Delays in Implementing Ontario Legislationon

The Ontario government in December of 2016 passed legislation authorizing the use of IZ in the province. The implementation of this legislation is dependent upon the the province also releasing the associated regulations. The release of those regulations has been pending for some time.

The delays are related to the behind-the-scenes lobbying by the development industry. The developers have been pushing for a regulation that would require all municipalities to compensate the developers for the affordable units. More specifically, the required compensation would be arbitrarily set across-the-board at 50% of the price or rent difference between the market units and corresponding affordable units.

This regulation would be particularly counterproductive. It would subvert the very purpose of the legislation by ensuring that it generated no or very little affordable housing. Municipalities do not have the cash or other financial resources to provide mandatory compensation like this. Faced with this obligation, they will chose either not implement IZ programs, or implement programs providing affordable housing in a very limited or shallow way.

Opposition to this regulation has rightfully developed, as news has leaked out about the efforts of the developers. Both the City of Toronto and the Association of Municipalities of Ontario have objected to this possible provision. Similar objections were registered in a letter prepared in late March by Social Planning Toronto and signed by over 30 community and non-profit organizations across Ontario (see letter). During Question Period on 3 April, MPP Cheri DiNovo quizzed the Minister about the status of this provision, while calling it a “poison pill” (see transcript).

While undermining the legislation, this provision is also remarkable for being so unnecessary. The proof of this can be seen is the large number of the US programs that have successively operated without any or limited compensation. And it is generally recognized that no compensation is typically needed particularly in fast-growing communities like Toronto and those in the surrounding GTA.

It is also important to note that there is no precedent for this sort of mandated across-the-board compensation in the US programs. The municipalities there have been free to fashion their own regulations – sometimes with and sometimes without compensation – that respond to their particular and disparate local conditions and needs. They seemed to have acted responsibility because these programs have generated considerable affordable housing while not apparently impairing the ability of developers to build. Municipalities in Ontario should be given the same flexibility and opportunity.

What makes an effective program?

The experience in the US shows that to be fully effective IZ programs should incorporate a number of key aspects.  These aspects deal with how the rules in IZ programs should be framed and approached rather than with what specifically should be in them. (The latter is addressed in an introductory way in this website in A Guide to Developing Inclusionary Housing Programs.)

1)    Make the programs mandatory

First and foremost, the programs should be mandatory – that is, they should require the developers to provide affordable housing as a condition of obtaining a development approval.

Voluntary (otherwise called incentive-based or optional) programs have been proven to be far less effective in producing affordable housing. Developers have shown little interest in voluntarily providing that housing even in exchange for incentives. As a consequence, voluntary are no longer considered to be a credible option.

Municipalities also should be aware of a crucial difference between the two. In voluntary programs, the municipalities will be expected to provide sufficient compensation to make the developers “whole” again – that is, to cover the cost burden associated with the affordable housing. In well-designed mandatory programs, municipalities will not have that responsibility, for the cost burden can be passed back to the land.

2)    Apply the obligation as universally as possible

In order to achieve the greatest output, the affordable housing obligation should fall on as many developments as possible. These should include developments proceeding as-of-right, as well as those getting a rezoning. Also, they should include small developments because they typically represent a significant proportion of the total housing production.

Applying the obligation as widely as possible is also important for another reason: it is necessary if all developers are to be treated consistently and fairly.

3)    Use fixed and non-negotiable rules

The rules should be fixed, non-negotiable and set out in advance. This applies most particularly to those rules determining the cost of the affordable housing obligation, and also the value of any concessions (if any) provided by the municipality.

Fixed rules are fundamental to mandatory programs, as there can be no mandatory obligation if it can be negotiated away. They also are important for treating all developers consistently and fairly, and for facilitating the approval process.

Finally, fixed rules crucially affect the need for compensation in the programs. When developers know the cost burden of the affordable housing obligation with certainty and ahead of time, they will offer correspondingly less for purchasing the land for development. In effect, this will reduce or eliminate the need for other compensation by passing the cost of the affordable housing back to the land.

4)    Target “below-market” housing

The programs should be directed at extending the affordability range of the housing currently being made available. They will serve little or no public purpose if they are used to produce more of what private developers are doing already. So, the programs should clearly target “below-market” housing – meaning housing provided at a price or rent below what the market is providing for the equivalent housing

5)    Allow enhanced provision through negotiation

The programs should be capable of taking advantage of, and even encouraging, opportunities to secure enhanced provision. Most developments can be expected to meet the minimum provision with no negotiation, and with no change to the required obligation nor the concessions (if any) offered. But there will be others willing to provide an enhanced provision – possibly through a larger number of affordable units and/or the units at a deeper level of affordability. To achieve, the programs will need to be open to negotiating compensation specific to the added costs associated with that enhanced provision, and to fostering partnerships with non-profit providers.

