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Home My WebLink About5 Points Senior Villas Proposed Project 7/15/91 CITY OF HUNTINGTON BEACH COUNCIL - ADMINISTRATOR COMMUNICATION HUNTINGTON BEACH To Honorable Mayor and City From Michael T. Uberuaga��(� Council Members City Administrator Subject City Council Work Study Date July 15, 1991 Session—Five Points Senior Villas Proposed Project Institutional Property Investors Inc., (IPI) as represented by David Michelson, has proposed the development of Five Points Senior Villas. This project, located at Main and Florida Streets, consists of 164 apartment units for seniors with 33 units restricted to low income households. The property is currently owned by the Resolution Trust Company. The Planning Commission, at its meeting of May 17, 1991, approved CUP No. 91-4, allowing for the construction of the 164 units conditioned that 20% of the units be affordable to low and moderate income households. IPI proposes to work with Wells Fargo Bank who is prepared, according to the developer, to assist the project with $8 million of construction financing through tax exempt bonds. IPI's original request was for a refund of $500,000 for fees that were previously paid for the development of the site. They were advised that fees could only be refunded through City Council action (see Attachment 1). On April 16, 1991, staff informed IPI that little if any justification existed for City/ Agency financial assistance of $675,000 for the project based on an economic analysis of the project by Keyser Marston (see Attachment 2). Additional analysis was completed and reports prepared by Keyser Marston based on the information provided by IPI. These reports are dated May 21, 1991, and May 31, 1991, June 10, 1991, (see Attachment 3). Again, the same conclusion was reached that the project does not require any public financial assistance to achieve economic feasibility. The tax exempt financing alone (provides $2 million in savings to developer) sufficiently mitigates the cost of the project and the income restricted units. The major difference in the pro forma analysis is the operating costs of the project. Both KMA operating cost estimates and the Wells Fargo operating cost estimates determine that the project will be financially feasible. The developer's expense estimates are higher, and therefore, do not lead to a financially feasible project. Staff agrees with KMA that the operating costs of the developer are overstated and that financial assistance by the Agency is not warranted. MTU:ls xc: Barbara A. Kaiser, Deputy City Administrator Attachments 9304r off •j TABLE 3 (CONT) C 10 YEAR CASH FLOW i ' Z FIVE POINTS SENIOR CITIZEN APARTMENT COMPLEX HUNTINGTON BEACH, CALIFORNIA 164 UNITS - 20% SET ASIDE FOR VERY LOW AND LOW INCOME tI1 r. F-' R1 NET CASH FLOW BEFORE DEBT SERVICE (10,940,000) 457,734 945,307 980,788 1.017,618 1,055,849 1,095,535 1,136,732 1,179,498 17,649,002 A NET CASH FLOW AFTER DEBT SERVICE (2,755,000) 163,425 129,452 328,196 361,808 381,079 401,045 388,503 231,302 5.463,535 77 CASH ON CASH RETURN 5.9% 4.7% 5.6%. 6.6% 7-9% 9.6% 11.6% 13.2% M DEVELOPER RETURN 87,998 69,705 77,105 84,435 92,120 100,178 109,579 124,547 2,941,903 M M RETURN TO INVESTORIDEVELOPER, NPV DEVELOPER RETURN 1,728,941 16% Uo1 NPV EQUITY RETURN 3,836,591 Z 1RR ON TOTAL INVESTMENT 12.1% ` IRR ON EQUITY 15.3% BOND AMOUNT 8,185,D00 EQUITY AMOUNT 2,755,000 TOTAL DEVELOPMENT COST 10,940,000" SOURCE: KEYSER MARSTON 8 ASSOCIATES, INC. TABLE: FVEPTS: 5/20/91 o f TABLE 3 C 10 YEAR CASH FLOW Z FIVE POINTS SENIOR CITIZEN APARTMENT COMPLEX r� HUNTiNGTON BEACH, CALIFORNIA 6� 164 UNITS - 20% SET ASIDE FOR VERY LOW AND LOW INCOME CONSTRUCTION YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR 1 2 3 4 5 6 7 8 9 10 ----- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ A RENTAL INCOME m I BEDROOM 1 BATH (VERY LOW) $45,749 $76,002 $78,282 $80,630 S83,049 S85.,541 $88,107 $90,750 $93,472 S96,277 1 BEDROOM 1 BATH DELUXE (VERY LOW) 3,519 5,846 6,022 6,202 6,388 6,580 6,777 6,981 7,190 7,406 2 BEDROOM 1 BATH (VERY LOW) 3,980 6,613 6,811 7,015 7,226 7,443 7,666 7,896 8,133 8,377 2 BEDROOM 2 BATH (VERY LOW) 0 0 0 0 0 0 0 0 0 0 1 BEDROOM 1 BATH (LOW) 72,391 120,263 123,871 127,587 131,414 135,357 139,418 143.600 147,908 152,34'"... 1 BEDROOM i BATH DELUXE ('LOW) 10,505 17,452 17,976 18,515 19,071 19,643 20,232 20,839 21,464 22,16 --�l D 2 BEDROOM 1 BATH (LOW) 5,796 9,628 9,917 10,215 10,521 10,837 11,162 11,497 11,842 12,197 co 2 BEDROOM 2 BATH (LOW) 5,796 9,628 9,917 10,215 10,521 10,837 11,162 11,497 11,842 12,197 A i BEDROOM 1 BATH (MARKET) 527,422 884,707 920,095 956,899 995,175 1,034,982 1,076,382 1,119,437 1,164,214 1,210,783 0 I BEDROOM 1 BATH DELUXE (MARKET) 80,724 135,408 140,824 146,457 152.316 158,408 164,745 171,334 178,188 185,315 2 BEDROOM 1 BATH (MARKET) 56,916 95,472 99,291 103,263 107,393 111,689 116,156 120,803 125,635 130,660 2 BEDROOM 2 BATH (MARKET) 39,953 67,018 69,698 72,486 75,386 78,401 81,537 84,799 88,191 91,718 LAUNDRY INCOME 9,840 10,234 10,643 11,069 11,511 11,972 12,451 12,949 13,467 14,005 --------- --------- --------- --------- --------- --------- --------- --------- --------- ......... GROSS INCOME S862,590 S1,438,271 $1,493,347 $1,550,553 $1,609,972 $1,671,689 $1,735,794 $1,802,380 $1,871,545 $1,943,388 (LESS) VACANCY AND BAD DEBT 0 71,914 74,667 77,528 80,499 83,584 86,790 90,119 93,577 97,169 --------- --------- --------- --------- ----- --- --------- --------- - ------- --------- ......... EFFECTIVE