HomeMy WebLinkAboutReso 179-2022 (22-821)
STRATEGIC ECONOMICS | 2991 SHATTUCK AVE. STE 203, BERKELEY, CALIFORNIA | 510.647.5291
MEMORANDUM
To: Billy Gross, Senior Planner, City of South San Francisco
Lisa Costa Sanders, General Plan Project Administrator, City of South San Francisco
From: Derek Braun and Chris Holcomb, Strategic Economics
Date: October 3, 2022
Project: South San Francisco General Plan Update
Subject: Results and Conclusions of Community Benefits Contribution Analysis
This memo describes the findings of analyses that examined the financial feasibility of several
hypothetical “prototype” development projects in South San Francisco. The City of South San Francisco
requested these analyses to assess potential opportunities for commercial projects to support optional
community benefits contributions in exchange for a density bonus. The results of these analyses will
inform the creation of a revised zoning code being developed in conjunction with the City’s ongoing
General Plan update, known as “Shape SSF.”
As part of Shape SSF, South San Francisco is considering revising and expanding the City’s use of
optional density bonuses as an incentive for developers to provide additional community benefits
beyond mandatory requirements. Under such a program, the City may allow bonus density standards
for office and life science development in exchange for community benefits contributions by project
developers. To assess the value of contributions that the City could potentially “capture” from new
development, this memo describes the additional value associated with development prototypes
that exceed base floor area ratio (FAR) standards. This memo also describes the range of
supportable contributions values under different cost, revenue, and developer return assumptions.
Strategic Economics developed the findings of the analysis described above by analyzing the financial
feasibility of several building “prototypes” consisting of a representative but generic set of four life
science and four office development projects. The prototypes varied in their densities, heights, and
parking configurations. Most of the prototypes included a ground-floor retail component.
The financial feasibility of these prototypes was first assessed using current assumptions of market
values and development costs. However, real estate market conditions are changing rapidly due to
ongoing supply chain disruptions, construction labor shortages and, in the case of office development,
uncertain future demand for office space on the San Francisco Peninsula. Development conditions
could also shift in response to changing rents for life science, office, and residential properties. In
order to identify a range of potential community benefits contributions under different development
conditions, Strategic Economics also analyzed a variety of "sensitivity analysis" scenarios for each of
the life science prototypes.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 2
MEMO ORGANIZATION
The memo is organized into the following sections:
• Executive Summary
• Development Prototypes and Approach to the Analysis: Describes the building prototypes and
the general approach to the financial feasibility analyses.
• Potential for Life Science and Office Prototypes to Support Community Benefits Contributions:
Describes the maximum community benefits value supportable by the life science and office
prototypes, and a range of supportable contributions under different “sensitivity” analyses.
• Appendix A: Detailed Methodology and Assumptions: Reviews the approach to calculating
supportable community benefits values and to testing the sensitivity of the feasibility results,
as well as the cost and revenue assumptions used in the pro forma models.
• Appendix B: Financial Pro Forma Models: This Appendix presents the pro forma financial
models and assumptions for each prototype, including major costs, revenues, and developer
return.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 3
EXECUTIVE SUMMARY
• The financial feasibility “sensitivity” analysis suggests that the City of South San Francisco
could reasonably enact a requirement that developers provide a community benefits
contribution of approximately $20 per bonus square foot of office and life science building
area if the base zoning allows a .5 FAR1 building. Cities typically seek to require that developers
provide community benefits contributions equating to approximately half the value uplift
created through providing additional development rights. This ensures that project developers
are incentivized to take advantage of the bonus rights to receive additional value, and in turn
provide community benefits contributions to the City. A $20 per bonus square foot community
benefits contribution requirement would represent less than half the value uplift per bonus
square foot in three tested sensitivity analysis scenarios for life science projects, and a quarter
of the value uplift under existing market and development conditions for life science projects.
• Dynamic development and market conditions suggest that South San Francisco should pursue
a relatively flexible community benefits framework. Development conditions for life science
and office space could rapidly change in South San Francisco. For example, while demand for
life science space is at an unprecedented high due to biotechnology investment activity during
the COVID-19 pandemic, immense developer interest in building life science space could
potentially lead to an oversupply in the region and a decline in achievable rents. At the same
time, construction costs have been especially volatile in recent years, creating uncertainty
about costs to deliver projects in the future. Under both of these scenarios, the margin of error
for development feasibility—and corresponding community benefits potential—becomes much
more limited.
• Any selected voluntary community benefits program should apply equally to office and life
science development projects. Office development projects are not currently feasible in South
San Francisco and cannot support community benefits contributions in exchange for bonus
FAR. Nevertheless, any selected voluntary community benefits program should apply the same
required contribution per bonus square foot to both office and life science development
projects. This will ensure that developers cannot avoid the community benefits contribution
by, for example, building a bonus FAR office project and later converting it to life science use,
or by differentiating the office component of a typical life science project in order to exempt
the space from the contribution.
1 “Floor area ratio,” or “FAR,” is the ratio of total building area to lot size on a parcel of property. FAR is a measure of overall development
intensity or density on a site.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 4
Development Prototypes and Approach to the Analysis
DEVELOPMENT PROTOTYPES
Strategic Economics worked with Raimi+Associates to develop a set of building prototypes
representing different land uses and development intensities for use in Strategic Economics’
financial feasibility analyses. The prototypes included life science, and office buildings (with some
prototypes including retail on the ground floor), designed to represent potential development that
could occur on a 6.0 acre parcel located east of Highway 101. Raimi+Associates informed the
design of the prototypes partly based on review of recently built development projects located in
and near South San Francisco.
LIFE SCIENCE AND OFFICE PROTOTYPES
Raimi+Associates developed four prototypes representing life science buildings and four
representing office buildings, displayed in Figure 1 and Figure 2. The life science and office
prototypes share the same density, layout, and construction type as each other. Note that the
LifeSci-3 and Office-3 prototypes reflect the current base development standards in most areas
east of Highway 101 (at .5 FAR),2 while the LifeSci-MU-5 and Office-MU-5 prototypes reflect the
typical 1.0 FAR of properties that use the City’s current density bonus program.