6)    Maintain affordability “permanently”

The affordability of the affordable units should be protected for a long period of time, if not permanently. Those protections should ensure the housing remains available at an affordable rent or price, and only to income-eligible households.

During that period, the units should not be sold in the open market, even if the value of affordable housing is recaptured, because the inclusionary benefits of the housing will be lost.

7      Provide flexibility but within limits

The regulations should provide some flexibility in how the affordability housing obligation is met – particularly, by allowing the use of cash-in-lieu payments and off-site development. Both of these are important and useful ways of producing a wider range of affordable housing types and/or housing at deeper levels of affordability. They also potentially have the added benefit of engaging the non-profit sector in producing that housing.

There is a downside to allowing unlimited access to these options. Many developers will take advantage of them, with the consequence that the benefits of inclusionary developments will not be achieved.

So, the options should be available only at the discretion of the municipality, and only then where they can be demonstrably shown to produce a greater public benefit than the on-site obligation. There could be still other limits, such as requiring these options to be used only on developments in close proximity to the originating development.

8)    Recognize the importance of growth

These programs depend upon harnessing market activity to provide affordable housing. They take a share of what the developers are otherwise building. Where there is little or no such activity, IZ by itself is not capable of producing much affordable housing.

As a consequence, it should be recognized that the programs work most readily in communities or areas facing sustained and strong growth. They work well there because the growth leads to rising land values that can be tapped to support the provision of affordable housing.

What is not necessarily needed – compensation

Compensation for the affordable housing is not necessarily needed in mandatory programs in order for them to be productive. This is shown by the many productive programs that provide no or only limited compensation.

Mandatory (unlike voluntary) programs can be designed so that cost burden is passed back to the land – that is, reflected in the purchase price offered for the land. This can be achieved by setting reasonable affordable housing obligations, and using fixed rules that establish the cost burden with some certainty in advance.

Most of these programs do offer compensation, but only mainly through concessions available through the regulatory process – such as, relaxed development standards (notably, increased density), fee waivers and fast-tracked approvals. These typically do not include cash subsidies, property tax abatement, nor state or federal assistance of any kind.

Density increases are the most effective and widely used of these regulatory concessions. They are particularly valuable because the economic benefit generated by additional density will be by itself sufficient to cover the cost burden of the affordable units.

In most cases, however, that compensation can be best described as being no more than notional or token. The amounts are arbitrarily set and not related to the cost burden. They are based on what the municipalities can readily provide, and not what they need to provide. Once set, the compensation is seldom adjusted, although the cost burden changes over time and project-by-project.

There is certainly no evidence – whether in their ordinances or actions – that the municipalities in mandatory programs have ever assumed any obligation to make the developer “whole” again, or even to cover the cost burden in any calibrated or substantial way.

Compensation is provided the most in particular circumstances – namely, where the developments provide an enhanced provision beyond the minimum obligation. To do this, these developments need to be offered incentives covering the added costs specifically due to that enhanced provision. Because they are often negotiated on a one-off basis, this leads to much wider range of compensation being used than normally associated with these programs.

Chicago IL: Affordable Requirements Ordinance

This mandatory inclusionary zoning program, adopted in 2007 and revised in 2015, is unlike most programs in that it has been designed primarily to secure fees-in-lieu rather than affordable units, and particularly those built on-site in mixed-income developments.

This profile, which was originally prepared in October 2009, has been updated in May 2016 to reflect the regulatory changes made in October 2015.

Momentous Breakthrough in Ontario

Ontario has passed key legislation authorizing municipalities in the Province for the first time to use inclusionary zoning.  The lack of legislated authority was the principal obstacle to the use of these provisions here.

The legislation, entitled the Promoting Affordable Housing Act, was passed on 6 December 2016 and received Royal Assent on 8 December.  (Read the legislation.)

The inclusionary zoning provisions were enacted through amendments to the Planning Act.   The regulations necessary to put the provisions into effect have not been released by the Province.

The new legislation was first introduced on 18 May 2016.   At the time, the Minister stated that “enabling municipalities to use tools like inclusionary zoning supports our vision of an Ontario where every person has access to an affordable, suitable and adequate home.”

