DENSITY BONUS AND AFFORDABLE HOUSING POLICY: ANALYSIS AND RECOMMENDATIONS
A financial analysis report by Coriolis Consulting Corp. examining density bonus and affordable housing policies, including construction cost assumptions and land residual analysis.
- Parking costs are assumed to average $35,000 per stall to $40,000 per stall (depending on the number of levels of underground parking).
In total, hard costs including parking range from about $190 to $200 per square foot for mixed use lowrise buildings and $255 for concrete buildings.
The construction costs are based on information published by BDC Development Consultants, Altus Group, BTY Group and on discussions we had with developers who are active in the Victoria multifamily residential market.
- A separate landscaping cost allowance of $10 per square foot of site area is included.
- An allowance of $2,500 per lineal metre of site frontage is included for upgrades to the adjacent sidewalks, boulevard, street trees, lighting, and road to centre line.
- Connection fees are assumed to total about $50,000 per site.
- Soft costs and professional fees (permits, engineering, design, legal, survey, appraisal, accounting, new home warranties, insurance, deficiencies and other professional fees) and development management total 12% of hard costs. This excludes the soft costs and professional fees associated with the rezoning process.
- Post construction costs are included for six months following project completion.
- A contingency allowance of 3.5% of hard and soft costs is included.
- Interim financing is charged on all costs (including land) at 5% per year. In addition, a financing fee equivalent to 1% of total projects costs is included.
- Residential and commercial DCCs are included at current rates.
- Property taxes are based on 2015 mill rates and our own estimate of the assessed value during development.
- Developer’s profit margin is set at 15%, which is the typical minimum profit margin target for new multifamily development in Victoria.
The key assumptions for are office case study analysis are as follows:
- Average lease rates for new office space is assumed to be $29 per square foot net, assuming a $25 tenant improvement allowance. This may be optimistic under current market conditions.
- Parking income is assumed to average $125 per stall per month.
- Net operating income from retail space is capitalized at 5.75% to estimate total market value.
- Rezoning costs (application fees, architects, consultants, management, disbursements) are assumed to total $100,000. This assumes that rezoning is consistent with the OCP plan so costs are minimized, otherwise the cost would likely be higher.
- Construction cost assumptions are as follows:
- Hard costs for the office building (excluding parking) are $210 per square foot for shell space.
- Parking costs are assumed to average $35,000 per stall to $40,000 per stall (depending on the number of levels of underground parking).
- An allowance of achieving LEED Gold certification is also included.
In total, hard costs including parking range from about $270 to $275 per square foot.
A separate landscaping cost allowance of $10 per square foot of site area is included.
An allowance for site servicing is included for upgrades to the adjacent sidewalks, boulevard, street trees, lighting, and road to centre line.
Connection fees are assumed to total about $50,000 per site.
Soft costs and professional fees (permits, engineering, design, legal, survey, appraisal, accounting, new home warranties, insurance, deficiencies and other professional fees) and development management total 15% of hard costs. This excludes the soft costs and professional fees associated with the rezoning process.
Leasing commissions on the commercial space are set at 17% of Year 1 lease income.
A separate marketing allowance is included.
Post construction leasing costs are included for twelve months following project completion.
A contingency allowance of 5% of hard and soft costs is included.
Interim financing is charged on all costs (including land) at 5% per year. In addition, a financing fee equivalent to 1% of total projects costs is included.
Commercial DCCs are included at current rates.
Property taxes are based on 2015 mill rates and our own estimate of the assessed value during development.
Developer’s profit margin is set at 15%.
6.3 Approach to Affordable Housing Analysis
We used the results of our financial analysis for each of our case study sites in Section 3.1 to estimate the potential amount of affordable housing that could be supported by rezonings in the Core Area.
Our affordable housing estimates focused on the strata residential (or mixed strata residential and commercial) sites. The office sites were excluded from our affordable housing analysis on the assumption that office projects would not include affordable housing.
For each case study site and for each of the four affordable housing scenarios, we estimated the amount of affordable housing that could be funded by the calculated total value of the amenity contribution (i.e. 75% of the estimated increase in property value associated with the bonus floorspace).
The affordable housing component is assumed to replace space that would otherwise have been used for strata residential. Because the affordable housing has less value than the strata residential space, it negatively impacts the financial performance of the overall project and reduces the estimated increase in value associated with the bonus floorspace. For our calculations we determined the “net cost” per square foot of the affordable housing component for each of the four different types of affordable housing. The net cost was determined as follows:
- Estimated completed value per square foot of the affordable housing.
