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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).