Loading...
Redevelopment Analysis(2).pdfJUL', ACKNOWLEDGEMENTS Mw= 11"Tm \ \ \ ^} f ^\ /� \ 3 \ \ ^\ / } \ Ulrban Design Mark Hinshaw, FAIA, FAI'CP ol,-!2:# un Brianna Hol'an, AICP A gj Flinanclal Analliysis IA. BLE OF CONTENTS Introduction Sectiori 1:, Current Conditions 1. Property Value 2. Site Conditions 3. Existing Regulations Section 11, Redevelopirnent, undeir Existing Code and C ntrac IRezone 1. Office Baseline Scenario 2. Financial Analysis Over Time Section 11111: Redevelopment undeir New Contract, Rezone 1. Alternative I a. Economic viability b. Flexibility c. Consistency 2. Alternative 2 a. Economic viability b. Flexibility c. Consistency 3. Alternative 3a and b a. Economic viability b. Flexibility c. Consistency 4. Financial Analysis Assumptions 5. Financial', Analysis and Sensitivity Analysis C. Final Assessment and Considerations 7. Residual Land' Value Analysis 8. Phasing Options Section W: Fiscal Impact Analysis 1. Tax Revenue 2, Cost Implications to the City Section V: Conclusions 1. Conclusions 2. Next Steps 3. Other Considerations A . . . . . . . "e J "�jyn" Mp '01 y IT, o/ A "' q E M4 40, IM" k, 91, 0 V "i'm/A 6 r qP u ori 4, "o A J MOO , 11114 g Pff'4 W '4 Over tile lase several years, tile Port of Edmonds has been assessing its holdings at Harbor Square, a 14.6- acre commercial development bounded by Dayton Streer on the north, Edmonds Way/SR 104 oil tile east, wetlands to the south and the mainline railroad tracks to the west. Clearly, the property has a greater potential than what is currentlyseen oil the ground, with older, modest, lowsluing buildings that reflect an earlier era of cornmercial real estate development. Vacancies are high and the development does nor cornpece well in a market filled with other more contemporary buildings and site amenities. FLirtherinore, with shifts in the economy, there is less demand ("(.)r the type of space offered by harbor Square. Although some major uses occupying the site are doing reasonably well, the property is in need ofa substantial re-pLirposing so that the Port can enjoy a healthy streani of income to rnect its many objectives related to serving the corninunity and the region. Already, its loss of standing and income generation is beginning to present diffiCUILiCS Fier tile POH in Managing its portfolio of investments in a balanced and productive manner for the Future. The current recessionary period provides an opportunity to re-evaluate this valuallic asset. A few years ago, the Port participated in a planning effort for the entire area between Sunset Ave S. and the tracks — an area that involves multiple ownerships, as well as a planned Sound Transit commuter rail station. While efforts to produce a coordinated plan for the area were valuable and uncovered many interesting subjects, ultimately the joint effort did not proceed and individual owners are new PLIrSLlil'lg projects indepelldently, White from one perspective, this represents an unfortunate rnissed opportunity, the Port can examine its own holdings, free of the objectives and preferences of othcr parties. The Port retained rwo firms to provide advice on the development of Harbor Square. LMN Architects, which was involved in previous master planning endeavors, examined the configuration ofsLreets, buildings, and public spaces, as well as a possible phasing plan. Berk & Associates (BERK) examined rnarket conditions, land value, financLal perforrnanCe, And tax I-CMILIC impacts. Both studies together provide a solid set of choices and directions For the Port Commission to consider. Current recessionary conditions would not warrant any action in the near FlItUre, other than to perhaps rc- configure lease terms and conditions as they expire. BUt the:. fundamental approach indicated by this study should be able to set in motion actions that will prepare the property for developri'lent proposals and disposition as the market begins to recover. waterfront promenade pat -king Tennis facilities of the Harbor Square Athletic Club I CURREN"'11,11'r CONDITIONS "["his section of tile report is intended to convey baseline information regarding the current site. This includes physical conditions, relationships, regulatory issues, along with niarket conditions and assumptions, about development potential. It looks at how the current development is positioned and how it is performing. This allows a comparison with alternatives that are described in tile Subsequent sections. Basic site condition and regulatory data relied upon in this analysis was taken fron-i existing reports and sources. 1. Site Conditions 2. Property Value 3, Existing Regulations 1. SITE CONDITIONS I larbor Square is lo,catcd between Highway 1014 (Edmonds Way) to the east and Admiral Way to the west with Dayton, Street to the north. It is a walkable distance to many arnenities, includingDowntown Edmonds, the Ferry'rerminal, the waterfront promenade and recently renovated train station. A trail and platforms overlooking the Edmonds Marsh is located along the southern edge of the. property- The Burlington railroad right-of-way, carrying a mix ofcommercial cargo and conn'nuter trains everyday, parallels the west edge of the property. Harbor S(ILlare houses 11 bUildings with uses including: office, warchousing, restattram, hotel, an(] an athletic club with a variety off acilities. Most of the buildings were constructed in the 1980's, except the hotel which was built in the kR:e 1990's. Surface parking takes up a large portion of. the site to serve the daytime uses. Current OCCUpancy rates vary among, the office and distribution buildings; txiany of which are under perforining even Under today's lower market standards. CurrentOperations and Valuation Exhibit 1.1 Space Characteristics 'Current Operations" Building Floorspace (SF) Leased Space 71,345 Space Available 31,105 Total Space 102,450 Percent Vacant 30% Cost Summary Estimated Total Annual Operating Expenses $435,495 Operating Expenses as % of Total Revenue 40% Income Summary Rent Rates Average for all Tenants $15.40 Gross Monthly Income (as of May 1, 2009) $91,551 Estimated Annual Income $1,098,617 Net Operating Income (NOI) $663,121 Valuation Cap Rate Capitalized Value 7.0% $9.5 m 7.5% $83 m Source: BERK, 2009 2. VALUE OF THE HARBOR SQUARE PROPERTY TODAY Usi rig informationobtained from die Port and Not, cliwest(-',ountryMatiat6�etiietit, BI.`RK reviewed the currem operations for Buildings I through 5 of the Harbor Square property. 'Hie hotel and the athletic club were excluded From redevelol:)me nt scenarios beingdeveloped by I.N4N,and it is assumed that these. properties will Continue to operate as currently configured. As shown in Exhibit 1. 1, Buildings 1-5 in Harbor Square include 102,450 square feet of available space, 30% of which is currently vacant. Operating expenses were averaged over a 4 -year period and found to be 40% of total tCVCnUC, producing at], estimated total annual operating expense of $435,495. Rents: average $15.40 per SF producing an annual income ofjust over $1 million. Factoring in expenses produces a net operating incorrie (NOI) oF663,1 2 1. 'Flie Property was valued using the NOI and three separate cap rates, 71ya, 7.5%, and 80/b resulting in capitalized values ranging from $8.3 million to $9.5 million. "Ve , va JM lov --- ------- --- — — mw// z, "i/j; athletic club facilities VM P" 5, gg pe Z W, TOTAL ,6 2.16 '00 NMW NVMV5 1ii0 3. EXI11 11111 STING REGULMIONS site plan sho�wing existing conditions The existing I larbor ,Square development was created by a contract rezone in l9 0. The rezotie established standards for use,, loc coverage serbacks, building height, and open space. Additional regulations governing the site are found in the current Edmonds development code, and standards relevant to this analysis call be found in Elxhibit 1.2 Wow. Existing Standards, Exhibit 1.2 Category Standard Maximurn Height 35 ft Lot Coverage 32%(+/-) Ground!, floor Building, Area 190,000 sf Maximum Square Footage 218,000 sf Allowed Uses Manufacturing, Warehouses, Laboratories and Research, Retail and BLISiness uses, Municipal and Public utilities, Business/professional Office Setbacks 25 ft building setback from Dayton and Sunset 10 ft parking setback from; Dayton and Sunset 25 ft from Edmond's Marsh property line Parking Ratios Retail 1 space : 300 sq ft Restaurant 1 space : 200 sq ft Office I space: 800 sq ft Other requirements A walkway paralleling SR 104 (Sunset); from the interior looped street to, the south east corner and proceeding there along the edge of the marsh to intersect with the existing loath along the rnarsh in the central portion of the site. Critical Areas Map. source: City o,f Edmonds SMP Draft Update 6106 Environmental Regulations Draft soil maps frorn the City website indicate the property is in a high liquefaction hazard area but has nuspecific regulations on this condition, The most noteworthy potential environmental issue in regards to permitting with the City is the proximity to the Edmonds Marsh, a large wetland to the south. Th is wetland is tikely a Ca cegory I or I I and has significant buffic r requ i rei n en rs (100- 00 f,eet) I" r new development. However, s ince existi rig conditions of" the property are already disturbed with urban development, there is likely some flexibility with the required buffers. The Critical Areas Ordinance (CAO) does allow additions to existing structures within wetlands buffers under- Certain criteria, but