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Old Posted Oct 8, 2007, 12:16 AM
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Shaping North First Street
Friday, October 5, 2007
Silicon Valley / San Jose Business Journal - by Sharon Simonson

Green stamp pushed
San Jose District 4 Councilman Kansen Chu wants new North San Jose structures to earn an environmental stamp of approval from the Washington, D.C.,- based U.S. Green Building Council.

"My office is pushing hard for the LEED Silver certification," Chu says. "You hear about the global warming, and you know the environmental impact (of construction). I feel San Jose should take some leadership."

Silver certification is the second-most stringent in a four-tier ranking that the Green Building Council uses, with Gold and Platinum levels being more difficult to attain and basic certification being somewhat easier. The standards address not only the emission of carbon-dioxide from energy consumption but also such things as indoor air quality, water use, and limiting waste, particularly from construction materials.

"The goal is to create high-performing buildings, buildings that require less maintenance and are less costly over time and are healthier for the people inside," says Ashley Katz of the U.S. Green Building Council.

But Chu's initiative is raising questions about the implementation of the city's North San Jose redevelopment plan, a crucial effort to re-build what has been the most important employment center and tax-base in Silicon Valley's largest community.

Developers and property owners in the area say recent city actions make them fear the city is going to pile on new and costly requirements, like the Silver LEED certification, just as the 5,000-acre project is gaining momentum. If so, they argue, the jobs and tax-generating power of the plan would be undercut. Chu himself acknowledges that getting the Silver designation could add construction expense.

Other members of the San Jose City Council have already tried to temper Chu's enthusiasm. During a Sept. 25 council meeting, Chu moved to approve the rezoning of two North San Jose sites to make way for the construction of nearly 900 new apartments and condos, but only under the condition that the new development attain the LEED Silver designation. The memo was issued shortly before the meeting, a fact for which Chu apologized and which he later acknowledged was not fair. Staff reports on the projects do not discuss imposing the condition.

Ed McCoy, a vice president for the developer Fairfield Residential LLC, told Chu and the council that the conditions would effectively kill the projects, which together would represent a $350 million investment and some $3.5 million a year in new property taxes for local governments. The council voted to ask Fairfield to build to the "equivalent" of the LEED Silver standard. It did not define what "equivalent" meant.

A $100 million housing project being proposed by Barry Swenson Builder, also in North San Jose but outside Chu's district, was not held to the same standard. Chu said after the meeting he is O.K. with the substitution.

At the urging of City Attorney Rick Doyle, the council also directed staff to formulate a city-wide policy on the issue, so as to avoid acting on an ad-hoc basis.
San Jose spent years developing its North San Jose plan, which, more than anything else, is intended to be a local economic driver. However, the land-use in the plan adopts environmentally friendly principles. Housing is to be built mostly at densities of no less than 55 units an acre and up to 90. Industrial buildings will be mid- and higher-rises, not the single-story or lower-rise workplace buildings that often characterize North San Jose now. The entire project is anchored by the North First Street transit line, with the underlying notion that people will live in the nearby housing, use the trolley to get to and from work, and rarely use cars.

While an environmental impact report the city prepared in anticipation of the plan's execution discusses using "green building" techniques on private development, it talks about them only as "voluntary."

Of course, for building owners and developers, the largest questions about adopting LEED building standards are whether they make construction more expensive and if the investment is returned with interest. Rank-and-file tenants like the idea of occupying a "green" building, one developer says. But unless they are major corporations concerned about such factors as public image, they aren't willing to pay more.

Rents are directly related to the cost of construction. If market rents don't produce a return sufficient to compensate a developer for the cost of construction plus some risk premium -- development is a high-risk business -- projects do not get done.

Asked if LEED designed buildings are financially sound, David Kaneda, founder and president of San Jose's Integrated Design Associates Inc., says, "In general, they are, but it depends on how far you take it and what you do. If you look at research on the cost of LEED, the numbers are all over the place, but on average, they are more expensive than other buildings."

Kaneda has gained local fame in recent weeks as word has spread of his effort to build a "zero energy" building for his business that produces as much energy as it uses by combining energy-saving building methods and operating standards with the addition of photovoltaic panels to capture the sun's energy. The building is intended as a laboratory to test technologies on which he advises his clients. The company designs electrical and lighting systems with a focus on sustainable and high-efficiency design. So far -- and he has only been in the building for a number of weeks -- he's found the experience "frustrating," Kaneda says, because systems are not operating perfectly and still need to be fine tuned.

Kaneda expects his building to gain Silver LEED certification, but says his emphasis was mostly on producing less carbon dioxide, something that adhering to LEED standards alone does not necessarily do.

The irony in the entire debate is that San Jose's downtown City Hall is not Silver certified. Indeed, San Jose has achieved no Green Building certification at all for City Hall, though records show it began trying in May 2007 under the LEED "Existing Buildings" rating system.

Matt Morely, City Hall facility manager, says the problem has been compiling the documentation that the Green Building Council demands, not City Hall's instruction. The city is on track to submit its paperwork to the Green Building Council early next year and hopes to achieve at least a Gold level certification.

City Hall opened in 2005. Chu did not gain his seat on the council until this year.

Developers eye debate on schools
The city of San Jose and the Santa Clara Unified School District are struggling to find common ground in a debate over as much as $400 million in potential new costs for the redevelopment of North First Street.

