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sr-092810-3h~i~y Ca~noi~ e~tirrga Septerr~er 2;~, 2010 Agera~3a t~rn~ ~-' a: (ayor and Gity Council From: (>arsha Janes Mautrie, City Attorney Subject: Resolution Autarnatical[y Adjusting the Afrordable Housing Unit Development Cost Pursuant to Municipal Cade Section 9.56.070{c) R~aor~ars~~r~cied Act6e~n Sta€€ recommends that the City Council adapt the attached Resolution which would automatically adjust the Affordable Housing Unit C~eveiopment Cast for new rt~arket rate apartments and candarniniums. x~cutsu~ aar~arr~a~y Can September 96, 2010, the City published notice ofi this hearing and the availability ofi the HR8:A analysis. The City repubEished this notice on September 22, 2090. A copy of this analysis has been avai9able in the City Cierk's C)ffioe for public review since September 96, 2010 and is attached hereto as Exhibit B. 2 €nano€a€ €rnpa~fs st~g~f Rci€ear~s There is no financial impact. Prepared ~Sy. Marsha Janes Moutrie, City Attorney ~ipprc~ved. ~ arded to Cor~oi€: I ~~~~~~i rs a J e Moutrie ity Attor RTTRCHMEHTS: Rod ~ouid ~ City Manager A. F2esoiution Rutomaticaiiy Rdjusting the AfPordabie Housing Unit taeveiopment Cost - S.M.M.C. 9.56.07{3(c) ~. HR&R Anaiysis Proposed PY 2Ct1C1-11 Annuai Adjustment for the Rffordable Housing Unit C~eveloprnent Cost 3 ATTAC731fEN'P B Analyze. Advise. Act. HR&A ADVISORS, INC. Economic Development, Real Esta(e Advisory & Public Policy 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 90401 Re: Proposed FY 2010-11 Annual Adiustment 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 1st 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 April 24, 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 Cost is equal to the City's total cost to develop a unit of affordable housing (i.e., land, construction, professional fees and other "soft" costs and financing costs) minus the amount of ' Hamilton, Rabinovitz & Alschuler, Inc., The Nexus Between New Market Rate Multf-Family developments in the Crty of Santa Monica and the Need for Affordable Hoarsing, 2005 Update, July 1, 2005, prepazed for the City of Santa Monica. 2800 28~rn SrReaT, SDIre 325, SnNra MoNlca, CALIFORNIA 90405 • TeI,: 310.581.0900 Fax: 310.581.0970 Los Angeles New York Barry Rosenbaum, Esq. City of Santa Monica September 8, 2010 construction loan that can be supported by the net operating income derived from operating a typical City-assisted affordable housing development. A 2005-2007 cumulative inflation increase for the Affordable Housing Unit Development Cost to $265,632 using the approved methodology was adopted by the City Council when it approved Resolution No. 10230 (CCS) on July 24, 2007. The City Council approved the last annual increase for FY 2009-10 using this methodology when it adopted Resolution No. 10423 (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. 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 beriveen 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 Development Cost for FY 2010-11. It shows Shat a weighted average inflation index using the City Council-approved approach results in a 1.3 percent annual decrease to $281,100 (-$3,702 compared with the FY 2009-10 Unit Cost). HR&A ADVISORS, INC. Page 2 Barry Rosenbaum, Esq. City of Santa Monica September 8, 2010 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 Unit Development Cost for FY 2010-11. We are available to assist you in presenting the Resolution to the City Council. Sincerely, ~~ PAUL J. SILVERN, Partner HR&A ADVISORS, INC. Page 3 Barry Rosenbaum, Esq. City of Santa Monica September 8, 2010 Table 1 Affordable Housing Development Cost Annual Inflation Adjustment Calculations for FY 2010-11 Land Cost Inflation Median Annual Price Calculation ZIP Code Change During 2009 # Condos Sold Weights Weighted Avg. 90401 -3.3 % 13 3.7% -0.1 90402 1.8% 19 5.4% 0.1°/a 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% rasa:=xaxa +ca Source: MDA Dataquick (available on-line at: http://www.dgnews.com/Charts/Annual-Charts/LA-Times-Charts/ZIPLAT09.aspx) Construction Cast Inflation Engineering News Record's Construction Cost Index -Los Angeles March 2009 Index Value - 9,799.19 March 2070 Index Value 9,769.69 Percentage Change 2009-2010 0.3 % , ~~~ Source: Engineering News Record (available at http:/lww,v.enr.construction.wm/features/coneco/subs/constlndexHist.asp) Derivation of Land 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 $ 11.799.833 $ 16.374.833 $ 7,905,000 $ 17,235,392 $ 25,140,392 31.4% 68.600/a 100.0% 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% Adjusted Unit Cost FY 2009-10 CosdUnit Inflation Factor Updated CostNnit Affordable Housing Development Cost $284,802 -1.3% $281,100 For Information Only: Consumer Price Index Change, LA-Riv-Or Co., All Urban Consumers, 1982-84 = 100 Mar. 20091ndex Value 227.376 Mar. 2010 Index Value 225.483 Percentage Change Mar. 2009-Mar. 2010 1.9% Source: US Bureau of Labor Statistics (available at: http:/M+vnv. bls.gov/cpi) Prepared by: HR&A, Inc. ADVISORS, INC. Page 4 ATTACHMENT A April 24; 2006 HR&A Letter re: Annual Adjustment Methodology HR&A ADVISORS, INC. AndlvzC. Aclvist:. Act. [7nx~.~4o, y luearovm &.9lsexw.rA,1n~G. Pa!!ry, Flrwrcla(,$dtmrmggmem COAn+trams April 24, 204b Mr. }ton Barcficld FIousing Administrator City of Santa Monica 2121 Cloverfield Blvd., Suite 100 Santa Monica, CA 90405 Re: Annual Aduustment for the Affordable Housina Fee Deaz Rou: Per your request, tlds letter summarises an annual adjustment approach we recommended for the City of Santa Monica's {"City"}Affordable Housing Pee, which developers of multi- family residential developers may elect to pay, pursuant fo Santa Monica Municipal Code Sectioa 9.56.070, as amended. This recommendation was included in Section V of wr recent report, 2005 Updnte, The NexusBehveenNewMarketRateMulti-FamilyDeve(ogmente rn the Crty af5anta Monica and the Need forA,{fordabte Flouring, Jaly i, 2005 {"2005 Nexas Study tTpdate"}. In order to better ensure that the Affordable Housing Peon remain consistent with changing mazkot conditions, it would he prudent fat rite City to appty an annual adjustment index, but to use an inf#aflon concept o01ort6an the Consumer Price Index (CPn. While the CPI is often used to make in4aiion adjustments because of its convenience, the monthly changes in the value of consumer goods that dominate the CPI are not be the most appropriate basis for measuring cllnngo in the City's cos[ to develop affordable housing. However, to be meaningful, any aftemafiva index must rely on data that is readily accessible to City staff fat calculating tho change, and for the public's information. A suitable aitemafive approach would need to measuro aunual changes in lead cost and construction costs, which together account for about 75-80 percent ofOle cost ofnow affordable housing development.i There are, in our experience, several. well-established construction cost indices. We recommend Engineering Nows Rocord's (ENR} Construction Cast Indox, because it ' 1lxat5er 20.25%cansis#pfprofessional fees and older°soR costs"and financing costs, neither of which fsregalarty ewnitaredby tSird pasty sources for inRation changes. S0ns325, SANTA MO.~'ICA, cAruaaNrn 90905 • 7L•c: 310.581,0900 • Fnx:310.581.0410 teS RNGP1GS No. CALRUFNU YoAnAem, OR N¢w YOIVC Ran Barefield Housing Division City of Santa Monica Agri! 24, 20D6 is updated monthly and is readily available via the Internet. However, there is no comparable index of changes in land cost. One proxy measure that could be used for land cost changes is change in median condominium purchase prices,? Since the median condo Salo price for the City as a whole would be skewed by the tendency for sales to ba concentrated in a taw subareas, a more neutral measure would be the weighted average annual change in median condo sale prlaes by ZIP Code. These data are published by iho Los Angeles Tirnes each January, using Los Angeles County Assessor data aompIled by Datagttick. They are also available on a subscription basis from other vendors, such as First American Real Estate Solutions. The relative balance between land east inflation {based on changes in median condo prices) and construction post inflation (based on a construction cost index) eou(d be detetmincd based on current development cost data for recently completed orconstruction-in-progress multi- family affordable developments assisted by the City. We recommend using a simple average of the ratio between land purchase price and the sum of land cost and hard constntction cos[ to derive the land value percentage; the inverse ofthis ratio would be the construction cost share.; Since rho 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 recommend that City staff measure the weighted average annual change in median condominium price for the immediately preceding