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).