Report: Beverly Square Commercial Retail Development by Vicente Romero

BEVERLY SQUARE BEVERLY HILLS WINTER 2014 Adam Monaghan Arfakhashad Munaim Vicente Romero Carla Salehian

BEVERLY SQUARE: SANTA MONICA BLVD. & CHARLEVILLE RD.

final due diligence

Winter 2014 UP M272 Adam Monaghan Arfakhashad Munaim Vicente Romero Carla Salehian

TABLE OF CONTENTS

1. INTRODUCTION.....................................................................................................01 2. LOCATION AND SITE ATTRIBUTES...................................................................05 3. MARKET CONDITIONS.........................................................................................13 4. DEVELOPMENT PROGRAM AND DESIGN......................................................23 5. FINANCIAL FEASIBILITY.......................................................................................26 6. CHALLENGES AND OPPORTUNITIES..............................................................37 7. CARTOGRAPHY......................................................................................................40

CHAPTER 1: INTRODUCTION

CHAPTER 1: INTRODUCTION | PART 1 | Development Program Beverly Square is a new neighborhood-serving specialty retail center proposed for development at 9900 South Santa Monica Boulevard in Beverly Hills, California. The project will offer 61,868 square feet of LEED-Silver certified, finely crafted gross buildable area (GBA), including over 10,000 square feet of thoughtfully manicured open space. Beverly Square has been designed as an attractive specialty retail destination for upscale neighborhood residents and high wage earning professionals employed in the immediate vicinity. Practicing the subtle art of place making, our design team has created a two-story urban infill retail center that evokes hints of the European Revival architectural style exhibited throughout the City of Beverly Hills. Figure 1.1 presents a rendering of the concept design.

Figure 1.2: Beverly Hillsâ&#x20AC;&#x2122; Characteristic Signage

Figure 1.1: Concept Design

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Figure 1.3: Project Site and Beverly Hilton

Located on a corner lot of about 36,000 square feet, with a floor-area-ratio (FAR) of 1.72, the street-facing shops at Beverly Square offer multiple points of entrance and egress, creating a texture of permeability for pedestrians walking alongside the development. Two levels of subterranean parking, including ample space for bicycles, exceed the City’s requirements, thus providing an additional community benefit of 62 spaces to the surrounding businesses. Beverly Square offers a total net leasable area (NLA) of 49,728 square feet for chic retailers selling high end products. Figure 1.4 illustrates the proposed building uses and square feet of the project.

Figure 1.5: Project Site In addition to serving as a market-driven response to local retail conditions, the proposed Beverly Square development Figure 1.4: Building Uses and Total Square Feet Members of the City of Beverly Hills Planning Division have stressed the importance of utilizing the parcel at 9900 South Santa Monica Blvd to create a unique commercial experience that elicits a “Main Street” feeling from residents, business owners, and visitors in the area. After carefully researching the local market conditions and population demographics, our development team has designed Beverly Square to meet the retail demands of a wealthy, middle age, highly educated population of residents and professionals. Potential retailers comprising the tenant base of Beverly Square include: • Purveyors of fine clothing Janie and Jack, Ted Baker,

project strives to fulfill the vision set forth in the City of Beverly Hills General Plan. It is a pedestrian-scale development that seeks to activate the public realm, helping the City Grow Smarter. The design concept preserves the architectural continuity found throughout the city to celebrate its rich cultural heritage of Sustaining Great Places. The project supports the City’s effort to Reduce its Carbon Footprint by achieving LEED-Silver status. Beverly Square will be a bustling specialty shopping center that will create jobs and help the City Maintain a Resilient Economy. Working in concert with the local chamber of commerce, municipal officials and area residents, the development team for Beverly Square understands that incorporating the longterm goals set forth by the City of Beverly Hills is paramount to success.

and Lululemon Athletics; • Specialty food stores Dean & Deluca, and Sunlife Organics; • Personal care facilities such as Pure Barre, Yoga Works, Bodyrok Sculpt and Cycle, and Burke-Williams day spa; • Home goods providers Williams-Sonoma and Between the Sheets; • Small-scale cafes such as Starbucks and Le Pain Quotidien; • Retailers and service providers addressing the needs of local residents and professionals: dry cleaning and tailoring; stationary; florist; and a pet grooming boutique, among others.

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Figure 1.6: S. Santa Monica Blvd. Retail and Traffic

CHAPTER 1: INTRODUCTION | PART 2 | Market, Entitlements, Returns Market Strengths

additional review of any potential challenges posed by local segment

businesses or residents that may occur as a result of the traffic

characteristics of the population in the one-half mile vicinity

study, environmental review (although we anticipate a negative

surrounding the project site indicate a wealthy, middle age,

declaration during the CEQA review), or building and safety

highly educated population with disposable income that

review.

The

socioeconomic

and

consumer

they spend on specialty goods. The higher relative population density of the area (9,883 persons per square mile, compared

Based on conversations with members of the City

with the County average of 5,975) creates conditions suitable

Planning Division, we believe that the project conforms to the

for a walkable and bicycle friendly commercial development.

correctly zoned uses for the site. If it conforms to the City of

High household income and discretionary spending on luxury

Beverly Hills Planning Commission’s vision for the economy and

goods indicates the target population’s preference for a high-

built environment of the local area, we are confident that Beverly

end, carefully crafted shopping experience.

Square will obtain all necessary entitlements within two years.

Including residents, businesses, and high wage earning

Financial Returns

professionals working nearby, we estimate retail demand in

The development team conducted a detailed financial

the one-half mile trade area equals $160.4 million per year. As

feasibility assessment, which draws from various real estate

noted above, Beverly Square will provide 49,728 square feet

market reports and economic data to determine that the

of neighborhood retail NLA. Based on information we have

Beverly Square project is low risk, high feasibility investment

regarding local area projects currently in the planning phase, we

opportunity compared to current market return thresholds.

estimate that the market will add an additional 173,319 square feet of the same product coming on line at the same time. As

The total development cost (TDC) for the project equals

such, we estimate Beverly Square’s capture to be 28.7 percent

$44,619,362. The total value upon completion is $52,061,840,

of the new market, or about $46 million of the total area retail

which generates $7,442,477 in equity value. The leveraged

demand. Based on sales figures from “Dollars and cents of

return on equity comes to 10.20 percent, and the unleveraged

shopping centers / the SCORE,” we estimate that Beverly Square

return on TDC equals 7.35 percent. The one-time leveraged

will generate $45.3 million in sales per year, which falls within

profit at sale over equity is 69.05 percent, and the one-time

the project’s expected market capture of total area demand.

unleveraged gross margin on TDC is 16.68 percent. Over a tenyear period, the year-on-year internal rate of return of 20.92

Entitlement Prospects

percent on equity is an investment opportunity that cannot be

In order to ensure a streamlined progression through

matched in money markets.

the City’s entitlement process, the development team has designed Beverly Square to conform completely to the City

Even after conducting a series of financial stress tests,

of Beverly Hills municipal code. This includes the parameters

including manipulating cap rates, construction costs, and the

considered for any development in the Commercial (C3-A) Zone

loan-to-value ratio (LVR), the project proved to be resilient.

(Title 10, Chapter 3, Article 17) as well as a careful study of the

The relative strength of the Beverly Hills commercial retail

requirements for development in an area of transition between

market allows this project to obtain favorable returns using

commercial and residential uses (Title 10, Chapter 3, Article

rather conservative estimates for the LVR (65 percent) and cap

19.5). Figure XX on page XX provides a detailed breakdown

rate (6.30 percent). Even when these numbers are adjusted,

of each step in the entitlement process, including a timetable.

the project continues to fare well due to the premium rent per

The estimated timeframe for project approval is subject to

square foot it is able to command while keeping operating costs to a minimum.

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CHAPTER 2: LOCATION AND SITE ATTRIBUTES

CHAPTER 2: LOCATION AND SITE ATTRIBUTES | PART 1 | Neighborhood Analysis This section of the report closely examines the existing

Wilshire Blvd. & Whittier Blvd.

conditions for the proposed Beverly Square commercial retail

• 728 Metro Rapid – Downtown Los Angeles – Century

development located in the southwestern corner of the City

City via West Olympic Blvd.

of Beverly Hills, CA (See Maps 1, 2 and 3, Chapter 7). Since the once-famous Friar’s Club, located on the corner of South Santa

These buses run daily from approximately 5 a.m. to

Monica and Charleville Blvd., was demolished in 2011, the site

9 p.m., with a maximum of 10-minute peak headways and

has existed as a vacant parcel. Nevertheless, neighborhood and

20-minute midday and evening headways. In addition, five

site-specific analysis demonstrate that the location gleams with

Metro Local Bus Services operate in close proximity the site:

potential.

(4, 14, 16, 20, and 28). All of these run to/from Downtown Los Angeles with a similar frequency, but with more local stops than

NEIGHBORHOOD ANALYSIS

the Metro Rapid services. The closest bus stops to our project site are around 1,000 feet away from the site (5 minutes walking).

