1| HR&A Advisors Presentation Title
July 26, 2022
City Council Meeting Presentation
Prepared by: HR&A Advisors, Inc.
Summary ofthe "ImpactReport"on the
Funding forHomelessnessPrevention,
AffordableHousing, and SchoolsBallotMeasure
Outline
Impact Analysis Limitations & Approach
Transfer Tax & Ballot Measure Background
Ballot Measure Revenue Estimates
Illustrative Ballot Measure Expenditures
Risks to Revenues & Implementation
| HR&A Advisors Funding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure 3 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors
1. TIME: The full 30-day window in the Elections Code was not actually available. Between the contracting and agenda preparation processes, only about 2.5 weeks were available to prepare the analysis.
2. A REVENUE MEASURE: The Ballot Measure itself is primarily a revenue raising measure to support specific program expenditure decisions by the City Council in the future. Therefore, it was not possible to analyze most of the Elections Code “impact” categories.
HR&A’s approach to preparing the analysis included the following tasks:
• Detailed review of the full text of the Ballot Measure and related information, and an interview with the proponents • Reviewed the City’s existing real estate transfer tax ordinance • Assembled and reviewed historical real estate transfer tax revenue data • Assembled and analyzed $8 million+ residential and commercial real estate sales during 2012 to 2021 • Reviewed 2012-2021 City expenditures related to Ballot Measure funding allocations with City Finance Department and City Community Services Department
• Interviewed senior real estate industry professionals knowledgeable about City circumstances • Assessed Ballot Measure revenue and implementation risks Limitations of the Impact Analysis
Overall Analysis Approach
Ballot Measure Overview
The "Funding for Homelessness Prevention, Affordable Housing, and Schools" Ballot Measure seeks to add funding for homelessness prevention, affordable housing, and schools by amending Santa Monica Municipal Code Chapter 6.96 to provide a new Third Tier tax rate for real estate transfers of $8.0 million or more.
The proposed Third Tier Rate would be $56.00 per $1,000 of value transferred (i.e., sale price), of which $50 is in addition to the City’s existing tax rate schedule.
The Ballot Measure would create a School Fund and a Homelessness Prevention and Affordable Housing Fund, of which:
• The first $10 million of funds shall go to the School Fund; • The next $40 million of funds shall go to the Homelessness Prevention and Affordable Housing Fund; and • Any funds above $50 million shall be deposited 20 percent to the Schools Fund and 80 percent to the Homelessness Prevention and Affordable Housing Fund.
The Ballot Measure would establish an 11-member Resident Oversight Committee, appointed by the City Council, to provide recommendations to the City Council for expenditures from the Homelessness Prevention and Affordable Housing Fund. All decisions about expenditures from the School Fund rest with the SMMUSD Board of Education.
The Ballot Measure does not contain a sunset provision. Therefore, the Third Tier tax rate could only be amended through a subsequent ballot measure approved by a majority of City voters. 4 | HR&A Advisors Funding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure 5 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors The current City Real Property Transfer Tax Ordinance (Municipal Code, Chapter 6.96) includes two tax tiers for properties sold below and above $5 million.
Ballot Measure Background
City
Transfer
Tax Tier
Transfer Value Tax Rate
1 Under $5.0 million 0.3% or $3 tax per $1,000 of value 2 $5.0 million and above 0.6% or $6 tax per $1,000 of value The Tier 2 tax rate was added by City voters when they approved Measure SM in 2020, including certain new exemptions for transfers to non-profits and for affordable housing. 6 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors The Ballot Measure is proposing a new Third Tier tax rate of 5.6% that would apply to real estate transfers of $8 million or more. 5.0% of the 5.6% Tier 3 rate is net new.
Ballot Measure Background
Sources: Santa Monica Municipal Code, Chapter 6.96; Ballot Measure; HR&A Advisors City
Transfer Tax
Tier
Transfer Value Tax Rate
1 Under $5.0 million 0.3% or $3 tax per $1,000 of
value
2 $5,000,000-$7,999,999 0.6% or $6 tax per $1,000 of
value
3 (Proposed) $8.0 million or more 5.6% or $56 tax per $1,000 of value The tiered City tax rates are in addition to the $1.10/$1,000 rate applied by Los Angeles County. 7 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors Qualifying Tier 3 property sales would generate hundreds of thousands of dollars, if not millions, in new tax revenue from each sale.