FIGURE 1: SUMMARY OF LIFE SCIENCE PROTOTYPES
Prototype Characteristics LifeSci-3 LifeSci-MU-5 LifeSci-MU-8A LifeSci-8B
Parcel Size (acres) 6.0 6.0 6.0 6.0
Number of Stories 3 5 8 8
Floor Area Ratio (FAR) 0.5 1.0 2.0 3.9
Retail Square Feet 7,418 15,627 9,198 0
Parking
Parking Spaces
Surface 226 0 0 0
Structured 0 474 949 1,783
Total 226 474 949 1,783
Life Science Parking Ratio (Spaces per
1,000 SF) 1.75 1.75 1.75 1.75
Retail Parking Ratio (Spaces per 1,000 SF) 2.0 2.0 2.0 n/a
Sources: Raimi+Associates, 2021; Strategic Economics, 2021.
2 “Floor area ratio,” or “FAR,” is the ratio of total building area to lot size on a parcel of property. FAR is a measure of overall
development intensity or density on a site.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 5
FIGURE 2: SUMMARY OF OFFICE PROTOTYPES
Prototype Characteristics Office-3 Office-MU-5 Office-MU-8A Office-8B
Parcel Size (acres) 6.0 6.0 6.0 6.0
Number of Stories 3 5 8 8
Floor Area Ratio (FAR) 0.5 1.0 2.0 3.9
Retail Square Feet 7,418 15,627 9,198 0
Parking
Parking Spaces
Surface 226 0 0 0
Structured 0 474 949 1,783
Total 226 474 949 1,783
Office Parking Ratio (Spaces per 1,000 SF) 1.75 1.75 1.75 1.75
Retail Parking Ratio (Spaces per 1,000 SF) 2.0 2.0 2.0 n/a
Sources: Raimi+Associates, 2021; Strategic Economics, 2021.
APPROACH AND METHODOLOGY
The financial feasibility of the eight prototypes was calculated using a static pro forma model. This
“point in time” model reflected the process a developer would undertake in determining whether
to pursue a project, and it assumed that developers would need to acquire land to build. The model
first assessed each development project’s feasibility using yield-on-cost as a metric of the
developer’s target return. Subsequently, the model measured the supportable residual land value
(RLV) of each development project based on the target yield-on-cost. These terms are defined
below:
• Yield-on-cost (YoC) is a measure of project profitability commonly used in static pro forma
analysis of income-generating projects, including commercial and multi-family rental
housing development projects. The yield-on-cost metric allows for the direct comparison of
financial performance among different types of projects, even if they have different
sources of financing. Yield-on-cost is defined as the net operating income in the first
stabilized year (i.e., first year after the lease-up period) divided by the development costs.
• Residual land value (RLV) is the net value available for land acquisition after accounting
for all revenues, development costs, and required return. If the residual value is less than
acquisition cost for land, then the development project is considered infeasible. For
financially feasible projects (based on yield-on-cost and an RLV exceeding land acquisition
cost), any RLV exceeding site acquisition costs reflects a potential maximum contribution
of a development project toward additional community benefits or other requirements.
Determination of Land Value for Comparison to RLV: Current base density standards for life
science and office development in South San Francisco in the East of 101 area allow for a
maximum floor area ratio (FAR) of 0.5, while a density bonus of up to 1.0 or 1.25 FAR is available
to developers that meet certain building and transportation demand management standards.
However, review of recent development projects in South San Francisco suggests that few, if any,
projects are now being constructed at a density of 0.5 FAR. Developers interviewed for this study
indicated that projects at this density are no longer feasible in today’s market. As a result, the
analysis assumed that land costs reflect the price range of properties allowing life science
development at a 1.0 FAR. Recent transactions and developer interviews indicate this range is
$175 to $250 per square foot of land, and the residual land value analyses described in this memo
assumed $200 per square foot of land. This pricing assumption was held constant for all three
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 6
land uses to reflect outcomes of potentially allowing multiple land uses on certain parcels, and
because such a policy would result in land being priced for the land use with the highest
supportable value. Market conditions, recent development activity, and the findings of Strategic
Economics’ feasibility analyses all support the conclusion that life science projects in South San
Francisco will generally support higher residual land values than office uses.
Speculative Development Assumption: The financial feasibility analysis assumed that each
prototype is a speculative development project rather than a “build to suit” project for a specific
user. This assumption allows broad application of the analysis results by ensuring they are based
on typical construction costs and market-based expectations of income and developer return.
A detailed description of all other cost and revenue inputs can be found in Appendix A.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 7
Potential for Life Science and Office Prototypes to Support
Community Benefits Contributions
The following findings describe the potential for future life science and office development projects
in South San Francisco to support additional community benefits contributions in exchange for
increased development rights. The findings discuss which development prototypes would be
feasible based on their yield-on-cost outcomes, and describe their supportable residual land
values. Following this discussion, the next section describes the dollar values of the maximum
supportable community benefits contributions for financially feasible prototypes under various
scenarios; this information is then used to provide a preliminary recommended fee per bonus
square foot of building area.
The following findings describe the financial feasibility of each prototype under current market
conditions:
• Office development projects are infeasible in South San Francisco and are therefore
unable to support additional community benefits. The yield-on-cost results for the office
development prototypes are well below the thresholds required for financial feasibility, and
a developer would be highly unlikely to pursue a speculative office development project in
South San Francisco. Therefore, Strategic Economics did not further examine residual land
values of the office prototypes since these projects would achieve negative residual land
values and would be unable to support community benefits contributions. These findings
are consistent with Strategic Economics’ Market and Economic Existing Conditions report,
which found that South San Francisco has attracted little non-biotechnology office
development due to the preferences of office tenants to locate in either Silicon Valley or
San Francisco. While there are some examples of recently completed office projects in
South San Francisco, those projects were mostly build-to-suit developments for
biotechnology companies already located in South San Francisco.
