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SR-407-000-03 (8) F :\ResourceManageShare\ST AFFREPORTS2004\DRAFTBOX\Affordable Housing Strategies.doc Council Meeting: May 10, 2005 Santa Monica, California sa MAY 1 02005 TO: Mayor and City Council FROM: City Staff SUBJECT: Strategies to Increase the City's Supply of New Affordable Units INTRODUCTION This report discusses the Affordable Housing Production Program and other policies and programs that the City Council may want to consider updating so that annual affordable housing production better fulfills the goals of Proposition R. BACKGROUND The City Council directed staff to evaluate the Affordable Housing Production Program and/or other City programs and policies, and suggest ways to update these provisions to facilitate meeting the Proposition R affordable housing goals (that 30% of all newly constructed multifamily housing each year be affordable to low and moderate income households). As a matter of law and policy, the City of Santa Monica is committed to producing and preserving affordable housing. This commitment is effectuated, in part, through the City's Affordable Housing Production Program (SMMC Chapter 9.56). This program requires that developers of new market-rate multifamily housing within the City include affordable housing units on-site, construct them off-site, pay an affordable housing fee to the City, or acquire and dedicate land to the City for construction of affordable units. 1 ~B MAY 1 0 2005 DISCUSSION Changes in the realities of housing production and in California law yield new constraints and opportunities for the City concerning affordable housing requirements. Pursuant to Council direction, staff has worked with a consultant to review options for updating the Affordable Housing Production Program (AHPP), including revising its affordable housing fees, and considering incentives that might encourage more developers of market-rate multifamily housing to construct affordable housing units. There are several options involving revisions to the AHPP, zoning regulations, permit procedures and other City policies that the City Council may discuss and consider. These options are categorized as follows: 1. Update the affordable housing fees 2. Make other adjustments to the affordable housing fee 3. Increase the density bonus 4. Further reduce parking requirements 5. Waive, reduce or defer various permit fees 6. Broaden permit streamlining 7. Amend Proposition R 8. Require on-site affordable units On February 17, 2005, the Housing Commission considered the information presented in this staff report. On March 17, 2005, the Housing Commission and the Planning 2 Commission held a joint meeting to consider and discuss these options. The purpose of the March 1 ih meeting was for the two Commissions to make recommendations to the City Council regarding these options. The Housing Commission and the Planning Commission reached a consensus recommending that Council adopt four of the proposed fifteen options identified in this report: 1) Increase the affordable housing fee to the highest supportable level (Option 1); 2) Eliminate the current affordable housing fee discounts (Option 2.a); 3) Incorporate an annual inflation adjustment to the affordable housing fee (Option 2.c); and 4) Allow payment of the affordable housing fee for fractional units (Option 2.d). The two Commissions also reached a consensus that two other proposed options should not be pursued: 1) City permit fees should not be waived, reduced or deferred (Option 5); and 2) Broadened streamlining is not endorsed at this time but, Council should revisit that option in the future (Option 6). Finally, the Commissions recommended that City Council should direct staff to continue researching the legal feasibility of mandating some affordable units (whether on-site or off-site) for all new multifamily developments (Option 8). 3 The remaining options that the Commissions did not reach consensus are: 1) Adjust the fees to account for construction and land cost inflation to time of use (Option 2.b); 2) Vary the fees by City subarea (Option 2.e); 3) Change the basis of fee imposition to a percent of sale price for condominiums. (Option 2.f); 4) Require affordable housing fee payment when obtaining building permit (Option 2.g); 5) Allow market rate multi-family developers to purchase "credits" in affordable housing developments built by other parties (Option 2.h); 6) Increase the density bonus (Option 3); 7) Further reduce parking requirements (Option 4); and 8) Amend Proposition R (Option 7). All of the options presented to the Housing Commission and Planning Commission are explained below in further detail. 1. Update the Affordable Housinq Fee Since the adoption of the AHPP, most developers, and particularly developers of condominium projects, have elected to pay the affordable housing fee rather than construct affordable units on-site or off-site. These fees are deposited into the City's Housing Trust Fund and are then provided as grants or loans to developers of affordable housing, who usually leverage City funds with other financial resources. 