Pier 70 Feasibility Analysis

Transcription

1 Final Report Pier 70 Feasibility Analysis Prepared for: Port of San Francisco Prepared by: Economic & Planning Systems, Inc. ROMA Design Group February 2010 EPS #17007

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3 Table of Contents 1. EXECUTIVE SUMMARY... 1 Introduction... 1 Financial Analysis Structure... 1 Development Program... 3 Summary of Results and Key Findings... 3 Summary of Findings PURPOSE AND METHODOLOGY... 9 Purpose and Limitations... 9 Evaluation Methodology LAND USE PROGRAM Uses Programmed Other Uses Considered REVENUES Real Estate Revenues Public Financing Sources Private Capital Investment COSTS Sitework and Waterfront Improvements Rehabilitation and Adaptive Reuse Ongoing Costs Costs Excluded from Pier 70 Feasibility Analysis FEASIBILITY RESULTS Financial Feasibility Analysis Summary of Investments and Returns SENSITIVITY TESTS Sensitivities Tested Results of Tests Appendix A: Appendix B: Additional Support Tables Sensitivity Results

4 List of Tables and Figures Table 1. Project Description Summary...3 Table 2. Pier 70 Project Development Costs...4 Table 3. Pier 70 Project Revenues...5 Table 4. Cost and Revenue Comparison...6 Table 5. Description of Uses Included in Feasibility Analysis Table 6. Project Description for 50 Acres Table 7. Summary of Vertical Pro Forma Results Table 8. Summary of Rehabilitated Building Pro Forma Factors Table 9. Adaptive Reuse: Space by Type/Lease Rates Table 10. Phasing Assumptions Table 11. Infrastructure Financing District Bond and Debt Service Calculations Table 12. Mello-Roos CFD Bond Debt Service Calculation Table 13. New Payroll Tax Calculation Table 14. Proposition D Revenues Table 15. Adaptive Reuse Pro Formas Table 16. Rehabilitated Buildings Cash Flow Table 17. Sources and Uses Table Table 18. Development Cash Flow Table 19. Sensitivity Descriptions Table 20. Sensitivity Test Results Figure 1. Illustrative Development Plan Preferred Master Plan, Pier

5 1. EXECUTIVE SUMMARY Introduction Pier 70 is an industrial brownfields development opportunity situated along San Francisco s renowned waterfront. The site comprises 65 acres located along the City s Central Waterfront just south of Mission Bay, bounded by Mariposa Street to the north, Illinois Street to the west, 22nd Street to the south and, to the east, San Francisco Bay. It is home to an unparalleled collection of historic, maritime industrial buildings as well as the largest, non-naval ship repair facility on the West Coast all of the historic buildings are in need of significant investments to mitigate and repair deterioration. The Port of San Francisco (Port), as the site owner, retained a team of consultants to conduct technical analyses related to historic structures, environmental conditions, urban design, and market and financial feasibility analysis. The results of the technical work guided the preparation of a Preferred Master Plan for the site. This Report is one of several studies that support the plan (which has been drafted concurrently with this Report). The Port retained Economic & Planning Systems, Inc. (EPS) to lead the Preferred Master Plan efforts and to conduct financial feasibility testing during the preparation of the document. Pier 70 presents unique development opportunities and challenging financial requirements. Although the site includes a significant amount of land suitable for revenue-generating new development, the costs associated with rehabilitation of historic structures, new infrastructure, environmental remediation, and open space development will require the coordination of investments from both public and private entities to achieve the primary goals of the project creation of a mixed-use waterfront district, historic rehabilitation, open space, and enhanced public waterfront access. EPS conducted financial feasibility analysis throughout the preparation of the Preferred Master Plan, testing various land use densities and use-types to shape the ultimate Plan. This Report details EPS s key findings, assumptions, and information sources related to the feasibility analysis of the Pier 70 site. The actual project cash flow will depend on the timing, use, and extent of public financing options, the timing and actual costs of site development investments, and the rate of absorption and achievable values of new development and rehabilitated buildings. Financial Analysis Structure EPS prepared a financial model for the Pier 70 project that arrayed project costs and revenues into an annual cash flow for the development entity for a 30-year period. The model excludes the 15-acre BAE shipyard including its buildings and BAE s lease payments to the Port. The financial analysis is similar to a base reuse or large-scale redevelopment project financial model. The financial model assumes that the Port will continue to own the land and enter into a longterm ground lease with a single development entity. A single developer for the site is an analytical assumption; the Port may lease the site in a different manner. Consistent with Economic & Planning Systems, Inc. 1 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINALFeb12010.doc