• Life science buildings built at 2.0 FAR or higher are likely feasible under current market
conditions. Figure 3 indicates that the LifeSci-MU-8A (2.0 FAR) and LifeSci-8B (3.9 FAR)
prototypes are likely feasible, as reflected in their yield-on-cost values. Of the two
prototypes, LifeSci-MU-8A has the highest potential for feasibility, based on current
assumptions about costs and revenues. More information on the development cost
assumptions underlying these feasibility assessments can be found in the Development
Costs section of Appendix A.
• Life science buildings at densities of 0.5 and 1.0 FAR are not feasible under current market
conditions. The LifeSci-MU-3 (.5 FAR) and LifeSci-MU-5 (1.0 FAR) prototypes respectively
achieve a yield-on-cost of 4.37% and 4.89%, which fall below the current threshold for
marginal financial feasibility of 5.0%. Note that although life science projects at a density
at or near 1.0 FAR were recently completed in South San Francisco, recent escalation of
land prices and construction costs has resulted in conditions that will likely render many
similar projects infeasible in the future.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 8
FIGURE 3: YIELD-ON-COST METRICS AND FEASIBILITY THRESHOLDS FOR LIFE SCIENCE AND OFFICE PROTOTYPES
Life Science Prototypes
LifeSci-MU-3 LifeSci-MU-5 LifeSci-MU-8A LifeSci-8B
Yield-on-Cost 4.37% 4.89% 5.25% 5.13%
Assumed Threshold for Marginal Feasibility 5.00-5.24%
Assumed Threshold for Likely Feasibility 5.25%
Office Prototypes
Office-MU-3 Office-MU-5 Office-MU-8A Office-8B
Yield-on-Cost 2.22% 2.52% 2.60% 2.67%
Assumed Threshold for Marginal Feasibility 6.75% - 6.99% [1]
Assumed Threshold for Likely Feasibility 7.00%
[1] The feasibility thresholds used for life science and office reflect the respective return expectations for developers of these two
products. The thresholds differ due to the levels of risk assumed for building each product type. Currently, uncertainty regarding
achievable rents and the ability to tenant office buildings in the Bay Area as a result of COVID-19’s impact on work locations makes
office buildings significantly riskier products to develop than life science buildings.
Note: Cells highlighted in dark orange indicate prototypes that are likely to be feasible, while those highlighted in light orange indicate
prototypes that are marginally feasible.
Source: Strategic Economics, 2021.
FIGURE 4: RESIDUAL LAND VALUE FOR LIFE SCIENCE PROTOTYPES (PER SQUARE FOOT OF LAND)
Note: The supportable residual land value shown above is based on achieving a 5.0% yield-on-cost; as shown in Figure 3, the analysis
assumed that a 5.0% to 5.24% yield-on-cost reflects a marginally feasible life science project, while projects with a yield-on-cost of
5.25% are likely to be feasible.
Source: Strategic Economics, 2022.
$115
$173
$321 $315
$0
$50
$100
$150
$200
$250
$300
$350
LifeSci-MU-3 LifeSci-MU-5 LifeSci-MU-8A LifeSci-8B
Typical Land Cost Range ($175 -
250)
Residual Land Value (PSF Land)
Cost of Land Used in Analysis
($200 PSF)
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 9
VALUE UPLIFT AND POTENTIAL COMMUNITY BENEFITS CONTRIBUTIONS SUPPORTABLE BY THE
LIFE SCIENCE DEVELOPMENT PROTOTYPES
Residual land value, as shown in Figure 4, represents the value of the project remaining to pay for
the costs of land, after other development costs and developer return are taken into account. The
difference between residual land value and the current price of land, therefore, represents the
maximum surplus value that could be used to support community benefits contributions. More
details on residual land value and calculation of community benefits can be found in Appendix A
and Appendix B. In order to identify a range of potential community benefits contributions under
different development conditions, Strategic Economics compared a variety of "sensitivity analysis"
scenarios for each of the life science prototypes. The findings of this analysis provide guidance for
establishing a community benefits fee per bonus square foot of life science space.
The sensitivity analysis scenarios were as follows:
• Scenario 1: Existing Conditions: This scenario compares life science prototypes using
development assumptions reflecting current market conditions and required return
(including achieving a five percent yield-on-cost), as described in Appendix A.
• Scenario 1b: Existing Conditions with 5.25% Yield-on-Cost: This scenario reflects maximum
potential community benefit contributions for each prototype under a higher required yield-
on-cost. In this scenario, the target yield-on-cost was increased from five percent to 5.25
percent.
• Scenario 2: Rents Decrease by 5%: This scenario reflects the maximum potential for
community benefit contributions for each prototype if average rents decrease by five
percent.
• Scenario 3: Construction Costs Increase by 5%: This scenario reflects the maximum
potential for community benefit contributions for each prototype if construction costs
increase by five percent.
• Scenario 4: High-End Land Costs: This scenario reflects maximum potential for community
benefits contributions for each prototype if land costs are $250 per square foot instead of
the $200 per square foot assumed in the baseline analysis. Typical land costs for life
science development opportunities in South San Francisco range from $175 to $250 per
square foot of land.
• Scenario 5: Community Facilities District: This scenario reflects maximum potential for
community benefits contributions in the event of the passage of a Community Facilities
District to fund improvements in the East of 101 area. This scenario was modeled by
increasing project operating costs by one dollar per square foot of building area.
• Scenario 6: Childcare Parcel Tax: This scenario reflects maximum potential for community
benefits contributions in the event of the passage of a Childcare Parcel Tax. This was
modeled by increasing operating costs by $2.50 per square foot of land.
