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sr-090809-1jc7~+ ~ ~,tYa, city council Report Santa Monica City Council Meeting: September 8, 2009 Agenda Item: ~=c~ 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 $26.45 per square foot of floor area would be increased by $0.69 and the current Affordable Housing Unit Base Fee for new market rate condominiums of $30.89 per square foot of floor area would be increased by $0.80, effective on November 9, 2009. The adjusted Affordable Housing Unit Base Fee would be $31.69 for new market rate condominiums and $27.14 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, its July 24, 2007 meeting, and July 23, 2008 meeting, the City Council utilized this methodology when it adopted Resolution No. 10149 (CCS), Resolution No. 10229 (CCS), and Resolution 10329 (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 2009-10 based on this established methodology. HR&A's analysis demonstrates that the current Affordable Housing Unit Base Fee for new market rate apartments of $26.45 should be increased by $0.69 per square foot of floor area and the current Affordable Housing Unit Base Fee of $30.89 for condominiums should be increased by $0.80 per square foot of floor area. The proposed resolution would revise the Affordable Housing Unit Base Fee accordingly, effective on November 9, 2009. The adjusted Affordable Housing Unit Base Fee would be $31.69 for new market rate condominiums and $27.14 for new market rate apartments. On August 26, 2009, the City published notice of this hearing and the availability of the HR&A analysis. The City republished this notice on September 2, 2009. A copy of this analysis has been available in the City Clerk's Office for public review since August 27, 2009 and is attached hereto as Exhibit B. Financial Impacts & Budget Actions There is no financial impact. Prepared by: Marsha Jones Moutrie, City Attorney Approved: ^~ M rs a Jor} s tfiloutrie City ttorn Forwarded to Council: Adopted and approved this 8th day of September, 2009. ~~a~ Ken Censer, Ma or I, Maria Stewart, City Clerk of the City of Santa Monica, do hereby certify that the foregoing Resglution No. 10422 (CCS) was duly adopted at a meeting of the Santa Monica City Council held on the 8th day of September, 2009, by the following vote: Ayes: Council members: Bloom, Davis, Holbrook, McKeown Mayor Censer, Mayor Pro Tem O'Connor Noes: Council members: None Abstain: Council members: None Absent: Council members: Shriver ATTEST: Maria Stewart, City C rk ,'~I?zY 1" Ifl. ,fit}V1bf'. ,^~C.i. HR&A Aovlsoas, Nc. Economic Development, Real Estafe Advisory & Public Policy Consultattts July 28, 2009 Mr. Barry Rosenbaum, Esq., Senior Land Use Attorney Office of the City Attorney City of Santa Monica 1685 Main Street Santa Monica, CA 90405 Re: Proposed FY 2009-] 0 Annual Automatic Adjustment for the Affordable Housin¢ Unit Base Fee Dear Mr. Rosenbaum This letter summarizes the results of applying the annual adjustment calculation methodology adopted by the City to establish the Affordable Housing Unit Base Fee pursuant to Santa Monica Municipal Code Section 9.56.070(b) ("the affordable housing unit base fee shall be adjusted [annually] based on changes in constructions costs and (and costs). This 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 April 24, 2006. A copy of the April 24, 2006 letter is included for reference as Attachment A hereto. The City Council approved the last annual increase for FY 2008-09 using this methodology when it adopted Resolution No. 10329 (CCS) on July 23, 2008. 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 was 6.50 percent measured between March 2009 (the budget adoption year) and March 2008. 