These provisions followed the commitment made in the Province’s  Long-Term Affordable Housing Strategy Update released in March 2016 that first called for the implementation of inclusionary zoning.  (Read the strategy)

New York NY: ‘Mandatory Inclusionary Housing’

INTRODUCTION

The city’s new mandatory inclusionary program – called the Mandatory Inclusionary Housing Program (MIH) – was passed in March 2016. It is one part of the new mayor’s multi-pronged housing plan, called “Housing New York”, aimed at providing 80,000 new affordable units across the city by 2024.

This program will be applied to new developments in 15 designated neighborhoods across the city. It will be linked to other efforts in these particular neighborhoods that will include the public investment of $1 billion for infrastructure improvements, and an overhaul of the out–of-date zoning code to allow for higher approved densities and remove unnecessary development barriers.

This new mandatory program supplements an existing voluntary program that will continue to operate in other areas. This voluntary program – called the Inclusionary Housing Program (IHP) – was adopted in 1987, and then extended in 2005 (see the Appendix).

The new mayor in the 2013 electoral campaign was critical of the less than satisfactory results of the voluntary program, and made mandatory inclusionary zoning one of the central features of his proposals to address the affordable housing crisis in the city.

PROVISIONS

Subject Developments

This inclusionary program will apply to new developments providing 10 or more new units in pre-zoned parts of 15 identified neighborhoods across the city.

The specific areas affected will be determined after a comprehensive planning study of each neighbourhood, followed by a statutory public review. Together this can take 1-2 years. Only part of these neighbourhoods are likely to be up-zoned and made subject to the affordable housing obligation.

The first re-zoning for East New York in Brooklyn has been completed. Others are in the pipeline. (The first re-zoning was completed so quickly because the planning study for the area was initiated when new mandatory provisions were still being considered.)

Spot re-zoning for specific developments outside the designated areas also can be initiated by developers, but the re-zoning must go through same process and will be subject to the mandatory rules – including the obligation to provide affordable housing according to the prescribed of options noted below.

Housing Obligation & Income Targets

The provision of the affordable housing will be mandatory. The production of affordable housing will be a condition of development approval when developers build in one of the subject areas.

Developers will be required to provide affordable housing according to one of four options. The options target different income groups. Those options with lower income thresholds demand fewer affordable housing units.

The option or options available to the developers will be selected by the city after the comprehensive re-zoning process. The intent is to relate the affordable housing obligation to the different local market conditions and needs.

These are the two primary options:

  • 25% of the total residential floor area for affordable housing – 15% for incomes averaging 60% of the average median income (AMI), and 10% at 40% AMI; and/or
  •  30% of the area for incomes averaging 80% AMI.

There area also two supplementary options:

  •  20% of the area for incomes averaging 40% AMI (this is called the “deep affordability option”) and/or
  • 30% of the area – 20% for incomes averaging 115% AMI, 5% at 70% AMI, and 5% at 90% AMI (this is called the “workforce option”).

At a minimum, the developers will be required to build to one of the two primary options. In some cases, they might be allowed to chose between one or other of the primary options. In still other cases, they might be allowed to chose between one or both of the primary options and one or both of the supplementary options.

These provisions set a maximum for the average of the incomes, and not a maximum for each unit. In the case of the workforce option specifically, none of the units can go to incomes over 135% AMI.

Compliance Alternatives

The affordable housing obligation can be met through new construction, preservation and/or rehabilitation of existing units.

Provision off-site is allowed, but another 5% of the units must be provided as affordable.

Developments with 11-25 units have the option to pay into a city affordable housing fund. These payments will be reserved for ten years for use in the same community district.

Cost Offsets

No specific cost offsets have been identified in this program.

The requirement to provide affordable housing will be tied to a pre-determined up-zoning – that is, a permitted density increase determined through a comprehensive planning study and public review process. Once established, the increased density will be available as-of-right when the affordable housing obligation is met.

No financial subsidies will be provided for meeting the mandated obligation. Subsidies might available in order to provide additional affordable units or make them more affordable. It is also possible that there could be financial assistance in cases of proven hardship.

Reduced parking requirements are the only regulatory concession offered, but this concession is not limited just to the inclusionary developments.

There are no automatic fee waivers but it is possible that some might be negotiated. In this case, the most likely possibility is a waiver of the city’s mortgage recording tax which is quite high.

Development Standards

The affordable units can be limited to the bottom 65% of the residential floors in any mixed-income development. In other words, the top floors can be reserved for the premier market units.

The affordable units must have the same size as the equivalent market units.

Affordability Controls

The affordable housing must be kept permanently affordable through a restrictive covenant registered on the property. The registration on the property is seen to be more permanent that a registration on the building only.