For each of these scenarios, maximum community benefits potential was calculated based on
value “uplift” per square foot of bonus building area if the allowable FAR increased from a 0.5 FAR
base to 2.0 FAR or 3.9 FAR. The results of this analysis are shown in Figure 5. In addition, a full
table of residual land values and total project values for community benefits is shown in Appendix
B, in Figure 15. Key findings from this analysis are as follows:
• The higher-FAR life science prototypes are likely to support community benefits
contributions under current conditions. No potential for community benefits contributions
exists when comparing a 0.5 FAR base prototype (LifeSci-MU-3) versus a 1.0 bonus
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 10
prototype (LifeSci-MU-5) under any of the scenarios tested. However, under the “existing
conditions” scenario, the analysis found a supportable value “uplift” of $79 per square
foot of bonus building area when comparing the .5 FAR LifeSci-MU-3 base life science
prototype versus the 2.0 FAR LifeSci-MU-8A bonus prototype, as shown in Figure 5. The
analysis also found an uplift of $34 per bonus square foot of building area when comparing
the .5 FAR LifeSci-MU-3 base versus the 3.9 FAR LifeSci-8B bonus prototype. This uplift
represents the additional value created, in terms of residual land value, by allowing the
bonus project. A portion of this value could potentially be returned to the City by a project
developer in exchange for the bonus development rights. The 2.0 FAR prototype is feasible
and capable of supporting community benefits contributions in all sensitivity analysis
scenarios except for Scenario 1b and Scenario 2. The 3.9 FAR prototype is feasible and
capable of supporting community benefits contributions in all scenarios except for 1b, 2,
and 3.
• Based on results of the sensitivity analysis scenarios, the value uplift per bonus square
foot of building area ranges from $0 to $79 when comparing a life science project at a .5
base FAR versus 2.0 bonus FAR. Figure 5 shows the value uplift per bonus square foot of
building area under different sensitivity analysis scenarios and under different assumed
base FAR and bonus FAR for the life science development prototypes. Excluding the
scenarios in which the 2.0 FAR prototype is infeasible or nearly infeasible, the analysis
found value uplift of between $12 and $79 per bonus square foot between a .5 FAR base
project and a 2.0 bonus FAR project, with an overall average of $47.
• Due to the higher construction costs associated with the 3.9 FAR life science prototype,
the prototype generates relatively low value uplift per square foot of bonus building area.
As shown in Figure 5, if the base zoning allows a .5 FAR life science project, the 3.9 FAR
bonus prototype generates lower value uplift per bonus square foot of building area than
the 2.0 FAR bonus prototype. For example, under existing conditions (Scenario 1), the
value uplift per bonus square foot is $79 for the 2.0 FAR prototype and $34 for the 3.9
FAR prototype. Among the prototypes studied, the sensitivity analysis also showed that the
greatest value uplift per bonus square foot occurs between the 1.0 FAR prototype and 2.0
FAR prototype, as demonstrated in the rightmost column of Figure 5.
• The sensitivity analysis suggests that the City of South San Francisco could reasonably
enact a requirement that developers provide a community benefits contribution of
approximately $20 per bonus square foot of building area if the base zoning allows a .5
FAR building. Cities typically seek to require that developers provide community benefits
contributions equating to approximately half the value uplift created through providing
additional development rights. This ensures that project developers are incentivized to
take advantage of the bonus rights to receive additional value, and in turn provide
community benefits contributions to the City. Based on the value uplift per bonus square
foot associated with the .5 FAR base versus 2.0 FAR bonus development prototypes, a $20
per bonus square foot community benefits contribution requirement would represent less
than half the value uplift per bonus square foot in Scenarios 4, 5, and 6, and a quarter of
the value uplift in the existing conditions scenario (Scenario 1).
• Dynamic development and market conditions suggest that South San Francisco should
pursue a relatively flexible community benefits framework. Development conditions for life
science and office space could rapidly change in South San Francisco. For example, while
demand for life science space is at an unprecedented high due to biotechnology
investment activity during the COVID-19 pandemic, immense developer interest in building
life science space could potentially lead to an oversupply in the region and a decline in
achievable rents. At the same time, construction costs have been especially volatile in
recent years, creating uncertainty about costs to deliver projects in the future. Under both
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 11
of these scenarios, the margin of error for development feasibility—and corresponding
community benefits potential—becomes much more limited.
• Any selected voluntary community benefits program should apply equally to office and life
science development projects. As noted earlier, office development projects are not
currently feasible in South San Francisco and cannot support community benefits
contributions in exchange for bonus FAR. Nevertheless, any selected voluntary community
benefits program should apply the same required contribution per bonus square foot to
both office and life science development projects. This will ensure that developers cannot
avoid the community benefits contribution by building a bonus FAR office project and later
converting it to life science use, or by differentiating the office component of a typical life
science project in order to exempt the space from the contribution.
FIGURE 5: PROJECT VALUE “UPLIFT” PER BONUS SQUARE FOOT, BY SENSITIVITY ANALYSIS SCENARIO AND UNDER
DIFFERENT BASE FAR AND BONUS FAR LIFE SCIENCE DEVELOPMENT PROTOTYPES
Base Versus Bonus FAR
0.5 to 1.0 0.5 to 2.0 0.5 to 3.9 1.0 to 2.0
Scenario 1: Existing Conditions $0 $79 $34 $121
Scenario 1b: Existing Conditions with 5.25%
Yield-on-Cost $0 $1 $0 $1
Scenario 2: Rents Decrease by 5% $0 $0 $0 $0
Scenario 3: Construction Costs Increase by 5% $0 $12 $0 $19
Scenario 4: High-End Land Costs $0 $46 $19 $70
Scenario 5: Community Facilities District $0 $53 $11 $81
Scenario 6: Childcare Parcel Tax $0 $46 $19 $70
Source: Strategic Economics, 2022.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 12
Appendix A: Detailed Methodology and Assumptions
This section provides a detailed description of the methodology used for the financial feasibility
and community benefits analysis. It also summarizes the development assumptions used in the
pro forma analysis, including revenue assumptions and development costs such as land costs,
construction costs, and indirect costs based on the eight life science and office prototypes.
METHODOLOGY
This section provides an overview of the study methodology, including a detailed description of the
pro forma methods used to estimate potential community benefits for commercial development.
