Beyond Public Subsidy: Richard Joy on IZ

Rhys Phillips: Let me start with asking whether you think inclusionary zoning is a viable program option within our development market as a means to address affordable housing?

Richard Joy, Executive Director of Urban Land Institute

Richard Joy: I would definitely say that on the face of it, inclusionary zoning is an honest concept that, in fairness, deserves the consideration it has been given.  I’m not so sure with the current provincial government the degree to which it is now being pursued versus the previous government. [This said] I do think there is some important caveats to the way it was initially being considered in Ontario.

First, looking at inclusionary zoning in the U.S., there has been mixed success. It has not been applied universally successfully although it has been almost entirely the model, the typology on which affordable housing has been introduced in the U.S.

Where successful, it has been almost entirely in the rental context and not the condominium ownership model. The concept as it is understood in the U.S. and the concept as it is being contemplated in Ontario for the most part has some significant differences. This doesn’t mean it can’t work here, but it’s hard to argue that because it’s worked in many ways in the U.S. with a certain model, ergo the same model will work here. I think that’s one important distinction.

RP: What do you think are the key elements that affect its possible effectiveness here versus in the USA?

RJ: Let me ask you, in the U.S. are they primarily condominium or rental models?

RP: In New York about 75 per cent is rental.

RJ: I think that is one of the important starting points.  I think with an inclusionary zoning program, which I’m sure is different in every jurisdiction, the degree to which you can continue to ensure below market delivery overtime is probably easier to imagine through rentals. How you would see that work in a condominium ownership model is more difficult. How do you sell a unit below market [value] and, if so, is that purchaser then able in the future to sell it at market value or at least with some catch up to whatever the market value is at that time. I think that is a piece that is a little bit concerning now.

[That said] there are ways to overcome the condo ownership problem while maintaining affordability. Units potentially could be managed as rental units so that they are not ever sold and the delivery of this sort of rental might be with the developer or a third-party management company that retain all these affordable rental units. Or it could be perhaps a partial ownership model managed by someone like Options for Homes with a sort of a shared amortization model. There could be an understanding that the unit never fully goes to the open market. There is then a closed loop through the shared amortization mortgage network.

I also think that in nearly 100 per cent of the cases where inclusionary zoning is in place and works successfully in the U.S. is where there is [also] a subsidy involved. This subsidy is thus offsetting the otherwise full market return potential of that unit. That could be [achieved] through some kind of tax adjustment that lowers the tax burden or it could be a grant program of some kind that a developer can access.

Most likely, however, [the incentive] is through extra zoning that might not otherwise be available to a developer that permits more development than otherwise could have done. The problem in Ontario is that it is very difficult to ascertain [a real advantage] when we have in most of our municipalities deliberately under-zoned most lands and are therefore requiring almost all developments to go through a rezoning. The “ask” is always for more than what the zoning allows. But how do you really know what is [extra zoning] in that context?

In jurisdictions like New York City you have very rigid, hundred-year stable zoning and you know what you’re allowed, and you can’t get anything more. If you then say that in addition to this well-established zoning threshold, you are allowed to do more, well then you could probably argue that that’s a social form of “subsidy.” It works in that type of jurisdiction but in ours it is very hard to do. To quantify [real extra value] is very difficult. So I think if there are no dollars available in our jurisdiction, there is really very little likelihood of a tax treatment that is going to be meaningful.

It’s very hard to imagine here in Ontario how a subsidy like work to deliver inclusionary zoning and that context you are really looking at the subsidy coming from within the project itself meaning 0ne of the market units is probably subsidizing the non-market unit. I think has got a lot of developers concerned about how they could do that, actually putting more pressure on what market units will cost and these are already considered expensive.

RP: This seems to be recognized in the Toronto analysis when they consider as-of-right land costs. What if you own a manufacturing [zoned property] that is no longer going to be manufacturing and it needs to be rezoned; what is the real appropriate as-of-right zoning?

