Memorandum
To: City Council
From: Danielle Noble, Acting Director, Housing and Human Services Department Re: Proposed FY 20233-24 Annual Adjustment for the Affordable Housing Unit Development Cost
This memo summarizes the results of applying an annual adjustment to the Affordable Housing Unit Development Cost pursuant to Santa Monica Municipal Code (SMMC) Section
9.64.070.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 9.64.070.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 9.64.070.A.2 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 9.64.050.D is less than 0.5. 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, professionalfees andother “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 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.
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 2022- 23 using this methodology when it adopted Resolution No. 111357 (CCS) on October 25, 2022.
For the construction cost inflation component of the calculation approach, the Engineering News Record’s(ENR) Construction CostIndex 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 4.0 percent measured between March 2023 (the current budget adoption year) andMarch 2022, as comparedwith a 10.1percent change between March 2022 and March 2021.
Although there is no comparable index for inflation in land cost, the City-adopted calculation method usesthe 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 2022 sales data compiled from Los Angeles County Assessor records, the weighted average change for the City during 2021 was 10.3 percent, as compared with a 10.6 percent increase during 2022.
The relative balance between land cost inflation (based on changes in median condo prices) and construction cost inflation (based on a construction cost index) continuesto 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 1819 Pico Boulevard and 1834-1848 14th Street. 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 (29.2%). The inverse of the land value percentage is the construction cost share (70.8%).
Table 1, on the following page, presents the annual adjustment calculation establishing the Affordable Housing Unit Development Cost for FY 2023-24. It shows that a weighted average inflation index using the City Council-approved approach results in a 5.8 percent annual increase (compared with a 10.2 percent increase for FY 2022-23), to $434,257, which is a $23,806 increase per apartment compared with the FY 2022-23 Housing Unit Cost.
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 2022-24.