For the community benefits analysis, Strategic Economics developed a static pro forma model to
first measure the financial feasibility of the building prototypes and subsequently calculate
supportable residual land value in the multi-step process described below:
1. All development costs were estimated, including land costs, direct construction costs
(“hard” costs), indirect costs (“soft” costs such as development fees, permits and
overhead), and financing costs; City staff assisted with estimating municipal fees for each
prototype.
2. The net operating income of each prototype was estimated based on currently achievable
market-rate commercial lease revenues and assumptions about average vacancy and
operating expenses. Strategic Economics estimated the market value of the developments
using the income capitalization method, which divides net operating income of the property
in its first stabilized year by the current capitalization rate.
3. The return (profit) was calculated by subtracting total costs (1) from total revenues (2).
4. Feasibility was tested by comparing the project return to a “target return,” or industry
standard return that a developer would require for a project of each type, expressed as a
yield-on-cost.
5. For projects with a yield-on-cost exceeding current developer return thresholds and a
positive value remaining after accounting for the target developer return, the residual land
value represents the maximum capacity to pay for additional community benefits.
More information on the yield-on-cost and residual land value calculations are provided below.
COMMUNITY BENEFITS ANALYSIS: RESIDUAL LAND VALUE METHOD
After assessing financial feasibility, the pro forma model calculated supportable residual land
value, or the value that the developer has remaining to pay for land after accounting for costs,
revenues, and required return. For each prototype, residual land value was calculated by dividing
the net operating income (described in step 2 of the methodology above) by the target yield-on-
cost (step 4) to estimate the total supportable project value. Then, residual land value was
calculated by subtracting the total development costs excluding land acquisition. Residual value
that exceeds the current market cost of land (based on review of comparable sales transactions
and information gleaned through interviews with local developers) represents the maximum value
that the City can potentially capture in the form of community benefits. These calculations are
shown in Figure 10.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 13
FIGURE 6: EXAMPLE RESIDUAL LAND VALUE CALCULATION – SENSITIVITY ANALYSIS SCENARIO 1: ORIGINAL LIFE
SCIENCE ASSUMPTIONS
Prototype
LifeSci-3 LifeSci-MU-5 LifeSci-MU-8A LifeSci-8B
Assumptions
Minimum Yield on Cost (YoC) 5.0% 5.0% 5.0% 5.0%
Price of Land psf $200 $200 $200 $200
Land in acres 6.0 6.0 6.0 6.0
Project Value Metrics (in Millions of $)
Net Operating Income $7.8 $16.1 $32.5 $58.3
Supportable Project Value (NOI/YoC) $156.1 $321.7 $650.8 $1166.7
Residual Land Value Calculation (in Millions of $)
Supportable Project Value (NOI/YoC) $156.1 $321.7 $650.8 $1166.7
Construction Costs, Excluding Land $125.9 $276.3 $566.7 $1084.1
Residual Land Value $30.2 $45.4 $84.1 $82.6
RLV psf of land (in $) $115 $173 $321 $315
Remaining Value for Community Benefits Calculation
Residual Land Value $30.2 $45.4 $84.1 $82.6
Land Costs $52.8 $52.8 $52.8 $52.8
Remaining Value for Community Benefits -$22.6 -$7.4 $31.3 $29.8
Source: Strategic Economics, 2022.
Strategic Economics estimated maximum potential community benefits contributions between
base and bonus FAR scenarios by comparing the residual land value associated with a base
prototype to that of a higher intensity prototype, which represents the value “uplift” associated
with the increase in FAR. In scenarios in which the base prototype is feasible, the value uplift is
the difference between the residual land value for the bonus prototype and the residual land value
for the base prototype. In scenarios in which the base prototype is not feasible (i.e., the residual
land value is negative after accounting for the cost of land), then the value uplift and maximum
community benefits contribution for the higher FAR prototypes is simply the remaining residual
land value after accounting for the cost of land. The value uplift / maximum supportable
community benefits contribution was then divided by the difference in square feet between the
base and bonus prototypes to express the results based on dollars per bonus square foot of
building area.
REVENUES
This section describes the revenue assumptions for life science and office buildings, including their
respective retail components where applicable.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 14
RENTAL RATES
• Retail Rents: The average monthly rent of $2.75 per square foot (NNN 3) for retail
components of mixed-use buildings were developed based on a review of asking rents for
retail properties built since 2015 in South San Francisco.
• Life Science Rents: Life science rents were developed based on a review of average rents
in the North Peninsula submarket for Class A properties. They were further refined based
on rents achieved at comparable, recently-completed projects and based on developer
input regarding current achievable rents in South San Francisco for new buildings.
• Office Rents: Office rents were developed based on a review of current rents for the newest
office properties in South San Francisco. Because most office properties were built prior
to the “Great Recession” of 2007 to 2009, rents for a new Class A building in South San
Francisco were presumed to be somewhat higher than the current average rents of the
older Class A buildings (between $3.85 and $4.00 per square foot per month for a Full
Service Gross lease 4). This analysis therefore assumed a monthly rental rate of $4.25 to
account for a newer building.
EXPENSES, VACANCY, AND CAPITALIZATION RATES
The assumptions for vacancy rates, capitalization rates, and operating expenses were based on
experience with similar pro forma analyses and consultation with developers and investors
familiar with local market and development conditions. They are presented below in Figure 7 and
Figure 8.
FIGURE 7: REVENUE ASSUMPTIONS FOR OFFICE PROTOTYPES
Unit Office-MU-3 Office-MU-5 Office-MU-8A Office--8B
Office
Average Monthly Rent Per NSF, FSG [1] $4.25 $4.25 $4.25 $4.25
Expenses % of Scheduled Revenue 30% 30% 30% 30%
Average Vacancy % of Scheduled Revenue 5% 5% 5% 7.5%
Capitalization Rate % of Net Operating Income 6.00% 6.00% 6.00% 6.00%
Retail
Average Monthly Rent Per NSF, NNN [2] $2.75 $2.75 $2.75 $2.75
Expenses % of Scheduled Revenue 10% 10% 10% 10%
Average Vacancy % of Scheduled Revenue 5.0% 5.0% 5.0% 5.0%
[1] Full Service Gross (FSG) leases refer to agreements in which the tenant pays only for the base rent while the landlord covers
operating expenses.