Ballot Measure Background
Sale Price
Tier 2 Tax Rate
(0.6% or
$6/1,000)
Proposed
Incremental Tier 3
Tax Rate
(5% or $50/$1,000)
Total Tax
(5.6% or
$56/$1,000)
$8 million $48,000 $400,000 $448,000
$12 million $72,000 $600,000 $672,000
$25 million $150,000 $1,250,000 $1,400,000
$50 million $300,000 $2,500,000 $2,800,000
$100 million $600,000 $5,000,000 $5,600,000
$200 million $1,200,000 $10,000,000 $11,200,000
Sources: Ballot Measure; HR&A Advisors
8 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors Revenue generated from the incremental 3rd Tier tax revenue would be allocated to two funds: The School Fund and the Homelessness Prevention and Affordable Housing Fund.
Ballot Measure Background
Sources: Ballot Measure; HR&A Advisors
9 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors ▪ Charter cities, like Santa Monica, are authorized to set city-specific tax rates that may exceed the usual city rate. ▪ Santa Monica's proposed 5.6% tax rate would be the highest rate in CA for properties sold between $8 million and $25 million Charter cities across California have implemented, or are proposing, additional property transfer tax rates on top of the statewide 0.11% transfer tax rate collected by counties.
Comparison to Other Cities
City
Santa
Monica
(Proposed)
Berkeley Culver City
Los
Angeles
(Proposed)
Oakland Richmond San Jose San
Francisco
Tax
Rates
0.3%: <$5M
0.6%:
$5M-$8M
5.6%: $8M+
1.5%:
Up to $1.5M
2.5%:
$1.5M+
0.45%:
<$1.5M
1.55%:
$2M-$3M
3%:
$3M-$10M
4%: $10M+
0.45%:
<$5M
4%:
$5M-$10M
5.5%:
$10M+
1%:
up to $300K
1.5%:
$300K-2M
1.75%:
$2M-$5M
2.5%:
Over $5M
0.7%:
under $1M
1.25%:
$1M-$3M
2.5%:
$3M-$10M
3%:
$10M+
0.33%: >$2M
1.08%:
$2M-$5M
1.33%:
$5M-$10M
1.83%:
$10M+
0.5%:
$100K-$250K
0.68%:
$250K-$1M
0.75%:
$1M$5M
2.25%:
$5M-$10M
5.5%:
$10M-$25M
6%: $25M+
Sources: City of Santa Monica; californiacityfinance.com; HR&A Advisors 10 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors Ballot Measure Revenue Estimate Approach
The impact report analysis provides a Ballot Measure revenue estimate based on the proposed incremental Tier 3 tax rate as if it had been applied to actual sales of $8 million or more over the previous 10 years (2012-2021) .
Analyzed commercial & multi-family property sales data from CoStar real estate database
Analyzed single-family home & condo sales from the Multiple Listing Service Reviewed preliminary estimates with the City’s Director of Finance and the Assistant City Treasurer
11 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors Commercial sales represent 82% of all qualifying transactions and 94% of sales value from 2012-2021. Sales of office, retail and multi-family buildings represent 85% of the commercial transactions.
Revenue Estimates
Year
Number
of Sales
$8M+
Total
Sales
2012 18 $507M
2013 19 $692M
2014 11 $267M
2015 30 $1.0B
2016 39 $2.4B
2017 23 $1.0B
2018 30 $1.2B
2019 23 $1.0B
2020 20 $496M
2021 21 $504M
Total 234 $9.2B
Sources: CoStar; HR&A Advisors
12 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors Year
Number
of Sales
$8M+
Total
Sales
2012 4 $40M
2013 4 $39.8M
2014 4 $52M
2015 4 $52.6M
2016 3 $37.8M
2017 9 $83.2M
2018 5 $50.3M
2019 7 $80.2M
2020 6 $52.5M
2021 6 $107M
Total 52 $595M
Single-family and condo sales represented 18% of all qualifying transactions and 6% of all total sales value from 2012-2021.
Revenue Estimates
Sources: Multiple Listing Service; HR&A Advisors
13 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors Based on historic data, potential tax revenue would have varied from a low of $16 million (2014) to a high of $123 million (2016), suggesting year-to-year fluctuationsin the level of tax received.
Based on historical sales data from 2012-2021, the City would have realized approximately $49 million in average annual revenue from the proposed Tier 3 tax rate.
