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SR-400-008-01 (5) ATTACHMENT J ''i 1., , HR&A HAMILTON, RABINOVITZ & ALSCHULER, INC. Pulicy, Financial & Management Consultants MEMORANDUM FOR: Robert Moncrief, Housing Manager MEMORANDUM FROM, ~ S;lvem SUBJECT: Implications of Changed Market Circumstances for the Affordable Housing Fee for New Condominium Projects DATE: March 1, 2000 This memorandum analyzes the implications of recent changes in local real estate market conditions for the nexus calculations underlying the City of Santa Monica's ("City") Affordable Housing Feel for new condominium projects, and the degree to which the fee operates as a "constraint" on new housing development within the meaning of California Housing Element law. The analysis in this memo builds on HR&A's prior work on these subjects over the past four years 2 In a separate memorandum dated December 7, 1999, we analyzed whether 30 new condominium projects submitted to the City for land use entitlements between March I, 1998 and April 30, 1999, immediately prior to enactment of a moratorium on new multi-family developments,3 differ in any significant ways from condominium projects proposed in past years, and documented the motivations of project applicants to submit their projects for approvals. Among other things, we found, based on interviews with nearly all of the applicants or their representatives, that changes in market conditions - i.e., the perceived ability to sell new I Santa Monica Municipal Code ("SMMC") Chapter 9.56, commencing with S 9.56.010, which establishes the program and the fee option (s 9.56.070), and Resolution No. 9295 (CCS), which set the initial fees as of July 21, 1998. 2 Hamilton, Rabinovitz & Alschuler, Inc., The Nexus Between New Market Rate Multi-Family Developments in the City of Santa Monica and the Needfor Affordable Housing, July 7, 1998 (hereinafter, "Nexus Study"); Memorandum from HR&A to Robert Moncrief, Santa Monica Housing Manager, regarding recommendations for revising the City's inelusionary housing program, dated April 6, 1998; and a series of 10 technical memoranda and reports ineluded as a technical appendix to the City's 1998-2003 Housing Element Update, (hereinafter, "Housing Element Update"). 3 On May 25, 1999, the City Council adopted Interim Emergency Ordinance 1944, which established a 45-day moratorium on development applications in the City's multi-family zoning districts, to enable the City to assess the impacts of new development and other related housing issues. The moratorium was subsequently extended for nine additional months. 1990 SOCTH BCXDY DRIVF, SeTTE 777, Los A~CrELES> CALIFOR~IA 98025. TEL: 310.820.3444. FAX: 310.820.6778 NEW YORK Los ANGELES , - ) l '. Implications of Changed Market Circumstances for the Condominium Affordable Housing Fee condominiums for a higher price - was the primary reason for submitting the project applications, not changes in City regulations, including the new Affordable Housing Fee. We also found that while the new project applicants were projecting higher sales prices than in past years, they were also paying more for land and construction costs. The analysis in this memo provides further detail about these particular findings, and their implications for the amount of the Affordable Housing Fee, and the relationship between the fee and thresholds of project financial feasibility. Following a summary of findings and conclusions, the analysis is presented in four principal sections, as follows: · Overview of Market Changes. This section briefly summarizes the dramatic recovery of the Los Angeles County and City real estate markets since 1996, following several years off ailing values during the recession of the early 1990s. Only early evidence of the strength of the recovery was evident at the time the analysis for the Affordable Housing Fee was being prepared during the first half of 1998. Information on changes in condominium sales prices, as well as changes affecting development costs are presented. · Project Feasibility Implications. Following another round of interviews with developers, architects and other real estate development professionals, and review of secondary data, we re-ran four financial feasibility models for new condominium projects that we had constructed for prior work on these subjects. These include prototypical one- and three-lot projects, each under two land cost assumptions to reflect average high and average low costs in the City. This section reports the results of those model runs, and the effects that the incremental addition of an Affordable Housing Fee has on generally accepted measures of project feasibility, which we have defined as the tipping point for the "constraint" analysis. · Affordable Housing Fee Implications. The last section provides a re-estimation of the Affordable Housing Fee applicable to new condominiums under the Affordable Housing Production Program, based on the changes in market circumstances, and using the nexus-based calculation approach developed for the original fee calculation. This calculation also reflects the effect that changed market circumstances have on the City's costs to produce affordable housing. This last section also discusses an alternative fee calculation method, based on the sale price of new condominiums, rather than the floor area of the project, which may better track changes in the market. A number of Appendices include supporting data used in the analysis. HAMILTON, RABINOVITZ & ALSCHULER, INC. Page 2 'ft.' j3 Implications of Changed Market Circumstances fnr thp rnnnnm;n;l1m A ffnrnnhlp Hnl1<;nu HPP ,_. ..__ __.._._...u.......__,,_._._._._ ___rr_u.r, _ __ This memo does not address market conditions or fee implications for new apartment projects. This is because there are very different dynamics at work in the City's housing market that limit developer interest in building new apartment construction. Chief among these is full implementation of the Costa-Hawkins Rental Housing Act,4 on January 1,1999, which for the first time in 20 years, lifts restrictions on the rent that can be charged for existing apartments when tenants voluntarily vacate a unit. The ability to obtain significantly higher rents in existing units has the effect of dampening interest in new apartment construction. As a result, the relative increase in new development application activity in the City during late 1998 and 1999, which contributed to the City Council's decision to enact the development moratorium, was almost exclusively for new condominium projects, and not apartment projects. 4 Calif. Civil Code ~1954.50. HAMILTON, RABlNOvlTZ & ALSCHlILER, INC. Page 3 ~-'I , ..:.. ,_j ti Implications of Changed Market Circumstances for the Condominium Affordable Housing Fee I. SUMMARY OF FINDINGS AND CONCLUSIONS Changed Market Conditions · Sales Prices for Newly Constructed Condominiums Have Increased Significantly During the Past Two Years. The increases range from a low of 13 percent on the south side of the City to a high of 46 percent in the Mid-City area. North of Wilshire, where the highest average prices are found, the increase was 33 percent. · Competition to Purchase New Apartment Buildings and a General Improvement in the Real Estate Market Have Significantly Increased Land Costs for Multi- Family Development. Estimates derived from closed sales of condominium projects built since 1990 indicate that land values have increased over 20 percent since 1997. · An Increase in the General Volume of Construction Activity, and Recent Changes in Building Codes, Have Caused an Increase in Condominium Project Construction Costs. Hard construction costs are up about 15 percent over the last two years. Implications for Condominium Proiect Feasibility · The New Balance Between Higher Sales Prices and Higher Costs Renders N(MJ, Small Condominium Projects in Higher-Cost Areas of the City Feasible, But They Remain Infeasible for Large Projects and Projects in Lower-Cost Areas. Using the rate of return and gross margin thresholds employed in previous analyses, only one prototype appears to be "feasible." Not surprisingly, this is the prototype that predominates among the 30 new condominium projects submitted to the City during late 1998 and early 1999. · Feasible N(MJ Condominium Projects Can Now Support a Higher Affordable Housing Fee Without Acting as a "Constraint." Using the analysis approach employed for the Housing Element Update, and related work, we estimate that prototypical condominium projects charging prices that render the project "feasible," can sustain a fee in a range up to $16, depending on the prototype and the feasibility threshold used.. For the one prototype that is feasible today (five- units in a higher-cost area), the supportable range is up to $12 per square foot. Implications for the Amount of the Affordable Housing Fee · A Recalculation Using the 1998 Nexus Study Approach Results in an Affordable Housing Fee of$Il.Ol Per Square Footfor New Condominiums. As before, this represents a simple average between values that define a range of typical HAMILTON, RABNOVITZ & ALSCHULER, INC. Page 4 i;..\ ,_,l t.' Implications of Changed Market Circumstances for the Condominium Affordable Housinf!. Fee circumstances. The revised fee generally falls within the upper limit of the range that would avoid imposing a "constraint" on new condominium development. The new fee is 54 percent higher than the original fee estimate prepared in 1998. The increase is due to higher household income needed to afford more costly units, and the greater need for housing affordable to workers whose labor demand is implied by household spending. The increase also reflects a 20 percent increase in the City's subsidy cost to produce a unit of affordable housing, which is due primarily to the same higher land and construction costs that affect market rate development. · Considering the Volatility of the Condominium Development Market, the City May Want to Consider Replacing the Per-Square Foot Fee Formula With a Formula Based on a Percentage of the Initial Sale Price of Ne'.V Condominiums. The re-calculated fees translate to about 3.5 percent of the gross sale proceeds of a five-unit condominium project. Using a fee based on a percent of the sale prices in new condominium projects might be a more market-sensitive fee calculation approach. The City of Palo Alto has used a similar approach for over two decades. Inasmuch as price determines household spending, labor demand and the associated demand for affordable housing, the Nexus Study logic would be preserved under this approach. This approach would also capture the variation in new condominium projects that occurs even within a single area of the City (e.g., Ocean Avenue vs. interior streets, all north of Wilshire Boulevard), more sensitively than the floor area-based fee. It would present, however, additional administrative complications, because the fee would have to be collected through escrows of each initial unit sale. R'\MILTON, RABINOVITZ & ALSCHULER, INc. Page 5 .i~i "l U Implications of Changed Market Circumstances for the Condominium Affordable Housing Fee II. CHANGES IN REAL ESTATE MARKET CONDITIONS SINCE 1997 In the analysis prepared for the Nexus Study, which relied on market and other data through 1997, we noted that there were early signs that the local real estate market was beginning to emerge from the depths of the recent recession. The recession lasted longer (1990-94) and took a heavier toll (-555,000 jobs) in Southern California than in any other region of the state, and Los Angeles County bore the brunt of the decline. As in other market