GROSS INCOME S862,590 $1,366,357 S1,418,680 $1,473,026 $1,529,473 $1,588,104 $1 649,004 $1,712,261 $1,777,968 $1,846,219 EXPENSES 404,856 421,050 437,892 455,408 473,624 492,569 512,272 532,763 554,073 576,236 ------ --------- --------- --------- --------- --------- --------- --------- --------- --------- NET INCOME BEFORE DEBT SERVICE $457,734 $945,307 $980,788 $1,017,618 $1,055,849 $1,095,535 S1,136,732 $1,179,498 $1,223,894 $1,269,983 PLUS: INTEREST EARNINGS 139,113 77,500 63,163 47,275 31,000 14,338 0 0 0 PLUS: CAPITALIZED INTEREST 478,226 0 0 0 . D 0 0 1 0 0 (LESS) DEBT SERVICE 823.650 823,650 823,650 823,650 823,650 823,650 823,650 823,650 823,650 (LESS) DEV SHARE Of CASH FLOW a 35% 87,998 69,705 77,105 84,435 92,120 100,178 109,579 124,547 140,086 PLUS: EARNOUT AMOUNT 0 0 185,D00 205,000 210,000 215,000 185,000 0 0 - --------- --------- --------- --------- --------- --------- --------- --------- NET INCOME AFTER DEBT SERVICE $163,425 $129,452 $328,196 $361,808 $381,079 S401,045 $388,503 $231,302 $260,159 SALES PROCEEDS 16,933,101 (LESS) CLOSING COSTS W 3% 507,993 (LESS) BOND REPAYMENT 8,419,914 (LESS) DEVELOPER SHARE OF SALES PROCEEDS 2,801,818 NET SALES PROCEEDS 5,203,376 t7� JUN 10 '9.1 12:46 KEY:SER MARSTON, P.5 TABLE 2 ESTIMATED OPERATING INCOME FIVE POINTS SENIOR CITIZEN APARTMENT COMPLEX HUNTINGTON BEACH, CALIFORNIA 164 UNITS • 20%. SET ASIDE FOR VERY LOW AND LOW INCOME RENTAL INCOME 1 BEDROOM 1 BATH (.VERY LOW) 13 UNITS a $473 / MONTH $73,800 1 BEDROOM 1 BATH DELUXE (VERY LOW) 1 UNITS a $473 / MONTH 5,700 2 BEDROOM 1 BATH (VERY LOW) 1 UNITS a $535 / MONTH 6,400 2 BEDROOM 2 BATH (VERY LOW) 0 UNITS a $535 / MONTH 0 1 BEDROOM 1 BATH (LOW) 14 UNITS a $695 / MONTH 116,800 1 BEDROOM 1 BATH DELUXE (LOW) 2 UNITS a $706 / MONTH 16,900 2 BEDROOM 1 BATH (LOW) 1 UNITS a $779 / MONTH 9,300 2 BEDROOM 2 BATH (LOW) 1 UNITS a $779 / MONTH 9,300 1 BEDROOM 1 BATH (MARKET) 102 UNITS a $695 / MONTH 850,700 1 BEDROOM 1 BATH DELUXE (MARKET) 14 UNITS a $775 / MONTH 130,200 2 BEDROOM 1 BATH (MARKET) 9 UNITS a $850 / MONTH 91,800 2 BEDROOM 2 BATH (MARKET) 6 UNITS a $895 / MONTH 64,400 LAUNDRY INCOME 164 UNITS a $5 / MONTH 9,800 GROSS INCOME $1,385,100 (LESS) VACANCY AND BAD DEBT 5.00% GROSS INCOME 69,300 GROSS EFFECTIVE INCOME $1,315,800 EXPENSES 101,214 SF a $4.00 /SF 404,900 NET INCOME BEFORE DEBT SERVICE $910,900 OR SAY $911,000 SOURCE: KEYSER MARSTON & ASSOCIATES, INC. TABLE: FVEPTS: 5/20/91 Key serMarstonAssociatednc. Richard L.Botti 500 South Grand Avenue,Suite 1480 Calvin E.Hollis,II Los Angeles,California 90071 Kafhleen H.Head 213/622-8095 Fax 213/622-5204 SAN DIEGO 619/942-0380 'Heinz A.Schilling SAN•FRANCISCO 415/398-3050 Cj Timothy C.Kelly IRE A.Jerry Keyser M E M O R A ND U M _ Kate Earle Funk JUN Robert J.Wetmore Michael Conlon ��T � -+p Denise E.Conley � OM`C TO: , Mr. Charles P. Spencer Director of Housing and Redevelopment City of Huntington Beach FROM: KEYSER MARSTON ASSOCIATES, INC. SUBJECT: Five Points Senior Citizen Apartment Project DATE: May 31., 1991 Keyser Marston Associates, Inc. (KMA) would like to offer the fol- lowing clarifications and informational requests related to the letter prepared by David Michelsen dated May 30, 1991. The points correspond on a numerical basis to those in the Michelsen letter. 1. The capitalized interest cost of $722 , 547 was included in the KMA estimate of capital costs to be incurred by the developer. In addition, approximately $295, 000 of debt service to be in- curred during the lease-up period was also included in the capital cost estimate. As shown in Table 1 of the KMA letter dated May 21, 1991, these costs were estimated at $1, 018, 000. This corresponds to the amount estimated in the pro forma sub- mitted by the developer on May.. 8 , 1991. The disbursement of $721, 000 in capitalized interest during tl -first- tY-o years of operation was also- taken directly from the pro forma submitted by the developer. 2 . The low income rents were based on the lower of the limit im- posed by Orange County (80% of median income) or the .achiev- able market rents . estimated in the developer's market oppor- tunities analysis. It was assumed that an average of 1. 25 people will reside in the one bedroom units and 2 people will reside in the two bedroom units. In .the event HUD has .estab- : .lished market rents that are lower than both the rents-allow- able by., the Orange -County restrictions and the, achievable market' rents, the developer has no advantage .to allocating these units to HUD_ recipients. As, long as the units*.meet the Orange County `1•6w income- standard they should qualify far tax ,t I1�& exempt bond financ'ing - { v t l h Id - -h y - fl&tEValtiatS Alt-S 1 i z L"i opment y on ervtce's ,t al. -p� •,, - ,. r-i.- eP V Real Estat cede el ;Li t I " jt l�i .i 1 ! 4 ?; 7 ._ i f,y;rl_ U i V 7_F y G J t t r I l 1 rj f!t ��i t.'T1 r •,;t'{,tZ .,4. -j:. t- h t -i i' .•(- 'I. .. i :1•. ' !i F.Ia•q�- t t i 't.•q J, ..fi Page 2 In any event, the KMA gross income estimate does not vary materially from the developer's pro forma estimate. There is only a $10, 000 difference in the gross income estimates. The major income differential can be found in the operating ex- penses, which are estimated at $5. 08 per square foot in the developer's estimates, and $4 . 00 per square foot in the KMA estimates. 3 . KMA used the developer's debt service payments in the KMA cash flow model. In the event these payments have changed, KMA will need to be provided with the revised annual debt service payments, plus the Ps. imated payoff am. tint -?kt the end of tin years of project operation. 