SR-061907-8C~~~
~;tYOf City Council Report
Santa Moniea~
City Council Meeting: June 19. 2007
Agenda Item: ~~
To: Mayor and City Council
Chairperson and Redevelopment Agency
From: Andy Agle, Director of Housing and Economic Development
Subject: Revisions to the Housing Trust Fund Guidelines
Recommended Action
Staff recommends that the City Council/Redevelopment Agency approve revisions to
the Housing Trust Fund Guidelines ("Trust Fund Guidelines") regarding funding limits
and terms.
Executive Summary
As the City moves forward with leveraging housing trust funds to better facilitate the
provision of affordable housing, staff recommends approval of revisions to the Housing
Trust Fund Guidelines regarding funding limits and terms. The purpose of these
changes is to facilitate and promote affordable housing development by ensuring that
the City's participation as lender continues to reflect current costs and criteria.
The primary revisions which are proposed include: 1) updated per unit funding limits; 2)
establishment of an annual cost adjustment index for unit funding levels; 3) developer
fee increases; and 4) purchase option provision for the City/Redevelopment Agency.
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There is no .budgetary impact to the housing trust funds from the recommended
revisions.
Discussion
Background
The City has five housing trust funds: the Citywide Housing Trust Fund; the TORCA
Housing Trust Fund; the Redevelopment Housing Trust Fund; the HOME Trust Fund;
and the CDBG Trust Fund. The various revenue sources for these housing trust funds
are in-lieu housing and office mitigation. fees, condominium conversion taxes,
redevelopment area tax increment, and federal grants. These City housing trust funds,
together with other federal and state housing programs, and private equity, facilitate the
development of affordable housing throughout the community. At this time staff is also
moving forward with a plan to leverage housing trust funds to support additional
affordable housing as described in the Information Item dated June 11, 2007.
The administration of these housing trust funds is governed by the Trust Fund
Guidelines adopted by the City Council/Redevelopment Agency in November 1998.
The purpose of the Trust Fund Guidelines is to establish parameters for the terms of the
funding provided to affordable housing developments. The Trust Fund Guidelines are
amended periodically to reflect changes in the housing market and the affordable
housing sector, and to facilitate affordable housing development. The most recent
revisions to the Trust Fund Guidelines occurred in January 2005 and involved
increasing the aggregate funding limits and other adjustments to the loan terms.
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Fundina Limits
All loans require the approval of the City Manager/Executive Director pursuant to the
Trust Fund Guidelines and funding limits. Funding above the per unit limit requires
approval of the City Council/Redevelopment Agency. Recent experience with
affordable housing development in Santa Monica suggests a need to revise the funding
limits upward. Per unit funding limits were last increased in 2001.
New Construction: During the past year a total of five new construction affordable
housing projects ranging in size from 36 to 47 units have either been completed (three
projects) or are under construction (two projects); total development costs have ranged
from $14 - $17 million for the five projects. The per unit total development cost for the
two projects that are currently under construction is $385,000.
Market information indicates that land prices have escalated in recent years. The
development costs noted above are no longer representative of what it would cost to
purchase and develop a site today. Land costs for the five projects averaged about
$73,000 per unit based on sites purchased in the 2000 to 2004 period. By adjusting the
land cost component of total development costs to reflect current pricing of land
(estimated at $179,000 per unit) an adjusted total development cost of $499,000 per
unit is computed for the two projects currently under construction. Further adjustments
to update this information for 2007, including the rise in construction and related costs,
brings the per unit cost up to $586,000.
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Based on the most likely combination of outside funding, including private equity, bank
financing, and State funding programs, it is estimated that a prototypical. new
construction, large family project would be eligible for approximately $200,000 per unit
in outside funding, leaving an unfunded balance of $386,000 per unit to be provided by
the City. The average per unit funding amount for zero and one-bedroom units is
estimated at $367,000 per unit.
