SR-08-27-2013-3CReport
City of City Council
Santa MookieA
City Council fleeting: August 27, 2013
Agenda Item: _
To: Mayor and City Council
From: Andy Agle, Director of Housing and Economic Development
Subject: Affordable Housing Production Program Fee Resolutions -
Recommended Action
Staff recommends that the City Council 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
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
1, 2013, if approved.
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
1
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.
Discussion
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 previous annual adjustment, adopted by Council on September 11, 2012, increased
the fees by 0.8 percent ($0.22 per square foot for apartments and $0.36 per square foot
for condominiums).
rI
The table below summarizes this year's proposed adjustment to the fees, which would
be increased by 0.8 percent again based on this year's changes in land and
construction costs.
The proposed Resolutions, Attachments A and B, would adjust the fees accordingly,
effective November 1, 2013. 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 C and D. 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 $500,000.
On August 16, 2013, the City published notice in the Santa Monica Daily Press of this
hearing and the availability of the HR&A Advisors' analyses. The City republished this
notice on August 21, 2013. Copies of these analyses have been available in the City
Clerk's Office for public review since August 16, 2013.
3
2012
2013
%
Fee Description
Amount
Amount
Change
Affordable Housing Unit Base Fee —
$27.57
$27.79
+0.8%
Apartments(per square foot)
Affordable Housing Unit Base Fee —
$32.20
$32.46
+0.8%
Condominiums (per square foot
Affordable Housing Unit Development
$289,299
$291,613
+0.8%
Cost
The proposed Resolutions, Attachments A and B, would adjust the fees accordingly,
effective November 1, 2013. 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 C and D. 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 $500,000.
On August 16, 2013, the City published notice in the Santa Monica Daily Press of this
hearing and the availability of the HR&A Advisors' analyses. The City republished this
notice on August 21, 2013. Copies of these analyses have been available in the City
Clerk's Office for public review since August 16, 2013.
3
Financial Impacts & Budget Actions
The proposed rate change in the Affordable Housing Production Program (AHPP) fee
will increase annual revenues by an estimated one percent or $6,000 at account
04264.404400. Revenues have been included in the FY 2013-14 adopted budget.
Prepared by: Jim Kemper, Housing Administrator
Approved: Forwarded to Council:
25
Andy Agle, Dire for Rod Gould
Housing and Economic Development City Manager
Attachments:
A. Resolution Automatically Adjusting the Affordable Housing Unit Base Fee -
S.M.M.C. 9.56.070(b)
B. Resolution Automatically Adjusting the Affordable Housing Unit Development
Cost - S.M.M.C. 9.56.070(c)
C. HR&A Analysis: Proposed FY 2013-14 Annual Automatic Adjustment for the
Affordable Housing Unit Base Fee
D. HR&A Analysis: Proposed FY 2013-14 Annual Automatic Adjustment for the
Affordable Housing Unit Development Cost
rd
219300 28th Street, Suite. 325, Satrtx-,t Monica, CA 90405
T: 310 z81-0900 1 F; 310-591-0910 1 evwvv,hraadviv)r.s.catm
July 22, 2013
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 2013-14 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 A hereto. The City Council approved the last
annual increase for FY 2011-12 using this methodology when it adopted Resolution No. 10705
(CCS) on September 11, 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 by subscription. The applicable
index change was zero percent measured between March 2013 (the current budget adoption
year) and March 2012, as compared with a +2.5 percent change between March 2011 and
March 2012.
Although there is no comparable index for inflation in land cost, the City -adopted method uses the
weighted average annual change in median condominium sale prices, by ZIP Code, as a proxy
measure for land cost changes measured for the immediately, preceding calendar year. The 2012
median condo price changes by City ZIP code were published in the Los Angeles Times in January
2013, using Los Angeles County Assessor data compiled by Dataquick. The weighted average
change for the City during 2012 was +3.2 percent. During 2011, there was a -2.9% decrease.
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. For the current analysis, the two City -
assisted projects are 2802 Pico Boulevard and 430 Pico Boulevard. 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 derive the land value percentage (25.3%). The inverse of the
HR&A Advisors, Inc. I Los Angeles I New York I Washington, D.C.
