HomeMy Public PortalAboutAttachment C_Development Feasibility AssessmentATTACHMENT C
DEVELOPMENT FEASIBILITY ASSESSMENT
August 27,2021
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Memorandum
To: Dan Amdsden, Director of Operations, MIG
From: Aaron Nousaine, MCRP, Associate Principal
Matt Fairris, MCP, Senior Associate
Date: August 27, 2021
Re: Innovate Gateway - Development Feasibility Assessment
The following memorandum summarizes key findings from a financial feasibility analysis
prepared by BAE Urban Economics in support of the Innovate Gateway project in the Town of
Truckee, California, which was prepared between August 2020 and August 2021, in
partnership with MIG. The purpose of the overall planning effort is to evaluate opportunities
for additional housing development along the corridor, as well as preparation of new economic
development strategies and sustainable mobility improvements throughout the Gateway Area.
The purpose of the financial analysis, summarized below, is to evaluate the likely feasibility of
new real estate development along the corridor under current market conditions and to
identify what is needed to facilitate the financial feasibility of desired development types.
Development Prototypes
For the purposes of this exercise, MIG worked with Town staff to initially identify five
development prototypes for consideration that generally represent the types of development
that the Town would like to see, that represent a range of development types (e.g., mixed-use;
townhome; multifamily; etc.) and intensities (e.g., density; floor area ratio or FAR; etc.), and
that are representative of common site characteristics along the corridor (e.g., site size, depth,
and width; proximity to adjacent uses; etc.). Following the initial specification of the
prototypes, BAE conducted interviews with developers in the area to ascertain development
costs for similar and recent projects in Truckee and the North Tahoe Region and to confirm
revenue assumptions (e.g., sale prices; asking rents; cap rates; etc.). BAE then participated in
discussions with MIG and Town staff regarding minor modifications to the prototypes that
might be appropriate to ensure that they align with current market conditions. MIG then
conducted a number of community workshops to present the prototypes to the community and
collect input regarding additional modifications that address the needs of the community. BAE
then revised the pro forma models to reflect the characteristics of the finalized prototypes.
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Prototype #1: Townhomes
The first development prototype identified for
the purposes of this research is a medium
density townhome project that could be well
suited to the deep, yet narrow, lots located
along the Donner Pass Road corridor. The
prototype is envisioned on a lot that is just
under one acre in size at a density of roughly
18 units per acre. For the purposes of this
analysis, the units are assumed to be attached
two story town homes that are 1,240 square feet in size with two bedrooms. Each unit would
have a one car garage and an additional 50 square feet of supplemental storage space, and
seven guest parking spaces. The project would provide just under 50 percent lot coverage.
Prototype #2: Multifamily Residential
The second prototype reflects a higher density
product that is also 100 percent residential in
nature. The project occupies a roughly square
site that is just under two acres in size at a
density of 42 units per acre. The project
includes 72 rental housing units in four, four
story buildings, with unit sizes ranging from
620 to 1,100 square feet, and a mix of one-,
two-, and three-bedroom units. The project has a 25 percent internal circulation factor that
also accounts for additional leasable storage space. If developed, the project would offer 40
covered or “tuck-under” parking spaces along with 46 surface parking spaces. This prototype
would require 64 percent total lot coverage; though MIG believes that it would still be possible
to meet the 50 percent snow storage requirement.
Prototype #3: Gateway Infill
The third prototype represents an infill, mixed-
use product that is thought to represent one
option for incorporating housing and additional
commercial space within existing strip centers
by leveraging land used for otherwise
underutilized surface parking. The project
occupies a site that is just under one acre in
size, with an assumed density of roughly 12
units per acre and a combined residential and
commercial floor area ratio (FAR) of .85. The initial concept includes 23,000 gross square feet
of commercial space on the ground floor(s), along with 11 residential units on upper floors.
The residential units are envisioned as 900 square foot two-bedroom units. The project would
Source: Town of Truckee; MIG, 2021.
Source: Town of Truckee; MIG, 2021.
Source: Town of Truckee; MIG, 2021.
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include 11 tuck-under parking spaces (one for each residential unit), as well as six
supplemental surface parking spaces. The project would also benefit from additional surplus
surface parking and snow storage space located on the site. This prototype would require 58
percent total lot coverage; though MIG believes that it would still be possible to meet the 50
percent snow storage requirement.
