P.O. Box 711 (City Hall, 400
City of South San Francisco Grand Avenue)
South San Francisco, CA
CALIFORNIA Legislation Text
File #: 22-553 Agenda Date: 7/13/2022
Version: 1 Item #: 14.
Study Session regarding a ballot measure to adopt an ordinance authorizing the City of South San Francisco to develop, construct, or acquire affordable, low-rent housing units pursuant to Article XXXIV of the California Constitution, subject to the approval of the voters. (Sky Woodruff, City Attorney and Mike Futrell, City Manager)
RECOMMENDATION
Staff recommends the City Council review and consider the provided analysis on the development, operation and maintenance of low-rent housing by the City as possible under an Article 34 authorization and direct staff on next steps.
BACKGROUND
At the City Council study session on February 16, 2022, ECD staff and the City Attorney's Office presented a draft ballot measure regarding Article 34 authorization which, if approved by the voters, would authorize the City to develop, construct, or acquire low-rent housing for a period of thirty (30) years. The City Council provided direction to move forward with placing the proposed measure on the November 2022 election ballot, but directed that the proposed percentage of housing units allocation that may be authorized by the proposed measure to be referred to the Housing Standing Committee for further review and comments. The City Council also desired to further understand the methodology used to determine the allocation proposed by the draft ballot measure.
At its study session on March 21, 2022, the Housing Standing Committee reviewed these issues and directed that the time period proposed under the ballot measure be modified to eight years and that the measure, as modified, be presented to the City Council for consideration. Specifically, the Committee proposed the ballot measure to authorize the City to be able to construct or acquire 1% of the total number of existing housing units in the City for eight years, instead of thirty years. The eight-year period is intended to align with the City's Housing Element adoption cycle and the associated Regional Housing Allocation (RHNA) obligations. The Committee also desired to receive information about potential impacts on property tax revenue, use of commercial linkage fees, or other City financing to develop or acquire units.
As amended based on Committee comments, the specific ballot measure question was written as follows:
Without increasing local taxes. shall the City of South San Francisco be authorized to develop. construct, and/or acquire affordable. decent, and safe rental housing for low-income persons, including families, seniors, people with disabilities, and veterans, in an amount up to 1% of the total number of existing housing units in the City of South San Francisco annually for an eight (8) year period, with any year's unused units being carried over each year?
Finally, at the City Council's recent meeting on May 11, 2022, the Council requested additional analysis of the financial impacts, benefits, and drawbacks of developing, operating, and maintaining a social housing project under Article 34 authorization.
City of South San Francisco Page 1 of 2 Printed on 4/23/2025 powered by Legistar™
File #: 22-553 Agenda Date: 7/13/2022
Version: 1 Item #:
DISCUSSION
Since the May 11, 2022 hearing, staff has hired BAE Urban Economics to conduct such an analysis for the City.
Attached for the City Council's consideration is a thorough examination of the costs to construct and operate two development prototypes-a 100% affordable housing project and a mixed-income development-as well as some variations in funding for the prototype projects and revenue generation potential to support additional housing projects. Representatives from BAE Urban Economics will be prepared to discuss their analysis and impacts of variables that could make such a development more or less feasible.
No other action or consideration of potential ballot measure is proposed for discussion at this meeting.
CONCLUSION
Staff recommends the City Council review and consider the provided analysis on the development, operation and maintenance of social housing as possible under an Article 34 authorization and direct staff on next steps.
Attachments:
Social Housing Development Financial Feasibility Analysis (BAE Urban Economics) City of South San Francisco Page 2 of 2 Printed on 4/23/2025 powered by Legistar™
bae urban economics
Memorandum
To: Tony Rozzi, Chief Planner/Acting ECD Director, City of South San Francisco Sky Woodruff, Principal, Meyers | Nave
From: David Shiver, Principal
Matt Fairris, Senior Associate
Date: July 7, 2022
Re: Social Housing Development Financial Feasibility Analysis Introduction
To meet the growing demand for affordable housing in South San Francisco, the City is interested in understanding the financial implications of developing or acquiring affordable housing within the City. This model, called "social housing," assumes the City would leverage their own financial resources to finance, build, own, operate, and maintain the property. In order to understand the one-time capital cost and ongoing operating and maintenance costs of a social housing project, the City contracted with BAE Urban Economics, Inc. ("BAE"). BAE recently provided technical assistance in an assessment of the inclusionary housing ordinance, as well as a high-level assessment of the potential development on the City-owned Municipal Services Building site.
The following analysis provides an assessment of the expected one-time capital costs to build the affordable housing units, potential funding mechanisms to minimize the city's funding, as well as the ongoing financial implications of operating and maintaining the properties after construction. While the City is most interested in delivering housing units that will be affordable to lower-incomes, BAE also analyzed the potential for the City to build and operate a mixed-income development, with half of the units affordable to lower-income households and the other half rented at market-rate rents. For the purposes of this analysis, as will be discussed below, BAE assumes the lower-income units will be affordable to households at 50 percent of the Area Median Income ("AMI"), also known as "very low-income households." For reference, the household income for a four-person household at 50 percent of AMI in San Mateo County is roughly $91,350.
Residential Development Prototypes
To estimate the financial implications of social housing built by the City of South San Francisco, BAE created three financial feasibility pro forma models that represent a range of options for the City. To allow a comparison across the project types, all of the financial San Francisco Sacramento Los Angeles Washington DC New York C 2560 gth St., Suite 211 803 2nd St., Suite A 448 South Hill St., Suite 701 1140 3"d St. NE, 2d Floor 234 5th Ave.