Beverly Hills is considered by most real estate brokers to

Additionally, there are two proposed heavy rail line extension

be one of the most exclusive and desirable locations throughout

stations that will lengthen the Metro Purple Line further west. The

the entire county of Los Angeles. Performing a broad analysis of

closest proposed station to the east is located at the intersection

existing neighborhood conditions revealed how desirable this

of Wilshire Blvd. and Rodeo Dr. and the closest proposed station

particular location is with respect to access to transit and area

to the west is located at the intersection of West Olympic Blvd.

amenities.

and Avenue of the Stars. Each location would be within a halfmile radius, or about 15 minutes on foot.

TRANSIT ACCESS SURROUNDING ASSETS The proposed development site is surrounded by a variety of transportation options. First, in terms of car access, the

Parks and Recreation: A wide selection of nearby parks

site is located within a six mile radius of several of LA’s busiest

and open space add to the richness of the community assets

freeways and corridors including the I-10 to the south, California

surrounding the project area. Located within a one-mile radius

State Route 2 (North Santa Monica Blvd.) to its immediate north,

of our project site, Beverly Hills Garden Park and the Roxbury

and the I-405 to the west. Locally, the site is served by secondary

Park Community Center offer green space to be enjoyed by

road South Santa Monica Blvd., providing immediate access from

visitors and residents alike. See Map 7, Chapter 7.

the primary road in the area, North Santa Monica Blvd. Both are designated as “heavy haul routes” and carry large daily amounts

Schools: Also located within the immediate periphery

of traffic, which is a highly desirable quality for any commercial

of the project site are a variety of public and private schools,

development. Additionally, the site permits easy access to other

including El Rodeo Elementary, Beverly Vista Elementary School,

notable commercial streets in the area including S. Beverly Drive,

Beverly Hills High School, and Good Shepherd Catholic School

S. Doheny Drive, and S. Robertson Blvd. (See Map 6, Chapter 7).

(Pre K – 8th Grade). Shopping: Shopping is a major attraction for most

The site is also served by a variety of transit connections, including three Metro Rapid Bus Services:

Beverly Hills visitors, and a variety of retail options exist in the area. First, a selection of small “mom and pop” type shops line

• 704 Metro Rapid – Downtown Los Angeles – Santa

Santa Monica Blvd. along our project site including several

Monica via Santa Monica Blvd.

florists, shoe repair shops, health and beauty salons, medical

• 720 Metro Rapid – Santa Monica – Commerce via

offices and local diners and eateries. While many of these retail

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establishments provide a great deal of community character to

LONG TERM DEVELOPMENT

the area, they appear to be quite dated. For a more exclusive shopping experience, the famous Golden Triangle surrounding

The most recently proposed large scale project, the

Rodeo Drive is located to the east, featuring high-end designer

2012 Gateway Project, was designed to supplant the long since

boutiques.

Additionally, the Century City Westfield mall is

demolished Pacific Railway line sitting between North and South

located approximately one half mile to the southwest, catering

Santa Monica Blvd. This project proposed the establishment

to the regional shopping needs Los Angelesâ&#x20AC;&#x2122; Westside residents.

of an overlay zone that would guide future development and

Lastly, the closest supermarkets (Whole Foods Market and

would, among other things, encourage the establishment of

Ralphs) are found within one mile of the site.

pedestrian and bike-friendly shopping networks, promote the garden quality of the city, and increase overall connectivity

Arts/Entertainment: The site is situated near several

within the City of Beverly Hills. The project received a great

iconic Beverly Hills establishments and locations. Apart from the

amount of backlash and negative criticism from local residents

aforementioned boutiques and art galleries lining Rodeo Drive,

(who were primarily concerned with the traffic implications of

the famous Beverly Hilton Hotel is located on the northern

the project) and eventually, toward the end of 2013, the project

side of Route 2. For those seeking a museum experience, the

was ultimately disapproved by the City Council. Another lower-

renowned Museum of Tolerance can also be found within the

scale project proposed for the area is the North Santa Monica

project area.

Reconstruction Plan, which focuses on creating infrastructure and aesthetic improvements to the Route 2. All in all, no major project proposals were found that could potentially interfere with development of Beverly Square.

Figure 2.1: Summary of Surrounding Assets

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CHAPTER 2: LOCATION AND SITE ATTRIBUTES | PART 2 | Site Level Analysis The proposed site is comprised of five distinct land parcels, located on six lots (740-745) at the corner of South Santa Monica and Charleville Blvd. Four parcels average 6,000 square feet, while the fifth, corner lot, measures approximately 12,000 square feet, reaching a total area of 35,997 square feet (See Figure 2.2). According to property profiles and grant deeds obtained by the authors (See Appendices 2.1 and 2.2), Sunnyside Holdings, LLC owns all five of these parcels. A summary table detailing the address, area, APN, lot number, and total taxable land value for each property is provided below.

Figure 2.3: Project Site Zoning Summary Source: Beverly Hills City Code According to the City of Beverly Hills municipal zoning code, the permitted uses in zone C-3A are as follows:

Figure 2.2: Project Site Parcel Summary

Figure 2.4: Permitted and Conditionally Permitted Uses Matrix

Source: Property Profiles and Grand Deeds

Source: Beverly Hills City Code, Title 10, Chapter 3, Article 17

ZONING Additionally, the proposed Beverly Square development In terms of zoning and land use, the entire project

is located in an area of transition between commercial and

site area is designated as “Other Commercial,” Commercial

residential uses, which requires particular considerations.

Zone C-3A. The maximum floor area ratio (FAR) is 2.0, with a

Pursuant to Title 10, Chapter 3, Article 19.5 of the Beverly Hills

maximum height of 45 feet, or 3 stories. As a general rule of

municipal code, given that the site shares a public alley with a

thumb, one parking space per every 350 square feet of floor

residentially zoned property, the site falls into an area legally

area of commercial space is required (with a larger requirement

defined as a “Commercial Residential Transition Area.” As such,

for dining/restaurant spaces, although Beverly Square does

the setback requirements state that, “no building, structure, or

not plan for restaurant use). The surrounding uses in the area

improvement, either above or less than eight feet (8’) below

immediately adjacent to the site are the same commercial zone,

the grade level, except a wall or other improvement otherwise

C-3A, to the north and to the northeast. A multi-family residential

permitted by this article shall be located within six feet (6’) of

zone of high-density units (50 DU/acre, maximum height of 60

the edge of the alley adjacent to such site.” In addition there are

feet) is located immediately to the south of the site. To the north

requirements for wall size, landscaping, mechanical venting,

of the location, crossing North Santa Monica Blvd, a hotel zone

loading docks, extended hours for delivery, and noise, among

is established for the Beverly Hilton, and a mixed use site exists

others. The project team would be responsible for obtaining

for a now defunct proposal along 9900 Wilshire Boulevard. (See

a transitional use license from the department of financial

Figure 2.3, and Maps 4 and 5, Chapter 7)

administration.

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NATURAL PHYSICAL FEATURES: The site is located 267 feet above sea level and has a slope close to zero. There are no foreseeable topographic problems as documented, except for possible drainage issues that could result from the lack of slope. However, the geologic material found underneath the site reject this possibility. Alluvial gravel and sand and silt-clay (derived mainly from the Santa Monica Mountains) include gravel and sand of stream channels. This material, originated during the Pleistocene Era (which lasted from about 2,588,000 to 11,700 years ago), is formed by detritus from the erosion of the Santa Monica Mountains. It is porous, and permeable, allowing excess drainage back to the water table. (See Map 8, Chapter 7)

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CHAPTER 2: LOCATION AND SITE ATTRIBUTES | PART 3 | Entitlement Process Assessment Principal Planner Michele McGrath and Associate

• Step 4: Environmental Assessment (CEQA Review,

Planner Shena Rojemann at the City of Beverly Hills each

see Appendix 2.8)

recommend that the most efficient manner to receive the proper

• Step 5: Architectural Commission Review (see

entitlements to build the Beverly Square project is to conform

Appendix 2.9)

to the existing uses in Commercial C3-A (see “Zoning” section

• Step 6: Building and Safety Plan Check

above for a complete list of acceptable uses). In undertaking a planning application, it is necessary If, however, the team seeks to design and build a use

to consult closely with City staff throughout the process. Before

that does not conform with the existing use, there are two

submitting the application the applicant must walk through the

options. If the use appears on the list of approved conditional

entire proposal with planning division staff. It is wise to obtain a

uses provided per Title 10, Chapter 3, Article 1702 of the City

Staff Review Committee (see Appendix 2.10 ), which is comprised

Code, the step is to file an application for a conditional use

of representatives from the following departments: Planning,

permit (CUP, see Appendix 2.3). Following submission of the

Building and Safety, Fire, Recreation and Parks, Public Works, and

application, which includes prescribed fees, plan, and map

Public Art. This committee will provide guidance, suggestions,

submissions, the applicant would appear before a hearing of

and corrections to the project. Once the application is ready, it

the Planning Commission to state his/her case for the CUP. If the

must include:

proposed use is deemed non-conforming, the team would file an application for a zone change, which would require review by

• The application itself;

the Planning Commission and a General Plan amendment (see

• Concept approval from the Building & Safety

Appendix 2.4). This is a much more arduous process, involving

Division;

not only the Planning Commission, but also the City Council and

• Environmental assessment;

members of the community. As such, after consulting with the

• Architectural plans;

City’s Principal Planner, the team has chosen to follow the advice

• Digital copies of everything;

and desired use of the City of Beverly Hills Planning Division to

• Public notice (since this project is over 2,500 square

build a project within the conforming uses for the Commercial

feet and will be reviewed by the Planning Commission);

(C3-A) zone.

