R-10329f: \atty\m u n i\I aw\b a rry\affo rdfee res o7-23-08
City Council Meeting 07-23-08 Santa Monica, California
RESOLUTION NUMBER io329 (CCS)
(City Council Series)
A RESOLUTION OF THE-CITY COUNCIL OF THE CITY OF SANTA MONICA
AUTOMATICALLY ADJUSTING THE AFFORDABLE HOUSING UNIT BASE FEE FOR
NEW MARKET-RATE MULTIFAMILY DEVELOPMENT PURSUANT TO SANTA
MONICA MUNICIPAL CODE SECTION 9.56.070(b) BASED ON CHANGES IN
CONSTRUCTION COSTS AND LAND COSTS
WHEREAS, on November 8, 2005, the City Council amended Santa Monica
Municipal Code Section 9.56.070 to provide that commencing on July 1, 2006, the
Affordable Housing Unit Base Fee shall be automatically adjusted annually by City
Council resolution based on changes in construction costs and land costs; and
WHEREAS, in order to implement the Council's decision, staff formulated a
specific method of measuring changes in construction costs and land costs; and
WHEREAS, this proposed methodology was detailed in an April 24, 2006 letter
prepared by Paul S. Silvern of HR&A Advisors, Inc. ("HR&A") on behalf of the City and
approved by the Council on June 13, 2006; and
WHEREAS,. pursuant to this methodology, on June 27, 2006, -the City Council
adopted Resolution No. 10149 (CCS) which established an affordable housing unit base
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fee for condominiums of $28.15 per square foot and an affordable housing unit base fee
for apartments of $24.10 per square foot; and
WHEREAS, pursuant to this methodology, on July 24, 2007, the City Council
adopted Resolution No. 10229 (CCS) which incrementally adjusted these base fees by
$1.41 per square foot for new market rate condominiums and $1.21 per square foot for
new market rate apartments; and
WHEREAS, Resolution No. 10149 .(CCS) and Resolution No. 10229 (CCS)
thereby established an affordable housing unit base fee for condominiums of $29.56 per
square foot and an affordable housing unit base fee for apartments of $25.31; and
WHEREAS; in accordance with Santa Monica Municipal Code Section 9.56.070
and the City Council's approved methodology, HR&A has calculated the required
incremental adjustment to these base fees based on the changes constructions costs
and land costs that have occurred since the adjustment undertaken last year; and
WHEREAS, on July 12, 2008, the City published notice that at the July 23, 2008
City Council meeting, the City Council would consider a proposed resolution to
incrementally adjust the affordable housing fee that private developers pay to the City
for the production of affordable housing .based on this methodology and that the HR&A
analysis was available for review in the City Clerks Office; and
WHEREAS, the City republished this notice on July 18, 2008; and
WHEREAS, a copy of HR&A's analysis has been available in the City Clerk's
Office for public review since July 11, 2008; and
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WHEREAS, based on this analysis, an increase in the amount of $1.14 per
square foot of the current Affordable Housing Unit Base Fee of $25.31 for apartments
and an increase in the amount of $1.33 per square foot of the current Affordable
Housing Unit Base Fee of $29.56 condominiums would be appropriate,
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF SANTA MONICA
DOES RESOLVE AS FOLLOWS:
SECTION 1. The current Affordable Housing Unit Base Fee for new market rate
condominiums of $29.56 per square foot established by Resolution No. 10149 (CCS)
and Resolution No. 10229 (CCS) shall be increased by $1.33 per square foot of floor
area.
SECTION 2. The current Affordable Housing Unit Base Fee for new market rate
apartment of $25.31 per square foot established by Resolution No. 10149 (CCS) and
Resolution No. 10229 (CCS) shall be increased by $1.14 per square foot of floor area.
SECTION 3. The City Clerk shall certify to the adoption of this Resolution, and
thenceforth and thereafter the same shall be in full force and effect on October 1, 2008.
