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HomeMy WebLinkAboutA033 - Letter from Paul White in favor of tax abatement [ s L C DEG 15 2000 December 12, 2000 CITY 0 AMES,'IOU'JA To Mayor Tedesco and the Ames City Council: I am writing you about tax abatement for Somerset. I purchased a townhouse in Somerset recently. I consider this an investment in my future and I hope that it not only maintains its value but increases in value over time. I believe that the idea behind Somerset is a good one and it is my hope that the development is completed as planned. I think that tax abatement will help get the subdivision finished as it was originally planned. I understand that I will not directly benefit from the tax abatement but it is my opinion that I will benefit indirectly because the abatement will help the completion of the subdivision and make my property more valuable. I am in favor of tax abatement for the Somerset Subdivision. Respectfully, Paul White 2727 Hampton Ames, Iowa ANSWERS TO COMMONLY ASKED QUESTIONS ABOUT TAX ABATEMENT FOR SOMERSET 1. Question: Why is there movement on the Uthe Farm if the market is "saturated?" Answer: The Uthe Farm is a significantly different development than Somerset. There are currently no standard subdivision lots similar to Northridge available in the market place. In addition,lots for medium priced homes are unavailable, which has resulted in a significant number of individuals employed in Ames purchasing homes in Ankeny. The reason for the slow pace of Somerset is not a result of a saturation point in the market place,but a result of the limited acceptance by the marketplace of this neo-traditional village concept. 2. Question: Why do we need abatement for some of the same amenities that have been voluntarily put in other developments? Answer: There is no tax abatement on the amenities. In addition,they are not the same amenities that have been voluntarily put in other developments. There is no pavilion in any other development. The number of trees, expense of lights, additional architecture and park areas have resulted in significantly higher costs in this development. Parks in other subdivision have in fact been taken over by the City and maintained under the Parks and Recreation Department. 3. Question: Have not other new developments, like Stone Brooke, taken a long time to catch on and then gone like gangbusters? Answer: Stonebrooke has never gone like gangbusters. That development started in 1980 with high interest rates. The fact is that it has been built out at a very slow pace and has not been a highly profitable subdivision. The Developers, however, chose to develop it in that manner and have accepted the results of their decision, and there has been no effort to have the City assist them through tax abatement in that development because the decision to create it was solely that of the Developers. Other developments have been slow to start and progressed more quickly, but none has been so slow as Somerset after four years. 4. Question: How is there equity for those who have already bought? Answer: Even though the individuals who have already bought in Somerset subdivision will not receive tax abatement,they will receive the benefit of the development being built out as intended. Their properties will be worth more if the entire subdivision is built out like a village, rather than having to convert it to a standard subdivision. Thus,their properties will ultimately be more marketable and more valuable. r 5. Question: Are the Developers' hearts really in making this concept work? (Example, even the entry sign took forever to get going and weeded.)? Answer: The Developers have a ten million dollar investment in this development. They wish to finish it out as they had originally intended. They are willing to put up an additional million dollars of incentives to move this development forward. The question at this time is whether the City's heart is really in it if they do not give the tax abatement to encourage the build out of the village. 6. Question: Are things selling less well in Somerset than in the market as a whole? Answer: Yes. Single family housing in the town as a whole is up 18%. The last two to three single family homes sold out at Somerset have been sold at a loss to get them off the market. A review indicates that the holding period for a Somerset home is significantly longer than in other developments. As it relates to multifamily housing, those facilities cannot be sold without suffering a loss. In other subdivisions, nine apartment buildings have been sold. No multifamily housing buildings have been sold in Somerset except for one which has sold at a loss to get it off the market. P:\BJNadierWUNZIKER\SOMERSET\Answers.wpd MEMO TO: AMES CITY COUNCIL, MAYOR AND CITY MANAGER FROM: SOMERSET DEVELOPERS DATE: DECEMBER 12, 2000 RE: RESOLUTION APPROVING THE URBAN REVITALIZATION PLAN FOR SOMERSET ----------------------------------------------------------------------------------------------------------------------- I. INTRODUCTION On October 10,2000,the City Council