Presented to:
City of San Jose
October 18, 2023
235 Montgomery Street, Suite 629 | San Francisco, CA 94104 | www.centuryurban.com Century | Urban
Strategic
Real Estate
Advisory Services
Conceptual Feasibility Analysis
Att
Attachment A – Cost of Development by Century | Urban
PAGE 2
CONCEPTUAL FEASIBILITY ANALYSIS
TO: City of San Jose, Office of Economic Development
FROM: Century Urban, LLC
SUBJECT: Conceptual Feasibility Analysis
DATE: October 18, 2023
CONFIDENTIAL AND PRIVILEDGED
Summary
The City of San Jose, Office of Economic Deve lopment (the “City”) has engaged Century Urban, LLC (“Century | Urban”) to prepar e a conceptual feasibility analysis for five residential rental and sale development prototypes. The analysis is intended to update conceptual prototype feasibility analyses prepared in 2018, 2019, an d 2022 to provide a perspective on the general development economics of high-density resident ial development in the current market and to fulfill the requirements of 14.10.310 of the San Jose Municipal Code (see Legislative Background below for additional detail). The prototypes ar e analyzed across a range of City submarkets, projects sizes, and construction types, among other factors.
The conceptual analyses’ findings indicate that similar to the findings in 2022, residential development economics are challenging under current market conditions. Since the last analysis was prepared, the cost of construction has contin ued to increase, while rising interest rates have increased capital costs, along with target retu rns for achieving feasibility. Rental rates and condominium sale prices have increased since th e last analysis, but the magnitude of these increases is insufficient to offset the effect of higher development costs.
The analyses conclusions are not intended to imply that every residential development is equally challenged in San Jose. Actual projects may di ffer from the prototype assumptions and may be less or more challenged.
Analysis Qualifications
The analysis referenced in this memorandum utiliz es prototypical projects representing high- level average or median project types and high-l evel project assumptions prevalent at the time the analysis was prepared. Thou gh there may be similarities , prototype projects do not correspond to any actual specific project or the actual economics of any particular development.
PAGE 3
While prototypes were designed to represent actual or median projects, any given actual project may reflect different costs, rental rates, sale prices, or other details driven by the circumstances of that project such as its developer, history, site conditions, contractor, business plan, and/or other factors. Moreover, the criteria and assumptions utilized in selecting and analyzing the prototypes may be specific to the time during which th e analysis was prepared and the research was conducted. Research was conducted and data wa s gathered for this report during the third quarter of 2023. Appropriate assumptions for the prototypes will likely evolve over time as market conditions change.
In 2023, residential real estate markets experi enced a significant drop in transaction volume.
CBRE projected in its mid-year 2023 that commercial real estate investment volume will drop 37% year over year in 2023, and Green Street Adviso rs estimated that transaction volume during the second quarter of 2023 was down approximately 50% compared with the same time last year. In some respects, this trend is mirrored in San Jose residential real estate; the City has seen limited new project starts, completions, and sales, as well as limited land sales for new development projects. As a result, certain analysis assumption s such as land prices and target returns are estimated based on the limited available data and incorporate qualitative feedback from market participants.
Legislative Background
This conceptual feasibility analysis has been prepared to analyze whether construction of Private Construction Projects within the residential Su bcategory of Use is Financially Infeasible as specified in Section 14.10.310 of the San Jose Mu nicipal Code, which specifies that A) the City Council must make a determination whether a fee or tax reduction is not a Subsidy, supported by findings, following a public hearing; B) the Council’s findings must be based on evidence presented at the public hearing including a st udy on whether relevant Private Construction Projects are Financially Infeasible; and C) the fi nancial feasibility study must be performed by a qualified consultant retained through the City’s normal procurement process. The study must address a specific set of issues (see Exhibit E), and preparatio n of the study will include the opportunity for stakeholder input. The Council is also directed to use reasonable efforts to conduct the required public hearing within 90 cale ndar days following completion of the study.
Capitalized terms used in this paragraph are de fined in Chapter 14.10 of the San Jose Municipal Code.
Construction Types
The residential development prototypes to be analyzed fall into three common residential construction types: Type V, Type III, and Type I. Each of these construction types has multiple
PAGE 4
subtypes and requirements specified by building code, but in general, the lower the construction type number, the greater the fire-life-safety requirements.
Type V construction refers to a building type in which the interior and exterior structural materials of the building are permitted to be “combustible”. This means that wood may be used as a core structural material in the building’s design including for framing, walls, floors and roofs. Wood-framed construction is often used for single-family homes, as well as smaller apartment and retail buildings. Wood frame construction is often lower cost than other construction methods.
Type III construction refers to a building in which exterior walls are “non-combustible” but other elements (framing, floors, ceilings) may be designed with combustible materials such as wood. Walls are typically constructed from concrete block, precast panels, or other non-combustible materials. This type of construction is generally used in larger apartment buildings, schools and other medium-sized commercial buildings. Type I construction refers to a building in which all structural materials are non- combustible. In a Type I building, walls, floor s, and roofs are constructed with materials such as concrete and steel. This construction type is generally utilized with high-rise residential and commercial buildings and tend s to be the most expensive of the three construction types.
In addition to limiting construction materials for each building type, the International Building Code and most local building codes also limit the maximum height and building stories for a project depending on its construction type.
The three construction types utilized in the protot ype analysis are intended to reflect a range of building types and sizes developed by residential developers in the City.
Prototypes
The prototypes reviewed in this conceptual analysis are based on prototypes previously analyzed in 2018, 2019, and 2022 to allow comparison to these prior analyses and are intended to represent a range of residential development projects.
Building Heights/Density
For rental prototypes, the analysis includes a Type V project of five stories with a density of 65 units per acre, a Type III project of seven stories with a density of 90 units per acre, and a Type I project of 22 stories with a density of 350 units per acre. The for-sale prototypes include a Type V project of five stories with a density of 50 units per acre and a Type I project of 22 stories with a density of 350 units per acre.
PAGE 5
Two versions of the Type I rental and sale prototypes were analyzed – one version, which reflects standard City requirements for payment of an inclusionary in-lieu fee and construction taxes, and a “waiver” version, which reflects a waiver of payment of the inclusionary in-lieu fee and 50% reduction of select construction taxes.
Submarkets
The prototypes were reviewed and applied in submarkets including “South & East”, “Central”, “West”, “North” and “Downtown.” The City provided boundaries based on its Inclusionary Housing Ordinance Areas (s ee Exhibit G) to guide the geographical definition of each submarket. Century | Urban researched each prototype and submarket to estimate the property income, expenses, sales prices, costs, fees, and land cost assumptions appropriate for the prototype or submarket.
Average Unit Sizes
The prototypes assume an average unit size of 900 net square feet for all rental prototypes, 1,150 net square feet for the Type V sale prototype, and 950 net square feet for the Type I sale prototype. Assumed building efficiencies (i.e., net square feet as a percentage of gross square feet) ranged from 78% to 80% resultin g in average gross square feet per unit of 1,125 to 1,438.
Prototype Size Low-Rise Mid-Rise High-Rise Low-Rise High-Rise Rental/Sale Rental Rental Rental Sale Sale
Construction Type Type V Type III Type I Type V Type I
Height/Stories 5 7 22 5 22
Density/Acre 65 90 350 50 350
Protot
ype Building Height and Density
Prototype Submarkets
Prototype Size Low-Rise Mid-Rise High-Rise Low-Rise High-Rise Rental/Sale Rental Rental Rental Sale Sale
Construction Type Type V Type III Type I Type V Type I
Submarkets South & East,
Central
Central, West,
North
Central, West,
North,
Downtown
South & East,
Central &
West, North
Downtown
Prototype Size Low-Rise Mid-Rise High-Rise Low-Rise High-Rise Rental/Sale Rental Rental Rental Sale Sale
Construction Type Type V Type III Type I Type V Type I
Avg Unit Size Net SF 900 900 900 1,150 950
Efficiency 80% 80% 78% 80% 78%
Avg Unit Size Gross SF 1,125 1,125 1,154 1,438 1,218
Protot
ype Unit Sizes and Efficiencies
PAGE 6
Parking Ratios
Assumed parking ratios are 1 per unit for the Type V and Type III rental prototypes, 0.8 per unit for the Type I rental prototypes, and 1.1 per unit for the Type V and Type I sale prototypes.
