Vanguard Analysis: Council’s Call on Revenue For Nishi

Interior View of Nishi

Interior View of Nishi

There are two basic levels of fiscal analysis for Nishi that need to be addressed. The first is the corrected EPS projection that the Nishi development would create a net negative of $106,000 in annual revenue. The second is the call by some that Nishi needs to generate ongoing revenue for the city. Both of these separate issues should be addressed in turn.

The EPS report, as many have stated, used very conservative assumptions to demonstrate the fiscal impact of Nishi on the city. I think it is safe to say, even using very modest assumptions, that the $106,000 deficit can be easily dispelled.

On Tuesday, Tim Ruff laid out that, while “Nishi will NOT be requesting a CFD [Community Facilities District] to finance the public improvements,” it will “agree to a landscape and lighting district to cover costs associated with maintenance of parks and a ‘make-whole’ provision for transactions involving public entities to ensure net fiscal positive.”

As Robb Davis noted on Tuesday, “That alone will take this talismanic figure of $78,000 ($106,000) and turn it positive.”

But added to that, there is the assumption that neither the 2004 sales tax nor the 2014 sales tax will be renewed. I think it is safe to assume that we will renew at least at the half-cent level, which would generate another $127,000. And I would go so far as to predict that it is more likely than not that we go to the full one-percent, which is another $127,000.

So those three factors alone change the EPS assumptions, pushing the project close to $300,000 in the positive.

Anyone who is arguing that Nishi Gateway will be revenue negative based on the EPS report is pushing a false negative.

The council, however, is going a step further and having representatives from the Finance and Budget Commission (FBC) meet with EPS and Plescia to make sure everyone is on the same page. That is due diligence.

But some people are not simply satisfied with the project being net fiscally neutral, they want it to be a revenue generator. For that they cite the goals of the project as laid out in October 2013, which said, “Revenue generation to support city services throughout the community.”

From the outset, I think it is important to recognize that everyone has different drivers. While Nishi got wrapped into the conversation on Innovation Centers, the Research and Development (R&D) space was always going to be small – around 325,000 square feet.

When Studio 30 evaluated sites for Innovation Centers, it saw the need to look at two peripheral sites over and above Nishi, which was always seen to be evaluated at roughly 300,000 to 500,000 square feet in R&D uses.

As Robb Davis wrote yesterday in a comment on the Vanguard, “We did include Nishi last year in the Innovation Park Guiding Principles and those principles DO say significant benefit but it was always going to be challenging to get there.” He would add that “direct fiscal benefit is only one element of economic benefit and I would invite people to read the EPS report for more on the ‘multiplied’ effects of this project, which are substantial.”

That said, if we examine Dan Carson’s analysis of how he got to about $2 million in net revenue, we can see a plausible scenario to get there.

There are three main drivers in and above what we have already discussed.

First, there is the projected hotel generation of $494,000. The city has commissioned HVS Consulting to come out with a feasibility study of TOT (Transient Occupancy Tax) projections. We have to understand that, in addition to the Hyatt on campus in close proximity, there is also the proposed Embassy Suites on Richards. In addition to those, there is an application for a hotel on Second Street across from Target and one on Research Park Drive.

Bottom line is that we will have a better sense when the HVS report comes out, but I would at least take the nearly half-million in projected revenue with a healthy skepticism.

Second, Mr. Carson sees a revenue stream of $420,000 from a CFD. No one at this time seems to favor a CFD. I still think we should at least look at a per square foot surcharge perhaps of $2 on the R&D, which could generate over $650,000 at build out. But that too doesn’t seem to be in the cards.

Third, Dan Carson projects major savings through the assumption of marginal instead of average costs for police and fire services.  Last week, he wrote, “EPS assumed it would cost the city $312,000 annually to protect 43 acres at Nishi, but the Fire Department gets about twice that much money annually to protect Nishi land — plus 32,000 acres more — in a local special fire district.”

Matt Williams, also on the FBC, wrote in a comment, “I agree with Dan that the ‘true’ marginal cost to the City for Fire and Police services is going to be significantly less than what EPS is projecting. However, it is important that the developer pay the full EPS calculated amount to the City each year, so I am not going to include that $734,000 cost reduction in this analysis.”

That seems like a reasonable approach here.

