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StafiF recommends that the City Council adopt the attached Resolution which would
autornaticaily adjust the Rffardable t-lousing Unit Base Fee for new market rate
apartments and candominiums.
x~~~tiv~ ~~srratt~ary
1
2
Flnaa~cl~l Irp~o4~ ~a~dge# Actic~ras
There is no financial impact.
Prepared ~yd N3arsha Jones Ivtoutrie, City Attorney
,~pprca~ed:
Pca arced fts C~aanc:l.
- ------- _~~-~C---- -
s'fia J s ~outri Rod Gould
C' y Attu n City tanager
ATTACHt~E~T~:
A. Resolution Automatically Adjusting the Affordabie Housing Unit C3ase Fee - S. .
M. C. 9.06.070{b}
~. h{R&A Analysis Proposed FY 2010-11 Annual Automatic Adjustment for the
AfFordable Housing Unit base Fee
3
ATTAC@SEl]'P B
Antilyze. Aclvisc. Act.
HR$'A ADVISORS, INC.
Economic Development, Real Estate Advisory & Public Polley Consultants
September 8, 2010
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 2010-11 Annual Automatic Adjustment for the
Affordable Housine 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 land 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 Apri124, 2006 letter is included for reference as Attachment A hereto. The City
Council approved the last annual increase for FY 2009-10 using this methodology when it
adopted Resolution No. 10422 (CCS) on September 8, 2009.
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 -0.3 percent measured between March 2010 (the budget adoption
year) and March 2009, as compared with a 6.5 percent increase between March 2008 and March
2009. This is the first negative annual change in this component since we have been making
these calculations
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 2009 median
condo price changes by City ZIP code were published in the Los Angeles Times in January 2010,
using Los Angeles County Assessor data compiled by MDA Dataquick. The weighted average
change for the City during 2009 was -3.4 percent. This is a less negative change than the -11.9%
reduction during 2008.
2800 28rx Srxear, Sun>:325, SANTA Mox[cn, C.v,goxxu 90405 • TEt: 310.581.0900 • FAx: 310.581.0910
Los Angeles New York
Barry Rosenbaum, Esq.
City of Santa Monica
September 8, 2010
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 development cost data for the two most recently completed or planned multi-family
affordable developments assisted by the City. These developments - 1458 14`h Street and 2602
Broadway -are different from the projects used in past calculations. 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 (31.4%). For the two most recent
developments, this factor represents a larger share than in past calculations (21.4%). The inverse
of the land value percentage is the construction cost share (68.6%), which is correspondingly
lower for two most recent developments than in past calculations (78.6%).
Table 1, on the following page, presents the annual adjustment calculation establishing
the Affordable Housing Unit Base Fee for FY 2010-11. It shows that a weighted average
inflation index using this City Council-approved approach results in a 1.3 percent annual
decrease to:
$31.28 per square foot for condominium developments (a reduction of $0.41 per square foot
from the FY 2009-10 Fee) and
$26.79 per square foot for apartment developments (a reduction of $0.35 per square foot
from the FY 2009-10 Fee).
It is my understanding that the results of the calculations shown in Table 1 will be the
basis for a Resolution changing the Affordable Housing Base Fee for FY 2010-11. We are
available to assist you in presenting the Resolution to the City Council.
Sincerely,
v~~
PAUL J. SILVERN,
Partner
HR&A ADVISORS, INC. Page 2
Barry Rosenbaum, Esq.
City of Santa Monica
September 8, 2010
Tahle 1
Affordable Housing Unit Base Fee Annual Inflation Adjustment Calculations for FY 20010-11
Land Cost Inflation
Median Annual Rrice Calculation
ZIP'Code Change During 2009 # Condos Sold Weights Weightetl Avg.
90401 -3.3% 13 3.7% -0.1%
90402 1.8% 19 5.4% 0.1%
90403 2.0% 146 41.6% 0.8%
90404 -11.1 % 84 23.9% -2.7°/
90405 -5.9% 89 25.4% -1.5%
351 100.0% 3.4%
Source: MDA Dataquick (available on-line at: http://wvrw.dgnews.com/Charts/Annual-Charts/LA-Times-Charts/ZIPLAT09.aspx)
Construction Cost Inflation
Engineering News Record's Construction Cost Index -- Los Angeles
March 2009 Index Value 9,799.19
March 2010 Index Value 9,769.69
Percentage Change 2009-2010 0 3 /
ma ~-;,-......~.-,~..,.,....2
Source: Engineering News Record (available at http:/Mnnvd.enr.construction.com/features/coneco/subs/constlndexHist.asp)
Derivation oflantl Cost and Construction Cost Calculation Weights
Hard Construction
Most Recent CCSM Family Rental Projects Land Cost Cost Sum
1458 14th Street $ 2,730,000 $ 6,035,559 $ 8,765,559
2602 Broadway $ 5.175.000 $ 11.199.833 ~ 16.374.833
$ 7,905,000 $ 17,235,392 $ 25,140,392
31.4 % 68.6 % 100.00%
Source: Housing Division, City of Santa Monica
Inflation Factor Derivation
Inflation Value Weight Wtd. Avg.
