Panel Presentation — San Jose City Council, November 1, 2022

ULI Bay Area
Multi-Family Real Estate 101
Prepared for the City of San Jose
November 1, 2022

About Urban Land Institute
(ULI)
▪ The mission of ULI is to shape the future of the
built environment for transformative impact on
communities worldwide.
▪ What ULI San Francisco does:
▪ Provides a forum for sharing of best practices
▪ Creates opportunities for young professionals to
develop skills and build relationship
▪ Organizes and conducts meetings.
▪ Directs outreach programs
▪ Administers UrbanPlan program
▪ Conducts Technical Assistance Panels

3 30% Professional Services
27% Financial
27% Developers
12% Public
4% Other
Our Members
ULI SF Public Agency
Offerings
4 ▪ Technical Assistance Panels (TAPs):Industry experts volunteer to assist on specific public issues.
▪ UrbanPlan for Communities: An immersive workshop
for public officials. With Legos!
▪ Development Fundamentals: A series of courses
designed for public sector staff.
▪ Housing Opportunities Consultations: A one-on-one
“test-fit” advisory session for public agencies.

Libby Seifel

SEIFEL CONSULTING
President & Founder
Eric Tao
L37
Managing Partner
Drew Hudacek

SARES REGIS
Chief Investment Officer
Todays Presenters

Purpose of the Training
What are our goals and
purpose?
What do YOU hope to
get out of this?
Agenda for the Presentation

1. Developers’ view of Risk and Return

2. Multi-family costs and valuations

3. What policy levers can you pull?
ULI Bay Area
Chapter 1
Risk & Return

Residential – Rental
• Multi-Family Apartments
• SRO’s
• Single Family for Rent
• Mobile Homes
Chapter 1 - Risk and Return
Market forces are outside of the
control of developers
The market decides what
works…not us, not you
Chapter 1 – Risk and Return

Chapter 1 - Risk and Return
Risk
Return
However, the market is competitive
(even if not entirely efficient), so
trade-offs must be made.

A universal truth of all investment is that capital strives to generate the highest return for the least amount of
risk
How investors label their pools of Money
Risk
Return
Core Plus
Core
Value Add
Opportunity
Chapter 1 - Risk and Return

How real estate food groups line up
Risk
Return
Industrial
Apartments
Office
Hospitality
Land Speculation
Chapter 1 - Risk and Return
Apartment development is inherently risky
What risks are
developers
really taking?
Entitlement
Political/
Community
Environmental
Construction Financing
Market
TIME
Other
Developers are the “movie producers” of real estate
We bring together the opportunity
We put together
• The team
• The money
• The experience and know-how
Chapter 1 - Risk and Return

ULI Bay Area
Chapter 2
The Cost of Producing Multifamily Housing

November 1, 2022 17
The capital “stack” represents all the money it takes to build a building Total
Project
Costs
Developer Equity
Investor Equity
Total Project
Value
Debt
Chapter 2 – The Cost of Multifamily Housing
November 1, 2022 18
When things go well…
Total
Project
Costs
Debt
Dev Equity
Investor
Equity Total Project
Value
Debt
Dev Equity
Investor
Equity
Chapter 2 – The Cost of Multifamily Housing

November 1, 2022 19
Total
Project
Costs
Debt
Dev EquityInvestor
Equity
Total Project
Value
When they don’t…
Debt
Dev Equity
Investor
Equity
Chapter 2 – The Cost of Multifamily Housing
November 1, 2022 20
Total
Project
Costs
Debt
Investor
Equity
Total Project
ValueDebt
Dev Equity
Chapter 2 – The Cost of Multifamily Housing
When we see a financial crisis…