the code is unclear on what regulations would apply with a redevelopment and new use ofa previously distarbcd site. In addition the property is located in proximity to ShellabargedWillow Crizeks Which, 51-1pporr anadromous fish population. This proxirnity ii'my require a special Critical Areas report to determine appropriate huffier distances and/or mitigation. To determine the likely buffer/mirigation. requirernents, thus issue should be discussed with the City in a preapplication consultation. Consult Edmonds Development Code section 23.40-070 fi)r details of process. j Mw z 6 Y, 17 0� "d ol� 0 og 4 P EOMrOs 116 iw 1 Point�, "27 41111"1 ry <II tTa > < Legend Ifl, Seabird Colony N., o Patchy Kelp DRAFT SMP Jurisdiction I I WDFVV Haulaul Localton Continuous Eelgrass Edmonds s City Limits a Impoviant Wildift Resource Patchy Ealgrass Major Road Smait Spawning Area Bald Eagtle Terf�tvy sueet Crab Sand Lance Spawning Area Geoduck Railroad /4,I)4vjjp, Chinook and Bull Trout Distnbutton' Qverft water Struclum Stream 0'�o Conti nuous Kelp Weiland County Boundary Critical Areas Map. source: City o,f Edmonds SMP Draft Update 6106 Environmental Regulations Draft soil maps frorn the City website indicate the property is in a high liquefaction hazard area but has nuspecific regulations on this condition, The most noteworthy potential environmental issue in regards to permitting with the City is the proximity to the Edmonds Marsh, a large wetland to the south. Th is wetland is tikely a Ca cegory I or I I and has significant buffic r requ i rei n en rs (100- 00 f,eet) I" r new development. However, s ince existi rig conditions of" the property are already disturbed with urban development, there is likely some flexibility with the required buffers. The Critical Areas Ordinance (CAO) does allow additions to existing structures within wetlands buffers under- Certain criteria, but the code is unclear on what regulations would apply with a redevelopment and new use ofa previously distarbcd site. In addition the property is located in proximity to ShellabargedWillow Crizeks Which, 51-1pporr anadromous fish population. This proxirnity ii'my require a special Critical Areas report to determine appropriate huffier distances and/or mitigation. To determine the likely buffer/mirigation. requirernents, thus issue should be discussed with the City in a preapplication consultation. Consult Edmonds Development Code section 23.40-070 fi)r details of process. 01% to, s E (1411 it I MU iTN This section explores redevelopment as permitted by the current City code and contract rezone requirements chat apply to site. This exercise seeks to address the following question: If the current buildings were removed, WoUld it some econornic sense to develop a new set of buildings that confi)rm to the requirements and limitations imposed on the site? It is important to note that while much of the debate concerning redevelopment in this area has focused on height limitation, there are, in fact, numerous regulations chat present severe restrictions on how the property could be used, some ofwhich have far greater implications than height. This, section will depict and discuss, what could theoretically be developed, along with tbe economic feasibility of these options. 1 story retail: 9000 sf parking: 24 stalls internal street improvements I surface parking: '150 stalls M 2 story office: 21200 sf retail: 41,800 sf office: 84500 sf 126ww ,300 sf .......... uli %l ®r M I athletic ClUb facilities street improvements along dayton 2 story retaiL 12800 sf office: 1970�O sf parking: 55 stalls 2 stoffy office i 20800 sf I. OFFICE RETAIL BASELINE SCENARIO The Office Retail Baseline Scenario, developed by LMN, increases the square footage oFoffice and retail available by about 25,000 SF and improves the circulation patterns on the property. Exhibit 2.2 shows preliminary financial analysis of rcdeveloprnent on Harbor Square following specificariaris in the Baseline Scenario. In the Baseline analysis, average rent rates were assurned to be slightly higher than rates Currently achieved at I larbor Square to reflect the effecr of new construction and improved site layout. Vacancies were set at 10%, an improvement over the Current Harbor Square vacancy rate of301M.). BERK',s rent and vacancy assumptions represent a best case scenario when rnarket conditions improve, With the additional square fooragc, higher rents, and improved occupancy rates, the estimated wflue ol"Ilarbor Square ranges from $ 18.0 M to $20A M, about double its estimated value today. I lowcver, when the cost ofconstruction is factored into the equation, the final value created is exceeded by COnStrLJCtiOn COSCS ($26.2 M) by $5.6 M to $8.2 M. Under this development scenario it is Unlikely that a developer would consider redevelopment of Harbor Square as an office -retail inixed use developrnenL, Baseline Redevelopment Analysis Exhibit 2.2 Space Characteristics Building Floorspace (SF) Office 84,50,0 Retail 41,800 Total Space 126,300 Construction Costs FINANCIAL ANALYSIS OVER TUME In addition to the snapshot perspective of Exhibit 2.2, BEIK developed a detailed pro farm to estimate the costs M'development, cash How, debt sand returris for the Mce Retail Baseline Scenario over ten ycars of operations. $/SF Total Estimated Land Acquisition Cost $20.00 $3,205,580 Land Development and Demolition $3.00 $718,740 Building Construction Costs Office $192.00 $16,224,000 Retail $118.80 $4,965,840 Total Construction Costs $25,114,160 Revenue Suninnary Rent Revenue $/SF Total' Office $20.00 $1,690,000 Retail $18.00 $752,400 Vacancy Office 10% -$16%000 Retail 10% -$75,240 Total Net Revenue $2,198,160 Operating Expenses Office $6.00 $507,000 Retail $6,00 $250,800 Total Operating Expenses $757,800 Net Operating Income (NOI) $1,,440,360 Valuation Cap Rate Capitalized Value 7.0% $20,6 M 7,6% $19.2 M 8.0% $18.0 M Total Costs $25.1 M Value Creation/Loss (Value rninus, Const. Costs) -$4.5 M to -$7.1 M Source: BERK, 2009 FINANCIAL ANALYSIS OVER TUME In addition to the snapshot perspective of Exhibit 2.2, BEIK developed a detailed pro farm to estimate the costs M'development, cash How, debt sand returris for the Mce Retail Baseline Scenario over ten ycars of operations. Given the Current development and financial climate, financing at 8% was assurned with a loan-ro-value ratio of 50%, requiring a substantial developer/investor contribution, For the purposes of this pro forma it was assumed that the property would be sold in year ten. Under this set of assumptions, the Baseline Scenario under current zolling standards produces the following Internal Rate,,,, of Return (MRs): • Retail 7.1 % • Office 5.011/o • Project Total 5.6% The IRR is an annual averagc rate cal. return that is the mosr cornmon mcasure of financial performance liar an income property such as Harbor Square. "lypically an IRR of over 15% is desirable brut With threshold -level assessments, some developers would study a project further with IRRs of t2%. It is unlikely that the Baseline Scenario would be feasible for development due to the low MRS, fn addition, the following risks involved with this scenario have not been factored into the analysis and reduce to the feasibiliry: The scenario basically replaces what exists today, presumably in an upgrade(] Form. Upgrades WOUld require higher renEs, than are currently collected and creates the risk that the current: tenants would not renew their leases and the new space would be subject to higher vacancy rates. Financing is a hiniring tactor in todays market. A significant equity contribUliOu was assumed in this prelitninary assessment. Eventually, a developer/investor might be able to increase their leverage, but the increase in debt will reduce cash flow, which depending on the interaction of other &CtOrS Could lower the IRR, ml%%.�.r 1iNi i."% 1 ri�J71 lid/1. �..., f%I � i li/i- ��..., �.. �.. i Yi,/.ifi: lilt/r„rrl, ireuii l 1. '/. i, ii i I,G%/f�Uf(fll(;'r',- � /,%/!%r!!rl!�/{(rl'!f . � /J. Inlffpllhl,fr.�./Ir%frill, AY/ , r"(f11W�4b'M U,lh i�.0 OI//llllll/1//� .r 11 p ” 1,� r! / r �r'U.. r ar r r r r i , r7.ir,�l f � ( ,!�/,(/ f G/d,il N 9Y„ f �1 i, ,;Ir ��� r!:,,, ,1l�1 � :� �%f / �1f,,(!(h �(1,A 1 JY I J(s{{ ,,,y d� 1rr it J y�H rr r i J: c;;lr � �m.. �� n n.r,� 1 ( u i �.p � .r !Y a.+ � � �I � �. i fl�N � IIS d�J�k.Nlla „�r�. �jr�,r /,ddp fill .,,fl l / i I r a I �, ) r !, /„ / �,�, , f I 1 � l ! I m � ��l.l,�,�a�r1,� ��,„r ��, ,,„����,�,'�x,'r�l�r,,,,,�, '', �`l�n„�,�N��„�,�a�,�,;���f,��>>>��,�>;�,, �'�rr,,,� �)�i��P11��111%��ffljll�ll��ll����i�,,,��,,,��,�t�,,l�, ,ti�,,,>�„�„, � �,�,,,�,1�,�� „�,��,1��,��„ [" 10 N I I REDEVELOPMENT UNDER NEW CONI"'RACT REZONE Based on the economic and market assessment, this section examines three redevelopment alternatives for 1-farbor Square, each of which require different rezone considerations. The first would request to modify current zoning and land use regulations to aHow residential use, greater lot coverage, and lower parking ratio (but not height). The second alternative includes chose changes plus air increase in, building height. Financial analysis is provided for each and site plan arid the overall arrangement of buildirigs, street, amenities, and possible phasing are shown in site plan and massing drawings, This analysis brackets possible strategies For phasing of regulatory changes and development over time, A potential "land swap" internal to the development is also examined to allow for a different arrangement of uses in recognition of the adjacency to a busy rail line with noise, arid vibration impacts. This phase of financial analysis Focuscs on all three rcdcveloprxient scenarios. The three scenarios being considered. include: W Alternative I: PAR 1. 