sr-090809-1kc7®
c;tYo, City Council Report
Santa Moniea
City Council Meeting: September 8, 2009
Agenda Item: 1 ~~"
To: Mayor and City Council
From: Marsha Jones Moutrie, City Attorney
Subject: Resolution Automatically Adjusting the Affordable Housing Unit
Development Cost Pursuant to Municipal Code Section 9.56.070(c)
Recommended Action
Staff recommends that the City Council adopt the attached Resolution which would
automatically adjust the Affordable Housing Unit Development Cost for new market rate
apartments and condominiums. More specifically, the current Affordable Housing Unit
Development Cost of $277,585 would be increased by $7,217 effective on November 9,
2009. The adjusted Affordable Housing Unit Development Cost would be $284,802.
Executive Summary
Santa Monica Municipal Code Section 9.56.070(c) provides that the Affordable Housing
Unit Development Cost 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 these 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
Santa Monica Municipal Code Sections 9.56.050(d) and 9.56.060(e) provide that when
developers of market rate multi-family housing are providing affordable housing units on
or off-site respectively and the calculation of the number of affordable housing units
required results in a fractional unit, these developers are eligible to pay a fee equal to
the cost. of producing that fractional unit if that fraction is less than .75. Section
9.56.020 defines the affordable housing unit development cost as the City's average
cost to develop a unit of housing affordable to low- and moderate income households.
Section 9.56.070(c) of the City's Affordable Housing Production Program provides that
the Affordable Housing Unit Development Cost shall be adjusted annually by City
Council resolution based on changes in construction costs and land costs. In order to
1
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
behalf of the City. This methodology was approved by the City Council at its June 13,
2006 meeting. At its July 24, 2007 meeting and its July 23, 2008 meeting, the City
Council utilized this methodology when it adopted Resolution. No. 10230 (CCS) and
Resolution No. 10330(CCS) respectively which establishes the current Affordable
Housing Unit Development Cost.
HR&A has calculated the appropriate adjustment to the Affordable Housing Unit
Development Cost for FY 2008-09 based on this established methodology. HR&A's
analysis demonstrates that the current Affordable Housing Unit Development Cost of
$277,585 should be increased by $7,217. The proposed resolution would revise the
Affordable Housing Unit Development Cost accordingly, effective on November 9, 2009.
The adjusted Affordable Housing Unit Development Cost would be $284,802.
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:
Forwarded to Council:
2
%~i iti?r'r'E'. .'1{I'v'1'if?, 1~C"t.
HR&A ADVISORS; INC.
Economic Development, Real Esfate Advisory & Publfc Policy Consid[ants
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 90401
Re: Proposed FY 2009-10 Annual Adjustment for the
Affordable Housing 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 151 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 April 24, 2006 letter 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
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 SantaMonica.
ZBOO ZBTH STREET, SVITE 325, SANTA MOMCA, CALIFORNIA 9O4OS • TEL: 310.581.0900 Fax: 310.581.0910
Los Angeles New York
Barry Rosenbaum, Esq.
City of Santa Monica
July 28, 2009
Cost is equal to the City's total cost to develop a unit of affordable housing (i.e., ]and,
construction, professional fees and other "soft" costs and financing costs) minus the amount of
construction loan that can be supported by the net operating income derived from operating a
typical City-assisted affordable housing development. The City Council approved the last
annual increase for 2008-09 using this methodology when it approved Resolution No. ] 0330
(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 between March 2008 and March 2009 was 6.5 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 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 Dataquick. The cumulative
weighted average change for 2007 was -11.9 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 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 Development Cost for FY 2009-10. It shows that a weighted
average inflation index using the City Council-approved approach results in a 2.6 percent annual
increase to $284,802.
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 Unit Development Cost for FY 2009-
10. We are available to assist you in presenting the Resolution to the City Council.
Sincerely,
y~~
PAUL J. SILVERN,
Partner
HR&A ADVISORS, INC. Page 2
Barry Rosenbaum, Esq.
City of Santa Monica
July 28, 2009
Table 1
Affortlable Housing Development Cost Annual Inflation Atljustment Calculations for FY 2009-10
Land Cost Inflation
Median Annual Price Calculation
ZIP Code Change During 2008 # Condos Sold Weights Weightetl Avg.
90401 -8.4°/a 8 2.4% -02%
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 DataQuick)
Consiructi on Cost Inflation
Engineering News Record's Construction Cost Index -- Los Angeles
March 20081ndex Value 9,199.69
March 20091ndex Value 9,799.19
Percentage Change 2008-2009 6.5%,~
Source: Engineering News Record (available at http://www.enr.construction.coMfeatureslconeco/subs/constlndexHist.asp)
Derivation o/Land Cost and Construction Cost 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 Centinela $ 1.725.000 $ 9.876.604 $ 11.601.604
$ 5,325,000 $ 19,502,172 $ 24,827,172
21.400/a 78.6°°/a 100.0%
Source: Housing Division, City of Sanla Monica
Inflation 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
.: 2.6
Adjusted Unit Cost
FY 2008-09 Cosf/Unit Inflation Factor Uptlatetl CosUUnit _ $ Change
Affordable Housing Development Cost $277,585 2.6% $284,802 $7,217
For Information Only:
Consumer Price Index Change, LA-Riv-Or Co., All
Urban Consumers, 1962-84 = 100
Mar. 2008 Index Value 223.606
Mar. 2009 Intlex 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, Ina
HR&A ADVISORS, INC. Page 3
ATTACHMENT A
Apri124, 2006 HR&A Letter re: Annual Adjustment Methodology
HR&A ADVISORS, INC.
