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SR-09-11-2012-7CCity Council Meeting: September 11, 2012 Agenda Item: 77 =C To: Mayor and City Council From: Andy Agle, Director of Housing and Economic Development Subject: Affordable Housing Production Program Amendment Recommended Action Staff recommends that the City Council: 1. Introduce for first reading the attached Ordinance that would eliminate the existing discount to the Affordable Housing Unit Base Fee, currently 50 percent in commercial /industrial zones and 25 percent in residential zones; and 2. Adopt the attached Resolutions that would automatically adjust the Affordable Housing Unit Base Fee for new market -rate apartments and condominiums and the Affordable Housing Unit Development Cost. Executive Summary This report discusses a proposed amendment to the Affordable Housing Production Program eliminating the existing discount to the Affordable Housing Unit Base Fee (Section 9.56.070). The fee discount applies when a proposed development does not displace existing multi - family housing. At its June 26, 2012 meeting, City Council directed staff to return with a draft ordinance eliminating this provision. The discount policy was intended to encourage housing development on parcels without existing multi - family housing. However, staff review of development data over the last several years indicates that the majority of developments have occurred on parcels with existing . multi - family housing units. Therefore, this policy does not appear to be effective. The proposed adjustments to the Affordable Housing Unit Base Fee and Affordable Housing Unit Development Cost reflect changes in land and construction costs. On June 13, 2006, the City Council approved the methodology for ascertaining changes in these costs and thereby calculating the adjustment. The attached resolutions have been. prepared in accordance with the approved methodology. The Affordable Housing Unit Base Fee and the Affordable Housing Unit Development Cost would be 0.8 percent higher than the existing amounts and would become effective November 10, 2012, if approved. 1 Background The Affordable Housing Production Program (AHPP), Chapter 9.56 of the City's Municipal Code, implements Proposition R, which establishes that not less than 30 percent of all newly constructed multi - family housing in the City annually must be affordable to low- and moderate - income households for at least 55 years. The AHPP was adopted by the City Council on July 21, 1998 and has been periodically amended, as necessary. The AHPP requires developers of new market -rate multi - family housing to contribute to affordable housing goals by dedicating a portion of a development's total residences as affordable housing, constructing affordable housing off -site, dedicating land for affordable housing development, or paying the Affordable Housing Unit Base Fee. This fee is updated annually based upon changes in land and construction costs. When a developer chooses to dedicate a portion of a project's total residences as affordable housing, the number of affordable residences that must be provided is based on the number of market -rate units in the development. Oftentimes, the calculation of required affordable residences results in a fraction. In that instance, when the fraction is 0.75 or more, the number is rounded -up to a whole number. However, any fraction less than 0.75 can be satisfied by payment of a fee. The amount of the fee is based upon the Affordable Housing Unit Development Cost, which is also automatically adjusted annually based upon changes 'in land and construction costs. For example, if a developer is required to provide 4.7 units of affordable housing within a development, the developer would be required to dedicate four affordable units and pay 0.7 times the Affordable Housing Unit Development Cost to satisfy the requirement associated with the fraction. E Discussion Eliminate Fee Discount The AHPP currently provides a discount to the Affordable Housing Unit Base Fee for new multi - family housing developments that will not displace existing multi - family housing. There is a 50 percent discount in commercial /industrial zones and a 25 percent discount in residential zones. At the time of the AHPP's adoption, most existing multi - family housing had rent levels that were affordable to low- and moderate - income households. The fee discount was intended to encourage residential development on sites that would not result in tenant displacement. However, staff has found that more than one -half of the 140 new developments since the implementation of the discount policy have involved properties with existing multi - family housing. Therefore, the discount does not appear to be achieving its intended purpose. Eliminating the discount and requiring that all multi - family housing developments pay the full fee amount would increase fee revenue contributed to the City's Housing Trust Fund, which is used to finance affordable housing throughout the City. The amount of increased fee revenue that would result if the discount is eliminated is difficult to estimate given the sporadic