Barry Rosenbaum, Esq.
City of Santa Monica
July 22, 2013
land value percentage is the construction cost share (74.7%). For the FY 2011-12 analysis, using
two other City -assisted developments, the land value share was 31.4 percent and the construction
cost share was 68.6 percent.
Table 1, on the following page, presents the annual adjustment calculation establishing the
Affordable Housing Unit Base Fee for FY 2013-14. It shows that a weighted average inflation
index using this City Council -approved approach results in a +0.8 percent annual increase, which
is identical to the percentage increase for FY 2011-12:
® $32.46 per square foot for condominium developments (an increase of $0.26 per square foot
from the FY 2012-13 Fee); and
® $27.79 per square foot for apartment developments (an increase of $0.22 per square foot
from the FY 2012-13 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 2013-14. We are available to assist
you in presenting the Resolution to the City Council.
Sincerely,
G
PAUL J. SILVERN,
Partner
HR&A ADVISORS, INC. Page 2
Barry Rosenbaum, Esq.
City of Santa Monica
July 22, 2013
Table 1
Affordable Housing Unit Base Fee Annual Inflation Adjustment Calculations for FY 20013-14
Land Cost Inflation
Median Price Change Calculation
ZIP Code 2011-2012 If Condos Sold Weights Weighted Avg.
90401 32.2% 22 4.7% 1.5%
90402
25.6%
40
90403
1.4%
190
90404
-6.4%
101
90405
1.2%
115
3,625,000
$ 12,630,138
468
Source: Dataquick Information Services (available on-line at:
hVp://www.dgnews.comiCharts/Annual-Chads/LA-Times-Charts21PLATIl aspx)
Construction Cost Inflation
Engineering News Record's Construction Cost Index-- Los Angeles
March 20121ndexValue 10283.55
March 20131ndexValue 10283.93
Percentage Change 2012-2013
Source: Engineering News Record (subscription required; data are available from HR&AAdvisors, Inc.)
Derivation of Land Cost and Construction Cost Calculation Weights
8.5% 2.2
40.6% 0.6%
21.6% -1.4%
24.6% 0.3%
100.0% 3.2%
Source: Housing Division, Ci(yof Santa Monica
Inflation Factor Derivation
Hard Construction
Most Recent CCSM Family Rental Projects
Weight Wirt. Avg.
Land Cost
Cost
Sum
2802 Pico
$
3,625,000
$ 12,630,138
$ 16,255,138
430 Pico
$
4,500,000
$ 11,361,066
$ 15,861,066
Adjusted Fees
$
8,125,000
$ 23,991,204
$ 32,116,204
FY 2012-13 Fees
Inflation Factor Updated Fees
25.3%
74.7%
100.00%
Source: Housing Division, Ci(yof Santa Monica
Inflation Factor Derivation
Inflation Value
Weight Wirt. Avg.
Land Value Inflation
3.2%
25.3% 0.87/
Construcfion Cost Inflation
0.0%
74.7% 0.0%
Adjusted Fees
FY 2012-13 Fees
Inflation Factor Updated Fees
$ Change
Condos
$32.200.8%
$32.46
$0.26
Apartments
$27.57
0.6% $27.79
$0.22
Forinformation Only.
Consumer Price Index Change, LA-Riv-Or Co.,
All Urban Consumers, 1982-84 = 100
Mar. 20121ndexValue
236.941
Mar. 2013 Index Value
239.995
Percentage Change Mar. 2011 -Mar. 2012
1.3%
Source: US Bureau of Labor Statistics (available at:
hfp://www.bls.gov/cpi)
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.
MHI
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HAm=4, RxiItuU &Arscmara%We.
PWV, Plronetal h Aimagement CNOR1104f,
April 24, 2006
Mr. Ron Bareficld
Housing Administrator
City of Santa Monica
2121 Cloverfield Blvd., Suite 100
Santa Monica, CA 90405
Re: Annual Adiustment for the Affordable Housing Feo
Dcar Ron:
Per your request, this letter summarizes an annual adjustment approach we recommended
for the City of Santa Monica's ("City") Affordable housing Pee, which developers of multi-
family residential developers may elect to pay, pursuant to Santa Monica Municipal Code
Section 9.56.070, as amended. This recommendation was included in Section V of our recent
report, 2005 Update, lire Nexes Between New Market Rate Mtdti-Fe utily Developments in the
City of Santa Monica and the Need forAfordable housing, July 1, 2005 ("2005 Nexus Sludy
Update").
