Agenda Packet 10-17-18 Work Session

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PNW Economics Page 4 Prepared for: City of Eugene Prepared by: PNW Economics Response to MUPTE Citizen Advisory Committee Questions: Obie Companies Application proposed apartments would qualify for such a classification in our view. The 7-story construction typology, in a narrow building structure to also accommodate planned new redevelopment immediately adjacent, and affecting nearby traffic and existing, income-generating parking space nearby with construction staging and logistics will undoubtedly pose unexpectedly higher costs than a less-challenging site and development type with track record in Eugene and resulting economies of cost. 11.The applicant included $81,238 as an annual expense for “Reserves” for the apartments and $8,566 as “Reserves” for the Commercial portion. Is it appropriate to include “Reserves” in annual expenses, given that they are not actually paid out to a third party as an expense? They apparently are not used to calculate NOI. The survey you used in your analysis did not appear to include “Reserves” in national average operating expenses (using the Total column on page 7). Consultant Response: We have seen a Reserves set aside in different project planning pro formas not unlike the assumption in the Obie Companies application. However, the rate can vary from development to development based on who operates and manages the project and how. As the likely owner-developer of Gordon Lofts, Obie Companies would itself likely plan for such Reserves costs as the long-term owner of the project and likely source of funds for later repair and replacement. It would be reasonable to ask the Applicant about their Reserves and operating cost assumptions as the application provides no basis for its assumptions beyond the explanation that information is based on the credibility of a management company retained by the Applicant. Relative to other expense items, however, we would not view modifications to Reserves assumptions as significant. 12.The applicant included first year negative apartment income for “Less Loss to Lease” of $55,152. The applicant defined “Loss to lease” as “[t]he difference between market rent and in place contract rent.” App at 36. Does loss to lease have any relevance in a pro forma where all apartment lease payments are calculated to increase automatically 3% each year? Does loss to lease apply in the first year? Consultant Response: PNW Economics has never seen the term “Loss to Lease” utilized in a new development pro forma. It is our understanding that the term is more common and applicable to existing apartment projects that experience cost due to vacant units being repaired, renovated, or remodeled and thus not occupied and earning rent income. In our experience, the Absorption Vacancy Loss term and assumption is far more common and reflects the fact new apartment units do take time to become leased for the first time and the resulting, unusual beginning vacancy rate strictly from beginning lease-up activity. For this reason, our analysis utilizes the Absorption Vacancy Loss term and assumption as described on pages 16-17 of our report. 13.The applicant included first year negative apartment income for “Less to Model Room/ Concessions” of $75,248. The applicant defined “Model” as a “select apartment set up to tour which is not considered rentable during lease up.” The applicant defined “Concessions” as a “discount offered as an incentive for signing a lease or renewal agreement.” App at 36. Does “Less to Model Room” have any relevance for the first year in the pro forma if the Model Room is part of the assumed 5% vacancy and would October 17, 2018, Work Session – Item 2