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STAFF REPORT

December 22, 1999

To: Planning and Transportation Committee

From: Acting Commissioner, Urban Development Services and Commissioner, Community and Neighbourhood Services

Subject: Incentives for Private-Sector Affordable Housing Development: Proposal Review

Purpose:

To review an affordable housing model using property tax measures and other incentives proposed by Councillor Jakobek

Financial Implications and Impact Statement:

There are no immediate financial implications stemming from this report.

Recommendations:

It is recommended that:

1) the potential use of property tax measures and other incentives to stimulate affordable rental housing development, as outlined in this report, be forwarded to the City of Toronto Business Reference Group (for consideration by the Multi-Residential Sub-Panel) as part of their overall mandate to bring forward to City Council, through the Assessment and Tax Policy Task Force, requests for new tax policy by legislation;

2) this report be forwarded to the Community Services Committee and the Policy and Finance Committee for information; and

3) the appropriate City Officials be authorized and directed to take the necessary action to give effect thereto.

Background:

On October 12, 1999, in a letter to Councillor Duguid, Chair of the Community Services Committee, Councillor Jakobek proposed the development of a program to increase the supply of rental housing in the City of Toronto. The proposal was received by the Community Services Committee at its meeting of November 4, 1999, and was accompanied by a covering report from the Commissioner, Community and Neighbourhood Services. The covering report identified a number of considerations, including current City programs to encourage the creation of affordable housing, as well as the need for a more detailed review of the proposed program.

Following its deliberations, the Community Services Committee took the following actions:

- supported the proposal in principle;

- requested that a more detailed report be submitted in January 2000 on the following:

- potential municipal, provincial and federal incentives, including tax incentives, to encourage private sector production of affordable housing;

- an assessment of the applicability of the model used for farm taxes in Ontario;

- the provision of affordable homeownership through condominiums; and

- the establishment of a public/private sector task force to develop, analyze and recommend potential federal, provincial and municipal incentives for private sector production of affordable housing.

- requested that the report be developed in consultation with the Chief Administrative Officer and the Chief Financial Officer and Treasurer;

- directed that the report be processed through the Planning and Transportation Committee as well as the Community Services Committee to ensure continuity with other homelessness and housing strategies; and

- directed that the report also be forwarded to the Policy and Finance Committee.

This report is in response to the directions of the Community Services Committee. The report has been prepared in consultation with Finance, Legal, CAO, and Shelter, Housing and Support.

Comments:

1. Introduction

In proposing an incentive program for private-sector affordable housing development, the following considerations were identified:

- with the cancellation of the provincial non-profit housing program in 1995, a number of developers have been seeking opportunities to build rental housing in the City;

- feasibility analyses for rental housing have shown that market rents cannot support the cost base in order to achieve an acceptable return on investment (i.e. economic rents);

- the introduction of the Tenant Protection Act and changes to legislation regarding property taxes have started to close the gap between economic and market rents, but only at the high end of the rental market; and

- while construction of high-end rental accommodation can help to ease overall pressure on the rental stock it cannot address the shortfall in the supply of more affordable rental housing.

Information on housing completions collected by CMHC shows that, while ownership housing is being approved and produced in the City, the production of rental housing has declined significantly. In 1998, there were 4,248 ownership housing completions but only 114 purpose-built rental housing completions across the new City of Toronto.

The proposal to use property tax measures and other tax incentives to stimulate new rental construction was, in part, prompted by the fact that programs incorporating such measures are achieving success in other jurisdictions, for example, New York City.

2. Affordable Rental Housing Development: The U.S. Experience

The U.S. experience has demonstrated that tax provisions can play an influential role in encouraging rental housing investment flows from private investors. Indeed, as a result of the combination of federal, state and municipal programs, rental housing in the U.S. has become, in the words of one commentator, "the investment of choice".

Rental housing development in the U.S. is publicly supported in three key ways: large federal grant programs, generous tax credits to attract private capital, and a stronger federal role to reduce risk for mortgage lenders. In 1998, federal Community Development Block Grants and HOME grants totalled US$5.9 billion, of which approximately US$1 billion went to non-profit housing. Federal Low Income Housing Tax Credits, involving US$3 billion in foregone taxes annually, are allocated among the states and then project by project. Private investors put equity into affordable housing projects in order to obtain a multi-year stream of these tax credits. Complementing these tools is a federal lending role (the Federal National Mortgage Association, Fannie Mae, and other bodies) more comparable to CMHCs former lending and mortgage insurance role rather than its reduced current role. Housing activity by municipalities depends mainly on these same three mechanisms, with property tax incentives as an added tool.