Prototypical Large Family Project
(2 & 3 ddrm units) 2006 Cost
Per Unit 2007 Cost
Per Unit
Land $179,000 $196,000
Hard Costs (i.e. construction) $249,000 $ 274,000
Soft Costs (i.e. architectural, fees) $ 71,000 $ 88,000
Total Development Costs $499,000 $558,000
Plus: Contingency of 5% ----- $ 28,000
Adjusted Total Development Costs ----- $586,000
Less Estimated Non-City Funding ----- ($200,000)
Proposed City Funding ----- $386,000
' Adjusted current land cost of $2S7 per square foot on a 22,500 square foot site fora 36 unit project
z Based on most recent project costs
s Increased by 9.6% based on market data
° Increased by 10% based on Engineering News Record's Building Cost Index for LA Area and Housing
Division estimates
e Based on ratio of soft costs to hard costs
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Acquisition and Rehabilitation: During 2006 a total of three apartment buildings ranging
in size from 8 to 22 units were purchased to preserve as affordable projects. Total
development costs, including acquisition and rehabilitation, have ranged from $2 - $6
million for all three projects, or approximately $323,000 per unit. Purchase prices for
these projects averaged $236,000 per unit. A review of 2006 sales data for apartment
buildings sold reflects a higher average cost at $267,500 per unit (citywide) and
$322,000 per unit (North of Wilshire area). Accomplishing geographic distribution of
affordable housing throughout the City requires that the maximum per unit funding limits
be brought in line with the higher costs observed. By adjusting the acquisition cost
component of total development costs to reflect 2006 pricing in the North of Wilshire
area, a total development cost of $409,000 is computed for the three rehabilitation
projects. Further adjustments to update this information for 2007, including the rise in
construction and other related costs, brings the per unit costs up to $481,000.
Prototypical Acq & Rehab Project 2006 Cost
Per Unit 2007 Cost
Per Unit
Building Acquisition $322,000 $361,000
Hard Costs (i.e. construction) $ 54,000 $ 59,000
Soft Costs (i.e. architectural, fees) $ 33,000 $ 38,000
Total Development Costs $409,000 $458,000
Plus: Contingency of 5% ----- $ 23,000
Adjusted Total Development Costs ----- $481,000
Proposed City Funding ----- $481,000
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~ Adjusted current building cost based on average resale pricing for buildings North of Wilshire
z Based on actual project costs
s Increased. by 12% based on market data
" Increased by 10% based on Engineering News Record's Building Cost Index for LA Area and Housing
Division estimates
e Based on ratio of soft costs to hard costs
Because outside funding for acquisition and rehabilitation projects is not readily
available (based on the typical targeting of very low and low income households with
insufficient rental income to service a 30 year bank loan), combined with the fact that
real estate transactions are time sensitive, the City will need to fully fund these
acquisitions.
The following table shows the existing and proposed Trust Fund Guidelines funding
limits:
Proposed Maximum Funding Limits: The existing Trust Fund Guidelines limit the
number of units per development to fifty. City funding for a development containing
more than fifty units would require City Council/Redevelopment Agency approval.
Under the proposed Trust Fund Guidelines, the maximum funding that the staff could
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administratively approve would be $19,300,000 for new construction (50 units x
$386,000/unit) and $24,050,000 for acquisition and rehabilitation projects (50 units x
$481,000/unit).
In summary, the proposed revisions facilitate affordable housing development by
updating funding levels so they reflect current costs and remove some uncertainty
associated with affordable housing development and financing.
Establishment of Cost Adjustment Index
Since establishment of the Trust Fund Guidelines in 1998, funding levels have been
unable to keep up with the escalating costs of development. As a result, funding
increases have been approved by Council in 2000 and 2001. To keep pace with
inflation and streamline the administrative process of requesting periodic funding
increases, it is recommended that the Trust Fund Guidelines utilize an established index
that is tied to construction and land costs so that funding levels can be adjusted
annually. Staff recommends that the Affordable Housing Fee methodology which was
approved by Council on May 9, 2006 be adopted as the Housing Trust Fund index for
purposes of adjusting funding levels.
Hamilton, Rabinowitz & Alschuler was retained by the City Attorney's Office to develop
an annual adjustment calculation methodology for the City's Affordable Housing
Production Program (AHPP) which is detailed in Attachment A. The purpose of this
methodology was to comply with the City's AHPP ordinance that requires the fee to be
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adjusted annually based on changes in construction and land costs. The methodology
consists of the following components:
(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;
(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.