Land Value Inflation -3.4% 31.4% -1.1%.
Construction Cost InFlation -0.3% 68.6 % -0.2%
1.3%
Adjustetl Fees
FY 2009-10 Fees Inflation Factor Updated Fees :~ $ Change
Condos $31.69 -1.3% $31.28 ~ -$0.41
Apartments $27.14 -1.3% $26.79d -$0.35
For Information Only:
Consumer Price Intlex Change, LA-Riv-Or Co.,
All Urban Consumers, 1982-84 = 100
Mar. 2009 Index Value 221.376
Mar. 2010 Index Value 225.483
Percentage Change Mar. 2009-Mar. 2010 1.9%
Source: US bureau of Labor Statistics (available at: http://www.bls.gov/cpi)
Prepared by: HR&A, Inc
HR&A ADVISORS, INC. Page 3
ATTACHMENT A
Apri124, 2006 HR&A Letter re: Annual Adjustment Methodology
HR&A ADVISORS, INC.
r\ndlYtr,. A(IviSC. ~Ct.
[iAnmrav,xAnaitivrrz& Nsscmnaar, lr;c
Pol{ry Fhwmtmf&tdarogenreml Corsvllmma
April 24, 200b
Mr, Ron Barefioid
Housing Administrator
City of Santa Moaica
2121 Cioverfield Blvd., Suite 106
Santa Monica, CA 90405
Re: Aannal Adiustment for the Affordable Horsing Pee
Dear lion
Per your request, this letter summarizes an. annual adjustment approach we recommended
for the Gity afSama Monica's {"City") Affordable Housing Fee, which developers of multi-
family residential developers may elect to pay, pursuant to Santa Monioa Municipal Code
Section 9.16.070, as amended. This recommendation was included in Section V of our recont
report, 2005 Update, The Nexus BeAveen NewMarket 1{ate.Mufti-family Developments in the
City ofSama Maniea and the Needforrt$ordabte Rousing, July 1, 20fl5 {"2005 Nexus Study
(Idate").
In order to better ensure that the AffardableHausing Fees remain consistent with
changing market conditions, it woultl be prudent for tite Gity Y4 apply att annual adjustment
index, but to use an inflation concopt othor than the ConsumerS'rice Index (CPI), while the CPI
is often used to mako in4afion adjustments bacause of its convenience, the monthly changes in
the value of consumer goods that dominate the CPI are not be the most appropriate basis for
measrring change in the City's cost to develop affordable lionsing. However, to ba meaningful,
any atternative index must rely on da#a that is readily accessible to City staff for calculating the
change, and for the public's information.
A suitable alternative approach would need to measure anuuai changes iu load cast and
cons9ntetion cos{s, which together account for about 75-80 percent ofthe cost ofnew affordable
housing devetapment.r Thero are, in our experience, several well-established construction cost
indices. we recommend Bngineering News Record's (ENR} Construction Cost Index, because it
' 'the ofher20.25%Gpnsists afprofessional fees and other"soft vests"aud financing mete, neitherof
which is regularly moaitmrd by third party sanraesfw inflation ahimges.
280628mSinE6r, Surra 325, sAMN MtaMCA, CALtPoNifA 90905 • 1Et:3l0.581.09W • YAx:3I0.581,0320
I4SANael.as Na. Cncaaruu Panrucm, aR NEwYOnx
Ron k3arefield
Housing Division
City of Santa Yloniea
April 2d, 2006
is updated monthly and is readily available via the Internet. Howevor, there is no comparable
index of changes inland cost. One proxy measure that could be used for land cost changes is
change iu median condominium purchase prices.2 Since the median condo stile price for the City
as a whale woald beskewed by the tendency for sales to be concentrated in a few subareas, 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 Tithes each Tamtary, using Los
Angeles County Assessor data compiled. by I)ataquick. They are also available on a subscrfptian
basis from other vendors, such as First American Real .Estate Solutions.
The relative balance beriveon land cost inflation (haled on changes in median condo
prices) and construction cost inflation (based on a construction cost index) could be determined
based on current development cost data for recently completed orconstruction-in-progress multi-
famllyaffordable developments assisted by the City. We recommend using a simple average of
the ratio between land purchase priao and the sum of land cost snd hard construction cost to
derive the land value percentage; the inverse of #his ratio would be the tonstruetion cost share.3
Since the proposed attnual inflation adjustments to the Affordable Housing Fee will be
adopted by Resolution of the City Council aspart of the annual budget process each June, we
recommend that City staffmoasure 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~he annual ohange in median. condo prices in the aaiculation, rather then year-
over-year changes in March or any other month, because median monthly prices can vary
significantly due to the number of sales and particu[ar composition of the sales in any particular
month. The annual average tends to smooth out these effects. we recommend the man#hly year-
over-year approach for constntntion costs, however, because construction represents a much
larger share of fate! protect cost. Using the most recently available constntetion cost inflation
data better ensnras that the Affordable Housing Fee will keep pace with the acntal cost Yo the
City ofdeveloping affordable housing.