The prototypes described above are summarized in Exhibit A. To allow comparison to prior analysis, the prototype assumptions are consistent with prototype assumptions used in the 2022 analysis.
Assumptions
Assumptions for the conceptual analysis, which are detailed in Exhibit D, include the following:
All prototypes except Type I rental and sale prototypes assume above-grade structured parking. Type I prototypes assume below-grade structured parking. Project construction timelines are estimated to range from 20 to 30 months. Inclusionary requirements are assumed to be fulfilled through the payment of the in-lieu fee, which in the case of “waiver” scenarios is assumed to be waived as discussed below. Construction is assumed to be open shop.
Development Costs
Development costs include “hard costs”, which represent the labor and materials associated with building construction, and “s oft costs”, which represent costs related to items such as architecture and engineering, financing, City fees, insurance, property taxes, overhead, legal, accounting and marketing.
As noted above, development costs for a give n project may vary by project design, size, location, construction type, site specific conditions, and other factors. For this analysis, an average project with a flat or relatively fl at site and no unusual environmental, soils, infrastructure, or off-site conditions is assumed.
Prototype Size Low-Rise Mid-Rise High-Rise Low-Rise High-Rise Rental/Sale Rental Rental Rental Sale Sale
Construction Type Type V Type III Type I Type V Type I
Parking Ratio 1.0 1.0 0.8 1.1 1.1
Protot
ype Parking Ratios
PAGE 7
Although this analysis reflects a specific point-in-time, construction costs in the Bay Area have increased significantly over time and w ill likely continue to change. The sensitivity analysis described below reflects the effect on feasibility of changes in development costs.
Hard Costs
Building hard costs were estimated separate ly from parking hard costs, which varied based on the type of parking assumed in each prototype.
The assumptions utilized for prototype hard co sts were generated by a cost estimating consultant. Total hard costs also include a 5% hard cost contingency.
Soft Costs
Soft costs are estimated by soft cost catego ry for each prototype as further detailed in Exhibit D. In total, soft costs equated to 32% to 40% of hard costs and ranged from approximately $133 to $185 per gross square foot depending on the prototype1. Variations in soft costs among the prototypes of the same construction type are driven primarily by the range of City fees, particularly parkland and inclusionary in-lieu fees, which vary by submarket.
1 Excluding “waiver” scenarios.
Size Construction Type Rental Sale
Low-Rise Type V $438 $468
Mid-Rise Type III $498 NA
High-Rise Type I $558 $594
Building Hard Costs Per GSF (excluding parking)
Size Type Parking Type Rental Sale
Low-Rise Type V Above-grade $108 $112
Mid-Rise Type III Above-grade $112 NA
High-Rise Type I Below-grade $267 $272
Parking Hard Costs Per GSF
Size Type South & East Central West North Downtown
Low-Rise Type V 32% 40% NA NA NA
Mid-Rise Type III NA 39% 38% 33% NA
High-Rise Type I NA 37% 37% 32% 36%
Soft Costs as a % of Hard Costs - Rental Prototypes
PAGE 8
The tables above do not include the Type I “w aiver” scenarios in which 50% of Building and Structure (“B&S”) and Commercial, Resi dential, Mobile Home Park (“CRMP”) construction taxes and 100% of inclusionary in-lieu fees are waived.
Further detail regarding development cost assumptions is provided in Exhibit D.
City Fees
City fees for each prototype are estimated based on the prototype’s location and size, among other factors. City fees include the following:
Construction taxes, which include the following six categories: B&S; CRMP; Construction Taxes; Residential Construction Tax; Strong Motion Instrumentation Program Assessment (“SMIPA”); and Building Standards Administration Special Revolving Fund (“BSARSF”). The latter tw o categories are collected on behalf of the State. The amounts of these taxes ar e calculated based on a percentage of building construction valuation or on a per unit basis. The “waiver” scenarios for certain Type I prototypes analyze the potential effect of waiving 50% of the B&S and CRMP taxes in addition to the inclusionary in-lieu fee described below. Parkland In-Lieu Fees, which are assessed for each prototype project based on its location. All prototypes are assumed to receive a 25% parkland fee credit based on the provision of onsite open space.
School Fees (ranging from $4.55 to $4.79 per square foot) are assessed per residential gross square foot based on the applicable submarket location and school district.
The City is continuing to re-examine its traffic fees. As a result, estimated traffic fees have not been included in the analysis. As part of the traffic fee revisions, the City is defining centrally located “growth areas” where new development may not be assessed traffic fees based on vehicle mile traveled (“VMT”).
Size Type South & East
Central &
West North Downtown
Low-Rise Type V 32% 33% 34% NA
High-Rise Type I NA NA NA 31%
Soft Costs as % of Hard Costs - Sale Prototypes
Size Type
Low-Rise Type V $133 $134
Mid-Rise Type III $153 NA
High-Rise Type I $185 $168
Average Soft Costs Per GSF
Rental Sale
PAGE 9
Inclusionary In-Lieu Fees are assessed per square foot depending on the project size and submarket location. The “waiver” scenarios for certain Type I prototypes analyze the potential effect of waiving this fee in addition to a portion of the construction taxes described above.
Other City planning and building permit fees are assessed based on project size, number of units, and other factors. These fees include the costs of the City’s land use and site plan approvals, planning review, and building department fees, among other fees.
The total City Fees per unit for each prototype are estimated to be in the ranges shown in the table below. Further detail is provided in Exhibit D.
Rental Rates
For the rental prototypes, Century | Urban conducted research regarding the effective rental rates at properties similar to each prototype in each applicable submarket. Effective rental rates reflect actual in-place rental revenue taking into account concessions or other deductions. As an example, at the time of this writing, many Class A projects were offering four weeks of free rent in associat ion with a twelve-month lease. As a result, effective rents are generally lower than asking rents.
Based on this research, the following effective monthly rental rate assumptions for each prototype and applicable submarket, shown on both a per rentable square foot and per unit basis, are utilized in the conceptual feasibility analysis. Monthly rental rates are rounded to the nearest $10.
Total City Permits & Fees Per Unit
Approximate
Range
Construction Taxes $7,900 to $9,900
Parkland In-Lieu Fees $9,800 to $20,800
School Fees $5,100 to $6,900
Planning/Building Fees $3,100 to $7,700
Inclusionary In-Lieu Fees $24,500 to $57,700
Total Fees $53,600 to $92,800
PAGE 10
The City also requested analysis of the effect on Type I “waiver” scenarios of requiring that 5% of total onsite units be affordable to households earning no more than 100% of Area Median Income for Santa Clara Coun ty (“AMI”) as determined by the U.S.
Department of Housing and Urban Development (“HUD”) with adjustments by the California Department of Health and Community Development (“HCD”). AMI is often used to determine the affordability level of below-market rate housing. For example, very low-income households earn no more than 50% of AMI, and low-income households earn no more than 80% of AMI. Housing affordable to households earning 100% of AMI would generally be considered as targeting moderate-income households. Based on an assumed unit mix, the estimated average affordable rent at this AMI tier was $4.15 per square foot or $3,734 per unit per month. This rental rate is higher than the estimated market rate rental rates for all Type I prototype submarkets in the analysis. Accordingly, inclusion of a 5% onsite affordability requirement at 100% AMI would not affect projected revenues and the results of the analysis.
