"This teeny document is like an atomic bomb. No, seriously. The entire development community is waiting for a storm, and right now they don't know if it's Category 1, or Category 4, or Armageddon."
These words, spoken by one Design Review Panelist, were the opening remarks of the discussion surrounding the City's inclusionary zoning policies at the DRP session last month. While the statement is rather alarmist, it speaks volumes about the importance of these policies and the impact they may have on the provision of affordable housing in Toronto.
Following changes to the Planning Act that came into effect in April 2018, municipalities in Ontario were granted the ability to implement inclusionary zoning, which currently does not exist in Canada. At a unique Design Review Panel session, the City presented their current progress on policy directions, offering background information on what exactly inclusionary zoning means, and how it might fit within Toronto's scorching hot housing industry.
The City's policy directions are only preliminary at this point, and by the Panel's own admission, being comprised of architects, urban designers, and landscape architects meant that they were not exactly experts on drafting planning policy. However, a ton of useful information was included and a rather intriguing discussion evolved out of the presentation that offered a snapshot of the many debates to come surrounding the solutions to Toronto's housing crisis. Without further ado, let's dive into the dizzying rabbit hole of inclusionary zoning and housing policy.
What is Inclusionary Zoning?
Simply put, inclusionary zoning refers to the act of rezoning properties to require mandatory inclusion of affordable housing units in new developments. The term 'affordable housing' encompasses both rental and ownership dwellings of all types and sizes, ranging from detached single-family houses to units in multi-residential buildings, and simply means that the dwellings are offered at below-market prices. Exactly how far below market value constitutes affordable housing has yet to be set in stone; this is part of the City's policies, discussed later in this article.
The City now has the ability to add this requirement where it sees fit, and is currently studying the best way to do so. Inclusionary zoning does not necessarily apply to every single property or every single type of development, and the number of affordable units provided as part of a development can vary; these are all parameters that the City is trying to sort out before implementing these policies.
Who Benefits From Inclusionary Zoning?
Inclusionary zoning directly benefits the population that earns too much income to qualify for social housing, but does not earn enough income to be able to afford market prices. This, unfortunately, is a rapidly growing slice of the population eating away at the city's middle class. Toronto's current average rent for a one-bedroom apartment is $1,270, which would require an income of just over $50,000 per year using the 30% of annual income rule. The average for new condo rentals has just surpassed $2,200, which would require an annual salary of $88,000. A recent study by the Canadian Centre for Policy Alternatives showed that minimum wage earners cannot afford to rent a one- or two-bedroom apartment anywhere in Toronto on their own.
The City also presented some rather concerning statistics to highlight just why affordable housing is needed:
- Only 2% of housing built or approved in Toronto over the past 5 years has been affordable housing.
- 1 in 2 residents spend more than 30% of their annual income on housing; 1 in 4 spend more than 50%; and 1 in 5 live in what is termed 'unsuitable' housing, meaning inadequate living space or number of bedrooms to accommodate the number of occupants.
- The median household income in Toronto stands at $45,285 for renters and $92,168 for owners, which is not keeping pace with the annual income required to afford market housing prices in the city.
- Renters are disproportionately affected by rising house prices, and comprise roughly 47% of the city's households.
Who Pays for Affordable Housing?
This is the million-dollar question that many are focusing on: who absorbs the costs associated with the reduced housing prices of affordable units?
The City engaged an outside consultant to conduct a study of the financial impacts of inclusionary zoning, and they are also in consultation with BILD, non-profit housing providers, academics, and housing advocates who are all doing their own studies on the matter. The preliminary results of the City's study indicate that the private sector can bear the burden of the reduced costs, but the answer is a lot more complicated than that.
By the City's calculations, inclusionary zoning - within appropriate limits - will still turn a profit when the land is developed. The idea is that, with inclusionary zoning in place, developers will pay less for the land knowing that their revenue will be reduced on account of the inclusionary zoning. Land value will still increase, but at a slower rate than without the requirement for affordable units. More importantly, the City is emphasizing that the costs would not be passed on to the consumer, a contentious point that many are arguing. Their economic models indicate that the land value adjustment can absorb the costs.
This, of course, applies only to developers buying new land. For those who already own the land but have yet to develop, the situation is a bit trickier, since the landowners have already paid a price for the properties based on a development without affordable housing. The City is looking at ways of creating a transition to inclusionary zoning, rather than implementing a hard requirement across the board, to prevent too much of a shock to the housing industry.
The City is also looking at mitigating the effects of the cost through geographic location of inclusionary zoning. Their financial study modelled areas of the city that had strong, moderate, and weak housing markets based on supply and demand, among other factors. Using this map, the City will look at implementing inclusionary zoning only in the strong and moderate market areas, where demand is high enough that the reduced land values will have less of a chance of discouraging developers from building.