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 2008 median condo price changes by City ZIP code were published by the Los Angeles Times on January 25, 2009, using Los Angeles County Assessor data compiled by MDA DataQuick. The weighted average change for the City was -11.9 percent. 2$~~2$TH STREET, SUITE 325,$ANTA MOMCA, CALIFORNIA 9~4~5 TEL:3t~.5$t.~9W FAX: 31~.5$1.~91~ Los Angeles New York Barry Rosenbaum, Esq City of Santa Monica July 28, 2009 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 actual development cost data for the two most recently competed or construction-in-progress multi-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 (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 Base Fee for FY 2009-10. It shows that a weighted average inflation index using this City Council-approved approach results in a 2.6 percent annual increase to $31.69 per square foot for condominium developments and $27.14 per square foot for apartment developments. It is my understanding that the results of the calculations shown in Table 1 will be the basis for a Resolution increasing the Affordable Housing Base Fee for FY 2009-10. We are available to assist you in presenting the Resolution to the City Council Sincerely, ~~ PAUL J. SILVERN, Partner HR&A ADVISORS, IrrC. Page 2 Barry Rosenbaum, Esq. City of Santa Monica July 28, 2009 Table 1 Affortlable Housing Unit Base Fee Annual Inflation Adjustment Calculations for FY 2009-10 Land Cost In/lation Median Annual Price Calculation ZIP Code Change During 2006 # Condos Sold Weights Weighted Avg. 90401 -8.4°/a 8 2.4% -0.2% 90402 -26.4% 23 6.9% -1.8% 90403 -13.2% 132 39.9°% -5.3% 90404 -7.9% 87 26.3% -2.1% 90405 -10.4 % 81 24.5 % -2.5 331 100.0% -11.9% Source: Los Angeles Times, Business Section, p. C12, January 25, 2009 (based on MDA Data Quick) Construction Cost Inflation Engineering News Record's Construclion Cost Index -- Los Angeles March 20081ndex Value 9,199.69 March 20091ndex Value g,7g9.1g Percentage Change 2008-2008 6.5%;, sa~.~-=.., s:~.. a. ,. Source: Engineering News Record (available at http://www.enr.construclion.com/features/coneco/subs/constlndexHist.asp) Derivation of Land Cost and Construction Cosf Calculation Weights Hard Construction Most Recent CCSM Family Rental Projects Lantl Cost Cost Sum Berkeley Place-3031 Santa Monica Blvd. $ 3,600,000 $ 9,625,568 $ 13,225,568 The Tahiti Apts.-2411 Cen tinela $ 1.725,000 $ 9.876.604 $ 11.601.604 $ 5,325,000 $ 19,502,172 $ 24,827,172 21.4% 78.6% 100.00% Source: Housing Division, City of Santa Monica lnflaflon Factor Derivation Inflation Value Weight Wtd. Avg. Land Value Inflation -11.9% 21.4% -2.5% Construction Cost Inflation 6.5% 78.6% 5.1 Adjusted Fees FY 2008-09 Fees Inflation Factor Updated Fees e $ Change Condos $30.89 2.6% $31.69 $0.80 Apartments $26.45 2.6% $27.14 .r $0.69 For Information Only: Consumer Price Index Change, LA-Riv-Or Co., All Urban Consumers, 1982-84 = 100 Mar. 2008 Index Value 223.606 Mar. 2009 Index Value 221.376 Percentage Change Mar. 2008-Mar. 2009 -1.0% Source: US Bureau of Labor Statistics (available at: http://www.bls.gov/cpi) Prepared by: HR&A, Inc. HR&A ADVISORS, INC. Page 3 ATTACHMENT A Apri124, 2006 HR&A Letter re: Annual Adjustment Methodology HR&A ADVISORS, INC. April 24, 2006 Mr. Ron Ba~eld housing Administrator City of Santa Monica 2121 Ciover(ield Blvd, Snite I00 Sanm Monica, CA 90405 Re; Annum Adjustment for the Affordable housing Pec Dear Ron Per your request, this leitcr summarizes an annual adjustment approach we recommended for the City of Santa Moniea's {"City"} Aifordable Housing Fee, which developers of multi- family residential developers may elect to pay, pursuant io Santa Monica Mutileipal Code Section 9SG.07Q as amended. This reoommondaton was included 3n Section V of our recent report, 2063 