Parkmerced Project Might Not Pencil Out, Forecaster Says
Developers might earn less than 18 percent return on their investment in part because of the $360 million payments they must make to spruce up the neighborhood and subsidize new rent-controlled units.
That's slightly below the 20 percent return needed to attract capital to a typical housing project, according to a report drafted by CBRE Consulting.
At first glance, Fortress Investment Group, which took over the project last fall, would seem to be suffering through the middle stages of San Francisco developer grief. Rents in this city are preposterously high, despite the fact we're as beaten down by the recession as most other U.S. cities. Developers are lured by the fantastic income potential here. They buy into what would seem, in almost any other city in America, a relatively simple proposition to build some apartments and make big money.
This stage is called "denial."
Next come delays in the form of multiple hearings with neighborhood activists, meetings with politicians bent on extracting concessions, and multiple redesigns intended to ameliorate local concerns.
Parkmerced has moved at an unusual steady pace through this phase because of concessions it's offered the city in return for development rights. Developers have pledged to maintain thousands of new apartments under leases equivalent to their current rent-controlled agreements, pay for a light-rail spur, and other community improvements.
But last month a reported 150 residents showed up at a developer meeting to protest what they believe is a flimsy promise -- that they'll get to keep their low-rent units.
This stage is called "anger."
The project is headed for hearings at the city Planning Commission over the next few weeks, and local groups committed to fighting development can be expected to be heard. Given that this always happens when new apartments are proposed, the economic analysis commissioned by the mayor's office can be viewed as an element in the traditional phase of developer's grief called "bargaining."
From the economic analysis text:
"There is little ability from a financial standpoint for the project sponsor to provide for additional public benefits - either in the form of one-time capital expenditures or ongoing operational support - without engaging in a trade-off among the public benefits already proposed."
Next, expect "depression," as a slow economic comeback produces worst-case investment scenarios.
And then there is "acceptance," when, like legions of of other San Francisco developers, Fortress Investment Group resigns itself to losing money on a dream-turned-nightmare real estate deal.
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