New Multi-Residential Property Class

Additional Issues

The Policy and Finance Committee recommends the adoption of:

(1)the recommendations of the Assessment and Tax Policy Task Force embodied in the following communication (June 28, 1999) from the City Clerk; and

(2)the report (July 8, 1999) from the Commissioner of Community and Neighbourhood Services:

Recommendations:

The Assessment and Tax Policy Task Force recommends that:

(1)the following recommendation 4 in the report (February 24, 1999) from the Chief Financial Officer and Treasurer relating to the inclusion of low-income units in any new development in the new multi-residential class be referred to the Business Reference Group as part of the comprehensive tax policy review;

"That, if there have been no building permits issued for this new property class, the province be requested to amend Ontario Regulation No. 282/98 to include in the description of the new multi-residential property class that the municipality can, by by-law, set an appropriate number of low-rental units within properties eligible for inclusion in this new class."

(2)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 reports, for the information of the Policy and Finance Committee, having requested the Commissioner of Community and Neighbourhood Services to report to the Policy and Finance Committee, at its meeting to be held on July 20, 1999, on the definition of "common area" and the impact of Recommendation No. 2 above on potential loss of services and facilities for tenants, including outdoor amenity space and facilities, as a result of additions.

Background:

The Assessment and Tax Policy Task Force, on June 28, 1999, had before it a joint report (June 16, 1999 from the Chief Financial Officer and Treasurer and Commissioner of Community and Neighbourhood Services respecting New Multi-Residential Property Class: Additional Issues, and recommending that:

"(1)Recommendation 4 in the report (February 24, 1999) from the Chief Financial Officer and Treasurer relating to the inclusion of low-income units in any new development in the new multi-residential class be referred to the Business Reference Group as part of the comprehensive tax policy review; and

(2)City Council request that the Ministry of Finance and Ontario Property Assessment Corporation jointly commit that the newly created multi-residential property class will be applied to all new rental units created in the City of Toronto which would otherwise have been classed as multi-residential."

The Task Force's recommendations are noted above.

--------

(Joint Report dated June 16, 1999, addressed to the

Assessment and Tax Policy Task Force from the

Chief Financial Officer and Treasurer and the

Commissioner of Community and Neighbourhood Services)

Purpose:

To provide information relating to assessment issues and property eligibility for inclusion in the New Multi-Residential Property Tax Class for new multi-residential rental properties.

Financial Implications:

None.

Recommendations:

It is recommended that:

(1)Recommendation No. 4 in the report (February 24, 1999) from the Chief Financial Officer and Treasurer relating to the inclusion of low-income units in any new development in the new multi-residential class be referred to the Business Reference Group as part of the comprehensive tax policy review; and

(2)City Council request that the Ministry of Finance and Ontario Property Assessment Corporation jointly commit that the newly created multi-residential property class will be applied to all new rental units created in the City of Toronto which would otherwise have been classed as multi-residential.

Background:

At its meeting of March 2 - 4, 1999, City Council considered a report from the Assessment and Task Policy Task Force (February 24, 1999) and adopted a recommendation, among others, that the Chief Financial Officer and Treasurer, in consultation with appropriate officials, review Recommendation No. 4 in the report (February 24, 1999) from the Chief Financial Officer and Treasurer and report back in time for consideration in the year 2000, such report to clarify that any benefit be passed on to the residential tenant:

"(4). That, if there have been no building permits issued for this new property class, the province be requested to amend Ontario Regulation No. 282/98 to include in the description of the new multi-residential property class that the municipality can, by by-law, set an appropriate number of low-rental units within properties eligible for inclusion in this new class"

Council also referred the briefing note from the General Manager, Shelter Housing and Support Division (dated March 3, 1999), be referred back to the Assessment and Tax Task Force for further consideration.

Comments:

(1)Recommendation No. 4 - Low-income Unit Option in New Multi-Residential Class:

This recommendation was included in the February 24, 1999 report in which tax ratios were established by Council for the new multi-residential property class. It was included for Council to consider whether it would be an appropriate tool to be used with the creation of the new multi-residential class to encourage new rental construction that would allow municipalities the option of requiring a specified number of low-income units in any new development in this new class. The result would be that Council could, if it wished, require the inclusion of a minimum number of low-income units in any new or converted apartment building placed in the new multi-residential class.

The recommendation included a provision that the authority for the new multi-residential class (Ontario Regulation 282/98) only be amended if no building permits have been issued and therefore, no properties included in the new multi-residential class. Consequently, if the Province amended the regulation to require low-income housing units as part of any new development, there would be no impact on existing properties since no new properties exist in the class yet. It should be noted that we do not anticipate much rental housing construction, even with the new class, because the applicability of the new class is limited to just eight years by provincial regulation, after which the building is assessed as multi-residential. This means that the benefit of the reduced rate does not have a significant impact on the economics of development for new development. Developers can instead register new construction as condominium (even if units are intended for rental) and thereby attain the residential/farm rate over the life of the building. However, as discussed below, even with the eight year limitation, the class may be of use to landlords adding new units to existing multi-residential buildings.

