Agenda Packet 10-17-18 Work Session

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Gordon Lofts MUPTE Application MUPTE REVIEW PANEL MINORITY REPORT 100518 used 5% and 6% Year 1 vacancy assumptions, respectively. Of the seven MUPTE applications approved since 2010, all used 5% Year 1 vacancy, except for the 6% used by Capstone. The applicant in this case allocated $250,000 in the Budget for “Ramp up (employees- model room- pre sales efforts).” Presumably, the applicant will be actively marketing the units prior to and during construction, probably for well over a year prior to completion. The bank probably will require a certain number of units to be rented before allowing the applicant to close on permanent ﬁnancing. Johnson Economics, in evaluating the Olive Lofts MUPTE application, allowed two years for construction and initial lease-up, starting Year 1 for purposes of MUPTE evaluation in the third year, assuming 5% vacancy. For Gordon Lofts, PNW Economics escalated revenue and expense items by two years to get the amounts for Year 1 of the MUPTE evaluation. However, PNW Economics started the Year 1 in 2020, after only a little over one rather than two years. Like the Johnson Economics analysis, the third year (2021) should be Year 1 of the MUPTE pro formas, with 5% stabilized vacancy. Use of a 42%, 37%, 25% or 20% vacancy assumption for Year 1 would probably result in almost all new construction apartment projects failing the bank cash ﬂow and DCR requirements in Year 1. A 5% ﬁrst year vacancy assumption is more realistic, is consistent with a two year delay in starting Year 1 for MUPTE purposes, and matches vacancy assumptions used by other MUPTE projects. G. Applicant’s Full Amenity Income (or at Least 1/2) Should Be Included Income projected by the applicant, including apartment amenity income, was apparently based upon a market study by Johnson Economics. The amenity income was thus much more than speculation, and the projection should be respected. The consultant performed a market study and concluded that the amenity income projected by the applicant was “implausibly high.” The MUPTE ordinance requires the city manager to “retain an independent outside professional consultant to review the project’s ﬁnancial pro-forma * * * .” EC 2.945(4). It is not clear that a market study is within the scope of the consultant’s responsibility. “The burden is on the applicant to demonstrate that absent the exemption, the project would not be ﬁnancially viable.” EC 2.946(2)(b). The amenity income projected by the applicant makes the project more ﬁnancially viable than without such income. The panel has the consultant’s market study questioning the amenity income but not the applicant’s market study supporting the amenity income (which the applicant chose not to provide). Johnson Economics, who apparently did the market study supporting the amenity income, was the City retained consultant for the Olive Lofts MUPTE application and thus is just as qualiﬁed as PNW Economics, which questioned the amenity income. The two consultants were both previously in the same economic consulting ﬁrm. It would be difficult to evaluate which consultant’s study is correct. Under these circumstances, the applicant’s full projection of amenity income should be utilized. Even if one believes that the projected amenity income is too high, such income should not be rejected, and at least half of amenity income, or $281,606, should be utilized. Page