City of Richmond’s Financial Analysis of the Point Molate Project – Things We Know Now
1. It’s expensive to create a new neighborhood in a remote part of town with significant wildfire risk. It will cost our General Fund (GF) $5.7 million/year — with close to 60% due to fire station costs. None of this can be down-sized if the project is only able to sell 800, 1,200 or 1,600 homes instead of 2,040. And expense inflation may be greater than property tax revenue increases.
2. The report accepts the sales price projections provided by the developer. These assume an average selling price of $1.25 million for 1,490 units. (The other 550 are currently planned to be rentals at $3,500-4,000/month) The 1,490 homes include a lot of condos in massive apartment buildings. It’s one thing to think a nice 3,500 sq ft single family house at Point Molate could go for $1.4 million (or even more?). It’s quite another to think that a 1,500 sq ft condo in a large, uninspired building would go for $1 million or more. It’s much more likely to be $600K. If the average selling price is $800K for all 1,490 homes (including 276 single family @ $1.4 mil) – instead of $1.25 million, and you assume the fire station needs to be operational at the point when the first 150 homes are completed and beginning to be sold, there will be General Fund shortfalls totaling well over $10 million in the first ten to twelve years – if we are lucky about absorption (meaning selling 100 per year). And it could be closer to $15 million as the Sales Tax projections are based on the dubious assumption that households are making 45% of their taxable purchases in Richmond.
3. The only sensitivity/scenario analysis they did was projecting two scenarios – on the down side, achieving 90% of the target $1.25 million average selling price and on the upside, getting an extra 10% from various premiums and upgrades. There is no analysis of what happens if prices are 33% lower than planned, or if Richmond can’t absorb 1,490 upper middle class homes, or if it takes 40 or 50 years to do so. Note that the Shea Waterline project, which is really a beautiful project with no problems except perhaps sea level rise in 30-40 years, has never sold more than 3 units per month and that Terminal One hasn’t even broken ground four years after approval. Taking 40-50 years for them all to sell or never selling all 1,490 would increase the likely $10 million GF shortfall. Total GF shortfalls could reach $20-25 million.
4. Then there is what happens with the Mello-Roos bond payments if the project only sells 1,000 units plus the 550 rentals units when they are planning on 2,040. The City could be on the hook for this shortfall – the report is silent on the question. But 500 homes that never get sold represent $3.5 million/year that was supposed to be going towards Mello-Roos bond payments. If the City has to guarantee these payments, that could easily be another $35-50 million. We need an annual cash flow analysis of this plus a full legal opinion. Mello-Roos infrastructure bonds don’t always work out for municipalities. It is rare for Mello-Roos bonds to be issued for a project like this where the developer gets permission to build 2,000 units, spends money on the infrastructure for 2,000 units but has no obligation to actually build all of them. Municipalities do sometimes end up holding the bag. You can’t foreclose on a house that was never built or sold!
5. The jobs projection is 5,800 job years which works out to an average of around 200 people working over the course of 30 years. This is of course valuable to the community, but a smaller project could create 125-150 jobs over 30 years without the environmental damage and the traffic and safety risks that were clear in the SEIR.
6. The one-time property transfer taxes of $20-25 million could cover the General Fund shortfalls in some scenarios but not all and there is no guarantee that the City could avoid cash flow problems even when the shortfalls are covered. The transfer taxes would come in when development parcels get bought by developers and homes get bought by families. There is no analysis of annual cash flows under various assumptions. The City can’t afford to be financing this kind of expense.
7. Why do enormous environmental damage, create major traffic and safety problems, and take on financial risks just to break even? Why not explore a smaller development that creates fewer problems, creates another great park, and might not require a new fire station? (As one member of the DRB said last week, the best chance for this development to be successful is for it to be very high-end — having a park in the southern half and fewer cheap condos is beneficial if this is your true market…..)
8. The report asserts that total property taxes for the 1,490 homes that might be sold would range from $23,000/yr to $27,300/yr if the developers can sell at their forecasted prices. This includes $6,000 to $7,000 per year in Mello-Roos bond payments. How many people will want to pay an extra $6,000-7000 in property taxes to live in Point Molate over what they would pay if they bought a similar home in Point Richmond or Marina Bay?
9. The City is asking us to believe that there are 1,490 households with annual incomes averaging $250,000 that will want to pay $1.25 million and $25K/yr in taxes to live there. Households making an average of $150-175,000 seems more likely. And there may be risks with this. If the traffic issues and lack of amenities result in only 1,000 families wanting to move there, the developer would escape with a smallish and disappointing profit, but the City would be stuck with negative cash flow on the project forever. Looks like 1,500 families are needed for break-even.
Does it “Pencil Out” for Richmond? See the analysis in a nutshell, here