An,th'ze. r\de-i:e. Act.
I?AM[LlY1W, R.taR.YJV irS. & ALU.rn ctn, [Nf:.
PMity. MCSrrio(S Mmug<ment COruWHnv
April 24, 2ooe
Mr. Ron Burefield
housing Administrator
City of Santa Monica
2121 Cloverfield Blvd., Suite too
Santa Montca, CA 90405
Re: Annual Adyustrnent for thc Affordab€e Housing Fee
Dear Ron:
Per yourreyuest, this letter summazizes an annnal adjustment approaoh wo recommended
for the Gity of Santa Monica's {"City"} Affordable Housing Feo, which developers of multi-
family rcgidential developers may oleo to pay, pursuant to Santa Monioa Municipal Code
Section 9.56.010, as amended. This teoommeudation was included in Section V of our recant
report, 2005 update, The Nexus Between New Market Rate Multi-Family IIevelopments in the
Crty of'Santa Monica and the Need forR,fJordabfe Hauling, Juty 1, 2005 {"2005 Nexiu Study
Update"}.
In order to better ensure that thc Affordable Housing Fees remain consistent with
changing market conditlans, k would be prudent f'or the City to app}y a» annual adjustment
index, bue to use an infiatinn concept other than the Consumer Price index (CPT). While the CP1
is often used to make inflation adjustments because of its cnnvcnien6a, the monthly ctrattges in
the value ofconsumer goods that dominate the CPI are not be the most appropriate basis for
measuring change in the City's cost to develop affordable housing. FTowever, to be meaningful,
any alternative index must rely on data that is readily accessible to City staff for catenlating the
change, andfar the public's information,
A sui#abte alternative approach would need to measure annual changes fin land cost and
construction posts, which togcdrer account for about 15.80 percent of the cost of new affordable
housing development' There are, rn our experience, several well-estab6ahed constrretion cost
indices. Wo recommend Engineering News Record's (ENRj Construction Cost Index, because i#
' The other20-2510 matish ofprofesslcuxl fees and other"soft cells"and financing costs, norther of
wMeh is regularly monitomd by Third party sourus for iMtatinn changes.
?89028tH Sra£ar. SUna323, Snerra MOmCA, CArmwmA 96703 • I£u 3t0.38k.0900 • Ynx: 330.38S.PI10
ant AFratFS Ntl. Cn[mJnNU ROxnAvn~aR N£w YOwc
Ran $arzfield
Housing Division
City of Sanra Monica
Apri12V, 2006
is updated monthly and is readily available via the intemet. However, there is na comparable
index of changes inland cost. One proxy measure that could be used for land cost changes is
change in median condominium purohase prices' Since the median condo sale price for the City
as a whole would be skewed try the tendency for sales to be concentrated in a few subareas, a
more neutral measure wooed be the weighted average ammae change in median condo sale prices
by 7.IP Code. These data are published by ilia Los Angeles Trmes each January, using Los
Angeles County Assessor data compiled by Dataquick. They arc also available on a subscription
oasts Gum other vendors, such as First American Real Hstato.Solutions.
The 1•eiative balance benvaen land oust inflation {based on changes is median condo
prices) and constnction cost intention (bsscd on a construction cost index) could be determined
based on current devetopmcnt cast data for recently comploted or constnection-in•progmss muiri-
Famity affordable devciapmcros assisted by the Ciry, We recommend using a simple average of
the rntio between land purchase price and iho sum of land cost and hard construction cost to
derive the land value peecenWgo; the inverse of this ratio would be the construction cost share.;
Since the proposed amrual inf3ation adjustments to the AlTordnbee Housing Fee will be
adapted by Resolution of the City Cnuncii as part of the annual budget process each June, we
recommend that City stuff measure the weighted average aanuae change in median condominium
price for the immediately preceding calendar year, and ilia construction cost index change
between March of the budget adoption year and March of t€te hnmcdiatc(y preceding year. We
recommend using the annual eliangs in median condo prices in the calculation, rather then ycar-
over-year changes in Mazch ar any other month, because median montttiy prices esn vary
signilicamly due to the number of sales and particular composition of the sales in any particular
month. Tese annual average tends to smwth out these effects. We recommend the rnonihty yearv
over-year approach for constmction costs, howcveq because construction represents amuck
larger share of total project cost. Using the most recently available construction cost inflation
data betttr ensures that the Affordable keovsing Fee wilt keep pace with the actuak cost to the
City of developing affordable housing.