voted to have staff prepare an Urban Revitalization Plan for the Somerset Development. The Urban Revitalization Plan was to result in a 100%tax abatement for a three year period for new single family,multifamily and retail commercial construction in the Somerset Development. In addition to the tax abatement, the City negotiated with the Developers nine different conditions they needed to meet in order for the tax abatement to go forward. The Somerset Development was a new development type called a"village concept." The effect of the village was to have a higher density of use of land to avoid urban sprawl, higher infrastructure costs and the loss of agricultural land. By combining single family attached and detached, multifamily and commercial in a smaller area, the density of population on the land is increased significantly. The neo-traditional styling of the village was to offset the closer proximity of people to each other. Since this development style had rarely been used in a small midwestern town,it was unknown by the Developers or the City if the concept would be accepted by a sufficiently large portion of the marketplace for the development to be successful. Somerset started out and continues to be a public/private partnership. The village concept was required of the Developers by the City in exchange for not building apartments in the Northridge Subdivision and for having the property annexed into the city. Since the development type was brand new, the cost of creating the design regulations for the village has all been borne by the Developers. This has resulted in significantly higher cost to the Developers with a significant benefit to the City. The Developers have incurred the losses from delay as a result of creating a totally new development style for the city. Four years later, the Developers fears about nonacceptance by a sufficiently large sector of the market place have been realized. In the fourth year of the development,the progress has slowed to a snail's pace. Single family construction has lagged significantly behind single family development in other subdivisions within the city. See Section III(A). The multifamily housing has turned into a poor investment as a result of the inability to get increased rents to offset increased development costs. See Section III(B). The Developers have incurred significantly more up-front costs because of the need to build out the entire development so prospective purchasers could see how the different property uses are interrelated. In addition, significantly higher amenity costs were incurred to give the area the feel of a neo-traditional development. All in all, the development is currently in jeopardy of failing and needs additional incentives to be built out as envisioned. The Developers are willing to put in an additional one million dollars of incentives to increase the pace and acceptance of the development, as well as providing housing plans, developing additional marketing strategies and free access to the club house by civic groups. They have come to the City for a limited duration tax abatement that, if successful, will result in more tax income to the government over a ten-year period than if the revitalization is not adopted and the current pace of construction continues. See Section U. If the entire revitalization is not approved, the Developers will be forced to come to the City to have the remainder of the land not platted converted to a standard subdivision. U. TAX INCOME IMPLICATIONS OF THE URBAN REVITALIZATION PLAN-A WIN/WIN SCENARIO The City Planning and Housing Department requested from Richard Horn, the City Assessor, an estimate of the value of real estate that may be eligible for tax abatement in Somerset. Mr. Horn made a series of assumptions,one of which was a full build-out in one year of the remaining property in the development. It is clear that such an assumption is not based on what is reasonably expected to happen in the development. Based upon these assumptions, Mr. Horn made some calculations as to the amount of taxes that would not be collected as a result of the tax abatement. There was no consideration given to the tax consequences if the development is not jump started and continues to be built out very slowly. Attached to this memorandum is another analysis of the tax consequences of the tax abatement(See Exhibit"I"). Exhibit 1 uses the City Assessor's numbers and assumptions,but instead of assuming the development is built out in 12 months, which is impossible, a reasonable assumption is used based upon granting and not granting the tax abatement. We must remember that if the construction does not take place,no taxes are paid except on the bare land. Additional taxes are only created from the construction of houses, apartments and commercial buildings. The assumptions of the analysis are that if tax abatement does not take place,the basic construction pace will remain about the same. If the tax abatement does take place and the Developers comply with the nine conditions to which they have agreed, the pace of the development should at least double on single family housing and triple for apartments. The Developers believe this is a conservative assumption. The apartment building, we believe, will be at a faster pace because numerous investors will build the apartments during the three years to get the tax abatement. From the City's standpoint,the quicker the construction takes place,the better,because the property goes on to the tax roles much quicker. 