Sales Prices
Estimated sale prices for the for-sale protot ypes are based on research regarding sales comparables with adjustments for buildin g age in the prototype submarkets. For preceding period from October 2022 to September 2023, over 900 sales comparables were reviewed. The average sales prices per square foot reflected in these sales comparables are summarized by submarkets in the table below. Similar to rental rates, sales prices vary across submarkets and product types.
Type V $3.42 $3.60 NA NA NA
Type III NA $3.60 $4.10 $3.40 NA
Type I NA $3.60 $4.10 $3.40 $3.87
Type V $3,080 $3,240 NA NA NA
Type III NA $3,240 $3,690 $3,060 NA
Type I NA $3,240 $3,690 $3,060 $3,480
Rent Per
SF/Month North
Rent Per
Unit/Month
Downtown
South &
East Central West North Downtown
South &
East Central West
North
Average Sale Price PSF $620 $690 $690 $730
Condominium Sales Comparables South &
East
Central &
West DowntownPrior 12 Months
PAGE 11
The tables below summarize the assumed aver age sales prices on a per-square-foot and per-unit basis based on the research conducted with adjustments for building age.
Brokerage commissions, warranty reserves, and sales costs are subtracted from gross sale proceeds to estimate net sale proceeds for each prototype.
Developer Return
Developers require a return on their investme nt to undertake the risks involved with a development project. The required return fo r a specific project may vary based on the project’s specific characteristics, as we ll as market/economic conditions including specifically capital market conditions. Th e prototype feasibility analyses include an estimate of the return that developers would require to proceed with project development.
For the rental prototypes analysis, the required return is estimated using a Return-on-Cost (“ROC”) metric. This return metric is commonly used for rental projects. The appropriate target ROC is established based on a proj ect’s perceived risks, which include the uncertainty of project costs, schedule, revenues, and economic conditions upon completion. The target ROC assumed for the rental prototypes is 5.75%.
For the sale prototypes analysis, the required return is estimated based on a Profit Margin metric. Like the ROC for rental projects, the Profit Margin metric is commonly used for for-sale projects, and the appropriate target Profit Margin is based on the project’s perceived risks. The target Profit Margin used for the sale prototypes is 20%.
Land Costs
Land costs are estimated based on research of comparable land sale transactions in each submarket. Land sale prices vary substant ially even within each submarket and are affected by location, topography, site an d soil conditions, parcel configuration, neighboring uses, access, noise, entitlement and permit status, among other factors. The North
Type V $775 $725 $700 NA
Type I NA NA NA $775
North
Type V $891,250 $833,750 $805,000 NA
Type I NA NA NA $736,250
Average Sales Price PSF
South &
East
Central &
West Downtown
South &
East
Central &
West Downtown
Average Sales Price Per Unit
PAGE 12
estimated land costs per unit for each submarket are summarized in the table below. There have been limited land sale tr ansactions for multifamily re sidential developments since the 2022 analysis; as a result, land values ar e estimated to be the same as the estimated land values in the 2022 analysis.
The land costs per unit shown in the table ab ove are compared to the estimated residual land values for the applicable prototypes in each submarket, as further discussed below.
Feasibility Analysis
To evaluate the potential feasibility of each pr ototype, Century | Urban prepared an analysis to estimate each prototype’s residual land value and then compared that residual land value to the estimated market price of land in each submarket based on comparable land sale transactions.
The residual land value represents the amount t hat a developer estimates that it can pay for a development site and still achieve its target return . If the residual land value is greater than the market price of land, then this is an indication that new development projects are feasible, land for development is more likely to transact, and new projects are more likely to be developed. If residual land value is less than the market pric e of land, then this is an indication that new development projects are not feasible, land for development is less likely to transact, and new projects are less likely to be developed.
The example shown in the chart below demonstrat es the concept of residual value for three individual units in three hypothet ical projects. In this example, a unit can be sold for $100. In example 1 (on the left), the hard costs, soft costs and target developer return required to build the unit total $75. In this case, the remaining “res idual land value” is $100 (sales price) minus $75 (total development cost, developer return, and sale s costs) = $25 per unit. If the developer were to pay more than $25 a unit for land, then the total cost to build would exceed $100 and the developer would not recover its costs or receive it s target return. Therefore, in example 1, new development is likely to occur in a market where land can be purchased for $25 per unit or less.
In example 2, shown in the middle, total development cost, developer return, and sales costs are $84 and residual land value is $100 (sales price) minus $84 = $16 per unit. This example reflects that as development costs increase, the price a developer can pay for land decreases (from $25 per unit in example 1 to $16 per unit in example 2) assuming that sales prices remain constant. In example 3 on the right, the total development cost, developer return, and sales costs of $110 Low $40,000 $40,000 $65,000 $25,000 $25,000
High $65,000 $65,000 $75,000 $85,000 $85,000
West North Downtown
Land Prices Per Unit South &
East Central
PAGE 13
exceed the sale price per unit, which results in ze ro or “negative” residu al land value. In this scenario, development is unlikely to occur.
Feasibility Results
The conceptual feasibility analysis indicates th at none of the prototypes support positive estimated residual land value in any of the submarkets. These results suggest a challenging environment for ground-up reside ntial development proj ects similar to the prototype projects in the selected submarkets. The conceptual feasibility assumptions and resulting residual land values for each prototype are shown in Exhibit B.
As noted above, the “Waiver” scenarios in the tables below reflect a waiver of 50% of certain construction taxes and 100% of inclusionary in-lieu fees for Type I prototypes.
PAGE 14
Macroeconomic Context
In general, the Bay Area features a diverse economy with low unemployment, a large and diverse range of employers, and significant demand for housing by prospective renters and homebuyers at a variety of income levels. However, even though demand is strong, housing development remains challenging. One of th e primary challenges is the high cost of construction. The Engineering News Record (“ENR”) and TBD Consultants publish indices which track construction costs quarterly in the Bay Area. Th e chart below shows the change in these indices since 2014. Both indices reflect major increases in cost since 2014 and even more significant increases since 2020. Since 2014, the total increa se has been over 200%. Between the first quarter of 2020, when the COVID-19 pandemic began, and the second quarter of 2023, the latest available data, TBD Consultants estimates an increase of 27%. To a limited extent, these hard cost increases have been offset by rental rate and sale price growth, but construction cost growth has outpaced rental rate and sale price growth.
Residual Values Per Unit - For Rent
Submarket South & East Central West North Downtown
Type V ($323,000) ($343,000) NA NA NA
Type III NA ($435,000) ($363,000) ($429,000) NA
Type I NA ($614,000) ($542,000) ($607,000) ($568,000)
Type I - Waiver NA ($540,000) ($469,000) ($572,000) ($495,000) Submarket South & East Central &
West North Downtown
Type V ($342,000) ($394,000) ($419,000) NA
Type I NA NA NA ($611,000)
Type I - Waiver NA NA NA ($570,000)
Residual Values Per Unit - For Sale
PAGE 15
Other macro-economic factors have also impacted residential feasibility. Increases in interest rates and borrowing costs driven in part by inflation and corresponding policy reactions have caused a decrease in market transaction volume. In July 2019, Polaris Pacific tracked listings for over 2,200 condominiums in the active sale inventory in Silicon Valley. In August 2023, there were under 1,500 such listings. During the period fr om 2015 to 2023, there was an average of 63 new construction sales month. In comparison, new construction sales averaged 35 units per month over the 18-month period from March 2022 to August 2023 and 31 units per month over the 12- month period from September 2022 to August 2023. To a certain extent, these changes can be attributed to the rise in interest rates. Since the writing of last year’s report, interest rates for 30 year fixed-rate mortgages have more than doubled, as shown in the following chart from Freddie MAC:
PAGE 16
Given continued demand for housing, the market for leasing and sales remains active, but the increased cost of debt, affecting both residential condominium buyers and commercial apartment investors, has, compared with 2022 and previous years, increased debt service payments, putting downward pressure on property prices. In addi tion, the Federal Reserve has indicated that further rate increases are still likely, adding speculation that further negative asset price movement is possible. These trends, plus increa sed development costs have negatively affected project feasibility, and made it more difficult fo r developers to attract lenders and investors to their projects.