• Shade and shadow study; • Traffic analysis (for any project over 10,000 square

While the project team seeks to build a project within the acceptably zoned uses, there are still legal and technical

feet); • Subject fees

considerations that necessitate a discretionary review process. According to our research, the following steps are to be taken if

A lot line merger is necessary when assembling several

the project conforms to code under the Commercial C-3A zone:

contiguous parcels into one site. Over time each individual parcel may have accumulated different lot lines, so in order to

• Step 1: Planning Application (see Appendix 2.5)

create one complete site, it will be necessary to work with the

• Step 2: Lot Line Merger Application (Adjustment of

city planners to have the area surveyed and the new lot lines

five parcels, see Appendix 2.6)

registered. (See Title 10, Chapter 2, Article 8 “Lot Line Merger”)

• Step 3: Development Planned Review (DPR) Application for project over 2,500 square feet where

The next step is to complete the DPR application. This is

the Planning Commission reviews the code and

similar to the previous steps but also includes a zone objectives

conformance of the project (see Appendix 2.7)

program that “defines implementation and operational

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measures which assure that the objectives of the subject zone

POLITICAL ASSESSMENT

are advanced. In conjunction with this program, a parking program is to be prepared and included,â&#x20AC;? (see Appendix 2.7).

According to the Principal Planner Michele McGrath,

The applicant must also include a construction management

only nine percent of available commercial lots remain out of

program to demonstrate that the process is farther along than

all commercially zoned properties in the entire City of Beverly

simply the concept phase by showing a thorough understanding

Hills. City officials intend to preserve every bit that remains for

of the construction issues.

exclusively commercial purposes. The City Council members the primary decision-makers who approve or deny any

For the environmental assessment there is a separate

proposed project over 2,500 square feet. Conversations with

application that includes the same conceptual approval from the

councilmembers, local business tenants, property owners, and

Building & Safety Division (obtained for the planning application

city officials weighed heavily toward our design of a commercial

process, as long as notification is given that conceptual approval

retail development that would attract upscale residents and

involves an environmental assessment as well), public notice,

high wage earning professionals to boutique shops and cafes.

parcel maps, hazardous waste and substances statement, traffic

Several city officials suggested that a pedestrian-oriented

analysis, and subject fees.

development at a street level design would likely not yield any opposition from property owners or business tenants since it

If the project application is fully complete with

would work to generate revenue for the city and revitalize South

appropriate filing of Lot Line Merger and Development Planned

Santa Monica Blvd. In addition, Charleville Blvd. terminates in

Review (DPR), parking and traffic study and design proposal, the

a dead end west of the site (on the other side of South Santa

approximated entitlement process schedule is as follows (See

Monica Blvd.) that could present an opportunity for possible

Entitlement Process Schedule on page 12 for a more detailed

pedestrian or transit connections. As noted, Beverly Square is

outline):

designed to address the needs of the upscale area residents and serve as a pedestrian and bicycle friendly retail experience. The development team intends to work closely with City officials and public constituents throughout the process to promote the smooth and efficient settlement of entitlement issues. The following table summarizes the key constituents and potential opponents.

Figure 2.5: Discretionary Review and Estimated Time Frame Source: Various Intervies, including Michelle McGrath Beverly Hills Principle Planner Based on conversations with members of the City Planning Division, we believe that the project conforms to the correctly zoned uses for the site. If it conforms to the City of Beverly Hills Planning Commissionâ&#x20AC;&#x2122;s vision for the economy and built environment of the local area, we are confident that Beverly Square will obtain all necessary entitlements within two years.

Figure 2.6: Political Assessment Comparisons Source: Various Intervies, including Michelle McGrath Beverly Hills Principle Planner

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Entitlement Process Schedule

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CHAPTER 3: MARKET CONDITIONS

CHAPTER 3: MARKET CONDITIONS | PART 1 | Regional Analysis - Los Angeles County In order to gain a comprehensive understanding of the

EMPLOYMENT CHARACTERISTICS AND TRENDS

local market for neighborhood commercial retail development at the proposed site, it is important to begin with an analysis of

Employment is a particularly important variable

the metropolitan socioeconomic characteristics for Los Angeles

to consider when performing a regional analysis, primarily

County. Conducting this study from a bird’s eye view allows

because it plays such an important role in determining a

us to draw conclusions about broad metropolitan trends that

region’s growth. Based on 2010 Census data, there are around

provide a baseline for our interpretation of localized market

3.9 million jobs within the County. In recent years, L.A. County

data. Comparing socioeconomic statistics from the immediate

has seen a decrease in younger workers (age 29 or younger)

surroundings of the proposed project site, the City of Beverly

and an increase in older workers. In 2002, the “29 or younger”

Hills, and the L.A. metro area is a key analytical tool we use to

group made up 28.2 percent of the working population whereas

determine the market conditions under which our project will

in 2010, they made up only 23.2 percent. The age “55 or older”

be successful.

group percentages have been steadily increasing, comprising 13.2 percent of the working population in 2002 and 18.2 percent

SOCIO-DEMOGRAPHIC OVERVIEW

in 2010. Salaries have also been slowly increasing over the past several years. In 2010, 37.5 percent of the working population

According to the 2010 Census, Los Angeles County has a total population of 9.8 million, making it the most populous

earned more than $3,333 per month and had a median income of around $55,476 (See Figure 3.1, Family Household Income).

county in the United States1. Including Beverly Hills, it is home to 88 incorporated cities and has an overall population density of about 2,420 persons per square mile. The estimated median age within the County is about 35 years, with about a quarter of the population under the age of 18, and approximately 11 percent of the population over the age of 65. Given that Los Angeles is one of the largest metropolitan centers in the United States, it comes as no surprise to see a diverse racial composition, with just over half the population (50.3 percent) identifying their race to be White alone, 13.5 percent identifying their race to be Asian alone, and almost half of the population (47.7 percent) identifying a Hispanic or Latino origin in their ethnicity2. Lastly, L.A. County

County of Los Angeles

contains around 3.4 million housing units with a slight majority listed as renter occupied (52.3 percent). (See appendix 3.2A, B, and C for detailed tables on LA County’s demographic profile).

1 See Appendix 3.1 for a side-by-side demographic comparison between Los Angeles County and the project site-specific Census Tract (Beverly Hills 7010). Source: 2010 Census via Social Explorer. 2 The Census counts “race” and “ethnic origin” as different categories, which accounts for the discrepancy that these three percentages add up to more than 100 percent.

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City of Beverly Hills Figure 3.1 Household Income Distributions Source: 2008-2012 ACS 5 Year Estimates (Onthemap.census.gov) 14

ACS

5-Year

Estimate

for

2008-2012

identified

OVERALL ECONOMIC OUTLOOK

educational services as the largest industry sector within the County, followed by professional management and services,

To gain further insight into the economic picture

manufacturing, and retail trade (See Figure 3.2, Occupational

of the L.A. metro area, we analyzed macro-level trends and

Comparison by Industry). In order to examine industry trends

projections from the Kyser Center for Economic Research Los

over the time period from 2002 to 2010, we examined NAICS

Angeles County Economic Development Corporation “2013-

Industry Sector data (see Appendix 3.3), which showed the

14 Economic Forecast and Industry Outlook” report, published

percentage share per sector of the overall economy remained

February 2013. According to the report, the unemployment rate

relatively stable during that eight-year time period. A few

was expected to fall to 10.0 percent in 2013 and subsequently

industries, however, experienced more noticeable changes.

to 9.7 percent in 2014. That is still several years away from a

Los Angeles, like other regions across the United States,

stabilized unemployment rate of around 7.5 percent. Nonfarm

experienced a significant decrease in manufacturing from 13.7

jobs in the County were expected to increase to close to four

percent in 2002 to 9.1 percent in 2010. It also saw a slow, steady

million, which the report estimates is a few years away from

growth in the health care and social assistance industry sector

reaching the 2007 peak of 4.12 million jobs.

(from 9.1 percent in 2002 to 11.1 percent in 2010) and public administration (going from 1.8 percent in 2002 to 4.0 percent in 2010).