2 If we assume that there is no tax abatement and the current pace of construction continues, based upon the homes, townhomes, apartments and commercial being built over the next five years, the taxes collected on that property would be $3,022,200.00. See Exhibit 1,Tables I and II. If you use Mr. Horn's assumption that it is all built out in one year and the taxes on the property is $1,056,840.00, over a ten year period losing three years for tax abatement the tax collected would be $7,397,880.00. If the City could be assured this would happen, this would clearly be a wise decision. It is not reasonable, however, to expect such a build out. If the tax abatement is granted and the pace of construction doubles for single family and triples for apartments,over that same ten-year period(abating the first three years of taxes)the government will collect$3,926,774 looking at five years of construction. See Exhibit 1, Tables I and IV. Thus,the tax abatement will actually contribute over$900,000 in additional tax versus the denial of the tax abatement and the continuation of the current pace of construction. Even if the increase in pace of construction is double for all types of construction, the taxes collected over a ten year period are approximately$275,000 higher with abatement. See Exhibit 1, Table III. The Council should also recognize that the three million dollars of housing inventory that is currently built, but unsold, will in all likelihood have to be discounted to reflect the tax abatement. The builders will need to suffer this loss since tax abatement only applies to property to be built after the revitalization zone is in place. These will need to be discounted or prospective purchasers will insist on waiting to buy property covered by the tax abatement. This discount is on top of the incentives the developers have agreed to provide as part of the tax abatement. It is clear that the tax abatement for Somerset is a wise economic decision by the council. This is a win/win situation. The government ends up collecting more taxes in the long run as a result of increasing the pace of construction and the City's preferred style of development gets completed as intended. We can then find out if our citizens truly enjoy living in a village community. Further, we can encourage other Developers to use the village concept for subdivisions which will result in a higher density of use of land in our community resulting in lower infrastructure costs. III. REVITALIZING THE ENTIRE DEVELOPMENT A. Single Family Housing: The pace of construction and sales of single family attached and detached houses has been very slow in this development.A review of the lot sales(See Exhibit"2")from 1998 to 2000 reveals that three other subdivisions have sold 50% to 100% more lots than Somerset. A review of the sales of completed homes (See Exhibit "3") during the same period is even more dramatic. The other developments have sold three to four times as many homes as Somerset. The numbers are worse for lots than completed homes because builders are afraid 3 to build homes in the subdivision, and thus, have bought lots, but will not construct homes for fear that they will not sell. The builders fear has validity in fact. An analysis of the number of days the homes have been listed in Somerset(See Exhibit"4")reveals some very lengthy holding periods. A vast majority (between 70% to 80%) of new homes in Ames in the last three years were sold during the construction phase. In Somerset,the holding period has been from 70 to 653 days - almost two years. Approximately one-third of the homes sat on the market for a year or more. The perception of the builders is correct that they have a one in three chance that the home they build in Somerset will eat up their profit in holding costs. Why take that chance when they have a two in three chance in other subdivisions of selling their spec home while constructing it. The reasons for the lack of acceptance in the marketplace are several. First, the additional cost of the lot in this subdivision is $7,650.00 (See Exhibit "5"). As a result of the design criteria, the cost of homes is higher as a result of the porches and front facades,trim pieces around the windows and accent pieces in the siding and along the soffit. Even though these design criteria give the village its unique look,not a sufficient portion of the marketplace is willing to pay the additional money for these aesthetically pleasing costs. Another problem is the inability of a home buyer to build the layout of their home as they wish as a result of the restrictions of the design criteria. The fact that the homes are on smaller