4 Thus, the amount of the affordable housing fee bears a direct relationship to the number of affordable units that can be constructed. The current housing fees have not been updated for several years. The fee applicable to apartments was first established in July 1998 at $6.14 per square foot and has never been updated. The condominium fee was originally established in July 1998 at $7.13 per square foot and was then updated in March 2000 to $11.01 per square foot. These fees were established based on a study prepared by Hamilton, Rabinovitz & Alschuler, Inc. (HR&A) that focused exclusively on the relationship between the demand for goods and services created by households who occupy new market-rate multifamily development in the City, the number of low-wage workers needed to satisfy this demand, and the costs of producing the affordable housing needed by these workers who reside in low-income households. The study established the fee range per square foot that could be imposed on new market-rate multifamily development to help finance the development of affordable housing needed to meet the demand created by market- rate multifamily housing development. The calculation approach was thoroughly peer reviewed, at the request of the City Council, and has received favorable commentary in the professional literature. The formula for calculating the affordable housing fees was based primarily on the income and spending patterns of households in new market-rate housing, the lower- wage labor demand needed to support this spending, and the cost of constructing multifamily housing affordable for those lower-wage workers who reside in low-income 5 households. A detailed explanation of these factors is included in Attachment A. Since the adoption of the current affordable housing fee for apartment and condominium developments, new household income and spending and other data have become available, and the costs of constructing, renting, and purchasing multifamily housing have all increased significantly. A detailed explanation of the changes in the data used to recalculate the affordable housing fees since the last fee update is included in Attachment B. Based upon the HR&A's study formula and current data detailed in Attachments A and B, and broadening the labor demand analysis to also include moderate-income households (up to 100% x area median income {AMI}), consistent with Proposition R, the resulting new fee for apartments would be approximately $21.68 per square foot and the new fee for condominiums would be approximately $25.63 per square foot subject to additional adjustments discussed subsequently in this report and any further refinements of the analysis. The preliminary calculations represent an increase of approximately $15.54 and $14.62 per square foot, respectively. 2. Other Adiustments to the Affordable Housinq Fee Oation There are several other refinements to the AHPP's affordable housing fee that should be considered to ensure that it constitutes an equivalent affordable housing obligation as on-site or off-site construction. 6 a) Eliminate the affordable housinq fee discounts. The fee discounts contained in the AHPP may no longer be necessary. Currently, the AHPP includes a twenty-five percent (25%) discount on fees imposed on developments constructed on vacant land in residential zones, and fifty percent (50%) discount for developments constructed on non-residential sites (that do not already contain multifamily units). These fee discounts were intended to help steer new multifamily development away from underdeveloped sites in multifamily neighborhoods and toward commercial areas. Multifamily development activity since the fee discounts were established has occurred primarily in the non- residential areas of the City, particularly the downtown. This trend likely reflects the higher densities allowed in the downtown and not the fee discounts. Therefore, the fee discounts no longer appear necessary or justified. b) Adiust the fees to account for construction and land cost inflation to time of use. Affordable housing fee revenue is deposited in the City's Housing Trust Fund and often takes a few years to accumulate until sufficient funds are available to fund new affordable housing. During this interim, the fee revenue loses some of its purchasing power due to construction and other development cost inflation including increased land costs. The fee amount could be adjusted upward by an annual inflation factor for the average time the funds remain in the account prior to expenditure. The inflation adjustment should, ideally, reflect a combination of factors such as changes in construction costs, area median income, and land value based on data that is readily available. The inflation 7 factor formula may need to account for any interest earnings the City receives on the deposit of such funds. c) Annual inflation adiustment. The AHPP provides for periodic recalculation of the fees to account for changed housing market circumstances, but this is not automatic and historically has not been performed annually. The program could provide for an automatic annual inflation adjustment to the base fee amounts between periodic recalculations, just as the office development affordable housing fee is adjusted. This would be in addition to the inflation factor described above, which accounts for the time that the fee revenues are held in the Housing Trust Fund. Once again, the inflation factor should reflect a combination of factors such as changes in construction costs, area median income, and land value based on data that is readily available for calculating the annual adjustment. d) Allow fees for fractional inclusionarv units. For developers who elect to include units in their developments, but application of the percentage requirement results in a fraction of a unit, consider applying the fee formula to the fractional unit. This would eliminate an on-site production disincentive in situations where the affordable percentage calculation results in a fraction of a unit that then must be rounded up to the next integer and treated as a whole affordable housing unit. This would not diminish the affordable housing requirement. 