Despite the ongoing conversation in the community about the proposal to convert the King Edward II Inn to housing for at-risk young adults, very little has centered on the estimated cost, or overall financing, of the project. A significant portion of this project is paid for with our state and federal tax dollars, so it’s a fair assumption that the public wants a good value for our money. Here’s a brief look at where the money is coming from and where it is going.

To begin, the total cost of the project is $9,146,080, as stated in the Corrected Environmental Assessment on file at the Mayor’s Office of Housing (MOH). Note that the original project estimate was approximately $8.2 million; this is especially shocking when we remember that the original Notice of Funding Availability (NOFA) from the MOH was for just $2 million.

This $9.1 million cost is quite high for 24 residential units and one manager’s unit; in fact, it comes out to over $381,000 per residential unit. For comparison, a 16-unit apartment complex in Nob Hill recently sold for roughly $2.8 million; which is $175,000 per unit. That is a striking difference when you consider that the Nob Hill apartment complex had an average apartment size of 920 square feet, each with its own kitchen. The renovated King Edward will have an average of 250 square feet per unit, and a shared kitchen on the ground floor. Looked at another way, this project will have a total cost of about $1,045 per square foot, in a neighborhood where the average single family home sells for about $770 per square foot.

So if they are planning to spend $9.1 million, where is the money going? The total purchase cost of both the building and the land is $3.5 million. That leaves $5.6 million for renovating the building – $5.6 million to fix up a $3.5 million building. That can’t be right – or can it? Every project of this scale will incur some overhead, thus the entire $5.6 million cannot go to tenant improvements. It is actually a combination of administrative, management and developer fees, and, of course, profit. Yes, profit. To the developer the total profit is just over $931,000, or over 11 percent of the originally proposed budget.

In addition to these profits of nearly $1 million, another $1 million will go to soft costs that include legal, architectural and marketing fees, and $35,000 is budgeted for community outreach. After all that, there is still $923,669 that was added to the budget after the loan was approved, and we do not know where it is being spent.

When we start to look at the source of this money, things get a little more complicated. The MOH has approved a loan in the amount of $4,416,508 to cover the initial acquisition and the predevelopment planning. In fact, the original NOFA was only for $2 million, but the MOH felt an additional $2,416,508 was warranted. This money comes from a combination of Community Development Block and Home Investment Partnership Program grants. However, this is only temporary because the developer expects to refinance the project by the end of 2012. If that works, the City is off the hook; otherwise, we (the City and taxpayers) are carrying the loan indefinitely.

Here’s the tricky part. The refinancing includes a combination of financial sources including Housing and Community Development, the Multi-Family Housing Program, the Affordable Housing Program, the Mental Health Services Act, and a combination of Limited Partner Equity and General Partner Equity. In short, the developer will create both a general partnership (typically in the form of an LLC) and a limited partnership, which will each invest in this project. The Community Housing Partnership, as a nonprofit, will retain the land and will not have to pay property taxes, yet they will transfer ownership of the building to the limited partners to be managed by the general partners, for a fee.

So why would anyone with sufficient wealth invest in a redevelopment project? The answer is tax credits. If done properly, the federal government will pay a 9 percent tax credit annually, most likely for the next 10 years. The state government could also kick in another 30 percent one-time tax credit. So let’s say you invest $5 million into this project: Your tax bill will go down by $450,000 per year. If the state credit comes through, you will also get another $1.5 million credit. That is not taxable income; instead, it is taxes you do not have to pay. I don’t know if you’ve taken a look at your own investments lately, but a 9 percent annual return – tax free – is looking pretty good right now. Of course, you have to have a pretty big tax bill in the first place to make it work.
All of this is legal; it’s the way these programs work. But when the average rent for a one-bedroom apartment in the neighborhood is under $1,700; that same $9,146,080 could house 45 young adults for the next 10 years. Unfortunately, there are a lot of people with a vested financial interest who want to make this project bigger and more expensive than it needs to be. Perhaps that is why the public commentary has been careful to avoid any discussion of the costs until now.
If you feel that this project warrants further review by our mayor and other city officials before approval, please voice your concerns to Mayor Gavin Newsom ([email protected]), the Mayor’s Office of Housing ([email protected]) and Supervisor Alioto-Pier ([email protected]).

John Millar is president of The Marina Community Association, which is dedicated to protecting and improving the distinctive residential quality of the Marina District. Visit www.sfmca.org for more information.