SR-407-000-05 (10)
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~CitYOf
Santa Moniea@
City Council Report
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City Council Meeting: Ma~ 9,999&
Agenda Item: ~ I S
To:
Mayor and City Council
From:
Marsha Jones Moutrie, City Attorney
Subject:
Request for Approval of Methodology for Calculating the Annual
Adjustments to the Affordable Housing Fee Pursuant to Municipal Code
Section 9.56.070
Recommended Action
For purposes of calculating the annual adjustments to the City's affordable housing fee,
staff recommends that the City Council approve using:
(1) the Engineering News Records Construction Cost Index to track
construction costs;
(2) the weighted average annual change in median condominium sales prices
by Zip Code to reflect changes in land costs; and
(3) current development cost data for recently completed or In-progress
affordable multi-family development assisted by the City to establish the
relative balance between land cost inflation and construction cost inflation.
Executive Summary
Last Fall, the City Council adopted an ordinance modifying the City's affordable housing
fee and providing that the fee would be adjusted each July 1st beginning this year. The
1
ordinance specifies that the annual fee adjustment shall be based on changes in
construction and land costs. This report recommends that the City Council approve a
methodology for ascertaining changes in those costs and thereby for calculating the
adjustment.
Discussion
By amending Municipal Code Section 9.56. 070, the City Council has established law
and policy with respect to the City's affordable housing fee. In order to implement the
Council's decision, a proposed method of computation has been formulated. It reflects
changes in construction and land costs. This proposed methodology is detailed in the
April 24, 2006 letter prepared by Hamilton, Rabinowitz & Alschuler, Inc. that is attached
to this report as Attachment A.
Specifically, staff recommends that construction cost changes be measured using the
Engineering News Record's ("ENR") Construction Cost Index. That index is well
established, is updated monthly, and is readily available over the Internet.
As to land costs, staff recommends use of the weighted average annual change in
median condominium sales prices within the City by Zip Code. These data are
published by the Los Angeles Times each January, using Los Angeles County Assessor
data compiled by Dataquick. They are also available on a subscription basis from other
vendors, such as First American Real Estate Solutions.
2
The relative balance between land costs and construction cost changes can be
determined based on current development cost data for recently completed or
construction-in-progress multi-family affordable developments assisted by the City. We
recommend using a simple average of the ratio between land purchase price and the
sum of land cost and construction cost to derive the land value percentage; the inverse
of this ratio would be the construction cost share.
In practice, the affordable housing fee will be adjusted by resolution of the City Council
as part of the annual budget process in June of each year. Using the data described
above, staff would measure the weighted average annual change in median
condominium sales price for the immediately preceding calendar year, and the
construction cost index change between March of the budget adoption year and March
of the immediately preceding year. Using the annual averages for sales price
information will smooth out the differences between sales statistics for particular
months. As to construction costs, however, using the monthly year-over-year approach
will best ensure that the fee keeps pace with the actual cost to the City of developing
affordable housing.
Alternatives
As an alternative approach, the City Council might choose to use the Consumer Price
Index ("CPln) as a basis for adjusting the affordable housing fee because it IS
conveniently available. However, the CPI, which reflects changes in the cost of
3
consumer goods, is not a reliable measure of changes In the costs of developing
housing, and so staff does not recommend this approach.
BudgetlFinanciallmpact
There is no financial impact.
Prepared by: Marsha Jones Moutrie, City Attorney
Attachment: Hamilton, Rabinowitz & Alschuler, Inc. 4/21/06 Letter
Approved: Forwarded to Council:
/
f: \atty\muni\strpts \m j m \affordhsgfeeadjust.doc
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HAMILTON, RABINOVITZ & ALsCHULER, INC.
