Square Foot)
Cube $519
Creative $638
Hotel (Per Room) $431,743
Retail and Entertainment (Per Square Foot)
Honda Center District $767
Restaurant Row $1,062
Fine Dining $1,283
Concert Hall $1,737
Market Hall $1,109
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 10 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx Retail – Retail uses are anticipated to be an essential value generator for the project. Retail includes traditional retail and restaurant spaces as well as entertainment uses. Average monthly rents range from roughly $2.00 to over $7.00 (NNN) per square foot, by retail type, with entertainment uses at the low end of that spectrum. Individual lease rates will vary significantly by location within the project, size, and other factors.
Office – The project adds new office space, in addition to existing office space in the Arena Corporate Center that will be retained. The project includes two new office products, “creative office” and “Cube office.” The Cube building is a standalone tower, while the creative office sits above the entertainment district. Monthly average lease rates are anticipated to be about $3.00 and up (NNN) per square foot, with individual lease rates depending on the space. The lease rates analyzed are above current asking rates for office space in Anaheim but are comparable to lease rates observed in competitive market areas nearby. The location at ocV!BE is likely to support marketing premium Class A offices capable of garnering higher rent than typical product in the city today.
Hospitality –The program includes hotel uses totaling 550 rooms. The analysis expects the hotels will be mid- to upscale, with an average daily room rate of about $200. The hotels are anticipated to satisfy current and future demand in the market, including new demand generated by the Honda Center and other uses within the ocV!BE project.
Performance Venue – The concert hall is envisioned to be a community-serving 5,902-seat 66,000-square-foot flexible venue intended for a wide variety of events such as concerts, performances, conventions, banquets, esports and shows. Analysis of the venue should be viewed as preliminary due to uncertainty around the design and cost of this facility, along with associated revenue potential.
Project Costs
Project costs reflect a comprehensive vertical development budget and comprise construction costs, soft costs, and other project costs, including a development contingency allowance and the required developer rate of return.
Construction costs – Project construction costs cover the vertical development of building spaces, including all labor and materials, fit out, and general contractor charges. For hotel uses and housing, the costs include the necessary furniture, fixtures, and equipment (FF&E). Other uses are assumed to have a tenant improvement budget for fit-out, as is standard in the marketplace. Construction costs estimates reflect data from the ocV!BE applicant team, with EPS vetting assumptions against third-party cost estimating resources.6 The analysis of construction cost is specific to the type of construction anticipated for the ocV!BE site, with unique cost estimates for each building type (e.g., residential, office, hotel) as well as the building format (e.g., low- versus mid-rise construction).
Soft costs – Soft costs include professional services associated with planning, design, and other professional support services; assumptions regarding taxes and insurance and financing costs; and general and administrative costs borne by the project developer. Impact fees are estimated at a planning level and are included as site development and amenity costs in the analysis.
6 EPS evaluated the applicant team costs based on construction cost data for Anaheim provided to EPS by Marshall & Swift Commercial Building Cost Data.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 11 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx Relevant development impact fees include a Transportation Impact Fee, Storm Drain Impact Fee, Sewage and Sanitation District Fees, and a Parks and Recreation Fee. The analysis assumes that about 20 acres of park land is provided among Meadow Park, Urban Park, Wellness Park, and other open space.
Contingency – Other project costs include a development contingency of 10 percent of construction costs, consistent with industry project budgeting at the planning stage of project development.
Figure 5 summarizes the per-unit and per-square-foot vertical development costs used in the analysis. For each land use category shown, the cost estimate presented below includes the full development budget (hard, soft, and other costs) along with the cost of structured parking necessary for each land use.
Figure 5 Vertical Development Cost Summary1
Note: Development cost shown above for low and very low-income housing units is adjusted downward to reflect public subsidies from Low Income Housing Tax Credits.