Berkeley, CA 94710 Davis, CA 95616 Los Angeles, CA 90013 Washington, DC 20002 New York, NY 10001 510.547,9380 530.750.2195 213.471.2666 202.588.8945 212.683.4486 wwwbae1.com
feasibility models assume a 150-unit residential prototype on a one-acre site intended for higher-density development. The differences between the models are the affordability levels of the rents and the financing plan for the development. The prototypes include:
Prototype 1: 150-Unit 100% Affordable Project using City Funding and Permanent Debt - This development prototype assumes a mix of one, two-, and three-bedroom units, all affordable to households at 50 percent of AMI. To fund the development of this 100 percent affordable development, this prototype assumes the City would take out a permanent loan against the revenue generated by the project. Due to the restricted rents, this loan is insufficient to cover the full development costs, similar to all affordable housing projects, leaving a "funding gap." For this prototype, the remaining funding gap is assumed to be filled with exclusively City funding.
Prototype 2: 150-Unit 100% Affordable Project using Low-Income Housing Tax Credits, City Funding and Permanent Debt - Similar to Prototype 1, this prototype assumes all units are affordable to households at 50 percent of AMI, including a mix of one-, two-, and three-bedroom units. This prototype would similarly assume a permanent mortgage supported by the rental revenue. Unlike Prototype 1, however, this prototype assumes the use of Low-Income Housing Tax Credits ("LIHTC"). These credits are awarded by the California Tax Credit Allocation Committee to support the development of affordable housing. These funds are awarded based on the project costs and unit mix and help fill the funding gap associated with affordable housing developments. However, these funds do not cover the full funding gap, therefore, this prototype assumes the City funding would support the remaining funding gap after the use of permanent debt and LIHTC.
Prototype 3: 150-Unit Mixed-Income Project using City Funding and Permanent Debt - This mixed-income prototype assumes half of the units are affordable to households at 50 percent of AMI, while the other units are rented at market rates. The affordable units include a mix of one-, two, and three-bedroom units, while the market rate units include a mix of studio, one-, and two-bedroom units, due to the challenges with delivering three- bedroom market rate units. In terms of the assumed funding sources, this model strictly uses permanent debt supported by the rental income and City funding.
In addition to these three baseline prototypes, BAE also tested the financial impacts of various sensitivities, including other City funding contributions, different affordability levels, and alternative funding schemes.
Cost and Revenue Assumptions
The following section summarizes the assumed development cost and operating cost assumptions used in the financial feasibility model. BAE leveraged information from prior analyses recently conducted for the City, as well as review of publicly-available applications for 2 LIHTC in the City and surrounding jurisdictions. This is typical in affordable housing development, especially those with the use of federal, state, and local funds, due to the requirements set forth in those funding programs. One critical assumption is the use of prevailing wage in all aspects of the development process.
Development Cost Assumptions
Site Acquisition Cost - The estimated site acquisition costs is based on developer interviews and a review of recent land transactions for infill development parcels. Based on the research, the estimated land price for all of the prototypes is $125 per site square foot, or nearly $5.5 million for the one-acre site.
Site Work - According to developers, the cost of any required site work will be similar for each prototype, at $20 per site square foot. This includes costs associated with utilities, concrete slabs, and preparing the site for the high-density development.
Residential Hard Construction Costs - Due to the assumed public involvement in the development process, BAE assumes the use of prevailing wage for all development costs.
This is particularly important for the hard costs, where the use of prevailing wage can increase the total cost significantly. Based on interviews and review of recent development costs, the hard cost is estimated at $400 per square foot across all prototypes.
Parking Hard Costs - Due to the relatively small site size and the desire to achieve higher densities, all of the prototypes assume podium parking. Based on conversations with developers, the podium parking hard costs roughly $45,000 per space.
City Impact and Permitting Fees - City impact and permitting fees are based on the City's master fee schedule. As is typical for most City fees, and particularly impact fees, per unit rates depend on the unit type and density. Inclusive of all City impact fees, the total fee per unit for the prototypes is approximately $30,000 per unit. As will be discussed in the sensitivity section, the City could choose to waive these fees for these developments in order to reduce the overall cost. However, the baseline feasibility models assume all City fees are paid during the construction period.
Soft Costs - Softs costs, which are typically estimated as a percentage of hard construction costs, include the costs associated with engineering, legal, and accounting services. Based on developer feedback, soft costs typically amount to roughly 20 percent of hard costs for both higher-density prototypes.
Developer Fee - In traditional affordable housing developments, the developers are eligible for a developer fee to cover staff overhead and other internal project costs.
Although these prototypes assume the City is acting as the developer, the City may wish to 3 assume a developer fee in order to cover internal project costs. In addition, this fee may also be needed if the City wishes to partner with a more experienced development partner.
Similar to other costs above, however, the City may wish to waive any developer fee in order to reduce the overall costs. Reducing any developer fee would require that the City development staff is paid using other pools of funding.
Financing Costs - While the City may be able to use their funds during construction, these baseline models assume the City takes out a construction-period loan to fund the construction of the project. BAE assumes a loan valued at 65 percent of construction costs and to pay a loan fee of one percent of the loan amount. The construction period interest is estimated based on an annual interest rate of 5.5 percent and a drawdown factor of 65 percent. Due to the size and complexity of the prototypes, the loan period is assumed at 24 months. As discussed in the sensitivity section, the City could reduce or eliminate the need for a construction loan by using City funds to finance the construction period.
Operating Cost and Revenue Assumptions
Affordable Residential Rental Rates - While the City may wish to deliver housing affordable to various income levels, BAE assumes the prototype will include units affordable at 50 percent of AMI which is roughly $91,350 for a four-person household.
