City Council
Report
City Council Meeting: August 24, 2021
Agenda Item: 3.E
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To: Mayor and City Council
From: Andy Agle, Director, Community Services Department, Housing and Human Services
Subject: Adoption of Resolutions for Affordable Housing Production Program Fees Recommended Action
Staff recommends that the City Council:
1. Adopt the attached Resolution decreasing the Affordable Housing Unit Base Fee by 2.7 percent for new market-rate apartments and condominiums (Attachment A); and
2. Adopt the attached Resolution decreasing the Affordable Housing Unit Development Cost by 2.7 percent (Attachment B).
Summary
A key element of Santa Monica’s strategy to increase housing affordability is requiring market-rate housing developers to assist with creating affordable housing. Developers must either construct residences that are affordable to low- and moderate-income households or pay a fee, which is used to subsidize affordable housing built by nonprofit developers. The City calculates and publishes adjustments to the Affordable Housing Unit Base Fee and Affordable Housing Unit Development Cost on an annual basis, to keep pace with changes in land and construction costs.
The calculation methodology approved by City Council uses a combination of the annual change in median condominium sale prices in Santa Monica as a proxy measure for land cost changes and the change in construction costs based upon the Engineering News Record’s (ENR) Construction Cost Index specific to the Los Angeles area (Attachment C). The land cost and construction cost factors are weighted based on development cost data for the two most recently completed or under construction multifamily affordable developments financed by the City. 2 of 5
Based on 2020 sales data compiled by DQNews using Los Angeles County Assessor and Recorder data, the weighted change for the City in median condominium sale prices from 2019 to end of year 2020 was negative 10.5 percent. Condominium sale prices in Santa Monica have since increased from 2020 levels, however these increases will not be captured until next year’s calculation and adjustment.
The ENR Construction Cost Index increased 0.6 percent between March 2020 and March 2021. Recent increases in construction costs began in May of 2021 and will be captured in next year’s calculation. A land cost inflation weight of 29.2 percent and construction cost inflation weight of 70.8 percent results in a 2.7 percent decrease. The table below on page 3 summarizes the annual adjustment formula calculation.
The new Affordable Housing Unit Base Fee and Affordable Housing Unit Development Cost would be 2.7 percent lower than the existing amounts. The new amounts would become effective November 1, 2021, if approved. The table below summarizes the adjustments in previous years.
Historical Annual Adjustment Rate
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 -1.2% 2.1% 0.8% 0.8% 7.2% 4.9% 3.6% 5.0% 5.0% 2.2% 0.0% -2.7% Discussion
The Affordable Housing Production Program (AHPP), Chapter 9.64 of the City’s Municipal Code, implements Proposition R, which establishes that not less than thirty 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 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, designating land for affordable housing development, or paying an affordable housing fee, in accordance with the following formulas:
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1. Affordable housing unit base fee x floor area of multi-family project;
2. Multi-family projects with fractional affordable housing units of less than 0.75 based upon the formulas established in Section 9.64.050: Affordable Housing Unit Development cost x fractional percentage.
When the formula calculation for required affordable residences results in a fraction of less than 0.75, the obligation can be satisfied by payment of a fee based upon the Affordable Housing Unit Development Cost. For example, if a development is required to provide 4.7 units of affordable housing, the developer is required to designate four affordable residences and pay 0.7 times the Affordable Housing Unit Development Cost to satisfy the requirement associated with the fraction.
Annual Fee Adjustments
Section 9.64.070 of the 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 (Attachment D) 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 table below summarizes the changes in these two factors since 2020, and the calculation results in a 2.7 percent decrease in 2021.
Inflation Factor Derivation
Inflation
Volume Weight
Weighted
Average
Land Value Inflation -10.5% 29.2% -3.1%
Construction Cost Inflation 0.6% 79.8% 0.4%
-2.7%
Unit Base Fee and Unit Development Cost, which would decrease by 2.7 percent based on this year’s changes in land and construction costs.
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The table below summarizes this year’s proposed adjustment to the Affordable Housing.
Fee Description 2020
Amount
2021
Amount
%
Change
Affordable Housing Unit Base Fee –
Apartments (per square foot) $36.49 $35.50 -2.7%
Affordable Housing Unit Base Fee –
Condominiums (per square foot) $42.62 $41.47 -2.7%
Affordable Housing Unit Development
Cost $382,795 $372,460 -2.7%
The proposed Resolutions, Attachments A and B, would adjust the fees accordingly, effective November 1, 2021. Details of the calculations prepared by staff for the Affordable Housing Unit Base Fee and the Affordable Housing Unit Development Cost are provided in Attachment E and Attachment F. The revenue implications resulting from the proposed fees adjustment are anticipated to be minimal, as fee revenues depend on development activity in any given year.
On August 2, 2021, the City published notice in the Santa Monica Daily Press of this hearing and the availability of the staff analyses. The City republished this notice on August 9, 2021. Copies of these analyses have been available in the City Clerk's Office for public review since August 2, 2021.
Past Council Actions
August 13, 2019
(Attachment G)
The previous annual adjustment increasing the fees by five percent.
June 13, 2006
(Attachment H)
City Council approved the methodology for ascertaining
changes in these costs and thereby calculating the adjustment.
July 21, 1998
(Attachment I)
The AHPP was adopted by the City Council and has been
periodically amended, as necessary.
Council resolutions were not necessary in 2020 because the calculation resulted in no adjustments to the Affordable Housing Unit Base Fee and the Affordable Housing Unit Development Cost. The November 12, 2020 Info Item (Attachment J) outlines the changes in the factors that resulted in no adjustments. 5 of 5
Financial Impacts & Budget Actions
The proposed rate change in the Affordable Housing Unit Base Fee and Unit Development Cost is expected to decrease annual revenues by approximately $8,100 per year depending on development activity levels. The proposed rate change is not anticipated to impact the development of affordable housing in the City. Revenues are recorded in account 10400001.415300.
Prepared By: Nigel Wallace, Senior Administrative Analyst Approved Forwarded to Council
Attachments:
A. Proposed Resolution: Base Fee
B. Proposed Resolution: Development Cost
C. Land and Construction Cost Inflation Source Data
D. AHPP Administrative Guidelines
E. Staff Analysis: Proposed FY2021-22 Unit Base Fee Adjustment Memo F. Staff Analysis: Proposed FY2021-22 Development Cost Adjustment Memo G. August 13, 2019 Staff Report
H. June 13, 2006 Staff Report (Web Link)
I. July 21, 1998 Staff Report (Web Link)
J. November 19, 2020 Info Item