CMA 2015 #408 · Agenda item attachment · Jan 11 2016

W-ZHA, «c DRAFT MEMORANDUM TO: Iram Farooq, City of Cambridge FROM: Sarah Woodworth, Managing Member RE: Zoning: Middle-Income Housing DATE: January 19, 2015 EXECUTIVE SUMMARY W-ZHA, LLC was retained by the City of Cambridge to evaluate how proposed zoning changes in Central Square may impact private development feasibility. In essence, the proposed zoning changes encourage the provision of workforce-affordable family housing by offering developers an increase in a site's floor area ratio. For purposes of this analysis, workforce-affordable family housing is defined as a 3 bedroom unit affordable to households with an annual income that is 80 percent of the areawide median income. This translates into a family with an annual income of about $75,500.1 A 40,000 square foot site was assumed for this analysis. The zoning changes were tested on three development scenarios: a residential project; a mixed-use project incorporating residential, retail and office uses; and a mixed-use project incorporating residential, retail and laboratory space. W-ZHA worked with City staff and interviewed local developers to ascertain reasonable development cost and operating assumptions for residential, office and laboratory land uses. The analysis indicates that the workforce-affordable family housing provisions challenge private development feasibility for a purely residential project and a mixed-use office, residential and retail project. The increase in density does not offset the cost of incorporating three-bedroom apartments at discounted rates. The developer does not achieve a reasonable yield on their investment. Under a mixed-use scenario with lab space, the developer can achieve an adequate yield on investment with the workforce-affordable housing units. This is because the lab use generates sufficient investment return to subsidize the residential component. In practice, the lab use would pick up more of its fair share of the land value, thereby making the residential project financially more attractive. 1 These provisions targeting affordable family housing are in addition to the City's current affordable housing policy which targets households earning at a maximum 60 percent of the areawide median income.

- 2- W-zHA, LIc INTRODUCTION W-ZHA was retained by the City of Cambridge to evaluate how proposed zoning changes in Central Square may impact private development feasibility. W-ZHA performed a yield analysis to determine whether a project would generate sufficient net operating income to justify the cost and risk of developing the project. A 40,000 square foot site was assumed for this analysis. The zoning changes were tested on three development scenarios: a residential project; a mixed-use project incorporating residential, retail and office uses; and a mixed-use project incorporating residential, retail and laboratory space. W-ZHA worked with City staff and interviewed local developers to ascertain reasonable development cost and operating assumptions for residential, office and laboratory land uses. RESIDENTIAL LAND USE Development Program: Existing Zoning and Proposed Zoning The proposed zoning allows for more height and a lower minimum parking requirement. To realize the maximum intensity of use provided by the proposed zoning, a project must incorporate dwellings units affordable to middle-income households. The middle income units were assumed to be three bedroom with an average size of 1,300 net square feet per unit. Development Program Residential-Only Scenario Existing and Proposed Zoning Proposed Zoning Existing Zoning 3.0 4.0 Maximum FAR 80 140 Maximum Height 12 6 Assumption: Stories Built Avg NSF Units 179 141 810 Market Rate 18 24 810 Affordable 0 Middle Income 8 1,300 211 159 Total Units Parking 1.0 0.5 Parking Space /Unit 106 159 Parking Spaces Source: City of Cambridge; W-ZHA E: \New Folder (2)\[memo.xIsx]resi

- 3- W-zHA, Le The table above summarizes the development program for a residential project under existing and proposed zoning. A 40,000 square foot site is assumed. Under proposed zoning a developer can build 211 units on the site versus 159 units under today's zoning. Eight of these units must be affordable to families' earning 80 percent of the area's median income, Net Operating Income: Existing and Proposed Zoning Average Rental Rates Per Square Foot Residential Land Uses Central Square, Cambridge: Proposed Zoning Existing Zoning $4.10 $3.91 Market Rate $1.40 Affordable $1.40 na Middle Income $1.30 Source: City of Cambridge; W-ZHA E:\New Folder (2) \imemo xIsx/rent Market rent is assumed to be $3.91 per square foot. There are rent premiums for views on the upper floors of residential buildings. A 2 percent rent premium was applied for each floor above the 5th floor of the building. Net Operating Income Residential-Only Scenario Central Square, Cambridge Proposed Zoning Existing Zoning Net Operating Income $5,103,600 $3,834,000 /Unit $24,113 $24,188 Source: City of Cambridge; W-ZHA E: \New Folder (2)\[memo.xlsx)Sheet5 The net operating income per unit remains essentially the same under existing and proposed zoning. While there are rent premiums for the additional height, the low rental income from affordable and middle-income housing offsets this benefit.