Using the official rental rates published by the California Housing and Community Development Department ("HCD"), the affordable rents range from $1,643 to $2,251 depending on the assumed size. 1
Market-Rate Residential Rental Rates - Given Prototype 3 includes market-rate housing, BAE compiled market-rate rents for newer apartment projects in the city. Based on these comparable properties, BAE assumes the following market-rate rents:
• Studio unit - $2,318 ($5.15 per square foot) per month • 1-bedroom unit - $3,244 ($4.99 per square foot) per month 2-bedroom unit - $3,613 ($4.25 per square foot) per month 3-bedroom unit - $4,125 ($3.75 per square foot) per month Residential Rental Operating Expenses - In order to calculate the Net Operating Income (NOI) of the rental prototypes, BAE assumes different operating costs for the affordable units and the market rate rents, due to the services provided to each unit type. For the affordable housing units, the costs to operate the building, including property management and on-site services, are estimated at roughly $12,500 per unit per year. This would include any City costs of managing the property, either via a partnership with a 1 HCD income and rental rate limits by unit type are available at: https://www.hcd.ca.gov/grants- funding/income-limits/state-and-federal-income-limits.shtml 4 management entity or through a new internal property management team. Note that these operating costs do not include the payment of property taxes because all deed- restricted housing units affordable to households at 80 percent of AMI or less are exempt from property taxes.
For the market-rate units, property taxes comprise a large portion of the ongoing operating costs. Based on input from City staff, it is assumed that market-rate units included in a city-developed building would be exempt from property taxes. As such, BAE assumes a much lower annual operating cost, at $4,125 per unit per year. As discussed in the following sections, this property tax exemption does have implications for all tax receiving entities in the City, as new households would be added without new revenue streams to those service-providing entities under this development model. Additionally, the tax exempt status of the market-rate units could be disputed by the County Assessor. A final determination that the market-rate units are subject to property tax would significantly increase the annual operating costs.
Capital Funding Assumptions
Due to the complex nature of affordable housing development, and the various options available to the City of South San Francisco if they choose to build affordable housing, BAE assumed a variety of funding plans for each prototype. This includes:
Permanent Debt- All units assume the use of permanent debt supported by the projects' rental revenue. This permanent debt reduces the City's gap funding by raising a modest amount of up-front revenue to fund the construction of the project. BAE assumes a debt service coverage ratio of 1.15, meaning the City would leverage up to 85 percent of the expected revenue to support a permanent debt amount. The lending terms also assume a five percent interest rate for a 30-year term.
Low-Income Housing Tax Credits - The most common source of revenue to support affordable housing development is the Low-Income Housing Tax Credits ("LIHTC"). LIHTC funds are allocated to affordable housing developers in order to fill the expected funding gap due to the reduced revenue generated by restricted rental rates. LIHTC are competitive and allocated by the California Tax Credit Allocation Committee ("TCAC"). In order to be eligible for LIHTC, the applicant must have recent development experience using LIHTCs, meaning the City would need to partner with an experienced developer until they meet the requirements set forth by TCAC.
In order to estimate the amount of LIHTC allocated to these prototypes, BAE reviewed recent LIHTC applications in the area and used similar assumptions. These models assume the development would receive an allocation of the less-competitive four-percent tax credit program. This program allocates LIHTC at a rate of four percent of the eligible project costs, for 10 years, essentially covering 30 to 40 percent of the project costs. One 5 additional nuance of the LIHTC program is being located in a Qualified Census Tract ("QCT") or Difficult to Develop Area ("DDA"), which increases the amount of funds the project can receive. Unfortunately, only a limited part of South San Francisco qualifies for this "boost," so these models assume the project is not eligible for the increase in LIHTC funds.
City Gap Funding - Due to the City's interest in delivering affordable housing in a relatively short period, BAE assumes the remaining funding gap associated with the prototypes is filled by City funds, such as the funds generated by the Commercial Linkage Fee. Iypically. the City has contributed these funds to other affordable housing developers at between $50,000 and $75,000 per unit. Under these models, the City's contribution would be notably larger on a per-unit basis due to the cost and lack of additional funding sources that other affordable housing developers receive, such as State funds from HCD.
Financial Feasibility Summary
The following section summarizes the financial feasibility of the three baseline housing prototypes. This includes the total development cost, estimated permanent debt, and required City gap funding. The detailed financial feasibility summary models are included at the end of the document in Appendix A.
Prototype 1: 100% Affordable with City Gap Funding
Prototype 1 is estimated to cost roughly $104.5 million to construct, or nearly $700,000 per unit. This includes a site acquisition cost of nearly $5.5 million, as well as site preparation costing nearly $900,000. As is typical, the vertical construction costs account for the majority of the total construction cost, or roughly $90.6 million in total vertical construction costs. The largest source of vertical construction costs is the hard cost, which is estimated at $65 million in total. At a ratio of one parking space per unit, the total parking costs is projected to cost roughly $6.8 million. Soft costs, such as architecture and engineering fees, are estimated at $14.4 million, while City impact fees account for nearly $5 million in cost. Aside from vertical construction costs, the remaining costs are associated with construction financing and a developer fee to cover overhead costs, whether that be City staff or a co-developer partner. In total these additional costs amount to $7.6 million, the majority of which is associated with the construction loan interest.
In order to estimate the total City gap funding required to develop this prototype, BAE assumes the City would leverage the projects' rental income to support a permanent debt payment.