lots and are closer to neighbors is also a detriment. Finally,the homes are located near large multifamily housing units, which has always been a detriment in our college town. These objections of the marketplace are the very things that give the village its unique feel and concept. It is a feel that is often associated with a large city. It may be that it will be ultimately accepted in a small midwestern community,but it is too early to tell. If we do not create a revitalization plan for the requested area, we will never know. Apparently, the reputation of the development does not hold out great hope that it will be accepted without the Developers and the City whole-heartedly committing to the concept with dollars and marketing plans. B. Multifamily Housing: One cannot really talk about single family housing without including in the discussion multifamily housing. This development has always been one of mixed housing uses in a dense area. If the apartments are not built with the unique and tasteful styling as currently exists, the entire development is doomed. Numerous realtors will tell you that when prospective single-family housing buyers are taken to Somerset,the first question they ask is"where are the apartments located"and"what will the buildings look like." It is common in city politics to have neighborhoods object to apartment building being located near their single family homes. The only way to avoid the 4 negative impact of apartments is to make them look unique and neo-traditional so the single family owners enjoy seeing the buildings in their neighborhood. Thus, the rub is created. If you build the multifamily housing with greater design criteria, they cost more. If you get greater rents,that is fine,because your return on your investment is the same as other areas. It has been determined,however,over the last four years that you cannot get greater rents in this development (See Exhibit "6"). Thus, you have a building that costs you more, but you get the same income as another apartment building built in another subdivision at a lesser cost. In Somerset you receive a 5%return on your investment and in other subdivisions you receive a 12%to 15% return on your investment. A reasonable investor would not construct an apartment building with a 5%return. If you borrow money at 8.5%to 9%,you end up paying 3.5%to 4%out of pocket. One could get a better return on a certificate of deposit at a bank with much less risk. Further,you do not have tenants bothering you or the other problems associated with owning apartments. This would explain why the construction of multifamily units in Somerset has drawn to a halt. A reasonable council member may very well ask why would we give tax abatement on an apartment building. The answer is that it is the exact type of construction for which the City gets its biggest bang for the dollar. A review of Mr. Hour's analysis reveals that on the single family housing, tax abatement makes up only about one-third of the lost tax revenue because of the 56.3% rollback. In fact, the single family homes show that the difference between"no abatement"and"abatement"totals reflect that there is only a$4,500 difference in collected taxes if the pace is increased by the abatement and marketing incentives. See Exhibit 1, Tables II and III. The apartment buildings,however,make up 48%of the taxes as a result of the fact that they are 100% assessed. This means that the faster they are built, the better,because they go on the tax roll sooner. Based on the current economics, no additional apartment buildings would be built. Rather,they will go to other parts of the community to build where they can expect a normal return. Thus,the taxes on these buildings will not be realized,but the City will still be required to expend the money to maintain the roads, lights and other public improvements. Going back to Tables III and IV of Exhibit"I",the greatest return the City gets from the tax abatement is from the apartments. See also Exhibit 1,Table H. Without the tax abatement, it is estimated 24 apartments per year will be built. That is unreasonably optimistic based upon current economics. However, even using the Developer's unreasonably optimistic number about how many apartments can be built without tax abatement, the government receives substantially more on multifamily housing in the"with abatement"scenario. Over a-ten-year period, by having more apartments built, the government gets almost $822,264 more in taxes looking at five years of construction. See Exhibit 1,Table IV. The developers believe that the construction of apartments will triple because the investors will try to build 5 as many as possible during the tax abatement period. The only reasonable economic and political decision is to permit the tax abatement on the multifamily units. It puts more money in the City's pocket and allows these buildings to be constructed in such a manner as to not discourage the sale of the single family homes. This is a married project which requires all parts of the development to continue together. One part of