nature of development. However, a review of development data from the past three years indicates fee revenue may increase in the range of $50,000 to $150,000 annually. Any such additional revenue for affordable housing is crucial in light of the recent loss of redevelopment funding. Annual Fee Adiustments Section 9.56.070 of the City's AHPP provides that the Affordable Housing Unit Base Fee and the Affordable Housing Unit Development Cost shall be adjusted annually by City Council resolution based on changes in construction and land costs. The fee adjustment methodology is detailed in Section 2 of the AHPP Administrative Guidelines and reflects the methodology approved by the City Council in 2006. The fees are adjusted based on two factors: 1) changes in construction costs as measured by the Engineering News Records Construction Cost Index, and 2) changes in land costs measured by using the proxy of change in median condominium sales prices. The 3 previous annual adjustment, adopted by Council on June 14, 2011, increased the fees by 2.1 percent ($0.56 per square foot for apartments and $0.66 per square foot for condominiums). The table below summarizes the proposed adjustment to the fees. hz 20I s: 2012 X10 -M Affordable Housing Unit Base Fee — $27.35 $27.57 +0.8% Apartments (per square foot Affordable Housing Unit Base Fee — $31.94 $32.30 +0.8% Condominiums (per square foot Affordable Housing Unit Development $287,003 $289,299 Cost The proposed Resolutions, Attachments B and C, would adjust the fees accordingly, effective November 29, 2012. Details of the calculations prepared by HR &A Advisors for the Affordable Housing Unit Base Fee and the Affordable Housing Unit Development Cost are provided in Attachments D and E. The revenue implications are minimal as the proposed fees represent an increase of less than one percent and the average annual fee revenue in recent years has been approximately $700,000. On August 31, 2012, the City published notice of this hearing and the availability of the HR &A Advisors' analyses. The City republished this notice on September 5, 2012. Copies of these analyses have been available in the City Clerk's Office for public review since August 31, 2012. rd Financial Impacts & Budget Actions The elimination of the AHPP fee discount will result in increased revenue on a per project basis, although annual AHPP revenue in general can fluctuate significantly based upon the sporadic nature of development. For example, annual AHPP revenue has ranged from approximately $304,000 to $1,200,000 over the last three years. Additionally, the proposed annual increase to the AHPP fees is minimal at less than one percent and will therefore have only a minimal effect on revenue. Prepared by: Caroline Sim, Senior Development Analyst Approved: Andy Agle, Director Housing and Economic Development Attachments: Forwarded to Council: Rod Gould City Manager A. Proposed Ordinance Eliminating the Discount to the Affordable Housing Unit Base Fee B. Resolution Automatically Adjusting the Affordable Housing Unit Base Fee - S.M.M.C. 9.56.070(b) C. Resolution Automatically Adjusting the Affordable Housing Unit Development Cost - S.M.M.C. 9.56.070(c) D. HR &A Analysis: Proposed FY 2012 -13 Annual Automatic Adjustment for the Affordable Housing Unit Base Fee E. HR &A Analysis: Proposed FY 2012 -13 Annual Automatic Adjustment for the Affordable Housing Unit Development Cost F:atty \muni \laws \barry\AHPP2012Amendment 09 -11 -12 City Council Meeting: 09/11/2012 Santa Monica, California ORDINANCE NUMBER (CCS) (City Council Series) AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF SANTA MONICA AMENDING SANTA MONICA MUNICIPAL CODE SECTION 9.56.070 TO ELIMINATE THE DISCOUNT TO THE AFFORDABLE HOUSING UNIT BASE FEE WHICH IS CURRENTLY A FIFTY PERCENT DISCOUNT IN INDUSTRIAL /COMMERCIAL DISTRICTS AND A TWENTY -FIVE PERCENT DISCOUNT IN RESIDENTIAL DISTRICTS WHEN CERTAIN CONDITIONS ARE MET WHEREAS, the City's Affordable Housing Production Program, Chapter 9.56 of the Santa Monica Municipal Code (the "AHPP "), requires developers of multi - family housing projects to contribute to affordable housing production and thereby help the City meet its affordable housing goals; and WHEREAS, the requirements of the AHPP are based on a number of factors including, but not limited to, the City's long- standing commitment to economic diversity; the serious need for affordable housing as reflected in local, state, and federal housing regulations and policies; the demand for affordable housing created by market rate development; the depletion of potential affordable housing sites by market -rate development; and the impact that the lack of affordable housing production has on the health, safety, and welfare of the City's residents including its impacts on traffic, transit and related air quality impacts, and the demands placed on the regional transportation infrastructure; and 1 WHEREAS, subject to certain exceptions, the requirements of the AHPP can be met through various alternatives including providing affordable housing units on -site, providing affordable housing units off -site, acquiring land for affordable housing, and