Revenue Estimates
Summary
Total Sum of Sales Price (2012-21) $9,803,504,360
Total Potential Tax Revenues (2012-21) $490,175,218
Average Year Total 5% Tax AllocatedFunds $49,017,522
In an Average Year
(5% Tax Allocated Funds)
School Fund $10,000,000
Homelessness Prevention and Affordable
Housing Fund $39,017,522
Summary of Revenue Generated From Proposed Tier 3 Tax Rate Relationship between City Sales Transactions and Estimated Real Estate Transfer Tax Revenues Between 2012-2021
Sources: CoStar, Multiple Listing Service; City of Santa Monica; HR&A Advisors 14 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors Illustrative Expenditure Analysis Approach
Drawing from 10 years of City expenditure data, and the Ballot Measure's Fund allocations, the analysis compares how expenditures from the Ballot Measure's new annual tax revenue, by Fund category, compares with average annual City expenditures Grouped historical City expenditures into four Ballot Measure Homelessness Prevention and Affordable Housing Fund categories.
Identified FY 2020-21 expenditures as a representative year, except for affordable housing production.
Used $7.5 million as a best estimate of average annual on-going expenditures for affordable housing, based on go-forward revenue sources and not one-time funding.
Compared illustrativeBallot Measure Fund allocations with estimates of existing City expenditures in the same general Fund categories.
1 2
3 4
15 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors The estimated annual average of $39 million in new tax revenue for the Homelessness Prevention & Affordable Housing Fund represents about 3 times the funding for similar expenditure categories.
Expenditure Estimates
Existing Expenditure Category
Existing
Expenditure
(FY2020-21
Actuals)
%
Illustrative
Additional
Expenditures
from Ballot
Measure
%
Administration
• Homeless Initiatives Staffing
• Housing Division
$2.4M 18% $2.3M 6%
Emergency Income Assistance
• HHSD Flex Funds
• POD Program
$2.1M 16% $11.7M 30%
Acquisition, Rehabilitation, and
Development of Affordable Housing $7.5M 56% $19.5M 50%
Programs to Preserve Tenancy
• LAFLA - General Community Legal
Services
• St. Joseph Center - Retention Program
• Step-Up On Second – Sanctuary
• Tenant Counseling
$1.3M 10% $5.5M 14%
Total $13.3M 100% $39.0M 100%
Sources: City of Santa Monica; Ballot Measure; HR&A Advisors 16 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors Illustrative Expenditures
The estimated annual average $19.5 million in new funding for affordable housing is more than 2.5 times the estimate of existing average annual expenditures.
Assuming average City subsidy values/unit and that all other financing sources and sufficient City administrative capacity are available, the Ballot Measure Funding could support annually about:
74 Affordable units on land acquired from a private party at market rate; or 182 Affordable units on City-owned land; or
36 Affordable units from the acquisition, rehabilitation and deed restriction of existing market-rate apartment buildings
17 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors The Ballot Measure tax revenue estimates are subject to a variety of risks. Some are risks whether or not the Ballot Measure passes; others may be a direct response to the scale of the incremental Tier 3 tax rate.
Risks to Tax Revenue
Economic & Real Estate Market Cycle Volatility
Uneven Numbers and Frequency of Large Transactions
Development Project and Investor Financial Feasibility Impacts Increase in Tax Avoidance Behavior
Potential Litigation
18 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors There are also implementation risks to achieving the programmatic benefits these additional resources could provide.
Risks for Implementation
Compliance, Implementation, and Enforcement Staffing Needs Eligibility Requirements Could Constrain Disbursements
Concerns Regarding Coordination of Expenditure Recommendations and Operation of the Residents Committee
19 FundingforHomelessnessPrevention,AffordableHousing,andSchoolsBallotMeasureFunding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure| HR&A Advisors If voters approve the proposed Ballot Measure, the City could generate about $49 million in new annual tax revenues, based on previous sales of $8 million or more.
Conclusion
Subject to recommendations by the Resident Oversight Committee and approval or modification by City Council,the new tax revenues could make significant progress in addressing the needs of:
• Homeless persons needing housing;
• Rent-burdened, low-income existing households; and
• The City to produce a significant number of new units affordable to low- and moderateincome households However, due to market risks associated with the scale of the Tier 3 tax rate, there are reasons to be cautious about whether estimated revenue would be realized every year.
Additionally, caution is warranted about the City’s ability to deliver effective programs and new affordable units, to the degree that the Resident Oversight Committee and City Council may recommend.
Q&A
20 | HR&A Advisors Funding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure