SR-407-000-03 (15)~/+
~ City of
Santa Monica
City Council Report
City Council Meeting: June 27, 2006
Agenda Item: ~"Q
To: Mayor and City Council
From: Marsha Jones Moutrie, City Attorney
Subject: Resolution Revising the Affordable Housing Unit Base Fee For New
Market-Rate Multifamily Development Pursuant to Municipal Code Section
9.56.070
Recommended Action
Staff recommends that the City Council adopt the attached Resolution which would
revise the Affordable Housing Unit Base Fee for new market rate apartments to $24.10
per square foot of floor area and for condominiums to $28.15 per square foot of floor
area effective on September 1, 2006.
Executive Summary
Last fall, the City Council adopted an ordinance modifying the City's Affordable Housing
Production Program, Chapter 9.56, and providing that the Affordable Housing Unit Base
Fee shall be adjusted annually by resolution based on changes in construction and land
costs. On June 13, 2006, the City Council approved the methodology for ascertaining
changes in those costs and thereby for calculating the adjustment. This resolution has
been prepared in accordance with the methodology approved by the City Council on
June 13th and is attached as Exhibit A.
1
Discussion
On November 8, 2005, the City Council amended the City's Affordable Housing
Production Program, Chapter 9.56, including Section 9.56.070. This amended provision
provides that the Affordable Housing Unit Base Fee shall be adjusted annually by City
Council resolution based on changes in construction costs and land costs. In order to
implement the Council's decision, staff formulated a proposed method of computation to
reflect changes in construction costs and land costs. This methodology was detailed in
an April 24, 2006 letter prepared by Paul S. Silvern of Hamilton, Rabinovitz & Alschuler,
Inc. ("HR&A") on behalf of the City. This methodology was approved by the City
Council at its June 13, 2006 meeting.
HR&A subsequently prepared an analysis utilizing this methodology to calculate the
appropriate adjustment to the Affordable Housing Unit Base Fee for FY 2006-07. This
analysis demonstrates that a fee of $24.10 for apartments and $28.15 for
condominiums is appropriate. The proposed resolution would revise the Affordable
Housing Unit Base Fee accordingly, effective on September 1, 2006. On June 16,
2006, the City published notice of this hearing and the availability of the HR&A analysis.
The City republished this notice on June 22, 2006. A copy of this analysis has been
available in the City Clerk's Office for public review since June 16, 2006 and is attached
hereto as Exhibit B.
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Budget/Financial Impact
There is no financial impact.
Prepared by: Marsha Jones Moutrie, City Attorney
roved:
Forwarded to Council:
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Attachment A
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~nalyze. ~dvise. nrt.
F~AMILTON, RAB[NOVITZ 8L ALSCHi1LER, INC.
Palicy, Financial & Management Consultants
June 1 S, 2006
Mr. Barry Rosenbaum, Esq.,
Senior Land Use Attorney
Office of the City Attorney
City of Santa Monica
2121 Cloverfield Blvd., Suite 100
Santa Monica, CA 90405
Re: FY 20Q6-07 Annual Adiustment for the Affordable Housing Unit Base Fee
Dear Mr. Rosenbaum:
This letter sununarizes the annual adjustment calculation methodology that will be
utilized by the City to establish the Affordable Housing Unit Base Fee pursuant ta Santa Monica
Municipal Code Section 9.56.07Q(b). This methodology was recommended by HIt&A in a letter
to City staff dated Apri124, 2005, and approved by the Santa Monica City Council at a public
hearing on June 13, 2006.
Consistent with SMMC Section 9.56.0'70(b), the calculation approach measuares annual
changes in land cost and construction costs, which together account for about 75-80 percent of
the cost of new affordable housing development. i For the construction cost inflation component
of the calculation approach, the City Council accepted HR&A's recommendation to use the
Engineering News Record's (ENR) Construction Cost Index, because it is updated monthly and
is readily available via the Internet. Although there is no camparable index for znflation in land
cost, the City Council also accepted our reeommendation to use median condominium purchase
prices as a proxy ~neasure for land cost changes. Further, since the median condo sale price far
the City as a whole would be skewed by the tendency for sales to be concentrated in a few
subareas, a more nentral weighted average annual change in median condo sale prices by ZIP
Code is used in the calculation approach. These median condo price by City ZIP code data are
published by the Los Angeles Tzmes 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 Rea~ Estate Solutions.
` The other 20-25°lo consists of professional fees and other "soft costs" and fmancing costs, neither of
which is regularly monitored by third party sources for inflation changes.
