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SR-08-26-2014-3Bo{ City Council Report City Santa Monica City Council Meeting: August 26, 2014 Agenda Item: 3 °B 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 increase the Affordable Housing Unit Base Fee for new market -rate apartments and condominiums and the Affordable Housing Unit Development Cost by 7.2 percent. 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 7.2 percent higher than the existing amounts and would become effective November 1, 2014, 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 designating a portion of a development's total residences as affordable housing, constructing affordable housing off site, 1 designating land for affordable housing development, or paying the Affordable Housing Unit Base Fee. The Fee is updated annually based upon changes in land and construction costs. When a developer chooses to designate 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 designate 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 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 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 August 27, 2013, increased the fees by 0.8 percent ($0.22 per square foot for apartments and $0.26 per square foot for condominiums). 2 The table below summarizes this year's proposed adjustment to the fees, which would be increased by 7.2 percent 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, 2014. 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 and depend on development activity in any given year. On August 15, 2014, 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, 2014. Copies of these analyses have been available in the City Clerk's Office for public review since August 15, 2014. 3 2013 2014 F ee Description : Amount Amount �° Change ;; Affordable Housing Unit Base Fee — $27.79 $29.79 +7.2% Apartments per square foot Affordable Housing Unit Base Fee — $32.46 $34.80 +7.2% Condominiums (per square foot Affordable Housing Unit Development $291,613 $312,609 +7.211'o Cost The proposed Resolutions, Attachments A and B, would adjust the fees accordingly, effective November 1, 2014. 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 and depend on development activity in any given year. On August 15, 2014, 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, 2014. Copies of these analyses have been available in the City Clerk's Office for public review since August 15, 2014. 3 Financial Impacts & Budget Actions The proposed rate change in the Affordable Housing Production Program (AHPP) fee will increase annual revenues by an estimated $20,000 - $30,000 depending on development activity levels. Revenues will be deposited at account 04264.404400 and budget is included in the FY 2014 -15 adopted budget. Prepared by: Jim Kemper, Housing Administrator Approved: Andy Agle, Director Housing and Econo is evelopment Attachments: Forwarded to Council: Rod Gould City Manager 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 2014 -15 Annual Automatic Adjustment for the Affordable Housing Unit Base Fee D. HR &A Analysis: Proposed FY 2014 -15 Annual Automatic Adjustment for the Affordable Housing Unit Development Cost Il Attachment C HP&kAnalyzc. Advise. Act. 700 South Flower Street, Suite 2730, Los Angeles, CA 90017 T: 310 -581 -0900 1 F: 310- 581 -0910 1 www.hraadvisors.com July 23, 2014 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 2014 -15 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 2013 -14 using this methodology when it adopted Resolution No. 10763 (CCS) on August 27, 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 by subscription. The applicable index change was 4.4 percent measured between March 2014 (the current budget adoption year) and March 2013, as compared with a zero percent change between March 2012 and March 2013. 