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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 vze. Advise. Act. 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)