the revitalization plan will not work without the other. It must be a package deal. C. Commercial. The final piece of the puzzle is the commercial area. This district is the area that makes the village concept unique and inviting. Being able to walk to a commercial district in an area with unique and beautiful architecture is the essence of a village. There is only one problem, the retail space is not affordable for the merchants we wish to place in the buildings. It should be understood that the tax abatement is only on retail space. Mr.McMillen's letter misses its mark because he wanted tax abatement for office space that already had been built. This is specifically excluded in this revitalization plan. We have always wanted to encourage retail in this area. This dates back to the time when small commercial developments were mixed into neighborhoods. The retailers,with the level of foot traffic involved in this area, cannot afford$14 to$15 per square foot. Outside North Grand Mall,retail commercial space rents from $8 to $11 per square foot. There is no reason for a merchant to take a risk in an unknown area at high rental rates. The buildings, however, are very expensive to build under the current design criteria. You have to, in essence,create a building with two store fronts,rather than one as is the standard throughout the remainder of the community. This would be like creating the store fronts of downtown on both sides of the building. In order to get this development completed like it was intended,the tax abatement is necessary in the commercial area to reduce the cost of the buildings so that the merchants can receive a lower rent. Currently,these buildings are also a poor economic investment and will not be built because you cannot obtain the rents necessary from the merchants. Further, the City gets more tax dollars with the abatement if it gets these buildings built as soon as possible. In this case,haste does not make waste. We should be happy to encourage the construction of these buildings so the entire neighborhood can come alive to the benefit of the City and the development. IV. CONCLUSION 6 The City of Ames has indicated that the village concept is the preferred alternative for development. This development group accepted the undaunting task of creating this new development type and are willing to go on the line again with a million dollars worth of incentives to help market the project(See Exhibit 7). This development is to serve as a model for subsequent village developments. If it fails, it will be very difficult for the City to convince other developers to create new village subdivisions. The council should not view the tax abatement for Somerset as any precedent for other developments. First, there will never again be a first village development. Thus, some of the problems confronted by these developers, such as greater up front costs and lack of understanding by the market place, will not be confronted again. This is a unique situation. The City's desire to finish out its first preferred development style subdivision is reason enough to encourage its completion with tax abatement. The Somerset Village is at a crossroads. The higher costs of building in the village and its lack of acceptance by a sufficiently large sector of the market has caused the development to drag. By leveraging the developers one million dollars of marketing incentives with the City's tax abatement, the private/public partnership can see the village built out as it was envisioned. As the City Manager said in his September 26, 2000 recommendation, "The Somerset development is the City's first"village"and,therefore, it is crucial that the project is successful if we hope to convince other developers to undertake our preferred alternative. Toward this end,it would seem appropriate to make one final push to guarantee the success of this new development model." The tax abatement,over a ten year period,will ultimately bring greater tax dollars to the City than if the current pace of construction is maintained. But more than that, the City and the private developers can see this project through to its conclusion. In the end,the City and the developers will be proud of what they have brought to our community. This could be the best development ever built in the City of Ames. P:\BJNadler\HLTNZIKER\SONIERSEnCityCouncii-memo.wpd 7 Table 1 13 December, 2000 Somerset Tax abatement comparison Year Current construction Doubling all construction Tripling Multi family Const No abatement w/3 year abatement Doubling all other Const w/3 year abatement 1 75,555 0 0 2 226,665 0 0 3 453,330 0 0 4 755,550 151,120 186,178 5 1,133,325 458,238 563,412 6 1,511,100 969,188 1,179,536 7 1,888,875 1,541,030 1,856,552 8 2,266,650 2,125,930 2,546,626 9 2,644,425 2,710,830 3,236,700 10 3,022,200 3,295,730 3,926,774 Exhibit"1" N N 0 (D 0 N j N 0 Q' C C C C O n C O O N O O O O N cn A W N O m A W N = m A W N cn A W N n OCn O 3 � (D QCD O -n (D -n d N O N O Cn Cn O O O C0 3 0 o o CD o CD �_ .