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).