Sensitivity Analysis
As previously noted, the assumptions used in the prototype analysis are based on research regarding current development costs, rents, sale prices and underwriting inputs. However, these assumptions are intended to reflect average projects and may shift over time as market conditions change.
To provide additional context, se nsitivities were prepared to anal yze the potential effect of 5% variations in hard costs, soft costs, rental rates, and sale prices by construction type. The results of these sensitivity analyses, which are summarized in Exhibit C, indicate that 5% improvements in hard costs, soft costs, rental rates, and sale prices do not bridge the feasibility gap (see below for explanation of how the feasibility gap is calculated) for any of the prototypes.
The feasibility gap amounts shown in the Exhibi t C charts represent the sum of the absolute amount of the estimated negative residual land value per unit for each prototype plus the estimated market cost of land per unit for such prototype. For example, the average projected
PAGE 17
residual land value for the Type V rental prototypes is approximately negative $332,000 per unit and the estimated market land cost per unit is approximately $52,500 per unit, so the estimated feasibility gap is approximately $384,500 per unit for this prototype (rounded to $390,000 in Exhibit C). In other words, the residual land va lue for this prototype would have to increase by $384,500 to yield a residual land value of positive $52,500 per unit that corresponds to estimated market land costs, thereby indicating a potentially feasible project.
The leftmost column in each chart in Exhibit C shows the average feasibility gap per unit for each rental or sale prototype across all relevant submarkets analyzed for such prototype. The columns to the right of this column show the effect on the average feasibility gap of varying hard costs, soft costs, rental rates or sale prices by 5%. For example, for the first Type V rental prototype chart shown in Exhibit C, a 5% reduction in hard cost s would decrease the feasibility gap by $30,000 from $390,000 to $360,000.
As noted above, City Permits and Fees including construction taxes, parkland in-lieu fees, schools fees, planning and building fees and inclusionary in-lieu fees are estimated to total approximately $30,000 to $90,000 per unit depending on the prototype, with the lowest totals being associated with the waiver scenarios. Given feasibility ga ps which range from approximately $370,000 to approximately $670,000 per unit, a reduction or even waiver of all such fees would not eliminate the estimated feasibility gap.
The estimated feasibility gaps will likely be bridged by improvements in the relationship between development costs and project revenues. In a ddition, there may be proposed development projects that are closer to feas ibility than the prototypes studied for purposes of this analysis, whereby smaller reductions in development costs or improvements in revenues may render such projects feasible.
An additional sensitivity analysis was prepared to estimate the potential effect of deferring the payment of development impact fees from the commencement of project construction (i.e., upon building permit issuance) to the completion of construction (i.e., upon certificate of occupancy issuance). The effect of this change in payment ti ming is projected to r ange from approximately $2,200 to $5,500 per unit depending on the prototype, which does not appear to materially affect feasibility.
Community Review
In connection with the preparation of this analysis , the City held virtual meetings on September 28th and October 12th to review the underwriting assumptions and findings for the feasibility prototypes with stakeholders such as local developers, brokers, and other industry professionals.
High-level feedback was provided during the September 28th meeting, and more specific
PAGE 18
feedback was provided during the October 12th meeting. A summary of the feedback provided during the October 12th meeting is provided in Exhibit F. With the exception of a few comments regarding estimated development costs being potentially higher than development costs observed by some participants in the meeting, th e effect of the feedback provided would be to further increase the estimated feasibility gaps in this analysis.
Conclusion
This conceptual analysis reviewed a set of residential development prototypes to assess the potential feasibility of new rental and sale development projects in San Jose.
The analysis indicates negative estimated residual land values across the reviewed prototypes and suggests that, similar to the conclusions in 2022, development of residential projects is challenging in the current market. As noted at th e beginning of this report, since the time when the 2022 study was prepared, the cost of construc tion has continued to increase, while rising interest rates have increased capital costs and target returns for achieving feasibility. Rental rates and condominium sale prices have increased sinc e the 2022 analysis, but the amount of these increases is insufficient to offset the effect of higher development costs and target returns.
The conclusion that development of residential pr ojects is challenging in the current market is not intended to suggest that no residential develo pment in the City will occur, as projects may have cost structures or target rental rates or sale prices that vary from the prototypes. However, the results do suggest a difficult development environment for projects similar to the prototypes.
E v e n w i t h 5 % v a r i a t i o n s i n d evelopment costs or rental rates and sales prices, the prototype projects still appear to be challenged.
PAGE 19
Exhibit A
PAGE 20
Exhibit B
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest ' 000, monthly pro-forma values rounded to nearest '0 Submarket: South & East
Prototype: Type V
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 5.00
Density (du/ac) 65
Efficiency 80%
Parking Ratio 1
Construction Months 20
Construction Costs Per Unit
Hard Costs
Building Hard Costs $492,800
Parking Hard Costs $43,200
Contingency/Other Hard Costs $26,800
Total Hard Costs $562,700
Soft Costs
Architectural and Engineering $33,800
Financing Costs $31,600
City Fees and Permits $53,600
Other Soft Costs $52,300
Soft Cost Contingency $8,600
Total Soft Costs $179,800
Total Hard and Soft Costs $742,600
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.42
Average Rent Per Month $3,080
Other Income Per Month $180
Vacancy / Credit Loss at 5% Per Month $160
Total Revenue Per Month $3,100
Operating Expenses
General Operating Expenses Per Month $590
Taxes Per Month $490
Total Annual Operating Expenses Per Month $1,080
Net Operating Income Per Month $2,010
Net Operating Income Per Year $24,200
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $420,000
Total Hard and Soft Costs $743,000
Residual Value ($323,000)
Feasibility Gap ($375,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $40,000
2019-2021 Indicative Land Cost - High $65,000
PAGE 21
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: Central
Prototype: Type V
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 5.00
Density (du/ac) 65
Efficiency 80%
Parking Ratio 1
Construction Months 20
Construction Costs Per Unit
Hard Costs
Building Hard Costs $492,800
Parking Hard Costs $43,200
Contingency/Other Hard Costs $26,800
Total Hard Costs $562,700
Soft Costs
Architectural and Engineering $33,800
Financing Costs $33,600
City Fees and Permits $92,800
Other Soft Costs $54,400
Soft Cost Contingency $10,700
Total Soft Costs $225,200
Total Hard and Soft Costs $787,900
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.60
Average Rent Per Month $3,240
Other Income Per Month $180
Vacancy / Credit Loss at 5% Per Month $170
Total Revenue Per Month $3,250
Operating Expenses
General Operating Expenses Per Month $590
Taxes Per Month $520
Total Annual Operating Expenses Per Month $1,120
Net Operating Income Per Month $2,130
Net Operating Income Per Year $25,600
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $445,000
Total Hard and Soft Costs $788,000
Residual Value ($343,000)
Feasibility Gap ($395,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $40,000
2019-2021 Indicative Land Cost - High $65,000
PAGE 22
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: Central
Prototype: Type III
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 7.00
Density (du/ac) 90
Efficiency 80%
Parking Ratio 1
Construction Months 24
Construction Costs Per Unit
Hard Costs
Building Hard Costs $560,300
Parking Hard Costs $44,800
Contingency/Other Hard Costs $30,300
Total Hard Costs $635,300
Soft Costs
Architectural and Engineering $38,100
Financing Costs $44,200
City Fees and Permits $92,000
Other Soft Costs $58,800
Soft Cost Contingency $11,700
Total Soft Costs $244,800
Total Hard and Soft Costs $880,100
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.60
Average Rent Per Month $3,240
Other Income Per Month $180
Vacancy / Credit Loss at 5% Per Month $170
Total Revenue Per Month $3,250
Operating Expenses
General Operating Expenses Per Month $590
Taxes Per Month $520
Total Annual Operating Expenses Per Month $1,120
Net Operating Income Per Month $2,130
Net Operating Income Per Year $25,600
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $445,000
Total Hard and Soft Costs $880,000
Residual Value ($435,000)
Feasibility Gap ($487,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $40,000
2019-2021 Indicative Land Cost - High $65,000
PAGE 23
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: West
Prototype: Type III
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 7.00
Density (du/ac) 90
Efficiency 80%
Parking Ratio 1
Construction Months 24
Construction Costs Per Unit
Hard Costs
Building Hard Costs $560,300
Parking Hard Costs $44,800
Contingency/Other Hard Costs $30,300
Total Hard Costs $635,300
Soft Costs
Architectural and Engineering $38,100
Financing Costs $44,100
City Fees and Permits $90,700
Other Soft Costs $58,700
Soft Cost Contingency $11,600
Total Soft Costs $243,200
Total Hard and Soft Costs $878,500
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $4.10
Average Rent Per Month $3,690
Other Income Per Month $180
Vacancy / Credit Loss at 5% Per Month $190
Total Revenue Per Month $3,680
Operating Expenses
General Operating Expenses Per Month $610
Taxes Per Month $600
Total Annual Operating Expenses Per Month $1,210
Net Operating Income Per Month $2,470
Net Operating Income Per Year $29,600
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $515,000
Total Hard and Soft Costs $878,000
Residual Value ($363,000)
Feasibility Gap ($434,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $65,000
2019-2021 Indicative Land Cost - High $75,000
PAGE 24
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: North
Prototype: Type III
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 7.00
Density (du/ac) 90
Efficiency 80%
Parking Ratio 1
Construction Months 24
Construction Costs Per Unit
Hard Costs
Building Hard Costs $560,300
Parking Hard Costs $44,800
Contingency/Other Hard Costs $30,300
Total Hard Costs $635,300
Soft Costs
Architectural and Engineering $38,100
Financing Costs $42,500
City Fees and Permits $64,100
Other Soft Costs $57,200
Soft Cost Contingency $10,100
Total Soft Costs $212,100
Total Hard and Soft Costs $847,400
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.40
Average Rent Per Month $3,060
Other Income Per Month $180
Vacancy / Credit Loss at 5% Per Month $160
Total Revenue Per Month $3,080
Operating Expenses
General Operating Expenses Per Month $590
Taxes Per Month $490
Total Annual Operating Expenses Per Month $1,080
Net Operating Income Per Month $2,000
Net Operating Income Per Year $24,000
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $418,000
Total Hard and Soft Costs $847,000
Residual Value ($429,000)
Feasibility Gap ($485,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $25,000
2019-2021 Indicative Land Cost - High $85,000
PAGE 25
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: Central
Prototype: Type I
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 22.00
Density (du/ac) 350
Efficiency 78%
Parking Ratio 1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $643,800
Parking Hard Costs $85,400
Contingency/Other Hard Costs $36,500
Total Hard Costs $765,800
Soft Costs
Architectural and Engineering $45,900
Financing Costs $63,600
City Fees and Permits $91,700
Other Soft Costs $68,300
Soft Cost Contingency $13,500
Total Soft Costs $283,000
Total Hard and Soft Costs $1,048,800
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.60
Average Rent Per Month $3,240
Other Income Per Month $200
Vacancy / Credit Loss at 5% Per Month $170
Total Revenue Per Month $3,270
Operating Expenses
General Operating Expenses Per Month $670
Taxes Per Month $510
Total Annual Operating Expenses Per Month $1,180
Net Operating Income Per Month $2,080
Net Operating Income Per Year $25,000
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $435,000
Total Hard and Soft Costs $1,049,000
Residual Value ($614,000)
Feasibility Gap ($666,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $40,000
2019-2021 Indicative Land Cost - High $65,000
PAGE 26
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: Central - Waiver
Prototype: Type I
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 22.00
Density (du/ac) 350
Efficiency 78%
Parking Ratio 1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $643,800
Parking Hard Costs $85,400
Contingency/Other Hard Costs $36,500
Total Hard Costs $765,800
Soft Costs
Architectural and Engineering $45,900
Financing Costs $59,200
City Fees and Permits $29,900
Other Soft Costs $64,700
Soft Cost Contingency $10,000
Total Soft Costs $209,600
Total Hard and Soft Costs $975,400
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.60
Average Rent Per Month $3,240
Other Income Per Month $200
Vacancy / Credit Loss at 5% Per Month $170
Total Revenue Per Month $3,270
Operating Expenses
General Operating Expenses Per Month $670
Taxes Per Month $510
Total Annual Operating Expenses Per Month $1,180
Net Operating Income Per Month $2,080
Net Operating Income Per Year $25,000
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $435,000
Total Hard and Soft Costs $975,000
Residual Value ($540,000)
Feasibility Gap ($666,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $40,000
2019-2021 Indicative Land Cost - High $65,000
*Waiver scenarios assume a waiver of inclusionary fees and a 50% reduction in CRMP and B&S Construction Taxes
PAGE 27
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: West
Prototype: Type I
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 22.00
Density (du/ac) 350
Efficiency 78%
Parking Ratio 1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $643,800
Parking Hard Costs $85,400
Contingency/Other Hard Costs $36,500
Total Hard Costs $765,800
Soft Costs
Architectural and Engineering $45,900
Financing Costs $63,500
City Fees and Permits $90,100
Other Soft Costs $68,200
Soft Cost Contingency $13,400
Total Soft Costs $281,100
Total Hard and Soft Costs $1,046,800
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $4.10
Average Rent Per Month $3,690
Other Income Per Month $200
Vacancy / Credit Loss at 5% Per Month $190
Total Revenue Per Month $3,700
Operating Expenses
General Operating Expenses Per Month $690
Taxes Per Month $590
Total Annual Operating Expenses Per Month $1,280
Net Operating Income Per Month $2,420
Net Operating Income Per Year $29,000
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $505,000
Total Hard and Soft Costs $1,047,000
Residual Value ($542,000)
Feasibility Gap ($612,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $65,000
2019-2021 Indicative Land Cost - High $75,000
PAGE 28
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: West - Waiver
Prototype: Type I
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 22.00
Density (du/ac) 350
Efficiency 78%