Updal~ 7heNaxttr Between NewMa'ket Rate Multi-Family Developments in rite City nlSanta Monlea and the Naed forAjjordable (lousing, Juiy 1, 2005 ("2003 Nemts Study CJpdate'~. In order to better ensure that the A1fonYable Ilou.4ing Fees remain eonsistentwith changing market conditions, it would be pendent for the City to apply an annual adjustment index, but to use as inflation concept other than the Consumer Price index (CPI). While the CPI is often used to make in£latlan adjustatenu because of its convenience; the monthly changes in the value of consumer goods thabdominate the CPI arc not be the most appropriate basis for measuring ohange in the City`s cost to develop atI'ordable housing. however, [o be meaningful, any altemative index mast rely on data that is readily accessible to City staff for caictdating the change, and for the public's information. A suifsble altemative approach would need to measure annual changes in ]and cost and construction posts, wlilch together account for about 75-SO percent ofthe cost of new affordable housing devetopment.t There are, in our experience, several wetl-established construction cost indices. We recommend Engineering News Record's (ENR} Consitvction Cost Index, because it ' The other20-25%consists afprofessionaF fear and other "soft costs" and financing costs, neither of which is regolarlymonitnred by RtiM party sources for inflation changos. 18e028rx $rar6T, $Urm323, $aNPA MnNIeA, CAr.a~pRalA 90t0$ ~ T2i,; 3(0.587.0900 ~ xsx: 310.581.a930 3[xpnwi&s Ya GSRORMA Pexn.am, OR Nsw Yaxtc fiecx rae,.;or~hl wemwntCOnmbc~v Ron $arefield Housing Division City of Santa Monica April 29, 7006 is updated monthly and is readily available via the Interact. Hrnvevar, there is no campaxable index of changes in land cost. Qne proxy measure that could be used for land cost changes is change in median condominium purchase prices.Z Since the median condo sale price for the City as a whole would 6e skewed by the tendency 1'or sales to be concentrated in a few subareas, a morv neuGal measure would bo fhe weighted average annual change in median condo sale prices by 7,IP Cade. These data are published by the Los Angeles Trtne.s each January, using Los Angeles Cowfy Assessor data compiled by Dataquick. They arc also available on a subscription basis from Cthcr vendors, such as FirsiAmeriCan Beal Estate So(utlons- Tha relative balance 6etweeo land cost irrtlation (based on changes in median condo prices) and constnution cost hiffafion (based on a construction cost index) could be ded:rnrincd based on current development cost data far recently completed orconstruction-in-progress multi- family affordable developments assisted by the City. 1VC rccommcnd using a simple average of the ratio betweea land purchase price and the sum of Land cost and hard construction cost fo derive the land value percentage; the inverse of this ratio would be the construction cost share.' Since khe 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 reeammend that City staff measure dte 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 MaxClt Of [he immediately preceding year. We recommend using t11C annual change in median condo prices -tn the calculation, rather then yCar- over-year changes in March or any other month, because median monthly prices can vary signxfieamly due to the number of sales and particular composition of the sales in any particular month. Tito amoral average tends to smooth ouk khese affCCts. w.e recommend the monthly year- over-year approach for cmtsttnetion costs, however, because eonstmntion represents a much larger share of total project cost Using the most recently available construction cost inflation data belles ensures that the Affordable Housing Fee wilt keep pace with the