paying an affordable housing fee; and WHEREAS, the AHPP currently provides a discount to the Affordable Housing Unit Base Fee for new development that will not displace existing multi - family housing - a fifty percent (50 %) discount in commercial zones and a twenty -five percent (25 %) discount in residential zones; and WHEREAS, at the time of the AHPP's adoption, most existing multi - family housing had rent levels that were affordable to low and moderate income households; and WHEREAS, this fee discount was intended to encourage residential development on sites that would not result in tenant displacement; and WHEREAS, history of housing construction demonstrates that this incentive has not been effective since more than one -half of the 140 new multi - family developments since the discount's adoption have involved properties with existing multi - family housing; and WHEREAS, eliminating the discount would also increase fee revenue contributed to the City's Housing Trust Fund which is used to finance affordable housing throughout the City, NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF SANTA MONICA DOES HEREBY ORDAIN AS FOLLOWS: `A SECTION 1. Santa Monica Municipal Code Section 9.56.070 is hereby amended to read as follows: 9.56.070 Affordable housing fee. A multi - family project applicant eligible to meet the affordable housing obligations established by this Chapter by paying an affordable housing fee shall pay the fee in accordance with the following requirements: (a) An affordable housing fee may be paid in accordance with the following formulas: (1) Multi -faritity- prejests-in -Multi fa Ay—Residentia# Affordable housing unit base fee x floor area of multi - family project; (2-)-Mufti family prejests4n -Mu4ti fa +pity ;- es:d°nt a1 Aff4rdable-- housing-u4it�ase- #ee-xc flee- area -a# (9�M t+-f arm4 y- p4:ejests- 4r+- 4ndust-r+aW- Gommers4al witamily- housing --or- are - already- deueleped -with 3 61 47 y „,,��� ♦� ` , preserves t- he —°v-x is sting --i- u4ti-famity- hGusing'-or a GategeFy G remoA permit has been obtained for the existing Ifi famil,i housings (42) Multi- family projects with fractional affordable housing units of less than 0.75 based on the formula established in Section 9.56.0500: City's affordable housing unit development cost x fractional percentage. (b) For purposes of this Section, the affordable housing unit base fee shall be established by resolution of the City Council. Commencing on July 1, 2006 and on July 1st of each fiscal year thereafter, the affordable housing unit base fee shall be adjusted based on changes in construction costs and land costs. No later than July 1, 2015, and approximately every five year period thereafter, the City will conduct a comprehensive study of these fees and the results of the comprehensive study shall be reported to the City Council. The amount of the affordable housing fee that the multi - family project applicant must pay shall be based on the 0 affordable housing unit base fee resolution in effect at the time that the affordable housing fee is paid to the City. (c) For purposes of this Section, the City's affordable housing unit development cost shall be established by resolution of the City Council. 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. No later than July 1, 2015, and approximately every five year period thereafter, the City will conduct a comprehensive study of these fees and the results of the comprehensive study shall be reported to the City Council. The affordable housing fee that the multi - family project applicant must pay shall be based on the affordable housing unit development cost resolution in effect at the time of payment to the City. (d) The amount of the affordable housing unit base fee may vary by product type (apartment or condominium) and shall reflect, among other factors, the relationship between new market rate multi - family development and the need for affordable housing. 5 (e) The affordable housing fee shall be paid in full to the City prior to the City granting any approval for the occupancy of the project, but no earlier than the time of building permit issuance. (f) The City shall deposit any payment made pursuant to this Section in a reserve account separate from the General Fund to be used only for development of very low- and low- income housing, administrative costs related to the production of this housing, and monitoring and evaluation of this affordable housing production program. Any monies collected and interest accrued pursuant to this Chapter shall be committed within five years after the payment of such fees or the approval of the multi - family project, whichever occurs later. Funds that have not been appropriated within this five -year period shall be refunded on a pro rata share to those multi - family project applicants who have paid fees during the period. Expenditures and commitments of funds shall be reported to the City Council annually as part of the City budget process. (g) An affordable housing fee payment pursuant to this Section shall not be considered provision of affordable housing units for purposes of determining whether the multi- a