City Council Report
City Council Meeting: July 8, 2014
Agenda Item: 8-B
To: Mayor and City Council
From: Andy Agle, Director of Housing and Economic Development
Gigi Decavalles-Hughes, Director of Finance
Subject: Real Estate Transfer Tax and Affordable Housing Ballot Measures
The State of California’s elimination of the Santa Monica Redevelopment Agency has dramatically curtailed the City’s ability to support the production and preservation of affordable housing. Without continued support of affordable housing, economic diversity in Santa Monica may decline and the housing needs of lower-income members of the community cannot be addressed adequately. Pursuant to previous Council direction, staff recommends adoption of an ordinance and a resolution placing two measures on the November 2014 General Municipal Election Ballot. The first measure would set the real estate transfer tax at nine dollars per thousand dollars of sales price for all real estate transfers over $1 million. The second measure would provide an opportunity for voters to express their preference that the increased revenues be used for affordable housing. The proposed ordinance and resolution are attached.
Council held policy discussions on February 28, 2012 and December 11, 2012 to consider a variety of issues related to affordable housing in Santa Monica. The policy discussions were held in the wake of the dissolution of all redevelopment agencies in California, including the Santa Monica Redevelopment Agency (RDA.) The RDA provided the primary local funding source for the production and preservation of affordable housing in Santa Monica. During the years leading up to redevelopment dissolution, the Housing Division invested over $15 million per year of redevelopment funds to finance affordable housing through loans and grants to non-profit housing organizations. The investment of local funds leveraged an additional $15 to $20 million annually from private investors and institutional lenders. With the dissolution of redevelopment, the flow of funds that can be invested in affordable housing, as well as the City’s ability to leverage outside funding, has been radically diminished. Current budget projections show less than $1 million per year available for affordable housing production and preservation in the coming years. With such limited funding, it will take the City several years to accrue sufficient funds to support one affordable housing preservation or production opportunity.
With state-mandated vacancy decontrol significantly impacting the affordability of Santa Monica’s rent-controlled apartment supply, financing the production and preservation of affordable housing has been a critical tool in ensuring the continued availability of housing that is affordable to households of all income levels and in maintaining economic diversity in Santa Monica. Funding from the RDA played the central role in the City’s ability to finance the production and preservation of affordable housing, and has been the cornerstone of Santa Monica’s robust affordable housing program. Since 1994, approximately 38 percent of all new housing built in Santa Monica has been affordable to low- and moderate-income households, totaling nearly 1,600 residences that will serve many generations of families and individuals of modest incomes. This is an outstanding accomplishment that few cities have achieved.
The final wave of redevelopment-funded affordable housing developments has recently been completed or is under construction. During 2014, over 250 new affordable apartments have become available to low-income families, seniors, and artists. Another 32 affordable apartments are expected to be completed in early 2015. Staff anticipates that one or two additional housing rehabilitation opportunities will be funded from recent land sales. Once those opportunities are funded and completed, the non-profit affordable housing pipeline in Santa Monica is expected to run dry. Finding new funding sources will be critical to continuing Santa Monica’s commitment to a diverse community with housing for people of all incomes.
As discussed in the City Council staff report of February 25, 2014, prospects for significant, new funding sources at the federal, state, or regional levels are dim. If new funding sources are developed at higher levels of government, they will likely require the availability of local matching funds, particularly in locations such as Santa Monica where land and construction costs are high. If the City desires to maintain its traditionally broad and deep affordable housing program, staff believes that the creation of a new local funding source will be necessary. In the coming months, Council is expected to consider an ordinance to implement a commercial / housing linkage fee. While a commercial / housing linkage fee would play an important role in mitigating the impacts of commercial development on affordable housing needs, staff does not expect it to be a significant, on-going source of funding to invest in affordable housing. One of the primary reasons is that there is not expected to be significant commercial development in Santa Monica in the coming years.
Within the current development pipeline, most of the proposed projects are primarily residential. Most of the significant commercial developments (hotels, mixed-use creative office / residential developments) are anticipated to include affordable housing. Commercial components of any new developments will also likely be offset by existing, on-site commercial structures. While only a portion of the projects may ultimately make it into construction, it does provide a reasonable proxy for the type of development that will be expected. As a result, if approved, the new fee will likely be an important, though relatively insignificant, source of funding for affordable housing, requiring funds to be accumulated over multiple years to be sufficient to create or preserve affordable housing. Maintaining the City’s robust affordable housing program will require additional local funds.