� 3 3 O O O O O O (D N N A A A O O CD O O O N A A CO OD CO m m m N N N O O O A A N a X N O O O O O O O O O O O O O 0 0 CD 0 0 0 O O O O O O X N � (D N O CD1 0 0 0 0 0 O O O O O O O O O O O O O O O O O O X W { (D (J) N O O O O O O O 0 0 0 0 0 0 CD 0 0 0 0 0 O O O O O O -< rQ N '7 X m O m m m m (D cD A O A N 00 m co 00 W W N ti O O O CD O CD W O O O O O0 m O O O O mco m O O O O m r: O W Ut J J Ui N N O W N X G V Q) O m N W O N m O W A cD U7 a _ W (D A A N Ut N W (D �-p f m O) O0 V co m W U1 W N N N O O O O O O m O O O N m N 0 0 0 m m O 00 O A m � O m 1 m W V J V V N N N cc W W N X O V (D (D (D (D V O0 m m m CO m m m d A A Co m j (D Cn J N A A A W j j W CD m W (D 07 00 W O A 00 00 00 A W N W O O O O O O O m O A 00 00 00 00 0 0 m O m O O A A m D, U W N W V J � 1 � O W W V V V (D N N N (D W W N X m (D (D (D cD (D (Jl W m mm W m m _m V A A (D J -< 9 -,ACn Cn cD N[�o N A A A A O j V N Nw (DA N (D cD W w 00 Ut AA O0 N m CDm m CD CD O CD O CD N AA m m co m 0 m m m� �m A O O A A m !C!yy a N m J — O W W V J V O L Wi -� N N N (D W W N X .G-. 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This variable will be similar in all subdivisions. Exhibit "3" Building permit Sale Inspection Address Date Date Date 2308 Camden 6/1/99 Lot 4/23/99 12/3/99 126 2317 Camden 9/2/99 9/29/00 392 2406 Camden 12/12/97 9/14/00 641 2407 Camden 8/23/99 11/24/99 93 2412 Camden 12/12/97 4/1/99 474 2413 Camden 12/29/97 4/23/99 480 2419 Camden 12/9/97 9/18/98 283 2424 Camden 6/18/98 6/30/99 377 2430 Camden 6/18/98 9/30/98 104 2431 Camden 12/24/97 7/17/98 205 2437 Camden 12/12/97 5/20/98 159 2503 Camden 12/30/98 10/14/00 653 2504 Camden 12/30/98 9/15/99 259 2509 Camden 11/21/97 9/4/98 287 2510 Camden 6/10/99 10/31/99 143 2515 Camden 2/24/98 9/17/98 205 2522 Camden 10/22/98 12/6/99 410 2528 Camden 12/28/98 5/21/99 144 2614 Camden 1/26/98 6/12/98 137 2628 Camden 11/9/98 6/10/99 213 2509 Kent 9/18/98 2/12/99 147 2518 Kent 1/12/99 6/1/99 140 2521 Kent 12/30/98 3/31/00 456 2320 Bristol 3/9/00 10/20/00 225 2506 Sherwood 11/17/97 11/20/98 368 2507 Sherwood 11/18/98 3/15/00 482 2504 Somerset 2/5/99 6/30/99 145 2516 Somerset 2/8/99 6/17/99 129 2517 Somerset 8/23/99 12/3/99 72 2522 Somerset 10/21/98 7/8/99 260 2523 Somerset 8/20/99 2/25100 189 2530 Somerset 10/14/98 6/30/00 624 2608 Somerset 5/30/00 10/6/00 99 2620 Somerset 3/15/00 7/26/00 133 2812 Somerset 5/16/00 8/31/00 107 This exhibit is only intended to show the time period between taking out a building permit and the ultimate sale of the home. We understand the Council wished to see the days on the market, but it is impossible to make that determination. Some builders put homes on the market when they take out a building permit, some do so when they dig the basement, some do when the drywall is completed while others do so when the home is complete. Thus, no numbers can give an accurate reflection of holding periods. Exhibit "4" August 16, 2000 Cost differences between Somerset Village and other subdivisions in Ames. The comparisons below are comparing the costs incurred in Somerset Village to those in Hillside and Northridge. The first six additions at Somerset have approximately 200 lots total. There are single family, multi family, commercial, town house and row house lots. 1) Street Lights—Typically the developers spend $300 to $500 per lot in any given subdivision. In Somerset we are spending 1 '/z times the cost for the light poles. For example this increases the lot cost by approximately$500. 2) Street trees—Most subdivisions the cost for street trees is zero. In Somerset already we have spent $90,000 on street trees. That is an additional cost to each lot in the amount of$450. 3) Engineering—In Hillside and Northridge the developers have spent approximately $1200 to $1500 per lot for engineering and design. So far in Somerset for the first six additions we have already spent $2260 per lot. That is an additional cost per lot of between $750 and $1000 per lot. 4) Architectural design—Other subdivisions do not require architectural design so there is no cost. In Somerset we have already spent$265,000 on architectural design. That translates into $1325 per lot. 5) Interest carrying costs—Given the unique makeup of Somerset Village (the different uses and housing types) it requires the developers to have a number of different additions going at the same time. The developers are currently carrying $6,000,000 worth of inventory. A typical residential subdivision is only 25 or 30 lots with a total retail value of$1,200,000. The interest carry alone is $2400 per lot. 6) Ground set aside for parks and open spaces. Between the Grove, the Crescent lawn, the Stange crescent and the Somer pond and pavilion we lost enough ground to have 10 single family lots @ $30,000 each equals $300,000. Plus the cost of putting sidewalks and landscaping around the same areas ($125,00 for the pavilion and $20,000 for sidewalks and landscaping) $2125 per lot. Street lights $ 500 per lot Street trees $ 450 per lot Engineering $ 750 per lot Architecture $1,325 per lot Interest carry $2,400 per lot Park area $2,125 per lot Total additional cost $7,650 per lot EXHIBIT "5" Somerset Village/Garden Apartments