Attachment 23-24ifirf l..,, ,,,,,„ILf.nft(,,
Economic k Planning SYS£en7 s, /nc.
501 Nlnrn Street, 5u,te 200
Berkeley, CA 94710-2257
510 841 919O le!
510 8-11 92O8 fax
Berkeley
Denver
Los Angeles
Sacramento
www.epsys.com
MEMORANDUM
To: John Shenk
From: Teifion Rice -Evans and Ashleigh Kanat
Subject: Albright Project Feasibility Considerations; EPS #121103
Date: May 31, 2013
Economic & Planning Systems, Inc. (EPS) recently prepared a planning -
level development feasibility analysis to evaluate the economics of the
350,000-square foot Reduced Area Alternative in Los Gatos relative to
the 550,000-square foot Proposed Project. Development of the Reduced
Area Alternative would entail demolishing the ten existing buildings,
making site improvements and constructing four new buildings and one
new 80-space parking garage.
Following the last Town Council meeting, you have requested we
address two topics in more detail in advance of the June 3rd Council
hearing. The first topic concerns the economics of redevelopment and
the relevance of the leaseability of the current buildings and the
potential feasibility of the Reduced Area Alternative; the second topic is
the reasonableness of the application of a 7 percent return on cost
hurdle rate. These topics are addressed below:
1) Retenanting of the existing buildings may be possible, but this is not
related to and does not affect the development feasibility of either
the Proposed Project or the Reduced Area Alternative. The
redevelopment of existing buildings generates greater financial
barriers to development than an undeveloped site, particularly if the
existing buildings are occupied. The stream of lease revenues from
the existing development means that new development must be able
to offer a sufficient payment to existing landowner(s) to cover the
loss of the current income stream as well as the demolition costs and
the costs of new development. As a result, it is common for
redevelopment projects to require a significantly greater amount of
development than currently present on site in order to be feasible.
It is expected that there are tenants who would be interested in the
existing buildings, new buildings under the Reduced Area Alternative,
and new buildings under the Proposed Project. However, the
expected interest from tenants in new buildings under the Reduced
Area Alternative does not mean necessarily that redevelopment is
financially feasible. The test of financial feasibility requires a more
in-depth analysis that compares the expected lease rates with the
costs of property acquisition, demolition, and new development, as
provided in the prior EPS product. That the existing buildings can be
renovated and fully leased is an important indicator of market
f- T AcH ➢ " 2 3
Memorandum
Albright Project Feasibility
May 31, 2013
Page 2
demand, but does not alone determine the feasibility of a potential redevelopment project.
Our analysis indicates that the potential revenues generated by the Reduced Area Alternative
are insufficient to justify the costs of redevelopment, assuming a return on cost hurdle rate
of 7 percent.
2) Evaluation of potential feasibility and estimates of financial performance rely on professional
judgments concerning reasonable hurdle rates of return below which the likelihood of
attracting interested developers and project financing is significantly reduced. Pro forma
analysis allows developers to determine expected rates of return under expected costs and
revenues. This type of analysis allows for a determination by the developer as to whether
the expected return on investment is consistent with the expected project risks, pre -
development costs, actual development costs, including financing costs, and the time and
effort the developer expects to invest in bringing the project to fruition. In EPS's experience
evaluating commercial office/R&D projects in suburban markets in the San Francisco Bay
Area, a return on costs of 7 to 9 percent (or above) indicates a viable project. For the
purpose of our analysis, we applied a 7 percent hurdle rate of return, which is at the low end
of the typical range, to provide a planning -level indication of developer incentive and
potential financial feasibility. Developers do vary, however, in terms of their required return
on costs depending on their own tolerance for risk, sources of capital, and investor
expectations. It should be noted that even if a developer considers an expected return on
costs to be sufficiently attractive, this does not necessarily mean that the project will meet
the requirements of potential investors.
P:\121000\121103AIbrlgh[ los Gatos \Corres\121103mm 053113_revlsed.docx
John R. Shenk
jshenk@me.com me.com 1408-242-9052
May 30, 2013
VIA E-MAIL
Mayor and Town Council Members
Town of Los Gatos
110 East Main Street
Los Gatos, CA 95030
Re: Albright Way Entitlement —Planned Development Overlay Zone Justification Letter
Dear Mayor and Council Members:
On May 15, 2013, I submitted an additional justification letter that explained how
the Albright Way project (the "Project") is consistent with the General Plan in general and the
Planned Development (PD) Overlay Zoning provision in particular. Because that letter was 14
pages and I realize that you have limited time to read and digest information related to the Project, I
write again to highlight why the Project is consistent with the PD Overlay provision in the General
Plan and Zoning Code.
Zoning Code section 29.80.080 states: "The purpose of the PD or planned
development overlay zone is to provide for alternative uses and developments more consistent with
site characteristics than are allowed in other zones, and so create an optimum quantity and use of
open space and encourage good design."
