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sr-092810-3g.rl[`i 6t ~2B&$&€ ff~€!®i7i: FLT ~~corr+~~~~ ~ctdora ail StafiF recommends that the City Council adopt the attached Resolution which would autornaticaily adjust the Rffardable t-lousing Unit Base Fee for new market rate apartments and candominiums. x~~~tiv~ ~~srratt~ary 1 2 Flnaa~cl~l Irp~o4~ ~a~dge# Actic~ras There is no financial impact. Prepared ~yd N3arsha Jones Ivtoutrie, City Attorney ,~pprca~ed: Pca arced fts C~aanc:l. - ------- _~~-~C---- - s'fia J s ~outri Rod Gould C' y Attu n City tanager ATTACHt~E~T~: A. Resolution Automatically Adjusting the Affordabie Housing Unit C3ase Fee - S. . M. C. 9.06.070{b} ~. h{R&A Analysis Proposed FY 2010-11 Annual Automatic Adjustment for the AfFordable Housing Unit base Fee 3 ATTAC@SEl]'P B Antilyze. Aclvisc. Act. HR$'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).