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1 AGENDA City Council Retreat December 6, 2021 9:00 AM, Pearl Pass Conference Room 427 Rio Grande Place Aspen, CO 81611 I.RETREAT INFORMATION I.A.City Council Housing Retreat 2021 1 MEMORANDUM TO: Mayor and City Council FROM: Sara Ott, City Manager MEMO DATE: November 26, 2021 MEETING DATE: December 6-7, 2021 RE: City Council Housing Retreat REQUEST OF COUNCIL: Aspen City Council will participate in a Housing Retreat scheduled for December 6-7. The preparations for this retreat have been underway for several weeks. The format will be similar to the Council Goalsetting Retreat in July and Ron LeBlanc will again serve as facilitator. The draft agenda is attached for your review. To assist the Council in preparing for this retreat. Several City Council work sessions were held on a variety of topics related to housing. Additionally, staff prepared, and I have distributed, several information memos. A compilation of all these items will be provided before the retreat. The draft agenda is ambitious. This is a complicated issue with critical long range impacts for our community. Going into the retreat, everyone should understand the need to be flexible and nimble throughout the two days using the agenda as a guide to enable quality discussions and solicit policy direction from City Council. The ultimate goal is to provide guidance for a Housing Strategic Plan. The retreat will attempt to address housing by its component parts. Recent discussions with City Council, both during Work Sessions and from one-on-one discussions, seems to suggest several “major buckets”. These will be teased out in greater detail during the retreat: •Policy review •Partnerships/Regionalism •City as a developer •Land banking •Finances •Roles •Others? RECOMMENDATIONS: I look forward to taking part in the Housing Retreat and working with the City Council to develop a Strategic Plan, as well as, to evaluate multiple paths to success. 2 ASPEN CITY COUNCIL RETREAT December 6 & 7, 2021 Pearl Pass Conference Room Aspen City Hall Monday, December 6, 9-4pm 9:00 Informal networking (coffee, juice, muffins) 9:15 Welcome Mayor Torre Sara Ott, City Manager 9:20 Facilitation Process (Ron) •Clarifying Roles: facilitator, staff, and Council •How will we define success at this retreat? •How will we make decisions? 9:35 What topics are off limits for today •Short Term Rentals •Others? 9:40 Looking back and looking forward •What have we done right in the past? •What could we do better in the future? 10:20 BREAK 10:30 Path to a Strategic Plan •What does Leadership look like? •Group exercise 12:15 LUNCH 12:45 Breaking down housing into manageable chunks •Policy review •Partnerships/Regionalism •City as a developer •Land banking •Finances •Roles •Others? 2:00 Can we live with these buckets? •Consolidate, eliminate, add, prioritize 2:15 BREAK 2:25 CHECK-IN, ARE WE ON THE RIGHT PATH? Page 2 of 224 3 2:30 CIRCLE BACK TO HOMEWORK •Items from homework, should we add to buckets? 2:40 What is actionable? •Break into small groups 3:45 Summary of today’s work •Building a Strategic Plan 4:00 Adjournment Tuesday, December 7, 9 am -1pm 9:00 Informal networking (coffee, juice, breakfast burritos, snacks) 9:15 Check in •Check in regarding yesterday’s session (Mayor Torre, Sara, Ron) 9:30 Building a Housing Strategic Plan •What are the components? •What is the process? •Who should be involved? •How do we get there? Small Group exercise 10:15 BREAK 10:30 Groups report findings •Common areas •Differences •Opportunities for consensus •Timeline 12:45 Summary and Next steps 1:00 Adjournment (No lunch) Page 3 of 224 4 Table of Contents Page numbers referenced below are located on the TOP RIGHT. 2012 Aspen Area Community Plan - Housing .............................................................................................. 5 GMQS & Affordable Housing – February 22, 2021 – Work Session Memo .............................................. 10 Affordable Housing Update – April 12, 2021 – Work Session Memo ....................................................... 21 GMQS & Affordable Housing – May 19, 2021 – Work Session Follow-Up Memo ................................... 46 Affordable Housing Land Use Code Coordination – July 12, 2021 – Work Session Memo ...................... 48 Lumberyard Affordable Housing Design Process – November 1, 2021 – Work Session Memo .............. 80 Policy Resolution 106.21 – Land Use Code Changes – November 9, 2021 .............................................. 95 APCHA by the Numbers – November 22, 2021 – Work Session Memo ................................................ 108 Aspen Housing Data – November 23, 2021 – Informational Update .................................................... 137 Roaring Fork Valley Roadmap – Housing Coalition – November 23, 2021 – Informational Update .... 142 Housing Partnerships – November 23, 2021 – Informational Update .................................................. 144 5 38 2012 Aspen Area Community Plan HousingHousing Vision We believe that a strong and diverse year-round community and a viable and healthy local workforce are fundamental cornerstones for the sustainability of the Aspen Area community. Philosophy We are committed to providing affordable housing because it supports: •A stable community that is invested in the present and future of the Aspen Area. •A reliable workforce, also resulting in greater economic sustainability. •Opportunities for people to live in close proximity to where they work. •A reduction in adverse transportation impacts. •Improved environmental sustainability. •A reduction in downvalley growth pressures. •Increased citizen participation in civic affairs, non-profit activities and recreation programs. •A better visitor experience, including an appreciation of our genuine, lights-on community. •A healthy mix of people, including singles, families and seniors. Many of the philosophical statements in the 2000 AACP still ring true today: “We believe it is important for Aspen to maintain a sense of opportunity and hope (not a guarantee) for our workforce to become vested members of the community. ... (We seek) to preserve and enhance those qualities that has made Aspen a special place by investing in our most valuable asset – people.” “Our housing policy should bolster our economic and social diversity, reinforce variety, and enhance our sense of community by integrating affordable housing into the fabric of our town. A healthy social balance includes all income ranges and types of people. Each project should endeavor to further that mix and to avoid segregation of economic and social classes ...” Living in affordable housing is not a right or a guarantee, but a privilege, carrying with it responsibilities to future generations, such as long-term maintenance and regulatory compliance. The creation of affordable housing is the responsibility of our entire community, not just government. We should continue to explore methods that spread accountability and responsibility to the private sector, local taxing districts and others. We continue to support the following statements from the 1993 and 2000 AACP: “Housing should be compatible with the scale and character of the community and should emphasize quality construction and design even if that emphasis increases [initial] costs and lessens production, [within reason].” At the same time, new construction should emphasize the use of durable and renewable materials in order to improve our environmental stewardship. We should demonstrate our commitment to future generations by providing educational outreach regarding long-term maintenance and regulatory compliance by adopting a strategic plan for long-term maintenance of publicly-owned rental properties, and for handling “unique” properties, such as those with a sunset on deed restrictions. Page 5 of 224 6 39 2012 Aspen Area Community Plan Housing At the same time, we need a new focus on the issues surrounding retirement in affordable housing, as we are on the brink of a rising retiree demographic. In addition, we should continue to provide housing that accommodates the needs of people with disabilities. The provision of affordable housing remains important due to several factors, including the continued conversion of locally-owned homes to second homes, a trend of a more costly down-valley housing market and the upcoming trend towards retirement in affordable housing. With limited vacant land in the Aspen Area and limited public funds, we cannot build our way out of this challenge. Our affordable housing program is continually encountering new crossroads that demand creative thinking, understanding and thoughtful action. What’s Changed Since 2000 Since the adoption of the 2000 AACP, a total of 652 new affordable housing units have been constructed, with another 181 approved but not yet built. By any measure, these are impressive accomplishments, but various relevant trends have continued to challenge the goal of establishing and maintaining a “critical mass” of working residents, as stated in the 2000 AACP. While the ratio of local workers living in affordable housing units increased from 25% to 32% from 2000 to 2008, the ratio of local workers living in free market homes dropped from 22% to 13%, the result of continued conversion of locally-owned free market homes to second homes. At the same time, the economic boom period of 2004 to 2007 saw a dramatic increase in the cost of downvalley land and homes, reducing opportunities for Aspen workers to find free market ownership options in the valley. While the recession has rolled back prices, this plan must assume that the economy will experience another period of prosperity during the life of the plan. In addition, the number of retirees in deed- restricted housing is estimated to jump from approximately 310 today to more than 800 in 2021. The 2007 Housing Summit considered all these factors and more. The primary outcome of the Summit was to encourage additional “land- banking,” which ultimately resulted in the purchase of the BMC West property, a parcel at 488 Castle Creek Road and others. The 2008 Affordable Housing Plan evaluated 15 potential sites for affordable housing units, identifying a range of up to 685 possible housing units. Aspen Area Housing History In the early 1970’s free- market housing that had primarily housed local employees was being demolished and redeveloped as second homes. By 1974, the City and County began addressing this trend by establishing separate affordable housing programs and 14 years later formed the joint Aspen/Pitkin County Housing Authority (APCHA). APCHA is currently funded through a City of Aspen sales tax and a Real Estate Transfer Tax (RETT). The State enacted legislation in 2001 granting Housing Authorities across the state specific powers to raise revenue through sales taxes, use taxes, an ad valorem (property) tax, and/or a development impact fee. To date, APCHA has not pursued these revenue sources. The City of Aspen has a housing sales tax, and both the City of Aspen and Pitkin County have Housing Mitigation fees. APCHA operates under the 4th Amended Intergovernmental Agreement between the City of Aspen and Pitkin County. This agreement has eliminated APCHA’s role as an active developer of workforce housing; that role has been assumed by the City of Aspen. Currently, APCHA is principally involved in the qualification, sales, and enforcement of the housing program and is involved in the oversight of over 2,800 units of deed- restricted housing. The APCHA Board of Directors alone, or in concert with other entities, suggests new policy, programmatic changes, and legislation, or makes recommendations, as required by the City, County or State. Page 6 of 224 7 40 2012 Aspen Area Community Plan Housing What’s New in the 2012 AACP Linkages The creation of Affordable housing can help reduce pressures on the valley-wide transportation system by providing housing opportunities for our local workforce in the Aspen Area, while reducing air quality impacts associated with a commuting workforce. Affordable housing is also critical to a viable economy, and helps to ensure a vital, demographically diverse year-round community. At the same time, limited opportunities and funds mean we cannot build our way out of the housing problem, and we recognize that new affordable housing includes infrastructure costs ranging from transportation to government services, schools and other basic needs. Controlling growth and job generation can reduce the pressure to provide affordable housing. Housing Growth & Economy Transportation Community Character The re-use of philosophical language from past community plans is due largely to the long-term support in the Aspen Area for affordable housing as a critical tool to maintain a strong year-round community. Some shifts in policy direction for the 2012 AACP can be attributed to the long-term growth and maturation of the housing program, bringing greater awareness of the need for long-term capital reserves and maintenance for individually-owned and rental properties, as well as publicly-owned rental properties. Another difference in the 2012 AACP is the decision not to establish a specific number of housing units to be developed during the 10-year life of the plan. This should not be perceived as a wavering of support for affordable housing units. The plan calls for exploring the potential of a new housing unit goal, but specific research on this topic was not conducted as part of this plan. This plan focuses on the ongoing challenges of establishing and maintaining a “critical mass” of working residents. The policies outlined in the Housing chapter and related housing mitigation policies in the Managing Growth for Community & Economic Sustainability chapter are intended to meet these challenges as the community continues to provide affordable housing. At the same time, the 2012 AACP calls for further research on the physical limits to development in the form of ultimate build-out, projected future impacts related to job generation, demographic trends, the conversion of local free market homes and other factors. This kind of statistical analysis will help inform future decision-making and goal-setting in a more meaningful way. Instead, this plan emphasizes the need to spread accountability and responsibility for providing affordable housing units beyond the City and County governmental structures, and continuing to pursue affordable housing projects on available public land through a transparent and accountable public process. While past plans have supported “buy-down” alternatives, there has been little comprehensive effort in this regard. A “buy-down” program may be an expensive proposition, but this plan calls for exploring it more thoroughly. The idea is to finally determine if the community is willing to pay the price for providing long-term affordable housing by converting existing free market homes, and or affordable housing, rather than building new homes. On the Horizon As the community continues to provide affordable housing, it is important to recognize and understand future challenges. We must continue to track changes to the Colorado Common Interest Ownership Act (CCIOA) and update our housing policies on a timely basis. APCHA should vigorously promote adoption of CCIOA by existing associations, and require new associations to adopt CCIOA. Lending practices are changing, resulting in new and potentially difficult financing. Page 7 of 224 8 41 2012 Aspen Area Community Plan Housing Policy Categories Collaborative Initiative Collaborative Initiative, Work Program for APCHA Collaborative Initiative, Work Program for APCHA Collaborative Initiative Incentive Program, Proposed Code Amendment Housing Policies I. SUSTAINABILITY AND MAINTENANCE I.1. Affordable housing should have adequate capital reserves for major repairs and significant capital projects. I.2. Deed-restricted housing units should be utilized to the maximum degree possible. I.3. Deed-restricted housing units should be used and maintained for as long as possible, while considering functionality and obsolescence. I.4. Provide educational opportunities to potential and current homeowners regarding the rights, obligations and responsibilities of home ownership. I.5. Emphasize the use of durable and environmentally responsible materials, while recognizing the realistic lifecycle of the buildings. II. PROGRAM IMPROVEMENTS II.1. The housing inventory should bolster our socioeconomic diversity. II.2. Affordable housing should be prepared for the growing number of retiring Aspenites. II.3. Employers should participate in the creation of seasonal rental housing. II.4. Employers who provide housing for their workers through publicly-owned seasonal rental housing should assume proportionate responsibility for the maintenance and management of the facility. II.5. Redefine and improve our buy-down policy of re-using existing housing inventory. II.6. Eliminate the Accessory Dwelling Unit (ADU) program, unless mandatory occupancy is required. III. FISCAL RESPONSIBILITY III.1. Ensure fiscal responsibility regarding the development of publicly-funded housing. III.2. Promote broader support and involvement in the creation of non- mitigation Affordable housing, including public-private partnerships. Community Goal Community Goal, Work Program for APCHA Collaborative Initiative, Incentive Program Collaborative Initiative, Incentive Program Work Program for APCHA Proposed Code Amendment Collaborative Initiative Collaborative Initiative, Incentive Program Page 8 of 224 9 42 2012 Aspen Area Community Plan Housing Policy Categories Housing Policies IV. LAND USE & ZONING IV.1. Affordable housing should be designed for the highest practical energy efficiency and livability. IV.2. All affordable housing must be located within the Urban Growth Boundary. IV.3. On-site housing mitigation is preferred. IV.4. Track trends in housing inventory and job generation to better inform public policy discussions. IV.5. The design of new affordable housing should optimize density while demonstrating compatibility with the massing, scale and character of the neighborhood. IV.6. The residents of affordable housing and free-market housing in the same neighborhood should be treated fairly, equally and consistently with regard to any restrictions or conditions on development such as parking, pet ownership, etc. V. HOUSING RULES AND REGULATIONS V.1. The rules, regulations and penalties of affordable housing should be clear, understandable and enforceable. V.2. Ensure effective management of affordable housing assets. Incentive Program, Proposed Code Amendment Proposed Code Amendment Work Program for Planning Department & APCHA, Proposed Amendment Data Needs Proposed Code Amendment Proposed Code Amendment Work Program for APCHA Work Program for APCHA Page 9 of 224 10 MEMORANDUM TO: Mayor Torre and Aspen City Council FROM: Ben Anderson, Principal Long-Range Planner Phillip Supino, Community Development Director MEMO DATE: February 18, 2021 MEETING DATE: February 22, 2021 RE: Work Session Discussion – GMQS Development Allotment System REQUEST OF COUNCIL: This work session’s purpose is to follow-up on previous Council direction to facilitate a discussion on the current system of development allotments within the Growth Management Quota System (GMQS). Council’s desire to hold this discussion emerged from earlier Council direction around affordable housing goals and the consideration of the annual action item for Council to consider rolling-over unused GMQS allotments. This memo and staff’s introductory presentation at the work session will provide a high- level discussion of the following: 1.A brief history of the GMQS system and of the use of development allotments within this system 2.Trends in the recent utilization of development allotments and impacts within the GMQS system 3.Other trends in the development landscape that manifest as “growth” but are not captured in the GMQS system 4.Identification of range of possible responses to the current condition At the conclusion of the discussion, staff will request direction from Council as to the desire to pursue further study and evaluation of the development environment and possible responses within the GMQS. Depending on this response, follow-up questions related to prioritization in ComDev’s workplan and support for budget authorization may be necessary. SUMMARY AND BACKGROUND: History Affordable housing in Aspen dates to the 1977 adoption of the Growth Management Quota System (GMQS). Since then, inclusionary zoning, affordable housing mitigation requirements, and the assessment of impact fees on development for the provisions of affordable housing have become keystones of Aspen’s approach to maintaining community character, social equity, and a functional in-town economy – and regulating “growth”. 24 Page 10 of 224 11 Page 2 of 11 Affordable Housing/Land Use Code Coordination The initial response to growth in the Aspen area was based on a description of things that residents were seeing and feeling in the late 60s and early 70s. Traffic was increasing, new homes were being built, new businesses were coming to town, skier visits were increasing, population was growing. Conversations about infrastructure’s capacity to serve these developments were being held as were calculations made about how to pay for necessary expansions of infrastructure to meet increasing demands. Following innovative approaches from communities like Petaluma, CA and Ramapo, NY, Aspen and Pitkin County established a series of policies to define and limit growth. Many types of policies emerged from this effort, but most central to our current discussion, the 1977 Plan recommended annual quotas for the City of Aspen based on the phasing of development types: •Permanent residential development 39 units •Tourist residential development 18 units •Commercial building potential 24,385 square feet These numbers were arrived at by examining building potential based on zoning at the time and allocating 80% of this potential over a period of 15 years. It is also important to note that at the time “growth”, like today, was viewed as a complex idea – of which not a single element “can be singled out to explain the total growth phenomenon” (pg. 3 of 1977 Plan). It was understood that the recommended growth allotments would help to realize this ideal 3.47% “growth rate” identified by the plan. Significant efforts to study growth and craft fine-tuned responses continued through the 80s and 90s. In 1994, a major re-write of the GMQS chapter of the land Use Code was undertaken and codified in response to the 1993 AACP. An important change reduced the desired growth rate from 3.47% to 2%. Interestingly, this is also the AACP that Figures 1&2. Cover and image from the 1977 Aspen / Pitkin County Growth Management Policy Plan. This document set the basis for Aspen’s current GMQS system. Responding to the growth rates at the time for population and housing starts exceeding 10%, this document established a goal for limiting growth across factors at 3.47% annually. This number served as the foundation for the initial establishment of growth management allotments. 25 Page 11 of 224 12 Page 3 of 11 Affordable Housing/Land Use Code Coordination established the affordable housing goal of housing 60% of Aspen’s workforce. A new, more complex allotment system was established in response: •Tourist Accommodations 11 units •Free Market Residential 4 units •Free Market Residential AH associated 8 units •Resident Occupied 8 units •Affordable Housing 43 units •Commercial (allocated by zone district) 20,000 square feet This new system gave further definition to a system for development to compete and qualify for these allotments. Categories of “exempt” and “non-exempt” developments were established. There was a Growth Management Commission that reviewed development proposals against these criteria in being granted allotments. It was a much more involved system than currently exists today. In 2007, Ordinance No.14 codified the next significant change to GMQS. Continuing to use the 2% growth rate, a new study and analysis established the number of annual allotments that remain in place today: •Residential – Free Market 18 units •Commercial 33,300 square feet •Lodging 112 pillows •Residential Affordable Housing No limit •Essential Public Facility No limit Requests/applications for allotments were reviewed twice annually. A scoring/ranking system was still utilized, but it was simplified from previous systems and not required for all projects. Unused allotments could be carried forward with Council approval Today, the same allotment number for each development type remains. However, the ranking/scoring/competition process has been removed by subsequent code amendments and projects receive allotments on a first come, first serve basis – and are confirmed at the issuance of a development order following land use approval. While significant aspects of the GMQS system have changed over the years, a few constants emerge: 1) Similar questions across time: •What do we mean when we use the term “growth”? •What impacts of growth are we trying to reduce or mitigate? •What are the best tools to most effectively mitigate these impacts? 2) Intensive studies to get at the right number of GMQS quotas or allotments. 26 Page 12 of 224 13 Page 4 of 11 Affordable Housing/Land Use Code Coordination 3) Fixed allotments for Free Market Residential, Commercial, and Lodging development. 4) The constant presence of affordable housing goals and policy in GMQS study and evaluation. 5) Increasing relationships between growth management policies and affordable housing mitigation requirements. Current Conditions While the GMQS system has changed in multiple ways since 2007, the number of allotments has remained fixed. As required by code, staff provides a yearly audit of the available allotments utilized and requests Council direction on whether to roll-over unutilized allotments into the next year. Year FM Residential Units Commercial square feet Lodging Pillows Affordable Housing Units Essential Public Facility square feet GMQS Allotments allowed per year *established in 2007 18 33,300 112 No limit No limit Utilized GMQS Allotments 2015 11 28,701 32 11 20,070 2016 8 28,045 112 42 47,640 2017 0 231 90 60 9,194 2018 1 4,471 20 9 13,000 2019 1 1,760 0 0 5,372 2020 2 3,056 0 7 8,319 Total GMQS Allotments and Percentage Utilized 2015-2020 23 of 108 21.2% 66,264 of 199,800 33.2% 254 of 672 37.8% 129 N/A 103,595 N/A Total GMQS Allotments and Percentage Utilized 2018-2020 4 of 54 7.4% 9,297 of 99,900 9.3% 20 of 336 5.9% 16 N/A 26,691 N/A Table 1. GMQS allotment utilization, 2015 – 2020 27 Page 13 of 224 14 Page 5 of 11 Affordable Housing/Land Use Code Coordination As Table 1 identifies, over the last six years, annual utilization of allotments has been minimal, using roughly a third of the available allotments. In the last three years utilization has diminished further, with less than 10% of allotments being utilized. It is important to note that while allotments for Affordable Housing units and Essential Public Facility square footage is tracked year to year, there are not current limits for these development types. Table 2 below, describes recent changes in Aspen’s population. Population has been growing by roughly 2% over the last 5 years or so – consistent with the 2% “growth” rate identified as a goal in the 1993 re-write of GMQS. It is unclear the role that GMQS system plays in controlling population growth with other barriers to entry in Aspen, including median home price, availability of workforce housing, geographical and political constraints on development and other factors. In the context of Council discussions on affordable housing goals, real and perceived development pressures, and yearly reports that show minimal utilization of the allotments at the foundation of Aspen’s growth management system, Council is right to ask for an understanding of the situation. Furthermore, given the age of the system relative to the rapidly changing dynamics in real estate markets, federal economic policy, and consumer preferences for Aspen, staff believes it is important to periodically assess the effectiveness of central regulatory controls and policies, like GMQS. STAFF DISCUSSION: If GMQS Allotments are not being utilized and population is growing at a moderate rate, what is the community seeing and feeling today related to growth? 1) Development Activity that does not utilize allotments Figure 3 (on the next page) is a map that identifies the 138 issued, currently open building permits for projects with a valuation of greater than $200,000 (Note: $200K was identified Year Aspen’s Population (U.S. Census Bureau) % Growth from Previous Year 2015 6,740 0.5% 2016 6,788 0.7% 2017 7,097 4.6% 2018 7,234 2% 2019 7,431 2.7% Total change 2015-2019 +691 +10.3% Average Annual Growth Rate 2015-2019 +2.1% Source: American Community Survey (ACS) 5-year Table 2. Population growth, 2015 – 2019. While variation across years exists, over the last five years, population has increased by an average annual rate of roughly 2%. 28 Page 14 of 224 15 Page 6 of 11 Affordable Housing/Land Use Code Coordination to filter out projects with a more limited impact). This map and data does not include recently completed projects, or projects that are in the land use or building permit review process. Combined, the open permits depicted in the map represent nearly a half of a billion dollars in project valuation. If averaged. each blue dot represents $3.3 million dollars of labor and materials value. While a few of these projects (commercial projects primarily) did receive allotments in years past at the time of land use approval, most of the development depicted in this map is entirely exempt from the allotment process – and did not utilize any GMQS allotments for residential, commercial or lodge development. Development types that do not utilize GMQS allotments: •scrape and replace redevelopment of residential units; •addition of floor area to existing residential units; •addition of subgrade floor area to residential units; •redevelopment of existing Lodge units; •redevelopment of existing commercial net leasable area; and •renovations that do not alter number of units or floor area Figure 3. Open Building permits and project valuation. Each blue dot identifies a project with a valuation of greater than $200K. In total, the projects depicted combine for a valuation of $455M. On average each dot represents $3.3M of labor and materials. 29 Page 15 of 224 16 Page 7 of 11 Affordable Housing/Land Use Code Coordination In staff’s view, this situation is the primary contributor to what the community is witnessing and perceiving related to development pressures. Evaluated one way, each of these dots represents a booming design and construction economy, well-paying jobs, and fees and taxes that support essential community functions. In another view, each dot represents noise, construction fencing, cranes, increased traffic, parking issues in neighborhoods, disruption of adjacent right-of-way, and impacts to the landfill. There is also the matter of “community character” – a subjective term which carries a lot of weight for community members. To some, a rapidly changing built environment defines Aspen and makes way for new architecture, design and neighborhood character. To others, perceived changes translate into feelings of loss of context, loss of a sense of place, and departure from the city’s history. With the recent unprecedented activity in Aspen’s real estate market, staff anticipates a continuation, if not an acceleration of this condition. 2) Emergence of the short-term rental market – beyond the traditional lodge room base Recent changes to business license and vacation rental permit requirements for short- term rentals will soon provide much better data on the scale of this phenomena, but at a high level, it is clear that the emergence of AirBnB, VRBO, and other mechanisms to connect visitors to residential “lodging” accommodation have ushered in new dynamics to the lodging, real estate, and development markets. There are many implications to this new trend, but most important to GMQS – is that growth and limitation on lodging and tourist accommodations have been defined by the allotment system since the very beginning of efforts to manage growth. This is and has been in recognition of the fact that tourist visitation drives many of the “growth” related impacts previous Councils and community members sought to control: traffic, demand for goods and services, strains on city infrastructure Currently, GMQS has no mechanism to evaluate or limit the number of short-term rentals in otherwise residential uses. It is clear, however, that visitors staying in private, short- term rentals still create many of the same impacts as with traditional lodging. Additionally, private homes used intermittently as lodging require maintenance and services separate from those required for traditional lodging properties. With better data, the issue will be better understood, but at present, the Land Use Code has minimal tools to mitigate the impacts of the growth pressures caused by this industry. 3) Duration between allotments being granted and initiation of construction activity Even when allotments are required, there is a time disconnect between the approval of development allotments and when the impacts of those allotments are felt by the community. For example, the Lift One Lodge and Gorsuch Haus projects, when built, will represent one of the largest development projects in Aspen’s history. Lift One Lodge’s approval of development allotments span across several land use approvals going back to 2007. Gorsuch Haus was granted development allotments over two years in 2015 and 2016. If the projects have building permits issued in 2022/2023, the duration between the first allotment issuance related to the project and first signs of construction will be 15 30 Page 16 of 224 17 Page 8 of 11 Affordable Housing/Land Use Code Coordination years or more. While the Lift One Corridor project is perhaps an extreme case, even a typical duration between GMQS review and the felt impacts of development to the community contributes to the perception of a problem in the system. There are commercial projects currently under construction that received GMQS allotments as far back as 2012. Is the disconnect between the GMQS allotments and the real and perceived impacts of development activity a problem? While reasonable people can honestly debate the costs, benefits, and trade-offs within Aspen’s current development context, staff has identified two tangible concerns. 1)We no longer have the right tools The purpose of Aspen’s entire system of growth management, since its first inception, was to make sure that “growth” could be accommodated by existing and planned infrastructure, that new development was appropriately funding these infrastructure needs, and that “growth” was proceeding at a rate that was sustainable in preserving identified elements of community character. Identification and analysis of the factors that contributed to “growth” were carried out through complex studies. Those factors were then strategically limited to align infrastructure capacity and financing – and to provide direction to some degree of growth and change that was acceptable to the community. The types of development pressure in Aspen have clearly changed over time – and this change seems to be accelerating in recent years. As a consequence, it is staff’s view that the once direct nexus between the factors that cause “growth” and the tools that the LUC offers to mitigate “growth” is now less defined. The primary outcome is that the community does not have the right tools to mitigate the pressures or any negative impacts of development types that have come to define Aspen’s recent real estate and development context. 2)The impact to affordable housing mitigation As previously stated, affordable housing mitigation requirements have increasingly become a central component of the GMQS. Through careful study, employee generation rates and mitigation requirements have been crafted in direct relationship to the development types limited by the allotment system. Today, because of the trends identified above, staff utilizes the GMQS chapter of the LUC to more frequently identify affordable housing mitigation requirements for a project than to use the allotment system or other components of GMQS. Within this intricate relationship, over the years, various credits and incentives have been included to encourage or discourage different types of development (example – the lodge unit size incentive in reducing mitigation requirements). Three important outcomes have resulted. First, development uses these credits and incentives. Commercial, residential, and lodge development and redevelopment are evaluated in their pro forma through the lens of these incentives and disincentives and then designed accordingly to minimize mitigation requirements. This is not a surprise, but 31 Page 17 of 224 18 Page 9 of 11 Affordable Housing/Land Use Code Coordination what it means is that the community experiences these projects as “growth” – but does not realize the anticipated proportion of related affordable housing. This was very much a part of the community conversation around the Lift One Corridor project. Per Council direction, staff is currently working on potential code amendments to refine existing incentives and credits within AH mitigation requirements Second, and more importantly, is the impact of development types that have been discussed above that do not require GMQS allotments. It is also true that these development types are largely exempt from affordable housing mitigation requirements. As these types of projects have become a prominent part of the development landscape, the implications to the affordable housing mitigation system is becoming clearer: There is significant development activity that is not appropriately mitigating for its observed employee generation impacts. Lastly (and really an extension of the previous point), the GMQS / affordable housing mitigation relationship is built on an assumed premise – that if growth occurs within the allotment system, it will have mitigation requirements that will provide a proportional amount of affordable housing. For all of the reasons described above, this presumed relationship no longer functions as designed. There is clearly extensive development activity ($286M in building permit valuation in 2020 alone). However, the number of new FTEs created requiring mitigation does not seem to be driving the development of new affordable housing at scale with this development activity. This has implications to the 150 Fund and to the health and sustainability of the Affordable Housing Credits program. If allotment related AH mitigation is no longer as prevalent, what mechanisms or funding sources will take the place in meeting affordable housing goals? What are the potential responses to this disconnect in the GMQS? The creation of the GMQS placed Aspen and Pitkin County on the forefront of planning innovation in defining and managing the impacts of growth. While the basic goals and pursuits remain valid today more than ever, it is staff’s view that the changing development context in Aspen has shifted some of the fundamentals of the “growth” that the community feels – away from the tools designed in GMQS to mitigate these impacts. Is it time to change these tools – or add new tools to the toolbelt? A range of choices 1) Continue with the status quo. While staff acknowledges that there are gaps in the system that could and probably should be corrected, is this time during a global pandemic that has translated into unprecedented local real estate activity – an appropriate time to begin making significant changes to a system that has been in place since 1977? Ultimately, this response asks a question: Is this issue a sufficient enough priority for Council to initiate what could be a significant policy and regulatory analysis given Council’s other high priority goals? 32 Page 18 of 224 19 Page 10 of 11 Affordable Housing/Land Use Code Coordination 2) Targeted policy and code responses to prevalent development types that are not currently captured in GMQS. Per Council direction, staff is already working on potential code amendments that would re-evaluate some of the existing credits and incentives that preclude development types from being captured in the allotment system and reduce affordable housing mitigation requirements. But other areas for targeted responses could be appropriate. Examples of this may include the following: rethinking how the code handles “demolition”; creating new categories in the allotment system that would capture re-development scenarios; or including short-term rentals as a development type within the GMQS. (Staff believes that any approach related to the latter should be included in a more comprehensive regulatory response to short-term rental uses.) 3) Reducing the current allotments to reflect current development realities. In staff’s view, while this would create consistency between the code and current development reality, this tactic would not address many of the issues identified the current development context. It may be appropriate to utilize this tool in combination with other responses. One issue with this choice is that development allotments have been crafted in response to previous technical studies. Any change to allotments, even in reduction, should also be in response to a new study of current and future conditions. 4) Rethink the direct tie between growth and affordable housing mitigation / development. As discussed above, affordable housing has been placed in a direct supply and demand relationship with free-market commercial and residential development. In essence – growth happens, mitigation is provided, and affordable housing is developed to meet the needs of an expanding workforce. If “growth” is not happening in the way that GMQS currently defines growth, this causes a significant problem in meeting current and future affordable housing needs. Staff is not providing a recommendation on specific policy or code changes on this topic at this time. However, staff does believe that this dilemma is significant and will ultimately need to be studied and addressed – in potentially transformative ways. 5) A whole cloth rethinking of growth management. It is staff’s view that there are important fundamentals in the GMQS that no longer apply today as they did in 1977. Some of this is a consequence of this system working exactly as it was designed. Without question though, “growth” as the community experiences today, is not the same “growth” that was felt in 1977. The impacts may feel the same, but the underlying factors are very different. Is this a reason to redesign the foundation of Aspen’s Land Use Code? Perhaps, but while there are compelling reasons to do so, it should be noted that this would be a major undertaking for the community. It might also be appropriate that any such change would instead follow a community conversation on “growth” that could define the next update of the AACP. 33 Page 19 of 224 20 Page 11 of 11 Affordable Housing/Land Use Code Coordination QUESTIONS FOR COUNCIL: 1)To what degree is a response to this issue a priority for Council? 2) If it is identified as a priority, where is the appropriate response within the range of choices discussed above? 3)If priorities for a response are identified, how should staff prioritize this work relative to other Council goals, ComDev work program items, and the demands of responding to community needs resulting from the pandemic? Note that, should Council seek to prioritize work on this topic, additional resources to support ComDev staff may be required. FINANCIAL IMPACTS: At this time, N/A. ENVIRONMENTAL IMPACTS: N/A ALTERNATIVES: N/A RECOMMENDATIONS: N/A CITY MANAGER COMMENTS: EXHIBITS: A.Full-size map identifying open building permits 34 Page 20 of 224 21 MEMORANDUM TO: Mayor Torre and Aspen City Council FROM: Ben Anderson, Principal Long-Range Planner THROUGH: Phillip Supino, Community Development Director MEMO DATE: April 7, 2021 MEETING DATE: April 12, 2021 RE: Work Session Discussion – Proposed Land Use Code Amendments – GMQS and Affordable Housing Credits REQUEST OF COUNCIL: This work session’s purpose is to review proposed Land Use Code amendments related to Policy Resolution #079, Series of 2021 (Exhibit A). These amendments reflect the first phase of responses to coordination between the LUC and Council’s affordable housing goals. The proposed amendments would impact the Growth Management Quota System and Certificates of Affordable Housing Credits chapters of the LUC. Staff anticipates presenting Ordinances to Council to codify these amendments on April 27th (First Reading) and May 11th (Second Reading). Direction from Council is desired as staff finalizes the proposed amendments and related code language. See Exhibit B for a table outlining the specific questions of Council requesting direction. SUMMARY AND BACKGROUND: Following several discussions in work sessions with staff, Council passed Policy Resolution #079, Series of 2020 in October of 2020. This resolution (Exhibit A) approved pursuit of code amendments in four areas: 1) Affordable Housing Fee-in-Lieu – update calculation and methodology for updating over time. 2) Certificates of Affordable Housing Credits program – improvements to provide clarity and optimize effectiveness of the program. 3) Existing Credits and Incentives within affordable housing mitigation requirements – bring equity to mitigation requirements across development types. 4) Multi-family Replacement requirements – clarify and simplify and ensure that redevelopment scenarios continue to meet community goals and expectations. 2 Page 21 of 224 22 Page 2 of 14 Over the last 18 months, with consultant support, staff has held discussions with representatives of the development community in evaluating and now proposing code amendments in response to the Policy Resolution and the previous discussions with Council. STAFF DISCUSSION: This memo covers individually each of the four topic areas outlined above. Each section includes staff recommendations for Council action at the upcoming ordinance hearings and questions for Council to answer to inform staff work in preparation for those hearings. Affordable Housing Fee-in-Lieu (FIL) In 2019 and 2020, staff worked with consultants Julie Herlands of TischlerBise and Tyson Smith of White and Smith in the drafting of the Fee-in-Lieu Assessment and Recommendations Report. This study evaluated aspects of Aspen’s affordable housing mitigation system and specifically the FIL for legal sufficiency and soundness related to previous calculation methodologies. The report provided recommendation for a new calculation, using adjusted methodologies. It is essential to note for Council that determining a community-specific, legally defensible fee-in-lieu rate is a highly specialized exercise rooted in national best practices and clear methodologies. Staff supported industry leading experts in this process and suggests Council accept their recommendations. In Fall of 2020, Julie and Tyson, working with staff began work towards a new calculation of the FIL. The following describes the methodology and resulting proposed update to the FIL. Desired Outcomes: • Reflective of actual costs and revenues of affordable housing in Aspen’s development context. • Simple, direct, repeatable. • Legally defensible and following best practices in determining impact fees. • Identify a total development cost – land, hard and soft construction costs – on a per square foot of net livable basis – and by FTE (full-time equivalent). • Clear process for annual and 5-year updates. Projects utilized in determining development costs: Construction Costs: Burlingame III (Phase 2B) – estimates at submission of building permit; 79 Units, 193 FTEs, City of Aspen 150 Fund 802 W. Main – completed project; 10 units, 17.5 FTEs, Public/Private 517 Park Circle – completed project; 11 units, 21.25 FTEs, Public/Private 488 Castle Creek – completed project; 24 units, 47 FTEs, Public Private 210 W. Main – completed project; 8 units, 18 FTEs, Private, AH Credits 3 Page 22 of 224 23 Page 3 of 14 Land Costs: 834 W. Hallam – in construction; .15 acre, 7 units, 18.75 FTEs, Private, AH Credits 611 W. Main – Land Use/HP Approvals; .21 acre, 7 units, 14.75 FTEs, Private, AH Credits 802 W. Main – completed project; .21 acre, 10 units, 17.5 FTEs, Private/Public 517 Park Circle – completed project; .33 acre, 11 units, 21.25 FTEs, Public/Private 488 Castle Creek – completed project; .82 acre, 24 units, 47 FTEs, Public/Private 1020 E. Cooper – proposed project/under appeal, .10 acre, 12.75 FTE, Private, AH Credits Lumberyard – land purchase/planned development; 7.75 acres, 549 FTEs* City of Aspen 150 Fund *FTE density averaged from other projects Methodology: 1) Utilizing public sector, private sector, and public/private partnership affordable housing projects, staff and the consultant team identified actual land and construction (hard and soft) costs for recent projects and land purchases. 2) Costs for both land and construction were analyzed by project to the square foot of net livable development and averaged across the projects. Using the Code determined calculation of 400 square feet per full time equivalent (FTE) employee, a total cost of constructing affordable housing per FTE was identified. 3) Utilizing the Aspen Pitkin County Housing Authority (APCHA) Guidelines, established sales and rental rates by Category and bedroom count were used in a calculation to identify the anticipated revenue stream per FTE for completed projects. Two important assumptions were included for the rental revenue stream: a) revenue (rental income) was calculated over a 15 year period with a 2% annual increase in the rental rate; and b) rental revenue was reduced by 50% to acknowledge common maintenance and operations costs. Sales and rental revenue were then averaged per FTE, by Category. 4) The per FTE revenue amount for each Category (identified in #3 above) was subtracted from the total development cost per FTE (identified in #2 above). The remainder of each calculation subtracting the Category revenue from the total cost per FTE results in the Category Fee-in-Lieu schedule above. Total development cost per FTE – Revenue per FTE by category = Fee-in-Lieu by Category 4 Page 23 of 224 24 Page 4 of 14 Calculation Outcomes: Note: See Exhibit B for a complete set of tables identifying costs and revenues. Cost Per Square Foot – Net Livable Per FTE Land $422.00 $168,800.00 Construction – Soft Costs $186.70 $74,681.92 Construction – Hard Costs $501.34 $200,535.03 Total $1,110 $444,017 Revenue Sales – Per FTE Rental Per FTE AVG. Per FTE Category 1 $30,130 $37,763 $33,946 Category 2 $67,519 $63,530 $65,525 Category 3 $102,839 $89,780 $96,309 Category 4 $161,810 $116,433 $139,121 Category 5 $227,872 $155,378 $191,625 Fee-in-Lieu Costs/FTE Revenues/FTE Proposed FIL Category 1 $444,017 $33,946 $410,071 Category 2 $444,017 $65,525 $378,492 Category 3 $444,017 $96,309 $347,708 Category 4 $444,017 $139,121 $304,896 Category 5 $444,017 $191,625 $252,392 Fee-in-Lieu Current FIL Adopted 2018 Proposed FIL % Increase from 2018 Category 1 $381,383 $410,071 7.5% Category 2 $342,599 $378,492 10.4% Category 3 $306,550 $347,708 11.8% Category 4 $238,687 $304,896 21.7% Category 5 $168,290 $252,392 50.0% Note: Categories 2 and 4 are highlighted as these are the primary Categories for mitigation requirements. The values for Categories 1, 3, and 5 are used primarily for the conversion between mitigation requirements or a starting point for the value of AH Credits. Analysis: 1. The fee-in-lieu (FIL) was last calculated in 2015 using Burlingame Phase 2A and estimates of future projects at 802 W. Main, 488 Castle Creek, 517 Park Circle, and Burlingame Phase 2B. A flat 7% increase across all categories was approved by Council in 2018 to arrive at the Current FIL. The 7% increase was generated by an evaluation of the construction cost index from The Engineering News Record, as described in the current Land Use Code language. 