family project qualifies for a density bonus pursuant to Government Code Section 65915. SECTION 2. Any provision of the Santa Monica Municipal Code or appendices thereto inconsistent with the provisions of this Ordinance, to the extent of such inconsistencies and no further, is hereby repealed or modified to that extent necessary to effect the provisions of this Ordinance. SECTION 3. If any section, subsection, sentence, clause, or phrase of this Ordinance is for any reason held to be invalid or unconstitutional by a decision of any court of competent jurisdiction, such decision shall not affect the validity of the remaining portions of this Ordinance. The City Council hereby declares that it would have passed this Ordinance and each and every section, subsection, sentence, clause, or phrase not declared invalid or unconstitutional without regard to whether any portion of the ordinance would be subsequently declared invalid or unconstitutional. SECTION 4. The Mayor shall sign and the City Clerk shall attest to the passage of this Ordinance. The City Clerk shall cause the same to be published once in the official newspaper within 15 days after its adoption. This Ordinance shall become effective 60 days from its adoption. APPROVED AS TO FORM: 7 H% Analyze. AdAw. Act. 2800 28th Street, Suite 325, Santa Monica, CA 90405 T 310,581 -0900 1 F: 310-581-0910 1 www.hraadvisors,com June 6, 2012 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 2012 -13 Annual Automatic Adjustment for the Affordable Housing 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 April 24, 2006 letter is included for reference as Attachment hereto. The City Council approved the last annual increase for FY 2010-11 using this methodology when it adopted Resolution No. 10578 (CCS) on June 14, 2011. 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 +2.5 percent measured between March 2012 (the current budget adoption year) and March 2011, as compared with a +2.7 percent change between March 2010 and March 2011. Although there is no comparable index for inflation in land cost, the City - adopted method uses 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 2011 median condo price changes by City ZIP code were published in the Los Angeles Times in January 2012, using Los Angeles County Assessor data compiled by Dataquick. The weighted average change for the City during 2011 was -2.9 percent. During 2010, there was a +0.6% increase. As with last year's annual adjustment calculation, the relative balance between land cost inflation (based on changes in median condo prices) and construction cost inflation (based on a construction cost index) continues to be based on development cost data for the two most recently completed and /or under - construction multi - family affordable developments assisted by the City — i.e., 1458 14'h Street and 2602 Broadway. The City - adopted calculation approach uses a simple average of the ratio between land purchase price and the sum of land cost and hard construction cost to HR &A Advisors, Inc. I Los Angeles I New York I Washington, D.C. Barry Rosenbaum, Esq. City of Santa Monica June 6, 2012 derive the land value percentage (31.4 %). The inverse of the land value percentage is the construction cost share (68.6 %). Table 1, on the following page, presents the annual adjustment calculation establishing the Affordable Housing Unit Base Fee for FY 2012 -13. It shows that a weighted average inflation index using this City Council- approved approach results in a +0.8 percent annual increase to: $32.20 per square foot for condominium developments (an increase of $0.26 per square foot from the FY 2011-12 Fee); and $27.57 per square foot for apartment developments (an increase of $0.22 per square foot from the FY 2011-12 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 2012 -13. We are available to assist you in presenting the Resolution to the City Council. . Sincerely, 04(_ PAUL J. SILVERN, Partner HR &A ADVISORS, INC. Page 2 Barry Rosenbaum, Esq. City of Santa Monica June 6, 2012 Table 1 Affordable Housing Unit Base Fee Annual Inflation Adjustment Calculations for FY 20012 -13 Land Cost Inflation ZIP Code Median Price Change 2010 -2011 #Condos Sold Calculation Weights Weighted Avg. 90401 0.6% 10 2.7% 0.0% 90402 42.0% 30 8.1% 3.4% 90403 -7.8% 147 39.7% -3.1% 90404 -7.2% 80 21.6% -1.6% 90405 -5.9% 103 27.8% -1.6% Condos $31.94 370 99 9% 2.9 Source: Dataquick Information Services (available on -line at: http: //www.dgnews.co m /Charts /An n ua I -C ha ds /LA -Tim es- Charts 21 P LAT11.as px) Construction Cost Inflation Engineering News Record's Construction Cost index -- Los Angeles March 2011 Index Value 10,035.05 March 2012 Index Value 10,283.55 Percentage Change 2011 -2012 2,5% F' Source: Engineering News Record (available athffp:ltwww.enr.construction.com /features /Conew /subs /constindexHist.asp) Derivation of Land Cost and Construction Cost Calculation Weights Most Recent CCSM Family Rental Projects Land Cost Hard Construction 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 Adjusted Fees 31.4% 68.6% 100.00% Source: Housing Division, City of Santa Monica Inflation Factor Derivation