Myths

A number of myths continue to be associated with IZ, although there is no evidence to support them. These myths serve to cloud and confuse the debate on how best to design these programs.

As will be seen, many of these myths deal in one way or another with the cost burden associated with providing the affordable housing.

IZ is a “partnership”

This term is frequently used by the development industry in Ontario. It is used to suggest that the other levels of government, particularly the municipalities, must somehow have “skin in the game” – that is, contribute financially toward the affordable housing.

This is a made-in-Ontario concoction. No reference to either this term or the notion is found anywhere in the US with regard to IZ.

To the contrary, IZ programs in the US have been designed for the most part to operate with little or no financial support from the municipalities. Indeed, these programs were designed this way because the municipalities in the US, like those in Ontario, lacked the financial resources needed to provide this support.

The programs also are designed to operate independently from state-level programs. States are typically involved only when they provide financial assistance to secure affordable housing at a deeper level of affordability than achieved by the IZ programs on their own.

IZ raises housing prices for the market homebuyers

IZ is often described as driving up the price of housing for other homebuyers, either generally across the community or more specifically in the same development. This is said to happen because the developers will pass on the cost of the affordable housing to the other buyers.

But developers cannot hike house prices in this way. The market as a whole sets the price of housing, and not the individual developers. And it is reasonable to expect that developers are already selling at the highest possible price. So, they cannot raise the price to cover the affordable housing obligation or any other cost increase.

There are two authoritative studies coming out of the US that clearly support this position. More specifically, the studies show that the price of housing in municipalities with IZ programs is virtually the same of that in comparable municipalities without these programs.

Developers must absorb the cost burden of the affordable units

If the developers cannot pass the cost burden onto the market homebuyers, so the argument goes, then the developers must absorb the cost by taking a hit on their profits.

The possibility that the developers will accept any significant reduction in profits is remote. The more likely response is that the developers will postpone the development until the market conditions favour going ahead.

In any case, IZ programs are not designed with the expectation that the developers will absorb this cost. These programs intentionally fix the affordable housing obligation so that the developers can take into account the associated cost when bidding to purchase land for development. In this way, the cost associated with the affordable housing will be “passed back to the land” – that is, seen in the form of reduced land prices.

IZ depends upon concessions

While most IZ programs do provide concessions, the value of these concessions and rationale behind them is often misrepresented.

The concessions offered by IZ typically are related to the development requirements and approval process. They principally include waivers of development-associated fees and relaxation of various development regulations. As noted earlier, they certainly do not include financial subsidies.

These concessions are offered by the municipalities for a simple reason: they consider it unfair or inappropriate for them to be adding to the cost of affordable housing, while at the same time requiring the developers to reduce the price of that housing. So they do what they reasonably can to eliminate those costs.

It is notable that these concessions generally remain fixed over time, and are granted uniformly to all eligible developments. They certainly are not adjusted to meet any prescribed standard nor to satisfy any viability criteria relevant to any particular development.

The value of these concessions is also relatively modest. They typically represent no more than a small fraction of the price write-down associated with the affordable housing. They are determined by what the municipality can reasonably give and not by what might be required to sustain by any development.

Here is a final important point. While it is true that most programs do provide these concessions, there are many that do not. That these programs can produce affordable housing in the absence of concessions is proof by itself that they are not needed to make IZ work.

IZ works only with up-zoning

Under this thesis, up-zoning is necessary because the increased density allowed by the up-zoning is seen as a necessary way of paying for the affordable housing.

The experience in the US does not support this. The vast majority of 500 or so programs there apply IZ to all approvals, including developments proceeding “as-of-right” with no density increase. It is only in the dozen or so “big city” programs that IZ is tied to up-zoning. This occurs, not because IZ needs up-zoning, but because virtually all development in those cities needs up-zoning.

IZ relies on density bonusing

Density bonusing refers to offering additional density to compensate developers for providing affordable housing. The additional density is automatically granted on some standard basis fixed in advance and applicable to all eligible developments.

Density bonusing is rooted in an old way of thinking about inclusionary zoning. It comes out of early programs, and especially the so-called incentive-based (or voluntary) programs. In these programs, the developers are asked to provide affordable housing, and so must be rewarded amply to secure their participation. (This approach is reflected in the continued use of the term ‘incentives’, although ‘concessions’ and ‘compensation’ are more suitable terms under mandatory programs.)
These programs have been proven to be ineffectual, and so they are no longer considered as useful vehicles for IZ. While they still do exist, they have lost all relevance for new programs.

There is another reason for the change in thinking. Density bonusing represents bad planning practice. This is because the affordable housing obligation is established first, and then the density increase automatically follows. In other words, this means that affordable housing trumps all other planning considerations with regard to the allocation of density.

Mandatory programs typically take the opposite approach. In these programs, the permitted density is first determined by appropriate planning grounds, and then the standard affordable housing obligation is applied.

This approach is used by all of the “big city” IZ programs, where up-zonings are prevalent. It is also the practice in the City of Toronto when applying s37: the appropriate density is first established and then the community benefits negotiated, not the other way around.

RD 2Mar2018