Current U.S. federal income tax policies and programs bear a closer resemblance to Canada's income tax treatment of rental properties before 1972 -- a period when rental production in Canada was high - including no GST, more sources of finance (such as pension and insurance funds) and income tax treatment which was more generous.

In addition to a more generous and flexible federal tax environment, large U.S. cities, such as New York, have the ability to implement property tax measures as well as other tax incentives. Under s.421(a) of the New York State Real Property Tax Law, New York City is able to offer partial exemptions from real estate taxes to owners of newly constructed multiple dwellings. There are also real estate tax incentive programs for ownership housing and the rehabilitation of housing and vacant commercial and industrial properties. During the 1999 fiscal year alone, New York City has achieved the rehabilitation, conversion and construction of over 102,000 housing units.

Since 1984, developers of rental properties in New York have been permitted to finance about 90% of their total development costs with tax exempt bonds. In exchange, 20% of the units created must be affordable and all units must be rent stabilized. New buildings can receive deferred incremental tax exemptions for anywhere from 13 to 28 years (including a 3-year construction period and various phase-in periods). Buildings in Manhattan are exempt from this program unless they receive government assistance, contain 20% affordable units, or the owner is participating in the 421(a) affordable housing program.

In order to oversee the diversity of housing activity and programs, New York City has a direct operating arm: the Department of Housing Preservation and Development. This Department is responsible for housing development, loans, rental agreements, property standards, managing City-owned property, and administers tax incentive and abatement programs. However, as noted above, New York City operates within a very different regulatory, financial and policy environment than that which exists in Canada.

3. Impact of Canadian Federal Tax Legislation on Rental Housing Development

Recent analyses by real estate economists and tax experts have suggested that changes in federal tax legislation over the past 25 years have played a role in discouraging new private investment in purpose-built rental housing.

According to a recent report by Crawford Paterson Campbell Chartered Accountants entitled: "Fiscal Impact of Federal Tax Legislation on Residential Rental Rates in Canada" (1999):

"The income tax provisions contained in the Income Tax Act (Canada) regarding rental housing investment have become more severe since 1972 when the Income Tax Act was reformed. Changes in the tax treatment of losses due to the claiming of capital cost allowances (CCA), the amount of CCA deductible, allowable soft costs, the deferral of taxes payable on recaptured depreciation upon reinvestment, and the application of a tax on capital gains at the time of sale have severely reduced the attractiveness of investment in rental housing. The application of the GST to the full cost of new constructions, as well as on-going operating costs, aggravated an already serious situation."

Past experience has shown that there is a clear relationship between tax provisions and rental housing investment flows from private investors. For example, when the federal government temporarily reintroduced one of the pre-1972 tax reform provisions (the ability to deduct CCA losses against other income - the MURB provisions) in the later 1970s, rental housing starts increased across Canada.

Creating a more favourable federal tax treatment for rental housing, in combination with the range of property tax measures and other incentives, could have the potential to stimulate new rental construction and ensure the full range of housing is being provided in Toronto.

4. Technical Assessment of the Proposed Program: a Brief Summary

The results of a preliminary technical assessment of the proposal are presented in Appendix A. This assessment takes a closer look at the potential impact of five property tax measures and other tax incentives on two illustrative development scenarios. In addition to the four specific measures identified in the proposal (waiving property taxes for 15 years, PST rebate ($2,000 max.), waiving development charges, and waiving of permit fees), a fifth incentive has been included: a GST rebate of 2.5% which would allow rental development to have the same GST treatment as condominium housing. The purpose of adding the GST incentive is to permit an evaluation of all of the measures together. Implementing all five measures would require actions on the part of the federal and provincial governments, as well as the City of Toronto.

The two illustrative development scenarios are:

- downtown high-rise building with 200 units; and

- suburban, low-rise building with 50 units.

Pro forma analyses were carried out using current development assumptions. The pro formas were used to generate economic rents which are the rent levels required in order to support the cost base while achieving an acceptable return on investment. Economic rents are higher than current market rents. It is this persistent gap between economic rents and market rents which has been one of the main obstacles to encouraging the development of new, purpose-built rental housing in Toronto.

