Independent analysis suggests City Hall poised to enrich a developer while ignoring Greenest City promise (Cressey project at 18th and Commercial)

18th and commercial block image(Reposted from Cedar Cottage Area Neighbours, CCAN. Side note: Today is the very day the Development Permit Board is poised to permit the elimination of 98 rental apartments and conversion to hotel-use permit, for Carmana Plaza, whose owner that has illegally run a hotel for at least six years. Very close in scale to the 112 units in the 18th and Commercial case below. Does anyone notice the contradictions in policy enforcement, and and consistent favouritism for “special” developers?)

A controversial proposal by developer Cressey for the corner of East 18th Avenue at Commercial Drive would result in the loss of dozens of mature trees while resulting in a much higher than normal profitability according to an independent analysis. The question asked by the community member who did the analysis is,  “Why should this developer be permitted this much density with so much profit potential, destroying all these trees, while all the usual development fees and community amenity contributions are waived?”

East 18th Avenue proposal

Background

The City of Vancouver Planning Department is considering this rezoning application for a large six and four storey rental project submitted by Cressey Development Group for the 1600-1700 hundred blocks of East 18th Avenue at Commercial  Drive. The developer is proposing a density of 2.85 FSR for the rental project (current maximum is 0.75 FSR). Large block buildings would occupy the majority of the site eliminating most of the existing mature trees.

Cedar Cottage 18thLocal residents have already experienced the impact of a lot of new development by this same developer in an adjacent formerly light industrial area. Cressey is now pushing into this quiet residential neighbourhood, buying up a group of properties that has always been a green oasis, a habitat for many species of birds and other animals. This amount of density would result in the excavation of virtually the entire site. A project with smaller buildings would still be very profitable for the developer, providing substantial rental housing while retaining the natural beauty of this location. A lower density project with more ground oriented buildings as stressed in the Neighbourhood Plan would also be a much better fit for this single family neighbourhood. Local residents want to see Vancouver prove it is serious about being The Greenest City by rejecting this bloated project.

Analysis

A financial analysis is referred to in the industry as a Pro Forma. In the case of a rental project the analysis tells the developer how long it is likely to take to recoup 100% of investment. This figure is called the capitalization or Cap Rate. For example, a Cap Rate of 4% would mean that the project will recoup 4% of the initial investment each year, meaning it would take 25 years to pay off the cost to build the project. According toColliers International this is at present the standard cap rate in Metro Vancouver for apartment projects. Anything above 4% would amount to a bonus.

Cost to a developer includes the cost to buy the land plus the cost of construction (Altus Cost Guide 2015) (Page 5). The yearly profit is the net income from rentals after expenses. Typical rents for new buildings are available from the CMHC Rental Market Report (page 23). In the case of this project a few more factors must be considered.

  • The construction is wood-frame which reduces the cost to build by at least 10% in comparison with concrete construction according to BTY Group.
  • This project is proposed to receive a huge concession on required parking due to it being dedicated rental (64 parking stalls for 112 apartments). According to the City of Vancouver Parking By-Law this number of units would require 105 parking stalls. This amounts to a reduction of 41 stalls. This is a saving of, very conservatively, $25,000 per stall. The analysis factors this in.
  • There are no community amenity contributions (CACs) being paid for this project. This CAC elimination amounts to an immediate benefit to the developer. The project would also receive a waiver of development cost levies (DCLs).

CCAN proforma83 on 3365 Commercial, as of 23-June-2015

Conclusions

The density sought in the proposal cannot be justified according to this analysis. The 7.0% return this project will achieve has not been typical in Greater Vancouver since 1998 when the bank rate was 6%; currently it is 0.75%. If the City of Vancouver were to approve a project with a Cap Rate of 4.5% that would be consistent with today’s market. In that case the density would be about .80 FSR which would allow for the retention of a lot of the trees and green space. The residents of this neighbourhood would like to see Vancouver prove it is serious about becoming The Greenest City by rejecting this application.

References

Contact: Lee Chapelle   604-365-1069 (Cell)

Email ccan2013@shaw.ca, FaceBook https://www.facebook.com/ccan2013, Twitterhttps://twitter.com/CCAN2013

Cedar Cottage Area Neighbours (CCAN) is a non-profit coalition of neighbours who are striving to preserve the livability and unique character of this special community.

One thought on “Independent analysis suggests City Hall poised to enrich a developer while ignoring Greenest City promise (Cressey project at 18th and Commercial)

  1. Let me first say that I work for a competitor of Cressey. Here’s my take on the analysis above:

    The construction costs used is way, way too low. Shockingly low. Only a completely biased analysis would use these numbers.

    There is no way Cressey builds for $165 psf, including the required parking. This analysis uses the lowest possible construction number from Altus’ guide, which in my opinion is not indicative of market costs, and knowing what I know about Cressey, they certainly aren’t the type of company that develops as cheaply as possible. If I were pro forma-ing this, I’d be using $165 per square foot *plus* $35,000 per parking stall. Add on 30% for soft costs (which I think is about the percentage used in the analysis above), and you’re good. According to my math, you’re about $47 per SF ($3.845m) light on your costs.

    If you use my construction numbers, you get a total cost of about $28,875,000 (this includes soft costs), which translates roughly to a development yield of 5.94%, based on the income numbers provided, which do seem about right. Operating costs might be a bit high, but it’s close enough.

    The suggestion that a developer should build to a 4.5% yield is a bit crazy. 4.5% might be what you could buy a newly constructed, leased up-building for, but it ignores development risk. I see no problem with a 6% development yield.

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