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Specific Plan public benefit review comments

From: domainremoved <John>
Date: Tue, 6 Oct 2015 09:25:11 -0700

Dear Council Members:

I'm writing to comment on your upcoming Downtown/El Camino Real Specific Plan
review for October 6, 2015, on the topic of public benefit valuation. These
comments are offered in my role as a Planning Commissioner, but I am not here
representing the Planning Commission as a whole.

By 'benefit valuation' I mean the estimate used for the overall revenue
increment in development potential attributable to an increase, over Specific
Plan baselines, for a project's increased floor area, dwelling unit density or
overall building size. As you know, two projects recently came before the
Planning Commission with well-structured pro forma valuation estimates created
by an outside economics consultant. For these two projects, the value added
was estimated at about $400,000 for one project, $1,500,000 for the other.

Leaving aside physical amenities proposed by the developers to partly
compensate the City for these estimated increases in value, my key question
for you to consider is what to do with these starting valuation numbers? What
role should they play in Planning Commission decision-making for the
individual projects?

During the PC Specific Plan discussion on August 3, we briefly discussed a
general rule to use as the negotiation starting point: namely, 50% of the
projected additional project benefit value, calculated in the pro formas as
above. This means that the City should expect a return, in city value terms,
equivalent to 50% of the additional project value attributed to the larger
projects.

For the two recent projects, that would imply around $200,000 and $750,000
respectively for Menlo Park. As emphasized in the slide presentation:

. The 50% choice represents a partnership in which City and developer share
equitably in the additional building value made possible. The City's role is
of 'virtual land owner' to be compensated for making the increased project
possible.
. Such 50% dollar values are starting points, not hard negotiation limits.
. Developers would know that the 50% values represent a general target, either
in total dollar terms, or the equivalent value of some physical amenity (open
space, roadway improvements, etc.). Their package could include zero or more
dollars to get to roughly 50% of the total benefit value.
. City residents, Commissioners and others could know the 50% value is the
target to expect in return for a particular project, and evaluate a concrete
benefits package accordingly. They may also be motivated to advocate for a
greater or less amount in different cases.

In terms of process, the 50% starting point gives the negotiation discussion
its proper framing, by starting the negotiation with a target value expected
to be satisfactory. It is then up to the developer to explain why their
negotiation package is 'worth' the 50% starting point or more, or perhaps why
the 50% number should be modified. The PC and city residents can then
consider the value, to the city, of a proposed physical amenity and/or dollars
with this target number in mind.
   
For example, a proposed hotel with yearly hotel tax in the hundreds of
thousands of dollars may argue the project's 'intrinsic' benefit is sufficient
to compensate for increased building scale. Another project might include some
public open space, like a pocket park. In that case, the PC has to decide if
the value, to the city, of that space is worth the equivalent of the 50%
starting point. Importantly, it is fallacious to automatically equate the
developer's cost of the park with city value. If the park is oddly shaped and
always in the shade, or has low nearby foot traffic, then the value to the
city might be judged as small, and possibly worth less than its development
cost. In some cases, that cost also may not reflect tax rules making for a
lower actual cost to the developer. The appropriate perspective here, for the
PC and others representing city interests, is the city's 'willingness to pay'
for the open space, given the 50% benefit target budget, and not amenity cost
per se.

In any case, the PC can respond to the developer that they are entitled to
some fractional 'credit' for their project, but perhaps less than the 50%
value target. The developer might then balance their offer with additional
dollars; revise the proposed park; suggest some other physical amenity; or ask
for a vote on their proposal as its stands. In the latter case, if the
proposal does not win approval the developer can appeal to the City Council to
vote on the combined benefits package and project.

This seems like a reasonably practical and clear process, at least for a
start. Bonus level projects of various scales and sizes will pose different
challenges, but the 50% starting point begins to impose a shared frame of
reference. The policy judgment, of using the 50% starting value, needs to be
endorsed or revised by the council, as well as an affirmation or criticism of
considerations mentioned, especially that of distinguishing amenity cost from
city value, the latter being reflected in project-specific value judgments
made by the PC, residents and council.