The increase in resale price will be limited to the increase in the AMI for the relevant household size.

ADMINISTRATION

The administration of the program involves mainly two city departments:

  • The Department of City Planning is responsible for special permits and re-zonings. This includes conducting the planning studies and public review process that sets the new zoning for the affected neighbourhoods. Through the City Planning Commission, the department also works to determine which option(s) will be applied in the mandatory program.
  • The Department of Housing Preservation & Development administers the both the voluntary and mandatory programs. This includes confirming when a development is eligible to participate in the program, and then ensuring its compliance with the rules. It also provides subsidy loans for the development of affordable housing.

PRODUCTION

The city has projected that this program will produce 12,000 affordable units by 2024, or 1,500 units per year on average. This would represent roughly 7% of the total projected housing construction in the city over that time.

OBSERVATIONS

This program (like the voluntary one as well) is applied only in certain types of areas – namely, ones that are either potentially or currently facing substantial housing redevelopment pressure that would upset the existing income mix of these areas. Inclusionary programs are seen as a way of harnessing the energies of private development to provide new and much-needed housing, but also that provides affordable housing and maintains economically diverse neighbourhoods.

The program works on the principle that whenever development potential is unlocked by up-zoning, the developers who benefit from this public action should be required to include affordable housing in their residential developments.

As a consequence, great emphasis is placed on protecting the affordability of the affordable housing on a permanent basis. This is seen as crucial to ensuring that all of the economic benefits of new development do not fall eventually into the private hands, and that lower-income households are not driven out as economic conditions improve in these neighbourhoods.

This mandatory program is different than conventional inclusionary zoning programs in three notable ways:

  • It is being applied only in certain designated growth neighbourhoods, rather than universally across the entire city. (And it will co-exist with the existing voluntary program in still other areas.)
  • It is being linked to public infrastructure investments for improving parks, streets, schools and other community amenities in these areas. Notably, these monies are not to be used for financial subsidies for the affordable housing itself.
  • It is also being tied to reforms of the local zoning code that will set new as-of-right density limits in these areas, and remove existing development barriers.

The new program incorporates some significant changes to the city’s earlier program. It turned from the use of voluntary contributions to mandatory obligations, stopped the reliance on financial subsidies to provide the affordable housing, and extended the range of income levels being served.

The changes were made to address deficiencies in the earlier voluntary program. They are particularly intended, not only to increase the amount of affordable housing being provided, but also to provide it in a wider range of areas.

It is also notable that the new program intends to boost output while removing subsidies. This reflects a growing conviction that these limited resources could be more effectively and appropriately spent in other ways, particularly as the developers could provide housing for the targetted incomes without getting both density increases and financial subsidies.

APPENDIX: Inclusionary Housing Program (IHP)

This voluntary inclusionary program was first established in 1987, and then extended in 2005. The first is now called the ‘R10 Program’, and the second the ‘Designated Areas Program’. Changes to the rules for both programs were made in 2009.

The two IHP programs differ mainly in the areas where applied and in the density bonus offered (see below). The latter was developed to apply the same incentive-based approach to a wider set of areas. Both continue to operate independently of each other, and also the mandatory program.

In both cases, the areas have been zoned ahead of time to allow as-of-right development at a permitted base floor area ratio (FAR) when not providing affordable housing, or at a higher bonused FAR when providing the prescribed affordable housing.

PROVISIONS

Provisions specific to the R10 Program

This program applies to all of the city’s highest density residential (R10) zones. These zones are found chiefly and widely in Manhattan, but elsewhere only in downtown Brooklyn and a small part of Long Island City.

In these areas, the base permitted density had been set at a FAR of 10, but this program allows new developments providing affordable housing to earn a bonus of 20%, increasing the permitted maximum FAR up 12.

Provisions specific to the Designated Areas Program

This program applies certain designated areas across the city that were zoned for medium- and high-density. All of these areas have experienced growth or are expected to grow in the near future.

These areas have base densities with FARs ranging from 2.2 to 9. The program generally provides a density bonus of 33% above the permitted FAR base. The exception is in two zones with a FAR of 2.2, where only a 10% bonus is allowed.

The rezoning to allow for increased density comes only after a comprehensive planning study and a statutory public review process. Only part of one of the originally designated areas will be up-zoned and subjected to the affordable housing requirements.

The rezonings under this program started in 2005 and continued through 2011. It is now applied in about two dozen areas ranging from individual blocks to corridors and large parts of the neighborhoods.