Site Development Costs and Amenities – Site costs include horizontal development costs such as demolition, basic site work, open space and park land costs, infrastructure costs (i.e., streets and utilities), development impact fees, and project amenities. • Parks and Open Space – The project’s three major parks, Meadow Park (minimum of 4 acres), Wellness Park (4.7 acres), and Urban Park (1.3 acres), are estimated to cost approximately $40 million. This assumes about $90 per square foot in improvement costs. • Amenities – These include other publicly accessible areas such as multiple plazas and a paseo, along with features such as public art. Combined, these are estimated to cost approximately $45 million.
Use Vertical Development
Cost1
Residential (Per Unit)
Market Rate $382,330
Moderate Affordable $382,330
Low and Very Low Affordable $114,699
Office (Per Square Foot)
Cube $400
Creative $651
Hotel (Per Room) $332,545
Retail and Entertainment (Per Square Foot)
Honda Center District $449
Restaurant Row $587
Fine Dining $1,142
Concert Hall $1,735
Market Hall $952
[1] Cost estimates reflect total development budget by land use type, including construction cost, architecture and engineering, permits, financing, marketing, overhead, and contingency.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 12 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx • Impact Fees – Fees include a Transportation Impact Fee, Storm Drain Impact Fee, Sewage and Sanitation District Fees, and a Parks and Recreation Fee. The project’s location in the Platinum Triangle increases the project’s fee burden due to supplemental fees charged to development in the area. It is estimated the applicant will pay approximately $76 million in impact fees. While the City offers partial impact fee credits for certain transportation improvements, the Applicant is not pursuing any such reimbursement at this time. The impact fee burden calculated in this memorandum reflects the full fee amounts.
• Infrastructure – The proposed development requires a number of infrastructure improvements. These include roadway improvements such as Douglas Ave., Katella Ave, River Rd., and Cerritos Way, among others. Additionally, dry utilities are also required, along with several bridges, an offramp from SR-57, and a culvert. Combined, these improvements cost an estimated $80 million.
• Information Technology – This includes a data center along with the standard IT infrastructure required. The user app that the applicant intends to deploy for residents, employees, and visitors of the site results in the need for non-standard technological improvements. IT infrastructure is estimated to cost approximately $25 million.
Income-Generating Horizontal Development – In addition to the site and amenity costs listed above, the applicant is proposing other improvements that are assumed to generate revenue to offset their cost.
• Parking Structures – Four parking decks containing 7,111 parking spaces are proposed which, along with the associated bridges over Douglas Avenue, are estimated to cost approximately $225 million, or about $31,000 per space.7 Event venue ticket sales are expected to generate about $5.6 million per year in parking revenue, which results in net revenue of $2.8 million that can be applied toward parking structure development (i.e., due to the “coverage ratio” associated with the anticipated lease revenue bonds).8 Capitalized at a rate of 5 percent, the available revenue contributes about $56 million toward development cost, resulting in a net parking structure cost of $169 million. • Amphitheater – An approximately 6,000-seat amphitheater is proposed adjacent to Meadow Park, which is expected to cost approximately $30 million. These costs are anticipated to be recouped through revenue generated by programming at the venue. • Central Utility Plant – This comprises an onsite chilled water central plant, which is estimated to cost approximately $25 million. This cost is anticipated to be recouped through user charges and fees.
• Honda Center Improvements – The Applicant intends to make renovations to the Honda Center, including the West Entrance and rooftop deck, estimated to cost approximately $25
7 The Development Agreement calls for a minimum of 6,800 parking space (Section 7.3). The Applicant anticipates development of 7,111 spaces, as reflected in this analysis. 8 A portion of the parking revenue will not be used to finance parking facility construction and will be available to fund operation and maintenance of the parking facilities.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 13 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx million. These costs are expected to be recouped through ticket sales for events at the Honda Center.
