July 8, 1999

To:Policy and Finance Committee

From:Commissioner of Community and Neighbourhood Services

Subject:Definition of "Common Area" - Supplementary report to "New Multi-Residential Property Class: Additional Issues"

Purpose:

To provide supplementary information requested about implications for tenants should the province and Ontario Property Assessment Corporation agree to apply the new multi-residential tax class to newly create units within existing rental residential properties.

Funding Sources, Financial Implications and Impact Statement:

None.

Recommendations:

It is recommended that Council support the application of the new multi-residential tax to new units within existing rental buildings, and request that the Ontario Property Assessment Corporation only apply the class to units where the landlord has provided evidence that the space was previously non-residential.

Council Reference/Background/History:

In July 1998, Council approved a strategy in support of improving the supply of affordable housing. Since that time, a number of initiatives have been approved which are intended to spur rental housing construction by reducing the gap between the cost of development and the rents that could be charged given the market. The approach has been to remove or minimize many of the barriers to rental housing construction which currently exist.

Property taxes are a major barrier to new construction because they are approximately four times higher for rental housing than property taxes of paid by condominiums and other residential properties. On October 31, 1998, City Council passed a by-law to establish a new tax class for new rental residential housing beginning January 1, 1999. Earlier this year, the tax rate for this new class was set at the same rate as other residential properties.

Every unit counts:

While the City initiative to establish a new tax class is acknowledged to be one of the most important steps it could take to encourage rental housing constructions, its usefulness has been negated by the Province's decision to limit applicability of the class to just eight years. Eight years is much less than the usual 25 to 35 year time horizon used by financial institutions when assessing the viability of a project.

However, the new class can contribute to development of new units within existing rental buildings because the economics are different. We are aware of apartment owners who are interested in adding floors and units to existing building. These units are much more likely to be created if the new tax class and reduced tax rate are applied.

Unfortunately, the Ontario Property Assessment Corporation (OPAC) and Ministry of Finance staff have advised that the new multi-residential class applies only to new construction of entire buildings or conversion of prior industrial or commercial space within the existing building and would, therefore, not be applicable to units newly created from unused space. At its meeting June 24, 1999, the Assessment and Tax Policy Task Force discussed the issue of using the new class as a means of supporting development of additional rental units within/on existing rental residential properties, and recommended the following:

the Ministry of Finance and OPAC be requested to amend O Reg 282/68 (subsection 10) to clarify that any newly constructed units that are new construction or conversion from a non-residential use other than "common area" space in a building that would otherwise be included in the multi-residential class, be included in the new multi-residential property class; and that such amendment allow for a retroactive application for all of 1999.

The Task Force supported applying the new class to new units within existing buildings, provided that existing tenants do not lose access to common-area space, services or facilities. The Commissioner of Community and Neighbourhood Services was requested to report to the July 20, 1999 meeting of the Policy and Finance Committee on the definition of "common area" and the impact of the recommendation above on potential loss of services and facilities for tenants, including outdoor amenity space and facilities, as a result of additions. This report has been prepared in response to that request.

Definitions:

The Ministry of Finance advises that there is no formal written definition of non-residential space. In a verbal legal opinion, they confirmed that for the purposes of the new multi-residential tax class, non-residential space within an existing property classed as multi-residential would include space which was previously classed as commercial or industrial. The opinion given made reference to the example of a lobby area being converted to residential. These units would not be eligible for the new class as the lobby was space previously used by the tenants.

This opinion of what constitutes non-residential space may not always be consistent with the Tenant Protection Act (TPA). The TPA defines a "residential complex" as including all common areas and services and facilities available for the use of its residents. Space which is not available for the use of its residents, and is subsequently converted to a rental unit, should be considered eligible for the new class as existing tenants would not in that instance lose any common area, service or facility as a result of the conversion.

Implications:

It is likely that additional units will be created if the regulation be amended as recommended by the Task Force. It is the concern of the Task Force that a tax advantage not be given where a common area, service or facility has been lost or reduced because of the creation of the unit.

In practical terms, determining whether or not the newly created rental unit was created in space not previously available to tenants in the building can be difficult. Typically assessors will look only to the number of units in the building when considering whether the unit is residential or multi-residential, not to the history of the space used to create the unit. If the Ministry of Finance and OPAC should agree to amend the regulation to permit newly created units to be eligible for the new tax class, a process will be required to ensure the class is applied only in situations where existing tenants have not lost common area due to the creation of the unit.

This report recommends that as part of requesting an amendment to the regulation, OPAC require the landlord to provide evidence that the space was not previously part of the "residential complex" (as defined by the Tenant Protection Act) before making a determination on whether the class applies. Evidence may include an order of the Ontario Rental Housing Tribunal (Tribunal) pursuant to a landlord application under s.7 of the Tenant Protection Act. This application is made to determine whether or not the space used to create the new unit falls under the definition of "residential complex". If the order of the Tribunal concluded the space was not part of the "residential complex", then the newly created unit would be eligible for the new class. In some situations, such as adding stories to an existing building, building drawings may be sufficient evidence.

If creation of the unit causes a reduction or loss of common area space, or a service or facility (such as locker space), the landlord is required to reduce rents. Should the rent not be reduced, tenants can file an application under the Tenant Protection Act with the Tribunal for a reduction in rent. If a unit is incorrectly classed as new multi-residential, tenants may file an appeal with OPAC, and file an application for rent reduction with the Tribunal. The resultant order by the Tribunal should be sufficient evidence for the assessor to overturn the original incorrect classification.

A specific example raised by the Task Force is the case where new units are created by adding onto an existing building, thereby removing outdoor amenity space. Consistent with the principles noted earlier, the landlord would be required to provide evidence that the space was not previously available for use by tenants in order for the unit to be eligible for the new class. It is appropriate that this determination be made through an application to the Tribunal since it is not always clear whether or not exterior space is intended for the use of tenants by virtue of their tenancy, particularly where there are no facilities located on the space. The Tribunal can undertake a more detailed review of the matter than a property assessor, and can order adjustments to rents charged if indeed amenity space has been lost.

Conclusion:

The new class would only apply to non-residential space which is converted to a rental property. Common areas are residential space and, therefore, units created from common area space would not be eligible for the new class. It is recommended that assessors be requested to apply the new class only when the landlord provides evidence that the space used to create the unit was not previously residential. Evidence may include, for example, an order from the Ontario Rental Housing Tribunal which outlines what space, services and facilities are included in the definition of the "residential complex", and by extension, what space is non-residential.

Contact Name:

Joanne Campbell, Tel: (416) 392-7885, Fax: (416) 392-0548.