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 2013 median condo price changes by City ZIP code were published in the Los Angeles Times in January 2014, using Los Angeles County Assessor data compiled by Dataquick. The weighted average change for the City during 2013 was +15.4 percent, as compared with a 3.2% increase during 2012, evidencing a strengthening recovery in the local housing market from the 2007 -2009 national recession. 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 %). HR &A Advisors, Inc. I Los Angeles I New York I Washington, D.C. Barry Rosenbaum, Esq. City of Santa Monica July 23, 2014 Table 1, on the following page, presents the annual adjustment calculation establishing the Affordable Housing Unit Base Fee for FY 2014 -15. It shows that a weighted average inflation index using this City Council- approved approach results in a +7.2 percent annual increase (as compared with a 0.8 percent increase for FY 2013 -14): ® $34.80 per square foot for condominium developments (an increase of $2.34 per square foot from the FY 2012 -13 Fee); and ® $29.79 per square foot for apartment developments (an increase of $2.00 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 2014 -15. We are available to assist you in presenting the Resolution to the City Council. Sincerely, V I� PAUL J. SILVERN, Vice President ADVISORS, INC. Page 2 Table 1 Affordable Housing Unit Base Fee Annual Inflation Adjustment Calculations for FY2014 -15 LandCastinliation Median Price Change ZIP Code 2012 -2013 #Condos Sold Calculation Weights Weighted Avg. 90401 -12-2% 17 3.6% -OA % 90402 -1.0% 29 62% -0.1% 90403 17.0% 200 42.6% 72% 90404 29.9% 110 23.4% T0% 90405 7.1% 114 242% 1.7% 470 100.0 % 15.4% Source: Dalaquick Information Services (available on -line at: $ Change Condos - hffp1M1vww.dgnews.com /Charts /Annual-ChailsA A- Times- Charts/APLATI l aspx) $34801 $2.34 Apartments Construction Cost Inflation 7.2%1 $29.79 $2.00 Engineering News Record's Construction Cost Index —Los Angeles March 2013 Index Value 10283.93 March 2014 Index Value 10731.68 Percentage Change 2013 -2014 4.4%1, ,:. Source: Engineering News Record (subscription required; data are available from HR&AAdvisors, Inc.) Derivation of Land Cast and Construction Cost Calculation Weights 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 $ 11,361,066 $ 15,861,066 $ 8,125,000 $ 23,991,204 $ 32,116,204 25.3% 74.7% 100.00% Source: Housing Division, City of Santa Monica Inflation Factor Derivation Inflation Value Weight WId.AVg. Land Value Inflation 15.4/6 25.3% 3.99/6 Construction Cost Inflation 4.4% 74.7% 3.3% 71$ - AcgustedFees FY 201344 Fees Inflation Factor Updated fees $ Change Condos $32.46 72% $34801 $2.34 Apartments $27.79 7.2%1 $29.79 $2.00 For information Only: Consumer Price Index Change, LhRiv -Or Co., NI Urban Consumers, 1982-84 =100 Mar. 2013 Index Value 239.995 Mar. 2014 Index Value 242.491 Percentage Change Mar. 2013 -Mar. 2014 1.0% Source: US Bureau of Labor Statistics (available at: httplNrww.bls.goV /cpi) Prepared by: HR&AAdvisors, Inc. HR &A ADVISORS, INC. ATTACHMENT A April 24, 2006 HR &A Letter re: Annual Adjustment Methodology Analvre. Advise. Act. IIAmiuron, IIAnnarvm.& Amcinii 3y INC. P°ery. F1,W hl k AW4"AmICOM110f, April 24, 2006 Mr. Ron Barefield Housing Administrator City of Santa Monica 2121 Cloverfreld Blvd., Suite 100 Santa Monica, CA 90405 Re: Annual Adiustment for the Affordable Housing Feo Dear Ron: Per your request, this letter summarizes an annual adjustment approach Ave recommended for the City of Santa Monica's ( "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 Between New Market leate Mrdti- Family Developments to the CO of Santa Monica mid the Need forAffordable Housing, July 1, 2005 CT 005 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 (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 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 cast 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 Engineering News Record's (ENR) Construction Cost Index, because it ' 'Pile other 20-25% consists ofprol'essional fees mid other "soft costs "and financing costs, neither of which is regularly monitored by third party sources for Inflation chonges. 