• Signage Assets – The Applicant is proposing two “spectacular” digital advertising displays on the side of parking structure B (north of Katella) and 15 static advertising signs visible from adjacent highways and public streets. These signage assets are expected to cost approximately $4 million. The value of the signage program is a significant revenue generator for the project, even after shared revenues that flow to the City (see Shared Sign Revenue section, below). 9
Figure 6 provides an overview of site and amenity costs (with the exception of signage), including those that are anticipated to offset costs through future revenue.
Figure 6 Site and Amenity Costs
9 In addition to the signage considered by this analysis, the Applicant is proposing one spectacular digital display and several static displays on the parking structure A to serve the ARTIC facility. These additional signs are excluded from this financial analysis because the revenues generated are required to be used to maintain and operate the ARTIC facility.
Improvement1
Cost Capitalized Value Net Cost
Supportive Infrastructure and Amenities
Adjacent Parks $40,000,000 $0 $40,000,000
Amenities $45,000,000 $0 $45,000,000
Impact Fees $76,000,000 $0 $76,000,000
Infrastructure $80,000,000 $0 $80,000,000
IT $30,000,000 $0 $30,000,000
Parking Decks2
$225,000,000 $56,000,000 $169,000,000
Amphitheater3
$30,000,000 $30,000,000 $0
CUP3
$25,000,000 $25,000,000 $0
Honda Center3
$25,000,000 $25,000,000 $0
Total Site and Amenities Cost $576,000,000 $136,000,000 $440,000,000 [1] Excludes signage investment
[2] Projected incremental parking revenue is $5.6 million annually through a ticket fee. After accounting for the lease revenue bond coverage, approximately 50% of those fees, or $2.8 million, can be capitalized at a 5% rate. This implies a value of approximately $56 million. [3] Improvement is anticipated to generate sufficient revenue to cover costs.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 14 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx Land Cost Estimate
Figure 7 shows the land cost basis of the ocV!BE project, which is estimated at approximately $70 million. The development relies on 37.7 acres acquired from public entities, which were sold at an average of about $645,000 per acre, pricing which reflects the requirement that parking be maintained on site. In addition, the development proposal requires acquisition of 11.9 acres of privately-owned land which is estimated to cost an average of $3.9 million per acre.10 The blended average acquisition cost of all land acquisitions is estimated at approximately $1.4 million per acre. The applicant team also controls the 23.1-acre Arena Commerce Plaza, acquired for approximately $125 million. The cost of that site reflects the existing, stabilized office buildings there. Accordingly, the financial feasibility analysis attributes the cost of Arena Commerce Plaza to the existing building assets rather than ocV!BE land cost basis. Additional acreage included in the project proposal includes public parking and open space that will not be owned by the project applicant.
Figure 7 Land Cost Basis
Note: The balance of the 100-acre project site (about 27 acres) includes land that will be retained by the City (i.e., ARTIC property, land under the Honda Center) and public streets that will be improved as part of the project.
10 Crexi research data provided by ocV!BE.
Acreage Total Cost Cost per Acre
Public Land Acquisitions
Transfer Lot1
7.35 $2,150,000 $292,517
HC Lot 1/3 & Lot 21
9.23 $7,950,000 $861,322
Orange County Flood District 14.70 $12,700,000 $863,946 SCE Easement Property2
6.42 $1,500,000 $233,645
Subtotal 37.7 $24,300,000 $644,562
Private Land Acquisitions3
11.9 $46,079,193 $3,881,988
Total Land Cost Basis 49.6 $70,379,193 $1,419,794
Arena Commerce Plaza4
23.1 Acquired Site Area 72.6
[1] Prices reflective of parking encumbrance on these sites. [2] Site transaction currently under negotation.
[3] Based on cost per acre of comparable properties, according on Crexi research provided by ocV!BE. [4] The $125,000,000 acquisition of the Arena Commerce Plaza was valued based on three stabilized office buildings that remain in use, not the land itself. This acquisition is not included in the land basis calculation.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 15 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx Pro Forma Financial Analysis
The following summarizes the financial feasibility findings from analysis of the ocV!BE program.