downturns, home prices in high-cost submarkets, like Santa Monica and the Westside in general, tend to fall further, in relative terms, but also to recover faster once conditions improve. Once it started, the pace of recovery was very fast. Bidding wars over limited supplies of units, held low by the lack of new construction during the recession, became the norm, and prices began to escalate significantly. At the same time, however, other changes in the market had the effect of ratcheting up the cost of new multi-family construction, particularly in Santa Monica. These included upward pressure on multi-family land prices as buyers competed for existing apartment buildings, with their newly decontrolled rents in the wake of full implementation of the Costa-Hawkins Rental Housing Act. In addition, a general increase in the volume of new construction, and a resulting shortage of construction labor, coupled with potentially costly changes in building code requirements, had the effect of increasing average construction costs for new multi-family projects. A. Changes in Condominium Prices The economic recession during the early I990s hit Southern California particularly hard. Between 1990 and 1994, the region lost about 555,000 jobs. Nearly all of the regional jobs decline (-500,000) occurred in Los Angeles County. The job losses were concentrated in the aircraft, space and defense sectors (-120,000 jobs), but there were also significant job declines in construction (-68,000) and related manufacturing sectors (-30,000 jobs) as construction investment plummeted (75% decline in building permits, 1989-1993). Real consumer spending dropped by 15 percent between 1990 and 1993, resulting in a loss of about 100,000 retail sector jobs. Corporate restructuring in the financial sector, and a number of natural and social disasters also hurt the regional economy. Record levels of foreign trade and business activity in the motion picture and television production industries, tourism and light manufacturing (e.g., apparel) sectors, where the region has a particular market niche, fueled a rapid recovery that began in 1995. The region as a whole has now recouped all of the recession period job losses. Los Angeles County, however, did not begin to recover until 1996, and is still about 90,000 jobs shy of its 1990 peak employment level. The County's real estate market was affected by these trends in several ways. New building construction dropped to about $9 billion in 1993, from a peak in 1989 of about $26 billion, when it accounted for eight percent of the region's total economic output, and well below the 20-year average of about $16 billion. Similarly, residential building permits sank to about 29,000, from a 1989 peak of about 116,000. Job-related income pressures and fears caused home buyers to withdraw from the market, and also fueled a dramatic rise in foreclosures, all of which HAl\IILTON, RABINOVITZ & ALSCHULER, I:-<c. Page 6 ~ ,I<'i' , j '_' i Implications of Changed Market Circumstances for the Condominium Affordable Housin~ Fee contributed to a decline in home prices. An excess supply of apartments resulting from a construction surge in the late 1980s, in response to strong demand and attempts to beat a critical change in federal tax law that applied to apartment investors, resulted in unusually high vacancy rates, which pushed average rents lower and/or held rent increases to low levels.. Figure 1 shows the pattern of declining and then recovering residential building permit activity in Los Angeles County and in Santa Monica during the 1990s. In Santa Monica, the recovery is particularly evident in the multi-family sector (apartments and condominiums), though the data are skewed upward for 1998 by the large Arboretum apartment project. Even with a general economic recovery under way during the latter half of the decade, new residential construction activity remains well below historic production levels. This constraint on supply, in the face of job gains and the increasing demand for housing that goes with it, has put upward pressure on prices. The most acute example of this situation in the state is in Silicon Valley and other parts of the San Francisco Bay area, where the booming information technology industry has attracted thousands of new jobs, and pushed median home prices over $400,000. Similar problems are occurring in many other markets benefitting from strong economic recovery. The lack of new housing construction looms as one of the most serious threats to the state's future economic competitiveness, because prospective workers, including many earning above-average wages, are finding it increasingly difficult to find housing they can afford within reasonable home-to-work commuting proximity. 5 These general trends are also evident on the Westside. Figure 2, on the second following page, shows that in both relative (top chart) and absolute (bottom chart) terms, home prices on the Westside6 sank quickly as the recession wore on, languished at the bottom between 1994 and 1996, then accelerated upward, beginning in 1997. The increases in 1998 and 1999 were at a double-digit pace. 5 See generally, Center for the Continuing Study of the California Economy, California Economic Growth, 2000 Edition, Chapter 6 (Key Issues Facing California). 6 The analysis is based on re-appraisals of a representative group of existing single-family homes every six months. The Wests ide sample group includes two homes in Beverly Hills, three in Santa Monica (two located south of Pi co, one north of Wilshire), five in Los Angeles (west of Fairfa.x and north of Washington Blvd.), three in West Los Angeles and once each in Brenlwood and Culver City. HAMILTON, RABI!'JOVITZ & ALsCHULER, INC. Page 7 '1 . r-, "J.Jc) Implications of Changed Market Circumstances for the Condominium Affordable Housing Fee Figure 1 Residential Construction in Los Angeles County and Santa Monica, 1990-1999 Residential Units With Permits Issued in Los Angeles County, 1990-1998 ~ 19,500 E ~ I :;rlK~-=:9 "$14; ~&7 ~~ 709.9.;0 7.9~ '0..915" -&;~ -&.9.> 7,9.9<9 -&~ ~ oooSingle-Family ~Multi-Famil Residential Units With Permits Issued in the City of Santa Monica, 1990-1998 r~b~~ 1.9.lb ~, ~<' 1.9.9.;> 1.9~ 1.90%- iB.s& 1.9.9,> '~ '~ i ~ ""'Single-Family _+_M.J1ti-Family' Value of New Multi-Family Building and Alterations & Additions Permits Issued in the City of Santa Monica, 1990-1998 ~ $80,0000 i $70,000,0 ,5 $60,000,0 i $50,000,0 E $40,000,0 :. $30,000.0 '0 $20,000.0 ....... ~ $10,000.0 :;! $00 '~ "''''' "'~ ''lv '''l1,. ''&", ''''q,. ''&> ''&", ~ ........... .......New Multi-Family _____AJterations & AdditIons Source: Construction Industry Research Board (from local building department data) HAMILTON, R"BINOVITZ & ALSCHLlLER, INC. Page 8 " 1.~ ~j Implications o/Changed Market Circumstances for the Condominium Affordable Housinf.: Fee Figure 2 Housing Price Trends in Los Angeles County and the Westside Index of Market Prices for a Sample of Existing Homes, LA County and the Westside, 1990-1999 100.0 90.0 <> ... II 80.0 <> '" '" ... 70.0 Q. <( 60.0 50.0 709~ 709097 709o9,? 709090' 70909.. 7090905' 709,%- 70909,> 70909<9 7090909 --- N'LAC~~~tY___Westside I Average Home Prices in a Sample of Existing Homes, LA County and the Westside, 1990-1999 $1,000,000 $800,000 $600,000 $400,000 $200,000 'N_._ ,-+" ~.A .N ". ....... -..... -.... ,,-~ -.. .....' $(] 7" "'0 7" "'7 ~" 7" "'" 7"h,. 7" "'oj' 7",,%> 7" "'> J'"h", 7" "'", .~..., LA County _Wests ide Source: Real Estate Research Council of Southern California, Real Estate and ConstrucDon Report, 3'" Quarter, 1999 Analysis of sales in new condominium projects constructed in the R2 District since 1990, the subset of condominium sales that is used for fee-related feasibility modeling, confirms the upward trend in prices since the middle of the decade, and a rapid acceleration in just the past two years. Table 1 shows that, cit)'\Vide, current median prices are between 13 percent and 46 percent HAMILTON, RABINOvlTZ & ALSCHULER, INC. Page 9 0;1 .0 Implications of Changed Market Circumstances for the Condominium Affordable Housing Fee higher than in 1997, The acceleration has been particularly evident in the Mi-City area (+46%) and north of Wilshire Boulevard (+33%). Table 1 Median Sale Price Per Square Foot Trends in Condominium Projects Built Since 1990 in the R2 District, City of Santa Monica, 1997-1999 1999 City Area 1997 1998 Overall Lower Half North of Wilshire $253.10 $265.40 $335.35 $313.10 Mid-City-Downtown $146.64 $207.16 $213.49 $192.72 South of Pico $238.10 $254,72 $268,66 $243.65 Source: L.A. County Assessor data compiled by Fist American Real Estate Solutions; HR&A B. Changes in Multi-Family Development Costs Interviews with developers of 30 recent condominium applications indicated that both land costs and hard construction costs have also been increasing significantly in the past few years. The following subsections explore these issues, using various third part data sources. 1, Land Prices On January 1, 1999, the Cost-Hawkins Rental Housing Act went into full effect, after two years of interim implementation. With this state-mandated change in Santa Monica's rent control law, apartments can be re-rented at full market value when a tenant voluntarily vacates a unit. Inasmuch as apartment building values are a direct function of rental income, the increase in total rent made possible through this change had an immediate effect on the value of apartment buildings. HR&A's analysis of30 recent condominium applications showed that the built-out character of Santa Monica means that new condominium development projects are increasingly being proposed on sites that have apartments. Condominium developers are therefore competing with a new supply of apartment buyers attracted to the City because of more attractive cash flows after Costa-Hawkins, Data from the County Assessor's office on closed apartment building sale transactions confirm the upward price spiral. As shown in Table 2, the median value ofland has increased over 30 percent in all areas of the City since 1997, in the R2 District where most new condominium projects are constructed. HAMILTON, RABINOvlTZ & ALSCHULER, INC. Page 10 M, 1 '. 'l.~.t.i Implications of Changed Market Circumstances (or the Condominium Affordable Housin~ Fee Table 2 Median land Values Derived From Apartment Building Sales' in the R2 District, City of Santa Monica, 1997-1999 City Area 1997 1998 1999 Overall lower Half North of Wilshire $75.25 $48.13 $50.95 67.11 $90.66 61.34 98.64 92.51 58.48 66.39 Mid-CitylDowntown 74.85 73.60 South of Pico 1 Closed sales, grant deeds only, excluding obvious high and low outlier values. land values imputed from assessed value of land, where total assessed value is within 10% of recent sale price. Includes duplexes, triplexes, quadraplexes and 5+ unit buildings. Source L.A. County Assessor data compiled by First American Real Estate Solutions; HR&A 2. Hard Construction Costs Interviews with architects and other professionals involved in the 30 new condominium projects submitted to the City in 1998 and 1999, suggest that average construction costs for new condominiums have increased about 15 percent over the past two years, due to a combination of competition for high-quality contractors and subcontractors in a very active construction market, and faster than average escalation in costs for materials and fixtures required for condominiums in Santa Monica's price ranges. Recent changes in construction practices and building code requirements were also cited. These observations about an upward drift in construction costs are supported by related data for basic low-rise apartment construction (not including subterranean parking), as shown in Figure 3. Condominium construction costs are generally higher per square foot than apartment construction, particularly in a high-amenity market and when subterranean parking is included, as is always the case in Santa Monica. HAMILTON, RABINOVITZ & ALSCHCLER, INC. Page 11 .'