F13 Office of the President TO MEMBERS OF THE FINANCE AND CAPITAL STRATEGIES : For Meeting of DISCUSSION ITEM ORCHARD PARK FAMILY HOUSING AND GRADUATE STUDENT HOUSING REDEVELOPMENT PROJECT AND WEST VILLAGE TRANSFER STUDENT HOUSING PROJECT, DAVIS CAMPUS EXECUTIVE SUMMARY The UC Davis on-campus student population continues to grow while the local off-campus housing market has had extremely low vacancies along with consistent rent increases in recent years. Over the past decade, the campus has increased on-campus apartment housing through the first phase development of West Village (2011-12) and the development of the Eighth and Wake apartments in 2014. Despite these projects, there remains strong demand for on-campus apartments. To help address the demand for graduate, family, and transfer student housing, the campus is utilizing the systemwide public-private partnership model in support of the President s Student Housing Initiative. The campus engaged in a comprehensive process to select a developer that will provide the requisite facilities for these student groups. The selection process concluded in October 2017 with the selection of University Student Living. The Orchard Park Family and Graduate Student Housing Redevelopment Project, as proposed, would provide 200 two-bedroom below-market student family apartments with a total of 400 beds and up to 1,200 graduate student beds. The West Village Transfer Student Housing Project, as proposed, would provide up to 3,800 beds, 1,200 of which would be masterleased by the campus for transfer student housing. The projects are expected to be financed with funds from a tax-exempt bond issuance. The campus anticipates returning to the Regents for business terms approval and design approval, following action pursuant to the California Environmental Quality Act, in July 2018.
FINANCE AND CAPITAL STRATEGIES -2- F13 BACKGROUND The current and projected increasing demand for on-campus student apartment housing has several driving factors including challenging off-campus market conditions, a potential student population increase of 5,175 students by 2030, and the recent closure of the functionally obsolete Orchard Park apartments. The campus is proposing to redevelop the former Orchard Park site and also expand the current apartment housing inventory at West Village to address a large portion of this current and projected demand. The campus Draft Long Range Development Plan (LRDP), expected to be released in March 2018, is anticipated to provide housing capacity to accommodate up to 8,500 additional students on campus in both apartments and residence halls. This increase would nearly double the number of students living on campus from 9,818 in 2016-17 to 18,318 in 2030. The Orchard Park and West Village projects as currently planned would accommodate up to 5,200 students. These two projects are being evaluated at the project level within the Draft LRDP Environmental Impact Report (EIR). Regental review of the LRDP EIR for adoption of the LRDP and design approval of these two specific projects is anticipated to occur in July 2018. Table 1: 2016-17 UC Davis Enrollment and Students Living on Campus Enrollment Students Housed (#) Total 33,825 * 9,818 ** * Based on average enrollment over three quarters. ** Does not include off-campus master-lease apartments. Project Drivers - Orchard Park Need for Building Replacement The Orchard Park apartment complex was constructed in 1964, and was recently demolished as it was functionally obsolete with failing systems. As illustrated in Attachment 1, the site is well located for campus and city access, and increased densification will result in a much more efficient use of the site. Project Drivers - West Village Need for Transfer Student Housing All new transfer students to UC Davis are guaranteed apartment housing in one of six apartment complexes located both on and off campus. Of the approximately 1,000 transfer students who choose to lease through Student Housing and Dining Services, 550 reside in off-campus apartments through master lease agreements between a private landlord and the University.
FINANCE AND CAPITAL STRATEGIES -3- F13 These master lease arrangements allow for the campus to guarantee housing for all first-year transfer students in a highly compressed rental market. This guarantee is critical as transfer students are notified in the early spring of their acceptance to UC Davis for the fall quarter. Due to market conditions and very limited vacancy, the majority of rental units will have already been leased by the spring for the academic year starting the following fall quarter, thus leaving transfer students with very limited housing options. This housing guarantee eliminates such housing challenges for these incoming students. As part of the West Village project, the campus will master-lease back 1,200 of the up to 3,800 beds in the new project. This will enable Student Housing and Dining Services to expand the transfer housing guarantee for the entire duration of the transfer students undergraduate program at UC Davis and will also allow the campus to eliminate the University s master leases within the City of Davis. Off-Campus Market and Constraints The rental housing market in the City of Davis creates significant challenges for the UC Davis student population. For the past six years, the rental market has had a vacancy rate below two percent. For the period 2014-17, the vacancy rate has been consistently equal to or below 0.3 percent. Figure 1 below provides the ten-year City of Davis vacancy rate. Figure 1: 10-Year City of Davis Apartment Vacancy Rate Source: BAE Urban Economics 2017 Apartment Vacancy and Rental Rate Survey (http://housing.ucdavis.edu/vacancy-report/) This landlord-favorable vacancy rate has resulted in average annual rental rate increases of