The technical assessment shows that, for the two illustrative cases, the above-noted range of property tax measures and other incentives, function to begin to close the economic/market rent gap. In the downtown, high-rise example, the proposed measures close between one-half and two-thirds of the gap while in the suburban low-rise example (with lower land and construction costs), the gap is almost fully closed for the smaller unit type and two-thirds closed for the larger unit type.

Appendix A also provides an overview of the legislative requirements which would be needed to implement these measures. It should be noted that the measures and incentives examined in Appendix A will vary according to the ease of implementation and some may only be achieved over the longer term. For example, creating a level playing field for rental housing by providing the same GST rebate which is available to condominium housing would require the co-operation of the federal government.

5. Need for a Financial Impact Assessment of the Proposed Model

In addition to the preliminary technical assessment provided in this report, there is a need for a financial impact assessment of measures such as the waiving of property taxes, fees and development charges which could result in foregone tax revenue to the City. This analysis should also include an assessment of the administrative, program and enforcement requirements which could represent a further cost to the City.

In 1998, during its implementation of interim tax policies (1998-2000), City Council established a Business Reference Group (BRG), chaired by the CFO and Treasurer, consisting of interested stakeholders and City staff. The BRG will be presenting a final report in February 2000 which will include the development of long-term property tax policies for the City beyond 2000.

The BRG is divided into three main Sub-Panels that are reviewing the Multi-Residential, Commercial and Industrial sectors. The Multi-Residential Panel is considering the tax burden implications for that class of properties as well as measures that could be implemented to address them. While the overall goal of the BRG is to develop equitable tax options for all sectors, the Multi-Residential Panel is considering measures that could be implemented to ensure the health of the rental housing sector, including affordable rental housing

As the BRG has already been established with a mandate to review property tax options for all sectors of properties in the City, it would be appropriate that the proposal, as well as the results of the preliminary technical review, be forwarded to the BRG for inclusion in its comprehensive review of property tax issues and related issues.

6. Additional Matters

This section provides a brief discussion of several additional matters requested by the Community Services Committee.

The Model for Farm Taxes in Ontario

There is a precedent for the rebating of a component of the property tax in Ontario. The former farm tax model saw the province rebate 75% of the municipal tax portion to farmers. This approach was dropped in 1997 when the province decided to reduce the provincial share of property taxes on agricultural land rather than administer a rebate program.

Provision of Affordable Homeownership through Condominiums

As noted above, ownership housing, of which a significant component is condominium housing, is being approved and produced in the City of Toronto. The proposal could be adapted to the condominium context. However, a wide range of housing indicators suggest that a priority for the City is the production of purpose-built rental housing. Indeed, rental housing production is at a disadvantage when compared with condominium housing, particularly in its tax treatment with the federal GST being a prime example.

Establishment of a Public/Private Sector Task Force

It has been recommended that a public/private task force be established to develop, analyze and recommend potential federal, provincial and municipal incentives for private sector production of affordable housing. Two groups already exist to fulfil this function within the City: the Urban Development Round Table and the Capital Revolving Fund Reference Group, both of which have significant participation by members of the private development and housing industries.

These groups will be consulted as part of the development of housing policies in the context of preparing the City's new Official Plan. Staff are currently in the process of developing a consultation document which will incorporate the role of incentives in addressing the need to generate new rental housing investment to ensure that there is the provision of the full range of housing as mandated by the Planning Act.

Conclusion:

This report has provided a preliminary technical review of the proposal for an incentive program for affordable housing. The analysis has shown that a range of property tax measures and other incentives, implemented by the City, the province and the federal government can play a role in closing the gap between economic rents and market rents. Creating a more favourable federal tax treatment for rental housing, in combination with the range of incentives discussed in this report, could have the potential to stimulate new rental construction and ensure the full range of housing is being provided in Toronto.

Contact:

Katherine Chislett Tel.: 397-0260

Senior Planner Fax: 397-4080

City Planning Division kchislet@toronto.ca

Paul J. Bedford

Executive Director and Chief Planner

City Planning Division

James Ridge

Acting Commissioner,

Urban Development Services

Shirley Hoy

Commissioner,

Community and Neighbourhood Services

[p:\1999ug\uds\pln\pt992079pln-cc]

APPENDIX A

Technical Review of the Proposal

1. Proposed Program

The proposed program for private-sector affordable housing development has the following main components:

Incentives to be provided:

- property taxes on new rental developments to be waived for 15 years;

- the provincial sales tax (PST) would not be assessed against any aspect of the development;

- all development charges and permit fees to be waived; and

- a fast-track approval process for rental developments would be implemented in order to create additional savings.

