HOUSING INCENTIVE PROGRAM STUDY:
TESTING THE FINANCIAL FEASIBILITY OF
MULTI-FAMILY HOUSING TYPOLOGIES
Prepared for:
City of Palo Alto
Prepared by:
Keyser Marston Associates, Inc.
June 13 , 2024
Housing Incentive Program Study Page i
Keyser Marston Associates, Inc. 2405001v2.PA / 17125.015.001 June 13, 2024
TABLE OF CONTENTS
I. EXECUTIVE SUMMARY ............................................................................................................... 1 A. FINANCIAL EVALUATION METHODOLOGY .................................................................................................. 1 B. BASE ZONING PROTOTYPE ANALYSIS ........................................................................................................ 1 C. PROPOSED ZONING PROTYPE ANALYSIS .................................................................................................... 4 D. ADDITIONAL POLICY CONSIDERATIONS ..................................................................................................... 6 II. FINANCIAL EVALUATION METHODOLOGY .................................................................................. 8 A. ANALYSIS OF BASE ZONING PROTOTYPES .................................................................................................. 8 B. ANALYSIS OF PROPOSED ZONING PROTOTYPES ........................................................................................... 8 C. FINANCIAL EVALUATION ORGANIZATION ................................................................................................... 9 D. PRO FORMA ASSUMPTIONS ................................................................................................................. 10 III. ANALYSIS OF BASE ZONING PROTOTYPES ................................................................................ 12 A. SITE A: CD-C ZONE.......................................................................................................................... 12 B. SITE B: CN ZONE .............................................................................................................................. 13 C. SITE C: CC(2) ZONE .......................................................................................................................... 16 D. SITE D: RM-20 ZONE ........................................................................................................................ 18 E. SITE E: RM-30 ZONE ........................................................................................................................ 20 F. SITE F: RM-40 ZONE ......................................................................................................................... 21 G. CONCLUSIONS ................................................................................................................................... 23 IV. ANALYSIS OF PROPOSED ZONING PROTOTYPES ....................................................................... 25 A. SITE A: CD-C ZONE ........................................................................................................................... 25 B. SITE B: CN ZONE .............................................................................................................................. 27 C. SITE C: CC(2) ZONE .......................................................................................................................... 29 D. SITE D: RM-20 ZONE ........................................................................................................................ 32 E. SITE E: RM-30 ZONE ........................................................................................................................ 34 F. SITE F: RM-40 ZONE ......................................................................................................................... 35 G. CONCLUSIONS ................................................................................................................................... 42 V. POLICY CONSIDERATIONS ........................................................................................................ 44 A. APPLICABILITY OF ZONING MODIFICATIONS TO SMALL SITES ....................................................................... 44 B. APPLICABILITY OF ZONING MODIFICATIONS TO LARGER SITES ...................................................................... 44 C. CURRENT CITY PERMITS AND FEES ......................................................................................................... 45 D. CONCLUSIONS ................................................................................................................................... 45
Housing Incentive Program Study Page ii
Keyser Marston Associates, Inc. 2405001v2.PA / 17125.015.001 June 13, 2024
ATTACHMENTS
Attachment 1: Base Zoning Prototype Analyses
Appendix A: Site A – CD-C Zone
Appendix B: Site B – CN Zone
Appendix C: Site C – CC(2) Zone
Appendix D: Site D – RM-20 Zone
Appendix E: Site E – RM-30 Zone
Appendix F: Site F – RM-40 Zone
Attachment 2: Proposed Zoning Prototype Analyses
Appendix A: Site A – CD-C Zone
Appendix B: Site B – CN Zone
Appendix C: Site C – CC(2) Zone
Appendix D: Site D – RM-20 Zone
Appendix E: Site E – RM-30 Zone
Appendix F: Site F – RM-40 Zone
Attachment 3: Background Information
Appendix A: Market Surveys
Exhibit I Resale Home Survey
Exhibit II New Home Sales
Exhibit III Apartment Rent Survey
Appendix B: Affordable Sales Price Calculations
Housing Incentive Program Study Page 1
Keyser Marston Associates, Inc. 2405001v2.PA / 17125.015.001 June 13, 2024
I. EXECUTIVE SUMMARY
The City of Palo Alto (City) is considering modifications to the Zoning Ordinance to create incentives for multi-family and affordable housing development. The intent of the revised zoning standards is to enable multi-family housing typologies that are both physically feasible and financially feasible.