Key Findings from Pro Forma Financial Feasibility Analysis The analysis finds that the proposed ocV!BE development proposal is financially challenged from a traditional development economics perspective. The proposed land use program generates a positive residual land value of about $250 million, which is more than double the site’s acquisition cost of $70 million. However, the site and amenity costs described in the previous section, which total a net of $440 million, leaves the project with a value deficit of roughly $160 million, even after the $100 million net signage rights value estimate is factored in.11 Appendix Figure A-1 summarizes the results of the planning-level financial feasibility analysis of the proposed ocV!BE project. Several of the proposed land uses appear to generate relatively high residual land values in isolation. Highest of these is market rate residential at $83 million, followed by the hotels at $55 million, the Honda Center Entertainment District (HC District) at $50 million, and the “Cube” office at $39 million. Positive RLV is also generated by “Restaurant Row” ($13 million), the market hall ($12 million), and the fine dining spaces ($3 million). The Concert Hall is only expected to cover its vertical development cost, though the foot traffic from events at the venue is expected boost performance at the site’s retail and restaurant uses.
Creative office is shown to generate slight negative $1.8 million, which reflects the high cost of construction for this unique space and uncertain tenanting potential. Both low and very low affordable housing and moderate affordable housing are financial cost to the project, by $1.3 million and $130,000, respectively.12 The low and very low affordable housing development is assumed to benefit from Low Income Housing Tax Credits that offset much of the cost of development.
Shared Sign Revenue Analysis
Sign District and Requirement for Revenue Sharing
The proposed project is located within the City of Anaheim’s "Arena/Stadium Special Sign District" which allows the City to consider applications for appropriate and economically viable signage that (a) coordinates with architectural elements within the Arena/Stadium Special Sign District; (b) reflects a vibrant, contemporary image of the Arena/Stadium Special Sign District as a significant sports and/or entertainment center of the City; (c) limits visual clutter by regulating the number, size, and location of signs; and (d) controls potential traffic hazards and protects public safety. Per City code, revenues generated from Arena/Stadium signs must be shared with the City and may benefit areas outside of the District in addition to supporting the construction, day-to-day operations, long-term maintenance, capital improvements, preservation, and enhancement of businesses within the Arena/Stadium Special Sign District, including facilities management.
11 Signage value after revenue sharing.
12 Note that the inclusion of affordable housing in the program creates benefits under stated density bonus housing law that are not quantified here.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 16 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx ocV!BE Sign Revenues are Projections
The City engaged signage/sponsorship experts Victus Advisors to provide valuation analysis and advisory concerning the ocV!BE signage program and revenue sharing agreement. Victus relied on market information and industry research to establish revenue potential for each signage asset. The analysis also considered necessary reinvestment in signage technology, ongoing operations and maintenance costs, and brokerage commissions to arrive at net signage revenue estimates. The net cash flow from the signage program over 30 years is the basis of the valuation estimate presented in this analysis, with the net present value calculated using a 5% discount rate.
Signage Revenue Sharing Structure
The signage revenue sharing structure commences after year 10 of operations, which allows revenue generated during the early years of program operations to fund ocV!BE project cost obligations, including public financing of public infrastructure included in the project. Each operating year following year ten (the “threshold year”), shared signage revenue is calculated as operating year signage revenue less threshold year signage revenue. The City and the applicant had initially considered that shared signage revenue would be split equally (50/50) between the City and the ocV!BE manager (or another designated manager affiliate).
Based on the revenue sharing parameters under consideration, Victus calculated the present value of shared signage revenues over a 30-year time horizon. The analysis highlighted that more than three-quarters (77%) of the monetary value received by the City would be deferred to the final 10 years of the 30-year program (operating years 21 through 30). To remedy this issue, Victus calculated a constant annual payment that spreads out revenues to the City evenly and results in the same net present value. Furthermore, Victus recommended that the constant annual payment be an agreed upon fixed payment to avoid annual auditing procedures and likely disagreements about eligible revenues and costs.