2. Following the completion of the Fee-in-Lieu Assessment and Recommendations Report, staff and the consultant team utilized actual projects costs across private, 5 Page 24 of 224 25 Page 5 of 14 public, and public/private partnership development. Additionally, APCHA sales and rental rates were both accounted for on the revenue side of the equation. Assumptions were made related to rental revenue per FTE – but by averaging per FTE revenue between sales and rental revenue – staff is confident that this is a sound methodology that accounts for an evaluation of the revenues that would come into a project. 3. Staff and the consultant team felt strongly about the inclusion of the Lumberyard project within the calculation for land costs. While of a different scale from the other projects and has the effect of reducing the average of the land cost/FTE, it is a future project that is in the near horizon and needed to be included. To keep consistency, the average density of FTEs across the other projects was applied to the Lumberyard to arrive at the estimated number of FTEs. The resulting number was in the ballpark of the project planning that Council has been involved with. 4. The revenue side of the equation is important in that it is what differentiates between the Category FILs. Costs per FTE are fixed across Categories. It is the revenue that varies. 5. Categories 2 and 4 are the most important Categories – as these are the Categories at which mitigation most typically occurs – Category 2 for single-family and duplex residential development and Category 4 for commercial, lodging, and multi-family residential development. Staff does note the difference in the significance of the proposed increase between Cat. 2 and Cat. 4. The difference is entirely dependent on APCHA’s sales and rental rates for the Categories. 6. Land costs per FTE in the proposed methodology remain relatively flat in comparison to 2015 (keep in mind that the proposed methodology uses land that was all purchased prior to the pandemic-driven real estate market). Construction costs per FTE are up by roughly 42% since the 2015 FIL calculation (comparing BG 2A – 2015 with BG 2B – 2021). 7. The FIL is important as a foundation to the GMQS chapter of the LUC. It has implications to the success of the AH Credits program. It certainly has impacts to viability and costs associated with individual development projects. While all of these relationships were in the back of the mind as this proposed methodology was being crafted, it must be understood that at the center of this effort was one goal: to most accurately and directly understand the costs associated with the development of affordable housing. 8. Update methodology. Staff and the consultant team are recommending two concrete steps in defining future updates to the FIL calculation. First, the FIL is proposed to be updated annually using the Engineering News Record’s National Construction Cost Index. It is proposed that in the first quarter of each year, staff would propose an update using the most recent index. This would require passage of an Ordinance by Council. Secondly, it is recommended that a new calculation 6 Page 25 of 224 26 Page 6 of 14 of development costs (land and construction) is completed every five (5) years. This full recalculation would include a consideration of any changes to APCHA sales and rental figures. Approval of the updated calculation would similarly require approval by Ordinance. Staff Recommendation: 1. Adopt the revised Fee-in-Lieu rates by Category. 2. Council will review and consider an annual increase of the FIL utilizing the Engineering News Records’ most recent National Construction Index – proposed for consideration by Ordinance in the first quarter of each year. 3. FIL will be recalculated every five (5) years utilizing the proposed methodology in evaluating actual land acquisitions and recent construction projects as possible. Questions for council: 1) Does Council generally support the approach in the proposed methodologies for calculation and regular updates to the FIL? 2) Is there any additional information that Council desires for presentation on the FIL topic during the consideration of the Ordinance for the amendment? Improvements to Certificates of Affordable Housing Credits program The Affordable Housing Credits program has been a success. Housing for roughly 110 FTEs has been completed to date – and more units are in the pipeline under construction or in land use review. These units are delivered to the community with no hard cost to the City’s 150 Fund and no soft costs to staff time and organizational capacity. In conversations with the development community, there are several concerns with the program that prevent it from providing the necessary incentives to fully compete with free- market development. Two issues are prominent. First, banks and other financing entities have difficulty recognizing the value of Aspen’s AH credits when underwriting project financing. Secondly, the value of credits is ultimately dependent on the demand for credits. Short and long-term demand from those needing to mitigate for free-market commercial and residential development, particularly at any significant quantity, is difficult to predict. There may be solutions or improvements to both of these dilemmas, but these would likely require significant changes to growth management policies, and City intervention into the credit market in ways that the program was initially designed to avoid. Given the ability of the Credits program to deliver units to the community, there is a community interest in ensuring the program works for developers seeking to use it. The proposed amendments to improve the AH Credit program do not resolve these two 7 Page 26 of 224 27 Page 7 of 14 fundamental issues, but instead, are smaller scale improvements designed to help potential projects cross the threshold to viability. To be sure, they are incremental adjustments, but hopefully give additional encouragement to the development of AH Credits projects. Staff will continue to evaluate the feasibility of addressing the more fundamental issues. Recommended Code Changes: 1) Provide clarity that AH Credits projects can be pursued in conjunction with other state or federal incentives for affordable housing development. The code is unclear about this – and it has been interpreted in the past that an AH Credits project could not also pursue programs like the Low-Income Housing Tax Credit (LIHTC). While staff does not believe this was an intended interpretation, there has been confusion. The code change would simply provide clarity to the topic. As LIHTC and other incentive programs are often directed toward the development of units for low income individuals and families – this could have the effect of generating more lower Category units through the AH Credits program. 2) Allow for phased issuance of AH certificates to correspond with construction phasing. As proposed, this would allow 30% of approved credits to be issued at completion of foundation; 30% at framing/roofing inspection; and 40% at issuance of Certificate of Occupancy. A performance bond or other instrument guaranteeing the ability to complete the project would be a necessary condition of pursuing this option – but staff has heard that this could be an important tool to help with projects that are being self-financed – or financed outside of traditional mechanisms. Pursuit of this option would be a choice made by the developer at the time of land use review. 3) Multiplier for FTEs generated within a designated historic structure A few, recent AH Credits projects have been proposed on designated historic properties within Victorian-era structures. Combining the constraints of an existing structure that is required to be preserved with limitations on the mass and scale of new construction on site – and the additional costs of bringing an old building up to current standards, makes these projects challenging. This proposed change would grant a multiplier of 1.2 to the FTEs generated by units within the designated structure. Staff has been presented with a significant range of additional costs associated with locating AH units within a designated structure, rather than new construction. A multiplier of 1.2 seems a measure that could add additional incentive without fundamentally compromising the relationship of the AH Credits program to AH mitigation requirements. It is important to note that this multiplier would only be available to the units within a designated structure – not to units in new construction in the same project. 8 Page 27 of 224 28 Page 8 of 14 Example: Three (3), two (2) bedroom units in a designated historic structure, deed restricted at Category 3. Current Value of Credits: 3 x 2.25 FTE = 6.75 FTE x $306,550 (Cat 3 FIL) = Approx. Value of $2,069,213 With Multiplier 6.75 x 1.2 = 8.1 FTE x $306,550 = Approx. Value of $2,480,325 The Multiplier brings roughly $400,000 of additional value to the project’s generated AH Credits for the units in the historic structure. The trade-off is that the project would “artificially” create an additional 1.35 FTEs worth of credit – that would not actually house employees. Staff believes this to have minimal and limited impact and if it has the effect of allowing a project to proceed that otherwise would not, the larger outcome justifies the trade-off. 4) Flexibility for credit issuance in deed-restricting existing free-market, multi-family residential development. One path to generate AH Credits is to improve and then deed-restrict existing free- market, multi-family residential units. If units are upgraded to meet APCHA development standards, AH Credits for this kind of project can be issued using the same calculation for FTEs based on bedrooms as new construction. Staff has encountered proposed projects where the size of the unit (small) combined with bedroom count – could not meet APCHA unit size standards. In this proposal – these types of units would rely on the 400 square feet per FTE figure in the LUC to generate the possible number of credits – rather than the bedroom count. This would provide clarity when evaluating the potential for credit issuance in existing, often older, multi-family developments. Staff Recommendation: 1) Adopt the four (4) proposed amendments to the Certificates of Affordable Housing Credits program. 2) Continue to study the feasibility of more significant changes to the credits program. Questions for Council: 1) Does Council support staff’s proposed amendments to the AH Credit program? 2) Does Council support staff continuing efforts to evaluate possible solutions to underlying, fundamental issues within the credit program? 9 Page 28 of 224 29 Page 9 of 14 Multi-Family Replacement – Improvements and Updates Staff has been working with a consultant team from Design Workshop to do two primary things: 1) to respond to some basic confusion that property owners and the development community has when working in this section of the code that has been amended multiple times over its 30+ year history; and 2) To study the development scenarios that result from this policy/regulation – so to better understand the realities of likely development outcomes. From this effort, which is still on-going, staff intends to come forward with what will likely be a proposal for significant change to how redevelopment of existing multi-family is dealt with in the GMQS chapter of the code. We are not proposing any significant change at this time for the following reasons: 1) This is a very important, and very complex section of the code. Because of the trends in Aspen’s real estate market in the last year, it is becoming even more important and complex. Staff wants to make sure that we get any proposed changes right. 2) The analysis of the development scenarios – using a new tool that we have developed with the consultant team – is showing some things that we expected to see, but other outcomes that we did not. Staff needs to better understand the implications of this more clearly before making specific recommendations. 3) This is a topic that will require a robust conversation with the community (property owners, the development community, etc.). The gathering and communications limitations of this last year have significantly curtailed staff’s ability to conduct outreach. Staff followed Pitkin County’s excellent efforts to engage on significant proposed changes to their GMQS system. The limitations of the current context were shown to be difficult to overcome and that process has been postponed by the BOCC. Staff sees changes to multi-family replacement as being similar in nature and scope. We recommend pursuing any proposed changes on this topic when staff can provide the community with more normal engagement opportunities. While staff recommends deferring any significant changes to sometime in the second half of 2021, we are proposing minor changes to the text of multi-family replacement to clear up some misunderstandings and scrivener’s errors from previous amendments which add to the confusing nature of the section of the code. No policy or regulatory changes are proposed, only clarification and clean-up of the text. Staff would also like to present Exhibit C. This document was created by the consultant team to provide a simple illustration of how multi-family replacement actually works related to the code requirements. This will be an important tool as we have conversations about potential changes. 10 Page 29 of 224 30 Page 10 of 14 Staff Recommendation: 1) Adopt minor changes to the multi-family replacement section of the code that clarify and clean-up, but do not change policy or regulatory outcomes at this time. 2) With the support of the consultant team – continue to study and evaluate development scenarios and potential responses. 3) Return to Council later in 2021 with proposals for substantial policy and regulatory changes in support of improved development outcomes and affordable housing goals. Questions for Council: 1) Does Council support staff’s recommendation of a clean-up and clarification of multi-family replacement in this round of amendments – and deferring more substantial policy and/or regulatory changes until more study can been completed and a more robust engagement process can be pursued. Incentives and Credits within the affordable housing mitigation system From previous discussions with Council, staff identified four (4) specific policies to study and evaluate as potential amendments. In summary, these existing credits/incentives have the effect of reducing AH mitigation requirements for different development types. 1) Lodge Unit Density and Size Incentive – this reduces the required mitigation of a lodge project if a project utilizes land efficiently and provides smaller unit sizes. The reduction is on a sliding scale that reduces required mitigation from 65% to as low as 10%. This reduction was part of the conversation related to Lift One Lodge and Gorsuch Haus as their mitigation requirements were being evaluated by Council. Both projects were fully code compliant in the required mitigation – but both took full advantage of this incentive in significantly reducing mitigation. it is important to note that in a lodge scenario this incentive applies to all related uses – commercial, residential, etc. in the same project. 2) Existing Lodge Unit Credit – Under current code, in a redevelopment scenario that would trigger demolition, the new lodge would receive a credit of units for existing against the new unit count – regardless of whether there was ever mitigation provided for the existing units. 3) Existing Residential Floor Area Credit – Under current code, a single-family or duplex, when redeveloped (triggering demolition), receives a credit for existing Floor Area towards the new Floor Area – regardless of whether there was ever mitigation provided for the existing unit(s). 4) Exemption for Residential sub-grade area – In residential (primarily single-family and duplex) development and redevelopment scenarios, the vast majority of the 11 Page 30 of 224 31 Page 11 of 14 sub-grade area is exempt from the Floor Area calculations that determine AH mitigation requirements. While this issue also intersects with mass and scale questions in zone district dimensional limitations, this discussion can be isolated to the mitigation context. Recommended Code Changes: At this time staff is recommending the elimination of the Lodge Incentive and Credit (1 and 2, above), but is recommending deferral to later in 2021 on the Residential Credit and Exemption (3 and 4, above). Lodge Incentive and Credit – Staff recommends that these aspects of the code be removed for the following reasons: 1) The mitigation reduction incentive for density and unit size has tended not to translate into the lodge outcomes that were desired. Often projects are designed within the code language to meet the letter of the regulation, but not necessarily the intent. Even if the desired outcomes were fully realized, it seems that community and Council desires for affordable housing is now of a higher priority than the type of lodge product that is being produced. 2) In the code amendments responding to the 2016 Moratorium, Council removed the automatic credit for commercial Net Leasable in redevelopment scenarios. Instead, commercial projects need to show that this area was previously mitigated before receiving the credit. Staff recommends that lodge uses be consistent with other commercial mitigation requirements in this regard. In an important difference, staff does not recommend that mitigation for existing units be phased in over time. Instead redeveloped lodge units would be mitigated at 65%. 3) If a project could show evidence of previous mitigation for existing units, consistent with commercial development, the existing credit would be applied. Residential – Credit for Existing Floor Area and Sub-Grade Exemption 1) Staff, while supportive of the potential changes to residential mitigation is not recommending these changes at this time and instead recommends deferral to a future process This could be considered in coordination with amendments to multi- family replacement as described above, and analysis of the affordable housing mitigation requirements for other residential uses. To get a sense of the scale and impact of these possible changes from current code, staff offers the following scenario: • R-6 Zone District – 3,240 square feet of allowable Floor Area. • Existing home of 2,900 square feet of Floor Area is proposed for demolition. Existing home has no evidence of previously mitigating. 12 Page 31 of 224 32 Page 12 of 14 • New, proposed home will build to maximum allowable Floor Area and will additionally include a 3,000 square foot basement (currently exempt). Current Mitigation Requirements: 3,240 sf (proposed FA) – 2,900 sf (existing FA) = 340 sf (new FA) 340 sf = .05 FTE = $17,130 of Cat. 2 Fee-in-Lieu Removal of Existing Floor Area Credit: 3,240 sf of FA = .52 FTE = $178,151 of Cat 2 Fee-in-Lieu Removal of Sub-Grade Exemption: 340 sf of new FA + 3,000 sf of Sub-Grade area = 3,340 of total new FA 3,340 sf = .53 FTE = $181,577 of Cat. 2 Fee-in-Lieu Removal of both Existing Floor Area Credit and Sub-Grade Exemption: 3,240 (Above Grade) + 3,000 (Sub-Grade) = 6,240 of new FA 6,240 sf = 1.01 FTE = $346,025 of Cat. 2 Fee-in-Lieu Based on previous conversations with Council, there are numerous reasons to support this policy change. First, this would bring equity in terms of mitigation across development types. Second, this would begin to capture the employee generation that is occurring in residential development and re-development scenarios that is not currently captured. Third, residential development and redevelopment are driving many of the perceptions and real impacts of “growth” that have been discussed with Council. These policy changes would be a major step toward responding to these issues. However, staff cannot recommend these changes at this time for the following reasons: • Staff has similar concerns to community engagement limitations discussed above related to multi-family replacement. These would represent major changes in how residential development is financially evaluated and designed. • The last residential generation/mitigation study was conducted with current code in place. Staff believes a robust analysis of these potential changes related to the previous residential analysis – and perhaps the need for a new study to justify these mitigation requirements would be necessary. • Staff believes that this type of change would need to be connected to clearly stated and specific goals related to affordable housing. Similarly, clear policy statements about the current impacts of residential development / redevelopment to community “growth” patterns would be needed in support of these changes. 13 Page 32 of 224 33 Page 13 of 14 Staff Recommendation: 1) Eliminate the Lodge Unit Size and Density Incentive and Existing Lodge Unit Credit. 2) Continue to study and evaluate the justification and impacts of eliminating the existing residential floor area credit and sub-grade exemption. No related code changes are proposed at this time. 3) Continue to discuss and build policy around affordable housing and growth management goals to provide a basis for future code changes in this area. Questions for Council: 1) Does Council support the elimination of the Lodge Unit Size and Density Incentive, and Credit for Existing Units as proposed? 2) Does Council support the deferral of consideration of changes to the Credit for Existing Residential Floor Area and Sub-Grade Exemption. 3) Does Council support staff continuing to work on providing support and justification to these types of code changes? This would include pursuing the expertise of consultant / professional services and additional budget requests (Staff has included a Spring Supplemental request for funds to cover the cost of this work.). CONCLUSION: Dependent on the outcomes of this work session, staff intends to return to Council with proposed LUC amendments on the topics described above: First Reading: April 27th Second Reading: May 11th Prior to the review of the Ordinance, staff will be presenting these proposed changes to the Planning and Zoning Commission on Tuesday, 4/20; and the APCHA Board on Wednesday, 4/21. Recommendations from these boards to Council will be provided. FINANCIAL IMPACTS: At this time, N/A. ENVIRONMENTAL IMPACTS: N/A ALTERNATIVES: N/A RECOMMENDATIONS: See above and in Exhibit B. CITY MANAGER COMMENTS: 14 Page 33 of 224 34 Page 14 of 14 EXHIBITS: EXHIBIT A – Policy Resolution No. 079, Series of 2020 EXHIBIT B – Summary Table of Staff Recommendations and Questions for Council EXHIBIT C – Full Tables for Fee-in-Lieu Calculation EXHIBIT D – Summary of Current Multi-Family Replacement Requirements 15 Page 34 of 224 35 RESOLUTION NO. 079 SERIES OF 2020 A RESOLUTION OF THE CITY OF ASPEN CITY COUNCIL ADOPTING POLICIES AUTHORIZING AMENDMENTS TO THE LAND USE CODE IN SUPPORT OF CITY COUNCIL'S AFFORDABLE HOUSING GOALS WHEREAS,pursuant to Section 26.310.020(A),a Policy Resolution is required to initiate the process of amending the City of Aspen Land Use Code; and, WHEREAS,pursuant to Section 26.310.020(A), during a work session on August 10, 2020, the Community Development Department received direction from City Council to explore targeted amendments to the Land Use Code related to growth management, affordable housing mitigation and the Affordable Housing Credits Program; and, WHEREAS, the Community Development Director recommends Council consider potential changes to the General Provisions (26.104), Growth Management Quota System 26.470), Certificates of Affordable Housing Credits (26.540) sections, and other sections of the Land Use Code as necessary for coordination, WHEREAS, City Council has reviewed the proposed code amendment policy direction, and finds it meets the criteria outlined in Section 26.310.040;and, WHEREAS, amending the Land Use Code as described below will ensure the ongoing effectiveness and viability of the regulations within the City of Aspen Land Use Code to achieve City Council's policy and regulatory goals related to affordable housing; and, WHEREAS,the regulations and standards in the Land Use Code provide important tools in the development of affordable housing within the City of Aspen; and, WHEREAS,Aspen's affordable housing system is essential in the advancement of a sustainable community; and, WHEREAS,the proposed Land Use Code amendments related to affordable housing will advance specific policy statements in the Aspen Area Community Plan(AACP); and, WHEREAS, pursuant to Section 26.310.020(B)(2), during a duly noticed public hearing on October 13, 2020 the City Council approved Resolution 079-2020, by a 5 to 0 vote,requesting code amendments to the Land Use Code; and, WHEREAS,pursuant to Section 26.310.020(B)(1), the Community Development Department, following approval of this Policy Resolution will conduct Public Outreach with the public, property owners, and members of the development community; and, Resolution 079-2020 Land Use Code/Affordable Housing Code Amendments Policy Resolution Pagel of 3 Exhibit A - Policy Resolution 16 Page 35 of 224 36 WHEREAS, this Resolution does not amend the Land Use Code, but provides direction to staff for amending the Land Use Code;and, WHEREAS,the City Council finds that this Resolution furthers and is necessary for the promotion of public health, safety,and welfare. NOW,THEREFORE,BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF ASPEN AS FOLLOWS: Section 1: Overall Code Amendment Objectives The objectives of these code amendments are to: 1. To more closely align City Council's affordable housing goals with policies and regulations in the Land Use Code. 2. Build upon the established successes of Aspen's affordable housing efforts. 3. Update, improve, clarify and simplify existing policies and regulations related to the provision of affordable housing. 4. Improve policies to further encourage both public and private sector development of affordable housing. 5. Maintain existing and increase the free-market and deed-restricted housing units available to Aspen's workforce. Section 2: Tonics for Potential Code Amendments 1. Affordable Housing Fee-in-Lieu 2. Certificates of Affordable Housing Credits 3. Existing Development Credits and Incentives Related to Affordable Housing Mitigation for various development and use types. 4. Multi-family Replacement Section 3: Affordable Housing Fee-in-fieu Amendment The goals of this amendment are to: 1. Update the calculation method and propose updated figures to better reflect the value of an affordable housing unit in the context of Aspen's development realities. 2. Update the current fee-in-lieu rate and provide clarity to the method of updating the fee-in-lieu calculation over time. Section 4: Certificates of Affordable Housing Credits Code Amendment The goals of this amendment are to: 1. Align the Land Use Code and APCHA development requirements to improve clarity and provide flexibility to affordable housing development and re-development projects. 2. Modify regulations and processes which govern the value, management, and accounting of Certificates of AH to ensure the program aligns with AH market dynamics and optimizes the effectiveness of the Certificates program. Resolution 079-2020 Land Use Code/Affordable Housing Code Amendments Policy Resolution Page 2 of 3 17 Page 36 of 224 37 3. Provide clarity in the relationship between Aspen's Credit program and other affordable housing incentives and the eligibility of various entities to generate Certificates. Section 5: Existins Development Credits and Incentives Amendment The goal of this amendment is to: 1. Bring equity to affordable housing mitigation requirements across different development types. Section 6: Multi-family Replacement Amendment The goals of this amendment are to: 1. Bring clarity to and simplify policies that preserve existing free-market and deed restricted multi-family housing units. 2. Ensure that redevelopment scenarios of existing multi-family housing continue to meet community goals and expectations. Section 7: Other Amendments as Necessary Other amendments may be required to ensure coordination between the sections identified above and other sections in the LUC which may not have been anticipated. Section 8• This resolution shall not affect any existing litigation and shall not operate as an abatement of any action or proceeding now pending under or by virtue of the resolutions or ordinances repealed or amended as herein provided,and the same shall be conducted and concluded under such prior resolutions or ordinances. Section 9• If any section, subsection, sentence, clause, phrase, or portion of this resolution is for any reason held invalid or unconstitutional in a court of competent jurisdiction, such portion shall be deemed a separate, distinct and independent provision and shall not affect the validity of the remaining portions thereof. FINALLY,adopted this 13th day of October,2020. Torre, Mayor TEST: APPROVED AS TO FORM: Nicole Henning,City Cle es True,C Aomey Resolution 079-2020 Land Use Code/Affordable Housing Code Amendments Policy Resolution Page 3 of 3 18 Page 37 of 224 38 EXHIBIT B – Summary Table - Staff Recommendation and Questions for Council Policy Topic Staff Recommendation Questions for Council Fee-in-Lieu 1. Adopt the proposed Fee-in-Lieu schedule. 2. Council will review and consider an annual increase of the FIL utilizing the Engineering News Records’ most recent National Construction Index – proposed for consideration by Ordinance in the first quarter of each year. 3. FIL will be recalculated every five (5) years utilizing the proposed methodology in evaluating actual land acquisitions and recent construction projects as possible. 1) Does Council generally support the approach in the proposed methodologies for calculation and regular updates to the FIL? 2) Is there any additional information that Council desires for presentation during the consideration of the Ordinance for the amendment? AH Credits Program 1) Adopt the four (4) proposed amendments to the Certificates of Affordable Housing Credits program. 2) Continue to study the feasibility of more significant changes to the credits program. 1) Does Council support staff’s proposed amendments to the AH Credit program? 2) Does Council support staff continuing efforts to evaluate possible solutions to underlying, fundamental issues within the credit program? Multi-Family Replacement 1) Adopt minor changes to the multi-family replacement section of the code that clarify and clean-up, but do not change policy or regulatory outcomes at this time. 2) With the support of the consultant team – continue to study and evaluate development scenarios and potential responses. 3) Return to Council later in 2021 with proposals for substantial policy and regulatory changes in support of improved development outcomes and affordable housing goals. 1) Does Council support staff’s recommendation of a clean-up and clarification of multi-family replacement in this round of amendments – and deferring more substantial policy and/or regulatory changes until more study can been completed and a more robust engagement process can be pursued. Existing Incentives and Credits 1) Eliminate the Lodge Unit Size and Density Incentive and Existing Lodge Unit Credit. 2) Continue to study and evaluate the justification and impacts of eliminating the existing residential floor area credit and sub-grade exemption. No related code changes are proposed at this time. 3) Continue to discuss and build policy around affordable housing and growth management goals to provide a basis for future code changes in this area. 1) Does Council support the elimination of the Lodge Unit Size and Density Incentive, and Credit for Existing Units as proposed? 2) Does Council support the deferral of consideration of changes to the Credit for Existing Residential Floor Area and Sub- Grade Exemption? 3) Does Council support staff continuing to work on providing support and justification to these types of code changes? This would include pursuing the expertise of consultant / professional services and additional budget requests. 19 Page 38 of 224 39 Page 1 of 3 EXHIBIT C – Fee-in-Lieu Tables Construction Costs Land Costs Total Costs Note: at this point in the calculation, the $/SF of net livable were multiplied by 400 SF to get at the cost per FTE. Project Soft Costs Hard Costs Total Construction Costs $/SF Net Livable $/FTE $/SF Net Livable $/FTE $/SF Net Livable $/FTE 1 $119 $51,571 $616 $268,614 $735 $320,396 2 $247 $95,794 $506 $196,630 $753 $292,424 3 $224 $83,753 $436 $163,099 $660 $246,852 4 $211 $77,582 $474 $174,559 $685 $252,140 5 $134 $53,443 $474 $189,786 $608 $243,230 Range $119 - $247 $51K - $95K $436 - $616 $163K - $268K $608 - $753 $243K - $320K Average $187 $72,471 $501 $198,538 $688 $271,008 Project $/SF Net Livable $/FTE 1 $540 $210,431 2 $481 $166,667 3 $426 $216,949 4 $544 $211,429 5 $518 $193,955 6 $311 $114,296 7 $135 $53,270 Range $135 - $540 $53K - $217K Average $422 $166,714 Inputs $/SF net livable $/FTE Land Cost $422.00 $168,800.00 Soft Costs $186.70 $74,681.92 Hard Costs $501.34 $200,535.03 Total Cost $1110.04 $444.016.95 20 Page 39 of 224 40 Page 2 of 3 Revenues Fee-in-Lieu Fee-in-Lieu Costs/FTE Revenues/FTE Proposed FIL Category 1 $444,017 $33,946 $410,071 Category 2 $444,017 $65,525 $378,492 Category 3 $444,017 $96,309 $347,708 Category 4 $444,017 $139,121 $304,896 Category 5 $444,017 $191,625 $252,392 FOR SALE UNITS MAX NET SALES REVENUES BY CATEGORY AND SIZE OF UNIT (2020 APCHA Regulations) Category 1 Category 2 Category 3 Category 4 Category 5 Sales Price*Per SF Per FTE Sales Price*Per SF Per FTE Sales Price*Per SF Per FTE Sales Price*Per SF Per FTE Sales Price*Per SF Per FTE Studio/0 Bedroom 1.25 500 $43,120 $86 $34,496 $98,000 $196 $78,400 $164,640 $329 $131,712 $272,440 $545 $217,952 $386,120 $772 $308,896 1 Bedroom 1.75 700 $54,880 $78 $31,360 $118,580 $169 $67,760 $179,340 $256 $102,480 $291,060 $416 $166,320 $418,460 $598 $239,120 2 Bedroom 2.25 900 $65,660 $73 $29,182 $145,040 $161 $64,462 $212,660 $236 $94,516 $323,400 $359 $143,733 $454,720 $505 $202,098 3 Bedroom 3.00 1,200 $76,440 $64 $25,480 $178,360 $149 $59,453 $247,940 $207 $82,647 $357,700 $298 $119,233 $484,120 $403 $161,373 AVERAGES $60,025 $75 $30,130 $134,995 $169 $67,519 $201,145 $257 $102,839 $311,150 $405 $161,810 $435,855 $570 $227,872 * Sale price reduced by 2% to account for APCHA Commission FOR RENT UNITS MAX GROSS RENTAL REVENUE BY CATEGORY AND SIZE OF UNIT (2020 APCHA Regulations) Category 1 Category 2 Category 3 Category 4 Category 5 Rental Income Per SF Per FTE Rental Income Per SF Per FTE Rental IncomePer SF Per FTE Rental IncomPer SF Per FTE Rental Income Per SF Per FTE Studio 1.25 500 $110,725 $221 $197,469 $395 $295,057 $590 $391,602 $783 $536,942 $1,074 1 Bedroom 1.75 700 $137,207 $196 $231,875 $331 $328,629 $469 $429,553 $614 $574,267 $820 2 Bedroom 2.25 900 $162,646 $181 $266,490 $296 $363,244 $404 $464,376 $516 $608,881 $677 3 Bedroom 3.00 1200 $188,503 $157 $297,977 $248 $398,901 $332 $498,991 $416 $644,121 $537 FOR RENT UNITS: Net Revenue Available NET REVENUE AFTER EXPENSES 50.00%MAX NET RENTAL REVENUE BY CATEGORY AND SIZE OF UNIT AFTER O&M EXPENSES (2020 APCHA Regulations) Category 1 Category 2 Category 3 Category 4 Category 5 Rental Income Per SF Per FTE Rental Income Per SF Per FTE Rental IncomePer SF Per FTE Rental IncomPer SF Per FTE Rental Income Per SF Per FTE Studio 1.25 500 $55,362 $111 $44,290 $98,735 $197 $78,988 $147,529 $295 $118,023 $195,801 $392 $156,641 $268,471 $537 $214,777 1 Bedroom 1.75 700 $68,603 $98 $39,202 $115,938 $166 $66,250 $164,315 $235 $93,894 $214,777 $307 $122,730 $287,133 $410 $164,076 2 Bedroom 2.25 900 $81,323 $90 $36,144 $133,245 $148 $59,220 $181,622 $202 $80,721 $232,188 $258 $103,195 $304,441 $338 $135,307 3 Bedroom 3.00 1200 $94,251 $79 $31,417 $148,988 $124 $49,663 $199,450 $166 $66,483 $249,495 $208 $83,165 $322,061 $268 $107,354 AVERAGES $74,885 $94 $37,763 $124,226 $159 $63,530 $173,229 $224 $89,780 $223,065 $291 $116,433 $295,526 $388 $155,378 AVERAGE REVENUES FOR SALE AND FOR RENT Category 1 Category 2 Category 3 Category 4 Category 5 Rev. per Unit Per SF Per FTE Rev. per Unit Per SF Per FTE Rev. per Unit Per SF Per FTE Rev. per Uni Per SF Per FTE Rev. per Unit Per SF Per FTE Studio $39,393 $78,694 $124,867 $187,296 $261,836 1 Bedroom $35,281 $67,005 $98,187 $144,525 $201,598 2 Bedroom $32,663 $61,841 $87,618 $123,464 $168,702 3 Bedroom $28,449 $54,558 $74,565 $101,199 $134,363 AVERAGES $67,455 $85 $33,946 $129,611 $164 $65,525 $187,187 $241 $96,309 $267,108 $348 $139,121 $365,691 $479 $191,625 FTEs per Unit Sq. Ft. per Unit FTEs per Unit Sq. Ft. per Unit FTEs per Unit Sq. Ft. per Unit 21 Page 40 of 224 41 Page 3 of 3 Fee-in-Lieu Current FIL Adopted 2018 Proposed FIL % Increase from 2018 Category 1 $381,383 $410,071 7.5% Category 2 $342,599 $378,492 10.4% Category 3 $306,550 $347,708 11.8% Category 4 $238,687 $304,896 21.7% Category 5 $168,290 $252,392 50.0% 22 Page 41 of 224 42 The City of Aspen has a long-standing Aordable Housing Program, and requires all new development or expansions to contribute to the aordable housing system to o-set the impacts created by development. This flyer details one tool for preserving and expanding the supply of aordable housing—the Multi-Family Replacement Program. Please reach out to the Planner of the Day with any questions, or for assistance in determining the options that may be best for your project. planneroheday@gmail.com 970-429-2763 ASPENMULTIFAMILY REPLACEMENTPROGRAM PRESERVINGAFFORDABLEANDACCESSIBLEHOUSINGFOR ALLOFASPEN’SRESIDENTS WHATISTHEPURPOSEOFTHEPROGRAM? ORIGIN The City's neighborhoods have traditionally comprised a mix of housing types, including those aordable by its working residents. However, because of Aspen's attractiveness as a resort environment and because of the City’s physical constraints, there is constant pressure for the redevelopment of dwellings currently providing resident housing for tourist and second-home use. Such redevelopment results in the displacement of individuals and families who are an integral part of the Aspen work force. Given the extremely high cost of and demand for market-rate housing, resident housing opportunities for displaced working residents, which are now minimal, will continue to decrease. Aspen has had a Multi-family Replacement Program in place since 1988. APPLICABILITY Any time an existing multi-family unit is demolished, combined, or converted to another use, the developer is required to comply with this code section. WHATISTHEMULTIFAMILYREPLACEMENTPROGRAM? Updated as of March 2021. As a result of the replacement of resident housing with second homes and tourist accommodations and the steady increase in the size of the workforce required to assure the continued viability of Aspen area businesses and the City's tourist-based economy, the City has found it necessary, in concert with other regulations, to adopt limitations on the combining, demolition or conversion of existing multi-family housing in order to minimize the displacement of working residents, to ensure that the private sector maintains its role in the provision of resident housing and to prevent a housing shortfall from occurring. The Multi-family Replacement Program is an Aspen City ordinance located in the Growth Manage- ment Quota System (GMQS) chapter of the City’s Land Use Code that sets in place requirements for replacing any multi-family housing units within Aspen that are demolished. INTENT The program is intended to prevent the loss of existing housing stock and increase the supply of aordable housing in Aspen. EXEMPTIONS There are a number of exemptions to these requirements. The remodeling or expansion of existing multi-family residential units is exempt from the requirements of GMQS if no additional floor area is added and no demolition of the unit occurs. Within the multi-family replacement section, the following activities are exempt from the requirements: Replacement aer non-willful demolition Demolition by public agency Demolition of units that have never housed a local working resident Demolition of illegal Bandit Units Penetration of demising walls related to normal maintenance. Demolition work related to life safety that could not have been originally anticipated. Exhibit D - Summary of existing code 23 Page 42 of 224 43 APCHA HOUSING Category 1 Low-income Below 50% AMI Category 2 Lower moderate income 50.1 - 85% AMI Category 3 Upper moderate income 85.1 - 130% AMI Category 4 Middle income 130.1 - 205% AMI Category 5 and RO Upper middle income 205.1 - 240% AMI TARGET HOUSEHOLD INCOME LEVEL AMI PERCENTAGE RANGE Aspen Multi-Family Replacement Program KEYDEFINITIONS Free Market: Dwelling units intended exclusively for residential purposes, not subject to any residency requirements and not including hotels, or lodging. Aordable Housing: Dwelling units intended to house only local working residents that are deed restricted according to the Aspen/Pitkin County Housing Authority Guidelines. APCHAHOUSEHOLDINCOMECATEGORIES RESIDENTIALUSES The Resident Occupied (RO) category oers qualified higher income households the opportunity to own aordable housing. For RO ownership qualification, Maximum Household Gross Income Levels are unlimited, and the Maximum Household Net Assets Level is higher than other APCHA categories, or unlimited as stated in the applicable deed restriction. RESIDENTOCCUPIEDUNIT The City has created incentives for private developers to create new housing product that is not tied to a mitigation requirement (Sec 26.540). This is done by providing a saleable certificate equal to the amount of full-time equivalents (FTEs) housed by aordable housing units they create. The aordable housing developer sells that certificate to another developer who needs to mitigate for the FTEs generated by their project. CERTIFICATESOFAFFORDABLEHOUSINGCREDITS A contract entered into by the APCHA , City of Aspen, and/or Pitkin County and the developer, owner or purchaser of real property identifying the conditions of occupancy and resale as aordable housing. DEEDRESTRICTION To raze, disassemble, tear down or destroy forty percent (40%) or more of an existing structure (prior to commencing development). Demolition also includes the removal of a dwelling unit in a multi-family or mixed-use building, its conversion to nonresidential use, or any action which penetrates demising walls or floors between Multi-Family Housing Units if such action is undertaken to combine the units. DEMOLITION Any replacement units required to be deed-restricted as aordable housing shall be issued a certificate of occupancy, according to the Building Department, and be available for occupancy at the same time as, or prior to, any redeveloped free-market units, regardless of whether the replacement units are built on site or o site. TIMINGREQUIREMENT Category units refer to specific household income and AMI levels to provide lower and middle income households the opportunity to rent or own aordable housing. CATEGORYUNITS UNIT TYPE Studio 1.25 Employees One-bedroom 1.75 Employees Two-bedroom 2.25 Employees Three-bedroom or larger 3.0 Employees, plus .5 / each addl. bedroom Dormitory 1.0 Employee per 150 SF of net livable area EMPLOYEES HOUSED FULLTIMEEQUIVALENTSHOUSED A unit of measurement standardizing the workloads of employees. In this Chapter, full-time equivalents (FTEs) refer to the number of employees generated or housed by development. FULLTIMEEQUIVALENTS Whenever a project provides residential units on or o site, this schedule shall be used to determine the number of employees housed by such units: When an aordable housing mitigation requirement needs to be converted between FTEs and square feet, a conversion rate of 400 square feet (SF) per 1 FTE is used. SF/EMPLOYEECONVERSION 24 Page 43 of 224 44 Aspen Multi-Family Replacement Program HOWDOESTHEPROGRAMWORK? EXAMPLES REPLACEMENTWITH RESIDENTOCCUPIEDOR LOWERDEEDRESTRICTION REPLACEMENTWITH CATEGORYORLOWER DEEDRESTRICTION REPLACEMENTWITH AFFORDABLEHOUSING CREDITS Aspen’s Multi-Family Replacement Program oers four paths for replacing existing multi-family units that are demolished. Dierent paths are available to dierent redevelopment eorts depending on the existing status of the units that will be demolished. Below is a summary of the requirements and allowances oered in each of the four paths. Regardless of the replacement option selected, all development must meet all applicable requirements of the code, including zoning. When this option is selected, the development can also replace 100% of the existing units as free market without additional mitigation, resulting in a doubling of the density related to the development. Additional Free Market units beyond the original number may be added subject to an additional GMQS Review requiring 60% - 70% aordable housing. A developer would select this option to provide replacement units at the Resident Occupied (RO) category, while maintaining the existing Free Market (FM) density. Six existing Free Market (FM) units are demolished and replaced with six Resident Occupied (RO) deed restricted units. demolished units replaced units When this option is selected, the development can also replace 100% of the existing units as Free Market without additional mitigation, resulting in a 50% increase in density. Additional Free Market units beyond the original number may be added subject to an additional GMQS Review requiring 60% - 70% aordable housing. A developer would select this option to provide replacement units at a Category 4 level, while maintaining the existing Free Market density. This option requires that any additional development on-site also be deed restricted as aordable housing. All the units that are replaced or built new are eligible for a Certificate of Aordable Housing Credit, and any unused Free Market development rights are required to be vacated. This section only requires that the number of units be replaced and is silent regarding bedrooms and net livable area. A developer would select this option in order to develop aordable housing credits that can be sold to other developers, or used for other projects in their portfolio. For existing Free Market residential units, there can be no net decrease in the number of overall units between the existing and proposed developments, and one of the following three options must be met: THREEPATHSFORREPLACINGEXISTINGFREEMARKETUNITS FM FM FM FM FM FM RO RO RO RO RO RO additional units FM FM FM FM FM FM additional units FM FM FM FM FM FM Six existing Free Market (FM) units are demolished and replaced with three Category 4 deed restricted units. demolished units replaced units FM FM FM FM FM FM C4 C4 C4 Six existing Free Market (FM) units are demolished and replaced with six (or more) aordable housing (AH) deed restricted units. demolished units replaced units additional units Certificates of aordable housing credit equal to the number of FTE housed by new aordable housing. FM FM FM FM FM FM AH AH AH AH AH AH AH AH AH 25 Page 44 of 224 45 Aspen Multi-Family Replacement Program For additional information, visit Chapter 26.470 of the City of Aspen Municipal Code For existing aordable housing units, the replacement project must provide housing for the same number of employees (based on FTEs) housed by the existing units. The code allows a change in the number of units, bedrooms, and net livable area provided. There is no specific requirement related to the category of the replacement units. ONEPATHFORREPLACINGEXISTINGAFFORDABLEHOUSINGUNITS EXAMPLE Six existing aordable housing units housing twelve full-time employees (FTE) demolished and replaced with eight aordable housing units housing twelve FTEs. demolished aordable housing units replaced units REPLACEMENTOFHOUSINGFORTHESAMENUMBEROFEMPLOYEES HOUSEDINDEMOLISHEDUNITS planneroheday@gmail.com 970-429-2763QUESTIONS? PLEASECONTACTUS WHERECANREPLACEMENTUNITSBELOCATED? In terms of the location for replacement units, the code includes a preference for on-site units. Units are required to be developed on the same site on which the demolition occurred unless the owner is able to demonstrate to the Planning and Zoning Commission that “replacement of the units on site would be in conflict with the parcel’s zoning or would be an LINKAGESTOOTHERSECTIONSOFGROWTHMANAGEMENT Both the 50% and 100% replacement options for Free Market multi-family residential units provide the option to develop additional Free Market housing through the 60% and 70% aordable development processes (See Sections inappropriate solution due to the site’s physical constraints.” If the Planning and Zoning Commission agrees that the replacement units cannot reasonably be located on-site, the developer can replace the units o-site or through the extinguishment of a Certificate of Aordable Housing Credit. 26.470.100(H-I). These provisions allow additional Free Market units if aordable housing units are also provided. These requirements are as follows: AFFORDABLE AFFORDABLE 60% of the additional units and 30% of the net floor area are required to be aordable housing at a Category 4 or lower. If ten new units are proposed, six can be Free Market (FM) and four additional Category 4 (C4) units are required. 70% of the additional units and bedrooms are required to be aordable housing. 40% of those housing units must be at a Category 4 or lower. new units FM FM FM FM FM FM C4 C4 C4 C4 EXAMPLES If ten new units are proposed, three can be Free Market (FM) units, while four are required to be Category 4 units (or lower) and three are required to be Resident Occupied (RO) units. new units C4 C4 C4 C4 RO RO RO FM FM FM 26 Page 45 of 224 46 1 FOLLOW-UP MEMORANDUM CITY COUNCIL WORK SESSION MEETING DATE: April 26, 2021 (continued from 2/22/21) FOLLOW-UP MEMO DATE: May 19, 2021 AGENDA TOPIC: Growth Management Quota System and Affordable Housing PRESENTED BY: Ben Anderson, Community Development COUNCIL MEMBERS PRESENT: All five members were present. _______________________________________________________________________ WORK SESSION DISCUSSION SUMMARY: Staff presented Council with information related to GMQS, particularly the allotment system and affordable housing mitigation. Staff presented the premise that aspects of the GMQS, with origins dating back to the mid-1970’s, are no longer responding to the current development trends as designed in mitigating the real and perceived impacts of growth. 1. Topic: Our current GMQS toolkit does not have the right tools to respond to the trends driving Aspen’s current and future development trends. Council majority consensus. Council agreed with this assertion. 2. Topic: Because affordable housing mitigation is so directly tied to the development types identified within the GMQS allotment system, the provision of affordable housing is not commensurate with real and perceived impacts of growth. Council majority consensus. Council agreed with this assertion. 3. Topic: What should be the appropriate staff response to these issues? Council majority consensus. Council agreed that the status quo was not an acceptable condition moving forward and gave direction to staff to study further, evaluate, and propose responses. Council also agreed that a range of responses were possible: • Targeted policy and code responses to specific development types. • Modifying the current allotment system in response to these issues. • Rethink direct tie between growth and affordable housing mitigation. • A full re-evaluation of GMQS as it relates to current and future “growth” trends. 9 Page 46 of 224 47 2 NEXT STEPS: Council and staff agreed that this is an expansive set of topics and that it is important to prioritize and be as specific as possible in directing our efforts and proposed responses. Council offered support for additional staffing and financial resources needed to complete this work in addition to ComDev’s existing work plan and services. 