To that end, the City engaged Keyser Marston Associates, Inc. (KMA) to evaluate the financial characteristics associated with prototypical residential projects. The intent of this financial analysis is to ensure that the proposed zoning modifications allow for financially feasible multi-family residential projects. The following report discusses the financial analyses prepared by KMA.
A. Financial Evaluation Methodology
KMA utilized the following methodology to evaluate the financial feasibility of each prototype:
1. KMA prepared pro forma analyses based on the scopes of development that were provided by Urban Field Studio.
2. The pro forma analyses were used to compare the value supported by the prototype project to the project’s development cost plus a standard developer profit.
3. If the project’s estimated value was less than the estimated costs plus developer profit, the project was deemed not likely to be built.
B. Base Zoning Prototype Analysis
As the first step in the process, Urban Field Studio and Lexington Planning created prototype development scenarios for six sites that comport with the City’s current development standards. For the purposes of this KMA analysis, “current” and “base” development standards refer to the base zoning standards applicable citywide, but do not take into account increased density standards available to Housing Element opportunity sites (adopted December 2023) or those available per State of California (State) Density Bonus Law. As described in Attachment 1, KMA evaluated the financial feasibility of each “Base Zoning Prototype.”
Housing Incentive Program Study Page 2
Keyser Marston Associates, Inc. 2405001v2.PA / 17125.015.001 June 13, 2024
As can be seen in Attachment 1, each of the Base Zoning Prototypes was found not likely to be developed under the City’s current zoning standards. The results of the KMA analyses of the Base Zoning Prototypes are presented in the table on the following page.
SITE C SITE F
CC(2) Zone RM-40 Zone
I. Site Area (Sf) 11,250 5,000
II. Development Scope
A. Unit Type Townhome Apartment Townhome Townhome Townhome Townhome B. Unit Mix
Studio Units 0 3 0 0 0 1
One-Bedroom Units 0 1 0 0 0 0
Two-Bedroom Units 0 12 3 0 0 3
Three-Bedroom Units 4 0 0 2 4 0
Four-Bedroom Units 0 0 0 2 0 0
Total Units 4 16 3 4 4 4
B. Unit Sizes
Studio Units 0 360 0 0 0 360
Live/Work One-Bedroom Units 0 0 0 0 0 0
One-Bedroom Units 0 528 0 0 0 0
Two-Bedroom Units 0 828 1,810 0 0 1,120
Three-Bedroom Units 1,575 0 0 1,891 1,429 0
Four-Bedroom Units 0 0 0 2,791 0 0
Net Living Area 6,300 11,544 5,430 9,364 5,716 3,720
Average SF/Unit 1,575 722 1,810 2,341 1,429 930
Retail GBA 0 2,900 10,784 0 0
Gross Building Area (Sf) 6,300 19,701 18,230 9,364 5,716 3,720 Floor Area Ratio (FAR) 1.23 1.22 1.53 0.94 0.86 0.74
Density (Units/Acre) 34 44 12 17 26 35
III. Estimated Development Cost
A. Land Value $1,614,000 $4,965,000 $3,544,000 $3,150,000 $2,087,000 $1,575,000 B. Direct Costs $2,387,000 $8,902,000 $9,571,000 $3,690,000 $2,284,000 $1,528,000 Per Sf of Net Saleable Area $379 $771 $1,763 $394 $400 $411 C. Public Permits & Fees $384,000 $1,392,000 $387,000 $412,000 $380,000 $364,000 Per Unit $96,000 $87,000 $129,000 $103,000 $95,000 $91,000 D. Indirect + Financing Costs $1,600,000 $3,515,000 $3,933,000 $2,505,000 $1,603,000 $1,146,000 As a % of Direct Costs 67% 39% 41% 68% 70% 75%
Total Development Cost $5,985,000 $18,774,000 $17,435,000 $9,757,000 $6,354,000 $4,613,000 Per Square Foot of GBA $950 $953 $956 $1,042 $1,112 $1,240 IV. Projected Revenues
A. Residential Revenue $7,005,000 $781,000 $6,101,000 $9,575,000 $6,356,000 $4,164,000 Per Market Rate Unit $1,751,300 $4,300 $2,033,700 $2,393,800 $1,589,000 $1,041,000 Per Affordable Unit $0 $0 $0 $0 $0 $0
B. Net Sales Revenue / Value
Residential Component $6,620,000 $5,765,000 $9,048,000 $6,006,000 $3,935,000 Retail Component 10,283,000
Total Net Sales Revenue / Value $6,620,000 $15,151,000 $16,048,000 $9,048,000 $6,006,000 $3,935,000 V.