The village/garden apartments must all belong to the Village/Garden Apartment Association. Belonging to the associations costs the owner$35 per month to belong to the overall association and the Village/Garden Apartment Association. Approximately $15 of the S35 goes to pay lawn care and snow removal for the apartments. $20 of the $35 goes to pay the ongoing maintenance for the subdivision and the maintenance of the clubhouse. The initial cash flow analysis for the apartments assumed that the additional costs for construction and the amenities would create value and be able to be passed on to the tenants. To date the general public has not seen the additional value in the Village concept. I have - enclosed a number of comparisons for you to review. I think that it shows that price and location are more important than bricks and garden walls are to the renters of Ames. When rent and cash flow projections were done on the apartment buildings a few assumptions were made by the builders and developers. 1) The buildings would be some of the nicest looking in town. 2) The buildings would have a number of amenities not offered many other places in town. 3) Given the amenities and the construction methods used a higher price per square foot would be able to be charged. I polled most of the apartment building owners in Somerset, when initial cash flow projections were made for the buildings they were set up to achieve the same rate of return as other new apartment projects in town. The builders and developers all realized heading into the projects that some additional cost would be incurred. However, all thought that they would be able to charge more for the apartments they would be offering. After exposing a number of buildings to the public the conclusions were the same. Rental rates were too high. Once the rents were dropped back to levels reflecting the rest of the market the vacancy rate went from 33% to 3%. New buildings typically rent at a quicker pace than existing rental units, everyone wants to live in a brand new place. This was not the case in Somerset. Rental rates could be achieved at the same level as other new construction in similar locations and of similar size but not any more. The rental market was not willing to pay for the additional costs of the village concept. The owners were faced with choosing between a vacancy rate of 30 plus percent and not getting a return on their capital already invested. With a vacancy of thirty plus percent the owners would have to put in several thousand dollars annually to keep the buildings from becoming insolvent. The other option was to lower rents to achieve an acceptable vacancy rate. By lowering rents the owners new they would not get a return on their investment but hopefully would not have to subsidize their investment. It was an easy decision to make. EXHIBIT "6" An informal pole of the current tenants reflected the following information. 1) Only a very small percentage of the tenants moved to Somerset because they knew anything about the Village concept. 2) Most moved into an apartment at Somerset because they thought it was a good location and the buildings were brand new. 3) Several of the tenants had looked at the units earlier in the year and came back when they saw that the price had been reduced. 4) An even smaller percentage said that the design criteria had any effect on them moving to Somerset. 5) Some did say that the extra amenities did make a difference when they made their final decision on where to live. When purchasing a village or garden apt lot in Somerset the purchasers were required to pay $1000 per apartment for the construction of the clubhouse and swimming pool. The construction costs for buildings in Somerset range from 8 to 10% higher than other projects of similar size. In 1999, I built a 12 unit building at 3314 Polaris Drive. The building has 13,000 sq. ft. My construction cost for the building (less the land) was $630,500. That equates to $48.50 per sq. ft. I also built two 8 plexes in Somerset in 1999. The buildings are 7032 sq. ft. each and they cost $396,400 and $413,500 respectively to build. That equates to $56.37 and $58.80 per sq. ft. Another builder Mark Hanson of Hanson Homes built two 14 unit apartment building at the Northern Lights Development. One was built in 1999 and one was built in 2000. The buildings were 14,500 sq. ft each and were built for$725,000 each. That equals $50 per sq. ft. Bob Shirk from HCS Construction has built eight 8 plexes and one 12 plex in Somerset. The buildings range in size from 6150 to 11,800 sq. ft. The buildings ranged in cost from $60 per sq. ft. to $65 per sq. ft. Some of the reasons for the higher cost are: front facades and porches, the windows and required trim pieces around the windows. Trim pieces under the soffiit and facia and on the corners of the buildings. The garages are required to have costly roof designs to minimize the scale, also the garages must have windows and brick on the facades that face the street. Garden walls are required to screen the parking lots. Hunziker& Associates has