-4- W-zHA, «c Development Cost: Existing Zoning and Proposed Zoning Development Cost Residential-Only Scenario Existing and Proposed Zoning ....'Existing Zoning Proposed Zoning i: Building GSF 155,169 210,307 Land Acquisition $8,250,000 $8,250,000 Demolition $140,000 $140,000 15q Ft 15q Ft $285 Hard Cost $170 $26,378,700 $59,937,600 30% $7,913,610 Soft Cost $17,981,300 Building Development Cost $34,292,300 $77,918,900 Spaces Spaces /Space 106 $15,900,000 159 $10,600,000 Parking Cost $100,000 $96,908,900 Total Development Cost $58,582,300 Source: W-ZHA E: \New Folder (2)\[memo.x/sx)rest cost Land cost was held constant between the two scenarios. Land cost was assumed to be $75 per FAR foot given today's zoning. Under existing zoning, developers will likely construct a stick-built building. This type of construction is less expensive than the cost to develop a twelve story building. Underground parking at $100,000 per space was assumed for both scenarios. Yield: Existing Zoning and Proposed Zoning A project's yield is simply a project's net operating income divided by its development cost. This indicator reflects how the real estate performs. A reasonable yield threshold for a developer is typically between 6 percent and 6.5 percent, While some developers may be willing to undertake projects for a lower yield because of today's low interest rates, for public policy purposes, it is reasonable to assume 6 percent to 6.5 percent.

- 5- W-zHA, uc ....Yield On Investment Residential-Only Scenario Existing and Proposed Zoning i.i: Proposed Zoning Existing Zoning Net Operating Income $5,103,600 $3,834,000 Development Cost $96,908,900 $58,582,300 5.3% 6.5% Yield 6% - 6:5% Yield Threshold Source: W-ZHA E:\ New Folder (2)\[memo.xisx]Sheet7 Given the assumptions, a residential project is feasible under existing zoning, but not feasible under the proposed zoning. The net operating income does not justify the cost to develop the project. MIXED-UsE: RESIDENTIAL, LAB, AND RETAIL Development Program: Existing Zoning and Proposed Zoning Under the mixed-use lab scenario, a residential building and a lab building are developed on the 40,000 square foot site. It is assumed that the residential building will incorporate retail into its ground floor. Retail space will likely be constructed adjacent to the lab building for cost purposes.

- 6- W-zHA, LC Development Program Mixed-Use: Lab/Residential/Retail Existing and Proposed Zoning Proposed Zoning Existing Zoning 4.4 3.0 Maximum FAR 80 Maximum Height 140 12 6 Assumption: Max Stories Built Development Program Square Feet Square Feet Lab/Retail Building 93,245 56,990 Lab 50,600 80,000 Retail 13,245 6,390 Residential/Retail Building 103,755 73,710 Residential 70,200 101,000 Retail 2,755 3,510 30,70 Total 197,000 Units Units Units Avg NSF 64 810 82 Market Rate 810 11 8 Affordable Middle Income 1,300 6 72 Total Units Parking Spaces Spaces 64 44 Lab/Retail Building Residential/Retail Building 74 30 Total 118 94 Source: City of Cambridge; W-ZHA E: \New Folder (2)\(memo, xlsx)sheet2 With a mix of uses there is an opportunity for shared parking. An analysis conducted by City staff indicated that 20 of the 50 spaces required to support the residential can be shared with the lab space.

- 7- W-ZHA, LIC Net Operating Income: Existing and Proposed Zoning Rental Rate Assumptions Average Rental Rates Per Square Foot Laboratory, Residential and Retail Uses Central Square, Cambridge Existing Zoning Proposed Zoning $65.00 $65.00 Laboratory Residential Market Rate $4.10 $3.91 Affordable $1.40 $1.40 Middle Income na $1.30 Retail $30.00 $30.00 Source: City of Cambridge; W-ZHA E:)New Folder (2))[memo.xlsx)rent lab Lab space is assumed to rent at $65 per square foot, triple net. Retail is assumed to rent at $30 per square foot, triple net. Residential rental rates are the same for this scenario as they were in the prior scenario. Net Operating Income: Total Program Net Operating Income Laboratory, Residential and Retail Uses Central Square, Cambridge Existing Zoning Proposed Zoning Net Operating Income $5,196,400 Lab/Retail Building $3,237,200 Residential/Retail Building $2,525,600 $1,827,500 Total $7,722,000 $5,064,700 Source: City of Cambridge; W-ZHA E: \New Folder (2)\[memo.x/sx]nol lab mix The lab and retail space generate significantly more net operating income per square foot as compared to the residential building.