FINANCE AND CAPITAL STRATEGIES -4- F13 five percent or more every year since 2013 1 and requires students to begin signing leases for the following school year as early as November of the preceding school year. PROJECT DESCRIPTION The two proposed apartment projects would total approximately 2 million gross square feet (gsf) and would include up to 5,200 beds within approximately 1,900 units, as summarized in Tables 2 and 3. Table 2: Project Square footage Combined Projects Orchard Park West Village Total Units 1,855 555 1,300 Total Student Beds Up to 5,200 up to 1,400 up to 3,800 Total Gross SF 1,972,000 642,000 1,323,000 The projects will contain a variety of unit types ranging from studios to five bedrooms. The majority of the units will be flats ; however, the family housing component of Orchard Park will also include approximately 165 two-story, approximately 800-gsf townhouse units. Table 3: Project Unit Counts (approximate) Orchard Park West Village Studio 54 126 1 bedroom 0 240 2 bedroom 251 542 3 bedroom 63 0 4 bedroom 167 418 5 bedroom 20 0 Total Units 555 1,326 Up to 30 percent of all non-family unit bedrooms will be sized to allow for double occupancies in order to create lower price point options for the students. The campus has reviewed a number of density and massing options based on construction type, cost per square foot, and number of beds delivered. To optimize the development opportunity at both sites, the campus s goal has been to pursue the maximum site density while taking into consideration the cost of construction, cost per bed, cost per square foot, social implications, daylighting, views, and the neighborhood scale. With these goals in mind, the campus rejected the high-rise options and has opted for lower-rise, three- and four-story construction for both projects, in addition to two-story student family townhouses at Orchard Park. Tables 4 and 5 1 BAE Urban Economics 2014-2016 Apartment Vacancy and Rental Rate Surveys (http://housing.ucdavis.edu/vacancy-report/)
FINANCE AND CAPITAL STRATEGIES -5- F13 outline the conceptual space programs for both projects. The campus anticipates that the unit types and counts and space programs of both projects will continue to be refined as the designs of the projects progress. Table 4: Conceptual Space Program for Orchard Park Program Estimated Gross Square Footage Residential Space 512,000 Student Study Space 8,600 Central Community and Lounge Space 4,000 Laundry 5,000 Circulation 77,000 Mechanical and Structural 15,000 Total Space Program for Orchard Park 648,000 Table 5: Conceptual Space Program for West Village Program Estimated Gross Square Footage Residential Space 1,021,000 Student Study Space 28,600 Central Community and Lounge Space 25,700 Laundry 12,500 Circulation 209,000 Mechanical and Structural 27,000 Total Space Program for West Village 1,324,000
FINANCE AND CAPITAL STRATEGIES -6- F13 Developer Selection Process The campus explored a number of different alternatives for delivering the two projects. In addition to the public-private partnership delivery model, the principal alternatives that were explored were to renovate Orchard Park; to demolish Orchard Park and have the campus develop the two new apartment projects. Additionally, the campus evaluated using a hybrid P3 development implementation strategy. These three alternatives are further described in Attachment 4. The campus concluded that the P3 delivery model would provide the best solution for both projects. It engaged in a rigorous evaluation process to select the developer to deliver new student housing at both sites. The process involved working closely with the Office of the President to utilize the systemwide P3 model in support of the Student Housing Initiative and to meet campus financial feasibility, quality, and affordability demands for student housing on campus. The campus completed a two-stage Request for Proposals (RFP) process to develop both Orchard Park and West Village. Candidates had the option of proposing on either project individually or for both projects combined. All proposers indicated a strong preference to propose on the combined projects. Following a rigorous evaluation process with active student participation, an all-day developer charrette with each finalist, developer interviews and presentations, the campus leadership recommended the selection of University Student Living LLC (USL) to President Napolitano on September 26, 2017. Ownership and Financing Structure The parties plan to finance the two projects with a tax-exempt bond structure similar to other UC projects emanating from the President s Student Housing Initiative. Tax-exempt bond financing under this structure requires that the owner of the project and the beneficiary of such financing be a not-for-profit entity. Through a ground lease, the not-for-profit entity will be responsible for constructing, owning, operating, and managing the project at its cost. The entity will contract with USL for the development of the project through a development agreement. It is anticipated that the campus will be responsible for managing the residential life program for both projects, and may also manage leasing for both projects. USL will be responsible for all other operation and management aspects of the projects. Tax-exempt bond financing offers an excellent opportunity to achieve affordable rents in the long term, because the University can control the rate at which rents increase over time. It is anticipated that the University would control all cash flows after payment of all expenses associated with the project, including operating expenses, replacement reserves, and debt service.