In order to better ensmo 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 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
treasuring 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 welt -established construction cost
indices. We recommend Engineering News Record's (ENR) Constraeffon Cost Index, because it
' The other 20-25% consists ofprofessioaal fees mud other "soft costs" mid financing costs, neither of
which is regularly monitored by third p" sourece for inflation changes.
280028ntSme6r,Surrn325,SAnrAMoNrcA,OAL oB 96105 • Teu310.581.0900 • FAx:31o5in.0910
ins ANORLM No, CALIFORNIA Pomn.Anv, OR New YORK
Ron I3arefield
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 7haes 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 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 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.'
Shtee 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, we
recommend that City staff measure the weighted average amoral change in median condominium
price for the immediately preceding calendar year, and the construction cost index charge
bctwcon 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 liter year -
over -year changes in March or any other month, because median monthly prices can vary
significantly due to the number of solos 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 better ensures that the Affordable Housing Fee will keep pace with the actual cost to the
City of developing affordable housing.
Table I below, which is a variation on Table V-5 from the 2005 Nexus Study Updatc,
illustrates how such an annual index could be constructed and applied to the recently adopted
Affordable Housing Fees 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
s Consistent with the City's historical experience, this assumes than most new affordable multi -fancily
projects will be dovetailed in multi -family districts, although some recent projects include sites in commercial
dishicts. Unlike residential property, there is no readily available data source for commercial land price changes.
' Por example, if the average land 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 trillion! ($3.0 million +$9,0
million) and the construction cost to land cost plus construction 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 I herein uses the alternative 7reighted average fees, which were also presented in
the 2005 Nexus Study Update, mud it was these fees that the City Council actually adopted on October 11, 2005,
HAMILTON, RAMNOV1TZ& A1,9CIIULRR, INC, - - - Page 2
Ron Barefield
Housing Division
City of Santa Monica
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 S. t percent based on the CPI.
It is my understanding that the inflation adjustment approach described above will be
prosentcd to the City Council on May 9, 2006. We are available to assist you, as needed, with
that presentation.
Sincerely,
&ULLVEF RN,
Partner
HANm.TON, RABrNovnz& AUSCHULaa, AIC. - Page 3
Ron Baretield
I lousing Division
City of Santa Modica
April 24, 2006
Source: Los Angeles Times, Real Estate BaUlon, P. K19, January 22, 2008 (based on DaleQ.Ick Inforri Systems)
Construction Coat inflaflon
Engineering News Record's ConshuCtIon Cost
Index
March 2006 Index Value 7,309
Llorch 2006 Index Value 7.692
Percentage Change 2005-2006 6.2ye
Sourco: Englneedng News Record (available of hltpdAAAv.enrconsWcilon.cowreatureskonac.laubs/consllndexHHtnsp)
Cedvaaon of Land Cost end Construction Cost Calculation Weights
Most Recent CCSM Family Rental Projects Land Cast Hard Conetrueil.. Total
1424 Uroamvay 5 3,640,000 $ 0,100,000 $ 11,740,000
2601 Santa Monloo Boulevard $ 3,250,000 3 8,100,000 $ 11,360,000
2200 Main Street $ 3120000 3 9.123,010 S 12243010
It 10,010,000 $ 25,323,010 $ 35,333,910
28% 72% t00%
Source: Housing Division, City of Santa Monica
Inflation Factor Derivation
Table 1
Affmdablo Houeing Fee Annualingatlan Atlluslmont Caleulaliona to FY x00607
Intiallon Value
Land Cost Inflation
_ALL Avp.