Policy. Financial & Management Consultants
April 24, 2006
Mr. Ron Barefield
Housing Administrator
City of Santa Monica
2121 Cloverfield Blvd., Suite 100
Santa Monica, CA 90405
Re: Annual Adiustment for the Affordable Housing Fee
Dear Ron:
Per your request, this letter summarizes an annual adjustment approach we recommended
for the City of Santa Monica's ("City") Affordable Housing Fee, which developers of multi-
family residential developers may elect to pay, pursuant to Santa Monica Municipal Code
Section 9.56.070, as amended. This recommendation was included in Section V of our recent
report, 2005 Update, The Nexus Between New Market Rate Multi-Family Developments in the
City of Santa Monica and the Need for Affordable Housing, July 1, 2005 ("2005 Nexus Study
Update"). .'
In order to better ensure that the Affordable Housing Fees remain consistent with
changing market conditions, it would be prudent for the City to apply an annual adjustment
index, but to use an inflation concept other than the Consumer Price Index (CPI). While the CPI
is often used to make inflation adjustments because of its convenience, the monthly changes in
the value of consumer goods that dominate the CPI are not be the most appropriate basis for
measuring change in the City's cost to develop affordable housing. However, to be meaningful,
any alternative index must rely on data that is readily accessible to City staff for calculating the
change, and for the public's information.
A suitable alternative approach would need to measure annual changes in land cost and
construction costs, which together account for about 75-80 percent of the cost of new affordable
housing development.l There are, in our experience, several well-established construction cost
indices. We recommend Engineering News Record's (ENR) Construction Cost Index, because it
1 The other 20-25% consists of professional fees and other "soft costs" and financing costs, neither of
which is regularly monitored by third party sources for inflation changes.
2800 28m STREET, SUITE 325, SANTA MONICA, CALIFORNIA 90405 · TEL: 310.581.0900 . FAX: 310.581.0910
Los ANGELES
No. CAUFORNIA
PORTlAND, OR
NEW YORK
Ron Barefield
Housing Division
City of Santa Monica
April 24, 2006
is updated monthly and is readily available via the Internet. However, there is no comparable
index of changes in land cost. One proxy measure that could be used for land cost changes is
change in median condominium purchase prices? Since the median condo sale price for the City
as a whole would be skewed by the tendency for sales to be concentrated in a few subareas, a
more neutral measure would be the weighted average annual change in median condo sale prices
by ZIP Code. These data are published by the Los Angeles Times each January, using Los
Angeles County Assessor data compiled by Dataquick. They are also available on a subscription
basis from other vendors, such as First American Real Estate Solutions.
The relative balance between land cost inflation (based on changes in median condo
prices) and construction cost inflation (based on a construction cost index) could be determined
based on current development cost data for recently completed or construction-in-progress multi-
family affordable developrrients assisted by the City. We recommend using a simple average of
the ratio between land purchase price and the sum of land cost and hard construction cost to
derive the land value percentage; the inverse of this ratio would be the construction cost share.3
Since the proposed annual inflation adjustments to the Affordable Housing Fee will be
adopted by Resolution of the City Council as part of the annual budget process each June, we
recommend that City staff measure the weighted average annual change in median condominium
price for the immediately preceding calendar year, and the construction cost index change
between March of the budget adoption year and March ofthe immediately preceding year. We
recommend using the annual change in median condo prices in the calculation, rather then year-
over-year changes in March or any other month, because median monthly prices can vary
significantly due to the number of sales and particular composition of the sales in any particular
month. The annual average tends to smooth out these effects. We recommend the monthly year-
over-year approach for construction costs, however, because construction represents a much
larger share of total project cost. Using the most recently available construction cost inflation
data better ensures that the Affordable Housing Fee will keep pace with the actual cost to the
City of developing affordable housing.
Table I below, which is a variation on Table V -5 from the 2005 Nexus Study Update,4
illustrates how such an annual index could be constructed and applied to the recently adopted
Affordable Housing Fees for new market rate apartment and condominium projects, for
FY 2006-07. It shows, for example, that a weighted average inflation index as proposed herein
2 Consistent with the City's historical experience, this assumes that most new affordable multi-family
projects will be developed in multi-family districts, although some recent projects include sites in commercial
districts. Unlike residential property, there is no readily available data source for commercial land price changes.