Based on the lending terms outlined in the previous section, this prototype can support a permanent debt amount of nearly $20 million. This is based on the project's net income, which includes $3.5 million in revenue, and nearly $2 million in operating expenses, including City costs to operate and maintain the property. Assuming the permanent debt is the only source of funding, the City would need to allocate funds to fill the remaining funding gap. 6 Based on the financial model, this 150-unit project would require nearly $84.8 million in total City gap funding, or roughly $565.000 per unit.
With the City gap funding, revenue from rents would likely be sufficient to pay for operation of the building, including debt service on the assumed loan that is in addition to the gap funding.
There would not be sufficient revenue from rents to produce a surplus that could be used to assist in financing an additional residential development project.
Prototype 2: 100% Affordable with LIHTC and City Gap Funding The development cost of Prototype 2 aligns with the costs outline above in Prototype 1, as this prototype simply adjusts the funding sources used to finance the project. As noted above, the total development cost amounts to $104.5 million, or nearly $700,000 per unit. The rental income generated by the units, which are affordable to households at 50 percent of AMI, can support the same $20 million in permanent debt. However, for this prototype, the City would seek an allocation of LIHTC, which are used to reduce the required City funding. Based on the assumptions outline above, this project would be eligible for roughly $37.6 million of LIHTC, which would be sold to a tax credit investor to generate LIHTC Equity to the project. This funding source decreases the amount of City gap funding required to develop the project.
More specifically, the 150-unit Prototype 2 would require roughly $47.1 million in total City gap funding, or roughly $315,000 per unit. This is still well above the typical City funding contributed to affordable housing projects, ranging from $50,000 to $75,000 per unit, due to the lack of additional Federal and State gap funding sources.
With the LIHCTC and City gap funding, revenue from rents would likely be sufficient to pay for operation of the building, including debt service on the assumed loan that is in addition to the gap funding. There would not be sufficient revenue from rents to produce a surplus that could be used to assist in financing an additional residential development project.
Prototype 3: Mixed Income with City Gap Funding
While incorporating market-rate units increases the amount of revenue generated by the project, these market-rate units still require an additional source of funding to supplant the typical investor equity included in these types of projects. Unless the City intends to find an investor partner to fund the market-rate component of this mixed-income prototype, the City would need to use City funds to replace the lack of traditional equity contribution.
In terms of development cost, Prototype 3 is projected to cost roughly $98.8 million, or $632,000 per unit. This prototype has a slightly lower development cost relative to the prior prototypes due to the smaller unit sizes of the market-rate units. As noted above, to maximize revenue and the value of the market-rate units, this prototype assumes the market-rate units are a mix of studio, one-, and two-bedroom units, rather than the affordable unit mix, which also includes three-bedroom units. In general, the distribution of costs is comparable to the prior prototypes, with a $5.5 million land acquisition cost, $81.7 million in vertical construction 7 costs, $4.4 million in construction financing, and $2.5 million in a developer fee to cover staffing overhead. As noted previously, the inclusion of market-rate units will increase the total project revenue, to an estimated $4.5 million in gross revenue. After accounting for the operating expenses, estimated at $1.3 million per year, the projects' net operating income is roughly $3.0 million. This revenue can support a significant permanent debt amount, of roughly $41 million, or roughly double the supportable loan amount in the prior prototypes.
Assuming this prototype solely leverages a permanent debt amount, the remaining funding gap would require City funding. Based on the financial feasibility model, this 150-unit mixed- income prototype would require a total of $53.8 million in total City gap funding, or roughly $360,000 per unit. As the financial pro forma shows in Exhibit 3 below, the required funding gap amount differs significantly based on the affordable units and market-rate units. Similar to Prototype 1, the affordable housing units require roughly $570,000 in total City gap funding per unit, while the market-rate units only require $146,000 per unit. Because the project is half affordable units and half market-rate units, these blend to create a project-wide gap funding requirement of $360,000 per unit.
In this prototype, rents from the market-rate units help to reduce the City funding gap, but the City must still add funding to make the project financially feasible. With the City gap funding, revenue from rents would likely be sufficient to pay for operation of the building, including debt service on the assumed loan that is in addition to the gap funding. There would not be sufficient revenue from rents to produce a surplus that could be used to assist in financing an additional residential development project.
Exhibit 1: Financial Feasibility Summary by Prototype
Project Type and Funding Plan
Prototype 1: Prototype 2 Prototype 3:
100% Affordable 100% Affordable Mixed-Income
150-Unit Project City Funding LIHTC and City Funding City Funding Total Development Cost $104,500,044 $104,500,044 $94,818,247 TDC Per Unit $696,667 $696,667 $632,122
Supportable Debt Amount $19,739,777 $19,739,777 $40,985,297 LIHTC Equity $0 $37,620,016 $0
City Gap Funding ($84,760,267) ($47,140,251) ($53,832,951) Per Unit ($565,068) ($314,268) ($358,886)
Sources: City of South San Francisco; BAE, 2022.
City Funding Requirements
The following section summarizes the critical City cost implications of the various prototypes discussed above. This includes the one-time capital costs, called out above, and the ongoing annual costs to the City.
8 Capital Costs
As discussed above, the baseline feasibility models require a City gap funding amount ranging from $47.1 million to $84.8 million, depending on the affordability levels of the units and the additional funding sources assumed to finance the project. Of the two prototypes including only affordable housing units, affordable to households at 50 percent of AMi, the major difference in the required City gap funding subsidy is the inclusion of LIHTC dollars. This funding source would add some complexity to the deal, due to the funding timelines set forth by TCAC, as well as the need to identify development, finance, and operating partners that meet TCAC regulations. However, as shown above, the LIHTC funding program can significantly decrease the required City gap funding subsidy. If the City pursues the idea of social housing, the decision to seek LIHTC is critical to balance the City's subsidy requirements and the speed and flexibility of the final delivered product, as well as ongoing monitoring requirements that come with LIHTC.
