Re: 339 – 345 Island Highway, View Royal BC Development Land Lift Analysis
A consultant report by Mulholland & Parker Land Economists evaluating potential land value increases from rezoning to determine community amenity contributions.
April 26, 2023
Leanne Taylor Director of Development Services Town of View Royal 45 View Royal Avenue, View Royal, BC V9A 1A6
Re: 339 – 345 Island Highway, View Royal BC Development Land Lift Analysis
Mulholland Parker Land Economists (MPLE) was retained to provide consulting services to prepare a land lift and amenity contribution analysis for the proposed development of 339, 341, and 345 Island Highway in View Royal, BC (the Site) from the currently permitted base density and uses as defined by the Town of View Royal’s C-5 land use zone to that which has been proposed by Invictus Commercial Investing Corp (the Developer).
The purpose of the analysis is to estimate the land lift and amenity contribution on the site due to a change in permitted use and density from a hotel or motel with a floor space ratio of 0.4 – 0.6 (see Section 10.4: C-5 Tourist Commercial in View Royal’s zoning bylaw) to a purpose-built rental development with a floor space ratio of 1.74. The project will consist of approximately 259 rental units, 1,575 ft² of commercial space, and approximately 298 underground and 31 surface parking spaces.
The Town of View Royal’s Community Amenity Contributions policy (Policy # 6400-041) says that “a land lift analysis should be conducted… where more than 100 additional residential units are proposed or possible. The Town will seek a target of 50% of the increase in land value for the provision of community amenities.”
METHODOLOGY & ASSUMPTIONS
The analysis is created using a standard developer proforma wherein estimates of revenues and costs are inputs and the remaining variable is the desired output. In typical proformas this output is usually profit, following a revenue minus costs equals profit formula.
For a residual land valuation, however, an assumption on developer’s profit needs to be included to leave the land value as the variable to solve for. For this analysis MPLE has determined the residual land value of the proposed purpose-built rental development based on the developer achieving an acceptable internal rate of return (IRR)¹ of 6.25% on total project costs. The 6.25% IRR target is derived by adding 2% to the local market’s capitalization rate for this kind of product, which is 4.25%.
As discussed with Town staff and the Developer, we assume that the Site’s supportable land value under its existing zoning is equal to its current valuation according to BC Assessment. Its land lift will therefore be its supportable value if rezoned to support the proposed rental development, minus its current property assessment. This lift in value is the total potential monies that are available for public amenities.
Often, there is some sharing of the land lift value between the Municipality/District and the developer, but the percentage shared varies from community to community and from project to project. Generally, municipalities seek 50 to 75% of the lift value. As mentioned above, the Town’s policy seeks 50% of the lift in value.
MPLE received revenue data and hard cost data for the analyses directly from the Developer. Development or soft costs have been drawn from industry standards and from the Town’s sources. All other assumptions have been derived from a review of the market and from other sources deemed reliable by GPRA.
¹ Internal rate of return (IRR) is a project viability measure equal to the interest rate of a hypothetical asset that required investment equal to this project’s costs and produced revenue equal to this project’s revenue. A higher IRR therefore indicates a project that produces more money faster. IRR is a convenient measure of project viability for long-term projects because it accounts for the value of time.
RESULTS AND CONCLUSION
If developed as proposed, the development would contain 225,971 ft² of gross buildable area (GBA) and 195,148 ft² of rentable area in the form of 259 units with an average size of 747 ft² plus 1,575 ft² of commercial space. Excluding land, it would cost about $126 million to construct, consisting of $98 million in hard costs, $17 million in soft costs, and $9 million in interest costs.
The units would be rented for $3.21 per ft² per month (about $2,401 per unit per month on average). To this would be added rental revenue of $75 per month from 200 of the project’s 259 underground parking stalls ($180,000 annually) and $19.92 per year per ft² of commercial space ($31,374 total) to produce annual gross revenue potential of about $7.7 million per year. After accounting for 1.5% vacancy, 30% operating costs, and $100,000 per year in miscellaneous structural maintenance, the building’s annual net operating income (NOI) would be about $5.2 million, which would tend to escalate over time as rental rates increase. Its value after thirty years of operation would be about $122 million, and at 6.25% IRR it would generate no land value today. In fact, it would require a subsidy of about $5 million to achieve the 6.25% IRR target.
The project’s proposed rental rates ($3.21 per ft² on average) are typical for the area, but even if they were increased by $0.25 per ft² to an average of $3.46, the project would still only support land value of $1.14 million due to several years of rising development costs. Even this positive land value amount would be significantly less than the site’s currently assessed value of $10.24 million, indicating that no land lift is present from rezoning.
There is currently no residual land value supported by the proposed development of 259 rental apartments and 1,575 square feet of commercial space on the Site. There is therefore no land lift from the proposed rezoning.
I hope this will suit your needs and I am available to discuss further after you have had time to review.
Yours truly,
George Parker | Director of Planning Mulholland Parker Land Economists T 604 275 4848 | M 778 872 6376 | F 1 866 366 3507 E gparker@mulhollandparker.com | W www.mulhollandparker.com
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