The bottom line is this – there are clearly people who want to see Nishi be an ongoing revenue generator for the city. The cleanest way to do that, in my view, would be a CFD or assessment that could generate $400,000 to $600,000 that, coupled with the savings from agreements already in place, and a reasonable assumption of the true costs for fire service and police protection, along with the extension of the sales taxes, can easily push the project into an ongoing NET revenue generation of over $1 million.

Right now, the council does not appear inclined to go that route. They seem satisfied with the project being net fiscally positive and with the benefits in terms of housing, sustainability and job generation.

The community will ultimately weigh on whether this is sufficient. We believe that the MRIC (Mace Ranch Innovation Center), with similar tweaks to the model and an appropriate assessment, can be the sole revenue generator that the city really needs.

But, at this point, it is safe to say that the EPS report is not describing Nishi as a fiscal negative on the city. Addressing three of their assumptions in a reasonable manner pushes the project easily into the positive.

—David M. Greenwald reporting

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  • David Greenwald

    Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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70 comments

  1. The cleanest place to do that, in my view, would be a CFD or assessment that could generate $400,000 to $600,000 that coupled with the savings from agreements already in place

    Then let’s do it.  Other newer developments in the city have to pay CFD’s so why not Nishi?  Is it fair to let this development slide while others, for instance Mace Ranch, Wildhorse and Cannery residents, have to pay a CFD?

    1. The cleanest way to get the money is with the transient occupancy tax from a hotel, and since it is a tax on people from out of town, it is a net positive for the community (unlike any other tax).  Davis has a shortage of quality hotel space and can readily absorb all of the proposed projects.

      I don’t see any value in a CFD, and just because we made the mistake in the past (with the ones you mentioned) is no reason to repeat it again.

        1. It should be approved.  There is no downside for the City, and no reason not to approve it. As long as there are investors willing to build hotels, we should build them and pocket the TOT.

        2. mark: there is plenty of downside to the city if the hotel market can’t support three or four more hotels, you end up undermining existing business, and potentially doing harm without bringing forward additional revenue.

        3. dp: “there is plenty of downside to the city if the hotel market can’t support three or four more hotels, you end up undermining existing business, and potentially doing harm without bringing forward additional revenue.”

          That is not a problem for the City, that is a problem for the owners of the existing hotels. It is not the City’s job to be concerned about competition for existing businesses, that is solely the business owner’s responsibility. If you cannot provide a competitive product, you should go out of business. The City’s decision should be based solely on increasing revenues to the City.  We do that by making sure that there is always a surplus of beds available in town for interested travelers, which will maximize the TOT.

      1. The main question regarding hotel revenue from Nishi is whether that represents net additional revenue or cannibalization of revenue from other hotels.  The $494,000 per year “margin” projected by EPS for a hotel on site is, at least for me, is a “bonus” for this project.  Businesses that grant discretionary bonuses to their employees only do so if the company that employs the boss and the workers has a level of performance that merits a “reward.”  In the Nishi hotel situation the only way Davis will earn a reward in the form of added Transient Occupancy Tax is if the combined hotel occupancy across all the hotels in the city is actually higher because of the increase in the supply of hotel beds.

        Davis currently does not have any appreciable supply of extended stay hotel beds.  I personally believe that an extended stay hotel on the Nishi site could capture additional hotel stays that the other hotels in Davis do not currently service, but there is a shortage of hard evidence on that subject, so pending additional data gathering, analysis and study, I believe we have to treat the $494,000 a year of “margin” for a hotel at Nishi as only “possible” until we have more evidence about the whole Davis hotel marketplace.

        1. Matt, what’s the plan for this possible hotel?  Since the Nishi footprint is already fairly small are the developers going to leave a plot of land undeveloped where the supposed hotel will be located?

        2. The existing evidence is that Davis does not have sufficient quality hotel space to meet the demand. Currently, the ‘go to’ places for business travelers are the Hyatt on campus and hotels in Sacramento, Woodland, and even Dixon, which means Davis loses out completely.

          TOT does not have to be shared with any other entity.  100% goes straight to the City’s general fund.  We missed out when we blocked the Hyatt from building in the City because those revenues now go to the University. It is not the job of the City to protect existing businesses from competition, so as long as there are investors willing to build hotels in the City, we should approve them and pocket the revenues. There is no downside risk for the City with these projects.

          We don’t need a marketing study, all we need is a proposal.

