Economic Analysis for the Flanders Mansion Property

ABSTRACT: The Flanders Mansion Property Economic Analysis prepared by CB Richard Ellis Consulting, Inc. (CBRE) is reproduced, excluding Case Studies 1, 2 and 3 and ASSUMPTIONS AND GENERAL LIMITING CONDITIONS. According to CBRE, “The purpose of this study is to analyze the economic feasibility of the City’s disposition alternatives for the Flanders Mansion Property. It is our understanding that for an alternative to be judged economically infeasible, it must be impractical either due to sufficiently severe additional cost or lost profitability, or by virtue of a severely limited or non-existent market for that alternative." In conclusion, “CBRE Consulting found that use of the Property as a single-family residence is most compatible with surrounding land uses, location attributes, legal restrictions, and other factors. Furthermore, our estimates of potential sale proceeds, lease income, and marketability support the conclusion that sale of the Flanders Mansion Property as a single-family home to an owner/occupant is the only disposition alternative that is economically feasible.” An ADDENDUM consisting of MARKET VALUE CONCLUSIONS and WORK REQUIRED GRAND TOTALS is provided.

CRBE CONSULTING, INC.

CBRE
CB RICHARD ELLIS
Four Embarcadero Center, Suite 700
San Francisco, CA 94111

T 415 781 8900
F 415 733 5530

www.cbre.com/consulting

To: City of Carmel-by-the-Sea and City Council
c/o Rich Guillen, City Administrator

From: Lynn Sedway, Executive Managing Director
Jonathan Kuperman, Director

Date: February 23, 2009

Re: Flanders Mansion Property – Economic Feasibility Analysis

At the request of the City of Carmel-by-the-Sea (“Carmel” or “City”), CBRE Consulting performed an economic analysis of the City-owned Flanders Mansion Property (“Flanders Mansion” or “Property”), a 6,019-square foot house built in 1924 and situated on approximately 1.25 acres in Carmel.

STUDY BACKGROUND AND PURPOSE

Carmel purchased the Flanders Mansion Property in 1973. The property is listed on the National Register of Historic Places as well as similar state and local registries. Its location is within Mission Trails Nature Preserve (“Preserve” or “Park”), which includes the adjacent Lester Rowntree Native Plant Garden.

The City has proposed disposition of the Flanders Mansion Property, which needs significant rehabilitation and ongoing maintenance. In addition to the primary objective of divestment to avert these expenses and potential liability, the City has several objectives:

1. To ensure that the Flanders Mansion Property is preserved as a historic resource;

2. To ensure that the Flanders Mansion building and property are put to productive use;

3. To ensure that future use of the Flanders Mansion Property will not cause significant traffic, parking, or noise impacts on the surrounding neighborhood;

4. To ensure that future use will not significantly disrupt the public’s enjoyment of the Mission Trails Nature Preserve and the Lester Rowntree Native Plant Garden;

5. To ensure that environmental resources of the park are protected; and

6. To ensure that the Flanders Mansion Property continues to provide the public with as many park benefits as are practical, given the proposed use.

DISPOSITION ALTERNATIVES
Multiple alternatives to retaining the Flanders Mansion Property are evaluated in this report:

Alternative 1 – Sale as a single-family residence, with the City or the buyer responsible for rehabilitation;

Alternative 2 – Lease by the City as a single-family residence, with the City or the lessee responsible for rehabilitation;

Alternative 3 – Sale as a low-usage non-residential property, with the City or the buyer responsible for rehabilitation;

Alternative 4 – Lease by the City as a low-usage non-residential property, with the City or the lessee responsible for rehabilitation.

STUDY TASKS

CBRE Consulting performed several tasks in the course of this study, including the following:

Review pertinent information regarding the site, including the previous Environmental Impact Report (EIR), the cost estimate report prepared by Architectural Resources Group, the 2005 Mitigation Monitoring and Reporting Program (“MMRP”), the 2005 Conditions of Sale, and other relevant codes, standards, and restrictions;

• Performed local reconnaissance to develop an understanding of the site and its environs;

• Inspected the site to determine potential and assess existing conditions related to access, parking, visibility, topography, and views;

• Observed adjacent properties and surrounding neighborhoods to further our understanding of potential value and use;

• Developed case studies involving comparable properties, to provide added perspective on the City’s aforementioned alternatives;

• Analyzed key local property-market statistics and trends affecting the value of the Property

• Conducted an appraisal of the market value of the Flanders Manson Property, through CBRE’s Valuation & Advisory Services group;

• Evaluated the feasibility and likely value outcome of each disposition alternative.

