By Richard Drdla, Richard Drdla Associates, Toronto, Canada. Earlier this year Richard, an expert on planning for affordable housing in North America, wrote us a guest blog post about the Greater Sydney Commission’s affordable rental housing targets. This post discusses the latest developments regarding inclusionary zoning in Ontario, Canada. Richard is a guest speaker at the 2018 Affordable Housing Conference held this week in Sydney. 

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Ontario’s legislation authorizing the use of inclusionary zoning (IZ), the Promoting Affordable Housing Act, 2016, was passed in December 2016.  The implementation of this legislation was subject to regulations from the Minister of Housing.  The first draft of those regulations was released for public review on December 2017.  The final regulations were released in April 2018, at which time they and the legislation came into effect.

Ontario’s regulatory framework represents a singular achievement.  It is the first time that a province or state has authorized  the use of IZ, while also prescribing how IZ might be used by its constituent municipalities.  There is no precedent for this in the US.  IZ programs there have been developed and operated by municipalities without sanction and direction coming from the states.  (The only exception to this is New Jersey, where the state supreme court – and not the state itself – set out the fundamental rules for the use of IZ.)

In developing this regulatory framework, as will be seen, the province struggled principally with how to reconcile two fundamental concerns:  enabling the municipalities to establish productive programs, while also maintaining the continued health of the development industry.  It is too early to know if it has succeeded.

Legislation

In general, the legislation takes a permissive approach.  It enables municipalities to adopt IZ programs, while not requiring them to do so nor limiting how they can do it.

Despite generally taking this approach, the legislation does contain one notable restriction.  It prohibits  the use of cash-in-lieu payments that would have allowed the developers to buy-out their affordable housing obligation.  While there are legitimate concerns about the use of cash-in-lieu, these could have been addressed through appropriate regulations without making an outright legislative prohibition.

Draft Regulations

In contrast with the legislation, the draft regulations were highly prescriptive, setting out province-wide rules that left little latitude for the municipalities to experiment and respond to local conditions.

The regulations included a number of restrictions that when taken together would have stifled the production of affordable housing.  First of all,  IZ could not be applied to developments of less than 20 units, nor to any rental developments.  Also, the maximum set-aside was limited to 5%, except in “high-density transit-station” areas where the limit was 10%.  All of these regulations are more restrictive than the well-tested best practices being used widely in the US.

On top of these, the regulations introduced another unprecedented and particularly crippling provision.  The municipalities would have been required to provide financial “contributions” (that is, compensation to the developers) amounting to 40% of the price reduction for the affordable units. (This figure changed over time.  For some time before the regulations were released, the developers had been seeking a 50% municipal contribution.  After the release of these regulations and the ensuing backlash, a 20% obligation was briefly floated by the government.)

This municipal contribution had to be made through waivers to parking requirements and to certain fees (planning application fees, parkland fees and development  charges) already being collected from the developers.  The use of density increases was ruled out by the regulations.  Direct financial subsidies were not required or expected, but remained moot.

The problem with this approach was that the prescribed municipal contributions effectively set the price reduction that could have been achieved, and that price reduction (even with just the 20% contribution) would not have been sufficient to provide affordable housing in the more upmarket developments.  Furthermore, achieving even this insufficient price reduction would have depended upon the municipalities fully reallocating monies already being collected for other municipal services and infrastructure improvements.

The regulations did allow the municipalities escape from this obligation when they used the  “community planning permit” system.  This is a form of comprehensive pre-zoning that allows the municipalities after planning, financial testing and public consultations to set affordable housing requirements, density limits and other conditions in specific areas.  But this process is more appropriate for use in small areas rather than across an entire jurisdiction.  As such, it is better used as a supplement to a full IZ program rather than as a substitute for it.

Before adopting IZ, the municipalities would have been required to prepare a “municipal assessment report”  analysing their housing needs and supply, and overall housing affordability.  The intent was to establish a factual foundation and justification for the programs.  It was not meant as a means of testing the viability of the regulations nor assessing their impact on development.

Pushback

What stands out most in the draft regulations is that they would have been so protective of the development industry. The government had clearly taken note of the developer’s argument that they needed provincial safeguards against the potentially unreasonable demands of the municipalities. This is seen in the restrictive regulations as well as the compensation requirements.

The government had spoken often about finding a “balance” between providing affordable housing and ensuring that development continued, but these regulations manifestly were not that.

The regulations prompted a strong pushback from the affordable housing advocates and the municipalities including particularly the City of Toronto. The Minister was caught flat-footed by the pushback, and had to scramble to re-think the regulations ahead of an impending provincial election.  This led to a remarkable turnaround in a very short period of time.

The pushback was founded principally on three arguments.  The first was that these regulations would have led to the production of very little affordable housing.  The second was that the municipalities were not capable of providing significant compensation, and in any case the need for that compensation was questionable.   Finally, the government should not attempt to impose one-size-fits-all rules across a province that has widely diverse housing conditions.

All of these concerns were addressed to some extent in the final regulations, but it is probably the last that led to the most significant changes.

Final Regulations

In sharp contrast to the earlier regulations, the final regulations give the municipalities an almost free hand in setting the rules and obligations in their IZ policies.  They contain only one notable limitation (and that one is less restrictive than the draft provision).  Under the final regulations, IZ cannot be applied to developments with fewer than 10 (previously 20) units.

But the final regulations also add a new and very significant condition:  before those policies are adopted, they must be analysed for their “potential impacts on the housing market and on the financial viability of development”.

What this analysis will entail remains unclear.  The government has offered no guidance, nor in the  pre-election scramble has it even given much thought to what might be required.   While the regulations do indicate that some form of financial testing will be needed, they notably do not establish what criteria must be used.  Most crucially, they do not say whether or not the  municipalities will be responsible for maintaining the profit margins of the developers or for providing compensation making them “whole” again.

Overview

The regulations were fundamentally changed between the draft and final versions.  They went from being very prescriptive to very permissive.  With regard to compensation, they also went from explicitly applying a province-wide standard formula to potentially using a locally-based viability test.

The final regulations longer refer directly to municipal compensation, but this contentious issue is still very much alive.  Whether or not compensation will be necessary, and if so how much, will be the most difficult matter to be addressed in the viability testing.

The new provisions can be seen as  a brilliant political maneuver.  They kicked this contentious issue down the road and past the upcoming election.  By leaving the issue unresolved, both sides – the developers on one and the housing advocates and municipalities on the other – for the moment have reason to be optimistic.

All in all, the final regulations represent a significant improvement and positive development in comparison with the draft regulations.   But there remains the concern that the viability tests will lead to unnecessary and impairing demands being placed upon the  municipalities, and this in turn could force the municipalities to trim their programs.