4 . At this time KMA has not been provided with specific informa- tion related to the developer' s financial arrangements with his equity partners. Typically, the terms would provide for a preferred return to the equity investor and the allocation of the remaining cash flows between the investor and the developer. The actual arrangements would not be the concern of the Redevelopment Agency except that the developer is requesting Agency financial . assistance. Thus, it is impera- tive that the Agency is confident that the cash flow distribu- tion is equivalent to other similar transactions in the marketplace. 5. KMA estimated that the project will cost $11. 24 million., in- cluding land acquisition costs of $2 . 25 million. KMA did not make any value judgment until the imputed sale in the tenth year of project operation. However, it is important to note that if the project' s appraised value is lower than was originally anticipated, it may be at least partially a func- tion of the land cost being higher than is supportable by the proposed project. 6. Given the unCer"tainty related to the f.iuct&a:.ions 'i:i i;1aYiC8t_ capitalization rates over time, KMA will adjust the cap rate to 7 . 5%. It is important to consider, however, that the achievable cap rate should be positively influenced by the provision of below market interest rate long-term financing. At such time as KMA is provided with the revised debt service schedule, the loan pay-off amount in the tenth year of operation, and the equity return terms, we will be happy to revise our analysis. Please forward this information to our office at your earliest convenience. KHHslp . 91272 .HT$.. .. 14066 0005t f Y KeyserMarstonAssociatesInc � i ti 5ja i „r: ATTACHMENT 1 �.0 -�� ACT City of Huntington Beach 2000 MAIN STREET CALIFORNIA 92648 DEPARTMENT OF COMMUNITY DEVELOPMENT Building Division 536-5241 Planning Division 536-5271 January 18, 1991 Mr. David R. Michelson Institutional Property Investors , Inc. 19800 MacArthur Blvd. #680 - Irvine, CA 92715 Subject : FIVE POINT COURT Dear Mr . Michelson: Thank you for your letter dated November 30, 1990. I have reviewed your letter and specifically your request to have the City of Huntington Beach contribute $500,000.00 towards a 160 unit low to moderate income senior apartment project. The money to be contributed by the City would be through the release of fees previously paid for development of the site. These fees were paid when building permits were issued for the 148 unit congregate care facility known as Five Point Court. Unfortunately, these fees cannot be refunded or .released by the Community Development Department. The fees may be refunded only through City Council action. I would encourage you, however, to contact Ms . Barbara Kaiser, Deputy City Administrator who is the Director of Economic Development. Ms . Kaiser and her staff would be willing to discuss your plans for assistance in developing the low to moderate income senior project. You may contact .Ms . Kaiser ' s office at (714) 536-5542. If you should have any questions regarding this matter, please feel free to contact me at (714) 536-5271 . Si erely, �t and Zelefsk P anning Director cc : Barbara Kaiser, Deputy City Administrator HZ :HF: lp (8405d) ATTACHMENT 2 City of Huntington Beach 2000 MAIN STREET CALIFORNIA 92648 DEPARTMENT OF ECONOMIC DEVELOPMENT Office of the Director 536-5582 Economic Development 536-5542 April 16, 1991 Institutional Property Investors, Inc. 19800 MacArthur Boulevard, Suite 680 Irvine, California 92715 Attention: Mr. David Michelson SUBJECT: FIVE POINT COURT —ECONOMIC ANALYSIS Dear Mr. Michelson: Attached for your information is a copy of the Redevelopment Agency's economic consultants (Keyser Marston's) analysis of your firms proposed senior citizen apartment project located at Main and Florida Streets. This analysis was based on documents provided by yourself. As you can see by Keyser Marston findings, there exists little if any justification for City/Agency assistance based on the above mentioned documentation. Unfortunately, budget constraints are such that I am unable to authorize additional consultant expenses for further review of your proposal. If, after having had reviewed Keyser Marston's preliminary analysis, feel there is additional information needing clarification or analysis to support your request and are agreeable to reimburse Agency expenses, please contact me at (714) 374-1575. Sincerely, C s encer, Director ptisin Redevelopment CPS:sar Attachment xc: Barbara A. Kaiser, Deputy City Administrator/Economic Development Kathe Head, Keyser Marston Associates, Inc. c KeyserMarstonAssociatesInc. Richard L.Botti 500 South Grand Avenue,Suite 1480 Calvin E.Hollis,11 Los Angeles,California 90071 Kathleen H.Head 213/622-8095 Fax 213/022-5204 SAN DIEGO619 942-03x0 Heinz A.Schilling SAN FRANCISCO 415 39h-3050 Timothv C.Kelly A.Jem-Keyser It C, Kate Earle Funk Robert J.Wetmore M E M O R A N D U M Michael Conlon �2 Denise E.Conley ppR F�pN TO: Mr. Charles P. Spencer, Director Housing and Redevelopment Huntington Beach Redevelopment Agency FROM: KEYSER MARSTON ASSOCIATES, INC. SUBJECT: Five Point Court - Developer Proposal DATE: April 8, 1991 In accordance with your request, Keyser Marston Associates, Inc. (KMA) reviewed the proposal to reconstruct and expand the senior citizen apartment complex at Main and Florida Streets. Specifi- cally, KMA has identified the key issues to be clarified with the developer before proceeding with an analysis of the assistance that could potentially be provided by the Huntington Beach Redevelopment Agency. 