Point Molate: The Real Story
By Jeff Kilbreth
Until two years ago, the battle for Point Molate was largely waged between developers and environmentalists. Those in favor of development assumed that the resulting building jobs and property taxes would be great for Richmond, while environmentalists saw a precious opportunity to create the last ridge-to-shoreline park on the San Francisco Bay.
It was simply a tough call between two perfectly reasonable points of view. Developing Point Molate would create a lot of jobs for a period of time, and Richmond undoubtedly needs to expand its tax base.
It became clear that insurance companies wouldn’t provide property insurance, and banks wouldn’t write mortgages, unless there was a dedicated fire station to the new housing. The remoteness of the site, combined with wildfire risk and the development’s proximity to Chevron’s fuel storage tanks, requires this additional infrastructure that doesn’t currently exist.
To provide this new infrastructure, it will cost Richmond over $6 million per year to provide full time fire station coverage and a single police beat. And it is highly unlikely the property taxes on 1,452 homes will cover such a large cost.
As this major obstacle emerged, more and more people became worried about the Point Molate development’s impact on the General Fund. It looked like there was a very real possibility that Richmond might end up substantially subsidizing waterfront condos for upper middle class buyers.
Nonetheless, Mayor Tom Butt urged Richmond to move forward: in 2020, he pushed the prior City Council to sign a development agreement with SunCal. The minor saving grace of this agreement came from the analysis of Point Molate Alliance lawyers and the progressive Council Members who were in office, all of whom insisted the agreement remain contingent on there being “no negative impacts on the General Fund.”
To execute the agreement, the second and final step was for the City to approve a Community Finance District that would be able to pay off the bonds issued by the City. And this is where the deal, quite rightly, fell apart. We were fortunate to have four Council members who were paying attention and saw through SunCal’s outrageous financial assumptions and misleading numbers.
Here’s why the bonds that would supposedly cover these infrastructure costs couldn’t be covered, thus costing the city hundreds of millions of dollars into the future:
According to SunCal, buyers of Point Molate homes could cover the cost of this necessary fire and police infrastructure with bonds. But the math there doesn’t work at all.
In California, there is a 2% cap on property taxes. A property owner can only be charged, at most, 2% of what their house value is at the time they buy. So, if a house is sold for $500,000, the most a buyer can pay per year in property taxes is $10,000. This cap includes local taxes and bonds.
At the current market value of what similar homes go for in the Bay Area, Point Molate buyers would likely reach 1.6% of the property tax amount just from buying their house. That leaves only .4% that can be legally charged for the bond amount. On that hypothetical $500,000 property, only $2000 per year would be paid per Point Molate household for what costs the City $6 million dollars per year.
How could 1,452 homeowners pay off $292 million in infrastructure and services bonds? This is equivalent to each homeowner taking on an extra mortgage for $200k. The bond industry wouldn’t even allow it, as the total Community Finance District property taxes can’t exceed 2% of assessed value. We never saw a spreadsheet, and the amount of indebtedness changed from $100 mil to $292 mil at the last minute. Regular taxes in Richmond are already 1.6%—so that caps the payments condo owners could be asked to make to $2,400 per year. And $200/month will not pay off a $200k mortgage.
The project simply doesn’t work for either our General Fund or for future Point Molate residents saddled with impossible bond payments. Here’s a quick summary of the problems with the developer’s plan:
1. The average selling price for shoreline condos in Richmond is around $600k, or about $400-450 per square foot. Until the last minute, SunCal said Point Molate condos would go for twice as much. But when our analysis used actual market rates— $1.4 million for single family homes and an average of $600k for the townhomes and condos— property tax revenue plummeted.
2. The developer initially implied that everything would sell in 7 years but, in reality, Richmond waterfront projects rarely sell more than 25 new units per year. When you allow for it taking at least 15 years and possibly 30 years to sell all 1,452 units, you’ve got huge losses in the General Fund for decades.