actual cost Yo the City of devetnping affordable housing. Table 1 below, which is a variation on Table V-5 from the 2005 Nexus Study Update,a IllvslmtCS how such an annual index Could be constructed and applied to file recently adopted Affordable Housing Fees for new market tare apartment and Condominium projects, for FY 2006-07. ti shows, for example, that a weighted average inflation index as proposed herein ' Consistent withthe City's historical esperienec, this azsumcs that mostnewaffordable mufti-family pmjems will be developed in multidamity districts, nlUou;h some recent projects include sites in commercial disni<u. Unlike rasidentialproperty, then is na teaJily available darn source for commercial lama griucchanges. ' For aeampte, iEthe average land east for recent projects was$-9A million and asxrage heal wnswction cost wax 59.0 million, the fend to land plus consnuction cost ratio would be 2S%(53.0 million 1($3.0 mi0ion+$9,0 million) and the tonszntcfion cost to land cost plus construction cwt ratio wonid bs 75%. ' Table V-5 was based on Citywide average feu, which was aae alternative fee schedule presented in the 2005 Nexus Study Updatu. Tahle 1 heroin uses the alternative svetnfitedmerage fees, which were also presented in the 2005 Nexus Study Update, and laves these fees that the City Counctl acUially a-0opted on October 11, 2005. HAht1LF0Y,RA$tA"OVCCZ&A1.SGHt71.2?R, INC, page 2 Ren 13arefie7d Housing Division City of Santa Monica Apri32A, 2006 wonid result is a 7.9 percent annual incroase, compared with a 5.2 percent increase based on construction costs alone, or 5.1 pemcnt based on tho CPI. It is my understanding that tho Inflation adjustment approach described above will be prosentcd to the City Council on Mxy 9, 200b. SVe aro available to assist you, as needed, with that presentation. - - Sincerely [II.J, LVEKN; Partner HA4t7f.'rON, RAIINOVf'T7. & AtSCtitiLER, INC. Pz1gC 3 fton earoficld Housing TJirision Cary of Santa Monies Ap]i12d, 200fi Tebta t AHortla618 Housinn Fae AnnuaHn6aHOn AtljuStmetrt CateulaHOna for FY Z669.6T Lantl CpsEln/ladOn M1tedlm Annnal Prtca Calcafatlo0 Z1P Cptle Change 9uain9 2008 Y1 COndae Spttl WelBhta WoighMtl Avg. 96461 33.@•b Z] ;.6% 1.6% 90402 ~2.1% 3P E.0% -0.1% 90409 8,6% 237 39.5% 3.8°b @0464 25.5% 162 2i.tYA 6.0% s64o-s t0.b% fog, 24.0% ?~ Boo ta.a% Saume: Eos Aagplas 71mes. Re91 Estate S¢etkn, p. Xt9, Jantgry 22.2696 (basetl on pafaCui<k Infomradpn $trotemsJ COnSfMCllan Coat IMaHOn Er.8lneednq Nervs Record's Conslrucilon Cost maax Marcb 20051ndex Valve ~ ],300 hlerch 20081ndex Valve ].892 Pettenteye Gban8e 2008-2066 E, Spurep: Enpineedng Nuns RecorE (avallabie at h8p:/Nmw.ertncansWCppn.camtteatureslOpnaw/subslOanslirtdaxHibbasp) Oar(vatipn oflantl COSt antl COnatrue6an Cast Cafea(adprt Wetghh Most Recent CCSM Fatuity Ranlai ProjaHS Land CVai kartl Cpnstruc6an Tptal 1a298roatlway 3 3.69P,000 ; e,t00.00P $ 11,]40,000 2601 3eMa MuNCa BOUlavacd 3 3,280A00 $ 8,109A00 $ 11,030,00P 2209 Maln Shael ; 3.126.006 5 91?3910 ,$ t?2b~940 $ 10.010,000 $ 25,323.y1P 6 35,333,916 28°k 72°!0 100% Source: Nousing olvlsWn, Clty of Santa Maniw tnftatton FervorCenvatton 1n1h68n YOlua WeFght RNd,Avg.... land Valve lnflaUOn 14,8'! 28.3 42% COnslmNan Cest in6adon 5.2% i1.i% S T.9% Adjus(etlFeBa Oct. 200$eaae Feea Innatfon Fa0lpr Updetad Eaea ;CbanBs Condos g23.03 7.9% $28.15 52.0] APartmenls 922.33 7.9% ;24.10 51.7] Far ln(amiaariao Only Consumer Ptk:a Index Chango. LA-Pov-OtCp.. Ail Urban CorHUmen Feb. 200E IMax Valua 147.4 Feb. 20061Mex VSiua 207,6 PerceniaBe Charge 2005.2006 bA% Sourco; US Bureau otlabor BlaUSOw(avapabla al: htlpYhrvm.bls-y0v(ep) Pre~radby Hamillw, Rabirtavilz & Ahchule', Inc. HAFttL7pN, RAAINOYITZ & A45CHi1LER, INC. Page 4 Reference Resolution No. 10422 (CCS).