Construction costs changes are 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, the methodology uses 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 the
Los Angeles County Assessor data complied by Dataquick. The relative balance
between land costs and construction cost changes is determined -based on current
development cost data for recently completed or construction in progress multi-family
affordable developments assisted by the City.
The Affordable Housing Fee will be updated by resolution of the City Council as part of
the budget process in June of each year. Since the numbers presented in this staff
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report are based on current information, it is recommended that effective July 2008 and
annually thereafter the proposed funding levels previously identified shall be subject to
an Affordable Housing Fee adjustment. Such adjustment shall mean and refer to the
percentage equal to the percentage increase in the Affordable Housing Fee from year to
year.
Developer Fee Increase
Developer fees are earned by affordable housing providers for each development they
complete, and are included in the per unit funding provided to the development. As in
the funding limits discussed above, the developer fee differs when the development is
for acquisition and rehabilitation, as opposed to new construction. The Trust Fund
Guidelines limit the developer fee for new construction based on the project size; from
$12,000 to $14,000 per unit. This developer fee has been in effect since January 2005.
Staff proposes applying the Affordable Housing Fee methodology to the existing
developer fee set in January 2005, which results in a sixteen percent increase.
DEVELOPER FEE FOR NEW CONSTRUCTION
# of`Units Existing i Proposed % Increase
1- 20 $14,000/unit $16,240/unit 16%
21 - 30 $13,000/unit $15,080/unit 16%
31 - 50 $12,000/unit $13,920/unit 16%
51 or more Negotiated n/a
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The current developer fee for acquisition and rehabilitation developments is $9,400 per
unit for developments of seven units or less. Staff proposes applying the sixteen
percent inflation factor resulting in a fee of $10,900 for acquisition and rehabilitation
developments of seven units or less. No changes are proposed for acquisition and
rehabilitation developments of more than seven units since these fees can be adjusted
as a percentage of costs. These fees are .set at the greater of $55,000 per project or
the sum of 5% of the depreciable acquisition basis and 15% of the rehabilitation basis.
In order to streamline the administrative process of requesting periodic developer fee
increases, staff recommends that the Trust Fund Guidelines utilize an index that is tied
to general development cost inflation levels so that the developer fees can be adjusted
annually. Staff recommends that the Affordable Housing Fee methodology be adopted
as the Housing Trust Fund index for purposes of adjusting developer fee levels. Since
the numbers presented in this staff report are based on current information, it is
recommended that effective July 2008 and annually thereafter that the proposed
funding levels previously identified shall be subject to an Affordable Housing Fee
adjustment. Such adjustment shall mean and refer to the percentage equal to the
percentage increase in the Affordable Housing Fee from year to year.
Purchase Option Provision
The Trust Fund Guidelines currently allow for loan forgiveness as long as the affordable
project stays in compliance with affordability restrictions through maturity (55 years; 25
year extension option). However, there is no provision for the City to recapture its
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original investment at the end of the permanent loan term. Staff recommends that a
provision be added to the Guidelines which gives the City an option to take title to the
property at the end of the loan term.
Other Technical Revisions
Minor technical adjustments to certain loan terms in the Trust Fund Guidelines are
proposed. The table below outlines these revisions:
Subject Existing Proposed
Rationale
Guidelines Revision
Two years plus one Additional twelve
Predevelopment Two years plus one eighteen month month extension to
Loan Term eighteen month extension plus one provide sufficient time
extension additional twelve for completion of
month extension predevelopment work.
Short term financing Changes in capital
Bridge Loan for borrowers who Delete the Bridge markets now allow for
Deletion are syndicating their Loan as loan type greater flexibility in the
low income tax funding of tax credit
credits equity
"Group Home" To use terminology
defined as housing Substitute the term
" defined in the Santa
Group Homes with separate Group Home with
" Monica Zoning
bedrooms and Congregate Regulations for
shared kitchen Housing" purposes of
consistency
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Subject Existing
Guidelines: Proposed
Revision Rationale
Funding Projects
Allow funding of
Outside Santa projects for homeless Facilitate regional
Monica for N/A to be located outside opportunities for
Homeless Santa Monica but homeless housing
within the region
Currently, affordable homeownership programs are evaluated on a case-by-case basis.
As the City gains. more experience with affordable homeownership, staff will be
analyzing the merits of including ownership housing as an eligible project type within the
Trust Fund Guidelines. If appropriate, staff will return to the City
Council/Redevelopment Agency at a future date with an amendment related to
ownership housing.
Commission Action
On April 19, 2007 and May 17, 2007 staff presented the information contained within
this report to the Housing Commission. The Housing Commission recommended that
the City Council update the Affordable Housing Trust Fund Guidelines to reflect current
and anticipated market conditions including the provision of an escalator index for future
cost increases for the production and preservation of affordable housing.
Alternatives
As an alternative approach, the City Council/Redevelopment Agency might choose to
approve the Trust Fund Guidelines without changing the existing funding limits.
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However, the lower funding limit would no longer be representative of what the City
share needs to be to expedite site or building acquisitions or facilitate the development
of affordable housing projects. Without the ability to finance projects administratively,
projects would need to be presented to the City Council/Redevelopment Agency on a
case-by-case basis resulting in greater uncertainty and delayed timelines associated
with affordable housing development and financing.
Budget/Financial Impact
There is no budgetary impact to the housing trust funds from the recommended
revisions to the Trust Fund Guidelines, as increased funding levels are necessary
irrespective of updates to the Guidelines. Staff is also moving forward with the
development of a plan to leverage redevelopment housing set-aside funds which should
make additional funding available in the future for affordable housing as described in the
Information Item dated June 11, 2007.
Prepared by: Bob Moncrief, Housing Manager
Approved:
Forwarded to Council:
Andy Agle, Directo~
Housing and Economic evelopment
Attachment A: Hamilton, Rabinowitz & Alschuler, Inc. 4/21/06 Letter
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Analyze. Ads`ise. Act.
HAM[LTON, RABINOVIIZ & ALSCHULER, INC,
Paliry, Ffxaxctal & Martagenrenl Coxsultaxis
June I5, 2005
Mr. Barry Rosenbaum, Esq.,
Senior Land Use Attorney
Office of the City Attorney
City of Santa Monica
2121 Cloverfield Blvd., Suite 100
Santa Monica, CA 90405
Re: FY 2006-07 Annual Ailjusnnem for the Affordable Housing U13it Base Fee
Dear Mr. Rosenbaum:
This letter summarizes the annual adjustment calculation methodology that will be
utilized by the City to establish the Affordable Housing Unit Base Fee pursuant to Santa Monica
Municipal Code Section 9.56.070(6). This methodology was recommended 6y HR&A in a letter
to City staff dated April 24, 2005, and approved by fhe Santa Monica City Council at a public
heazing on June 13, 2006.
Consistent with SMMC Section 9.56.070(6), the calculation approach measures annual
changes inland cost and constructor costs, which together account for about 75-80 percent of
the cost of new affordable housing development.l For the construction cost inflation component
of the calculation approach, the City Council accepted HR&A's recommendation to use the
Engineering News Record's (ENR) Construction Cost Index, because it is updated monthly and
is readily available via the Internet. Although there is tIO comparable-index for inflation in laud
cost, the City Council also accepted our recommendation to use median condominium purchase
prices as a proxy measure for land cost changes. Further, 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 weighted average annual change in median condo sale prices by ZIP
Code is used in the calculation approach. These median condo price by City ZIP code data are
published by the Los Angeles Times each January, using Los Angeles County Assessor data
compiled by Dataquick. Tkey are also available on a subscription basis from other vendors, suck
as First American Real Estate Solutions.
~ 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.
28002$rz1 Srxser, Stmv 325, Sarrra MOMCA, CALIFORNIA 40405 • Try.; 310.581.0900 • Fax: 310.581.0910
LOS ANGELES ~ N0. CALIFORNIA PORTLAND, 032 N6W YORK
Harry Rosenbaum, Esq. .
City of Santa Monica
June 25,2006 °
The relative balance between land cost inflation (based on changes in median condo
prices) and construction cost inflation (based on a construction cost index) was determined based
on current development cost data for recently wmpieted or construction-in-progress mufti-family
affordable developments assisted by the City, The approach uses a simple average of the ratio.
between Land purchase price and the sum of land cost and hard construction cost to derive the
land value percentage; the inverse of this ratio is the construction cost share.