Additionally, the largest gains for 2013 were projected in leisure and hospitality (8,600 jobs), healthcare (5,000 jobs), construction (4,900 jobs) and professional, scientific and technical services (4,400 jobs). The entertainment industry and the transportation and trade industry are two key sectors that will continue to bolster the L.A. County economy. Personal income increased in 2012 and is expected to increase to $470 billion by 2014. Additionally, taxable retail sales increased by 9.4 percent in 2012 and were projected to increase by 5.9 percent and 3.4 percent in 2013 and 2014, respectively. The report notes that, “Both of these indicators suggest that the local consumer sector is on the mend, an all-important fact for retailers and other consumer-serving businesses,” (LAEDC Kyser Center for Economic Research, Economic Forecast, February 2013, p. 32). Overall economic indicators demonstrate that Los Angeles County is in the midst of a full-fledged recovery from the Great Recession. This bodes well for the timing of the Beverly Square development, especially in one of the strongest markets in the entire county.

Figure 3.2: Occupational Comparison by Industry: L.A. County vs. City of Beverly Hills Source: 2008-2012 ACS 5 Year Estimates (Onthemap.census.gov)

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CHAPTER 3: MARKET CONDITIONS | PART 2 | Competitive Environment Beverly Square will serve the needs of the upscale

These comparable markets include Brentwood, Santa Monica,

residents living in the neighborhood immediately to the south

and Pacific Palisades, which, like our project site, still fall in the

of the project site. It is a hybrid between typical neighborhood-

upper echelon of retail markets yet fall short of the “one-percent

serving retail and specialty retail. Specialty retail requires

wealth” attracted to the Golden Triangle.

discretionary income and time, both of which the wealthy neighborhood residents possess. The development will attract

RENT COMPARABLES

shoppers (in part) by presenting a refined aesthetic presence that mirrors the high quality associated with the retailers and

Based on the Q4 2013 Reis reports, our analysis

their products. Beverly Square will offer local area residents and

revealed only one development – The Rodeo Collection, located

workers the convenience and proximity of neighborhood retail

approximately one half mile away on Rodeo Drive – that is

coupled with the beauty and exclusivity of a specialty shopping

comparable in terms of its service to upscale clientele (See

experience to meet their upscale sensibilities.

Map 10, Chapter 7). While Beverly Square is not an exclusive enclave for the ultra wealthy like the Rodeo Collection, we

To conduct a comprehensive analysis of the existing

make the comparison based on geographic proximity. Another

trade area for neighborhood commercial retail, we examine

comparable project – The 3rd Street Plaza, a little over two miles

four data sources. The first two sources are reports for Q4 2013

away – is modest by comparison, serving mid to upscale clientele.

from Reis Services, LLC. One report was generated for 9908

We also included two similar developments in Brentwood and

South Santa Monica Blvd. in Beverly Hills (Appendix 3.4A), and

Pacific Palisades.

the other for 129 Santa Monica Blvd. in Santa Monica (Appendix 3.4B). They each contain inventory of existing retail development

Asking rent per square foot for these four properties

currently on the market. The third source we examine is the

ranges between $3.51 and $5.00 per square foot, per month

website LoopNet, from which we catalogue seven market rate,

(see #’s 1-4, Figure 3.3, Comparable Retail Rental Properties). For

commercial retail projects currently available for lease. Finally,

a closer look comparable rental data in the immediate vicinity

to create a list of potential competitor projects, we include

of 9900 South Santa Monica Blvd., we also included information

planned and proposed developments from a list of ongoing

for six properties currently listed on LoopNet (see #’s 5-10, Figure

projects obtained from the City of Beverly Hills Planning Division

3.3, Comparable Retail Rental Properties). All properties are

(Appendix 3.5).

located within one mile of Beverly Square. Asking rent per square foot for ground floor, street-facing retail ranges from $6.00 to

TRADE AREA

$14.00. Two properties offer second story space for $4.00 per square foot. Data from these properties indicates that we can

This section of the report defines and analyzes the

assume a starting monthly rent per square foot in the range of

trade area for Beverly Square. The one-half mile trade area radius

$5.00 to $6.00. For more details, including our determination

for this project includes the famously affluent commercial retail

of a weighted average to account for the difference in rent for

stores located in Golden Triangle. By comparison, the current

first and second story shops, please see page XX in the Financial

retail stock along the South Santa Monica Blvd. shopping

Feasibility section of the report. WHERE???

corridor is not as upscale, however there are few retail areas in the world that compare to the luxury on display along Rodeo Drive. As such we sought market information from a variety of similar areas outside of the one-half mile vicinity that also mirror our site’s position in a residential-commercial transition zone.

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Figure 3.3: Comparable Retail Rental Properties Source: Reis Services, LLC (Beverly Hills and Santa Monica Retail Reports), LoopNet

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PLANNED & PROPOSED DEVELOPMENT According to the Reis reports, there are only seven

of current projects under review or recently approved by the

planned or proposed developments within a three-mile radius of

City of Beverly Hills Planning Commission (and/or City Council

our project site. Of those, only two are classified as neighborhood

in some cases), we found four potential competitors (see #’s

commercial retail developments. And of those two, one is almost

8-11, Figure 3.4, Planned and Proposed Projects, and Map 11,

three miles away and therefore falls outside the trade area. The

Chapter 7). While these projects are each within one mile of our

other project is a little over one half mile away, however even that

development, they are all located in the Golden Triangle, which

distance is also too far away to attract the local neighborhood

we have already indicated is not a directly competitive market

customers targeted by Beverly Square. Based on an assessment

for Beverly Square.

Figure 3.4: Planned and Proposed Projects within 3-mile radius of 9908 S. Santa Monica Blvd. Source: Reis, Inc. Property Report, “Comparable Group Listing”, December 2013

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VACANCY & ABSORPTION

on a similar time horizon and could conceivably be competitive with our project. Therefore we would have to compete with

The Reis reports for commercial retail properties

108,815 square feet of new commercial retail NLA within a one-

designate the Santa Monica-Westside-Downtown submarket

mile radius. Adding the 49,728 square feet of NLA from our

as one of twelve districts that make up the Los Angeles metro

project, the total new NLA for the competitive submarket at the

region market area. According to Reis, this submarket currently

time the projects open would be 173,319 square feet.

has 5.3 million square feet of neighborhood and community retail space, which is just fewer than eight percent of the total for the L.A. Metro area. A Q4 2013 CBRE “Greater Los Angeles Retail Marketview” report (Appendix 3.6) estimates about 4.6 million total square feet of gross leasable area in the “West Los Angeles” region. In the ten-year period since Q4 2003, Reis reports an annualized inventory growth rate for the submarket is 1.3 percent, indicating that even during the Great Recession this submarket experienced positive retail growth at a higher rate than that of the 0.7 percent growth rate for the metro region on the whole. According to the Reis report, vacancy rates in the Santa Monica-Westside-Downtown submarket for 2013 averaged 4.7 percent, while they averaged 7.4 percent at the L.A. Metro level. The CBRE report notes a vacancy rate of 3.4 percent for West L.A., with an overall rate of 5.8 percent for the metro area. Vacancy information for comparable properties examined in this report was unavailable. Given the competitive location of our development, we anticipate vacancy rates to be more in line with the CBRE report, somewhere between 3-4 percent. The CBRE report notes that the L.A. metro region sustained retail demand during Q4 2013 by recording a net positive absorption of almost 250,000 square feet, bringing the 2013 year-to-date figure to over 800,000 square feet. West L.A. contributed to these figures in Q4 with almost 53,000 square feet, ending the year with a positive net absorption of slightly less than 10,000 square feet. According to Reis, the annualized five-year historical absorption rate for the submarket is 1.1. Based on the two-year project entitlement schedule and an estimated two-year construction timeline, we estimate a total time horizon of four years from initial submission of the planning application to completion of the project. As noted, Beverly Square is projected to have a total of 49,728 square feet of NLA. Referring to Figure 3.4, “Planned and Proposed Projects,” we assume that the two closest retail properties (#’s 5, 11) will be

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CHAPTER 3: MARKET CONDITIONS | PART 3 | Market Demand This section assesses demographics of the local trade

EMPLOYMENT CLASSIFICATIONS

area, which we measure using two similar sources: Beverly Hills Census Tract 7010, and data available from Esri (Appendices

According to the Esri Business Summary for the one

3.7A through K) within a one-half mile ring around the project

half mile radius around the project site, there are just over

site. Census Tract 7010 is situated in the southwestern tip of the

28,000 daytime employees that work at 3,662 businesses in the

City of Beverly Hills. It includes upscale multi-family housing,

area. The largest segment of workers, more than one quarter

some single-family units, and a range of retail options that

(25.3 percent), works in “Professional, Scientific & Tech Services.”3

makes it representative of the market we hope to capture in

The next two largest sectors make up 10.5 and 10.4 percent

the immediate vicinity of our project site. We consider socio-

of the workforce, respectively: “Administrative & Support &

demographic indicators as well as employment and economic

Waste Management & Remediation Services,” and “Finance

conditions of those working in and visiting the area to determine

and Insurance.” “Accommodation & Food Services,” and “Retail

retail demand for our proposed project.

Trade” are also important local job providers, with 8.6 and 8.4 percent of the employees, respectively. “Real Estate, Rental

SOCIOECONOMIC CONDITIONS

& Leasing” employees are 5.2 percent of the workforce, and the “Information” sector makes up 5 percent of the area jobs.