Prototype #4: Infill Mixed Use
The fourth prototype also represents an infill,
mixed-use product, but one that emphasizes
residential uses, with a relatively limited amount
of commercial space along the main street
frontage only. The project would include a total
of 4,080 gross square feet of commercial space,
with a total of 40 residential units. The project
occupies a roughly square site that is 1.4 acres
in size at a density of roughly 29 units per acre
and a combined residential and commercial floor area ratio (FAR) of .69. The residential
inventory includes units over the top of the commercial component, as well as in two
residential only wings that extend backwards away from the street, creating a three-story “U”
shaped building configuration. The residential units would represent a mix of one-, two-, and
three-bedroom units ranging in size from 625 to 950 square feet. The project would also offer
an additional 7,400 square feet of leasable storage space that would be shared between the
residential units and the commercial tenants. This prototype would require 58 percent total
lot coverage; though MIG believes that it would still be possible to achieve the 50 percent
snow storage requirement.
Prototype #5: High Density Residential
The fifth prototype identified by Town staff, and further refined by MIG, is a high density
multifamily residential project. The project is a relatively high density residential located on a
roughly four-acre site at a density of 42 dwelling units per acre. Through sites of this size are
rare along the corridor, the purpose of this prototype is to illustrate what may be achievable
recognizing those rare opportunities, as well as through site consolidation. The project
includes a total of 170 rental housing units with a mix of one-, two-, and three-bedroom
apartments of various sizes. Following preparation of the preliminary financial models, Town
staff requested that prototype number five be excluded from the remainder of the analysis due
to the significant barriers to feasibility illustrated in that early analysis; therefore, the
remainder of the memorandum summarizes the feasibility of prototypes one through four only.
Source: Town of Truckee; MIG, 2021.
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Table 1: Donner Pass Road Development Prototypes
Sources: MIG; BAE; Town of Truckee, 2021.
Site Image
Site Example
APN 018-570-003 018-570-034 018-600-013
Address 11725 Donner Pass Rd 12047 Donner Pass Rd 11265 Donner Pass Rd 11716 Donner Pass Rd
Site Size (sq ft - acres)36,500 0.84 73,965 1.70 39,901 0.92 59,114 1.36
Residential Component
1 BR (Units - Sq. Ft.)0 n.a.32 620 0 n.a.16 625
2 BR (Units - Sq. Ft.)15 1,240 32 800 11 900 16 750
3 BR (Units - Sq. Ft.)0 n.a.8 1,100 n.a.8 950
Total Units 15 18,600 72 54,240 11 9,900 40 29,600
Internal Circulation/Storage (% - Sq. Ft.)0%0 25%13,560 10% 990 25% 7,400
Total Residential Sq. Ft.18,600 67,800 10,890 37,000
Number of Stories 2 4 3 3
Residential Floor Coverage 9,300 16,950 3,630 12,333
Commercial Component
Total Commercial Sq. Ft.0 0 23,000 4,080
% Non-Rentable n.a.n.a.20%5%
Leasable Commercial Sq. Ft.0 0 18,400 3,876
Parking
Residential
Surface (# - Sq. Ft.)7 400 46 400 6 400 32 400
Tuck Under (# - Sq. Ft.)15 300 40 300 11 300 16 300
Podium (# - Sq. Ft.)0 350 0 350 0 350 0 350
Subtotal, Res Parking 22 7,300 86 30,400 17 5,700 48 17,600
Commercial
Surface (# - Sq. Ft.)0 400 0 400 15 400 8 400
Tuck Under (# - Sq. Ft.)0 300 0 300 0 300 0 300
Podium (# - Sq. Ft.)0 350 0 350 0 350 0 350
Subtotal, Res Parking 0 0 0 0 15 6,000 8 3,200
Total Parking (Sq. Ft.)7,300 30,400 11,700 20,800
Total Project Sq Ft (res, comm, parking)25,900 98,200 45,590 61,880
Total Lot Coverage 16,600 47,350 22,997 34,493
Lot Coverage %45%64%58%58%
FAR 51%92%85%69%
Snow Storage 50% req.50% req.50% req.50% req.
