To the Editor:

Municipal Building Plan Cost Analysis

I would like to make Chatham Township residents aware of the prospective cost of the proposed Municipal Building Plan for providing affordable housing.  Last November Chatham Township put forward a plan to provide 65 of 74 required affordable housing units by building a 3-story structure on the foundation of the present Township Offices of the Municipal Building located at 58 Meyersville Road.  It was proposed that the Senior Center located in the basement of the building and the gym be preserved and be made available to the Township for use after construction is completed.  It was further proposed that the Township Offices be relocated to a new 28,000 square-foot Municipal Building at the site of the current Police Station on Southern Boulevard.  The new Municipal Building would also house the Police Department and the offices of the Public Works Department.  The Township did commit to temporarily relocating the Senior Center during construction, but no commitment has yet made for the recreational programs utilizing the gym.    

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Having spent some effort in trying to establish a reasonable cost estimate, I have concluded that a reasonable estimate of the total cost of the Municipal Building Plan lies somewhere between $17M and $20M. I will present a cost analysis to support these estimates. However, before I get into the details, I would like to observe that the associated cost per affordable housing unit provided by this plan range from $230,000 per unit to $270,000 per unit.

In discussing the Townships Committee’s handling of the affordable housing issue, Mayor Mike Kelly has emphasized several advantages of their approach.  First, by assuming full responsibility for the provision of court-mandated affordable housing the Township has avoided exposure to the “builder’s remedy” which could prospectively lead to uncontrolled and undesirable development within the Township.  In addition, he sights several major achievements. The Township has been able to negotiate a reduction from an initial requirement for 387 affordable housing units to only 178 units, a reduction of over 50%.  They were successful in negotiating a 30-year extension of the agreement to keep 72 Vernon Grove Condominiums in the affordable housing program at only a nominal cost to the Township.  And they were successful at forestalling a major proposed development of the Dixiedale Farm by negotiating with the owner to work with Stirling Properties to develop the Dixiedale plan for 53 multi-family luxury townhomes, with the developer agreeing to provide 24 affordable housing units at the Southern Boulevard “Skate Board” site.  This “Arbor Green” development is being provided at a relatively small cost to the Township.  However, with the requirement for 74 additional affordable housing units still to be provided they appear to have run out of luck. 

I will be providing a financial analysis of the proposal to move of the Police Department to an upgraded Municipal Building in conjunction with a River Road affordable housing development plan in a subsequent letter.  I believe I can demonstrate that this is a much more economical approach to satisfying the requirement for 74 additional affordable housing units though it does entail a number of troubling issues.

Cost Analysis

I have tried to put together a cost estimate for the Municipal Building Plan by using various publicly available cost figures including those disclosed at various Township Committee Meetings by Robert Hoffmann, the Township Administrator.  I have also learned a lot through personal discussions with Mr. Hoffmann, who has graciously made himself available.  However, we do not always agree on the cost estimates as I will note in my discussion.  

According to a December 6 Chatham Courier article, Mr. Hoffmann provided the following cost figures for the plan to build a new Municipal Building at the current Police Station site on Southern Boulevard.  The cost of the new Municipal Building was quoted as being $10.9M.  Mr. Hoffmann has said that his estimate is based on the $9.7M cost of the 28,000 square-foot Wanaque Municipal Building constructed in 2013.  However, commercial construction costs are estimated to have inflated at between 3% and 4% per year for the past several years.  Using an average annual inflation rate of 3.5% would yield an estimated cost of $12.8M for construction in 2021.  I will use this as my estimated cost. 

The cost estimates provided did not include any possible dislocation costs during the construction period.  Mr. Hoffmann has told me that he intends to seek court permission to delay the razing of the current Municipal Building until the new Municipal Building is completed, probably in 2023.  However, such permission is not assured so I will provide a rough estimate of the possible dislocation costs. 

Using an annual rental cost of $18/sf/yr quoted for Chatham Commons rental space, the cost of relocating the Township offices for a year and a half during the construction period might cost about $400k. 