2HOO Z$TH STREET, SUTTE 325, SANTA MONICA, CALIFORNIA 40405 • Tst: 310.581.0900 • Fex: 310.581.0910
LOS ANGELES NO. CALIFORNIA PORTLAND, OR NEW YORK
Barry Rosenbaum, Esq.
City of Santa Monica
June I5, 2006
The relative balance between land cost inflation (based on changes in median condo
prices) and consiruction cost inflation (based on a construction cost index) was determined based
on current development cost data for recently compieted or construction-in-progress multi-family
affordable developments assisted by the City. The approach uses a simple average af the ratio.
between land purchase price and the sum of land cost and hard construction cost to derive the
1and value percentage; the inverse of this ratio is the construction cost shaxe.
Since annual adjustrnents to the Affordable Housing Unit Base Fee will be adopted by
resolution of the City Council each June, the calculation approach measures the weighted
average annual change in median condominium pr~ce for the immediately preceding calendar
year, and the construction cost index change between March of the budget adoption year and
March of the immediately preceding year. The calculation uses the annual change in median
condo prices in the calculation, rather then year-over-year changes in Ma.rch or any other month,
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. The approach utilizes the montYily year-over-year approach for construction costs,
however, because construction represents a much larger share of total project cost. Using the
most recentiy available construction cost inflatian data better ensures that the Affordable
Housing Unit Base Fee will keep pace with the actual cost to the City of developing affordable
housing.
Table 1 below presents the annual adjustment calculation establishing the Affordable
Housing Unit Base Fee for FY 2006-07. It shows that a weighted average inflation index using
this City Council-approved approach results in a 7.9 percent annual increase, compared with a
5.2 percent increase based on construction costs atone, or 5.1 percent based on the Consumer
Price Index (CPI).
It is my understanding that the results of the attached calculation will be the basis for a
Resolution increasing #he Affordable Housing Fee to the new amounts resulting from the
calculations presented in Table I. We are available to assist you in presenting the Resolution to
the City Council.
Sincerely,
~
AUL ERN,
Partner
HAMILTON, RABINOVITZ & ALSCHULER, INC. Page 2
Barry Rosenbaum, Esq.
City of Santa Monica
June 15, 2006
Table 1
Affordabie Housing Fee Annual Inflakton Adjustment Calculations for ~Y 2006-07
Land Cos!lnflafion
Median Annual Price Calculation
ZIP Code Change During 2003 # Condos 3old Weights Weighfed Avg.
90401 35.9% 27 4.5°/a 1.6°k
90402 -2.1 % 30 5.0% -0.1 %
90403 9.8% 237 39.5% 3.9%
90404 25.5% 162 27.6% 6.9%
90405 10.5% ~ 24.0% ~.rJ%
60~ 14.8°!0
Source~ Los Rngeles limes, Real Estate Section, p. K19, January 22, 2006 (based on DafaQuick Information Systems)
Consfruction Cost Inflation
Engineering News Record's Construction Cost
Index
March 2d05 Index Value 7,309
March 2Q06 Index Value 7,692
Percentage Ghange 2005-2006 ~.2°~
Source: Engineering News Record (available a! http:/lwww.enr.construction.com/featuresiconeco/subs/constlndexHist.asp)
Derlvaffon of La»d Cost and ConstruCUort Cost Calculation Weights
Most Recent CCSM Family Rental Projects Land Cost Hard Construction Total
1424 Broadway $ 3,640,000 $ 8,100,000 $ 11,740,000
2fi01 Santa Monica Boulevard $ 3,250,000 $ 8,100,000 $ 11,350,000
2209 Main Street $ 3,120,000 ~ 9.123.910 $ 12,243.910
$ id,010,000 $ 25,323,910 $ 35,333,910
28% 72% 100%
Source: Housing Division, City of Sania Monica
Inflation FaCtor Berivation
inflation Value Weight Wtd. Avg.
Land Value IrtFlation 14.8% 28.3% 4.2%
Construction Cost inflation 5.2% 71.7% ~,8%
7.9%
Adfusted Fees
Ock 2005 Base Fees Inflation Factor Updated Fees $ Change
Condos $26.~8 7.9% $28.15 $2.07
Apariments $22.33 7.9°/a $24.t0 $1.77
Forlnfwmation Only:
Consumer Price Index Change, LA-Riv-Or Co.,
All Urban Consumers
Feb, 2005 Index Value 197.4
Feb. 2006 Index Value 267.5
Percentage Change 2~05-2006 5.1%
Source: US Bureau of Labor Statistics (available at: httpJAvww.bis.govlcpi)
Prepared 6y: Hamilton, Rabinovitz & A/schuler, Inc.
HAMILTON, RABINOVITZ & ALSCHULER, INC. Page 3