3. For such a project, the City’s property transfer tax is relevant. Every time a property is sold in Richmond, the city charges .7% for up to a $1 million dollar sale (higher for over $1 million). For instance, the sale of a $800k condo gets the City $5,600 ($800,000 X .007). Historically, an 8% turnover rate has been the rule of thumb: that 8% of homes are sold every year. If you assume a higher turnover rate of 15.5% (as SunCal did), then the City gets $5,600 once every 6.5 years—for every single condo. In short, SunCal has been telling us that their development will turn over at two times the rate typically used in such financial analysis.
4. Sales taxes are important to revenue as well, and increased residency would help. But we need to be honest about how much in taxable purchases are made per year in Richmond by Richmond homeowners. Many people don’t even spend $5k per year in Richmond. They do most of their shopping in El Cerrito, Albany, Berkeley, or even Pinole and San Rafael. The developer was planning on every household spending $18k per year in painting its rosy picture of the project.
5. The developer was assuming the City would get $150 million in assessed value from the commercial properties, with 80% of the value coming from office space. Right now, the SF Bay Area has the highest office vacancy rate in the country. And it is possible that the pandemic has changed the office market forever. It seems particularly foolish to count on this financial projection now.
6. In a tight financial situation, is it appropriate to count the special pension fund taxes that have to be spent paying down our pension obligations? Money is money, but if this is critical to making it work, maybe it’s just too risky. The special Richmond pension tax is .14% of assessed value - almost half of Richmond's share of the 1% primary property tax. So it is quite a lot of money. But it has to be used to pay down Richmond's inadequately funded pension liabilities. So including this revenue stream as an advantage of the project is not the same as increases to our regular property taxes, transfer taxes or sales taxes. Some people argue that money is money and that getting this money would free up other funds to be used for Point Molate's police and fire protection costs, but it is not clear that this is completely accurate.
To justify the Point Molate Development, the consultants would have us ignore things like inflation—namely, that police and fire costs would begin climbing immediately, while we wouldn’t get to full property tax revenues for 15 or even 30 years.
There are two ways to evaluate a major real estate development project's fiscal impact. The more careful and accurate way is to do a 50 year cash flow analysis that takes into account the timing of revenues and expenses as well as inflation. The easier shortcut is to assume that inflation doesn't matter, since it will impact revenues and expenses equally, and that it is safe to just figure out whether the project breaks even or makes money when all of the development has been completed.
This shortcut is what SunCal and its paid consultants used to argue their case. In the case of Point Molate, this was a very misleading decision by them. The 50-Year cash flow analysis shows over $50 million in losses prior to full build-out in Year 15, and over $140 million in losses after full build-out. In contrast, the shortcut analysis shows police and fire costs being flat for 50 years!
We decided not to ignore inflation and did our own 50-year cash flow analysis. In our “Best Case” scenario, wherein all units are sold within 15 years, the General Fund shortfall would be $225 million. In our “Worst Case” scenario, wherein all units are sold in 30 years, the General Fund shortfall would be $422 million.
And if you use the Developer’s paid consultant’s method of just evaluating the project on its ability to reach break at full build-out, when everything is sold and paying property taxes, you still never get to break-even for our General Fund, even if you count the pension fund tax and the $150 million in assessed value for the commercial development. It just isn’t that close— and there could easily be $100 to $200 million in losses before getting to full build-out.
Here’s the takeaway. Unless the housing market behaves absolutely perfectly, and every single SunCal projection goes exactly as predicted, and multiple tax streams behave abnormally, and the cost of police and fire services don't go up at all, Richmond loses hundreds of millions of dollars on this project.
So, the next time you hear the Mayor saying the RPA is anti-development, or is incapable of understanding economics or numbers, you should ask him why he is for a bad development that asks the citizens of Richmond to subsidize the creation of “Tiburon East,” and why he supported SunCal's fantasy that the numbers work for so long.
Jeff Kilbreth is a retired software executive with an MBA from Yale. He has a strong background in accounting and finance and is a former Richmond Planning Commissioner. He is a member of the Point Molate Alliance, the Richmond Progressive Alliance, and the Richmond Tennis Team.