Other hardscape and landscaping 19,900 26,615 16,904 24,621
Other Coverage %55%36%42%42%
Concept #1 -
Workforce Townhomes
Concept #2 -
Multifamily Residential
Concept #3 -
Gateway Infill
Concept #4 -
Infill Mixed Use
018-610-028, -029, -030
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Baseline Cost and Revenue Assumptions
For the purposes of this research, BAE identified development cost and revenue assumptions
based on a review of available information associated with recent and ongoing development
projects in Truckee and the North Tahoe region, as well as through one-on-one interviews with
representatives from the area real estate development community. BAE also collected more
generalized information on current pricing for both for-sale and rental residential, as well as
strip commercial space, based on information collected from ListSource and CoStar, both
private real estate market data vendors, as well as through a review of current listings.
Development Cost Assumptions
The following section provides a brief description of key cost assumptions.
Site Acquisition Cost – The estimated site acquisition cost is the same for all four
prototypes at $2.0 million per acre, or approximately $46 per site square foot, as all
prototypes would be located on similarly zoned sites within the Gateway Area. Due to the
limited availability of recent comparable sales, the assumed site acquisition cost is based
on fairly consistent input received through interviews with multiple stakeholders.
Site Work – Site work includes pre-construction activities necessary to prepare the site for
vertical construction, including grading and installation of on-site infrastructure. Interviews
and construction cost information for comparable projects identified a rough cost for site
preparation, excluding off-site infrastructure, of approximately $1.0 million per gross site
acre, or $23 per gross site square foot.
Hard Construction Costs – Costs associated with vertical construction, otherwise known as
hard construction costs or simply hard costs, vary based on the anticipated use (e.g.,
residential versus commercial) and residential unit type (e.g., townhome, apartment, etc.).
Residential Hard Costs – Hard construction cost for townhome units is estimated at
$280 per gross building square foot, while the cost for higher-density multifamily
construction is estimated at $260 per gross building square foot. The increased hard
construction cost for townhomes is slightly higher than the multifamily construction
costs due to the increased siding and higher-end finishes.
Commercial Hard Costs – Hard construction cost for commercial space is estimated at
$200 per gross square foot. This includes the cost to deliver a warm shell commercial
space, while the interior space is finished within the tenant improvement budget.
Commercial Tenant Improvements – After delivering the warm shell commercial space and
common areas, the space is then built out to tenant specifications assuming a $100 per
square foot tenant improvement allowance. Additional costs are born by the tenant.
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Parking Costs – There are two types of parking assumed in the prototypes, tuck-under and
surface parking. All prototypes include some parking of each type. The cost of surface
parking is the cheapest at $5,000 per space, while the cost for tuck-under parking is
estimates at $15,000 per space. Note that the per square foot construction cost for the
townhome product includes the cost associated with tuck under garage space.
Impact and Permitting Fees – Based on the Town’s impact fee and permit fee schedule,
residential developments pay approximately $12 per square foot in impact fees and
permitting, while commercial pays approximately $20 per square foot. These fees cover
the estimated impacts of new development on town facilities, traffic, fire, recreation, and
school impact fees, as well as plan check and inspection fees.
Inclusionary In-Lieu Fee – In addition to local impact and permit fees, the Town also has a
inclusionary housing policy that requires new residential developments to set aside 15
percent of the total unit count for occupancy by lower-income households. The units must
either be constructed on-site, or the developer can pay a fee per required unit in-lieu of
building the units. BAE tested both scenarios as part of the feasibility analysis. This
memorandum presents the more feasible option for each prototype. For those prototypes
where the developer would pay the in-lieu fee rather than provide the units on-site, BAE
assumes a fee amount of $93,783 per required affordable unit, per Town policy.
Workforce Housing – In addition to the inclusionary housing policy, the Town also has a
workforce housing policy that requires developers of new non-residential projects to
provide housing for a certain percentage of the workers estimated to be employed at the
project site upon completion. Projects with 3,500 square feet of commercial space or less
are exempt from the workforce housing policy, while projects with more than 3,500 square
feet of space must accommodate an increasing percentage of the support workforce
ranging from 3.5 percent for projects between 3,5001 and 9,999 square feet up to 14
percent for projects with more than 20,000 square feet. Employment generation is
calculated based on industry standards cited in the Town Code. For commercial projects,
the Code assumes 1 full-time equivalent employee (FTEE) per 500 gross square feet.