had multi family buildings in Somerset for sale since December of 1999. To date none have sold. In the rest of the Ames market during the same time period nine multi family buildings have either closed or are off market pending. Vacancy at Somerset is now at about 3% according to the information that was provided to us by the landlords. The problem is that the apartments are renting for $40 to $60 per apartment less than they were projected to. The abatement will offset the additional costs associated with building at Somerset. If the village concept is to succeed the design criteria must be maintained. Certain elements in the design guidelines help meld the apartments and the single family dwellings units together. The abatement is approximately equivalent to the increased costs for construction. If the developers are forced to go away from the design criteria or worse yet the ground sits undeveloped for a number of years then Somerset will suffer. The apartments also play a major role in the single family sales. Prospective buyers are very skeptical about being next to apartments. It is imperative that the apartments maintain the design standards or it will have an adverse effect on single family sales Chuck Winkleblack Broker Associate Hunziker& Associates APARTMENT OCCUPANCY IN SOMERSET Address # occupied Date 2523 Aspen (8 plex) 2 units Nov. 1999 2523 Aspen 3 units Dec. 1999 2523 Aspen 3 units Jan. 2000 2523 Aspen 6 units Feb.&March 2000 2523 Aspen 7 units April 2000 2523 Aspen 6 units May & June 2000 2523 Aspen 8 units July-Nov. 2000 2604 Aspen (8 plex) 1 unit March 2000 2604 Aspen 3 units April & May 2000 2604 Aspen 5 units June & July 2000 2604 Aspen 8 units Aug.-Nov. 2000 2612 Aspen (8 plex) 8 units Aug.-Nov. 2000 2609 Aspen (8 plex) 3 units June 2000 2609 Aspen 8 units July—Nov. 2000 2618 Aspen (8 plex) 6 units July 2000 2618 Aspen 8 units Aug.-Nov. 2000. 2816 Stange (8 plex) 1 unit May 2000 2816 Stange 3 units June 2000 2816 Stange 6 units July 2000 2816 Stange 8 units Aug.-Nov.2000 2610 Stange (12 plex) 9 units Sept. 2000 2610 Stange 10 units Oct. 2000 2610 Stange 12 units Nov. 2000 2804 Stange (8 plex) 2 units June 2000 2804 Stange 5 units July 2000 2804 Stange 8 units Aug.-Nov. 2000 2810 Stange (8 plex) 2 units July 2000 2810 Stange 8 units Aug.-Nov. 2000 ** In March of 2000 a decision was made to reduce rent by $50.00 per unit a _ 111 y ow - 215 Sinclair— Western Hills 3427 Polaris — Northern Lights r I =t 227 Raphael - Western Hills 3314 Orion — Northern Lights ,a TnjM ! !! - 1215 Florida — Wyndham Heights 1215 Florida — Wyndham Heights Efficiencies rent comparisons Address sq. ft. Net Rent Rent/sq. ft. 4815 Hutchinson 410 $435 $1.06 4901 Todd Drive 410 $435 $1.06 215 Sinclair 490 $510 $0.96 163 Hyland 410 $460 $1.12 2804 Stange 452 $475 $1.05 Somerset 2810 Stange 481 $475 $1.01 Spmerset One bedroom rent comparisons 123 Sheldon 689 $610 $0.88 4915 Todd Drive 624 $515 $0.83 2300 Mortenson 576 $510 $0.89 135 Dotson 573 $485 $0.85 227 Raphael 564 $535 $0.95 215 Sinclair 620 $570 $0.92 2523 Aspen 708 $580 $0.82 Somerset 2610 Stange 570 $665 $0.86 Somerset Two bedroom comparisons 2523 Aspen 841 $690 $0.82 Somerset 123 Sheldon 841 $750 $0.92 240 Raphael 800 $700 $0.87 1215 Florida 880 $730 $0.83 3427 Polaris 780 $720 $0.92 2610 Stange 928 $690 $0.74 Somerset Aspen and Stange 8 Plexes Income: Gross rents $ 57,420 Vacancies (3%) $ (1,722) Laundry income $ 1,400 Gross adjusted income $57,098 Operating expenses Real Estate Taxes (491,500 x 29 mills) $ 14,253 Electric and water $ 2,100 Gas $ 2,050 Insurance $ 975 Garbage $ 1,038 Repairs and maintenance $ 1,600 Association dues $ 3,272 Management fees $ 3,900 Cleaning and painting $ 1,300 Total operating expenses $ 30,488 Net operating income $ 26,610 Capitalization rate= 5.4% $26,610 divided by $491,500 October 3, 2000 Somerset incentive package cost Listed below is an estimate of what the incentives offered by the developers will cost. The chart shows a minimum and a maximum. Number of lots type of incentive minimum cost/lot Total cost 160 cash incentive $3,000 $480,000 160 realtor incentive $1,000 $160,000 160 house plans $ 600 $ 96,000 1 advertising and marketing $ 25,000 Total minimum cost for incentive package $761,000 Number of lots type of incentive maximum cost/lot Total cost 160 mortgage buydown $6,500 $1,040,000 160 realtor incentive $1,000 $ 160,000 160 house plans $ 600 $ 96,000 1 advertising and marketing $ 25,000 Total maximum cost for incentive package $1,321,000 The number shown on the first chart reflects a cash bonus instead of a mortgage buydown. If the homeowner does not need a mortgage or has a small mortgage, they can elect to receive a$3,000 cash bonus instead of using the mortgage buydown. $6500 was the maximum amount projected by Wells Fargo needed to fund the buydown. The mortgage buydown or the cash bonus will be paid directly to the party buying the property and not to the builder. If the assumption is made that half will take the cash bonus and half will use the financing option, the cost to the Developers will be $1,041,000. EXHIBIT "7"