35' Mixed-usc Residential OpriOrl -- a COnd0roiniURI/Mad configuration that stays within the existing 35' height limits on the property, Alternative If: 13-5 Story Mixed-use Residential Option —a condoniiniundreLad configuration 3 that exceeds the ' 5' height lirnit, with a rnix of three to five story buildings, Alternative III: /0 3.a Land Swap Option — a condom in iUru /recai I /town h ome configuration diaE 4 exceeds che 35" height limit with a nux of three to fivestory buildings. The defining characteristic of this scenario is a land swap whereby the existing Harbor Square tennis courts are Moved adjacent to the railroad and a cluster oFtownhomes; .are built adjacent tsn the marsh at the south end of the property. A` 3.b A second variation is also shown on the Land Swap Option that substitutes additional stacked condominiurns for tl the townhornes,The financial performance of this scenario was not explicitly modeled in this analysis:. 3 5pMI,XED--USE street improve- rnents 3 story retail: 9000 sl residential: 6,,iN sl - 82 uni�s"(73 stacked & 9 grounq,level),o6 2-3 levels 14 3 -story townhouse units(33,600 so parking: 213 stalls on one Ilevel story �tall: 7800 sf 5sidential: 62,210 sf 54 stacked units 112 ground level units mmw 3 story retail: 7000 sf residential: 39,000 sf 33 stacked units 6 ground level[ units parking: 57 stalls on I level club athletic club facilities E R. king NE 01 central open space 1. 35 -FT MIXED-USE RESIDENTIAL OPTION Eco Pros MW • Under the right market conditions, thus scenario can be - The 35' option's potential return is slimmer financially feasible. and not buffered from market uncertainties • As a smaller project, this option could be seen as a and other risks. safer investment - The property with a 35' height limit is less valuable to a developer than a property with a higher height limit. lid. Flexibility to adapt to future market conditions, to new infrastructure (e,g, potential ferry terminal overpass), and to address site conditions unknown at this'tune (e.g., water table, hazardous clean up). Pros Cons - The site's proximity to multimodal transportation - Precludes opportunity to provide more facilities makes a rnixed-use transt-oriented housing units should the market support a development more appropriate in the future than the higher density on the site in the future. current one- and -two story auto -oriented cornmerciall - Building 6 depends on the ability to provide uses. subterranean parking w/o complete assurance, of its feasibility. Consistency with City Goals ands Policies for the Area (Comprehensive Plan, Downtown Master, etc,) Consistent with Downtown Waterfront Plan Policies (mixed-use development, pedestrian oriented Dayton Street, support more active retail, design -driven master planned development. Pedestrian -scale development should be implemented through zoning regulations and design, guidelines. Encourage a variety of housing to serve, a diverse communityTranst-oriented development (TOO) Cons • Downtown Master Plan Waterfront District suggests taller buildings outside current view corridors at the bottom of the "bowl" could be appropriate. This option does not take advantage of this possibility. • Permitted Use (multi -family residential) • Maximum Square Footage (218,000 sf currently allowed) • Lot Coverage (32% currently allowed) • Setbacks. 25 ft building setback frorn Dayton and sunset; 10 ft parking setback from Dayton and Sunset. Parking Ratios Retail - existing code: 1/300 sf; proposed: 1/1000 sf + on -street parking Restaurant -existing code: 1/200 sf; proposed: 1/1000 sf + on -street parking Of )"Y MIXED - USE 4 stories ,retail:, 9000 sf rlesW�ntia .46,974 sf /(47 s�vcked units) parking: 213 stalls JWone level structure .6 stories r est jeidi.'42,898 sf 2 (4 s hacked units)F7 6 stories residential: 55,767 ... . .... . sf (55 stacked unit 9 ground level units eww'," m athletic club Im hotel �11 stories �tail: 7000 sf q.W open space 23,750 sf retail: 7800 sf residential: 79,845 sf street - 79 stacked units improvements - 12 ground level : units along da tan parking: 110 stalls on 2 levels Dayton SWeet m athletic club Im hotel �11 stories �tail: 7000 sf q.W open space 23,750 sf 2. 3-5 STORY MIXED USE OPTION A, Economic Viability GO-$ * Potential returns increase with denser development - Risk of putting more units on the market at a options, faster pace than market can absorb. * Taller 3-5 story buildings would provide more views - Risk reducing "uniqueness" of development if and p,ote ntia I ly higher sales prices, too Much of the same type of product is offered. 6",.Flexibility to adapt to future rnarket conditions, to new, infrastructure (e.g., potential ferry terminal overpass), and to address site conditions unknown, at this tinge (e.g,, water table, hazardous clean upO. Rrn'5. C-QD-5 * Commuter rail station can support higher density and -Building height is a very sensitive issue in the range of households. Mix of housing types and retail community couldappeal to a younger commuter demographic. * Increased height makes it more attractive to potential developers, * Does not require 5' below grade for parking podium. :. Consistency with City Goals and Policies for the Area (Comprehensive Plan, Downtown Master Plan, etc.) ros on • Downtown Master Plan Waterfront District suggests, - Policy E.14: "Height limits that reinforce and taller buildings, outside current view corridors at the require pedestrian -scale development ..." , this bottorn of the "bowl" could be appropriate. can be a subjective judgment in the contract re- • Consistent with Downtown Waterfront Plan Policies zone process. (mixed-use development, pedestrian oriented Dayton - Meeting 16.60.00�5.E., "sensitive to surrounding Street, support more active retail, design -driven neighborhoods" could present a challenge, master planned development, again given the subjective nature of this • Pedestrian -scale development should be criterion. implemented through zoning regulations and design guidelines. • Encourage a variety of housing to serve a diverse cornmunity. • Transit -oriented development (TOO): Encourage transit service and access • Provides public benefit in the form of improved public realm i (streetscapes, central plaza) equired Changes to the Zoning Code • Increase Maximum Height from 65' to approximately 55-60' • Permitted Use (rnulti-family residential) • Maximum Square Footage (21.8,000 sf currently allowed) • Lot Coverage (32% currently allowed) • Setbacks: 2,5 ft building setback frorn Dayton and Sunset; 10 ft parking setback from Dayton and Sunset, • Parking Ratios • Retail - existing code: 1/300 sf; proposed: 1/1000 sf + on -street parking • Restaurant -existing code: 1/200 sf; proposed: 1/1000 sf + on -street parking • Residential - existing code: 1.2 - 2.0 spaces/unit (studio to 3 br); proposed: 1/unit LAND SWAP OPTIONS athletic c,liub tires facilities '7 indoor courts outdoor courts + facilities internal street improvements 0 Sty 1 story retail 3,6010 sf parking: 30 stalls -04 J athletic clu�b" facilities 3,600 sf parking: 24 stalls i 5 story residential: 60,000 sf 60 stacked flat units parking: 20,000 sf 62 stalls on 1 level 4 story retail: 7,800 sf residentiaL 791,845 sf 79 stacked flats units 12 ground level parking: 32,500 sf 110 stalls on 2 levels Dayton Street 3 21 street improvements along dayton 4 story rated!: 7 un 14A stalls sf residential' 69,255 sf 69 stacked flat units 6 gro d floor units parking townhouse cluster residential 1,150 per unit 43 3 -story townhomes parking: 1 per unit alternative conf Iguration with stacked flats, instead of townhouses 5 story residentiaL 60,000 sf 60 stacked flat units ..... ..... parking: 22,750 sf 70 stalls on I level 5 story 7 residential: 136,0001sf 136 stacked fiat units parking- 46,150 sf Ni” i1 142 stalls on 1 level \11 PUcoca 0 E athletic V club > ° 36,000 sf V lis on 2 levels residential 50,000sf retail:. 5500 sf plaza: 7000sf townhouse cluster residential 1,150 per unit 43 3 -story townhomes parking: 1 per unit alternative conf Iguration with stacked flats, instead of townhouses 5 story residentiaL 60,000 sf 60 stacked flat units ..... ..... parking: 22,750 sf 70 stalls on I level 5 story 7 residential: 136,0001sf 136 stacked fiat units parking- 46,150 sf Ni” i1 142 stalls on 1 level \11 PUcoca 0 E athletic V club > W story 6 residential 50,000sf 50 stacked flat units parking 17,800 sf 55 stalls on 1 level �-4 townhouse cluster residential: 1„150 per unit 34 3 -story townhornes parking: 1 per unit townhouse cluster residential 1,150 per unit 43 3 -story townhomes parking: 1 per unit alternative conf Iguration with stacked flats, instead of townhouses 5 story residentiaL 60,000 sf 60 stacked flat units ..... ..... parking: 22,750 sf 70 stalls on I level 5 story 7 residential: 136,0001sf 136 stacked fiat units parking- 46,150 sf Ni” i1 142 stalls on 1 level 3.,A,, LAND SWAP OPTION -'TOWNHOUSE EMP14ASIS I. �ffl.Ill/(!/,. G. yl!?IIIIdJJ��d/1 (. ��r�i✓%.