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HomeMy WebLinkAboutExhibit 5Exhibit 5 TNDG Memorandum R. MEMORANDUM TO: City of Newport Beach DATE: March 10, 2008 ATTN: Mr. David Lepo Planning Director FROM: The Natelson Dale Group, Inc. (TNDG) FILE: #3918 SUBJECT: REVIEW OF FINANCIAL PRO FORMA FOR SEASHORE VILLAGE Per your request, The Natelson Dale Group, Inc. (TNDG) has conducted a limited and brief review of the following financial information regarding the proposed Seashore Village project: • The "Seashore Village Detailed Pro Forma" dated November 2007 and prepared by Todd Schooler & Associates, Inc. (the project applicant); and • An appraisal letter prepared by CB Richard Ellis, Inc. (CBRE) and dated January 5, 2008. This letter provides a summary of a detailed appraisal (which was not included in the documentation provided by the applicant). The purposes of TNDG's review were: a) to evaluate, in the limited sense described above, the reasonableness of the applicant's financial projections, and b) to determine the extent to which it would be feasible for the applicant to subsidize "replacement housing" in fulfillment of Mello Act requirements. In particular, we understand that the applicant has offered to invest $1 million in the replacement of affordable housing units. The City has requested TNDG's opinion regarding the ability of the developer to commit to a higher amount. Summary Conclusion TNDG estimates that the project could afford to subsidize "replacement housing" by an amount of at least $1.8 million to $2.0 million and still meet the projectfeasibility criteria established in the developer's pro forma. These calculations, and TNDG's commentary on the developer's financial projections, are provided below. Comments on Reasonableness of Applicant's Financial Proiections The applicant's November 2007 pro forma indicates a "net revenue return" of $5,015,500, representing a profit margin of 8.5% of projected gross revenues from sale of the developed homes. According to City staff, the applicant represents the project summarized in this pro forma as feasible and attractive from an investment perspective. Thus, TNDG has assumed that the above numbers — $5,015,500 in net revenues and an 8.5% profit margin — represent the developer's acceptable feasibility thresholds for this project. The profitability indicated in the applicant's November 2007 pro forma is based on three basic components 24835 E. La Pahna Ave., Suite 1. Yorba Linda, California 92887 Phone: (714) 692 -9596. Fax: (714) 692 -9597 �1 Mr. David Lepo March 10, 2008 Page 2 • Total sales revenue of $58,950,000 • Land purchase price of $25,500,000 • Total development costs of $28,434,500 Of the above items, only the development costs are documented in any detail on the pro forma. The basis of the $58.95 million in sales revenue is not indicated, and the land purchase price is apparently based on the CBRE appraisal (per City staff, the applicant has confirmed that the site is in escrow for $25.5 million, contingent on project approval). Given the limited documentation and the short timeframe available for this assignment, it has not been possible for TNDG to independently evaluate the financial feasibility of the project. However, based on a cursory review of the indicated development costs (the only information provided in any detail in the submitted financial analysis), TNDG believes that they are generally reasonable. TNDG has not independently evaluated the reasonableness of the anticipated land value or the project's revenue (i.e., sales price) potentials, although further comment on these topics is provided below. Comments on Proiect's Ability to Subsidize "Replacement Housing" The CBRE appraisal — which was prepared subsequent to the applicant's (November 2007) pro forma — indicates total revenue potential for the project of $60.9 million, or $1.95 million more than the sales revenue indicated on the applicant's pro forma. Based on this revised revenue expectation, TNDG has recalculated the amount the project could afford to commit for "replacement housing" and still remain feasible (based on the thresholds defined above). Two feasibility thresholds have been considered: 1) achieving a "net revenue return" (i.e., gross revenues minus land and development costs) of $5,015,500, and 2) achieving a profit margin of 8.5% of gross sales revenue. Based on the first method, the project could afford to commit $1,950,000 for replacement housing. Based on the second method, the project could afford to commit $1,789,000 Comments on Land Value The CBRE appraisal estimates the "as is" value of the property at $15.95 million. CBRE estimates the potential land value (if entitled pursuant to the applicant's request) at $25.5 million. Thus, re- entitlement of the property would increase the site's value (to the current owner) by nearly $10 million. Although neither TNDG nor the City has access to the detailed appraisal calculations, it is presumed that the $25.5 million is a residual land value based on certain assumptions about the profitability of redeveloping the site. That is, it is the maximum amount a developer could afford to pay for the site and still achieve an acceptable rate of return given the expected value of the "end product." According to City staff, the applicant reports that there are 24835 E. La Palma Ave., Suite 1. Yorba Linda, California 92887 Phone: (714) 692 -9596. Fax: (714) 692 -9597 Mr. David Lepo March 10, 2008 Page 3 a number of developers interested in buying the property for approximately $25 million based on the anticipated profit potential. It should be pointed out that the "expected profit potential" (on which the $25.5 million value is based) quite likely does not reflect the expectation that a developer would need to pay for "replacement housing" pursuant to the Mello Act. (Although if it does, this means that there is potentially more money available for the replacement housing.) Implementation of the Mello Act is somewhat problematic given the provision for exempting projects that would become infeasible if required to provide replacement housing. If the provision of replacement housing (either on site or via subsidization of offsite units) is not a "given" in a developer's financial calculations, the resulting land costs (if determined via a residual land value) will always be biased towards making it "infeasible" to provide replacement housing. In contrast, if every prospective developer interested in a given site were presented with an "amount certain" necessary to fulfill Mello Act requirements, this known cost would be factored into every developer's profit expectations and cause the residual land value to be adjusted accordingly (i.e., the property would be appraised at a lower value, allowing the developer to pay for the required replacement housing and still achieve an acceptable rate of return). Finally, we should note that TNDG has not evaluated the degree to which the proposed replacement housing commitment (whether the $1 million offered by the applicant or the higher amount indicated by TNDG's calculations) would in fact be sufficient to provide affordable housing comparable to the numbers of units that would be lost with the development of this project. In fact, the very content of this letter reveals only a few of the subtleties involved in attempting to arrive at the "truth" in these matters, given that the developer effectively has control of much of the relevant information. Please feel free to contact us if you have any questions about our conclusions. Roger A. Dale Managing Principal 24835 E. La Palma Ave., Suite I. Yorba Linda, California 92887 Phone: (714) 692 -9596. Fax: (714) 692 -9597 b'