8 e) Vary the fees by City subarea. Fees could be established for several subareas of the City, as defined by housing market differences (e.g., average land values, rents and/or purchase prices). As is current practice, the affordable housing fee update considers such differences and then averages across them for a City-wide apartment and condominium development fee per square foot. This averaging approach has the effect of slightly under-pricing the fee in higher- cost areas of the City (e.g., north of Wilshire) and slightly over-pricing the fee in lower-cost areas. Since the adoption of the AHPP, more market rate units have been constructed in higher-priced or rapidly appreciating areas. To the extent that this continues to be the case, the City may be losing fee revenue. Setting the fees at rates specific to their submarket areas would eliminate this circumstance. The City Council could also consider adopting a uniform fee based on a weighted average. f) Chanqe the basis of fee imposition to a percent of sale price for condominiums. The current affordable housing fee is imposed per gross square foot of new multifamily development. This means that the fee has a relatively larger impact on small developments and developments located in lower-price areas compared with the impact on larger developments or developments located in higher-price areas. One way to minimize such effects, and allow the fee to move automatically in tandem with changes in the real estate market, is to impose the fee as a percentage of the sale price. For example, the updated fee for a typical 9 five-unit condominium development north of Wilshire Boulevard is equivalent to about four and nine tenths percent (4.9%) of the average sale price in that area.1 This approach, however, would be more complicated to administer and difficult to enforce. g) Require affordable housinq fee payment when obtaininq buildinq permit. Currently the affordable housing fee payment is not due until the development is completed. The City uses these fees to subsidize affordable units, and the ideal scenario is to have the development of such units happen concurrently with the associated market-rate units. Therefore, requiring developers to pay the affordable housing fee at the time they obtain a building permit for their market- rate units assists in achieving the concurrent development scenario. h) Allow market rate multi-family developers to purchase "credits" in affordable housinq developments built by other parties. Another option for meeting the affordable housing obligation would be for developers to pay non-profit or for- profit developers of affordable housing developments for some of the units in those developments provided the payment is essential to completing the financing of the development and complies with other elements of the AHPP. This approach would be an alternative to paying an affordable housing fee to the City, and could result in faster construction of affordable housing since the payment would be used to complete the financing for a development already 1 Assumes the recalculated citywide average condominium affordable housing fee per square foot applied to a five- unit North of Wilshire condo project with average sale prices of $8 1 6,969 per unit (i.e., [$25.63/s.f. x 7,800 s.f.] / [$816,969 x 5 units] = 4.9%). 10 under way. In addition to amending the AHPP, such a credit system would require establishing new administrative guidelines to ensure that the payment for credits is at least equal to the amount of the otherwise applicable affordable housing fee, and that the payment will result in relatively prompt construction that would not otherwise result. All other requirements for off-site affordable units, including type, size, location relative to the market rate development, occupying household income and price restrictions, would also apply. City monitoring of such private transactions would be required. This "credit" concept is a feature of the inclusionary housing ordinance in Santa Cruz (Santa Cruz Municipal Code Section 24.16.030). 3. Increase the Densitv Bonus Currently, if a multifamily development satisfies its AHPP affordable housing obligation by including affordable units on-site, other sections of the Zoning Code provide a minimum density bonus of twenty-five percent (25%) above the underlying zoning standard for that site. Until January 1 st of this year, the density bonus allowed in that instance was the same as that mandated by State law, and was commonly referred to as the State density bonus. To be eligible for this density bonus a development had to have at least ten percent (10%) of the units affordable to very low-income households or twenty percent (20%) of the units affordable to low-income households, which are the same thresholds for the affordable requirements in the AHPP. 11 The density bonus now mandated under State law that became effective January 1 sl provides for a sliding scale of density bonus depending on the percentage of affordable units included in a development. The density bonus sliding scale ranges from a minimum of twenty percent (20%) to a maximum of thirty-five percent (35%). However, the minimum eligibility criteria for the new density bonus have been relaxed. A multifamily development that includes only five percent (5%) of the units affordable to very low-income households (lowered from the previous 10% requirement), ten percent (10%) of the units affordable to low-income households (lowered from the previous 20% requirement), or ten percent (10%) affordable to moderate-income households in a condominium development, is now eligible for a minimum twenty percent (20%) density bonus (lowered from the previous 25% density bonus). State law now allows a maximum density bonus of thirty-five percent (35%) to a development that dedicates either eleven