6 Pier 70 Feasibility Analysis Final Report 02/01/10 language contained in 2008 Proposition D, 1 the model assumes that the Port will receive rent from the Pier 70 developer equivalent to the current interim income from the site, about $3 million per year. In the cash flow model, the developer would undertake the horizontal development for the 50- acre site: infrastructure, site preparation, park and open space and pier/wharf projects. The developer would also rehabilitate the historic buildings and build the parking structures required on the site. As modeled, rather than constructing new buildings the vertical development, the development entity would enter into land leases with developers or users for building sites. The developer and/or its subtenants, not the Port, would bear the capital costs of implementing the Plan. The overall financial flows to the development entity modeled are: Rent from tenants of rehabilitated historic buildings and interim rent from existing tenants in the early years; Ground rent from the new building sites; Receipt of public finance funds as they are available to pay for allowed public uses; Parking income from structured parking; and Debt and investment from the private sector as required. The financial analysis tests whether the public financing and expected real estate revenues are sufficient to attract the private sector investment needed for the Plan to succeed, but does not imply a preferred financing structure. A base case and a set of sensitivity analyses were prepared to evaluate Pier 70 s financial feasibility. The development costs included in the financial feasibility analysis include site preparation, environmental remediation, infrastructure (new streets and utilities), parks, pier and wharf improvements, parking improvements and historic rehabilitation. Cost estimates reflect a planning level of detail for the infrastructure, parks, remediation and other site costs. The historic building costs were developed with the benefit of field visits and a conceptual reuse program informed by historic architects, structural engineers hazardous materials experts and cost estimators. All of the capital cost estimates include a factor for soft costs including planning, entitlement and contingency. Also included are two ongoing costs to the development entity: base rent to the Port and environmental remediation monitoring. 1 Proposition D is a measure passed by San Francisco voters in November 2008, amending the City Charter (adding section B7.310) to allow the Port to utilize a portion of payroll tax and transient occupancy tax revenues collected from Pier 70 employers and hotel guests (if any) for specified investments at Pier 70. The full text of this charter section is an appendix of the Preferred Master Plan. Economic & Planning Systems, Inc. 2 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

7 Pier 70 Feasibility Analysis Final Report 02/01/10 Parking is expected to be distributed throughout the site. Parking revenues are not expected to be sufficient to fund structured parking. The financial model reflects parking costs in two ways: a portion is included in the development pro forma for new and rehabilitated buildings and parking structures are a development cost. Development Program The Pier 70 Preferred Master Plan contains a framework for development of 50 acres of the site, excluding the 15-acre ship repair facility. The Plan includes more than 700,000 square feet of historic, rehabilitated building space, 3.09 million square feet of new development, and 22.6 acres of parks and open space, including a 7- and a 2-acre waterfront parks. Table 1 details this project description. Figure 1 illustrates the site plan included in the Preferred Master Plan document. The site plan demonstrates one approach to implementing the parameters contained in the Preferred Master Plan. Table 1. Project Description Summary Item Total (Yrs 0-20) Rehabilitated Buildings (sq ft.) 721,569 New Development (sq.ft.) 3,097,079 Total (sq.ft.) 3,818,648 Demolished Buildings (sq.ft.) 172,709 Parking Spaces 2,943 Parking Ratio (spaces per 1,000 bldg. sq.ft.) [1] 1.03 Parks and Open Space (acres) [1] The ratio is slightly above 1.0 space per 1,000 because of the higher parking ratio afforded the medical land use. Summary of Results and Key Findings Results The financial feasibility analysis evaluates the capital flow from the perspective of a master development entity that would prepare the site for new development (including environmental remediation and new infrastructure), complete rehabilitation of historic resources, and provide public amenities such as parks and open space. The revenues generated by these investments include historic building lease revenues, ground lease revenues (for new development pads), and available public financing sources such as federal historic tax credits, Infrastructure Financing District (IFD) bond, Mello-Roos Community Facilities District (CFD) bond, San Francisco 2008 Proposition D revenue, and San Francisco 2008 Proposition A Park Bond. The cash flow analysis results in two financial measures, both on an unlevered basis: (1) internal rate of return (IRR) and (2) cash flow net present value (NPV). Because potential private partners for the Port will each have unique preferences and mechanisms for establishing private financing for a project Economic & Planning Systems, Inc. 3 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINALFeb doc

8 Pier 70 Feasibility Analysis Final Report 02/01/10 like Pier 70, no assumptions on private financing are included nor has analysis been done to create a levered cash flow. Development Costs Table 2 reports costs used in the financial feasibility analysis totaled over a 30 year time period without including inflation (2009 dollar value). The largest cost item, historic rehabilitation, is shown before the application of federal tax credits. Table 2. Pier 70 Project Development Costs Item 30-year Total (thousands, 2009$) Capital Costs Historic Building Rehabilitation $355,000 Piers/Wharfs $60,000 Infrastructure and Site Preparation $70,000 Structured Parking $30,000 Parks/Open Space $30,000 Site Remediation $20,000 Subtotal $565,000 Ongoing Costs - over 30 years Base Rent to Port $85,000 Remediation Monitoring $5,000 Subtotal $90,000 Total Costs $655,000 Note: All capital costs include a 29 percent factor to cover planning, entitlement, and contingency. Rehabilitation costs include asbestos and lead paint abatement. Structured parking costs are adjusted for net parking revenues. Because of the planning level nature of these costs projections, estimates are shown to the nearest ten million. Project Revenues Table 3 summarizes the revenues from the project. The public financing sources available to the project are discussed above. The financial feasibility model estimated the public funding resources, based on the development program concept in the Preferred Master Plan, assumptions about timing, land and property values, and mix of users. Property tax projections assume that possessory interest tax (the property tax equivalent) is assessed on rehabilitated and new buildings. Payroll tax projections factor in existing City payroll tax incentives for biotech and clean tech uses. If additional future users of Pier 70 are exempt from property or payroll taxes -- e.g., government or certain nonprofit users assessment district, IFD revenue and Proposition D revenues could be reduced. Tax-exempt users will be required to pay an equivalent share of infrastructure and other costs to support Pier 70 public benefits and infrastructure. Economic & Planning Systems, Inc. 4 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