(I,','/1 ,l///%1/f H� /a/dU/Jrlf 9, //, ,,//p1%//!!II , r0/f!! /„GT. �/ l I I L up nON - TOWNHOUSE EMPHASIS P-mas Q • Highest potential number of units. Potential returns . Risk of putting more units On the market at a increase with denser development options. faster pace than market can absorb • Taller 4-5 story buildings would provide more views . Three-level townhouses may not appeal to and potentially higher sales prices. retiree market • Majority of units oriented to the Marsh - a unique . Contingent on agreement with athletic club I natural setting and amenity. owner. • More fully integrates Athletic Club and Tennis Courts into a new rnixed-use community. • Potential for a restaurant in central plaza as a higher rent retail option. • Moves residential components away from the railroad to mitigate noise concerns. 8„ Flexibility to adapt to future market conditions, to new Infrastructure (e.g., potentialferry terminal overpass), and to address site conditions unknown at this dirrie (e.g,,'water table, hazardous clean up). PrQ-* Cot,$ • Commuter rail station can support higher density and - Development feasibility of area adjacent to the range of households. Mix of housing types and retail Marsh has not been studied, couild appeal to, a younger commuter demographic. • Taller building heights and greater development capacity gives flexibility to provide more housing units, • Does not require 5' below grade for parking podium. IC, Consistency with City Goals arid Policies for the Area (Comprehensive Plan, Downtown Masto, Plan, etc.) "Erg'5. Qoxq - Same as 2.C., above - Same as 2,C,, above Required Changestoi the Zoning Code • Increase Maximum Height from 35' to approximately 55-60' • Permitted Use (multi -family residential), • Maxirnurn Square Footage (218,,000 sf currently allowed), • Lot Coverage (32% currently allowed) • Setbacks: 25 ft building setback from Dayton and Sunset; 10 ft parking setback from Dayton arid Sunset. • Parking Ratios • Retail - existing code-. 1/300 sf; proposed: 1/1000 sf + on -street parking • Restaurant -existing code: 1/200 sf; proposed: 1/1000 sf + on -street parking • Residential - existing code; 1.2 - 2.0 spaces/unit (studio to 3 br); proposed: 1/unit fee 2� (n :3 o CL ti sa c cs 'a as 0 t5 W OL V 0D s7 CJ 04m Oli CA (Dvs u r o It LO 0 (D 0 > 0 (n 4-- CL 0 E o 7EL C,4 W m LO Lo 00 0 M ol - ' co (N m Mi M 4 co IZ- m W 70 0 vi 0 (u U- n, vw E >1 -0 U):g En � 0 0 4( 0 0 3 EX) 0 �i E <D Muco m C,5 0 V) Lo "? n m m m C) k2) o Lo M W IN6 m m m N (q E 0 C_ > 2 -i6 E 0 cn It 0 0 E o > Cyq9 d 001 0 0 > E '0 Lo Ld T -i 4q 4) 0 c 6 06 LO IS) CNI 0 - lS) o Lo (N I-- m ol N 0) Ell 0 0 a) CL c - C)) 70 00 LO w 4) 0 0 IX a) "0 0 U) 0 c 0 Cx W 0 142 0 0 V) M CL (A C. UD 0 z 0 w M M z 4. FINANCIAL,, ANALYSIS ASSUMPTIONS BERK conducted financial analysis to estimate internal rates of return, net present value, and project costs associated with the three redevelopment alternatives developed by LMN, The timing of development is a fundamental iSSLIC in this analysis. h: made little sense to model a redevelopment assuming today's weak marker conditions and financial rnatkets that reflect as recovered market, at least 3-4 years front now, if not longer, were used, Several variables, including construction Cost, Unit sales price, sales pace (the number of sales per nionth), and project financing are critical inputs into the project feasibility analysis. It is particularly difficult to estimate these variables in a market several years in the future given the recent econornic downturn and volatility in the real estate market. That said, listed below are some assurriptions that can be reasonably made using market data from today and recent years. Construction Costs We used Quarterly Construction Cost Reports firorn Rider Levett Bucknall (RI -13) for construction cost estimates and also spoke to Sinion Squire, litincipal in the RLL Seattle office, to get his insights. fel: B compiles per square foot construction cost data each quarter by metro area (Seattle) and by project type (Multifamily Residential, Class .A Of Space etc.). A few things to note about the Q2 O�9 data and our final construction cost assumptions: • Cornpared to Q2 08, residential construction costs for single family and multifamily honles are down I I %. • According to RLB, costs may be down by as much as 20-25% over the prior year on projects with multiple bids. • No one knows exactly how construction costs will shift in the coming years, but the general expectation in the market is that costs will continue to decline over the next year and may stabilize for a period of several years. • For cost assumptions in this analysis, we decided to take current cost estimates arid discount them by 1011% to reflect the expected construction slow (]own and possible stabilization for a few years. Condominium and Retail Mixed -Use * Muldfamily residential cost estimates include an average cost for retail space and covered parking * Current estimates ("or a typical "five -over -one" MiXCd-ease InUltilan-lily Project are $165 per SF made up of the following components. Retail at $1 10 per SF Residential units at $ 197 per SF Covered parking at $60 per SF Townhomes ­Fhe scenarios examined in this second phase of' the project include townhOITIC units in addition to condominiums. RLB estimates For single-family residential construction were used as a basis fior estimating townhorne construction costs. Differences between the estimates for this property type are primarily driven by site preparation costs, roofing rnawriak and external ckidding materials. Interior finishes have little impact on overall costs per square foot. The lack ofelevators is one factor differentiating townhome construction costs From multiEarnily costs. Exhibit 3.1 suitunarizes the basic construction cost assumptions used in the pro f6rma analysis of'Harbor Square development scenarios. Summary of Construction Cost Assumptions Exhibit 3.1 Cost Base ($ per SF) eductimi Factor Final Cost dire to Building Type @A-s) Point Edward's Condoi On�l Year Stacked Condo $197.00 10% $17730 Townhorne $182.50 10% $1.64.25 Retail $110.00 10% $99.00 1 -Level Parking $60.00 10% $54.00 2 -Level Parking $65,00 10% $58.50 Source: Rider Levett Bucknall 2Q 2009 Quarterly Construction Cost Report and BERK, 2009 Unit Sales Price Using sales data from the Snohomish County Assessor's Office BERK reviewed condom iniLlIn sales prices frorn 2006 through 2009. Exhibit 3.2 shows average costs per square boort for all condominium sales in Echnorlds as well as the number Of units Sold each year. Sales in the Point Edwards condorniniUm project are highlighted separately because this project represents a, higher -end product with view, and onsite amenities and because the Port (d [Wi-nonds has indicated that it is interested in a higher -end product if Harbor Square is redeveloped, • Sales data indicate that after strong price increases in 2007 and 20,08, the condo market has crashed and prices have dropped significantly in the past year. • The weighted average sales price between 2006 and 2009 is $296 per SF for all Edmonds condos and $466 per SF for Point Edwards condos. These values served as reference points when deciding on the baseline sales prices to assume For the I larbor S(JUare scenarios, • The number of units sold data show that the Edmonds market can Support abOLIt 250 condo sales per year in a healthy rnarket and much less in today's market (2009 sales are on pace for fewer than 100 condo sales). Edmonds Condominium Sales Characteristics, -2009 Exhibit 3.2 AAL QQMW�n i &nPUEA @A-s) Point Edward's Condoi On�l Year Number Mg, Sale Price % Change Number Avg, Sale % Change In Sold ($ Sp,) in Sale Price Sold Price ($/SF) Sale Price (2009$) (2009$') 2006 263 $267 31 $380 2007 25,5 $309 15.9% 39 $464 22L% 2008 160 $327 5 7% 32 $573 23,6% YTD 2009 35 $278 -14,8% 9 $395 -31,2% Weighted Avg. $296 $466 Sale Price (06-09) Source: BERK, 2009 Note: Average unit sale price rounded to nearest $1000 Based oil the historical sales clata a baseline sales price assurription of $499 per SF for condominiums was used in the analysis. Tbwnhorncs, which are often larger than condominiums, typically sell for a lower price per SE For this analysis, a baseline assumption of $275 per SF was used, which is about two-thirds the condo price per SF. Exhibit 3.3 shows the average unit size in each scenario -and the average total sales price per unit. Average Unit Size and Sales Price Assumptions Exhibit 3.3 Scenario Unit Type "Avg Unit "Sale Price "'Avg Unit Size (,,SF)" ($ per SF)"' Sale Price" '351 Mlixed-Use Condominiums 982 $400 $393,000 Townhomes 2,400 $275 $660,000 3-5 $tory Condominiums 991 $400 $397,000 Mixed -Use Townhomes 2,400 $275 $660,000 Land!, Swap Condominiums 939 $400 $376,000 Townhomes Townhornes, 1,150 $2,75 $316,000 Source: BERK 2009 Financing just as it is difficult to predict whar, the Future will hoc ld for construction costs or sales prices, financing is subject to multiple factors. Even in stable economic times, loan tares and terms will vary based on the borrower, the lender, and the project specifics, This analysis assurned a typical financing structure For residential for-salc projects -- a two year iriterest-only, variable rate construction loan (often subject to a one year extension) rhat is paid off using, the sales proceeds. For the retail portion of the project an initial constrLIC6011 loan that converts to permanent, fixed rate amortized financing was assurned, Specific financing, assumptions include the following: Interest Rate 6% Loan to Vaiue 80% Fees 1% of loan arnount Loan Term (permanent financing) 10 years '['here is no guarantee that a developer would get the rate and terms assumed for this awdysis. However, they represent a favorable, post recession financing assumption, g' "//?1114 �7p "flm"'111R(111 ".0: vl� a a internal Rate of Return of Vertical Development by Use Exhibit 3.4 Internal Rate of Return Use Type 35" Mixed -Use 3-5 Story Mixed -Use Land 'Swap Townhomes Retail 15.9% 15,9% 15.9% Stacked Condominiums 39.2% 29.0% 32.6% Townhornes 38.1% 38.1% 18.7% �iource: BLKK, TUU`) 5. FINANCIAL ANALYSIS FINDINGS AND SENSITIVITY ANALYSIS Relative Returns — Individual Uses E,xhibitM shows the internal rate, ofreturn (IRI) ofeach individual use (retail, condoininiUrns, and cownhorrics) in cacti scenario under baseline assurliptions. For colliparison purposes, these return rnetrics are based only on the basic developinerit costs and revenues of the vertical development (i.e. the buildings excluding land acquisition and site preparation costs, which are shared by all components of the project). These metrics are meant to show the relative returns contributed by each use type to the development. • 'rhe retail COrIfigUrations in each scenario are essentially the sarne and have very sirrular I IU- • The condominium and townhorne components bring in the highest rates of return, • The cirrie value of money concept is denionstrated well by the rownhorne IRR values, In the 35' and 3-5 Story scenarios there are only 14 townhonies chat sell in the first year after construction. In the Land Swap sceriario 98 townhornes are sold over the course of three years. Spreading the sales over time drives the IRR down (from Y38.1% to 187%). Estimated Returns and Sensitivity Analysis— Entire Development in order to understand the relative risk inherent in cacti of the developinent options a threshold -level sensitivity analysis was conducted by varying two assumptions driving the performance of each scenario: the average sales price ($ per SF) and the average pace of sales (units sold per nionth) for residential units. Other variables including construction costs, financing tern1s, and retail rents, were held consiant. For as pray forma analysis of prospective project not feasible for several years, this threshold -level of sensitivity analysis is Nkcly sufficient to get a sense of the opportunities and risks involved with redevelopment, if (lie Port decides to pursue any of these alternatives seriously once the real estate market recovers, it will need to push the pro forma and sensitivity analysis further and truth -check niore of the market, development, and financial assumptions. Sensitivity Analysis Assumptions Exhibit 3.5 Sensitivity Analysis Range of Assuniptions Assumption Baseline High Low Sales Price ($ per SF) Stacked Conclorniniums. $400.00 $4 0.00 $350-00 Townhornes $275.00 $300,00 $250M Sales Pace (Units sold per month) Stacked Condominiurris 6.0 8.0 4,0 Townhornes 3.0 4.0 2.0 Source: BERK, 2009 Exhibit 3.5 shows the range of sales price and sales pace assumptions used in the sensitivity analysis, Exhibit 3,6 shows how final IRR arid N11V egirnaws for each development scenario vary depending or] tile Price and pace of residential units. Project costs, loan arnOUrit, and equicy coniribudon are also included, Unlike the values: presented earlier in Exhibit 3,41, these return rnetrics incorporate the cost of land acquisition and site preparation. 21001"'�' ON! 51111 R IMM11 0 1"(011 !3/1111 V111, NO IRR, NIIPV, and Project Costs for Entire Development by Sensitivity Scenario Exhibit 3.6 Internal Rate of Return Sensitivity Scenario 35" Mixed -Use 3-5 Story Mixed -Use Land Swap Townhomes Baseline Price and Pace 18.9% 20.5% 20,7% High Sales Price 30,0% 28.3% 9.2% High Sales Pace 22.1% 24.5% 253% High Sales Price and Pace 34.4% 34.9% 36.7% Low Sales Price 7.8% 11.6% 11,2% Low Sales Pace 15.4% 15.5% 15.9% Low Sales Price and Pace 6.7% 9.2% 8.8% Net Present Value Sensitivity Scenario 35" Mixed -Use 3-5 Story Mixed -Use Land Swap Townhornes ............... Baseline Price and Pace 1.9 M 5.2 M 5,O M High Sales Price 7.5 M 13.5 M 13,1 M High Sales Pace 3.0 M 7.8 M 7.4 M High Sales Price and Pace 8.6 M 16.8 M 16.2 M Low Sales Price -3.7 M -3.1 M -3.1 M Low Sales, Pace O.3 M 0,6 M 1.0 M Low Sales Nee and Pace -4.8 M -6,4 M -6.2 M Total Project Costs and Equity Contribution Total Project Cost 623 M 911 M 93,7 M Loan Amount 49,9 M 73.4'x' 74.9 M Equity Contribution 12.5 M 1.8.3 M 18.7 M Using baseline assumptions, all three scenarios have reasonable WR values and would be worth considering as as possible investrnent. The two larger scenarios provide greater returns above the threshold discount rate (al)OLIt $5 M NPV) than the 35' Mixed-use scenario (about $2 M NPV). Sales Price has the strongest effect on potential returns and financial feasibility of all three development scenarios. The pace of sales has as ICSS PrOlIOLInCed effect. Linder the low sales price assurnprion, the '35' N/lixed-use scenario is not feasible and the other two are borderline projects, I'lie project costs and equity contribution are included as a reference to the relative size of these scenarios and the relative level of financial coniniinnent required for redevelopment. The 3-5 Story and Land Swap Options are both larger projects with costs over $90 M and equity contributions over $18 M, while the 35' Mixed-use Option costs about $62 N/1 with an equity contribution of $115 M 6. FINAL ASSESSMENT AND 0 ["HER CONSIDERATIONS The threshold level pro f"Orma analysis indicated that under the right market conditions all three development scenarios are potentially feasible. As the Port moves: forward with additional analysis of development options for the I farbor Square property, there are several major unknowns arid risk factors that should be kept in inind and studied further. 11" g 1. Geological: and Environmental OVS. There are significant unknowns regarding the geotechnical constraints on redevelopment presented by potential soil contarnination or environmental inipact issues related to the adjacent protected marsh area. These issues have particular impact on tile 35' Mixed-use scenirio because the plans call for digging five feet underground to make space for two floors of condominiums above a first floor of retail. If the digging is cost -p roll ibi rive, redevelopment Of this scenario becomes much less feasible. The Land Swap scenario COUld aISO be significantly affected by environmerital constraints since tile development feasibility on the areas adjacent tea tile marsh has not yet been studied sufficiently 2. Market Uncertainties and Risks,. 'rhere, are several maarket factors that feed into the likelihood that each of the redevelopment scenarios will achieve assumed sale prices arld volumes. As shown in the sensitivity analysis, a $50 per SF swing in sales prices can make or break any of the development options. A few of (Ile important market factors to highlight itICILICIC: Market Segment — The market segment most often mentioned as an oppormnity in Ednionds is the retiree market, Harbor Squares proximity to the waterfront and Downtown EcIrnonds and proposed inix of amenities and retail options will appeal to this market Segment. However, other aspects of the proposed scenarios, such as, three -floor rownhonies with stairs may nor appeal to the retiree market. Another market segment that could be targeted with this development is a younger demographic that would utilize the nearby multi -t iodal transit hub and commute to employment centers by train. This market of working professionals and f"amilies would be more amenabie to the townhome units arid smaller condominium units. Other Factors (Views, Noise, etc.) — The pro forma analysis (toes not differentiate significaraly between tile scenarios based on other market factors such as views and noise impacts. It is likely that the taller buildings in the 3-5 Story Option and tile Land Swap Option would provide more attractive views and justify higher sales prices. On the flip side, the noise impacts on any development near the railroad have not been factored explicitly into this analysis, Pipeline Development ®- All three proposed development scenarios are large f6r the 1,,'Arnands market arid it is important to understand what else is being built in the area in order to estimate the likelihood that an appropriate sales pace and price can be maintained. 3. Land Swap Uncertainties. Tile Land Swap scenario is contingent oil an agreernent with the property owner of the tennis courts. At this point it was impossible to niodel the potential sale and swap agreements required for this scenario, These issues should be revisited if negotiations proceed Further- with this property Owoci'. 4. Importance of Flexibility on Market Value and Financial Feasibility. One factor that is not adequately reflected in the threshold pro forma analysis is the effect that additional height allowances in the zoning code would have on the financial feasibility of'reclevelopment. If the Porr were successful in increasing the height allowance on the property, tile project becomes inuch rolore attractive to potentid developers. The additional height: provides flexibility to vary the inix and configuration Of LISCS 011 the properry, mitigate unforeseen enviroruriental or regulatory constraints, and react appropriately to market shiflts. With the 35' height limit, if any unforeseen constraint. 