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SR-072308-1OCity Council Meeting: July 23, 2008 Agenda Item: ~ `® To: Mayor and City Council From: Marsha Jones Moutrie, City Attorney Subject: .Resolution Automatically Adjusting the Affordable Housing Unit Base Fee For New Market-Rate Multifamily Development Pursuant to Municipal Code Section 9.56.070(b) Recommended Action Staff recommends that the City Council adopt the attached Resolution which would automatically adjust the Affordable Housing Unit Base Fee for new market rate apartments and condominiums. More specifically, the current Affordable Housing Unit Base Fee for new market rate apartments of $25.31 per square foot of floor area would be increased by $1.14 and the current Affordable Housing Unit Base- Fee for new market rate condominiums of $29.56 per square foot of floor area would be increased by $1.33, effective on October 1, 2008. The adjusted Affordable Housing Unit Base Fee would. be $30.89 for new market rate condominiums and $26.45 for new- market rate apartments. Executive Summary ..Santa Monica Municipal Code Section 9.56.070(b) provides that the Affordable Housing Unit Base Fee shall be adjusted annually by resolution based on changes in construction and land costs. On June 13, 2006, the City Council approved the methodology for ascertaining changes in those costs and thereby for calculating the adjustment. This resolution has -been prepared in accordance with the approved methodology and is attached as Exhibit A. Discussion Section 9.56.070 of the City's Affordable Housing Production Program provides that the Affordable Housing Unit Base Fee shall be adjusted annually by City Council resolution based on changes in construction costs and land costs. In order to implement the Council's decision, staff formulated a proposed method of computation to reflect changes in construction costs and land costs. This methodology was detailed in an April 24, 2006 letter prepared by Paul S. Silvern of HR&A Advisors, Inc. ("HR&A") on 1 behalf of the City.. This methodology was approved by the City Council at its June 13, 2006 meeting. At its June 27, 2006 meeting and its July 24, 2007 meeting, the City Council utilized this methodology when it adopted Resolution No. 10149 (CCS) and Resolution No. 10229 (CCS) respectively which establish the current Affordable Housing Unit Base Fee. HR&A has calculated the appropriate adjustment to the Affordable Housing Unit Base Fee for FY 2008-09 based on this established methodology. HR&A's analysis demonstrates that the current Affordable Housing Unit Base Fee for new market rate apartments of $25.31 should be increased by $1.14 per square foot of floor area and the current Affordable Housing Unit Base Fee of $29.56 for condominiums should be increased by $1.33 per square foot of floor area: The proposed resolution would revise the Affordable Housing Unit Base Fee accordingly, effective on October 1, 2008. The adjusted Affordable Housing Unit Base Fee would be $30.89 for new market rate condominiums and $26.45 for new market rate apartments. On July 12, 2008, the City published notice of this hearing and the availability of the HR&A analysis. The City republished this notice on July 18, 2008. A copy of this analysis has been available in the City Clerk's Office for public review since July 11, 2008 and is attached hereto as Exhibit B. Financial Impacts & Budget Actions There is no financial impact. Prepared by: Marsha Jones Moutrie, City Attorney Approved: Forwarded to Council: e Ma ha M ~ u ie P. ont Ewell City Attor City Manager 2 Analyze. Advise. Acl. HR&A ADVtsoxs, Ixc. Economic Development, Real Es[ate Advisory & Public Policy Consultants July 10, 2008 Mr. Barry Rosenbaum, Esq., Senior Land Use Attorney Office of the City Attorney City of Santa Monica 1685 Main Street Santa Monica, CA 90401 Re: Proposed FY 2008-09 Annual Adiustment for the Affordable Housine Unit Development Cost Dear Mr. Rosenbaum: This letter summarizes the results of applying an annual adjustment to the Affordable Housing Unit Development Cost pursuant to Santa Monica Municipal Code (SMMC) Section 9.56.070(c) (" ...Commencing on July 1, 2007 and on July 15` of each fiscal year thereafter, the City's affordable housing unit development cost