Compliance is permitted through construction of on-site workforce housing or payment of
the Town’s housing in-lieu fee. Built units must either be deed restricted for occupancy by
lower-income households or by persons employed within the project.
Soft Costs – All other soft costs, including architecture and engineering fees, accounting
fees, and legal fees among others, amount to an additional 18 to 22 percent of hard costs.
The range of soft costs generally depend on the complexity and size of the project. For
example, the townhome project is fairly small, meaning the project does not achieve many
economies of scale with regard to soft costs, suggesting soft costs are estimated on the
higher end of the range, at 22 percent of hard costs. By contrast, the larger multifamily
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housing prototype is projected to achieve some soft costs efficiencies, resulting in a more
modest soft cost estimate of 18 percent of hard costs.
Developer Fee – For all rental prototypes, BAE assumes the development team would
require a developer fee in order to cover overhead costs. For these prototypes, this fee
amounts to three percent of the total combined hard and soft cost. The developer fee
differs from developer profit, summarized below, in that this fee covers the development
team’s overhead and does not include the profit required to attract equity investors.
Developer Profit – To attract needed investors, the development team/company must
generate at least a minimum profit. According to local developers, projects of the type
modelled here must yield a profit equal to at least 12 percent of the combined hard and
soft cost (i.e., development cost) to attract adequate capital to the project.
Financing Costs – The financial models assume that the development team will finance
construction of the project. Interviews with local developers indicates that projects of the
types being modelled here typically take out construction loans equal to 70 percent of
combined soft and hard cost at a roughly five percent interest rate. The models assume
an upfront loan fee equal to 1.0 percent of the total loan amount. Construction timelines
and loan terms depend on the complexity and size of the project. BAE generally estimates
an 18-month construction timeline for all prototypes, with the exception of the larger
multifamily housing prototype, which has an estimated 24-month construction timeline.
Operating Cost and Revenue Assumptions
Residential For-Sale Prices – BAE estimates the market rate sale price for the townhome
product at $540 per building square foot based on a review of current for-sale projects in
Truckee, as well as recent resale activity. Based on the townhome unit sizes of 1,240
square feet, this amount to an estimated sale price of $669,600 per unit. BAE recognizes
that some townhome projects in the current market, such as the Elements at Coldstream,
are commanding prices equal to more than $800,000 per unit, it is BAE’s understanding
that the community’s vision for the corridor includes an emphasis on providing housing
options that would be affordable to a broader subset of the population. Therefore, this
analysis assumes more moderate local’s-oriented market rate pricing, compared to those
being commanded within the luxury second home market
The Town’s inclusionary policy requires sale prices affordable to households at 120
percent of the Area Median Income (AMI). Based on BAE’s calculations, this sale price
equals roughly $470,000 per unit. As such, BAE assumes that if the project delivers the
inclusionary housing units on-site, the sale price would equal roughly $470,000 per unit.
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BAE also tested the ability for the townhouse prototype to sell units at prices that would be
better suited to the “workforce” housing market. Based on consultations with Town staff.
as well as regional workforce housing builders, BAE assumes a “workforce” sale price of
$575,000 per unit, or roughly 15 percent below the market rate sale price estimate.
Townhome Marketing Costs – To market the for-sale townhome units, BAE assumes that
marketing costs equal approximately two percent of the gross sale price.
Residential Rental Rates – This analysis assumes rental rates that are generally
representative of the rates associated with newly developed market-rate multifamily rental
projects in the Town. These rates range from just under $2,000 for a one-bedroom unit, or
$3.20 per square foot, to $2,640 for a three-bedroom unit, or $2.40 per square foot. This
analysis also recognizes that market rental rates in Truckee generally align with those that
can be considered affordable to households earning 120 percent of AMI. Therefore,
market rates are assumed to be affordable to many workforce households; though the
availability of year-round multifamily rental units in Truckee remains somewhat limited.
Affordable Rental Rates – Rents associated with inclusionary housing units provided in
accordance with the Town’s policy are based on those published by the California Tax
Credit Allocation Committee (TCAC), rents affordable to households at 80 percent of AMI
range from $1,348 for a one-bedroom unit to $1,868 for a three-bedroom unit.