The Victus research estimates advertising revenue generated by the videoboards and static signage is expected to be roughly $6 million during the first year of stabilization. Including operations and maintenance costs and reinvestment in the technology every 10 years, the analysis estimates a net present value of approximately $109 million over a 30-year period. This data is from a third-party analysis conducted for the City by Victus Advisors, which is summarized in Appendix B.13
The City and Applicant have crafted Development Agreement terms that formalize the envisioned sign revenue sharing structure. The DA specifies that after the threshold year (not later than eleven years after construction of the first digital a sign) and continuing during the initial thirty- year term of the Facilities Management Agreement, the shared sign revenues payable annually to the City shall be $1.14 million per year.14 These payments equate to a net present value of
13 In addition to the signage considered by this analysis, the Applicant is proposing one spectacular digital display and several static displays on the parking structure A to serve the ARTIC facility. These additional signs are excluded from this financial analysis because the revenues generated are required to be used to maintain and operate the ARTIC facility.
14 During any extended term, shared sign revenues may be split equally between the City and an affiliate of manager.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 17 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx about $9 million, which is deducted from the $109 million total signage value for the purposes of this financial analysis.
Fiscal Benefits from Tax Revenue
In addition to examining the economic feasibility of the ocV!BE project, EPS estimated selected fiscal revenues that would accrue to the City upon project stabilization. Specifically, EPS projected the amount of property tax, sales tax, and TOT that the development would generate.
The largest source of City revenue generated by the project is TOT at approximately $4.8 million per year. The estimated $32 million in annual room revenue expected to be generated by the site’s two hotels is taxed at a 15 percent rate.
With regard to property tax, EPS estimates an assessed value of approximately $1.5 billion subject to the 1% general levy. The project falls within tax rate areas where the City of Anaheim receives an incremental factor of 20 percent of the 1% levy (including property tax in lieu of vehicle license fees), which equates to annual property tax revenues of over $3.0 million.
Total taxable sales within the ocV!BE project are estimated at approximately $142 million per year. This is subject to a 7.75 percent rate, of which the City receives 12.9 percent (or 1 percent of total taxable sales). This results in an estimated $1.4 million in sales tax revenues accruing to the City annually. Sales tax assumptions for food and beverage at the hotel, concert hall and market hall were obtained from the applicant, while other retail and restaurant sales are based on per-square-foot sales data for Southern California.
Memorandum September 20, 2022
ocV!BE Feasibility and Fiscal Benefit Assessment Page 18 Z:\Shared\Projects\LA\214000s\214021_ocV!be\Deliverable\ocV!BE_Feasibility_9.20.2022 Final.docx Figure 8 Estimated ocV!BE Property, Sales and Transient Occupancy Tax Revenues
Considering these tax benefits in total with the signage revenue to the City discussed above results in a total fiscal benefit of approximately $9.9 million in 2022 dollars. The signage revenue in this calculation reflects payment of $1.14 million in shared signage revenue in year 11, which is estimated at about $670,000 in 2022 dollars. Note that future signage revenue is $1.14 million in nominal dollars and that the present value of that payment decreases with every subsequent year.
Revenue Source Taxable Value Estimated Annual
City Revenues
Property Tax1 $1,500,000,000 $3,000,000
Residential $610,000,000 $1,220,000
Office $260,000,000 $520,000
Hotel $240,000,000 $480,000
Retail/Entertainment $370,000,000 $740,000
Transient Occupancy Tax2 $32,000,000 $4,800,000
Sales Tax3 $142,000,000 $1,420,000
Hotel4 $5,000,000 $50,000
Retail5 $63,000,000 $630,000
Restaurant Row5 $11,000,000 $110,000
Fine Dining5 $7,000,000 $70,000
Concert Hall5 $15,000,000 $150,000
Market Hall5 $41,000,000 $410,000
Total $9,220,000
[1] City's share is 20% of the 1% general levy, including property tax in lieu of vehicle license fees. [2] TOT rate is 15%.
