On September 8, 2016, ULI and Urban Strategies Inc. hosted an invited group of industry experts for a round-table discussion on Inclusionary Zoning (IZ). Participants included developers, academics, the non-profit housing sector, municipal council and staff, and provincial staff. Dr. Michael Wilkerson, project director at ECONorthwest and author of the recent ULI report The Economics of Inclusionary Development, presented his study of the American experience with IZ and discussed how that might apply in the Ontario context. With greater insight into the impacts of the economic levers of this policy tool provided by Dr. Wilkerson, participants engaged in a thoughtful and probing discussion as to how to make such a policy work in the Ontario context.  While the Province’s commenting period has closed, the main themes of that conversation are summarized here to continue to contribute to the ongoing exploration of IZ in Ontario.

Michael Wilkerson’s presentation
Dr. Wilkerson gave an overview of his ULI report, which is available online, and provides a detailed analysis of the American implementation of IZ policies. The main points, particularly as they relate to the Ontario context, are summarized here.

• Not surprising to any in the room, inclusionary zoning only works in strong real estate development markets – without sustained development the market will not deliver a meaningful number of affordable units. While this is currently the case in Toronto and much of the GTA, it is not the case in all markets in Ontario.
• Inclusionary zoning policies typically dictate the number of affordable units and how affordable they should be (the effective depth of the subsidy). Comparing IZ policies across jurisdictions is made simpler in the American context as they all use a standard measure of affordability. IZ policies will identify that the set-aside units should be affordable for families with an income at a certain percent of the area median income (AMI), which is a federally generated metric. This is not a perfect measurement of housing affordability, as it doesn’t take into account the price of other expenses or fluctuations in interest rate, but it is generated for every jurisdiction in the US by the federal government and therefore is known, available and comparable. In Canada however, we have no standardized definition of affordability, nor standard data for determining affordable pricing in any area.
• Both housing providers and renters in the US have access to a wide range of affordable housing subsidies, which can be coupled with IZ policies to enhance the system. In Ontario these are generally limited to public sector housing providers and provincial welfare programs.
• The development community is sensitive to the combination of the number of set-aside units and the depth of affordability as both have the potential to increase costs. However, for any given land cost budget in the developer’s proforma, there are combinations to which the developer is indifferent. For example, a combination of a low number of set-aside units offered at very low percent of AMI may have the same impact as a higher set-aside with a higher income target. These “indifference curves” are unique to any given project based on market rents and land values.
• Many US municipalities also have access to a greater range of incentives (carrots) to off-set the affordable unit requirements (sticks), than do Ontario municipalities. IZ seems to be successful when the carrots and sticks are well matched. This typically means that there is little impact to the developability of the remaining market units. American municipalities often offer parking reductions, tax abatements, fee waivers, direct construction subsidies, among others. Most jurisdictions couple those incentives with increased density as zoning codes are typically fixed, so the bonus is real. This clearly differs to the Ontario system where density bonusing is already used for other community benefit and where zoning changes are a regular occurrence. In some municipalities it may be difficult to identify the bonus associated with IZ, as opposed to what might bring the development in line with current policies.
• Finally, Dr. Wilkerson’s report analyzed rental market delivery of IZ because most US jurisdictions with strong development markets are primarily building market rental. IZ units in a market where ownership is the predominant tenure – and condo ownership at that – is much more complicated to administer, and there is little data from which to draw firm conclusions.

Key Discussion Points Regarding the Ontario context
Dr. Wilkerson’s presentation provided a launch-pad for further discussion between the various participants representing the spectrum of players in the IZ debate. The following are the highlights of that discussion.

Matching Carrots and Sticks
Attendees agreed that there is a strong need to ensure that incentives are properly aligned with IZ policies. Incentives are crucial in allowing developers to offer affordable units within their projects, without needing to increase pricing for market units, or risk dramatic changes to land values, which may in turn upset the strong market.

Discussion explored not only what incentives could be offered but who would provide them: in addition to the fee reductions, reduced parking requirements, or density bonuses that could be offered by municipalities, attendees suggested there is also room for the province to contribute so the burden is shared between governments and the private sector.

Beyond balancing developer’s revenues and expenses, incentives can be a way that governments ensure that growth happens in line with policy objectives. For example, if IZ policies also reduce parking ratios when in proximity to transit, developers are more likely to create TOD communities (called for in Places to Grow and the Big Move) while reducing construction costs related to parking.

Management is vital
Given the generic nature of the proposed policies and the lack of clarity around how these IZ policies will be implemented in Ontario, many questions around the management of the process and resulting policies were raised. All participants agreed that despite popular myth, IZ is NOT a way to deliver affordable housing at no cost to the government. Regardless of whether or not incentives are negotiated between the public and private sector for the development of IZ units, there will be a necessary cost to managing their delivery.  Who will bear the necessary cost and effort of administration (measuring the market to determine affordability, determining eligibility of renters and purchasers, monitoring on-going affordability clauses upon resale, etc.)? The Province?  Municipalities? Will it be directly added to DCs? In some jurisdictions, the management is outsourced to the non-profit sector, but how will they in turn pay for the additional time and effort?

Beyond the “simple” issue of the carrots and the sticks, these administrative details were of great interest to all participants, particularly as they may apply to ownership units secured through IZ.  If units are meant to remain affordable, how will resales be managed? Will individual real estate agents be tasked with checking title and setting prices? Will there be a registry of units administered by the municipality or an agency? Or will units be clustered to function as a co-op model tasked with ensuring their units stay affordable?

It All Comes Down to the Regulations
Attendees were very interested in the “indifference curves” presented. This led to a discussion of how the provincial regulations will be drafted. The development community expressed interest in ensuring the regulations included limits on amount of units that could be required, and the depth of the affordability, in part to ensure IZ policies are not used to purposely deter development. On the other hand, municipal representatives were interested in retaining flexibility to set the requirements in response to local markets and sub-markets. In light of the sensitivity to the proforma variables examples presented by Dr. Wilkerson, there was suggestion that policy should not be set in the absence of local market data and studies.

Final Thoughts
In short, there is a need for policies that are flexible, but exist within larger parameters to allow for situational externalities while still remaining generally feasible. Further, a strong potential exists now to complete the analysis necessary before implementing IZ policies to ensure that better policies are introduced from the start.

While many, many more questions were raised than answers were available, many in the room were hopeful that the right questions were being asked at an appropriate time to help guide policy makers towards eventually landing on the correct answers.