Proposed Palo Alto Medical Foundation (PAMF) Project - Economic Studies for Development Agreement (October 20, 2006)
City of San Carlos Interoffice Memo To: Mark Weiss, City Manager
From: Brian Moura, Acting Economic Development Manager
Date: October 20, 2006
Subject: Economic Studies for Development Agreement Negotiations for the Palo Alto Medical Foundation (PAMF) Project (301 Industrial Road)
Overview of Development Agreements As you know, it is common for municipalities to enter into a Development Agreement when considering large complex projects such as the Palo Alto Medical Foundation (PAMF) proposed project. State Law provides jurisdictions with the authority to enter into a Development Agreement for a variety of reasons, including the following:
“Assurance to the applicant for a development project that upon approval of the project, the applicant may proceed with the project in accordance with existing policies, rules and regulations, and subject to conditions of approval, will strengthen the public planning process, encourage private participation in comprehensive planning, and reduce the economic costs of development”.
Creation of a Development Agreement for PAMF Proposed Project For the development proposed at 301 Industrial Road, the City Staff and the applicant (PAMF) have been discussing a Development Agreement for the proposed project and have begun identifying key components and terms for purposes of City Council consideration.
Staff believes that a primary goal of the Development Agreement is to ensure that the City would be placed in the same position financially whether or not it approves the project (Along those lines, it is worth mentioning that consensus on Development Agreement terms does not constitute approval of the project).
Staff presents the attached materials to you for distribution to the City Council for their review. Although economic impacts are an important element of the project under consideration, they are not the sole issue. The range of issues for consideration of the requested entitlement include, but are not limited to, environmental, economic, social, land use and technical.
Over the last year or more, we have been in the process of commissioning a series of studies to assess the economic impacts of the proposed PAMF project at 301 Industrial Road. We have received final versions of these studies and would like to extend an opportunity for review of these documents prior to any upcoming meetings on the project.
Keyser Marston Associates Study of Project & Economic Impacts to City Due to the size and non-profit nature of the use proposed by PAMF, the City retained the services of Keyser Marston Associates, Inc. (KMA) for purposes of obtaining an independent, expert review of the project and its potential economic impacts. Since the project would likely foreclose alternative for-profit uses of the site, staff believed it was also important for the report to analyze the fiscal impacts associated with certain alternative uses that were deemed reasonably foreseeable based on market demand. These alternative uses include a retail sales facility, an automobile sales facility, and an industrial facility.
KMA projected the annual net benefit (or loss) to the City for the project and each alternative use. The report concludes that of the alternatives, the auto and retail sales facilities generate the greatest amount of revenue to the City, and that the PAMF facility generates the greatest loss of revenue to the City.
Specifically, the report concludes that if the project proposed by PAMF is approved and constructed as proposed, it is projected to provide $227,000 in annual revenue with annual costs of $393,000.
In terms of alternatives, the auto facility is projected to provide $770,000 in annual revenue with $35,000 in annual public service costs (due to low employment rate), the retail facility is projected to provide $570,000 in revenue with $117,000 in public service costs, and the industrial facility is projected to provide $97,000 in revenue with annual public service costs of $185,000. The annual net benefits (or losses) for the project and each alternative use were projected over a 30 year and 50 year time-frame and are summarized below. Attached to the report is a professional opinion letter from Cronin & Associates noting that it is not unreasonable to expect this site to continue to be devoted to healthcare for 50 years or more.
30 Year Fiscal Impact Table - With Different Land Uses - 301 Industrial Road Use of Site | 30 Year Fiscal Impact | Net Present Value @ 6% | PAMF Facilities (with use tax guarantee) | ($7,194,000) | ($2,481,000) | Retail Alternative | $19,695,000 | $7,200,000 | Auto Center | $34,939,000 | $14,145,000 | Industrial Center | ($3,865,000) | ($1,487,000) |
50 Year Fiscal Impact Table - With Different Land Uses - 301 Industrial Road Use of Site | 50 Year Fiscal Impact | Net Present Value @ 6% | PAMF Facilities (with use tax guarantee) | ($17,977,000) | ($3,500,000) | Retail Alternative | $48,403,000 | $9,912,000 | Auto Center | $82,615,000 | $18,645,000 | Industrial Center | ($9,965,000) | ($2,032,000) |
CBRE Study of Project & Economic Impacts to City Commissioned by PAMF The applicant, PAMF, retained the services of CBRE Consulting, Inc., a Sedway Group, to provide a fiscal impact analysis of the project. The CBRE report highlights the economic and social benefits of the project, and documents that the project would have a net fiscal benefit to the community. Specifically, the CBRE report concludes that the project proposed by PAMF would yield $222,445 in revenue and $203,611 in expenditures.
Two Methods to Analyze Public Service Costs There are generally two types of methodologies used to assess public service costs. A “marginal cost” approach evaluates individual budget components (i.e. police department budget) in terms of whether they are fixed or variable and evaluates the variable expenses to determine the incremental cost attributable to new development. The “average cost” approach divides the total cost to provide municipal services by the number of persons, households, or employees being served.
The KMA report relied on the average cost approach. The CBRE report appears to use a blend of the “marginal cost” and “average cost” approaches. Additionally, the CBRE report assumes a 25-year time period (versus the 30- and 50- year time period used in the Keyser Marston Associates, Inc. study). Last, the CBRE report questions the feasibility and desirability of the alternatives considered in the Keyser Marston Associates, Inc. report. The difference in methodologies used in these two studies may help to explain the differences in the report conclusions.
Conclusion and Documents Attached The attached fiscal expert opinion documentation should provide decision-makers with a variety of approaches to utilize in assessing the most appropriate components and terms of a resulting Development Agreement.
The following documents are attached for your reference: Palo Alto Medical Foundation Site Evaluation of Fiscal Impact of Proposed Project and Alternatives – Final Report - Prepared for the City of San Carlos by Keyser Marston Associates, Inc., Dated September 14, 2006 (PDF  , 890K) Palo Alto Medical Foundation Site Evaluation of Fiscal Impact of Proposed Project and Alternatives – Table - Prepared for the City of San Carlos by Keyser Marston Associates, Inc., Dated September 14, 2006 (PDF , 641K) Professional opinion letter from John M. Cronin of Cronin & Associates – a hospital operations expert - is attached as an Exhibit to the Keyser Marston Associates, Inc. Report (PDF , 43K) Fiscal Impact Analysis of the Proposed Palo Alto Medical Foundation Facility in the City of San Carlos Prepared for Palo Alto Medical Foundation by CBRE Consulting, Inc. a Sedway Group, Dated September 2006 (PDF , 236K)
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