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SECTION 4. Resolution No. 10149 (CCS) and Resolution No. 10229 (CCS)
shall remain in full force and effect. This resolution does not supersede or alter
Resolution No. 10149 (CCS) and Resolution No. 10229 (CCS) in any respects.
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APPROVED AS TO FORM:
,analvre. ~,c3vise. Aca.
HR&A Aovcsoxs, Ixc.
Economic Development, Real Estate Advisory & Public Policy Consultants
July 10, 2008
Mr. Barry Rosenbaum, Esq.,
Senior Land Use Attomey
Office of the City Attorney
City of Santa Monica
1685 Main Street
Santa Monica, CA 90405
Re: Proposed FY 2008-09 Annual Automatic Adjustment for the
Affordable Housing Unit Base Fee
Dear Mr. Rosenbaum:
This letter summarizes the results of applying the annual adjustment calculation
methodology adopted by the City to establish the Affordable Housing Unit Base Fee pursuant to
Santa Monica Municipal Code Section 9.56.070(b) ("the affordable housing unit base fee shall
be adjusted [annually] based on changes in constructions costs and land costs). This
methodology was approved by the Santa Monica City Council at a public hearing on June 13,
2006, based on the recommendation of HR&A in a letter to City staff dated Apri124, 2006. A
copy of the Apri124, 2006 letter is included for reference as Attachment A hereto. The City
Council approved the-last annual increase for FY 2007-08 using this methodology when it
adopted Resolution No. 10229 (CCS) on July 24, 2007.
For the construction cost inflation component of the calculation approach, the
Engineering News Record's (ENR) Construction Cost Index specific to the Los Angeles metro
area is utilized, because it is updated monthly and is readily available via the Internet. The
applicable index change was 3.7 percent measured between March 2008 (the budget adoption
year) and March 2007.
Although there is no comparable index for inflation in land cost, we use the weighted
average annual change in medium condominium sale prices by ZIP Code as a proxy measure for
land cost changes measured for the immediately preceding calendar year. The 2007 median
condo price changes by City ZIP code were published by the Los Angeles Times on January 20,
2008, using Los Angeles County Assessor data compiled by Dataquick. The weighted average
change for the City was 7.4 percent.
2800 28rx STREET, Score 325, Snivrn Moxicn, CALIFORMA 90405 • TeL: 310.581.0900 • FAx: 310.581.0910
Los Angeles New York
Barry Rosenbaum, Esq.
Cityof Santa Monica
July 10, 2008
The relative balance between land cost inflation (based on changes in median condo
prices) and construction cost inflation (based on a construction cost index) was determined based
on current development cost data for the two most recently completed or construction-in-
progress multi-family affordable developments assisted by the City. The approach uses a simple
average of the ratio between land. purchase price and the sum of land cost and hard construction
cost to derive the land value percentage (21%); the inverse of this ratio is the construction cost
share (79%).
Table 1, on the following page, presents the annual adjustment calculation establishing
the Affordable Housing Unit Base Fee for FY 2008-09. It shows that a weighted average
inflation index using this City Council-approved approach results in a 4.5 percent annual
increase to $30.89 per square foot for condominium developments and $26.45 per square foot for
apartment developments.
It is my understanding that the results of the calculations shown in Table 1 will be the
basis for a Resolution increasing the Affordable Housing Base Fee for FY 2008-09. We are
available to assist you in presenting the Resolution to the City Council.
Sincerely,
C~r~~~
PAUL J. SILVERN,
Partner
I3R&A ADVISORS, INC. Page 2
Barry Rosenbaum, Esq.
City of Santa Monica
July 10,2008
Table 1
Affordable Housing Unit Base Fee Annual Inflation Adjustment Calculations for FY 2008-09
Land Cost Inflation
Median Annual Price Calculation
ZIP Code Change During 2006 # Condos Sold Weights Weighted Avg.
