The Ontario IZ regulations recently announced by the Minister of Housing are clearly a remarkable turnaround and positive development. They have been rightfully welcomed by the affordable housing advocates, but this advance has been made by leaving unresolved the crucial question of what compensation will be required from the municipalities.
The municipalities now have been given virtually a free hand in setting their regulations, but this comes with a new and very significant condition: before doing so, the impact of their regulations on the inclusionary developments must pass a financial viability test. What this will entail is unclear, but it has the potential for hobbling the productivity of the IZ programs.
It must be appreciated that IZ programs do create a cost burden that somehow must be absorbed. These tests will hinge on what that cost burden is, and who pays for it. More demanding regulations presumably will lead to a higher cost burden.
The long-standing thinking in this country is that the government must pay for affordable housing. This thinking goes mostly unquestioned here. It is behind the bogus notion espoused by the developers that IZ must be a partnership. If this way of thinking prevails in these tests, the municipalities could be called upon to compensate the developers substantially for the cost burden out of resources they don’t have, or to moderate their demands for affordable housing.
The need for compensation is viewed differently in the US. It is widely held there that the cost burden is largely “passed back to the land”. In other words, the developers will assess the costs associated with providing the affordable housing and then offer correspondingly less when bidding to buy land for development. So, it is the land owners who must absorb the cost of the affordable housing by giving up some of the large windfall profits they have been reaping from the rapid growth in land prices.
In reality, while this pass-back remains substantially true, the distribution of the costs might be more complicated than this. Developers sometimes do absorb some of the cost by adjusting the design and construction of the affordable units. The municipalities typically contribute modestly by reducing fees and relaxing standards. And, some homebuyers at the upper end of the market might see house prices marginally rise as well.
In this context, the financial viability testing will have to juggle assumptions about complex range of variables that go beyond that in more conventional market assessments. Among others, it will have to determine the reduced land values that could be achieved, the profit margins that would be acceptable, the construction and design savings that could be made, as well as the impact of different regulations and of density up-zoning. Furthermore, because most programs will be applied municipal-wide, all of these factors will have to be examined on a broad generic basis, although many of them will vary widely when considered site-by-site. Given the complexity of these variables, it is very unlikely that the testing can ever provide a definitive and conclusive answer to what compensation might be required.
It is notable that there is no precedent for this sort of financial viability testing in the US programs. New programs there are implemented based on experience rather than testing. In other words, new programs largely copy what has been proven successful in established nearby programs while not damaging the development industry. When changes are made to these programs, they are done on a cautious trial-and-error basis. Providing the obligations are reasonable and fair, it is expected the development industry and land market can adjust to them
In summary, the financial viability testing requirement set out in Ontario IZ regulations raises a number of questions. First of all, are these tests really necessary considering how these programs have been typically implemented in the US? Can the tests actually be done in a way that will produce conclusive results, and results that can be reliably applied on a broad municipal-wide basis? And, finally, if undertaken, will they have the effect of forcing the municipalities to limit their programs because they will lack adequate resources to pay the compensation?
Richard Drdla 26 Apr 2018
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