-;1 . ,-~ _ :t L" Implications of Changed Market Circumstances (or the Condominium Affordable Housinf{ Fee Figure 3 Apartment Construction Cost Trends $46.00 "0 $44.00 o LL Q) $42.00 15 ~ f1 $40.00 ~ a. $38.00 Ui 8 $36.00 $34.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: Real Estate Research Council, op. cil. Among the other factors causing costs to increase are changes to the structural requirements in the 1998 Uniform Building Code, including increased thickness of exterior wood frame walls, requirements for more expensive fasteners, new requirements for geology reports and involvement by engineers, and further structural reinforcement when homes are planned within 15 miles of an active earthquake fault. 3. Other Development Costs Interviews conducted by HR&A also suggest an upward trend in professional development costs, including the fees of architects, engineers and other technical experts whose services are required for new condominium development. Liability insurance costs and considerations related to rampant construction defect litigation, though it does not often apply to small condominium projects, also increases project costs. On the other hand, City permit fees (excluding the Affordable Housing Fee) have declined since our last analysis. Individual permit fees continue to increase annually at about the rate of inflation, but the Environmental Management and Public Works Department has changed its policy about what it charges for public improvements when new multi-family projects are constructed. The cost for curb, gutter, sidewalk and alley improvements is now estimated to cost about five percent of hard construction cost, rather than the 10 percent assumed n previous analyses.7 Calculation of the current fees applicable to each off our prototypical condominium projects is included in Appendix A. 7 Source: Joan Akins, Environmental Management & Public Works Dept. HAMILTON, RWINOVlTZ & ALSCIIULER, INC. Page 12 i.':.t l_' Implications of Changed Market Circumstances for the Condominium Affordable HousinR Fee m. IMPLICATIONS FOR CONDOMINIUM PROJECT FEASmILITY In order to begin our assessment of the relative effects of rising condominium prices, on the one hand, and rising development costs on the other, on the Affordable Housing Fee, we re- ran four condominium financial feasibility simulation models that had been used in HR&A's prior work for the Housing Element Update and the Nexus Study, using updated income and development cost values. This section provides a summary of the models, the differences in the analysis variables since they were last reported in 1998, the results of the new runs, and the degree to which dollar increments offee might "constrain" project feasibility. A. The Financial Feasibility Simulation Models The condominium models include a one-lot, five-unit project (the most typical case) and a three-lot, 16-unit project, each of which is then run with an average high and average low land cost, for a total offour models. All simulations are based on development in the R2 District, where most new projects have been proposed. The simulation models estimate the development costs, income from sale of units, rate of return and other indicators that an experienced and well-informed property owner or developer, or their lender, would consider in evaluating whether a project is "feasible." As we have cautioned throughout or work on this subject, it should be remembered that real estate markets are very dynamic and operate in response to a number of variables that interact in complex ways. No model can perfectly predict future conditions, nor can it account for all possible circumstances. It represents a best approximation. Like all such analyses, the results achieved from HR&A's model depend on a number of assumptions about the physical development of each project, construction-related costs, financing costs, project income and project feasibility, all of which are explicitly noted in the model runs included as Appendix B. HR&A has made every effort to use reasonable assumptions, based on the firm's national real estate consulting experience and familiarity with the Santa Monica market. Table 3 compares some of the more significant of these assumptions for each of the three times these feasibility models have been run during the past four years. HAMILTON, RABINOVITZ & ALsCHULER, INC. Page 13 , { Implications of Changed Market Circumstances for the Condominium Affordable Housin[; Fee Table 3 Comparison of Assumptions Used in Modeling Condominium Project Feasibility in Santa Monica, 1996-2000 Housing Nexus Study Condominium PARAMETER Element Update (1997-98) Fee Update Memo (1995-96) (2000) Physical Factors Lot Size (SF) 7,500-22,000 7,500-22,000 7,500-22,000 Zoning Districts R2 R2 R2 Number of Units Per Project 5-16 5-16 5-16 Units Mix All 2-BR/2-Bath All 2-BR/2-Bath All 2-BR/2-Bath Average Unit Size (SF) 1,313-1,339 1,424-1,519 1,440-1,530 Total Gross Floor Area (SF) 7,595 7,595 7,650 Development Costs Land Cost (Per SF; low & hi9h avgs.) $40-75 $40-$75 $59-$99 Construction Costs (per SF) $68-$82 $71-$85 $84-$102 Soft Costs (incl. financing costs) Varies Varies Varies Developer Fee 5-7% 5-7% 7% Total Dev. Cost/Unit $250.9K-$3049K $256.1-$368AK $339.7K-$438.2K (inc!. land and financing) Financing Terms Construction Loan Rate 10.5% 9.5% 9.0% Construction Loan Points 1.5% 1.5% 1.5% Construction Loan Term 30 years 30 yea rs 30 years Max. Loan-to-Value Ratio 75% 75% 75% Income Low Avg. Condo Price $180,765 $227,840 $327,000 Low Avg. Condo Price (Per SF) $135 $160 $218 High Avg. Condo Price $267,800 $356,965 $502,500 High Avg. Condo Price (Per SF) $200 $235 $335 Other Costs Annual Inflation 3% 3% 3% HOA Fees (per unit/yr.) $2,500-3,000 $2,500-$3,000 $2,500-$3,000 Source: HR&A It is also important to note that the feasibility model assumes a particular approach to condominium development, which is typical in Santa Monica, but not unique. The approach reflected in the model assumes that a developer buys a site from another party in an arms-length transaction. The developer secures the right to purchase the site at a fixed price once all City entitlements to develop are in hand (i.e., up to and including a building permit), through payment ofa monthly sum (i.e., option-to-buy payment) beginning with project conceptualization and HAMIL TON, RABINOVITZ & ALSCHULER, INC. Page 14 ~... \ :~ ...J Implications of Changed Market Circumstances for the Condominium Affordable Housing Fee continuing until the City issues a building permit. Only at that point in time is the land purchased.8 The model also assumes that the developer obtains conventional financing for the project. This means that the amount of the construction loan (and hence, the amount of equity required) is a function of75 percent of the value of the completed project. The model does not account for outside equity investors, nor the preferred return on their investment that they are usually due. Any other approach to the development of a site - e.g., by a property owner directly who has a low cost basis in the land, or use of below-market rate financing - could lead to different results about project development costs, income and feasibility than those reported here. "Feasibility" is defined in terms of two thresholds commonly used in the condominium project development industry: (a) return on equity; and (b) gross margin9 These are the same feasibility concepts used in prior HR&A analyses. "Return on equity" is the total, cumulative return over the entire time period of project development and unit sales. It is calculated as the profit from unit sales (i.e., gross sales less brokerage commissions, closing costs and other sales costs) divided by cash equity, which in most cases is equal to the value of the land purchased for the project. In our experience, most condominium developers would need to be reasonably confident of receiving a return on equity at least in the 36-46 percent range in order to proceed with a project. "Gross margin" is an alternative threshold calculated as profit (i.e., gross sales revenue less the costs of sales) minus development costs divided by gross sale proceeds. In our experience, most developers expect to earn a gross margin of at least 15-20 percent in order to proceed with a project. As we have consistently noted in preparing these analyses, there are always instances in which a developer would expect to achieve higher returns,IO or might accept less than these thresholds and still proceed with the project. But, consistent with the "reasonable person" standard developed for the Housing Element Update constraints analyses, we believe these are the thresholds that, if not reached, would deter most reasonably well-informed and experienced developers from proceeding with a project. 8 In our interviews with developers, we heard that the intense competition for sites with existing apartment units has resulted in some developers having to buy sites in advance of receiving City approvals. This increases the level of risk for the developer, and can also change the timing of the equity pay-in needed to put the project together (e.g., interim loan to acquire the site paid off by the construction loan at a later date). For analytic purposes, our analysis continues to assume that the developer's equity contribution is equal to the price paid for the land plus any development costs that cannot bc funded by the construction loan. 9 Rate of return on development cost, which uses a diffcrcnt percentage threshold, is also used in some cases, but more often for apartment development, in our expcrience. 10 Recent interviews with some of the individuals involved in 30 recent condominium project applications indicated an investment goal of 100% return on equity, especially considering recent prospects for earning annual returns in excess of 20% through much less risky equity investment alternatives. HAMILTON, RABINOVITZ & ALSCHULER, INC. Page 15 7:'; -.. l; Implications of Changed Market Circumstances for the Condominium Affordable HousinR Fee B. Feasibility Results Table 4 summarizes the results of the financial feasibility model runs with updated development costs and sales prices. It shows that the only case that is feasible, using the return on equity threshold, is a one-lot project in a higher cost area (i.e., higher median sales prices and land costs), where the per-unit sale price exceeds the per-unit development cost. The other three prototypes produce negative returns. The sale prices for the one-lot project in lower-cost areas, and both cases for three-lot projects, are not high enough to overcome the costs of development. Table 4 Comparison of Financial Returns for Four Prototypical Condominium Projects in the R2 District, City of Santa Monica, 2000 Smaller Projects' Larger Projects' Indicator Threshold Lower-Cost' H ig her- Lower-Cost Higher-Cost Cost' Return on Equity 40-50% -35% 46% -75% -35% Gross Margin 15-20% -11% 20% -10% -24% Total Development Cost Per Unit (inc!. land) NA $339,694 $421,050 $367,048 $436,231 '"Smaller" project = one-lot project (5 units) 2 "Larger" project = three-lot project (16 units) 3 "Lower-cost" area assumptions include $297,000-$315,000 condo price and $59/sf land cost. 4 "Higher-cost" area assumptions include $407,520-$512,550 condo price and $99/sf land cost. Source: HR&A As shown in Table 5, prices would have to rise another 13-35 percent, holding everything else constant, for the small prototype in a low-cost area, and the two large prototypes to be feasible. Table 5 Per-Square Foot Condominium Sale Prices Required for "Feasible" Condominium Scenarios in the R2 District, City of Santa Monica, 2000 Increase Needed Prototype Actual To Be Feasible Amount Percent Small Higher-Price Areas $335 $335 $0 0.0% Lower-Price Areas $218 $256 +$38 +17.4% Large Higher-Price Areas $335 $380 +$45 +13.4% Lower-Price Areas $218 $294 +$76 +34.9% Source: HR&A HAMILTON, RABINOVITZ & ALSCHULER, INC. Page 16 ,,'_J . -' J Implications o/Changed Market Circumstances (or the Condominium Affordable Housinf? Fee Appendix B contains the output from each of the four simulation model runs that show the "feasible" prototypes with no Affordable Housing Fee. C. Affordable Housing Fee as a Potential Constraint on New Development When preparing a Housing Element, State law requires local jurisdictions to assess, among a number offactors, any constraints imposed by local government on the maintenance, improvement or development of housing of all kinds.11 In formulating a five-year housing strategy, jurisdictions are required to, among other things, consider removing any such constraints. 