Program requirement:

- provision of a reduced rent (50%) for 20% of the rental units in the development.

The proposal would support the development of mixed-income communities and would generate economic benefits to the City through the jobs and investment created by new construction.

2. Preliminary Technical Assessment

In order to take a closer look at the potential impact of a range of property tax measures and other incentives on the feasibility of new rental housing developments two development schemes are presented here to assess the sensitivities of a range of incentives on financial performance. The scenarios are:

- a 200-unit downtown, high-rise development (100 1-Bed, 100 2-Bed); and

- a 50-unit suburban, low-rise development (25 1-Bed, 25 2-Bed).

In addition to the pro forma work, this review addresses the legislative changes which would be required for implementation.

It should be noted that the pro forma results outlined here are for illustration purposes only. A number of assumptions have been used to assess development feasibility and these could vary substantially from assumptions used for specific sites or particular development contexts. However, the two scenarios do provide a general sense of potential financial feasibility across a broad range of rental housing.

Factors Affecting the Development Feasibility of Rental Housing

Rent revenue is a key factor in determining the economic feasibility of a rental building. The revenue stream determines what income is available to cover financing and operating costs as well as the level of return on investment. Three important concepts are applied in assessing the financial performance of a rental development: Net Operating Income (NOI), the Capitalization Rate (Cap Rate), and Cash-on-cash return (C-on-C).

Net Operating Income: NOI is the difference between revenues and expenses before debt payment (i.e. mortgage payments). It is used to determine the value of a rental building and for the purpose of determining the amount of mortgage financing to be provided.

Capitalization Rate: capitalization is the process of converting a future income stream (e.g. from rents) into a present value. The Cap Rate is the ratio of the NOI to the purchase price of the property. The market value of a property can be estimated by dividing the NOI by the appropriate Cap Rate.

Cash-on-Cash Return: C-on-C is the ratio of the cash flow (NOI less debt payments) to the initial equity.

A recent study by Clayton Research Associates for CMHC titled: "Understanding Private Rental Housing Investment in Canada" (1999) indicates that investors in the Toronto market for existing rental properties are achieving Cap Rates in the order of 9%. The report further states that investors are looking for cash-on-cash returns of 15% for new rental development. The following analysis uses these investment benchmarks in determining the base case against which the impact of a range of incentives can be measured.

Developing a Base Case for Two Development Scenarios

The preliminary assessment provided here has been adapted from the approach developed by Greg Lampert in his February 1999 report: "Responding to the Challenge: The Economics of Investment in New Rental Housing in 1999" which was prepared for the Ministry of Municipal Affairs and Housing. Mr. Lampert's input assumptions have been modified to reflect:

- recent increases in mortgage interest rates;

- changes in CMHC's mortgage insurance policies for rental housing;

- new development charges;

- unit sizes which reflect recent replacement rental housing proposals in the City; and

- the results of the October 1999 CMHC Rental Market Survey.

The base case pro forma have been generated using the following illustrative assumptions:

Downtown High-Rise Rental Building (200 Units) Suburban Low-Rise Rental Building (50 Units)
Per Unit Development Costs:

- Land

- Hard Costs:

- 1-Bed (650 sq. ft.)

- 2-Bed (830 sq. ft.)

- Soft Costs (incl. municipal fees)

- Development Charges:

- 1-Bed

- 2-Bed

- Cash-in-lieu (parkland)

- GST

$21,000

$56,550

$72,210

$15,000

$1,692

$2,644

5% of land cost

7%

$13,300

$42,800

$54,780

$12,500

$1,692

$2,644

5% of land cost

7%

Per Unit Operating Costs:

- Maintenance and Repair

- Property Taxes (Years 1-8)

- Property Taxes (Year 9>)

- Annual inflator

- Vacancy loss

$2,800

1.213702%

4.600840%

2%

3% of rental revenue

$2,800

1.213702%

4.600840%

2%

3% of rental revenue

Financing Assumptions:

- Amortization

- Interest Rate

- CMHC Mortgage Ins. Premium

- Mortgage amount and equity required determined from CMHC lending criteria and devt. costs.