It is likely that the Police Department will have to be moved to accommodate construction.  If Mr. Hoffmann gets permission to delay the razing of the Municipal Building, the cost of temporarily moving the Police Department to vacant space in the current Municipal Building might cost on the order of $100k.   If permission is not granted, the relocation cost for the Police Department would probably be more on the order of $250k. 

It is also likely that the offices of the Public Works Department will have to be relocated during construction.  I will not include this cost since is not likely to be large and is difficult to estimate because there are a lot of contingencies.

The Township has committed to finding alternative space for the Senior Center and possibly the gym recreational programs during the period the 65-unit affordable housing building is under construction.  The Township is currently exploring options for continuation of the recreational programs, but no firm commitment can be given at this time.  I would estimate that the dislocation cost could exceed $200k.

Hence the total dislocation costs could be as high as $850k.  While this is only an educated guess, it is provided in the absence of any Township estimate of the actual potential cost. 

An additional cost to the Township that was discussed by Mr. Hoffmann in his November 26 presentation at the Special Affordable Housing Meeting is the $2M to $3M subsidy that the Township must provide to the developer to retain the Senior Center and gym in the newly configured building.  I will use an average $2.5M subsidy cost in my estimates.

Mr. Hoffmann provided the following valuations of the current Municipal Building and associated land. The Municipal Building is valued at $4M and the land at $2M.  This $6M represents the acknowledged value of this property to the Township.  I do not agree with this estimate.  I believe the current Municipal Building has significantly greater value to the Township than $4M.  To appreciate the value of the building to the Township, consider that the Township has offered a subsidy of between $2M and $3M to the developer of the new building to retain the gym and Senior Center in the new structure.  That would imply that the value of the remainder of the building that is to be razed, namely roughly 30,000 square-feet of the Township office space, is only worth $1M to $2M to the Township.  Considering that the new Municipal Building of comparable office space will cost over $10M to build, the $4M total value appears to me to be a gross underestimate of the value.  However, to not get carried away with a dispute that is hard to resolve, I will use a moderate $5M as the estimated value of the Municipal Building, being comprised of $2.5M for the office space and $2.5M for the gym and Senior Center.   Hence, if the office space is razed the Township will lose $2.5 in value.

Mr. Hoffmann went on to estimate the best-use-value to a developer to be only about $2.9M.  This is just a way of saying that the Municipal Building property has a lot more value to the Township in providing its current function than the property would have to a developer of residential homes that are consistent with the current zoning.

The total land value of the 10-acre Municipal Building property is quite low because a large part of it is encumbered by wetlands restrictions.  Of the available usable land currently estimated to be worth $2M, the residual value of the land remaining under Township ownership after the affordable housing development at the site is estimated by Mr. Hoffmann to be about $1M.  That is basically comprised of the Senior Center Parking lot and the area around the access roads.  The Township is donating the other $1M in land value to the developer to meet the requirement for parking space for the affordable housing units.

The Municipal Building conversion to affordable housing only provides 65 of the 74 required units. The Township has not disclosed its plans for satisfying the remaining 9 units requirement, but it is known that they are looking into Group Housing for individuals with special needs.  I don’t have any specific knowledge of what that might cost, but I will use a cost of $300k because it seems like a reasonable ballpark estimate of the cost of a property that has been under consideration and leads to a nice rounding of the total costs.

Total Cost Estimates

I will give two estimates for the total cost of the Municipal Building Plan, one for the lower component estimates provided Mr. Hoffmann, and another based on my own component estimates. 

For Mr. Hoffmann’s estimate, the components are the cost of the new Municipal Building ($10.9M) plus the cost of relocating the Senior Center ($200k) plus the cost of relocating the Police Department ($100k) plus the cost of subsidizing the developer to preserve the gym and Senior Center ($2.5M) plus the lost value of the razed office space donated to the developer ($2M) plus the value of the land donated to the developer ($1M) plus the cost of the Group Home ($300k) yielding a total of $17M. 