12 In 1996, we prepared analyses of whether various City programs and policies might be a "constraint" on new development.13 Our analysis used the following definition: A program will constitute an actual governmental constraint on new housing production within the meaning of Government Code ~ 65583(a)(4) if the program, either individually or in combination with other governmental programs, has a significant adverse impact on the City's ability to meet its fair share of the regional need for additional housing determined in accordance with [the Southern California Association of Government's regional housing need allocation process]. OperationaIIy, we interpreted this definition to mean that a City program, procedure or requirement is, or could be, a "constraint" if, as a result of procedures and/or substantive requirements, it adds a scale of extra cost or time that significantly and adversely affects the financial feasibility of new housing projects. We observed that housing development projects and housing developers are not all equal, and therefore it is not possible to establish a bright-line threshold for a "significant adverse impact" that will apply in every case. Property owners and developers have varying degrees of experience, resources, ability to raise capital, skills and tolerances for navigating through the local 11 An analysis of potential and actual governmental constraints upon the maintenance, improvement or development of housing for all income levels, including land use controls, building codes and their enforcement, site improvements, fees, and other exactions required of developers, and local processing and permit procedures. (Gov't Code ~ 65583(a)(4)) See also, State Department of Housing and Conununity Development, "Housing Element Qucstions and Answers," June, 1988, at pp. 10-12. 12 Address and where appropriate and legally possible, remove governmental constraints to the maintenance, improvement or development of housing. (Calif. Gov't Code ~ 65583(c)(3)) 13 City of Santa Monica, 1998-2003 Housing F:lement Update, Technical Appendix, 1997. HAMILTON, RAB!1\'OVITZ & ALSCHULER, INC. Page 17 ~~~ ~-- -;: c3 Implications of Changed Market Circumstances for the Condominium Affordable HousinJ; Fee land use approval process, and degrees of motivation to seek an alternative use of their properties. The minimum acceptable financial returns that property owners and developers expect from a residential project in order to proceed with a new construction project, or to continue owning or managing an existing building, also vary. Further, the minimum acceptable return will vary by project size, location, and product type (e.g., condominiums versus apartments). This constraint threshold can be said to have been crossed for new residential construction when the direct cost of complying with a City program, regulation or procedure is so expensive, in time and/or cash outlay, that the resulting increase in development cost makes the new development project financially infeasible. Indicators of having crossed the line include costs which translate into a significant reduction in land value (to the extent that development costs are reflected in the price ofland); costs which imply unusually high equity contributions; costs which cause the cash-on-cash return or internal rate of return from the development project to fall below returns achievable from other risk-adjusted uses of capital; and procedures or requirements that make a project unmarketable. All these charges are relative to the norm in the competitive development market, such that a reasonably well-informed and experienced property owner or developer with an average project would elect not to pursue the project. These costs include those associated with the process involved in the City program or requirement, and its substantive requirements. To the extent that property owners or developers in a position to utilize the City program or procedure would elect not do so because the costs of a City program or requirement make an otherwise feasible project infeasible, it can be fairly concluded that little new housing development would be produced, and therefore that the City's ability to meet its obligation to produce a fair share of regional housing need would be significantly and adversely affected. A City program, policy or procedure that leads to this outcome would, in our opinion, constitute an actual local governmental "constraint" To test the financial feasibility implications of alternative fee levels on typical projects in the R2 District under these circumstances, we assumed that condominium purchase prices reach the point at which typical projects are feasible, holding all other things constant, and then added one dollar increments of potential Affordable Housing fee to the "feasible" one-lot and three-lot R2 prototypes. Table 5 shows the results for the four condominium project prototypes using the return on equity feasibility threshold. Table 6 shows the results using the gross margin feasibility threshold. The highlighted values shown in Tables 5 and 6 indicate the fee amounts that could be charged without causing the fee to constitute a "governmental constraint," within the meaning of State housing element law, using the definition developed for the Housing Element Update. These results indicate that there are different tolerances for an Affordable Housing Fee, depending on the area ofthe City (e.g., "higher-cost/value" areas north of Wilshire and in Ocean Park vs. all other areas of the City). More specifically, the fee could range from $6 to $10 per square foot for condominiums without crossing the definition of a "constraint," using the return on equity HAMILTON, RABINOVITZ & ALSCHULER, INC. Page 18 1 " ~'J Implications of Changed Market Circumstances for the Condominium Affordable Housinf; Fee threshold. Switching to the gross margin feasibility threshold implies a maximum range of $10- $16 per square foot, depending on the prototype. These bands of value are broader than the $4- $8 range identified in the work underlying the current fee, due to changes in prices and costs discussed above.14 It should be recalled, however, that only the one-lot, higher-cost area prototype is feasible under current market conditions. The band of maximum "feasible" fee values for this prototype is between $10 and $12 per square foot. 14 To account for variation in what defines "feasible" in the real estate industry, "constraint" is defined in terms of a range of investment return values. For the return on equity threshold, the range is up to 10 percentage points below the 46% return, which we conclude is "feasible" today for the one-lot, higher cost area prototype (i.e., an acceptable range of 36-46%). For the gross margin threshold, which uses a different calculation formula, the range is five percentage points below the "feasible" project (i.e. an acceptable range of 15-20%). HAMILTON, RABINOVITZ & ALSCHULER, INC. Page 19 . .1 ~ D Implications of Changed Market Circumstances for the Condominium Affordable Housin~ Fee Table 5 Impacts of an Affordable Housing Fee, in One Dollar Increments, On "Feasible" Prototypical Condominium Projects in the R2 District in the City of Santa Monica, Under High and Low Land Costs and Sales Prices Using the RETURN ON EQUITY Feasibility Threshold Fee Amount Per GSF 1 -Lot Projects in the R2 District 3-Lot Projects in the R2 District Lower-Cost' Higher-Cost' Lower-Cost Higher-Cost Retum3 Return Return Return 45.7% 46.3% 45.8% 45.7% 43.9 At: "lO/ .II., nnJ A A ..,nl &..f-~..t:..70 &..f-.;lo.>770 &..f-"+.I70 42.1 44.2 42.4 43.8 40.3 43.1 40.8 42.8 38.5 42.0 39.2 41.9 36.7 41.0 37.6 40.9 34~9 39.9 3QiO 40.0 33.1 38.8 34.5 39.0 31.3 37.8 32.9 38.1 29.6 36.7 31.3 37.1 27.8 $6;$ 29.7 StiIz 25.9 34.5 28.1 35.3 24.1 33.5 26.5 34.3 22.3 32.5 24.9 33.3 20.5 31.3 23.3 32.4 18.8 30.3 21.8 31.5 17.0 29.2 20.2 30.5 15.2 28.1 18.6 29.6 13.4 27.1 17.0 28.6 11.6 26.0 15.4 27.7 9.8 24.9 13.8 26.8 $0 (Base Casel $1 $2 $3 $4 $5 $:6 $7 $8 $9 ~mp $11 $12 $13 $14 $15 $16 $17 $18 $19 $20 1 $59/sf land cost; $256-$294/sf purchase price. :1 .Ionn'_1'__...I ___-'-_ ..."'.....r- .10-............_.. _ __.__ .. - ...~;:,(:sT 1(:1110 l;O:i-r; ...J..>::J-...JOV/ST purcnase price. , Return on equity. 4 PlCIrr"pn+ ,..h~nnp. in rpci,.h I~I I~nri \l~h IIl:to . -.--.... ...........1:1I... n. ....._.....__.... ........... .-............ Source: HR&A39.9 H'\MILTON, RABI:-JOVITZ & ALSCHULER, INc. Page 20 "..) .t. Implications of Changed Market Circumstances for the Condominium Affordable Housinf; Fee Table 6 Impacts of an Affordable Housing Fee, in One Doller Increments. On "Feasible" Prototypical Condominium Projects in the R2 District in the City of Santa Monica. Under High and low land Costs and Sales Prices Using the GROSS MARGIN Feasibility Threshold Fee Amount Per GSF '-lot Projects in the R2 District 3-lot Projects in the R2 District lower-Cost' Higher-Cost' lower-Cost Higher-Cost Return' Return Return Return 20.1% 19.9% 19.9% 19.9% 19.5% 19.5% 19.4% 19.6 19.0 19.0 19.0 19.3 18.4 18.6 18.6 18.9 17.8 18.1 18.2 18.6 17.3 17.7 17.8 18.3 16.7 17.2 17.2 18.0 16.2 16.8 17.0 17.6 15.6 16.4 16.6 17.3 15.1 15.9 16.2 17.0 t!t;$ 15.5 15.8 16.7 14.1 15.1 15.4 16.3 13.5 114U:l l$iO 16.0 13.0 14.2 14.6 15.7 12.5 13.8 14.3 15.4 12.0 13.4 13.9 15.1 11.5 13.0 13.5 1\4:8 11.0 12.6 13.1 14.5 10.5 12.2 12.8 14.2 10.0 11.8 12.4 13.9 9.6 11.4 12.0 13.6 $0 (Base Case) $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $15 !t$ $17 $18 $19 $20 , $59/sf land cost; $256-$294/s1 current market purchase price. 2 $99/s1 land cost; $335-$380/s1 current market purchase price. , Gross margin. 4 Percent change in residual land value. Source: HR&A HAMILTON, RABINOVITZ & ALSCHULER, INC. Page 21 , .J..J :.