9 Pier 70 Feasibility Analysis Final Report 02/01/10 Table 3. Pier 70 Project Revenues Item 30-year Total (thousands, 2009$) Development Revenue Ground Lease - New Development $220,000 Historic Building Lease $260,000 Interim Lease Revenue $20,000 Subtotal $500,000 Public Financing Park Bond Proceeds $10,000 Proposition D Bond Proceeds $40,000 Land-Secured Bond Proceeds (Mello-Roos) $80,000 Infrastructure Financing District (IFD) Proceeds $110,000 Historic Tax Credit $70,000 Subtotal $310,000 Revenue Total $810,000 Note: Because of the planning level nature of the revenue project, estimates are shown to the nearest ten million and exclude inflation. IFD revenues reflect receipt of 65 percent of the growth in property tax revenues. New development and historic building rehabilitation projects will pay impact fees to support transportation improvements, affordable housing and child care facilities. These fees total about $70 million for the planned development program. These fees are included in the soft costs in the financial model. Ground lease revenue from new development is based on the land value resulting from building feasibility analysis for each land use category. These ground lease revenues were adjusted downward to reflect the impact of CFD financing which imposes a special tax on new development sites. Lease revenue estimates for rehabilitated buildings were based on conceptual use programs for the various historic spaces and market rate rents. Most project costs will occur periodically during the project timeline. In contrast, most revenues will be realized on an ongoing basis (e.g., ground lease and historic building lease revenues). In order to compare costs with revenues, revenues are shown here in constant 2009 dollars summed over 30 years. Cost and Revenue Comparison Development of Pier 70 will require a substantial outlay of capital. Including all costs and contingencies associated with preparing the land for new development and rehabilitating historic buildings, expenditures total $655 million, in constant 2009 dollars. Over a 30-year horizon, the development entity receives $810 million in revenues, but the costs of the project occur far earlier in time than the revenues generated. In particular, in the first five years, key 20th Street historic buildings (101, 102, 104, and 113/114) are projected to be rehabilitated, requiring an investment of $80 million, after adjustments for historic tax credits. A lender or investor must advance funds to move the project forward; these funds must later be returned with a risk- Economic & Planning Systems, Inc. 5 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

10 Pier 70 Feasibility Analysis Final Report 02/01/10 appropriate level of interest. The cash flow shows a total of $165 million of private capital invested before the development entity realizes a return on that investment. The financial cash flow includes all of the public financing sources secured to date and evaluates the internal rate of return (IRR) realized by the development entity. As presented, the project reflects an IRR of 10.2 percent. Real estate development projects of this complexity and risk generally require an IRR of 15 percent or more, reflecting the market returns required on a mix of private debt and investor equity. This feasibility gap is the difference between the net present value (NPV) of the costs and revenues summarized over time, reflecting the risk adjusted, time-value of money. An NPV discount rate of 15 percent (reflecting a blend of private sector debt and equity) is used here. Because most of the revenues accrue after the development costs, this illustrative cash flow analysis demonstrates a feasibility gap of $46 million on a NPV basis. See Table 4 for the revenue and cost comparison on an NPV basis. The $46 million feasibility gap indicates further refinement of the Pier 70 financial structure is required. Sensitivity testing demonstrates several pathways to a feasible project. Access to lower cost financing mechanisms, additional IFD revenues from the State share of tax increment, and tuning the timing and magnitude of costs incurred will be the most important factors in closing the feasibility gap. The Port anticipates that real estate developers can bring additional insights into refining the project land use program, cost estimates and financing plan to meet market demands and assist in finding the best users for historic buildings, while meeting the Plan goals. Concerted efforts by the Port, its constituents and its partners to access additional funding sources and achieve additional value from the site will be needed to realize a successful project. Table 4. Cost and Revenue Comparison Item NPV (at 15%) (thousands) Revenues Real Estate Revenue $99,000 Public Financing $94,000 Historic Tax Credits $30,000 Subtotal $223,000 Costs Historic Building Rehabilitation $150,000 Infrastructure and Parking Structures $52,000 Remediation $16,000 Parks $16,000 Rent to Port $25,000 Piers/Wharfs $10,000 Subtotal $269,000 Net Result ($46,000) IRR 10.2% Note: A detailed version of this information is provided in Table 17. Economic & Planning Systems, Inc. 6 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINALFeb doc