Parking Ratio 1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $643,800
Parking Hard Costs $85,400
Contingency/Other Hard Costs $36,500
Total Hard Costs $765,800
Soft Costs
Architectural and Engineering $45,900
Financing Costs $59,100
City Fees and Permits $28,400
Other Soft Costs $64,600
Soft Cost Contingency $9,900
Total Soft Costs $207,900
Total Hard and Soft Costs $973,600
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $4.10
Average Rent Per Month $3,690
Other Income Per Month $200
Vacancy / Credit Loss at 5% Per Month $190
Total Revenue Per Month $3,700
Operating Expenses
General Operating Expenses Per Month $690
Taxes Per Month $590
Total Annual Operating Expenses Per Month $1,280
Net Operating Income Per Month $2,420
Net Operating Income Per Year $29,000
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $505,000
Total Hard and Soft Costs $974,000
Residual Value ($469,000)
Feasibility Gap ($612,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $65,000
2019-2021 Indicative Land Cost - High $75,000
*Waiver scenarios assume a waiver of inclusionary fees and a 50% reduction in CRMP and B&S Construction Taxes
PAGE 29
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: North
Prototype: Type I
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 22.00
Density (du/ac) 350
Efficiency 78%
Parking Ratio 1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $643,800
Parking Hard Costs $85,400
Contingency/Other Hard Costs $36,500
Total Hard Costs $765,800
Soft Costs
Architectural and Engineering $45,900
Financing Costs $61,500
City Fees and Permits $62,600
Other Soft Costs $66,600
Soft Cost Contingency $11,800
Total Soft Costs $248,500
Total Hard and Soft Costs $1,014,300
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.40
Average Rent Per Month $3,060
Other Income Per Month $200
Vacancy / Credit Loss at 5% Per Month $160
Total Revenue Per Month $3,100
Operating Expenses
General Operating Expenses Per Month $670
Taxes Per Month $480
Total Annual Operating Expenses Per Month $1,150
Net Operating Income Per Month $1,950
Net Operating Income Per Year $23,400
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $407,000
Total Hard and Soft Costs $1,014,000
Residual Value ($607,000)
Feasibility Gap ($662,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $25,000
2019-2021 Indicative Land Cost - High $85,000
PAGE 30
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: North - Waiver
Prototype: Type I
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 22.00
Density (du/ac) 350
Efficiency 78%
Parking Ratio 1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $643,800
Parking Hard Costs $85,400
Contingency/Other Hard Costs $36,500
Total Hard Costs $765,800
Soft Costs
Architectural and Engineering $45,900
Financing Costs $59,400
City Fees and Permits $33,600
Other Soft Costs $64,900
Soft Cost Contingency $10,200
Total Soft Costs $214,000
Total Hard and Soft Costs $979,800
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.40
Average Rent Per Month $3,060
Other Income Per Month $200
Vacancy / Credit Loss at 5% Per Month $160
Total Revenue Per Month $3,100
Operating Expenses
General Operating Expenses Per Month $670
Taxes Per Month $480
Total Annual Operating Expenses Per Month $1,150
Net Operating Income Per Month $1,950
Net Operating Income Per Year $23,400
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $408,000
Total Hard and Soft Costs $980,000
Residual Value ($572,000)
Feasibility Gap ($662,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $25,000
2019-2021 Indicative Land Cost - High $85,000
*Waiver scenarios assume a waiver of inclusionary fees and a 50% reduction in CRMP and B&S Construction Taxes
PAGE 31
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: Downtown
Prototype: Type I
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 22.00
Density (du/ac) 350
Efficiency 78%
Parking Ratio 1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $643,800
Parking Hard Costs $85,400
Contingency/Other Hard Costs $36,500
Total Hard Costs $765,800
Soft Costs
Architectural and Engineering $45,900
Financing Costs $63,200
City Fees and Permits $85,400
Other Soft Costs $67,900
Soft Cost Contingency $13,100
Total Soft Costs $275,600
Total Hard and Soft Costs $1,041,300
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.87
Average Rent Per Month $3,480
Other Income Per Month $200
Vacancy / Credit Loss at 5% Per Month $180
Total Revenue Per Month $3,500
Operating Expenses
General Operating Expenses Per Month $680
Taxes Per Month $550
Total Annual Operating Expenses Per Month $1,230
Net Operating Income Per Month $2,260
Net Operating Income Per Year $27,200
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $473,000
Total Hard and Soft Costs $1,041,000
Residual Value ($568,000)
Feasibility Gap ($624,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $25,000
2019-2021 Indicative Land Cost - High $85,000
PAGE 32
San Jose Residential Feasibility Analysis - Exhibit B
Per unit costs rounded to nearest '00; per unit residual values rounded to nearest '000, monthly pro-forma values rounded to ne arest '0 Submarket: Downtown - Waiver
Prototype: Type I
Tenure Rental
Item Amount
Average Unit Size (Net Rentable SF) 900
Stories 22.00
Density (du/ac) 350
Efficiency 78%
Parking Ratio 1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $643,800
Parking Hard Costs $85,400
Contingency/Other Hard Costs $36,500
Total Hard Costs $765,800
Soft Costs
Architectural and Engineering $45,900
Financing Costs $58,700
City Fees and Permits $23,700
Other Soft Costs $64,300
Soft Cost Contingency $9,600
Total Soft Costs $202,300
Total Hard and Soft Costs $968,100
Pro-Forma Per Unit
Revenue
Average Rent Per Square Foot Per Month $3.87
Average Rent Per Month $3,480
Other Income Per Month $200
Vacancy / Credit Loss at 5% Per Month $180
Total Revenue Per Month $3,500
Operating Expenses
General Operating Expenses Per Month $680
Taxes Per Month $550
Total Annual Operating Expenses Per Month $1,230
Net Operating Income Per Month $2,260
Net Operating Income Per Year $27,200
Residual Analysis Per Unit
Residual Value
Total Supportable Cost $473,000
Total Hard and Soft Costs $968,000
Residual Value ($495,000)
Feasibility Gap ($551,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $25,000
2019-2021 Indicative Land Cost - High $85,000
*Waiver scenarios assume a waiver of inclusionary fees and a 50% reduction in CRMP and B&S Construction Taxes
PAGE 33
San Jose Residential Feasibility Analysis - Exhibit B
Per unit cost and pro-forma values rounded to nearest '00, per unit residual values rounded to nearest '000 Submarket: South & East
Prototype: Type V
Tenure Sale
Item Amount
Average Unit Size (Net Saleable SF) 1,150
Stories 5
Density (du/ac) 50
Efficiency 80%
Parking Ratio 1.1
Construction Months 20
Construction Costs Per Unit
Hard Costs
Building Hard Costs $672,800
Parking Hard Costs $49,300
Contingency/Other Hard Costs $36,100
Total Hard Costs $758,100
Soft Costs
Architectural and Engineering $45,500
Financing Costs $42,700
City Fees and Permits $69,900
Other Soft Costs $74,200
Soft Cost Contingency $11,600
Total Soft Costs $243,900
Total Hard and Soft Costs $1,002,000
Pro-Forma Per Unit
Revenue
Average Price Per Net Saleable Square Foot $775
Average Price $891,300
Sales Costs Including Warranty Reserve $53,500
Profit $178,300
Total Net Supportable Cost $659,500
Residual Analysis Per Unit
Residual Value
Supportable Cost $660,000
Total Hard and Soft Costs $1,002,000
Residual Value ($342,000)
Feasibility Gap ($395,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $40,000
2019-2021 Indicative Land Cost - High $65,000
PAGE 34
San Jose Residential Feasibility Analysis - Exhibit B
Per unit cost and pro-forma values rounded to nearest '00, per unit residual values rounded to nearest '000 Submarket: Central & West
Prototype: Type V
Tenure Sale
Item Amount
Average Unit Size (Net Saleable SF) 1,150
Stories 5
Density (du/ac) 50
Efficiency 80%
Parking Ratio 1.1
Construction Months 20
Construction Costs Per Unit
Hard Costs