1. To what income group is this project targeted? What standard of affordability was applied . for that target group? In any event, it appears that only 11% of the units (18 units) have income restrictions applied. 2. The proposal states that Wells Fargo will provide construction financing on a tax exempt basis. It is our understanding that the Internal Revenue Code requires at least 20% of the units to be set-aside for occupancy by tenants having incomes of less than the 50% of the County median income, or 40% 'or more of the units must be set-aside for tenants with incomes of 60% or less of the County median. Thus, it does not appear that the project, as currently proposed, would qualify to receive tax exempt financing. Real Estate Predevelopment&Evaluation Services Page 2 3. What is the source of permanent financing for the proposed project? At what interest rate will it be provided? Schedule 3 , submitted by the developer, indicates that $9 million of bond financing will be provided, but that $1 million will be withheld. Are these funds being escrowed, and will they be provided to the developer at some point during the process? We do not understand why the developer would have to make debt service payments on funds that he cannot use. Assuming these funds are escrowed, the developer should be able to require that these funds be placed in an interest bearing account. This will off-set the debt service obligation on the withheld amounts to some extent. 4. Assuming this project were to receive permanent financing at a tax exempt interest rate, the developer will save upwards of $1.5 million in interest expenditures, in present value terms, over the term of the loan. Assuming 18 units are set-aside for . low income households, this savings equates to over $83, 300 per restricted unit. An analysis of the developer's pro forma indicates that total construction costs, including land acquisition, equates to approximately $66, 600 per unit. Thus, the provision of tax exempt financing more than compen- sates the developer for providing 18 rent restricted units. 5. The developer is requesting $675, 000 in assistance from the Huntington Beach Redevelopment Agency, or $37 , 500 per restricted unit. If the developer's total costs are con- sidered, the Agency assistance would represent 56% of the costs associated with the 18 income restricted units. For comparison purposes, it should be noted that the restricted rents presented in.. the developer's pro forma are 21% to 40% lower than the projected market rents. Thus, there appears to be a disparity ..between the magnitude of the detriment to the developer and the assistance being requested. 6. KMA reviewed the developer's construction cost and income pro forma on a preliminary basis. The major components of these pro formas can be summarized as follows: KeyserMarstonAssociatesInc. z 1 Page 3 COSTS Land $2,250,000 $14, 062/unit Direct Costs Building $4,819,000 $37. 37/sf GBA FFE 200,000 Garage 425,000 $45.71/sf new area Site Work/Landscaping 320, 000 $4/sf land area Total Direct Costs; $5,764, 000, Indirect Costs As % Direct Costs Architecture & Engineering 4.2% Project Services/Mktg'. 4.8% Taxes/Insurance 3 . 0% Legal/Accounting 1.7% Development Management 3 .5% contingency 6. 1% Financing Costs Interest 8% Loan Origination Fees 5.2 points Income Market Rents $650 - $895/month $1.04 - $1. 12/sf Restricted Rents $515 - $580/month $. 67 - $. 68/sf Expenses $3.65/sf GBA At this time, KMA is unable to comment on the validity of these numbers. At such time as a site plan is provided we will be able to discuss the various components of the developer's estimates. KHH:gbd 91172 .HTB 14066. 0005 KeyserMarstonAssociatesInc. ;,TUN 10 '91 12:4:3 KEYSER MARSTON, P•S ATTACHMENT •3 KeyserMaistonAssociateslnc. Richard L.Botti 500 South Grand Avenue,Suite 1480 Calvin E.Hollis,I1 Los Angeles,California 90071 Kathleen H.Head 213/622-8095 Fax 213/622-5204 SAN DIEGO 619/942-0380 ',Ileinz A.Schilling SAN FRANCISCO 415/398.3050 Timothy C.Kelly A.Jerry Keyser M E M O R A N D U M Kate Earle Funk Robert J.Wetmore Michael Conlon Denise E.Conley TO: Mr. Charles P. Spencer, Director of Housing and Redevelopment City of Huntington Beach FROM: KEYSER MARSTON ASSOCIATES, INC. SUBJECT: Five Points Senior Citizen Apartment Project DATE: June 10, 1991 On June 7 , 1991 Keyser Marston Associates, Inc. (KMA) received a revised pro forma from Institutional Property Investors, Inc. re- lated to the proposed Five Points Senior Citizen Apartment Project. As you know, KMA had a number of questions related to the pro forma previously submitted, which were clarified in this revised pro forma. I have enclosed a copy of the KMA pro forma, which has been revised accordingly. The key findings of this analysis can be sum- marized as follows: 1. Table 1 summarizes the costs that will be incurred by the developer during the construction and lease-up period. KMA estimates these costs at $10 . 94 million. The developer - did not submit a revised cost pro forma in the June 7 , 1991 cor- respondence. we have, therefore, assumed that the previously submitted estimate of $10 , 587 , 894 remains valid. Based on this assumption, the KMA and developer estimates are essen- tially equivalent, with the KMA estimate being approximately $352 , 000 higher than the developer estimate. 