11 Pier 70 Feasibility Analysis Final Report 02/01/10 Summary of Findings The analysis demonstrates that development of the Preferred Master Plan may be feasible; however, its success depends upon significant private investment and additional financial resources beyond the base case assumptions, as described below. 1. The feasibility of development at Pier 70 requires a significant level of private investment. With $565 million in capital costs to prepare the site for development, rehabilitate historic resources, and provide park and open space amenities, the revitalization of Pier 70 will require that the Port partner with a private entity with a proven track record for complex and successful redevelopment projects as well as financial resources sufficient to bring the long-term vision for Pier 70 to market. 2. In addition, funding beyond that included in the base case will be needed to generate a feasible project. As shown in Table 4, the base case land use scenario results in a project IRR of 10.2 percent and has an NPV of negative $46 million calculated with a 15 percent discount rate. Several potential funding opportunities have not been included in the base case analysis such as additional IFD revenue, funds from other local revenues, and state, philanthropic, and/or federal grants. The results of the base case analysis indicate that additional funding will need to be secured in order to create the conditions which will attract private investments. 3. The infusion of one or more additional funding sources improves the project s financial feasibility significantly. Several of the sensitivities tested evaluate the feasibility effects of additional outside funding sources. The potential sources of outside funding tested include: the State s portion of IFD funding (allows the project to capture the State s share of site property tax increment), grants and philanthropic sources, and additional public funding from another source. These funding sources increase the project s NPV significantly, with a combination of the State s share plus additional outside grants resulting in a positive NPV for the Project. 4. Measures which delay expenditures without affecting revenue generation will further improve project feasibility. The base case cash flow assumes that the infrastructure costs are substantially front-loaded in the project with 100 percent installed by year 10. A more detailed project plan and cash flow may reveal potential cost efficiencies which minimize or delay expenditures. One alternative tests this potential efficiency by delaying infrastructure and environmental remediation costs. 2 Combining additional public funding and enhanced IFD revenues with a delay in expenditures results in a project NPV of positive $20.0 million, achieving project feasibility. 2 It is important to note that this analysis did not test the physical or operational constraints associated with the timing and phasing of infrastructure or environmental remediation costs. The analysis only speaks to the financial implications of delaying investments. To the extent that spreading out these costs through time is not physically or practically possible, this alternative could not be implemented. Economic & Planning Systems, Inc. 7 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

12 Figure 1. Illustrative Development Plan Preferred Master Plan, Pier 70 VERY SIGNIFICANT RESOURCE SIGNIFICANT RESOURCE CONTEXT RESOURCE OPEN SPACE SHIP REPAIR BUILDING REMOVED NEW BUILDING PADS 1A CRANE COVE PARK 8 This diagram indicates potential sites for the general placement of buildings within each of the blocks. These building sites are not to be construed as the actual shape of future buildings, but rather as a general envelope for new buildings. The building sites were developed in consideration of the size and depth of building floorplates for potential new uses as well as in consideration of historic relationships such as the slipways and the objectives for creating visual and pedestrian linkages and open space relationships. Variations within these building sites is encouraged to create a finer grain scale and pattern that provides the appropriate context for the historic building and the district. Variations in the building sites which achieve the desired density can also be considered if they comply with the historic district and other goals of the Plan. 1B 2A 3A 2B 3B IRISH HILL 2C SHIP REPAIR 5A 5 B 5 C 7A 6A 6B 6C 6D 6E 8A SLIPWAYS PARK N New Building Sites PIER 70 PREFERRED MASTER PLAN 51

13 2. PURPOSE AND METHODOLOGY Purpose and Limitations The Preferred Master Plan provides a structure for development of Pier 70 that defines the elements of the Historic District, retained ship repair activity, new waterfront parks, and the envelope of supportable new development on the site. The Preferred Master Plan establishes a flexible development program. Phasing of improvements will need to be adaptable to changing market conditions and specific development and tenanting opportunities. The purpose of including financial feasibility analyses throughout the drafting of the Pier 70 Preferred Master Plan is to ensure that the ultimate Plan reflects a development program which could achieve feasibility. To that end, feasibility analysis has been an integrated part of the master plan effort, helping to shape the direction of the Plan from the early stages through the development of the preferred land use concept. Because feasibility testing relies upon estimates of market values and cost estimates, it reflects a snapshot of real estate economics at the time of the analysis. Though every effort has been taken to employ conservative estimates which avoid inflating the feasibility of the Plan, a positive, feasible result does not ensure success at Pier 70. Achieving the Pier 70 Master Plan, for any combination of land uses, will require a partnership with the private sector and a significant level of private investment well in advance of financial returns being realized. Evaluation Methodology The feasibility analysis has been completed assuming a master developer entity would prepare the 50-acre site for new development and manage the rehabilitation of all historic resources. The Master Developer framework was used for analytic purposes it does not indicate a preferred transaction structure. (Note that the feasibility analysis does not include the ship repair operation.) Costs such as planning, entitlement, environmental remediation, infrastructure replacement, parks, and historic rehabilitation are compared with revenues anticipated from ground leases for new development and building leases for the rehabilitated building space and available public funding sources. The Preferred Master Plan provides flexibility in the mix of uses which may be included in newly development building space and rehabilitated buildings. In order to project revenues, this analysis assumed a specific mix of uses with sensitivity analysis to consider additional uses. These revenues and costs are arrayed in an annual cash flow to determine the net present value of revenues and investments and the project s internal rate of return. Various land use programs in terms of intensities and uses were tested in this manner. The program contained in the Preferred Master Plan reflects a result which meets the Port s key goals for Pier 70 historic preservation, open space and shoreline access, and maintenance of the working shipyard. The feasibility analysis considers the viability of this development program to attract private investment. Economic & Planning Systems, Inc. 9 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