Building Hard Costs $672,800
Parking Hard Costs $49,300
Contingency/Other Hard Costs $36,100
Total Hard Costs $758,100
Soft Costs
Architectural and Engineering $45,500
Financing Costs $43,000
City Fees and Permits $77,400
Other Soft Costs $74,600
Soft Cost Contingency $12,000
Total Soft Costs $252,500
Total Hard and Soft Costs $1,010,700
Pro-Forma Per Unit
Revenue
Average Price Per Net Saleable Square Foot $725
Average Price $833,800
Sales Costs Including Warranty Reserve $50,000
Profit $166,800
Total Net Supportable Cost $617,000
Residual Analysis Per Unit
Residual Value
Supportable Cost $617,000
Total Hard and Soft Costs $1,011,000
Residual Value ($394,000)
Feasibility Gap ($446,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $40,000
2019-2021 Indicative Land Cost - High $65,000
PAGE 35
San Jose Residential Feasibility Analysis - Exhibit B
Per unit cost and pro-forma values rounded to nearest '00, per unit residual values rounded to nearest '000 Submarket: North
Prototype: Type V
Tenure Sale
Item Amount
Average Unit Size (Net Saleable SF) 1,150
Stories 5
Density (du/ac) 50
Efficiency 80%
Parking Ratio 1.1
Construction Months 20
Construction Costs Per Unit
Hard Costs
Building Hard Costs $672,800
Parking Hard Costs $49,300
Contingency/Other Hard Costs $36,100
Total Hard Costs $758,100
Soft Costs
Architectural and Engineering $45,500
Financing Costs $43,200
City Fees and Permits $81,200
Other Soft Costs $74,800
Soft Cost Contingency $12,200
Total Soft Costs $257,000
Total Hard and Soft Costs $1,015,100
Pro-Forma Per Unit
Revenue
Average Price Per Net Saleable Square Foot $700
Average Price $805,000
Sales Costs Including Warranty Reserve $48,300
Profit $161,000
Total Net Supportable Cost $595,700
Residual Analysis Per Unit
Residual Value
Supportable Cost $596,000
Total Hard and Soft Costs $1,015,000
Residual Value ($419,000)
Feasibility Gap ($474,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $25,000
2019-2021 Indicative Land Cost - High $85,000
PAGE 36
San Jose Residential Feasibility Analysis - Exhibit B
Per unit cost and pro-forma values rounded to nearest '00, per unit residual values rounded to nearest '000 Submarket: Downtown
Prototype: Type I
Tenure Sale
Item Amount
Average Unit Size (Net Saleable SF) 950
Stories 22
Density (du/ac) 330
Efficiency 78%
Parking Ratio 1.1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $723,500
Parking Hard Costs $119,700
Contingency/Other Hard Costs $42,200
Total Hard Costs $885,300
Soft Costs
Architectural and Engineering $53,100
Financing Costs $70,500
City Fees and Permits $59,800
Other Soft Costs $81,200
Soft Cost Contingency $13,200
Total Soft Costs $277,900
Total Hard and Soft Costs $1,163,200
Pro-Forma Per Unit
Revenue
Average Price Per Net Saleable Square Foot $775
Average Price $736,300
Sales Costs Including Warranty Reserve $50,000
Profit $134,000
Total Net Supportable Cost $552,200
Residual Analysis Per Unit
Residual Value
Supportable Cost $552,000
Total Hard and Soft Costs $1,163,000
Residual Value ($611,000)
Feasibility Gap ($666,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $25,000
2019-2021 Indicative Land Cost - High $25,000
PAGE 37
San Jose Residential Feasibility Analysis - Exhibit B
Per unit cost and pro-forma values rounded to nearest '00, per unit residual values rounded to nearest '000 Submarket: Downtown - Waiver
Prototype: Type I
Tenure Sale
Item Amount
Average Unit Size (Net Saleable SF) 950
Stories 22
Density (du/ac) 330
Efficiency 78%
Parking Ratio 1.1
Construction Months 30
Construction Costs Per Unit
Hard Costs
Building Hard Costs $723,500
Parking Hard Costs $119,700
Contingency/Other Hard Costs $42,200
Total Hard Costs $885,300
Soft Costs
Architectural and Engineering $53,100
Financing Costs $68,000
City Fees and Permits $24,800
Other Soft Costs $79,100
Soft Cost Contingency $11,300
Total Soft Costs $236,300
Total Hard and Soft Costs $1,121,600
Pro-Forma Per Unit
Revenue
Average Price Per Net Saleable Square Foot $775
Average Price $736,300
Sales Costs Including Warranty Reserve $50,000
Profit $134,000
Total Net Supportable Cost $552,200
Residual Analysis Per Unit
Residual Value
Supportable Cost $552,000
Total Hard and Soft Costs $1,122,000
Residual Value ($570,000)
Feasibility Gap ($666,000)
Market Land Cost
2019-2021 Indicative Land Cost - Low $25,000
2019-2021 Indicative Land Cost - High $25,000
*Waiver scenarios assume a waiver of inclusionary fees and a 50% reduction in CRMP and B&S Construction Taxes
PAGE 38
Exhibit C
Effect Per Unit on Feasibility Gap of Varying Hard Costs, Soft Costs, and Rental Rates by 5%
Type V Rental Prototype
PAGE 39
Type III Rental Prototype
PAGE 40
Type I Rental Prototype
PAGE 41
Effect Per Unit on Feasibility Gap of Varying Hard Costs, Soft Costs, and Sale Prices by 5%
Type V Sale Prototype
Type I Sale Prototype
PAGE 42
Exhibit D
Development Costs
Building Hard Costs Per GSF Rental Sale
Type V $438 $468
Type III $498 NA
Type I $558 $594
Parking Hard Costs Per GSF Rental
Sale
Type V $108 $112
Type III $112 NA
Type I $267 $272
Hard Cost Contingency Rental
Sale
5.00% 5.00%
Entitlement Professional Fees Rental Sale
e.g., CEQA-related and pre-entitlement professional fees Type V $531,000 $531,000 City Fees calculated separately Type III $531,000
Type I $1,062,000 $1,062,000
Post Entitlement A&E / Prof Fees Rental Sale
of Hard Costs 6.00% 6.00%
Insurance Rental Sale
of Hard Costs 1.00% 1.50%
Developer Fee Rental Sale
4.00% 4.00%
Financing Rental Sale
Interest Rate 8.00% 8.00%
Loan to Cost 55.00% 55.00%
Fees 1.00% 1.00%
Soft Cost Contingency Rental
Sale
5.00% 5.00%
Above grade pricing for Type V and Type III, below grade pricing for Type I.
PAGE 43
Rental Prototype Assumptions
Market Rent Per Unit / Month South & East Central West North Downtown Type V $3,080 $3,240
Type III $3,240 $3,690 $3,060
Type I $3,240 $3,690 $3,060 $3,480
Market Rent Per SF / Month South & East
Central West North Downtown
Type V $3.42 $3.60
Type III $3.60 $4.10 $3.40
Type I $3.60 $4.10 $3.40 $3.87
Other Income Per Unit / Month
(Incl parking) Type V $180
Type III $180
Type I $200
Vacancy/Credit Loss 5.00%
Operating Expenses Per Unit / Year
(not including property taxes)
Type V $7,080
Type III $7,080
Type I $8,040
Target Return on Cost
Type V 5.75%
Type III 5.75%
Type I 5.75%
Sale Prototype Assumptions
Market Sale Price PSF South & East
C, W, N Downtown
Type V $775 $725
Type I $775
Sales Costs Including Warranty Reserve 5%-6%
Target Profit Margin South & East C, W, N Downtown
Type V 20% 20%
Type I 20%
Note 1 Monthly unit rents and annual unit operating expenses are rounded to the nearest $10.
PAGE 44
City Permits and Fees - Rental Prototypes Total fees and per unit fees rounded to nearest '00 Prototype Type V Type V Type III Type III Type III
South &
East Central Central West North
Residential Value Per GSF $149.80 $149.80 $149.80 $149.80 $149.80 Residential Value Per Unit $168,500 $168,500 $168,500 $168,500 $168,500 Parking Value Per GSF $68.12 $68.12 $85.19 $85.19 $85.19 Parking Value Per Unit $27,200 $27,200 $34,100 $34,100 $34,100 Total Valuation Per Unit $195,800 $195,800 $202,600 $202,600 $202,600 Construction Tax Assumptions
Building and Structure 1.54% of value
CRMP 2.42% of value
Construction Tax $75.00 per unit
Residential Construction Tax $90.00 per unit
SMIPA 0.01% of value
BSARSF 0.004% of value
Total Construction Tax Per Unit $7,900 $7,900 $8,200 $8,200 $8,200 Parkland In-Lieu Fees $13,100 $22,600 $22,600 $20,800 $27,700 Parkland Credit Note 1 25% 25% 25% 25% 25%
Total Parkland In Lieu Fees Per Unit $9,800 $17,000 $17,000 $15,600 $20,800 School Fees Per Residential GSF $4.55 $4.79 $4.79 $4.79 $4.79 School Fees Per Unit $5,100 $5,400 $5,400 $5,400 $5,400 Planning and Building Fees Per Unit $6,200 $6,200 $5,300 $5,300 $5,300 Inclusionary In-Lieu PSF $21.74 $49.99 $49.99 $49.99 $21.74 Inclusionary Fee Per Unit $24,500 $56,200 $56,200 $56,200 $24,500 Total Permits and Fees Per Unit $53,600 $92,800 $92,000 $90,700 $64,100 Note 1 Adjustment to reflect assumed amount of parkland provided within project.