2 . Table 2 presents a stabilized income analysis, of which the pertinent elements can be summarized as follows: YA Developer Gross Income $1, 385, 100 $1, 376,790 Vacancy 69, 300 68, 840 Operating Expenses 404, 900 516,236 ------ --------- Net Operating Income $ 910, 900 $ 791,714 Real Estate Predevelopment&Fval uation Services Page 2 The key differential between the KMA and developer pro formas is related to ongoing operating expenses. KMA has estimated these expenses at $4 . 00 per square foot, while the developer estimate equates to $5 . 10 per square foot. However, in a let- ter dated May 31, 1991, the developer indicated that Wells Fargo Bank, the construction lender for this project, es- timates that operating expenses will total $451, 000 or $4 . 47 per square foot. This represents a' $. 63 per square foot dif- ferential from the expense estimate used in the developer pro forma. 3 . A 10-year cash flow analysis is presented in Table 3 . KMA -utilized the debt service, interest earnings, capitalized in- terest and earnout amounts submitted by the developer. However, based on the debt service footnote in the developer's pro forma, which states that the loan is fully amortized over 30 years, it was assumed that the outstanding balance in year 10 would be approximately $8 . 4 million rather than the $9 . 5 million shown in the developer pro forma. 4 . Table 3 also presents the return to the developer and the equity investor assuming the equity investor receives 65% of the project cash flow. As can be seen in Table 3 , the inves- tor return is estimated at 15 . 3% . Using the developer' s es- timates, including a sale or refinancing in ten years, the in- vestor return is estimated at 10. 2%. If the wells ,Fargo ap- praisal expense estimates are used, the investor return is 13 . 2%. The developer estimate of project return at 7 . 11% rep- resents an average annual return excluding the assumed sale or refinancing of the project. The cost and income assumptions, excluding the operating expense estimates, are roughly equivalent between the KMA and developer pro formas . However, the magnitude of the differential between the g,Ueratinq a se estimates makes a materia 1 diffe ence in the analysis of the project,s financial feasibility. It is our conclu- sion tha-E usincr eit or the Wells Fargo es- t1ma_es _t e prgjPct is financials Pagible Using the developer's ex)ense estimates, the project return is in all likelihood insuffi- cien o su port the fu ro ected cost o e develo ment, in- cluding the es ima . 25 million in land acquisition costs. KHH: lp 91286.HTB 14066 . 0005 KeXserMarstonAssociatesInc. TABLE i ESTIMATED DEVELOPMENT COSTS FIVE POINTS SENIOR CITIZEN APARTMENT COMPLEX HUNTINGTON BEACH, CALIFORNIA 164 UNITS • 20% SET ASIDE FOR VERY'LOW AND LOW INCOME LAND 108,029 SF $20.83 /SF S2,250,000 DIRECT COSTS BUILDING SHELL/GARAGE 101,214 SF $54.00 /SF $5,466,000 ON•SITES/LANDSCAPING 108,029 SF $3.25 /SF 351,000 TOTAL DIRECT COSTS $5,817,000 INDIRECT COSTS ARCHITECTURE & ENGINEERING 4.00% DIRECT COSTS $233,000 PERMITS & FEES ALLOWANCE 749,000 TAXES & INSURANCE 1.00% DIRECT COSTS AND LAND 81,000 LEGAL & CLOSING 1.00% DIRECT COSTS AND LAND 81,000 CAPITALIZED INT/DEBT SVC DURING COSST 723,000 FINANCING FEES 6.50 POINTS 618,000. MARKETING/LEASING ALLOWANCE 100,000 DEVELOPMENT MANAGEMENT 2.00% DIRECT COSTS 116,000 CONTINGENCY 3.00% D.IRECT COSTS 175,000 TOTAL INDIRECT COSTS $2,876,000 TOTAL DEVELOPMENT COSTS $10,943,000 OR SAY $10,940,000 SOURCE: KEYSER MARSTON &. ASSOCIATES, INC. TABLE: FVEPTS: 5/20/91 `1' .,*7 yam= COASTLINE GROUP DX. 43 CORPORATE PARK,SUITE 208. IRVINE,CAUFORNIA 92714 TELEPHONE (714) 25248422 Wd"V_Sar&M MAL RM ME*W.Sato Mi'WC L SsarOosa C;"n 8_Mal April 30, 1991 Mr: Charles R. Adams, MAI Vice President/Manager Wells Fargo Bank 2030 Main Street, Suite 700 Irvine, California 92714 - RE: Five Point Senior Villas 18660 Main Street Huntington Beach, California Your File No.: OC-1027 Our File No.: 91-011 Dear Mr. Adams: In response to your authorization, we have conducted the investigations and analyses necessary to form an opinion as to the market value of the property described'hemin, subject to the assumptions and limiting conditions contained in the report which follows. Based upon our analysis and appraisal, it is our opinion the "As-Is Value", the "Value Upon Completion" and the"Stabilized Value" of the subject property,as of April 15, 1991, "As-Is Value" $ 3.250,000 "Value Upon Completion" $10,050,000 "Stabilized Value" $10.650,000 We believe that it would take approximately 60 to 90 days to market the subject property at the appraised value. T'he following report sets forth the data and analyses upon which the above opinion is, in part,predicated. If you have any questions or if we can be of funher assistance, please do not hesitate to call. Respectfully submitted, ZO Robert E_ McHolIand, MAI chard . S Ztsk is a�of a � �u'� av�ttiatfpn tpp�rr taJ�far its intmal w*only.This c=t��Pi.4r2fr! g4 stjwad 04'"az7lar pracrt' ndorAsAM has Dana doWed..Tbis copy is�-x..