There are a number of issues that relate to the provision of low-income units in any new development, including government funding, permanency, subsidization either directly to the tenant or to the developer, ensuring affordable rents and impact to the developer (in particular, whether the developer would not proceed with the development if restrictions are imposed).

Given the scope of this issue, it is recommended that it be considered by the multi-residential panel of the Business Reference Group that will be completing a comprehensive review of tax related impacts and options prior to the next re-assessment.

(3)Briefing Note - General Manager, Shelter Housing and Support Division (March 3, 1999):

Council referred the briefing note from the General Manager, Shelter Housing and Support Division (dated March 3, 1999), back to the Assessment and Tax Task Force for further consideration.

The Assessment Act allows the Minister of Finance to prescribe property classes, some of which may provide a municipality the option of having the property class apply within that municipality. Ontario Regulation No. 282/98 created a new multi-residential property class. City Council passed a by-law October 31, 1998, that created the class and have it apply to the 1999 tax year, as part of several initiatives aimed at improving the supply of rental housing.

Ontario Regulation 282/98 (Section 10) provides that the new multi-residential property class consists of property that would otherwise have been in the multi-residential property class (i.e. rental residential buildings with seven or more units) but which units have been built or converted from a non-residential use pursuant to a building permit issued after the by-law was passed, and which units were ready for occupation on or before the day as of which the land is classified for the taxation year.

The City has the right to establish the class; however, it is the province which assigns each property its class through the Ontario Property Assessment Corporation (OPAC). OPAC and Ministry of Finance staff have had discussions with City staff and have indicated that the new multi-residential class applies only to new construction or conversion of entire buildings. It would not be applicable to newly created units or previously common space that may be converted to new apartments. The regulation is interpreted as referring to buildings as a whole although it is not unusual for one property to have more than one assessment portion which may have different tax classes. With respect to conversion of common area space to rental units, the Province has noted that common areas are considered to have already been used as a part of the rental building by tenants and is therefore not new space.

The Provincial interpretation eliminates the possibility of converting portions of buildings and placing them in the new class to be taxed at a lower rate compared to the remainder of existing units in the same building. Taxing similar apartments in the same building at different rates creates inequities within the building. The intent of the Provincial initiative would appear to both encourage new rental construction while ensuring tax equity is maintained. Construction or conversion of entire buildings achieves both goals. Placing five units in a building of 100 units in the new multi-residential class creates tax inequities within that building.

However, while taxing similar units at different rates creates inequities within the building and is, therefore, at odds with Provincial policies, it can make it feasible for units to be created which is in line with City of Toronto goals for increasing the supply of rental housing. A recent report by Greg Lampert for the province (Responding to the Challenge: The Economics of Investment in New Rental Housing in 1999, Feb.1999) points out that rental housing development can generally be more financially feasible for owners wishing to intensify the use of existing properties. By permitting the new class to apply to newly created units within or attached to an existing multi-residential rental property, the cost of creating the unit becomes more feasible.

Given Council's objective of improving the supply of affordable housing, this report recommends that Council request the Ministry of Finance and Ontario Property Assessment Corporation jointly commit that the newly created multi-residential property class will be applied to all new rental units created in the City of Toronto which would otherwise have been classed as multi-residential. Staff of the Shelter, Housing and Support Division and Finance Department should be requested to communicate with Ministry of Finance staff and Ontario Property Assessment Corporation in this regard.

Conclusion:

Recommendation 4 in the report (February 24, 1999) from the Chief Financial Officer and Treasurer relating to the inclusion of low-income units in any new development in the new multi-residential class should be addressed as part of the comprehensive tax policy review to be undertaken by the Business Reference Group.

The multi-residential property class for new rental housing will reduce the gap between the economic rent and market rent of new rental construction -- whether a new building or new units within an existing building -- and should positively impact on additional rental housing supply. Council established the new class as one measure to help stimulate supply of rental housing. This report recommends that Council request the Ministry of Finance and Ontario Property Assessment Corporation jointly commit that the newly created multi-residential property class will be applied to all new rental units created in the City of Toronto which would otherwise have been classed as multi-residential.

Contact Names:

Paul WealleansJoanne Campbell

Phone: 397-4208Phone: 392-7885

(Minute No. 2.77 of the Council of the City of Toronto, appended to the foregoing report was forwarded to all Members of Council with the July 20, 1999, agenda of the Policy and Finance Committee and a copy thereof is also on file in the office of the City Clerk.)

The Policy and Finance Committee also submits the following report (July 8, 1999) from the Commissioner of Community and Neighbourhood Services:

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.

Recommendation:

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's 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.