Provisions shared by both programs

To take advantage of the density bonus, the developments must provide affordable housing floor space at least equal to both of the following:

  •  20% of the total new housing floor space; and
  •  the following percentage of the additional bonused floor space:
    – 80% whenever a subsidy is used;
    – 50% when no subsidy is used and the units are provided through preservation; and
    – 28.5% when no subsidy is used and the units are provided through new construction or substantial rehabilitation.

The latter provisions were added in 2009 as a way of promoting more affordable housing without the use of subsidies.

In addition to the density bonus, this program offers access to financial subsidies coming from various city, state and federal programs and including property-tax abatements, tax-exempt bonds, and low-income housing tax credits. The main city contribution is the form of tax abatements for periods of 5 to 25 years (with the possibility of an extension), depending upon the level of affordability and location.

Initially, in the R10 program developers were prohibited from using both a density bonus and tax abatement because the bonus was considered to provide an adequate benefit on its own. The designated areas program allowed both from the outset, and R10 was changed to be consistent in 2009.

The affordable units can be rental or ownership, and provided through new construction, preservation and/or substantial rehabilitation of existing housing. Both programs were opened to affordable ownership housing in 2009.

They can be provided either on-site, or off-site provided the other site is within the same district or within a 1/2 mile of the bonused development.

All floor area must be accommodated within the established height and setback provisions.

The affordable units must be affordable to households earning at or below 80% of AMI. In certain areas, some units may be set aside for higher income households, but only if a greater percentage is provided.  No subsidies can be used for units above the 80% threshold.

All of the affordable units must be remain permanently affordable. Maintaining permanent affordability often has required setting aside a large capital reserve for future maintenance of the rental units.

OUTPUT

From their start to mid-2013, the two programs have produced about 4,500 affordable units. More specifically, the designated areas program delivered 2,770 units in 41 projects (or about 325/year on average), and the R-10 program 1,750 in 60 projects (or about 65/year).

For the period of 2005 to mid-2013, when both were operating, they produced a combined 3,540 units. During that time, approximately 220,0000 new housing units (160,000 in buildings of 4 or more units) were constructed across the city. That means that the affordable housing produced by the two programs together represented 1½% of the total construction activity.

Most of the units were concentrated in just four neighbourhoods: Hudson Yards and West Chelsea in Manhattan’s Westside, and Greenpoint and Williamsburg in Brooklyn. These four accounted for 75% of the affordable housing coming out of the designated areas program.

In Manhattan, nearly all of the units were produced on-site in new large buildings. In Brooklyn, about half were new on-site and about half off-site, with most of these through preservation of existing housing. The preservation typically involved partnering with non-profit organizations.

Little affordable housing was provided in the twenty or so other neighbourhoods included in the program. The output there amounted to less than 700 units, even though significant development had occurred in some of these places.

Nearly all of the affordable units relied on tax, grant and other financial incentives as well as the density bonuses. The main city contribution was in the form of tax abatements for the affordable rental properties.

The above output figures do not reflect the rent-regulated affordable units lost through demolition. One estimate puts the loss at 1,000 units.

ASSESSMENT

Overall, the two voluntary programs have not performed well, considering the need for affordable housing and the level of construction activity in the city. They produced relatively little affordable housing, and that was poorly distributed across the city.

The program works on the principle that whenever development potential is unlocked by up-zoning, the developers who benefit from this public action should be required to include affordable housing in their residential developments.

The program is seen as taking advantage of redevelopment pressures to provide much needed new housing, but in a way that enhances rather than upsets the existing income mix of the affected neighbourhoods.

As a consequence, great emphasis is placed on protecting the affordability of the affordable housing on a permanent basis. This is seen as crucial to ensuring that all of the economic benefits of new development do not fall eventually into the private hands, and that lower-income households are not driven out as economic conditions improve in these neighbourhoods.

The lack of production cannot be attributed to the lack of development activity. There was considerable development in many areas where there little or no afford-able housing output. One of the prime reasons for the lack of production is that the large majority of the eligible developers chose not to participate in the program.

Another reason is the limited scope of the programs. The designated areas program in particular applies only within limited areas of certain neighbourhoods. So, relatively few developers were able to participate, and those that did only had to provide a small percentage of the floorspace for affordable housing.

The production came at a considerable cost to the public purse, as virtually all of the affordable provision received substantial financial subsidies. As noted earlier, there has been the growing conviction that these subsidies were not necessary to achieve the targetted affordable housing, and the monies could be better spent in other forms of housing assistance.

RD 13May16

Density Bonusing

Density Bonusing

Density bonusing has been long identified with inclusionary zoning, but it is time for this association to be severed.  Simply put, density bonusing represents an ineffective and generally inappropriate approach to inclusionary zoning, and so should be no longer used in this context.