1. Summer 2021 • Proposed changes to single family and duplex redevelopment AH mitigation requirements. • Proposed changes to inclusion of subgrade areas for residential AH mitigation requirements. • Continued policy discussion related to Multi-family Replacement requirements in the GMQS. Staff requests a Work Session with Council in July 2021 to provide an update on staff findings related to Single Family residential mitigation and multi-family replacement policies. 2. Early Fall 2021 • Evaluation of opportunities within Part 700 (Zone Districts) of the LUC for AH opportunities and in pursuit of other community goals. • Discussions with Council about desire to update AACP in 2022 and the role of the AACP in shaping GMQS response. • Evaluation of short-term rentals in relationship to GMQS concerns and AH mitigation requirements. • Continued evaluation of AH Credits program in relationship to overall GMQS/AH mitigation conversation – and for opportunities for continued improvements to the program. • Following discussions with interested stakeholders and further staff evaluation, proposed policy response strategies to GMQS issues discussed above. 10 Page 47 of 224 48 2 Page 48 of 224 49 3 Page 49 of 224 50 4 Page 50 of 224 51 5 Page 51 of 224 52 6 Page 52 of 224 53 7 Page 53 of 224 54 8 Page 54 of 224 55 9 Page 55 of 224 56 10 Page 56 of 224 57 11 Page 57 of 224 58 12 Page 58 of 224 59 13 Page 59 of 224 60 14 Page 60 of 224 61 15 Page 61 of 224 62 16 Page 62 of 224 63 17 Page 63 of 224 64 18 Page 64 of 224 65 19 Page 65 of 224 66 20 Page 66 of 224 67 21 Page 67 of 224 68 22 Page 68 of 224 69 23 Page 69 of 224 70 24 Page 70 of 224 71 25 Page 71 of 224 72 26 Page 72 of 224 73 27 Page 73 of 224 74 28 Page 74 of 224 75 29 Page 75 of 224 76 30 Page 76 of 224 77 31 Page 77 of 224 78 32 Page 78 of 224 79 33 Page 79 of 224 80 Page 1 of 8 MEMORANDUM TO: Mayor and Council Members FROM: Chris Everson, Affordable Housing Project Manager THROUGH: Rob Schober, Capital Asset Director MEMO DATE: October 29, 2021 MEETING DATE: November 1, 2021 RE: Lumberyard Affordable Housing Design Process Update REQUEST OF COUNCIL: Staff is requesting feedback from Council about overall project vision and alternate parking plans recommended for upcoming community engagement. BACKGROUND: Attached Exhibit A – Lumberyard Project Background provides a history of work to date on the Lumberyard affordable housing design effort. The detailed background information provides important context for where the current effort is picking up after the effort left off in late 2020. DISCUSSION: Council is being asked to provide the following direction during the today’s session: 1. Do the project vision and guiding principles meet Council’s expectation? 2. Feedback on additional explorations or metrics that will assist in evaluating success moving forward? 3. Are the range of parking alternatives presented today reasonable to take to the community for public input? Project Vision and Guiding Principles Since being brought together, the current project team, including Cushing Terrell and DHM Design, have been integrating their knowledge of the project work to date, and have been working primarily on Council’s concerns about the 2020 Lumberyard 310-unit conceptual master plan. The project team has also been further studying the technical elements of the project site and engaging a series of “staff advisory” conferences with key City department representatives to make sure that the project team is hearing important project input from the City’s many referral departments such as Environmental Health & Climate Action, Parks & Open Space, Parking, Transportation, Communications, Community Development, Building, Engineering, APCHA, and Utilities. 14 Page 80 of 224 81 Page 2 of 8 While becoming familiar with the project background and the City’s values, the project team has developed a vision statement for the Lumberyard affordable housing development. Lumberyard Affordable Housing Project Vision Statement: A stable, thriving affordable neighborhood. Pedestrian friendly, environmentally sustainable, connected, and welcoming. Looks, lives and feels authentically Aspen! Cushing Terrell have also engaged key City and CORE personnel in a sustainability workshop as well as additional follow-up from that workshop, including collecting goals and recommendations for potential certification programs for energy efficiency and environmental sustainability. This work is ongoing, and the project team will be bringing forward a sustainability recommendation in upcoming meetings. Parking Alternatives Analysis Council’s concern about 100% underground parking is a fundamental site master planning issue which must be managed prior to continuing with the schematic design process. The Cushing Terrell team has engaged most of their design effort to this point developing alternate parking plans. Underground parking removes conflicts between pedestrians and cars and leaves space on the surface for site amenities which increase the livability of the facilities. But underground parking is costly in many ways including initial cost, ongoing maintenance cost, disposition of excavated material, environmental impacts, access convenience and more. Cushing Terrell’s first design task has been to perform a parking alternatives analysis to study impacts of varying levels of above-ground parking in place of 100% underground parking. The goal of this effort is to come up with feasible alternatives to 100% underground parking with 310 units on site and with buildings no taller than 4 stories. The four parking alternatives which the Cushing Terrell team is presenting all include the same number of units (310) and parking spaces (432) as are contained in the 2020 Lumberyard 310-unit conceptual master plan. The plans all include the same amount of space and parking for a childcare facility. But the plans have varying amounts of usable open site area, with some site area more consolidated into larger yard-like spaces and some more distributed. The useable open site area notes shown below are a sum of consolidated yard-like green spaces of over 6,000 sq. ft. Latch Parking Plan: Latch distributes 310 units in twenty structures and maintains generous usable open site area. With more parking underground, latch provides connected public-facing open space on the site. These 4-story structures are conceptual only and contain space needed for 310 two-level units accessed by external stairs and access decks. Latch has 351 underground parking spaces (81%), 44 carport-covered surface parking spaces (10%) and 37 uncovered surface parking spaces (9%). Latch provides about 1.4 acres of yard-like green spaces of over 6,000 sq. ft. with two large, primary public-facing green spaces. 15 Page 81 of 224 82 Page 3 of 8 Pivot Parking Plan: Pivot spreads livable area provides two story units that aren’t back-to-back. This gives daylight, views and cross-ventilation to each unit. These 4-story structures are conceptual only and contain space needed for 310 two-level units accessed by a covered breezeway. Pivot has 311 underground parking spaces (72%), 49 carport-covered surface parking spaces (11%) and 72 uncovered surface parking spaces (17%). Pivot provides about 0.8 acres of yard-like green spaces of over 6,000 sq. ft. and breezeways with front stoops and balconies. Hinge Parking Plan: Hinge maximizes consolidated open site areas into large, protected courtyards and consolidates 310 units into three very large, efficient structures. These 4-story structures are conceptual only and contain space needed for 310 single-level units accessed by an internal corridor. Hinge has 261 underground parking spaces (60%), 78 carport-covered surface parking spaces (18%) and 91 uncovered surface parking spaces (21%). Hinge provides about 1.8 acres of yard-like green spaces of over 6,000 sq. ft. with three large, protected courtyard areas. Flange Parking Plan: Flange has no underground parking and balances pedestrian, vehicle, and other modes of connection on the surface. Flange consolidates 310 units into nine moderately large, efficient structures and has a lower initial carbon footprint with no underground garage. These 4-story structures are conceptual only and contain space needed for 310 single-level units accessed by a covered breezeway. Flange has 0 underground parking spaces (0%), 201 carport- covered surface parking spaces (47%) and 231 uncovered surface parking spaces (53%). Flange provides about 0.2 acres of yard-like green spaces of over 6,000 sq. ft. 16 Page 82 of 224 83 Page 4 of 8 Rough Order Cost and Excavation Estimates Below is a table of conceptual rough order of magnitude estimates of initial cost and annual maintenance cost for parking for each parking plan. The estimates are based on 2021 dollars, not future dollars, and include only parking, not the entire development. These estimates are intended to be used only for rough order of magnitude comparison among the parking plans and are not based on construction bids and should therefore not be relied upon as an indication of actual construction cost in 2021 or in the future. This also does not include the 15 to 16 childcare surface parking shown in all the plans. The table also includes a rough order estimate of excavated material for underground parking which has been reduced to dump truck loads to make the comparisons as simple as possible. This does not include estimates of excavated material for crawl spaces which are likely under buildings where there will be no underground parking. This also does not include estimates of excavated material for carport-covered or uncovered surface parking spaces which is also likely needed. The “Dump Truck Loads Excavated” estimates shown here are for excavation due to underground parking which is in excess of excavation for crawl spaces and carport-covered or uncovered surface parking. The “Dump Truck Loads Excavated” shown is not attempting to be an accurate measure of dump truck trips on Highway 82 since a significant amount of fill would be used to balance the site grading and to create berms for noise mitigation and other landscape features. 17 Page 83 of 224 84 Page 5 of 8 Housing Needs Study Update (Information Only – Not Part of Today’s Decision-Making) The project team has commissioned an updated housing needs analysis with Economic & Planning Systems, Inc. (EPS). EPS is in the final stages of data analysis and are beginning to format a draft final report. In the report, data related to household incomes covers the Roaring Fork Valley from Glenwood Springs to Aspen. And because the Aspen/Pitkin County Housing Authority housing regulations require employment in Pitkin County, data related to jobs i n the report will focus on jobs in Pitkin County. Data from 2020 was not included due to accuracy concerns around COVID- 19 impacts. More detailed information will be reported shortly, and the preliminary information shown below is the primary area of concern: From 2010 to 2019, the following trends have occurred with households from GWS to Aspen: • A decline in rental and ownership households under 85% AMI (APCHA Categories 1 & 2) • A small increase in rental and ownership households 85-120% AMI (APCHA Category 3) • Some increase in rental households >120% AMI (APCHA Categories 4+) • Larger increase in ownership households >120% AMI (APCHA Categories 4+) From 2010 to 2019, the following trends have occurred with jobs in Pitkin County: • Some growth in jobs for household incomes under 85% AMI (APCHA Categories 1 & 2) • About twice as much job growth for household incomes 85-120% AMI (APCHA Category 3) • Some growth in jobs for household incomes >120% AMI (APCHA Categories 4+) • Wages in Aspen and Snowmass tend to be higher than the rest of the RFV This preliminary information appears to suggest: • Household losses combined with some job growth at lower incomes suggests a heavy focus on providing Category 1 & 2 units • Small household increases combined with higher job growth at 85-120% AMI suggests an equally heavy focus on Category 3 units • Household increases combined with some job growth at >120% AMI suggests a lesser focus on Category 4+ units What might this mean for income levels in upcoming affordable housing developments? • The Lumberyard program has to this point considered a mix of approximately 50% Category 1 & 2, 30% Category 3 and 20% Category 4+. Some consideration could be given to increasing Category 3 and decreasing Category 4+. • For Burlingame Ranch Phase 3, consideration could be given to focusing unit sales more on Categories 2 & 3 and less on Categories 4+. Staff plans to continue to develop reports and recommendations for Council review and direction as affordable housing development projects move forward. 18 Page 84 of 224 85 Page 6 of 8 Land Use Actions in Process The design for the Lumberyard affordable housing facilities needs to be determined before a development application can be submitted. But there are two land use approval steps that must occur prior to submittal of the affordable housing development application. These two steps are necessary to assemble the project site. The project site currently consists of three parts as shown below: Annexation of Mini Storage: The 3-acre Mini Storage site is outside Aspen City limits and meets the regulated requirements for annexation into the City of Aspen. Years ago, the City of Aspen likewise annexed the 4.7-acre Lumberyard property into the City. Since the 3-acre Mini Storage site was purchased by the City of Aspen in 2020, annexation of the Mini Storage property has not yet occurred. An annexation application has been drafted and will be submitted shortly. The annexation will follow the same process that the Lumberyard property followed years ago, and a temporary re-zoning will be applied to the parcel once annexed – this will facilitate the continued operation of the Mini Storage operation until the City phases that out as 2024 approaches. The annexation process will follow the City of Aspen municipal code requirements and will require public notice and public hearings per typical regulation by the City of Aspen Community Development Department. Staff plans to proceed as described unless directed otherwise by City Council. Subdividing Undeveloped 2.8 Acres: The 2.8-acre undeveloped site was annexed into the City of Aspen years ago as part of the Burlingame Lot 1A property which covers all of Deer Hill. Because the 2.8-acre undeveloped area is still part of Burlingame Lot 1A, it must be subdivided from Lot 1A so that it can be joined with the balance of the Lumberyard property for the development of affordable housing. The Deer Hill conservation easement and the Bar-X Pre-Annexation Agreement are historical recorded documents which allow this area to be used for development of affordable housing, and the process requires approval by Aspen Valley Land Trust (AVLT). Staff plans to proceed as described unless directed otherwise by City Council. 19 Page 85 of 224 86 Page 7 of 8 While these preliminary land use approval actions are in process, the Lumberyard project team will continue to develop the designs for affordable housing with input from Council and as informed by further community engagement. While the land use actions described above will prepare the site for the affordable housing development application submittal, these actions have no bearing on the ongoing design of the housing facilities and are being performed now due to necessity and time efficiency. Upcoming Community Engagement (Lumberyard Outreach #4) After hearing from Council at the November 1 work session and incorporating Council’s input into the alternative parking plans, the Lumberyard project team plans to perform further community engagement around these topics. This will be the fourth round of community outreach for the Lumberyard project (Outreach #4). The objective of Outreach #4 is to measure and document community sentiment around the alternative parking plans presented to Council. The schedule for the upcoming community outreach is shown below, and is subject to modification as we move forward: October 29 Re-launch Lumberyard on aspencommunityvoice.com Email to City & Lumberyard mailing lists - Nov 1 City Council work session Social media post - Nov 1 City Council work session November 1 Aspen City Council Work Session – Present Parking Alternatives November 4 Aspen Community Voice and City Website - ready for comments and input November 8 Main Street Banner - request for community input Store Front Flyers (Library, City/County Buildings, Info. Kiosk, etc.) Email to City & Lumberyard mailing list - request for community input Press release and media releases - request for community input November 26 Email to City & Lumberyard mailing list – more input opportunities/events Social media post – more input opportunities/events Newspaper/Online Media Ads – more input opportunities/events Nov 26 - Dec 20 Survey in process, topics based on Nov 1 work session December 3 Newspaper, Online, Radio, social media – promote Dec 9 public meeting December 8 Newspaper, Online, Radio, social media – promote Dec 9 public meeting December 9 Newspaper, Online, Radio, social media – promote Dec 9 public meeting December 9 TBD Public Meeting, on-line or in-person with controlled access or hybrid, (Details TBD pending COVID direction and input from public health officials) December 10-20 Continue data collection, close on Dec 20 Dec 21 - Jan 5 Compile and format data and reports, summary report ACV January 7 Email to City & Lumberyard mailing lists – Jan 10 City Council work session Social media post – Jan 10 City Council work session January 10 Aspen City Council Work Session - Present Outreach Results Staff plans to proceed as described unless directed otherwise by City Council. The project information is now available at aspencommunityvoice.com/lumberyard. 20 Page 86 of 224 87 Page 8 of 8 Ongoing Project Schedule: 2022 Complete Schematic Design Development Application Approval & Submittal RFQ PPP Development Opportunities Land Use Approval Process Detailed Design Record PD & Development Agreement 2023 Construction Documents Contracting & Procurement Building Permit Applications 2024 Tentative Construction Start Access & Infrastructure Phasing plan TBD FINANCIAL IMPACTS: The 2022 budget was reviewed in a work session with City Council on October 25, 2021. Ongoing financial impacts related to project design decisions are TBD. RECOMMENDATIONS: Staff recommends that Council consider the project vision and alternative parking plans presented and provide direction as requested. Staff additionally recommends that Council maintain staff plans to continue with land use actions and community engagement as described. CITY MANAGER COMMENTS: EXHIBITS: Exhibit A – Lumberyard Project Background Exhibit B – Presentation Slides including Appendix with Parking Analysis 21 Page 87 of 224 88 Page 1 of 7 EXHIBIT A – LUMBERYARD PROJECT BACKGROUND TO: Mayor and Council Members FROM: Chris Everson, Affordable Housing Project Manager THROUGH: Rob Schober, Capital Asset Director MEMO DATE: October 29, 2021 MEETING DATE: November 1, 2021 RE: Exhibit A - Lumberyard Project Background REQUEST OF COUNCIL: N/A – Information Only BACKGROUND: Staff does not intend to review this background material in detail during the work session. The following background provides a history of work to date on the Lumberyard housing design effort. This detailed background information is included for anyone who may not be up to date on work leading up to the November 1, 2021 work session. June 11, 2019: Council directed staff to move forward with community outreach and conceptual design for the Lumberyard affordable housing development project. June 24, 2019: Council approved a contract for community outreach and conceptual design with DHM Design. August 20, 2019: Staff provided an update to Council including a schedule of outreach activities to be held in the fall of 2019 (outreach #1), and at Council’s request added additional public-facing activities. September 24, 2019: Staff reported to Council that the fall 2019 outreach #1 effort had reached approximately 800 community members through over 50 total outreach events, meetings and interviews. Below is a summary of what was heard during this early outreach process: • Provide a variety of unit types, serving a mix of demographics • Site is appropriate for larger buildings/higher density than may be appropriate elsewhere • Parking is challenging at the AABC, don’t make is worse by under-parking Lumberyard • Childcare is needed in the community and may be appropriate at this site • The response about the need for the building supply operation varied broadly October 8, 2019: City Council approved a contract to purchase the 3-acre Aspen Mini Storage property for a purchase price of $11 million. This brings the total site area to 10.5 acres. The Aspen 22 Page 88 of 224 89 Page 2 of 7 Mini Storage property is in Pitkin County and meets the requirements to be annexed into the City of Aspen as was done years ago with the Lumberyard property. November 18, 2019: The project team presented Council with themes that were heard during the fall 2019 outreach #1 and “density heat maps”. Council directed the team to present design alternatives at additional community gatherings, particularly near the AABC, in early 2020. An example of one of the density “heat map” concepts is illustrated below: January 2020: Site development diagrams and character images were shared with the public in three open house meetings (outreach #2) in January 2020, one of which was at the AABC. The team also issued a survey targeting commuting workers which received about 50 responses. Over half said they commute at least four days a week to work in Aspen, and nearly 75% of respondents said they would choose to live in Aspen if quality affordable housing were available. March 2, 2020: The design team presented “consensus items” and “opposing viewpoints” from the January 2020 outreach #2, and Council provided the following direction: • Density: Advance conceptual studies with unit counts ranging from 140 units up to 500+ units • Transportation: Proceed with basic traffic impact analysis, include impacts at AABC roadways • Parking: Use municipal code standards to set a parking maximum for each density scenario • Childcare: Continue to advance discussions on community need and feasibility • Mixed use: Develop information on neighborhood needs, discontinue large lumberyard option • Air quality and noise: Perform planning-level data gathering and evaluation 23 Page 89 of 224 90 Page 3 of 7 July 6, 2020: The project team introduced five massing studies based on two different layout concepts, each with an upper and a lower density option, plus one shared living (or co-living) option: • Concept 1a – Concept 1 with “High Density” – 450 total units • Concept 1b – Concept 1 with “Low Density” – 216 total units • Concept 2a – Concept 2 with “High Density” – 450 total units • Concept 2b – Concept 2 with “Low Density” – 217 total units • Concept 2c – Concept 2 with “Shared Living Maximum Density” – 501 total units Four of the five concept plans listed above are illustrated below: Upon extensive review and discussion of the five alternatives, Council provided the design team with direction for further plan refinements and with an overall unit count direction aiming toward 300+ units. September 14, 2020: Council provided direction on the survey questions which were to be included in outreach #3, which occurred October 1 through November 6, 2020. October 26, 2020: Staff presented preliminary results of the of outreach #3 as well as a narrowed set of conceptual site alternatives which included the following alternatives: • Concept A: 250 Units, 40% UGP, 76% 3-Story, 67% Studios & 1-BRs, 2.9 Acres Open Area 24 Page 90 of 224 91 Page 4 of 7 • Concept B: 300 Units, 100% UGP, 56% 3-Story, 67% Studios & 1-BRs, 3.0 Acres Open Area • Concept C: 330 Units, 100% UGP, 24% 3-Story, 67% Studios & 1-BRs, 3.5 Acres Open Area Below is a summary image depicting the three refined conceptual site alternatives, including vital statistics for each plan: After review and discussion, Council agreed directionally to pursue the following: • Underground parking • Some four-story massing in key areas • Increasing the number of 1- and 2-bedroom units • Increasing the amount of ownership units • Childcare on site • Prioritize energy efficiency and sustainability • Allowing the ABC to provide commercial services • Paring back the co-living option • Maintain 300+ units on the site November 23, 2020: The project team presented the final results of the fall 2020 outreach #3. The project website registered over 1,900 unique visitors, and there were 773 survey responses with the following results: Unit Mix: For rental versus ownership, the mean of responses is 58% rental and 42% ownership. The most common answer was 50/50. 39% of respondents agreed with the proposed unit mix of 1/3 studio and 1-bedroom units and 1/3 multi-bedroom units. 38% 25 Page 91 of 224 92 Page 5 of 7 suggested there should be more multi-bedroom units. The highest-ranking unit types in both rental and ownership were 1- and 2-bedroom units. Parking: 75% of respondents are supportive of underground parking, particularly when it results in higher total density and higher quality of outdoor spaces around the buildings. The need for on-site parking was nearly unanimous from those who indicated they see themselves as potential residents of the Lumberyard. A majority also support providing some additional ‘ancillary’ parking on the site for guests or other uses. Transportation: A majority of respondents are supportive of evaluating a shuttle service, or similar mechanism, to improve transit access to the Lumberyard. Mixed-Use/Commercial: Over 75% of respondents believe that allowing the ABC to serve the commercial needs of the neighborhood is appropriate. Co-Living/Shared-Living: A slight majority of the overall survey respondents were supportive of the concept of co-living, but nearly 75% of those who see themselves as potential residents of the Lumberyard were not supportive and would prefer to have full- size units instead. Energy Efficiency and Environmental Sustainability: The public is strongly supportive of raising the bar in energy efficiency and sustainability, and a majority are also supportive of pursuing a sustainability certification, such as LEED or similar programs. Childcare: A majority of survey respondents are supportive of providing childcare on the site, although the individual comments and other feedback mechanisms used suggest this to an even stronger degree. Architectural Character/Style: The highest support by all respondents was given to mountain contemporary style followed closely by mountain traditional architecture. Site Amenities: The most-favored amenities were generous gear storage, private outdoor spaces such as decks, porches and patios along with lawn and park space. People also favored extra parking spaces. The project team also presented the results of the preliminary technical studies, which are briefly summarized below: Civil / infrastructure: There are no fatal flaws and that capacity will be available to adequately serve the project at the density level being pursued, albeit with some improvements to on-site or immediately adjacent facilities possibly being needed. Traffic: The preliminary results indicate that the impacts to the overall AABC area are not significant, with an increase of 100 vehicle trips during peak morning and evening hours, and an average peak time increase in travel time through the ABC segment of HWY 82 of less than 10 seconds. 26 Page 92 of 224 93 Page 6 of 7 Noise: Noise measurement results indicated that while noise levels are elevated, they are within acceptable levels, based on HUD guidelines, although this should be further studied. Geotechnical: A report from a neighboring facility indicates favorable building soils for foundations and does not raise red flags, but there could be a lot of large boulders. Existing Conditions Survey: No specific red flags were identified, although there are some unusual drainage patterns to the northeast, and the CDOT ROW drainage will need to be accounted for in the stormwater management program for the project. Air Quality: Initial findings from Pitkin County’s study of air quality in the area indicate that air quality levels in the ABC are within acceptable thresholds, although this should be further studied. Based on the direction provided by Council from the October 26, 2020 work session and as further refined based on the community input from outreach #3, the project team presented the final 2020 Lumberyard conceptual master plan as illustrated below: The final 2020 Lumberyard conceptual master plan includes the following: • 310 Units, 68% rental, 32% ownership • 212 Rentals, 48 Studios, 100 1-Bedrooms, 64 2-Bedrooms, 0 3-Bedrooms • 98 Ownership, 0 Studios, 40 1-Bedrooms, 42 2-Bedrooms, 16 3-Bedrooms • 100% Underground Parking, 432 parking spaces (based on code max parking requirement) 27 Page 93 of 224 94 Page 7 of 7 • 24% 4-Story, 76% 3-Story Building Heights • 448 total bedrooms, 592 FTE’s housed with 240,000 sq ft of livable area • 3.5 acres of useable open site area and on-site childcare Upon review and extensive discussion, Council expressed numerous concerns about the final 2020 conceptual master plan, which are briefly summarized below: • Concerns over the use of 100% underground parking • Tight spacing between buildings • Some concern about building heights and orientation • Relocating ownership units to south end of site • Noise Mitigation • Innovation • Demographics of target user mix (i.e. “who is this housing for?”) • Maintain a schedule for construction to begin in 2024 March 8, 2021: Council directed staff to issue an RFP for a full architecture and engineering (AE) design team for the purpose of evaluating alternatives to 100% underground parking and to begin the schematic design process. Council also directed staff to maintain DHM Design’s involvement as land planner, to update the City’s housing needs study and to begin planning on an RFQ for public/private partnership housing development and financing opportunities. July 27, 2021: Council approved the current contract with Cushing Terrell as the City’s lead architect for the ongoing Lumberyard design process. DISCUSSION: N/A – Information Only FINANCIAL IMPACTS: N/A – Information Only RECOMMENDATIONS: N/A – Information Only CITY MANAGER COMMENTS: N/A – Information Only 28 Page 94 of 224 95 MEMORANDUM TO: Mayor Torre and Aspen City Council FROM: Ben Anderson, Principal Long-Range Planner THROUGH: Phillip Supino, Community Development Director MEMO DATE: November 3, 2021 MEETING DATE: November 9, 2021 RE: Resolution No. 106, Series of 2021 – Policy Resolution Proposed Land Use Code Changes Calculation of Single-Family and Duplex Residential Affordable Housing Mitigation REQUEST OF COUNCIL: At a Work Session on July 12, 2021, Council unanimously directed staff to develop amendments to the Land Use Code (LUC) that would have the effect of increasing required affordable housing mitigation for single-family and duplex residential development. Specifically, the changes would eliminate the credit for existing floor area and use a gross, rather than net Floor Area calculation when assessing affordable housing mitigation requirements on these types of development (and redevelopment). Resolution No. 106, Series of 2021 is a Policy Resolution that if approved, would begin the formal amendment process to the LUC. First and Second Readings of an Ordinance approving these amendments would come before Council on November 23rd and December 14th. Staff recommends Council approve Policy Resolution No. 106, Series of 2021. SUMMARY AND BACKGROUND: As part of an ongoing effort to better coordinate the Land Use Code in support of Council’s Affordable Housing Goals and in relationship to discussions with Council about the effectiveness of Aspen’s Growth Management Quota System in responding to the current development context, staff has continued to study and analyze a range of related topics. Staff has held several Work Sessions with Council over the last 18 months toward better understanding the issues and in thinking about possible improvements. As part of this work, Council passed a series of targeted code amendments in May of 2021 – including an update to the Affordable Housing Mitigation Fee-In-Lieu The relationship of Growth Management to Affordable Housing Mitigation has long been a part of Aspen’s system of housing the employees generated by different development types. The specific mechanisms within the LUC that have defined this relationship over 405 Page 95 of 224 96 Staff Memo, Policy Resolution No. 106, Series of 2021 Page 2 of 10 time have been changed and adjusted numerous times to respond to shifting dynamics in Aspen’s development context. It has become apparent through analysis of our Growth Management Allotment system and issued building permits, that residential development and redevelopment is now the dominant contributor to both the real impacts and perceived pressures that growth creates. Overtime, technical changes to the LUC have had the effect of reducing the mitigation requirements for single-family and residential development and redevelopment in a way that has not been applied to commercial, lodge and multi-family residential. In the current context, while the construction and other employee generation impacts of single-family and duplex residences has intensified, the mitigation requirements have not kept pace. The current mitigation requirements for single-family and duplex development are based on a 2015 study by research consultants, RRC. While staff remains confident in the fundamentals of this study – the application and intersection of the findings of this study with other calculation methodologies (particularly Floor Area) has had the effect of significantly reducing required mitigation. The proposed code changes considered by this Policy Resolution would do two things in response: 1. Remove the credit for existing Floor Area from the calculation of Affordable Housing Mitigation in redevelopment scenarios when demolition occurs. 2. Use a gross Floor Area calculation, rather than a net calculation, in determining mitigation requirements. The gross Floor Area calculation would include all sub- grade areas, garages, and circulation features for the purposes of AH mitigation only. This new methodology would not affect the calculation of allowable floor area in meeting Zone District dimensional requirements, and residential development rights would be unchanged. STAFF DISCUSSION: Single-Family and Duplex Development Affordable Housing Mitigation Two different AH mitigation calculations apply when the Land Use Code refers to Residential Development. First, and not part of these proposed amendments applies when a subdivision with multiple lots is created, a change of use takes place, or a new multi-family project is developed. These types of projects require the assignment of Growth Management Allotments and require that 30% of the project’s Floor Area (and 60 or 70% of the project’s units) be some balance of deed restricted affordable housing. This requirement could also be called inclusionary zoning in the broader planning world’s terminology. These projects require a Planning and Zoning review in the final determination of the mitigation requirements. 406 Page 96 of 224 97 Staff Memo, Policy Resolution No. 106, Series of 2021 Page 3 of 10 The second calculation is typically assessed during the building permit review process. Today, this calculation is much more common than the scenario described above. These projects take place on existing residential lots – either as new construction or the redevelopment of an existing home or homes. Different from the above scenario, the mitigation here has been understood as a much more direct impact fee, rather than a form of inclusionary zoning – calculating employee generation on a per square foot basis. No development Growth Management Allotments are required. When a new home is built or square footage is added to an existing home, a 2015 Employee Generation Study established the following mitigation requirements: .16 FTE per 1,000 square feet of Floor Area up to 4,500 sf. .36 FTE per 1,000 square feet of Floor Area over > 4,500 sf. Per the study, these figures were derived from an estimate of the full-time employees generated during the construction and life span of the property. For example, a new home, on a previously vacant lot, with a Floor Area of 5,500 square feet as measured per the LUC would have the following mitigation requirements: 4,500 / 1000 = 4.5 x .16 = .72 FTE 1000 / 1000 = 1 x .36 = .36 FTE .72 + .36 = 1.08 FTE Existing Floor Area Credit In redevelopment scenarios, the current code allows for the Floor Area of the existing home to be credited against the Floor Area for the new home. Additionally, in situations where a significant remodel that triggers demolition is contemplated, only new, additional floor area is calculated. In both cases, the exemption of the existing floor area is credited, regardless of whether mitigation was ever assessed on the property and regardless of whether the existing Floor Area is renovated or scraped and replaced. AH mitigation for new residential development became a requirement in the mid-1980s. Depending on the circumstance and the code requirements in effect at the time of the project, on-site units, off-site units, fee-in-lieu, and accessory dwelling units have all been used in meeting mitigation requirements. Because of the change in code requirements over time and the variability of development history on residential properties, simply providing the credit was previously argued as a fair and straightforward response to this issue. The credit for existing residential floor area, like the previously eliminated credits for existing commercial and lodge development, seems to have its origins in thinking about growth management that came to define the system – that new development is what drives growth. Long-standing, existing development should be exempt, and a new development that mitigates – has provided mitigation forever. Today – it is redevelopment of properties that is driving the growth that the community is experiencing. The whole concept of a credit is undermined by the real impacts to employee generation that redevelopment scenarios are creating. 407 Page 97 of 224 98 Staff Memo, Policy Resolution No. 106, Series of 2021 Page 4 of 10 Since 2015, approximately 325,000 square feet of existing floor area has been credited in redevelopment and major renovation scenarios 1. If not credited, the square footage would conservatively translate into 52 FTEs (or approximately $19.5M of mitigation value based on Cat. 2 FIL). It is also important to note that a similar credit for existing Floor Area for commercial redevelopment was eliminated from the LUC in a 2017 Amendment and the credit for existing Lodge units was recently eliminated by Ordinance No. 13, Series of 2021. Sub-Grade (Basement) and other Exemptions from gross Floor Area Under current code Sub-Grade areas (and other areas, like garages and circulation elements) are effectively exempt from the contribution to both Allowable Floor Area and Affordable Housing Mitigation. In essence, a calculation is made based on the percentage of exposed wall area and applied to the gross floor area. As a consequence, unless a project purposely exposes a large percentage of the basement to the surface for light wells or other features, or the property is on a slope that naturally exposes the basement, the vast majority of the gross floor area of basements is exempt. In the 2015 Employee Generation Study, sub-grade and other exempt areas were discussed as having impacts – but it was determined these areas should remain exempt in consistency with the calculations for Allowable Floor Area in limiting the mass and scale of a house. Figure 1: Comparison of a redevelopment project’s mitigation requirements – with and without the credit for existing floor area. The existing credit reduced the required mitigation by .32 FTE. 1 Calculated though analysis of a spreadsheet that documents impact fees used in zoning review of issued building permits 408 Page 98 of 224 99 Staff Memo, Policy Resolution No. 106, Series of 2021 Page 5 of 10 Figure 2: Comparison showing the impacts to AH mitigation created by the Sub-Grade Exemption. In this example, the exemption reduces the mitigation requirements by .78 FTE. Staff does not have a calculation to summarize the total amount of sub-grade area that has been exempted from mitigation over time, but the combination of real estate values on a square foot basis and the exemption of basements from Allowable Floor Area calculations has given significant incentive to maximize the size of these spaces. At this Figure 3: The effect of eliminating both the credit for existing Floor Area and sub-grade exemption. 409 Page 99 of 224 100 Staff Memo, Policy Resolution No. 106, Series of 2021 Page 6 of 10 time, staff is proposing to include this area in AH mitigation requirements but is not proposing to limit these areas in relationship to calculation for Allowable Floor Area. Analysis Staff recognizes the scale of impact that these two changes would have on the current mitigation requirements for single-family and duplex development and re-development. In evaluating these potential impacts, staff analyzed six recent redevelopment projects (See Table 1 on page 7). Of the six, only one (Project 3) is an outlier due to the size of the sub-grade area and the fact that it is technically two, detached dwellings. The others are representative of typical, single-family projects. What would these changes accomplish? Staff believes the changes pursued by these amendments would be an effective response to Council and community concerns about affordable housing requirements for residential development and may generate the following outcomes: 1. A more fully responsive mechanism to mitigate for the development activity that is most shaping Aspen’s current “growth” context. This includes the continuing trend of increased demand and valuation of single-family and duplex homes, the scale and pace of scrape and replace redevelopment, and the growing role of Short-Term Rentals across our residential zone districts. 2. Assess a mitigation requirement for development that is clearly generating new demand for employees. 3. Create a more equitable mitigation requirement across different types of development – Commercial, Lodge, Residential. 4. Create additional demand within the Affordable Housing Credits program by increasing mitigation requirements which may be met through the purchase of credits from the market. This may result in the development of more AH units by the private sector. 410 Page 100 of 224 101 Staff Memo, Policy Resolution No. 106, Series of 2021 Page 7 of 10 Table 1: Examples of recent, actual single-family development projects depicting the mitigation requirements under current code and the impacts of eliminating the credit for existing floor area and subgrade exemption. The table shows that each project is different in how these changes would impact the eventual mitigation requirement. Some project financial proformas would be impacted more significantly than others based on the size of the new home’s subgrade area or the size of the existing home (and credit for Floor Area) in relationship to the size of the new home. 411 Page 101 of 224 102 Staff Memo, Policy Resolution No. 106, Series of 2021 Page 8 of 10 Figure 4. In spite of the significant increase that these changes would make to residential mitigation, the mitigation per square foot would remain well below that of mitigation required for a similarly sized commercial area. Public Outreach Typically, when ComDev is proposing an amendment to the LUC, we have a public outreach plan in place to gather input and comment in shaping the amendment. On this set of topics however, staff does not believe that traditional public outreach will move the needle in support of these proposals. In staff’s view, removing these long-standing reductions in the required mitigation for residential projects will be unpopular within the development community – and particularly for those that are contemplating redevelopment projects. On the other hand, like many other requirements of the of the LUC that translate into the development of affordable housing – those that may benefit from an additional housing unit being built or those that may generally support additional affordable housing may not be fully engaged in technical aspects of the LUC. Additionally, the context surrounding COVID has made comprehensive outreach efforts challenging. Staff has posted the process for these potential amendments in two recent editions of the Community Development Newsletter and will continue to do so through Second Reading. Additionally, staff, should Council adopt Resolution No. 106, will conduct direct outreach to members of the development and design community explaining the proposed changes ahead of Second Reading. Any feedback received from this outreach will be summarized for Council consideration. The public will also have an opportunity to provide comment with Planning and Zoning Commission as that body considers in a public hearing whether to provide formal recommendation in support of the proposed amendments. 412 Page 102 of 224 103 Staff Memo, Policy Resolution No. 106, Series of 2021 Page 9 of 10 In thinking about these proposed changes and the nature of public outreach, it should be noted that all required residential mitigation can be deferred if the owner is a full-time, locally working resident under APCHA Guidelines. 2015 Aspen Residential Employment Generation Study Employment generation studies are essential to the foundation of Aspen’s GMQS system in that they establish the measurable impacts of development. These studies set the clear nexus between a square foot of construction and the demand for employees that are being created by the new development. The RRC (consultant) study is built on the assumption that it is measuring the new impacts of residential development for two specific activities – construction and future maintenance and operations. The current report is applicable to new development on an established vacant lot and redevelopment scenarios. The report also briefly references the inclusion of sub-grade area. On both topics, the report (Credit and Exemption) is responding to these reductions in mitigation as established elements in Aspen’s LUC – rather than factors that are driving the impacts of employee generation. RRC has provided recent (October 2021) evaluation of the 2015 employee generation study as it relates to these specific code changes and per that evaluation, staff does not believe that the proposed amendments would in any way undermine the basis of the study Staff raises this topic because of the importance of our mitigation requirements matching the generation studies behind them. If Council were to implement the elimination of the existing floor area credit and utilize gross Floor Area, staff recommends an update to the generation study in 2022 to reflect the new stipulations in the LUC and more fully understand the impact of redevelopment scenarios. This study could additionally be expanded to incorporate analysis of short-term rentals and their relationship to residential uses and redevelopment in evaluating employee generation impacts. CONCLUSION AND NEXT STEPS: The proposed Amendments under consideration in this Policy Resolution would, in staff’s view, be a positive step in further recognizing the impacts of single-family and duplex development and redevelopment on employee generation and the demand for affordable housing. While impactful, the code amendments necessary to achieve this change are minimal in scope and complexity and do not alter underlying development rights. If Council approves Resolution No. 106, the following dates have been identified for the next steps in the review of these amendments: November 16th – Review with P&Z for a recommendation November 23rd – First Reading of Ordinance with Council December 14th – Second Reading of Ordinance with Council 413 Page 103 of 224 104 Staff Memo, Policy Resolution No. 106, Series of 2021 Page 10 of 10 FINANCIAL IMPACTS: ENVIRONMENTAL IMPACTS: ALTERNATIVES: Maintain status quo and not pursue proposed amendments – or consider other alternatives per Council direction. RECOMMENDATIONS: Staff recommends Council approve Policy Resolution No. 106, Series of 2021. CITY MANAGER COMMENTS: EXHIBITS: None 414 Page 104 of 224 105 Resolution 106-2021 Land Use Code / Affordable Housing Code Amendments Policy Resolution Page 1 of 3 RESOLUTION NO. 106 SERIES OF 2021 A RESOLUTION OF THE CITY OF ASPEN CITY COUNCIL ADOPTING POLICIES AUTHORIZING AMENDMENTS TO THE LAND USE CODE IN SUPPORT OF CITY COUNCIL’S AFFORDABLE HOUSING GOALS WHEREAS,pursuant to Section 26.310.020(A), a Policy Resolution is required to initiate the process of amending the City of Aspen Land Use Code; and, WHEREAS,pursuant to Section 26.310.020(A), during a work session on July 12, 2021, the Community Development Department received direction from City Council to draft targeted amendments to the Land Use Code related to growth management affordable housing mitigation requirements for single family and duplex development; and, WHEREAS, the Community Development Director recommends Council consider potential changes to the General Provisions (26.104), Growth Management Quota System (26.470), and Miscellaneous Supplemental Regulations (26.575) chapters, and other sections of the Land Use Code as necessary for coordination; and, WHEREAS,City Council has reviewed the proposed code amendment policy direction, and finds it meets the criteria outlined in Section 26.310.040; and, WHEREAS,amending the Land Use Code as described below will ensure the ongoing effectiveness and viability of the regulations within the City of Aspen Land Use Code to achieve City Council’s policy and regulatory goals related to affordable housing; and, WHEREAS,the regulations and standards in the Land Use Code provide important tools in the development of affordable housing within the Cityof Aspen; and, WHEREAS,Aspen’s affordable housing system is essential in the maintenance of a sustainable community; and, WHEREAS,theproposed Land Use Code amendments related to affordable housing will advance specific policy statements in the Aspen Area Community Plan (AACP); and, WHEREAS,pursuant to Section 26.310.020(B)(2), during a duly noticed public hearing on November 9, 2021 the City Council approved Resolution 0101-2020, by a X-to- X vote, requesting code amendments to the Land Use Code; and, WHEREAS,pursuant to Section 26.310.020(B)(1), the Community Development Department, following approval of this Policy Resolution will conduct Public Outreach with the public, property owners, and members of the development community; will 415 Page 105 of 224 106 Resolution 106-2021 Land Use Code / Affordable Housing Code Amendments Policy Resolution Page 2 of 3 receive recommendation from the Planning and Zoning Commission in a public hearing; and will propose an Ordinance to be considered at First and Second Reading; and, WHEREAS,this Resolution does not amend the Land Use Code, but provides direction to staff for amending the Land Use Code; and, WHEREAS, the City Council finds that this Resolution furthers and is necessary for the promotion of public health, safety, and welfare. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF ASPEN AS FOLLOWS: Section 1: Overall Code Amendment Objectives The objectives of these code amendments are to: 1. Align City Council’s affordable housing goals more closely with policies and regulations in the Land Use Code. 2. Build upon the established successes of Aspen’s affordable housing efforts. 3. More directly recognize the employee generation impact of single family and duplex residential development. 4. Improve policies to further encourage both public and private sector development of affordable housing. 