Ontario’s legislation authorizing municipalities in the Province to use inclusionary zoning, entitled the Promoting Affordable Housing Act, was passed on 6 December 2016 and received Royal Assent on 8 December 2016.  The inclusionary zoning provisions were enacted through amendments to the Planning Act.  Read the legislation.

Overall, the legislation is appropriate, progressive and well-founded. It enables the municipalities, without unnecessarily binding them, to implement IZ programs capable of providing affordable housing.  Nevertheless, for these programs to be fully effective, further attention will need to be given to three important issues. Three issues needing further attention are these:

1) The legislation relies on the lax and very flawed definition of affordable housing contained in the Provincial Policy Statement. This will make the programs hard to administer, and open the strong possibility they will not even generate much affordable housing, at least as more rigorously defined across the US.

2) The legislation prohibits the use of cash-in-lieu of providing the affordable units. This will limit the capability of the programs to provide a wide range of affordable housing, and also to engage small developments in the provision of that housing.

3) The legislation does not establish the appropriate legal mechanism – specifically, a “positive covenant” – for registering and sustaining the affordability controls on the affordable ownership units. The municipalities will have to rely on second mortgages, which is a workable but inferior option.

Prohibition on Cash-in-Lieu

The legislation prohibits the use of cash-in-lieu payments. Paying cash-in-lieu allows the developers to buy-out their affordable housing obligation units by paying the cash equivalent for foregone units.

Most of the IZ programs in the US allow for the payment of cash-in-lieu (which they call fees-in-lieu). This experience reveals both the potential pitfalls and benefits of these payments.

There are some legitimate concerns about cash-in-lieu payments:

• They subvert the principal goal of IZ – namely, to provide “inclusionary” affordable units that are mixed within market developments.

• Developers will typically use cash-in-lieu whenever given the opportunity because making a payment is far easier than building the units. So, in programs where developers are given the choice to use this option, they deliver money but relatively few affordable units.

•  The payments are too often set at a rate that does not fully reflect the value of the foregone units. So, the developers also receive this added bonus when not providing the actual units.

But there are also at least three substantial reasons for using cash-in-lieu:

• It provides a valuable source of funding for all sorts of affordable housing not typically provided by IZ. For example, the monies can be used to construct special needs housing, support housing at a deeper affordability, buy affordable ownership units for use as rental housing, and provide rental assistance.

• It provides a way for small development to contribute toward the provision of affordable housing in a reasonable and equitable way. Small developments are often seen as having more difficulty in delivering the actual units than larger developments. So, programs without case-in-lieu typically leave the out. But, in turn, this considerably reduces the amount of affordable housing received because the small developments collectively represent a significant part of total building output.

• It provides a way dealing with the fractions of units that will occur when the obligation is calculated, and especially in developments with a variety of unit types. In the absence of cash]-in-lieu, the numbers are typically rounded down, with an ensuing loss of units.

The best way to deal with cash-in-lieu payments is not to prohibit them, but rather allow them to be used subject to regulations preventing their misuse. The key regulation is to allow them only at the discretion of the municipality, and then only when they demonstrably provide a better public benefit. The latter criterion typically involves requiring the provision of a substantially larger number of affordable units or units at substantially lower affordability. Other regulations also can limit how, when and where the funds can be used, and to ensure the value of the payments is regularly reset at an appropriate level.

Definition of Affordable Housing

The legislation does not include a definition of affordable housing, but instead relies on the definition set out in the PPS. The municipalities will be able to construct their own definitions, but the standards they use must be at or below those in the PPS definition.

The problem is this: the PPS definition uses lax standards, and also contains many other flaws that will make it difficult and maybe impossible to use. (See a fuller critique.)

In IZ programs in the US, affordable housing is recognized as “below-market” housing. This concept is firmly established and widely understood there. And it is fundamental to explaining what the programs are trying to achieve.

“Below-market” housing is essentially housing provided at a price or rent lower than the housing being delivered by the private market. In other words, these programs are directed at providing housing affordable to households not being served by the market. They are not directed at providing more housing for those already being served.

The province has never offered any explanation of how the standards in its definition were determined, nor what they are intended to achieve. In the absence of this explanation, they can only be treated as arbitrary.

In any case, while admittedly limited the available evidence indicates that the standards are too lax. They are unlikely to provide “below-market” as defined in the US. They will allow developers just to build more of the same – albeit at the affordable end of the market. This would seem to undermine the very purpose of these programs.

The PPS definition of affordable housing is also seriously flawed in many ways that will complicate its application. The most notable of these are the following:

•  It relies on income data that is not available in a timely way and appropriate format.

•  It uses multiple and inconsistent standards for income, price and rent.

•  It does not provide a way for matching the income and the price/rent thresholds

All of these aspects and others must be addressed before the PPS definition can be successfully used in IZ programs.

Positive Covenants

The legislation fails to address the legal agreements that should be used when protecting the long-term affordability of affordable ownership units generated by the IZ programs.

The discussion guide associated with the legislation rightly speaks of the need for effective agreements on the owners of the affordable units to protect their affordability. But the wording used here also indicates that the agreements would be between the homeowners and the municipality. If so, this would indicate a misunderstanding of how they might and should be done.

The US experience again offers some important lessons. The affordability controls in that country are set out in restrictive covenants registered on title of each property. Among other things, these covenants set out who would be eligible to buy the units and at what price whenever the units are resold.

These agreements are called “self-administering” or “self-perpetuating” because the lawyers for the buyers and sellers are responsible for ensuring the affordability conditions are met, and also passed on in each succeeding sale. These agreements are not between the owners and the municipality. The municipalities typically are involved only in an oversight or monitoring capacity, and in having final sign-off authority.

Because common law practices have evolved differently in Canada, restrictive covenants cannot be used in the same way here. So at the present time, municipalities are limited mainly to using second mortgages. While these agreements are effective, they represent only a second best solution. Their drawback is that there must be an agency to administer them, and the cost of the service is recovered through the sale proceeds.. While modest, the fee serves to erode the affordability of the units.

Municipalities need to given authority to use similar provisions as those in the US. This can be done through legislation by allowing what might be called “positive covenants”. The legislation should be quite straightforward and noncontroversial. There already is a Canadian precedent for this: BC passed legislation in 1993 enabling the use of “housing agreements”, which are equivalent to these covenants.

The authority to use positive covenants should not be limited to inclusionary zoning. Other programs providing affordable ownership housing should also be given access to these provisions.

Richard Drdla 18 April 2017