3 For example, if the average land cost for recent projects was $3.0 million and average hard construction
cost was $9.0 million, the land to land plus construction cost ratio would be 25% ($3.0 million I ($3.0 million + $9.0
million) and the construction cost to land cost plus construction cost ratio would be 75%.
4 Table V -5 was based on Citywide average fees, which was one alternative fee schedule presented in the
2005 Nexus Study Update. Table 1 herein uses the alternative weighted average fees, which were also presented in
the 2005 Nexus Study Update, and it was these fees that the City Council actually adopted on October 11,2005.
HAMILTON, RABINOVITZ & ALSCHULER, INC.
Page 2
Ron Barefield
Housing Division
City of Santa Monica
April 24, 2006
would result in a 7.9 percent annual increase, compared with a 5.2 percent increase based on
construction costs alone, or 5.1 percent based on the CPI.
It is my understanding that the inflation adjustment approach described above will be
presented to the City Council on May 9, 2006. We are available to assist you, as needed, with
that presentation.
Since~e" ~
~~
Partner
HAMILTON, RABINOVITZ & ALSCHULER, INC.
Page 3
Ron Barefield
Housing Division
City of Santa Monica
April 24, 2006
Table 1
Affordable Housing Fee Annual Inflation Adjustment Calculations for FY 2006-07
Land Cost Inflation
ZIP Code
90401
90402
90403
90404
90405
Median Annual Price
Change During 2005
35.9%
-2.1%
9.8%
25.5%
10.5%
# Condos Sold
27
3D
237
162
144
600
CalculatIon
Weights
4.5%
5.0%
39.5%
27.0%
24.0%
I
Weighted Avg.
1.6%
,,(),1%
3.9%
6.9%
2.5%
14:8%1
Construction Cost Inflation
Source: Los Angeles Times, Real Estate Section, p. K19, January 22,2006 (based on DataQulck Information Systems)
Engineering News Record's Construction Cost
Index
March 2005 Index Value
March 2006 Index Value
Percentage Change 2005-2006
7,309
7,692
6~
Source: Engineering News Record (available at http://www.enr.constructlon.comlfeatures/coneco/subs/constlndexHislasp)
Derivation of Land Cost and Construction Cost Calculation Weights
Most Recent CCSM Family Rental Projects
1424 Broadway
2601 Santa Monica Boulevard
2209 Main Street
Source: Housing Division, City of Santa Monica
Inflation Factor Derivation
land Value Inflation
Construction Cost Inflation
Adjusted Fees
Condos
Apartments
$
$
$
$
Land Cost
3,640,000
3,250,000
3.120.000
10,010,000
28%
Hard Construction
$ 8,100,000 $
$ 8.100,000 $
$ 9123910 $
$ 25,323,910 $
72%
Weight
28.3%
71.7%
I
ililfR'lll
Inflatton Factor
7.9%
7.9%
Total
11,740,000
11,350,000
12.243.910
35,333,910
100%
WId. Avg.
4.2%
~
7.9%}
Updated Fees _
$28.151
$24.10
$ Change
$2.07
$1.77
Inflation Value
14.8%
5.2%
Oct. 2006 Base Fees
$26.08
$22.33
For Information Only:
Consumer Price Index Change, LA-Riv-Or Co.,
All Urban Consumers
Feb. 2005 Index Value 197.4
Feb. 2006 Index Value 207.5
Percentage Change 2005-2006 5.1 %
Source: US Bureau of labor Statistics (available at: http://www.bls.gov/cpl)
Prepared by: Hamiffon, Rabinovitz & Alschuler, Inc.
HAMILTON, RABINOVITZ & ALSCHULER, INC.
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