5. Maintain existing and increase the free-market and deed-restricted housing units available to the Aspen community. Section 2: Topics for Potential Code Amendments 1. Affordable Housing Mitigation Requirements for Single Family and Duplex residential development: a. eliminates the credit for existing floor area in redevelopment scenarios b. calculates mitigation requirements utilizing gross floor area – this would now include sub-grade areas, garages, and circulation elements. Section 3: Other Amendments as Necessary Other amendments may be required to ensure coordination between the sections identified above and other sections in the LUC which may not have been anticipated. Section 4: This resolution shall not affect any existing litigation and shall not operate as an abatement of any action or proceeding now pending under or by virtue of the resolutions or ordinances repealed or amended as herein provided, and the same shall be conducted and concludedunder such prior resolutions or ordinances. Section 5: If any section, subsection, sentence, clause, phrase, or portion of this resolution is for any reason held invalid or unconstitutional in a court of competent jurisdiction, such portion shall 416 Page 106 of 224 107 Resolution 106-2021 Land Use Code / Affordable Housing Code Amendments Policy Resolution Page 3 of 3 be deemed a separate, distinct, and independent provision and shall not affect the validity of the remaining portions thereof. FINALLY,adopted this 9th day of November 2021. ______________________________________ Torre, Mayor ATTEST:APPROVED AS TO FORM: _______________________________________________ Nicole Henning,City Clerk James R True, City Attorney 417 Page 107 of 224 108 MEMORANDUM TO: Mayor and City Council FROM: Diane Foster, Assistant City Manager; Matthew Gillen, Executive Director, APCHA THROUGH: Sara Ott, City Manager MEMO DATE: November 17, 2021 MEETING DATE: November 22, 2021 RE: APCHA’s HomeTrek affordable housing data, created in preparation for City Council Housing Retreat SUMMARY AND BACKGROUND: Costing $1.4 million, and now operational for nearly a full year, HomeTrek is APCHA’s data tracking and online interface, replacing the previous antiqued paper-based system. APCHA is committed to maximizing benefits and efficiencies from this investment, both internally and for the community. This HomeTrek data overview is provided as background material to support City Council’s upcoming Housing Retreat. DISCUSSION: APCHA is delighted to provide Council with a high-level overview of the breadth and depth of data available in HomeTrek, and a glimpse into the capabilities and functionality of the system which APCHA will continue to expand and exploit. As a living database HomeTrek is continually being updated and refined. Some extraneous data has been removed for clarity. This presentation focuses on APCHA unit counts, general ownership and sales information, and information gathered through the biennial 2021 Ownership Affidavit. Affidavit information is current as of November 16, 2021, and approximately 94.2% of Ownership Affidavits have been received. Duplicate affidavit responses have been filtered as best as possible. Previously, this data was referred to as “APCHA Census” data, however, to avoid confusion with the Decennial U.S. Census, we have changed our terminology to the more precise Ownership Affidavit data. While this presentation includes information on APCHA Deed Restricted rental unit stock, does not contain specifics regarding those who live in APCHA rental units, as APCHA’s planned “Rental Survey” is scheduled for early 2022. Like the biennial Ownership Affidavit, the Rental Survey will allow APCHA to better understand the demographics of those who live in deed restricted rental units. 252 Page 108 of 224 109 APCHA is also currently working with both City of Aspen Community Development Department and Pitkin County on Accessory Dwelling Unit (ADU) and Caretaker Dwelling Unit (CDU) information verifications. 253 Page 109 of 224 110 HomeTrek Reports 0 | Page HOMETREK REPORTS November 18, 2021 254 Page 110 of 224 111 HomeTrek Reports 1 | Page Table of Contents APCHA INTRODUCTION ................................................................................................................................. 2 APCHA Units Ownership vs. Rental ........................................................................................................... 3 APCHA Units by Category .......................................................................................................................... 4 APCHA Units by Bedroom Size .................................................................................................................. 5 APCHA Units by Category & Bedroom Size ............................................................................................... 6 Unit Ownership by Number of Years by 10 Year Groupings ..................................................................... 7 Owner Age Frequency Distribution .......................................................................................................... 8 Owner Employment Status Frequency Distribution ................................................................................. 9 Additional Property Ownership Frequency Distribution ........................................................................ 10 Ownership Units: Number of Occupants by Bedroom ........................................................................... 11 APPENDIX .................................................................................................................................................... 13 APCHA Units Ownership vs. Rental by Category .................................................................................... 14 APCHA Units Ownership vs. Rental by Bedroom Size ............................................................................. 17 Owner Age Frequency Distribution – Full Breakdown ............................................................................ 19 Last Purchase Date of Units – Full Breakdown ....................................................................................... 20 Appreciation Rate Frequency Distribution ............................................................................................. 21 Residency Frequency Distribution .......................................................................................................... 22 Ownership Units: Number of Retired Occupants ................................................................................... 23 Ownership Units: Number of Units with Dependents by Bedroom Size ................................................ 24 255 Page 111 of 224 112 HomeTrek Reports 2 | Page APCHA INTRODUCTION APCHA by the Numbers • Total Ownership Units – 1,651 • Total Rental Units – 1,472 • Estimated Residents in Deed-restricted Units: o Ownership– 3,222 (Including Dependents) Based on Affidavit Responses o Rental Units – 1,782 (Including Dependents) • City Of Aspen Full Time Population based on 2020 Census– 7,247 • Pitkin County Full Time based on 2020 Census – 17,358 • Percentage Of Aspen’s Full Time Population in Deed-restricted Housing (within Pitkin County) ≈ 34% • Units within City Limits – 2,369 o Ownership Units within City Limits – 1,101 o Rental Units within City Limits – 1,268 256 Page 112 of 224 113 HomeTrek Reports 3 | Page APCHA Units Ownership vs. Rental Ownership Type Record Count % Record Count Notes “Blank” 15 0.5% No associated ownership type for these records in HomeTrek Long-term rental 1069 34.2% Seasonal rental 276 8.8% Attached ownership 1157 37.0% Detached ownership 494 15.8% Ownership / Rental Unit 102 3.3% Can be either an Ownership Unit or a Rental Unit per deed-restriction Music Room 10 0.3% Units at Marolt Ranch, these are practice rooms NOT lodging/bedroom units Total 3123 100% Filtered By Show: All units/properties Unit/Property Record Type equals Unit Unit Name does not contain hometrek, test, duplicate, delete, phillips • https://hometrek.lightning.force.com/lightning/r/Report/00O5x00000870cjEAA/view 257 Page 113 of 224 114 HomeTrek Reports 4 | Page APCHA Units by Category Category Record Count Notes “Blank” 43 No associated category for these records in HomeTrek Category 1 136 Category 2 415 Category 3 724 Category 4 624 Category 5 88 Includes units previously designated at Category 6 & Category 7 RO 901 See appendix for break down of # of units by ownership type LIHTC 40 5 APCHA Managed Units. LIHTC stands for "Low-Income Housing Tax Credit" - these units are located at Truscott Phase II & Aspen Country Inn. LIHTC 50 35 LIHTC 60 87 City 48 A Unit owned/created by CoA. Units fluctuate category based on tenant/owner. County 4 A Unit owned/created by CoA. Units fluctuate category based on tenant/owner. Category A 4 These designations on apply to the Basalt Vista Housing Partnership. For reference, these categories fall between APCHA categories 2 & 3. Category B 9 Total 3123 Filtered By Show: All units/properties Unit/Property Record Type equals Unit Unit/Property Name does not contain hometrek,test,duplicate,delete,Phillips • https://hometrek.lightning.force.com/lightning/r/Report/00O5x0000082zKxEAI/view 258 Page 114 of 224 115 HomeTrek Reports 5 | Page APCHA Units by Bedroom Size Bedrooms Record Count % Notes "Blank" 13 0.42% No associated bedroom for these records in HomeTrek 1 890 28.50% 2 978 31.32% 3 669 21.42% 4 121 3.87% 5 18 0.58% 6 1 0.03% Studio 405 12.97% SFH 16 0.51% Single Family Home. Number of bedrooms unknown, but this is a standalone unit Lot 1 0.03% These are undeveloped lots that will have future deed-restricted unit built Storage 11 0.35% These are the music rooms located at Marolt Ranch, cannot be used as lodging Total 3123 100.00% Filtered By Show: All units/properties Unit/Property Record Type equals Unit Unit/Property Name does not contain hometrek,test,duplicate,delete,phillips • https://hometrek.lightning.force.com/lightning/r/Report/00O5x00000870ceEAA/view 13 890 978 669 121 18 1 405 16 1 11 0 200 400 600 800 1000 1200 "Blank"1 2 3 4 5 6 Studio SFH Lot StorageRecord CountBedrooms 259 Page 115 of 224 116 HomeTrek Reports 6 | Page APCHA Units by Category & Bedroom Size • https://hometrek.lightning.force.com/lightning/r/Report/00O5x0000082zT1EAI/view?queryScope=userFolders • Highlighted fields show concentrations of units Category Bedrooms "Blank" 1 2 3 4 5 6 Studio SFH Lot Storage Total "Blank" 12 8 9 2 0 0 0 12 0 0 0 43 Category 1 1 48 31 5 0 1 0 50 0 0 0 136 Category 2 0 194 108 45 1 0 0 67 0 0 0 415 Category 3 0 233 222 159 4 0 0 106 0 0 0 724 Category 4 0 93 283 183 33 2 0 30 0 0 0 624 Category 5 0 17 28 40 2 0 1 0 0 0 0 88 RO 0 233 238 204 78 14 0 106 16 1 11 901 LIHTC 40 0 4 0 0 0 0 0 1 0 0 0 5 LIHTC 50 0 29 3 0 0 0 0 3 0 0 0 35 LIHTC 60 0 21 38 0 0 0 0 28 0 0 0 87 City 0 10 14 21 0 1 0 2 0 0 0 48 County 0 0 3 1 0 0 0 0 0 0 0 4 Category A 0 0 1 2 1 0 0 0 0 0 0 4 Category B 0 0 0 7 2 0 0 0 0 0 0 9 Total 13 890 978 669 121 18 1 405 16 1 11 3123 Filtered By Show: All units/properties Unit/Property Record Type equals Unit Unit/Property Name does not contain hometrek, test, duplicate, delete, Phillips 260 Page 116 of 224 117 HomeTrek Reports 7 | Page Filtered By Show: All units/properties Ownership Type equals Attached ownership, Detached ownership Unit/Property Name does not contain hometrek, test, duplicate, delete, phillips 620 520 402 100 9 0 100 200 300 400 500 600 700 0-9 10-19 20-29 30-39 40+ Ownership Years by 10 Year Groupings Unit Ownership by Number of Years by 10 Year Groupings • https://hometrek.lightning.force.com/lightning/r/Report/00O5x00000870dDEAQ/view • Full breakdown available in appendix Ownership Years Record Count % Record Count 0-9 620 37.6% 10-19 520 31.5% 20-29 402 24.3% 30-39 100 6.1% 40+ 9 0.5% Total 1651 100.0% 261 Page 117 of 224 118 HomeTrek Reports 8 | Page 21 337 469 553 435 239 26 3 0 100 200 300 400 500 600 20-29 30-39 40-49 50-59 60-69 70-79 80-89 90+ Owner Age in 10 Year Groupings Owner Age Frequency Distribution • https://hometrek.lightning.force.com/lightning/r/Report/00O5x0000082zTaEAI/view • Full breakdown available in appendix Owner Age Record Count % Record Count 20-29 21 1.01% 30-39 337 16.18% 40-49 469 22.52% 50-59 553 26.55% 60-69 435 20.88% 70-79 239 11.47% 80-89 26 1.25% 90+ 3 0.14% Total 2083 100.00% Filtered By Show: All unit owners Person/Business Account: Person/Business Account Record Type not equal to Business Account, Dependent Person/Business Account: Person/Business Account Name does not contain trust,llc,city,apcha,inc,resid Current Owner equals True Unit Type Lookup does not contain rental 262 Page 118 of 224 119 HomeTrek Reports 9 | Page Owner Employment Status Frequency Distribution All Employment Status Count % Notes Working (not retired or semi-retired) 1529 79.4% Applies to ALL affidavits Semi-Retired and working 126 6.5% Applies to ALL affidavits Semi-Retired and not working 3 0.2% Applies to ALL affidavits Retired and not working 162 8.4% Applies to ALL affidavits Not currently Employed and not working 64 3.3% Applies to ALL affidavits "Blank" 42 2.2% No associated selection Total 1926 100.0% • All data is from latest affidavit update: 11/16/2021 • Responses regarding work requirements for Pitkin County or the Roaring Fork Valley have been combined simplification. 79% 7% 0%9% 3%2% Employment Status Working (not retired or semi- retired) Semi-Retired and working Semi-Retired and not working Retired and not working Not currently Employed and not working "Blank" 263 Page 119 of 224 120 HomeTrek Reports 10 | Page Additional Property Ownership Frequency Distribution Add'l Property Ownership Count % Notes One - only own this property in the OEZ 1558 81.4% Applies to all units EXCEPT those at Lazy Glen and Aspen Village One - only own this property in the Roaring Fork Valley 142 7.4% Applies ONLY to units at Lazy Glen and Aspen Village More than one - own additional developed property in the OEZ 29 1.5% Applies to all units EXCEPT those at Lazy Glen and Aspen Village More than one - own additional developed property in the Roaring Fork Valley 3 0.2% Applies ONLY to units at Lazy Glen and Aspen Village "Blank" 182 9.5% No Associated Selection Total 1914 100.0% 81% 7% 2% 0% 10% Additional Property Ownership -ALL One - only own this property in the OEZ One - only own this property in the Roaring Fork Valley More than one - own additional developed property in the OEZ More than one - own additional developed property in the Roaring Fork Valley "Blank" 264 Page 120 of 224 121 HomeTrek Reports 11 | Page Ownership Units: Number of Occupants by Bedroom • https://hometrek.lightning.force.com/lightning/r/Report/00O5x0000082zTQEAY/view?queryScope=userFolders • Highlighted cells show units “underutilized” based on number of occupants vs. number of bedrooms How many people live in your unit? # of Bedrooms "Blank" 0 Occupants 1 Occupant 2 Occupants 3 Occupants 4 Occupants 5 Occupants 6 Occupants 7 Occupants 8 Occupants Total 1 Bedroom 8 1 219 74 6 1 0 0 0 0 309 2 Bedroom 5 4 126 190 97 46 12 1 0 2 483 3 Bedroom 1 1 57 120 135 144 30 6 0 1 495 4 Bedroom 0 0 11 18 34 24 11 2 0 0 100 5 Bedroom 0 0 1 3 1 7 2 0 0 0 14 6 Bedroom 0 0 0 0 0 1 0 0 1 0 2 SFH 1 0 1 2 1 0 1 0 0 0 6 Studio 0 0 43 3 1 1 0 0 0 0 48 Total 15 6 458 410 275 224 56 9 1 3 1457 265 Page 121 of 224 122 HomeTrek Reports 12 | Page 266 Page 122 of 224 123 HomeTrek Reports 13 | Page APPENDIX 267 Page 123 of 224 124 HomeTrek Reports 14 | Page APCHA Units Ownership vs. Rental by Category Category Ownership Type "Blank" Long-term rental Seasonal rental Attached ownership Detached ownership Ownership / Rental Unit Music Room Total "Blank" 11 31 1 0 0 0 0 43 Category 1 1 82 28 15 1 9 0 136 Category 2 0 201 0 192 2 20 0 415 Category 3 0 411 14 241 31 27 0 724 Category 4 2 46 7 493 50 26 0 624 Category 5 0 0 0 84 4 0 0 88 RO 1 159 223 95 406 7 10 901 LIHTC 40 0 5 0 0 0 0 0 5 LIHTC 50 0 35 0 0 0 0 0 35 LIHTC 60 0 87 0 0 0 0 0 87 City 0 8 3 24 0 13 0 48 County 0 4 0 0 0 0 0 4 Category A 0 0 0 4 0 0 0 4 Category B 0 0 0 9 0 0 0 9 Total 15 1069 276 1157 494 102 10 3123 268 Page 124 of 224 125 HomeTrek Reports 15 | Page *All columns stacked to 100% to see the breakdown of category by ‘Ownership Type’ Filtered By Show: All units/properties Unit/Property Name does not contain hometrek, test, duplicate, delete, phillips Unit/Property Record Type equals Unit • https://hometrek.lightning.force.com/lightning/r/Report/00O5x00000870ctEAA/view 0 100 200 300 400 500 600 "Blank" Category 1 Category 2 Category 3 Category 4 Category 5 RO LIHTC 40 LIHTC 50 LIHTC 60 City County Category A Category B Ownership vs. Rental by Category Music Room Ownership / Rental Unit Detached ownership Attached ownership Seasonal rental Long-term rental "Blank" 269 Page 125 of 224 126 HomeTrek Reports 16 | Page 270 Page 126 of 224 127 HomeTrek Reports 17 | Page • https://hometrek.lightning.force.com/lightning/r/Report/00O5x00000870cyEAA/view APCHA Units Ownership vs. Rental by Bedroom Size Bedrooms Ownership Type "Blank" Long- term rental Seasonal rental Attached ownership Detached ownership Ownership / Rental Unit Music Room Total "Blank" 9 4 0 0 0 0 0 13 1 2 389 124 280 72 23 0 890 2 1 309 98 428 105 37 0 978 3 2 77 11 355 207 17 0 669 4 1 2 0 43 74 1 0 121 5 0 0 0 4 14 0 0 18 6 0 0 0 0 1 0 0 1 Studio 0 288 42 46 5 24 0 405 SFH 0 0 0 1 15 0 0 16 Lot 0 0 0 0 1 0 0 1 Storage 0 0 1 0 0 0 10 11 Total 15 1069 276 1157 494 102 10 3123 Filtered By Show: All units/properties Unit/Property Name does not contain hometrek, test, duplicate, delete, phillips Unit/Property Record Type equals Unit 271 Page 127 of 224 128 HomeTrek Reports 18 | Page Filtered By Show: All units/properties Ownership Type equals Attached ownership, Detached ownership Unit/Property Name does not contain hometrek, test, duplicate, delete, phillips 320 300 241 279 217 185 61 39 9 0 100 200 300 400 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40+ Ownership Years by 5 Year Groupings 620 520 402 100 9 0 100 200 300 400 500 600 700 0-9 10-19 20-29 30-39 40+ Ownership Years by 10 Year Groupings Ownership by Number of Years – Full Breakdown https://hometrek.lightning.force.com/lightning/r/Report/00O5x00000870dDEAQ/view\ Ownership Years Record Count % Record Count 0-4 320 19.4% 5-9 300 18.2% 10-14 241 14.6% 15-19 279 16.9% 20-24 217 13.1% 25-29 185 11.2% 30-34 61 3.7% 35-39 39 2.4% 40+ 9 0.5% Total 1651 100.0% Ownership Years Record Count % Record Count 0-9 620 37.6% 10-19 520 31.5% 20-29 402 24.3% 30-39 100 6.1% 40+ 9 0.5% Total 1651 100.0% Ownership Years Record Count 0 31 1 87 2 70 3 67 4 65 5 55 6 44 7 83 8 87 9 31 10 46 11 34 12 51 13 51 14 59 15 102 16 40 17 49 18 34 19 54 20 61 21 34 22 69 23 23 24 30 25 80 26 39 27 36 28 18 29 12 30 19 31 19 32 1 33 10 34 12 35 21 36 6 37 3 38 2 39 7 40 4 41 1 42 1 43 3 Total 1651 272 Page 128 of 224 129 HomeTrek Reports 19 | Page Age Count 100 0 99 0 98 1 97 0 96 0 95 0 94 0 93 0 92 0 91 0 90 2 89 0 88 0 87 1 86 0 85 3 84 6 83 1 82 3 81 10 80 2 79 12 78 9 77 14 76 21 75 25 74 23 73 35 72 29 71 38 70 33 69 34 68 46 67 25 66 39 65 46 64 50 63 41 62 43 61 57 60 54 59 37 58 39 57 65 56 59 55 49 54 54 53 59 52 76 51 63 50 52 49 50 48 44 47 48 46 43 45 47 44 38 43 51 42 52 41 58 40 38 39 61 38 51 37 58 36 34 35 37 34 27 33 30 32 22 31 9 30 8 29 8 28 5 27 2 26 2 25 1 24 2 23 0 22 1 21 0 20 0 Total 2083 21 337 469 553 435 239 26 3 0 100 200 300 400 500 600 20-29 30-39 40-49 50-59 60-69 70-79 80-89 90+ Owner Age 78.01% 21.99% Owner Age, Under 65 vs. Over 65 Under 65 Over 65 Owner Age Frequency Distribution – Full Breakdown • https://hometrek.lightning.force.com/lightning/r/Report/00O5x0000082zTaEAI/view Owner Age Record Count % Record Count 20-29 21 1.01% 30-39 337 16.18% 40-49 469 22.52% 50-59 553 26.55% 60-69 435 20.88% 70-79 239 11.47% 80-89 26 1.25% 90+ 3 0.14% Total 2083 100.00% Owner Age Record Count % Record Count Under 65 1625 78.01% Over 65 458 21.99% Total 2083 100.00% Filtered By Show: All unit owners Person/Business Account: Person/Business Account Record Type not equal to Business Account, Dependent Person/Business Account: Person/Business Account Name does not contain trust,llc,city,apcha,inc,resid Current Owner equals True Unit Type Lookup does not contain rental 273 Page 129 of 224 130 HomeTrek Reports 20 | Page Filtered By Show: All units/properties Ownership Type equals Attached ownership,Detached ownership Unit/Property Name does not contain hometrek,test,duplicate,delete,phillips Last Purchase Date of Units – Full Breakdown • *All data is last purchase date of CURRENT OWNERS https://hometrek.lightning.force.com/lightning/r/Report/00O5x00000870dSEAQ/view Purchase Date (Month) Record Count January 108 February 95 March 150 April 122 May 167 June 143 July 142 August 148 September 203 October 127 November 129 December 117 Total 1651 Purchase Date (Year) Record Count 2020- 149 2010-2019 578 2000-2009 560 1990-1999 294 1980-1989 66 1970-1979 4 Total 1651 Purchase Date (Year) Record Count 2021 65 2020 84 2019 67 2018 77 2017 42 2016 47 2015 78 2014 91 2013 50 2012 32 2011 44 2010 50 2009 47 2008 35 2007 82 2006 85 2005 45 2004 44 2003 36 2002 51 2001 71 2000 64 1999 22 1998 33 1997 20 1996 94 1995 37 1994 25 1993 19 1992 15 1991 19 1990 10 1989 3 1988 12 1987 27 1986 2 1985 6 1984 3 1983 2 1982 10 1981 1 1980 0 1979 1 1978 3 Total 1651 108 95 150 122 167 143 142 148 203 127 129 117 0 50 100 150 200 250 Last Purchase Date by Month 149 578 560 294 66 4 0 100 200 300 400 500 600 700 2020-2010-2019 2000-2009 1990-1999 1980-1989 1970-1979 Last Purchase Date by 10 Year Grouping 274 Page 130 of 224 131 HomeTrek Reports 21 | Page Appreciation Rate Frequency Distribution Unit Appreciation Formula Record Count % Notes 3% 29 1.8% 3% or CPI 1085 65.7% 4% 89 5.4% 6% 28 1.7% 6% or CPI 32 1.9% CPI 20 1.2% NA 368 22.3% These units have no associated appreciation rate, they sell at market. Total 1651 100.0% Filtered By Show: All units/properties Unit/Property Record Type equals Unit Ownership Type equals Attached ownership,Detached ownership Unit/Property Name does not contain hometrek, test, duplicate, delete, phillips • https://hometrek.lightning.force.com/lightning/r/Report/00O5x0000082xLVEAY/view?queryScope=userFolde rs 275 Page 131 of 224 132 HomeTrek Reports 22 | Page Residency Frequency Distribution Owner Residency Count % Notes Less than 6 months per year 2 0.1% Applies to units at Lazy Glen and Aspen Village More than 6 months but less than 9 months per year 4 0.2% Applies to units at Lazy Glen and Aspen Village Less than 9 months per year 18 0.9% Applies to all units who received a standard affidavit 9 months or more per year 1786 93.1% Applies to all units EXCEPT those at Smuggler Subdivision and specific units in the Woody Creek Metro District Less than 6 months and 1 day per year 3 0.2% Applies ONLY to units at Smuggler Subdivision and specific units in the Woody Creek Metro District At least 6 months and 1 day per year 62 3.2% Applies ONLY to units at Smuggler Subdivision and specific units in the Woody Creek Metro District "Blank" 43 2.2% No associated selection Total 1918 100.0% 0%0%1% 93% 0%3%3% Owner Residency -ALL Less than 6 months per year More than 6 months but less than 9 months per year Less than 9 months per year 9 months or more per year Less than 6 months and 1 day per year At least 6 months and 1 day per year "Blank" 276 Page 132 of 224 133 HomeTrek Reports 23 | Page Ownership Units: Number of Retired Occupants Retired - ALL Count % Notes Retired and does not work 175 59.9% Applies to ALL affidavits Semi-Retired and does not work in Pitkin County 3 1.0% Applies to all affidavits EXCEPT those for Lazy Glen and Aspen Village Semi-Retired and does not work in the Roaring Fork Valley 1 0.3% Applies ONLY to affidavits for Lazy Glen and Aspen Village Semi-Retired and works in Pitkin County 93 31.8% Applies to all affidavits EXCEPT those for Lazy Glen and Aspen Village Semi-Retired and works in the Roaring Fork Valley 20 6.8% Applies ONLY to affidavits for Lazy Glen and Aspen Village Total 292 100.0% *This is based on affidavit responses as of 11/16/2021 175 3 1 93 20 0 20 40 60 80 100 120 140 160 180 200 Retired and does not work Semi-Retired and does not work in Pitkin County Semi-Retired and does not work in the Roaring Fork Valley Semi-Retired and works in Pitkin County Semi-Retired and works in the Roaring Fork Valley Retired Occupany-ALL 277 Page 133 of 224 134 HomeTrek Reports 24 | Page Ownership Units: Number of Units with Dependents by Bedroom Size # of Bedrooms Units with Dependents % 1 15 2.62% 2 182 31.82% 3 304 53.15% 4 57 9.97% 5 10 1.75% 6 1 0.17% Lot 2 0.35% Studio 1 0.17% Total 572 100.00% *This is the number of units (by bedroom) with at least 1 dependent as listed on the affidavit. APCHA Regulations define dependent as, “A ‘dependent’ is either a ‘qualifying child’ or a ‘qualifying relative.’” See Part VII of the APCHA Regulation for further information. Filtered By Show: All survey responses Survey Monkey Respondent ID does not contain will not receive Are there dependents in your home? equals Yes • https://hometrek.lightning.force.com/lightning/r/Report/00O5x00000870pJEAQ/view 278 Page 134 of 224 135 HomeTrek Reports 25 | Page 1 Dependent 2 Dependents 3 Dependents 4 Dependents 5 Dependents Total 1 Bedroom 10 4 0 1 0 15 2 Bedroom 103 64 16 2 0 185 3 Bedroom 98 176 35 3 3 315 4 Bedroom 18 30 6 2 0 56 5 Bedroom 2 6 2 0 0 10 6 Bedroom 0 1 0 0 0 1 SFH 0 1 1 0 0 2 Studio 0 1 0 0 0 1 Total 231 283 60 8 3 585 0 50 100 150 200 250 300 350 1 Bedroom 2 Bedroom 3 Bedroom 4 Bedroom 5 Bedroom 6 Bedroom SFH Studio Number of Dependents by Bedroom 1 Dependent 2 Dependents 3 Dependents 4 Dependents 5 Dependents 279 Page 135 of 224 136 HomeTrek Reports 26 | Page 280 Page 136 of 224 137 INFORMATION ONLY MEMORANDUM TO: Mayor Torre and Aspen City Council FROM: Ben Anderson, Principal Long-Range Planner Chris Everson, Affordable Housing Senior Project Manager THROUGH: Diane Foster, Assistant City Manager, and Scott Miller, Public Works Director MEMO DATE: November 19, 2021 RE: Current Conditions – Aspen Housing Data __________ SUMMARY: With the purpose of providing data in support of Council’s discussion at the Housing Retreat scheduled for December 6th and 7th, this memo provides high level, background information that frames the current status in our residential sector – both free- market and deed-restricted, affordable. A mixture of Census data and other locally sourced data is included. This memo is not comprehensive and is intended to provide an overview. If Council desires more robust or specific data, or analysis on any of these topics, staff will try our best to be responsive to any requests. GENERAL HOUSING DATA: Data from the U.S. Census Bureau in small, quasi-rural geographies like Aspen should be used to understand topics broadly and in identifying trends or generalized conditions, but it should not be utilized in situations that demand precision. Table 1. General Housing Data – Total Units, Occupied, and Vacant, City of Aspen Year 2000 2010 2020 Total Housing Units 4,354 5,929 6,197 %Change 2000-2010 - 36.2% 2010-2020 – 4.5% Occupied Units 2,903 3,516 3,540 %Change 2000-2010 - 21.1% 2010-2020 – 0.7% Vacant Units 1,451 2,413 2,657 %Change 2000-2010 - 66.4% 2010-2020 – 10.1% % of Vacant Units 33% 41% 43% Source: Colorado State Demographer’s Office compiled decennial US Census Data from 2000-2020; and APCHA data derived from HomeTrek. Deed-Restricted APCHA Units in COA (source: APCHA) Total 2,303 Free-Market Units Total from Census less APCHA units Total 3,894 % of Vacant Free- Market Units (assuming 100% of APCHA units are Occupied) 68% 2 Page 137 of 224 138 Page 2 of 5 Information Only Memo Housing Data and Information Table 2. Breakdown of Housing Types Total Housing Units 6,197 (2020 Decennial) Housing Type Single-Family Multi-Family Mobile Homes % of total units 39.6% 57.4% 3% Source: 2019 American Community Survey; ACS, 5-year 150 FUND AND CITY OF ASPEN HOUSING DEVELOPMENT: Chris Everson, Affordable Housing Senior Project Manager provided the following data and other information for Council’s consideration related to the 150 Fund. Again, this is a sampling of information to provide a broad overview. Table 3. Completed Public Projects; 2000-2021. Year Facility Units Own/Rent 2000 Snyder 15 Own 2001 7th and Main 12 Own 2002 Truscott II 87 Rent 2005 Annie Mitchell 39 Own 2006 Little Ajax 14 Own 2007 Burlingame Ranch I 91 Own 2015 Burlingame Ranch II 86 Own 2020 802 West Main 10 Rent 2020 517 Park Circle 11 Rent 2021 488 Castle Creek 24 Rent Total Completed 389 257 Own / 132 Rent Total FTEs 840 Table 4. Public Projects Currently in Progress. Year Facility Units Own/Rent *2022 Burlingame Ranch III 79 Own **2024-2035 Lumberyard 310 2/3 Rent – 1/3 Own Total In Process 389 177 Own / 212 Rent Total FTEs 780 *Currently under construction ** Currently in planning, subject to change 3 Page 138 of 224 139 Page 3 of 5 Information Only Memo Housing Data and Information 2022 Burlingame Ranch Phase III Work Plan Highlights: • Determine Income Category Distribution • Define Lottery/Sales Process • Complete Construction & Procure CO’s • Establish New Condominium Association • Facilitate Sales & Occupancy, Begin 2-Year Warranty Period • Operate New Condo Association During Declarant Control • Occupancy planned Fall 2022, 79 For-Sale Units, including 1-, 2-, and 3-bedroom units 2022 Lumberyard Affordable Housing Work Plan Highlights: • Complete Schematic Design & Development Application • Issue RFQ/P for PPP Private Development Opportunities • Submit Development Application • Land Use Entitlements / Development Approval Process • Design Development & Development Agreement • Document and Record Planned Development • Tentative Construction Start: 2024, tentatively planned with 310 units, 2/3 for-rent & 1/3 for-sale As part of the design and entitlements process, the Lumberyard project team will assemble a proposed phasing plan which will be connected to alternatives for sources or funds which may range from 150 Fund cash flows and City of Aspen bond issuance debt to private developer financing and potential federal and state funding options. These alternatives will drive the creation of a proposed implementation phasing plan for the Lumberyard affordable housing development. City of Aspen 150 Housing Fund – Revenue History Since 2000, over $240 million in dedicated revenues has been invested into the ongoing operation and expansion of the Aspen Pitkin County Housing Authority affordable housing inventory. This includes the development of the completed projects listed above as well as funds invested in upkeep and operation of existing City-owned facilities. Funds from this revenue stream are also budgeted annually toward the operation of the Aspen Pitkin County Housing Authority (APCHA), and those funds are also matched by Pitkin County. (The table below does not include such Pitkin County funds.) 4 Page 139 of 224 140 Page 4 of 5 Information Only Memo Housing Data and Information Year Revenues 2000 $5,302,335 2001 $4,845,133 2002 $4,751,964 2003 $8,543,109 2004 $8,090,180 2005 $12,773,154 2006 $14,000,177 2007 $14,075,761 2008 $12,001,447 2009 $8,373,748 2010 $8,321,575 2011 $9,752,953 2012 $8,986,581 2013 $9,584,101 2014 $11,590,103 2015 $13,039,396 2016 $10,084,871 2017 $13,422,231 2018 $13,042,701 2019 $13,784,319 2020 $21,009,309 2021 YTD $18,433,018 2000-2021 $243,808,166 Table 5. 150 Fund Revenue History. Revenues shown are used not only used for development of new affordable housing units – funds are also used for upkeep and ongoing operation of existing City-owned facilities as well as toward the operation of the Aspen Pitkin County Housing Authority (APCHA). Additional note: Many of the affordable housing units in the APCHA inventory are privately owned, operated, and maintained. CITY OF ASPEN AFFORDABLE HOUSING CERTIFICATES PROJECTS: The Affordable Housing Certificates Program has been in place since 2010 – with the first project completed in 2012. The program has included new projects, conversions of free- market units to deed-restricted, and the use of historically designated properties – all completed by developers in the private sector. Other than the land use reviews, the City of Aspen did not have to expend any resources in the development of these units. The FTEs generated by a project are typically determined by the number of bedrooms in each unit in the project. Categories of the units are assigned in the deed-restrictions. For the completed projects, all have been created in Categories 2, 3, and 4. There have been 109 FTEs generated by completed projects to date, with another 43 – either with Land Use approval or in Land Use Review. Table 6. Total APCHA Inventory. 5 Page 140 of 224 141 Page 5 of 5 Information Only Memo Housing Data and Information Table 7. AH Certificates Projects since 2012. Completed Projects FTEs Generated 301 W. Hyman 313/317 AABC 210 W. Main 518 W. Main 834 W. Hallam 815 Vine 829 W. Bleeker Total 14 24 18 29.66 18.75 3 1.25 109 FTEs Projects with approval or in review FTEs Proposed 611 W. Main 1020 E. Cooper 1235 E. Cooper Total 15.9 14.1 12.7 42.7 FTEs NEXT STEPS: Staff looks forward to participating in Council discussions at the Housing Retreat on December 6th and 7th. In the meantime, please reach out to Ben Anderson or Chris Everson if you have questions about any of this information or are desiring any other data related to housing. ben.anderson@cityofaspen.com; 429.2765 chris.everson@cityofaspen.com; 429.1834. 6 Page 141 of 224 142 INFORMATION ONLY MEMORANDUM TO:Mayor and City Council FROM:Diane Foster, Assistant City Manager; Ron LeBlanc, Special Projects Manager THROUGH:Sara Ott, City Manager MEETING DATE:November 22, 2021 RE:Roaring Fork Resiliency & Recovery Roadmap REQUEST OF COUNCIL: This informational memo updates the Roaring Fork Resiliency and Recovery Roadmap Program. No City Council action is requested at this time. BACKGROUND: A group of local government agencies from the Roaring Fork Valley, including the City of Aspen and APCHA, are participating in a State of Colorado Department of Local Affairs (DOLA) program that encourages local governments to build a resiliency roadmap through a collaborative approach to community recovery from the COVID pandemic. It might be helpful to present the chronology of events that brought us to this point in time. The City of Aspen submitted a Letter of Intent (LOI) in December 2020. At that time, the federal Economic Development Administration (EDA) had not released any funds to the states for this purpose. With the change of leadership under the Biden Administration, EDA Awarded $2.3 million from the CARES Act Recovery Assistance grant to the Colorado Department of Local Affairs (DOLA) to assist rural Colorado communities develop economic recovery and resiliency plans. This grant does not include direct funding, it provides technical assistance to organize a regional effort. Providing program leadership is a team of several state agencies (Department of Local Affairs (DOLA), the Office of Economic Development and International Trade (OEDIT), and the Colorado Department of Labor and Employment (CDLE). The Glenwood Springs based non-profit, Community Builders, was retained by the state to develop a framework for creating community engagement in rural Colorado. The focus is to provide rural communities planning and technical assistance support to diversify and strengthen their local/regional economies while building resiliency. Communities with shared economies were invited to form Regional Community Teams to accelerate progress toward thriving and resilient economies. The original LOI submitted by the City of Aspen was one of 16 submitted statewide. The state funding limits participation to 16 Regional Community Teams. The initial 7 Page 142 of 224 143 group of submittals represented over 50 rural Colorado communities. The program’s focus is to assist the rural areas of Colorado. Boulder County, City and County of Broomfield, City and County of Denver, Jefferson County and Douglas County are not eligible along with municipalities with populations over 50,000. The EDA grant was matched with $869,723 from the state of Colorado. In early 2021, the state decided to solicit formal applications for this program. The original 16 regions were encouraged to apply as well as other regions that did not submit a LOI. Because of the regional nature of this effort, DOLA encouraged Roaring Fork Valley participants to submit a formal application under the leadership of Pitkin County. Eagle County submitted a formal application although it had not previously submitted a LOI. Pitkin County and Eagle County each pledged to support the other’s application and exchange information. Both applications were among the 16 selected by the state. SUMMARY At the direction of the City Manager, city and APCHA staff have been active participants in the Roaring Fork Valley Roadmap process, facilitated by Pitkin County. The group has embraced the concept of collaboratively address the topic of workforce sustainability. In October approximated fifty stakeholders participated in a series of focus groups that included representatives from Roaring Fork Valley nonprofits, local governments and agencies and the private sector. This group recommended a specific focus on a regional affordable housing project, there was also strong support for addressing issues related to diversity, equity and inclusion as well as mental wellness. While this project is still in its early stages, there has been active and consistent participation from all of the Roaring Fork Valley local government staff, along with DOLA staff. The collective and overwhelming consensus of stakeholders that more affordable housing is needed in the Valley aligns well with City Council’s critical goal of increasing the number of affordable housing units Staff will keep Council updated as this project moves forward. CITY MANAGER COMMENTS: 8 Page 143 of 224 144 Page 1 of 5 MEMORANDUM TO: Mayor and Council Members FROM: Chris Everson, Affordable Housing Project Manager THROUGH: Scott Miller, Public Works Director MEMO DATE: November 10, 2021 RE: Information only memo – Partnerships for Affordable Housing REQUEST OF COUNCIL: This is an information memo for City Council. No action is requested. BACKGROUND: Staff was asked to provide information about potential types of partnerships which could be utilized to help alleviate the affordable housing crisis in Aspen. DISCUSSION: Partnerships for Affordable Housing typically fall into three categories: between one or more governmental jurisdictions; between a government and a non-profit; and between a government and private sector organizations. The most common type of partnerships between one or more governmental jurisdictions involves a city partnering with other cities to create an entity similar to a housing authority. Some housing authorities have taxing authority, others do not (APCHA). Local governments frequently form partnerships with non-profit organizations to operate a housing program or manage a public housing project. Sometimes the non-profit organization is eligible for grants that a governmental jurisdiction is not. Non-profits also appeal to philanthropic organizations and individuals who can claim tax deductions for making contributions Recent discussions by the City Council have referenced public–private partnerships, P3s or PPPs. PPPs which involve agreements among one or more government entities and one or more private sector companies to design, build, finance, operate, and/or maintain projects, facilities or operations which may be funded and operated through a partnership of government and one or more private sector companies. This memo is intended to provide a broad view of the benefits and risks of PPPs, as well as a high- level outline of the various potential structures. There are a few unique elements in the Aspen area market and in the current economy that make PPPs more challenging than most – and are the primary reasons why City Council should view PPPs as a potential tool, but not a silver bullet: • Land costs and availability are a barrier to every developer, including the City. Potential partners will likely first look to the City to either provide land or allow for land use code variances that could offset the high cost of land. Possible variances include increasing the density of a parcel or allowing for a greater number of free market units on the property; 9 Page 144 of 224 145 Page 2 of 5 • The few cities with outstanding bond ratings like Aspen’s used to be attractive partners because of their ability to access low-cost capital. With the Federal Reserve seemingly stuck at historically low rates, realistically, this is not a tool the City of Aspen can use; • Percent of free market housing likely to be supported by the City Council and the community: Recent and historically consistent discussions by the Council and the community point to a desire for little or no free market housing as part of affordable housing developments; • Willingness to offer expiring deed restrictions: While still an incentive offered to developers in other communities, it is highly unlikely the City Council and community would support a project that offered expiring deed restrictions; and • Misalignment of values: Many potential partners have a top priority of profitability – and many do have environmental and other community benefits as secondary and tertiary priorities – however the misalignment of the primary priority of the developer versus that of the City is a difficult place to start a partnership. In 2005, Urban Land Institute published the following Ten Principles for Successful Public/Private Partnerships: 1. Prepare properly for public/private partnerships 2. Create a shared vision 3. Understand your partners and key players 4. Be clear on the risks and rewards for all parties 5. Establish a clear and rational decision-making process 6. Make sure all parties do their homework 7. Secure consistent and coordinated leadership 8. Communicate early and often 9. Negotiate a fair deal structure 10. Build trust as a core value Source: Mary Beth Corrigan et al., Ten Principles for Successful Public/Private Partnerships (ULI, 2005) In a typical PPP, a private sector consortium forms a special company called a "special purpose vehicle" (SPV) to develop, build, operate, and/or maintain the asset for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV. The consortium is often made up of a developer and/or lender (or both) and a sometimes a management company. A contractor may also be part of the SPV or may be contracted by the SPV. Agreements to design, build, operate and maintain can be complex and can be effort-intense to put in place and may incur significant legal fees due to the need to hire attorneys to write complex, binding legal agreements which include arrangements and terms that require certain obligations and guarantee and secure the cash flows and involve outside funding mechanisms as well as management terms. The City of Aspen has been and is currently still involved in such PPP arrangements related to affordable housing developments. 10 Page 145 of 224 146 Page 3 of 5 In some PPPs, capital investment may be made by the private sector on the strength of a contract with government, and sometimes on a long-term land lease for government-owned property. With some PPPs, the government may use tax revenues to provide capital for investment, with operations run jointly with the private sector or under contract. PPPs may also include the use of capital from both government and private sector entities, and sometimes government entities may provide ‘gap’ funding when private sector sources fall short of 100% funding. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by providing guaranteed annual revenues for a fixed term. Below is a summary of some PPP benefits and limitations: Potential benefits: • Project risks transferred to private partner • Greater price and schedule certainty • More innovative design and construction techniques • Public funds freed up for other purposes • Quicker access to financing for projects • Higher level of maintenance • Project debt kept off government books Potential limitations: • Increased financing costs • Greater possibility for unforeseen challenges • Limited government flexibility • New risks from complex procurement process • Fewer bidders Source: Legislative Analyst’s Office, Maximizing State Benefits from Public-Private Partnerships, November 8, 2012. To facilitate PPPS, a government entity might issue an RFQ/P or may make funding available on a ‘rolling’ basis to entities that submit project proposals which fulfill pre-set criteria published by the government (or quasi-government) entity. For the latter, the City of Aspen whether this would be possible under the City of Aspen procurement code or whether this could somehow be done outside the procurement code. The amount of effort and/or risk taken on by a government or quasi-government entity may be modified by including more or less of a role in the service or facility being created. A PPP may be created so that the government or private sector partners take on more or less of the work to create the service or facility sought. 11 Page 146 of 224 147 Page 4 of 5 Risks and/or activities transferred in PPP Agreements may include design, construction, financing, operations, maintenance and may even include reversionary rights. Financing risks may include: • Changes in financing costs • Estimated and actual inflation • Design and construction risks • Risks associated with archeological, paleontological, wildlife, or cultural resources • Discovery of hazardous materials or unknown utility lines • Delays in getting permits approved 12 Page 147 of 224 148 Page 5 of 5 Operation and maintenance risks may include: • More facility maintenance required than planned • Operation of facility more costly than planned • Standards or requirements imposed in the future Revenue risks • Use of the facility lower than predicted • Public less willing to pay user fees than projected Source: Legislative Analyst’s Office, Maximizing State Benefits from Public-Private Partnerships, November 8, 2012. In considering where to place itself on the spectrum, public agencies need to consider questions such as: 1. Is this a complex asset that would benefit from private sector innovations and that would capture more creativity by transferring design/build risk to the private sector? 2. Is there a benefit to accessing private financing? a. Does introducing private equity ensure more robust delivery and long-term operations? b. Does limited availability of traditional public financing necessitate using private capital for critical infrastructure? c. Does assigning revenue risk to the private sector come with consequences such as higher prices to the public? d. How can risk be shared or transferred from public to private as noted in figure 2-3? 3. By including maintenance and/or performance-based payment structures in the deal, does the public get a high-quality product over the long term? 4. Can the private sector use tools that are otherwise unavailable to a public agency to create value (e.g.,subleasing a part of a facility, creating and monetizing private development opportunities as part of the project)? Source: Successful Public/Private Partnerships from Principles to Practices, Stephen B. Friedman, ULI, 2017 FINANCIAL IMPACTS: n/a RECOMMENDATIONS: Staff recommends that Council consider the information provided. CITY MANAGER COMMENTS: EXHIBITS: Exhibit A – Successful Public/Private Partnerships from Principles to Practices, Stephen B. Friedman, ULI, 2017 13 Page 148 of 224 149 FROM TO Public/Private PARTNERSHIPS SUCCESSFUL PRINCIPLES PRACTICES EDITED BY STEPHEN B. FRIEDMAN ULI Public/Private Partnership Councils 14 Page 149 of 224 150 15 Page 150 of 224 151 FROM TO Public/Private PARTNERSHIPS SUCCESSFUL PRINCIPLES PRACTICES EDITED BY STEPHEN B. FRIEDMAN ULI Public/Private Partnership Councils 16 Page 151 of 224 152 Recommended bibliographic listing: Friedman, Stephen B., editor. Successful Public/Private Partnerships: From Principles to Practices. Washington, DC: Urban Land Institute, 2016. ISBN: 978-0-87420-378-3 © 2016 by the Urban Land Institute 2001 L Street, NW Suite 200 Washington, DC 20036-4948 Cover photos: center: Crossings/900, Redwood City, California (Chad Ziemendorf); top left: Shops and Residences of Uptown Park Ridge, Park Ridge, Illinois (OKW Architects, photographer: Charlie Mayer); top right: Governor George Deukmejian Courthouse, Long Beach, California (© Robb Williamson/AECOM). All rights reserved. Reproduction or use of the whole or any part of the contents without written permission of the copyright holder is prohibited. II 17 Page 152 of 224 153 About the Urban Land Institute The mission of the Urban Land Institute is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. ULI is committed to ■■Bringing together leaders from across the fields of real estate and land use policy to exchange best practices and serve community needs; ■■Fostering collaboration within and beyond ULI’s membership through mentoring, dialogue, and problem solving; ■■Exploring issues of urbanization, conservation, regeneration, land use, capital formation, and sustainable development; ■■Advancing land use policies and design practices that respect the uniqueness of both the built and natural environments; ■■Sharing knowledge through education, applied research, publishing, and electronic media; and ■■Sustaining a diverse global network of local practice and advisory efforts that address current and future challenges. Established in 1936, the Institute today has more than 38,000 members worldwide, representing the entire spectrum of the land use and development disciplines. Professionals represented include developers, builders, property owners, investors, architects, public officials, planners, real estate brokers, appraisers, attorneys, engi- neers, financiers, academics, students, and librarians. ULI relies heavily on the experience of its members. It is through member involvement and information resources that ULI has been able to set standards of excellence in development practice. The Institute has long been recognized as one of the world’s most respected and widely quoted sources of objective information on urban planning, growth, and development. About the ULI Foundation The mission of the ULI Foundation is to serve as the philanthropic source for the Urban Land Institute. The Foun- dation’s programs raise endowment funds, major gifts, and annual fund monies to support the key initiatives and priorities of the Institute. Philanthropic gifts from ULI members and other funding sources help ensure ULI’s fu- ture and its mission of providing leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. About the Public/Private Partnership Council The mission of the Public/Private Partnership Council (PPPC) is to develop, refine, and disseminate best practices for effective real estate public/private partnerships. The Council is a vibrant community of practitioners who learn from one another through hands-on examination of projects, discussion and debate of emerging industry trends, and the development of resources to improve outcomes for both the public and private sectors. The Council offers members the opportunity to examine completed projects in the cities where it meets through first-hand review of sites and presentations by the public/private development teams that made them happen. All property types are considered by the Council, as long as they have a tangible development and investment component from public and private sources. III 18 Page 153 of 224 154 ULI Senior Executives Patrick L. Phillips Global Chief Executive Officer Michael Terseck Chief Financial Officer/Chief Administrative Officer Cheryl Cummins Global Governance Officer Jeanne R. Myerson Chief Executive Officer, Americas Lisette van Doorn Chief Executive Officer, ULI Europe John Fitzgerald Chief Executive Officer, ULI Asia Pacific Kathleen B. Carey President and Chief Executive Officer, ULI Foundation Adam J. Smolyar Chief Marketing and Membership Officer Steve Ridd Executive Vice President, Global Business Operations Stephanie Wasser Executive Vice President, Member Networks ULI Project Staff Kathleen Carey President and Chief Executive Officer, ULI Foundation James A. Mulligan Senior Editor Laura Glassman, Publications Professionals LLC Manuscript Editor Betsy Van Buskirk Creative Director John Hall Design Group, Beverly, Massachusetts Book Design and Production Craig Chapman Senior Director, Publishing Operations About This Report This document was the work of a committee organized from the membership of the ULI Public/Private Partnership Councils, both the Gold and Blue Flights. Organizer Tyrone Rachal, Principal, Red Rock Global Chair and Editor Stephen B. Friedman, President, SB Friedman Development Advisors Contributing Authors Mark Burkland, Partner, Holland & Knight Joseph E. Coomes Jr., Of Counsel, Best Best & Krieger* Stephen B. Friedman, President, SB Friedman Development Advisors* Jeffrey Fullerton, Director, Edgemoor Infrastructure and Real Estate Clayton Gantz, Partner, Manatt, Phelps & Phillips LLP* Ryan Johnson, Director, Edgemoor Infrastructure and Real Estate Neisen Kasdin, Office Managing Partner, Akerman LLP Charles A. Long, Principal, Charles A. Long Properties David Scheuer, President, the Retrovest Companies † Russ Weyer, President, Real Estate Econometrics Inc.