Table 1 below, which is s variation cn Tabte V-5 from ihti 2005 Nexus Study Update,"
illustrates how such an annual index could be constructed and applied to the recently adopted
AffordableFiousing 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 heroin
' Ctmsistrntwidt the City's historical zxperienec, this assumes that most new atYoMabkmulti-family
projects wild be dcvelzped an multi-family disficls, although some rector projeen include rites in <ommeezial
districts. Unlike msidantint property, thzre is no readily avaitabte data source to commercial land price changes.
' For example, if ific avcmga Sand rost for resent projects eves Ss.0 million and average haul wnswction
cost wus$9.0 mili3on,tht land to land plus rnnsiructlon cost ratio wautdh25%($3.0 millionl($3.9 million+$9.0
million) and the ronstmetion cost to land cost plus ronsfmction tort rntio won3d be 73°fo.
' Table V-S was based on Citywide average fees, which was one ahemative fm schedule presented in the
2009 Nexus Study Update. Tahle 1 herein vsa the alicmalive wetghted m~ernge tees, which wero also presented in
the 2005 Nexus Study Update, end it wos ihzse fees that tlu City Council adualEy adopted on October 7 t, 2095.
HAMILRON, RABt&-0VFT7.&ALSCHULF,ft, TFaG. Yage 2
Kan Barefield
Housing Division
City of Santa Monica
Apri12d, 2006
would result in a 7.9 percent anmial increase, compared with a 5,2 percent increase bayed on
constnwtion costs alone, ar 5.1 percent based on the CPI.
It is my understanding tha[ the htflation adjustment approach desceibed above will bo
presented Ca the City Council on May 9, 2066. LVe are available to assist you, as needed, with
that presentation.
Sincerely
. I7I. 7. VERN,
Partner
H.~wt.rott, RAE3INOVITJ, ~ Atscttirtsn, tuC. Page 3
Ran Barcticld
Housing Division
Ciry of Santa Mauicn
Apri124, 2006
Tablo
Attaraa0ro Houalnn Fa¢ Annual tn0ation Rajuatmant CaleDlatlona for FY 2a08AT
Land Goat[nttatlon
Median Anneal Prtca G¢IC¢18ttOn
ZIF Catle Change CUtln93D05 pCOndos SOfd We]ghts Wglghted Avg
90401 55,9% 3] ;.6% 1.8%
904D2 -2.iX 50 fi.D6'e -0.i%
90903 8.8% 25] 39.9E 3.9°6
90904 253% i02 27.0% 8.fl°k
809QS 10.5% - 14 24.Q% 2>,~
60a t4.8%
Source: Los Mgofes Times. Real Esta(e Sscltan, p. K19, Jamrary22. 2006 (based arc ~ala6ufck InfgmuUgn 5yatams)
COnstrtrcltan Cas[/n//afhn
Englneadng News Record's Cgnsimcdan Cosl
Intlax
Mara 20as Index Value T,gpg
March 20081ndex Yelae ].092
Percenla9e Change 2005-2W8 g
5aurce: Engineedrg R'ews Recortl (avallabte at bltp lNrvm,rnr.consWCUan.mndfealqraS/canew/suESlwrtatlntlevNfetasp)
DarNallon oltand Cost end COnaWChon Cost Ca(calaOOn Werghh
MoalfteceM CCSM Family Rental Pro(acb LarW Cgai Hard COnstraeUOn Total
1924 Broadway 3 3.640.000 S 0, 100,000 S 11,]gOp00
26015aMa Mgnka SOUlevard 3 3,280.000 S 8.t00A00 5 11,350.D00
2209 Main 3lraei $ 3.120.DDn 5 9125910 R 12205910
3 10.010,000 $ 25,323.910 5 35,333,910
28% ]2% 700%
Sgan»: tbgaing CWiston, Cfry of Santa Manica
lnftafbn FacforOanvagon
U9anon Valaa Weight RNd. Avg.
Lartd VaWa lnBadon 14.8'! 29.3% 4.2°b
tigtla'INq(Ign t.'bat Inil3dan 5.2YO 7).S%
].9%
Atl{usbtl Fecs
Oct""<OCS Basa Feea IntliUgn Factor ptlete Feaa SChaOg~_
Condgs $2608 ].g% $28.15 52.0]
ApaNnenfa 022.55 7.9% 324.10 Si.]]
Consumer Pdra Intlax Chango, tA-Rh-0rCO.,
Nl Urban Cglttumars
Fab. 20051ndex Value 19].4
Feb. 2005 IMOx Vsioe 20].5
Percenla9e Change 20052008 8.t%
Squrw: VS &ereau of Labor SlatlaUC¢ (nva0¢ble al: OUpUAWm.bls.AOWCp)
Preegred by HamiROn, Rabirtov]z BAHChWar, Mc.
HAhfELI"(1Y, RAHMOV1T2 & ALSCH(JLEl; ut(<. Page 4
Reference Resolution No.
10423 (CCS).