5: Impact of Phasing on Financial Analysis. The initial development scenarios were modeled at a threshold level without Factoring in likely phasing of construction. This approach has as particularly strong effect oil the larger 3-5 Story and Land Swap scenarios because the residential units in these scenarios are being sold over the course of five to six years. If construction and sales were phased, the financial returns for these scenarios would improve since the developer would not have tot hold on to construction debt for as long. 7. RESIDUAL LAND VALUE ANALYSIS 1'hc previous sections presented financial returns for each development scenario From the perspective of a developer purch-a-sing the Harbor Square property from the Port of Edmonds, An important determination for the Port to consider is which scenario presents the greatest potential financial return if it did sell Harbor Square. I'he Port must also consider dic value of the property today and under what conditions it makes financial sense to sell the property. Exhibit 3,7 shows the same information On Current I larbor Square operations presented earlier in Exhibit 1, 1. According to this analysis, tire Harbor Square property is worth bctween $83M and $9.5M under current operations. An "Improved Operations" scenario was created to show what the property could be worth if the Port invested in tenant improvements and other amenities. Under this scenario, vacancies are reduced to 20%, average rent is increased to $18.00 per SF, and the vahre of the property increases to $ 11 .I M - $127M. Initial tenant improvement Costs to achieve these improved rents and occupancy rates could range from $2M -$3M ($20-$30 Per SF), 'I'lic valuation estimates of current and improved operations at Harbor Square are useful reference points to use when evaluating the residual land value under each redevelopment scenario. Harbor Square Valuation: Current and Improved Operations exhibit 3.7 Space Characteristics Building Floorspace (SF) Leased Space Space Available Total Space Percent Vacant Cost Surnmary Estimated Total Annual Operating Expenses Operating Expenses as % of Total Revenue hicome Summary Rent Rates Average for all Tenants Gross Monthly Income (as of May 1, 2009) I Estimated Annual Income Net Operating Income (NOI), Valuation Cap Rate 7.00% 7.50% 8.00% Source: BERK, 2009 Current Operations Improved Operations 71,345 81,960 51,145 20,490 102,450 102,450 30% 20% $435,495 $584,806 40% 40% $15.40 $1&00 $91,551 $122,940 $1,098,617 $1,475,280 $663,121 $890,474 Capitalized Value $9.5 M $12,7 M $8.8 M $11.9 M $83 M $11.1 M W RON, 0 Residual Land Value: Net, Present Value of Vertical Development exhibit 3.8 -------- ----- -- ---- . ..... . ....... . ............. . . . .. .. Net Present Value 35° Mixed -Use 3-5 Story Mixed -Use Land Swap Townhonies Scenario Retail 0.1M 0.1M 0.1 M Stacked Condominiums 7.8 M, 10.8 M 103 M Tbwnhomes 0.5 M 05 M 0.5 M Total Development 7.9 M 10.9 m 10,6 M Residual Land Value ($/Lot SF) $25.56 $35.26 $3439 Source: BERK, 2009 Note: NPV calculated using dISCOUnt rate of 15% Residual land value analysis is basically the calculation ofwhat a developer or owner twcupant call afford to pay for the underlying dirt, considering the valve of' the completed project as proposed. Exhibit 3.8 shows the Net Present Value (NPV) for each scenario when land acquisition costs are removed from the pro forma and only vertical development is modeled, A 15% discount rate is used in the NPV calcttlations to represent the developers, expected profit. The value of vertical development, minus the developer's profit, leaves the residual land value. In other words, the NPV residuals shown in Exhibit 3.8 represent the theoretical maximurn a developer would be willing to pay for land and other associated costs not included in the base vertical development pro forina (e.g, entitlement costs, environmental clearILIP, etc.). The residual N11V ranges Pion, $T9M in the 35' Mixed-Lfsc Scenario to almost $1 f M in the 3-5 Story and Land Swap Scenarios. Assuming the land is already entitled and no unforeseen additional, site preparation costs einerge, the implied residual land value is about $25 per SF for the 35' Mixed -Use Scenario and $35 per SF for the larger scenarios. If the Port were to sell the property to a developer to redevelop, they would realize a sale price of roughly the residual land value. Comparing the results in Exhibit 3.8 with the current value of the property (shown in Exhibit 3.7), it does not make sense for the Port to sell the property if the 35' height limit is in place since its current operations are worth more ($8.3M - $9,5M) than the residual land value ($7.99), The residual land value of the 3-5 Story and I,and Swap Scenarios could potentially exceed the value of the property today, in which case the Port could consider selling the property for redevelopment, I lowever, with unprovemerus in the current buildings, the value of the property COUld increase to the point that selling the property for redevelopment does not make financial sense. As the Port gets closer to a fimd decision on its I larbor Square options, this is an area of analysis it will want to explore further. 7 7 M m f YR�fi efy. ?/ gL S away c "r 10 N I VI: FISCAL IMPACT ANALYSIS This section assesses the likely fiscal impact of Elie Harbor Square redevelopment scenarios on revenues and costs for the City of Edmonds. 'flus information should he valuable for the Port and the City of Edmonds as they engage in discussions about a potential contract rezone application fi)r the 1-larbor Square property. BF,,RK's approach to the fiscal analysis was to model all the major tax revenue strcanis generated by I farbor Square operations under the three most likely scenarios the Port could pursue with the property-. 1. Current Buildings with Improved Operations. If the Port were unable to pursue redevelopment because Oft"narket conditions or the inability to obtain a contract rezone, the most likely scenario is continued operations of existing buildings. BERK has modeled as scenario where operations are improved slightly assuming the Port invests in tenant, improvements and amenities to snake the property more attractive. 2. 35' M':Ixed-Use Scenario. if the Port were to obtain a contract rcvx)nc allowing for residential uses on the property but notadditional height, the 35' Mixed Use Scenario is utast likely. It should be noted that the residual land value analysis in the previous section Naas shown that although this scenario may be Feasible from a developer's perspective, it does not likely make sense from the Ports perspective because Harbor Square is worth more to the Port today than what as developer would be willing to pay I"br the property. 3. 3-5 Story Mixed' -Use Scenario, If the Port were to obtain a contract rezone allowing for residential uses as well as additional height, the 3-5 Story Mixed Use Scenario is most likely, The fiscal analysis only considers the tax revenues generated6or the City of IdrTionds frorn activity at Harbor Square,, The following major tax revenue strearris were estiniated: 1. Leasehold Excise Tax. In the Current Operations Scenario the property is subject to leasehold excise tax based on the lease revenues generated by occupants renting space ,it I [arbor Square, Only the local portion of leasehold excise tax that is distributed to the City of E(h-nonds is included in the analysis. 2. Property Tax. In the 35' Mixed -Use and 3-5 Story Mixed -Use scenarios it is "assumed that the property is sold to as developer and. becomes subject to property tax based on the assessed value of the property. 3. Utility Tax. City of Edmonds utility tax revenues generated by residents and businesses occupying Flarbor square. 4. Sales Tax, Ongoing sales taxes generated by residents and businesses occupying Harbor Square, One-time sales taxes generated by construction in the redeveloprnent scenarios are also estimated. Summary of Tax Revenues over 30 Years, Current Operations Scenario Exhibit4-3 TOW Wowd ra X W' VO 01 Ue Sa cep (; $500,000 100.000 $450000 90')00 $400D00 . . . .... BODOO $300000 ....... 60D00 $250,000 J — 50D00 $200,000 . .................... .. .. 