* *Editing Committee †Deceased Other Committee Members Peter DiLullo, LCOR Inc. Sakura Namioka Brad Power Cassie Stinson, Shareholder, Boyar Miller Support Grace Kim, Marketing Director, SB Friedman Development Advisors Jess Zimbabwe, Executive Director, Rose Center for Public Leadership, National League of Cities and the Urban Land Institute Financial Support ULI Foundation I v 19 Page 154 of 224 155 This report is dedicated to the memory of David Scheuer, late president of the Ret- rovest Companies, Burlington, Vermont. David contributed to this report and more im- portantly was an environmentally sensitive and award-winning developer who practiced the art and science of high-quality development through public/private partnerships. He was also a leader in promoting ULI’s Healthy Places Initiative. He succumbed to ALS in August 2015 before this project was complete. He will be missed at ULI and from the ongoing effort to bring about better places through the collaborative and cooperative efforts of the public and private sectors. DEDICATION DEDICATION v 20 Page 155 of 224 156 21 Page 156 of 224 157 1 Introduction .........................................................................................................2 Joseph E. Coomes Jr. and David Scheuer2 What We Mean When We Say Public/Private Partnership ................................6 Joseph E. Coomes Jr., Mark Burkland, and Jeffrey Fullerton3 From Principles to Practices ...............................................................................14 CREATING A SHARED VISION AND PUBLIC PURPOSE ...............................................16 Neisen Kasdin ASSEMBLING THE DEVELOPMENT TEAM ..................................................................20 Mark Burkland and David Scheuer PROACTIVE PREDEVELOPMENT FOR SUCCESSFUL PPPS ...........................................24 Clayton Gantz CREATING RELATIONSHIPS BETWEEN DEVELOPERS ................................................28 AND PUBLIC BODIES Stephen B. Friedman and Clayton Gantz THE “BUT FOR” PROBLEM AND THE NEED TO MAKE A FAIR DEAL .........................32 Stephen B. Friedman and Charles A. Long ASSESSING FISCAL IMPACTS AND COMMUNITY BENEFITS OF PPPS ........................38 Russ Weyer STRUCTURING DEVELOPMENT PARTNERSHIP DEALS ...............................................42 Stephen B. Friedman and Charles A. Long EVALUATING AND STRUCTURING INFRASTRUCTURE AND FACILITY PPPS ..............52 Jeffrey Fullerton and Ryan Johnson MANAGING RISK AND SHARING SUCCESS ................................................................58 Joseph E. Coomes Jr. and Charles A. Long DOCUMENTING AND MONITORING DEALS ..............................................................60 Mark Burkland 4 Conclusion ..........................................................................................................63 Stephen B. Friedman, Joseph E. Coomes Jr., and Clayton Gantz Resources ...........................................................................................................65 NOTES ...........................................................................................................................66 CONTENTS 22 Page 157 of 224 158 INTRODUCTION JOSEPH E. COOMES JR. AND DAVID SCHEUER SB Friedman Development AdvisorsSouth Campus, University of Illinois at Chicago, Chicago, Illinois. 1 2 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 23 Page 158 of 224 159 T en years ago, the Urban Land Institute published Ten Principles for Successful Public/Private Partnerships.1 That publication set forth core principles essential for successful accomplishment of joint development by the public and private sectors, benefiting both, that neither could achieve independently. Those ten principles remain as applicable today as they were then, but the challenges facing urban development have changed dramatically. >>> INTRODUCTION 3 24 Page 159 of 224 160 Today, ULI’s priorities include leadership in global and domestic initiatives to improve quality of life and global competitiveness, including the following: ■■Supporting infrastructure investment to enhance competitiveness and sustainability; ■■Providing diverse and affordable housing; ■■Developing sustainable communities in economic, environment, social, and quality-of-life aspects; ■■Building healthy places by urban design that pro- motes personal and public health; and ■■Creating resiliency in public and private infrastruc- ture, buildings, and facilities to respond to and rebuild with less fragility in the wake of natural disasters, which appear to be increasingly more frequent and severe as a result of climate change. At the same time, new challenges face a public sector with diminished resources: ■■Meeting the needs of the aging baby boomer cohort; ■■Understanding the needs of the millennial cohort, the largest in U.S. history; ■■Addressing increased ethnic and racial diversity; ■■Coping with the national infrastructure deficit; ■■Linking transportation to land use and infill development; ■■Creating opportunities for affordable and workforce housing; ■■Stimulating job creation; ■■Improving access to high-quality education and health care; ■■Reducing carbon emissions; ■■Fostering global economic competitiveness; and ■■Incorporating principles of resilient, sustainable, and healthy communities into planning and community development practices. These challenges require a collaborative effort by the public and private sectors to effectively use the resources and skills of each to shape and carry out de- velopments that respond to these challenges. Neither sector can accomplish this task alone; hence, PPPs in development, infrastructure, and public facilities are a continuing necessity. As the Brookings Institution, based on case studies of selected metropolitan regions, recently stated: The tectonic plates are shifting. Across the nation, cities and metros are taking control of their own destinies, becoming deliberate about their eco- nomic growth. Power is devolving [from federal and state governments] to the places and people who are closest to the ground and oriented toward collaborative action.3 IN 2005, REAL ESTATE MARKETS WERE BOOMING and provided numerous examples of successful public/private partnerships (PPPs), many of them involving the use of public redevelopment authority and tax increment financing. In 2004 alone, $75 billion was spent nationally through PPPs on economic development and urban renewal projects.2 The recession that began in 2008 brought most real estate development to a halt, caused capital markets to dry up, precipitated several municipal bankruptcies, and left governments at all levels financially stressed. Although economists say the recession technically ended in June 2009, the trough was so deep that even in 2016 recovery is not complete. Whereas markets in some regions have recovered completely, others are still struggling. But everywhere, PPPs have become critical to enabling the transformations that are taking place in our urban environment in both primary and secondary markets, using new methods of financing from a variety of sources, including significant foreign investment. Ten Principles for Successful Public/Private Partnerships Mary Beth Corrigan et al., Ten Principles for Successful Public/Private Partnerships (Washington, DC: ULI, 2005), 1. 1. Prepare properly for public/private partnerships 2. Create a shared vision 3. Understand your partners and key players 4. Be clear on the risks and rewards for all parties 5. Establish a clear and rational decision-making process 6. Make sure all parties do their homework 7. Secure consistent and coordinated leadership 8. Communicate early and often 9. Negotiate a fair deal structure 10. Build trust as a core value 4 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 25 Page 160 of 224 161 PPPs have never been easy. As the Ten Principles illustrated, successful PPPs require the building of trust between the public and private sectors and a change in mind-sets: for the public sector, from development regulator to facilitator of economically feasible projects providing public benefits, and for the private sector, from an adversarial private role as an applicant for development permits to a collaborative, open, and transparent role in negotiating profitable projects with public benefits. The divide between the two sectors is reflected in the survey summarized in the adjacent sidebar. However, creating effective PPPs is more necessary today than ever, given public sector needs and fiscal constraints when faced with challenging urban issues. In Ten Principles, PPPs were considered “creative alliances” formed between a government entity and private developers to achieve a common purpose. Over the past ten years and in the future, the need for these creative alliances is expanding in three broad areas: (a) to facilitate the development of a real estate asset to achieve greater benefits for both the public and private sectors; (b) to develop and ensure the maintenance of critical infrastructure; and (c) to design, build, operate, and maintain public facilities, all in the service of the goal of building sustainable, healthy, and resilient communities. The purpose of this publication is to build on the Ten Principles to provide public and private sector representatives with an understanding of both the necessity for, and the obstacles and opportunities inherent in, PPPs and a toolkit of best practices for the creation of effective PPPs. It is written with the goal of helping both the public and private sectors understand each other’s needs, expectations, and resources. It is intended to be applicable to a broad range of communities, not just large cities or other jurisdictions undertaking news-making projects. Ex- amples have been intentionally selected to be widely applicable. The next chapter distinguishes the three most com- mon types of PPPs, and chapter 3 discusses key prac- tices to build on the principles established in the Ten Principles. These include the necessity for creating a shared vision, assembling the right public and private teams, using proactive predevelopment to prepare for a PPP, establishing working relationships between the public and private sectors, demonstrating that a PPP is a fair deal, identifying fiscal impacts and demonstrating community benefits, structuring PPP development deals, using a value-for-money (VfM) analysis to test the benefits of PPPs for facilities and infrastructure, managing risks and sharing success, and documenting and monitoring a PPP. Best practic- es for success are summarized in the conclusion. 6. Make sure all parties do their homework 7. Secure consistent and coordinated leadership 8. Communicate early and often 9. Negotiate a fair deal structure 10. Build trust as a core value PUBLIC/PRIVATE SECTOR SURVEY CHARLES A. LONG ULI’s Public/Private Partnership Council surveyed its membership on their percep- tions of the significant challenges in crafting partnerships and the skill needed for both the public and private sectors. Here are the questions and the results of the survey. 1. Where are the greatest challenges in crafting effective public/private partnerships? 2. What expertise does the public sector need? 3. What expertise does the private sector need? Source: Charles A. Long Properties, Survey Monkey. Public sector understanding of private capital criteria and return requirements Validating the “fairness” of the deal to the public sector Negotiations dynamic—too much hard bargaining, not enough trust building Lack of public support for “public subsidies” Public sector understanding of risk of loss in predevelopment Determining a fair rate of return to the private sector Private sector understanding of public financing and investment constraints Sharing proprietary information Validating market and cost assumptions Public sector’s unreasonable performance schedule Private sector understanding of need to create community ownership Private sector lack of commitment to working with community groups Public sector selecting a developer based on “pretty pictures” instead of performance 60.98% 51.22% 48.78% 41.46% 36.59% 34.15% 24.39% 24.39% 14.63% 14.63% 12.20% 12.20% 9.76% Real estate finance—capital sources and required returns Standards providing a fair return to the private sector and protecting the public sector from “giving away the store” How to manage negotiations so they are transparent and respect proprietary information Negotiation as problem solving not hard bargaining How to reduce predevelopment risk and still achieve the community vision Risk profiles for each state of development How to build community support How to select a developer based on qualifications 58.54% 56.10% 43.90% 41.46% 39.02% 29.27% 24.39% 17.07% How to explain the project risk profile and capital financing so the public agency can respond effectively How to engage the community and create ownership How to create a deal that is fair to the public sector Negotiation as problem solving not hard bargaining The range of public sector tools that can reduce risk, lower financing costs, and address a financing gap Entitlement processing steps and their potential impact on project viability and processing time How to participate in negotiations so they are transparent and respect proprietary information 63.41% 46.34% 46.34% 43.90% 34.15% 24.39% 24.39% INTRODUCTION 5 26 Page 161 of 224 162 WHAT WE MEAN WHEN WE SAY PUBLIC/PRIVATE PARTNERSHIP JOSEPH E. COOMES JR., MARK BURKLAND, AND JEFFREY FULLERTON Governor George Deukmejian Courthouse, Long Beach, California.© Robb Williamson / AECOM2 6 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 27 Page 162 of 224 163 F or our purposes, public/private partnerships take three forms. The first section of this chapter summarizes the functions of a more traditional PPP, formed to develop or redevelop an area or a site in a community. The following two sections describe the use of PPPs as a tool to develop public infrastructure or as a method for a public body to realize the monetary value of an asset it holds that is unnecessary, is underused, or otherwise lacks value in its current form. The public partner may be any of a number of >>> WHAT WE MEAN WHEN WE SAY PUBLIC/PRIVATE PARTNERSHIP 7 28 Page 163 of 224 164 governmental entities—municipalities, special districts, counties, states, and authorities. Throughout the report we often refer to these entities as municipal- ities as an all-inclusive term, which mirrors the new language of financial regulation in which all state and local issuances of securities are considered “municipal” and under the supervision of the Municipal Securities Regulatory Board (MSRB). Using PPPs to Facilitate Development of a Real Estate Asset or Community Area Development PPPs have the power to develop or redevelop an area or site, often blighted or underused, within a community. The partnership may be proac- tively initiated by a municipality to achieve key public objectives, such as downtown revitalization, affordable housing, industrial and commercial development, transit-oriented development, or neighborhood services. The municipality may have public land to include in a project or may be seeking to repurpose a surplus public facility for private use and return it to the tax rolls. A development PPP may also be initiated when a devel- oper envisions a project but cannot realize that vision without the help of the host municipality. The developer may need assistance with site assembly, remediation, extraordinary site preparation, public facilities, overly restrictive zoning, costs of structured parking, rebuilding infrastructure to serve the development or to access water and sewer services, stormwater management, or the like in a newly developing area (greenfield). Here is a familiar situation: The downtown business district of a bedroom community is distressed. A few businesses remain, but many buildings host nonretail tenants or have been shuttered. The post office and library generate some foot traffic, but not much. The municipality has revised its zoning regulations to encourage development. A developer sees an opportunity to build a mixed-use building but faces challenges: ■■The property may have been contaminated by operations of a long-shuttered gas station on abutting property. ■■The developer is struggling to acquire that abutting property, which is essential to the project. ■■The project requires numerous variances from the municipality’s newly revised zoning standards or a dramatic switch to form-based zoning. ■■The project requires upgrades to aging public infrastructure, including water and sewer mains and street reconstruction. ■■The first-floor retail component of the building won’t be viable any time soon. The building must contain a sufficient number of residential units to sustain the project. ■■The municipality would like the project to be a catalyst for further development in the area in which it is located The developer and municipality meet, and the seed of a partnership is planted. The municipality is eager for the project but wary of the developer’s numerous requests for assistance and of taking on too much financial risk. Issues are discussed touching every ele- ment of the project—from the exercise of the munici- pality’s eminent domain power to the size and design of the building; the establishment of a tax increment financing (TIF) district and issuance of TIF bonds for infrastructure improvements; the must-be-anticipated assault from nearby residents who will just hate how tall and ugly the building is; and the myriad other is- sues, standards, and milestones integral to the project. Partnerships between developers and host municipal- ities are necessary for several reasons: ■■Municipalities now expect that every significant development will benefit the municipality in ways in addition to attracting new residents or businesses. Those benefits may be traditional, such as infrastruc- ture improvements, or more contemporary, such as long-term sharing of the costs of infrastructure main- tenance or other traditionally public services, or the creation of community-building amenities, such as plazas, parks and open space, public art, or bikeways. Public/private partnerships are considered “creative alliances” formed between a government entity and private developers to achieve a common purpose. Other actors have joined such partnerships—including nongovernmental institutions, such as health care providers and educational institutions; nonprofit associations, such as community-based organizations; and intermediary groups, such as business improvement districts. Citizens and neighborhood groups also have a stake in the process. Ten Principles, v. 8 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 29 Page 164 of 224 165 ■■Developers are more wary of financial risks be- cause of municipalities’ higher expectations, long and expensive entitlement processes, social media mobilization of opposition, and decision-making processes fraught with politics. ■■A municipality may see a favorable opportunity to invest in a project or project infrastructure. ■■A developer may need resources outside the four corners of its project to achieve economic viability and meet the goals of the municipality. When an effective PPP is formed, the needs noted can be met, financial and political risks can be better managed, and other controversy can be anticipated and mitigated. The range and scope of a partnership is limited only by enabling laws and the parties’ collective imagination: ■■Brownfield development, where a partnership can ease the burdens on both the developer and the municipality of regulatory processes, unanticipated obstacles and their costs, and public controversy; ■■Redevelopment of industrial property, which may involve environmental issues, railroads, and other regulatory hurdles; ■■Area-wide revitalization projects that require land assembly, regulatory compliance, and infrastructure improvements; ■■Infill site redevelopment, mixed-income housing, and transit-oriented development with their atten- dant planning and zoning challenges; and ■■Funding of public amenities or infrastructure in strategic locations to spur economic growth (as discussed further in the following section). Using PPP Tools to Develop Critical Infrastructure An infrastructure PPP is a partnership arrangement in the form of a long-term performance-based contract between the public sector (any level of government) and the private sector (usually a team of private sector companies working together) to deliver public infra- structure for citizens. A PPP could be created for any kind of infrastructure or service, such as a new hospital or bridge or highway, a new type of technology that delivers services in a faster and more efficient manner, or a new federal government building—anything that citizens typically expect their governments to provide. Figure 2-1 summarizes both the benefits and limita- tions of these types of partnerships. Emerging from the recession, many municipalities, as well as state and federal agencies, found themselves struggling with the dual problem of an increasing public debt burden and an increasing infrastructure deficit. In 2013, the American Society of Civil Engineers pegged the U.S. infrastructure deficit at $3.6 trillion. The need for internationally competitive infrastructure and the potential benefits noted in figure 2-1 have caused many public agencies of American jurisdictions to begin looking at the variety of PPPs used around the globe to deliver long-term infrastructure and their core public service missions expediently. These types of partnerships combine the strengths of both the public and private sectors. A typical infrastructure PPP transaction involves a public entity procuring a suite of services from a private entity to deliver some or all phases of development, design, construction, financing, and operations (design/build/finance/operate/maintain, or DBFOM). Each project uses some or all of the DBFOM suite, depending on the needs of the public sector. By including long-term maintenance in the procure- ment, agencies are ensuring they are not repeating the mistakes of the past that have caused building systems, roads, bridges, and water infrastructure to fail from chronic deferred maintenance. By including financing in the procurement, agencies can more effectively time the revenues associated with the economic uplift from the projects with the related expenditures for the infrastructure and thus effect risk transfer. Through design/build procurement in a competitive environment, agencies can harness private sector innovation while increasing the speed to market of critical infrastructure. PPPs for infrastructure enable the public sector to transfer risks to the private sector, which is a proven factor in their success. Risks typically transferred can include the risk of construction cost overruns, timing of delivery, and long-term maintenance and life-cycle costs. Infrastructure PPPs enable faster project delivery than traditional public procurement methods and can FIGURE 2-1 Summary of PPP Benefits and Limitations Potential benefits • Project risks transferred to private partner • Greater price and schedule certainty • More innovative design and construction techniques • Public funds freed up for other purposes • Quicker access to financing for projects • Higher level of maintenance • Project debt kept off government books Potential limitations • Increased financing costs • Greater possibility for unforeseen challenges • Limited government flexibility • New risks from complex procurement process • Fewer bidders Source: Legislative Analyst’s Office, Maximizing State Benefits from Public-Private Partnerships, November 8, 2012. WHAT WE MEAN WHEN WE SAY PUBLIC/PRIVATE PARTNERSHIP 9 30 Page 165 of 224 166 often be used to preserve public sector debt capacity for additional projects. Throughout the world, this transaction structure has been used to deliver a wide range of public assets, including highways, mass tran- sit, airports, and public buildings. Although these in- frastructure PPPs have been commonplace in Canada, India, Europe, and Australia for decades, they are now increasingly being looked at in the United States to address a growing list of critical infrastructure needs. American public procurement strategies traditional- ly follow a design/bid/build procurement methodology. This method isolates the various aspects of asset deliv- ery. Each aspect is usually completed by independent teams as each activity is completed in a linear fashion. In contrast, a more integrated PPP model can be used by the public agency to contract for a more holistic result. By combining the aspects of real estate delivery, financing, and long-term operations and maintenance, public agencies can encourage more collaboration and high-quality delivery. One of the great benefits of public/private part- nership is that one size does not have to fit all, and FIGURE 2-2 Risk-Transfer Spectrum in a Turnkey Public Facility & Design AGENCY RISK PRIVATE RISKRISK CONTINUUMDevelopment Design & Construction O&M/ Life-Cycle Costs Financing Development Design & Construction O&M/ Life-Cycle Costs Financing Development Design & Construction O&M/ Life-Cycle Costs Financing Development & Design Construction O&M/ Life-Cycle Costs Financing AGENCY RISK RISK TRANSFERRED TO PRIVATE SECTORKEY: Design/Bid/Build (DBB) TRADITIONAL DBB RISKS • In traditional DBB, the agency retains all risk of development, design and construction, financing, and operation and maintenance/life-cycle costs Turnkey/Design/Build (TDB) DEVELOPMENT, DESIGN, AND CONSTRUCTION RISKS TRANSFERRED UNDER TURNKEY APPROACH (COST AND SCHEDULE) Turnkey/Design/Build/Finance (TDBF) FINANCING RISKS • Alternative private financing Turnkey/Design/Build/Finance/Operate/Maintain (TDBFOM) O&M/LIFE-CYCLE RISKS • Entitlement delays • Permit delays • Utilities (cost and schedule) • Site issues • Attracting third-party tenants • Change orders • Schedule delays • Scope creep • Code compliance • Baseline operating costs • Uncontrolled operating cost escalations • Energy/performance • Deferred maintenance • Deferral of major equipment and component replacements Source: © Edgemoor Infrastructure & Real Estate LLC. Note: O&M = operation and maintenance. 10 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 31 Page 166 of 224 167 agencies can determine which risks are best managed by private sector parties (and thus transferred) and which are best retained. For example, a spectrum of risk transfer in a turnkey public facility is represented by figure 2-2. In considering where to land on the spectrum, pub- lic agencies need to consider a host of issues specific to the infrastructure or public facility they seek to deliver to the public. When considering an infrastruc- ture PPP, public agencies should ask questions such as the following: 1. Is this a complex asset that would benefit from private sector innovations and that would capture more creativity by transferring design/build risk to the private sector? 2. Is there a benefit to accessing private financing for public infrastructure? a. Does introducing private equity ensure more robust delivery and long-term operations? b. Does limited availability of traditional public financing necessitate using private capital for critical infrastructure? c. Does assigning revenue risk to the private sector come with social consequences because the con- sortium sets tolls or other rates for use? d. How can risk be shared or transferred from public to private as noted in figure 2-3? 3. By including maintenance and/or performance- based payment structures in the deal, does the pub- lic get a high-quality product over the long term? 4. Can the private sector use tools that are otherwise unavailable to a public agency to create value (e.g., subleasing a part of a facility, creating and monetiz- ing private development opportunities as part of the project)? If some or all of the preceding objectives are important, the public agency should consider a PPP. As an example, consider the delivery of the South County Secondary School in Lorton, Virginia. Under the traditional procurement process, the district would have delayed this project by several years, waiting for funding authority and ultimately paying more for the asset. By engaging a private developer in a PPP model, the district was able to reduce cost through design/ build innovation and used a creative private financing strategy that monetized excess. The school was deliv- ered three years faster and created $25 million in value that would not otherwise have been realized. One common tenet of any infrastructure PPP is that it typically allows faster delivery of public assets because the private sector is willing to take risk to advance the project. Figure 2-4 gives a hypothetical timeline comparison. Infrastructure PPPs are not the same as the privatiza- tion of public assets. In a privatized asset scenario, the assets are sold; but in an infrastructure PPP, owner- ship of the underlying land and improvements often remains with the public sector and, critically, the public sector is a key decision maker throughout the entire development and operation process. This participation is typically accomplished with a service agreement that details performance requirements for the private sector’s delivery of some or all of designing, building, financing, operating, and maintaining a building or piece of infrastructure. Life-cycle maintenance and upgrades by the private sector can mitigate the exten- sive buildup of deferred maintenance costs that are characteristic of many publicly owned facilities. To determine whether an infrastructure PPP makes sense for the delivery of a given public asset, the public sector can perform a value-for-money (VfM) analysis. This analysis compares the public sector’s cost to deliver and operate an asset using a traditional method such as design/bid/build with the public sec- tor’s cost to deliver and operate the same asset under a PPP arrangement. The mechanics of the VfM analysis are discussed further in chapter 3. Monetizing Public Assets for Public Benefit Public asset PPPs are partnerships that find ways to unlock the existing monetary value found in many public assets today. Whether through an outright sale, FIGURE 2-3 Major Risks Transferred in PPP Agreements Financing risks • Changes in financing costs • Estimated and actual inflation Design and construction risks • Interface between design and construction • Discovery of endangered species • Discovery of archeological, paleontological, or cultural resources • Discovery of hazardous materials • Discovery of unknown utility lines • Delays in getting permits approved Operation and maintenance risks • More facility maintenance required than planned • Operation of facility more costly than planned • Standards or requirements imposed in the future Revenue risks • Use of the facility lower than predicted • Public less willing to pay user fees than projected Source: Legislative Analyst’s Office, Maximizing State Benefits from Public-Private Partnerships, November 8, 2012. WHAT WE MEAN WHEN WE SAY PUBLIC/PRIVATE PARTNERSHIP 11 32 Page 167 of 224 168 ground lease, or other transaction mechanism, the proceeds from the monetization of these public assets are then used to provide additional public benefit. Numerous types of public assets are good candidates for public asset PPPs, and the uses of the proceeds are seemingly endless. Potential underused public sector assets include the following: ■■Vacant land; ■■Surplus buildings; ■■Air rights; ■■Parking lots and garages; ■■Transit stations; ■■Assets on sites with higher and better uses; ■■Utility systems and infrastructure; ■■Fleet and equipment; and ■■Energy savings through cured deferred maintenance. The public sector must factor in a number of con- siderations before embarking on a public asset PPP. Does the asset in question play a role in long-term master-planning considerations for the public sector? Might existing legal, financial, environmental, or other aspects of the asset make a private sale or transfer difficult to execute? Does sufficient market demand exist for the asset? Selecting an appropriate private sector partner for a public asset PPP is a crucial decision. Finding a partner who has a proven track record with similar asset sales is a key factor, because that can play a significant role in the ultimate value the public sector is able to cap- ture from the partnership. Another key aspect of a public asset PPP is deter- mining a clear use for the proceeds of the asset mon- etization that will be beneficial to the public. Perhaps less clear-cut than a VfM analysis but no less import- ant, the public sector must analyze its current position and be certain that the monetization of an existing asset will ultimately provide more benefit to the public than keeping it as is. Monetization has not been with- out controversy, such as the monetization of parking and airports used to provide short-term monetary ben- efits to a municipality, for example to fill an operating budget gap, rather than reinvesting in further capital improvments or other longer-term strategies. No matter the type of public/private partnership, the principles for success discussed in this report apply. FIGURE 2-4 Hypothetical Timeline Comparison for Infrastructure PPP DESIGN/BUILD DESIGN/BID/BUILD TIME SAVINGS 6 months 12 months 18 months 24 months 32 months 38 months DESIGN CONSTRUCTION DESIGN CONSTRUCTION BID Source: © Edgemoor Infrastructure & Real Estate LLC. Facing page: Shops and Residences of Uptown Park Ridge, Park Ridge, Illinois. 12 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 33 Page 168 of 224 169 OKW Architects; Photographer: Charlie MayerWHAT WE MEAN WHEN WE SAY PUBLIC/PRIVATE PARTNERSHIP 13 34 Page 169 of 224 170 FROM PRINCIPLES TO PRACTICES Shops and Residences of Uptown Park Ridge, Park Ridge, Illinois.OKW Architects; Photographer: Charlie Mayer3 14 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 35 Page 170 of 224 171 T he ten principles recapped in the introduction continue to provide a basic frame- work for thinking about appropriate public/private partnerships. Many specific tools and techniques have been used and refined to help implement the principles in the often challenging realm of real estate development and redevelopment. Each section of this chapter provides additional detail on techniques and methods that have been found to help apply the principles to successful development programs. >>> FROM PRINCIPLES TO PRACTICES 15 36 Page 171 of 224 172 Creating the Vision The process of developing a shared vision is far more extensive, expensive, and time-consuming than either private developers or many public officials would like. The vision can be the product of a community planning or visioning process; a developer-generated vision; or a combination of both: that is, a government vision or master plan, shaped and refined with com- munity input, and implemented by a developer. Understanding the difference between a vision plan and a master plan is important. A master plan is a more detailed plan, which is prescriptive about uses, urban design, and development regulations, such as height, density, and the like. A vision plan speaks more broadly to uses, character, and scale of an area. Vision plans are typically more helpful than prescriptive master plans. The former afford the developer the flexibility to shape the project based on the reality of the market. Informed Vision An informed vision is one that is based on solid market analysis, planning, and business principles and relates to historical trends and a realistic projection of future possibilities. It is not based on the whim or unrealistic expectations of a political leader or constituent group. The vision may be created by a small group of business or civic leaders or enlightened government officials, working with professional planners, architects, and economists. That vision is then ready to be explained, shared, and shaped with constituent groups and stakeholders. Alternatively, an increasing number of examples of stakeholder-engaging processes, properly informed by the work of a team of experts, result in “fact-based” visions with strong community support. As an example, in Miami Beach’s South Beach in the 1980s, the vision that guided its remarkable transformation was first created and refined by a small group of preservationists, planners, architects, entrepreneurial new investors, and cultural innovators. That vision was subscribed to by new residents and investors and ultimately by longtime residents and businesses. Though never formally adopted by the city government, that vision guided investments in public infrastructure, the arts, and catalytic PPP projects such as the Loews Miami Beach Hotel. In practice, although we may talk about “PPP” or “P3,” public/private projects have more key participants, as shown in the sidebar “Why P5s Matter.” Public Participation An integral part of creating a shared vision is public participation and engagement. Community outreach, public presentations, and workshops with neighbors and constituent groups are often required before government considers and approves PPP projects. Public participation can be used both to help shape a shared vision and to educate stakeholders and interested parties, to dispel myths and present facts supporting the proposed project. This early spadework Creating a Shared Vision and Public Purpose NEISEN KASDIN All successful projects start with a vision. Without a vision, the project will most likely fail. The vision is the framework for project goals and serves as the benchmark to ensure the realization of joint objectives. Ten Principles, 8. THE VISION GUIDING A PPP must be subscribed to by key stakeholders, including elected officials, the developer, and neighbors, as well as civic, philanthropic, and business leadership. The developer, “commu- nity,” and government must have a common vision and compatible goals. It must be an informed vision, and appropriate public participation is crucial in shaping, validating, and supporting that shared vision. Successful public/private projects fuse market potential, physical reality, and community goals. 16 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 37 Page 172 of 224 173 A vision plan that resulted in Miami’s largest PPP project is Midtown Miami, located about two miles north of downtown. The site was an abandoned 55-acre rail yard owned by the Florida East Coast Railroad, along what was known as the FEC Corridor. The corridor was a little-used freight line leading into Downtown Mi- ami, surrounded by derelict former warehouses and manufacturing facilities. In 2002, the Metropolitan Center of Florida International University (FIU) created a redevelopment strategy for the corridor. The cen- terpiece was the redevelopment of the rail yard as a mixed-use development integrated into the surrounding urban grid. Shortly after the plan was completed, private investors purchased the rail yard and implemented a successful development plan that followed the vision, but adapted it to accommodate major retail that became the foundation for the de- velopment of the neighborhood. The rail yard, the FIU plan, and the Midtown Miami Master Plan that was ultimately developed are shown at right. DEVELOPER AND GOVERNMENT: SHARING THE VISION Critical to the success of a PPP is that the sponsoring government and developer both share, and be- lieve in, the vision. In the Midtown Miami project, the developers for the retail and infrastructure, Developers Diversified Realty (DDR), and Midtown Equities, the residential developer, bought into the vision of the FIU plan. The district city commissioner, Johnny Winton, and Miami mayor Manny Diaz supported the FIU plan and became champions of the develop- ment plan proposed by DDR and Midtown Equities. Implementing the plan required replatting, rezoning, and amend- ing the land use and creating a Regional Activity Center to allow greater development, creation of a site-specific Community Redevel- opment Area (CRA), and creation of a Community Development District (CDD) to help finance infrastructure improvements. All of this was accomplished within one year. Without government leadership and the developers sharing and strongly believing in that vision, this could not have been accomplished. IMPLEMENTATION OF THE VISION The Midtown Miami project required the creation of a site- specific CRA and pledging of the CRA TIF to pay for public parking garages for the retail center. It also required creation of a CDD to pay for project infrastructure through tax-exempt bonds. Both of these financing vehicles required specific findings that a public purpose was being served as a predicate to the issuance of bonds. The TIF money could be used only for a public garage and the CDD assessments for publicly owned infrastructure. MIAMI, FlORIDA CREATING THE VISION FOR MIDTOWN MIAMI FROM TOP: Aerial of abandoned rail yard; Florida International University’s pro- posed mixed-use district; the Midtown Miami master plan that ultimately was developed.Zyscovich ArchitectsZyscovich ArchitectsZyscovich Architects PRINCIPLE IN PRACTICE FROM PRINCIPLES TO PRACTICES 17 38 Page 173 of 224 174 prevents opposition down the road. A delicate balance also exists between accommodating public concerns and ideas and being too accommodating. Often, local knowledge received from the public outreach process helps project design, function, and implementation. However, some ideas offered by constituent groups, neighbors, and government are impractical, unreason- able, and contrary to the project’s vision. Those ideas must be politely, but firmly, rejected. A number of techniques have been developed and are widely used to help create a shared vision and build support for ideas gestated from business, developer, or govern- mental initiatives, such as the following: ■■Stakeholder steering committees; ■■Focus groups; ■■Community planning processes with multiple workshops; ■■Planning charrettes; ■■Joint committees and task forces; and ■■Joint commission reviews. Official Support The shared vision should ultimately have official support from the governmental entities with authority to facilitate its execution, whether through entitle- ments, infrastructure investment, financial assistance, or public financing. As a practical matter, the broad official support for a project and the vision behind it will help it proceed through the often extended period of implementation and multiple governmental admin- istrations (and sometimes successive or multiple devel- opers). In addition, formal approval helps establish the public purpose being served. Public Purpose Public purpose is both a legal requirement and the raison d’être for a PPP project. Most public actions in support of a PPP project, especially where government is making a direct financial contribution or providing use of public lands or facilities, require meeting a legal test that the public investment serve a public purpose. Public purpose does not mean that the local government providing the incentives must be the sole beneficiary of those incentives. The private party receiving the incentives can also directly benefit. Public purpose—as opposed to public use—can include economic development, job creation, preservation or creation of open space, and many other acts broadly contributing to the “health, safety, and general wel- fare” of the community. These acts are often outlined in specifically required tests and provided for in state law. WHY P5s MATTER CALVIN GLADNEY, MOSAIC URBAN PARTNERS The public/private partnership—often called a PPP or P3, is a beloved tool in the United States and abroad. However, as I work with cities and nonprofits on urban regeneration projects around the country, I see a more complex tool emerging—one I call the P5. BEHOLD . . . THE P5 The five Ps: Not just an evolved version of P3s As you can see from the diagram, the P5 adds three critical players to the equation: 1. The philanthropic sector; 2. The nonprofit sector; and 3. The people. So . . . why should you care about the emergence of the P5? If you are fighting in the war to regenerate our neighborhoods, towns, and cities, you care because: (1) The players in a P5 world speak a different language (Do you speak Philanthropic?); (2) they use different financing tools and structures (e.g., Program- Related Investments (PRIs) or New Market Tax Credits Equity); and (3) these part- ners’ goals are different (longer term and more specifically mission-driven than even the public sector). All of these factors not only make working in a P5 partnership more challenging, but also make P5s an incredibly powerful resource to create more equitable real estate and economic development outcomes in our neighborhoods. Nonprofit Sector Philanthropic Sector The People Private Sector Public Sector THE DEVELOPMENT 18 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 39 Page 174 of 224 175 Continuum of Public Sector Support The extent and nature of public support can vary greatly from project to project. At one end of the continuum is heavy financial participation, which can include direct investment of public funds, favorable lease or conveyance of public lands, and investment in infrastructure. At the other end of the continuum, di- rect public investment can be minimal, but the project could be facilitated through more liberal and flexible development standards, expedited processes, and con- veyance at market rate of public property. These issues are discussed in more detail in the next section. In sum, engagement among the public sector, private developers, and civic, community, philanthropic, and business interests will help form a compelling and enduring shared vision that integrates community goals, physical capacity, and economic feasibility, as illustrated in figure 3-1. This shared vision may be used to build support and champions for visions emerging from any one of those sectors. Obtaining official sanc- tion and establishing the legal public purpose pave the way for an enduring vision for an area or a project that can then receive the support of various public powers and funds as well as survive the vicissitudes of both economic cycles and political change. A shared vision that is created and embraced by key stakeholders will stand the test of time and will persevere through implementation. Ten Principles, 9. FIGURE 3-1 Elements of a Successful Project Economic Feasibility Community Goals Site Capacity SUCCESSFUL PROJECT Source: SB Friedman Development Advisors. FROM PRINCIPLES TO PRACTICES 19 40 Page 175 of 224 176 Assembling the Development Team MARK BURKLAND AND DAVID SCHEUER Assembling the Municipal Team As PPPs have become more creative and complicated over the years, assembling experienced advisers for each component of the project has become increas- ingly important for a jurisdiction contemplating a part- nership. The assembly can become surprisingly large, composed of some persons who will be thoroughly engaged in the project and others who will be called on only for particular components. Following is a description of the typical members of a municipal team. MUNICIPAL STAFF MANAGER. The city or village manager, or equivalent, should normally assume administrative responsibility for the team. The manager’s first task is to choose, with advice from staff, the members of the team. What other responsibilities the manager assumes de- pends on his or her abilities and experience. At a mini- mum, the manager should remain the central reposito- ry for all information and general communications. In addition, the manager should retain certain respon- sibilities, such as communications with the mayor or president of the municipality and the other corporate authorities. Most of the project’s day-to-day tasks likely will be assigned to the other team members. FINANCE DIRECTOR AND DEPARTMENTAL STAFF. The finance director certainly must be engaged in the proj- ect along with his or her departmental staff. The staff will very likely be supplemented by an outside consul- tant to deal with what is perhaps the most complex components of the project. In many municipalities, the finance director has valuable experience and the confidence of the corporate authorities and thus is an important member of the team. DEVELOPMENT DIRECTOR AND PLANNER. The importance of the municipality’s economic develop- ment/development staff would be difficult to over- state. They are instrumental in setting the stage for a project through their planning efforts and zoning ordinance maintenance over the years. In addition, they are likely the most familiar with the municipality’s planning commission, zoning board of appeals, and other advisory bodies, some of which are likely to be engaged in project review. As deal structures are negotiated and project details are proposed, debated, and revised, keeping the in-house experts close by may be important. MUNICIPAL ATTORNEY. Good legal services are re- quired for a successful project. The municipality’s attor- ney not only must know the law, but also must be able to draft an approval ordinance, a development agree- ment (or equivalent), and perhaps related documents such as covenants, easements, and property transfer documents. Those documents can become complicat- ed quickly. Many of them will differ significantly from those of a typical development project with which the municipality’s regular counsel may be familiar. It is also helpful if the attorney is an experienced, skilled nego- tiator. These days, a municipality’s attorney likely has experience with land use, zoning, and development matters and at least some knowledge of the basic laws and structures related to redevelopment and PPPs. When the limits of that knowledge and experience are reached, especially in small communities that use their general counsel only sparingly, then retaining outside special counsel to help with some components of the project may be necessary. IN PUBLIC/PRIVATE DEVELOPMENT PROJECTS, a wide range of issues unique to the particular project generally are presented and need to be effectively addressed. Such issues might include creating a shared vision, understanding benefits, understanding the economics of the project, structuring the transaction, and protecting all parties in its execution and ongoing operation. Thus, both developers and governmental bodies should carefully consider their typical processes for undertaking development projects and, particu- larly, ensure they form teams that possess the required expertise to achieve a successful conclusion. 