Land Value Inflation
14.8%
28.3%
Median Annual Pace
Calculation
5.2%
21P code
change During 2005
ofCondos Sold
Wel9hls
Weighted Avg
90401
35.9%
27
4.6%
1.8%
90402
-2.1%
30
5.0%
Oct 2005 Base Foes
00403
9.8%
237
39.6%
3.0%
90404
26.5%
162
27.0%
6.9.4
9040@
10.5%
m
24.0%
25%
600
1
14.8%
Source: Los Angeles Times, Real Estate BaUlon, P. K19, January 22, 2008 (based on DaleQ.Ick Inforri Systems)
Construction Coat inflaflon
Engineering News Record's ConshuCtIon Cost
Index
March 2006 Index Value 7,309
Llorch 2006 Index Value 7.692
Percentage Change 2005-2006 6.2ye
Sourco: Englneedng News Record (available of hltpdAAAv.enrconsWcilon.cowreatureskonac.laubs/consllndexHHtnsp)
Cedvaaon of Land Cost end Construction Cost Calculation Weights
Most Recent CCSM Family Rental Projects Land Cast Hard Conetrueil.. Total
1424 Uroamvay 5 3,640,000 $ 0,100,000 $ 11,740,000
2601 Santa Monloo Boulevard $ 3,250,000 3 8,100,000 $ 11,360,000
2200 Main Street $ 3120000 3 9.123,010 S 12243010
It 10,010,000 $ 25,323,010 $ 35,333,910
28% 72% t00%
Source: Housing Division, City of Santa Monica
Inflation Factor Derivation
Intiallon Value
Weight
_ALL Avp.
Land Value Inflation
14.8%
28.3%
4.2%
Conslmdlon Coal Inflation
5.2%
71.7`/e
3.8%
7.8%
EmmmEmEmw
Ad/uated Fees
Oct 2005 Base Foes
InOallonfectot
rUPchn-d-KOO-81,
$Change
Condos
$26.08
7.9%
$28.15
$2.07
Aparlmenls
$22.33
7.D%
$24.16
$1.77
Forinformallon Only: -
Cena9rllotPrIce IndeXChange. LA-Riv-Or Co..
NI Urban Consumers
Fob. 2006 Index Value 187,4
Feb. 20061ndoxValue 207.6
Pafcenluge Change 2005-2000 5.1%
Source: U5 Bureau of Labor Stagstios (available at hllp1A•nn2bls.guWcpl)
Prepared by Hamilton, Rabin 0vila 8 Alachole, in,
HA611LTON, RAHINOVLCL & ALSCNULER, INC. Page 4
21100 281h Street, .suite 325, Santa Monica, CA 90105
T: 3'10-581-0900 1 F, 330-581-0910 1 vw w.hraarvisoi:s,rottl
July 22, 2013
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 2013-14 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 1st of each fiscal year thereafter, the City's affordable
housing unit development cost shall be adjusted based on changes in construction costs and land
costs ..."). The inflation methodology is the same as that used to produce annual adjustments for
the Affordable Housing Unit Base Fee, pursuant to SMMC Section 9.56.070(b). That methodology
was approved by the Santa Monica City Council at a public hearing on June 13, 2006, based on
the recommendation of HR&A in a letter to City staff dated April 24, 2006. A copy of the April
24, 2006 letter is included for reference as Attachment A hereto.
SMMC Section 9.56.070(a)(4) provides that developers of market rate multi -family housing are
eligible to pay a fee equal to a fraction of an affordable unit when the number of units otherwise
required by Section 9.56.050(d) is less than 0.75. In such cases, the amount of the fee is equal to
the City's Affordable Housing Unit Development Cost multiplied by the fractional unit. The City's
Affordable Housing Development Unit Cost is defined as the average cost to the City to develop
a unit of housing affordable to low- and moderate -income households. The Affordable Housing
Unit Development Cost was originally estimated to be $239,949, as contained in the nexus study
prepared by HR&A in 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 2012-13 using this methodology when it adopted
Resolution No. 10706 (CCS) on September 11, 2012.
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
July 22, 2013
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 with a subscription. The applicable
index change was zero percent measured between March 2012 (the current budget adoption
year) and March 2011, as compared with a +2.5 percent change between March 2011 and
March 2012.
Although there is no comparable index for inflation in land cost, the City -adopted calculation
method uses the weighted average annual change in median condominium sale prices, by ZIP
Code, as a proxy measure for land cost changes measured for the immediately preceding
calendar year. The 2012 median condo price changes by City ZIP code were published in the Los
Angeles Times in January 2013, using Los Angeles County Assessor data compiled by Dataquick.