Census Tract 7010 is comprised of a total population of

Based on this summary area jobs, we infer that almost half (45.9

5,431 individuals, which accounts for about 16 percent of the

percent) are high wage earning jobs that would contribute to

total population for the City of Beverly Hills. The population

demand for higher end goods offered in the amenity-rich and

density is 9,883 persons per square mile, which is considerably

beautifully landscaped Beverly Square. See Map 9, Chapter 7.

higher than the rest of the City (with a population density of 5,975 persons per square mile). Additionally, the median age for

CONSUMER SEGMENT CHARACTERISTICS

the project area is just over 44, which is almost ten years older than the L.A. County average. In fact, 18.7 percent of the census

In order to gain a comprehensive understanding of

tract population is 65 or above compared to 10.8 percent for

the consumer population living within the trade area of the

the County. Over 80 percent of the tract population identifies

project site we examine Esri’s TapestryTM Segmentation. Figure

as “White alone,” compared to around half the L.A. County

3.5 depicts the population percentage of the three most

population.

prevalent segments in the area and illustrates the distinguishing characteristics of each segment.

Educational attainment levels in the project area are much higher than County averages. According to ACS

MARKET DEMAND POSSIBILITIES

estimates for 2008-2012, around 70 percent of the population in the project area has a higher education degree. Educational

The

socioeconomic

and

consumer

segment

attainment usually has strong correlation to income levels,

characteristics of the population surrounding the project site

and Beverly Hills is no exception. The median income for the

indicate a wealthy, middle age, highly educated population with

project area is estimated at $86,609 (Esri reports $85,500), which

disposable income that they spend on luxury goods. The higher

contrasts considerably to the County’s median income estimate

relative population density of the area creates conditions suitable

of $56,241. Around 45 percent of the local population has a

for a walkable and bicycle-friendly commercial development.

household income $100,000 or more.

High household income and discretionary spending on luxury goods indicates the target population’s preference for a firstrate, carefully crafted shopping experience.

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82.4%

14.0%

3.6%

Figure 3.5: Esri’s TapestryTM Segmentation Source: ESRI

number of customers from outside the one half mile radius, which accounts for the extreme supply surplus relative to the

The Esri Retail Market Potential report (see Appendix

population-based demand.

3.7C) provides retail spending trends exhibited by the area population. The trends listed below further corroborate the high purchasing power of this target consumer population:

Excluding the distorted retail surplus numbers from the Golden Triangle, we feel confident that our hybrid specialtyneighborhood retail development will occupy a unique space

• About half of all consumers purchased men’s and

for upscale clientele who live and work in the surrounding

women’s apparel in the past 12 months

community. Esri estimates retail demand on the part of the local

• Almost one-fifth purchased fine jewelry in the past

population at almost $105 million, however that figure does not

12 months

account for demand created by the local workforce. As noted

• Over two-thirds drank bottled water in the past six

above, half of the area’s 28,000 daily workers are high-end wage

months

earners who would be the most likely to contribute to total retail

• Nearly two-thirds dined at a restaurant in the past

demand. Assuming that each of the 14,000 high wage-earning

12 months

workers spends an average of $50 per week in the area, they

• Nearly two-thirds have monthly credit card

contribute an additional $36.4 million in retail demand to the

expenditures over $700

trade area. Local businesses also create demand when they order food for clients and employees, purchase supplies, and generally

The Esri Retail Marketplace Profile report (see

engage in the local economy. According to the Esri report, there

Appendix 3.7D) shows a retail surplus of about $578 million in

are 3,662 businesses located within a one-half mile radius of

annual sales, which indicates a saturated market for the area’s

the project site. Assuming they spend a conservative average

residential population (3,757). It must be understood, however,

of $100 per week in the area, they contribute an additional $19

that sales from Golden Triangle businesses contribute heavily

million in retail demand per year. Including residents, high wage

to this calculation. As noted, the Golden Triangle is a world-

earners, and businesses, retail demand in the one-half mile

class shopping district that attracts a disproportionately high

radius trade area equals $160.4 million per year.

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According to “Dollars and cents of shopping centers / the SCORE,” sales figures for the upper decile of U.S. neighborhood shopping centers in the west average $454.76 per square foot per year. Given the high median income of local area residents that will patronize Beverly Square, we multiply that baseline figure by two4 to estimate that Beverly Square will generate approximately $910 in sales per square foot per year. This translates to $45.3 million in sales per year. As noted above, Beverly Square will provide 49,728 square feet of neighborhood retail NLA. Based on information we have regarding projects currently in the planning phase, we estimate that the market will have an additional 173,319 square feet of the same product coming on line at the same time. As such, we estimate Beverly Square’s capture to be 28.7 percent of the new market, or about $46 million of the total area retail demand of $160.4 million. The $45.3 million sales projection for Beverly Square falls within the expected market capture of $46 million of the total area demand.

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CHAPTER 4: DEVELOPMENT PROGRAM AND DESIGN

CHAPTER 4: DEVELOPMENT PROGRAM AND DESIGN To achieve the successful completion of the Beverly

at Avenue of the Stars and Olympic Boulevard. Despite the

Square development, our project team will strive to work

objective proximity, research shows that the positive economic

collaboratively with various actors in the City of Beverly Hills,

benefit derived from proximity to transit stations begins to

including the Planning Division in the Community Development

diminish at distances over one quarter mile. Given that the

Department, Chamber of Commerce and local homeowners

closest of the two proposed Metro stops would be just over one

associations. It is imperative that the Beverly Square project

half mile away, our project will not likely capture many transit-

supports the vision for commercial development that the City

oriented development benefits. However, Beverly Square will

articulates in the General Plan.

promote walkability in the immediate commercial surroundings as an ideal of pedestrian-oriented development that creates a

According to the vision of the General Plan, the City of Beverly Hills lays out five general themes in in order to, “define a

connected and walkable environment that takes the advantage of existing and proposed bicycle paths.

roadmap to sustain and nurture the qualities and characteristics that contribute to Beverly Hills’ identity as an extraordinary

The Beverly Square development program aspires to

community in which to live, do business, work, shop, recreate,

reimagine South Santa Monica Boulevard as a “Main Street”

be culturally enriched, and respect the environment (City of

corridor, serving as the area’s premier destination among the

Beverly Hills General Plan, Pg. 6). These five themes are:

existing adjacent commercial and retail uses. The proposed development guidelines illustrate the manner in which our vision

1. Sustaining Great Places

for the site coincides with local development considerations.

2. Growing Smarter 3. Maintaining a Resilient Economy, and Provision of

Pedestrian-Scale Development

Services 4. Living Lightly – Reducing Our “Carbon Footprint” 5. Developing a Sustainable Future

Beverly Square promotes the public safety of a great neighborhood that is compact and connected. The proposed development connects to the retail corridor along South Santa

Members of the City Planning Department highlighted

Monica Boulevard with a proposed pedestrian path through

the importance of ensuring that all proposed development fit

the center of the site. The pedestrian is encouraged to enter the

within the context of these five themes. As such, our proposal

development from the street at two entrances that guide her

for Beverly Square seeks to increase the overall quality of life

into a courtyard of retail shops. A variety of streetscape furniture,

for residents by promoting walkability, providing upscale retail

landscaping, and lighting provides the intimate character of the

services commensurate with clearly defined market needs, and

neighborhood that is both walkable and friendly.

employing LEED-Silver green building practices. Architectural Continuity While the City of Beverly Hills articulates a vision for reducing its carbon footprint, the reality is that it is still a

The area immediately surrounding the project

heavily automobile oriented city. Nevertheless, we considered

demonstrates a variety of retail and residential uses that exhibit

relationship between the proposed project and the movement

an assortment of architectural styles, including European

toward transit-oriented development. There are two proposed

Revival, Spanish Revival, Mediterranean style, and Modernism

stops along the Metro Purple Line Extension within an

– all within the extent that exhibits the living vernacular of

approximately one half-mile radius of the project site: one

the City of Beverly Hills. Based on a critical examination of

at Wilshire Boulevard and Rodeo Drive, and the other one

these architectural styles, including field observations and

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conversations with the City’s urban designer, Beverly Square

styles to add surface permeability and water catchment

seeks to illustrate frontage types, exterior facade walls, building

systems to further the green building goals of the City. Based on

heights, and massing in order to continue the preservation of this

conversations with Kathleen Head, Managing Principal at Keyser

distinct neighborhood character. With a combination of these

Marston Associates, we believe that we can achieve LEED-Silver

architectural styles and varied massing of building heights, we

certification for the building structure at no extra construction

intend to capture an illusory effect of a traditional town setting

costs.

with a “Main Street” character that extends throughout South Santa Monica Blvd.

