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Open Letter to the Berkeley City Counci: Proposed Significant Community Benefits for Large Downtown Buildings Are Inadequate

Kate Harrison and James Hendry
Wednesday June 17, 2015 - 10:22:00 AM

We strongly urge you to strengthen the city’s requirements that developers provide “significant community benefits” in exchange for the right to construct buildings above normal height limits in Downtown. The current proposal on the Council’s June 25th agenda for a payment of a flat fee is woefully inadequate based on the City’s own economic assessment performed as part of the Downtown Plan. Further, these projects should mitigate the loss of onsite non-profit and cultural amenities and insure the payment of existing mitigation fees (e.g., for housing and art) that are required of all Berkeley development, before the significant community benefits formula is applied. 

Assessing Reasonable Community Benefits 

In 2011, Berkeley retained AECOM to determine the amount of feasible significant community benefits from the three 180 foot buildings allowed under the Downtown Plan. The consultants used as their model a 17-story (272 unit) project located directly across the street from the proposed Harold Way project. AECOM concluded that the hypothetical project could feasibly support $33,000 in community benefits per unit – nearly $10 million -- PLUS meeting a 20% affordable housing ownership requirement equal to $14.6 million (see Attachment 1).[1] This combined total of $24.6 million should be adjusted – at a minimum -- to reflect rent increases for new apartments of 34% since 2011, compared to increases in construction costs of only 8.5%. Using these figures, the $24.6 million in today’s dollars equals $31 million. This is a conservative figure as the hypothetical project was less profitable (smaller than and with only half the retail of Harold Way, lower unit rents[2] and with no theaters) and provided more parking, the cost of which the developer has been able to forgo. With financing, the developer can recoup these costs over a 20- to 30-year period. 

The Flat Square Footage Fee Proposal Before the Council Is Insufficient 

The proposal before the council to assess community benefits based on a flat fee per square foot[3] would provide for about $14 million in community benefits (see Attachment 2), less than half of the benefits estimated above. Benefit payments would then be reduced by $6.5 million[4] for having a project labor agreement, reducing available fees to somewhere around $8 million. This reduction would occur even though the developer had already included the cost of the PLA in the project’s total cost of $130 million and entered into a PLA prior to claiming it as a significant community benefit. Since the proposal further allows some portion of the benefits to be credited toward arts and cultural activities, very little funding would remain for significant community benefits. 


Estimating Profits  

Concern has been raised that assessing greater community benefits would cut significantly into profits and deter development. In fact, for Harold Way alone, the first project that would be subject to the community benefits requirement, revenues in excess of construction costs appear to approximate $151.5 million over a twenty-year period. The developer cites project costs[5] of $130 million. The developer estimates that the project will garner $14.7 million in revenue[6] during the first year of operation. Assuming a modest 5% annual rent increase, the project will generate an estimated value in today’s dollars of $281.5 million during its first twenty years. Additionally, similar to anyone purchasing a house, long-term financing (such as a mortgage or other partnership arrangement) will spread these costs over a 20 to 30 year period. HSR Berkeley, the developer of Harold Way, itself cites a return on its total real estate investments of 30%,[7] demonstrating that significant community benefits can be provided while still allowing substantial profits to the developer and/or subsequent owner. 

Not all of the figures needed to perform an economic analysis of the projects downtown are available to the public. As stewards of our public resources, the Council should require a pro forma and/or net present value economic analysis for each proposed large project that exceeds usual heights. Berkeley used a pro forma analysis to evaluate the recent Stonefire project. The developer of Harold Way stated that it anticipated independent verification of its claimed community benefits in its initial submission to ZAB on significant community benefits in October, 2014. 

The Downtown Plan envisioned a trade-off or approving taller buildings in exchange for significant community benefits to achieve the Plan’s goals of affordable housing, green buildings, provision of open space and transportation enhancements. Approving the buildings without ensuring that Berkeley receives the corresponding benefits is not what voters supported when they approved the original Measure R and trusted the council to make decisions that benefit the community at large. 



[1] Using Berkeley’s current formula for calculating affordable ownership unit in-lieu fees.  

 

[2] In fact, Harold Way Project developers assume studio apartment rents of approximately $3,100 month, more than 60% higher than the $1,800 month rent used in the AECOM study.  

 

[3] $100 per square foot for floors above 75 feet and $150 per square foot for floors above 120 feet.  

 

[4] 5% of construction costs estimated by the developer. AECOM estimated these costs at closer to 2.5%.  

 

[5] Including the cost of constructing six theaters and a project labor agreement.  

 

[6] Residential, parking, commercial and theater spaces.  

 

[7] http://developers.injunct.com/leggmason/contact_joe_p.php.