        3. the vanguard article from a few weeks ago, calls that into question.  we don’t have an independent consultant’s report.  and we are talking about four or five new hotels.  before we start banking on funding, shouldn’t we know what the market can support?

        4. The vanguard article of a couple of weeks ago was about two owners of the existing hotels in town trying to block new competition.  The data presented with the article did not support their contention that the market was already saturated. They made the same claims back when the Hyatt was proposed, and unfortunately, the City listened, pushing the construction to the University. That was a huge loss to the City and should not be repeated.

          The City shouldn’t be wasting money on marketing studies, that is the responsibility of the investors. All the City has to do is say yes to the construction and pocket the revenues.  Remember, if construction/occupancy is restricted until after the interchange is fixed, we are looking at 5-10 years down the road before this hotel will be in place.

        5. BP said . . . “Matt, what’s the plan for this possible hotel?  Since the Nishi footprint is already fairly small are the developers going to leave a plot of land undeveloped where the supposed hotel will be located?”

          I do not KNOW the answer to that question BP.  However, my somewhat informed guess is that given the fact that the developer has committed to no Phase II occupancy until the I-80 Richards Interchange improvements are completed (currently projected by SACOG to be no earlier than 2022), the detailed engineering/construction process for the non-residential space won’t begin prior to 2019 or 2020, and by that time the supply/demand realities of the Davis hotel marketplace (with its added hotel beds) will put everyone into a position to make an informed decision about the highest and best use of the non-residential land that is part of Phase II.

        6. Mark West said . . . “We don’t need a marketing study, all we need is a proposal.”

          Mark, my understanding (but not firsthand knowledge) is that over and above any possible hotel proposal from Nishi, the City is currently processing either three or four hotel proposal applications.  If that information is correct, then your “all we need is” statement is already a work in process.

          I personally believe that Davis can support considerable additional hotel bed supply without negatively impacting room rates for the existing hotels.  Whether it can support as many as five new hotels (MRIC is considering one too) is enough of an unknown that a bit of evidence gathering seems to be in order, given the 2022 Phase 2 occupancy commitment made by the Nishi developer.

          In the meantime, the City can/will proceed with an expeditious processing of the hotel proposals it has in hand.

        7. Matt:  “Whether it can support as many as five new hotels (MRIC is considering one too) is enough of an unknown that a bit of evidence gathering seems to be in order”

          Whether or not the market will support that many hotels is not the City’s concern.  What impact it has on room rates even less so.  The only questions for the City are, is the zoning appropriate, and does the building conform to existing planning guidelines. The success of the new venture, or the existing competitors, are the responsibilities of those owners, not the City.

          It doesn’t matter if you think the City can support more hotels. What matters is if there are investors willing to invest in the new venture. The City is not (or at least, should not be) running a protection racket.

  2. I think it is safe to assume that we will renew at least at the half-cent level which would generate another $127,000. And I would go as far as to predict that it is more likely than not, that we go to the full one-percent, which is another $127,000.

    As was pointed out yesterday, since Nishi will be filled with mostly students that would’ve been here anyway that Davis would’ve realized most of those sales tax revenues regardless.

    1. Matt can probably address this better, but I don’t believe the extra revenue generated comes from the presence of the residents in the project. There are retail components and perhaps projected point of sale taxes.

      1. Who buys the retail?  The students that would be here anyway.  If they didn’t buy their goods at Nishi they would most likely buy them at some Davis establishment.

        1. If the students would be here anyway, why are we building new housing? I thought it was to address the shortfall in housing for students who are having to live elsewhere.

        2. The town would’ve absorbed most of them one way or another.  We always have.  Do you believe that many students that go to college here live elsewhere?

          BTW, did you see where the UC system is going to start addressing their housing needs?  Maybe we really don’t need all that housing at Nishi?  More R&D?

        3. according to what don shor has said, a lot of students are commuting into town and that’s why we need more rental housing.  if that’s the case, then this project should add needed housing and generate additional tax revenue from its retail component, small as it may be.