The City is currently not planning to provide financial incentive along with the inclusionary zoning requirements, but they are still exploring opportunities to do so and are looking at different sustainable financial models. The Province has not indicated that they would provide financial incentive either.
What Are The Policy Directions?
At the moment, the City does not have any concrete policies written yet for inclusionary zoning. What they do have is policy directions, a rough idea of where they want to go with a few numbers thrown in to test the waters.
Below is a list of the different parameters required to define inclusionary zoning and the direction the City is looking to go in for each, as well as some issues and commentary that was brought up by the Design Review Panel:
1) Minimum Size of Development for Inclusion of Affordable Housing
- Inclusionary zoning would apply to projects of 100 units or more in the Downtown area or east and west of Downtown, and to projects of 140 units or more in all other areas of the city.
Not all developments would require affordable housing units, and the City is looking to define thresholds for when inclusionary zoning kicks in. In order to not disincentivize low- or mid-rise developments - a housing type already difficult to build given rising land values - the City is targeting larger-scale developments with these benchmarks.
This threshold approach, however, was questioned by the Panel. If a hard unit limit of 100 in the Downtown area was imposed at which inclusionary zoning would be triggered, they asked, what would stop developers from building projects with 99 units to avoid having the affordable housing requirements kick in? They proposed more flexibility on the limits, perhaps using a sliding scale model that adjusted to the size of the development rather than having a unit count threshold.
2) Locations and Areas of Inclusionary Zoning
- Inclusionary zoning would apply only in strong and moderate market areas
As mentioned earlier, this approach is meant to concentrate affordable housing in areas of the city that are experiencing significant growth so that the costs can more easily be offset by the demand for new housing. It should also be noted that the Province's Bill 108 seeks to restrict inclusionary zoning to transit nodes and corridors; fortunately for Toronto, most of these are already strong markets, so there is some alignment between the two governments.
3) Household Incomes Eligible for Affordable Housing
- Inclusionary zoning will assist low and moderate income households, roughly the 30th to the 60th percentile of income. This translates to between $35,000 and $67,000 per year for renters, and $42,500 and $87,500 per year for owners.
4) Affordable Housing Types and Unit Sizes
- Affordable housing units will generally reflect the type and size of market units within the same development.
The Panel supported this idea, but wanted it pushed further with stronger language. Their main concern was combatting inequality that might arise between the two unit types. They felt that integration of both unit types within the same building was paramount to the success of the project, otherwise there is a risk of "ghettoizing" the affordable units with separate entrances and amenities that are not shared with market units. They also pointed out that there is a risk of the affordable units being finished with lower quality and less durable materials than the market units.
The Panel strongly felt that "you should not be able to distinguish an affordable unit from a market one" and that "if you really care about creating an inclusive city, you need to remove the separate entrances for affordable units and market units".
5) Required Amount of Affordable Units Within a Development
- Option 1: Inclusionary zoning would be applied only on the increase in density above as-of-right permissions.
- Option 2: Inclusionary zoning would be applied across the entire project.
- For both options listed above, requirements for condominium projects would be 20% of units in strong market areas and 10% of units in moderate market areas that must be affordable. Requirements for rental projects would be 5% of units in strong market areas and 2.5% of units in moderate market areas that must be affordable.
- Where rental units are conveyed at no cost to the City for long-term lease or transferred to a non-profit housing organization for the purposes of a longer affordability period or a greater reduction of housing costs, the inclusionary zoning requirement may be reduced by 50%.
The discrepancy in the numbers between condo and rental units is to avoid deterring development of purpose-built rental buildings. Current market conditions favour condo developments as the easier and safer investment, but the City has identified an urgent need for more rental properties. Affordable housing requirements are kept lower for rentals simply to encourage developers to build more of them.
The same comments from the Panel in Policy Direction #1 apply here. They encouraged the City to use a sliding scale or a more flexible method rather than setting hard numbers.
6) Period of Affordability of Housing Units
- Affordable housing units would remain affordable for a period of 25 years.
Perhaps a controversial policy that many people may not be aware of, there is in fact an expiry date, so to speak, for affordable housing units. After the affordability period ends, affordable units can then be sold or rented at market rates. Rental units would still be subject to annual rent increases within the provincial rent increase guideline during the affordability period.
There is a catch, however, to what might happen when affordable units are sold. This is explained further in Policy Direction #9.
7) How Measures and Incentives are Determined
- The amount of affordable housing units will be calibrated across different markets to ensure project viability is maintained without municipal financial contributions.
- Where additional affordable units or a longer affordability period would be provided, developments would be eligible for incentives offered through the already implemented Open Door Affordable Housing Program.
Basically, the City is trying to avoid having to pitch in financially by targeting inclusionary zoning in areas of the city where the market is strong enough to support it without their help. The Panel had a lot to say about this approach.