280028m Srnsa, SUrra325, SANrA MONICA, CA1.1ronNm 90405 . TaL: 310,581.900 . 11=310.591.0910 Les ANOnLss NO, CALIFORNIA POxn,AND, OR Ninv Yom Ron Barefield 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 Tines each January, using Los Angeles County Assessor data compiled by Dataquick. They are also available call subscription basis from other vendors, such as First American Re=d 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 reconrriend 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 of the City Council as part of the annual budget process each June, wo 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 laid 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. 'File 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 blousing 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 Update,° illustrates how such run 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 that atoll new affordable nmld- family projects will be developed in nnrlli- family districts, although settle recent projects include riles in commercial districts. Unlike residential property, there is no readily available data source for commercial land price changes. Por example, if [Ito average land cost for recent projects was $3.0 million and average hard construction cost was $9.0 million, the land to land plus construction cost ratio would be 25 %(S3.0 million /(53.0 tuition +$9.0 million) and the construction cost to land cost plus construction cost ratio would be 75 %. a Table V -5 was based on Citywide average fees, which was one alternative fee schedule presented in the 2005 Nexus Study Update. Table I herein uses the alternative tvetghred average fees, which were also presented in the 2005 Nexus Study Update, and it was these fees that the City Council actually adopted on October 11, 2005. HAhuLTON, RABINOVITZ & ALSCn0I,13R, INC. Page 2 Ron Barefield- Housing Division City of Santa Monica April24, 2006 would result in a 7.9 percent annual increase, compared with a 5.2 percent increase based on construction costs alone, or 5.1 percent based on the CPI. It is my understanding that the inflation adjustment approach described above will be presented to the City Council on May 9, 2006. We are available to assist you, as needed, with that presentation. Sincerely UL 7. LVERN�, Partner HA,NnLTON, RADINOVrrz & ALScumER, INc. Page 3 Ron BaraFold I lousing Division City of Santa Monica April 24, 2006 Source: Housing Division, City of Santa Monica Inflation Fecrar Derivatten Tabfo i Affordable Hauslnp Fee Amuail r0atlon Adlualmont Caicul Ilc (or FY 200607 Inflation Value Land Cost Ingatien Land Value Inflation 14.8% 28.3°% 4.2% Modlan Annual Price Calculation 6.2% ZIP Code Change Curing 2006 #Condos$otJ Weights Wolghlod Avg Mal 36.8% 27 4.6% 1.6% Inflation Factor Updated Few 1 00402 -2.1% 30 6.0% -0.1% 7.9%1 $28.15 00403 9.8°% 237 39.5% 3.0% 7.9% . $24.10 00404 26.6% 162 274% 6.0% 00406 10.6% MA 24.0% 2.5-4 600 1 14.8% Source: Los Angeles Times, Real Estate Section, p. K19, January 22.2008 (based on DataQuIck Information Systems) Construction Cost iflallon Engineering Nmvs Record's Construction Cost Index March 2006 Index Value 71300 March 2008 Index Value 7,692 Percentage Change 20052006 6.2% MOMMMMEMIZZIazzlil Source: Engineering Nows Record (available at http:/ )VA�v. enr. constmcllon. com/featur esiconeco tsubs /0nst[ndexHist.asp) Oedva tlon otLand Cost and Cans(mction Cost Calculation Weights Most Race.