Memo from the development economics consultant team led by Karl F. Seidman regarding a financial assessment of the Canal District Kendall (PUD-CDK) Zoning Petition submitted by BioMed Realty

Executive Summary

Zoning Petition. On March 11, 2020, BioMed Realty, L.P. (BMR), submitted a rezoning petition to amend the Zoning Ordinance and the Zoning Map to create a new Planned Unit Development District entitled “Canal District Kendall” (PUD-CDK) located along Third Street in Kendall Square, between Linskey Way and the Broad Canal. The proposed zoning would enable the development of the vacant lot at 585 Third Street, either alone or combined with the adjacent gas transfer station (GTS) owned by Eversource at 330 Third Street.

As requested by a recent City Council Policy Order, an economic analysis was conducted to assess the potential change in property value from this rezoning petition and estimate the value of public benefits to be delivered in tandem with the new development allowed by the petition. Since many factors impact the final project value – factors that may change before the final project is complete - the estimates used in this memo are indicative of the magnitude of the zoning petition’s impact and not be construed as a precise determination of this impact.

Methodology. The analysis herein presents the results of a financial model used to estimate the project value to a developer under (a) the development scenarios that could occur under current zoning and (b) the scenarios that could occur with the zoning petition.

Six development scenarios were analyzed: (a) four scenarios under current zoning with residential or office/lab alternatives at 585 Third Street with and without the GTS; and (b) two scenarios for the alternative development outcomes enabled by the zoning petition at 585 Third Street with and without the GTS site.

Since the analysis indicated that the residential scenarios were not financially viable, the impact of the zoning petition was only considered in comparison with the existing zoning office/lab development scenarios. Impact on Project Value. The increase in allowable office/lab development under the zoning petition will result in an increase in the net value of real estate that could be built.

This net value increase represents (a) the change in total project value between scenarios under current zoning and the zoning petition (b) minus the increase in their respective development costs. Using developer investment return requirements, the zoning petition would result in an estimated $88 million net value increase without the GTS site, and an estimated $98 million in net value increase with the GTS site.

Developer Cost for Benefit Commitments. BMR has committed to multiple benefits in conjunction with the zoning petition, including a new arts and cultural center, relocation of the Eversource GTS site, a new indoor public space and several free or subsidized services. The estimated value of the public benefits is $19.4 to $30.3 million for development without the GTS site and $66.9 to $80.7 million with the GTS site, based on projected costs to the developer of fulfilling the proposed commitments.

Final Memo 12/15/2020

2 INTRODUCTION In 2019, the City Council adopted a Policy Order requesting an economic analysis of rezoning petitions that increase the development potential of sites by more than 50,000 square feet (SF). The goal of this analysis is to assesses the potential change in property value from the zoning petition and estimate the value of public benefits to be delivered in tandem with new development allowed by the petition. In 2020, Cambridge hired Karl F. Seidman Consulting Services and Karp Strategies (together, the Consulting Team) as an independent third-party to prepare this analysis.

ZONING PETITION

On March 11, 2020, BioMed Realty, L.P. (BMR), submitted a rezoning petition to amend the Zoning Ordinance and the Zoning Map to create a new Planned Unit Development District entitled “Canal District Kendall” (PUD-CDK) located along Third Street in Kendall Square, between Linskey Way and the Broad Canal. The proposed zoning would enable the development of the lot at 585 Third Street, either alone or combined with the adjacent gas transfer station (GTS) owned by Eversource at 330 Third Street.

Several proposed revisions to the original petition were made following the Planning Board public hearing held on September 14, 2020. In the petition’s current form, the anticipated new development would include up to 525,000 SF of office and/or laboratory space and would be required to provide an arts and cultural use on the site.

This memo summarizes the methodology and results of the economic analysis conducted to assess new development enabled by the zoning petition, inclusive of development on 585 Third Street only (without the GTS site) and on a larger combined parcel with the GTS site (See Figure 1). Figure 1. Map of Properties Considered in this Memo 330 Third Street 585 Third Street 3

METHODOLOGY + DATA SOURCES

To complete its analysis, the Consultant Team employed the following four-step methodology: In conjunction with the Cambridge Community Development Department, the development scenarios that could occur under current zoning and with the zoning petition were determined. These scenarios are presented in the next section.

The changes in the type and scale of development with the petition, along with the resulting differences in development revenue and costs between current zoning and petition scenarios, formed the basis for estimating the petition’s economic impact on project value. This initial step also identified the relevant public benefits expected to occur with the zoning petition that required valuation.

STEP 1 The key financial parameters needed to complete the economic analysis of development scenarios were identified and estimated. Examples of these parameters included rental and vacancy rates for the new construction housing and office/lab space in Kendall Square, construction and other development costs, the cost of capital and financial returns for comparable development projects, and costs associated with providing public benefits.

To estimate these parameters, the consultants reviewed real estate market reports from Costar and other firms, City of Cambridge reports, analyzed building permit construction cost data for comparable projects and conducted twenty interviews.

These 20 interview sources included the Biomed Realty Trust/Redgate development team for the project site, commercial real estate brokers and developers with experience in Kendall Square, general contractors with local experience, operators of arts and cultural centers and theaters, developers and contractors, and a winter market operator in Cambridge. Detailed information on the financial parameters used in the analysis are provided in an appendix.