Inflation Value Weight Wtd. Avg. Land Value Inflation -2.9% 31.4% -0.9% Construction Cost inflation 2.5% 68.6% 1.7% if Adjusted Fees FY 2011 -12 Fees Inflation Factor Uptlated Fees -a $ Change Condos $31.94 0.8% $32.201] $0.26 Apartments $27.35 0.8% $27.57 $0.22 For Infirm ation Only. Consumer Price Index Change, LA-Riv-Or Co., Al Urban Consumers, 1982 -84 = 100 Mar. 2011 Index Value 232.241 Mar. 20121ndex Value 236.941 Percentage Change Mar. 2011 -Mar. 2012 2.0% Source: US Bureau of Labor Statistics (available at: hfp: //www.bis.govlcpi) Prepared by: HR &A Advisors, Inc. HR &A ADVISORS, INC. Page 3 ATTACHMENT A April 24, 2006 HR &A Letter re: Annual Adjustment Methodology HR &A ADVISORS, INC. HIt]LMah'zo. A[IviSC Arl. finmu,aoN,tNUa:wfrz &NSnnnsx, tot. Nalrry, NrmrrcrplRAfpnpgrmmt Cpnrv!lpnlf April 24, 2006 Mr. Ron Bareflcld Housing Administrator City of Santa Monica 2121 Cloverfield Blvd., Suite 100 Santa Monica, CA 90405 Re: Annual Adiustment for the Affordable Housing pcc Dcar Ron: Per your request, this letter summarizes an annual adjustment approach we roeotmnended for the City of Sant Monicds ("City") Affordable Housing Fee, which developers of multi- family residential developers may elect to pay, pursuant to Santa Monica Municipal Code Section 9.56.070, as amended. This recommendation was included in Section V of our recent report, 2005 Update, The Nexus Belween New Market Rate Mrdti- Family Develapme im N the City of Santa Monica and the Need forA,Qord able housing, July 1, 2005 ("2005 Nexus Sin dy Update "). In order to better ensue that the Affordable Housing pees remain consistent with changing market conditions, It would be prudent for the City to apply an annual adjustment index, but to use an inflation concept other than the Consumer Price Index (CPI). While the CP1 Is often used to make inflation adjustments because of its convenience, the monthly changes in the value of consumer goods that dominate the CP1 are not be the most appropriate basis for measuring change In the City's cost to develop affordable housing. However, to be meaningful, any alternative index must rely on data 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 annual changes in land cost and construction costs, which together account for about 75 -80 percent of the cost of new affordable housing development.' There are, in our experience, several well- established construction cost indices. We recommend BngineeringNews Record's (LNR) Construction Cost index, because it ' The other 20 -25% consists ofprofesslonal fees mid odrer "soft costs" cord financing costs, neither of which is regularly monitored by third party souroo for inflation chartoo. 2800281usracer, Suma325, SANTA mowcA, OAL"nna, 90105 •'t6:310.581.0900 • AAN:310,581.0910 Lasmmsas No. CALIFORNIA POR' ,eR New Yom Ron Uarefield Housing Division City of Santa Monica April 24, 2006 " 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 sale price for the City as a whole would be skewed 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 Times each January, using Los Angeles County Assessor data compiled by Dataquick. They are also available on a subscription basis from other vendors, such as First American Real Estate Solutions. The relative balance behveen land cost Inflation (based 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 or construction -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 construction cost to derive the land value percentage; the inverse of this ratio would be the construction cost share.' Since the proposed annual inflation adjustments to the Affordable Housing Fee will be adopted by Resolution oftho 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 construction cost index change between March of the budget adoption year and March of the Immediately 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 the sales in any particular month. The annual average tends to smooth out these effects, We recommend the monthly year - over -year approach for construction costs, however, because construction represents a much larger share of total project cost. Using the most recently available Construction cost inflation data batter ensures that the Affordable Housing Fee will keep pace with the actual cost to the City of developing affordable housing. Table 1 below, which is a variation on Table V -5 from the 2005 Nexus Study Update," illustrates how such all annual index could be constructed and applied to the recently adopted Affordable Housing Pees for new market rate apartment and condominium projects, for FY 2006 -07. It shows, for example, that a weighted average inflation index as proposed herein a Consistent with the City's historical experience, this assumes tha t most new affordable multi - family projects will be developed in multi- family districts, ahhough some recent projects include sites in commercial districts. Unlike residential property, there is no readily available data source for commercial land price changes. " ' For example, if the average laird cost for recent projects was $3.0 million and avenge hard construction cost was $9.0 million, the land to land plus construction cost ratio would be 25 %($3.0 million/ (S3.0 million+ S9.0 million) and the construction cost to ]mid cost plus comhuctlon cost ratio would be 75 %. . Table V -5 was based on Citywide average fees, which was one alternative fee schedule presented in the 2005 Nexus Study Update.. Table 1 herein uses the alternative weightedaverage fees, which were also presented in the 2005 Nexus Study Update, mid hives these fees that the City Council actually adopted on October I I, 2005. RAawovtrZ & ALSCmR.Ha, INC. page 2 Ron Barefield Mousing Division City of Santa Monica Apri124, 2006 would result in a 7.9 percent annual increase, compared with a 5.2 percent increase based on construction costs alone, or 5.1 percent based on the CPI. It is my understanding that the inflation adjustment approach described above will be presented to the City Council on May 9, 2006. We are availublo to assist you, as needed, with that presentation. Sincerely XIUjnj--I�fLVERN, Partner HAMMTOM, RABn10VITZ&i ALSCHULeit, INC. - Page 3 Ron Baretield Fluusing Division City of Santa Monica April 24, 2006 Table Affordable Housing Fee Annual Inflation A6lustmant Celmdatlans tar FY 2008 07 Land Cast fn lation Inflation Value Weight Median Annual Nice Calculation 14.8% 21P Code Change During 2005 # Condos $old WelBhls Weighted Avg 00401 $5.9% 27 4.5% 1.8% 90402 -2:1% 30 6.0% -0.1% 00403 9.8% 207 39.6% 3.0% 00404 25.5% 162 27.0% 6.91/1 90405 105% 19.4 24.0% 23_% 7.fl% $24.10 600 14.8% Source: Los Angeles 71mes, Real Estate Section, p, K79, January 22, 2008 goosed on Da(aQufck Infomlaga0 Systems) Construction Qostletietmn Englneedng Nmvs Record's ConaWction Cost Index March 2006 Index Value 7,309 March 2006 Index Value 7,692 Percentage Change 2005 -2ami 6.2=, Source: Engineering News Record (available at hllplAn•A9.enr.consW CIlon.comilealureel onewisubalconallndaxmishasp) Dedvallon attend Cost and Construction Cost Calculation Weights Most Recent CCSM Family Rental Projects Land Cast Hard Construction Total 1424 Broadway $ 3,640,000 $ 6,100,000 S 11,740,000 2601 Santa Monica Boulevard $ 3,250,000 $ 8,100,000 $ 11,350,000 2200 Main Street 5 3120200 S 9.123910 3 12.243.910 $ 10,010,000 $ 25,323,010 $ 35,333,010 28% 72% 100% Source: Housing Division, City of Santa Monica Inflation FactorDedvatfon Inflation Value Weight Win, Avg. Land Value Inflation 14.8% 28.3% 4.2% ConelNctfen Cost lnflegon 5.2% 71.7% $.8.A° 7.8% AdjustadFees Oct, 2005 Does Fees Inflation Factor FUPdat-71`0051. $ Change Condos $26.08 7.9% $28,15 52.07 ApaNnenis $22.33 7.fl% $24.10 $1.77 For mlormollon Only: Consumer Price Index Change, LA- RiV -Or Co., All Urban Consumers Feb. 2006 Index Value 197.4 Feb. 20001ndoxValue 207.6 Percenloeo Change 2005.2000 6.1 % Source: US Bureau of Labor Elegatice ( available at: ldIp9A%W,.1bisSov1cpi) Pro aced b . Hamilton, Rabinavli: & Auscnui r, ins HANULTON, RAHINOVITZ & ALSCHULER, INC. Page 4 H'V'Analym Advise. Act. 2800 28th Street, Suite 325, Santa Monica, CA 90405 T: 310 -581 -0900 1 F: 310 - 581-3910 1 www.hraadvlsota.rorn June 6, 2012 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 2012 -13 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 1 s' 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 20051 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 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 2011-12 using this methodology when it adopted Resolution No. 10579 (CCS) on June 14, 2011. 1 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 Santa Monica. HR &A Advisors, Inc. I Los Angeles I New York I Washington, D.C. Barry Rosenbaum, Esq. City of Santa Monica June 6, 2012 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 +2.5 percent measured between March 2012 (the current budget adoption year) and March 2011, as compared with a +2.7 percent change between March 2010 and March 2011. Although there is no comparable index for inflation in land cost, the City- adopted calculation method uses 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 2011 median condo price changes by City ZIP code were published in the Los Angeles Times in January 2012, using Los Angeles County Assessor data compiled by Dataquick. The weighted average change for the City during 2011 was -2.9 percent. During 2010, there was a +0.6% increase. As in recent years, 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 and /or under - construction multi - family affordable developments assisted by the City — i.e., 1458 14th Street and 2602 Broadway. The City- adopted 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 %). The inverse of the land value percentage is the construction cost share (68.6 %). Table 1, on the following page, presents the annual adjustment calculation establishing the Affordable Housing Unit Development Cost for FY 2012 -13. It shows that a weighted average inflation index using the City Council- approved approach results in a +0.8 percent annual increase to $289,299 (a $2,296 increase compared with the FY 2011-12 Unit Cost). 