As many Panelists are directly involved in building housing across the City, they were quick to point out that one of the biggest expenses of developments is the actual construction costs. "There is always a certain amount [of money] needed to get it out of the ground," they said, "and fewer units in the development makes it more difficult to recover those costs". The private sector already bears the brunt of development costs, but some Panelists felt the City should bear some responsibility as well. While they argued that financial incentives from the City would be welcomed, they broadened the meaning of incentives to include other municipally-controlled factors, such as the speed at which development applications are processed or the allowable density of the development, as ways the City could help the private sector to offset the costs of development without giving direct financial contributions.
One Panel member proposed expanding the scope of the initiative with the help of incentives: "Inclusionary zoning shouldn’t just be limited to strong and emerging markets. One of the only things the City is able to do is provide relief for developers...we need to figure out what the incentives are".
8) Price or Rent of Affordable Housing Units
- The price or rent of affordable housing units will maintain the existing definition within the Official Plan.
- Affordable rents are based on 100% of the average market rent for the City of Toronto by bedroom type, inclusive of utilities.
- At least 10% of all affordable rental units will be provided at 80% of the average market rent.
- Affordable ownership prices will address households with income between the 30th and 60th percentiles of income depending on unit type. A definition of affordable ownership price does not yet exist but is currently being developed.
9) Sharing of Net Proceeds Upon Sale of Affordable Units
- Affordable rental housing units would not be required to share proceeds of a sale where the housing is sold to a new owner.
- Affordable ownership units will require ongoing administration and oversight by a non-profit housing provider. Legal agreements will secure that any proceeds from a sale be redirected by a non-profit provider towards affordable housing.
These policy directions are in line with how the City already approaches affordable housing. A non-profit housing provider would oversee affordable ownership units during the affordability period, and proceeds of the sale after the affordability period would go toward building new affordable housing units. The provincial regulations also allow municipalities to received up to 50% of the net proceeds of that sale. This is only for ownership units; there will be no sharing of proceeds for the sale of affordable rental units, and rent can be adjusted for these units to market rates if the unit is vacated after the affordability period expires.
10) Provision of Off-Site Affordable Units
- Offsite units would be permitted at the City's discretion so long as they are located within an inclusionary zoning area.
The City's intent is that all affordable housing units would be provided on the site of the actual development, but certain conditions or circumstances may arise where this is not possible or it may be better to provide the required affordable units elsewhere. The City would arrange this on a case-by-case basis and would ensure all planning requirements are met throughout the process.
How Will Inclusionary Zoning Be Implemented?
How inclusionary zoning is implemented could have a huge impact on its success. At this point in time, the problem is still a giant question mark, but the City is looking at different ways of introducing inclusionary zoning in the least disruptive way possible. The Panel was adamant that it must be phased in gradually, otherwise the impact on the development industry would be "cataclysmic".
As discussed earlier, whether or not a developer has already purchased land greatly impacts their ability to accommodate requirements for affordable housing. There may need to be a transition period, as the Panel suggested, for the development industry to adjust to these changes and for land values to correct themselves to the new inclusionary zoning. The City seems to be trying to figure out how to tiptoe around the landmines that could cause this initiative to implode.
"It's a Great Start, But More Is Needed"
The Panel was encouraged by what they saw, but were quick to point out that inclusionary zoning is only one small part of what needs to happen in order to create a truly affordable and livable city for all.
As one Panelist suggested, "Neighbourhoods could be the fastest way to get affordable housing". They were referring to the 'yellowbelt', the vast swaths of land making up almost 75% of the city that are zoned as Neighbourhoods (coloured yellow on the City's zoning maps), a highly restrictive designation that only permits single-family residential development. Many have argued that unlocking these lands and allowing development of low-rise multi-unit dwellings, laneway houses, and other forms of small-scale density could easily flood the market with a supply of new, more affordable housing.
The Panel also alluded to another common argument in the housing crisis: "How many empty units are there in these condo towers? What if there was a penalty or an incentive to open those up?" Many studies have identified a growing trend where investors purchase real estate and let it sit empty or convert it into other uses, such as AirBnB, as a place to park their capital. This has put added strain on the tight housing supply by removing eligible housing units from the market. Making these units available once again to residents could also increase supply and help to ease rising house prices.
Panel members also pointed fingers at the City, saying that they have a big role to play in housing affordability. "Inclusionary zoning is part of it, but there's also the provision of transit, zoning, land values, and so on", the Panel stated, going on to say that the City has a lot of municipally-owned land that could easily be repurposed or redeveloped into affordable housing. The Panel was encouraged that the inclusionary zoning policies are proceeding, but strongly emphasized that the City "needs to move on multiple fronts" in order to fully address the issue of housing affordability.
None of this will happen very quickly, of course; the finalized inclusionary zoning policies will be sent for provincial review in early 2020, after which the zoning by-laws will be written, notwithstanding delays for revisions and appeals to the OMB in the interim. But nevertheless, this is one big step that could have a huge impact for decades to come - if it is done right.
Let us know what you think in the comments section provided below.
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