Although the inclusion of market-rate units in Prototype 3 does increase the rental revenue and supportable debt amount, the City would still be required to provide a significant amount of funding to fill the financing gap. This includes a more limited amount of City funding to fill the gap associated with the market-rate units, estimated at roughly $11 million, or $150,000 per market-rate unit. The only way for the City to recoup these funds would be to refinance the property after several years or sell the market-rate component to an investor. Similar to Prototype 1, the affordable component of Prototype 3 would require roughly $570,000 per unit in City gap funding. In total, this mixed-income project requires a total of $53.8 million of City gap funding, or $359,000 per unit.
Ongoing Annual Costs
As noted above, the City would have upfront costs associated with planning, entitling, and constructing the project, as well as ongoing annual costs to operate and maintain any social housing development.
Predevelopment Costs and Staff Overhead
In order to navigate the development process of the social housing project, the City would incur costs associated with staff time to plan, entitle, and begin construction. In traditional affordable housing development, built by for-profit or non-profit affordable housing developers, these costs are covered by the Developer Fee at the end of construction. BAE estimates that the City costs to oversee the delivery of the 150-unit project, which could take three to five years, would cost at least $2.7 million in funding. While this could be recouped after construction, this overhead repayment would increase the cost of construction, therefore increasing the required City subsidy. One way or another, the City would need to identify a funding mechanism to cover the project management staffing. 9 Ongoing Operations and Maintenance
Whether the City creates an internal property management team or contracts with a third-party operator, all of the social housing developments will require ongoing operating and maintenance. Depending on the revenue generated by the projects, this ongoing cost would likely be covered by the revenue generated by the specific property. Even affordable housing developments at very low-income levels typically generate sufficient revenue to at least cover annual operating costs for property management, maintenance, and on-site services. BAE estimates the total cost to operate and maintain an affordable housing unit to be roughly $12,500 per unit. For the 150-unit fully affordable complexes, this amounts to roughly $1.9 million in annual costs. Operating costs for market-rate units is somewhat lower, at just $4,125 per unit, due to the assumed property-tax exemption. For the mixed-income development envisioned in Prototype 3, the mix of units decreases the overall operating costs to just $1.3 million per year. Even with the City gap funding, none of the prototype projects generate sufficient rental income to produce a surplus that could be used to assist in financing another housing project.
Foregone Property Taxes
Affordable housing properties that are deed-restricted at rents below 80 percent AMI are property tax exempt, meaning that any affordable units delivered in the City, regardless of the developer and owner, do not pay property taxes to the City. For the purposes of this analysis, the City assumes that market-rate units delivered as part of this social housing model would also be property tax exempt. This increases the net revenue generated by the project, and therefore the supportable loan amount, but it also increases the amount of expected property tax revenue that would not be produced by development for tax receiving entities. As shown below, the 75 units of market-rate housing included in Prototype 3 would typically generate roughly $463,000 in annual property tax. The largest share of these funds flow to the South San Francisco Unified School District ($203,800 per year) and San Mateo County ($120,000 per year). Assuming the market-rate housing units within the social housing development are property tax exempt, these tax-receiving entities would forego expected property taxes in order to support the delivery of this mixed-income social housing project, in addition to the property tax that they would forego from the affordable units regardless of the developer and owner of the project.
10 Exhibit 2: Expected Property Tax by Prototype and Development Model Prototype 3:
Prototype 1 & 2: 75 Market-Rate Units /
150 Affordable Units 75 Affordable Units
Tax-Receiving Entity Traditional Social Housing Traditional Social Housing City of South San Francisco $O $77,823 $0
South San Francisco Unified School District $0 $O $203,822 $0 San Mateo County $0 50 $119,977 $0
SMC Community College Distric $0 $34,279 $0
County Office of Educatior $O $17,603 $0
Special Districts $0 SO $9,728 $0
Total Property Taxes $0 $0 $463,231 $0
Sources: City of South San Francisco; BAE, 2022.
Alternative Funding Mechanisms
While the social housing development model is an option to expand the inventory of affordable housing in the South San Francisco, the City also has several additional options for supporting housing development. The following section summarizes these alternative funding mechanisms, including the potential positive and negative aspects of each option.
Gap Funding to Affordable Housing Developers
Similar to recent trends, the City can continue providing gap funding to third-party affordable housing developers building affordable housing in the City. Based on input from City staff, the City typically provides roughly $75,000 per unit to affordable housing developers progressing with projects in South San Francisco. This funding mechanism is less expensive to the City, as experienced affordable housing developers will also apply for additional State and Federal funding programs. By reducing the required City gap funding subsidy amount, the City can support more affordable housing units. For example, if the City were to use all of the projected Commercial Linkage Fee revenue, estimated at $122 million through 2036, the City could support the delivery of approximately 1,600 affordable housing units over that timeline. The major drawback of this funding scheme is the City is dependent on the outside development community to identify, purchase sites, and pursue development of projects within the city.
Affordable housing developers often have several ongoing projects at various phases of development but given the extreme need for affordable housing in the Bay Area, it is possible that developers may overlook South San Francisco projects in place of easier deals in other Bay Area cities. While the City can provide additional incentives to attract developers to projects in South San Francisco, discussed in more detail below, strictly providing gap funding to developers will take time to meet the pressing need for affordable housing in the city.