At its February 25, 2014 meeting, Council discussed an adjustment to the real estate transfer tax rate in order to increase City revenues that could be used to support affordable housing. A real estate transfer tax is collected by a county recorder whenever commercial or residential property changes hands and an ownership transfer document is recorded. All California counties collect a transfer tax of $1.10 per $1,000 of transferred value. In addition, many California cities charge an additional transfer amount that is collected by the county recorder and paid to the respective city. Santa Monica collects an additional amount of $3 per $1,000 of transferred value that goes to support general City programs. Currently, city transfer rates in California range from $1.10 to $25.00 per $1,000 of transferred value. (See Attachment C for a list of California cities’ transfer rates.)
For example, if a property in Santa Monica sold for $1,000,000, the Los Angeles County Recorder would collect a transfer tax of $4,100 ((1,000,000/1000)*(1.10+3.00)), with $1,100 for the county and $3,000 for the City. Payment of the transfer amount can be negotiated between the buyer and the seller.
The idea of increasing real estate transfer rates and later directing the increased receipts toward affordable housing is appealing for a variety of reasons. First, transfer receipts can vary widely from year to year, based on transactions that occur during any year. Such receipts tend to be affected by the general volume of residential and commercial sales and the exact timing of significant sales. For example, a handful of significant commercial property sales in one year, combined with brisk residential sales activity, could spike transfer receipts, while minimal commercial and residential sales in a subsequent year could drop municipal receipts. (See Attachment D for historical transfer fee receipts in Santa Monica.) The volatility of transfer receipts would make it difficult to fund an operating program that has relatively fixed costs each year. By comparison, affordable housing opportunities are funded once sufficient funds have been collected to support the opportunity. As a result, the volatility of the funding source would not be a significant detriment to the City’s funding system for affordable housing.
Increasing the transfer rate and later allocating funds toward affordable housing also has appeal from a policy perspective. While the existing AHPP ensures that new market-rate residential development mitigates the need for affordable housing, and the proposed housing linkage fee will help mitigate new commercial development’s impact, there is no means to address the affordable housing impacts of existing commercial and residential properties, particularly those that were developed before current affordable housing policies were in place. Increasing the transfer rate on property transfers and later allocating it toward affordable housing could allow a small portion of the escalation in values of existing residential and commercial properties to be dedicated to promoting economic diversity and to helping address the housing needs of low-income members of the Santa Monica community.
Increasing the real estate transfer rate would require voter approval. There are several reasons that voters could embrace an adjustment to the transfer rate. First, residents encounter the transfer tax only when they are buying or selling property, which is a rare occasion for most residents. Second, residential sales prices in Santa Monica have peaked at a level that is commensurate with their pre-recession levels. (See Attachment E for median residential sales prices since 2000.) As a result, most residential sales are expected to involve value appreciation that far surpasses any likely amount of the transfer rate. Sales by longer-term owners can see doubling, tripling, and quadrupling of values since purchase. Local brokers and appraisers estimate that commercial property values have similarly recovered from the recession. Second, the payment of the transfer tax can be negotiated between buyers and sellers and the payment is accompanied by a variety of other escrow and closing costs that many buyers and sellers consider to be part of the cost of the transaction. Finally, with a minimum transaction threshold for application of the higher rate, such as one million dollars, homeowners of more modest means would be shielded from the increased rate when they sell their homes. A threshold also would ensure that virtually all commercial transactions would pay the higher rate, ensuring that existing commercial properties contribute to the community’s needs when a sale occurs.
In reviewing transfer tax receipts from previous years, staff estimates that the additional receipts from setting the transfer rate at $9 per $1000 of sales price over $1,000,000 would generate between $4 million and $10.2 million per year. The wide range presented is due to the volatile nature of real estate transfers, as discussed above. Staff estimates that except in very slow real estate markets, making the additional funds available for affordable housing would replace approximately half of the affordable housing program previously funded by redevelopment. If the state is able to develop and execute a plan for affordable housing funding, local funds could leverage state funds and make Santa Monica more competitive for those funds.
Adjusting the local transfer tax for general municipal purposes would require approval by over 50 percent of voters. A companion measure could provide voters with an opportunity to demonstrate their desire that the increased revenue be directed toward affordable housing.