�i y =mrar the tervtt and CCrVkrinns eym#-_ INSTITUTIONAL PROPERTY INVESTORS, Wkr.... IN IL 19800 MacArthur Boulevard, e680. Irvine, CA 92715. (714)8333-9870 FA:,; (7 14);56-0981 May 30, 1991 To: Charles (Pat) Spencer Director of Housing and Redevelopment City of Huntington Beach By flax: 375-5087 Dear Pat, We request that Keyser Marston Associates be given direction by you to consider (7) additional points in their feasibility report which we believe will significantly alter their conclu- sion: 1. The capitalized interest of 721,000 as used in Keyser Marston's pro forma is not used correctly. The fund is for both construction and fill up and would be expended within year I past construction. Our estimate is that construction interest will use up 70% of the net funded capitalized 1nt- erest with the remaining 30% for fill up_ Thus, Keyser Marston has overstated income by over $550,000. 2. The 10Z of low income units, Which are HIID units, were assumed to be at market rents of 695.00 for a one bedroom, and 779.00 for a two bedroom. This is an error. Hud currentiv pays 635.00 for a one bedroom and 750.00 for a two bedroom. 3. The takeout loan will be amortized over 25 years_ This was not projected by us or by Keyser Marston as we were not aware of this fact until. May 16 when the meeting between FNMA and Wells Fargo was held at Valley View. This will significantly affect spendable cash flow. 4. Kathy assumed the investor was receiving a17, of the spend- able income. The split is 50% to I.P.I., the developer, and 50% to the investor. I.P.I. is not receiving a building profit or general contractor's fee, and is building the project at cost. This significantly affects the yield to the investor. (cony_) INCOME PROPERTY ACQUISMONS, DEVELOPMENT AND MANAGEMENT 1A JL May 30, 1991 Charles (Pat) Spencer Director of Housing and Redevelopment City of Huntington Beach Pace 2 5. Keyser Marston assumed a 4% annual rent increase. Senior apartments are restricted by Social Security increases and cost of Jiving adjustments. FNMA requires us to use 3%. In addition, variable expenses during coasLrucciou were not included in Keyser Marston's assumptions, and these total over $160,000. 6. Wells Fargo's outside appraiser's report, which was just completed, indicated a total project value of $10,600,000. This is $660,000 less than Keyser Marston's estimate. In addition, the appraisal disputes both our own estimate and that of Keyser Marston of net income before debt service by over $50,000 per year, 7. Keyser Marston's most significant error is the assumption that senior apartments, sell at 7% capitalization rates. The- current market is 8% and the lowest rate at the heighth of the market was 7.5Z. This overstates the 10th years sales value by over $2,300,000. (The Wells Fargo appraisal report documents past sales capitalization rates.) We will forward a copy of the appraisal for Kathy Head's rev-.ew. Given the above points, we request: a two weep: postponement of our portion of the council meeting which is currently scheduled for June 3. This will give Keyser Marston an opportunity to incorporate these points into their feasibility report and to discuss viore thoroughly our request for public assistance. Very truly �jyours, 4"-it,A, David R. Michelson President DRM:cb cc: fames Bancroft Norman Ward Dennis Gage Kathy Head KeyserlVlarstonAssociatesInc. Richard L.Botti- 500 South Grand'Avenue;•Suife-l480 Calvin E.Hollis,II Los Angeles,California 90071'" Kathleen H. Head 213/622-8095 Fax.213/62275204':. SAN fit EGO619/942-0380 Heinz A.Schilling SAN FRANCISCO 415/398-3050 Timothy C.Kelly A.Jerry Keyser RECEIVED Kate Earle Funk Robert J.Wetmore Michael Conlon MAY 2 Denise E.Conley 3 1991 EPARTMENT OF May 21, 1991 ECONOMIC DEVELOPMENT Mr. Charles P. Spencer Director Housing and Redevelopment City of Huntington Beach 2000 Main Street Huntington Beach, California 92648 Dear Pat: In accordance with your request, Keyser Marston Associates, Inc. (KMA) reviewed the proposal submitted for the development of a 164 unit senior citizen apartment project to be located at the south- west corner of Main and Florida Streets in Huntington Beach. The purpose of this review is to determine, on a preliminary basis, whether the project requires public financial assistance in order to be economically viable. ANALYSIS KMA performed a cost/income analysis of the proposed project to determine the supportable investment from a developer' s perspec- tive, and the resulting need for Agency financial assistance (if any) . The cost estimates used herein represent the costs required to build an above-average quality project such as is being proposed by the developer. The income analysis is based on a market feasibility analysis commissioned by the developer, and the 1991 HUD guidelines for very low and low income housing prices in Orange County. Development Costs The 164 unit apartment project consists of the following unit mix: Unit Size No. of Units Square Feet 1-bedroom 1 bathroom 129 576 1-bedroom 1 bathroom deluxe 17 716 2-bedroom 1 bathroom 11 790 2-bedroom 2 bathroom 7 864 Real Estate Predevelopment&Evaluation Services Mr. Charles P. Spencer May 21, 1991 Page 2 It is assumed that the project will be constructed at an above- average quality level, commensurate with the senior citizen project recently completed by this developer in the City of Garden Grove. As presented in Table 1, the basic cost assumptions used in this analysis can be summarized as follows: 1. The developer has currently offered $2 . 25 million, or $20 . 83 per square foot of land area to acquire the 108 , 029 square foot site. 2 . Shell costs, including the completion of the garage are estimated at $54 per square foot of the net building area. This relatively high construction cost is reflec- tive of the high quality construction assumed for the proposed project. 