Residential Rental Operating Expenses – To support ongoing operating costs and
maintenance of the property, as well as providing property management and resident
services, BAE estimates that roughly 33 percent of rental revenue will be dedicated to the
operating budget. A large portion of this budget is associated with local property taxes, as
well as property management costs, and a reserve fund to support future capital costs.
Residential Capitalization Rate – Based on interviews with local developers and investors,
BAE estimates the market value of residential rental properties using a capitalization (cap)
rate of 5.0 percent. This cap rate takes the property’s Net Operating Income (NOI) and
converts it to a capitalized project value in order to assess the properties current value.
Commercial Rental Rates – According to local stakeholders, Gateway Area represents a
secondary commercial market within Truckee. Commercial properties along Donner Pass
Road are generally resident and service oriented, versus the visitor oriented commercial
offerings in the Downtown and the Railyards, and the higher end offerings at Soaring
Ranch. Real estate brokers indicate that commercial rents can reach $3.00 per square
foot, triple net, and above in the more prime primary market areas, with spaces along
Donner Pass Road more likely to command around $2.75 per square foot, triple-net rent.
Although BAE assumed this as a baseline rental rate to understand current feasibility of
commercial space, BAE also tested the extent to which increased commercial rents may
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contribute to the financial feasibility of mixed-use projects, assuming that they could be
positioned to attract tenants willing and able to sustain higher monthly rental rates.
Commercial Operating Expenses – Commercial lease terms are assumed to be triple net,
meaning that the majority of ongoing expenses are passed through to tenants, such as
property taxes and insurance. This analysis, therefore, assumes a very limited annual
operating expense budget, at just five percent of gross commercial revenue.
Commercial Capitalization Rate – Due to market challenges and uncertainly associated
with the commercial real estate resulting from the expansion of online retailing and the
impacts of the ongoing pandemic, the assumed commercial cap rate is higher than the
comparable residential cap rate, at 6.0 percent.
Financial Feasibility Analysis
The following section summarizes results from the baseline financial feasibility analysis for
each prototype, then discusses alternative scenarios under which each prototype may be able
to achieve feasibility, assuming various changes in the model assumptions. The model
sensitivities tested as part of the scenario analysis vary widely, ranging from policy changes
(like increased densities, reduced municipal fees, and alternative inclusionary housing
compliance methods, among others), to adjustments in developer expectations (including
reduced profit margins, reductions in hard costs achieved through value engineering and
reduced quality finishes, etc.) and changes in market conditions (like increased unit pricing
and rental rates, reduced land cost, etc.). A particular emphasis is placed on evaluating
scenarios though which the Town, in partnership with developers, could bring additional
workforce and/or affordable housing options to the Gateway Area as part of new projects.
Prototype #1: Townhome Prototype
As initially specified under the baseline financial feasibility scenario, the townhome prototype
is not financially feasible under current market conditions. As reported in Table 1a, the
townhome prototype features has an initial all-in project development cost of $733,226 per
unit, including site acquisition and development, soft and hard construction, and financing.
With assumed market rate sale prices of $669,600 per unit, the project has a net financial
shortfall of $77,018 per unit.
Achieving Market Rate Feasibility
Based on the sensitivity analysis conducted by BAE, as illustrated in Table 1b, the developer
would need to decrease the total hard cost by five percent, while also reducing the soft cost
from 22 percent to 18 percent of hard cost, and reducing the developer profit from 12 percent
to 10 percent of the combined hard and soft cost. The developer would also then need to
increase the sale price of each unit by at least four percent. This would not only result in a
feasible project, but one that is priced in such a way to be achievable to at least a portion of
the existing pool of Truckee workforce households.
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In the event that the developer increased the sale price of the units to $825,000, which was
the approximate base price for the lower-cost townhomes in the first release at the Elements
at Coldstream, the project would not only become feasible without any reductions to cost or
return assumptions, but would be able to absorb up to a 15 percent increase in development
hard costs, which may be a necessary increase in order to increase the quality of the
architecture and finishes sufficient to justify the increase in price. If the price is increased to
$900,000 per unit, which corresponds to the current list price for the lowest cost unit currently
available for purchase at the Elements at Cold Stream (i.e., the Luna floor plan), the project
would be able to absorb up to a 30 percent increase in hard costs, while still paying the
inclusionary housing in-lieu fee and all other associated project costs. If the project were to
also construct the two required inclusionary housing units on-site, while maintaining the
$900,000 sale price for the market rate units, the project could still sustain an increase in the
assumed hard construction cost of 22 percent, which may be adequate to provide an
increased quality of finishes necessary to justify the price increase. At these price points,
however, the project would be almost exclusively positioned towards the high-income second
home market and would have very little impact on local workforce housing availability.