Since annual adjustments to the Affordable Housing Unit Base Fee will be adopted by
resolution of the City Council each June, the calculaiion approach measures 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 of the immediately preceding year. The calculation uses the annual change in median
condo prices in the calculation, rather then yeaz-over-year changes in Mazch or any other month,
because median monthly prices can vary significantly dne to the number of sales and particular
composition of the sales in any particulaz month. The annual average tends to smooth out these
effects. The approach utilizes the monthly year-over-year approach for construction costs,
however, because construction represents a much lazger share of total project cost. Using the
most recently available construction cost inflation data better ensures that the Affordable
Housing Uztit Base Fee will keep pace with the actual cost to the City of developing affordable
housing.
Table I below presents the annual adjustment calcu]ation establishing the Affordable
Housing Unit Base Fee for FY 2006-07. It shows that a weighted average inflation index using.
this City Council-approved approach results in a 7.9 percent annual increase, compared with a
5.2 percent increase based on construction costs alone, or 5.1 percent based on the Consumer
Price Index (CP17.
It is my understanding that the results of the attached calculation will be the basis foz a
Resolution increasing the Affordable Housing Fee to the new amounts resulting from the
calculations presented in Table 1. We are available to assist you in presenting the Resolutioh to
the Clty Z.`OUnC1I.
Sincerely,
AUL ERN,
Paztner
HAMILTON, RABINQVITZ & ALSCFIULER, INC. ~ Page 2
Barry Rosenbaum, Esq.
City of Santa Monica .
June I5, 2006
Table 1
AHOrdable Housing Fee Annual Inflation Adfustment Calculations for FY 2006.07
Land Cost lnfladon
Median Annual Price
Z1P Code Change Dudng 2005
80402 -2.1% 30 5A% -0.1%
90403 9.8°,6 237 39.5% ~ 3.9°h
90404 25.5Yo 182 27.0°h 6.9%
90405 10:SYo ,'L4g 24.0°,5 25%
800 14.8°l0
Source: Los Ange/es Times, Real Es{afe Section, p. Kf 9, January 22, 2006 (based an DataQuick Intannetion Systems)
Consouctton Costndladon
Engineenng News Record's C.ortsiruc0on Cost
index
March 20051ndex VaWa 7 3D9
March 2006 Index Value 7,692
Percentage Change 2005-2006 S.~A
Source; Engineering News RecoM (available at hltp9hvww.enrconsfruction.COm/(eaturestwneco/su6slconstlndexHst.asp)
Dertvadon oftand Cosf and ConStrucdan Cost CalcufaSOn Weights
Most Recerrt CC$MFemily Rental Projects Land COST Hard Consiructton Tofal
742A Broadway $ 3,540,000 $ 8,700,000 $ 11,740,000
2601 Santa Monica Boulevard $ 3,25D,000 $ 8,700;000 $ 11,350,000
2209 Main Street $ RA2n.nnn g 9123910 $ 12.243.9tQ
$ 10,010,000 $ 25,323,910 $ 36,333,910
Source: Housing Division, City of Santa Monica 28% 72% 100%
lMladan FactorDertvadon
InflaOan Value Weighs 4Vtd, Ayg,
Lend Veluo lnSaOon 14.8% 28.3% 4.2%
Construc['bn Cost infla8on ~ 5.2°k 7t.7% 3.8°k
7.9%
Adjusted Fees
Oct 2095 Base Feea Inflation Factor Updafed Fees $ Change
Condos $28.08 7.9%
Apartments ~ $28.15 ~- $2.07
$22.33 7.9°5 $24.10 $1.77
Forfnformetion Only:
Consumer Price index Change, !A-Rtv-pr Co.,
All Urban Consumers
Feb. 20051ndexVafue 197.4
Feb_ 20081ntlex Value 207.6
Percentage Change 2005-2006 5.1%
Sources: US Bureau of Labor Statistics (available at: hltp7Mtmv.bls.gov/cps)
Prepared by Hamilton, Rabinavilz & A/SChuler, inc.
I-LAMILTON, RABINOVITZ & ALSCHULER, INC. Page 3