Vibrant Business and Shopping Districts

We begin with single-story storefronts facing South

Beverly Square has been designed to activate the

Santa Monica Blvd. in a symmetrical nod to the identity of the

public realm of courtyards and fountains with outdoor seating

commercial establishments across the street. The northwest

to create an upscale, intimate shopping experience for patrons.

corner of the project serves as a primary entrance that tapers

As noted, the project is driven by market demands to provide

down from a two-story massing structure, thus creating an “L”

upscale retails shops and services for the wealthy consumer base

product with a series of courtyards that produce the ‘element

in the adjacent residential area accessible on foot or bicycle. In

of surprise’ in terms of human encounters and retail experience.

addition, local area professionals who work within walking

Along the eastern edge of the site lies one of the larger square-

distance of the shops, as well as members of the greater Beverly

footage establishments and terminates with varied retail uses

Hills community, will be drawn to experience the intimately chic

on the southern edge of the site. In addition, two levels of

neighborhood setting. These new high-end establishments

subterranean parking accommodate 205 parking spaces, 63

seek to promote the economic development goals of the City

of which are for community benefit. The parking entrance is

while furthering the reputation of Beverly Hills as a destination

located on the southwest corner of the site abutting South Santa

for those seeking a specialty retail experience. Potential retailers

Monica Blvd. This proposed location enables an ideal circulation

comprising the tenant base of Beverly Square include:

route for vehicles and ease of access for handicapped persons traveling in vehicles or on the street. The overall building

• Purveyors of fine clothing Janie and Jack, Ted Baker,

envelope is developed based on the contextual environment

and Lululemon Athletics;

of the neighborhood that contains hotel establishments with

• Specialty food stores Dean & Deluca, and Sunlife

a minimum of four stories, two and one half story residential

Organics;

buildings, and a pattern of single-story to two-story commercial

• Personal care facilities such as Pure Barre, Yoga

developments along the South Santa Monica Boulevard corridor.

Works, Bodyrok Sculpt and Cycle, and Burke-Williams day spa;

Natural Resources Management

• Home goods providers Williams-Sonoma and Between the Sheets;

As advocates of environmental design, we seek to

• Small-scale cafes such as Starbucks and Le Pain

create a series of buildings at a maximum of two story heights

Quotidien;

to enable natural ventilation and sunlight to enter into what

• Retailers and service providers addressing the

would otherwise be cold, dark spaces. In this capacity, our

needs of local residents and professionals: dry cleaning

light and shade study would provide minimal development

and tailoring; stationary; florist; and a pet grooming

of artificial lighting to conserve the City’s energy costs and

boutique, among others

promote a variety of sustainable design interventions. In addition, the project proposes landscaping the site with natural foliage and aesthetically beautiful water fountains to create the exotic appeal of nature within an upscale retail experience. We propose innovative techniques of landscaping and pavement

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BEVERLY SQUARE SITE PLAN

CHAPTER 4: DESIGN CONCEPT

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BEVERLY SQUARE FIRST FLOOR PLAN

CHAPTER 4: DESIGN CONCEPT

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BEVERLY SQUARE SECOND FLOOR PLAN

CHAPTER 4: DESIGN CONCEPT

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BEVERLY SQUARE SECTION

CHAPTER 4: DESIGN CONCEPT

CHAPTER 5: FINANCIAL FEASIBILITY

CHAPTER 5: FINANCIAL FEASIBILITY | PART 1 | Assumptions The development team conducted a detailed financial feasibility assessment, which draws from various real estate market reports and economic data to determine that the Beverly Square project is low risk, high feasibility investment opportunity compared to current market return thresholds. The proposed upscale neighborhood retail center contains 49,728 square feet of net leasable area distributed among approximately eighteen units. The total development cost (TDC) for the project equals $44,619,362. The total value upon completion is $52,061,840, which generates $7,442,477 in equity value. The leveraged return on equity comes to 10.20 percent, and over a ten-year period, the year-on-year internal rate of return of 20.92 percent on equity is an investment opportunity that is hard to match in money markets. The first part describes our cost, income, and financing assumptions in a series of detailed tables (See Tables below). The next section explains how our feasibility assessment compares to static and ten-year return on investment measures. Finally, we present a series of sensitivity tests that demonstrate how specific financial adjustments to cap rates, construction costs, and the loan to value ratio could alter project feasibility.

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LAND ASSUMPTIONS

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FINANCING ASSUMPTIONS

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Development Costs ASSUMPTIONS

INCOME ASSUMPTIONS

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EXPENSES ASSUMPTIONS

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CHAPTER 5: FINANCIAL FEASIBILITY | PART 2 | Feasibility Assessment Static Measures of Return

investment falls within the range of accepted returns provided for un-anchored national retail by the RealtyRate Investor

We review the project’s return measures based on two

Survey, but is below the national average of 12.85 percent.

financing mechanisms: debt coverage ratio (DCR) and loan to

Beverly Hills, however, is one of the country’s hottest markets,

value cap ratio (LVCR). The LVCR mechanism provides the lowest

which makes it a more secure investment opportunity than the

maximum loan at $33,840196, which necessitates an equity

national average. Beverly Square investors would be willing to

investment of $10,779,166 to cover the TDC of $44,619,362.

take a return on equity investment toward the lower end of the

The leveraged return on the equity investment is 10.20 percent

accepted spectrum due to the lower risk of a sound investment

and the unleveraged return on total development cost equals

in a hot market. The 7.35 percent unleveraged return on TDC is

7.35 percent. The profit at sale is projected to be $7,442,478,

one percentage point lower than the first tier neighborhood/

which provides a leveraged profit over equity rate of 69.05

commercial retail average for Los Angeles, which is provided by

percent. Finally, the unleveraged gross margin over the total

the RERC Q3 2013 Real Estate Report. Again, because Beverly

development cost is estimated to be 16.68 percent.

Hills is such a hot market, investors would accept a slightly lower return because the risk on investment is lower than the average

These returns clearly indicate that the project is

risk for Los Angeles. Comparative figures for profit at sale and

feasible, and moreover, a sound investment opportunity. Figure

gross margin were not available. However, a logical review of

5.1 “Project Feasibility Comparison” presents a breakdown

these returns reveals that a profit at sale around 70 percent and

of how our project’s financial returns compare to current

a gross margin over 16 percent are positive return measures.

market returns. The 10.20 percent leveraged return on equity

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Figure 5.1: Project Feasibility Comparison 37

IRR (10-year) Measures of Return In addition to the static measures of return, we measured leveraged and unleveraged internal rates of return (IRR) using a ten-year cash flow model that assumed a three percent annual increase in net operating income (NOI) and a terminal cap rate of seven percent. The project generates a year-on-year leveraged IRR of 20.92 percent and a 9.80 percent unleveraged IRR. The unleveraged IRR range for national strip shopping centers provided in the Q3 2013 PWC Real Estate Investor Survey is between 5.50 to 11.50 percent, with an average of 8.06 percent. The Beverly Square project falls into the upper end of that range and actually surpasses the national average, indicating a high level of feasibility. The 20.92 percent leveraged IRR represents a return on investment higher than most returns available in capital markets. A Bloomberg finance report (Appendix 5.1) notes that hedge funds offered an average 7.4 percent return on investment in 2013. While the S&P 500 produced a remarkable 26.5 percent return in 2013 (Appendix 5.2), that was its best return since 1995 and represents an anomaly laden with risk. An IRR above 20 percent on a real estate project in Beverly Hills offers a far safer investment opportunity.

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CHAPTER 5: FINANCIAL FEASIBILITY | PART 3 | Sensitivity Analysis In an effort to gauge the strength of this project’s

On the other hand, increasing the cap rate to 7.30

expected financial returns on investment, we applied four

percent caused the project value (and equity value created) to

categories of stress tests, including:

drop by $7.1 million. The maximum available loan decreased to $29.2 million, necessitating an increase in initial equity to

• Adjusting the starting cap rate up and down by one

$15.4 million. The return on equity investment remained very

percent

respectable at 9.07 percent, but the leveraged return of profit

• Adjusting the ending cap rate up and down by one

over equity plummeted to 2.02 percent. The leveraged IRR over

percent

ten years dropped slightly to 17.48 percent. Despite the low

• Adjusting the construction costs up and down by

profit over equity return, even with the cap rate increased to

ten percent

7.30 percent the project remained feasible.

• Adjusting the LVR up and down by ten percent As can be seen in Figure 5.2, “Sensitivity Analysis,” the We measured the effect these tests had on the four

three other tests altered returns but did not cause significant

static return measures (return on equity investment, return

enough changes to make the project infeasible. The relative

on TDC, profit at sale, and gross margin) as well as leveraged

strength of the Beverly Hills commercial retail market allows this

and unleveraged IRR after a ten year investment period. The

project to obtain favorable returns using rather conservative

adjustments and corresponding consequences on the return

estimates for the LVR (65 percent) and cap rate (6.30 percent).

measures are captured in Figure 5.2, “Sensitivity Analysis.”

When these numbers are adjusted, the project continues to fare well due to the premium rent per square foot it is able to

The most impactful of the four tests we applied was to

command while keeping operating costs to a minimum. In

adjust the cap rate up and down by one percent from our base

sum, the Beverly Square development project a low risk, highly

rate of 6.30 percent. This is not surprising because the cap rate is

feasible investment opportunity in a trusted market.

perhaps one of the most important real estate investment factors for any project. It is a measure of the rate of return based on the expected income that the property will generate. Lowering our cap rate to 5.30 percent increased the project value upon completion (and equity value created) by approximately $9.8 million. Additionally, this increased the maximum available loan (still using the loan to value cap ratio), which lowered the initial equity investment needed to cover total development costs. This combination of less initial equity and higher project value caused leveraged returns on equity to skyrocket to 15.67 percent (cash flow over equity), 392.91 percent (profit over equity), and a 32.66 percent IRR over a ten-year period.