Achieving Feasibility as Workforce housing
Table 1c illustrates the changes that would be required in order to achieve financial feasibility
with all units priced at $575,000 per unit, which is what stakeholders indicated is the lowest
price at which townhomes may be constructed and sold at market rates within the region. The
key changes that are required to achieve feasibility at this price point include a waiver of the
Town’s inclusionary housing requirement, assuming that all units would be deed restricted for
workforce occupancy, a reduction in the soft cost to 18 percent of hard cost, and a reduction
in the assumed developer profit from 12 to 10 percent. In addition, the site acquisition cost
needs to decrease by more than 85 percent, from $2.0 million per acre to $340,000 per acre.
Prototype #2: Multifamily Housing Prototype
Similar to the townhome prototype, the higher-density multifamily rental prototype is not
financially feasible as specified under the baseline scenario. As reported in Table 2a, the
project features a total all-in development cost of $395,804 per unit. With rental units priced
similar to the recently constructed Coburn Crossing project, this prototype on its own would
result in a net loss of approximately $102,129 per unit under current market conditions
Market Rate Feasibility Sensitivities
In order to achieve feasibility, assuming no change in land cost, the developer would need to
reduce hard costs by ten percent, which may be a challenge recognizing the relative shortage
of construction labor and recent increases in construction materials. As shown in Table 2b,
the developer would also need to accept a reduction in profit from 12 to 10 percent, which
would make it more difficult to attract the required capital and developers may also be put in
the position of needing to pass on other more profitable projects elsewhere in order to pursue
a less profitable project in the Gateway Area. The project would need to increase rents by
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approximately 15 percent; though due to the smaller unit sizes, the total per unit rent would
not be hugely different from other units on the market with the same number of bedrooms.
Other adjustments that were not explicitly tested here, but which might also support feasibility
include adjusting the unit mix to include studio units, which according to a recent Mountain
Housing Council (MHC) report are in demand among workforce households.1 Another possible
option could be to pursue the project as a for-sale product. With an estimated delivery cost of
less than $400,000 per unit, a higher density condominium project may be able to offer
relatively affordable for-sale housing options, assuming adequate consumer acceptance.
Workforce Feasibility Sensitivities
Another alternative approach for achieving feasibility is similar to that used for Coburn
Crossing, wherein all of the units in the project are deed restricted for workforce occupancy
but are allowed to charge market rate rents. Under a workforce housing scenario, the project
would still require substantial concessions and/or public support, such as the use of publicly
owned property to provide dedicated workforce rental housing, like that owned by the School
District and the Public Utility District. As illustrated in Table 2c, the elimination of the site
acquisition cost and a reduction in developer profit to 10 percent could be sufficient to offset
the assumed 20 percent cost premium that is often associated with transition to prevailing
wage labor, while rents could actually be reduced ever so slightly compared to those presented
in Tables 2a and 2b.
Prototype #3: Gateway Infill Prototype
The gateway infill mixed-use prototype is particularly challenging, as illustrated in Table 3a.
Under the baseline assumptions, neither the residential nor the commercial components are
independently profitable; meaning that neither is initially capable of providing subsidy to the
other within the project financial model, which is often a goal of mixed-use development.
Some of the key factors contributing to infeasibility include the relatively high cost of
construction for both project components, combined with comparatively low rental rates. For
example, the residential rental rates assumed under the baseline scenario correspond with
the high end of the current multifamily year-round rental market; though increased revenue
may be possible if the residential units are converted to short-term rentals. Similarly, the
commercial rental rate assumed under the baseline scenario is on the high end for
commercial spaces along the Donner Pass Road corridor; though higher rates are being
charged within the higher end commercial nodes in Truckee, like the historic Downtown, the
Truckee Railyard, and Soaring Ranch. As noted above, another key factor contributing to
infeasibility is the relatively high cost of land on the corridor.