( CCSM Family Rants l Projects Land Cost Hard construction Total 1424 Broadway $ 3,640,000 5 870,000 5 11,740.000 2601 Santa Monica Boulevard $ 3,250,000 $ 81100.000 $ 111350,000 2200 Main Street S 8,120,000 1 9123910 5 12.243910 $ 10,010,000 $ 26,323,910 $ 35,333,910 28 °l. 72°% 100% Source: Housing Division, City of Santa Monica Inflation Fecrar Derivatten Inflation Value Weight WId.AVg� Land Value Inflation 14.8% 28.3°% 4.2% Construction Cost ln0auon 6.2% 71.7% Adjusted Few Oct, 2006 Base Fees Inflation Factor Updated Few 1 $ Change Condos $26.06 7.9%1 $28.15 $2.07 Apartments $22.33 7.9% . $24.10 $1.77 Fortmermation Only; Consumer Price Index Change.LA-RIV.Or Co.. All Urban Consumers Fob. 2005 Index Value 197.4 Feb, 20081ndex Value 207.6 Percentage Change 2005.2000 6.1% Source: US Bureau of Labor Slausucs (available al: httpJANNi.bls.gov /cpl) Prepared by, Hamilton, Rabinovirz & Aischuler, me. HANHLTON, RABINOVITZ & ALSCHULER, INC. Page 4 Attachment D HP&A I Analyze. Advise. Act. 700 South Flower Street, Suite 2730, Los Angeles, CA 90017 T: 310 -581 -0900 1 f: 310 -58 "1 -0910 1 www.hraadvisors.com July 23, 2014 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 2014 -15 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 P 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 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. 1 Los Angeles 1 New York 1 Washington, D.C. Barry Rosenbaum,Esq. City of Santa Monica July 23, 2014 for FY 2013 -14 using this methodology when it adopted Resolution No. 10764 (CCS) on August 27, 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 4.4 percent measured between March 2014 (the current budget adoption year) and March 2013, as compared with a zero percent change between March 2012 and March 2013. 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 2013 median condo price changes by City ZIP code were published in the Los Angeles Times in January 2014, using Los Angeles County Assessor data compiled by Dataquick. The weighted average change for the City during 2013 was 15.4 percent, as compared with a 3.2% increase during 2012, evidencing a strengthening recovery in the local housing market from the 2007 -2009 national recession. 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 %). Table 1, on the following page, presents the annual adjustment calculation establishing the Affordable Housing Unit Development Cost for FY 2014 -15. It shows that a weighted average inflation index using the City Council- approved approach results in a 7.2 percent annual increase (compares with a 0.8 percent increase for FY 2013 -14), to $312,609, which is a $20,996 increase compared with the FY 2013 -14 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 2014 -15. We are available to assist you in presenting the Resolution to the City Council. Sincerely, 04�1 - PAUL J. SILVERN, Vice President HR &A ADVISORS, INC. Page 2 Barry Rosenbaum, Esq. City of Santa Monica July 23, 2014 Table 1 Affordable Housing Development Cost Annual Inflation Adjustment Calculations for FY 2014 -15 Land Costlydlafton ZIP Code Median Price Change 2012 -2013 It Condos Sold 90401 -12.2% 17 90402 -1.0% 29 90403 17.0% 200 90404 29.9% 110 90405 7.1% 114 $ 11,361,066 $ 15,861,066 470 Source: Dataquick Information Services (available on -line at: httpJ/www.dgnews.com/ Charts / Annual- Chads&A- Tme"harts/ZIPLATI l espx) Construction Cost leflation Engineering News Record's Construction Cost Index —Los Angeles March 2013 Index Value 10283.93 March 2014 Index Value 10731.66 Percentage Change 2013 -2014 4.4 %.j Calculation Source: Engineering News Record (subscription required; data are available from HR&AAdvisom, Inc.) Derivation ofLandCost andConstructton Cost Calculafton Welghfs 3.6% -0.4% 62% -0.1% 42.6% 72% 23A% 7.0% 242% 1.7% 100.0% 15A% Source: Housing Division, CifyofSanta Monica Inflation Factor Derivation Inflation Value Weight Wtd. Avg. Land Value Inflation 15.4% 25.3% 3.9% Construction Cost inflation 4.4% 741% 33% _.. 