FINANCE AND CAPITAL STRATEGIES -7- F13 Student Rental Rates For purposes of rent comparisons, the most comparable properties in the Davis market are the three earlier phases of the UC Davis-sponsored West Village project Viridian, Solstice, and Ramble. These P3 projects were developed between 2010 and 2013 with Carmel Partners. These represent the best comparable projects because they are relatively new, are of high-quality design and construction, are close in proximity to the subjects, and are leased by the bed. As shown in the tables below, the currently estimated rents for Orchard Park and West Village will provide significant affordability while also providing a level of residential life and student support services that are not offered in private off-campus properties. Table 1. 2018/19 Rental Rate Comparison Orchard Park Orchard Park Bed Rate Per Month (1) Comparable Market Rate Bed Rate Per Month (2) Cost Savings Student Family Housing 2-Bedroom $510 $1,200+ $690 / 58% Graduates 2-Bedroom 3-Bedroom 4-Bedroom $1,030 $900 $890 $1,200+ $1,065+ $1,055+ $170 / 14% $165 / 15% $165 / 16% (1) Orchard Park rates based on current pro forma. (2) Market rates based on existing West Village project. Rates shown are the lowest rate tier. Table 2. 2018/19 Rental Rate Comparison West Village 2-Bedroom 4-Bedroom Double-Occupancy Bedrooms West Village Bed Rate Per Month $1,030 $890 $770 Comparable Market Rate Bed Rate Per Month (2) $1,200+ $1,055+ $795+ Cost Savings $170 / 14% $165 / 16% $25 / 3% (1) Master lease bed rates include preliminary affordability targets (subject to further analysis of campus Student Housing and Dining Services budget. (2) Market rates based on existing West Village project. Rates shown are the lowest rate tier. Project Schedule and Projected Future Actions Key Milestones Business Terms Presented to Regents July 2018 Design and CEQA Presented to Regents July 2018 Bond Closing and Commencement of Construction Fall/Winter 2018
FINANCE AND CAPITAL STRATEGIES -8- F13 First Occupancy Target Fall 2020 CONCLUSION The campus Draft LRDP, to be released in March 2018, is anticipated to provide capacity to increase student housing on campus by 8,500 beds. The Orchard Park and West Village projects are using the P3 delivery model which is supported by the President s Student Housing Initiative, with a goal of making over 5,200 beds available through multiple project phases that could potentially begin as soon as fall 2020. These 5,200 beds represent a large portion of the 8,500- bed housing capacity anticipated to be identified within the Draft LRDP. KEY TO ACRONYMS CEQA GSF LRDP P3 RFP UC Davis USL California Environmental Quality Act Gross-Square-Foot Long Range Development Plan Public-Private Partnership Request for Proposal University of California, Davis University Student Living ATTACHMENTS: Attachment 1 Attachment 2 Attachment 3 Attachment 4 Project Locations Map Project Site Plan: Orchard Park Project Site Plan: West Village Alternatives Considered
PROJECT LOCATIONS MAP ATTACHMENT 1
PROJECT SITE PLANS: Orchard Park ATTACHMENT 2
PROJECT SITE PLANS: West Village ATTACHMENT 3
ATTACHMENT 4 ALTERNATIVES CONSIDERED Information regarding the alternatives considered for both the Orchard Park and West Village student housing projects is below: Alternative 1 (Orchard Park): Renovate Orchard Park The 200-unit Orchard Park apartment complex was a sprawling, low-density development built in 1964 to accommodate graduate and undergraduate students with families. In 2014, the campus ordered a Facility Condition Assessment (FCA) provided by an independent third-party consultant to evaluate the existing property conditions. The FCA ultimately determined that Orchard Park would need a minimum investment of $43 million to renovate the property and address deferred maintenance, system obsolescence, and ADA accessibility issues. In 2015, as part of a side-by-side analysis comparing renovation and redevelopment options, the campus determined that the costs of renovating the functionally obsolete apartment complex were greatly disproportionate to the benefits of the increased bed yield provided by redeveloping the site. Alternative 2 (Orchard Park and West Village): Demolish Orchard Park and Have Campus Develop the Two New Apartment Projects A campus-delivered project would entail the campus funding the entire development of both projects. The projects would be overseen by UC Davis Design and Construction Management (DCM), potentially as Design-Build or Design-Bid-Build with a General Contractor. Upon project completion, ongoing housing operations, leasing and programming would be overseen by Student Housing. This option was ultimately not selected due to a combination of high project delivery costs, low unit affordability and a significant campus equity investment in order to achieve the required metrics of the Debt Affordability Model. Additionally, the use of capital for this project would have limited other capital-intensive campus projects including classrooms, teaching laboratories, and other critical campus needs. Alternative 3: Demolish and Develop (Orchard Park) Using a Hybrid P3 Development Implementation Strategy A Hybrid P3 delivery involves a third-party developer-builder designing, constructing, and operating a student housing project on campus-owned land under a ground lease while extending the ground lease at the adjacent Russell Park apartments to aid in the delivery of additional affordable units.
ATTACHMENT 4 Under this concept, and in partnership with Russell Park s ownership and management team, the existing ground lease at Russell Park would be restructured to increase the lease term, and to expand the Russell Park boundary to include Orchard Park. The extension of the ground lease would guarantee long-term rental revenues to the Russell Park owners in exchange for the allocation of affordable units at Russell Park along with affordable units at the new Orchard Park. The Hybrid P3 could have potentially provided affordable rental rates, along with quickly providing existing affordable beds at Russell Park. However, this option was dismissed for the following reasons: 1) the expansion of the Russell Park ground lease to include development rights at Orchard Park could be considered a sole-source development right in conflict with UC procurement policy and 2) the Russell Park owner/development team was not selected to be part of the Student Housing Developer bench of the President s Student Housing Initiative as they did not meet the minimum recent development experience qualification for selection.