20 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 41 Page 176 of 224 177 CODE REVIEW AND ENFORCEMENT STAFF. The municipality’s staff responsible for code reviews must be involved from time to time to ensure that building, fire, drainage, and the host of other code standards are met. This may include persons from the fire, police, and development departments, among others. An- swering questions regarding code compliance quickly, as they arise, is preferable to altering course at a later time when the project is further along. ENGINEER AND PUBLIC WORKS DIRECTOR. Because municipal infrastructure (existing and proposed) often is a key consideration in a project, both the municipal engineer and public works director should be engaged at the outset, so they have the full background. CONSULTANTS FINANCIAL ADVISER/MUNICIPAL ADVISER. Perhaps the key outside consultant is the financial adviser. The more the municipal team knows about the develop- er’s positions, the municipality’s own resources, the potential structures for an agreement, and myriad other elements—and the sooner the team knows it—the better. This role has multiple aspects, and the municipality typically needs (a) an adviser on the real estate economics of the project and the actual need for financial assistance; (b) an analyst who understands the local revenue sources and can prepare and review projections of revenue as well as evaluate benefits; and (c) a registered municipal adviser under the new requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act who can legally and practically advise on debt instruments, such as notes, reimbursement agreements, or bonds that may be used in the financial structure. ARCHITECT. For a project that includes significant buildings and streetscapes, an architect may be essen- tial. The municipality should expect the architectural features of a project to be subject to close scrutiny and to generate a variety of opinions. A municipal staff rarely includes someone with the experience and expertise to guide discussion of these features. For that reason alone, an architect can be a valuable team member. The architect can also be valuable as a resource, or a gateway to a resource, for cost esti- mates, landscaping design, and other related project elements. In addition, many architects know how to conduct a charrette, the value of which should not be forgotten. OUTSIDE SPECIAL COUNSEL. As noted previously, when a project is complex, retaining an attorney with specific experience may be necessary. When in doubt, do so. Never be underrepresented. BOND COUNSEL. Engaging bond counsel may be necessary. Although the municipal attorney may act as issuer’s counsel, an outside attorney more commonly serves as bond counsel. COMMUNICATIONS AGENCY. Municipalities can lag far behind private sector companies and agencies in working to communicate with the public and stake- holders regarding complex redevelopment projects. When public assets or public funding is involved, maintaining both the actuality and the appearance of upholding fiduciary duty is important to the project’s success. Public outreach and transparency in the pro- cess should be considered from the outset. COMMUNITY MEMBERS In discussing the shared vision, we emphasized the importance of using inclusive processes involving the public as well as agencies to arrive at a common vision as a project begins. As a project progresses, it will again come before the public and community as developers are selected, projects reviewed, and formal approvals occur. Among those who need to be includ- ed throughout the process are the following: STAKEHOLDERS. For most development projects, the municipality can identify residents, businesses, and organizations that will be affected to a degree greater than the general population. Figuring out who those people and entities are and engaging them early is useful. The chamber of commerce, other business associations, and homeowners association leaders may be good choices. These groups likely won’t be involved regularly in the project, but the municipality will benefit from knowing who they are and what they think—and from having engaged them early on. COMMUNITY LEADERS. In addition to the direct stake- holders are community leaders. Every municipality has them—they may be former elected officials, business leaders, clergy, social services providers, or others. If el- ements of the proposed PPP will be controversial, then the municipality will benefit from having engaged with the people around town who likely will be approached for opinions on those elements. FOCUS GROUPS. At some point, the municipality may want to vet an element of the project with residents who compose a cross section of the municipality— whether in a charrette setting or through an open house or meet-the-developer event. Stakeholders and community leaders can be part of a focus group, but inclusion of average residents may be wise. FROM PRINCIPLES TO PRACTICES 21 42 Page 177 of 224 178 APPROVAL BODIES. Although formal approval bodies will still have to manage specific processes and pro- cedures, to the extent allowed by law, their inclusion throughout the process will facilitate review and help ensure that issues and problems are identified early. These entities may include appearance commissions, historic preservation boards, and planning commis- sions, among others, all of whom have official duties in addition to those of the ultimate governing body. Assembling the Developer Team Few tasks require more attention and care for the developer or provider of a public facility or service than selecting the appropriate project team. This is especial- ly true when the development team is competing for a project through a competitive process. The successful developer’s tasks are the following: ■■Putting the right team on the field; ■■Coaching each member so that team goals and individual roles are clear; and ■■Managing the team effectively. Some team members have more visibility and ap- parent importance than others. Not uncommonly, one team consultant compromises the success of an entire team. In the end, poor performance by any team mem- ber can derail a development proposal. In a competitive process, just the appearance of uncertainty, misreading the community goals, or miscommunication can have a compromising effect. Empathy, listening, and the ability to engage with public officials and the community are crucial skills. The following guidelines have proved useful in selecting consultants to join the developer team: ■■Does the consultant have specific experience and a strong track record in the field? What is the firm’s breadth of experience? What is the depth of experience in the area needed for the project? For example, if the project involves multifamily housing, does the architect have a substantial portfolio in this product type? ■■Does the consultant have a clear understanding of the developer’s goals? The developer is responsible to communicate and confirm this. ■■Does the consultant have a clear understanding of the public and community goals? Is the consultant capable of listening actively to municipal team mem- bers to develop and refine the required understand- ing of the public and community goals, challenges, and perogatives? ■■Does the consultant have adequate communication skills in a public forum? Is he or she able to produce clear, understandable presentation materials? Can he or she respond well to questions and comments? Consultants who come across as arrogant, egotisti- cal, or all-knowing can do irreparable harm. ■■Does the consultant have sufficient staff and ca- pacity? Can he or she meet deadlines for producing deliverables? Does he or she understand the full task or scope? ■■How effectively can the consultant budget and man- age his or her portion of the project? ■■How flexible is the consultant? On programmatic changes? On design changes? On schedule and budgetary issues? ■■Do the team members work effectively together? Are they collaborative or proprietary? Are they team players or individualists? ■■Is the team, or a significant component, local to the jurisdiction? Vet each team member about his or her experience in the locality. Are they respected? Do they have past issues with decision makers? With stakeholders? Having some local representation can be helpful, both substantively for local knowledge and politically, conveying the message that the team understands and respects the community. It strengthens and adds credibility to the team. ■■Are the team members objective enough to conduct due diligence about the potential risks of the project and answer these questions: Is this city or public entity capable of delivering what is required of it in a timely manner? Is this project appropriate for a PPP or will the city subsequently discover that it can undertake the project under traditional procurement methods? The development team for a PPP will be larger and different from the team for a private development project. It must include experts in redevelopment law, public finance, community engagement—and members of the community. The experts and design professionals must be comfortable engaging in a public process, as well as in practicing their profession. 22 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 43 Page 178 of 224 179 A few key words of advice: ■■Go where the numbers are! For example, the archi- tect’s experience should match up with the products in the program and the context of the project. The same is true of other consultants. ■■Make sure you have assembled the full team neces- sary, and be prepared! If you anticipate a contro- versial issue (environmental, traffic, community op- position), choose consultants who can competently address those issues and get them on board early. ■■When thinking about selecting any team member, consider how they will be perceived in a public fo- rum as well as how they work behind the scene: • Will they appear knowledgeable and candid? • Will they instill trust and complement the entire team? • Will they reflect well on the project and the developer? How Might This Team Be Different? As noted, the team should encompass the range of issues expected in a particular project. Both the public and private sides need to be represented in most areas of expertise. In many situations, the developer should expect to have the following, often additional, experts (and studies) available: ■■Design professionals skilled in public participation and interaction, able to engage creatively with the public in workshops, charrettes, and presentations to public bodies. Depending on the scope of the project, this may require urban planners, urban designers, and landscape architects or site planners, as well as architects. ■■Financial consultants knowledgeable in private sector real estate economics and public sector tools, able to prepare and defend pro formas with and without public assistance and help structure a trans- action to address public side concerns. ■■Fiscal and economic impact analysts able to realisti- cally and accurately address the fiscal benefits and possible secondary economic benefits of a project. ■■Traffic and parking experts able to both estimate traffic, including time-of-day matters, and construc- tively address solutions to real traffic issues. ■■Engineering specialists able to address specific site-related issues, such as flooding, wetlands, soil conditions, and other environmental issues that may be raised. ■■Attorneys knowledgeable in redevelopment law and process, not just land use, entitlements, and real estate transactions. Sometimes these will be the same professionals with whom a developer would work on all projects, but other times they will be different. The greater the number of participants and stakeholders representing the community and funders, the larger the overall team, because each player is likely to bring its own ad- visers and experts. The developer must expect to field this larger, diverse team. Selection and involvement of these team members may be key to success. All parties must be prepared to work with a complex team repre- senting the diverse interests in the project. FROM PRINCIPLES TO PRACTICES 23 44 Page 179 of 224 180 Although this section emphasizes what government can do to set the proper stage for public/private proj- ects, it can also serve as a guide to what the private sector might expect and encourage. These predevel- opment activities may result in a more publicly driven process for selecting developers, particularly where public land becomes involved. Although developers may be tempted to jump in ahead of competitors and seek to undertake many of these activities under pri- vate control, the pitfalls are substantial; encouraging public sector preparation is recommended. Naturally, communities have used proactive pre- development to further their public/private develop- ment objectives in many different ways, including the following nonexhaustive list: ■■Undertake market-based planning to facilitate development. Proactive planning is an effective way for communities to get things done without having to provide financial subsidy. Good planning can help drive an outcome; for example, if down- town revitalization is the goal, smart planning can ensure that the necessary ingredients (e.g., a rational, market-based mix of residential, office, Proactive Predevelopment for Successful PPPs CLAYTON GANTZ MUNICIPALITIES CAN DO MUCH TO LAY THE GROUNDWORK for successful public/private partner- ships in their communities. Through effective predevelopment activities, municipalities can both attract private development to their communities and help ensure that the community’s development vision is realized in a timely and efficient manner. The governmental efforts for predevelopment can help reduce risk to levels manageable by the private sector and thereby facilitate projects. Effective predevelopment activities can do much to ensure maximum value for public assets used in redevelopment. In contrast, the failure to take basic steps such as those enumerated below increases the odds of poor or even failed exe- cution and failure to meet redevelopment objectives. and retail uses, available public transit, suitable parking, and inviting public spaces) will be in place. Good planning can also lessen the risk of project challenges and delays. For example, where a well- thought-out precise zoning plan is coupled with thorough environmental review, developers who are prepared to build within the “box” created by the precise plan can often proceed without the necessity of further environmental review. The municipalities can recover the cost of these planning and environ- mental review activities through the imposition of development fees or assessments. ■■Build community support. Local government leaders, trusted and respected in their communities, are often more effective than private developers in building community support for a project. Through an inclusive planning process, community concerns can be identified and addressed, thus mitigating a major development risk. As suggested in figure 3-2, building support can be a multistage process and may take some time. Many helpful techniques and processes can be built into a planning and development review process, including community workshops, stakeholder focus groups, design char- [P]artnerships must create and use mechanisms to allow continuous assessment of the effectiveness of decisions and implementation procedures. To resolve constraints, . . . partners must have the opportunity to modify the process. [T]o incorporate new information and reassessed goals into the process, parties must allow for incremental . . . decision making. . . . [T]he process must . . . be flexible. Ten Principles, 17. 24 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 45 Page 180 of 224 181 rettes, web-based tools, and management of public hearings and review. ■■Assist with site assembly. Traditionally, municipal- ities have assisted with site assembly by using their powers of eminent domain to take private property, which in turn was conveyed to a developer for proj- ect development. The constitutionality of such tak- ings by eminent domain for the purpose of facilitat- ing private development was considered by the U.S. Supreme Court in the case of Kelo v. New London. Although the Kelo court upheld the constitutionality of the city of New London’s takings, ironically the court’s holding has had the effect of creating a wide- spread public and political backlash against the use of eminent domain to facilitate private development. This reaction resulted in the passage of many new state laws that at least purported to limit eminent domain rights in this setting. While legal scholars de- bate whether such efforts at reform were substantive or merely “window dressing,” the fact is that many municipalities are extremely reluctant to exercise their eminent domain powers. Sellers reap federal tax ben- efits where eminent domain is used or threatened, which can be a tactical tool in site assembly. Although the traditional tool of eminent domain has fallen into disfavor, a municipality can still do a lot to facilitate site acquisition. For example, through the planning process, the municipality can concentrate development in areas with fewer or larger landholdings, thereby easing the developer’s land acquisition task. The municipality can also sell or lease its property to facilitate site assembly, a tactic particularly practical in facilitating redevelop- ment of parking lots, municipal service facilities, and obsolete municipal buildings ripe for replacement. ■■Develop community infrastructure to support development. The community can provide transit, parking, utility, and other infrastructure to serve community objectives and facilitate private develop- ment. For example, public transit might be provided to mitigate increased traffic caused by increased downtown density. Similarly, structured parking might be provided to attract dense retail develop- ment. The costs of these infrastructure activities are typically recovered through user fees but may also be recovered through development impact fees or assessments, or simply the overall increased value of the redeveloped area. This strategy often requires FIGURE 3-2 Vision to Action Larimer/East Liberty Choice Neighborhood Plan Source: City of Pittsburgh; Pittsburgh Urban Redevelopment Authority; Housing Authority of the City of Pittsburgh; McCormack Baron Salazar; Jackson Clark Partners. FROM PRINCIPLES TO PRACTICES 25 46 Page 181 of 224 182 The Crossings/900 project, a development by Hunter Storm and Kilroy Realty, is a cen- terpiece of Redwood City’s efforts to revitalize its downtown by facilitating the development of housing, office, and retail. To fa- cilitate this and other downtown development, the city adopted a thoughtful and detailed plan focused on driving the desired outcome of a vibrant pedestrian downtown, and it supported the plan by exhaustive environmental review, resulting in an area-wide Environmental Impact Report. By designing its project to fit the constraints of the precise plan zoning, the developer was able to leverage the environmental work undertaken by the city and was required to undertake only limited additional environmental review, thus limiting the environ- mental review process and its po- tential for challenge, uncertainty, and delay. In contrast, other Bay Area jurisdictions, which have not invested the time and effort re- quired to do thorough planning and environmental review, have seen their community revital- ization efforts become mired in litigation. The city contributed to the site ac- quisition by selling at fair market value the principal development site, a 200-space city parking lot a short walk to the Caltrain station, to the developer. The developer was able to enhance its project by acquiring two smaller contiguous parcels from private landowners. In the end, the developer needed to deal with only three landown- ers, making the site acquisition process relatively manageable. Increased stress on limited park- ing resources was a concern with respect to the development activi- ty engendered by the city’s pre- cise plan. The city addressed this effect in several creative ways. First, the city provided private developers with an incentive to provide shared parking for public uses by allowing lower parking ratios where the developers’ parking was made available for shared public parking after 5 p.m. and on weekends. Second, the city contributed valuable parking infrastructure by making spaces available in a nearby city parking garage and providing a shuttle service from that garage to the new downtown area. The city also mitigated developer risk by agreeing to relocate an underground culvert before development began. Although the developer could have under- taken that responsibility, it would have needed to discount its land acquisition price to reflect the risk associated with that unknown underground condition. The city correctly determined that under- taking the work itself would be cheaper and allow the city to re- ceive full value for its land. Other steps taken included making city land available to the developer for construction period staging and expediting processing time for nondiscretionary approvals, such as building permits. REDWOOD CITY, CALIFORNIA CROSSINGS/900 Source: Clayton Gantz, Manatt, Phelps & Phillips LLP law firm, on behalf of Hunter/Storm and Kilroy Realty.Chad Ziemendorf PRINCIPLE IN PRACTICE 26 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 47 Page 182 of 224 183 difficult decisions to focus public investment rather than spread it throughout the community. It can often be best accomplished when linked directly to project development and recaptured through the revenues of the project itself via tax increment financing, payments in lieu of taxes, and other boot- strap techniques. ■■Undertake selective site preparation. Particularly with respect to land owned or controlled by the municipality and slated for private development, the municipality can undertake selective site preparation and remediation activities, such as moving under- ground utilities that affect development and allow- ing predevelopment entry to undertake excavation and environmental due diligence. These activities can be particularly important with contaminated sites. In some cases, public sector leadership can facilitate obtaining brownfield grants, recognizing that in many cases, the actual remediation is best undertaken as part of the redevelopment. ■■Streamline development approval processes. Streamlining entitlement and other approvals can in itself be a form of predevelopment. In many locales, the recent trend to update zoning with form-based code—or other forms of improvements—has been effective by establishing clearer parameters of acceptable development. Coordinating review and approval processes can also help facilitate both com- munity input and moving projects forward. By undertaking these sorts of activities, municipalities effectively reduce the risk of challenges, unforeseen conditions, and delay, thus greatly decreasing the project risk for private developers. By doing so, they effectively create an environment in which private developers can compete effectively and aggressively to pursue projects, and thus increase the returns to the community, both in terms of dollars paid for commu- nity assets and in quick and efficient realization of the desired community benefits. A Chicago suburb of 41,000 undertook substantial pre- development to support creation of a town center that would build on its traditional downtown, train station, and village hall. Its work included the following: • Acquistion of nine acres of industrial land; • Remediation; • Market and financial feasibility studies; • Predevelopment planning to establish development goals for the site; and • Developer recruitment, result- ing in selection of New England Builders as redeveloper of the site as Bartlett Town Center. Tax increment financing was used to support the work. BARTLETT, ILLINOIS HEAVY LIFTING PREDEVELOPMENT EFFORT Source: SB Friedman Development Advisors.SB Friedman Development AdvisorsSB Friedman Development Advisors PRINCIPLE IN PRACTICE FROM PRINCIPLES TO PRACTICES 27 48 Page 183 of 224 184 The difference in perspective was reflected in the survey presented in chapter 1: the private sector finds the public sector’s limited understanding of private-capital underwriting criteria to be among the greatest challenges while the public sector needs to protect itself from giving away the store. The private sector does not understand that municipalities are not profit motivated, and the public sector does not understand that private developers expect to be paid to take risk. Bridging the divide is critical to success, and estab- lishing relationships is one of the first steps. When Developers Approach a Public Body Developers often approach public bodies to propose projects they feel will fulfill a community need but that require some type of public assistance. These may be business incentive requests, tax abatements, tax increment, sales tax sharing, or any of the many other variants on tools. They may be seeking public land that completes a parcel where they have some ownership or responding to a general call for development in a community in which the public body owns little or no land but is trying to encourage development. In eval- uating developers’ initiatives, both public and private sector participants should consider several key actions: ■■Get to know each other. Knowing with whom you are dealing and their capabilities is number one in any transaction. It has been said that “you can’t make a bad deal with a good person and you can’t make a good deal with a bad person.” Disclosure and background checks should occur early in the re- lationship. As a result of the Great Recession, many firms have restructured or been newly created. The track records and reputations of the individual prin- cipals will be more critical in such cases as the public side considers the capabilities of the private partner. Conversely, the developer needs to understand how the government entity is structured; what the election cycle is; who can champion the project; and what time frames, such as term limits, may affect approval. In addition, the need for transparency in government and limitations on participation of pub- lic officials in private and trade events and organiza- Creating Relationships between Developers and Public Bodies STEPHEN B. FRIEDMAN AND CLAYTON GANTZ PUBLIC/PRIVATE PARTNERSHIPS INVOLVE A RELATIONSHIP between public bodies and private enti- ties different from typical civic, regulatory, or procurement activities. The public entity has goals and ob- jectives beyond highest price, lowest cost, or minimal compliance. It is seeking other benefits at the same time that the private parties are often dealing with projects with complex problems (see figure 3-3). As a result, development project deals are typically negotiated, and many states provide different authorities for deal making in redevelopment districts or other special zones that would not be allowed elsewhere. For public facility and privatization projects, the public entity bears a unique responsibility to fully define what is being sought and to seek proposals that fully address complex public issues. Partners can communicate more effectively by building personal relationships with each other. Formal and informal forms of communication between entities create opportunities to build a more open and trusting relationship. Ten Principles, 31. 28 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 49 Page 184 of 224 185 tions can make the kind of informal communication that helps to build trust difficult to achieve. ■■Establish a shared vision. How does the project fit with public goals and values? Even in the case of a developer-initiated project, the municipality and the developer must plan to engage stakeholders and adjacent property owners to reach a shared vision with support for the project. ■■Determine who has authority. For the private sec- tor, making sure you are dealing with officials with the authority to carry out the process and move the project forward is important. Local and specialized counsel are often required to ensure this. ■■Determine If the developer controls any land. In cases where the developer owns relevant land, rather than simply proposing an idea about a development, the landscape is different. Where the developer owns or controls land, it may be entitled to different processes in obtaining adjacent public land and certainly in seeking entitlements and finan- cial assistance. ■■Assess whether the public body has land to complete a site. What resources and tools are available to assist this project? ■■Identify the legal processes that allow negoti- ation. The regulations vary from state to state. Can land be sold without public bidding? Can terms of deals be negotiated in closed session? Must analysis and numbers be revealed or are they legally propri- etary? The private sector must expect more public disclosure of “sensitive” information than it would like, and the public must expect less. ■■Establish fair value—appraisals. Where public land is involved, achieving a fair price is critical both legally and politically. But what is a fair price? It is typically not what the public entity paid for the land, but often less. Appraisals based on the use of the land as part of the project should be the basis for determining a fair price. ■■Review capabilities for structuring, document- ing, and monitoring. These issues are dealt with in later sections. Developers need to recognize that public involvement may include upside sharing of profits over a threshold as well as ongoing commit- ments to provide the public benefits promised. The documentation will be extensive, and the public bodies need to have appropriate capabilities to com- plete their responsibilities in these matters. Soliciting Developers: RFQ/RFP Process for Publicly Owned Land Developers and public bodies approach the process of selecting a developer for a project on publicly owned land with almost diametrically opposed points of view. The public sector must have an open, transparent process: it is the law and a way to manage locally “in- volved” developers as well as other public policy issues. Developers want to avoid expensive, public processes and protect proprietary information. Most developers tie up land in private, then they work to complete the deal. They do not announce their intentions to the world first. To manage these opposing cultures and require- ments, a two-step process can be used: obtaining true qualifications first (via a request for qualifications, or RFQ)—including experience and capacity, organiza- FIGURE 3-3 Private Sector versus Public Sector Private Sector Sees the “Hair” on the Deal • Profit maximizing; time kills deals; • Entitlement time/risk; • Community opposition/benefits agreements; • Business cycle time risks; • Landowner holdouts/excessive site assembly costs; • Road, traffic, other off-site needs; • Deal with the unknown, e.g., underground, remediation, environ- mental risk; • Excess costs of demolition, site preparation; • Construction risks, costs, fees that are a mismatch with market pricing; • Product market mismatch/market risks; • Financial guarantees; • Financing gap; • Risk of city performance; • Dealing with bureaucracy; • Problems caused by excessive transparency; and • Risk of failure. Public Sector Focuses on Public Values, Goals, and Issues • Benefit maximizing; controversy minimizing; • Density, height, design, and parking requirements; • Open spaces, parks, and recreation; • Community programming and events to activate areas; • Historic preservation; • Preference for homeownership; • Inclusionary zoning, affordable housing requirement; • Fiscal impact and fees for other districts; • Public funding/fiduciary (and legal) responsibilities; • Minority-owned business certification, women-owned business certification, and prevailing wage; • Community and taxpayer opposition; • Political and career risk; and • Risk of failure—financial loss and impact on providing basic services. Source: SB Friedman Development Advisors. FROM PRINCIPLES TO PRACTICES 29 50 Page 185 of 224 186 tional and financial—and requesting specific proposals second (via a request for proposals, or RFP). Assuming the community has done the predevelopment work discussed previously, these are the key steps to recruit- ing the most qualified developer: ■■The development prospectus. A substantive prospectus should include details on the market, site conditions, status of control, a “believable fiction” of the desired development outcome, indication of what types of tools may be available, and indication of community and official buy-in. Considerable debate exists about how much “flash” is needed in documents. One way or the other, substance is preferred to flash. The document should be realistic and balance economic feasibility, site capacity, and community goals. It should be clear about what is expected of respondents at both the qualifications and proposal stages. ■■Outreach and advertising. Individual outreach to identify and encourage developers with the type of experience needed is necessary to get a good response to an RFQ/RFP. Public bodies will be required to advertise broadly, however, which often discourages the most appropriate developers who believe they are entering a “beauty contest” rigged for the locally connected. Outreach can overcome that misapprehension. ■■Timing. The process should allow ample time to attract developers and for developers to prepare re- sponses. For RFQs, a minimum of 90 days is recom- mended: 30 to reach the developers; 30 for them to decide to respond; 30 to prepare their response. For RFPs, a similar amount of time should be allowed. Developers do not know if they will be asked for a proposal and need time to mobilize to prepare a thorough response. ■■Qualifications. The RFQ stage should require infor- mation to establish the respondents’ understanding of the project (but not a specific, detailed proposal), the experience of the team with similar projects, the current organizational capacity of the team, and financial capacity of the organization—not just its access to financing for the project. The organization will need staying power from its own resources to complete the predevelopment because it typically will not have land it can mortgage until the deal closes. ■■Proposals. An appropriate number of teams—typi- cally three to six—can be invited to submit detailed development proposals. Developers should expect to be provided with additional information on site conditions, such as environmental and soils studies, infrastructure conditions, and the like. Public bodies should expect to meet with candidates to share information as well as goals regarding the project. ■■Review. Proposals should be reviewed both quan- titatively and qualitatively. Public bodies should be certain that all proper review bodies are included and that the process passes procedural muster. De- velopers should be prepared to present their plans to multiple community and public body meetings. The financial proposal, design, goal achievement, and community benefits will all be part of the re- view. In the end, the selection should be of the best plan with the best overall benefits. PARK RIDGE, ILLINOIS SHOPS AND RESIDENCES OF UPTOWN PARK RIDGE After purchasing two car deal- ership sites, relocating them within the city, and determining it must replace a leaking reservoir, the city of Park Ridge, Illinois, fol- lowed the process outlined here. The city received 19 qualifications submittals and elicited six full proposals. The ultimate project re- inforced the downtown and com- muter-rail station, adding 90,000 square feet of commercial space, 190 condominiums, and more than 700 parking spaces. The development met its $100 million–plus pro forma, but chang- es in assessment practices have challenged some of the public financing commitments in the TIF district. Still, the project—devel- oped by PRC Partners (Edward R. James Companies, Valenti Builders, and Mid-America Real Estate Group)—was catalytic in anchoring and transforming the downtown to become a lifestyle center with a Walk Score of 85.OKW Architects; photographer: Charlie MayerSB Friedman Development Advisors PRINCIPLE IN PRACTICE 30 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 51 Page 186 of 224 187 ■■Negotiate term sheet before final selection. Es- tablishing term sheets with finalist developers before final selection can be useful in ensuring the selected developer will not try to negotiate away from terms that led to its selection. Other developers will be in line to step in if the selected developer does not negotiate in good faith according to the term sheet. ■■Documenting and monitoring. These matters are detailed in a later section. Important, however, is to ensure that the redevelopment agreement and other documents follow the term sheet and are legally binding to ensure that the desired development is what will be delivered. In many cases this may lead to simultaneous approval of a redevelopment agreement and entitlements necessary to undertake the project. Figure 3-4 summarizes this process. Additional Considerations in RFQ/RFP Process for Delivering Public Facilities A successful PPP solicitation process for infrastructure projects has all the same considerations previously noted. As with all competitive solicitations, the public agencies’ reputation to run an open and fair compet- itive process is key; however, with infrastructure proj- ects, the magnitude of investment by private sector consortiums in successful bids is often several million dollars. A reputable agency and a desirable asset can attract private firms to make significant investments in developing innovative designs and technical concepts as well as creative financing and legal structures, all of which benefit the public sector partners. ■■Have clear goals. To encourage competition, public agencies considering a PPP should be clear on their goals in the RFQ. Clearly articulating what problem the agency is trying to solve will encourage private sector teams to organize and respond appropriately. A clear statement of goals and scoring criteria in the document also send a signal to the market that the process is professional and well thought out. ■■Have clear rules of engagement. Outlining a transparent and fair process attracts private sector partners with the same values. Items to consider are anti-lobbying regulations, communication proto- cols, definitive timelines, and conflicts of interest. In addition, an agency should be clear about its legal authority to enter into a PPP. Care should be taken to define technical requirements broadly enough to allow a range of innovative solutions. ■■Develop a short list. A typical RFQ/RFP process for public infrastructure will shortlist no more than three or four qualified teams. Typically, this number is enough to encourage competition and innovation but gives the private competitors reasonable odds for their significant investment in preparing the RFP response. ■■Offer a stipend for short-listed teams. By offer- ing a stipend, the agency encourages a higher level of investment in the responses and, as a result, will typically receive a higher-quality product. A stipend also demonstrates an investment in the procurement beyond staff and consultant time by the agency, showing the market the agency is a serious about the procurement and reducing the perceived risk the project might be canceled. FIGURE 3-4 Elements of a Successful Project 1>>DEFINE DEVELOPMENT GOALS 2>>ESTABLISH DEVELOPER RELATIONSHIP 3>>FINALIZE AND IMPLEMENT PROJECT SUCCESSFUL DEVELOPMENTSOLICIT DEVELOPER FOR PUBLIC LAND RESPOND TO DEVELOPER SEEKING LAND/ASSISTANCE • Develop a community- supported vision with all stakeholders • Prepare site development program • Address development readiness of site • Understand resources • Create a “believable fiction” • Prepare request for qualifications • Review qualifications and determine short list • Solicit proposals from short list • Evaluate proposals • Conduct interviews/community reviews • Select developer • Identify land sales processes • Negotiated sales • Modified bidding • Alternative bids • Identify entitlements • Review assistance application • Project plan and costs • Market analysis • Financial benefits/tax increment • Pro forma/gap • Community benefits • Eligible costs • Basic structure/capital stack • Negotiate term sheet/ redevelopment agreement • Obtain zoning/planned development approval • Identify financing structure/sources • Identify public structure • Pay-as-you-go • Notes • Bonds • Obtain simultaneous approvals • Coordinate and oversee project Source: SB Friedman Development Advisors. OR FROM PRINCIPLES TO PRACTICES 31 52 Page 187 of 224 188 In general, this “but for” problem arises in two circumstances: ■■Financing Gap: A project has a funding gap where its market value is insufficient to create financial viability to fund its costs. This gap may arise because of market weakness, special public requests and requirements (e.g., reduced height and density), or extraordinary costs associated with land assembly, environmental remediation, or site conditions (e.g., soils, wetlands, stormwater). ■■Competitive Necessity: Competition among mul- tiple jurisdictions for private investment generates use of a variety of tools as inducements to locate in one location over another. This competition can be for job creation, tax base, or catalytic uses that en- hance overall community viability. It can be among different regions (interregional) and within regions (intraregional). The dynamics of these two situations differ significantly. A project should be considered for public invest- ment to address these situations when all four of the following conditions are met: 1. The project contributes to important public policy goals, such as employment, serving as a develop- ment catalyst, providing affordable housing, creat- ing a needed service or facility, cleaning up a dirty or hazardous site, substantially enhancing tax base, creating public amenities, or other agreed goals. 2. The project will be economically feasible and has a reasonable chance of success if the assistance is provided. 3. But for the assistance to be provided, the project will not be able to proceed as desired to achieve its public and private sector goals. 4. The project will pay for itself through revenues it generates or is of such importance that tapping other funds is justified by its broader benefits. The two following sections describe how jurisdic- tions can evaluate the appropriateness of assistance to meet a financing gap or competitive situation. Financing Gap A developer approaches a municipality and says: “Mayor, I believe we have a project that can provide the kinds of public benefits you would like to see, and I just need a little help closing a funding gap.” The mayor’s reaction is: “Tell me why this project is a great deal for the community and then I’ll decide whether it serves the public’s interests to partner with you.” To address the public sector question, the project will need to be fully reviewed and evaluated against the four criteria noted: public goal attainment, project viability, financing gap, and fiscal benefit. This section focuses on project viability and financing gap. Fiscal benefits are discussed in the section “Assessing Fiscal Impacts and Community Benefits of Public/Private Partnerships.” A financing gap is a shortfall between a project’s cost and its market value under current financing conditions. In certain circumstances, it can also mean that financing is not available for other reasons—a problem that occurred during the Great Recession of 2008 to 2012. The gap can be the result of market weakness, limitations on height and density beyond those imposed by the market, additional public The “But for” Problem and the Need to Make a Fair Deal STEPHEN B. FRIEDMAN AND CHARLES A. LONG WE HAVE ADDRESSED SOME WAYS in which municipalities can facilitate PPPs through predevelopment activities earlier in this chapter, but sometimes that is not enough. In many cases, private real estate invest- ment still requires a PPP to address its economics: that is, an economic shortfall or need exists that “but for” its existence is preventing the project from moving ahead. Solving this problem must occur within the context of the real estate project’s economics, and the solution must be fair to the public. Demonstrating the fairness of the deal ranked high in both the public and private sectors in the survey reported in chap- ter 1 of this report. 