7.2Y..j Adjusted Unit Cost FY 201344 Cost/Unit Inflation Factor I Updated CostfUnit -.; $ Change Affordable Housing Development Cost $291,613 7.2% $312,6091 $20,996 Forinlormafton Only: Consumer Price Index Change, LAtRiv -Or Co.,All Urban Consumers, 1982 -84 =100 Mar. 2013 Index Value 239.995 Mar. 2014 Index Value 242.491 Percentage Change Mar .2013- Mar.2014 1.0% Source: US Bureau of Labor Statistics (available at hIIpJAvww.bis.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 $ 11,361,066 $ 15,861,066 $ 8,125,000 $ 23,991,204 $ 32,116,204 25.3% 74.7% 100.0% Source: Housing Division, CifyofSanta Monica Inflation Factor Derivation Inflation Value Weight Wtd. Avg. Land Value Inflation 15.4% 25.3% 3.9% Construction Cost inflation 4.4% 741% 33% _.. 7.2Y..j Adjusted Unit Cost FY 201344 Cost/Unit Inflation Factor I Updated CostfUnit -.; $ Change Affordable Housing Development Cost $291,613 7.2% $312,6091 $20,996 Forinlormafton Only: Consumer Price Index Change, LAtRiv -Or Co.,All Urban Consumers, 1982 -84 =100 Mar. 2013 Index Value 239.995 Mar. 2014 Index Value 242.491 Percentage Change Mar .2013- Mar.2014 1.0% Source: US Bureau of Labor Statistics (available at hIIpJAvww.bis.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. A,, vie. Advise. Act. Irnma.Tos, RAmeovaz &Arscuuruq Inc. , Wtv.. Fdmd4 &Afmlagemenl Comullanlr April 24, 2006 Mr. Ron Barefineld Housing Administrator City of Santa Monica 2121 Cloverfneld Blvd., Suite 100 Santa Monica, CA 90405 Re: Annual Adjustment for the Affordable Housing Feo 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 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 Between New Mmket Rate Multi - Family Developments in the City of Santa Monica and the Needfordffordable 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 (CPI), While the CPI is often used to make inflation adjustments because of its convenience, the monthly changes in ilia 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, width 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 Engineering News Record's (ENR) Construction Cost Index, because it I Tho other 20 -25% consists of professional fees mid other "soft costs "and financing costs, neither of which Is regularly monitored by third party sources for inflation changes. 280028THSmneer, SUa025,SAWA MON(CAt CAMORNIA 90405 a 9)3E:310.581.0900 • NAx:310.581.0910 Lai Amami No, CNAromu PORVANII,OR NEWYaw 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 cast. One proxy measure that could be used for land cost changes is change in median condominium purchase prices.2 Since the median condo stile 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 27ines each January, using Los Angeles County Assessor data compiled by Dataquick. They are also available on a subscription basis front 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 it 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 amoral inflation adjustments to the Affordable Housing Pee 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 change between March of die 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 your- 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. 'file annual average lends 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 Update; illustrates how such rut 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 Consistent with Ole City's historical experience, this assumes hint most new affordable multi- family projects will be developed in multi- fardly 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, iflite average land cost for recent projects was $3.0 million and average hard construction cost was $9.0 million, the land to land plus construction cost ratio would be 25 %($3.0 million / ($3.0 million +$9.0 roll lion) 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 thealtemalive tveigHrerl cnerage fees, which