The Economic Impact of Section 37 Policies and Housing Policies in the New Toronto Official Plan
David M. Nowlan
Professor Emeritus, University of Toronto
Partner, August Trust Research Partnership
June 2006
(Commissioned by the Policy and Research Section of the City of Toronto’s Planning Division as background research on the City’s new Official Plan.)
Table of Contents
Executive Summary iii
Chapter 1: Introduction 1
Chapter 2: Section 37 Density and/or Height Incentives 2
2.1 Introduction 2
2.2 Recent experience in Toronto 3
2.3 Community benefits and market failures 4
2.4 Uncertainty and the breadth of community benefits 6
2.5 Impact of section 37 on development timing 7
2.6 Summary 9
Chapter 3: Housing Policies and Section 37 11
3.1 Introduction 11
3.2 Inclusionary policies elsewhere 13
3.3 Some Toronto examples 15
3.4 Two international feasibility studies 18
3.5 Case Study I: effect of requiring 20% affordable housing on a large site in Toronto 21
3.6 Case Study 2: effect of requiring 20% affordable housing on a second site in Toronto 27
3.7 Implications of the two case studies 30
3.8 The impact of housing policies on development timing 31
3.9 Summary 32
Chapter 4: Conclusions 34
Appendix 1: Policies Analyzed in this Report 37
Table 1
Examples of Mandatory Inclusionary Housing Programs in the US 14
Table 2
Residual Land Values per Square Foot for Various Inclusionary Zoning Scenarios in Los Angeles 19
Table 3
Affordable Rents and Affordable Dwelling Prices 22
Panel 1
Case Study 1: 20% Affordable Ownership Housing 24
Panel 2
Case Study 1: 20% Affordable Rental Housing 25
Panel 3
Case Study 2: 20% Affordable Ownership Housing 28
Panel 4
Case Study 2: 20% Affordable Rental Housing 29
ii
Executive Summary
In November 2002 the City of Toronto passed an Official Plan, the first for the amalgamated City. It anticipates the need to accommodate within the City between 1996 and 2031 a residential population growth of approximately 22 per cent and a growth in jobs of about 42 per cent. At the same time, the Plan envisages a better City, one with substantially improved public amenities including cultural facilities and green space along with vibrant neighbourhoods, diversity and opportunity, beautiful architecture and a clean environment. The Plan aims to achieve not just growth, but “better growth.”
These are not separable goals, growth and better growth. The two go hand in hand. Without better growth, there will not be the growth in numbers. The attractiveness, the livability, the diversity, the culture of cities everywhere has proven in study after study, in interview after interview, to be the magnet that draws people in to a city, to live and to work, and that attracts the businesses that offer employment. At the same time, the elements of better growth that the Plan seeks to achieve are costly and depend upon our having a successful, productive economy. To produce the buildings necessary to house and employ the expanded population will require a thriving development industry, one that is faced with appropriate incentives to undertake the huge building task ahead.
Some policies in the Plan have been challenged, and appealed to the OMB, on the grounds that they will serve to impede growth and thus work against the very objectives set out in the Plan. In particular, objections have been raised to housing policies in section 3.2.1 and to the policies in section 5.1.1 that set out the conditions for using section 37 of the Planning Act to secure community benefits. These policies are listed in Appendix 1.
In this report, the economic impact of the above policies is analyzed with a view to determining whether or not they will in fact result in reduced housing and employment growth and so undermine the Plan.
Section 37 agreements secure community benefits that are identified in the course of studying requests for increased density or height. The higher density or height, if approved, will raise the residual or land value of a proposed development and so benefit the current land owner. If the possibility of securing a density increase had been envisaged some time earlier, then some of this anticipated benefit may have already been received by an earlier land owner who, because of this expectation, was able to get a higher price for the land than otherwise. Because of the cost to the developer of the community benefits, this increase in the residual development value will, in general, be less than it otherwise would be.
According to policy 7 in section 5.1.1, priority for community benefits is to be given to capital facilities that provide on-site or local community benefits. Thus the local community will also be a special beneficiary of section 37 agreements. In some cases, the benefit will be distributed more widely, especially when the community benefit consists of a facility that would otherwise have been undertaken by the City. In such a case, the general taxpaying public will benefit.
Because much of the benefit may be focused locally, the development project is likely to be more attractive to tenants or buyers than it would be without the community benefit. This allows a developer to charge higher rents or prices and so capture back part of the cost of providing the community benefit.
Recent section 37 agreements help illustrate the wide range of community benefits that might be achieved. In general there is no reason to define the nature of these benefits more narrowly than is done in policy 6. The breadth of the facilities listed there is a reflection of the different circumstances that face different locations around the City. A more narrowly defined list would reduce the opportunity throughout the City to gain both community facilities and other benefits associated with achieving good planning objectives. However, the enormous variety in possible section 37 agreements does create some uncertainty among developers over just what might be expected with respect to any given property. This uncertainty adds somewhat to the risk of land assembly and may have the effect of lowering land prices below what they otherwise would be. This is unlikely to be a significant factor and is almost certainly outweighed by the benefits achievable through acknowledging site-specific differences. To reduce the costs of uncertainty, planners should be as open as possible about the type of section 37 community benefits that they are willing to contemplate in various parts of the City and publicize the details of the agreements that have been entered in to.