STUDY RESOURCES

CBRE Consulting relied upon myriad sources of information for this economic analysis including but not limited to (i) Denise Duffy & Associates, (ii) City of Carmel-by-the-Sea staff and records, (iii) the cost estimate report prepared by Architectural Resources Group, dated January 15, 2009, (iv) the Multiple Listing Service for the Monterey Bay area, (v) summary appraisal report prepared by CBRE Valuation & Advisory Services, dated October 24, 2008, and (vi) other documents and sources, including those noted in the Case Studies section of this report.

APPROACH TO ESTIMATING VALUE

In estimating the value of the Flanders Mansion Property for each alternative involving a sale of the property, CBRE Consulting judged the sales comparison approach most appropriate. Briefly, this standard valuation method uses data from the sale of comparable properties to indicate a value for the subject. For the lease alternatives, CBRE estimated the property’s income-producing potential.

CBRE Consulting understands that the economic analysis of the Flanders Mansion Property performed for the prior EIR utilized the summary appraisal report prepared by Mark S. Askew and dated June 24, 2005. We regarded that appraisal as obsolete for the purpose of our study and conducted a new appraisal through CBRE’s Valuation & Advisory Services group. The resulting summary appraisal report, including the specific comparables and assumptions relied upon in this analysis, can be found in the Appendix of this study.

SUMMARY OF VALUE ESTIMATES

The City requested CBRE to analyze two types of alternatives, sale and lease, and to consider two types of occupancy, single-family residential and nonresidential. A summary of the estimated value of these combinations is presented below.

Sale Alternatives

CBRE’s appraisal report (accompanying this report as an Appendix) estimates the following values associated with sale of the Flanders property. In our opinion, estimates of market values for the Flanders Mansion Property are not affected significantly by whether the City or another party completes the restoration.

The budgeted rehabilitation cost was deducted to estimate the as-is value in each scenario. The major components of the rehabilitation costs and estimates relate to site work, the building’s exterior, and the building’s interior. The largest line items are for re-roofing the building and for shoring the southeast corner of the house and installing a perimeter foundation wall.

In the following table, the difference between the as-rehabilitated value of $2,040,000 for sale as non-residential property and the as-is value of $890,000 is $1,157,000 for restoration. In all scenarios, CBRE Consulting used the restoration budget estimate pertaining to residential use, recognizing that adaptive reuse of the Property as a nonresidential property may incur higher restoration costs. The restoration costs for a nonresidential use would likely fall between the amount budgeted for residential use and use by the City itself as a public facility, which Architectural Resources Group estimated at $1,409,716.

SUMMARY OF ESTIMATED VALUES FOR SALE ALTERNATIVES
Sale as a Single-Family Residence to owner/Occupant
As-Rehabilitated (Restored): $4,000,000
As-Is (Unrestored): $2,843,000

Sale as Non-Residential Property for Owner’s use
As-Rehabilitated: $2,040,000
As-Is: $890,000

Lease Alternatives

As an alternative to a sale, the City may lease the Flanders Mansion Property as a home or non-residential property. CBRE’s appraisal report estimates the annual net operating income associated with the two scenarios. We used these figures to illustrate approximately how long would be needed for the City to recover the full cost of restoration.

A dynamic model employing rental rate and operating expense adjustments over time, as well as net present value calculations, could be constructed. However, such an analysis would rely on necessarily imprecise assumptions and forecasts and would ultimately, in our opinion, make a similar demonstration of the economics of these alternatives.

It is also important to note that the market for comparable single-family rentals is exceedingly thin in the vicinity of the Flanders Mansion Property and, in fact, non-existent where lessees are responsible for rehabilitating a property. Similarly, in the Property’s immediate area, CBRE Consulting found a very limited market for comparable non-residential rentals, and here again, a non-existent market for non-residential rentals when the lessee is required to rehabilitate the property.

SUMMARY OF BREAK-EVEN ANALYSIS FOR LEASE ALTERNATIVES
Net Rental Income
Lease as Single-Family Residence: $96,900
Lease as Non-Residential Property: $137,233

Effective Gross Income
Lease as Single-Family Residence: $96,900
Lease as Non-Residential Property: $180,533

Operating Expenses:
Lease as Single-Family Residence: ($28,691)
Lease as Non-Residential Property: ($47,686)

Annual Net Operating Income:
Lease as Single-Family Residence: $68,209
Lease as Non-Residential Property: $132,847

Estimated Cost of Restoration:
Lease as Single-Family Residence: ($1,157,000)
Lease as Non-Residential Property: ($1,157,000)

Years to Recover Restoration Cost:
Lease as Single-Family Residence: 17.0
Lease as Non-Residential Property: 8.7

At present, the Property has shared public street access. The appraised values presume that a perpetual easement, providing site access from Hatton Road, is granted prior to sale or lease. Without such access, achievable disposition values would be significantly lower.