32 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 53 Page 188 of 224 189 requirements for amenities, site acquisition and prepa- ration costs, environmental remediation, soil condi- tions, stormwater management, or other extraordinary costs that take a project out of the market. A project can be evaluated carefully to validate and measure the problem as a basis for assistance. REAL ESTATE ECONOMICS AND RETURNS The need for the public sector to understand real estate finance was the highest-ranked challenge in the survey reported in chapter 1. Real estate development is a capital-intensive business where a significant portion of a project’s costs can be the cost of the capital necessary to fund the development. Real estate projects compete in a global market for both debt and equity and must provide an appropriate risk-adjusted rate of return over the life of the project to be funded. The key tool for evaluating both the viability of a project and its need for assistance is the pro forma financial analysis—a projec- tion of the expected financial performance of a project. USE OF A PRO FORMA. A pro forma is a projection based on current and foreseeable market assumptions at the time it is prepared to justify entering into a PPP. For a single building project to be started or completed in a relatively short time, say three to five years, the pro forma may reasonably approximate the actual economic performance of the project. However, for longer or more complex projects, the parties should assume that the pro forma will change over time for better or for worse, depending on real estate and eco- nomic cycles, regulatory changes, or unforeseen events resulting in project changes, delays, reduced revenues, or increased costs—or occasionally improved market and financing conditions and reduced costs. Both parties should negotiate business terms in a way that ultimately reflects the actual economic performance of the project. For example, the public entity may want to negotiate a base level of infrastructure or public amentities or a minimum economic return depending on the project’s performance. The developer may want provisions to protect it from adverse market, economic, or unforeseen events. The pro forma is a tool on which to evaluate the viability of the project and need for financial assistance and to build a deal structure that is clear on the allocation of risks between the parties and provide a framework to deal with unforeseen adverse events while still leading to project success. REVIEWING THE PRO FORMA. The pro forma for a development project contains both development costs and ongoing revenues. For a for-sale project, such as a condominium, residential subdivision, or industrial land sales program, the revenues are typically sell- out proceeds. Costs during sell-out are part of the development costs. For investment projects, such as office buildings, retail, or rental residential, the oper- ating period is important as well as the development costs. Each element of the pro forma can be validated against current market conditions. DEVELOPMENT COST PRO FORMA. The cost structure shown in figure 3-5 generally applies to both for-sale and investment projects. Each of these costs can be validated through research of industry sources or through interviews and expert consultation, or both. (See the Resources section of this report.) Many are specific to the project, labor and construction markets, and site conditions and need to be validated carefully. Evaluating site and hard construction costs, as well as FIGURE 3-5 Development Cost Pro Forma = Total, all-in costs Site costs • Land acquisition • Demolition • Remediation • Site improvements (including land- scaping) Building construction • Core and shell • Tenant improvements • Furniture, fixtures, and equipment • Options Soft costs • General and administrative (G&A) • Permits and fees • Financing during construction • Marketing • Commissions • Legal and professional • Architecture, engineering, and planning Source: SB Friedman Development Advisors. FIGURE 3-6 Revenue/Operating Pro Forma Investment projects • Preleasing/lease-up schedule • Base rental income • Accessory income • Percentage rent (retail usually) • Expense and property tax recoveries • General operations • Utilities • Maintenance • Property taxes • Insurance • Legal/accounting • Management • Tenant improvements • Reserves • Debt service For-sale projects • Total revenue • Base unit price • Additional parking cost • Upgrades • Extra cost options Source: SB Friedman Development Advisors. FROM PRINCIPLES TO PRACTICES 33 54 Page 189 of 224 190 fees, is very important. A small, say 5 percent, over- statement of costs can quickly open a seeming gap. REVENUE/OPERATING PRO FORMA. Each revenue and expense assumption can be validated using a combi- nation of industry sources (see Resources), comparable projects, interviews with market players, and expert consultation. The elements of the pro forma will vary. For example, if the project is a net leased one, then operating costs may be less important. To the extent relevant to a specific situation, the pro forma should include the elements shown in figure 3-6. EVALUATING REVENUE: THE IMPORTANCE OF MARKET ANALYSIS Revenue estimates for a project, whether for sale or for lease, are critical and are derived from an under- standing of the real market for the project. A small understatement of revenue coupled with a small over- statement of costs can open up a 10 percent or great- er seeming financing gap. Conversely, overestimating revenue sets a project on a path toward market failure. Real estate market analysis should carefully review both existing supply and, independently, demand. Supply analysis can tell you a great deal about current rents or prices, and vacancy and historical absorption. However, looking at demographic and economic drivers of demand, related to past absorption, helps forecast future need. Household formation, age and income preferences, retail sales potential, employment growth, and projected growth in output all drive the amount and types of real estate for which demand ex- ists. As shown in figures 3-7 and 3-9, age and income shifts can be analyzed, and retail sales potential can be reconciled using tools such as gravity modeling. These market studies can be complex, but they avoid major “topline” mistakes that cannot be overcome. The Re- sources section contains references for techniques of market analysis, including gravity modeling and other more advanced tools. INVESTMENT ANALYSIS AND RETURN MEASURES Projects should be evaluated based on risk-adjusted rates of return appropriate to the project type and market conditions, taking into account the appro- priate financing structure and rates and terms. Rates vary widely with market conditions, type of financing, and access different types of developers may have to capital. Rates and terms for each capital source are determined in the context of a particular transaction and market conditions at the time a specific project is being reviewed. Figure 3-8 shows the types of capital that make up what is called the capital stack. The application of each layer of the stack differs, depending on the risk profile of the project component. Debt, which has the lowest cost, typically does not enter a project until the entitlement risk has been passed and construction starts. A real estate development project will also have two forms of debt: construction debt to finance the actual construction and long-term “permanent” debt, a mortgage that is serviced from project revenues. As one moves up the capital stack, the cost of the capital becomes more expensive because its appli- FIGURE 3-7 Five-Year Change in Market-Area Households by Age and Income FIGURE 3-8 The Capital Stack Equity Debt Mezzanine or performing debt • Return from project performance • Paid in tiers (the waterfall) • Much higher return than debt • Funds before debt • The value-add play • Return from interest rate and from performance • Pays an interest rate • Costs less than equity • Secured by a lien on the property • Amount based on LTV, LTC, or DCR • Lender can foreclose if not paid • Construction and permanent loans –4,000 –3,000 –2,000 –1,000 0 1,000 2,000 3,000 Age of householderNumber of householdsUnder $25,000 $25,000–$49,000 $50,000–$74,999 $75,000–$99,999 $100,000–$149,999 $150,000+ Under 35 35–54 55–74 75+ Source: ESRI; SB Friedman Development Advisors. Source: Charles A. Long Properties LLC. 34 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 55 Page 190 of 224 191 cation is committed to a riskier component of the project. The overall rate of return required for a project is the result of the blended cost of capital over time. Equity investors drive the underwriting criteria because they are the ones taking the risk and obtain- ing the bank loan. Equity returns, which are often viewed by the public sector as quite high, are what is necessary for real estate to compete for capital with other investment options. These returns also reflect the risks associated with construction and lease-up, and the duration of development—often two years of predevelopment and two years to full lease-up or sell- out once construction begins. The financial structure typically gives preference to the lowest costs of capital—usually debt—and then the other sources. Debt, however, is secured by a lien, and many investors limit debt to mitigate the risk of losing the project to foreclosure if market conditions change. The amount of debt is driven by bank under- writing criteria, risk, loan to value or cost (LTV or LTC), and debt coverage ratios upon completion. Construc- tion debt is replaced by permanent debt upon project completion and lease-up. The rates of return change with market conditions and should be researched through market analysis and inter- views of market participants. The investment analysis can then review a number of key return measures, as follows: For-sale projects: ■■Margin on sales (combined overhead, G&A, and profit) Investment projects: ■■Capitalization rate ■■Annual cash on total cost at stabilization ■■Annual cash on equity at stabilization ■■Internal rate of return on total cost ■■Internal rate of return on equity Details on how these factors are analyzed can be found in the Resources section. The specific benchmarks are again determined, based on research, interviews, and adjustment to re- flect the appropriate levels of risk. The amount of assis- tance that will in some form be required to achieve the necessary rate of return for the project to be financially feasible can then be calculated and the gap validated. FIGURE 3-9 Retail Gravity Model Source: ESRI; SB Friedman Development Advisors. FROM PRINCIPLES TO PRACTICES 35 56 Page 191 of 224 192 After a gap has been confirmed, then the public and private sectors can address how to overcome it. Tools for closing a financing gap are described in the section “Structuring Development Partnership Deals” in this chapter. Competitive Necessity The second type of “but for” condition involves single or multiple jurisdictions competing to attract the same development. Such competition may be for job creation, tax base enhancement, or a specific use, such as a research park, that will catalyze more economic activity within the jurisdiction. The dynamics of com- petition among regions (intraregional) differ from that within regions (interregional). Private investors choosing among regions consider a broad range of issues, such as quality of life, infrastructure, education system, cost of living, and regional demographics, as well as an economic package. This type of competition requires that jurisdictions within a region collaborate and bring regional resources to the table to enhance their compet- itive position and, perhaps, to overcome shortcomings in base conditions. In contrast, competition within re- gions, primarily for tax base, frequently approaches the dynamics of a zero-sum game where jurisdictions may offer resources that are close to the economic value of the resources created by the investment. Here are some parameters of these two competitive situations. INTERREGIONAL COMPETITION Companies frequently seek a new location for their headquarters office, industrial plant, or new product center by choosing among different regions based on both their underlying circumstances and the value of the economic package offered by the region. This sets up a competition among regions. If jurisdictions within a region can understand this dynamic, they can pool resources to make their region more competitive. As an example, jobs within one jurisdiction in a region provide economic value to the entire region, not just to that jurisdiction. Regional cooperation and collabo- ration benefit all jurisdictions in the region. Effective action in this environment starts with an assessment of the region’s competitive position. Here is a checklist of dimensions to assess: ■■Statewide regional and sector-based development policies; ■■Business climate rankings; ■■Land and building costs; ■■Labor costs/union status; ■■Labor availability and skills; ■■Local taxation; ■■Utilities: water, sewer, power; ■■Transportation for goods, workforce, and executives and sales personnel; ■■Industry links; ■■Community quality and cost of living; and ■■Incentives, both state and local. The economic package then needs to address the region’s shortcomings. Will the school district be part of the discussion? What about job training programs? Can tax and utility costs be reduced? In some cases, tools such as tax incentives, development assistance, housing assistance, and others can address cost differ- entials. In other cases, an individual jurisdiction would be hard pressed to overcome lack of diverse housing, mixed-use walkable neighborhoods, or transit access in the short run. In many regions, the calculus has been made more complex by the need to attract the millennial cohort labor force with its special skills and the mismatch of housing and jobs for both this and other labor cohorts. The millennial cohort has a documented preference for mixed-use urban living, placing many suburban loca- tions at a disadvantage. Decades of suburban mono- culture development have separated administrative, managerial, and executive labor in distinct sections of the region, requiring long employee commutes if the project is not located in a transit-rich location. But a region’s competitive strength is frequently its strongest asset. In Chicago, Mayor Emanuel’s “elevator speech” during his first term was simply: “I guaran- tee you your labor force (10 points higher college graduates than nationally and a restructured com- munity college system), and I guarantee you global access (O’Hare International Airport).” He succeeded in attracting 32 corporate headquarters to downtown, including several from other regions with almost no incentives! Trust is tangible and can be earned through work and commitment to the project. Building trust incrementally through small efforts within the partnership creates a record of small successes that support bigger strides. In other words, success breeds confidence, and confidence breeds trust. Ten Principles, 30. 36 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 57 Page 192 of 224 193 INTRAREGIONAL COMPETITION Within a market area, the iconic example of inter- regional competition is competition for retail sales. This is ultimately a zero-sum game because demand crosses jurisdictional boundaries and is ultimately limited. However, this fact does not stop localities from seeking to attract retail for its contribution to both property tax and sales tax. Furthermore, in some states (Illinois among them), sharing sales tax with retailers and retail developers is legal. (In California, as a contrast, this practice was outlawed in 1994.) The stakes can be high and the competition fierce, with the seemingly rational idea of tax-base sharing limited to a few areas. Evaluating the need to provide assistance to a retail project (excluding real estate extraordinary cost issues discussed in the prior section) requires careful analysis of the following: ■■Demographic pitch of area to retailer; ■■Traffic and site access characteristics; ■■Market area/competition and overlaps; ■■Land and site costs; ■■Property tax and sales tax differentials; ■■Local factors; ■■Tax-sharing deals and incentives offered by competitors; ■■Projections of revenue generation; and ■■Abatement/development cost shares. In the final analysis, such projects involving competi- tion within the region can involve sales-tax sharing, real estate tax abatement, or TIF-type assistance with development costs. Frequently, however, such packag- es simply relocate economic activity from one part of the region to another with no net gain in value. Making a Fair Deal That Connects the Public Investment to the Public Benefits Simultaneous with identifying the means of closing the gap is the work of crafting business terms of the PPP. Three principles apply in crafting business terms: ■■Connect the public investment to the benefits created. ■■The private sector must have its own capital (“skin in the game”) before public investment goes into the project. ■■Create terms that provide the public sector a return if the project performance exceeds expectations— that is, ensure that the public investment does not create a windfall for the developer. As noted in the survey in chapter 1, a major impedi- ment to making effective PPPs can be a “winner-take- all” or “hardball” bargaining dynamic. Such bargain- ing often fails in the PPP context because it inhibits problem solving and trust building. The negotiation process, instead, should focus on identifying and addressing each party’s legitimate issues in an open and transparent way that allows for accommodation wherever possible, recognizing that, at times, each party will be asked to leave something on the table to make the deal work. The private sector must recognize that the public sector must ultimately be in a position to defend its deal to all stakeholders. Conversely, the public sector must recognize that the private sector must realize a fair return to justify the risk that it may incur in a development deal. Summary With this analysis in hand, and assuming the project meets the four criteria—goals, need, viability, fiscal benefit—six principles should be followed in negotiat- ing these PPPs: 1. MAKE DEALS BASED ON THE REAL NEEDS, NOT WISHFUL THINKING. Validate the deal based on the real estate economics and on what the markets will actually support or on the carefully analyzed competitive position. 2. BUILD TRUST AND OWNERSHIP. Who is involved in the partnership is as critical as what the project is. Developers and communities need to take the time to use the “open book” and to develop relation- ships of consistency and trust. 3. DO THE HARD WORK COMPETENTLY. PPPs are complicated and require resilience and persistence to accomplish. They require a competent team on both sides of the table who take the time and effort to craft complex deals. 4. USE NEGOTIATION AS PROBLEM SOLVING. Re- specting public needs for transparency and private need to protect proprietary information, expect the negotiation process to be used to resolve the differ- ing perspectives, needs, and risks of the parties. 5. VALIDATE A FAIR DEAL FOR BOTH. The public must achieve key goals and benefits, and the private sector must receive a reasonable return for the level of risk. 6. UNDERSTAND THE REAL RISKS AND FINANCING CHALLENGES. Both the public and private partners must explain to the public the risks and financing issues that deals worthy of public/private partner- ship entail. FROM PRINCIPLES TO PRACTICES 37 58 Page 193 of 224 194 From the public sector perspective, PPPs help address a number of governmental social objectives, including the following: ■■Job creation; ■■Affordable housing; ■■Expansion or restoration of government infrastructure; ■■Health education; and ■■Quality of life. Those objectives help drive the fiscal responsibilities of and benefits for the public sector. Those responsibili- ties and benefits include: ■■Increasing the tax base through property taxes; ■■Increasing sales tax revenue through an increase in jobs; ■■Introducing private sector technology and inno- vation in providing better public services through improved operational efficiency; ■■Incentivizing the private sector to deliver projects on time and within budget; ■■Imposing budgetary certainty by setting present and future costs of infrastructure projects over time; ■■Creating diversification in the economy; ■■Supplementing limited public sector capacities to meet the growing demand for infrastructure and community service development; ■■Integrating local workforce development; and ■■Developing the capacities of minorities, women, and disadvantaged businesses. From the private sector perspective, many objectives and benefits are obtained by engaging in a PPP, includ- ing the following: ■■Making a profit; ■■Repaying equity; ■■Creating leverage; ■■Increasing business; ■■Increasing the value of property in a sustainable and prosperous environment; ■■Allocating risk; ■■Building trust and long-term relationships with the public sector; and ■■Deploying assets, both financial and human resources, during economic downturns. Measuring the Fiscal and Economic Benefits of PPPs Measuring the fiscal and economic benefits of PPPs can take many forms and take place at various points during the PPP project. Particularly during the forma- tion time frame, both the public and private sectors seek to determine the fiscal and economic impacts of the project. Both parties have different measurements to determine if the project is feasible enough to pro- ceed with the partnership. The public sector will want to know the fiscal impact, in terms of revenues and costs, the project will have on its budget. Those revenues and costs target both operating budgets and capital budgets. The public sector will also want to determine the local economic effect the project will have on job creation; direct, indirect, and induced effects; plus the dynamic effects. The private sector will seek to determine the direct profitability of the project on its finances in addition to the political and public goodwill and future growth that could potentially occur because of the public involvement in the project. Assessing Fiscal Impacts and Community Benefits of PPPs RUSS WEYER PUBLIC/PRIVATE PARTNERSHIPS have immediate and lasting impacts and benefits to both the public sector and the private sector. These impacts and benefits are the very reason that PPPs are formed. Fiscal and economic advantages of PPPs include reduced public capital investment, improved efficiencies and quicker completion, improved cost-effectiveness, shared resources, and a guaranteed revenue stream. 38 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 59 Page 194 of 224 195 WHEN TO MEASURE Various schools of thought exist about the timing of fiscal measuring. Each situation is unique and requires collaboration between the public and private entities involved in the partnership. Fiscal measurement of a PPP project during its ne- gotiation process is imperative. This measurement sets the benchmark fiscal targets that are used to measure the project’s positive or negative fiscal results. Once the benchmark measurement is established, both the public and private partners need to agree upon the future time frame in which to measure the fiscal results. Depending on the tax and fiscal struc- tures of a public entity, measuring the project upon its completion is prudent, thus allowing the project time to get up and running in terms of its fiscal impact on the public sector. An interm measurement may be required if the proj- ect appears to be missing its timing of a plan element delivery or if the project’s plan elements change during the course of its evolution. PUBLIC SECTOR FISCAL AND ECONOMIC MEASUREMENTS Generally, public sector entities use two types of mea- surements to determine the viability of a PPP—fiscal im- pact analysis models (FIAMs) and economic impact mod- els. FIAMs are used to determine the net fiscal impact of a PPP on public sector budgets, and they determine both the operating and capital impacts of a project. Operating revenues and costs are ongoing charges. Operating revenues are a combination of ad valorem taxes and per capita charges, such as gas taxes, sales taxes, franchise fees, utility taxes, occupational licenses, building permits, and grants. Costs are gener- ally measured on a per capita basis and include finan- cial and administrative, legal, law enforcement, fire, corrections, solid waste, U.S. Departent of Housing and Urban Development (HUD), economic develop- ment, and health. Capital revenues and expenses are one-time charges imposed on projects to cover such community capital costs as roads, schools, law enforcement, emergency medical services, libraries, and parks. Capital revenues are generated from impact fees. Costs are driven by a num- ber of analysis techniques, such as trip generation and capacity for roads, and per capita for other capital needs. TYPES OF FIAMS. In his book The Fiscal Impact Handbook,4 Robert Burchell identifies six types of fiscal modeling methods. The per capita multiplier method is the most widely used model due to its focus on resi- dential development. However, all the models apply to PPPs. Following is a description of each model type: ■■Per Capita Multiplier Method: This technique— primarily used for the impact of residential develop- ment—uses average government cost per person and school costs per pupil multiplied by a projec- tion of the expected number of new people and students to estimate the costs of a new develop- ment. The recommended multipliers for population and enrollment changes can be derived using U.S. Census data. ■■Case Study Method: The case study method can be used for residential and nonresidential fiscal impact analyses. This method involves interviewing local officials and experts (e.g., school administra- tors, people involved in local budget process, etc.) to obtain an estimate of how different government bodies will be affected by a given development. The expert estimates are then combined to account for the impacts in different areas and create an overall estimate of the fiscal impact of a development. ■■Service Standard Method: The service standard method uses U.S. Census of Governments data to calculate the average manpower per 1,000 people and capital-to-operating expenditure ratios for eight municipal functions. The fiscal expenses are then calculated based on expected population changes, [I]t is widely acceptable that the private side, in exchange for taking significant financial risk, will accrue proportionate future financial returns. The public side, in return for providing the infrastructure, entitlements, or other public resources that allow the private activity to advance, will receive sufficient tangible and intangible public benefits—such as improved public infrastructure; increased property, employment, or sales tax base; provision of needed services; clearing of blight; and nontax income and tax revenue generated by the project—that justify the required investment. Ten Principles, 26. FROM PRINCIPLES TO PRACTICES 39 60 Page 195 of 224 196 service manpower requirements, local salaries, statu- tory obligations, and expenses per employee. ■■Comparable City Method: As the name indicates, this method is based on finding a municipality that has a similar population and growth rate as the city in question is projected to have. The underlying assumption of this method is that cities of compara- ble size and growth rates spend similar amounts on municipal and educational expenditures. ■■Proportional Evaluation Method: This method is used for a fiscal impact analysis of nonresidential development, whereby the development is assigned a portion of the municipality’s costs based on the proportion of local property it comprises. However, because municipal expenditures for a single devel- opment are not always linear with regard to the development’s size, this method can overstate the cost of large developments and understate the cost of small developments. ■■Employment Anticipation Method: Another meth- od for estimating the fiscal impact of nonresidential developments is the employment anticipation method. This method hinges on an estimate of the number of employees a development would add to the munic- ipality. In effect, estimates of the additional cost for each new employee across various municipal sectors are multiplied by the anticipated increase in employees to create the total cost estimate for the city. Selecting an appropriate method or methods to use is primarily determined by the type of PPP being proposed. The models may be implemented at any stage of the PPP—from the beginning, to determine potential impacts, through completion, to determine if the PPP met its goals. TYPES OF ECONOMIC IMPACT MODELS. Economic impact analyses usually use one of two methods for determining impacts. The first is an input-output model (I/O model) for analyzing the local and regional economy. These models rely on interindustry data to determine how effects in one industry (PPP project) will affect other sectors. In addition, I/O models estimate the share of each industry’s purchases that are sup- plied by local firms (compared with those outside the study area). Using these data, multipliers are calculated and used to estimate economic impacts. Examples of I/O models used for economic impact analyses are IMPLAN, RIMS-II, and EMSI. Input/output models measure direct, indirect, induced, and dynamic effects of a PPP project on the local and regional economy. The direct effects from the initial spending create additional activity in the local economy. Indirect effects are the results of business-to-business transactions indirectly caused by the direct effects. Businesses initially benefiting from the direct effects will subsequently increase spending at other local businesses. The indirect effect is a measure of this increase in business-to-business activity (not including the initial round of spending, which is included in the direct effects). Induced effects are the results of increased personal income caused by the direct and indirect effects. Busi- nesses experiencing increased revenue from the direct and indirect effects will subsequently increase payroll expenditures (by hiring more employees, increasing payroll hours, raising salaries, and so on). Households will, in turn, increase spending at local businesses. The induced effect is a measure of this increase in house- hold-to-business activity. Finally, dynamic effects are caused by geographic shifts over time in populations and businesses. Another method used for economic impact anal- yses is economic simulation models. These are more complex econometric and general equilibrium models. They account for everything the I/O model does, plus they forecast the impacts caused by future economic and demographic changes. One such model is is the REMI Model. COMPARISON TO OTHER ANALYSES Economic impact analyses are related to but differ from other similar studies. An economic impact analysis cov- ers only specific types of economic activity. Some social impacts that affect a region’s quality of life, such as safety and pollution, may be analyzed as part of a social impact analysis but not an economic impact analysis, even if the economic value of those factors could be quantified. An economic impact analysis may be per- formed as one part of a broader environmental impact assessment, which is often used to examine impacts of proposed development projects. An economic impact analysis may also be performed to help calculate the benefits of a project as part of a cost-benefit analysis. Public and Private Sector Tools Brought to a PPP Both parties not only inherently receive monetary ben- efits from the partnership but also bring tools that are unique to each partner to the partnership. Completing the circle in assessing fiscal and community benefits is reviewing the various tools that each party brings. Understanding these tools is important because they form the basis for assessing the fiscal impacts and community benefits. Tolls and fees, TIF or another form of tax district, impact fees, development taxes, capital contributions, special assessments, grants, and development approvals are just a few of the public sector tools that would benefit a PPP. Development efficiency, private financing, labor skills, technology transfer, and an experienced workforce are tools the private sector brings to the PPP. 40 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 61 Page 196 of 224 197 COMMUNITY BENEFIT AGREEMENTS A community benefits agreement (CBA) is a contract signed by community groups and the private sector that requires the private sector to provide specific amenities or mitigations to the local community or neighborhood. In exchange, the community groups agree to publicly support the project, or at least not to oppose it. Often, negotiating a CBA relies heavily upon the formation of a multi-issue, broad-based commu- nity coalition, including community, environmental, faith-based, and labor organizations. Negotiating with community representatives in creating a CBA can be an effective way to gain com- munity support for the private sector and help move the PPP forward. Participating in CBA negotiations also allows the private sector to work with a unified public coalition rather than having to engage community organizations one by one. Effective CBAs are inclusive because they allow many public organizations to participate. They are also enforceable and provide accountability from both the public and private sectors to perform the obligations of the agreement. Typically, CBAs include job quality standards, local hiring programs, and affordable housing requirements that are all at the top of community activists’ lists. Oth- er potential benefits that could be included in a CBA are living wage and prevailing wage requirements; lo- cal hiring goals; job training programs; minority, wom- en, and/or local business contracting goals; and space setasides for neighborhood organizations, community centers, child care centers, and other nonprofits. Because a CBA is a legally binding contract, it can be enforced only by the parties that signed it. CBAs that are incorporated into development agreements can be enforced by the government as well as by community groups. DEVELOPER CONTRIBUTION AGREEMENTS Many times during the rezoning or other development processes, a local government will require the develop- er to make certain types of contributions, either mon- etary or in kind. The developer contribution agreement (DCA) sets forth the requirements for these contribu- tions for both the local government and the developer. DCAs are most often mutual and are negotiated and agreed upon during the formation of the PPP. Mutual developer contribution agreements benefit both the public sector and the private sector in that the private sector contributes something of value in return for a benefit from the public sector. An example would be for the private sector to financially contribute to the construction or addition to a wastewater treatment plant in exchange for reserving future capacity. WASHINGTON, D.C. McMILLAN DEVELOPMENT CBA The government of Washington, D.C., owned a 25-acre parcel of the McMillan Sand Filtration Site, which is bounded by North Capitol Street NW, Channing Street NW, First Street NW, and Michigan Avenue NW in the District of Columbia. In 1986, the property was declared as surplus by the federal government. In 1987, the District purchased the site for mixed-use development and historic preservation. In 2007, Vision McMil- lan Partners LLC (VMP), consisting of Trammell Crow Company, EYA, and Jair Lynch Development Partners, was identified as land development partners of the property and later as its vertical developers. The project plan consists of 146 townhomes, 531 apartments, a grocery store anchor and other ground-floor retail, over 1 mil- lion square feet of health care facilities, an eight-acre central park with other open space, and a 17,000-square-foot community center. In 2014, a community benefits agreement (CBA) was created to represent neighboring residents’ concerns and involved input and negotiations among the developer, the affected communities, the D.C. Office of Planning, and the D.C. Zon- ing Commission. It was determined from the beginning that the project would significantly and negatively impact the abutting Bloomingdale and Stronghold neighborhoods as well as nonabutting neighborhoods in close proximity to the property; thus, these neighborhoods were considered deserving of receipt of targeted CBA benefits and amenities. In addition, because the project would most directly affect the abutting commu- nities, those communities were to be given special consideration with regard to proposed changes to the development plan for those items that are of greatest negative impact. The CBA established that in addition to affordable housing commitments, VMP would provide the following community benefits: • $1,000,000 as a workforce develop- ment fund; • $125,000 to parent-teacher associ- ations serving science, technology, engineering, and mathematics programs at three nearby schools; • $500,000 over a ten-year period to provide guided tours of the McMil- lan site highlighting the preserved historic resources; • $750,000 over a ten-year period to create a community market, outdoor cage, and space for art installations; • $225,000 to facilitate business start- up in the project; • $500,000 for neighborhood beau- tification projects in surrounding neighborhoods; • $150,000 for a storefront improve- ment program; • VMP’s best efforts to provide free wi-fi for public use in the communi- ty center and park; and • A total of approximately 97,770 square feet of gross floor area devoted to retail and service uses, including a neighborhood-serving grocery store. Capping off a series of recent approv- als by the Zoning Commission and D.C. Council’s Government Operations and Economic Development Commit- tees, the four resolutions granting the surplus and disposition of McMillan received unanimous passage during the December 2, 2014, legislative meeting. The council unanimously passed resolutions PR20-1082, PR20- 1083, and PR20-1084, granting the sale at fair market value to VMP. The property is now in the planning and permitting process. Source: Vision McMillan Partners Team: Trammell Crow Company, EYA LLC, Jair Lynch Development Partners. PRINCIPLE IN PRACTICE FROM PRINCIPLES TO PRACTICES 41 62 Page 197 of 224 198 ■■Difficulties with site assembly; ■■Extraordinary cleanup, demolition, or structural costs; ■■Poor surrounding conditions that undermine market and marketability for a project; ■■Needed infrastructure; ■■Regulatory processes and standards out of synch with the project; ■■Public goals in a desired project that are “above market”; ■■Community-imposed design or density limits that reduce returns below acceptable level; ■■Capital market fluctuations and investment priorities creating financing difficulties; ■■Multiple problems creating returns lower than required to attract capital; and ■■Competitive site and location costs (taxation, labor, development, etc.). The public sector has tools with which to help the private sector overcome these problems with actions that, among others, ■■Lower the cost of capital through financing tools; ■■Reduce effective project costs through government grants, cost sharing, or philanthropy; ■■Overcome regulatory and other institutional barriers; ■■Enhance project value through public investment or increased density; ■■Anchor the development with a public facility lease or facility; and ■■Moderate operating cost differences (e.g., taxes, labor costs, training, etc.). In many states and locales, public tools have been essentially incentive payments to induce a production facility or employer and were about helping the com- munity compete with other communities. Although this use of public tools continues, and in fact in some states has increased in recent years, their use raises much concern. For example, in August 2010, the New Jersey State Comptroller issued a report reviewing tax abatements, which found that [tax] abatement practices go largely unmonitored . . . and . . . municipal governments have little incentive to comprehensively assess whether an abatement is necessary to attract development, whether the type of development is needed in the first place, or whether the abatement ultimately achieves its desired economic development goals.5 The recommended practices today focus assistance on the real problems of a project, taking into account the risks experienced by both the public and private sectors and the benefits to be attained by each (as discussed in the two prior sections). Managing Risk Structuring PPP transactions presents a dilemma and a conflict between the perspectives of private and public bodies and their risks and needs. Generally, assistance to projects is constrained by need on one hand and fiscal benefits on the other. From a pri- vate sector standpoint, the risks are greatest in the predevelopment and development phases, particularly with projects that seek to address the often complex goals of publicly desired redevelopment. The private sector would like as much assistance at the front end as possible. Even predevelopment soft costs can reach seven figures. From the public sector standpoint, the risks that the project will not be completed or produce the benefits expected lead to a preference to link assistance to performance of the project. In the case of projects to be funded by or with reference to incremental revenues or other benefits that flow from the project, a timing problem exists, as illustrated by figure 3-10. Structuring Development Partnership Deals STEPHEN B. FRIEDMAN AND CHARLES A. LONG AS DISCUSSED IN THE SECTION “The ‘But for’ Problem and the Need to Make a Fair Deal,” public/ private partnerships address the fundamental economic viability of a project or the competitive environment for attracting a particular investment. Some of the problems faced by development projects today include: 42 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 63 Page 198 of 224 199 The public sector’s risk is mitigated by limiting its pledge of support to revenues linked to the project’s benefits and provided when the project delivers the promised gains for the jurisdiction. Structuring requires achieving a balance between the private sector’s need for early capital and the public sector’s need to limit risk. Structuring should be thought of not only as direct financial assistance, but also as other actions that may assist a project (see sidebar at right). These may include the following: ■■Process Assistance: Streamlining development ap- provals and providing appropriate entitlements more quickly at less cost to the project; ■■Site Assembly Assistance (Nonfinancial): Using public powers of eminent domain for redevelop- ment to help complete a site or provide public land or parking facilities that can become part of a development; ■■Site Assembly (Land Writedown) Assistance: Acquiring land and reselling at its redevelopment value or providing financial assistance to a devel- oper where land costs are greater than supportable residual land value for the desired use; ■■Infrastructure and Public Facility Coinvest- ment: Prioritizing street, water, sewer, park, school, transportation, and government building projects to support a development; ■■Facilitation of Improvement Districts and Special Assessment Districts: Where economically competitive, providing the legal and administrative mechanisms for a development to pay for its own infrastructure through additional taxes; ■■Assumption of Extraordinary Costs: Having a public agency use its own funds, create and use some form of incremental taxing district, and/or seek grants or low-cost loans from higher levels of government to absorb demolition, remediation, and structural issues linked to site conditions such as soil bearing, engineered caps, flood protection, and wetlands; ■■Using Financing Tools to Reduce Cost of Capital: Facilitating tax-exempt bonds where allowable (e.g., industrial revenue bonds, periodic disaster bonds, housing bonds, 501(c)(3)) and finding government loan funds that may be available for public or in some cases private costs; ■■Using Tax Credits to Reduce Other Capital Re- quirements: Assisting developers in obtaining tax credits for projects, including housing (coordinating with allocating body), new markets, and historic as well as state variants on the same; ■■Tax Abatements and Sharing: As allowed in one form or another in many states, allowing private developers to retain or receive back a portion of taxes generated for use to assist the economics of the project; and ■■Local Tools/Local Funds for Project Costs: Whether public or private as allowed by law in FIGURE 3-10 Fundamental Timing Problem Source: SB Friedman Development Advisors. Mismatch: Public gap financing is most needed HERE . . . . . . but revenue becomes available HERE Project agreement finalized/ construction start YEAR 1 Substantial completion Substantial occupancy YEAR 2 Project generates new revenue YEAR 3 Taxes collected Funds paid over to developer MIAMI, FLORIDA BRICKELL CITY CENTRE Brickell City Centre is a 6.5 million-square-foot mixed- use project by Swire Properties of Hong Kong under construction in downtown Miami. The government participation was not in the form of direct subsidy but in the nature of favorable regulatory and proprietary actions, which included adoption of a Special Area Plan, the first under Miami’s new zoning code, that allowed certain deviations from the code because of the size, scale, and complexity of this project. In their proprietary capacities, the County Transit Agency, the Florida Department of Transportation, and the city of Miami conveyed easements and small parcels to the developer at market rates, which helped facilitate the development. Source: Neisen Kasdin. PRINCIPLE IN PRACTICE FROM PRINCIPLES TO PRACTICES 43 64 Page 199 of 224 200 each locale, using locally generated funds from TIF, payments in lieu of taxes, and similar tools to defray development costs. These may be also used in con- junction with various bonding and other borrowing mechanisms. The Financial Assistance Toolkit The tools available for financial assistance vary over time and from place to place. Figure 3-11 summarizes typically available tools for development and redevel- opment projects in 2015. However, each state and locale has its own set of laws and policies that will shape how projects may be assisted, and the tools will change over time. Fresh research at the start of a project is often warranted. Using the Tools The application of the tools can be understood within a four-part framework as follows: 1. THE PUBLIC SECTOR CAN ASSIST IN OVERCOM- ING BARRIERS AND RISKS, such as site assembly, cleanup, entitlement, and market risk, that make private investment in a project risky. In many states, redevelopment agencies still have the legal authority to exercise eminent domain for site assembly for re- development projects. Some states authorize either cities or redevelopment agencies to mandate site cleanup and bill the site owners. A process that en- gages the community to create a community vision can streamline the entitlement process and lower the risk of loss during predevelopment. A public facility lease for a portion of a project may provide the anchor tenant necessary to complete financing. Special taxes such as hotel, visitor, and entertain- ment taxes may be used to bolster the cash flow of related facilities to reach sufficient net operating income to support financing. A public agency can address market risk with contingent business terms, which postpone debt repayments or provide project subsidies if market performance fails to meet market projections, for example by providing aid with a second or third mortgage position. Public agencies can also enhance project value by permitting higher density and height in return for public benefits. The city of Vancouver, British Columbia, has a term called “the land lift” under which the city’s grant of density and height results in a community benefit package of affordable housing, parks, and plazas. California law allows jurisdictions to require a setaside of units for affordable housing in return for increased height and density. Similar bonus or tradeoff provisions are common elsewhere as well. 2. THE PUBLIC SECTOR CAN INCREASE PROJECT VALUE through coinvesting in adjacent facilities that synergize higher value or by granting additional development entitlements that increase the develop- ment yield and, therefore, project value. Coinvest- ment in parks, parking, transit infrastructure, bike trails, theaters, and even golf courses are examples of facilities that often increase the value of adjacent development. Allowing increased height and density (the so-called land lift) is commonly used as a means to increase project value to fund the cost of afford- able housing or other community benefits. Coinvestment can have major impacts on project value. Examples of areas in which to invest include public plazas, parks, theaters, bike trails and golf courses. One example of coinvestment is shown in figure 3-12. This project in Charlotte, North Carolina, converted an old Rouse shopping center that had paved over a creek into a mixed-use project that daylighted the creek. The city invested $16.9 million in bike trail and stream restoration, connect- ing the project to the downtown, and provided the development with tax rebates based on its rating on a Sustainable Development Index. The result is a $240 million mixed-use project with residential, office, and retail. FIGURE 3-11 Typical Tools, 2015 Municipally Controlled Tools • Tax increment financing (TIF) • Payment in lieu of taxes (PILOT) • Improvement districts (BID/CID/SA) • Sales tax sharing (selected states) • Tax abatements • Land banks Other Tools for Local Projects • New Markets Tax Credits (NMTCs) (selected locations) • Renewed for 2012 and 2013 • Commercial, industrial, community facilities, mixed use • EB-5 (Immigrant Investor Program) • Foreign investment in exchange for green card • Debt or equity source in layered deals • Low-income housing tax credits • HOME • Section 108 loans • Transportation Infrastructure Finance and Innovation Act (TIFIA)/ Railroad Rehabilitation & Improvement Financing (RRIF) • Transportation Investment Generating Economic Recovery (TIGER) • U.S. Economic Development Administration programs • Privatization and facility provision • Foundations/civic ventures Source: SB Friedman Development Advisors; Real Estate Strategies Inc. 44 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 65 Page 200 of 224 201 3. THE PUBLIC AND PHILANTHROPIC SECTORS CAN LOWER THE COST OF CAPITAL by either financing some components of the project using low-cost municipal debt or providing a source of capital that has a low or no return requirement. Ordinary mu- nicipal tax-exempt debt financing is limited to public facilities, such as land, roads, utilities, parking, or affordable housing, but it can create significant cost savings because the cost of municipal debt is lower than private debt. Other municipal debt instruments may not be tax-exempt but can still result in lower capital costs than private debt or equity. Low- or no-cost capital can take such forms as tax credits, grants, or philanthropic contributions. These capital sources may have a position for distribution of return subordinated to that of the primary equity investors, may be donations, or may be forgiven at a later time. 4. THE PUBLIC SECTOR CAN REDUCE THE NET PROJ- ECT COSTS by directly funding some portions of the project, contributing land to a project, or waiving some project costs, such as development impact fees. The reduction in cost allows a lower project value to meet the project hurdle on return necessary to show economic viability and attract the remaining capital. Financing and Grant Tools Following the “less-to-more” principle, strategies to overcome barriers and risks and use public investment to help a project would come first. However, these are often insufficient, and various financing and grant tools may be needed to achieve a desired project. Key tools are described below. LOWERING THE COST OF CAPITAL Figure 3-13 diagrams the basic financing structure of a real estate project. Capital comes in two basic categories: debt and equity. Similar to financing for a single-family home, the debt is secured by a lien, which allows the lender to foreclose for nonpayment, and the equity is “at risk” for loss if the property value declines. The total capital for a project is sometimes called the capital stack (see figure 3-8). Although the stack can have many different layers, including first loans, second loans, mezzanine debt, and different priorities of equity, figure 3-8 shows three basic categories: debt, mezza- nine debt, and equity. Because debt is secured by a lien and has lower risk, it has an interest rate that is much lower than the rate of return needed to attract equity. Mezzanine debt is typically junior to primary debt and carries a higher rate of interest commensurate with risk. Interest may also be contingent, within limits of Internal Revenue Service (IRS) definitions of interest versus equity return. Mezzanine debt often substitutes for equity, carrying lower return obligations. Today mezzanine debt is part of almost every large financing simply as a pricing tool to attract capital in- vestment. In fact, most modern senior secured financing allows for the tranching of the facility to provide higher- yielding subordinate tranches to facilitate syndication. Equity receives a return based on project perfor- mance, often in a tiered distribution, which distributes initial profits to the investors and increasing distribu- tions to the developer for higher profits. Other tiers may be related to returns to early investors versus later investors, as well. Most projects will also have a temporary financing structure during construction followed by a permanent structure upon completion or some later point. There may be “bridge” loans to cover later contributions— Mixed-Use Redevelopment by Pappas Properties Public participation • $8.9 million in infrastructure • $8.0 million in greenway/land acquisition • $17 million from property tax rebates Cost • $240 million, private Size • 163,000 square feet of office space • 231,000 square feet of retail space • 205 residential units • 2,000 parking spaces FIGURE 3-12 Metropolitan, Charlotte, North Carolina Source: Charles A. Long Properties LLC.Pappas PropertiesFROM PRINCIPLES TO PRACTICES 45 66 Page 201 of 224 202 sometimes developer equity but sometimes the public participation. Not uncommonly, construction loans convert to “mini-perms” with a five- to seven-year term and then are “taken out” by permanent financ- ing. Some tiers of equity investors may remain for the long haul; others may be replaced at different points or the project may be sold. From the public sector point of view, the capital structure should first provide for a reasonable equity contribution (“skin in the game”) and maximize the lowest-cost debt financing before determining the level of public involvement. The public sector has numerous capital sources that can lower the cost of capital for public/private projects. BONDS. The first major category is municipal bonds, which typically have a lower interest rate than private debt because their interest is exempt from federal in- come tax (they are also exempt from taxation to taxpay- ers in many of the states of issuance). They also usually have a longer amortization period than private debt. However, in recent years, concerns about municipal credit have resulted in some periods in which interest rates on municipals have exceeded private debt. As an indicator of this market anomaly, since 2009, the Bond Buyer Index for general obligation bonds has ranged from about 3.25 percent to 5.4 percent. Bonds have the additional advantage that in many cases they can be used for construction as well as permanent financing. Under the Dodd-Frank Financial Reform Act of 2010, municipal finance has come under additional regulation. A new category of registered professional was created called a “municipal advisor.” Profession- als providing advice on the use of bonds for economic development and redevelopment projects must be registered with the Securities Exchange Commission (SEC) and the Municipal Securities Regulatory Board (MSRB), or their advice must be reviewed by some- one who is registered and designated by the issuing jurisdiction as their “independent registered municipal advisor.” These bonds fall into numerous categories, depend- ing on their repayment source, and they are a major funding source for PPPs. The most significant types of bonds for public/private partnerships are as follows: ■■Land-Secured Bonds (also may be called Special Assessment and Community Improvement Dis- trict Bonds): These bonds are repaid in installments by property owners within a development project. The payments are subject to enforcement through tax foreclosure. The annual payments can be derived from a tax formula, based on the property charac- teristics, or on a fixed lien assessment that allocates FIGURE 3-13 Basic Financing Structure Involving Debt and Equity THE REAL ESTATE Political/physical/economic opportunities and constraints Funds DEBT SOURCE Lenders EQUITY SOURCE Owners and investors Funds PUBLIC SECTOR AGENCIES DEVELOPER/ OPERATOR Debt service Return CAPITAL CONSTRUCTION & DEBT FINANCING PREDEVELOPMENT & EQUITY FINANCING Entitlements, public participation Vision, skills, predevelopment, required coinvestment ReturnTaxes and fees THE MARKET/ USERS Commodity and/or value Sale, lease, or occupancy $ Source: Charles A. Long Properties LLC. 46 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 67 Page 202 of 224 203 the original costs that were financed. These types of bonds can be used for infrastructure and site cleanup, as shown in the example in figure 3-14 describing the Mission Bay project in San Francisco, which used $400 million of land-secured bonds. ■■Tax Increment Bonds: Most states have statutes permitting operation of tax increment financing, based on forming a redevelopment project area or TIF district. Increased property taxes from these designated areas can be invested in projects that revitalize the area and increase property values. Figure 3-15 illustrates the distribution of property taxes from these areas. These types of bonds are sometimes called special revenue bonds, and re- payment is limited to defined sources within the TIF district or other supporting sources. In one city, all sales tax revenue is pledged as a support. Depend- ing on state law on allowable use of TIF funds, these bonds may be limited to public infrastructure or may be available for other project costs, such as site preparation within the private project, rehabilitation of buildings, or new construction. The use of the proceeds and the repayment sources will determine which elements of such bonds may be tax exempt and which may be taxable. Even when taxable, they may be a lower-cost source of funds than additional private debt, which, in any case, may not be avail- able because of the economic characteristics of the project and its financing gap. ■■Other Municipal Bond Types: Although federal regulations limit use of municipal bonds to public purposes and require