          1. From the 2014-14 Campus Travel Survey:

            Residential location
            Since travel behavior varies substantially by residential location, each year respondents are asked about their residential location, defined as the place of residence from which they regularly travel to campus. The four broad categories included the on campus area, the West Village apartments, off-campus elsewhere in Davis, and outside of Davis (Q15). The results suggest that 13.1 percent live on campus (an estimated 5,499 people), 3.9 percent live in the West Village apartments (1,641 people), 60.2 percent live elsewhere in Davis (25,355 people), and 22.8 percent live outside of Davis (9,620 people) (Table 14). Individuals who indicated that they live outside of Davis are most likely to live in the nearby cities of Sacramento, Woodland, Vacaville, West Sacramento, Dixon, Elk Grove, and Winters.

            How they get here:

            Table 21 shows the mode share for students and employees who live outside Davis (an estimated 9,620 people). Among those traveling from outside Davis, 86.4 percent commute by car, 6 percent ride the bus, and 4.8 percent ride the train.

            Lots of info here (download the pdf): http://its.ucdavis.edu/research/publications/publication-detail/?pub_id=2347

            And, of course, none of that includes the non-UCD folks who work in Davis and commute in.

        4. BP, you are right the student s would be here anyway; however, the current Davis residents (who are not students) that the added students will outbid for rental housing will no longer be in Davis, and the current level of sales tax revenues that come from those “pushed out” residents will be lost.

          The key metric is not sales tax revenue per person.  It is sales tax per bed.  Nishi, if approved, will add beds.  Therefore, it will add sales tax.

          Changing the demographics of a person sleeping each night in an existing Davis bed will not make any material change in sales tax revenue.

      2. The town would’ve absorbed most of them one way or another.  We always have.

        The way we’re “absorbing” them these days is by converting single-family homes to mini-dorms (often more like mini-animal-houses) and reducing the availability of housing for actual families.

        1. That is correct Jim, although student groups outbidding families for apartments and thereby driving those families out of town is another way the “absorbing” is being done.

          I’ve said this many times before but the population changes in Davis from 2000 to 2010 documented in the US Census are clear”

          Age Group _ 2000 Census _ 2010 Census _ Change ____ % 2000 _ % 2010

          0-19 years ___ 16, 184 _____ 15,317 ___ minus 867 ____ 26.8% __ 23.3%

          20-24 years __ 13,698 _____ 17,200 ___ plus 3,502____ 22.7% __ 26.2%

          25-54 years __ 23,170 _____ 21,630 ___ minus 1,540 ___ 38.4% __ 33.0%

          55 plus years __ 7,256 _____ 11,475 ___ plus 4,219 ____ 12.0% __ 17.5%

          The numbers don’t lie. From 2000 to 2010 UCD student population in the City went up dramatically. Senior population went up dramatically. Familes with children went down dramatically.

          From 2010 to 2020 that trend will both continue and accelerate as the UCD students are “absorbed” by the supply of Davis housing.

        2. Matt, those stats could also say that due to lack of local good jobs that once students hit the job market age they had to move away.  That’s why students and seniors who mostly don’t have jobs increased.  It’s all in how one decides to decipher fact based analysis.

        3. BP said . . . “Matt, those stats could also say that due to lack of local good jobs that once students hit the job market age they had to move away.  That’s why students and seniors who mostly don’t have jobs increased.  It’s all in how one decides to decipher fact based analysis.

          Your bolded words are correct BP, but what you have done with your argument above is move deck chairs on the Titanic.  Adjustments to the mix of underlying reasons for why the process of “absorbing” UCD student residents has displaced family residents doesn’t change the bottom-line . . . 2,407 family residents are gone from Davis at the same time as 3,502 additional UCD student residents have been “absorbed.”

           

  3. We should’t do a CFD for the same reason we shouldn’t have done one in those other places, the tax burden on new residents will undermine their willingness to fund school parcel taxes.

    Watching the tape of public comment on Nishi last night I noticed that the for the old Davisites who showed up the same dynamics of the growth wars of years past were expressed with the same people voicing them. Do the names Samitz, Pope, Souza and Wagstaff sound familiar? Yet in addition to this generation of old pro-growth and anti-growth warriors was a new demographic, Millenials. A number of young people spoke complaining about a housing shortage, out migration of the young, the poor conditions of rental housing in a sellers market, low vacancy rates , high rents and unattainable housing prices. This represents a change in the election dynamics and an opportunity for the advocates for Nishi.