$794,000 $1,515,000 $1,720,000 $1,086,000 $721,000 $472,000 VI. Net Surplus/(Cost)
A. Net Sales Revenue / Value $6,620,000 $15,151,000 $16,048,000 $9,048,000 $6,006,000 $3,935,000 B. Revenue Offsets
Total Development Cost $5,985,000 $18,774,000 $17,435,000 $9,757,000 $6,354,000 $4,613,000 Threshold Developer Profit 794,000 1,515,000 1,720,000 1,086,000 721,000 472,000 Total Revenue Offsets $6,779,000 $20,289,000 $19,155,000 $10,843,000 $7,075,000 $5,085,000 VII. Net Surplus/(Cost) ($159,000) ($5,138,000) ($3,107,000) ($1,795,000) ($1,069,000) ($1,150,000) $15,151,000
Threshold Developer Profit @ 12%
Net Residential Sales Revenue or
10% of Apt Value
SUMMARY OF BASE ZONING PROTOTYPES
CD-C Zone CN Zone RM-20 Zone RM-30 Zone
5,125 15,761 10,000 6,626
SITE A SITE B SITE D SITE E
Housing Incentive Program Study Page 4
Keyser Marston Associates, Inc. 2405001v2.PA / 17125.015.001 June 13, 2024
C. Proposed Zoning Protype Analysis
Subsequent to the analysis of the Base Zoning Prototypes, Urban Field Studio and Lexington Planning created prototype development scenarios that modified current development standards (Proposed Zoning Prototypes). The purpose of modifying current development standards was to create zoning requirements that allow for the development of multi-family projects that are both physically and financially feasible.
Modifications were made to a variety of development standards such as: reduced parking ratios, increased building height, increased floor-area-ratios (FAR), reduced setbacks, modified daylight planes, reduced lot and landscape coverage and changes to ground floor retail requirements.
Specifically, the modifications were intended to allow for additional units to be constructed on each of the development sites (e.g., increased FAR) and/or to reduce the costs associated with developing residential units (e.g. reduced parking requirements). These factors have a direct impact on the financial feasibility of each development prototype.
The Proposed Zoning Prototypes evaluated in this analysis are the result of an iterative process between KMA, Urban Field Studio, Lexington Planning and the City. A number of potential modifications were tested for each of the sites in order to develop prototypes that were both physically and financially feasible. In particular, for the RM-40 Zone site, three scenarios for proposed modifications were evaluated in this analysis.
The KMA financial analyses of the Proposed Zoning Prototypes are presented in Attachment 2. As shown, each of the Proposed Zoning Prototypes was found to be financially feasible under the proposed zoning modifications.
The results of the KMA analyses of the Proposed Zoning Prototypes are presented in the table on the following page.