Note 2 Traffic fees currently being revised
PAGE 45
City Permits and Fees - Rental Prototypes Total fees and per unit fees rounded to nearest '00 Prototype Type I Type I Type I Type I
Central West North Downtown
Residential Value Per GSF $149.80 $149.80 $149.80 $149.80 Residential Value Per Unit $172,800 $172,800 $172,800 $172,800 Parking Value Per GSF $112.22 $89.90 $89.90 $89.90
Parking Value Per Unit $35,900 $28,800 $28,800 $28,800
Total Valuation Per Unit $208,800 $201,600 $201,600 $201,600 Construction Tax Assumptions
Building and Structure 1.54% of value
CRMP 2.42% of value
Construction Tax $75.00 per unit
Residential Construction Tax $90.00 per unit
SMIPA 0.01% of value
BSARSF 0.004% of value
Waiver Scenario B&S, CRMP Reduction 50% Waiver Scenarios Only Total Construction Tax Per Unit $8,500 $8,200 $8,200 $8,200 Parkland In-Lieu Fees $22,600 $20,800 $27,700 $14,600
Parkland Credit Note 1 25% 25% 25% 25%
Total Parkland In Lieu Fees Per Unit $17,000 $15,600 $20,800 $11,000 School Fees Per Residential GSF $4.79 $4.79 $4.79 $4.79 School Fees Per Unit $5,500 $5,500 $5,500 $5,500
Planning and Building Fees Per Unit $3,100 $3,100 $3,100 $3,100 Inclusionary In-Lieu PSF $49.99 $49.99 $21.74 $49.99
Inclusionary Fee Per Unit $57,700 $57,700 $25,100 $57,700 Note: Inclusionary Fees Waived in Waiver Scenarios
Total Permits and Fees Per Unit $91,700 $90,100 $62,600 $85,400 Note 1 Adjustment to reflect assumed amount of parkland provided within project.
Note 2 Traffic fees currently being revised
PAGE 46
City Permits and Fees - Sale Prototypes Total fees and per unit fees rounded to nearest '00 Prototype Type V Type V Type V Type I
South &
East
Central &
West North Downtown
Residential Value Per GSF $149.80 $149.80 $149.80 $149.80 Residential Value Per Unit $215,300 $215,300 $215,300 $215,300 Parking Value Per GSF $68.12 $68.12 $68.12 $112.22
Parking Value Per Unit $30,000 $30,000 $30,000 $30,000
Total Value Per Unit $245,300 $245,300 $245,300 $245,300 Construction Taxes
Building and Structure 1.54% of value
CRMP 2.42% of value
Construction Tax $75.00 per unit
Residential Construction Tax $90.00 per unit
SMIPA 0.01% of value
BSARSF 0.004% of value
Waiver Scenario B&S, CRMP Reduction 50% Waiver Scenarios Only Total Construction Tax Per Unit $9,900 $9,900 $9,900 $9,400 Parkland In-Lieu Fees Per Unit $13,100 $22,600 $27,700 $14,600 Parkland Fees Credit Note 1 25% 25% 25% 25%
Total Parkland In Lieu Fees Per Unit $9,800 $17,000 $20,800 $11,000 School Fees Per Residential GSF $4.55 $4.79 $4.79 $4.79 School Fees Per Unit $6,500 $6,900 $6,900 $5,800
Planning and Building Fees Per Unit $7,700 $7,700 $7,700 $3,200 Inclusionary In-Lieu Per GSF $25.00 $25.00 $25.00 $25.00 Inclusionary In-Lieu Per Unit $35,900 $35,900 $35,900 $30,400 Note: Inclusionary Fees Waived in Waiver Scenarios
Total Permits and Fees Per Unit $69,900 $77,400 $81,200 $59,800 Note 1 Adjustment to reflect assumed amount of parkland provided within project.
Note 2 Traffic fees currently being revised
PAGE 47
Exhibit E
14.10.310 Financially Infeasible.
A fee or tax reduction applied uniformly to all Private Construction Projects within a specified Subcategory of Use is not a Subsidy if the Council determines, in accordance with the requirements of this Section, that construction of the projects is Financially Infeasible.
A. The Council must make its determination that a fee or tax reduction is not a Subsidy, supported by findings, following a public hearing.
B. The Council's findings must be supported by evidence presented at the public hearing, including a study analyzing whether construction of the Private Construction Projects within the specified Subcategory of Use is Financially Infeasible.
C. The financial feasibility study referenced in Subsection B of this Section 14.10.310 must be performed by a consultant qualified to provide real-estate analytic services.
1. The City will select and retain the consul tant using its normal procurement process.
2. The required consultant study mu st address the following issues:
a. Whether construction of the Private Construction Projects in the specified Subcategory of Use is Financially Infeasible;
b. The reason(s) for any conclusion that construction of the Private Construction Projects in the specified Subcategory of Use is Financially Infeasible; c. The anticipated duration of any conditio n(s) making construction of the Private Construction Projects in the specified Subcategory of Use Financially Infeasible; d. The estimated size of the financial gap between the Private Construction Projects in the specified Subcategory of Use being Financially Infeasible and financially feasible;
e. Options for making construction of the Private Construction Projects in the specified Subcategory of Use financially feasible, including the following:
i. Providing the proposed fee or tax reduction without requiring the payment of prevailing wages;
ii. Providing the proposed fee or tax reduction along with requiring the payment of prevailing wages; and
iii. Any additional options, other than the proposed fee or tax reduction, that would make construction of the Private Construction Projects within the specified Subcategory of Use financially feasible, provided that any such options must comply with all applicable laws and regulations, including the City's current general plan.
3. Consultant's preparation of the required study will include the opportunity for stakeholder input.
4. The Council will use reasonable efforts to conduct the required public hearing within ninety (90) calendar days following the completion of the study referred to in Subsections B and C of this Section 14.10.310.
(Ord. 30292)
PAGE 48
Exhibit F
Feedback from Developers, Brokers and Other Industry Professionals From Zoom Meetings held on October 12, 2023
Agree with conclusion that development is generally infeasible under current market conditions.
Parking ratio too low – need at least 1.4 spaces per unit. Average unit size should be 675-750 SF for rental.
Type V rental hard costs before contingency should be $485-$490 per net square foot. Type I hard costs appear to be in correct range.
Developers are electing not to pay in-lieu fees.
Target Return on Cost should be approximately 6.5% with 6.0% at minimum. Construction Loans – 50% LTC with 8.5%-9% interest rate Waiving impact fees helps, but is insufficient. Waiving annual property taxes would have more substantial beneficial effect.
Generally, total development costs per unit appear to be approximately 10% high. Downtown projects have some of lowest rents in City – low rents are needed to incentivize people to live Downtown – approximately $3.00 per square foot (PSF). Rents approximately $0.20 PSF/month too high for South & East submarkets and $0.80 PSF/month too high for Downtown submarket; north rents appear to be in appropriate range.
Other comment: rents $0.30 PSF/month too high in Center submarket – seeing rent in low $3.00 PSF range
Operating expenses have increased substantially since last year. Insurance costs have gone up 3x since last year, now $2,000-$2,250 per unit excluding earthquake coverage.
Operating expenses have exceeded $3,900 per unit for Type III excluding RE taxes, insurance and management.
Estimate low rise total development cost per unit cost to be $750,000 as compared to $869,000.
PAGE 49
Exhibit G
City of San Jose Inclusionary Housing Ordinance Areas