35 years

7%

3% on 80% of lending value

35 years

7%

3% on 80% of lending value

Year 1 Investment Requirements:

- Investor Cap Rate

- Cash-on-Cash Return

9%

15%

9%

15%

Base Case Pro Formas: Economic Rents

Economic rents are rents which support the cost base in order to achieve an acceptable return on investment. Using the above-noted illustrative input assumptions, the following economic rents were generated:

Downtown, High Rise (200 Units): Suburban, Low-Rise (50 Units):

- 1-Bed $1,043/mo - 1-Bed $839/mo

- 2-Bed $1,331/mo - 2-Bed $1,071/mo

The Economic-Market Rent Gap

The economic rents which must be achieved to support the cost base for the two illustrative cases are higher than current market rents in the City (1-Bed average rent - $772 and 2-Bed average rent - $924). It is this persistent gap between economic rents and market rents which has been one of the main obstacles to encouraging the development of new, purpose-built rental housing in Toronto.

There are different ways to approach the establishment of a market rent benchmark. Average City rents could be used (see above). However, these are calculated based on all rental properties, including older properties which may have lower rents. The City average rents do not take into account differences in location. For example, average rents are higher in the downtown area than in some of the suburban areas of the City.

The approach taken here is to use the average rents for the former Toronto as a benchmark for the downtown, high-rise market rents. The benchmark for the suburban low-rise case uses the average of the average rents for the five suburban community council areas. These have been determined as follows:

Community Council Area Average Oct. 1999

CMHC

1-Bed Rent

Average Oct 1999

CMHC

2-Bed Rent

Former Toronto $818 $1,083
East York $746 $882
Etobicoke $717 $869
North York $759 $905
Scarborough $747 $849
York $702 $842
Avg. for 5 Suburban Community Council Areas $734 $869

The following table compares the economic rents generated for the two base case development scenarios with the benchmark market rents determined from the CMHC October 1999 Rental Market Survey in the table above:

Downtown,

High-Rise

1-Bed Economic Rent $1,043

1-Bed City Average Rent $818

Econ/Mkt Rent Gap $225

2-Bed Economic Rent $1,331

2-Bed City Average Rent $1,083

Econ/Mkt Rent Gap $248

Suburban,

Low-Rise

1-Bed Economic Rent $839

1-Bed City Average Rent $734

Econ/Mkt Rent Gap $105

2-Bed Economic Rent $1,071

2-Bed City Average Rent $869

Econ/Mkt Rent Gap $202

The rent gap is somewhat smaller for the low-rise, suburban example as a result of lower land and construction costs. Low-rise rental properties, using wood-frame construction, are less expensive to build compared with high-rise buildings which require more sophisticated construction methods and building components such as elevators. However, high-rise rental developments do generate more housing and can represent a more efficient use of land.

Even though interest rates are now at lower levels and the Tenant Protection Act has introduced vacancy decontrol, there continues to be little prospect for new rental housing development unless measures can be taken to reduce the gap. With continued economic and population growth and, therefore, increased demand for rental housing, the already constrained rental market could become even tighter - with further negative consequences for tenants, particularly those with lower incomes. The lack of available rental housing also has an impact on the City's economic competitiveness.

Potential Impacts of a Range of Tax Incentives on Development Feasibility

In addition to the four specific incentives identified in Section 1 above, a fifth potential tax measure which could have a positive impact -- providing the same GST rebate of 2.5% to new rental housing production as is currently available to builders of condominium housing - has been included in the analysis. New rental production must pay the full 7% federal GST which is a further disadvantage for rental housing developers.

The following tables summarize the results of the preliminary review of the potential impact these five potential tax measures have on the gap between economic and market rents for the two illustrative base case development scenarios in the first year of the pro forma.