November 1, 2022 21
Chapter 2 – The Cost of Multifamily Housing
Fees & Exactions
Construction Financing
Other Soft Costs
Land
Hard Costs
What makes up the Costs of Multifamily Housing?
• Every fee or exaction local government requires, raises costs • IF the market is good, development can move forward with new projects. • Local government can require new fees, amenities, parks, affordability, infeasible uses, too much parking, etc. until the project stops penciling.
• IF project costs go up and rent and values don’t… projects die. • Bull markets are short… development cycles are long.
• Don’t miss the window!
Chapter 2 – The Cost of Multifamily Housing
Development
Feasibility
101 - Start
Development Feasibility Framework
Developer Margin/Return
Other Soft Costs
Construction Financing
Hard Construction Cost
Government Fees
Land
Supportable Cost
Developer Margin/Return
Project
Value
Land Cost or Residual Land Value
The value of land is tied to:

The rights
associated with
the land
The liabilities
associated with
the land
Residual Land Value
Difference between potential value and
projected development costs without land
(including target return on investment)
Residual Land Value Calculation
Potential Value
Less: Projected Costs without Land
Residual Land Value

Photo credit: www.sanjose.org
Multifamily Apartment Development
• 10% to 15% on-site affordable
• Ground floor retail (street frontage)
Existing Retail Property
• Commercial property with existing retail
• Purchase/sale price of $6 million
Proposed Building Characteristics
• 7 stories with 2 story podium
• Ground floor retail + parking garage

Residual Land Value – Sensitivity Analysis
Four initial scenarios evaluated individually:

1. Base affordable– 10% on-site below market rate (BMR) units

2. Offsites/fees increase by $20,000 per unit

3. Construction costs increase by 10%

4. Alternative affordable– 15% on-site BMR units
28 Initial
Sensitivity
Analysis
Results-
Individual
Scenarios
Residual Land Value Under Four Independent Scenarios
Residual Land Value – Sensitivity Analysis
Additional fifth scenario evaluated (along with combined scenarios):

1. Base Case affordable housing – 10% on-site BMR

2. Offsites/fees increase by $20,000 per unit

3. Construction costs increase by 10%

4. Alternative affordable housing – 15% on-site BMR

5. Parking reduction for housing and ground floor retail 30 Impact of
ground floor retail
and its parking
plus residential
parking?
Surface Podium Partially
Below
Grade
Below
Grade
(1 level)
Below
Grade
(2+levels)
Illustrative Parking Cost Per Space
Results of
Combined
Sensitivity
Analysis
Residual Land Value Under Base Case and Five Scenarios
Is there still a project and land deal?
Sensitivity Cases (individual requirements):

1. 10% On-site BMR Deal

2. Offsites/City fee increases by $20,000 Deal*

3. Construction costs are 10% higher Deal*

4. 15% On-site BMR Deal*
*Combined Sensitivity Analysis NO Deal

5. Combined with significant parking reduction Deal
ULI Bay Area
Chapter 3
What can policy do?

Chapter 3 – What can policy do?
A. Lower Costs
B. Increase Revenue
C. Increase Certainty
We are in a housing CRISIS! Do not let
perfection be the enemy of the good
Chapter 3A – Lower Costs
Options to Lower Costs
• Lower or flexible parking requirements

Chapter 3A – Lower Costs
Options to Lower Costs
• Lower or flexible parking requirements
• Eliminate retail or other uses in the wrong places

Chapter 3A – Lower Costs
Options to Lower Costs
• Lower or flexible parking requirements
• Eliminate retail or other uses in the wrong places
• Lower park fees and park requirements (especially for affordable housing)
• Lower processing fees
• Lower utility connection fees
• Lower percentage of onsite affordability

Chapter 3B – Increase Revenue
Increase revenue?
• Allow higher income targets for affordable housing

Chapter 3B – Increase Revenue
Increase revenue?
• Allow higher income targets for affordable housing
• Provide housing funding/subsidies
• Example: Rental housing voucher programs

Chapter 3B – Increase Revenue
Increase revenue?
• Allow higher income targets for affordable housing
• Provide housing funding/subsidies
• Example: Rental housing voucher programs
• Transfer taxes

Chapter 3C – Increase Certainty
Streamline development approval and processing time
Entitlement certainty is the most valuable
Chapter 3C – Increase Certainty
Pave the way for Office to Housing + Shopping Center to Housing conversions?
This will take some creativity!