14 Pier 70 Feasibility Analysis Final Report 02/01/10 The evaluation methodology includes known costs and revenues expected to be associated with Pier 70 development, as described in the Preferred Master Plan. These costs and revenues are all shown to be borne by and accrue to a master developer. In reality, the Port may make early investments in the property, as funds are available for specific purposes like historic building stabilization or environmental remediation. Real Estate Revenues Revenues are expected to accrue to the master developer from: (1) leases of existing, rehabilitated building space and (2) lease revenue for land at Pier 70 on which new development will be constructed. 3 The base case analysis assumes ground lease revenues instead of land sales, reflecting the Port s retention of site ownership. To estimate the achievable lease revenues for rehabilitated building space and for developable land, the analysis employed two estimating techniques: Rehabilitated building space rent. Adaptive reuse concepts have been developed by the Planning Team for buildings intended for rehabilitation under the Preferred Master Plan. The concepts include estimated leasable square feet, use, (e.g., cultural/institutional, office, retail, industrial, etc.) and market rents. Using market rents for each use, revenues from the rehabbed buildings are estimated. Residual land lease value. Excluding rehabilitated buildings, parks and open space, public right of ways, and the shipyard, ROMA and the planning team estimated the total area available for new development. Based on the results of EPS s December 2007 Pier 70 Master Plan Market Analysis and direction from the Port, three types of uses are included in the feasibility analysis for new development in the Plan: biotech, medical office, and general office space. The analysis includes estimates of expected land lease payments from the development types. Public Financing Public financing mechanisms which are required to facilitate upfront investments needed to prepare the site for redevelopment are also included in the analysis. Two key financing sources are: Infrastructure Financing District. Under State legislation, the Port may utilize tax increment financing through a mechanism called an IFD. The legislation allows the IFD to capture 65 percent of tax increment to fund infrastructure at the site. In addition, legislation is pending that would allow the Port to capture an additional 25.3 percent of the tax increment that would otherwise go to the State s Educational Revenue Augmentation Fund. These annual tax revenues could support tax allocation bonds to be used for infrastructure and other public improvements on the site. The State s portion is not included in the base case financial feasibility analysis, as it is an uncertain funding source. 3 The Preferred Master Plan illustrates a development program within rehabilitated buildings and the intensity of new development at the site. Economic & Planning Systems, Inc. 10 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

15 Pier 70 Feasibility Analysis Final Report 02/01/10 Mello-Roos Community Facilities District. A CFD may be used to establish a special tax on property within the district. The tax revenues can be used to secure CFD bonds for qualifying capital improvements, and can also be used to support ongoing maintenance and services. The special tax typically would be paid by owners or tenants of buildings on the site, although it can be structured to be paid initially by the site developer. The financial feasibility analysis assumes that building developers would discount sublease payments to a master developer to reflect the additional cost burden of the special tax. In addition to the revenues from building and land leases, known non-port funds are included as sources of investment to the project. Non-Port funding sources included in the analysis are: Federal historic tax credits which are available for applicable rehabilitation costs. San Francisco Proposition A Park Bond funding for the waterfront park. Proposition D payroll and transient occupancy tax revenue. Proposition D was passed by San Francisco voters in November 2008, amending the City Charter to allow the Port to utilize a portion of payroll tax and transient occupancy tax revenues collected from Pier 70 employers and hotel guests (if any) for specified investments at Pier 70. Proceeds from the taxes may be used on a pay-as-you-go basis, or could be used to support revenue bonds. Costs Costs related to the redevelopment of Pier 70 include demolition of some existing structures, environmental remediation, building rehabilitation, new utilities, structured parking, park and open space development, and pier and wharf repair. These cost estimates are based on Port, inhouse estimates and outside consultant efforts. Several additional documents are available that provide the background on cost estimates including Conceptual Estimate of Probable Construction Cost Based on Assessment of Building Conditions (M. Lee Corporation, July 2008). Economic & Planning Systems, Inc. 11 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

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17 3. LAND USE PROGRAM The land use program elements evaluated in the feasibility analysis are based on a collaborative planning effort led by EPS and ROMA Design Group under the direction of Port staff and incorporates key findings of technical analyses prepared by Carey & Company (historic preservation), OLMM Engineers (cost estimates), M Lee Corporation (cost estimates), and Treadwell and Rollo (environmental investigation). The sections below describe the types of uses included in the program and the total development at buildout of the project. These uses are included for evaluation purposes; actual uses may vary. Uses Programmed A variety of development types and uses were considered for inclusion in the land use program. The mix of uses included is based on a market study of development prospects at Pier 70 (see Pier 70 Master Plan Market Analysis, released December 2007). Those which were selected for inclusion in the feasibility analysis are detailed in Table 5. Table 5. Description of Uses Included in Feasibility Analysis Use Development Characteristics Biotech The configuration of biotech buildings tends to vary by the size and type of company occupying the space. Smaller companies and research institutions are likely to require wet lab space for testing and experiments as well as more traditional office space. Mature or larger companies may require these research and office spaces as well as significant product production space. Because of the need many biotech users have for precise control of temperature, moisture, and other elements and the difficulty in creating this type of space in an older building, biotech space is confined in the Pier 70 Plan to newly developed buildings only. New biotech buildings will have high floor-to-ceiling heights to accommodate the necessary heating, ventilating, and air conditioning (HVAC) systems. Medical Office General Office Medical office is included as a specific use because of the site s proximity to the new University of California, San Francisco Mission Bay Hospital. This type of use is included within the new development portion of the land use program. General office uses are anticipated to be a large portion of the mix of uses. General office uses incorporated in the feasibility analysis include new office space and space in rehabilitated office or other types of buildings (e.g., industrial or warehouse) converted to office uses. Economic & Planning Systems, Inc. 13 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