1 EPS. (June 2021). Workforce Housing Needs Assessment. Mountain Housing Council. Available at:
https://www.mountainhousingcouncil.org/wp-content/uploads/2021/07/Workforce-Housing-Needs-
Overview_5-27-2021.pdf
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Market Rate Feasibility Sensitivities
Based on the sensitivity analysis conducted by BAE, as illustrated in Table 3b, the changes
that may be necessary to achieve feasibility include a reduction in the land price by 50
percent, along with a 10 percent reduction in hard costs, a reduction in the assumed soft cost
from 22 to 18 percent of hard cost, and a decrease in the assumed developer profit from 12
to 10 percent. Most of these changes would be difficult to achieve even independently within
the current market. The project is assumed to pay the existing inclusionary in-lieu fee, but
would dedicate six of the total of 11 residential units for workforce occupancy in order to
comply with the Town’s workforce housing ordinance. The project would need to be
adequately positioned to support an increase in the assumed commercial and market rate
residential rental rates of 20 percent above the baseline assumption in order to be feasible.
Workforce Feasibility Sensitivities
An alternative scenario that positions all of the residential units for occupancy by higher-
income workforce households (including those not necessarily employed within the subject
development) at market rates would continue to face significant challenges to feasibility. As
shown in Table 3c, to achieve feasibility the site acquisition cost would need to be reduced by
60 percent, the residential hard construction cost would need to be reduced by 15 percent,
the soft cost reduced to 18 percent of hard cost, and the developer profit reduced to 10
percent. The Town would also need to essentially waive all permitting and impact fees, as well
as the inclusionary and workforce housing in-lieu fees. The commercial component would
then still need to be positioned adequately to support an increase in the commercial rental
rate of 20 percent above the current market price for newly built space along the corridor.
Prototype #4: Infill Mixed Use Prototype
As initially specified under the baseline financial feasibility scenario, shown in Table 4a, the
infill mixed-use prototype is also not feasible under current market conditions. Similar to the
gateway infill prototype, the key contributors to infeasibility are the relatively high land cost, as
well as the comparatively low commercial and residential rental rates.
Market Rate Feasibility Sensitivities
Based on the sensitivity analysis conducted by BAE, as illustrated in Table 4b, the developer
would need to figure out how to reduce the total hard cost by 10 percent, reduce the soft cost
to from 22 percent to 18 percent, and the developer profit from 12 to 10 percent. The site
acquisition cost would also need to be reduced by as much as 70 percent, and the Town would
need to agree to a 50 percent reduction in Town permitting and impact fees. Meanwhile, the
residential rents would need to increase by 10 percent and commercial rents by 20 percent.
While this scenario theoretically offers greater feasibility and market rate affordability
compared to the workforce housing scenario presented below, the likelihood of getting
adequate land with the necessary reduction in price is highly unlikely; therefore, the following
scenario illustrates the impact to feasibility of leveraging public land.
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Workforce Feasibility Sensitivities
Under the workforce housing scenario for the infill mixed-use prototype, BAE assumed that the
Town would approve an alternative inclusionary and workforce housing compliance plan under
which the entire project would be deed restricted for workforce occupancy, while being rented
at market rate. Under this scenario, the land cost would be reduced to zero assuming that it
would be donated or offered under a low- or no-cost ground lease by a local public agency,
which would trigger a roughly 20 percent increase in hard costs due to the need to hire
prevailing wage labor. The model also assumes that the soft cost is reduced to 18 percent
and developer profit reduced to 10 percent, and that the Town’s permitting and impact fees
would be waived, as would the inclusionary housing in-lieu fees. The model then assumes that
commercial rents would increase by 20 percent. Lastly, the model also assumes that the
residential rents would increase by 17 percent. While the residential rents by number of
bedrooms are generally in line with the market, the assumed unit sizes under this prototype
mean that the required rental rates are relatively high on a per square foot basis.
Financial Feasibility Conclusions
The analysis summarized above clearly demonstrates that new construction within the
Gateway area is difficult to accomplish from a financial feasibility perspective under current
market conditions. In general, the analysis also demonstrates that mixed-use development
may face particular challenges to feasibility compared to 100 percent residential projects.