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 2012 -13. We are available to assist you in presenting the Resolution to the City Council. Sincerely, PAUL J. SILVERN, Partner HR &A ADVISORS, INC. Page 2 Barry Rosenbaum, Esq. City of Santa Monica June 6, 2012 Table 1 Affordable Housing Development Cost Annual Inflation Adjustment Calculations for FY2012 -13 Land Cost Inflation 370 99.9% Source: Dataquick Information Services (available on -line at htt): /Avww.dq news.cem /Charts /Annual -C harts /LA -Tim es -C ha rts/ZIPLAT11.as px) Construction Cost Inflation Engineering News Record's Constructon Cost Index -- Los Angeles March 2011 Index Value 10,035.05 March 2012 Index Value 10,283.55 Percentage Change 2011 -2012 2.5% 1 Source: Engineering News Record (available at hfp: /Iwww.enr.construction.mm /features /Wneco /subslmnstindexH!st.asp) Derivation of Land Cost and Construction Cost Calculation Weights Median Price Change Calculation ZIP Code 2010 -2011 # Condos Sold Weights Weighted Avg. 90401 0.6% 10 2.7% 0.0% 90402 42.0% 30 8.1% 3.4% 90403 -7.8% 147 99.7% -3.1% 90404 -7.2% 80 21.6% -1.6% 90405 -5.9% 103 27.8% -1.6% 370 99.9% Source: Dataquick Information Services (available on -line at htt): /Avww.dq news.cem /Charts /Annual -C harts /LA -Tim es -C ha rts/ZIPLAT11.as px) Construction Cost Inflation Engineering News Record's Constructon Cost Index -- Los Angeles March 2011 Index Value 10,035.05 March 2012 Index Value 10,283.55 Percentage Change 2011 -2012 2.5% 1 Source: Engineering News Record (available at hfp: /Iwww.enr.construction.mm /features /Wneco /subslmnstindexH!st.asp) Derivation of Land Cost and Construction Cost Calculation Weights Source: Housing DMsion, Cityof Santa Monica Inflation Factor Derivation Inflation Value Weight Wtd. Avg. Land Value Inflation -2.9% 31.4% -0.97/ Construction Cost Inflation 2.5% 68.6% 1.7% 0.8 Adjusted Unit Cost FY 2011 -12 Cost/Unit Inflation Factor I Updated Cost/Unit ra $ Change Affordable Housing Development Cost $287,003 08% $289,2991 $2,296 r -s For Information Only: Consumer Price Index Change, LA- Riv -Or Co., Al Urban Consumers, 1982 -84 = 100 Mar. 2011 Index Value 232.241 Mar. 2012 Index Value 236.941 Percentage Change Mar. 2011- Mar -2012 2.0% Source: US Bureau of Labor Statistics (available at: http: //www.bls.govlcpi) Prepared by: HR &AAdvisors, Inc. HR &A ADVISORS, INC. Page 3 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% 100.0% Source: Housing DMsion, Cityof Santa Monica Inflation Factor Derivation Inflation Value Weight Wtd. Avg. Land Value Inflation -2.9% 31.4% -0.97/ Construction Cost Inflation 2.5% 68.6% 1.7% 0.8 Adjusted Unit Cost FY 2011 -12 Cost/Unit Inflation Factor I Updated Cost/Unit ra $ Change Affordable Housing Development Cost $287,003 08% $289,2991 $2,296 r -s For Information Only: Consumer Price Index Change, LA- Riv -Or Co., Al Urban Consumers, 1982 -84 = 100 Mar. 2011 Index Value 232.241 Mar. 2012 Index Value 236.941 Percentage Change Mar. 2011- Mar -2012 2.0% Source: US Bureau of Labor Statistics (available at: http: //www.bls.govlcpi) Prepared by: HR &AAdvisors, Inc. HR &A ADVISORS, INC. Page 3 ATTACHMENT A April 24, 2006 HR &A Letter re: Annual Adjustment Methodology HR &A ADVISORS, INC. wzc. Advises Act. IiAmmroN, Rmwovnz &Atsumn.mt,Mc. I'dN%F'awainle hfmagement(10=11nnb April 24, 2006 Mr. Ron Barefield Housing Administrator City of Santa Monica 2121 Cloverfield Blvd., Suite 100 Santa Monica, CA 90405 Re: Annual Adiuslment for the Affordable Housing Pee Dear Ran: Per your reyucst, this letter summarizes an annual adjustment approach we recommended for the City of Santa Monica's ( "City") Affordable Housing Pce, which developers of multi- family residential developers may elect to pay, pursuant to Santa Monica Municipal Code Section 9.56.070, as amended. This recommendation was included in Section V of our recent report, 2005 Update, 27ie Nextts Between New Mmket Rate Mrdti -RamUy Developments in 1/1e City of5anta Monica and the Need for•Afwzlable Ilousing, duly 1, 2005 ("2005 Nexus Study Update "). In order to better ensure that the Affordable Housing Pees remain consistent with changing market conditions, it would be prudent for the City to apply an annual adjustment Index, but to use an inflation concept other than the Consumer Price index (CPO. White the CPI is often used to make inflation 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 change In the City's cost to develop affordable housing. However, to be meaningful, any alternative index must rely on data 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 annual changes in land cost and construction costs, which together account for about 75 -80 percent of the cost of new affordable (rousing development.' 'There are, in our experience, several welt- established construction cost indices. We recommend Engineering News Record's (LNR) Construction Cost Index, because it ' The other 20 -25% consists of professional fees and other "soft costs" and 0naneing costs, neither of which is regularly monitored by third party sources for Motion changes. 