were also presented in the 2005 Nexus Study Update, and it was these fees that the City Council actually adopted on October 11, 2005. HAMILTON, RARINOVITZ & AISCIATLER, INC. Page 2 Pon Baretield Housing Division City of Scoria 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 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. Wo are available to assist you, as needed, with that presentation. r(e rl�yj (per AUI, J. LVE( 2N, Partner HAMILTON, RAtllNOVITZ& ALSCHULER, INC. Page 3 Ron Bareflold Housing Division City of Santa Monica April 24, 2006 Source: LasAngolas Times, Real bands S26lion, P. R18, January 22, 2008 (based on Oala0mak Infounanon Systems Construction Cost Inflation Englneedng Nevis Record's ConsmactIon Cost Index Much 2005 Index Value 7,309 March 2000 Index Value 7,692 Percentage Change 2005 -2000 6,2y, Source: Engfnew ng Nevis Record (available at hIIpJNnvv. om,conaWdion.com/(ealures /ceneco /subs /consltndoxHist.esp) Derivation of Land Cost and Construction Cost Calculation Weights Most Rocont CCSM Family Rental Projects Land Cost Hard Construction Total 1424 Broadway s 3,640.000 S 811001000 S 11,740,000 2601 Santa Monica Boulevard $ 3,260,000 $ 8,100,000 $ 11,350,000 2200 Main Street $ 3.120.000 S 0,123,010 $ 42,243,010 $ 10,010,000 $ 26,323,910 11 35,333,910 28% 72% 100% Source: Housing Division, City of Santa Monica Inflation FactorDe6vfIon 11111anon Value Weight Wid. Avg. Land Value Inflation 14.8% 28.3% 4.2% Construction Cost Infaton 0.2% 71.7% 0814 7.8°M eenecievieAM Ad /ustedFees Oct. 2008 Bas. Fees Inflation Factor UFueled Foos 11 Change Condos $26.08 7.0%1 $28.16 $2.07 Aeronauts $22.33 7.8% 1 $24.1011 $1.77 Fprtmarmaton Only: Consumer Price Index Change, LAPJv,Or Co., All Urban Consumers Feb. 2005 Index Value 197.4 Feb. 2000 indox Value 207.6 Percanage Change 2006.2000 511% Source: US Bureau or Labor Suntan" (available al: htlp1Awnv.bls.gev /cp1) Prepared by, Hamilton. Rebinovita & AtachulaL Inc. HANILUMN, RABINOVL'fz & A4SCIR)LEB, INC. Page 4 Tm,A1 Affordable Housing Fee Annual Inflellon Atlluslmont Calculall.nater FY 2000.07 Land Cost Inflation Macau Annual Pace Calculation 21P Code Change During 2005 #Condos Sold Weigh Ls Weighted Avg. 00401 35.0 °:0 21 A.0% 1.0% 80402 -2.1% 30 5.0% -0.1% 90403 9.8% 237 39.6'' /e 3.855 90404 26.5% 162 27.0% 0.0% 90405 10.6% 1.43 24.0% 9AA 600 1- 14.81 Source: LasAngolas Times, Real bands S26lion, P. R18, January 22, 2008 (based on Oala0mak Infounanon Systems Construction Cost Inflation Englneedng Nevis Record's ConsmactIon Cost Index Much 2005 Index Value 7,309 March 2000 Index Value 7,692 Percentage Change 2005 -2000 6,2y, Source: Engfnew ng Nevis Record (available at hIIpJNnvv. om,conaWdion.com/(ealures /ceneco /subs /consltndoxHist.esp) Derivation of Land Cost and Construction Cost Calculation Weights Most Rocont CCSM Family Rental Projects Land Cost Hard Construction Total 1424 Broadway s 3,640.000 S 811001000 S 11,740,000 2601 Santa Monica Boulevard $ 3,260,000 $ 8,100,000 $ 11,350,000 2200 Main Street $ 3.120.000 S 0,123,010 $ 42,243,010 $ 10,010,000 $ 26,323,910 11 35,333,910 28% 72% 100% Source: Housing Division, City of Santa Monica Inflation FactorDe6vfIon 11111anon Value Weight Wid. Avg. Land Value Inflation 14.8% 28.3% 4.2% Construction Cost Infaton 0.2% 71.7% 0814 7.8°M eenecievieAM Ad /ustedFees Oct. 2008 Bas. Fees Inflation Factor UFueled Foos 11 Change Condos $26.08 7.0%1 $28.16 $2.07 Aeronauts $22.33 7.8% 1 $24.1011 $1.77 Fprtmarmaton Only: Consumer Price Index Change, LAPJv,Or Co., All Urban Consumers Feb. 2005 Index Value 197.4 Feb. 2000 indox Value 207.6 Percanage Change 2006.2000 511% Source: US Bureau or Labor Suntan" (available al: htlp1Awnv.bls.gev /cp1) Prepared by, Hamilton. Rebinovita & AtachulaL Inc. HANILUMN, RABINOVL'fz & A4SCIR)LEB, INC. Page 4 Reference: Resolution No. 10833 (CCS) H Resolution No. 10834 (CCS)