18 Pier 70 Feasibility Analysis Final Report 02/01/10 Table 5. Description of Uses Included in Feasibility Analysis (continued) Use Development Characteristics Retail/Restaurant/ Entertainment/ Cultural/Institutional Industrial/Warehouse Parking Parks and Open Space Aside from small cafes which may be integrated in new biotech or office space, the land use program includes retail, restaurant, entertainment, cultural and institutional uses within the historic buildings. Many of these structures with their expansive interior spaces are well-suited to uses which will allow public access. The Union Iron Works complex (Buildings 113/114 and 115/116) is anticipated to serve as the center of these types of uses. Several of the existing buildings appear best suited for continued industrial or warehousing functions. These include Buildings 2 and 111. For the feasibility analysis, parking needs are expected to be met by locating parking throughout the site. To that end, parking space has been included in parking structures, within new buildings, and in appropriate portions of rehabilitated structures. Parks and open space are included throughout the land use program, specifically along the shoreline (Crane Cove Park and along the eastern edge of the site), adjacent to Irish Hill, and along 20 th Street. Table 6 summarizes this land use program. Parking assumptions within the financial model seek to balance the pitfalls of providing too much parking which would encourage single-occupancy vehicle commutes and displace valuable, revenue-generating space with undersupplying parking which may decrease office and biotech rents and weaker the viability of uses reliant on visitors. With the goal of providing just enough parking, the parking ratio included in the financial analysis is 1.0 parking spaces per 1,000 square feet of building space. Parking ratios in central business cores with easy access to frequent transit service may have parking minimums of 0.5 spaces per 1,000 square feet or parking maximums which may be provided. Conversely, suburban office developments like those in South San Francisco and other areas on the Peninsula typically number 3.0 to 4.0 spaces per 1,000 square feet. The ratio selected for Pier 70 is in-line with recent development at Mission Bay, which has a similar density and commute profile as Pier 70. The illustrative build-out scenario includes half of the required spaces within the vertical building pro formas and half in stand-alone parking structures. This means that the costs and revenues associated with building and operating the parking areas are included in the vertical pro formas of new construction and in a vertical pro forma for the parking structure. To the extent that adapted, historic structures appeared to be able to accommodate parking, a portion of spaces are also included in the historic rehabilitation and reuse pro formas. Economic & Planning Systems, Inc. 14 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

19 Pier 70 Feasibility Analysis Final Report 02/01/10 Other Uses Considered Two other uses have been considered for the land use program: residential and hotel. Descriptions of these uses and the rationale for their exclusion from the current land use program are provided below. Residential Residential uses have been excluded from the land use program in order to avoid conflicts between residents and shipyard operations. When a ship is in drydock, the shipyard frequently operates throughout the day and night, generating typical heavy industrial operation impacts around the clock. In addition, a residential development at Pier 70 would likely be isolated from residential neighbors. With longstanding industrial uses across Illinois Street and a power plant site to the south (where residential uses are restricted), there are few known opportunities for residential conversions near Pier 70. However, new residential units have been developed along both Illinois and Third Streets in recent years, indicating market support for housing in the area. In addition, the concentration of jobs anticipated at buildout of the land use program provides a rationale for incorporating housing into the program to offer new employees opportunities to live nearby. While residential uses have not been incorporated into the feasibility analysis, the integration of residential uses has been financially tested in the Sensitivities section of the Report. Hotel The employment capacity of the Preferred Master Plan combined with existing and planned commercial space and the future hospital at Mission Bay indicates the Central Waterfront area s potential for becoming a significant new activity-center in the City. Employment and medical services in the area may be sufficient to support the development of a hotel. Although a hotel is an appropriate use at Pier 70, hotel square footage is not included in the financial feasibility analysis. Development of a hotel at Pier 70 would generate both land lease revenues as well as Proposition D transient occupancy taxes, potentially improving the project s economics in a significant, favorable manner. A hotel use is excluded from the base case financial feasibility analysis in order to avoid skewing the analysis by assuming that a less common use will be developed at the site. Economic & Planning Systems, Inc. 15 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