RJ: That is another whole lens, but generally speaking public policy doesn’t want that to happen, but of course it does happen. I would think that inclusionary zoning would be found more likely in currently zoned residential properties. Future residential is what is hard to quantify.

RP: Ottawa had a rezoning request from 20-storeys to 64-storeys. Did the developer pay land costs at 20-storeys or for a higher density that is now claimed as its as-of-right zoning while the public sector responds, “no, you overpaid and that’s your problem.”  What is the appropriate as-of-right value?

RJ: That’s right. And I doubt very many land [parcels] trade on what you could argue is the current zoning at which they were bought unless it already been rezoned. I think they likely trade on speculation of what you could get and that gets baked into the land value immediately. That is just the way our system has encouraged the market to work. It is a flaw in our system.  As a result, it doesn’t make it any easier to deliver inclusionary zoning.

RP: In Boston they do not seem to give tax relief-type but in New York they do include tax and sometimes infrastructure relief.

RJ: I don’t know about the Boston context, but there may be other kinds of benefit. But if it becomes an understanding that all land will include a certain percentage of affordable units, at some point that [cost] gets baked in. You could argue that within an individual building some units are not subsidizing other units but instead [cost] is more broadly distributed. I think that’s an intellectual argument, but I don’t know that it would [apply] in the early years as a likely assumption.

RP: The city of Toronto’s assessment analysis argues that once you put into place inclusionary zoning, it affects the value of the land and over time a developer when buying land will need to consider that when assessing value. Will that suppress the willingness of owners to sell their property?

RJ: I think [inclusionary zoning] is an intellectually honest response that can work, although there are a lot of “ifs” to that. But nobody should say there is no way we could ever imagine that giving more value to a private developer through infrastructure improvements (let’s say a GO train, subway or LRT station) that increases the value of their land [just because] they were lucky to be in the right place at the right time should never require a public return. Similarly, getting significantly higher zoning than they might otherwise receive, [can be] considered a means to achieve a public policy outcome like affordable housing.

In a city region like Toronto, fastest growing in North America and even in Europe some say, there has to be some way to harvest some of the upside of that land value increase and development profitability to achieve stronger public outcomes than we are currently achieving. The current Ford Government is seized with this concept, more even than the previous government. They feel that something needs to come back and that something might be in the form of affordable housing or that something might be in the form of cash to pay for infrastructure. There is a growing consensus, especially with this government, that there is a better contract to be had in the sharing of value between private investment and public policy requirements.

RP: So how has the Toronto development sector reacted to the proposal? In New York and Boston there was considerable consultation and the city officials were somewhat surprised that there was not as much negative reaction as they thought. Has there been reaction within the industry in Toronto?

RJ: I can say that going back to the end of the previous Liberal government when this was first coming forward, there was strong negative reaction from the industry. I think they felt – and of course a lot of it had to do with individual municipalities crafting their policies within the framework of that legislation – that they saw it as flawed and not likely to achieve the results intended. So I ran into very few developers who took a positive view on inclusionary zoning. I’m not necessarily saying that condemns it. Developers have a bit of self-interest in opposing it. opposition.

There was a city councillor, Adam Vaughn, who managed to get what was really a prototype of this inclusionary zoning in place for a number of condominiums in the downtown of Toronto using the Section 37 tool, now weakened and changed of course [such that] it is not the same tool it used to be. There are other examples and, of course, [the affected developers] could argue whether the eventual agreements were “voluntary” or not. It was obvious he was strong-arming these developers into delivering [these affordable units]; but, they did it to achieve what was reasonable.

RP: What has been the impact of the revised regulations that came out in November amending the original ones from April 2018? What has been the major implications of those revisions?

RJ: One of the things is that now [inclusionary zoning] is restricted to areas around transit zones. Any other area has to be approved by the Minister.

RP: If the program does go ahead, what do you think are key elements in terms of successful implementation?

RJ: Maybe I could end on that point.  It has to be designed in a way that ensures the cost of delivering the [affordable units] doesn’t blow back into the price of the other market rate units within a given building of your project.  It ought to deliver [enough] net benefit to the developer to offset the cost.

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