Land Contribution
One of the most significant challenges to affordable housing development is the acquisition of suitable sites for development. Given affordable housing development teams do not have significant cash reserves, they often are unable to compete with the private market for the 11 acquisition of multifamily development sites. As such, public jurisdictions can support affordable housing development by leveraging publicly owned sites, such as excess sites from the City, School District, and other public land owners. In addition to identify existing publicly owned sites, the City could leverage City funds to locate and acquire additional sites in the City and reserve them for future affordable housing development through a partnership with an affordable housing developer. While the projected value of the land only accounts for five percent of the total development cost, the City would create additional value by reducing the risk and burden on the affordable housing development community on securing buildable sites and ensure a constant pipeline of affordable housing projects. If the City pursues acquiring sites for affordable housing, it is critical to understand the geographic components that make sites suitable and competitive for affordable housing funding. This includes proximity to transit, schools, grocery stores, among other amenities. Sites that are near these amenities are more competitive for funding programs and are more likely to attract affordable housing developers to pursue housing development opportunities.
Impact Fee Waivers and Deferrals
The City may waive or defer impact fee waivers to reduce the overall cost of development, whether in the social housing model or to third-party developers. Based on the financial feasibility models, the City's impact fees amount to roughly $30,000 per unit, or roughly 4.3 percent of the total development costs. While these support critical City services, such as parks, public safety, transportation, among others, the City could waive or defer these fees to affordable housing developments to reduce the overall cost of development. Although these fees only account for a small portion of the overall development cost, a large portion of the remaining development costs are relatively fixed, meaning City has limited options to reduce the overall development cost and associated gap funding required to deliver the units.
Build Units at Higher Incomes
While the above financial feasibility analysis shows the large gap funding required to support the social housing development model, the City. could build units affordable to households at higher incomes in order to improve the overall economics of the project. For example, if the City were to build units affordable to households at 80 percent of AMI, rather than 50 percent AMI modeled above, the required City gap funding would decrease to roughly $290,000 per unit, much lower than the initial $565,000 in the prior models. The City could further increase the affordability levels of the units included in the social housing development to 100 percent of even 120 percent of AMI, though rents at these levels are comparable to market-rate rents and may not provide much benefit to South San Francisco households. Although the projected $290,000 per unit is still well above the historic gap funding provided by the City, the City would maintain ownership of the units and could decide to change the affordability levels of the units in the future.
12 City General Obligation Bond with Pay-Go Funding
Based on discussions with City staff, South San Francisco could support a General Obligation (GO) bond to support the social housing concept in the City. These funds could be used in a variety of ways. First, these funds could be spread out across several development projects in coordination with other funds to deliver more housing units in the near term. Secondly, these funds could be used to fully support the delivery of one social housing development without the need for construction-period or permanent debt financing. This scheme would then allocate all net income generated by the project back to the City, or roughly $1.5 million annually. The City could then use these annual ongoing funds to support additional housing development throughout the City. On a "Pay-Go" basis, where the City accumulates the income and only uses the cumulative funding to support additional housing development, the City would accumulate roughly $15 million of net income over the next ten years. Assuming the City leverages these funds to provide gap funding to other affordable housing development after the ten-year period, these funds could support the development of between 20 and 50 units of affordable units.
13 APPENDIX A: DETAILED FINANCIAL FEASIBILITY MODELS
See Next Page
14 Appendix A-1: Financial Feasibility Summary, Prototype 1: 100% Affordable with City Funding Development Program Assumptions Cost Assumptions Development Cost Analysis Feasibility Analysis Site Size - acres / square feet 1.0 43,560 Site Acquisition Cost (per Site SF) $125 Project Cost Total Units 150 roject Incom
Affordable (% - count) 100% Construction Site Acquisition $5,445,000 ross Scheduled Rent Market Rate (% - count) 0% Ste Prep Costs (per site. sq.ft) $20 Less Vacancy 350) Leasable sq.ft. 130,000 Hard Cost per residential sf $400 Site Preparation $871,200 Less Operating Expenses Circulation & Communal Space 20% Parking cost per space, Podium $45,000 Not Operating Income Total Project sq.ft 162,500 Soft Costs (% of hard costs) 20% Vertical Construction Tolal Parking Spaces 150 Impact Fees (per unit) $29,963 Hard Cost $65,000,000 Feasibility Parking spaces per du 1.00 Developer Fee (% of hard and soft) 3% Parking Cost $6,750,000 Total Development Costs $104,500,044 Soft Costs $14,350,000 Per Unit $696,667
Residential Characteristics Impact Fees $4.494.479
AMi-Level Rental Revenue Subtotal $90,594,479 Supportable Debt Amount $19,739,777 Unit Mix Sg. Fl. 50% 60% 80% 100% MR All Monthly Rental Rate by AM-Level 450 Unit Type 50% 80% 100% MR Construction Financing LIHTC Equity so Studio
1-BR 650 50 50 Studio $1,529 $2,489 $3,127 $2,318 Const. Loan Fees $594,527 2-BR 850 50 50 1-BR $1,643 $1,985 $2,671 $3,356 $3,244 Const. Loan Interest $4,250,867 Remaining Feasibility Gap ($84,760,267) 3-BR 1,100 50 50 2-BR $1,961 $3,195 $4,017 $3,613 Par Unit ($565,068) All Units 150 150 3-BR $2,251 $3,677 $4,626 $4,125 Developer Fee $2,743,970 Summary Affordable Markel-Rate Total Operating Costs Annual City Cash Flow Number of Units (# - %) 150 100% 0% 150 Annual op. cost - per Affordable du $12,500 Total Development Cost $104,500,044 Excess Cash Flow to City $190,741 Avg. Affordability (% AM)) 50% n.a. Annual op. cost - per Market Rate du $4,125 Per Unit $696,667 Leasable Sq. FL. 130,000 130,000 Vacancy Rate, Residential 5.0% Per Net SF $804 Foregone Property Taxes $0 Total Sq. FI. 162,500 162,500 Market Rate Cap Rate 3.85% Per Gross SF $643 Parking Spaces 150 150 Net Revenue to City $190,741
Parking Space/du 1 Financing LIHTC Eligible Basis (a) $94,050,040 Construction-Period
MR Loan-to-Cost 65%
Loan Fees 1%
Draw down Facior 65%
Interest rate 5.50%
Loan Term (months) 24
Permanent Debt
Debt Service Coverage Ratio 1.15
Interest rate 5.00%
Loan Term (Years) 30
Low -Income Housing Tax Credits (LIHTC)
QCT/DDA Boost Eligible No
QCT/DDA Adjustment 100%
Tax Credit Term (years) 10
Tax Credit Type 4%
Tax Credit Rate 4.00%
Tax Credit Price $1.00
al Estimates eligible basis as 90 percent of tolal development cost. If avail, eligible basis alsa accounts for the 30% basis boost for being located in a ACT or DDA.