20 Table 6 Project Description for 50 Acres (excludes 15 acres of ship repair uses) Item Total (Yrs 0-20) Rehabilitated Buildings (sq. ft.) [1], [2] Office 343,326 Industrial/PDR 181,211 Institutional 100,111 Retail 73,363 Parking 21,265 Other (non-revenue generating) 2,294 Subtotal 721,569 New Development (sq. ft.) ]2] Biotech Office 1,268,437 Medical Office 126,844 General Office 1,141,593 Parking Structure 560,205 Subtotal 3,097,079 Total Development and Rehabilitated (sq. ft.) 3,818,648 Demolished Building Square Footage 172,709 Parking Parking in Structure (spaces) 1,724 Parking in Individual Buildings (spaces) 1,211 Total spaces provided 2,935 Parking Ratio (spaces per 1,000 bldg. sq. ft.) [2] 1.0 Parks / Open Space Acreage [3] Crane Cove Park 7.73 Irish Hill 1.53 Shipways Park 4.89 Central Plaza 0.41 Blocks 1-6 Open Space/Plazas 8.03 Total Parks and Open Space [1] Square footage is shown for historic buildings by the type of use used in the model. Several buildings are expected to accommodate a mix of uses. [2] Parking is in part provided in structures and in part within buildings. Square feet by use reflects the total gross building square feet, a portion of which is used for parking. [3] The ratio is slightly above 1.0 space per 1,000 due to the higher parking ratio afforded the medical land use. [4] Equal to 984,569 sq, ft. Open space on "blocks" 1 through 6 includes plazas and the spaces between development within the blocks as illustrated in the Preferred Master Plan. Source: Port of San Francisco; ROMA Design; Economic & Planning Systems Economic & Planning Systems, Inc. 1/11/ P:\17000s\17007Pier70\Model\17007feas30Dec09_FINAL.xls

21 4. REVENUES Revenue sources include direct revenue from site users (lease revenue) and public revenue. The sections below describe the types and magnitude of revenues. Real Estate Revenues The project will receive rent revenues from rehabilitated building leases and ground leases for new development pads. Ground Lease Revenue Revenues will be generated through ground lease revenue. The value of the ground leases are based on land values determined by the difference between vertical construction costs and the capitalized value of the building. Revenues from new development uses has been estimated by: (1) Establishing assumptions for net rents from tenants; (2) Estimating direct and indirect building construction costs; (3) Including cost overruns (contingency) and a builder profit; (4) Capitalizing revenues, net of total costs which results in the residual land value for the given use; and (5) Assuming that a proportion of the residual land value (8.5 percent) represents the land lease value. The land lease value is the cash flow that a horizontal developer may expect to receive from a vertical developer, constructing particular uses and amounts of leasable building space. These steps result in an estimate of the value of the land generated by the development. The ground rent per use is developed in 2009 dollars in a series of vertical pro formas included in Appendix A. Descriptions of assumptions used for capitalization rates, ground lease factors, and parking are included below. Capitalization Rates A capitalization rate (cap rate) is the ratio between the net operating income of an asset and the total market value of the asset. In the vertical pro formas for Pier 70 buildings, capitalization rates are used as assumptions to estimate the market value of the net operating income. Cap rates reflect the perceived risk associated with the project including the estimated development costs, vacancy rate, and building lease rates. Historic capitalization rates in San Francisco s office market range from about 5 percent to 9 percent (i.e., net operating income is between 5 and 9 percent of total market value). Three different cap rates are applied in the vertical pro formas: New commercial development. Given the various opportunities and constraints of development at the site, a cap rate in the middle of the historic range has been selected for all new commercial development modeled at Pier 70 (7 percent). Rehabilitated buildings. While some of the rehabilitated buildings may provide unique and spectacular spaces, other older buildings adapted for modern uses may not provide the same level of amenities and functionality that new construction supplies. Rather than Economic & Planning Systems, Inc. 17 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

22 Pier 70 Feasibility Analysis Final Report 02/01/10 differentiating among the buildings and projecting how the market will view these buildings, a single cap rate has been applied to all historic buildings, at the high end of the historic range (8.5 percent). Parking structure. A conservative cap rate has been applied to parking structures (9 percent) Ground Lease Factor The residual land value results from subtracting total development costs from the building value. This represents the value of the land, given the assumed development program built. In order to calculate the annual lease rate a developer would be willing to pay for the right to construct the project, a ground lease rate factor is applied to the residual land value. For modeling purposes, the ground lease factor selected (8.5 percent) is equivalent to a conservative capitalization rate for the San Francisco land. Parking Assumptions The portion of parking for the project that is provided within the building pads (0.5 spaces per 1,000 square feet of building space with another 0.5 spaces per 1,000 included in standalone parking structures) is included in the pro formas by use. To estimate lease revenue, the building size is reduced to account for the portion occupied by parking. Parking revenues are included assuming monthly parking rates of $225 in 2009 values and daily rates of $8 per space. New Building Development Revenue Values for ground leases vary according to use, as shown in Table 7, below. Appendix Tables A1 through A8 provide details on the vertical costs and revenues associated with new development by type of use. For example, Table A1, the biotech use pro forma, illustrates the square feet of new development assumed in the analysis and the revenues and costs associated with the construction and occupancy of the development. The calculation results in an estimated residual land lease value. This lease value is applied to the revenue section of the project cash flow. Reversion Value At the end of the 30-year cash flow period, the lump-sum value of future ground lease and rehabilitated building lease revenues are included in the analysis for the NPV and IRR measures. This means that at the end of the 30 years, the development entity may sell its interest in the site. This potential sale value is estimated to be equal to the present value of future lease income less annual costs (e.g., base rent to the Port, environmental monitoring costs, etc.). Economic & Planning Systems, Inc. 18 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

