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).