[3] Total sales tax is 7.75%, but City's share is 1% of taxable sales. [4] Based off of ocV!BE projected sales revenue.
[5] Assumes taxable sales of $400 per square foot annually.
Sources: City of Anaheim; ocV!BE; HdR; Economic and Planning Systems, Inc.
Appendix A
Figure A-1 Summary of ocV!BE Feasibility
Units Square
Feet Supportable Value
Value per
Square
Foot
Value per
Unit Development Cost Soft Costs Hard Costs Total Cost per Square Foot
Total Cost
per Unit Net Value
Residential
Market Rate 1,305 1,892,250 $581,539,257 $307 $445,624 $498,940,650 $88,518,150 $410,422,500 $264 $382,330 $82,598,607 Moderate Affordable 65 94,250 $24,718,112 $262 $380,279 $24,851,450 $4,408,950 $20,442,500 $264 $382,330 ($133,338) Low and Very Low Affordable 130 188,500 $13,621,224 $72 $104,779 $49,702,900 $8,817,900 $40,885,000 $264 $382,330 ($1,289,646) Office
Cube N/A 324,737 $168,618,134 $519 N/A $129,797,750 $23,807,125 $105,990,625 $400 N/A $38,820,384 Creative N/A 147,797 $94,353,605 $638 N/A $96,156,728 $20,041,273 $76,115,455 $651 N/A ($1,803,123) Hotel 550 590,000 $237,458,571 $402 $431,743 $182,900,000 $35,400,000 $147,500,000 $310 $332,545 $54,558,571 Retail and Entertainment
HC District N/A 156,973 $120,363,524 $767 N/A $70,543,666 $14,033,386 $56,510,280 $449 N/A $49,819,858 Restaurant Row N/A 26,515 $28,147,476 $1,062 N/A $15,559,002 $4,422,702 $11,136,300 $587 N/A $12,588,474 Fine Dining N/A 18,397 $23,598,347 $1,283 N/A $21,016,733 $3,815,538 $11,136,300 $1,142 N/A $2,581,614 Concert Hall N/A 66,006 $114,628,644 $1,737 N/A $114,520,410 $15,511,410 $99,009,000 $1,735 N/A $108,234 Market Hall N/A 77,000 $85,368,480 $1,109 N/A $73,319,400 $11,334,400 $61,985,000 $952 N/A $12,049,080 Vertical Construction 2,050 3,582,425 $1,492,415,374 $417 $413,016 $1,277,308,689 $230,110,834 $1,041,132,960 $357 $368,973 $249,898,714 Signage / Sponsorship Asset $100,055,282
Site and Amenities
Adjacent Parks $40,000,000 $40,000,000 ($40,000,000)
Amenities $45,000,000 $45,000,000 ($45,000,000)
Impact Fees $76,000,000 $76,000,000 ($76,000,000)
Infrastructure $80,000,000 $80,000,000 ($80,000,000)
IT $30,000,000 $30,000,000 ($30,000,000)
Parking Decks $225,000,000 $169,000,000 ($169,000,000)
Amphitheater $30,000,000 $0 $0
CUP $25,000,000 $0 $0
Honda Center $25,000,000 $0 $0
Horizontal Construction $576,000,000 $440,000,000 ($440,000,000) Land Cost Basis ($70,379,193)
Project Total ($160,425,196)
Values Costs
Appendix B
OCV!BE SIGNAGE – REVENUE SHARE ANALYSIS
SUBMITTED TO CITY OF ANAHEIM: SEPTEMBER 16, 2022
KA TELLA AVENUE /parenleft.casePUBLIC/parenright.case