Sources: City of South San Francisco; BAE, 2022.
15 Appendix A-2: Financial Feasibility Summary, Prototype 2: 100% Affordable with LIHTC and City Funding Development Program Assumptions Cost Assumptions Development Cost Analysis Feasibility Analysis Site Size - acres / square feet 1.0 43,560 Site Acquisition Cost (per Site SF) $125 Project Cost Feasibility Total Units 150 Preject Incomi
Affordable (% - count) 100% 150 Construction Site Acquisition $5,445,000 Gross Scheduled Rent $3,513,000 Market Rate (% - count) Site Prep Costs (per site. sq.ft) Less Vacancy (S175,650) Leasable sq.ft. 130,000 Hard Cost per residential sf 320 Sio Preparation $871,200 Less Operating Expens Circulation & Communa/ Space 20% Parking cost per space, Podium $45,000 at Operating Incon $1,462,350 Total Project sq.ft 162,500 Soft Costs (% of hard costs) 20% Vertical Construction Total Parking Spaces Impact Fees (per unit) $29,963 Hard Cost $65,000,000 Feasibility Parking spaces per du 1.00 Developer Fee (% of hard and soft) 3% Parking Cost $6,750,000 Total Development Costs $104,500,044 Soft Costs $14,350,000 Per Unit $696,667
Residential Characteristics Irpact Fees $4,494,479
$90,594,479 Supportable Debt Amount $19,739,777
39340 32489 80027 2318 MR Construction Financing LIHTC Equity $37,620,016 $594,527
$4,250,867 Remaining Feasibility Gap ($47, 140,251)
S3,195 $4,017 $3,613 Per Unit ($314,268)
$2,743,970
Summary Affordable Market-Rate Operating Costs Annual City Cash Flow Number of Units (#- %) 150 100% Annual op. cost - per Affordable du $12,500 Total Development Cost $104,500,044 Excess Cash Flow to Oity $190,741 Avg. Affordability (% AMI) 50% Annual op. cost - per Market Rate du $4,125 Per Unit $696,667 Leasable Sq. Pt. Vacancy Rate, Residential 5.0% Per Net SF 3804 Foregone Property Taxes $0 Total Sq. F. Market Rate Cap Rate 3.85% Per Gross SF $643 Parking Spaces Net Ravenue to City $190,741
Parking Space/du LIHTC Eligible Basis (a) $94,050,040
Construction-Period
MR Loan-to-Cost 65%
Loan Fees 1%
Draw down Factor 65%
Interest rate 5.50%
Loan Term (months) 24
Permanent Debt
Debt Service Coverage Ratio 1.15
Interest rate 5.00%
Loan Term (Years) 30
Low-Income Housing Tax Credits (LIHTC)
QCT/DDA Boost Bigible No
QCT/DDA Adjustment 100%
Tax Credit Term (years) 10
Tax Credit Type 4%
Tax Credit Rate 4.00%
Tax Credit Price $1.00
Note:
(a) Estimates eligible basis as 90 percent of total development cost. If available, eligible basis also accounts for the 30% basis boost for being located in a QCT or DDA.
Sources: City of South San Francisco; BAE, 2022.