The weighted average change for the City during 2012 was +3.2 percent. During 2011, there
was a -2.9% decrease.
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. For the current analysis, the two City -
assisted projects are 2802 Pico Boulevard and 430 Pico Boulevard. 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 derive the land value percentage (25.3%). The inverse of the
land value percentage is the construction cost share (74.7%). For the FY 2011-12 analysis, using
two other City -assisted developments, the land value share was 31.4 percent and the construction
cost share was 68.6 percent.
Table 1, on the following page, presents the annual adjustment calculation establishing the
Affordable Housing Unit Development Cost for FY 2013-14. It shows that a weighted average
inflation index using the City Council -approved approach results in a +0.8 percent annual
increase (same as FY 2012-13), to $291,613, which is a $2,314 increase compared with the FY
2012-13 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 2013-14. 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
July 22, 2013
Table 1
Affordable Housing Development Cost Annual Inflation Adjustment Calculations for FY 2013-14
Land Costinflation
Source: Dataquick Information Services (available on-line at:
hfp:/twww.dgnews.com/Charts/Annual-Charts/LA-Tim es-Charts/ZIPLAT11.as px)
Construction Cost Inflation
Engineering News Record's Construction Cost Index-- Los Angeles
March 20121ndexValue 10283.55
March 2013 Index Value 10283.93
Percentage Change 2012-2013
Source: Engineering News Record (subscription required; data are available from HR&AAdvisors, Inc.)
Derivation of Land Cost and Construction Cost Calculation Weights
Median Price Change
Calculation
ZIP Code
2011-2012
#Condos Sold
Weights Weighted Avg.
90401
32.2%
22
4.7% 1.5%
90402
25.6%
40
8.5% 2.2%
90403
1.4%
190
40.6% 0.6%
90404
-6.4%
101
21.6% -1.4%
90405
1.2%
115
24.6% 0.3%
74.7%
100.0%
468
100.0% 3.2%
Source: Dataquick Information Services (available on-line at:
hfp:/twww.dgnews.com/Charts/Annual-Charts/LA-Tim es-Charts/ZIPLAT11.as px)
Construction Cost Inflation
Engineering News Record's Construction Cost Index-- Los Angeles
March 20121ndexValue 10283.55
March 2013 Index Value 10283.93
Percentage Change 2012-2013
Source: Engineering News Record (subscription required; data are available from HR&AAdvisors, Inc.)
Derivation of Land Cost and Construction Cost Calculation Weights
Source: Housing Division, City of Santa Monica
Inflation Factor Derivation
Inflation Value Weight Wtd. Avg.
Land Value Inflation 3.2% 25.3% 0.8%
Construction Cost inflation 0.0% 74.7% 0.0%
Adjusted Unit Cost
FY 2012-13 Cost/Unit Inflation Factor Updated Cost/Unit ., $ Change
Affordable Housing Development Cost $289,299 0.8% $291,613 $2,314
Consumer Price Index Change, LA-Riv-Or Co., All
Urban Consumers, 1982-84 = 100
Mar. 2012 Index Value 236.941
Mar. 2013 Index Value 239.995
Percentage Change Mar. 2011 -Mar. 2012 1.3%
Source: US Bureau of Labor Statistics (available at: http:hWww.bls.gov/cpi)
Prepared by: HR&A Advisors, Inc.
HR&A ADVISORS, INC. Page 3
Hard Construction
Most Recent CCSM Family Rental Projects
Land Cost
Cost
Sum
2802 Pico
$
3,625,000
$ 12,630,138
$ 16,255,138
430 Pico
$
4,500,000
$ 11,361,D66
$ 15,861,066
$
8,125,000
$ 23,991,204
$ 32,116,204
25.3%
74.7%
100.0%
Source: Housing Division, City of Santa Monica
Inflation Factor Derivation
Inflation Value Weight Wtd. Avg.