Central to the disagreement, brewing since 2005, are widely differing opinions about how many new students will arrive at the Santa Clara district's doorsteps when an expected 32,000 new homes are built in the area over the next three decades.

A new study, paid for by the city but commissioned by the school district, is also questioning whether the city's housing plans for North San Jose will provide the work force mix that companies will need.

Meanwhile, developers and property owners with North San Jose interests are watching events with concern, fearing that the ultimate outcome will be greater costs to them.

But a city executive with extensive knowledge of the North San Jose plan says he is confident that the city and school district will reach compromise.

John Weis, deputy executive director for the San Jose Redevelopment Agency, says progress toward compromise has already begun and he asserts categorically that developers will not face new fees related to the schools issue or any other current North San Jose initiative.

At issue is the success or failure of what is viewed as the most important economic-development plan in San Jose today. North San Jose is home to some of the region's most important companies including Cisco Systems Inc. and eBay Inc., both of which employ thousands. They and other North San Jose companies also have been the source of millions of dollars of tax revenue for San Jose, some of which has financed construction of thousands of affordable homes.

Since Silicon Valley's economic collapse in 2001 and 2002, however, the area has suffered disproportionately. Industrial vacancy rates remain high, and many buildings are considered economically obsolete. Tax revenue has suffered.

In response, San Jose has sought to rejigger area land-use policies. The city has upped development densities dramatically to encourage vertical office development that companies want and to make room for new housing development because companies complained that their workers had no place nearby to live.

The new density plan increases land values but also requires $570 million in infrastructure investments, largely on roads. Developers and property owners are being asked to finance $460 million of that total. For every 100,000 square feet of office space, they will have to pay $1.1 million in assessments. Home builders will pay some $7,000 for every new apartment and condo built.

Developers say they accepted those fees thinking they would finance all of the public improvements that would need to be done. Now, however, it is unclear if that will be the case. If too many new requirements are pasted on top of what is already in place, including a new push to force stringent new green-development standards, they say, it will make new development in North San Jose economically difficult if not impossible.

"I am not as alarmed as I might be because nothing has been decided yet. But it is concerning the way it seems to be going," says Art Kennedy, an executive of Equity Office Properties, a unit of The Blackstone Group and one of the largest office building owners in North San Jose. "We thought the fees were done, and we've run (development) pro formas based on those fees."

Kennedy is one of five developer representatives on a new 25-member North San Jose Neighborhoods Planning Task Force.

The city's attitude toward the Santa Clara school district appears to have evolved in recent months as North San Jose homeowners have exerted increasing political pressure, finding what appears a particularly listening ear in their new District 4 Councilman Kansen Chu. Chu was elected to fill the incomplete term of now-Mayor Chuck Reed when Reed assumed the mayoral seat. Chu won on a platform that included championing the residents' cause. Chu faces re-election next year.

A staff person for Chu says his office is not aware that developers are worried about additional assessments for the area, nor are they aware that developers are questioning if they will be hit with new fees.

For its part, the school district says it has been beating the city's door for years, to little avail. Public record appears to support the claim.

"We started raising the red flag at the city in June 2005, and we went to the city council, and they ignored us," says Roger Barnes, the business administrator for the Santa Clara Unified School District. "At first the city was very feisty. They had their plan, and they were going to work their plan, and they weren't going to listen to anyone else. But someone -- maybe the mayor or Chu -- has turned it around, and now they have several people working on it."

The district is not opposed to North San Jose's redevelopment and recognizes the need to keep the region's economy vibrant, he adds.

According to the July 2007 study by Menlo Park's Schoolhouse Services, depending on how many homes are ultimately built in the Santa Clara district, the new housing will generate from 3,500 to 4,700 new school kids. Based on the lower number, the school district will need one small high school and four elementary schools, two of which would include middle schools.

The cost to develop those schools, including the cost of the land, is an estimated $400 million, Barnes and the study say. If developer fees raise an estimated $50 million, that leaves the school district with $350 million in unfunded costs.

Beyond that, because North San Jose is in a redevelopment "project area," property taxes that would otherwise go to schools are going to the city of San Jose's redevelopment agency. The school district also wants the city to address that by giving it revenue.

The study also asserts that demand for the high-density housing of between 55 and 90 dwelling units an acre that makes up all but about 7,000 of the units planned in North San Jose is not as deep as the city believes. Consequently, housing developers will attempt to expand their product offerings, which will generate more school-aged kids, the study concludes.

The redevelopment agency's Weis is skeptical, saying the assertion is based on the consultant's "philosophical" bent and not on the city's empirical work: interviews with the companies themselves

"That consultant does not make policy for the city of San Jose. The council does," he says.

Moreover, he says, the city will have the luxury of testing its beliefs: After the first new housing units are built in North San Jose, the city can go back to see what sort of student generation rates there are. At present, there are about 9,500 units in the planning stage, he says, and in the next couple of years many of them will be built.

"We will have some breathing room to give us time to observe," he says. "This is a 30-year plan. I've never done a 30-year plan where you've known everything from the start, and I've done a lot of them."

SHARON SIMONSON covers real estate for the Business Journal. Reach her at (408) 299-1853.^1530265&page=1
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