SR 08-25-2015 3L
City Council
Report
City Council Regular Meeting: August 25, 2015
Agenda Item: 3.L
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To: Mayor and City Council
From: Andy Agle, Director, Housing Division, Housing and Economic Development
Subject: Affordable Housing Production Program Fee Resolutions
Recommended Action
Staff recommends that Council adopt the attached Resolutions that would apply
4.9 percent increases in the Affordable Housing Unit Base Fee for new market-rate
apartments and condominiums and in 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 (Attachment A), Council approved the methodology for ascertaining
changes in the costs in order to calculate the annual 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 4.9 percent higher than the existing amounts and would become
effective November 1, 2015, 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 (Attachment B) and has been
periodically amended, as necessary. The AHPP re quires 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, designating land for affordable housing
development, or paying the Affordable Housing Unit Base Fee.
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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 Adjustments
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 26, 2014
(Attachment C), increased the fees by 7.2 percent ($2.00 per square foot for apartments
and $2.34 per square foot for condominiums).
The table below summarizes this year’s proposed adjustment to the fees, which would
be increased by 4.9 percent based on this year’s changes in land and construction
costs.
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Fee Description 2014
Amount
2015
Amount
%
Change
Affordable Housing Unit Base Fee –
Apartments (per square foot) $29.79 $31.25 +4.9%
Affordable Housing Unit Base Fee –
Condominiums (per square foot) $34.80 $36.51 +4.9%
Affordable Housing Unit Development
Cost $312,609 $327,927 +4.9%
The proposed Resolutions (Attachments D and E) would adjust the fees accordingly,
effective November 1, 2015. 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 F and G. The revenue implications are
minimal and depend on development activity in any given year.
On August 14, 2015, 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 20, 2015. Copies of these analyses have been available in the
City Clerk's Office for public review since August 14, 2015.
Pursuant to Council direction, staff and the City Attorney’s Office are evaluating whether
the recent California Supreme Court decision in Building Industry Association v.
San Jose gives the City additional flexibility with respect to the AHPP. If there is
additional flexibility, and a new fee structure is developed and adopted, the new
structure would replace the existing structure. In the meantime, staff recommends that
the existing fees be adjusted to their maximum level according to current City law.
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Financial Impacts & Budget Actions
The proposed rate change in the Affordable Housing Production Program (AHPP) fee
will increase annual revenues by an estimated $60,000-$70,000 depending on
development activity levels. Revenues will be deposited at account 04264.404400 and
are included in the FY 2015-16 adopted budget.
Prepared By: Jonathan Carr, Administrative Analyst
Approved
Forwarded to Council
Attachments:
A. June 13, 2006 Staff Report web link
B. July 21, 1998 Staff Report
C. August 26, 2014 Staff Report web link
D. Resolution Automatically Adjusting the Affordable Housing Unit Base Fee
E. Resolution Automatically Adjusting the Affordable Housing Unit Development
Cost
F. HR&A Analysis: Proposed FY 2015-16 Annual Automatic Adjustment for the
Affordable Housing Unit Base Fee
G. HR&A Analysis: Proposed FY 2015-16 Annual Automatic Adjustment for the
Affordable Housing Unit Development Cost
HR&A Advisors, Inc. | Los Angeles | New York | Washington, D.C.
July 16, 2015
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 2015-16 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 2014-15 using this methodology when it adopted Resolution No. 10833
(CCS) on August 26, 2014.
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 2.5 percent measured between March 2015 (the current budget adoption year) and
March 2014, as compared with a 4.4 percent change between March 2013 and March 2014.
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. Based on
our analysis of sales data compiled by Dataquick from the Los Angeles County Assessor records,
the weighted average change for the City during 2014 was 11.9 percent, as compared with a
15.4% increase during 2013.
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%).
Barry Rosenbaum, Esq.
City of Santa Monica
July 16, 2015
HR&A ADVISORS, INC. Page 2
Table 1, on the following page, presents the annual adjustment calculation establishing the
Affordable Housing Unit Base Fee for FY 2015-16. It shows that a weighted average inflation
index using this City Council-approved approach results in a 4.9 percent annual increase (as
compared with a 7.2 percent increase for FY 2014-15):
$36.51 per square foot for condominium developments (an increase of $1.71 per square foot
from the FY 2014-15 Fee); and
$31.25 per square foot for apartment developments (an increase of $1.46 per square foot
from the FY 2014-15 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 2015-16. We are available to assist
you in presenting the Resolution to the City Council.
Sincerely,
PAUL J. SILVERN,
Vice President
HR&A ADVISORS, INC.
ATTACHMENT A
April 24, 2006 HR&A Letter re: Annual Adjustment Methodology
HR&A Advisors, Inc. | Los Angeles | New York | Washington, D.C.
July 16, 2015
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 2015-16 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
1 Hamilton, Rabinovitz & Alschuler, Inc., The Nexus Between New Market Rate Multi-Family Developments in the City of
Santa Monica and the Need for Affordable Housing, 2005 Update, July 1, 2005, prepared for the City of Santa
Monica.
Barry Rosenbaum, Esq.
City of Santa Monica
July 16, 2015
HR&A ADVISORS, INC. Page 2
for FY 2014-15 using this methodology when it adopted Resolution No. 10834 (CCS) on August
26, 2014.
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 2.5 percent measured between March 2015 (the current budget adoption year)
and March 2014, as compared with a 4.4 percent change between March 2013 and March 2014.
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.
Based on our analysis of 2014 sales data compiled by Dataquick from Los Angeles County Assessor
records, the weighted average change for the City during 2013 was 11.9 percent, as compared
with a 15.4 percent increase during 2013.
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 2015-16. It shows that a weighted average
inflation index using the City Council-approved approach results in a 4.9 percent annual increase
(compared with a 7.2 percent increase for FY 2014-15), to $327,927, which is a $15,318 increase
compared with the FY 2014-15 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 2015-16. We are
available to assist you in presenting the Resolution to the City Council.
Sincerely,
PAUL J. SILVERN,
Vice President
HR&A ADVISORS, INC.
ATTACHMENT A
April 24, 2006 HR&A Letter re: Annual Adjustment Methodology