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Marin County
The Unaffordable Oak Hill Project
This project is to construct 135 apartments near San Quentin to house teachers in Marin County. Others have described very well all the complexities associated with putting this project together, attempting to finance it, and campaigning for local school districts to guarantee the necessary rental income level so the project cash flows. Great references on the subject include the article written by Mary Stompe, and another one by Dick Spotswood.
My main objective is to explore at a high level the underlying math of
the cash flows and the actual cost of the project scaled on a comparable
cost per square foot.
These are the details about the unit types and sizes.
The cost of the project is $118 million. This comes out at over $1,000 per square foot.
The $1,000 per square foot is very high given that the land was given to this project. This same $1,000 per square foot is much over the Marin County average market value per square foot of $746 (Source RedFin). It is only in very expensive Southern Marin markets that home values reach at and over $1,000 per square foot.
To fully appreciate how high the cost of this project is, we have to grasp the difference between construction costs and market value. Market value includes the value of the land that typically accounts for half or more of the total market value of a house. And, as mentioned the land was given to the project.
Next, let's figure out the cost of the bond financing. Using a 40 year term fully amortizing (480 months) and an estimated rate of 4.50% for such a bond (Muni Single A rating, 40 years), you get a monthly payment of $530,484.This translates into a $4.53 monthly payment or cash flow per square foot necessary to service the bond.
Using this $4.53 per square foot allows us to figure out what rent levels would be necessary to service the bond. And, such rents come in at a little over $2,800 for the Junior-1 bedroom to close to $6,000 for the 3-bedroom.
Next, let's figure what rent level Oak Hill will be able to charge teachers. This project is aimed at 50% - 80% of median household income. To keep it simple I use the 80% level. And, rents are limited to 30% of such income. As shown below, the allowed rents range from $1,261 to $3,551.
Source for Median Income: Neilsberg Research (US Census Bureau)
Next, let's figure the gap between the rents necessary to service the bond and the allowable rent levels. As shown below such gaps are enormous. This is especially true for the smaller units housing a single tenant.
Next, let's figure what the monthly rental gap is for the whole project. We also want to explore such gaps using different % of median income ranging from 50% to 80%.
As shown above the gaps in both dollars and % of rent necessary to service the bond are enormous. They represent between 47.8% to 67.4% of the mentioned necessary rent. A contact of mine shared with me that a party to the financing is pushing for this project to use an 85% of median income threshold. It is unclear if such a high threshold will be ratified and to how many units it would be applied. Assuming it could be applied to all units, the resulting gap would still be 44.5% of the necessary rent level for the project to cash flow.
And, my quick calculations way underestimate the level of subsidies needed. This is because I ignore the following:
- Property tax
- Insurance
- Utilities
- Vacancy rate
- Property management fees
- Landscaping & janitorial services
Another contact who is an architect and is knowledgeable about this specific project indicated that Oak Hill got numerous regulatory breaks to lower the overall cost of the project. Yet, its cost is still staggeringly high.
Even given high construction costs in California, it is challenging to explain the over $1,000 per square foot cost for this project. It appears way higher than other projects in California and elsewhere throughout the Nation.
Below I show a recent reference on the cost per square foot of developing apartment buildings throughout the US.
Source: Janover Multifamily Loans, November 2024
THE END
Gaetan Lion is an independent researcher with expertise in economics, econometrics, investments, risk management, statistics, and quantitative analysis. His areas of interest include demographics, economics, investments, Climate Change, health care, sports, and politics.