23 Pier 70 Feasibility Analysis Final Report 02/01/10 Table 7. Summary of Vertical Pro Forma Results Item Biotech Medical Office General Office Hotel For-Sale Condominiums Rental Apartments End User Rent/Price Construction Cost $50 $46 $40 / building Sq. Ft./year (NNN) $150 /room per night $435 $348 $352 /building Sq. Ft. $299 /building Sq. Ft. Building Value $509 $407 $410 /building Sq. Ft. $362 /building Sq. Ft. $510,000 / Unit $3 /Sq. Ft. per month $452 /building Sq. Ft. $490 /building Sq. Ft. $395 /building Sq. Ft. $423 /building Sq. Ft. Residual Land Value $75 $59 $58 /building Sq. Ft. $64 /building Sq. Ft. Ground Rent $6 $5 $5 /building Sq. Ft./year $5 /building Sq. Ft./year $37 /building Sq. Ft. $3 /building Sq. Ft./year $29 /building Sq. Ft. $2 /building Sq. Ft./year Existing Building Lease Revenue In order to estimate likely revenues and costs of rehabilitated buildings, the Port team and consultant developed an adaptive reuse program. The program includes total building square footage and use for each building expected to be included in the land use plan. The uses included in the adaptive reuse program are office, institutional/ cultural, retail, warehouse or storage, retail, and parking. Lease revenues associated with these uses range in value from $15 to $36 per square foot per year. All of the lease rates contained in the historic buildings analysis are based on advertised space for rent in late 2007 in the Dogpatch/Potrero Hill/Showplace Square area of the City. Table 8 illustrates the average result for all historic buildings in terms of the end user price (lease rate), the rehabilitation cost, the building value based on the capitalized lease stream, and net value of the rehabilitated building. Table 8. Summary of Rehabilitated Building Pro Forma Factors Item End User Rent/Price Average $26 / building Sq. Ft./year (NNN) Construction Cost $456 /building Sq. Ft. Building Value $231 /building Sq. Ft. Net Rehabilitated Building Value ($134) /building Sq. Ft. Table 9 illustrates the uses by building and expected lease revenues. The uses and building square feet devoted to each use were developed based on site tours by ROMA, EPS, and the Port and extensive discussions regarding the most appropriate use for each building. These represent the leasable square footage. In several cases, large single-story buildings are assumed to be subdivided with mezzanine areas. Economic & Planning Systems, Inc. 19 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc

24 Pier 70 Feasibility Analysis Final Report 02/01/10 Timing of Development The absorption rate of new development and occupancy of existing building space is a primary driver of the feasibility of the Plan. Based on the results of EPS s market study completed for the Port for Pier 70, full Plan buildout assumes an 18-year absorption. This absorption period translates into an average of 170,000 square feet of new building space occupied annually. Table 10 illustrates the absorption of specific historic buildings and new development on an annual and cumulative basis. Interim Leasing Revenues At the present, Pier 70 has a number of existing tenants paying about $2.9 million a year in rent. The financial model assumes that these leases phase out over the first ten years of the development program and that the master developer receives the interim leasing revenue. The exact timing of termination of existing leases will be determined as the project is implemented. It is likely that some users can be relocated into rehabilitated historic buildings and retain operations at Pier 70. Public Financing Sources The financial requirements to adaptively reuse Pier 70 will require a full range of public and private financing sources and mechanisms integrated in a comprehensive financing strategy. A substantial portion of the funds needed for development of infrastructure and public facilities and to rehabilitate historic structures will come from real estate revenues generated by rehabilitated buildings and from new development. Financial analyses to date demonstrate that the economic value of new uses at Pier 70 cannot fund the extraordinary costs of historic rehabilitation, environmental remediation, parks, and new infrastructure. Public financing mechanisms are required to close the feasibility gap. This section discusses potential public financing tools in this implementation effort: Infrastructure Financing District, Mello-Roos Community Facilities District, and Pier 70 Proposition D funding. Infrastructure Financing District As discussed earlier, an IFD allows for growth in future property taxes to be captured and reinvested in the project. This revenue stream can be accessed by public bonds on a tax-exempt debt basis and can be used on an annualized, pay-as-you go basis as well. Property taxes grow significantly after rehabilitation and development is well underway, making this tool valuable. Only when public finance markets know that an adequate property tax revenue stream is in place, or soon will be, to pay back the bonds can bonds be issued. Property tax-based finance is a common tool used for redevelopment and new development projects in California. IFD revenues are estimated by projecting the assessed value of new development and rehabilitated buildings, less any existing property assessed value. (Table 11 illustrates the calculation.) These values are based on the capitalized net operating income of the buildings. The difference between the two is the incremental assessed value. One percent of the incremental value is the incremental tax value and a portion of that amount may be captured for the project. Under the State legislation which enables the Port to create IFDs, the local portion of the tax increment may be captured by the Port for investments in the property including Economic & Planning Systems, Inc. 20 P:\17000s\17007Pier70\Report\Feas\17007FeasRpt_FINAL.doc