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SENSITIVITY ANALYSIS

STATIC RETURN AND TIME VALUE MEASURES

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CHAPTER 6: CHALLENGES AND OPPORTUNITIES

CHAPTER 6: CHALLENGES AND OPPORTUNITIES The biggest hurdle facing the proposed Beverly Square

Local business tenants might object to the new retail

commercial retail project is ensuring a smooth entitlement

development because they will see it as an affront to their sales,

process and avoiding surprise adversity on behalf of community

but the hotel establishments, including the Peninsula Hotel

actors that the development team was unable to anticipate. The

and the Beverly Hilton, should support the creation of a new

project has been designed to fully comply with all aspects of

shopping destination for their patrons. The development team

the City Code as it applies to that particular parcel in the “Other

can attempt to assuage concerns of local business owners by

Commercial” (C-3A) zone. The project team has decided to

presenting trade area sales supply and demand data. Including

engage key City officials and other constituents early and often

residents, businesses, and high wage earning professionals

to streamline the entitlement processes, navigate through and

working nearby, we estimate retail demand in the one-half mile

around any potential political pitfalls, and begin the process of

trade area equals $160.4 million per year. Beverly Square will

securing debt and equity to begin the project in earnest as soon

generate approximately $45.3 million in sales per year, which

as possible.

falls within the project’s expected market capture of $46 million, based on available retail square footage in the area. As an

The Beverly Square project will be located in a

additional point, the new development will provide services not

Commercial-Residential Transition Area, which creates a setback

currently offered by existing establishments along South Santa

restriction. Since the project will border two-story residential

Monica Blvd.

dwellings to the south, the project team is weary about possible opposition from nearby residents, including the Southwest

Another factor that affects our project are the high cost

Homeowners Association. Residents with abutting property

of parking spaces. Based on our proposed NLA, Beverly Square

could oppose a relatively high-density building mass in its

only needs to provide 142 spaces. With a building footprint of

proximity, but the 1.72 FAR in a zone permitting a 2.0 FAR is

36,000 square feet, each level of underground parking is capable

hardly any reason for concern.

of sustaining 102 spaces (36,000 total square feet divided by 350 square feet per space). This results in building an entire

In order to balance as much opposition as possible, the Beverly Square project will conform to the prescribed

second level for a need of only 40 spaces. As such, we propose a community benefit of 62 extra parking spaces.

sections of the municipal code while seamlessly transitioning into the neighborhood. The project has been designed with an

Andy Swyck, Director of Economic Development at

array of building heights to create an undulating pattern that

the Beverly Hills Chamber of Commerce, noted that the South

does not stand out as one solid wall abutting to residents, but

Santa Monica Blvd. corridor was in need of increased activity,

rather enables natural sunlight and ventilation. The building

particularly later in the day due to the exodus of professionals

is a combination of single and two-story heights that works in

from the area businesses. (Phone Interview on February 25,

aesthetic concert with the two-story residential developments

2014). In an effort to work collaboratively with the City of Beverly

on the opposite side the alley, the two-story commercial

Hills, the Chamber of Commerce, and local residents to achieve

developments adjacent to the south of the site, and single-

their goals for the area, Beverly Square would provide several

story commercial developments west of South Santa Monica

key community benefits:

Boulevard. As proposed, the Planning Commission and Architectural Review Board will most likely approve the Beverly Square project, subject to the architectural continuity of the site.

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•

Reinvigorating the South Santa Monica

Blvd. commercial corridor as a lively “Main Street” destination with a variety of upscale retail opportunities in a beautifully landscaped outdoor setting. As it grows in recognition among the local residents and business community, we hope that the site could host seasonal festivals, and other public, community events. •

The proposal of a bicycle lane and installment

of bicycle racks encourages the city’s stated goals of growing smarter by increasing non-motorized movement in the form of biking and walking. •

Attracting upscale, specialty businesses to

the area benefits the community by strengthening the local economy. Adding small-scale cafes like Starbucks and Le Pain Quotidien, wellness facilities like Pure Barre and Yoga Works, and retail establishments such as Ted Baker, Papyrus, and Janie and Jack bolster the overall business community be adding consistent revenue stream to the area. Since Beverly Square is a purely commercial venture, it also achieves the City Planning Division’s stated goal of developing part of the remaining nine percent of vacant commercially zoned lots throughout the city. Finally, perhaps one of the best opportunities that the Beverly Square project provides is for investors. The project requires an initial equity investment of $10,779,166 and the total development cost for the project comes to $44,619,362. The total value upon completion is $52,061,840, which generates $7,442,477 in equity value. The leveraged return on equity comes to 10.20 percent. If the investor chooses to sell the project on completion, she would receive a leveraged profit at nearly 70 percent of her initial investment. However, it would be more beneficial to keep the project for a ten-year period. Assuming a 3% increase in annual net operating income and a terminal cap rate of 7%, the year-on-year internal rate of return equals 20.92 percent on equity. The relative strength of the Beverly Hills commercial retail market makes the Beverly Square project a low risk, highly feasible investment opportunity for the right investor.

FINAL DUE DILIGENCE

CHAPTER 7: CARTOGRAPHY

Beverly Crest

0.7

Beverly Hills

k 7010

1.4

Cheviot Hills

Century City

Westwood

0.35

West Los Angeles 0

Hollywood Hills West

40 Miles

Fairfax

Hancock Park

Mid-Wilshire

Beverly k Hills

West Hollywood

Metro LA County Hollywood

Mid-City

Carthay

Beverly Grove

West Hollywood

Pico-Robertson

Miles

Beverlywood 2.1

MAP 1

BEVERLY SQUARE

Site

LEGEND

Regional Location

0.5 mile radius

Primary Sub-market

Secondary Sub-market

Proposed Metro stop

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE LOCATION

CHAPTER 7: CARTOGRAPHY

0.1

Westwood

0.2

West Los Angeles

Century City

0.4

0.6 Miles

Beverly Hills

Âą

MAP 2

BEVERLY SQUARE

Site

LEGEND

Aerial Photograph

0.5 mile radius

Neighborhoods

Proposed Metro stop

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE NEIGHBORHOOD LEVEL - AERIAL PHOTOGRAPH

CHAPTER 7: CARTOGRAPHY

0.1

Westwood

0.2

Century City

0.4

0.6 Miles

Beverly Hills

Âą

MAP 3

BEVERLY SQUARE

Site

LEGEND

Building Footprints

0.5 mile radius

Neighborhoods

Proposed Metro stop

Vacant sites

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE NEIGHBORHOOD LEVEL - BUILDING FOOTPRINTS

West Los Angeles

CHAPTER 7: CARTOGRAPHY

0.1

Westwood

0.2

West Los Angeles

Century City

0.4

0.6 Miles

Beverly Hills

Âą

MAP 4

BEVERLY SQUARE

0.5 mile radius

Site

LEGEND

Land Use Map

Neighborhoods

Proposed Metro stop

Single Family Residential

Land Use

Multi-Family Residential

Commercial And Services

Other Commercial

Retail Stores And Commercial

General Office Use

Hotels And Motels

Heavy Industrial

Mixed Urban

Educational Institutions

Parks And Recreation

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE NEIGHBORHOOD LEVEL - LAND USE

CHAPTER 7: CARTOGRAPHY

Westwood

Beverly Hills

MAP 5

Site

LEGEND

Zoning Map

BEVERLY SQUARE

0.5 mile radius

Neighborhoods

Proposed Metro stop

R-1x One-Family Residential Zone

R-1 One-Family Residential Zone

CITY OF BEVERLY HILLS

R-1.5x One-Family Residential Zone

R-1.5 x2 One-Family Residential Zone

R-1.7x One-Family Residential Zone

R-1.8x One-Family Residential Zone

R-4 Multiple Residential Zone

R-4 x1 Residential Income and Multiple Dwelling Zone

R-4 x2 Multiple Residential Zone

R-4-P Residential Parking Zone

RMCP Multiple-Family Residential-Commercial Parking Zone

C-3 Commercial Zone

C-3A Commercial Zone

C-3B Commercial Zone

C-3T-1 Commercial-Transition Zone

C-3T-2 Commercial-Transition Zone

C-5 Commercial Zone

Church Zone

LOS ANGELES CITY

S School

M272 - Real Estate Dev. & Finnc Winter 2014

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M.PD.2 Mixed Use Planned Development Overlay Zone

CR-PD Commercial Retail Planned Development Overlay Zone

C-R Commercial-Retail Overlay Zone

Parks, Reservoirs, Government (Unzoned)

T-1 Transportation Zone

Âą

A1 Agricultural

0.6 Miles

RE20 Residential Estate

Century City

0.4

R1 One-Family Dwelling R2 Two Family Dwellings RD1.5 Restricted Density Multiple Dwelling