percent (11 %) of its units to very low-income households; twenty percent (20%) to low-income households; or twenty-five percent (25%) of the units in a condominium development to moderate-income households. The State law revision also requires that between one and three "incentives or concessions" must be provided to a developer, depending upon the percentage of affordable units included in the development. It appears that the City's zoning regulations may need to be amended to be consistent with the new State density bonus law, and this increased density bonus (from 25% to 35%) for meeting the AHPP requirements may provide a sufficient incentive for more 12 inclusion of affordable units in developments, rather than payment of an affordable housing fee. Planning staff is preparing a more detailed analysis of the implications of this State law on current City requirements for future Council consideration. 4. Further Reduce Parkinq Reauirements Another incentive to consider for developments that include affordable units is a reduced parking space requirement. The City zoning regulations currently allow a reduced parking requirement, but only for each affordable unit. However, multifamily developments also have a parking requirement regarding guest spaces, and the current zoning regulations do not allow for this requirement to be reduced when affordable units are included in the development. The new State density bonus law discussed above mandates that developments qualifying for the density bonus must also be granted a reduced parking requirement. Again, it appears that the City's zoning regulations may require amendment to be consistent with the new State density bonus law. Because the cost of parking, most often in subterranean levels in Santa Monica, is a significant development cost, this change mandated by State law may also provide an incentive for developers to include affordable units in their developments. 5. Reduce. Defer or Waive Various Permit Fees and Taxes There are various fees and taxes associated with multifamily housing development involving planning and zoning applications, building permits, utility and sewer hook-ups and parks and recreation fees. These fees pay for City services provided in reviewing planning applications, building plans, construction inspections, and other services. 13 These fees amount to tens of thousands of dollars for small developments and hundreds of thousands of dollars for larger developments. Developers typically have to pay these fees and taxes out of the equity contribution to the development, because payment is required prior to the time a construction loan can be obtained, and these costs are not always reimbursable from the construction loan. One incentive to consider would be to reduce, defer or waive such fees and taxes on a proportional basis to reduce the cost to the developer of providing affordable units in their developments or constructing them off-site. The AHPP already provides for a waiver of the Condominium Tax and the Park and Recreational Facilities Tax for constructed affordable units. A similar approach could be applied to planning permit fees, building permit fees and other public works-related fees. Alternatively, these fees could be reduced by some percentage, or payment could be deferred to issuance of the certificate of occupancy, rather than at issuance of the building permit. Although such a policy would reduce the cost for those developments containing affordable units, the City services represented by these fees would still have to be provided, and the loss of revenue from these fees could create a budget problem and ultimately affect staff availability for these functions. 6. Broadened Permit Streamlinina The time required to complete the City's permit processes also adds to the cost of development, and any time savings for developments that include affordable units might serve as an effective incentive. Currently the AHPP provides that developments which 14 include affordable units are to receive priority plan check review (i.e., building permit process). However, a development begins at the planning application stage and ends at the completion of construction. Another incentive to consider involves permit streamlining for the planning approval process (and any appeals involving a public hearing) and priority construction inspections. The entitlement process, plan check process and the construction inspection process all take time that adds to the cost of development. To the extent that a development timeline can be reduced, there are cost savings to a developer that may mitigate some of the cost of providing affordable units. 7. Amend Proposition R Proposition R requires that thirty percent (30%) of all new multifamily housing on an annual basis be affordable to low and moderate income households. Proposition R could be amended to allow existing units that are rehabilitated and dedicated as affordable (via recorded covenants) to count toward the thirty percent goal. For example, the City uses a portion of its housing trust funds to subsidize the acquisition and rehabilitation of units by the nonprofit housing community. This effort does not count toward the achievement of Proposition R goals, even though the number of affordable units is increased by this activity. Dedication of existing units furthers the goals of preserving and creating affordable housing, whether undertaken by nonprofit or market-rate developers. Proposition R could also be amended so that the thirty percent requirement must be achieved over a multi-year average, rather than the current annual basis. For example, 15 some years the percentage of affordable units created on an annual basis may significantly exceed the thirty percent requirement (as in the 1990's), while more recently, production has been below the thirty percent requirement. However, on an aggregate basis to date, actual affordable housing production has exceeded the Proposition R mandate, achieving an affordable housing rate of approximately forty percent (40%). Therefore, allowing the thirty percent standard to be met using a multi- year average would level the year-to-year highs and lows associated with real estate market cycles and financial packaging for affordable developments, and may provide a more rational basis for evaluating the results of the City's overall affordable housing programs. Since Proposition R is a City Charter provision, any amendment would require a vote and majority approval by the City's residents. 