[2] Triple net leases (NNN) refer to lease agreements in which the tenant pays their pro rata share of operating expenses including
property taxes, common area maintenance, and building insurance.
Source: Strategic Economics, 2021.
3 Triple net leases (NNN) refer to lease agreements in which the tenant pays their pro rata share of operating expenses including
property taxes, common area maintenance, and building insurance.
4 Full Service Gross (FSG) leases refer to agreements in which the tenant pays only for the base rent while the landlord covers
operating expenses.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 15
FIGURE 8: REVENUE ASSUMPTIONS FOR LIFE SCIENCE PROTOTYPES
Unit
LifeSci-
MU-3
LifeSci-
MU-5
LifeSci-
MU-8A
LifeSci-
8B
Life Science
Average Monthly Rent Per NSF, NNN [1] $6.50 $6.50 $6.50 $6.50
Expenses % of Scheduled Revenue 10% 10% 10% 15%
Average Vacancy % of Scheduled Revenue 5% 5% 5% 7.5%
Capitalization Rate % of Net Operating Income 4.50% 4.50% 4.50% 4.50%
Retail
Average Monthly Rent Per NSF, NNN [1] $2.75 $2.75 $2.75 $2.75
Expenses % of Scheduled Revenue 10.0% 10.0% 10.0% 10.0%
Average Vacancy % of Scheduled Revenue 5.0% 5.0% 5.0% 5.0%
[1] Triple net leases (NNN) refer to lease agreements in which the tenant pays their pro rata share of operating expenses including
property taxes, common area maintenance, and building insurance.
Source: Strategic Economics, 2021.
DEVELOPMENT COSTS
Strategic Economics developed cost assumptions for use in the pro forma model based on a
combination of market research and interviews with residential, life science, and office developers.
Initial assumptions were made based on market reports and industry sources and were
subsequently vetted and refined through the developer interviews.
LAND COSTS
Because a goal of this analysis was to estimate the relative residual land value for different
building types (life sciences and office) and varying densities on the same parcel, the assumed
baseline value of land zoned for life science development – the market’s dominant land use -- was
held constant across all land uses. Developers reported that life science land in South San
Francisco is priced on a buildable square foot basis. Current base density standards for life science
and office development in South San Francisco in the East of 101 area allow for a maximum floor
area ratio (FAR) of 0.5, while a density bonus of up to 1.0 or 1.25 FAR is available to developers
that meet certain building and transportation demand management standards. However, a review
of recent projects suggests that few, if any, projects are now being constructed at a density of 0.5
FAR and that projects are no longer feasible at this density. As a result, this analysis assumed that
today’s land costs reflect life science development at a 1.0 FAR density.
Baseline land costs for the hypothetical development sites in South San Francisco were assumed
to be between $175 and $250 per land square foot for all prototypes, based on a review of recent
land and property transactions for life science properties citywide and feedback from developer
interviews. For the purposes of feasibility testing, $200 per land square foot was the benchmark
assumption used for land costs throughout the analysis.
DIRECT COSTS
Direct costs (Figure 9 and Figure 10) include the physical cost of construction, including site
preparation and any demolition, the vertical cost of building construction for each of the uses,
parking construction, and tenant improvement (TI) allowance. Each of these cost categories is
described in more detail below:
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 16
• Site preparation and demolition: Site preparation and demolition includes any costs
associated with demolishing existing improvements, site remediation, and any other onsite
work required prior to starting new construction. Site conditions in South San Francisco
that could significantly increase in the cost of sitework include the presence of toxins
requiring remediation; expansive soils due to site being built on fill; and a high water table.
The assumptions used for site preparation in this analysis assume relatively
straightforward site conditions, but it is important to note that much of the land East of
Highway 101 is known to have one or more of these conditions. For example, projects that
are built on fill could cost as much as $200 per square foot of building footprint for site
preparation.
• Life science construction costs: These include all direct costs for the life science portions
of the development. Costs for the LifeSci-Mu-3 and LifeSci-MU-5 prototypes were assumed
to be $450 per square foot, while the costs for the LifeSci-MU-8A and LifeSci-8B were
assumed to be slightly higher at $500 per square foot to account for the usage of both
steel and concrete in these prototypes.
• Office construction costs: These include all direct costs for the office portions of the
development prototype. Costs for the Office-MU-3 and Office-MU-5 prototypes were
assumed to be $400 per square foot, while the costs for the Office-MU-8A and Office-8B
were assumed to be slightly higher at $475 per square foot to account for the usage of
both steel and concrete in these prototypes. Note that these office construction costs may
be higher than costs for other buildings in the market area due to the assumption that
most office developers in South San Francisco would design office buildings that could
potentially be repurposed for life science users in the future. However, direct costs for
office buildings are lower than for life science buildings due to the absence of high-volume
HVAC systems and other building components that life science users would later add if the
building were repurposed.
• Parking costs. These costs include construction of on-site parking assuming surface
parking lots, structured parking, multi-level podium parking, and completely or partially
subterranean parking, alone or in combination depending on the prototype.
• Tenant improvements (TI): These include cost allowances for building alterations made to
accommodate the needs of tenants beyond the costs associated with the buildout of the
“cold shell.” TI costs are applied to the net square footage of retail, life science, and office
components for each of the building prototypes.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 17
FIGURE 9: LIFE SCIENCE DIRECT COST ASSUMPTIONS
Unit of measure LifeSci-MU-3 LifeSci-MU-5 LifeSci-MU-8A LifeSci-8B
Land Costs Per Land Square
Foot
$200 $200 $200 $200
Direct Costs
Demolition and Site Work Per SF Land $40 $40 $40 $40
Life Science Area
Construction
Per Gross SF Life
Science
$450 $450 $500 $500
Parking
Surface Per Space $5,000 $5,000 $5,000 $5,000
Structured Per Space $55,000 $55,000 $55,000 $55,000
Interior / Tenant
Improvement Allowance
Retail Per Net SF $175 $175 $175 $175
Life Science Per Net SF $175 $175 $175 $175
Source: Strategic Economics, 2021.