Moreover, the restoration budget does not include costs of certain interior improvements likely desired by a buyer or lessee, such as floor plan modifications that would make the Property more usable and more competitive with comparable homes or non-residential properties in the market.

ECONOMIC FEASIBILITY FINDINGS

The purpose of this study is to analyze the economic feasibility of the City’s disposition alternatives for the Flanders Mansion Property. It is our understanding that for an alternative to be judged economically infeasible, it must be impractical either due to sufficiently severe additional cost or lost profitability, or by virtue of a severely limited or non-existent market for that alternative. An evaluation of the feasibility of each disposition alternative for the Flanders Mansion Property follows.

Alternative 1. This alternative satisfies both tests of feasibility, provided the Property is sold to an owner/occupant. CBRE Consulting determined a market for the Flanders Mansion Property as a single-family home and estimated sale proceeds to the City, net of restoration cost, of $2,843,000. Whether the City did the restoration or the buyer did it would not change the economic outcome.

Alternative 2. CBRE Consulting considers this alternative economically infeasible under both tests. In the vicinity of the Property, the market for comparable single-family rentals is exceedingly thin and, in fact, non-existent where lessees are responsible for rehabilitating a property. Additionally, with the estimated income stream from this alternative, the City would not recover its restoration costs for approximately 17 years.

Alternative 3. It is our opinion that, on balance, this alternative has remote economic feasibility. In the Monterey Bay area, the sale market for non-residential properties comparable to the Flanders Mansion Property is highly limited. Indeed no comparables were identified in Carmel. Furthermore, no market was found for comparable properties requiring restoration.

Alternative 4. This alternative did not meet the tests of economic feasibility. In the Property’s immediate area, CBRE Consulting found a very limited market for comparable non-residential rentals, and here again, a non-existent market for non-residential rentals when the lessee is required to rehabilitate the property. Furthermore, with the estimated income stream from this alternative, the City would not recover its restoration costs for approximately nine years.

CONCLUSIONS

CBRE Consulting found that use of the Property as a single-family residence is most compatible with surrounding land uses, location attributes, legal restrictions, and other factors. Furthermore, our estimates of potential sale proceeds, lease income, and marketability support the conclusion that sale of the Flanders Mansion Property as a single-family home to an owner/occupant is the only disposition alternative that is economically feasible.

USE RESTRICTIONS AND POLITICAL ISSUES

The Flanders Mansion Property is subject to numerous restrictions. Its current zoning is P-2 (Improved Parkland). Allowable uses in this zoning district include park and recreation, single-family residential, municipal offices, small meeting or event space, and assorted cultural facilities.

Other restrictions result from the adjacency of the Flanders Mansion Property to the Lester Rowntree Native Plant Garden and its location within the Preserve-both of which contain Environmentally Sensitive Habitat Areas (ESHAs). Moreover, the City and the Property are within the California Coastal Commission’s jurisdiction and are recognized as sensitive habitats for a variety of animal and plant species.

The Flanders Mansion Property is designated a historic landmark on the National Register of Historic places, and it is listed on the City of Carmel-by-the-Sea’s Historic Inventory. The City is obligated to ensure that it is preserved.

Although the Mitigation Monitoring and Reporting Program (MMRP) and Conditions of Sale for the current analysis and proposed project have not yet been finalized or adopted, it is expected that the same or substantially similar conditions as approved in 2005 will be imposed when the City ultimately selects a project following completion of the current environmental analysis and public review process. Any owner of the Flanders Mansion Property must comply with the Flanders Mansion MMRP, and is subject to detailed Conditions of Sale. The Conditions of Sale and MMRP were adopted as a mitigation for many of the issues raised in the prior EIR. The Conditions of Sale will be recorded as covenants or conditions and will run with the land.

The restrictions described above significantly affect ownership costs and possible uses of the Flanders Mansion Property. Those factors in turn affect the City’s disposition alternatives. CBRE Consulting believes that many of the restrictions both constrain and enhance potential value. From a buyer or tenant perspective, the historic status of the Flanders Mansion Property may be viewed as desirable, due to the associated prestige. However, the historic designations limit significantly the potential use of the Property, given that certain alterations must meet rigorous federal, state, and local standards.