8. Require On-Site Affordable Units Ordinance No. 1615 (City Council Series), the City's Affordable Housing Production Ordinance that preceded Ordinance No. 1918 (CCS) mandated that affordable housing units be developed on-site with limited exception. When Ordinance NO.1 918 (CCS) was adopted, the City Council chose to expand the options for compliance with the affordable housing obligation for both policy and legal reasons. As discussed below, the legal concerns have not changed appreciably since Ordinance NO.1 918's adoption. Leqallssues A city's authority to adopt an affordable housing production program was most recently affirmed in Home Builders Association of Northern California v. City of Napa. However, 16 the specific requirements ofthese programs may still be subject to judicial scrutiny. In considering possible amendments to the AHPP, several potential legal issues have been raised. No doubt other issues will arise as the City proceeds to evaluate and update its affordable housing production ordinance. One issue concerns the ability of a city to mandate on-site inclusionary rental units. The legal uncertainty regarding a city's ability to impose a mandatory on-site requirement has not changed substantially since the City adopted its AHPP. More specifically, as to apartments, the issue remains whether the Costa-Hawkins Rental Housing Act ("Costa- Hawkins Act") prevents a local authority from controlling the rents on inclusionary housing units. While the Costa-Hawkins Act was certainly not drafted with this purpose in mind, its broad language might be read to affect this result. Moreover, efforts in the State legislature to modify the law to eliminate this possibility have failed. Also, the applicability and utility of the Costa-Hawkins Act exception for contracts with developers is unclear. Finally, it should be noted that the City's prior inclusionary ordinance, Ordinance No. 1615 (CCS), which required on-site units was challenged under the Costa-Hawkins Act. Although no final decision was rendered since the City changed the ordinance while the case was pending, the trial court had preliminarily concluded that Costa-Hawkins applied to inclusionary units. These concerns do not apply to for- sale affordable condominiums. The second issue concerns nexus requirements. Current case law continues to require a connection between any exaction imposed upon a private developer and the impacts 17 of that development, although the relationship between means and ends does not have to be as thoroughly established for legislatively imposed fees as for ad hoc, development-specific fees. For instance, in San Remo Hotel v. City and County of San Francisco (a case which challenged San Francisco's residential hotel conversion law), the California Supreme Court reiterated the necessity of a connection between development mitigation fees and development impacts. While the Court held that the heightened scrutiny established by the United States Supreme Court in Nolan v. California Coastal Commission need not be met, development mitigation fees must still bear a reasonable relationship in both intended use and amount with the deleterious impacts of the development. The Court stated that this requirement was both a matter of statutory law and constitutional law. In City of Napa, the California Court of Appeal rejected a facial takings challenge to Napa's inclusionary housing ordinance which required that ten percent (10%) of the housing units be affordable on site. The Napa ordinance provided alternatives. Developers of single-family units could satisfy the requirements through other means (e.g., land dedication, units at another site, affordable housing fees). Developers of multi-family units had to seek City Council authorization to pursue an alternative. In upholding the law, the Court noted that the ordinance imposed a relatively modest exaction and provided significant benefits to developers. More importantly, the ordinance expressly allowed developers to challenge the ordinance's requirements based on a lack of nexus by applying for a reduction, adjustment or waiver. Thus, 18 although the case is certainly favorable for cities, it does not stand for the proposition that no nexus is necessary. Rather, it upholds a local ordinance which shifts the burden to developers to show the absence of a nexus instead of requiring cities to perform nexus studies before adopting an inclusionary ordinance. Another issue concerns the impact of the Ellis Act on inclusionary housing requirements. To the extent that the requirements are based on the loss of existing housing stock removed pursuant to the Ellis Act, the ordinance may be subject to challenge, based on the decision in Bullock v. City and County of San Francisco. A recent Court of Appeal decision reaffirmed the Bullock decision, Reidy v. City and County of San Francisco. However, since the San Francisco conversion ordinance