Density bonusing refers to the practice of giving developers the right to build additional density in exchange for providing affordable housing.  The increased density is given to offset the cost burden of providing the units.

Density bonuses are one of various possible regulatory concessions that are often offered in inclusionary zoning.   Others include fee waivers, fast-tracked approvals, and reduced standards for parking, setbacks and other zoning requirements.  But density bonuses are probably the single most rewarding of these concessions.

It is a fundamental characteristic of all inclusionary zoning programs that the key rules are fixed.   These rules are set ahead of time and kept non-negotiable, so that all developers are treated fairly and equitably. This applies particularly to the affordable housing obligation of the developer, and also to any regulatory concessions offered by the municipality.  As a consequence, when density bonuses are offered, they are given automatically (or as-of-right) according to some pre-set formula.

(There is another practice – typically called “incentive zoning” or “bonus zoning” that offers density bonuses negotiated ad hoc on a project-by-project basis.  This approach has generally been unproductive, and in any case, should not be confused with inclusionary zoning.)

The problem is that density bonuses provided in this way can lead to bad planning, particularly when provided over and above the appropriate permitted density.  The approved density should be based solely on what is physically suitable for a particular site in terms of the capacity of the supportive infrastructure, impact on neighbouring development, consistency with strategic planning decisions and similar other objective criteria.   As important as affordable housing is, developments with affordable housing should not be automatically granted additional density rights exceeding  what is appropriate as compensation for the housing.  (Nor should the permitted density be kept deliberately low so that it can be raised to a reasonable level to pay for the affordable housing.)

It is relevant to note that the City of Toronto intentionally – and quite rightly – does not use the term ‘density bonus’ when administering s37.  The reason is that the city determines the permitted density based on what is appropriate for any site according to planning grounds.  It does not base the permitted density on what is necessary to achieve community benefits like affordable housing.

The persistence of density bonusing as a relevant concept can be ascribed to its association specifically with voluntary inclusionary zoning programs.  In voluntary programs, density bonuses are essential because the developers will be seeking incentives to cover the cost burden of providing the affordable housing.  In the absence of sufficient incentives, of which increased density is probably the key one,  they are unlikely to agree to provide the affordable housing.

The empirical record, however, clearly shows that voluntary programs have been ineffective in providing affordable housing (see Mandatory vs Voluntary).  While there were once many voluntary programs, their relative number has steadily declined over the years.  So, while density bonuses could be essential in voluntary programs, these programs themselves have been dismissed as a viable option.

On the other hand, density bonuses are not needed in mandatory programs.  There is no imperative in these programs to make the developers whole through any regulatory concessions .  In these programs, the cost burden can and should be passed back to the land – that is, it should go toward reducing the price being paid for the land (see Who Pays?).

Passing the cost back to the land is entirely reasonable.  The landowners have benefitted greatly from rising land values while doing nothing to create them.  Inclusionary zoning is a way of capturing some part of that enhanced land value for the public benefit, particularly when the municipalities have had a significant role in creating those values through public investments and planning decisions.

In summary, density bonusing represents the wrong way to think about inclusionary zoning.  The provision of affordable housing should be seen as a reasonable obligation by all residential developments, and not just an exceptional contribution for which some reward (like a density bonus) is due.

25 April 2016

Rick Jacobus: Inclusionary Housing – Creating and Maintaining Equitable Communities; National Community Land Trust Network, Cornerstone Partnership and Lincoln Institute of Land Policy; 2015.

This report provides a good overall review of the current thinking about inclusionary zoning practices in the US, particularly by  drawing extensively upon recent research and studies in the field.  Included are chapters on designing a program, understanding the economics, preparing for administration, and other key topics  (read the report).

 

http://inclusionaryhousing.ca/2016/03/27/2564/

Who Pays?

Who pays for the affordable housing provided under inclusionary zoning is a key question.  The provision does not come free. The requirement for developers to provide housing at less than its full market value creates a cost burden that must be absorbed somehow in the development process.

Knowing who pays this cost burden is fundamental to understanding how IZ works, and also how to create programs that are both effective and as fair as possible to the developers.

The following examination is based upon what has happened with IZ programs in the US. It applies only to mandatory IZ programs, as voluntary (or incentive-based) programs set-up a different dynamic about who shoulders the burden.

The following deals in turn with each of the potential candidates for bearing the cost:
∙   the municipalities;
∙   the developers;
∙   the other homebuyers; and
∙   the landowners.