90401 - -2.2% 16 3.7% -0.1%
90402 44.5% 31 7.1% 3.2%
90403 1.0% 160 36.7% 0.4%
.90404 1.4% 92 21.1% 0.3°/
90405 11.4% 137 31.4% 3.6°/
436 7.4
Source: Los Angeles Times, Real Estate Section, p. K10, January 20, 2008 (based on DataQuick Information Systems)
Construction Costlnflation
Engineering News Record's Canstmctioh Cost Index-- Los Angeles
March 2007 Index Value 8,873.09
March 2008 Index Value - 9,199.69
Percentage Change 2007-2008 3,7%
Source: Engineering News Record (available at http://www.enr.construction.com/features/coneco/subs/constlndexHist.asp)
Derivation of Land Cost and Consfrucdon Cost Calculation Weights
Hard Construction
Most Recent CCSM Family Rental Projects Land Cost Cost Sum
Berkeley Place-3031 Santa Monica Blvd. $ 3,606,109 $ 10,579,620 $ 14,185,729
The Tahiti Apts.-2411 Centinela $ 1.920.851 $ 9.929.178 $ 11.850.029
$ 5,526,960 $ 20,508,798 $ 26,035,758
21.2% 78.8% 100.00%
Source: Housing Division, City of Santa Monica
Inflatlon Factor Derlvation
Inflation Value Weight Wtd. Avg.
Land Value Inflation 7.4% 21.2 % 1.6%
Construction Cost Inflation 3.7% 78.8 % 2.9%
4.5%
Adjusted Fees
FY 2007.08 Fees Inflation Factor Updated Fees $ Change
Condos $29.56 4.5% $30.89 $1.33
Apartments $2591 4.5% $26.45 $1.14
For Information Only:
Consumer Pdce Index Change, LA-Riv-Or Co.,
-All Urban Consumers, 1982-84 = 100 '
Mar. 20071ndex Value 216.500
Mar. 2008 Index Value 223.606
Percentage Change Mar. 2007-Mar. 2008 3.3%
Source: US Bureau of Labor Statistics (available at: http:/hvt~wv.bls.gov/cpi)
Prepared by: HR&A, Inc.
HR&A ADVISORS, Ixc. Page 3
ATTACHMENT A
April 24, 2006 HR&A Letter re: Annual Adjustment Methodology
HR&A ADVISORS, INC.
Anaiv~re. Advise. Att.
I~L9IDn1.1UN, RAERJOVLTL&Arcnarn wa ING
Po&cy; Frnmsial & ATmmgemuf CmuuRmNS
Apri124,2006
Mr. Ron Barefield
Housing Administrator
City of Santa Monica
2121 Clover&eld Blvd, Suite 100
c„~,.+,w nroty~ Ce a0nn5
Re: Annual Adiustmern for the Affordable Housirle Fee
Dear Ron:
Per your request, this letter smnmarizes ap annual adjustment approach we recommended
for the City of Santa Monica's ("City") Affordable Housing Fee, which developers ofmuiti-
family residential developers may elect to pay, pursuant to Santa Monica Municipal Code
Section 9.5b.070, as amended This recommendation was included in Section V of our recent
report, ZIt05 Update, The NexusBenveenNew MarketRate Multi Fmnily Developments rn the
City ofSanta Monica and the Needforttffordable Housing, July 1, 2005 ("LOOS Nexus Study
Update'.
In order to better ensure that the Affordable Housing Fees remain consistent with
changing market conditions, $ world be prudent for the City to apply as annual adjustment
index, but to use an inflation concept other than the Consumer Price Index (CPI}. While the CPI
is often used to make inflation adjustments because of its convenience, the monthly changes in
the value of consumer goods that dominate the CPI are not be Ste most appropriate basis for
pleasuring change in the City's cost to develop affordable housing. However, to be meaningful,
any ahetpa#ive index must rely on data that is readily accessible to City staff for calculating the
change, and for the public's ipfolmation.