shall be adjusted based on changes in construction costs and land costs ..."). The inflation methodology is the same as that used to produce. annual adjustments for the Affordable Housing Unit Base Fee, pursuant to SMMC Section 9.56.070(b). That methodology was approved by.the Santa Monica City Council at a public hearing on June 13, 2006, based on the recommendation of HR&A in a letter to City staff dated Apri124, 2006. A copy of the Apri124, 20061etter is included for reference as Attachment A hereto. SMMC Section 9.56.070(a)(4) provides that developers of market rate multi-family housing are eligible to pay a fee equal to a fraction of an affordable unit when the number of units otherwise required by Section 9.56.050(d) is less than 0.75. In such cases, the amount of the fee is equal to the City's Affordable Housing Unit Development Cost multiplied by the fractional unit. The City's Affordable Housing Development Unit Cost is defined as the average cost to the City to develop a unit of housing affordable to low- and moderate-income households. The Affordable Housing Unit Development Cost was originally estimated to be $239,949, as contained in the nexus study prepared by HR&A in 2005 to support the imposition of the Affordable Housing Unit Base Fee. The amount of the Affordable Housing Unit Development Cost is equal to the City's total cost to develop a unit of affordable housing (i.e., land, construction, professional fees and other "soft" costs and financing costs) minus the amount of ~ Hamilton, Rabinovitz & Alschuler, Inc, The Nexus Between New Market Rate Multi-Family Developments in the City of Santa Monica and the Need for Affordable Housing, 2005 Update, July 1, 2005, prepared for the City of Santa Monica. 2800 28TH STREET, Scm~ 325, SnNTn Moxtcn, CAt,teoaxu 90405 • TrL: 310.581.0900 Fnx: 310.581.0910 Los Angeles New York Barry Rosenbaum, Esq. City of Santa Monica July 10, 2008 construction loan that can be supported by the net operating income derived from operating a typical City-assisted affordable housing development. A 2005-2007 cumulative inflation increase for the Affordable Housing Unit Development Cost to $265,632 using the approved methodology was adopted by the City Council when it approved Resolution No. 10230 (CCS) on July 24, 2007. For the construction cost inflation component of the calculation approach, the Engineering News Record's (ENR) Construction Cost Index specific to the Los Angeles metro area is utilized, because it is updated monthly and is readily available via the Internet. The applicable index change between March 2007 and March 2008 was 3.7 percent. Although there is no comparable index for inflation in land cost, we use the weighted average annual change in medium condominium sale prices by ZIP Code as a proxy measure for land cost changes measured for the immediately preceding calendar year. The 2007 median condo price changes by City ZIP code were published by the Los Angeles Times on January 2Q 2008, using Los Angeles County Assessor data compiled by Dataquick. The cumulative weighted average change for 2007 was 7.4 percent. 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 the two most recently completed or construction-in-progress multi-family affordable developments assisted by the City. The approach uses a simple average of the ratio between land putchase price and the sum of land cost and hard construction cosfto derive the land value percentage (21%); the inverse of this ratio is the construction cost share (79%). Table 1, on the following page, presents the annual adjustment calculation establishing the Affordable Housing Unit Development Cost for FY 2008-09. It shows that a weighted average inflation index using the City Council-approved approach results in a 4.5 percent annual increase to $277,585. If is my understanding that the results ofthe calculations shown in Table 1 willbe the basis for a Resolution increasing the Affordable Housing Unit Development Cost for FY 2008- 09. We are available to assist you in presenting the Resolution to the City Council. Sincerely, L ~~~ PAUL J. SILVERN, Partner HR&A ADVtsOxs, It1C. Page 2 Barry Rosenbaum, Esq. City of Santa Monica July 1Q 2008 Table 1 Affordable Housing Development Cost Cumulative Inflation Adjustment