-... Implications of Changed Market Circumstances (or the Condominium Affordable HousinK Fee IV. IMPLICATIONS FOR THE NEXUS-BASED AMOUNT OF THE AFFORDABLE HOUSING FEE This section presents a recalculation of the Affordable Housing Fee for new condominium projects, using the approach contained in the Nexus Study. It also discusses a structural change in the condominium fee, which might be considered to address the kind of market volatility experienced during the two years since the fee was initially calculated. This involves using a fee based on the percent ofthe initial sales prices, rather than a fee per square foot. A. The Nexus Study Fee Calculation Approach Estimating the marginal affordable housing demand caused by new market rate multi- family developments in Santa Monica, and a development fee that relates to this impact, was determined through a four-part analysis in the Nexus Study, which is summarized below. The analytic approach was selected after review and consideration of the professional literature, the few examples of related analyses that have been conducted to date in other jurisdictions, and suggestions by City Council members and City Commissioners. The approach is based on estimating the expenditures for goods and services made by households in new multi-family projects, estimating the labor demand implied by those expenditures, the portion of that labor that represents low-income households that need housing, the costs of that housing at the City's average rate of project subsidy, and the conversion of the resulting housing cost to a fee per square foot of new market-rate multi-family development. More specifically, the calculation steps for the condominium fee are: · Estimate Per-Project Household Income and Spending. The first step is to estimate the household income for all of the households in a typical new five-unit condominium project in the R2 District, the most typical case. Household income is derived from the purchase price needed for a feasible condominium development project, making various assumptions about the percent of household income devoted to mortgage payment and other housing costs. Household income estimates are averaged between the sales prices needed for a feasible one-lot project and three-lot project, then multiplied by five units in the typical project. The resulting total project household income is then multiplied by a factor (75.5%) to remove spending for savings, taxes and consumer interest. The remainder represents household consumption expenditures. · Estimate the Employment Impacts of Per-Project Household Spending. The second step in the analysis involves deriving the employment impacts of the household consumption. This is accomplished using the IMPLAN input-output model of the Los Angeles County economy. Input-output models trace the economic effects, including employment, that result from a change in a regional economy, such as the consumption expenditures by households in new market rate HAMILTON, RABINOVITZ & ALSCIDJLER, INC. Page 22 ~ 1 'j J Implications of Changed Market Circumstances (or the Condominium Affordable Housin~ J<ee multi-family housing in Santa Monica. It produces estimates of direct employment (i.e., at the restaurant or retail store where a purchase is made), indirect employment (i.e., in the industries suppling materials to the restaurant or retail store) and induced employment (i.e., due to consumption spending by direct and indirect employees). The model generates employment patterns that correspond specifically to the spending characteristics of upper-income households, like those who occupy typical new market rate multi-family developments in the City. Previous analysis indicated that consumption expenditures by upper-income households in typical new market-rate multi-family developments in Santa Monica generate between 3.74 and 5.54 total workers, primarily in the retail trade and services sectors of the economy. · Estimate the Number of Low-Income Households Related to the Employment Impacts of Per-Project Household Spending. Not all of these workers are low- income, and only some of these are members of households that meet the definition of a "low-income" household - i.e., earning up to 60 percent of the Los Angeles County median income, or about $25,000 per year for a two-person household. Deriving the subset of households meeting these criteria is accomplished using the Public Use Microdata Sample (PUMS) for Los Angeles County, a specialized scientific sample of 1990 census data. The PUMS data allow for cross-tabulations of household income by the industry in which the household members work. This made it possible to estimates the number of "low-income" workers generated by the consumption spending associated with new market rate multi-family projects in Santa Monica. For the sum of the affected industries, about 17 percent of all workers fit the "low-income" definition, or between about two-thirds (0.63) and one (0.93) low-income worker per new market rate multi-family development. The PUMS data are also used to estimate the number oflow-income households associated with these low-income workers. · Estimate an Affordable Housing Fee to Offset the Affordable Housing Demand of Per-Project Household Spending. The final step in the Nexus Study calculation process involves multiplying the affordable housing demand derived from the preceding steps by the City's average cost to produce a unit of affordable housing, and converting that cost into a dollar amount per square foot of new condominium project, whose household spending produces the initial demand for low-income labor. The City's cost is based on the gap between the cost of building a unit of housing that rents at a price affordable to a low-income household (at 60% x the Los Angeles County median), and the portion of that cost that can be financed with low-income household rent payments. The City "subsidy gap" in 1998 was about $155,000 per unit. Multiplying this subsidy gap amount by the number of affordable housing units needed to meet the low-income labor demand associated with consumption spending by households in new market rate multi-family HAMILTON, RABINOVITZ & ALSCHULER, INc. Page 23 " -J. c4 Implications o/Changed Market Circumstances for the Condominium Affordable Housinf!. Fee developments yields the fee amount that could reasonably be charged to the developer to offset the City's costs. The key components of the calculation that produced the initial fee for condominiums is shown in Table 7. Table 7 Derivation of a Development Fee to Offset the Affordable Housing Demand Caused by Total Household Consumption Expenditures In New Condominium Developments, City of Santa Monica Prototype Per-Prototype Units of Total Fee Amount Hhld. Income Low-Income Fee Per Gross Housing Amount 1 Square Foot 2 Demand $387,681 0.31 $47,525 $6.26 $496,260 0.39 $60,835 $8.01 $7.13 Condo - Lower-Cost Area Condo - Higher-Cost Area Average Fee for Condominiums 1 Housing Demand x $154,916 per unit (City's average subsidy gap). 2 Total Fee Amount divided by 7,595 gross square feet per typical market rate multi-family development. Source: HR&A B. Affordable Housing Fee Recalculation The variety of changes in the City's real estate market described above have impacts for nearly every one of the calculations used in the Nexus Study approach for deriving the fee. These changes are described below. · Higher Household Incomes. The combination of higher purchase prices needed for a "feasible" condominium project and higher mortgage rates (8.125% today versus 7.0% in the last analysis) mean that the income of each household in a typical five-unit condominium project must be higher than it was in 1998, when the fee was last estimated. As a result, the sum of the project's consumption expenditures is also higher today. The table on the following page presents a re- calculation of these values. It shows that for the lower-cost area prototype, the total per-project consumption expenditures total $398,569, a 36 percent increase over the amount estimated in July 1998. The total for the higher-cost case is $506,492, or 35% more than the prior estimate. HAMILTON, RABINOVITZ & ALsCHULER, INC. Page 24 _. :-1 J Assumptions: Estimates of Average Annual Per-Household and Per~Project Incomes in Four Prototypical New Market Rate Condominium Developments !n the City of Santa Mon!ca Case #1 Avg. Unit Size (GSF) Purchase Price/GSF Purchase Price Mortgage % Mortgage Interest Rate Mortgage Pmt./Mo. Prop. Tax Rate Homeowner's Deduc1. Property Tax/Yr. Property TaxlMo. D.................I.......,""".........~"'A~ ~ ''''1-''''-''1 "'~...,ClI'..."""Y".... HOA DueslMo. Total Housing CostsJrv1o. Totai Housing Costs/yr. Housing CostsIHhld Income Annual Household Income # Units/Project Project Hhld. Income Case #2 Avg. Unit Size (GSF) Purchase Price/GSF Purchase Price Mortgage % Mortgage Interest Rate Mortgage Pmt./Mo. Prop. Tax Rate Homeowner's Deduct. Property Tax/Yr. Property TaxlMo. Property InsurancelMo. HOA Dues/ivio. Total Housing Costs/Mo. Total Housing CostsIYr. Housing CostslHhld Income Annual Household Income # UnitslProject Project Hhld. Income SaMoNe:<\hhldjnc.x1s 1. 5-unit projects, typical of development in the R2 District 2. 4 Protoypes, based on protoypes per financial feasibility models Lower~Cost Area, 1 Lot Lower~Cost Area, 3 Lots Higher~Cosl Area, 1 Lot Higher~Cosl Area, 3 Lots 3. Condo Owners' Cost (mortgage, property tax, insurance and Homeowners Association dues) = 35% x Household Income 4. Case totals based on simple average of 1- and 3-1ot prototypes by cost area. Lower-Cost Area (average of ooe-Iot aod tlJree-/ot prototypes) 1-Lot 3-Lats Average 1,530 1,440 1,485 256 $ 294 $ 275 391 ,680 $ 423,360 $ 407,520 80.00% 80.00% 8,125% 8.125% $2,327 $2,515 1.05% 1,05% 7,000 $ 7,000 4,039 $ 4,372 337 $ 364 ,~ . 'uu ~ 208 $ 208 2,971 $ 3,187 35,658 $ 36,249 35.00% 35.00% 101,880 $ 109,282 $ 105,581 5 1 $ 527,905 1 x 75,5% =1 $ 398,569 I Higher-Cost Area (average of ooe-Iot and tlJree-/ot prototypes) 1-Lot 3-Lots Average 1,530 1,440 1,485 $ 335 $ 380 $ 358 $ 512,550 $ 547,200 $ 529,875 80.00% 80.00% 8,125% 8.125% $3,045 $3,250 1.05% 1.05% $ 7,000 $ 7,000 $ 5,308 $ 5,672 $ 442 $ 473 $ 100 $ 100 $ 208 $ 20B $ 3,795 $ 4,031 $ 45,543 $ 48,376 35,00% 35.00% $ 130,122 $ 138,218 $ 134,170 5 1 $ 670,850 I x 75.5% =1 $ 506,492 1 Page 25 Hamilton. Rabinovilz &. Al$chuler, Inc. 3/1/2000 .~ " " Implications of Changed Market Circumstances for the Condominium Affordable Housin~ Fee · Higher Labor Demandfrom Higher Consumption Expenditures. Higher spending levels increase the amount oflabor demand directly and indirectly associated with those expenditures. Re-running the revised per-project household consumption expenditures through the IMPLAN model results in a total demand for 5.6 jobs associated with the lower-cost area prototype, or about 30% more jobs than in the original Nexus Study estimate. About 7.1 jobs are associated with household spending for the higher-cost area prototype, an increase of29% from the original estimate. The details of the new IMPLAN model runs are shown in Appendix C. · Higher Demandfor Units Affordable to Law-Income Worker Households. Though the factors used to convert total consumption-related labor demand into households that qualify for affordable housing remain unchanged from the last analysis, because they are derived from the 1990 Census, the calculation factors are applied to a larger number of total workers, as noted above. Therefore, the household spending in the two prototypes produce an estimate of demand for 0.4 to 0.5 units of housing affordable to a low-income worker household, at 60 percent of the median Los Angeles County income. This result is also about 29-30 percent higher than in the original Nexus Study estimate. · Higher City Subsidy Gap. The same development cost factors affecting market rate housing also affect the cost of developing affordable housing, and the amount the City contributes to each project to fill the funding gap, which is referred to as the "subsidy gap." As shown in the revised calculations contained in Appendix D, the cost of the City's subsidy gap has increased to $186,208 per unit, from $154,916 (+20%) when the gap per unit was estimated in 1998. The difference is due primarily to higher land and construction costs, offset to some degree by reductions in some of the previous assumptions (e.g., reduction in construction management to $25,000, from $50,000)Y As shown in the summary calculation table on the following page, the result of the above changes, when applied to the floor area of a typical five unit condominium development project, is a maximum justified average fee of$l1.01 per square foot of new condominium development. This fee is about 54 percent higher than the fee estimated in 1998. It falls, however, within the general range of fees that could be imposed without creating a "constraint" on new development within the meaning of State Housing Element law. 15 The modifications to the subsidy gap estimate reflect comments from Housing Division staff. Final responsibility for the resulting new estimate rests, however, with HR&A. HAMILTON, RABINOVITZ & ALSCHULER, INC. 