A suitable aitemative approach would need to measure annual changes inland cost and
construction costs, which together account for about 75-80 percent of the cost of new affordable
hqusipg development There are, in our experience, several well-established construction cost
indices. We recommend Engineering News Record's (ENR) Construction Cost Index, because it
' The other 20-25%consists afprofessianal fees and ether "soft costs" and financing costs, neither of
w3rich is regularly monitored by tlshd party smuces for inflation changes
28002lrp[SneErtrr, Sorrn325, SANTA Momcn, (,'A1,[FORNtA 90405 • Tm,:310.581.0900 • FAX: 310.581.0910
LOS ANN®.ES NO. CAS.¢ORN7A POa2uPID, OR NEW YORK
Ron Barefield
Housing Division
City of Santa Monica
April 24, 2006
is updated monthly and is readily available via the Internet. However, there is no comparable.
index of changes in land cost. One proxy measure that could be used for land cost changes is
change in median condominium purchase prices? Since the median condo sale price for the City
as a whole would be skewed by the tendency for sales to be concentrated in a few subareas, a
more neutral measure would be the weighted average annual change in median condo sale prices
by ZIP Code. These data are published by the Los Angeles Times each January, using Los
Angeles County Assessor data compiled by Dataquick. They are also available on a subscription
basis from other vendors, such as First American Real Estate Solutions.
The relative balance between land cast inflatian (leased on changes in median condo
prices) and construction cost inflation {based on a construction cost index) could be determined
based on current development cost data for recently completed or construction-in-progress multi-
family affordable developments assisted by the City. We recommend using a simple average of
the ratio between land purchase price and the sum of land cost and hard construction cost to
derive the land value percentage; the inverse ofthis ratio would be the construction cost shaze.;
Since the proposed annual inflation adjustments to the Affordable Housing Fee will be
adopted by Resolufion of the City Council as part of the annual budget process each June, we
recommend that City staff measure the weighted average annual change in median candominium
price for the immediately preceding caiendaz year, and the construction cost index change
between March of the budget adoption year and March of the immediately preceding year. We
recommend using the annual change in median condo prices in the calculation, rather then yeaz-
over-yeazchangcs in Mazch or any othermonth, because median monthly prices can vary
significantly due to the number of sales and particular composition of the sales in any particular
month. The annual average tends to smooth out these effects. W.e recommend the monthly year-
over-year approach for construcflan costs, however, because construction represents a much
larger share of total project cost. Using the most recently available construction cost inflation
data better ensures that the Affordable Housing Fee will keep pace with the actual cost to the
.City of developing affordable housing.
Table 1 below, which is a variation on Table V-5 from the 2005 Nexus Smdy Update,°
illustrates haw such an annual index could be constructed and applied to the recently adopted
AffordableHousing Fees for new market rate apartment and condominium projects, for
FY 200b-07. It shows, far example, that a weighted average inflation index as proposed herein
~ Consistent with the City's historical experience, this assumes that most new affordable multi-family
projects will be developed inmulti-family disncts, although some recent projects include sites in commercial
districts. Unlike residential property, there is no readily available data source for commercial land price changes.
s For example, if the average land cost for recent projects was $3.0 million and average hard construction
cost was $9.0 million, the land to land plus cotvstmction cost ratio would be 25% ($3.0 million { {$3A million +$9.0
million) and the construction cast to laced cost plus construction Bost ratio would be 759u.
° Table V-5 was based on Citywide average fees, which was one alternative fee schedule presented in the
2005 Nexus Smdy Update. Table 1 herein uses the altemative weighted average fees, which were also presented in
the 2001 Nexus Study Update, and it was these fees that fhe City Council actually adopted on October 11, 2005.