Municipalities

IZ is not reliant on funding either from the municipalities, or any other level of government, to provide the affordable housing. IZ can and does successfully operate without the use of any financial subsidies.

Having said that, it must be noted funding is used in particular circumstances, and this clearly represents the exception rather than the rule. To be more specific, the funding is always applied on top of what is required by the inclusionary regulations. In this way, the funding is used to reach an even lower level of affordability not possible by IZ alone.

What many municipalities – but no means all – do offer are regulatory concessions in exchange for the affordable housing. These typically allow for relaxing certain regulations (such as, those setting density and height limits, parking standards, and others), waiving fees and charges and using fast-tracked approvals. All of these concessions have an economic benefit, but they do not involve actual cash transfers.

In none of these programs, however, do these concessions make the developers “whole” again. In other words, they are not designed or calibrated to cover the full cost of providing the affordable housing. These concessions might be better seen as political cover, rather than anything close to financial remuneration.

Also, it is important to note there are also successful programs that offer no such concessions whatsoever. This indicates that the provision of the affordable housing under IZ is not dependent upon having these concessions, and so they are really not necessary at all.

There also is a downside to most or all of these concessions, and this in turn raises the question of how appropriate they are. For example, the waiving of fees could lead to a reduction in service levels, or higher fees for others. The use of density bonuses could result in bad planning by permitting higher density where not appropriate. The fast-track approvals for some could cause delays for others.

Finally, municipalities also typically offer cost savings through regulatory concessions of another type. Many allow for the affordable units to be smaller in size, and/or to be built with a lower standard of finish, fixtures or amenity generally. In other words, while the affordable units must still meet an acceptable minimum standard of construction, they need not match the market units in all of their costly aspects. These savings are most unlikely to cover the cost burden, but they do serve to soften that burden.

Developers

IZ programs do not expect nor rely upon the developers absorbing this cost burden. They are particularly not expected to take a loss to their profits. This is an assumption held by many, but one that is wrong.

It is unreasonable to expect developers to take the hit. Although the municipalities under IZ can mandate the provision of affordable housing as a condition of building, they have no power to compel developers to actually build anything. Developers can and will stop building when suffering an undue financial loss caused by the inclusionary requirements.

That the developers are not hit unreasonably by IZ is supported by clear empirical evidence showing that they do not stop production in municipalities with IZ. Two studies, done by non-partisan and university-based organizations (see  Furman and Smart Growth), both independently came to the same conclusion: namely, that IZ has had little or no impact on the overall production of housing in communities where it is used. Where IZ did have an impact – and this should be of no surprise – was on the size and type of housing being produced. In other words, IZ caused the production of smaller units and more multiple housing, but not a cut in the overall housing output.

From these findings, it can be reasonably inferred that developers are able to accommodate to the affordable housing requirements, and to continue to build without significant damage to their bottom lines, at least once these programs are fully established (see FOOTNOTE).

Homebuyers

Developers take the position that under IZ programs they will simply pass on the cost burden to the other buyers in any particular development. In turn, this will inevitably drive up the price of housing generally. As a consequence, these programs are asking the other homebuyers to subsidize the buyers of the affordable units.

The available empirical evidence does not support this position. Specifically, the authoritative studies noted above also examined the impact of IZ on housing prices and came to the same conclusion – namely, that IZ had little or no impact on housing prices. The house prices in municipalities with inclusionary requirements were virtually the same those in municipalities without. And, if there was any rice increase attributable to IZ, it was insignificant when compared with the overall increase in market prices felt in those places.

The reason for this is easy to understand. The price of housing is determined by the market as a whole – in a sort of tug-of-war between all developers and all buyers – and not by the individual developers on their own. Furthermore, developers can be reasonably expected already to be charging what they consider to be the full market value for their product. So, any cost burden imposed by IZ, or any of the myriad other potential cost increases, cannot be simply passed on to the other homebuyers in the form of higher prices.

(Developers sometimes express this position by saying that the homebuyer ultimately pays for everything – including not only the house itself, but also all of the government impositions like development charges, planning fees and inclusionary requirements. This is true but only to a point, because there also is a limit to what the homebuyer will bear and that is expressed through the market price. The job of the developers, if they want to stay in business, is to ensure that all of costs of development (plus their profits) somehow stay within that market price.)

Landowners

Economists that have examined IZ generally conclude the cost burden of these programs is mainly “passed back to the land” (see FOOTNOTE). By this they mean that any additional cost associated with IZ – or at least that not recovered in other ways like the regulatory concessions – results in the developers offering and paying less for the land. This outcome is not specific to IZ; it applies to all cost increases that cannot be included in the overall purchase price.