    I have received several solicitations about endorsing Nishi. To date I have resisted taking a public stand in the form of doing so under my real name for personal reasons. Still I have some advice for Tim Ruff and his team, you should be organizing the young people of Davis to register and vote. Young residents and students have long been the sleeping giant of Davis politics but that same cohort, who have been squeezed between UCD’s need to grow and an old guard determined to resist that growth, seem to be your natural allies in the debate over what the future of Davis will look like. Getting them to participate in the election might very well determine its outcome. Instead of working the voter rolls, or at least in addition to it, you should get your people out to the shopping centers, big apartment complexes and houses where the students are and offer to register them to vote making the case for how the lack of rental housing plays against their interests as renters or potential buyers.

    Perhaps some of the investors in Nishi don’t want to do this because they have other interests where student electoral apathy plays to their advantage as landlords, perhaps they feel or have polling that shows they can win the vote without young people turning out. But from what I saw at public comment the other night the generational battle lines are drawn and the surest way to defeat the old guard is by organizing the young.

     

      1. DP, the answer to your question is “No” based on my understanding of the information presented to the FBC on January 11th by the two consultants who presented, Goodwin and Plescia.  The CFD presented to the FBC covered all property types.

  4. We should’t do a CFD for the same reason we shouldn’t have done one in those other places, the tax burden on new residents will undermine their willingness to fund school parcel taxes.

    Most of the residents will be in apartment rentals who  in my understanding don’t have to pay school parcel taxes.

    1. Your understanding is incorrect . . . based on my understanding of the information presented to the FBC on January 11th by the two consultants who presented, Goodwin and Plescia.

      1. Please explain.  I thought a lawsuit was settled that apartments weren’t charged per unit anymore but per building at whatever fee the school parcel tax was set at per residence.

         

        1. Granda had argued that the dual rate structure written into Measure E, a four-year school parcel tax approved by voters last November, violated state law. The measure would have charged single-family homes $204 per year and multi-unit dwellings (apartments, condos, etc.) $20 per unit.
          The California Court of Appeals ruled against a similar dual-rate school parcel tax in Alameda County in March, saying parcel taxes had to be assessed at a uniform rate, meaning one rate should apply to all types of parcels.

          http://www.davisenterprise.com/local-news/davis-school-board-announces-settlement-of-measure-e-lawsuit/
          So the way I read that only the building is charged the flat rate and no more per unit charges.

        2. They won’t be paying nothing, which is what you appeared to be saying.  They will be paying something, although what the something is is unclear.

        3. The way I read it if an apartment building has 50 units and the parcel tax is $204, the apartment building owner only pays a total of $204 for all 50 units.  Do you really believe the apartment owner is going to charge each renter $4?  Come on now, fact based analysis.

        4. BP, you are focusing solely on the Parcel Tax, and you may be right.  I’m not informed enough to know.  However, what the FBC heard from the consultants on January 11, 2016 was that two School District CFDs also apply to Nishi.  I don’t see anything in the Enterprise article that would indicate that those CFDs are affected by the Granda settlement.

          Further, it really makes no difference to the City’s revenues whether the property owner passes the tax on to the tenants or not.  As I said in my 5:54 comment, “They won’t be paying nothing, which is what you appeared to be saying.  They will be paying something, although what the something is is unclear.”

  5. As a resident of Olive Drive, we are very concerned about the impact on Olive and Richards.  It is a super dangerous intersection that will only get more dangerous if Nishi is approved.  As it stands traffic is slightly eased because east/west traffic is slim.  It is dangerous due to the number of bikes and pedestrians traversing the intersection and due to traffic created by both IN and OUT and Dutch Brothers.  I see nothing in the plan to relieve this.  The danger to bicyclists and pedestrians will get worse, congestion will get worse, as well as pollution levels from the increase of idling cars.  If they approve it, traffic should only exit to the university.  They say this for the students?  Then what is the need for a hotel, and why should traffic be allowed to connect to Olive.  This whole thing smells of a bad idea.

    1. those are reasonable concerns, but if they plan to reduce cars to the project, limit peak hour flow, time occupancy with corridor changes and changes to how dutch brothers works, i’m not sure how much of an impact it will be.

        1. They can meter out flow, how do they meter in flow of traffic let’s say coming off the freeway onto Richards or from downtown under the tunnel on Richards and flowing into Nishi?

        2. Are you saying we should meter traffic coming off of I80, I can’t believe the freeway backup that would cause.  Or meter the traffic coming in from under the Richard’s bridge?  Crazy!