0.2

RD2 Restricted Density Multiple Dwelling R3 Multiple Dwelling R4 Multiple Dwelling RAS4 Residential/Accessory R5 Multiple Dwelling C2 Commercial C4 Commercial PF Public Facilities CCS Century City South Studio Zone

0.1

West Los Angeles

FINAL DUE DILIGENCE

BEVERLY SQUARE NEIGHBORHOOD LEVEL - ZONING

CHAPTER 7: CARTOGRAPHY

0.6 Miles

½ ¾ ½ ¾ ½ ¾ ½ ¾ ½ ¾ ½ ¾ 0.4

Century City

½ ¾

½ ¾ ½ ¾ ½ ¾

Westwood

0.2

½ ¾ ½ ¾ ½ ¾ 0.1

Beverly Hills

MAP 6

BEVERLY SQUARE

Site

LEGEND

Transit Connections

0.5 mile radius

Neighborhoods

Proposed Metro stop

Bus Stop

Metro Local

704

Metro Rapid

720

728

½ ¾ ½Bikeways (SCAG) ¾

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE ½ ¾ ½ ¾

½ ¾

BEVERLY SQUARE NEIGHBORHOOD LEVEL - TRANSIT CONNECTIONS

West Los Angeles

CHAPTER 7: CARTOGRAPHY

Westwood

0.4

rly H

0.6 Miles

Be ve

El Rodeo Elementary School

Century City

Los Angeles Country Club

0.2

Westfield Shoppingtown Century City 0.1

West Los Angeles

ill

sH ig

Beverly Hills

CIty of Beverly HIlls City Hall Beverly Gardens Park

Good Shepherd Catholic School

h S ch o

MAP 7

BEVERLY SQUARE

Site

LEGEND

Local Amenities

0.5 mile radius

Neighborhoods

8 î

Corporate Headquarters

City Halls

Churches

Banking and Finance

Proposed Metro stop

Courthouses

Amenities

Farmers Markets

Chambers of Commerce

K { n

Sheriff and Police Stations

Schools / High Schools

Libraries

Golf Courses

¸ ² [ j " I n

Shopping Centers

Recreation Centers

Post Offices

Parks and Gardens

Museums and Aquariums

Health Clinics

P í

5 c

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

xb Ro ury

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE NEIGHBORHOOD LEVEL - AMENITIES

CHAPTER 7: CARTOGRAPHY

k Par

0.1

Westwood

st We

0.2

West Los Angeles

Be ver ly H ills line am

0.4

Century City

au af nic Mo ta Sa n

ent 0.6 Miles

Beverly Hills

Âą

MAP 8

BEVERLY SQUARE

Site

LEGEND

Geology Map

0.5 mile radius

Neighborhoods

Proposed Metro stop

Qay1

Alluvial gravel, sand and silt-clay, derived mostly from Santa Monica Mountains; includes gravel and sand of stream channels (Pleistocene)

Qay2

Alluvial gravel, sand and silt-clay, derived mostly from Santa Monica Mountains; includes gravel and sand of stream channels (Pleistocene)

Qao

Fault lines

Older alluvium of gray to light brown pebble-gravel, sand, silt and clay derived from Santa Monica Mountains; slightly consolidated (Holocene)

( (

SOURCE:Yerkes, R. F., 1997, Preliminary geologic map of the Beverly Hills 7.5 minute quadrangle, southern California: U. S. Geological Survey Open-File Report 97-256.

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE NEIGHBORHOOD LEVEL - GEOLOGY

CHAPTER 7: CARTOGRAPHY

Beverly Crest

0.7

Beverly Hills

k 7010

1.4

Cheviot Hills

Century City

Westwood

0.35

West Los Angeles 0

Hollywood Hills West

Mid-Wilshire

Hancock Park

Fairfax

40 Miles

West Hollywood

Metro LA County Hollywood

Mid-City

Carthay

Beverly Grove

West Hollywood

Pico-Robertson

Miles

Beverlywood 2.1

MAP 9

BEVERLY SQUARE

Site

LEGEND

Employment Centers

0.5 mile radius

Primary Sub-market

Proposed Metro stop

Employees per 100 residents

0.00

0.01 - 25.00

25.01 - 50.00

50.01 - 100.00

100.01 - 250.00

> 250.01

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE NEIGHBORHOOD LEVEL - EMPLOYMENT CENTERS

CHAPTER 7: CARTOGRAPHY

27,000

0.65

Bel-Air

0.325

Sawtelle

65,500

Beverly Crest

Westwood

West Los Angeles

Rancho Park

1.3

17,000

Mid-City

Âą

Carthay

Beverly Grove

Hollywood Hills West

Beverlywood

Pico-Robertson

1,400

11,376 80,000 Beverly Hills 5,700 3,100 13,952 2,925

Cheviot Hills

Century City

1.95 Miles

MAP 10

BEVERLY SQUARE

Proposed Metro stop

Neighborhoods

0.5 mile radius

Site

LEGEND

Comparable Retail Rental Properties

Sq. Ft.

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE NEIGHBORHOOD LEVEL - COMPARABLE RETAIL RENTAL PROPERTIES

CHAPTER 7: CARTOGRAPHY

0.65

Bel-Air

0.325

Sawtelle

260,000

Beverly Crest

Westwood

West Los Angeles

Rancho Park

1.3

358,881 94,000

Beverlywood

Pico-Robertson

Mid-City

40,300

Âą

Carthay

Beverly Grove

30,000 70,259 27,000

Hollywood Hills West

1,900 Beverly Hills 6,000N/A 14,815

Cheviot Hills

Century City

1.95 Miles

MAP 11

BEVERLY SQUARE

Proposed Metro stop

Neighborhoods

0.5 mile radius

Site

LEGEND

Planned and Proposed Projects

Sq. Ft.

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE NEIGHBORHOOD LEVEL - PLANNED AND PROPOSED PROJECTS

CHAPTER 7: CARTOGRAPHY

ic on

lvd

300

nt ra

ille lev

450 Feet

ar Ch

150

lvd

B ica on

M ta

n Sa

an SS

b Ro

bin

r sD

MAP 12

BEVERLY SQUARE

Aerial Photograph

LEGEND

Proposed site

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE SITE LEVEL - AERIAL PHOTOGRAPH

CHAPTER 7: CARTOGRAPHY

vd Bl

ic on

lvd

300

nt ra

ille lev

450 Feet

ar Ch

150

lvd

B ica on

M ta

n Sa

an SS

b Ro

bin

r sD

MAP 13

BEVERLY SQUARE

Entitlements

LEGEND

Proposed site

Vacant sites

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE SITE LEVEL - BUILDING FOOTPRINTS

CHAPTER 7: CARTOGRAPHY

vd Bl

ic on

lvd

300

nt ra

ille lev

450 Feet

ar Ch

150

lvd

B ica on

M ta

n Sa

an SS

b Ro

bin

r sD

Âą

MAP 14

BEVERLY SQUARE

Land Use Map

LEGEND

Proposed site

Land Use

Multi-Family Residential

Other Commercial

Hotels And Motels

Mixed Urban

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE SITE LEVEL - LAND USE

CHAPTER 7: CARTOGRAPHY

vd Bl

ic on

lvd

300

nt ra

ille lev

450 Feet

ar Ch

150

lvd

B ica on

M ta

n Sa

an SS

b Ro

bin

r sD

Âą

MAP 15

Proposed site

LEGEND

Zoning Map

BEVERLY SQUARE

ZONES:

R-4 Multiple Residential Zone

C-3 Commercial Zone

C-3A Commercial Zone

T-1 Transportation Zone

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE SITE LEVEL - ZONING

CHAPTER 7: CARTOGRAPHY

vd Bl

ic on

lvd

300

nt ra

ille lev

450 Feet

ar Ch

150

lvd

B ica on

M ta

n Sa

an SS

b Ro

bin

r sD

Âą

MAP 16

BEVERLY SQUARE

Geology Map

LEGEND

Proposed site

Qay1

Alluvial gravel, sand and silt-clay, derived mostly from Santa Monica Mountains; includes gravel and sand of stream channels (Pleistocene)

Qay2

Alluvial gravel, sand and silt-clay, derived mostly from Santa Monica Mountains; includes gravel and sand of stream channels (Pleistocene)

SOURCE:Yerkes, R. F., 1997, Preliminary geologic map of the Beverly Hills 7.5 minute quadrangle, southern California: U. S. Geological Survey Open-File Report 97-256.

Adam Monaghan Arfakshad Munaim Vicente Romero Carla Salehian

M272 - Real Estate Dev. & Finnc Winter 2014

FINAL DUE DILIGENCE

BEVERLY SQUARE SITE LEVEL - GEOLOGY

CHAPTER 7: CARTOGRAPHY

vd Bl

BEVERLY SQUARE: SANTA MONICA BLVD. & CHARLEVILLE RD.

APPENDIX

Winter 2014 UP M272 Adam Monaghan Arfakhashad Munaim Vicente Romero Carla Salehian