FIGURE 10: OFFICE DIRECT COST ASSUMPTIONS
Unit of measure Office-MU-3 Office-MU-5 Office-MU-8A Office-8B
Land Costs Per Land Square
Foot
$200 $200 $200 $200
Direct Costs
Demolition and Site Work Per SF Land $40 $40 $40 $40
Office Area Construction Per Gross SF Office $400 $400 $475 $475
Parking
Surface Per Space $5,000 $5,000 $5,000 $5,000
Structured Per Space $55,000 $55,000 $55,000 $55,000
Interior / Tenant
Improvement Allowance
Retail Per Net SF $175 $175 $175 $175
Office Per Net SF $140 $140 $140 $140
Source: Strategic Economics, 2021.
INDIRECT COSTS
Indirect costs (Figure 11 and Figure 12) include: architecture, engineering, and other types of
consulting services; taxes, insurance, legal, and accounting services; miscellaneous/other
services; and municipal permits and fees. A typical contingency (six percent of direct costs for
life science and office) and financing cost assumptions were also included. Estimates for city
permits and fees were estimated with guidance from City staff and represent all significant
development fees currently in effect for South San Francisco, including building, planning,
engineering fees, and in-lieu contributions for fractional below-market rate units.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 18
FIGURE 11: INDIRECT COST ASSUMPTIONS FOR LIFE SCIENCE DEVELOPMENT PROTOTYPES
Unit LifeSci-MU-3 LifeSci-MU-5 LifeSci-MU-8A LifeSci-8B
Arch, Eng & Consulting % of hard costs 5.0% 5.0% 4.5% 4.5%
Taxes, Insurance, Legal
& Accounting
% of hard costs 3.0% 3.0% 3.0% 3.0%
Other Soft Costs % of hard costs 1.0% 1.0% 1.0% 1.0%
Total Soft Costs
(Excluding Fees)
% of hard costs 9.0% 9.0% 8.5% 8.5%
Municipal Fees and
Permits [a]
(in $millions) $8.7 $18.2 $35.4 $67.2
Contingency % of hard costs 6% 6% 6% 6%
Financing % of hard and soft
costs
8% 8% 9% 9%
Developer
Overhead/Fee
% of hard costs,
excluding contingency
4% 4% 4% 4%
[a] Includes impact fees and permits.
Source: City of South San Francisco, 2021; Strategic Economics, 2021.
FIGURE 12: INDIRECT COST ASSUMPTIONS FOR OFFICE DEVELOPMENT PROTOTYPES
Unit Office-MU-3 Office-MU-5 Office-MU-8A Office-8B
Arch, Eng & Consulting % of hard costs 5.0% 5.0% 4.5% 4.5%
Taxes, Insurance, Legal
& Accounting
% of hard costs 3.0% 3.0% 3.0% 3.0%
Other Soft Costs % of hard costs 1.0% 1.0% 1.0% 1.0%
Total Soft Costs
(Excluding Fees)
% of hard costs 9.0% 9.0% 8.5% 8.5%
Municipal Fees and
Permits [a]
(in $millions) $8.9 $18.6 $36.3 $69.1
Contingency % of hard costs 6% 6% 6% 6%
Financing % of hard and soft
costs
7% 7% 7% 7%
Developer
Overhead/Fee
% of hard costs,
excluding contingency
4% 4% 4% 4%
[a] Includes impact fees and permits.
Source: City of South San Francisco, 2021; Strategic Economics, 2021.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 19
Appendix B: Financial Pro Forma Models and RLV Summary
FIGURE 13: LIFE SCIENCE PRO FORMA
Revenues (in Millions of $) LifeSci-MU-3 LifeSci-MU-5 LifeSci-MU-8A LifeSci-8B
Life Science
Gross Scheduled Income $8.9 $18.4 $38.0 $75.3
Less Operating Expenses -$0.9 -$1.8 -$3.8 -$11.3
Less Vacancy -$0.4 -$0.9 -$1.9 -$5.6
Net Operating Income $7.6 $15.6 $32.3 $58.3
Capitalized Value $168.8 $347.8 $717.4 $1296.4
Retail
Gross Scheduled Income $0.2 $0.5 $0.3 $0.0
Less Operating Expenses -$0.02 -$0.05 -$0.03 $0.00
Less Vacancy -$0.012 -$0.026 -$0.015 $0.000
Net Operating Income $0.2 $0.4 $0.3 $0.0
Cap Rate 4.50% 4.50% 4.50% 4.50%
Total NOI $7.8 $16.1 $32.5 $58.3
Total Capitalized Value $173.5 $357.5 $723.1 $1296.4
Development Costs (in Millions of $)
Land Costs $52.8 $52.8 $52.8 $52.8
Direct Costs
Demolition and Site Work $10.5 $10.5 $10.5 $10.5
Retail Area $3.3 $7.0 $4.6 $0.0
Life Science Building Area $54.3 $111.8 $256.3 $507.9
Parking $1.1 $26.1 $52.2 $98.1
Tenant Improvements
Retail $1.3 $2.7 $1.6 $0.0
Life Science $20.1 $41.3 $85.2 $168.9
Subtotal Direct Costs $90.6 $199.4 $410.4 $785.3
Indirect Costs
Soft Costs $8.2 $17.9 $34.9 $66.8
Impact Fees $7.2 $15.1 $30.2 $59.2
Building Permits $1.5 $3.1 $5.1 $8.1
Contingency $5.4 $12.0 $24.6 $47.1
Financing $9.3 $20.5 $44.4 $84.9
Developer Fee $3.77 $8.31 $17.10 $32.72
Subtotal Indirect Costs $35.3 $76.9 $156.4 $298.7
Total Development Costs $178.7 $329.1 $619.6 $1136.9
Metrics of Return
Net Value -$5.3 $28.3 $103.6 $159.5
Yield on Cost (NOI/Total Dev Cost) 4.37% 4.89% 5.25% 5.13%
Feasibility Infeasible Infeasible Feasible Marginally Feasible