calendar year, and the constxttetian cost index change between March of the budge[ adoption year and March of the immediat®iy preceding year. We recommend using the annual change In median condo prices in the calculation, 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 particular composition of rho sales in any particular month. The annnaI average tends to smooth out these effects. We recommend the monthly year- over-year approach fpr construction costs, however, because construction represents a much larger share of total project cost. Using the mast raaenfly available construction cost inflation data better ensures that the Affordable Housing Fee will troop pace with tho aetnal cost to the City ofdeveloping affordabIa housing. Table t below, tivhich is a variation on Table V~5 from the 2005 Nexus Study Updatc,4 illustrates how such an atmual index could bo canstmcted and applied to the recently adopted Affordable Housing Feas for new market rate aparkment and condominium projects, for FY 2006-07. It shows, for example, that a weighted average inflation index as proposed herein ~ Consistent with the City's historical esperionce, this azsumes that most new affardaht¢ multi-family projects will bedeveloped i¢ mnlti-family dishicis, although same recent projects include sites is commercial districts. Onlike residential property, thore is no readily available data source for commercial land price changes. ' For example, if the average land cost forzecent projects was $3.0 milEian cad average hard eonstrvciian cast was 59.0 minion, the land to la¢d plus covstraedon cast ratiowould be 2$%{$;,0 million /{53.0 million+Sq,d million) and the conswcGan cast to land cost plus eonstritation cost rntio would bo?5°/a ' Tabk V-$ was based on Citysvida average fees, which was one altemativt fee schedule presented in the 2005 Nexus Study tipdote. Tbble I herein uses tho attemative weighted rrverage fees, which were also presened in dte 200$ Nexus Study Update, and it was these fees that the City Council actually adopted on October 11, 2005. I7AtvvnLl'ON,RAAIN!)V1T2&AL5(:IdvLEx, INC. Page 2 Ron Baretield IloasingDivistm City of Santa Monica April 24, 2006 would result in a 79 percent anneal increase, eampared whh a 5.2 percent increase based on construction costs alone, or 5.1 percent based on the CPI. It is my understandigg that the inflation adjustment approanh descrilsed airove will be presented to the City Council on May 9, 2006. We are avaitabie io assist you, as needed, with that presentation. Sincerely UL 7. ,, VE Partner RnMQ,'1'oh+, ILianuovrrz & Ai.SCtiUGBR, Iuc. Page 3 Ron Barefitad Housing Div'tslon City of Santa Monica Apri124, 2006 Fable 7 Atiardabfa HOU91n9 Fee Annual inflatlbO AdlgAim tC I III t FY 200607 tandcost mnaaon Metltbn Annual Pnve caicntattan f 21P Cadb Change DUNag 2005 #COndos 3ottl WetgNts Weighted Avg 90407 05,8% 2T dk% 7.6% 90402 -2.1% 30 6,0% -0.1% 90403 9.8% 237 09.5% 39% 94904 25.5% t62 27.0% 8.9% 90-005 t6.5% 1gk 24.Oya 1.5% 809 14.8% Source: Las Mgok3 Finr¢s, Raal Estate Sacgon, p. K18. dawary 22, 2006 (based an DetaCUtClt Infom4agon Systems) . Canstroct(on CoafmttaRan I Englneedng Natvs ftecOM's ConaWCOen Cost Index Match 20051ndez VaWa 7,3p9 March 20061ndex VatgO 7,092 PercenlaOe Change 2005-2008 63 Seorca: Brgtneedng News Rawrd (ovagaWe at hBpJAw,w.enr.consWdian.somi[eatu[es/coneco/subs/tansltMerHisi.asp) Derivation o/Land Coa[ entll'.'4nsrNCtlaACut Cal¢uladen Wa7ghis MutRacent CC6M Family Rental Prajaeta land Caa2 Hard ConaUablion Total 1424 Broadway g 3.69p,000 6 B,WQ,000 g 11,740,000 2607 Santa Monira Boulevard $ 3,250.000 $ 8.700,OOp $ 11,360,000 2200 Matn Street S :1At2gnn0 S 9.123.910 S t22A3.a_18 10,010,000 $ 25,323,910 g 35,333,910 28% 72% t49% Satrtca: Hbusmg CivlSlan, Clry of Santa MonIW mnaRar Factor DarNatbn In0alton Value Watght Wtd Avg, Land YalOa trflagon 14.8% 28.3°4 4,2% Cansiroagon Cast mgagan sa% 71.7°!e ~. Ts% AtlfustedF¢¢s CAL 2806 Base Feas Ingation Factor ~' UR!~a1¢d F¢u $ Chang¢_ Condos $26.08 T.0%I ~ ~ $2E.16 $2.0] Apartments 822.33 7.9% $2Ad0. $7.77 FNlnkrmalion Only, Consume! Pdce hMex Change, LA-Riv-Cr CO.. Ail Clrban Consumers Fob. 20051ndex Value 797.A Feb. 20p8lndex V¢l0e yp7,g PBrCSnt~e Change 20052008 5.1% Saorcb: Ug Boteao orlabor Slagsgcs (available ab hapihwnv.bls.govkp4 Preparedby Ham9taa Rablrrovilz & AlsGldler, !~A HAtaftI,TON, RABYtiflViT2 &ACSCF3[]LER, INC. Page -0 Reference Resolution No. 10530 (CCS).