Downtown, High-Rise Development (200 Units) - Impacts on Monthly Rent by Unit Type

Incentive

Measure

Specific $ Impact of Incentive Cumulative $ Impact of Incentives Economic Rent

Incl. Impact of

Cumulative $

Incentives

Benchmark

Market Rent

Economic/Market Rent Gap
Base Case

- 1-Bed

- 2-Bed



-

-



-

-



$1,043

$1,331



$818

$1,083



$225

$248

+ No Mun. Prop'ty Taxes

- 1-Bed

-2-Bed



$61

$86



$61

$86



$982

$1,245



$818

$1,083



$164

$162

+ PST Rebate ($2,000)

- 1-Bed

-2-Bed



$20

$17



$81

$103



$962

$1,228



$818

$1,083



$144

$145

+ No Dev't Charges

- 1-Bed

- 2-Bed



$13

$16



$94

$119



$949

$1,212



$818

$1,083



$131

$129

+ No Mun. Fees/Permits

- 1-Bed

- 2-Bed



$13

$17



$107

$136



$936

$1,195



$818

$1,083



$118

$112

+ GST Rebate (2.5%)

- 1-Bed

- 2-Bed



$19

$25



$126

$161



$917

$1,170



$818

$1,083



$99

$87



Some of the findings are as follows:

- waiving property taxes for 15 years does have an impact on closing the gap between economic and market rents and improving the attractiveness of the investment by reducing the amount of equity required;

- the four incentives identified in Section 1 above would reduce the economic/market rent gap for a 1-Bed unit from $225 to $118 (a $107 difference or 48% of the gap) and the 2-Bed unit gap from $248 to $112 (a $136 difference or 55% of the gap); and

- incorporating the GST rebate would reduce the economic/market rent gap for a 1-Bed unit from $225 to $99 (a $126 difference or 56% of the gap) and the 2-Bed unit gap from $248 to $87 (a $161 difference or 65% of the gap).

Suburban, Low-Rise Development (50 Units) - Impacts on Monthly Rent by Unit Type

Incentive

Measure

Specific $ Impact of Incentive Cumulative $ Impact of Incentives Economic Rent

With Impact of

Cumulative $

Incentives

Benchmark

Market Rent

Economic/Market Rent Gap
Base Case

- 1-Bed

- 2-Bed



-

-



-

-



$839

$1,071



$734

$869



$105

$202

+ No Mun. Prop'ty Taxes

- 1-Bed

-2-Bed



$52

$67



$52

$67



$787

$1,004



$734

$869



$53

$153

+ PST Rebate ($2,000)

- 1-Bed

-2-Bed



$13

$16



$65

$83



$774

$988



$734

$869



$40

$119

+ No Dev't Charges

- 1-Bed

- 2-Bed



$17

$21



$82

$104



$757

$967



$734

$869



$23

$98

+ No Mun. Fees/Permits

- 1-Bed

- 2-Bed



$13

$17



$95

$121



$744

$950



$734

$869



$10

$81

+ GST Rebate (2.5%)

- 1-Bed

- 2-Bed



$9

$12



$104

$133



$735

$938



$734

$869



$1

$69

Some of the findings are as follows:

- the lower input costs for low-rise development (particularly land and construction costs) mean that economic rents can be achieved which are lower than the market rents after the incentive measures are applied;

- waiving property taxes for 15 years has an equally important impact on closing the gap between economic and market rents for the low-rise example;

- the four incentives identified in Section 1 above would reduce the economic/market rent gap for a 1-Bed unit from $105 to $10 (a $95 difference or 90% of the gap) and the 2-Bed unit gap from $202 to $81 (a $121 difference or 60% of the gap); and

- incorporating the GST rebate would reduce the economic/market rent gap for a 1-Bed unit from $105 to $1 (a $104 difference or 99% of the gap) and the 2-Bed unit gap from $202 to $69 (a $133 difference or 66% of the gap).

The feasibility of creating a wider mix of unit types and the potential impacts of the proposed program, especially 3-Bed and 4-Bed units which can house larger families with children, should also be explored. These unit types could more readily be accommodated in the context of low-rise, suburban development.

Potential Impact of a Fast-Track Process on Financial Feasibility

The pro forma analysis has not incorporated an input assumption for cost savings due to a fast- track application process for rental housing owing to the difficulty in determining a realistic dollar value for any potential savings. Current efforts to harmonize and streamline the planning application process are intended to speed the approval process, generally for the benefit of all applicants. Applications typically move through two processes: the political approval process and the building approval process.

The political approval process involves community consultation and Public Meetings. While it may be possible to implement some internal efficiencies, the fact remains that the public process must be served and there will be instances where community opposition could contribute to costly delays.

In the building approval process, applications are sorted by type but handled in sequence according to the receipt date. Accordingly, no type of development or individual proponent receives preferential treatment. This allows the process to be transparent. This approach is followed by all Departments which play a role in building approval process. A key aspect of fast-tracking is to ensure that there is an efficient process in place, with some measure of predictability, which is an important factor in encouraging investment by reducing the perception of risk.