The Project epitomizes the intent of the PD Overlay provision. The PD Overlay
proposed as part of the Project sets development standards that differ from those in the General
Plan, which is one of the purposes of a PD Overlay Zone according to the General Plan. (See
General Plan at p. LU-16-17 [A "Planned Development Overlay [Zone] is a specially tailored
development plan and ordinance which designates the zoning regulations for the accompanying
project, sets specific development standards, and ensures that zoning and the General Plan are
consistent." (Emphasis added)].) Where the General Plan would allow buildings up to 35 feet (two
stories) and site coverage of 50%, the PD Overlay zone would allow buildings up to 65 feet (four
stories), which allows an Architecture and Site proposal with site coverage of just under 23%. The
PD Overlay Zone allows the buildings to be taller than otherwise permitted, which in turn reduces
building coverage from what is otherwise allowed.
The site has historically been used for office/research and development uses and the
General Plan designated the site for continued light industrial use. The site is unique because it
mediates the transition between a busy, noisy freeway on one side and a townhome development on
the other. The site also sits between the car -oriented, well -traveled Winchester Boulevard and the
pedestrian -oriented Los Gatos Creek Trail. Finally, this site is in the Vasona Light Rail Area, which
ATTACHRENT 2. 4
Mayor and Town Council
May 30, 2013
Page 2
is an area recognized by the General Plan as suitable for increased development. These singular site
characteristics require a distinctive planning solution.
Further, as explained in the financial feasibility memorandum submitted on April 4
by Economic & Planning Systems, Inc, ("EPS") to make redevelopment of the site feasible, the site
must accommodate approximately 550,000 square feet of Class A office/research and development
space. A lesser amount of space or less quality of space would yield lower rents and make
redevelopment infeasible. A representative from EPS will be present at the June 3, 2013, Town
Council hearing to answer any questions that you may have regarding this assessment.
The PD Overlay Zone creates a site plan that optimizes the quantity and use of open
space for a 550,000 square feet Project. Without a PD Overlay Zone, the site plan would look like
the Reduced Height Alternative illustrated in Figure 5-3 in the Draft EIR, which is attached as
Exhibit A to this letter. That figure shows eight buildings that are 35 feet tall and each have 68,500
square feet of space. With eight 35 foot buildings and the required parking, the site would have no
room left for the open space features offered by the Project, including the extensive tree retention
and replacement and addition of generous landscaped courtyards. Instead, it would be a much less
appealing plan of densely packed low-rise buildings and parking, with little useable open space.
Conversely, with the PD Overlay Zone, the Project site plan would be as shown in
the plan attached as Exhibit B to this letter. Unlike the Reduced Height Alternative, the Project
includes copious amounts of sustainably landscaped outdoor space. This plan can accommodate
larger setbacks from the freeway, residences, and the Creek Trail, which allows more trees to be
retained and additional trees to be planted. In addition, unlike the Reduced Height Alternative, the
Project leaves room for rows of trees between parking aisles to further screen the development from
the Charter Oaks neighborhood and the Los Gatos Creek Trail. Finally, unlike the Reduced Height
Alternative, the Project acknowledges the differences in the uses that surround each side of the site.
For example, the shortest "building" (the three-story parking garage) is placed closest to the Charter
Oaks neighborhood and the Creek Trail, while the taller buildings are closer to the busier roads. In
addition, the widest part of the large central landscaped area is adjacent to the residences in Charter
Oaks. None of the Project's thoughtfully designed landscape features would be possible without the
PD Overlay Zone.
Not only does the PD Overlay Zone allow development with more open space than
what would be provided under the development standards in the General Plan and underlying
zoning, but the PD Overlay also allows more open space than currently exists on the site. (See Draft
EIR at p. 4.1-5.) The four proposed buildings plus parking garage would have less building coverage
than the existing 10 buildings-5.0 acres (proposed) compared to 5.6 acres (existing). Stated
differently, the Project increases the amount of open area on the site by 28.5%, increasing the open
space from 6.3 to 8.1 acres. As discussed above, reduced building coverage will increase the open
feel of the site and provide space to preserve trees and add new trees and landscaping.
In addition to good site design, the PD Overlay Zone also promotes good
architectural design. In fact, as the Town's consulting architect, Larry Cannon, stated that the
proposed Project buildings are "excellent in their design." The buildings consist of high quality,
Mayor and Town Council
May 30, 2013
Page 3
sustainable materials, including clear glass and solid masonry. The facades will be highly articulated
through the use of shifting volumes, layers of different materials, and vertical elements such as
columns and mullions to give the buildings rhythm and visual interest. Strong horizontal sun shades
decrease the heat load on the buildings and break up how one perceives the buildings. According to
Mr. Cannon, the sunshades will give the buildings a "perceived" height closer to 55 feet than the
actual 65 feet. The buildings also will be constructed to meet LEED silver criteria, which ensures
that the Project will be operationally efficient and reflect the Town's commitment to sustainability
The Project would not be possible without the PD Overlay Zone, which clearly
serves its purpose to "create an optimum quantity and use of open space and encourage good
design."
Sincerely,
John R, Shenk
Owner's Representative & Applicant
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