16 Appendix A-3: Financial Feasibility Summary, Prototype 3: Mixed-Income with City Funding Development Program Assumptions Cost Assumptions I Development Cost Analysis Feasibility Analysis in sre. were someter 1.0 43,560 Site Acquisition Cost (per Site SF) $125 Mixed-Income Development Mixed-Income Development Total Units 150 Affordable Market Rate Iotal Project Affordable Market Role Total Projoct Affordable (% - count) 50% Construction Prolect Income
Market Role (% - count) 50% 75 Site Prep Costs (per site. saft) $20 Site Acquisition $3.111,429 $2,333,571 $5,445,000 Gross Scheduled Rents $1,756,500 $2,752,050 $4,508,550 $40D Less Vocacy ($87,825) ($137,603) ($225,428)
Leasable sqft. Hard Cost our residenta sh
Circulation & Communel Space 20% Parking cost per space, Fodum $45,000 Site Preparation $497,829 $373,371 $871,200 Less Operating Expenses (5937,500) (5308.375) ($1,246,875) Total Project sq.ft 142,188 Soft Costs (% of hard costs) 20% Net Operating Income $731,175 $2,305,073 $3.036,248 165 Impact Fees (per unit) (a) $29,963 Vertical Construction
1.10 Developer Fee (% of hard and soft) 3% Hard Cost 532,500,000 324,375,000 356,675,000 Dexelopment Feastblity Parking spaces per ou
Parking Cost $3,375,000 $4,050,000 $7,425,000 Total Development Costs $52,708,343 $42,111,905 $94,818,247 Residential Characteristics Soft Costs $7,175,000 $5.695,000 $12,860,000 Por thit $702,751 $561,492 $632,122 Rental Revenue Impact Fees $2.247.240
AN- LAVAI
545287240 1327,240 181684472 Supportable Debt Amount $9,869,889 $31,115,409 $40,985,297 50%6 50% 80% 100% Menthly Rental Rate by AM-Level
$1,529 $1,849 $2,469 $3,127 $2,318 Construction Anancing LIHTC Equity so $o $0 52671 53356 33,244 Const. Loan Fees $297,668 $238,749 S536,417 $2,372 $3,195 $4,017 $3,613 $2,128,326$1,707,055 $3,B35,381 Remaining Feasiblilty Gap ($42,836,454) ($10,996,497) ($53,832,951) $2,251 82,726 $3,677 $4,626 $4,125 Por thir (S571,153) ($146,620) ($358,806) Developer Fee $1,373,852 $1,101,918 $2,475,770
Summary Affordable Market-Rate Total Operating Costs
Number of Units (#- %) 75 50% 75 50% 150 Annual op. cost - per Affordable du $12,500 Annual City Cash Flow Avg. Affordability (% AM) 50% Annual op. cost - per Markst Rate du 35025 Per Development Cost 352702743 2501405 832, 122 Excess Cash Flow to Cty $85,371 $300,662 5398,032 Lessine So. ru 65,000 48,750 113,750 Vacancy Rate, Residential Per thir Total Sa. FL 81,250 60,938 Por Not SF S811 $864 $834 Foregone Property Taxes so $463,231 5463,231 Por Gross SF $649 5691 5887
Parking Spaces rancine
Parking Specerdu Construction Feriod Net Revenue to City $96,371 (8182,569) ($67,199) MR LS-DOST 65%
Loan Fees 1%
Draw down factor 65%
interest rate 5.50%
Loan Term (months) 24
Permanent Debt
Debt Service Coverage Ratio 1.15
Interest rate 5.00%
Loan Term Years 30
Low -come Housing Tax Credts (LHTC)
CCT/DDA Boost Bigible No
100%
Tax Credt Term (years) 10
Tax Credt Type 4%
Tax Creát Rate 4.00%
Tax Credt Price $1.00
Sources: City of South San Francisco; BAE, 2022.
17 Government Code Section 54957.5
SB 343
Agenda: 07/13/2022 Reg CC
Item # 14
bae urban economi
SOCIAL HOUSING City of South San Francisco
FINANCIAL FEASIBILITY ANALYSIS July 13, 2022
DEVELOPMENT PROTOTYPES
Prototype 1 Prototype 2 Prototype 3
Site Size (Acres) 1.00 1.00 1.00
Number of Units 150 150 150
Affordability Levels
50% AMI 100% 100% 50%
Market Rate 0% 0% 50%
Unit Type
Studio 0.0% 0.0% 16.7%
1-BR 33.3% 33.3% 33.3%
2-BR 33.3% 33.3% 33.3%
3-BR 33.3% 33.3% 16.7%
Capital Funding Assumptions
City Gap Funding Yes Yes Yes
Low -Income Housing Tax Credits No Yes No
bae urban economics
FINANCIAL FEASIBILITY SUMMARY
Project Type and Funding Plan
Prototype 1: Prototype 2: Prototype 3:
100% Affordable 100% Affordable Mixed-Income
150-Unit Project City Funding LIHTC and City Funding City Funding Total Development Cost $104,500,044 $104,500,044 $94,818,247 TDC Per Unit $696,667 5696,667 $632,122
Supportable Debt Amount $19,739,777 $19,739,777 $40,985,297 LIHTC Equity $0 $37,620,016 $0
City Gap Funding ($84,760,267) ($47,140,251) ($53,832,951) Per Unit ($565,068) (S314,268) ($358,886)
Sources: City of South San Francisco; BAE 2022.
bae urban economics
FUNDING CAPITAL STACK COMPARISON
100%
542,667 ]8
City
80%
City Subsidy
70% $358,886
City Subsidy • City Gap Funding
60% S565.068 • Project Income
• Deferred Developer Fee
50% = San Mateo County
• Section 8 Voucher Loan
40% • UHTC
# Traditional Debt
20%
10%
Grand & Linden Project Prototype 1: 100% Prototype 2: 100% Prototype 3: Mixed- Example Affordable Affordable w/ LIHTC Income
bae urban economics
SOCIAL HOUSING ASSESSMENT SUMMARY
Social Housing Model Status Quo - City Support
• Potential for Faster Delivery • Dependent on Developers • Long-Term City Control • Less City Control
• High Upfront Costs • No Upfront Costs
• High Capital Costs • Low Capital Costs
($300k-$565k per unit) ($75k per unit)
• More Complex Transaction • Less Complex Transaction
Documents Documents
(Co-Developer and Management Partners) (Standard Loan Agreements, DA, DDA) • Higher Development Risk • Limited Development Risk
bae urban economics
AFFORDABLE HOUSING COST V. SPEED
Fast
Social Housing Model
(High City Costs, Higher City Risk, Faster
Delivery
Affordable Housing Production
Unit Production Potential
Housing Delivery Speed
$122 Million of Commercial
Linkage Fee
Social Housing =200-400 Units
Current City Efforts Status Quo=1,600-2,500 Units
(Higher Leverage, Less City Risk, Reliant on Developers) Low High
City Capital Contribution and Risk
bae urban economics
THANK YOU! QUESTIONS AND DISCUSSION