CERRITOS AVENUE /parenleft.casePRIVA TE/parenright.case DOUGLASS ROAD /parenleft.casePRIVA TE/parenright.case
57 FWY
DOUGL A SS ROAD /parenleft.casePUBLIC/parenright.case
ST ANLEY CUP WA Y /parenleft.casePRIVA TE/parenright.case RIVER ROAD /parenleft.casePUBLIC/parenright.case
660’ OUTDOOR ADVERTISING CONTROL CORRIDOR
2B.AS.201
2B.AS.202
2B.S1.201
2B.AS.204
2B.AS.203
2B.AS.205
2B.AS.206
2B.AS.210
2B.AS.211
2B.S1.202
1A.AS.305
1A.AS.306
1A.AS.307
1A.AS.304
1A.AS.303
1A.AS.301
3I.AS.302
EXISTING HONDA CENTER 57 FREEWAY MARQUEE
EXISTING HONDA CENTER KATELLA AVENUE MARQUEE
Arena Coordinated Sign Program: Advertising
AD
AD Advertising Digital
AS
AD Advertising Static
S
S1 Spectaculars
EXISTING
Existing Advertising Marquee To Be
Maintained Untill Development of
Project.
APPLICANT Anaheim Re al Estate Partners, LLC
2101 East Coast Highw ay, Suite 230, Corona del Mar, CA 92625 CONTACT Brian Myer s, [email protected], 415-593-8200 PROJECT ADDRESS 26 95 E Katella Avenue, Anaheim, CA 92806 SHARED SIGN REVENUE - SIGN LOCATIONS SEPTEMBER 2022
SIGN SCHEDULE
Digital Advertising Displays "Spectaculars"
2B.S1.201
2B.S1.202
Static Advertising Displays
2B.AS.201
2B.AS.202
2B.AS.203
2B.AS.204
2B.AS.205
2B.AS.206
2B.AS.210
2B.AS.211
3I.AS.302
1A.AS.301
1A.AS.303
1A.AS.304
1A.AS.305
1A.AS.306
1A.AS.307
ARENA SPECIAL
SIGN DISTRICT
NOTE: AB.AD.201 (not depicted above) replaces two existing marquee signs (57 Freeway marquee and Katella Avenue marquee) and is not included in shared sign revenue analysis
REVENUE SHARE SCENARIO 50-50 SPLIT AFTER YEAR 10
2 THRESHOLD
Operating Year: 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Estimated Total Market Value of Signage $8,482,305 $8,779,186 $9,086,457 $9,404,483 $9,733,640 $10,074,318 $10,426,919 $10,791,861 $11,169,576 $11,560,511 $11,965,129 $12,383,909 $12,817,345 $13,265,953 $13,730,261 $14,210,820 $14,708,199 $15,222,986 $15,755,790 $16,307,243 $16,877,996 Less - Estimated Expenses
Construction & Maintance Costs (annualized) ($492,381) ($505,313) ($522,691) ($540,070) ($557,448) ($574,827) ($592,205) ($609,584) ($626,962) ($644,341) ($661,719) ($679,098) ($702,453) ($725,808) ($749,164) ($772,519) ($795,874) ($819,230) ($842,585) ($865,940) ($889,295) Operating Costs ($15,657) ($16,127) ($16,611) ($17,109) ($17,622) ($18,151) ($18,696) ($19,256) ($19,834) ($20,429) ($21,042) ($21,673) ($22,324) ($22,993) ($23,683) ($24,394) ($25,125) ($25,879) ($26,655) ($27,455) ($28,279) Sales Commissions ($1,272,346) ($1,316,878) ($1,362,969) ($1,410,673) ($1,460,046) ($1,511,148) ($1,564,038) ($1,618,779) ($1,675,436) ($1,734,077) ($1,794,769) ($1,857,586) ($1,922,602) ($1,989,893) ($2,059,539) ($2,131,623) ($2,206,230) ($2,283,448) ($2,363,369) ($2,446,086) ($2,531,699) Estimated