Following are some additional issues which came up through the PC discussion.

1. Presentation slides for the Sept 21 PC meeting, developed by myself and
Chair John Onken, began with a 'back-of-the-envelope' estimation method for
benefit dollar value, using the increase in buildable square footage and the
market price of land (or long-term land lease, for which a net present value
calculation is used). This method of estimating the additional dollar value
is not meant as a substitute for the type of pro forma provided by the
consultant. It's meant as a simpler means, compared to a complete pro forma,
of calculating a dollar value benefit estimate, based on the known increase in
buildable floor area and land cost. For some projects, the quick estimate
will work reasonably well, in other cases too much detail will be left out.
The second situation was correctly emphasized in public comment by Steve
Pierce, representing the Greenheart development group. However, Mr. Pierce
also seemed to believe that, contrary to what's in the slides and our
discussion, that the 'cost-per-buildable-square-foot' calculation was a
substitute for the complete pro forma calculation, rather than being an
additional calculation optionally combined with the complete pro forma.

Why consider a simpler estimate which may far off a reasonable negotiation
number? The complexity of even the most straightforward pro formas, with
their uncertain interest rates, generic financing assumptions, capitalization
rates and many subcalculations is a barrier to public understanding. The
buildable-cost-per-square-foot calculation provides a simple upper bound, and
can be compared to the pro forma estimate to show, as Mr. Pierce pointed out,
the dollar consequences of building strategies for baseline versus bonus level
projects, such as above ground vs. underground parking. Since the
buildable-cost estimate is anyway so easy to carry out, and can be included in
any public discussion, its policy status may be moot.
     
In any case, how the City estimates additional project value for bonus-level
projects is separate from how those values enter into PC project assessment.
The latter should be seen as the pressing policy issue, with the '50% rule'
being one approach.

2. Chair Onken has emphasized the importance of separating the valuation
issues for a public benefit project (here in the Specific Plan area only) from
judgments of its architectural and design merits, and how well it meets
Specific Plan goals. Since a project may deliver 'intrinsic' benefits which
mitigate its increase in size (e.g. high architectural quality, integration of
public/private spaces, new retail/housing, etc.), the PC will likely face
hard tradeoffs involving a proposed benefits package, the project itself, and
the estimated dollar values at stake. Something for council to be aware of is
that the PC's abilities to influence good design, and help attain city
development goals, should not be compromised by the balancing of a benefit
proposal while also addressing issues of project design.

3. There are factors which may lead the City to motivate fewer, rather than
more, bonus-level projects. Public benefit projects are expected to use extra
buildable space to maximize office use, subject to Plan limits, because of
added office profitability. The Specific Plan has a limit on total office
space which, as noted by city staff, incorporated only a modest amount of
bonus-level projects in setting EIR parameters. Hence, given expected
consumption of the office space budget by the 1300 and 500 El Camino Real
projects, encouraging public benefit projects through low-benefit negotiations
could lead to a prematurely early cap to new office space development. How
probable that scenario is, or whether it should be a concern, may be a review
topic. In any case, tradeoffs may lead the PC to encourage some bonus-level
projects but not others, meaning possible recommendations that a project
revert to Specific Plan baseline criteria.

4. An issue raised about dollar payments to the City for public benefit is
tracking where, when and how such monies are spent. Even if the City is yet to
commit fully, e.g., to a new Downtown parking program, or a Middle Avenue
tunnel, it's possible to designate benefit dollars received to Specific Plan
infrastructure spending. That infrastructure spending could include staff or
consultant time needed to support early planning for large and complex
projects at early design stages. Tracking these dollars through the
multi-year capital budgeting process can be simple and transparent. My
opinion is that these are planning and implementation dollars potentially well
spent to accelerate Specific Plan implementation. More generally, other
Commissioners emphasized the need for clearer City policy on desirable public
benefit amenities.
        
           Thanks very much,
        Sincerely,
        John Kadvany / Menlo Park Planning Commissioner
Received on Tue Oct 06 2015 - 09:26:17 PDT

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