Summary of Poll
On February 25, 2014, Council authorized staff to engage Fairbank, Maslin, Maullin, Metz & Associates (FM3) to conduct a telephone survey of Santa Monica voters in order to better understand voter attitudes toward the real estate transfer tax and affordable housing in general. In April 2014, FM3 conducted a telephone survey of 501 Santa Monica voters, with a margin of error of plus or minus 4.4 percent. Attachment E provides a summary of the survey results. The survey found that 56 percent of voters believe there is a great need or some need for additional funding to provide affordable housing in Santa Monica. A majority of survey respondents expressed some level of support for increasing the real estate transfer tax from $3 to $9 per thousand dollars of sales value for properties sold over one million dollars, as well as for an advisory measure supporting use of the increased funds for affordable housing. Of those surveyed, 57 percent said they would definitely vote yes, probably vote yes, or would lean toward voting yes on the real estate transfer rate adjustment. Fifty-nine percent expressed similar levels of support for an advisory measure related to affordable housing funding. After hearing educational statements about the real estate transfer tax and the City’s affordable housing program, support for the transfer rate adjustment increased to 61 percent and support for the advisory measure increased to 67 percent. Survey respondents indicated the strongest support for the measures if the funds were used only for affordable housing, including acquisition and rehabilitation of existing apartment buildings, with the strongest support for housing for seniors, veterans, persons living with disabilities, and people who live or work in Santa Monica.
While the polling shows general support for the measures, it also indicates that the majority support is not definitive and that education plays a critical role in support for the measure. As a result, if the measures are placed on the ballot, education and outreach by affordable housing supporters will be critical to ensuring that voters understand the measures and go to the polls to vote for them. In considering whether to place the measures on the ballot, Council will need to assess the community resources that could commit to supporting a ballot measure campaign, particularly because the City is not allowed to use its resources to advocate for ballot measures.
Summary of Ballot Measures
As envisioned, the adjustment to the real estate transfer tax would be considered a general tax and thereby would require a simple majority (50 percent plus one) for voter approval. The companion measure would allow voters to express their preference that the funds be allocated toward affordable housing, if the real estate transfer tax adjustment were to be approved.
Attachment B is the resolution submitting the measures to the voters of the City of Santa Monica. The title of the measures are as follows:
PROPOSITION “ “: Shall an ordinance be adopted that amends the real estate transfer tax so that for commercial and non-commercial real estate sold for one million dollars or more, the tax rate would be $9 for each thousand dollars of sales price?
PROPOSITION “ “: ADVISORY VOTE ONLY: If the proposed transfer tax on commercial and non-commercial real estate sales is approved by voters, should the revenue be used to preserve, repair, renovate and construct affordable housing for low-income people who work or live in Santa Monica, including seniors, veterans, working families and persons with disabilities?
In addition, the resolution authorizes the City Council to submit arguments and rebuttals concerning the measure. Council may designate one to five members to submit arguments and rebuttals for the measure. Finally, the resolution directs the City Clerk to transmit a copy of the measure to the City Attorney and directs the City Attorney to prepare an impartial analysis of the effects of the measure on the existing law as well as on the operation of the measure.
Arguments and rebuttals shall be submitted in accordance with State Elections Code Sections 9280-9287 and Santa Monica Municipal Code Section 11.04.125. The Elections Official will set the deadline for submitting arguments as 14 days from the date the election is called on the measure and the deadline for submitting rebuttals to arguments as 10 days after the deadline for submitting arguments on the measure.
The advisory measure does not raise taxes; rather, it expresses Santa Monica voters’ preference if the real estate transfer tax is increased. The results of the measure would not bind the current or future city councils as to use of the revenues. In 2010, Santa Monica voters approved a transactions and use tax, as well as a companion measure expressing a preference that half of the revenues from the transactions and use tax be used to support school programs. Since adoption of the two measures, Council has allocated 50 percent of all revenues to school programs.
Council may choose not to adopt the resolution and thereby avoid placing the measures on the ballot. Council could also choose to place alternative measures on the ballot. Council also could choose to set the transfer rate at a different level. For example, if the rate for sales over $1 million were set at $6 per $1,000, annual receipts are estimated to range between $2 million and $5.1 million. However, the voter poll showed that dropping the rate to $6 did not result in a statistically significant increase in voter support.
Financial Impacts & Budget Actions
The cost of placing the measures on the ballot will be covered by the FY 2014-15 election budget. Voter approval of the transfer tax measure is expected to increase General Fund revenues by $4 million to $10.2 million per year, depending on the number and value of real estate transfers that occur during any year. Voter approval of the companion measure would create significant new revenues to support the resumption of the City’s affordable housing production and preservation program.