challenged in Bullock and Reidy required a one-for-one replacement of residential hotel units or payment of a substantial affordable housing fee, neither of these cases provides clear guidance on the remaining extent of municipal power to foster the replacement of affordable units lost to Ellis withdrawals. Budqet/Financial Impact No budget or financial impact is incurred as a result of action on this recommendation. Future budget or financial impact will be identified and reported. RECOMMENDATION It is recommended that the City Council consider and discuss the various affordable housing strategies outlined in this report including the recommendations of the Housing 19 and Planning Commissions, and provide direction to staff to prepare applicable amendments to the Affordable Housing Production Program and/or other City policies or programs, for subsequent Council action. Prepared by: Jeff Mathieu, Director, Resource Management Department Ron Barefield, Acting Housing & Redevelopment Manager Jim Kemper, Acting Housing Administrator ATTACHMENTS Attachment A: Overview of the HR&A's Affordable Housing Impact Analysis Approach Attachment B: Changes to Prior Application of the Affordable Housing Impact Calculation Approach 20 Attachment A OVERVIEW OF AN AFFORDABLE HOUSING IMPACT ANALYSIS APPROACH Each new market rate multi-family development project constructed and occupied in the City adds new households with particular income and spending characteristics. These households create demand for goods and services, in the private sector (e.g., restaurants, retail goods and medical services) and in the public sector (e.g., school teachers and municipal services). In general, the higher a household's income, the more dollars are spent for goods and services. New market rate multi-family housing in Santa Monica accommodates upper-income households almost exclusively, because of the high cost of rent or purchase price required to occupy it. Supplying goods and services sufficient to meet the consumption demand from upper-income households in new market rate multi-family housing requires workers across the pay scale spectrum, including lower-wage employees. Some of these lower-wage workers are members of low- and moderate-income households who require housing at prices they can afford. As a result, new market rate multi-family development is causally related to demand for housing that is affordable to lower-wage workers and their households. The scale of this demand, and an affordable housing fee required to mitigate it, can be calculated as follows: . Estimate Per-Project Household Income and Spending. Household income is derived from the purchase price needed for a feasible apartment and condominium development projects, making various assumptions about the percent of household income devoted to housing costs. The resulting total project household income is then multiplied by a factor, derived from national household survey data by household income level that accounts for typical household consumer spending, not including savings, taxes and consumer interest. The resulting per-project consumption expenditure estimates can be calculated for subareas of the City, or averaged for the City as a whole. . Estimate the Employment Impacts of Per-Project Household Spending. The employment impacts of household consumption are estimated using the IMP LAN input-output model of the Los Angeles County economy, The model produces estimates of spending-related jobs for each of 508 sectors in the County's economy. The County economy is used to capture the full employment impact of household spending (i.e., direct, indirect and induced impacts ). . Estimate the Number of Low- and Moderate Income Households Related to the Employment Impacts of Per-Project Household Spending. Deriving the subset of households meeting the "low- and moderate" household income definition is accomplished using the Public Use Microdata Sample (PUMS) data from the 2000 US Census for Los Angeles County, which allow for cross-tabulations of household income and size characteristics by the industry in which the household members work. This makes it possible to estimates the number oflow- and moderate-income workers generated by the consumption spending associated with new market rate multi-family projects in Santa Monica, and the number oflow- and moderate- income households associated with these low-income workers. HAMILTON, RABINOVITZ & ALSCHULER, INC. Page A-I · Derive an Affordable Housing Fee. The number oflow- and moderate-income households requiring housing, as derived from the preceding steps, is then multiplied by the City's cost to produce a unit of such housing. This cost is equal to the unit's total development cost (i.e., land, construction, professional fees, miscellaneous development costs and financing), minus the relatively small amount of construction loan that low- and moderate-income tenant rents can support. The resulting fee can then be divided by the gross floor area of a typical market rate or condominium project to yield and an affordable housing fee per square foot of new market rate development. HAMILTON, RABINOVITZ & ALSCHULER, INC. Page A-2 Attachment B CHANGES TO PRIOR APPLICATION OF AN AFFORDABLE HOUSING IMPACT CALCULATION APPROACH The affordable housing fee for market rate apartment projects has not been updated since it was originally calculated in July 1998; the condominium project fee was last updated in March 2000. In the intervening time there have been a number of changes in real estate market conditions and new data sets (e.g., 2000 US Census and updated IMPLAN input-output model) on which the calculations described in Attachment A depend. The following is a summary