Chapter 3C - Increase Certainty
Downtown Redwood City Example
• 20 years of work
• CEQA lawsuit clearing
• Economy took off
• Downtown transformed in 5 – 7 years.
• And more development is planned
Pave the way to development with CEQA led by City
ULI Bay Area
Thank You!

Nevada V. Merriman
November 1, 2022

AFFORDABLE HOUSING FINANCE

MidPen Housing
Real Estate Development:
• 8,500 affordable homes;
• 800+ units under construction in
2021
• Raised over $1 B for
development of affordable
housing since 2010
Property Management:
• 120+ properties; 17,000
residents. <1% vacancy
• 68+ properties in Silicon Valley
Resident Services:
• Workforce Development
• After School Literacy
• Older Adults Health and
Wellness
• Permanent Supportive Housing

Housing Affordability Gap in Silicon Valley
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
Extremely Low Income Very Low Income Low Income
Affordability Ranges
Income required
to afford
median 2 BR
rent
55 Affordable Housing Finance Overview
Why doesn’t the market produce Affordable Housing?
It Doesn’t Pencil
Affordable (aka below market) rents, comparatively high expenses • Depress first mortgage loan proceeds
• Limited cash flow – limited cash on cash return
Bridging the Gap - How do we make it pencil?
• Equity generated from the sale of Low Income Housing Tax Credits – 4% and 9% • Soft (aka deferred payment) loans
• Grants
56 Typical Capital Stack - Simplified
11%
30%
18%
23%
7%
13%
3%
3%60%
30%
1%
Perm Debt City $ County $
1%
Other Public$ Tax Credit Equity General Partner Equity 9 % CREDIT 4 % CREDIT
Typical Capital Stack – Not So Simple
11%
30%8%
11%
3%
11%
6%
8%
4%
4%
3%
5%
4%
4%60%
30%
1% 1%
AHPPerm Debt
Federal $
City Source 1
Other Public
City Source 2
Tax Credit Equity
County Source1
GP Equity
9 % CREDIT 4 % CREDIT
Timeline - Project

P R E D E V E L O P M E N T

1. Developing
the Project
Concept

2. Assessing
Project
Feasibility

3. Funding
Assembly

4. Contruction
and Lease Up 5. Operations
Construction Starts
Site Identified/Secured
3-5 YEARS
1-2 YEARS 55+ YEARS
Source: LISC Bay Area
Kiku Crossing, San Mateo
Orig inal De sig n
5 sto rie s
164 units
1:1 parking
$825k / unit T DC
Wi th A B 1763
7 sto rie s
225 units
1 : .73 parking
$758k / unit T DC
New State
T ools
Pub lic
Sector
Flexib ility
F ees
Stre am line d
Financing
De nsity b o nus le g islatio n
allo we d fo r 61 ad d itio nal
units with no added
p arking
Certainty in the system
shortened the ti mel i ne,
lo we ring e scalatio n
contingencies and
interest rate risk
I mpact f ee def erral unti l
perm conversion, saving
app. $350k, or $1.5k /
unit
Permit and plan check
f ee waivers, saving app.
$2M, or $8.7k / unit
Supported of f -site
parking to reduce costs
o f re q uiring p o d ium
p arking
Allowed concurrent
constructi on of two
structures to reduce
construction time, saving
app. $2M, or $8.7k / unit
Supported innovative
project structure,
includ ing a De sig n-Build
contracting approach
I nternal champions
shepherded the proj ect
through design review
and p e rm itting
R ev i sed i ncome targeti ng
fro m initial RFP, cre ating
fle xib ility in a co m p e titive
f inancing environment
Thank You!
Nevada V. Merriman
[email protected]

San Jose City CouncilNovember 1, 2022

San Jose City Council
November 1, 2022