Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
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40 • September 2015 • Western Real Estate Business www.REBusinessOnline.com S quires researched and wrote a re- port for RICS on "The Future Fi- nancing of Real Estate Develop- ment in Cities," using the San Francisco Bay Area as a case study. This report was completed while Squires was visiting the University of California at Berkeley on a Fulbright-RICS (Royal Institution of Chartered Surveyors) Scholarship. The research, which utilized an in- stitutional approach where a range of stakeholders were interviewed, critically analyzed how the fnancing of cities was connected with real estate development. The research particularly focused on how the fnancial mechanisms in place were incentivizing certain organizations to produce development 'good practice' and lesson-learning outcomes for other global cities. The Bay Area was selected as a region that has been successful in integrating cross-sector institutional support using innovative mechanisms. This area has also managed to bring an innovative ap- proach to fnancing afordable housing, particularly where city administrations competitively and collaboratively dealt with both high demand and a stagnant property market. Cities in the San Francisco Bay Area face a number of future fnanc- ing challenges, particularly those that demonstrate rather complex real es- tate fnancing across diferent insti- tutional fnancial structures that are often not mutually exclusive or uni- form. In reality, fnancial structures occur in overlapping governance lev- els, and often are organized in part- nerships that blend many interests. Multiple sectors and their respective stakeholders need fexible fnancial arrangements that consider diferent time aspects for completion and phas- ing at site scale. At the federal level, infuence on city fnance does much to determine the size of grants, but these often follow a specifc federal program or have federally incentiv- ized fnance for real estate develop- ment. At the state level, there are new opportunities with state-driven real estate transaction fees, and a continu- ation of fnance activity that engages with diferent functions (i.e. educa- tion, health, security and housing) for state-controlled districts. The state also encourages regional funds that involve institutions on environmental and transport concerns. City administrations are beginning to have more fnancial and regulatory control over real estate projects, but ul- timately depend on the resource base strength of the administrative bound- ary. Coordinated planning strength and master-planning capabilities are encouraging fnancial integration where institutions previously worked more in isolation. This multi-level f- nancial base has some semblance of coordination via committees of in- terested stakeholders that have little formal powers but vast infuence. Partnerships also generate a form of coordination as the formation of mul- tiple-institutional vehicles can ensure that more interests are engaged - from fnancial institutions to communities that have an economic stake and vot- ing right in the real estate projects that afect them. Those involved in fnancing real es- tate development for Bay Area cities can learn from multiple sectors at four key overlapping tiers. At the frst tier, public federal fnance is provided and devolved to the city and sub-city scale via government programs like the Low Income Housing Tax Credit sys- tem (LIHTC or incentivized by com- mercial lending with the Community Reinvestment Act in the afordable housing sector. At the second tier, we can learn from those elements that involve bonds and grants executed at the city level. Major instruments used in California include Infrastructure Financing Dis- tricts and Community Facilities Dis- tricts that operate as value-capture instruments — albeit less focused on blight than the now-disbanded Tax Increment Finance districts had previ- ously been. At a regional level, cities can learn from mechanisms like the state-led regional priority develop- ment area grants that have been se- lected to encourage transit-oriented developments situated at key trans- portation hubs. Lessons to learn at the third tier of fnancing involve city-level tax extrac- tions and exactions. City fnancing from tax extraction occurs through in- struments like special property taxes (i.e. Proposition 13), and with respect for afordable housing via inclusion- ary housing unit fees and levies, or inclusionary zones that encourage cross-subsidization within one or more sites. Exactions to learn from in this third tier include the use of impact fees on developers that contribute to ex- ternal public costs that occur during the development stage, often in the form of Community Beneft Agreements that pay on the beneft principle. The fourth tier involves multi-institutional donations by both philanthropic and private syndicates. The REIT model can provide multi-institutional econo- mies of scale for projects that no one individual organization could fnance. Philanthropic contributions from sev- eral charitable trusts can also provide gap fnancing and seed-corn money to accomplish mission-based projects. There are many things cities in the Bay Area are doing right in this arena, but of course there is always room for improvement to overcome remaining challenges. The complexity and large scale of real estate development for cities in the Bay Area means fnance partnership arrangements must be fexible. This is especially true if they are to withstand any cyclical changes and mitigate risk. Bonds over the lon- ger term of, say, 20 years, are one way to provide some stability, as long as the project considers all aspects of the property market and failures in the market. Public goods and services as a re- sult of the development need to be paid for and, as such, the bonding ap- proach needs to be progressive. This was the mission of the previous Bay Area redevelopment agencies. Finan- cial consolidation and consortiums across the region that have formed to gain the benefts of fnancial econo- mies of scale can now draw strength as the wider market improves. This fexibility in institutional approaches to fnance can be harnessed by all real estate development sectors in all cities across the Bay Area — ideally using a cross-sector approach. Transporta- tion hubs provide a platform for this cross-sector fnance of real estate de- velopment, and are one approach that is gaining momentum by cities in the Bay Area as part of a multi-stakehold- er industry that has been evolving f- nancially over many decades. Dr. Graham Squires, Senior Lecturer in Planning and Real Estate, University of Birmingham, United Kingdom THE FUTURE FINANCING AND DEVELOPMENT OF CITIES A new report sheds insight on fnancing throughout California and cities in the Bay Area. By Dr. Graham Squires Squires Phil Davis, Broker/Owner 10450 W. Cheyenne, Suite 130 • Las Vegas, NV 89129 (702) 873-1167 ext.206 • phil@phdpropertiesinc.com PROPERTY FOR LEASE LAS VEGAS • Anchored by Walmart • I-215 & W Cheyenne • Neighborhood Center • Space Available: 1,343-3,966 SF • Rental Rate: $18-$27/SF/Year • Gross Leasable Area: 35,769 SF SHADOW HILLS PLAZA • Join Starbucks, Wells Fargo Bank • Next to Summerlin