For my estimate the components are the cost of the new Municipal Building ($12.8M) plus the prospective cost of temporarily relocating the Police Department, the Township Offices and the Senior Center ($850k) plus the cost of subsidizing the developer to preserve the gym and Senior Center ($2.5M) plus the lost value of the razed office space donated to the developer ($2.5M) plus the value of the land donated to the developer ($1M) plus the cost of the Group Home ($300k) yielding a total of $20M. 

Summary

My intention in presenting this cost analysis is to demonstrate the high cost of the Municipal Building Plan when all of the cost factors are included.  There are three major differences in my estimates and the estimates provided by the Township, namely the cost of constructing the new Municipal Building and the potential cost of dislocations during construction, and the value of the current Municipal Building to the Township.

I submitted a draft of this letter to Mr. Hoffmann with the hope of being able to reconcile our differences in estimated costs.  Unfortunately, he is too busy with other Township demands to be able to meet me in the near term.  In particular, I would like to clarify how Mr. Hoffmann arrived at his estimate of the inflation factor used in projecting the 2013 cost of construction of the Wanaque Municipal Building to the 2021 timeframe.  It corresponds to a 1.5% inflation rate (consistent with the consumer price index) whereas my estimate is based on the 3% to 4% commercial construction cost indices widely available on the internet.

I also doubt that the Municipal Building Mr. Hoffmann is planning is entirely suitable for Chatham Township.  Another perspective of the potential cost of a new Municipal Building can be obtained by considering the cost of the new Berkeley Heights Municipal Complex which is currently under construction.  The Berkeley Heights Township website states that the 48,500 square-foot Complex, originally estimated to cost $28M, is now projected to cost $32M.  Scaling this cost to the size of the proposed Chatham Township Municipal Building yields an estimated cost of $18.5M.   It should be noted that the Berkeley Heights Municipal Complex has a lot of amenities that are not planned for inclusion in Mr. Hoffmann’s more modest proposal, and he firmly believes he can build an acceptable Municipal Building for his estimated cost.  I am skeptical.  Chatham Township is a prosperous community and its citizens will likely want to have a Municipal Building which they can be proud of.  A new Municipal Building is a major investment and its planning should not be rushed.  Given an opportunity for public review of the plans for the new Municipal Building, it is likely that the public will want some of the amenities that Mr. Hoffmann thinks are unnecessary.  Consequently, I believe the $12.8M I have used is a rather modest estimate.

Another significant difference in the cost estimates provided by Mr. Hoffmann is based on his assumption that the move to the new Municipal Building can be delayed until the construction is completed.  This makes a lot of sense economically, but it is contingent on having the court approve a 1.5 to 2-year delay in the construction of the 65-units of affordable housing proposed to be built at the Municipal Building site.  Given the likelihood that the Fair Share Housing people will oppose any such extension and the impatience of Judge Gaus with the rate of progress the Township has made in fulfilling its affordable housing requirement, I do not believe this extension can be assumed.  The default assumption should be that the work will proceed on a schedule as currently required by the court which (as I understand it) requires that construction must begin within one year of the final approval of the affordable housing plan put forth by the Township.

Finally, I believe that Mr. Hoffmann has undervalued the worth of the current Municipal Building to the Township.  Recall that Mr. Hoffmann estimates the value of the Municipal Building (including the Senior Center and the gym) at only $4M.  I used a rather moderate valuation of $5M in my cost analysis.  I believe that a more realistic valuation would be in excess of $5M.  I will return to this point when I present my analysis of the cost of upgrading the Municipal Building.

Some of my cost estimates may be crude, but for lack of better information, I believe they are indicative of what the true costs may be.  If Township officials do not agree with my estimates, I feel it is incumbent on them to provide a better (and sufficiently detailed) analysis.

The Municipal Building Plan has been claimed to be a cost-saving plan based on what I consider to be an exaggerated estimate of the cost of upgrading and maintaining the current Municipal Building.  In a subsequent letter, I will provide what I believe to be a more realistic analysis of the cost of moving the Police Department to an upgraded Municipal Building and only providing those improvements in the existing Municipal Building that are necessary to effectively utilize its potential. 

Mike Oien

Chatham Township