Calculations for FY 2008.09 Land Cost Inflatlon Median Annual Price Calculation ZIP Code Change During 2007 # Condos Sold Weights Weighted Avg. 90401 -2.2% 16 3.7% -0.1°/ 90402 44.5% 31 7.1% 3.2°/ 90403 1.0% 160 36.7% 0.4% 90404 1.4% 92 21.1 % 0.3% 90405 11.4 % 137 31.4 % 3:6°/ _ 436 7.4% Source: Los Angeles Times, Real Estate Section, p. K10, January 20.2008 (based on DataQuick Information Systems) Construction Cost Inflation Engineering News Record's Construction Cost Index -Los Angeles March 2007 Indez Value 8,873.09 March 2008 Indez Value 9,199.69 Percentage Change 2007-2008 3.7 Source: Engineering News Record (available at http://www.enr.construction.com/features/coneco/subs/constlndexHist.asp) Derivation of Land Cost and Construction Cost Calculation Welghts _ Hard Construction Most Recent CCSM Fatuity Rental Projects Land Cost Cost Sum Berkeley Place-3031 Santa Monica Blvd. $ 3,606,109 $ 10,579.620 $ 14,185,729 The Tahiti Apts: 2411 Centinela $ 1.920.851 $ 9.929.178 $ 11.850.029 $ 5,526,960 $ 20,508,798 $ 26,035,758 21.2% 78.8% 100.0% Source: Housing Division, City of Santa Monica Inflatlon Factor Derivation Land Value Inflation Construction Cost Inflation Adjusted Unit Cosf Affordable Housing Development Cost Inflation Value Weight Wtd. Avg. 7.4% 21.2% 1.6% 3.7% 78.8% 2.9% 4.5% FY 2007-08 Cost/Unit Inflation Factor For Information Only: Consumer Price Indez Change, LA-Riv-Or Co., All .Urban Consumers, 7982-84 = 100 Mar. 2007 Indez Value 216.500 Mac 2008 Index Value - 223.606 Percentage Change Mar. 2007-Mar. 2008 3.3% .Source: US Bureau of Labor Statistics (available at: http://www.bls.gov/cpi) Prepared by HR&A Ina HR&A ADVISORS, hvC. Page 3 ATTACFIMENT A AprIl 24, 2006 HR&A Letter re: Annual Adjustment Methodology HR&A ADVISORS, INC. i~rlel ~VZC'. A(1Vf5E'. ~"tCt. I~AMI[.TON, RABIIJOV172 & AI3CHOLF&, ING Po&cy, FLmawT & MmwBe~es~CoxivhmKs April 24, 2006 Mr. Ron Barefield Housing Adminisiratar City of Santa Moai~ 2121 Cloverfield Blvd, Suite 100 Santa Monica, CA 90405 Re: Annual Adiustment for the Affordable Housine Fee DearBon: Per your request, this letter summarizes an annual adjustment approach we recommended for the City of Santa Moniea's ("City's Affordable Housing Fee, which developers ofmulti- family residential developers may effect to pay, pursualrt to Santa Monica Municipal Code Section 9.56.07fl, as amended. This recommendation was included ill Section V of our recent report, 2005 Update. T7re Nexus Between New Market Rate Multi-Family Developments in the City of,Srntta Monica and the NeedforA, ffordabte Housing, July 1, 2005 {"2005 Nexus Study IJpdate'~. In order to better ensure that the Affordable Housing Fees remain consistent with changing market conditions, rt would be pnrdent for the City to apply an annual adjustme~ index, but to use an inflation concept other than the Consumer Price Index {CPI). While the GPI is often used to make. h3IIation adjustments because of its convenience, the monthly changes in the value of consumer goods that domhlate the CPI are not be the most appropriate basis for measuring change in file City's cost to develop affordable housing. However, to be meaningful, any alternative index must rely as data that is readily accessible to City staff for calculating the change, and for the public's iafomratioa. A suitable alternative approach would need to measure annual changes in land cost and constauction costs, which together account for about 75-80 percent of the cost of new affordable housing developmeatl There are, in our experience, several well-established construction cost indices. We recommend Engineering News Record's (ENR) Constnlction Cost Index, because it ' The other 20-25°'o consists of professional fees aad other "sob costs" ~d financing costs, neithQ of w3rich is regularly monitored by third party sources for inflation chmges. 28002%nt S~txecr, Snrrd 325. SANfA bforncA; CAL~ORNfA 90405 • TII.: 310.581.0900 • FAx: 330581.0930 7A3 Atanm FR KO. CAI.7EOR2IIA PORI4AND.Or{ KEPI 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 inland cost. One proxy measure that could be used for tend 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 subazeas, 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 Tames each January, using Los. Angeles County Assessor data compiled by I7ataquick. 