It is sometimes argued that if the City is prepared to allow increased density and/or height through the approval of site-specific development applications then it would be better simply to raise the as-of-right densities and heights to these higher levels. The difficulty with this approach is that, in the absence of individual site-specific studies, the as-of-right zoning must reflect general densities, heights and uses that are appropriate to the area being zoned. Applications for increases in densities or heights with respect to individual sites trigger a planning review in which criteria of good planning are applied to determine whether the increased densities or heights should be approved. In the absence of detailed, site-by-site analyses it is infeasible to adopt as-of-right zoning that can represent the outcome of reviews triggered by site-specific applications.
The public goods nature of the community benefits reduces the likelihood that developers acting individually would produce the best level of community benefit even though they would all benefit from its provision. The problem here is the well known “free rider” problem which can be resolved or at least mitigated by the use of section 37.
As to the effect of the section 37 policy on the path over time of floor space developments, it seems likely that the higher approved densities will result in somewhat more development at any point in time than otherwise, but some projects could be delayed in order to take advantage of the higher density at a later time if floor space prices are expected to rise. Market forces will dominate the path of aggregate floor space development, but the pattern of development may be influenced by approved increases in density and/or height, with fewer but larger projects being developed at any time.
Section 3.2.1 of the Official Plan sets out policies aimed at retaining, replacing and expanding the supply of affordable and mid-range rental units, ownership units and social housing. The purpose of these policies is to improve the residential mix and balance throughout the City, to guard against the development of low-income segregated areas and to allow people of all income groups more choice of location. Among other things, this will allow people to live and work in closer proximity, thus reducing the length of work travel.
The policies will be implemented through section 37 agreements, according to section 5.1.1 of the Plan. These agreements provide for increases in density and/or height to be approved, to the extent that such increases meet the criteria of “good planning.” In return, developers must adhere to the housing policies of the Official Plan and may negotiate additional, voluntary housing-related community benefits. Toronto examples show that housing policies and section 37 agreements have together worked to intensify and increase the housing stock of all types of dwellings.
Two case studies of properties in Toronto show that the cost of policy 9b, which requires 20 per cent of the new units in large-scale residential developments to be affordable, may be offset by density increases as low as 3 per cent. Even if the affordable dwellings under policy 9b are relatively large, high-quality three bedroom units, the increases in density that would offset the cost to the developers of the affordability policy may be in the order of 13 or 14 per cent, as Case Study 2 in chapter 3 shows. Since these offsetting density increases are much smaller than the typical increase observed in recent section 37 approvals by Council, the burden on developers of meeting the affordability policy is likely to be small or non-existent.
A variant of the section 37 approach using density bonuses to achieving various housing goals has been used for many years in a number of US jurisdictions, beginning with the inclusionary planning policies of the 1970s. Detailed feasibility studies of development sites in Los Angeles and a suburb of Sydney reinforce the findings of the Toronto case studies. They show that inclusionary policies may be accomplished without reducing the site value of affected sites through the granting of density incentives. Other forms of relieving the cost burden on developers of inclusionary policies include allowing lower cost interior finishings and smaller sizes for affordable units, and waiving or delaying some development fees.
It is my general opinion that the policies in section 3.2.1, implemented for the most part through section 37 agreements, will succeed in helping preserve and expand the low-income housing supply while not having a chilling effect on the rate of development of market housing units.
The broad conclusion of the report is that the policies I have examined should prove beneficial to the health of the City. By providing various public and community benefits, they will help strengthen the attractiveness of the City while not unduly reducing incentives to develop. In fact, the improved attractiveness of the City, through negotiated community benefits and a more diversified housing stock, is likely to be reflected in both the short and the long run in enhanced development values and development prospects.
vi
Executive Summary
Chapter 1
Introduction
The terms of reference for this study begin by noting that the City of Toronto “has adopted a new Official Plan to guide growth, manage the impacts of reurbanization and improve the liveability of the City over the next 30 years.”
It goes on to say that the central policy objective of the Plan is to “reurbanize the City to accommodate the significant growth in population and jobs as forecast by a consortium of Greater Toronto municipalities and the Province.” In order to build not just a larger City but a “better City,” the Plan establishes policies for “preserving rental housing, providing a mix of housing types and ensuring the affordability of housing in large developments.” Guidelines are also established for the application of Section 37 of the Planning Act in order to secure other community benefits.
“Toronto will grow,” says the Official Plan. “Our choice is not whether we grow but how well we grow. Making Toronto better should always come before making Toronto bigger, but we will get bigger.”[1]
Parts of the new Official Plan have now been appealed to the Ontario Municipal Board. Among other matters, concerns have been raised that policies with respect to the use of section 37, the preservation of rental housing and the creation of affordable and social housing will act as deterrents to development and so serve to undermine the intensification objectives of the Official Plan.
Within this context, I have been asked to analyze and comment upon the economic impact of the disputed polices mentioned above and to address the question “whether or not these policies will result in reduced housing and employment growth and so undermine the Official Plan.”