Assessing the Impact of The Provision of Reduced Rents

In exchange for the provision of a range of incentives, the proposal provides a requirement that 20% of the units be provided at a reduced rent. The specific suggestion was for a 50% reduction from the economic rent. The following discussion examines the impacts of this requirement on two pro forma: (1) the pro forma which includes the range of incentives identified in Section 1 above and (2) the pro forma which applies the additional potential incentive of a 2.5% GST rebate.

For the downtown, high-rise development, implementation of the requirement for a component of units to have a reduced rent would result in 160 units having an increased economic rent in order to cross-subsidize 40 units with a reduced rent. For the suburban, low-rise development, 40 units would have an increased economic rent with 10 units having a reduced rent. The following table summarizes the rent levels which were computed:

Downtown,

High-Rise

Downtown,

High-Rise

Suburban,

Low-Rise

Suburban,

Low-Rise

Economic Rents

(80% of Units)

Reduced Rents

(20% of Units)

Economic Rents

(80% of Units)

Reduced Rents

(20% of Units)

Initial Range of 4 Incentives:

-1-Bed

- 2-Bed

$1,040

$1,328

$520

$664

$829

$1,058

$414

$529

Initial Range of 4

Incentives + GST

Rebate:

- 1-Bed

- 2-Bed

$1,021

$1,303

$510

$652

$816

$1,042

$408

$521

Some of the findings are as follows:

- the provision of a reduced rent (50% of economic rent) for 20% of the units, through a cross-subsidy generated by the increasing economic rents of the remaining units, has a major impact on the pro forma;

- taking a closer look at the pro forma with the full range of incentives (including the GST rebate) the impact on economic rents is as follows:

Downtown, High-Rise Development:

- the 1-Bed economic rent rises from $917 to $1,021, an increase of $104;

- the 2-Bed economic rent rises from $1,170 to $1,303, an increase of $133.

Suburban, Low-Rise Development:

- the 1-Bed economic rent rises from $735 to $816, an increase of $81;

- the 2-Bed economic rent rises from $938 to $1,042, an increase of $104.

- these changes in economic rents represent increases of approx. 11% over the economic rents which do not provide a cross-subsidy.

One of the issues which would need to be addressed in implementing a cross-subsidy requirement, in exchange for a range of incentives, would be the potential hidden costs to the City for additional legal and administrative requirements, such as the need for agreements and on-going monitoring to ensure compliance. It is very difficult to estimate what this additional, continuing cost may represent. Should Council agree to support the incentive program with a reduced rent component, it is important that, as part of implementation, a detailed assessment be undertaken of the administrative model required.

3. Required Legislative Changes

The City Solicitor has advised of the following the legislative requirements necessary to implement a number of components included in the proposal.

Waiving municipal property taxes for 15 years: The proposal to waive the municipal portion of property taxes for 15 years will require legislative change. A legislative amendment would be needed to provide specific authority for the Council of a municipality to waive, cancel, or rebate taxes for up to 15 years for newly-constructed rental residential buildings, and to exempt such a waiver, cancellation, or rebate from the bonusing provisions of Section 111 of the Municipal Act.

The class of buildings to which this would apply would have to be defined. For example, the waiver, cancellation or rebate could be limited to new buildings which fall within the new multi-residential property class (7 or more units) or be expanded to include developments with fewer than seven units. The legislative amendment must also provide the authority to impose conditions for the on-going provision of the waiver, cancellation or rebate.

PST not to be assessed against any aspect of the development: The proposal that PST not be assessed against any aspect of the development would require that the province amend the Retail Sales Act.

Waiving, Cancelling or Rebating Development Charges and Permit Fees: Bonusing problems would exist with the waiver of all charges and fees for commercial enterprises. Legislative authority would need to be sought which would allow the waiver of all such charges and fees for the construction of new rental housing without violating section 111 of the Municipal Act .

Securing Rent Levels by Agreement: The incentive program proposes that in exchange for the incentives that a proportion of the units be rented at below-market rents. To secure these rent levels may require an amendment to the Tenant Protection Act in to exempt the units from the application of at least that portion of the Act which deals with rents. In addition, in order to secure these obligations by agreement, legislative authority should be sought to enable the registration of these agreements on title.

 

   
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