- 8- W-zHA, uc Development Cost: Existing Zoning and Proposed Zoning Laboratory/Retail Building 'Development Cost Laboratory/Retail Building Existing and Proposed Zoning Existing Zoning Proposed Zoning 93,245 56,990 Building GSF Laboratory 50,600 80,000 Retail 13,245 6,390 Land Acquisition $3,904,900 $3,597,300 Demolition $66,300 $61,000 Lab Space /saFt /SaFt $300 Hard Cost $300 $15,180,000 $24,000,000 23% $3,491,400 Soft Cost $5,520,000 $18,671,400 Building Development Cost $29,520,000 Retail Space /Sq Ft /Sq Ft Hard Cost $170 $170 $1,086,300 $2,251,700 10% $225,200 Soft Cost $108,600 $2,476,900 Building Development Cost $1,194,900 Tenant Improvement /Useable Sa Ft /Useable Sq Ft $175 $175 Lab Space $13,720,000 $8,677,900 $60 $794,700 Retail Space $383,400 $60 $14,514,700 Tenant Improvements $9,061,300 Parking Spaces Spaces /Space 44 64 $4,400,000 $100,000 Parking Cost $6,400,000 Linkage Payment Sq Fi /Sq Ft SqFt $4.44 $414,000 $253,000 93,245 Linkage 56,990 Total Development Cost $57,296,800 $37,238,900 Source: W-ZHA E: \New Folder (2)\[memo.xIsx]lab cost The lab building is more expensive to develop than the residential building.

... - 9- W-ZHA, «c Residential/Retail Building Development Cost Residential/Retail Building Existing and Proposed Zoning Existing Zoning Proposed Zoning 73,710 101,000 Building GSF Residential 98,245 70,200 Retail 3,510 2,755 Land Acquisition $4,345,100 $4,652,700 Demolition $79,000 $73,700 Residential Space /Sq Ft /5q Ft $170 $285 Hard Cost $28,785,000 $11,934,000 $8,635,500 $3,580,200 30% Soft Cost $37,420,500 $15,514,200 Building Development Cost Retail Space /5a Ft /SqFt $596,700 $285 $170 Hard Cost $785,175 30% Soft Cost $235,600 $179,000 $1,020,775 Building Development Cost $775,700 /Useable Sq Ft /Useable Sq Ft $60 $60 $165,300 Tenant Imp. Retail $210,600 Sub-Total Lab Space 538,606,575 $16,500,500 Parking (Space Spaces Spaces 30 74 Parking Cost $100,000 $3,000,000 $7,400,000 Linkage Payment Sq Ft /Sq Ft SaFt 2,755 $4.44 $15,600 3,510 Linkage $12,200 Total Development Cost $46,037,600 $28,647,800 Source: W-ZHA E:\New Folder (2)\[memo.xlsx]resi cost w lab As discussed in the prior residential-only scenario, the cost to develop a 12-story residential building is more expensive on a per square foot basis than the cost to develop a low-rise, stick-built building.

- 10- W-ZHA, LE Yield: Lab, Residentia, and Retail Mix As demonstrated on the following table, the lab/retail building exceeds the minimum yield threshold and residential does not satisfy the yield threshold. If built (or coordinated) as one project, the blended investment yield is reasonable. Essentially, the lab building would subsidize the residential building. The lab building's economics make it feasible for the residential to incorporate units affordable to middle- income households. Proposed Zoning: Investment Yield Mixed-Use Project Lab/Retail Proposed Zoning Existing Zoning Net Operating Income $5,196,400 $3,237,200 Development Cost $37,238,900 $57,296,800 Yield 8.7% 9.1% Yield Threshold 7.75% - 8.25% Proposed Zoning Existing Zoning Residential/Retail $2,525,600 Net Operating Income $1,827,500 Development Cost $28,647,800 $46,037,600 6% 5.5% Yield Yield Threshold 6% - 6.5% Proposed Zoning Existing Zoning Project: Residential & Lab & Retail Net Operating Income $5,064,700 $7,722,000 Development Cost $65,886,700 $103,334,400 7.7% 7.5% Yield 7.25%+ Yield Threshold Source: W-ZHA E: \New Folder (2)\[memo.x/sx]Sheet4

- 11- W-ZHA,uc MIXED-USE: RESIDENTIAL, OFFICE, AND RETAIL Development Program: Mixed-Use Office, Residential and Retail Development Program Mixed-Use: Office/Residential/Retail Existing and Proposed Zoning Proposed Zoning Existing Zoning 1,265 2.0 Base FAR - Office 2.0 1.35 Base FAR - Residential Base FAR - Retail 0.2475 0.4 4.4 Base FAR - Total 2.8625 3.0 Maximum FAR 4.4 80 Maximum Height 140 Assumption: Max Stories Built 12 6 Square Feet Development Program Square Feet Office/Retail Building 56,990 93,245 Office 80,000 50,600 Retail 13,245 6,390 103,755 Residential/Retail Building 73,710 Residential 70,200 101,000 3,510 Retail 2,755 Total 197,000 130,700 Units Units Units Avg NSF 810 64 82 Market Rate 8 11 Affordable 810 1,300 6 Middle Income 99 72 Total Units Spaces Spaces Parking 64 44 Office/Retail Building 74 Residential/Retail Building Total 118 94 Source: City of Cambridge; W-ZHA E: \New Folder (2)\[memo.xisx)off prog The mixed-use development program with office space is the same as it is with lab space except the lab space is replaced with office space. Under the proposed zoning, a mixed-use project can take advantage of shared parking opportunities and reduce the number of parking spaces built on-site.

- 12- W-ZHA, LIE Development Cost: Office and Retail Building Development Cost Office/Retail Building Existing and Proposed Zoning Existing Zoning Proposed Zoning 56,990 Building GSF 93,245 Office 80,000 50,600 Retail 6,390 13,245 $3,597,300 Land Acquisition $3,904,900 Demolition $61,000 $66,300 Office Space /Sq Ft /SaFt Hard Cost $9,614,000 $190 $15,200,000 $190 25% Soft Cost $3,800,000 $2,403,500 Building Development Cost $19,000,000 $12,017,500 Retail Space /Sq Ft /Sq Ft $190 Hard Cost $190 $1,214,100 $2,516,600 25% Soft Cost $303,500 $629,200 $1,517,600 $3,145,800 Building Development Cost Tenant Improvement /Useable Sq Ft /Useable Sq Ft $60 $60 Office Space $3,404,500 $2,254,700 $60 $60 $383,400 $794,700 Retail Space Tenant Improvements $2,638,100 $4,199,200 Parking Spaces /Space Spaces 64 51 Parking Cost $6,400,000 $100,000 $5,100,000 Linkage Payment Sq Ft Sq Ft /Sq Ft 56,990 93,245 $253,000 $414,000 $4.44 Linkage Total Development Cost $25,184,500 $37,130,200 Source: W-ZHA E: \New Folder (2)\(memoxIsx)Sheet6 An office/retail building is less expensive to develop than a laboratory building. The building costs are lower as is the tenant improvement allowance.

- 13- W-zHA, «c Total Development Cost: Mixed-Use Office, Residential and Retail The residential program is the same under both the lab and office scenarios. Therefore, the cost to develop the residential/retail building in this scenario is the same as it is in the lab scenario. Total Development Cost Office, Residential and Retail Uses Existing Zoning Proposed Zoning Office/Retail Building $25,184,500 $37,130,200 Residential/Retail Building $46,037,600 $28,647,800 Total Program $83,167,800 $53,832,300 Source: W-ZHA E:|New Folder (2)\[memo.xlsx)Sheet9 Yield: Office, Residential, and Retail Mix Proposed Zoning: Investment Yield Office, Residential and Retail Uses Office/Retail Existing Zoning Proposed Zoning Net Operating Income $3,205,000 $1,992,000 $37,130,200 Development Cost $25,184,500 Yield 8.6% 7.9% Yield Threshold 7.75% - 8.25% Existing Zoning Proposed Zoning Residential/Retail Net Operating Income $1,827,500 $2,525,600 Development Cost $28,647,800 $46,037,600 6% 5.5% Yield Yield Threshold 6% - 6.5% Proposed Zoning Existing Zoning Project: Residential & Office & Retail Net Operating Income $3,819,500 $5,730,600 Development Cost $53,832,300 $83,167,800 6.9% Yield 7.1% Yield Threshold 7.25%+ Source: W-ZHA E: \New Folder (2)\[memo.x|sx)Sheet11 The office/retail building exceeds the minimum yield threshold under existing and proposed zoning. The residential/retail building does not satisfy the yield threshold under proposed zoning. If built or

- 14- W-ZHA, Le coordinated as one project, the blended investment yield does not satisfy the yield threshold. The office building's economics are not strong enough to justify residential development under proposed zoning. CONCLUSION The analysis indicates that developers will not pursue residential projects or projects with a mix of office, residential and retail land uses if there is a requirement that workforce-affordable, three bedroom units are required to be part of the building's unit mix. In these cases, developers will not achieve the minimum investment return necessary to justify the project's development. The analysis does indicate that if a mixed-use project has a significant lab component it may be feasible to develop a residential project with the workforce-affordable units. The lab space will subsidize the residential project. If developers were able to provide workforce-affordable housing units in a less expensive building-type, the zoning may be workable. The City of Cambridge may want to consider allowing developers to provide workforce-affordable units off-site, but within the neighborhood.