of these changes, and how each one taken alone tends to affect the preliminary recalculation of affordable housing fees: · Current Market Prices, Rents and Implied Household Incomes are Much Higher. The recalculations reflect current median condominium sales prices and rents for market rate developments completed within the past few years. In all cases, the prices and rents are considerably higher, due to changes in general housing market conditions. This means that the incomes required by households to pay these prices and rents are also higher, in general, and this tends to force the affordable housing fee upward. · Use of More Specific Household Spending Factors. In HR&A's original 1998 calculations, and 2000 updates for condominiums only, the analysis utilized a national personal consumption factor (75.5%) to convert gross household income to expenditures for goods and services that create local labor demand. In the current analysis, more recent factors from the US Department of Labor Statistics that are more specific to the spending characteristics of high-income households are used. The higher the household income, the more absolute dollars are spent on goods and services, but the share of gross income that these expenditures represent declines as income rises. The conversion factors in the current analysis range from 74.2 percent to 53.1 percent. As a result, the relationship between housing prices and consumer spending, and the employment demand it implies, is no longer linear. This change has a downward effect on the fee. · Updated IMPLAN Model Implies Somewhat Lower Labor Demand per Dollar of Household Spending. The current analysis utilizes the most current version of the IMP LAN input-output model, and economic data for Los Angeles County as of 2002, the most recent year available. Changes in the structure of the model and in the Los Angeles County economy, since 1998 and 2000, combine to imply somewhat less total employment demand per dollar of household spending impact. The exact contribution of each change (i.e., model changes versus county economy changes) toward the results is unclear, but they tend to move the fee downward. · 2000 Census Data Imply a Higher Proportion of Low-Income Workers per Industry Sector and Slightly Fewer Workers per Household. The current analysis also utilizes Public Use Microdata Sample (PUMS) data from the 2000 US census in order to identify: (1) the proportion low- and moderate-income workers in each industry sector affected by household spending from new condominium and apartment projects; and (2) the average number of HAMILTON, RABINOVITZ & ALSCHULER, INC. Page B-1 workers in those low-income households. For example, according to the 2000 census, the weighted average percentage of workers in low-income households in 22.2% versus 16.7% in the 1990 census. And, the weighted average number of workers per low-income household in 2000 was 2.21 versus 2.65 in 1990. The combination ofthese two changes tends to move the fee upward, particularly as the target income level rises (i.e., for workers in households at 80% or 100% of median). · Higher Per-Unit Cost to Create an Affordable Unit. The analysis relies on the three most recent 41- to 44-unit new construction multi-family development projects by Community Corporation of Santa Monica (CCSM) as the basis for the capital subsidy gap per unit that the affordable housing fee must fill? Counting a small amount of construction loan than can be amortized by net operating income from such a development, but no other sources of public debt or equity, the capital subsidy gap ranges from $239,949 for worker demand up to 100 percent of the area median income, to is $316,554 for worker demand up to 60 percent of the area median income. These values are much higher than the $186,208 gap used in the 2000 fee update for condominiums, and the $154,916 gap used in the original 1998 analysis of apartments and condominiums, due to changes in land cost, construction costs and the average household income now being served by City projects (weighted average of 46% of area median income). Using income level combinations for projects targeted at workers in households at 80% and 100% of median reduces the capital cost slightly, because the somewhat higher rents these households can afford will support slightly more construction loan debt. This change in the average subsidy gap moves the fee upward. · Fees for City Subareas and Averages Across Subareas. Rather than generalized "high" and "low" land cost housing price scenarios as in the past, the latest analysis provides affordable housing fee calculations for specific subareas of the City, and averages across these areas for condominium and apartments developments. This information provides a basis for a schedule of fees that vary with market conditions in each subarea, or to use a Citywide average, as the City may prefer. If a Citywide average is to be used, however, consideration should be given to using a weighted average that reflects the higher propensity for development to occur in some subareas (e.g., north of Wilshire Boulevard). Summaries of the result of the preliminary affordable housing fee recalculations that take all of these changes into account are shown in Tables 1 and 2, for market rate condominium and apartment projects, respectively. More detailed calculations supporting the values contained in Tables 1 and 2 and presented in Tables 3 through 8. 2 The CCSM project development costs used as the basis for this part of the analysis include recent increases in construction costs. HAMILTON, RABINOVITZ & ALSCHULER, INC. Page B-2 ~~~~~ r-#~~l!l o>~l.Or-T"" r-~~~~ to . 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