compliance with IRS regula- tions for use of funds, numerous types of municipal bonds can still be used for PPPs. Housing revenue bonds can provide the debt component of afford- able housing or low-cost mortgages for single-family homeowners. Revenue bonds can finance capacity for large employers in water and sewer plants. Gen- eral obligation bonds can finance public infrastruc- ture components of private projects or site assembly. Importantly, not-for-profit organizations can be the beneficiary of tax-exempt bonds (sometimes called 501(c)(3) bonds) for their facilities. The example in figure 3-16 is from the city of Berkeley, California, which, through a lease, financed a new theater for the Berkeley Repertory Theatre company and issued lease revenue bonds paid for by lease payments from the not-for-profit theater company. ■■Developer Notes/Pay-as-You-Go. Sometimes taxable and sometimes tax exempt, depending on uses and repayment sources, these are less formal debt FIGURE 3-14 Mission Bay, San Francisco • 303-acre old rail yard • Site cleanup • 11,000 new residents • 31,000 new jobs • University of California, San Francisco, campus • Biotech research labs • $400 million of infrastructure (financed with “land secured” bonds) • Public transit links and open space FIGURE 3-15 Tax Increment Bonds Redevelopment finances investment from increased value INCREMENTAL ASSESSED VALUE Value created from new investment BASE ASSESSED VALUE Value of project area when formed Tax increment $Redevelopment agency City/county PROVIDE SERVICES INVEST IN PROJECT AREA Property tax $ Source: Charles A. Long Properties LLC. Source: Charles A. Long Properties LLC.Hawkeye PhotographyFROM PRINCIPLES TO PRACTICES 47 68 Page 203 of 224 204 instruments used when the level of support is insuf- ficient to tap public finance markets. The developer holds the note; in some cases, it may be sold to a third party. It may be supported by a general revenue source or limited to project revenues or other structures. TAX CREDITS. Tax credits create equity for projects by selling a right to take an income tax credit to corpo- rations or high-wealth individuals. They come in three basic categories: low-income housing, new markets tax credits, and historic preservation. Although largely federal tax credits, a number of states have parallel programs. Each category has different amortization FIGURE 3-16 Lease Revenue Bonds Berkeley Repertory Theatre • City signs lease with theater and places the lease with a trustee. • The trustee issues certificates of participation (COPs) in the lease in $5,000 denominations. • The proceeds from the sale of the COPs build the theater. • The theater pays rent to the city. • The city’s general fund backs up payments on the bonds. FIGURE 3-17 Types of Tax Credits Available Low-Income Tax Credits • Affordable rent-restricted housing • $9 billion annual market, awarded at the state level to specific projects • Rigorous compliance requirements New Markets Tax Credits • Low-income communities • $3 billion to $4 billion annually awarded by Treasury Department • Rigorous compliance requirements Historic Tax Credits • Historic preservation • Administered by U.S. Park Service and state preservation offices • Rigorous compliance requirements periods for taking the tax benefits and different compliance provisions and is administered by a distinct federal or state agency. Figure 3-17 summarizes the three types of tax credits. Using tax credits requires a substantial amount of time and expertise from specialists in the field and involves a number of intermediaries to obtain credits and investors to buy them. Somewhat organized and established sources of investors are now available for each type of credits, often conventional corporations with tax liability and large banks with community reinvestment act motivation. All the tax credits are used as but one layer in multi- source capital stacks. Low-income housing tax credits are often paired with “soft money” from the HUD HOME program or state and local sources. Allocations of 9 percent credits may be obtained from state hous- ing agencies (roughly 9 percent of eligible costs for ten years). Tax-exempt housing bonds may be used for first mortgage financing for such projects and automatical- ly trigger so-called 4 percent credits. Credits sell in a competitive market and may garner 70 to 90 percent, depending on conditions. New markets tax credits are obtained from a com- munity development entity (CDE) that has competitively obtained an allocation of credits from the Community Development Financial Institutions Fund (CDFI Fund) of the U.S. Department of the Treasury. These credits are for commercial, industrial, community facility, and mixed-use projects and are layered with many other sources (except low income housing tax credits). Key is a layer of “senior debt,” which may be philanthropic for community facilities or bank debt for other types of Source: Charles A. Long Properties LLC. Source: Charles A. Long Properties LLC.kevinberne.com48 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 69 Page 204 of 224 205 projects. Figure 3-18 illustrates a basic structure. The tax credit funds remain in the project for seven years, after which they may be refinanced or forgiven depending on the circumstances and CDE involved. New markets tax credits typically can account for 18 to 20 percent of a project’s costs, net of the fees and closing costs. Historic tax credits are based on 20 percent of eligible rehabilitation costs of a commercial property, including rental housing, listed on the National Regis- ter of Historic Places. Credits remain in place, amortiz- ing over five years. Because they confer ownership and other tax benefits of depreciation over the five years, they may sell for 100 percent of their value, typically to conventional corporations or bodies representing such investors. Compliance is complex and rigorous, requir- ing review and approval by the State Historic Preserva- tion Officer and the U.S. Department of the Interior. OTHER TOOLS. The following should also be consid- ered when capitalizing a project: ■■EB-5: EB-5 awards visas to immigrants who invest $500,000 to $1 million in a U.S. business. Appli- cants who can prove their investment has created at least ten jobs get permanent green cards. This capi- tal source is brokered through specialists who recruit investors and work within allotments set by statute. The Los Angeles Times reported in August 2014 that the program used up its entire annual allotment in 2014 and that 85 percent of funds for the program have come from China. ■■Land Value: A commonly used means of providing capital to a PPP is by conveying land for the project with a portion of the land sale price categorized as either debt or equity in the project. Payment on that portion of the land value can either be structured as a fixed interest rate or be based on project performance. ■■Direct Investment: Provided that the funding source is not municipal bonds, public agencies and philanthropic organizations can make direct investments in projects. Just as with land value, the investment can be made as debt or equity. ■■Credit Enhancements: Regional infrastructure banks and other financial institutions are often able to offer contingent guarantees and conduit financ- ing vehicles to allow developers, groups of landown- ers, and other unrated issuers to effectively organize and access lower costs of capital for projects that serve a public good. REDUCING NET PROJECT COSTS Public agencies have numerous sources of funding for lowering project costs to make the project viable: ■■Federal and State Grants: Numerous programs administered by the U.S. Department of Transpor- tation (Federal Highway Administration and Federal Transit Administration) are available to reduce project costs. HUD also administers categorical grant programs for affordable housing and sustainable development. The U.S. Environmental Protection Agency has funding available for site cleanup. ■■Regional Grant Programs: Many federal and state grants are funneled through regional councils of governments or metropolitan planning organiza- tions. In California, regional transportation metro- politan planning organizations are required to adopt sustainable community strategies and channel trans- portation funding to projects that enhance higher- density projects that reduce vehicle miles traveled. ■■Local Funding: Tax increment financing can serve as a source of funding to reduce project costs. Other funding sources include local sales tax and federal or state sources, such as Community Development Block Grants. FIGURE 3-18 Basic Structure of Senior Debt CDE FUND INVESTOR LEVERAGE LENDER(S) QUALIFYING PROJECT/ BUSINESS (QALICB) Passed through to investor Mirrors leverage loan Gross subsidy created by tax credit $7 MILLION LEVERAGE LOAN $3.9 MILLION TAX CREDIT $3 MILLION EQUITY $10 MILLION QUALIFIED EQUITY INVESTMENT LOAN A: $7 MILLION LOAN B: $3 MILLION SPONSOR/SPONSOR-AFFILIATED ENTITIES COMMUNITY DEVELOPMENT ENTITIES (CDEs)INVESTOR ENTITIES KEY: Source: SB Friedman Development Advisors. Note: CDE fees, closing costs, and required reserves reduce the net subsidy to about $2 million. FROM PRINCIPLES TO PRACTICES 49 70 Page 205 of 224 206 How Much Assistance? Previously, we discussed the need to measure the financing gap through analysis of the project’s pro forma or to analyze the project’s competitive position and what is needed to attract the use to a site or community. This needs analysis drives the maximum financial assistance within the limit of the financial benefits of the project. Often the private sector ap- proaches the project’s request for assistance based on other factors: the incremental benefits (“it’s my TIF”) or maximum legally eligible costs (for example, all land and infrastructure costs). The appropriate level of assis- tance is the lesser of eligible costs, financing capacity, or demonstrated need as illustrated hypothetically in figure 3-19. In contrast, some jurisdictions may impose more ar- bitrary limits, such as 20 percent of project costs, so as to achieve a 1:5 “leverage” or number of jobs created. Important policy goals may or may not be embedded in these limitations, but often they are inappropriate and restrict assistance to a level insufficient to allow the project to proceed. In addition, projects with broader and secondary benefits may justify public funding (above grants) that exceeds the measurable direct fiscal benefits. Major job creators, such as convention centers and other tourism attractors, are demonstrated to have second- ary economic impacts that may justify broader fund- ing. Catalytic projects that change the environment or major remediation projects may have positive spillovers that justify deeper and broader assistance. Monetizing Assistance The tools that address risk and return do so by low- ering capital costs, lowering project costs, reducing risk, or increasing project value. Their use requires that the public agency understand enough of real estate finance to ensure that the resulting partnerships are fair to the public. The partnerships should clearly connect to the public benefits that are being achieved; the process for arriving at these partnerships must be open and transparent; and the partnerships’ need for public actions must be explainable and understandable by the public. From the public sector perspective, a number of ways exist to integrate public support with private real estate economics. Public entities can approach mon- etizing from the perspective of risk (see figure 3-20) and public benefit, as summarized below. Accordingly, a number of techniques may be used to fund the local public share of assistance to a project. PAYMENTS IN LIEU OF TAXES (PILOT) In some states, this is a key form of assistance to abate taxes in part or in full, with some payment for certain governmental costs in lieu of taxes. In such a situation, the developer actually retains the funds and can apply them to costs within the project. Payments in lieu may be for general services or for off-site improvements, depending on state and local law and practice. Assistance to a PPP should be measured according to what is needed to fill a gap and within the levels of public benefit expected. Assistance can range from improved processes to deep financial involvement, but risks need to be shared fairly. FIGURE 3-19 Determination of Appropriate Level of Public Assistance MillionsEligible cost Demonstrated need to become feasible Financing capacity of proposed district $0 $2 $4 $6 $8 $10 $12 $14 $16 APPROPRIATE LEVEL OF PUBLIC ASSISTANCE Source: SB Friedman Development Advisors. 50 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 71 Page 206 of 224 207 PAY-AS-YOU-GO In pay-as-you-go financing, the payments to the de- veloper are made when and if funds become available, typically only from the project. The mechanisms may vary from state to state. For example, if the mech- anism available is a tax rebate, payment would be made as the funds were received. If incremental taxes are pledged on such a basis, those would be paid as received. Similarly, in some states sales tax may be shared with a developer as it is received. MONETIZING FUTURE REVENUES FROM THE PROJECT ITSELF In some states, interest-bearing notes may be issued to a developer as reimbursement for costs allowed under state law. The developer then borrows additional funds or provides its funds to complete project financing. This method is low risk to the municipality but often difficult for the developer in a challenging project. Notes may be left outstanding or may be taken out by more formal public financing when the project achieves stabilization. This financing may take the form of special revenue bonds supported only by the revenue from the project or some other defined, limited source, for example incremental taxes from throughout a district. General revenues are not pledged to this type of instrument. Bonds may also be issued that are supported by special taxes levied on a development. These may arise under special assessment legislation (typically based on benefit) or community improvement district legislation (often based on value or interests in real estate). These are additional taxes beyond the general taxes applica- ble to the jurisdiction. BACKING BONDS WITH OTHER REVENUE PLEDGES Bonds may also be used with broader backing, such as general sales taxes or the full faith and credit of the municipality (general obligation). In redevelopment this method can create greater risk than other mechanisms and is usually undertaken only after careful analysis and for specific purposes that provide a lasting public asset such as land or infrastructure. LOANS Some municipalities may have sources of funds for loans. These may come from previous repayments, sharing in success on projects, or other statutory and grant provisions. In these cases, the funds may be ad- vanced as a loan and a junior mortgage position taken on the project, usually at a submarket interest rate. The eventual repayment of these loans may create additional economic development resources. TRIGGER AND TAKE-OUT BONDS Various provisions may also trigger changes from one type of funding to another. The lowest rates will be paid by a municipality on general obligation bonds, and in some cases providing such support may be appropriate after the project has achieved stabilization to take out more expensive notes. In other cases, pro- viding such support in parallel to private commitments and private funding may be prudent. Although these mechanisms are more complicated for the private developer than a direct grant, they have all been used in various jurisdictions to successfully fund public/private development projects. FIGURE 3-20 Municipal Risk Spectrum: Funding Sources Revenues from project itself; only to the extent they materialize Lesser Risk >>>> Greater Risk Other special revenue pledges (e.g., special assess- ment; area-wide pledge) Other municipal revenue sources affecting general fund (e.g., sales tax, hotel tax) Municipal full faith and credit Source: SB Friedman Development Advisors. FROM PRINCIPLES TO PRACTICES 51 72 Page 207 of 224 208 Evaluating and Structuring Infrastructure and Facility PPPs JEFFREY FULLERTON AND RYAN JOHNSON PUBLIC PROCUREMENT STRATEGIES traditionally follow a design/bid/build procurement methodology. This method isolates the various aspects of asset delivery; each aspect is usually completed by independent teams as each activity is completed in a linear fashion. This structure is represented in figure 3-21. In contrast, an integrated PPP model can be used by the public agency to contract for a more holistic result. By combining the aspects of real estate delivery, financing, and long-term operation and maintenance, public agencies can encourage more collaboration and high-quality delivery. This structure is represented in figure 3-22. A number of factors are considered in determining whether or not to pursue an alternative path to provid- ing infrastructure or a public facility. These may include administrative capacity, construction and operating or- ganizational skills, financing legalities, length of lease allowed under governing statutes, and considerations of equity and ongoing efficiency. A body considering an infrastructure or facility PPP will want to evaluate all of these more qualitative and management issues, but it will also want to take a hard look at the economics involved, as discussed below. 70% 60% 50% 40% 30% 20% 10% –10% 0% Up to $50 $50 to $100 $100 to $300 Over $300COST OVERRUNSPROJEC T COST (MILLIONS) Average cost savings Average cost overruns Caltrans Historical Performance On projects over $300 million (like Presidio Parkway), Caltrans has historically had cost overruns in excess of 50 percent. MAXIMIZING BENEFITS OF PPPS: SOME POLICY CONSIDERATIONS In its analysis of the Presidio Parkway, the California Department of Trans- portation reviewed its experience of delivering projects on time. As illustrated in the graph, larger, more complex projects had a history of being over budget with the agency. This illustrates an expected value of the construction risks that would have been retained in the public sector comparator, defined as the estimated equivalent cost if the agency devel- oped the infrastructure under a traditional design/bid/build approach and retained the relevant risks of cost overruns, maintenance, etc. An agency needs to have an agreed-upon set of standards by which a VfM analysis is to be performed. The California Legislative Analyst’s Office reviewed the Presidio Park- way, along with the Long Beach Courthouse, and recommended that an independent review board be established to standardize VfM calculation methodologies before the state of California proceeded with further public/ private partnership projects. Such agencies exist in Canada and other coun- tries where infrastructure PPPs are more common. Source: Legislative Analyst’s Office, Maximizing State Benefits from Public- Private Partnerships (Sacramento, CA: Legislative Analyst’s Office, 2012). Source: Edgemoor Infrastructure and Real Estate; based on data derived from the Presidio Parkway Business Case Analysis by Arup & Parsons Brinckerhoff, February 2010. 52 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 73 Page 208 of 224 209 Value for Money Analysis The VfM analysis provides a useful prism through which the public sector can evaluate procurement options for new infrastructure assets. It is probably the most important of the factors in a decision over procurement methods because it can be used to justify the most cost-effective method rather than only tradi- tional approaches. A properly executed VfM allows the public sector to make an informed decision, based on comparing the costs and risks of a traditional delivery method with the costs and risks of a PPP delivery. The VfM analysis is typically performed by an independent third-party consultant on behalf of the public sector before procuring private sector partners. The results of the analysis can serve as a benchmark throughout the procurement, delivery, and operations phase and should be revisited routinely over time to confirm the assumptions used and the conclusions drawn from the analysis. PUBLIC SECTOR COMPARATOR The first step is to develop a public sector comparator (PSC), which is the term given to the public sector’s cost to deliver and operate the asset through a traditional procurement method. Typically, a standard design/bid/ build procurement process is used as the basis for the PSC. The PSC must include the estimated capital costs to design and construct the facility as well as all costs associated with financing the asset. In addition to the cost of financing and delivering the asset, the PSC in- cludes the cost of routine operations and maintenance of the facility as well as life-cycle costs, such as system upgrades and replacements that will affect the building or infrastructure over the course of its useful life. The PSC must also include the risks that the public sector takes on in the traditional process. Risks such as construction cost overruns and deferred maintenance can, and often do, have significant financial impacts to the public sector. A detailed analysis must be FIGURE 3-21 Traditional Design/Bid/Build Structure AGENCY/ INSTITUTION END USERSLEGAL REAL ESTATE DESIGN (A&E) BUILD (GENERAL CONTRACTOR) FINANCE O&M (FACILITY MANAGER) • End-user coordination site entitlement • Permits • Utilities • Inspections • Quality control • FF&E • Risk management • Community relations • Leasing • Accounting • Designer • Engineers • Code compliance • Tenant work • Schedule • LEED requirements • Geotech/ environmental • Builder/general contractor • Tenant work • Schedule • Insurance • Commissioning • Build per plans and specifications Source: © Edgemoor Infrastructure & Real Estate LLC. Note: A&E = architecture and engineering; O&M = operation and maintenance; FF&E = fixtures, furnishings, and equipment; LEED = Leadership in Energy and Environmental Design. AGENCY RISK RISK TRANSFERRED TO PRIVATE SECTORKEY: FROM PRINCIPLES TO PRACTICES 53 74 Page 209 of 224 210 performed to arrive at the cost of each of these risks and the likelihood of their occurrence. The expected cost of each of those risks borne by the public sector must be included in the PSC. Once all cash inflows and outflows have been vetted and determined, then the cash flow is discounted back to the present day’s dollars to arrive at a net present value (NPV) that will be compared to the PPP alternative. COST OF THE PPP ALTERNATIVE The next step in the VfM analysis is to estimate the cost of the PPP alternative, often referred to as the shadow bid. The shadow bid has two basic compo- nents. The first is the annual payment the private sec- tor will charge the public sector to deliver and operate the project. This amount includes the cost to finance the design and construction of the asset, private sector FIGURE 3-22 PPP Design/Build/Finance/Operate/Maintain Source: © Edgemoor Infrastructure & Real Estate LLC. Note: O&M = operation and maintenance; FF&E = fixtures, furnishings, and equipment; LEED = Leadership in Energy and Environmental Design. TURNKEY DESIGNBUILDER AGENCY/ INSTITUTION END USERSLEGAL CONCESSIONAIRELEGAL FINANCE O&M (FACILITY MANAGER) • Real estate activities • Owner-rep delivery • End-user coordination • Site entitlement • Permits • Utilities • Inspections • Quality control • FF&E • Leasing • Accounting • Risk management • Community relations • Design/build activities • Builder • Designer • Engineers • Lump sum fixed price • Code compliance • Tenant work • Guaranteed schedule • LEED requirements • Insurance • Geotech/ environmental • Move-in coordination • Life-cycle cost studies • Commissioning • Feasibility studies • Capitalization plan • Debt (banks/bonds) • Equity • Investors • Transaction structuring • Bond/lender counsel • Loan documentation • Collateral agreements • Builder/lender • Facility manager/ lender • Financial close • Ongoing financial reporting • Owner-rep operations • Life-cycle cost analysis • Building management • Operating cost management • Licensing/permits • Lease management • Tenant service • LEED requirements • Risk management • Insurance • Move-in coordination • Repairs and maintenance • Equipment/ component replacements AGENCY RISK RISK TRANSFERRED TO PRIVATE SECTORKEY: 54 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 75 Page 210 of 224 211 profit, routine operations and maintenance, and re- serves for life-cycle replacement. The cost of financing for the PPP alternative will typically be higher than in the PSC. The private financing mechanisms used in a PPP often require private equity investments that will garner higher rates of return than the low-cost, tax-exempt debt financing solutions that are typical in the public sector’s standard project finance approach. Although the PPP alternative typically has a higher cost of financing, a key benefit of the VfM analysis is that it allows the public sector to weigh that relative cost differential against all the other costs and benefits of a PPP to arrive at a true, holistic comparison of the traditional procurement method versus a PPP. The second component of the shadow bid is the ex- pected cost of all risks the public sector retains in a PPP scenario. Although a PPP transfers most risks to the private sector, a few notable exceptions include force majeure, unforeseen site conditions, and changes in law that must be factored into the shadow bid. Similar to the PSC, once all cash flows of the shadow bid are known, they are discounted back to present day value to arrive at the shadow bid’s NPV. For the VfM analysis to be accurate and a fair com- parison of the two alternative procurement methods, a few key parameters must be set. First, the project scope, operational standards, and life-cycle replace- ment assumptions must be the same for both the PSC and shadow bid. In addition, the discount rate used for both alternatives must be the same and be pegged at the public sector’s borrowing rate. Any inconsisten- cies in these parameters can yield dramatically differ- ent results in the NPVs being used for comparison. COMPARATIVE NPV The final step in the VfM analysis is to compare the NPVs of the PSC and the shadow bid. The difference between the value of the PSC and the value of the shadow bid the “value for money” created by select- ing the PPP alternative. Assuming that difference is positive, the public sector would receive more value for its money by opting to use a PPP to deliver the asset. Of course, quantitative factors are not the only selection criteria. The public sector must consider numerous other factors in making the final decision to pursue a PPP. Often, PPPs can deliver assets much more quickly than a standard procurement. In addition, many municipalities can benefit from the certainty that comes with transferring many risks to the private sector as well as the consistency of equal, anticipated © ICC Constructors, a joint ventureThe Intercounty Connector (ICC) in Maryland. FROM PRINCIPLES TO PRACTICES 55 76 Page 211 of 224 212 annual payments. In some cases, the jurisdiction may not have access to capital, even if less costly. However, PPPs can be political lightning rods, especially in juris- dictions that have not used the innovative approach successfully in the past. The VfM analysis, when com- bined with the full gamut of factors to be considered, is a wonderful tool to help the public sector determine if a PPP is the right solution to deliver new infrastruc- ture assets. Deal Types and Structures for Infrastructure and Public Facility Projects Several common structures are currently being pursued for infrastructure and public facility projects, depend- ing on their characteristics and the type of service being provided. REVENUE-GENERATING ASSETS For infrastructure such as toll roads and parking facilities that generate revenue from user-based fees, PPPs can be structured to capture that revenue stream and use it to secure financing for delivery of the asset. The public sector has the option to collect the tolls or user fees and set rates as a matter of social policy or to transfer the risk of generating revenue to the private sector. One recent PPP project that exemplifies this type of public/private partnership in the United States is the I-495 express lanes in Virginia. The Capital Beltway Express LLC consortium developed this $2 billion toll road under a design/build/finance/operate/ maintain (DBFOM) public/private service contract that allows it to collect tolls to help support the capital cost of the project. AVAILABILITY PAYMENTS For assets that do not typically generate revenue or for which the private sector is unwilling to take demand risk, such as courthouses, prisons, or research labs, for example, many PPPs use an availability payment structure. This structure is based on the public entity making regular payments to the private entity in exchange for the private entity operating the facility at predetermined levels of building performance. Any deficiency in the asset’s operation reduces the amount of the availability payment; thus, the private entity has a significant incentive to ensure that the asset is always functional. One recently successful example of this type of project was the Governor George Deuk- mejian Courthouse in Long Beach, California. When state bond funding was not available to complete this critical justice sector project, the state turned to a © Robb Williamson/AECOMGovernor George Deukmejian Court- house, Long Beach, California. 56 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 77 Page 212 of 224 213 European-style DBFOM to expedite the project. Under the performance-based contract, the state has an absolute right of offset to deduct from its service pay- ment to the private sector consortium, if components of the building are not available. The building was delivered ahead of schedule and under budget using an innovative off-balance-sheet financing structure to preserve debt capacity for the state of California. SAVINGS CAPTURE It is no secret that many public assets are operationally inefficient and functionally obsolete and are often far more expensive to operate and maintain than a newly built, efficient asset. A well-crafted PPP can take advantage of this situation by using the “savings captured” by constructing a new, more efficient facility to pay for the cost of constructing and operating that new facility. For example, if a municipality is paying $50 million a year to operate an inefficient building, a savings capture infrastructure PPP could be created to build a new building that requires only $20 million a year to operate. Then, the remaining $30 million of the current annual expenditure of $50 million can be used for debt service on the new facility. The net result for the public sector is a new facility delivered and operated for the same cost as it currently pays for the outdated existing facility. This strategy was recently used successfully by the city of Long Beach, Califor- nia, to procure a new civic center. By redirecting the funding otherwise going to off-site leases and ongoing maintenance of its existing civic center campus to a PPP development and allowing the private developer the right to develop excess land created in the master plan, the city will not only get a new city hall, library, and redeveloped 4.8-acre park, but also vibrant new development in the heart of the city that will provide incremental tax revenue and economic improvement. FROM PRINCIPLES TO PRACTICES 57 78 Page 213 of 224 214 and expeditiously through the entitlement process. Sec- ond, they address the market risk for developing newer, unproven product types by investing along with the developer and participating in that risk. Both of these Managing Risk and Sharing Success JOSEPH E. COOMES JR. AND CHARLES A. LONG A PRINCIPAL CHALLENGE for contemporary development today is its higher risk profile. Part of this risk comes from it being more urban, and more physically and economically complicated with new product types, such as mixed use. In addition, the public is increasingly involved in the entitlement process and demands more public benefits; consequently, the entitlement process takes longer, and its outcomes are more uncer- tain. Time also increases the risk that markets will change before the project can be built and closed out. Therefore, communities that want to achieve high-quality development engage in PPPs that address this higher risk profile by mitigating to the extent feasible the entitlement and market risks for the developer. These communities use basic strategies. First, they work with the community itself to create a vision with high-quality development standards that permit develop- ers who meet these standards to move straightforwardly FIGURE 3-23 Walnut Creek, California Downtown Redevelopment • Retail and office center for the East Bay • Incorporates a community vision into • Comprehensive plan • Zoning • Development conditions • Environmental review • Eliminates the project-by-project gauntlet—projects that meet the standards proceed to design and permit • Bases the plan on the market City of Walnut Creek, CaliforniaSource: Charles A. Long Properties LLC. 58 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 79 Page 214 of 224 215 strategies enable the community to share the success that comes from higher-quality development that is con- figured to respond to a contemporary demand profile. A High-Quality Community Vision High-quality developers prefer to compete on value, not on price. A jurisdiction that engages the commu- nity in creating a high-quality vision creates this oppor- tunity by setting its development standards high and, thus, making the community a more valuable location to live and work. The community vision also stream- lines the entitlement process for projects that meet the high standards and thus lowers the entitlement risk. An interesting consensus is emerging about the strategy of setting high standards and streamlining the entitlement process. Greenbelt Alliance in the San Francisco Bay area in its publication entitled Smart Infill says: “Simplify the process for developers. By stream- lining permitting and construction processes, getting departments to work together to promote infill, and ensuring requirements are consistent, cities can smooth the way for good development.”6 Communities that set high standards operate on the principal that the standards may cost more, but they make the community more valuable. Numerous exam- ples of this paradigm exist. The city of Walnut Creek in the San Francisco Bay area has strong planning pro- cesses and streamlined entitlement that have resulted in high-quality development (see figure 3-23). FIGURE 3-24 Silver Spring, Maryland Silver Spring Town Center Silver Spring, Maryland, in Montgomery County, part of the Washington, D.C. metro area, is currently a vibrant mixed-use com- munity that is headquarters to the American Film Institute and Discovery Channel as a result of county-financed parking and renovation of an art deco movie theater. Sharing Market Risk Communities share the market risk in numerous ways. One is to invest alongside the private sector and catalyze value. Figure 3-24 shows an example in Silver Spring, Maryland. The investments by the county in parking and in renovation of an art deco movie theater catalyzed conversion of the downtown area from a tired and obsolete suburban retail center into a vibrant mixed-use transit-oriented development. Another risk-sharing method is for a community to convey property for development at a reduced price through a ground lease, basing lease payments on the performance of the project. In the city of Pinole, California, the redevelopment agency conveyed land to a shopping center developer through a ground lease, where rent was 80 percent of the operating cash flow of the center. As a result of the redevelop- ment agency not requiring an upfront payment for the land, the developer was able to use the land value as the equity contribution to the project. Communities that recognize and manage the higher risk profile of today’s contemporary development can reap substantial benefits from helping the developer manage that risk. Starting with high development standards, streamlining and mitigating the entitlement risk, and extending into possible sharing of market risk through coinvestment or performance-based business terms are two major strategies to achieve this goal. Source: Charles A. Long Properties LLC.Bryce Turner of Brown Craig TurnerFROM PRINCIPLES TO PRACTICES 59 80 Page 215 of 224 216 Documenting and Monitoring Deals MARK BURKLAND SOME ADMINISTRATIVE PROCEDURES are always critical to completing a development transaction and carrying out a project. Faithfully memorializing the terms of the agreement reached by the developer and the municipality and incorporating the responsibilities of all parties are important to ensuring successful execution. The sensitivity of a municipality devoting public funds and other resources to a project, and assuming some level of risk of loss, demands greater documentation than would occur in a purely private project. When public land is involved, a purchase and sale agreement is often proposed by the private sector but rarely sufficient. Public/private transactions of all types require detailed agreements. Documentation of the Process The surest way to minimize last-minute misunder- standing or disagreements when a development deal is nearly at hand is to have properly memorialized the process. Following are common means of documenta- tion that always should be undertaken. JOINT EFFORTS Some recordkeeping may be shared by the parties as a matter of efficiency. ■■The parties should decide which party will be responsible for what recordkeeping. That decision itself should be in writing so no confusion exists about who is responsible for what recordkeeping. ■■Minutes should be prepared of each face-to-face meeting or significant telephone conference, includ- ing the date, the participants, and a brief summary of topics discussed. For items requiring follow-up, the nature of the item and follow-up required, who is responsible for the follow-up, and when the follow-up is due should be noted. ■■As negotiations progress, agreements on significant terms, even if still interim and subject to change, should be put in writing and distributed. INDIVIDUAL EFFORTS Each party should establish an internal protocol for memorializing communications and activities, includ- ing the following: ■■Logs of everyday communications. Each party should keep a record of each communication be- tween the developer and the municipality. • E-mail messages should be retained at least in electronic form. For municipalities, this almost certainly is required by state law. • Telephone calls made and received should be re- corded in a log—just the date and time of the call and the names of participants are enough. Voice- mail messages should be saved or transcribed unless they plainly are (or become) irrelevant. ■■Diaries of significant activities. Developers and mu- nicipalities have their own responsibilities and time- tables and have commitments to each other. Each party should keep a diary of those responsibilities and commitments so that none escapes attention and milestones and commitments are achieved. Documentation of the Deal When an agreement is reached, it must be written thoroughly and clearly. The importance of detailed, unambiguous writing is impossible to overstate. TERM SHEET/LETTER OF INTENT: Arriving at an agreement regarding key business terms sets the stage for the other agreements. This process allows the expectations of all parties to be reconciled. For the private side, the various requirements of working on a public transaction will become clear: disclosure of ownership; adherence to prevailing wage; minority- and women-owned business requirements; public goal attainment, such as job creation, should be summa- rized. For the public side, such matters as the basic fi- nancial structure, financing sources and commitments, performance guarantees, and tenant commitments are among the matters to be clarified and agreed. Although the subsequent agreements will memorialize much detail—and negotiation around it—basic deal parameters should not be a surprise going forward. 60 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 81 Page 216 of 224 217 DEVELOPMENT (OR REDEVELOPMENT) AGREEMENT: The development agreement is the working document that must be truly comprehensive. It should include all the substantive terms of the deal. A deal has far too many potential terms to list all of the categories here, but following are some basics: ■■All elements of the project affected by zoning or code limitations, variations, or modifications; ■■All requirements related to completion and submis- sion of final plans and specifications; ■■All procedures and documents required for all real property acquisitions, easements, transfers of title, and other land-related matters, including forms of deeds, easement agreements, and other transfer documents; ■■All responsibilities related to who builds what and when, and how that construction is accomplished and paid for; ■■Responsibilities for compliance with state and local labor, employment, environmental, LEED standards and other laws, including as applicable minority- and women-owned businesses, Historically Underutilized Business Zone (HUB Zone), disadvan- taged business enterprises, and prevailing wage; ■■TIF and other financing mechanisms, including fund- ing triggers and requirements; ■■All standards for documenting and reporting on project matters, such as • Spending; • Costs and reimbursement matters (and terms for making payments); • Prevailing wage law compliance (including such things as certified payroll records if, and as re- quired, by state or local laws); and • A statement of minority- and women-owned business requirements (which should be in the approval ordinance too) and proof of satisfaction of those requirements; ■■Timetables, critical path matters, inspections, ap- provals, public infrastructure standards, and other construction-related items; ■■Performance guarantees and warranties, including forms of performance security such as forms of letters of credit and performance and labor and materials payment bonds; ■■Commitments to provide declarations of covenants and forms of covenants, conditions, and restrictions; ■■Standards for, and limitations on, transferability of ownership, rights, and responsibilities; ■■Specific terms for declarations of breach, opportuni- ties to cure, and termination; ■■“Clawback” triggers and consequences; ■■Terms for final inspection and approvals of public infrastructure improvements and other elements of the project; ■■Profit-sharing provisions, lookbacks, and settling point; ■■Definitive development plans, specifications, and budgets in an enforceable form, such as approved planned development documents and building plans; and ■■Forms of condominium/homeowners association by- laws and property maintenance standards. ORDINANCE (OR EQUIVALENT): Deal terms may not commonly be stated in both the approval ordinance and in the development agreement, but it can be beneficial for both parties for that to be the case. The municipality must have, and the developer certainly must be satisfied with, an ordinance that covers every element of the deal. Some elements are exclusive to the ordinance, such as zoning approvals, among others. Other elements are appropriate in other doc- uments but should be stated in, or incorporated into, the ordinance. Still other elements are appropriate to be regulated both in the ordinance and in another document (such as a declaration of covenants or an easement agreement). Execution and Monitoring As the project proceeds, the private side should expect, and the public side should plan to conduct, oversight of execution and monitoring of performance throughout the life of the agreement. This may include the following: CONSTRUCTION OVERSIGHT: The private sector can expect the public sector to provide additional review of construction where public funds are involved. This oversight is typically in addition to lender inspections and may be a condition of release of public funds or reimbursements. PROJECT COMPLETION/COST CERTIFICATION: Formal procedures may be required to prove final costs and true-up elements of the agreement. ANNUAL FINANCIAL REPORTING/AUDITS: Some projects, particularly affordable housing, carry require- ments for annual audits and other financial reporting that may be beyond that usually required by lenders or equity partners in purely private transactions. COMPLIANCE REPORTING: Certified payrolls to demonstrate prevailing wage compliance and docu- mentation of minority- and women-owned business involvement are typically required on a monthly or quarterly basis. In some cities, residency targets for construction workers may also exist. FROM PRINCIPLES TO PRACTICES 61 82 Page 217 of 224 218 EMPLOYMENT AND OTHER PUBLIC GOAL ACHIEVE- MENT: Annual certification and documentation of achieving promised goals is typical. “Creating” and maintaining, or retaining, some number of jobs is a common requirement in city commercial and industrial projects. Maintaining affordability is a requirement of affordable housing projects. ONGOING REIMBURSEMENT OR PAY-AS-YOU-GO: Where assistance is provided over time, as reimburse- ment for eligible costs, subsidy of interest, or note payments, procedures for periodic submission and review of requests for payment will apply. PPP transactions share many elements with ordinary private transactions in terms of documentation and reporting. However, additional documentation, com- pliance, and reporting will be required for a number of project aspects, thereby adding to the ongoing respon- sibilities of both public and private parties to the project. Facing page: South Campus, University of Illinois at Chicago, Chicago, Illinois. 62 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 83 Page 218 of 224 219 SB Friedman Development AdvisorsCONCLUSION STEPHEN B. FRIEDMAN, JOSEPH E. COOMES JR., AND CLAYTON GANTZ 4 P ublic/private partnerships are a critical vehicle for accomplishing key community development objectives with regard to real estate development and redevelopment, infra- structure and public facilities, and monetization of existing public assets for public benefit. These partnerships tap the expertise, tolerance for risk, and financial resources of the private sector to help achieve public goals. However, they are complex, and the public and private sectors approach such transactions with different skills, concerns, and perspectives. >>> CONCLUSION 63 84 Page 219 of 224 220 The private sector finds the public sector’s limited understanding of private capital underwriting vexing while the public sector’s worry about “giving away the store” can get in the way of successful deal making. The private sector does not understand that municipali- ties are not profit motivated, and the public sector does not understand that developers justifiably expect to be paid to take risk. The public sector’s goals transcend profit, whereas the private sector may share the com- munity goals and broader objectives but must achieve an economically viable result more narrowly construed. These different perspectives were outlined in the introduction and further in the section “Creating Relationships between Developers and Public Bod- ies” in chapter 3 of this book. Building shared vision, knowledge, and trust are essential. Best practices have evolved, and the following tools to bridge the divide are better understood: ■■Create a shared vision and public purpose with both the partners and the community, stakeholders, and civic leadership. ■■Assemble the right development team with participation by all parties to the project to bring the breadth and depth of expertise required for more complex projects. ■■Engage proactively in the necessary predevel- opment activities, often exceeding those things that either a public entity or a private party will do on their own, to lay the groundwork for a successful partnership. ■■Establish appropriate relationships, with each party knowing the capabilities and history of the other and respecting and reflecting the public requirements for transparency and accountability while managing the private sensitivity to public process and disclosure requirements. ■■Make the economics and financing of the proj- ect clear so that public support can focus on clear extraordinary costs, public benefits, financing gap, or competitive necessity. ■■Know the benefits and how they will be secured through understanding the fiscal and economic impacts of project, seeing the other community benefits, and ensuring that the requisite commitments can be afforded by the private sector and will be received by the community. ■■For infrastructure and facilities, understand cost-effectiveness over a life cycle, and structure partnerships to ensure savings to the public sector when private sector efficiencies and skills bring benefits. ■■Structure transactions to meet the needs of the deal while mitigating risk to the public sector, a process that requires not only understanding the many resources available but also addressing the timing and risk preferences of both parties. Financ- ing market knowledge is critical—the developer needs to be sophisticated in such matters, and the public sector needs to be able to understand the reality faced by the developer. ■■Share in upside potential, particularly when public support is equity-like or involves risk that may justify profit sharing, waterfall participation, or con- tingent land prices, while protecting the developer’s need to achieve competitive returns. ■■Document and monitor the transaction to en- sure that the public receives the benefits it is seeking and the project is proceeding appropriately, allowing early opportunity to make changes and adjustments if problems occur. Through these tools and methods, the public and pri- vate sector concerns and perspectives can be bridged to use public/private partnerships to the benefit of the community with appropriate profit and returns to the private sector. 64 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 85 Page 220 of 224 221 Information Sources American Council of Life Insurers. Commercial Mort- gage Commitments. Washington, DC: American Council of Life Insurers. Building Owners and Managers Association Interna- tional. www.boma.org Council of Development Finance Agencies (CDFA). www.cdfa.net. ICSC. www.icsc.org. Principal source for retail data Institute of Real Estate Management. www.irem.org and www.irem.org/resources/income-expense- analysis-reports National Association of Home Builders (NAHB). The Cost of Doing Business Study. Washington, DC: NAHB, Updated regularly. www.nahb.org Real Estate Research Corporation. Situs RERC Real Estate Report. www.rerc.com RealtyRates.com. Developer Survey. 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Public/Private Finance and Develop- ment. New York: John Wiley & Sons, 2000. RESOURCES RESOURCES 65 86 Page 221 of 224 222 Notes 1 Mary Beth Corrigan, Ten Principles for Successful Public/Private Partnerships (Washington, DC: ULI, 2005). 2 Ibid., vi. 3 Bruce Katz and Jennifer Bradley, The Metropolitan Revolution: How Cities and Metros Are Fixing Our Broken Politics and Fragile Economy (Washington, DC: Brookings Institution, 2013), 5. 4 Robert W. Burchell, The Fiscal Impact Handbook (New Brunswick, NJ: Center for Urban Policy Re- search, 1978). 5 State of New Jersey, Office of the State Comptroller, “State Comptroller report highlights flaws in NJ’s municipal tax abatement program” (press release, August 18, 2010, Trenton, NJ), 1. 6 Greenbelt Alliance, Smart Infill (San Francisco, CA: Greenbelt Alliance, 2008), 4. 66 SUCCESSFUL PUBLIC/PRIVATE PARTNERSHIPS 87 Page 222 of 224 223 88 Page 223 of 224 224 ISBN 978-0-87420-378-3 9 780874 203783 51995 2001 L Street, NW Suite 200 Washington, DC 20036-4948 www.uli.org 89 Page 224 of 224 225