SITE A SITE B SITE C SITE D SITE E
No Parking
Limited
Parking 10,000 SF Lot
I. Site Area (Sf) 5,125 15,761 11,250 10,000 6,626 5,000 5,000 10,000 II. Development Scope
A. Unit Type Condo Apartment Apartment Townhome Townhome Apartment Apartment Apartment B. Unit Mix
Studio Units 0 0 8 0 0 4 3 0
Live/Work One-Bedroom Units 0 4 0 0 0 0 0 0
One-Bedroom Units 10 11 6 0 0 4 3 2
Two-Bedroom Units 1 18 16 2 0 0 6 16
Three-Bedroom Units 4 0 4 5 7 0 0 3
Total Units 15 33 34 7 7 8 12 21
B. Unit Sizes
Studio Units 0 0 514 0 0 415 450 0
Live/Work One-Bedroom Units 0 1,050 0 0 0 0 0 0
One-Bedroom Units 751 528 713 0 0 678 637 625
Two-Bedroom Units 1,240 828 1,066 1,593 0 0 740 971
Three-Bedroom Units 1,500 0 1,302 1,795 1,457 0 0 1,250 Net Living Area 14,746 24,912 30,654 12,163 10,199 4,370 7,701 20,540 Average Square Feet / Unit 983 755 902 1,738 1,457 546 642 978 Gross Building Area (Sf) 20,841 33,240 42,895 12,163 10,199 5,016 10,725 26,114 Floor Area Ratio (FAR) 4.07 2.11 3.81 1.22 1.54 1.00 2.15 2.61 Density (Units/Acre) 127 91 132 30 46 70 105 91
III. Estimated Development Cost
A. Land Value $1,614,000 $4,965,000 $3,544,000 $3,150,000 $2,087,000 $1,575,000 $1,575,000 $3,150,000 B. Direct Costs $7,724,000 $12,553,000 $15,434,000 $4,614,000 $3,763,000 $1,895,000 $3,959,000 $9,727,000 Per Square Foot $524 $504 $503 $379 $369 $434 $514 $474 C. Public Permits & Fees $1,425,000 $2,805,000 $2,958,000 $686,000 $665,000 $656,000 $1,008,000 $1,827,000 Per Unit $95,000 $85,000 $87,000 $98,000 $95,000 $82,000 $84,000 $87,000 D. Indirect + Financing Costs $3,138,000 $5,250,000 $6,007,000 $2,222,000 $1,764,000 $915,000 $1,616,000 $3,864,000 As a % of Direct Costs 41% 42% 39% 48% 47% 48% 41% 40%
Total Development Cost $13,901,000 $25,573,000 $27,943,000 $10,672,000 $8,279,000 $5,041,000 $8,158,000 $18,568,000 Per Square Foot of GBA $667 $769 $651 $877 $812 $1,005 $761 $711 IV. Projected Revenues
A. Residential Revenue $17,097,000 $1,741,000 $1,168,000 $12,863,000 $10,220,000 $363,000 $622,000 $1,234,000 Per Market Rate Unit $1,246,800 $4,500 $4,200 $2,060,700 $1,620,200 $3,700 $4,200 $5,100 Per Affordable Unit $444,500 NA NA $499,000 $499,000 NA NA NA B. Total Net Sales Revenue / Value $16,157,000 $28,825,000 $31,327,000 $12,156,000 $9,658,000 $5,925,000 $10,325,000 $20,650,000 V.