3 . Landscaping and other on-site improvements are estimated at $3 . 25 per square foot of land area, or approximately $350, 000 . 4 . Indirect costs were based upon percentages of direct costs,. with the exception ' of City permits and fees, financing costs, and marketing/leasing expenditures. 5. City permits and fees costs of $749 , 000 were assumed, based on the actual costs incurred by the- developer. 6 . Project financing costs consist of the bond origination fees, which are estimated at approximately 6 . 5 points. Capitalized interest expenditures and debt service during construction are estimated at approximately $1 . 02 mil- lion. 7 . A $100, 000 allowance for marketing/leasing expenditures was provided. As shown in Table 1, direct costs total $5. 82 million and indirect costs equal $3 . 17 million. If it is assumed that the land acquisi- tion costs are $2 . 25 million, total development costs are estimated at $11. 24 million. Revenues The proposed project is comprised of 15 units restricted to very low income households , 18 units restricted to low income households, and 131 market rate units. To determine the allowable rent levels for the income restricted units, KMA used the 1991 HUD guidelines for orange County, and inflated the allowable rent levels by 2 . 5% to reflect the projects opening in 1992 . It was assumed that very low income households could earn no more than 50% Key serMarstonAssociateslnc. Mr. Charles P. Spencer May 21, 19.91 Page 3 of the Orange County median, and the low income households could earn no more than 80% of the County median. It was further as- sumed that 1-bedroom units would be occupied by an average of 1. 25 people, and that 2-bedroom units would be occupied by an average of 2 people. The rent levels achievable for the market rate units were based on the. projections provided in the market feasibility study prepared for the -developer by Richard 0. Stein, Consulting Economist. In instances where the market rents were actually projected to be lower than the allowable level for income restricted units, it was assumed that the rent achieved for the income restricted units would be limited to the market level. Table 2 presents a breakdown of the projected rents for the various unit types. Based on this rent schedule, gross income is projected to be $1. 38 million upon project stabilization. Assuming the project sustains a 5% average vacancy rate, and operating expenses of $4 . 00 per square foot of net building area, the net income before debt service is $911, 000. Warranted .Assistance To calculate the warranted financial assistance to the proposed project, KMA prepared a 10-year cash flow analysis based upon the following assumptions: 1. Rent levels and operating expenses increase by an average of 4% annually. 2 . Interest earnings, use of capitalized interest and debt service payments are based on the estimates provided by the developer's bond underwriter. 3 . It is assumed the project is sold or refinanced in the tenth year of operation. 4 . Project debt is assumed to total approximately $8 . 18 mil- lion, with the balance of the $11. 24 million in develop- ment costs to be funded with equity. As can be seen in Table 3 , based upon the preceding assumptions, the proposed project generates a 12 . 5% internal rate of return on total investment and a 23 .1% internal rate of return on the equity investment. The annual cash on cash returns anticipated after the project reaches stabilization range from 9 . 2% to 23 . 4% , assuming the earn out funds are used to reduce the equity contribution over time. Both the annual returns and the cash flow returns fall within the range that would typically be considered acceptable for a project of the proposed scope and inherent risk level. KmerMm stonAssociatesInc. .r a f �. Mr. Charles P. Spencer r . May 21, .1991 Page -4 CONCLUSIONS/RECOMMENDATIONS Based upon the preceding analysis, KMA would concJ_udg that the senior citizen apartment project, as, current ly -bronosed, does not require any public financial assistance t economic feasibillty. . The provision of tax exempt financing sufficiently mitigates the cost premiums associated with the high quality con- struction being proposed, and the lost revenues associated with the . allocation of 33 income restricted units. It is further the KMA !conclusion that in order to justify the $675, 000 in assistance f� being requested by the developer, 40% of the units would have to be restricted to very low and low income households, on a propor- tionate basis. In the event the Agency chooses to provide the developer with `r $675, 000 in assistance, for the project as currently proposed, it should be provided in the form of an equity contribution. As such, the Agency should be entitled to a preferred return on this invest- hent in addition to a share of the project's future cash flows . Based on the current cost estimates, $675, 000 represents 22% of the project' s required equity infusion. Therefore, if the Agency provides these funds, they should be provided with a commensurate share of the cash flows distributed to the equity partners. We appreciate this opportunity to be of assistance, and are avail- able to answer any questions that may arise. Yours very truly, KEYSER MARSTON ASSOCIATES, INC. Kathleen H. Head KHH: lp 91261.HTB 14066. 