Table 1 below, which is a variation an Table V-5 from the 2005 Nexus Study Update,¢
illustrates how such an annual index could be constructed and appUed to the recently adopted
Affordable Hauling Fees for new market rate apartment and condominium projects, for
FY 200b-OT. It shows, for example, that a weighted average inflation index as proposed herein
~ Consistent with the City's historical ceperience, this assamos flier most new affoNabte mufti-family
protects wiq be developed in multi-family districts, although some recent projects incfuda sites in Srommemial
districts. Unlike residential praperry, there is nc readily available data 5ouma for commercial land price changes,
' Porexample,ifthe average tend costforrecentprojesta was S3.Omliion and averagehmdconstructian
cost was 59.0 mitlion, fhe land ro land plus SonsWCdan Solt ratio would be 25~/ (53A million /(53.0 million +59.0
million) and fhe eonshnction cost m land cost plus mnshvcdon cost ratio would be75%.
Table V-3 was based on Citywide average fees, which wes one ahemative fee schedule presented is the
2005 Nexus Study Update. Table 1 heroin uses the altemativa Welghtedeverage fees, which were alw presented in
the 2005 Nevus Study Update, and irivas thaso fees that the City Council actually adopted on pctober 11, 2005.
I'IAi4ttLTp.I, RABINpViS'L&ALSCIIIII.IiR, INC. Page 2
Ron Barefield~
Flousing Division
City of Santa Monica
Apri! 2d, 2666
would result in a?.9 percent annual increase, compttred with a 5.2 percent increase based on
construction costs alone, or 5. t percent based on the CPI.
It is my understanding that the intlatian adjustment approach described above will be
presented to the Gity Council on May 9, 2006. We are available to assist you, as needed, with
that presentation.
Sincere
TIL i. • VFRN,
Partner
HAMR.70N, RABINOVITZ & ALSCHUGER, INC. Page J
Ron Bazefield
Housing Division
City o£9anta Monica
Apri124, 2006
Tatrte 1
A£tardabte HOUSIng FOe Annua7tnttatfon Adtustmant CeleulafOns far PY 2048.97
tend Cos27nt/aflon
MsdPon AnnOaEFnOa Ga3cutatlOn
21P Cads Chatt9@Dnrln$2005 9C0ntloa Sold Waf9hta Wetghtetl AVB
90401 30.4% 27 4,5% 1.6%
90402 -2.1% 30 5.4% -0.1%
$0403 9.8% 237 3$.$% 3.9%
90604 2&5% t82 2Z0% 8.8%
80405 10.5°h ~ 26.0% 2 5%
800 i4,8%
SOOrcO: LOS A+t9ele3 7tmas, Real Estale SeclFOn, p. Kt9, January 22, 2048 (based On DataC0lGk InfarmaVan 6yslams)
f.anatNanan COSIIRRadbn
En0lneanng News Record's GOna@IrC$an CO81
Index
March 2005 (ntlax Vatua ],304
March 2006 Index Value ] ggg
Percentage Change 2005.2006 SP%
$anYCO: Engtneadng News Record (avaitab(e athtlpJ/vmwancconsuucUOn.com/(eeiuteshOnacalsubs/canallntlexHishaspJ
DOrlvaflOn oftand Castand COnstrucRan Cost CafcWattwr Wahjhts
Most Reeanl CC$M 6amlly Rental ProJegte Land Cast Hard Construction Fbtat
td24 BroarAvay S 3,660,000 S 8,100,004 S 11.7d0,40Q
26015anta MOnlq eoutavartl $ 3,250,000 $ 8,100.000 $ 11,354,004
2249 Maln street $ 312~00d $ 8.123.At0 5 12.2d3.A1b
S 10,O10AOd S 25,323,910 $ 35,333,914
28% 72% 100%
Source: Housing Oivfsbn, Cltyo£Santa hWnlca
MRafkn Paolor DaBVa non
Inllallon Valu@ We£gM Wtd. Avg.
Lend V@IU$InflaOOn 14.8% 28.3% 4.2%
Conshucli0n Cast In8a9on 52% 71.7 % $,$%.
A8%
Adjusted Pees
GeL 24056aae Feas tnt1360n F3Otar Vpdaled Fees §Chdn9@
Condos $26.06 T.9% $28.15 $Z.07
AparMenls $22.93 7.9% $26.10 $1.77
fw'£Namatlon Only:
Consumer PdOa IndaxChange, LA-RNArGO.,
NI Urban ~nsumers
606.2005 £ndaxVafue 187.4
Fa@. SOOfi Indox Value 267.5
Percenbge Ghanga 2005-2006 5.1
Source: US BUteaU O£tatror Slatlstica (ava4abla al: n4pdNrvnvbls.gaWCpO
Preparedby Hamitron. RabinovihdAlscnular, Ina
HAhII[,TON, RUtFNOVtT2 & Af.sCite7i.ER INC. Page 4
Reference Resolution No.
10529 (CCS).