While the Town may be able, in some cases, to leverage the profitability of high-end residential
development, possibly even at moderate densities; such development is most closely oriented
towards the high-value second home market and would do little to advance the emerging
vision for the Gateway Area as an every-day destination for the Truckee resident population
and a key point of concentration for the Town’s workforce households. Similarly, opportunities
may exist to leverage publicly owned land along the corridor to provide opportunities for below
market rate or dedicated workforce housing, the resulting increase in cost associated with
accommodating prevailing wage labor create additional hurdles to development feasibility.
Reducing the Impact of Land Cost on Feasibility
Among the variety of factors contributing to infeasibility of the modelled real estate
development prototypes, the particularly high cost of land along the Donner Pass Road
corridor is a key factor. Interviews with representatives from the local development and real
estate industries indicate that the price of land in the area is generally determined based on
the perceived current and anticipated future value associated with development of visitor
serving uses, such as high-end townhomes, condominiums, hotels, and associated retail uses.
Among the immediate options for reducing the impact of land cost on development feasibility
is increasing the allowed density, which helps to spread the gross land cost across a larger
number of units. Other similar actions, like increasing allowable site coverage and reducing
parking requirements to allow a developer to build comparatively more units. Another related
approach is to allow developers to build smaller units, which also happens to align with
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findings from the recently completed MHC workforce housing needs assessment, which
identified significant demand for studio, one-, and two-bedroom rental units among workforce
households after accounting for household size.
The Town may also consider adjusting land use policies, through processes like the ongoing
General Plan update, to better align with the current and anticipated future vision for the
corridor with allowed land uses and related development standards, such that arbitrage may
bring land prices better into line with the relative viability of the desired land uses along the
corridor. In a more immediate sense, the Town may also look to partner with public
landowners, such as the Tahoe Truckee Unified School District and the Truckee Donner Public
Utility District to explore opportunities for leveraging publicly owned land for the construction of
higher density townhomes and multifamily rental housing to house their resident workforce;
though, as noted earlier, such partnerships can trigger new costs and barriers to development.
Improve Attractiveness to Developers
While affordability is a topic of particular concern, both within the residential and commercial
markets (e.g., existing local business and workers often struggle to afford market rate rents),
another important strategy for facilitating feasibility is to make improvements that contribute
to the desirability of the broader Gateway Area, such that it becomes a more desirable place to
live and do business, thus encouraging an increase in market rate pricing for both residential
and commercial uses. Many of the improvements currently under consideration as part of the
Innovate Gateway initiative are good examples of this approach, such as improved bicycle and
pedestrian infrastructure, and expanded and improved public/private spaces (e.g., public
plazas, parks, outdoor dining areas, etc.). Projects like these improve the livability of the area,
both for residents and visitors, making it a more pleasant place to be and do business. Other
improvements that can increase the desirability of the area to developers include
infrastructure upgrades that lessen site preparation and on/off-site infrastructure costs, like
transit, sidewalks, snow/water management, utilities, and broadband, etc.
Another topic that came up during the developer interview process was a general perception of
the Town of Truckee as being a difficult place to do business in real estate. Interviewees cited
a need for the Town to better streamline the development code and the approvals process to
increase developer certainty and reduce approval risk. Doing so typically offers benefits in
terms of reduced developer fees and required profit margins, since most investors require
higher returns in comparatively higher risk situations. Specific recommendations include
clarifying development standards, reducing the number of rounds of required revisions, and
adjusting the process to provide fewer opportunities for local opposition to project delivery.2
2 Please note that this does not mean that no such opportunities should be afforded, only that the
community should be offered such opportunities strategically so as to not unduly impede development.
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Based on BAE’s analysis the Town’s current permitting and impact fees, including the
inclusionary and workforce housing in-lieu fee, are not among the top contributors to overall
project cost (i.e., contributing between three and eight percent of the total cost of
development). Nonetheless, as one of the few aspects of the development process that the
Town has direct influence over, the Town may want to consider offering incentives, such as fee
waivers or deferrals, for certain types of development that are desired along the corridor. Fee
waivers are typically best suited for infill developments in instances where the project is
unlikely to generate significant impacts and in categories where the fees are not needed to
offset the immediate cost of service provision. Fee deferrals can be reasonably applied to a
wider array of project types and typically represent a simple postponement of collections,
which can give a developer time to reach project stabilization and positive NOI.