$1,939,000 $2,883,000 $3,133,000 $1,459,000 $1,159,000 $593,000 $1,033,000 $2,065,000 VI. Net Surplus/(Cost)
A. Net Sales Revenue / Value $16,157,000 $28,825,000 $31,327,000 $12,156,000 $9,658,000 $5,925,000 $10,325,000 $20,650,000 B. Revenue Offsets
Total Development Cost $13,901,000 $25,573,000 $27,943,000 $10,672,000 $8,279,000 $5,041,000 $8,158,000 $18,568,000 Threshold Developer Profit 1,939,000 2,883,000 3,133,000 1,459,000 1,159,000 593,000 1,033,000 2,065,000 Total Revenue Offsets $15,840,000 $28,456,000 $31,076,000 $12,131,000 $9,438,000 $5,634,000 $9,191,000 $20,633,000 VII. Net Surplus/(Cost) $317,000 $369,000 $251,000 $25,000 $220,000 $291,000 $1,134,000 $17,000 Threshold Developer Profit @ 12%
Net Residential Sales Revenue or
10% of Apt Value
SUMMARY OF PROPOSED ZONING PROTOTYPES
SITE F
CD-C Zone CN Zone CC(2) Zone RM-20 Zone RM-30 Zone
RM-40 Zone
Housing Incentive Program Study Page 6
Keyser Marston Associates, Inc. 2405001v2.PA / 17125.015.001 June 13, 2024
D. Additional Policy Considerations
The following section provides additional policy considerations for the City:
APPLICABILITY OF ZONING MODIFICATIONS TO SMALL SITES
The City is also interested in understanding the impact on financial feasibility if the reductions in required parking ratios and/or building height and FAR are less substantial than those applied in the Proposed Zoning Prototypes analysis. A key factor that should be considered in the decision making process is that many of the sites evaluated in this analysis are fairly small – consisting of between 5,000 and 15,000 square feet of land area. For a development on a small site to achieve financial feasibility it is necessary to be able to create an extremely efficient design.
Parking Standards
The proposed reduction in the parking requirements significantly enhances the potential for financially feasible residential uses to be developed. A change to the proposed parking standard would require more site area to be dedicated for parking spaces, which would materially reduce the site’s buildable area. Given the limited number of units that each site can support a loss of even a few units on each site results in a significant impact on financial feasibility.
Height and FAR Standards
The achievable building footprint on a small site is disproportionately lower than the footprint that can be accommodated on a more typically sized development site. The proposed increases in FAR and height are necessary to compensate for this limitation. Recognizing the small number of units that can be accommodated per floor, even the reduction of one floor of building area has a significant impact on financial feasibility.
APPLICABILITY OF ZONING MODIFICATIONS TO LARGER SITES
As discussed above, this analysis primarily focuses on small sites. The site sizes were intended to be representative of typical parcel sizes within each zoning designation. However, the proposed zoning
Housing Incentive Program Study Page 7
Keyser Marston Associates, Inc. 2405001v2.PA / 17125.015.001 June 13, 2024
modifications may be applied to sites of all sizes within each zoning designation. Therefore, a developer may utilize the proposed zoning modifications on sites larger than evaluated in this analysis.
Without the physical constraints imposed by small sites, larger sites will likely be developed with more efficiently designed projects. Therefore, it is possible that the proposed zoning modifications will have a greater positive financial impact on larger sites.
CURRENT CITY PERMITS AND FEES
The pro forma analyses included in this report take into account the City’s current permits and impact fees. Specifically, the development costs for each prototype include the following impact fees: parks fee, community center fee, libraries fee, public safety facilities fee, general government facilities fee, school district fee, and the in-lieu art fee. As such, the financial analyses demonstrate that Proposed Zoning Prototypes are financially feasible with the City’s current impact fee schedule.
CONCLUSIONS
Based on the financial analyses that KMA has prepared over the course of this engagement, it is our opinion that the proposed modifications to the zoning standards are necessary to create sufficient incentive to attract residential development on the prototypical sites evaluated in this analysis. This is particularly true of the parking requirements and building height/FAR, all of which tend to have an outsized impact on financial feasibility.
To download the complete Keyser Marston Associates’ report, “Housing Incentive Program Study: Testing The Financial Feasibility Of Multi-Family Housing Typologies, ” please use the link below:
https://www.cityofpaloalto.org/files/assets/public/v/2/planning-amp-development- services/long-range-planning/kma-housing-incentive-program-report_2405001v3.pdf