280018m Sraear, SUNSM, SAWA MOWN, CACnuwnA 90405 • 4t4:310.581.0900 . PAx:310.581.0910 LOS ANnELat No. CALIFORNIA PORnANO, 01 NEW YORK Ron Barefleld Housing Division City of Santa Monica April 24, 2006 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 sale price for the City as a whole would be skewed 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 Trines each January, using Los Angeles County Assessor data compiled by Dataquick. They are also available on a subscription basis from other vendors, such as First American Real Rstate Solutions. The relative balance between land cost inflation (based 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 or construction -in- progress multi- family affordable developments assisted by the City. We recommend using a simple average of the mile between land purchase price and the sum of land cost and hard construction cost to derive the land value percentage; the inverse of this ratio would be the construction cost share.' Since the 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, Nye recommend that City staff measure 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 recotmnen l using the annual change in median condo prices in tire 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 the sales in any particular month. The mutual average tends to smooth out these effects. We recommend the monthly year- over-year approach for construction costs, however, because construction represents a much larger share of total project cost. Using the most recently available construction cost inflation data better ensures that the Affordable Housing Fee will keep pace with the actual cost to the City of developing affordable housing. Table 1 below, which is a variation on Table V -5 from the 2005 Nexus Study Update,° illustrates how such an annual index could be constructed and applied to the recently adopted Affordable Housing Fees for new market rate apartment rand condominium projects, for FY 2006 -07. It shows, for example, that a weighted average inflation index as proposed herein 7 Consistent with the City's historical experience, this assumes that most new affordable multi- family projects will be developed in multi - fancily districts, although some recent projects include sites in commercial districts. Unlike residential property, there is no readily available data source for commercial land price changes. r For example, if the average land cost for recent projects Avis $3.0 million and average hard construction cost was S9.0 million, the land to land plus construction cost ratio would be 25% ($3.0 million /($3.0 million +$9.0 million) and the cosetruction cost to hmd cost plus construction cost ratio would be 75 %. a Table V -5 was based on Citywide average fees, which was one alternative fee schedule presented in the 2005 Nexus Study Update. Table I heroin uses the alternative Ivelghted average fees, which were also presented in the 2005 Nexus Study Update, mid it was these fees that the City Council actually adopted on October 11, 2005. HAMILTON, RAmNOVITZ & ALSCHULGR, INC. Page 2 Ron Barefield Housing Division City of Santa Monies April 24, 2006 would result in a 7.9 percent annual increase, compared with a 5.2 percent increase based on construction costs alone, or 5,1 percent based on the CPI. It is my understanding that the inflation adjustment approach described above will be - presented to the City Council on May 9, 2006. We are available to assist you, as needed, with that presentation. Sincerely JAU'MLJ. LVE Partner HA'WJON, RAnhYOviTZ& AL3CHOL8a, 1NC. Page 3 Ron Baretield Housing Division City of Santa Monica Apri124, 2006 Table 1 Affordable Housing Foe Annual bananas Adjustment C I 1 tl for FV 200607 Land cost tnitagon Median Annual Price Calculation ZIP Coda Change During 2006 gCamino Sold Welghls Welin tod AVg 90401 35.9% 27 4.651 1.6% 90402 .2.1% 30 5.0% -011% 90403 0.8 °% 231 3915% 3.9% 90404 26.6% 162 27.0% 0.0% 90405 10.6% 194 24,0 %. 2" 600 14.8 Source: Los Angeles 77mes, Real Estate Section, p. K19, January 22, 2006 (based oil DabiQulek Information Systems) Construction Coal Inflation Enginsedag News Record's Constriction Cost Index March 200$ Index Value 7,300 March 2008 Index Voice 7,602 Pri c rilage Change 2005 -2006 6.2% Source: Englneedng Navrs Record (available at hlip9Nrrnv. micconsWCtion. wnvfeaturesi coneco/subs /4onnilade)Hlsi.8$p) Derivation efland CosI and Construction Cost Calculation Weights Most Recant CCSM Family Rental Projects Land Cost Hard Construction Total 1424 Smadivay $ 3,640,000 5 0.100,000 S 11,740,000 2661 Santa Monica Boulevard $ 3,250,000 $ 8,700,000 $ 11,350,000 2200 Main Street S 3.120,000 S 9123910 3 722d1910 $ 70,010,000 $ 25,323,010 $ 36,333,910 28% 72% 100% Source: Housing Derision, City of Santa Monica 1494 (ton Fee for Derive ties Inflation Value Weight WItl. AVp. Land Value Intuition 14.8% 28,3% 4.2% ConsBucllon Cost famibn 5.2% 71.7% 3.8% 7.8% Adjusted Fens _-- Oct. 2006 Buse Fees Inflation Factor Uptletetl Faos f $ Change Condos $20.08 7.0% $28.15. $2.07 Apartments $22.33 7.0% $24.10 $1.77 For Information Only: Consumer Pike, IndOX Change, LA- Riv -Or Co., All Urban Consumers Fab. 2005 Index Value 197,4 Feb. 2006 Index Volvo 207,5 Partisans. Change 2005 -2006 6.1% Swrco: US Bureau of Labor Statistics (available al: hBpdNnA'11ibig s /ep) Plennred by.•Hemilfon, RBCtaoyiM Is Alscnaler, Inc. HAMILTON, RABINOVI'fZ& ALSCHIJLER, INC. page 4 Reference Resolution Nos. 10705 (CCS) and 10706 (CCS).