HAMILTON, RABINOVtTZ & ALSCHULER, INC. Page 2
Ron Bazefield
Housing Division
City of Santa Monica
Apri124,2006
would result in a 7.9 percent annual increase, compared with a 5.2 percent increase based on
construction costs alone, or 5.1 percent based on the CPI.
It is my understanding that the inflation adjustment approach described above will be
presetrted to the City Council on May 9, 2006. We aze available to assist you, as needed, with
that presentation.
Sincerely
UL J, VERN,
Partner
HAMII.TON, RAB1NOVtrz & ALSCHULER, INC. Page 3
Ron Bare&eld
Housing Division
City of Santa Monica
Apri124, 2005
Table 1
Affordable Housing Fee Annualfngatlan Atljuslmenf CaleuWdans for FY 2006-D7
Land Cost Irrllao'on
Median Annual Price Calculation
ZIP Coda Change DuHng 2085 # Condos Soid Weights Weighted Avg.
90401 - 35.9% 27 4.5% t.8%
90402 •2.1% 30 5.0% -0.1°k
90403 9.8°h 237 39.5% 3.9%
94404 25.5% 182 27.0% 6.9%
90405 10.5% 144 24.0% ?~
800 14.8%
Source: Los Angeles limes, Real Estate Sectlon, p. K19, January 22, 2006 (based an DataDuick Irdormatlon Systems)
Constmctlon Castlnflatlon
Engineering News Record's Construction Cost
Index
March 2006 Index Value 7,309
March 2006 index Value 7,692
Percerdage Change 2005-2006 S,pA
Source: Englneedng News Record {available at httpJhuvnv.enr.constntc(ion.comtteaturestconeco/subs/constlndexHistasp)
Derfvatlan of Land Cost and Cons6ucdon Cos! Calculation Weights
Most Recent CCSM Famlty Rental Projects Land Cant Hard Constnrction Total
]4248roadway $ 3,840,000 $ 8,]00,000 $ 17,740,000
2601 Santa Monica 6oulevaN - $ 3,250,000 $ 8,100,000 $ 11.350.000
2209 Maln Street ~ 3.120.000 $ 9.123.910 S 12.243.910.
$ ]0,010,000 $ 25,323,910 $ 35,333,9]0
28°!0 72°k 100%
Source: Housing Division, City of Santa Monica
Inflation FaeforDerivatiort
Irdiation Value Weigh Wtd. Avg.
Land Value lydlatlon 14.8% 26.3% 4.2%
Canslruc0on Cast [nftallon 5.2% 71.7% 3.8%
7.9°1
Atljastedfees
OeL 1005 Base Fees Inflation Factor Updated Fees i $ Chang
Condos $28.08 7.9°k $28.15 ; $2.07
Apartments $22.33 7.9% $24.10 ' $1.77
For/nformaiion On/y
Consumer Pelee Index Change, L.A~Riv-Or Co.,
NI Urban Consumers
Feb. 20051ndex Value 197.4
Feb. 2006 Index Value 207.5
Percentage Change 2005-2006 5.1%
Sauree: US Bureau of Labor Statistlcs (available at: httpJhwrvi.bis.gov/cp)
Prepared by. Hamilton, Rabinovih & Akohukr, Inc.
HAMII.TON, RABIlVOVITZ & ALSCHUi.ER, INC. _ PBge 4
Adopted and approved this 23`d day of July, 2008.
~~
Richard Bloom, Mayor Pro Tem
I, Maria Stewart, City Clerk of the City of Santa Monica, do hereby certify that the
foregoing Resolution No. 10329 (CCS) was duly adopted at a meeting of the Santa
Monica City Council held on the 23`d day of July, 2008, by the following vote:
Ayes: Council members: Genser, Holbrook, McKeown, O'Connor
Mayor Pro Tem Bloom
Noes: Council members:.: None
Abstain: Council members: None
Absent: Council members: Shriver
Mayor Katz
ATTEST:
---~~ _ ~-
Maria Stewart, City erk