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 constntcton cost inflation (based on aconstntction wst index) could be determined based on current development cost data for recently completed orconstruction-in-progress mulfi- family affordable developments assisted by the City. We recommend using a simple average of the ratio between land purchase price and the sum of laced cost and hard construction cost to derive the land value percentage; the inverse ofthis ratio would be the construction cost share.3 Since the proposed annual inflation adjustments Yo 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 of the immediately preceding year. We recommend using the annual change in median condo prices in the calculation, rather then year- over-yeaz 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. T'he annual average tends to smooth out these effects. W.e 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 apartrnent and condominium projects, for FY 2006-07. ft shows, for example, that a weighted average inflation index as proposed herein z Consistent with the City's historical experience, this asswnes that most new affordable mniti-family projects will be developed in multi-family districts, aldrough some recent projectssnclude sites in commemial districts. Unlike residential property, there is no readilyavailabledeta source for commercial land price changes. ' For example, if the average land cost for recent projects was 53.0 million and average hard construction cost was $9A million, the land to land plus construction cost ratio would be 25% ($3.t) million / ($3.0 million +$9.0 million) aced the constnrction cost to land cost plus constmction cost ratio would be 75%. ° Tabie V-5 was based on Citywide average fees, which was one attemative fee scfiedule presented in the 2005 Nexus Study Update. Table 1 herein uses the ahemative weighted average fees, whicfi were also presentedm the 2005 Nexus Study Update, and it was Brew fees that the City Council acntally adopted on October 11, 2005. HAMII.TON, RABINOVIIZ & ALSCHULER, INC. Page 2 Ron Barefield Housing Division City of Santa Monica Apri124, 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, 200fi. We are available to assist you, as needed, with thatpresentation. Sincerely UL J. , VERN, Partner H.4MLlTON, RABINOVITZ & ALSCHULER, INC. - Page 3 Ron Barefield Housing Bivision City of Santa Monica Apri124, 2006 Table 1 Affordable Housing Fee Annual lnflaflon Atljustmarrt CalcuWgans for FY 2006-07 Land Cost Inflation Metlian Annual Pdoe Caleuiation. ZIP Code Change During.2005 0 Condos Sold Weights Weighted Avg. 90401 - 35.9% 27 4.5% t.6% 96402 -2.7% 30 5.0°d -0.1°.6 90403 9.3% 237 39.5% 3.9% 90404 25.5% 162 27.0°b 6.9% 90405 10.5% ],9_4 24.0% ?~ 606 - 14.8% Source: Los Angeles limes, Real Estate Seegon, p. K19, January 22, 2006 (based on OataQuick Infonnaflon Systems) Construotion Cost Irrtlatlon Engineedng News Record's Consirucifon Cost Index March 2005 Index Value 7,309 March 2008 Index Value 7,692 Percentage Change 2005-2006 5.2% Source: Engineedn9 News Record (available at hitplAvww.enr.construction.comJfeatures/cenecofs~s/eonstlndeldiistasp) DerAration of Land Cost and Construction Cost Calculation Weights Moat Recent CCSM Famly Rental Projeels. - Land GOat HaN COnsWedon Total 1424 Broadway $ 3,640,000 $ 8,100,000 $ 71,740,000 2601 Santa Monica6oulevard $ 3,250,000 ~ $ 8,100,000 $ 11,350,000 2209 Mein Street $ 3.120.000 3 9.123.910 5 12.243b10 - $ 10,010,000 $ 25,323,910 $ 35,333,910 28% 72°h 100% Source: Housing 61Wsion; Cfty of Santa Montca lntiation FaeforDerlvat/on IMIaBOn Value Weight Wtd. Avg. Land Valua lrrflatlon 14.6% 28.3°k 4.2% Cortstructlon Cost Ingagon 5:2% 71.7% $,$°~, 7.9°b AtlJustadFees ~ Oct. 2005 Baas Feea inflation Factor Updated Faes $ Change Condos $28A8 7.9°k $28.15 $2.07 Apartments $22.33 7.946 $24.10 $1.77 For Information Only Consumer Price Index Change, LA-Riv-Or Ca., All Urban Consumers Feb. 20051ndez Value 197.4 Feb. 2006 Index Value 207.5 Percentage Change 2005-2006 5.1% Source: US Bureau of Labor StadsSa (available at: hhpd/wurw.bfs.govlepq Prepared by. Hami7on, Rabinovfh & Alschuler, Ina HAMII.TON, RABIIIOVTTZ a$ ALSGHULHR, INC. Page 4 Reference Resolution No. 10330 (CCS).