Source: Strategic Economics, 2021.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 20
FIGURE 14: OFFICE PRO FORMA
Revenues (in Millions of $) Office-MU-3 Office-MU-5 Office-MU-8A Office-8B
Office
Gross Scheduled Income $5.2 $10.8 $22.2 $44.0
Less Operating Expenses -$1.6 -$3.2 -$6.7 -$13.2
Less Vacancy -$0.3 -$0.5 -$1.1 -$3.3
Net Operating Income $3.4 $7.0 $14.4 $27.5
Retail
Gross Scheduled Income $0.2 $0.5 $0.3 $0.0
Less Operating Expenses $0.0 -$0.1 $0.0 $0.0
Less Vacancy $0.0 $0.0 $0.0 $0.0
Net Operating Income $0.2 $0.4 $0.3 $0.0
Total Net Operating Income $3.6 $7.4 $14.7 $27.5
Total Capitalized Value $60.1 $124.0 $245.0 $458.7
Development Costs (in Millions of $)
Land Costs $52.8 $52.8 $52.8 $52.8
Direct Costs
Demolition and Site Work $10.5 $10.5 $10.5 $10.5
Office Building Area $48.2 $99.4 $243.5 $482.5
Retail Building Area $3.0 $6.3 $4.4 $0.0
Parking $1.1 $26.1 $52.2 $98.1
Tenant Improvements
Office $14.4 $29.6 $61.0 $120.9
Retail $1.3 $2.7 $1.6 $0.0
Subtotal Direct Costs $78.5 $174.5 $373.1 $711.9
Indirect Costs
Soft Costs $7.1 $15.7 $31.7 $60.5
Impact Fees $7.4 $15.7 $31.4 $61.4
Building Permit Fees $1.4 $2.9 $5.0 $7.7
Contingency $4.7 $10.5 $22.4 $42.7
Financing $7.2 $15.9 $33.5 $64.0
Developer Fee $3.3 $7.3 $15.5 $29.7
Subtotal Indirect Costs $31.1 $67.9 $139.5 $266.0
Total Development Costs $162.4 $295.2 $565.4 $1030.7
Metrics of Return
Net Value -$102.3 -$171.2 -$320.4 -$572.0
Yield on Cost (NOI/Total Dev Cost) 2.22% 2.52% 2.60% 2.67%
Feasibility Infeasible Infeasible Infeasible Infeasible
Source: Strategic Economics, 2021.
Results and Conclusions of Community Benefits Contribution Analysis for Shape SSF 21
FIGURE 15: LIFE SCIENCE RESIDUAL LAND VALUE AND COMMUNITY BENEFIT COMPARISONS, BY FAR AND
SCENARIO
.5 FAR 1.0 FAR 2.0 FAR 3.9 FAR
Scenario 1: Existing Conditions with 5.0% YoC
Total Residual Land Value $30,171,743 $45,414,017 $84,073,921 $82,643,989
Land Cost $52,816,000 $52,816,000 $52,816,000 $52,816,000
Remaining Value for Community Benefits -$22,644,257 -$7,401,983 $31,257,921 $29,827,989
Yield on Cost 4.37% 4.89% 5.25% 5.13%
Scenario 1b: Existing Conditions with 5.25% YoC
Total Residual Land Value $22,738,160 $30,092,922 $53,082,525 $27,086,110
Land Cost $52,816,000 $52,816,000 $52,816,000 $52,816,000
Remaining Value for Community Benefits -$30,077,840 -$22,723,078 $266,525 -$25,729,890
Yield on Cost 4.37% 4.89% 5.25% 5.13%
Scenario 2: Rents Decrease by 5%
Total Residual Land Value $22,574,556 $29,765,204 $51,790,960 $24,308,216
Land Cost $52,816,000 $52,816,000 $52,816,000 $52,816,000
Remaining Value for Community Benefits -$30,241,444 -$23,050,796 -$1,025,040 -$28,507,784
Yield on Cost 4.15% 4.65% 4.99% 4.87%
Scenario 3: Construction Costs Increase by 5%
Total Residual Land Value $24,342,473 $32,580,356 $57,655,068 $32,086,311
Land Cost $52,816,000 $52,816,000 $52,816,000 $52,816,000
Remaining Value for Community Benefits -$28,473,527 -$20,235,644 $4,839,068 -$20,729,689
Yield on Cost 4.23% 4.70% 5.04% 4.91%
Scenario 4: High-End Land Costs
Total Residual Land Value $30,171,743 $45,414,017 $84,073,921 $82,643,989
Land Cost $66,020,000 $66,020,000 $66,020,000 $66,020,000
Remaining Value for Community Benefits -$35,848,257 -$20,605,983 $18,053,921 $16,623,989
Yield on Cost 4.07% 4.70% 5.14% 5.07%
Scenario 5: Community Facilities District
Total Residual Land Value $27,611,003 $40,132,417 $73,638,961 $62,327,669
Land Cost $52,816,000 $52,816,000 $52,816,000 $52,816,000
Remaining Value for Community Benefits -$25,204,997 -$12,683,583 $20,822,961 $9,511,669
Yield on Cost 4.29% 4.81% 5.17% 5.04%
Scenario 6: Childcare Parcel Tax
Total Residual Land Value $17,060,183 $32,302,457 $70,962,361 $69,532,429
Land Cost $52,816,000 $52,816,000 $52,816,000 $52,816,000
Remaining Value for Community Benefits -$35,755,817 -$20,513,543 $18,146,361 $16,716,429
Yield on Cost 4.00% 4.69% 5.15% 5.07%
Source: Strategic Economics, 2022.
EXHIBIT "A"
Community Benefit Program Fees for Commercial Development Projects
Community Benefit Program fees for commercial development projects shall be calculated using the
gross floor area of net new commercial space subject to the Community Benefit Program fee pursuant
to South San Francisco Municipal Code Chapter 20.395.
Commercial Development Type Fee per Square Foot of Net New Gross Floor Area
Office and Research & Development Uses $20