CITY HALL — City officials proposed modifying their approach to calculating the value of some developments Wednesday night, something developers hold is fundamentally flawed and could prevent both new building and the community benefits that come with it.
The information is one piece of what city staff stressed should be a policy-based decision on whether or not a development that exceeds the normal limitations of size and density be allowed to go through in Santa Monica.
However, the calculations — pushed for most notably by outgoing Councilmember Bobby Shriver — provide the basis for many discussions surrounding the projects, including the amount of “extras” City Hall can ask for in return for permission to break their own building rules and create a more valuable project.
“This is the nut of what we’re struggling with, this value relationship,” said Planning Commission Chair Gerda Newbold.
The commission and City Council both use the information when making decisions on whether or not to support a development agreement, which is a contract between the developer and City Hall that allows the developer to exceed zoning rules in exchange for certain community benefits.
How much bigger or denser they are determines which “tier” the project falls into. “Tier 1” are projects that developers can build by right. Tiers two and three get progressively taller and denser.
In theory, those levels represent an increase in the value of the land in comparison to what the developer could have made “by right,” or without special permissions.
A portion of that added value pays for community benefits, things that Santa Monica residents expressed a desire for during the seven-year effort to create the Land Use and Circulation Element, or LUCE.
The financial analyses help commissioners and council members know how much they can ask in terms of extra benefits — parks, affordable housing, public art, etc. — before they cut the profit margin on the project to the bone.
Representatives of developers, however, disagree with the city’s method of analysis, saying that the calculations ignore certain costs and misstate added value, which could make some developments impossible to finance.
A main sticking point was the value of the land, which staff does not include in its calculations. High land costs make smaller projects that developers can build without a development agreement inherently unprofitable, said Dave Rand, an attorney with land use law firm Armbruster Goldsmith & Delvac.
“Tier 1 is a planning concept, not one grounded in economic reality,” Rand said. “Tier one is not economically viable. If you start from a base of unfeasibility, it skews the analysis.”
According to calculations by James Regan, a real estate and economic consultant introduced by Rand, city staff’s approach shows the lowest level of a hypothetical project at a value of $3,295,000, a number that jumps to $5,957,000 by giving the developer rights to build higher and denser.
In his estimations, the Tier 1 project actually has a negative value. Add to that the same rights and the developer is looking at a project value of only half a million dollars.
“I’m not sure there have been many Tier 1 developments built,” Regan told commissioners.
The disconnect could be solved pretty simply if each side could use the same economic models and speak the same language, Shriver said.
A huge proponent of financial feasibility analyses in municipal decision-making, Shriver continues to be disappointed by the products brought forward under the current thinking.
“I still haven’t seen the right one,” he said.
If the two sides are using the same playbook, they can enter development negotiations comparing apples to apples.
“As a policy matter, should the city calculations be done the same way as the developers? Yes, because the city is doing something that creates measureable value,” Shriver said.
For the time being, city staff will proceed with the modified system, despite developer complaints.
“The fact of the matter is that we need to have a definite set of what ground level is on a Tier 1 and the ceiling on a Tier 3, otherwise we’re lost,” said Planning Commissioner Jim Ries.