- Less total cost (and profit margin) per square foot of the affordable housing.
- Less completed value per square foot of the forgone strata residential space.
- Plus total cost (and profit margin) of the foregone strata residential space.
- Equals net cost per square of the affordable housing.
The estimated net cost per square foot for the different types of affordable housing that we tested is summarized in the following exhibit. As shown in the exhibit, the net cost varies by the type of affordable housing, location and type of construction material (as woodframe has a different completed value construction cost than concrete).
Estimated “Net Cost” PSF of Affordable Housing by Location and Construction Type
| Affordable Housing Scenario | Core Area Concrete | Core Area Woodframe | Outside Core Area Woodframe |
|---|---|---|---|
| 50% of HILs | $275 psf | $235 psf | $215 to $255 psf |
| 90% of HILs | $205 psf | $165 psf | $145 to $185 psf |
| 100% of HILs | $185 psf | $145 psf | $115 to $165 psf |
| Affordable Ownership | $145 psf | $110 psf | $95 to $130 psf |
Our affordable housing analysis assumes that all of the calculated amenity contribution value is used to fund affordable housing, leaving no room for contributions toward other amenities.
Therefore, our estimates assume that each rezoning provides affordable housing, but no additional amenity contribution.
6.4 Representative Case Study Financial Analysis
Because of the number of sites and scenarios analyzed, we have not included all of the detailed proformas for each site and each scenario in this report. This section provides an example of our analysis for one site.
The case study site shown in this example is located in the Core Area. It is a 14,600 square feet site that is currently improved with an older 9,000 square foot office building. The property is currently zoned S-1, Limited Service District allowing a wide range of commercial and service uses at a maximum density of 1.5 FSR. It is located within density bonus subarea B-1 allowing apartment or mixed use development at a base density of 3.0 FSR with an opportunity for bonus density up to a maximum overall density of 5.0 FSR.
Existing Value
To estimate the existing value, we examined a number of indictors of potential value:
- The capitalized value of the net income that could be generated by the existing commercial building.
- The land value of the property as a development site at the base density of 3.0 FSR.
- Recent sales of similar properties.
- The existing assessed value.
The highest estimated of value is based on the capitalized value of the potential net income from the existing commercial building of $2.2 million. Therefore, for our analysis we use a base existing value of is $2.2 million.
Estimated Land Value Assuming Mixed Use Development at the Maximum Density of 5.0 FSR
The following proforma shows our estimate of the site's value if rezoned and redeveloped to mixed use retail and strata apartment at a density of 5.0 FSR (the maximum permitted) without any amenity contribution for the bonus floorspace. As shown in the proforma, the estimated land value under this scenario about $2,675,000 million and the estimated supportable CAC is $12 per square foot of increased permitted floorspace.
Land Residual – Mixed Use Redevelopment at 5.0 FSR - Assumptions
| Major Assumptions | Figures/Inputs | Formula/Additional Info |
|---|---|---|
| Site and Building Size | ||
| Site Size | 14,602 | sq.ft. |
| 122 | feet of frontage | |
| Total Assumed Density (Blended Avg Maximum) | 5.00 | FAR include a bonus of 2.00 FAR |
| Total Gross floorspace | 73,010 | sq.ft. |
| Commercial floorspace | 2,920 | |
| Market Strata Residential floorspace | 70,090 | gross square feet |
| Net saleable space | 59,576 | sq.ft. or 85% of gross area |
| Average Gross unit size | 987 | sq.ft. gross |
| Average Net unit size | 839 | sq.ft. |
| Number of units | 71 | units or |
| Total Market Strata Unit Parking Stalls (including visitors) | 85 | stalls or 1.2 per unit |
| Total Commercial Parking Stalls | 7 | stalls or 1 per 37.5 square metres |
| Total Parking Stalls | 92 | stalls |
| Strata Revenue and Value | ||
| Average Sales Price Per Sq. Ft. | $520 | per sq.ft. of net saleable residential space |
| Commercial Revenue and Value | ||
| Average Retail Lease Rate for Retail Space | $25.00 | per sq. ft. net for shell space, no TI's |
| Capitalization Rate for Retail Space | 6.00% | |