Before buying any piece of land for development, developers typically do some sort of financial analysis that involves comparing projected revenues with projected costs in one or more potential schemes. The inclusionary requirement is just another one of the many costs that needs to be quantified and considered in this analysis. Ultimately, it is the difference between the revenues and the costs (plus profits) that sets the ceiling for the price they can offer for the land.

Burdening landowners in this way should not be seen as unwarranted or unfair. Landowners in high growth areas especially have benefitted enormously from rising land values that are “unearned’ because they have done nothing to create them. On the other hand, municipalities have had a major role in creating those land values through their infrastructure investments, planning, decisions over land-use and other ways. So, IZ represents a way for municipalities to recover some part of that value that they helped to create but otherwise would fall into private hands.

Summary

The provision of affordable housing under IZ does impose a cost burden that must be absorbed somehow in the development process. That cost burden hits various players in this process in the following ways:

∙ The other homebuyers are not affected by these programs in any substantial way. Specifically, they do not see any significant increase to the house price they pay. While developers will certainly try to pass these costs on to the other homebuyers, their scope for doing this is very limited.

∙ The developers do not, nor are they expected to, absorb this cost. In particular, they do not typically take a profit loss under these programs.

∙ The municipalities generally offer regulatory concessions in these programs, but these concessions only provide limited and partial recompense. They do not offer financial subsidies for meeting the basic inclusionary requirement, but can use subsidies for meeting still deeper levels of affordability.

∙ The landowners must absorb most of the cost burden associated with these programs. Developers typically pass these costs back to the landowners by offering to pay less for the land.

FOOTNOTE

The foregoing analysis describes what happens in mature programs that have been in operation for some reasonable time. In these programs, the market dynamic will have adjusted so that the developers will have learned to limit what they offer for the land. So, in this way the cost burden will be passed back to the purchase price of the land.

There will be a different dynamic when these programs are first introduced. Developers already owning the land, and particularly those that have developments in the approval pipeline, will not be able to pass these costs back to the land. As a consequence, these developers could be hit by the costs of the inclusionary requirements.

To be fair to these developers, this problem will have to be addressed in some way – possibly, by phasing-in the provisions and/or delaying compliance until the adversely effected projects can be flushed through the approval pipeline.

Ontario supports Inclusionary Zoning

In Ontario’s Long-Term Affordable Housing Strategy Update, released on 14 March 2016, the provincial government announced its intent to pass “legislation for inclusionary zoning that would enable municipalities to mandate the inclusion of affordable housing units in new development projects” (see full LTAHS Update report).

The Ontario Minister of Municipal Affairs, Ted McMeekin, has said that he wants the legislation passed by early June.  As he quite rightly noted, this legislation will be “transformational” to how affordable housing will be provided in this province in the future.

This legislation would be a major breakthrough and a critical step forward.  When passed, it is expected that the legislation will remove the single most significant barrier to the municipalities using inclusionary zoning – namely, their lack of authority to compel private developers to contribute affordable housing.

But, before the municipalities will be able to take effective advantage of this new authority, they will also need additional help from the Province in the following crucial ways:

  •  providing authority to use ‘positive covenants’ or some other form of “self-administering” enforceable agreement for protecting the on-going affordability of these units;
  •  re-formulating Province’s definition of ‘affordable housing’ (as found in the PPS) so that it could be made operational, and also ensure that affordable housing targets gaps in the housing supply rather than promoting what the developers are already capable of doing;
  • generating the economic data needed by each municipality for annually setting their income and price limits for the affordable housing by unit and family size; and
  • providing advice and assistance on the rules and regulations necessary to create effective programs while also minimizing the adverse impact on the developers.

Radio broadcasts

CBC Metro Morning (5 May 2015)

Richard Drdla fields various questions about inclusionary zoning.

http://www.cbc.ca/metromorning/episodes/2015/05/05/inclusionary-zoning/

CBC Metro Morning (27 November 2014)

Martin Blake, Vice-President of the Daniels Corporation, endorses inclusionary zoning, saying that “this is something that is absolutely necessary to ensure that Toronto is for everybody.”

http://www.cbc.ca/metromorning/episodes/2014/11/27/affordable-housing/

CBC Metro Morning (26 November 2014)

Peter Milcyzn, Liberal MPP, discusses the inclusionary zoning bill that he introduced in the Ontario Legislature on 18 November 2014.

http://www.cbc.ca/metromorning/episodes/2014/11/26/affordable-housing-bill/

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