Land Value Inflation 3.2% 25.3% 0.8%
Construction Cost inflation 0.0% 74.7% 0.0%
Adjusted Unit Cost
FY 2012-13 Cost/Unit Inflation Factor Updated Cost/Unit ., $ Change
Affordable Housing Development Cost $289,299 0.8% $291,613 $2,314
Consumer Price Index Change, LA-Riv-Or Co., All
Urban Consumers, 1982-84 = 100
Mar. 2012 Index Value 236.941
Mar. 2013 Index Value 239.995
Percentage Change Mar. 2011 -Mar. 2012 1.3%
Source: US Bureau of Labor Statistics (available at: http:hWww.bls.gov/cpi)
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.
Analvzc. Advises Act.
iL1Rum os, R10I[NUYnZ Fr AIS CIa1LlR 1NC.
pn/(ry, I•Irermbt & Afrtrvgemenf G'oNYll6nla
April 24, 2006
Mr. Ron Bar ficid
Housing Administrator
City of Santa Monica
2121 Cloverfield Blvd, Suite 100
Santa Monica, CA 90405
Re: Annual Adiustment for the Affordable Housing Fee
Dear Ron:
Per your request, this letter summarizes an annual adjustment approach we recommended
for the City of Santa Monica's ("City") Affordable Housing Pee, which developers ofmulti-
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, 27te Me= Between Nes, Market Rare Mnlfi-Pandly Develnpnrenm in the
City of Santa Monica and the Need for Affordable housing, July 1, 2005 ("2005 Nexus Study
Update').
In order to better ensure that the Affordable Housing Fees 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. While tho CPI
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 now affordable
housing development.' There are, in our experience, several well-establislied construction cost
indices. We recommend Engineering News Record's (ENR) Construction Cost Index, because it
' Tim other20.25%consists ofprofessimsal fees mid other"soft costs" and floaacutg costs, neither of
which is regularly monitored by third party sources for inflation changes.
280028n1STReaT, SUm1325, SANTA MONfeA,OAprORNIA 90405• TCU 310.581.0900 • FAX: 310.581.0910
LMANG ss NO. CAUFURNIA Posrv,No, OR NEw YORK
Ron 13arefield
Housing Division
City of Santa Madan
Aprl124, 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 Turves each January, using Los
Angeles County Assessor data compiled. by Dataquick. They arc also available on a subscription
basis from other vendors, such as First American Real Fstate 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 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 Pee will be
adopted by Resolution of the City Council us 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 tiny 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 amoral average tends to smooth out these effects. We recommend the monthly year-
ovcr-ycar 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 i below, which is a variation on Table V-5 from the 2005 Nexus Shady Updatc,e
illustrates how such all amoral index could be constructed and applied to the recently adopted
Affordable Housing Fees for new market rate apartment laud condominium projects, for
FY 2006-07. It shows, for example, that a weighted average inflation index as proposed herein
I Consistent with the Clty's historical experience, this assumes that most new affordable multifamily
projects will be developed in muni -family 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.
' For example, if (he average land cast for recent projects was $3.0 million and avenge hard construction
cost was $9.0 million, (he land to land plus construction cost ratio would be 25%($3.0 million / ($3.0 million +$9.0
million) and the construction cost to land cost plus construction 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 I hereto uses Iho altemalive nveighred 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,
HANm.TON,RANNOVITZ&ALSCHu1LnR,INC. Page 2
Ron Barefleld
Housing Division
City orsanta Monica
April 2d, 2006
would result in a 7.9 percent annual increase, compared with a 52 percent increase based on
construction costs alone, or 5.1 percent based on the CPI.
It is my understanding that tire 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.
y
Sineer/e�l'yn�'"'�`__�
AUL J. LVEF 2N,'
Partner
HA&M.70M, RAmNovrrz 3c A6SCH01.8R, INC. Page 3
Ron Bare)ield
Housing Division
City oCSanta Monica
April 24, 2006
Source: L"Angdfs577mes, Real Estate Section, p. K10, January 22.2006 (based on DalaOuick Information Systema)
Coas(mcflan Cos1/,01,11 n
Engineering News Record's Consimcuon Cost
Index
March 2005 Index Value 7,300
March 2006 Index Value 7,592
Percentage Change 2005-2008 6.2%
Source: Engineering News Record (available at hllp•JMnnv.euccons9uc11on.coMlaelures/coneco/suns/cansllndexHlst.esp)
Oerlvadon of Land Cost and Construelion Coal Calaulallon Weight.
