Some comments on Rob Gifford’s Newton Tab editorial in support of Austin St. Proposal:
| “At the conclusion of a multi-year planning process, “ | Some citizens are concerned that this planning process…
…began with a committee that included the selected developer recommended that Austin St. be declared surplus and was part of the mayor’s transition team. …began during a financial crisis for the city and country, in part created by the financial practices of the author’s firm. …began when the author was working closely with the developer and other financial executives in providing $45,000 to support to city politicians‘ efforts to pass an override. The developer’s and other engaged individuals city of Newton activities reflect good civic involvement and commitment to the city, but in context of a for-profit role in a city project now to some creates appearances of conflict of interest. |
| “the city issued a Request for Proposal for the Austin Street parking lot. “ | …was not publicized correctly per legal requirements |
| “Austin Street Partners (ASP) offered the second- highest cash bid of $1.050 million.” | …that was $4 million less than leading bid, and likely at least $10 million less than the current value of the property. A value that will increase significantly if transit service to the site improves in the future. |
| “Among the RFP respondents, the only higher cash bid ($5 million for an outright purchase of the land), was from New Atlantic;” | …with an outright purchase being strategy that is less tax-advantaged to that developer than the immediate write-off of a upfront lease payment.
…with specific provisions at the end of the lease term sheet that it contain covenants that make it indistinguishable from a fully owned property for mortgage purposes. |
| “however, its plan contemplated a project that was nearly 50 percent larger (98 units)” | … 44% (98-68)/68 larger, not 50% larger |
| “Besides the $1.050 million initial payment for the ground lease “ | …a lease that will last 198 years until the year 2213, with the specified extension option. Over 99 years it comes out to $841/month for 1.6 acres of land (1.3cents/sqft/month). |
| “plus a $300,000 building permit fee,” | …that will not begin to cover the extensive work the city has had to do on the part of the developer to try to sell the project to the public |
| “the city is receiving a broad array of benefits from the proposed transaction:— An additional $750,000 in off-site infrastructure improvements “ | …a capped contribution to perhaps only partially cover the infrastructure improvements needed to specifically support the burden of the project on sewer and water systems. |
| “plus a new public plaza” | …that is half the size originally envisioned. |
| — “Continued ownership and revenue from the 127 refurbished parking spaces currently on site.” | …except that there are currently 156 if not 164 parking spaces currently on the site |
| — “Continued ownership of the land underneath the project via the proposed ground lease” | … that will come in handy in the year 2213 when the city gets the land back |
| — “The creation of 17 new affordable housing units (25 percent of 68 units).” | …that will rent for above the median rental rate in Newtonville. |
| “When one looks at the long-term embedded gap between affordable and market rents, this alone constitutes a multi-million subsidy from ASP to the city.” | … a subsidy from the nearly half a billion dollars in rental revenue the project will yield in today’s dollars over the life of the project |
| — “A projected annual municipal fiscal surplus of $40,000 per year” | … that is canceled out if just 2 more students attend public school (or less if they require special services) and that is now more than canceled out by additional affordable units.… that could be further canceled out in tax revenue decrease from Newtonville businesses fail or leave the area due to construction/lost convenient parking.… that might be generated by 2% increase in walking distance residents, but easily offset by reductions in the large portion of current customers that arrive from car-dependent distances. |
| — “A projected $1.84 million increase in local retail and dining expenditures” | […over what time frame? Source?] |
| “Given that the City retains what it started with (127 public parking spaces) “ | …except that it has at least 156, if not the 164 specified by ASP in June. |
| and also receives substantial direct and indirect payments and benefits, I am hard pressed to see how anyone could challenge the fairness of the deal. | This post cites some basis for challenging the fairness. |
| “Real estate developers…raise third-party debt and equity capital from banks, institutions and private investors in order to finance the construction of the project.” | …and collect an immediate profit to reward upfront risk taking, which is larger if they have limited competition and have done a good job negotiating deal to a high net present value. |
| “If the location and demographics are sound, and the projected economic returns are sufficient, the money follows; if not, the developer writes off the early stage investment and moves on.” | …or moves to sue the city, as they have done in another project, which has not had appropriate independent counsel in the process. |
| “ASP’s current pro forma shows a 6.25 percent return on cost (annualized income divided by total development cost).” | … except that the pro forma appears to contain five errors that when corrected raise the return to 6.48%. This error translates to the equivalent of 3 additional affordable units. |
| The Massachusetts Department of Housing and Community Development (DHCD) has established minimum returns for affordable housing projects. Based on current interest rates, that figure is approximately 6.7 percent, so ASP is building at a lower level of profitability than the DHCD threshold. | …but with calculation errors corrected, they are much closer to 6.7% The 0.23% error was the equivalent of 3 affordable units. Even with 6 affordable units, the return remains above 6%. |
| Looking at this from a private sector perspective, the 6.25 percent return should be sufficient to attract the required third-party investment capital…but it’s not a slam dunk given the financial constraints associated with the project. | …but the return was actually 6.48% for original project, and the analysis does not include the value of having use of the land for 198 years, which could involve additional residential or retail expansion over time, or increases in rental value if actual transit comes to Newtonville. |
| On the plus side, this is a great walkable location, with excellent access to transit and amenities and very strong demand. | …walkable yes, transit not so much. Transit score of only 37 (“some transit”), in contrast to Newton Center for example, which has a transit score of 80 (“excellent transit”). |
| On the minus side, the project is on a ground lease (it’s far preferable to own the land under the project that you are building) | …that enables the developer to immediately write off the lease payment rather than depreciate the land. What are the pros and cons? Is there really a difference between owning and leasing 198 years? |
| with a relatively high (25 percent) percentage allocated to affordable units. | 25% is normal without the retail component. The retail component should drive more. |
| While more affordable housing is a great public benefit, for obvious reasons it is dilutive to the financial returns. Additionally, compared with most other institutional investment opportunities, this is a relatively small building. Certain costs (e.g., front desk and on-site maintenance staff) are fixed regardless of the size of the property, and thus will take a relatively bigger bite out of Austin Street’s bottom line. The developer is earning a fair return here, but there is little room for error. Any additional reductions in overall unit count, increase in affordable units or other consideration to the city would likely make the project financially infeasible.While I strongly support the Austin Street project, I recognize and respect that there are different perspectives and concerns being discussed and debated by the community and the Board of Alderman. However, we should take the questions surrounding project economics and city fiscal benefits off the table.This is a fair deal resulting from a thorough planning process, resulting in manifold benefits to the City of Newton. |
..on the basis of this editorial? |