40.O00 $150000 30.000 7 $1.00,000 20.000 MEM U—Ndd $501000IO 1-1 j_ DOO e �rvw lax $o 0 1 3 S 7 0, 11 13 IS 17 19 21 23 25 27 29 year Exhibit 4-3 shows the projected tax rCVCoL1eS from operations ofexisting Harbor Square buildings with improved occupancy and rents. Leasehold excise tax is the largest contributor of tax revenues, followed by utility taxes, and sales taxes. Sales taxes are relatively small since the majority of I larbor Square occupants are office users as opposed to retailers or restaurants. Exhibit 4-4 shows the projected tax revenues under the 35' Mixed -Use Scenario, The pritnary Sources of tax revenues in this scenario are property sax, sales tax, and utility taxes. Property tax revenues remain flat over brae because of restrictions on property tax growth and no aMlniption of -a property tax levy lid lift. One -Boase sales taxes on construction drive significant initial sales tax revenues (about $462,000 over two years) but stabilize once construction is complete. If the remail portion of the use mix (only 23,800 SF) were increased, increases in sales tax revenues would he realized. Exhibit 4-5 shows the projected tax rcVellUes under the 3-5 Story Mixed-l.Jse Scenario. The tax revellues ill this scenario arc similar to the 35' Mixed-(Jse Scenario but at a greater magnitude. One -rine c sales taxes oil construction drive significanc initial sales Tax rCVCT1L1CS (about $712,000 over two years) but stabilize once construction is complete. Annual Tax Revenue and One -Time Construction IRelated Revenue by Scenario Exhibit 4.6 Taxes In Year 8 (First year of stabilized Income from 3-5 Story MMixed Use Scenario) Current Buildings 35" Story 3-5 Story (Improved Mixed -Use Scenario Mixed) Use Scenario Operations) Leasehold Excise Tax$8-1,607 - - Property Tax - $92,334 $142,299 Sales Tax $33,445 $65,867 $66,866 Utility Tax $44,982 $52,990 $82,386 Other Tax $25.56 $4,516 $7,426 Total All Taxes $160,034 $215,707 $298,977 One-time Construction -related $461,697 $711,535 Sales Tax (Year I and 2) Source: BERK, 2009 Notes: Year 8 is the, year after all units are sold in the 3-5 Story Mixed -Use Scenario. This is the first year all three scenarios have stabilized income. *One -twice construction -related sales tax revenue was not explicitly modeled for the Current Improved Operations Scenario. If significant tenant improvements ($20-$30 per SF) were included in this scenario, there would be about $17,000-$26,000 in sales tax revenue for the City of Edmonds. Exhibit 4-6 shows a snapshot of annual tax revenue generated under each scenario iii year 8, the first year of stabilized operations for a I I three scenarios. Total reven ties range fro in$ MOI in the Current Buildings I rnproved Operations Scenario to $2999 in the 3-5 Story Mixed -Use Scenario. One-time construct ion- related sales tax revenues for the two redevelopment scenarios are also shown in Exhibit 4-6. The 35' Mixed -Use Scenario generates $462K and the 3®5 Story Mixed -Use Scenario generates $7121 over the two years ofconscruction, Net Present Value of Fut,ure'Tax Revenues for City of Edmonds Exhibit 4.7 NPV of Future Tax Revenues Scenario iO-Year 20 -Year 30 -Year Current Buildings- improved Operations 1..1 M 2.1 M 2,9 M 35'Mixed-Use Scenado 1.8 M 2.9 M 3,9 M 3-5 Story Mixed -Use Scenario 25 M 41 M 5.3 M Incremental Difference (current NPV ininus 3-5 Story NPV) 1.4 M 2.0 M 2.4 M Source: BERK 2009 Note: NPV calculated using a 5% discount rate. Exhibit 4-7 shows the l0-, 20-, and 30 -year NPVs of future tax revenues for the City of Ednionds generated by each development scenario. 1'hese values represent what the future tax revenue strearns generated by each development scenario are worth to the City of Edmonds in year one ofclevelopnient dollars. The Current Buildings — Improved Operations scenario represents a reasonable Prediction of" what would occur if the Port were unable to redevelop the site. The incrernental diff"Crence between the current operations N11V and 3-5 Story NPV represents what the tax revenue strearn front larger development scenario is worth to the city,'rhe incremental difference ranges l"corn ,$1.4M over 10 years to $2.44 over 30 years. Cost Implications for City Services Cost irriplications f'or City services will depend on the degree to which new activity generated byany redevelopment triggers the need for additional City services. In general, the level of activity generated by a development of this size in an area that is already devclopcd is unlikely to have any significant net impacts to the cost of providing City services, The City will likely niect the needs ol'the development using existing staffing and resources. Listed below are initial high-level, assessments oFcost irnpacrs to specific City services, Fire and Police services are two of the Lrgest cost centers for City services, Existing police and fire services are likely sufficient to address the incremental increase in calls for service related cc) activity at the site. The higher -quality development expected in the Harbor Square redevelopment scenarios makes it less likely that the additional housing and commercial activity will gencraresignificant calls For police set -vice. In general, citics have as great deal ol' . fixed capacity already in place for rnany services (e.g. key positions in leadership and management, and existing ("Ity service systerns and infrastructure) that do not necessarily change in a linear fashion" as the city grows. The increase in population under any of the Harbor Square redevelopment scenarios is: unlikely to be sufficient to have any impact on parks or general government costs (administration, finance, etc). * Any costs associated with perniitting and plan review will largely be covered through direct fees frorn the project. * Any impacts to the utility enterprise funds will likely be more than offset by ticifity costs paid by the occupants of the development. * Existing uses at the Harbor Square sire (hotel, health club, offices, and restat i ra tits) already generate a certain amount of traffic. There may not be a sign i fi cant increrricrital increase in traffic generated by residents and businesses under a redevelopment scenario and any traffic increase should be offset by traffic impact fees irnposed by the City of Edmonds, ( .... . .... I r, E C �r, i iw�,441 V CONCLUSIGN Following the analysis reported in the previous sections and discussions with the Port staff' and Comrilission, we are prepared to offer these conclusions: 1. CONCLUSIONS The Harbor Square property's economic potential Is hindered by regulatory limitations. A 198O contract rezone placed significant constraints on the property by prohibiting residential uses, mandating low lot coverage arid high parking ratios, arid to a lesser extent, limiting the building height to 35'. As a result, redevelopment of the property is limited to commercial uses and can only accommodate a stn All increase in density. Redevelopment of Harbor Square under current zoning Is unlikely. Given die property's zoning lirnitariomi, an office and rmail commercial redevelop menu scenaric) was modeled for financial feasibility. Under current market conditions, specifically related to lending arid leasing, estimated IRRs for chis, redeveloprilent scenario are very low. F,verl if financingand market conditions improve, redevelopment is unlikely since estimated construction costs exceed the final project"s value by $5 to $8 million. Assuming a contract rezone, a mixed-use project limited to 35' In height is probably not feasible. T'he 35' Mixed-use development scenario assumes a contract rezone that allows residential uses arid additional density on the site, but maintains the 35' height limit. From a developer's perspective, this redevelopment may be financially feasible tinder certain market conditions. I lowcver, from the Port's perspective, the estimated price a developer would be willing to pay for the property (residual land value of $7.9 M) is less than What current operations of Flarbor Square buildings 1-5 are worth ($8,3M -- $9',5M). If the 35' height firnit is kept, it is unlikely that a redevelopment scenario will generate a sales price high enough that it makes sense for the Port to sell the property to a developer. Assuming a contract rezone, two scenarios (3-5 Story and Land Swap) developed during this process may be feasible. 'I'liese two mixed-use scenarios incorporate higher densities and heights that exceed 35'.1"he residual land value of the two scenarios could potentially exceed the value of the property today, in which case the Porr could consider selling the proj,)crty for redevelopmoit. As the Port gets closer to a final decision oil its 1-farbor Square options, it will want to analyze these scenarios further along with the option ofinvesting in tenant improvernents and amenities in its current buildings. Regardless of which option makes the most firiancial sense ('()r the Port, the contract rezone will most likely need to incorporate an increase in height limit to inake redevelopment feasible for both developers and the Port. Redevelopment of Harbor Square will result in Increased tax revenue for the City of Edmonds. Both the 35' Mixed -Use :and 3-5 Story Mixed-use redeveloprnent scenarios would generate more tax revenues for the City of Edmonds than current operations at I -[arbor Square. One-time construction -related sales tax revenue ranges from $462,000 in the 35Mixed-Use scenario to $712,000 in the 3-5 Story Mixed -Use scenario. Oil all ongoing basis', annual tax revenue is estimated at $ 160,00,0 (current buildings with improved operations), $216,000 (35' N/lixed-Use scenario), and $299,000 (3-5, Story Mixed -Use scenario). On an NPV basis, the 30 - year tax revenue stream from the property is worth $2,9M (current buildings with improved operations), $3,9M (35' Mixed -Use scenario)!, and $53M (3-5 Story Mixed -Use scenario) to the City, I In year eikht, theflrst year qfstabilized operations in the,3.5,5twy Mixed-use Yeenario The incremental increase in fiscal revenues generated by the redevelop ment scenarios is a net fiscal beriefic for the City of Edmonds, 'This analysis should be shared with the City of Echnonds and could provide useful context for contract rezone discussions. PLANNING, PHASING AND DESIGN RECOMMENDATIONS Retain Some of the Buildings on the Property.The hotel and health club continue to be vibrant enterprises. They can remain as key pieces ofas reviudized I'larbor Square, although perhaps with more efficient arrangements and physical and Landscape enhancements. Moreover, Building #3, at the corner of Dayton and Sunset, is perf"onning well, any redevelopment plan should delr any replacement or remodel of that structure to later years, phased redevelopment would also ensure some lease income would be generated from existing businesses. Plan for a New Configuration and Image. As a frcestanding, suburban style "business park" with little relationship to downtown Urrionds or the waterfront and stnictures, that lack urban character, I'larbor Square looks ourdated, which is a liability. I larbor Square would benefit frorn a systein of streets and blocks rhar would help it integrate into the long standing pattern of the downtown, Consider a Tailored Approach to Building Height. Amending the contract rezone to allow for residential uses, greater lot coverage, and lower parking ratios would allow for reasonable redevelop nient of parcels in the north portion of the site. The issue of increased height is less important in the early phasing. Flowever, a filture consideration of height could lend itself to a building envelope that allows varied or transition zones of height. 