Most Recent CCSM Family Rental Projects Lend Cast Hard Construction Total
1424 Broadway $ 3,640,000 $ 8,100,000 6 11,740,000
2601 Santa Monica Beulavard - $ 3,260,000 $ 8,100,00D $ 11,350,000
2200 Main Street - a A.120 000 $ 9.123.910 5 12.243 010
3 — 10,010,000 $ 25,323,910 $ 36,333,910
26% 72% 100%
Source: Housing Oldsinn, City of Santa Monica
Inflation FactorPorNation
Inllalion ValueWe_lyht Wttl. Avg.
Land Value Instance 14.8% 20.3% 4.2%
Canmtmcllon Coal Inflation 5.2% 71.7% 38
Adjusted Foas
Oct 2005 Babe Fees Inflation Factor Masted Foca Is a change
Condos $2"a 1.9%1 $28.16
Aparlments $22.33 7.0°A $24.10
For Inlannalim Only:
Consumer Price Index Chango, LA-RNOrCo.,
All Urban Consumers
Feb. 2006 Index Value 197,4
Feb. 2008 IndexVaius 207.5
Percentage Change 2005-2006 5.1%
Source: US Bureau of Labor Statistics (available ah hllpdkA•ve.1his.gov/cp0
Assured by: Hamilton, RaNnoyif e & Alsehule, Inc.
HANIH.TON, RAIIINOVIfZ& ALSCHULER, INC. Page 4
Table 1
Affordable Housing Fee Annual Inflation Adjustmunt Celculattona for FY 200607
Land Cost Inflation
Median Annual Price
Calculation
21P Code
Change During 2005
#Condos Sold
Welghie
Weighted Avg
90401
$5.9%
27
4.6%
1.6%
90402
-2.1%
$0
5.0%
-0.1%
00403
9.0%
237
39.6%
3-9%
00404
25.5%
102
27.0%
6.9%
80405
10.5%
iii
24.0%
MI
600
14
Source: L"Angdfs577mes, Real Estate Section, p. K10, January 22.2006 (based on DalaOuick Information Systema)
Coas(mcflan Cos1/,01,11 n
Engineering News Record's Consimcuon Cost
Index
March 2005 Index Value 7,300
March 2006 Index Value 7,592
Percentage Change 2005-2008 6.2%
Source: Engineering News Record (available at hllp•JMnnv.euccons9uc11on.coMlaelures/coneco/suns/cansllndexHlst.esp)
Oerlvadon of Land Cost and Construelion Coal Calaulallon Weight.
Most Recent CCSM Family Rental Projects Lend Cast Hard Construction Total
1424 Broadway $ 3,640,000 $ 8,100,000 6 11,740,000
2601 Santa Monica Beulavard - $ 3,260,000 $ 8,100,00D $ 11,350,000
2200 Main Street - a A.120 000 $ 9.123.910 5 12.243 010
3 — 10,010,000 $ 25,323,910 $ 36,333,910
26% 72% 100%
Source: Housing Oldsinn, City of Santa Monica
Inflation FactorPorNation
Inllalion ValueWe_lyht Wttl. Avg.
Land Value Instance 14.8% 20.3% 4.2%
Canmtmcllon Coal Inflation 5.2% 71.7% 38
Adjusted Foas
Oct 2005 Babe Fees Inflation Factor Masted Foca Is a change
Condos $2"a 1.9%1 $28.16
Aparlments $22.33 7.0°A $24.10
For Inlannalim Only:
Consumer Price Index Chango, LA-RNOrCo.,
All Urban Consumers
Feb. 2006 Index Value 197,4
Feb. 2008 IndexVaius 207.5
Percentage Change 2005-2006 5.1%
Source: US Bureau of Labor Statistics (available ah hllpdkA•ve.1his.gov/cp0
Assured by: Hamilton, RaNnoyif e & Alsehule, Inc.
HANIH.TON, RAIIINOVIfZ& ALSCHULER, INC. Page 4
Reference:
Resolution No. 10763 &
10764 (CCS)