In like manner, the parkland surrounding the Flanders Mansion Property on balance contributes positively to its setting. At the same time, owners and occupants must ensure that use of the Property does not disturb sensitive habits or public enjoyment of the park. Past experience with other properties indicates that allowing public access to the grounds would not have a major negative impact on the ability to achieve the sale of the property at the value as appraised by CBRE. Furthermore, retention of the ability of the public to access the Flanders Mansion Property as part of the park is consistent with the desires of the neighborhood. Given these competing forces, no premium or discount related to the use restrictions of the Flanders Manson Property is factored into comparable sales and rentals. However, the various use restrictions do affect potential disposition alternatives and values.

CASE STUDIES

Approach

CBRE Consulting developed case studies of three comparable properties to help the City evaluate its disposition alternatives for the Flanders Mansion Property. We searched for significant historic homes meeting at least the following criteria:

Located in a residential neighborhood, with an affluent population and close to a park or other public open space;

Recently restored or repaired;

Currently or formerly publicly owned.

The following three cases possess a range of characteristics shared by the Flanders Mansion Property. Information was obtained by interviewing personnel from the City of San Juan Capistrano, the National Trust for Historic Preservation, and the Doris Duke Charitable Foundation. Additional information was gathered from news articles published by The New York Times and Los Angeles Times. Other sources included websites for the National Trust for Historic Preservation, the Ennis House Foundation, the Doris Duke Foundation for Islamic Art, the Doris Duke Charitable Foundation, and the California Office of Historic Preservation.

Summary

The following case studies range considerably in their comparability to the Flanders Mansion Property case. However, they help to inform the following observations about the historic reuse of single-family residences with similar characteristics and neighborhood settings:

• Same non-residential uses involve little or no significant public access or activity. However, if there is some level of access activity, extensive public outreach has been successful in mitigating neighborhood concerns. The public process may also aid in fundraising efforts.

• For a non-residential use traffic and parking impacts may be addressed through detailed conditional use permit requirements, mitigation measures and/or conditions of sale drafted to take into account the comments of the community. These conditions may limit the volume and timing of visits. Transporting visitors to the property from a remote location may be a possible solution.

• Most importantly, generation of revenue for repairs, rehabilitation, and subsequent maintenance is a sizable challenge. Visitor fees cannot be expected to cover costs associated with repairs and rehabilitation, or even ongoing maintenance. In one case study, we found that residential rental income might almost offset the City’s ongoing maintenance responsibilities; however, it is essential to note that rehabilitation has already occurred, and at a small fraction of the cost currently estimated for the Flanders Mansion Property.

Case Study 1 – Ennis House
2655 Glendower Avenue, Los Angeles, California

Case Study 2 – Shangri-La
4055 Papu Circle, Honolulu, Hawaii

Case Study 3 – Roger Williams House
29991 Camino Capistrano, San Juan Capistrano, California

ADDENDUM:
MARKET VALUE CONCLUSIONS
Appraisal Premise and Value Conclusion

Scenario 1: Sale as a Single-Family Residence
1 (a) City Restoration
As-Is: $2,843,000
Hypothetical As Complete: $4,000,000
1 (b) Buyer Restoration
As-Is: $2,843,000
Hypothetical As Complete: $4,000,000

Scenario 2: Lease as a Single-Family Residence
2 (a) City Restoration
As-Is: $0
Hypothetical As Stabilized: $1,050,000
2 (b) Lessee Restoration
As-Is: $0
Hypothetical As Stabilized: $1,050,000

Scenario 3: Sale as Non-Residential use
3 (a) City Restoration
As-Is: $890,000
Hypothetical As Stabilized: $2,040,000

Scenario 4: Lease as Non-Residential
4 (a) City Restoration
As-Is: $890,000
Hypothetical As Stabilized: $2,040,000
4 (b) Lessee Restoration
As-Is: $890,000
Hypothetical As Stabilized: $2,040,000
(Source: Summary, Appraisal Report, CBRE Consulting, Inc.)

WORK REQUIRED GRAND TOTALS (includes Bonding 2%)
Code/Safety Preparation For Sale of Building: $25,410.00

Costs to Purchaser, or to City for Long-Term Lease, for Use as Residence: $1,156,771.00

Use by City as Public Facility: $1,409,716.00
(Source: Flanders Mansion Cost Estimate, Architectural Resources Group)