2. NEXT STEP'S The Port should pursue a contract rezone. As discussed above, the opportunity for redevelop meat by either the port or a developer is severely limited without contract rezone. Working with die City on a contract rezone Would open up opportunities for redevelopment with residential uses and snore productive use of the property and help support comprehensive plan and other goals and objectives for the area, such as 'Eransit Oriented Develop nient, `rhc Port should meet with City Staffto present and get feedback on the fiscal impact findings and Lheapproach to site development, in particular the requested amendments to permitted uses, parking, and coverage, 'file Port should also seek the City's input <)it the height increase issue: either deferring it until a later time, or developing as stepped height envelope. Inquire if deferring the Light issue would simplify SEIIA review or any decision- rnaking process and discuss the effect/stattis of the Dykes' proposal, ASSLU'lling 3 contract rezone is accomplished. The Port should begin to work on tasks that will help achieve redevelopment. These olight, include the following: Discuss the land swap proposal with the health club owner, 'I"opics should include the motivation for the swap, the proposal, timing, cost-sharing, parking location and C011figUl-ation, the PrOPOSC(l Street network (with on-streer parking), and the nuinbcr of open or enclosed courts. if the health club owner is antenable to Elie swap, investigate the likely costs of'rebuilding the tennis courts closer to the railroad tracks. Additional financial and fiscal analysis could be conducted for the land swap proposal, focusing on the effects of phasing and multiple property transactions:. Consider Soils Tinain& The conceptual planning relied upon analysis conducted by Sound 'Fransit for the commuter rail station across Dayton to the north. That analysis indicated that it would be possible to excavate roughly five feet down bel -bre running into problerns with the water cable. It is reasonable to assurne that this condition is similar for land that (N"i &,M "A1111111/4 01111,1950",1"JO, " i abuts Dayton on the south. Providing sonic of the parking in a partially below ground story, enables the site to more cost-effectively accommodate multistory development. I'lowever, this, depth is likely to decrease away frons Dayton c1oser to the wetlands. Further soils testing and environmental analysis will be needed to determine where and whether below grade parking can be constructed along with any other developmental limitations. Talk to the City and local brokers about potential redevelopment interest. The City's economic developer nianager could speak to interest in office or commercial space and local brokers could provide insight into current demand and sales of condominiums. Consider re -platting the property. It is possible that the Port would need to initiate a re - platting ofthe I farbor S(luare property through the City's subdivision process. This would enable the Port to retain some portions of the property under leasehold agreements, while selling off others. It would also be useful to indicate the arrangement and dimensions of streets, whether the Port retains ownership of them or dedicates thenen to the City. In the meantime, while assessing redevelopment options, the Port should consider taking, a more active vote in asset nianagernent to improve upon Current operations. If the Port could lower vacancies and increase rents, both capitalized value and income Would increase. This would Put the Port in a better financial position while it waits for the market to return. I OTHER CONSIDERATIONS The items Wniniarimd here are longer -cerin considerations that may warrant further discussion Frorn the Port as they rnove forward with a redevelopment project. 1. Soliciting Interest Issue a prospectus to development companies, soliciting interest in portions or all of the property. This could cake several fornis: Request for Interest (11,H) All this might consist of is an expression of serious interest in the form of a letter. The letter would include sonic brief inforniation about similar projects and references. The response time would probably be on the order of 2-3 weeks, The Port would quickly be able to determine a field of interested parties, One consideration is whether to phice an ad in national Publication, such as Urban Land, or just in the Daily Journal of( . orm-nerce, which is aimed at a more regional audience. Request for Qualifications (RFO) 'Fhi,s is a more elaborate response than an R171. It would involve submittals that would, include not only the information in an RFI, but also the complete development team. Firm profiles, resumes of individuals, an identified project nianager, information of several relevant projects, and an indication of financial partners. The docurnent might be on the order of' 15-25 pages and include photos and data on other similar projects.. The turnaround time for this would be on the order of 3-4 weeks, Request for Concepts (RFQ This variation includes all of the elements oFan RFQ butasks, for one or more conceptual deMoprnent scherries for the property — either an initial Phase or all potential phases, The Port may wish to convey to the proposers the concepts already developed and discussed as as baseline, or allow submitters to develop their own concepts. Regardless, the RFQ should make the development parameters (uses, parking, coverage, height, etc.) clear m) that useful corni'mrisons can be made. Despite the concepts developed to date, there rnay be variations in use, type of residential units, sales vs leasing, amount of commercial, phasing and build -Out, and so forth. The turnaround time for this should be on the order of 4-6 weelcs. In this: variation, the Port should hold a pre-SUbrnittal meeting to clardy objectives, the timeline, and the selection process and to answer questions, A tour of the site shotflol also be included. One question that might arise is whether this is the best time to s:olicit developers. An argument could Ire made that it would be better for the port to first secure basic arneridinents before marketing the property, While this has some merit, its also necessary to realize that any developer understands the entitlement steps and the time involved. Moreover, any sizable project would require several years from securing the property, for design, for permitting, and for construction. So from that perspective many developers unsay want to start that sooner than later, in order to hit the LIPSWing in the recovery of the market. It might also help the City in appreciating that (here would be tangible benefits in the port 's having a development partner chat is prepared to deliver project once amenchnents are approved. 2. Public vs Private Ownership of Public Spaces and Streets Another issue is how any public space is paid for, with respect to improvements, as well maintenance, over time. It could be treated as a coni pion amenity, with various private owners or tenants paying proportionate amounts. Or it could be solely owned and maintained by the Port.. Or it Could be deeded to the City, assuming the City is a willing recipient. (An estimate of '$ per SF cost for the proposed plaza and open space noted in the Alternative Comparison Chart on page 23 of this report), 'rhere is a similar set of issues with regard to the streets. Are segryients constructed along with each project? Or does the Port take this on and charge pro. -rated costs toy future purchasers or leaseholders? Who actually owns and maintains them? Arc they public or private? E.ven if private, they will need to meet City standards for fire protection and other standards. Would it be best to simply dedicate them to the City? 3. Project Management Yet another issue is how the project might be managed. As with any complex project that unfolds over time, with multiple parties — developers, designers, tenants — The Pori will need to make sure that process proceeds smoorhly. Whde the project management role could be provided in-house, such projects often benefit from (tic expertise and experience of all outside C011SUltant.There are individuals and firms that provide such assistance on a contract basis. Initially, this Would nor necessarily be a frill -time role, But having a PPVI devoted to permitting, schedule, tenants, and the development team while representing the port's interest, Would ensure a positive otitcoll"le.