| Value of Retail Space on Lease Up | $396 | per sq. ft. of leasable area, with 5.00% allowance for vacancy |
| Pre-Construction Costs | ||
| Allowance for Rezoning Costs | $100,000 | |
| Construction Costs | ||
| On-Site Servicing (Upgrade of adjacent roads/sidewalks/etc) | $92,746 | or $2,500 per metre of frontage |
| Connection fees | $50,000 | |
| Hard Construction Costs | ||
| Market Strata Residential Area | $210 | per gross sq.ft. of residential area |
| Commercial Area | $175 | |
| Cost Per Underground Parking Stall | $37,500 | per underground/structured parking stall |
| Cost Per Surface Parking Stall | $7,500 | per at grade stall |
| Overall Costs Per Square Foot | $256 | per gross sq.ft. |
| Hard Cost Used in Analysis | $256 | |
| Landscaping | $73,010 | or $10 per sq.ft. on 50% of site |
| Soft costs/professional fees (excluding management) | 9.0% | of above |
| Project Management | 3.0% | of above |
| Car Share Costs | $0 | |
| Post Construction Holding Costs | $350 | per unit on average of 25% of units 12 months |
| Contingency on hard and soft costs | 3.5% | of hard and soft costs |
| Local Government Levies | ||
| Residential DCCs | $3.33 | per sq.ft. of floorspace |
| Commercial DCCs | $2.15 | per sq.ft. of floorspace |
| Financing Assumptions | ||
| Financing rate on construction costs | 5.0% | on 50% of costs, assuming a 1.75 year construction period |
| and a total loan of 75% on costs | ||
| Financing fees | 1.00% | of financed construction costs |
| Financing on Land Acquisition | 5.0% | during construction on 75% of land cost |
| Marketing and Commissions | ||
| Commissions/sales costs on residential | 3.0% | of gross strata market residential revenue |
| Commissions on commercial sale | 2.0% | of commercial value |
| Marketing on residential | 2.0% | of gross strata market residential revenue |
| Leasing commissions on commercial | 17.0% | of Year 1 income |
| Marketing on commercial | $0 | |
| Property Taxes | ||
| Tax Rate (res) | 0.719% | of assessed value |
| Tax Rate (comm) | 2.254% | of assessed value |
| Current assessment (Year 1 of analysis) | $2,107,000 | |
| Assumed assessment after 1 year of construction (Year 2 of analysis) | $16,067,797 | (50% of completed project value) |
| Allowance for Developer's Profit | 13.0% | of gross revenue, or 15.0% of total costs |
Land Residual – Mixed Use Redevelopment at 5.0 FSR – Analysis and CAC Calculation
| Analysis | Value |
|---|---|
| Revenue | |
| Gross Market Residential Sales Revenue | $30,979,603 |
| Less commissions and sales costs | $929,388 |
| Net residential sales revenue | $30,050,215 |
| Commercial Value | $1,155,992 |
| Commission on Commercial Sale | $23,120 |
| Net commercial value | $1,132,872 |
| Total Value Net of Commissions | $31,183,087 |
| Project Costs | |
| Allowance for Rezoning Costs | $100,000 |
| On-Site Servicing (Upgrade of Adjacent Roads/Sidewalks/Etc) | $92,746 |
| Connection fees | $50,000 |
| Hard construction costs | $18,679,886 |
| Landscaping | $73,010 |
| Soft costs | $1,700,608 |
| Project Management | $620,888 |
| Residential Marketing | $619,592 |
| Commercial Marketing | $0 |
| Leasing commissions on commercial space | $12,412 |
| Post Construction Holding Costs | $74,550 |
| Contingency on hard and soft costs | $770,829 |
| DCCs - residential | $233,431 |
| DCCs - commercial | $6,289 |
| Less property tax allowance during development | $16,384 |
| Construction financing | $756,349 |
| Financing fees/costs | $178,552 |
| Total Project Costs Before Land Related | $23,985,526 |
| Allowance for Developer's Profit | $4,190,482 |
| Residual to Land and Land Carry | $3,007,080 |
| Less financing on land during construction and approvals | $279,095 |
| Less property purchase tax | $52,560 |
| Residual Land Value | $2,675,425 |
| Residual Value per sq.ft. buildable | $36.64 |
| Residual Value per sq.ft. of site | $183.22 |
| CAC Analysis | |
| Estimated Rezoned Value | $2,675,425 |
| Estimated Base Value | $2,215,535 higher of (a) base OCP, (b) existing use, (c) existing land value |
| Estimated Increase in Value for CAC Analysis | $459,890 |
| CAC at 75% of Increased Value | $344,918 |
| Floorspace at Base OCP Density | 43,806 square feet |
| Assumed Floorspace Approved | 73,010 square feet |
| Increase in Floorspace over Base Density | 29,204 square feet |
| CAC per square foot of additional floorspace over base | $11.81 |