Value-in-Kind Portion ($848,231) ($877,919) ($908,646) ($940,448) ($973,364) ($1,007,432) ($1,042,692) ($1,079,186) ($1,116,958) ($1,156,051) ($1,196,513) ($1,238,391) ($1,281,735) ($1,326,595) ($1,373,026) ($1,421,082) ($1,470,820) ($1,522,299) ($1,575,579) ($1,630,724) ($1,687,800) CASH FLOW: $5,853,690 $6,062,950 $6,275,541 $6,496,184 $6,725,160 $6,962,761 $7,209,288 $7,465,056 $7,730,386 $8,005,613 $8,291,085 $8,587,160 $8,888,232 $9,200,663 $9,524,849 $9,861,203 $10,210,149 $10,572,131 $10,947,602 $11,337,037 $11,740,923 SHARED REVENUE: $0 $209,260 $421,851 $642,493 $871,469 $1,109,070 $1,355,598 $1,611,365 $1,876,695 $2,151,923 $2,437,395 $2,733,470 $3,034,542 $3,346,972 $3,671,159 $4,007,512 $4,356,459 $4,718,440 $5,093,912 $5,483,347 $5,887,233 CITY SHARE - 50%: $0 $104,630 $210,925 $321,247 $435,735 $554,535 $677,799 $805,683 $938,348 $1,075,962 $1,218,698 $1,366,735 $1,517,271 $1,673,486 $1,835,579 $2,003,756 $2,178,230 $2,359,220 $2,546,956 $2,741,673 $2,943,616 CITY SHARE - NPV: $8,729,207
Note: Key assumptions include 10-year digital signage life, 30-year static signage life, 5.0% discount rate, 3.5% inflation, 15.0% sales commission, 10.0% value-in-kind assumption REVENUE SHARE SCENARIO FIXED PAYMENT AFTER YEAR 10
3 Estimated Project Fixed Annual Payment to City City - Net Operating Cash Flow After Revenue Sharing as Estimated % of Present Value Year Expenses/Adjustments Payment to City Free Cash Flow (NPV) of Payments 0 - - - $8,729,207
1 $4,279,798 - -
2 $4,429,879 - -
3 $4,585,668 - -
4 $4,747,364 - -
5 $4,915,174 - -
6 $5,089,312 - -
7 $5,269,999 - -
8 $5,457,465 - -
9 $5,651,947 - -
10 $5,853,690 - -
11 $6,062,950 $1,140,966 19%
12 $6,275,541 $1,140,966 18%
13 $6,496,184 $1,140,966 18%
14 $6,725,160 $1,140,966 17%
15 $6,962,761 $1,140,966 16%
16 $7,209,288 $1,140,966 16%
17 $7,465,056 $1,140,966 15%
18 $7,730,386 $1,140,966 15%
19 $8,005,613 $1,140,966 14%
20 $8,291,085 $1,140,966 14%
21 $8,587,160 $1,140,966 13%
22 $8,888,232 $1,140,966 13%
23 $9,200,663 $1,140,966 12%
24 $9,524,849 $1,140,966 12%
25 $9,861,203 $1,140,966 12%
26 $10,210,149 $1,140,966 11%
27 $10,572,131 $1,140,966 11%
28 $10,947,602 $1,140,966 10%
29 $11,337,037 $1,140,966 10%
30 $11,740,923 $1,140,966 10%
Note: Key assumptions include 10-year digital signage life, 30-year static signage life, 5.0% discount rate, 3.5% inflation,
15.0% sales commission, 10.0% value-in-kind assumption
VICTUS ADVISORS LLC
2720 Homestead Rd. #130
Park City, Utah 84098
www.victusadvisors.com
CONTACT INFORMATION VICTUS ADVISORS
4