Memorandum
To: City Council
From: Danielle Noble, Acting Director, Housing and Human Services Department RE: Proposed FY 2023-24 Annual Automatic Adjustment for the Affordable Housing Unit Base Fee
This memo 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 9.64.070.B (“the affordable housing unit base fee shall be adjusted [annually] basedon changes in constructions costs and land costs.”). Thismethodology 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 2022-23 using this methodology when it adopted Resolution No. 111356(CCS) on October 25, 2022.
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 percent measured between March 2023 (the current budget adoption year) and March 2022, as compared with a 10.1 percent change between March 2022 and March 2021.
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 2022 sales data compiled by RSG from Los Angeles County Assessor records, the weighted average change for the City during 2022 was 10.3 percent, as compared with a positive 10.6 percent during 2021.
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 multifamily affordable developments assisted by the City. For the current analysis, the two Cityassisted 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 Base Fee for FY 2023-24. It shows that a weighted average inflation index using this City Council-approved approach results in a 5.8 percent annual increase (as compared with a 10.2 percent adjustment for FY 2022-23):
▪ $41.39 per square foot for apartment developments (an increase of $2.27per square foot from the FY 2022-23 Fee).
▪ $ 48.35per square foot for condominium developments (an increase of $2.65 per square foot from the FY 2022-23 Fee); and
The results of the calculations shown in Table 1 will be the basis for a Resolution changing the Affordable Housing Base Fee for FY 2023-24.