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'" t ~ ~ ~ ~ 15 ~ J Implications of Changed Market Circumstances for the Condomtntum Affordable Housin~ Fee C. An Alternative Affordable Housing Fee Basis for New Condominiums The volatility of the real estate market that gave rise to this analysis, and the changes it implies for the amount of the City's fee suggests that a fee formulation that is more sensitive to market changes may be worth pursuing, particularly for condominiums, which account for most of the new multi-family development that is causally related to demand for affordable housing. The per-square foot formula, though it is easy to administer, must be recalculated in detail periodically to account for changes market circumstances. None of the generally used inflation factors, or real estate market indexes are sufficiently sensitive to account for changes in the Santa Monica sub market. The Consumer Price Index ("CPI"), for example, is based primarily on a market basket of consumer goods whose price behavior is not related to the housing market. Even the housing cost components of the CPI may not be useful, because they are analyzed at the scale of Los Angeles County, whose general housing market does not move in the same rhythm as the Santa Monica submarket. One alternative that could be considered for condominiums is to convert the fee per square foot to a percentage of unit sale prices. A percent of sale price approach that has been used in Palo Alto for about 25 years. That city's affordable housing program uses a sliding scale fee equal to 3.25 percent to 5.0 percent of each unit's sale price, for projects ofless than 10 units. For larger projects, a 5.0 percent fee applies. Appendix E includes general information about Palo Alto's program. In Santa Monica's case, when the revised fees of$9.70-$12.32 per square foot, or $74,167 -$94 ,250 for typical five-unit projects, is compared with total gross sales from each "feasible" five-unit prototype, the fee is equal to about 3.5 percent of gross sales (i.e., before deductions for cost of sales). Setting the fee in this way would allow the amount of the fee proceeds to float in direct proportion to the price of the project's units, no matter how far up or down the condominium market moves. Inasmuch as price determines household spending, labor demand and the associated demand for affordable housing, the Nexus Study logic would be preserved under this approach. This approach would also better capture the variation in new condominium projects that occurs even within a single area of the City (e.g., Ocean Avenue vs. interior streets, all north of Wilshire Boulevard), more sensitively than the floor area-based fee. This approach is, however, more complicated to administer and could produce a longer period of time before fee proceeds are collected by the City. Under the Palo Alto approach, the fee condition is placed on each condominium tract map. Fees are collected through escrow on the initial sale of each unit. Fees on units that are completed and rented, rather than sold, are required on the basis of the most expensive unit sold. It is also possible that the developer could be required to post a bond for the fees at the time of building permit issuance, with the amount of the bond equal to the percentage fee applied to an estimate of gross unit sales. If this alternative approach is of interest to City staff and/or the City Council, we can assist you in developing the administrative procedures to implement it. HAMlL TON, RWINOVITZ & ALSCHULER, INC. Page 28 . 1 :J 'J Implications o/Changed Market Circumstances for the Condominium Affordable Housinf{ Fee APPENDIX A City of Santa Monica Development and Permit Fees for Four Prototypical Condominium Projects HA\1IL TOI', RABINOVITZ & ALSCHULER, INC. t', '" J '.) D : ~~i!~~ 11 ! e~~~a . 511111111 ! 11~ j !! iiiiiliii ~ : ~f""'''''''''''''' . ~ gt1&::i ~ ~I::l::l:l:l i U f . . . 8000 ~ .. iit ::l::l:l::l i ~ ~~ . . illll:l:l h~ ~ l a.a "o~ J;. !~ 11r; 1"1 Hllllllll ~~ it" iH 11 0"0 ~~ ~.it ,,~llllllll IH oJi t~ ~~~ ~~8'~1~ gg!8~~ aJ~~~a Hi 8~ ~ i~ 1Cr::ici ""'0,;1;: 5" ~ 8iiii S~~;; 1If~ z! j ~~a ~ 8 ~~a ~ 0 i:~M LUH ~8iiH 8 t::t:: i>'>'~~ ~ " ~m ~~ ~~~ ~~~ ~>'>'~~ ::'-' -' ~-- ~~ ~~ ~1l I 1~1l I - - ~eIl "~ ell H '~l~ ~ uh~ ! ::5....1....! :5:5....11-:: I 0000 H ~ ~;gl~~ .nUI~ I~ - - 8~ I...~tt 8~~ ~ ~- :~ 00 " t:: ......CO!q q u...qqo q ! iiliilOO ~~~ ~ ~oo~ 0 ~ d~~.~.g :;;:;;:1 ;l; <.> !&l" iil~~ 88~8 ~ 8888 . ": "" "t omm ~~ 1)~,"",~'~-~~ ~<D .....(') ~::::~ ....111).. 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Cl Ol !l. a> M co o ;:l; ci ... '" E ::l '2 'E o -g o u '5 gj ~ (ij 15 I-'- Implications of Changed Market Circumstances for the Condominium Affordable Housin~ Fee APPENDIX C IMPLAN Model Results for Labor Demand Associated With Per-Project Household Spending in New Condominium Project HAMILTON, RABINOVITZ & ALSCHULER, INC. '. J / J ESTIMATE OF TOTAL EMPLOYMENT ASSOCIATED WITH HOUSEHOLD CONSUMPTION EXPENDITURES, NEW 5-UNIT CONDOMINIUM PROJECT, LOWER-COST AREA, CITY OF SANTA MONICA, 2000 IMPLAN Cumulative Sector Industry Direct* Indirect* Induced* Total.. Percent Percent 454 Eating & Dririking 0.4806 0.0157 0.1422 0.6385 11.36% 11.36% 455 Miscellaneous Retail 0.3085 0.0046 0.1025 0.4156 7,39% 18.75% 490 Doctors and Dentists 0.2178 0.0000 0.0689 0.2867 5.10% 23.85% 492 Hospitals 0.1834 0.0001 0.0764 O.259B 4.62% 28.47% 447 Wholesale Trade 0.1232 0.0495 0.0571 0.2299 4.09% 32:.56"/e 450 Food Stores 0.1703 o 0025 0.0566 0.2294 4,08% 36.64% 496 Colleges- Universities- Schools 0.1505 o 0009 0.0312 0.1825 3.25% 39.88% 488 Amusement and Recreation Services- NEe 0.1265 0.0001 0.0328 01593 283% 42.72% 451 Automotive Dealers & Service Stations 0.1142 0.0017 0.0380 01539 274% 45.46% 449 General Merchandise Stores 0.1071 0.0016 0.0356 0.1443 2.57% 48.02% 495 Elementary and Secondary Schools 0.0949 0.0000 0.0161 0.1110 1.97% 50.00% 525 Domestic Services 0.0834 0.0000 00239 0.1072 1.91% 51.90% 414 Personnel Supply SelVices 0,0056 0.0752 00257 0.1065 189% 53.80% 452 Apparel & Accessory Stores 0.0772 0.0012 0.0256 0.1040 185% 55.65% 453 Furniture & Home Furnishings Stores 0.0719 0.0011 0.0239 0.0969 1,72% 5737% 504 Labor and Civic Orgamzations 0.0757 0.0001 0.0202 0.0959 171% 59.08% 493 Other Medical and Health Services 0.0657 o 0054 0.0241 o 0952 169% 60.77% 500 Social Services- N.E C 0.0663 0.0001 0.0172 0.0836 149% 62.28% 466 Beal.rt:y and Barber St10pS 0.0511 0.0117 00203 0.0830 1.48% 63.74% 457 Credit Agencies 0.0305 0,0324 00191 0.0820 146% 65.19% 463 Hotels and lodging Places 0.0452 0.0161 0.0147 0.0759 1.35% 66.54% 464 Laundry- Cleaning and Shoe Repair 0.0446 0.0154 0.0158 0,0759 1.35% 67.89% 462 Real Estate 0.0129 o 0387 0.0238 o 0754 1.34% 69.24% 459 Insurance Carners 0.0554 D.0045 0.0149 00748 1,33% 70.57% 456 Banking 0.0393 0.0113 0.0191 o 0697 124% 7181% 479 Automobile Repair and Services 0.0482 0.0050 0.0154 0.0686 1,22% 73.02% 5D1 Residential Care 0.0470 0.0000 0.0122 0.0592 105% 7408% 494 Legal Services 0.0242 0.0176 0.0156 0.0573 102% 75,10% 470 Other Business Services 0.0040 0.0351 0.0120 0,0511 0,91% 76.01% 435 Motor Freight Transport and Warehousing 0.0210 0,0178 0.0116 0.0503 089% 76.90% 56 Maintenance and Repair Other Facilities 00000 0.0377 0.0113 00489 087% 77.77% 460 Insurance Agents and Brokers 00000 0.0374 0.0093 0.0468 083% 78.60% 507 Accounting- Auditing and Bookkeeping 0.0014 0.0330 0.ot06 00450 080% 79.40% 448 Building Materials & Gardening 0.0331 0.0005 00110 0.0446 0.79% 80.20% 489 Membership Sports and Recreation Clubs 0.0333 0,0022 0.0086 0,0441 0.78% 80.98% 502 Other Nonprofit Organizations 0.0344 00006 0.0091 0.0440 078% 8177% 499 Child Day Care Services 0.0352 0.0000 0.0086 o 0438 0,78% 82.54% 508 Management and Consutting Services 0.0000 0.0321 0.0105 o 0426 076% 83.30% 497 Other Educational Services 0.0272 0.0044 0.0084 0.0400 0,71% 84.01% 475 Computer and Data Processing Services 0.0010 0.0271 0.0087 0.0368 065% 84,67% 472 Services To Buildings 0.0077 0.0194 00088 0.0358 064% 85,30% 468 MiscellaneolJs Personal Services 0.0256 00003 o 0069 00328 058% 85 89% 441 Communications- Except Radio and TV 0.0140 0.0091 0.0085 0.0316 056% 8645% 55 Maintenance and Repair. Residential o 0000 0.0236 0.0064 0.0300 053% 8698% 491 Nursing and Protective Care 0.0001 0.0000 0.0288 0.0289 051% 87,50% 512 Other State and Local Govt Enterprises 0.0183 0.0033 0.0072 0.0288 0,51% 8801% 476 Detective and Protective Services 0.0148 0.0077 0.0058 0.0283 0.50% 88,51% 437 Air Transportation 0.0193 0.0035 0.0051 0.0279 0.50% 89.Q1% All Others 02915 0.1802 0.1464 08181 10.99% 100.00% 3.5030 0.7874 1.3320 5.0224 100.00% SaMoNex2JIMPLAN.xls [low-cost] Page 1 Hamilton, Rabinovitz & Alschuler. Inc. 2/28/2000 \} ESTIMATE OF TOTAL EMPLOYMENT ASSOCIATED WITH HOUSEHOLD CONSUMPTION EXPENDITURES, NEW 5-UNIT CONDOMINIUM PROJECT, HIGHER-COST AREA, CITY OF SANTA MONICA, 2000 IMPLAN Cumulative Sector Industry Direct Indirect Induced Total Percent Percent 454 Eating & Drinking 0.6107 0.0200 01807 0.8114 11.36% 1136% 455 Miscellaneous Retail 0.3921 0.0058 0.1302 0.5282 7.39% 1875% 490 Doctors and Dentists 0.2768 D.OOOO 0.0875 0.3643 5.10% 23 85% 492 Hosprtals 0.2330 0.0001 0.0971 0.3302 4.62"'/0 2847% 447 Wholesale Trade 0.1565 0.0629 0.0726 0.2921 4.09% 32 _ 56% 450 Food Stores 0.2164 0.0032 00719 02916 408% 36.64% 496 Colleges- Universities- Schools 0.1913 0.0011 0.0396 0.2320 325% 39,88% 488 Amusement arid Recreation Servlces- NEe 0.1607 0.0002 0.0416 0.2025 2.83% 42 72% 451 Automotive Dealers & Service stations 0.1452 0.0022 0.0482 0.1956 2.74% 45 46% 449 General Merchandise StoreS 0.1361 0.0020 o 0452 0.1833 257% 48 02% 495 Elementary and Secondary Schools 01206 o 0000 00205 0.1411 1.97%. 50 _ 00% 525 Domestic Services 01060 00000 o 0303 0.1363 1.91% 5190% 474 Personnel Supply Services 0.0071 0.0955 0.0327 0.13:'3 1.89% 538:1% 452 Apparel & Accessory Stores 00981 0.0015 0.0326 01321 1.55% 5565% ""I'-J";! r-. .._"..,~ ., \ \__~ \,,", .._;_.....,__~ c-l_~__ V.V;'; 1""1 v,uu 1""1 V.V.:lU"t U.IL.:1<: LfL70 ::JI JI :'~ rUlllllUI<;; 0;>< nUlllC rUIIII"IIlII!:j" vlVIO::::O 504 ;...abor and CIVIC Organizations 00961 0.0001 0.0257 0.1219 1.71% 59 08% 493 Other Medical and Health Services 00835 o 0069 0.0306 01210 1.69% 60,77% 500 Social Services- NEe 0.0843 00001 00218 01062 1.49% 62.26% 466 Beauty and Barber Shops o 0650 00148 00257 01055 1.48% 63.74% 457 Credit Agencies o 0387 00412 o 0243 01043 1.46% 65.19% 463 Hotels and Lodging Places 00574 0.0204 0.0187 0.0965 135% 66,54% 464 laundry- Cleaning and Shoe Repair 0.0567 0.0196 0.0201 0.0964 1.35% 67 89% 462 Real Estate 0.0163 0.0492 0.0303 0.0958 1.34% 6924% 459 Insurance Carriers 00703 o 0057 0.0190 0.0950 1.33% 70 57% 456 Banking 0.0499 0.0144 0.0243 0.0886 1.24% 71.81% 479 Automobile Repair and Services 0.0613 0.0064 0.0195 0.0872 1.22% 7302% 501 Residential Care 0.0598 0.0000 00155 00752 105% 74,08% 494 Legal Services 0.0307 0.0223 0.0198 0.0728 1.02% 7510% 470 Other Business Services 0.0051 0.0447 0.0152 0.0650 0.91% 76.01'% 435 Motor Freight Transport and Warehousing 0.0266 0.0226 00147 o 0639 089% 76,90% 56 Maintenance and Repair ather Facilities o 0000 0.0479 00143 00622 087% 77,77% 460 Insurance Agents and Brokers o 0000 0.0476 00119 o 0594 083% 78,60% 507 Accounting. Auditing and Bookkeeping 00018 0.0420 00135 00572 080% 7940% "p Q, ,;I,,;...,., ~A",h:.n",l., 9. r-:::""~"<>ni"n I) nA'J1 n nnne:;: n n1"n n 1)~~7 n 7n~j. on 0,'"l01. ""'-'''''''''<J ...'-',....,....,"'~ ~~'~.....,"'<J 489 Membership Sports and Recreation Clubs o 0423 o 0028 00109 00560 0.78% 8098% 502 Other Nonprofit Organizations o 0437 o 0008 00115 o 0560 0.78% 8177%, 499 Child Day Care Services 00448 o 0000 0.0109 o 0556 0.78% 82,54% 508 Management and Consulting Services o. ,0000 0.0407 0.0133 00541 0.76% 83.30% 497 Other Educational Services 0.0345 0.0056 00106 0.0508 0.71% 84.01% 475 Computer and Data Processing SeNices 0.0013 0.0344 0.0110 0.0467 0.65% 84.67% 472 Services To Buildings 0.0097 0.0246 0.0111 0.0455 0.64% 85.30% 468 Miscellaneous Personal Services 0.0325 0.0004 0.0087 0.0416 0.58% 85.89% 441 Communications. Except Radio and N 0.0178 0.0116 0.0108 0.0401 0.56% 8645% 55 Maintenance and Repair. ReSidential o 0000 0.0300 00081 00381 0.53% 86.98% '0 , "I, 'r~;~_ ........-< Dr_+~"f;,,~ r-_r~ I.'.I.'UVI V.I.'VI.'V v,u-,v, V.""-'VI V...> 1 to 01 .'-'u I~ '~I,.J''''II ':0 <:IIII.' ,'v.""....",,"" '-'<:III;; 512 Other S1ate and Local Govt Enterprises 0.0233 0.0042 0.0092 0.0366 0.51% 8801% 476 Detective and Protective Services 00186 o 0098 0.0073 0.0359 050% 88.51% 437 Air Transportation 00245 0.0044 o 0065 00354 050% 8901% All Others o 3704 0.2290 01860 0.7855 10.99% 100.00'% 4.4515 1.D006 1.6927 7.1448 100.00% SaMoNex2\IMPLAN.xls [high-cost] Page 1 Hamilton, Rabinovitz & Alschuler. Inc 212812000 . , Implications of Changed Market Circumstances for the Condominium Affordable Housing Fee APPENDIX D Recalculation of Santa Monica's "Affordability Gap" Per Unit of New Affordable Housing Development HAMILTON, RABINOVITZ & ALSCHULER, Il\c. '2 Ii " ...", Z'" =>Z ~=> ~~ W" 0:'" ~~ "U CC ",Z ~::lg ~ IIf~ ~~~ o."Z 0"'0 ~w'" ~~~ ~~~ ~~t5 ~g~ ~~U "'~ ,." 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N" :::~,g~~~~ ~ NN~C'"l" -r- j:;J~" ,~ ~ i'i ~ ~~~~,~~8~~ ~ ;::;-;:;~~ ai~-C(l-.R i .; .i! l' ~ ~ Hen. ~~];;;;..1i.. ..:a)(OO~~l!!8 ~H~Eo~ ~ ~ ;;;~~~;~:t ~~J;~~ .... g; ,g. ~ ~ ~ 8,~m g~8~; i ~ ~-~ m~-C(l-..r~ 5~ N ON""",O ON ~~~!;;, <OIl'lUHI)"" "" NNCI';N - ~ N 88~m,~:!g~:: -r ~~~-~ m~-<<l-.,f'f5 i .; l' " ~ ~ g; 1:1: ail ~~.Q~. m lIll)( 0 8 ~~!E1i xx'~6 ~~~~i "":0 u:= ~~~ .,,' ~:!~~ lii u. ,0 = :'; ~ ~! !~~ ... ~.~t:.2 BE I zi~~~~ ~ ~8t~H " u: ~.. u ~ ~ ~U ~ ~ ~ .go ~ -I. ~~~. :;! 8<lll~ ... w ::> " j * ~ v ~ ~ i ~ . t r,) J :3 '" ,." ~~ ~" ~~ "''' w,. ~" .,0 "0 00 "'z ~:l ::',,- ZO ..~ gi ~~ 0" ~5 ~~ ~~ "'~ ,." OW ~~ ;:;~ ~w ~~ .... ~~ ~ ~ ;; = ~ . ~55i ~ =~H hH li'!lU ;~.~.~ irgE HH ~~~6 ~==t:: HH~ WCLo.. a. I i 11 ~ l E ~ ~ .. 1 i ~ 11.g ~Q. 8. i e ] jt j ~ ~ ~.- ~~ ~ iU Oil. ~~ :? -- I Ii, u '" :l",..:l~ ~~';~a Z l; Ii ~ B a.a..Il.n.a. I .~~ ~ p~~-~[ ~ ~ ~UUH~ ~ ~ a:oa::l!l.l0U U} u n~ th1111~ ...<;~.... H~n~H~ ~~~H~H~ "Up1iUll i6'ir5~111i :?:?:?:?:?~:?:?:? HHHtH HUU~H cCC::;f:::=C=== l! l!!.e l! l! f f! l! e ~6&~B~~~~ t to i; ti ~ Q) ,dj:.. 0.0..0..0..0..0..0..0..0... ." i l . . 1! .. :~ti tl~ ~i ~;i~i~'~~~ oil B ~w- ~nll -'jj~!l",,_".. gfl.. ~<~~~!~~~~~ a: U} ~ ~ ~ :;; ~ ~ H~ i-~ ~ ~ ";1~~ ~ ~O~...J~ ~ 15 U} D ] ;;, " ~" ~ Oil. ~ t ] '" .!; ~ o Q. ~ " " if t il. ~ t ~ ~ " 6 Q. .. tl " " 8 ~ o il . ~ ~ - nl I OO<<i~'O'O );12 !!l!!~~.8 i till Ii; ~H tj ii~~~~.i ~'i oo"..o~ ~:s ~~~~i'! !"! i;H~1 n o81ii o'l5.s IIlIll ';;7t"~~~5 i~ H:JH~:lU ..oi)(<.o~ ZOb ~55 ~i3~DO c'(~~~~~~~~ U::c- "'~ " "'" i__~i Jl ~.,,'" ! l~s l ~ 5 ~ ~';; 5 '8 ~ ~!!g~i] ~ ~!~j~!j~ ~ '" l:! ~ ~ "0' Implications of Changed Market Circumstances for the Condominium Affordable Housinf!, Fee APPENDIX E City of Palo Alto's Below Market Rate Program HAMILTON, RABINOVITZ & ALSCHULER, INC. \" 1 - 7 JAN-19-00 WED 10:40 AM ADVANCED. PLANNING ~~ Divisions I/1spfaicr\Se~ PIanniJ1g Trar~rIatkm FAX NO. 550 322 0952 P. 2 ~ity_Qtk~o_-b1to Dqxutnumt ofPlannillgatld Community tnviyonmen! ~c;. <.CJ en ~ ,-l CN .Y ~ :$ j ~~ i:' .; Of! i~ g ii.r~ ", " Ff8 1 3 ; !1Cl" ,- ;110.. ~. Febmary 8. .1996 \L' [;~ ~; ...:: C! Classic Communities. Inc. ATIN: Scott Ward 1068 East Meadow Circle . Palo Alto, CA 94303 i?-yrcrn Sr ~.,. ~ - ~/~ 7ez. Subject: Below Market Rate (BMR) Agreement for 321 Byron Street, Palo Alto DcarMr. Ward: This letter summarizes the agre.ement reached between you and Planning Division staff regarding satisfaction oflhe provisions of the City of Palo Alto Below Market Rate (BMR) Program. The requirements for a BMR component are contained in Program 13 of the Housing Element of the City of Palo Alto Comprehensive Plan. This letter relates to the proposed 6-unit single~family housing project at the current addresses of309 & 321 Byron Street. 308 Middlefield and 654 & 666 Everett Street ("the project"). This agreement is predicated on you. as the developer. subdividing the parcel. constructing the housing units on the six lots and selling the lots as developed parcels. If any other arrangement is utilized, such as selling the lots individually for development by others, a new BMR agreement will have to be approved by the City of Palo Alto prior to any sales. As discussed, you have agreed to provide a 4.0 percent in-lieu payment based all the actual sales value of each of the lots plus improvements (units) in the project. Payment will be made to the City of Palo Alto upon the first sale of each unit in the project. Proof of s~les prices must be submitted to the City of Palo Alto at the time of sale. The in-lieu fee requirement fol' any unit that is not 2.5OHamillOnAvenu<! P.o. Box 10250 PaIoAlIO.CA943ro 415.329.2404 415.329. 2240 F.1x JlJO cg,~~ JAN-19-00 WED 10:40 AM ADVANCED PLANNING FAX NO. 650 322 0952 P. 3 Mr. Scott Ward February 8, 1996 Page 2 sold and becomes occupiel;\ on a rental or lease bases shall be based upon the saLes price of the most expensive unit sold. Payment shall be due at time of occupancy aftlle unit(s) not sold. The terms of this agreement shall be incorporated into the Subdivision Agreement at the time the subdivision is approved by the PLanning Commission and the City Council in a form and instrument satisfactory to the City .. .La.._____ __.,_. _~__ .f\ITOrllCY S U1111,;1::. Thank you for your cooperation during the planning process on tbis project. Please sign this letter where shown below and return to me, indicating that we have reached agreement regarding your BM""R contribution. Sincerely, )&fl.~(~~ KENNETH R. SCHREIBER Director of PLanning and Community Environment .... _ _____...._ _____~J_ _ T'\~1___."-1_._1__...... ___.L_ ____________.....&_ .1'__ ___~__.L _.& ~~, '1..._______ I agn;c IU prUVlut:: a O~IUW lV1arlle[ rau~ compumm[ LV tHe prUJCl,;l in .>.to1 uyron Street as described in this letter dated February &, 1996. I /tJ/ 1. I/:. _, (/4A../liJU~ '--' '-J Scott Ward "1.Jc.cr J / :J I b Date cc: ../f..._1...._..... n_'^-_...1....._............. n...'_ AI........ T_T.........:.....,.. r",..__......_......:____ ~...l<1"v..v Clo;;U.....,llS":)l, rl11U n.nu llUl,l:)lJlt$ ~U!VUHIllVll Debra Cauble, Assistant City Attorney Jim Gilliland, Manager Planning Projects JaYlli Allsep, Contract Planner Nancy Lytle, Chief Planning Official 'J JAN-19-00 WED 10.41 AM ADVANCED. PLANNING FAX NO. 650 322 0952 CITY OF PALO ALTO HOUSING ELEMENT OF THE COMPREHENSIVE PLAN adopted by the City Council on July 20, 1998 ~he" I:xt 5YttYe !fC{) 0>1 /IlcTlY. /r., 1'118" Excerpts on the Below Market Rate (IIMR) Program and the Housing Development Fund P. L - " JAN-19-JO WED 10:41 AM ADVANCE~ PLANNING FAX NO. 650 322 0952 P. 5 __ _, _ I .... J V~ df Palo If1to ----p ~~1 - - ~ ~- HOUSING CONSERVATION GOAL H.2: .. . -"' . . . C()~scr~Alion andltI..htlellaJ;i:e or PaJo'Ailo'. Exi$IUlg llo~mg Stock'iUiil Re;idenlinl Neighbo1'hood3. ,,:'" . . ,._~.: ...' 4'..-..:'~~~~:~~~~-._"'~ ....~..... . '. :... - .f;. _ I!o~'rm d fJu'~-h'1t'1 ~ ~ 0~y 11-80 ~ . ~ . . -- l l\I~inbl" II... "umbel" or undli!311lllv I"elll:>! ),0 II. in... uuil. in P410 AlIa .1 no i~~~'\h:.~ 'I;; ~:";~~'~l I~Y~l'-'J~U~"~;P'PO"I~,~"rf~r~s' ~~.~~~~;;~ .he' r~n~;1 Bupply. PIlQc/U.,1l.15: Conrini's implementalion of th~ Condomiuiut'n COR...'erJioJt Ordinnnc..~. (;;'<0(;/(,1.11 H-/6~ ) WIlI"o a propo..d ,"b(!id,ion or condolllinium .~ould cauu ala., ofrelllt,l 1.0...ill8. gronl appro,'ol only i!tJII.,UIIIVO oflhefol/o.dng ,hre. circum- ,dnllce.s e .ti.ll: . Thl! pr()jcd ".iIl prod..ee 01 lea., a 100 percent incna.1t ill the ""mber of Iwiu cnrri!llriy on rile sica and tdii cOlnply lciih. ;;1. Ci,,)"i Below ltia,..kQr R,,'. (8MR) prOHrgno (J"lcriblld ill Progrct," H-20); and/or . Tho lIl,m"er oJrenlnl unics,o be prouitllld olllhe .i,. U 01 lea"eqllllllo lhe uumbc!, D/e:rtJli.'lg retunl unitJ, ",ullor . 1'(0 '"u rhon 20 percell I oj II,. Ilnics ,,'il! comply .dr/. 11r.. Ci,)'~ n,uR P.!!!- ~r"m. HOUSING DritERSllY GOAL H.3: ,iI~~~;:o~p~-p-~;~ti;1i'f(<~.D' .-t;""!'~~;'p" ':w' "::1" .. -f!f~!f;"'~ .... ........ CII'\":"." 0 n:Ck-SII8 0 D .l"'~~.""... . r"J ~..\.?tT..-';"111?il:;...:.:\v__3iliJ..i',-T~~_.~'~~ ~'i~~ ~"'\.'fi~.~~.~ ~"':'~~"..!:." ",~~;':',~'i' ~' ~~':;'_-C,~""~"'~~U.~~~.li!:i.."..~...{;..4U",-, ~1:"~~'U..U ll~U , comO~.I{e-.ide ~J';~~~.:~'-.; '.:......'-.~(,p.,-'.."'-aH.<.lh..'S'~.'l.~.:i.~N.~"!.a. ..,",;,: .~A-i~"-"."'" ~_" ~_,~..".fJ!i::"_~.' i:........,.: .,-; .erso~~. eCJp-\ . ee s.~~ '_~~. ~~~..r.:.:":';'~.;.f.'''';"'''. tif;.~....:t'ti';".~~':;.: ~ [h' :.,l:.,;.," .~;: !~i>~I';':"':ir, ~ ~:?';'i{:''',,'~:f. ~'~-:.!fi'~r''';t :_:,~~-,~'!"~-;:f!~~~!fr( ,';:'" I .. __n., ".- ......._4'-- _c......_."'-..:..__.-_;.~_....~.~ . .o(""-~~....>.;h:.!~..;t.~:...'l.L-~;.~.:~.ea~~.:.ii~~~."': ( p;;,r;k~'lll-~{)-;j ConI...".. imple""lIt<l'ion of Ih<< Cir)", "8elou; Mar~'el Rau" (BMR) l"d...iollll'Y 1101..i1l8 Progtamlhar re'l"ir..,.!',le.." r~n percellt of "u hOI..' in5 fUJi,s. buill i"for~ali1 projtcf$ oflhTe. Unil$ or ,nore (IRa retHal proje~1J Df fia;e uniu Dr mor.e f() be provided at "flow "lorksf. raCe" fa ...~,.y lou:-, Iou:.. and . _. I r ,. moal!'r"lfr-rll~onr. nOfuenaras. I/-Ib I I ~~.iA (aMYU ?If, I ;J. 0 ~ j) fYl f2.. 11-;),,0 gfrl R. fy OCJ'?tM'VI Ii JAN-19-JO WED 10:42 AM ADVANCE~ PLANNING FAX NO. 550 322 J952 P. 6 /I~:/. J: c.A-'lfUT D. L. JJUJ".. fCA,fG! " f , V O.hv'l _ ._. 1J.. _ ,., A r' '7'flfWl r{ r ~(./ Excerpt fl'om 1998-2010 Comprehensive PIau RE: Bl\IU IJrogl'am The Palo Alto Below lUnrket Rate ("BMR") Program Dcvelopers offor-sale housing projccls "ilh IInee or more unilS or relllal projecls offiveot mor.. unil;;,llll!:;t compl)" ,,'jlh POlio Aho"" nMR rC'1uiremcnls, For an application 10 be dNermined complele, the deyclopcr muslllgre. 10 one or II eomhination Df Ihe following, nhernalh'es: FOI.-.s"lc Unil., For each len unils ,levcloped. not less than one of lhe unils must be provided as . B~IR unil. The B~lR unilS lIIusl be \'ulupamble to alher ullil~ in Ihe rle,elopmenl. The inilial sales price for Ihe BMR unils should be consi.tent with \\'hol II ho"~,,hold IlIoking 80 10 100 percenl of Ihe Sonia Claro Counl}' median income can .fford in hou.ing expenses, sllch .. morlll"llc pay,,,c,'l, I,'XCS, insumnce and associalion dues. Further, Ihe price should be sufficienl to co.~r Ihe de,'e1"per'. c~llm..lc" direel ClJ,ulrucli"n and financing cosl oflhe unit, ~:<clusive of land, markcling, off-sile improvemenls. and profil. 1l.....'-..o:... 1l~lf~ ...'ll4. l""" n,.,,' 'Ion..;hl..._ t},,,.. "p'r~n...l n...:n.";t... i.c. fnrnfr_lt.i."" IIn;'c;. In ltu,..h 1":1':::.":' nr,... Jl'fR ~U\;t tnll.' hI> nr......:..l..... ... U'..-~..... .........~ ~....- ..._ n__ .-....--..-, ...- --~---- r---.....J .- -- ...... .......- -....-. _H ..........-.. --........... .....- _.-...,. _..... ........... ..... tnv-.......... fur' e;Jcllllirl~ ullil,; "c.eloped. or I'~cj\nlland 5uilable for affordable hau~ing mus' be pI'ovidcd 10 lhe City. OIT-sile uniu m'l,- be new'" reh"bililalcll c:<iMinl; Ul1ilO and 1l\1I3t be prc-.pprov~d by Ibe Cil)'. The Ihird priorily i. a cash paym~nl in-lie" of I'nlvidinl! u~IR u"il.. The in.lieu pllyrnelll is equal 10 5 pereenl oflhc grealer aflhe aelual s:lles price orCair markel value of e"ch ullil sold nnd mil';' be polio I" the Cil)". Housing De,elopmelll Fund al the lime of [irsl 5ale or tronsfer of the unil. BenIn! U!~i!=~ ,\Ilo..sl10 percenl of the unit,; ill a renlnl projecl must be pro.ided as B~JR unilslo households cuming betll-een 50 and 80 ____........ i..r.l..:. 1""...., .nl.., .........1i..... ~.."^.n_ Tl... 1'......1.. ...._ :...i.....II". ....".........1.....:1 ......6'...."l ^'''' 1"Tf'\ ~^...,i....... 0. f..... :1.. .......__...~~_ ...._A............\ l"l;OlL:l!;;ll~ '.U ,"'''' __vu.n} ..",......~.. ......v...~. . ..... ....UL.... ~I~ ''''U''~'Ul ",,,,.""U"'~U""'" ........"'... ...... . ............ ...........,...u U ,"VI ".;;1 .n,....1.."'~~v. V,u1Io1u1uI Fair Markel R~nl and may be adjusted annually based on an~-third orlhe CQnSUnler Price Ind~~ or olher cOlllp;lrable formul;) ilgreed In by Ihe Cil)'. Allernll,ives incl"de po.yme111 by Ihe devdoper of an 8'\IIuol in-lieu fce 10 lhe Cil(. Housing Develop. mcuf Fund I",.<cd 011 the dillercncoc betlreen lhe initi;)l Seclion 8 Fair l\l~rket Rent and rhe markel rale renl. of Ihe units. or 1I nne-lime fee b....ed un 5 p,'cent or Ihe appraised ,'.lue of Ihe rental porlion of Ihe project, c::~..."" . ........._.. TI.",... T..;....,_ A...~p"'. u......'" "'......~..... ......... .....y... ......._"'. Prujects nn .,Ie.. kltger Ihan five acres in si>;e. except in Ihe OS Dishiel, ,,'ill prol'ide a 15 percent BMR cornponent. SlIbdi,'is;Oll of Vnc~,,1 Lflnd h;. he Sold Wilhoul Oc,'e1opmcnl: ""c,ml I,,,,d Ih.,t i~ subdi.-ided into Ihree or IlIare lols and sold ,,'ilhoul construclion of hou~ing ;\1usl provide buil(bbk pared(s) equi,'alenlta 10 percel)! of the de~elopmentlO lhe Ci,y orlhe City's designee, The I;)nd is 10 be used for Ihe purpffie ....r .I..l.....lt\n;t\01' ",ffn1".I:.h1", hnUlIIloilur IInll~ 1'h~ Lilv r'n~v ~p.:11 th... nrnnp.Th.. u.ith thp. flllU'l,.-:, nl~l"r.d iI' rhl'.! Cirv.... Hnll'lloLn(l' nrvp.lnn- W"O ""...... -.....y..." _.._.~._--.- .'~~~---Q ------- - --- _._~ .--~; --.. ...~ r--r-../~ -- ,--- .n_ -_..~~ r----- ... ...- _n, - . .~y~_nD - - - ~--A lII,,"t Funo for fulure hou~ing de>clopmenl. A eOI\lpatable in-lieu fee I\\ay be agreed 10 b)' Ihe Cit). "",i Ihe deve!.)\,cr ba.."d 011 5 pcrcclll of the grealer of the flctual sales price or fair market volue of the improved lots ,,-ith 110u'e~. l~rnctiOl\nl UuiB' For projects Ofli'n or (nore unil,. an in-lieu pa)'menllo Ihe Cilf.s Housing De,'elopmenl Funcl mat be made for the fraclion of ...'Iil~ ,""V,'r .nlllt;"l..o:: nf tll"1I rl'Jr ,,-l,;rh.QIn A~tJB\1 RMR IInil i.c:. nnl nrn,:i~ptl. Thr irl..Hp.1I (,.1' '''Ji':r(''pnt:Hrr !'".11t' ,",.111 hr'" !lu~ ~nrn~ AS ........ .....-.... ..o_U"."._.. _~ ._n __. .. n__.- _u ----_. ~~---- --,.- ~- ---. r~~ - ----- ~ ..- .-- ---- -__ I'"~-__.n_o- ._-_ .. ,.. _-,' ---- -_.--- -- Ihal orllinnril}' required for lhe projecl, u_'ua11y 5 percenl. "or-.ales or renlal projecls of Ics~ than tell unils, Ihe B:\IR re'luiremenl IlIay be salisfied h)' Ihe pa.ymcnl of "n in-lieu fce on each of the unils using a sliding scale beginning at 3.2~ p,,,,'ent for Ihree f'Jr-sale unit,; and 3.75 percenl Cor live renlal unils. and inere~sing by 0.25 pereenl for each .<lditianal unil to S percell! for tell or more. The in-lieu fee pel'cenl.ge rate will be applied to the greater of Ihe aelu.1 sDles price or fuir lll<1rkcl value of the unil". The rcc on for-sale projeel.s "ill be paid upon the ."Ie of each unit ill the projec/ e~c1uding ony [lMR unils, For renl.1 projecls. lhc fee shall be paid prior 10 occupan<:}", t:qllivnlenl Altern"I;,'e.: The 13MR progr.", objectl.e is 10 obtain aclual housing unils or buildable parcels ,,'ilhin eaeh de,-elopmelll ralher Ihun "fr-~ile unil, or in-lic" payment" lIowe,'er. Ihe elly may consider equivalent "ltern.li,'cs 10 nny of the above provi"iall" JAN-19-00 WED 10: 42 AM ADVANCED. PLANNING FAX NO. 650 322 0952 P. 7 Chapter 4: Existing AHordaltle Housing .----_... The City of Palo Alto has been very active in promoting and supporting the provision of affordable housing. This chapter of the Housing ElementTechnical Document describl!s the various housing programs and policies operative in the City at the time this Element waS prepared (1996-97). Also included in this chapter is an inventory of the existing affordable housing units in the City and a description ofthe various sodal service agencies that receive City funding and provide housing support services. City Housing Programs and Policies 1 . Below Market Rote (BMR) Program One of the most significant housing programs adopted by the city is the "Below Market Rate"!BMR) Progrilm.The BMR program was initiated in 1974 as a mechanism to increase the supply of housing affordable to individuals and families with low- to moderate-incomes. When first adopted. the SMR program ilPplied to projects of 20 or more units. In 1976. this was lowered to projects of 10 or more units. In 1990. the threshold was further reduced to apply to projects of 3 or more units.With the adoption of the 1997 Comprehensive Plan and this Housing Element. the threshold is placed at three units for for-saIl" housing and five units for rental housing.The raising ofthe threshold forrental projects is being done in order to facilitate construction of 5mal1 rental projects,where the BMR program has Iimit~d impact The BMRprogram requires that, in for-sale projects ohhreeor more units and rental projects of five or more units. at least 10% of the units be provided at housing costs that arc afford- able to low- and moderate-income households. DeVE'lopments on sites greater than 5 acres in size are required to include a 15% BMR component. The priority for the program is to inc.lude units spread throughout the community and in all projects.An alternative allows for the developer paying an,Nin-\ieu"fee to the City rather than actually providing the units.These "in-lieu"fees are then deposited in the City's.Housing Development Fund. N{See the follow- ing page for a further description ofthis fund.) Program H.21 ohhe 1998-2010 Comprehen- sive Plan recommends the adoption of a revised density bonus program that allows for the construction of up to three additional market rate units for each BMR unit above that nor- mally required, up to a maximum zoning increase of 25 % in density and allows an equiva- lent i('lcrease i('l square footage for projects that meet this requirement. Because ofthc need for affordable housing, the BMR Program represents the only assessment of impact fees made by the city on new housing construction. The BMR Program was initiated in 1974. From 1974-97, there were a total of 144 ownership units and 33 rental units generated by the program. Sales and resales of BMR units are iJd- ministered under contract to the City by the Palo Alto Housing Corporation (PAHC), a private, non-profit organization. PAHC maintains 11 waiting list of intt"rested households, manages the resale of ownership units and oversees the tenancy ofthe rental units. The goal of the BMR program is to have the initial sales price of BMR ownership units afford- able to households whose incomes do ('lot exceed 100% ohhe median income. adjustl'!d for fa mily size. as established periodically by HUD for Santa Clara County. Certain restrictions arc Housing Technical Dm:ument: Chopler 4 I" -iok Ar jJaJo A1fo 29 JAN-19-00 WED 10:43 AM ADVANCED. PLANNING FAX N~ 550 322 0952 P. 8 rec.orded with the grant deed to ensure that there will be continued occupancy and owner- ship of the unit by low- Clnd moderate-income- persons.When a BMR owner wishes to sell the unit,he or she must gill!! the City the right of first refusal to purchase it. The City exercises its ~ option and assigns the right to purchase the unit to a buyer selected by the PAHC (according to guidelines approved by the City}.The price at which a unit is resold is calculated based on the increase in the "Consvrner Price Indal(" for the San Francisco Bay Area during the period of ownership. Currently, one-third of the percentage increase in the Index is applied to the purchase price to determine the resale price. For example. if a unit was purchased initially for S100,000 and iFthe Index rose 15% during the period of ownership, then the resale calcula- tion would be $ 100,000 + (1/3 x 15% x 100,000) ;; $105,000. Certain substantial imp'ovl!- ments and depreciation factors are also taken into consideration in calculating the resale prke. PAHC maintains a waiting list of people interested in purchasing a BMR unit, According to City policy, priority for ownership of BMR units is given to applicants who live or work in Palo Alto.Further, the household's income cannot exceed 100% of the median income and there are certain asset limitations. The BMR program also applies to rental projects. At least 10% of the units in a rental project must be provided as BMR units to households earning between 50% and 80% of the County median income. adjusted for family sileo The rents are initially established based on BUD Section 8 Fair Market Rents llnd may be adjusted annually based on one-third of the Con- sumer Price Index, or ocher simila r formula as adopted by the City Council. Alternatives in- clude payment by the developer of an annual in-lieu fee to the City's Housing Development Fund based on the diFference between the initial Section 8 fair market rents and the market rate rents of the units. or a one-time fee based On 5% of the appraised value of the rental portion of the project. &~ 4 ~ /H-h ~&t1 ~ JH-19-00 WED 10:43 AM ADVANCED. PLANNING FAX K~ 650 322 0952 City of Palo Alto BMR Ownership Program DRAFT Housing Price Guidelines Revised February 1, 1999 Persons 80% of San 100% of San Range of Affordability In Jose PMSA Jose PMSA Household Median Income Median Income 1 $46,250 . $57.800 $115,200 - $152,000 2 $52.850 $66,100 $136,200 - $178,400 3 $59,450 $74.350 $157.200 - $204,600 4 $66.100 $82.600 $178.400 - $230,800 5 $71,350 $89,200 $195,000 - $251,800 6 $76,650 $95,800 $211.900 - $272,800 7 $81,950 $102,400 $228,700 - $293,800 B $87,250 $109,050 $245.600 - $314,900 Assumed Unit Type Purchase Price Range Average Household Price Size 1 Studio $115200 To $152,000 $133.600 1 or 2 1 Bedroom $115200 To $178.400 $146.800 2 3. or 4 2 Bedroom $136200 To $230 800 $183.500 3.4.5, or 6 3 Bedroom $157200 To $272.800 $215.000 4,56.7, 8 4 Bedroom $178.400 To $314.900 $246.650 ASSUMPTIONS: HUD Median Income (As of 1-27-99) Annualized RatEls: Interest Rate As of 2-31-99 Mortgage Insurance Taxes Total Effective Interest Rate Number of Monthly Payments: Loan. To-Value: Allowance for Association Dues, Repair Costs, & Insurance (Per Month) Loan Terms: Zero Loan Points 30 Year, Fixed Rate Maximum of 30% of Gross Income for Housing Costs $82,600 7.25% 0.820/0 1.25% 9.32% 360 95% $250 P. 9 Bou99a d