0005 KeyserMarstonAssociatesInc. . TABLE 1 ESTIMATED DEVELOPMENT COSTS FIVE POINTS SENIOR CITIZEN APARTMENT COMPLEX HUNTINGTON BEACH, CALIFORNIA 164 UNITS - 20% SET ASIDE FOR VERY LOW AND LOW INCOME LAND 108,029 SF $20.83 /SF $2,250,000 DIRECT COSTS BUILDING SHELL/GARAGE 101,214 SF $54.00 /SF $5,466,000 ON-SITES/LANDSCAPING 108,029 SF $3.25 /SF 351,000 TOTAL DIRECT COSTS $5,817,000 INDIRECT COSTS ARCHITECTURE & ENGINEERING 4.00% DIRECT COSTS $233,000 PERMITS & FEES ALLOWANCE 749,000 TAXES & INSURANCE 1.00% DIRECT COSTS AND LAND 81,000 LEGAL & CLOSING 1.00% DIRECT COSTS AND LAND 81,000 CAPITALIZED INT/DEBT SVC DURING CONST 1,018,000 FINANCING FEES 6.50 POINTS 618,000 MARKETING/LEASING ALLOWANCE 100,000 DEVELOPMENT MANAGEMENT 2.00% DIRECT COSTS 116,000 CONTINGENCY 3.00% DIRECT COSTS 175,000 TOTAL INDIRECT COSTS $3,171,000 TOTAL DEVELOPMENT COSTS $11,238,000 OR SAY $11,240,000 SOURCE: KEYSER MARSTON & ASSOCIATES, INC. TABLE: FVEPTS: 5/20/91 r TABLE 2 ESTIMATED OPERATING INCOME FIVE POINTS SENIOR CITIZEN APARTMENT COMPLEX HUNTINGTON BEACH, CALIFORNIA 164 UNITS - 20% SET ASIDE FOR VERY LOW AND LOW INCOME RENTAL INCOME ------------- 1 BEDROOM 1 BATH (VERY LOW) 13 UNITS @ $473 / MONTH $73,800 1 BEDROOM 1 BATH DELUXE (VERY LOW) 1 UNITS is $473 / MONTH 5,700 2 BEDROOM 1 BATH (VERY LOW) 1 UNITS a $535 / MONTH 6,400 2 BEDROOM 2 BATH (VERY LOW) 0 UNITS a $535 / MONTH 0 1 BEDROOM 1 BATH (LOW) 14 UNITS @ $695 / MONTH 116,800 1 BEDROOM 1 BATH DELUXE (LOW) 2 UNITS @ $706 / MONTH 16,900 2 BEDROOM 1 BATH (LOW) 1 UNITS is $779 / MONTH 9,300 2 BEDROOM 2 BATH (LOW) 1 UNITS a $779 / MONTH 9,300 1 BEDROOM 1 BATH (MARKET) 102 UNITS @ $695 / MONTH 850,700 1 BEDROOM 1 BATH DELUXE (MARKET) 14 UNITS is $775 / MONTH 130,200 2 BEDROOM 1 BATH (MARKET) 9 UNITS a $850 / MONTH 91,800 2 BEDROOM 2 BATH (MARKET) 6 UNITS a $895 / MONTH 64,400 LAUNDRY INCOME 164 UNITS is $5 / MONTH 9,800 GROSS INCOME $1,385,100 (LESS) VACANCY AND BAD DEBT 5.00% GROSS INCOME 69,300 GROSS EFFECTIVE INCOME $1,315,800 EXPENSES 101,214 SF a $4.00 /SF 404,900 NET INCOME BEFORE DEBT SERVICE $910,900 OR SAY $911,000 SOURCE: KEYSER MARSTON & ASSOCIATES, INC. TABLE: FVEPTS: 5/20/91 TABLE 3 ' 10 YEAR CASH FLOW FIVE POINTS SENIOR CITIZEN APARTMENT COMPLEX HUNTINGTON BEACH, CALIFORNIA 164 UNITS 20% SET ASIDE FOR VERY LOW AND LOW INCOME CONSTRUCTION YEAR YEAR YEAR YEPR YEAR YEAR YEAR YEAR YEAR YEAR YEAR 1 2 3 4 5 6 7 8 9 10 ---------- ------ ------ -•--- RENTAL INCOME 1 BEDROOM 1 BATH (VERY LOW) S45,749 $76,740 $79,809 $83,001 $86,322 $89,774 $93,365 $97,100 $100,984 $105,023 1 BEDROOM 1 BATH DELUXE (VERY LOW) 3,519 5,903 6,139 6,385 6,640 6,906 7,182 7,469 7,768 8,079 2 BEDROOM I BATH (VERY LOW) 3,980 6,677 6,944 7,222 7,510 7,811 8,123 8,448 8,786 9,138 2 BEDROOM 2 BATH (VERY LOW) 0 0 0 0 0 0 0 0 0 0 1 BEDROOM 1 BATH (LOW) 72,391 121,430 126,288 131,339 136,593 142,056 147,739 153,648 159,794 166,186 . 1 BEDROOM 1 BATH DELUXE (LOW) 10,505 17,622 18,327 19,060 19,822 20,615 21,440 22,297 23,189 24,11`~ 2 BEDROOM.1 BATH (LOW) 5,796 9,722 10,111 10,515 10,936 11,373 11,828 12,301 12,793 13,30: 2 BEDROOM 2 BATH (LOW) 5,796 9,722 10,111 10,515 10,936 11,373 11,828 12,301 12,793. 131305 1 BEDROOM 11BATH (MARKET) 527,422 884,707 920,095 956,899 995,175 1,034,982 1,076,382 1,119,437 1,164,214 1,210,783 1 BEDROOM 1 BATH DELUXE (MARKET) 80,724 135,408 140,824 146,457 152,316 158,408 164,745 171,334 178,188 185,315. 2 BEDROOM 1 BATH (MARKET) 56,916 95,472 99,291 103,263 107,393 111,689 116,156 120,803 125,635 130;660 2 BEDROOM 2 BATH (MARKET) 39,953 67,018 69,698 72,486 75,386 78,401 81,537 84,799 88,191 91,718 LAUNDRY INCOME 9,840 10,234 10,643 11,069 11,511 11,972 12,451 12,949 13,467 14,005 --------- --------- ......... --------- ------- --------- --------- --------- --------- ------- GROSS INCOME S862,590 $1,440,654 $1,498,280 $1,558,211 $1,620,540 $1,685,361 $1,752,776 $1,822,887 $1,895,802 $1,971-,634 (LESS) VACANCY AND BAD DEBT 0 72,033 74,914 77,911 81,027 84,268 87,639 91,144 94,790 98,582 .: ......... --------- --------- --------- --------- ......... --------- --------- -------- EFFECTIVE GROSS INCOME $862,590 $1,368,621 $1,423,366 $1,480,301 $1,539,513 $1,601,093 $1,665,137 S1,731,742 $1,801,012 $1,8738052- EXPENSES '404,856 421,050 437,892 455,408 473,624 492,569 512,272 532,763 554,073 576,236 ------- --------- --------• --------- --------- ----•---- --------- --------- --------- --------- NET INCOME BEFORE DEBT SERVICE $457,734 $947,571 $985,474 $1,024,893 $1,065,888 $1,108,524 $1,152,865 $1,198,979 $1,246,939. $1,2961816. . PLUS,: INTEREST EARNINGS 155,259 49,969 0 0 0 0 0 0 0 PLUS: CAPITALIZED INTEREST 150,992 571,301 0 0 0. 0 0 0 0 (LESS) DEBT SERVICE 708,003 827,053 747,927 791,897 791,897 791,897 791,897 791,897 791,897 PLUS: EARNOUT AMOUNT 0 235,000 245,000 250,000 260,000 260,000 65,000 0 0 --------- ......... --------- --------- ......... --------- --------- --------- NET INCOME AFTER DEBT SERVICE $55,982 $976,788 $482,547 S482,996 $533,991 $576,627 $425,968 $407,082 $455,042 SALES PROCEEDS 18,525,944 (LESS) CLOSING COSTS a 3% 555,778 (LESS) BOND REPAYMENT 9,500,000 GROSS SALES PROCEEDS 8,470,166 NET CASH FLOW BEFORE DEBT SERVICE (11,240,000) 457,734 947,571 985,474 1,024,893 1,065,888 1,108,524 1,152,865 1,198,979 19,217,105 NET CASH FLOW AFTER DEBT SERVICE (3,055,000) 55,982 976,788 482,547 482,996 533,991 576,627 425,968 407,082 8,925,208 CASH ON CASH RETURN 1.8% 26.3% 9.2% 10.0% 13.3% 17.5% 20.7% 23.4% -_ RETURN TO INVESTOR . -•----•---------.. f�• _ _ IRR ON TOTAL INVESTMENT 12.5% IRR ON EQUITY 23.2% + .BOND AMOUNT 8,185,000 .. EQUITY AMOUNT 3,055,000 TOTAL DEVELOPMENT COST 11,240,000 ?-~