How an effective Inclusionary Zoning policy can increase affordable housing in Toronto

November 5, 2021

The City of Toronto has formulated an Inclusionary Zoning (IZ) policy following two years of extensive research, analysis, and consultations to chip away at its target of creating 40,000 affordable rental homes by 2030, a commitment enshrined in its HousingTO 2020-2030 Action Plan.

This planning tool is a significant addition to the City’s existing menu of initiatives that are designed to increase affordable housing stock – notable examples include financial incentives through the Open Doors Program and utilizing surplus municipal properties for mixed income developments. Inclusionary Zoning is a policy that captures value generated from development activity and sets it aside for affordable housing options to be created, ideally, within the same development. This strategy has the potential of creating 25,000 new affordable units by 2030 across Toronto.

Last week, the Planning and Housing Committee approved a version of an IZ proposal which will be voted on at City Council next week. We hope that Toronto will not only adopt the policy but move forward with a version that is needs based and is consistently strengthened based on robust data as the policy evolves over the coming years.

City of Toronto’s Inclusionary Zoning Proposal

City of Toronto Staff have made innumerable proposals related to extracting more significant contributions from the development industry for affordable housing for over twenty years. Yet, it has only been about ten years since provinces across Canada have started to empower their municipalities to adopt IZ. Toronto appears to be one of the first cities to consider a version that is comprehensive and mandatory.

The City’s current iterations have emerged following provincial passage of amendments to the Planning Act in 2016 which authorized municipalities to use IZ. A regulatory framework was released shortly thereafter laying out key conditions and parameters for municipalities in Ontario to adhere to when considering adoption of the policy.

Regulation 232/18 has afforded some flexibility for municipalities to chart their own path so long as a preliminary needs analysis and financial feasibility study is conducted while planned projects with less than 10 units are exempted. Subsequent provincial amendments in 2019 restricted the application of the policy to the boundaries of transit hubs or “Protected Major Transit Station Areas” (PMTSA).

The City has since conducted its own housing needs analysis along with three rounds of financial impact assessments, the details of which have been the subject of considerable feedback from myriad stakeholders in the housing ecosystem. The studies and engagements inform a policy that consists of design elements that have potential for increasing and sustaining affordable housing supply, while some aspects warrant reconsideration.

IZ as a requirement

The City has proposed that inclusionary zoning will be mandatory in new developments. Various exemptions remain, for example, for those development applications that were received before the policy was introduced. In general, however, evidence from other jurisdictions that have introduced a mandatory approach typically demonstrates greater success in producing affordable housing options compared to voluntary arrangements.

Set aside rates and phase-in

The proportion of units that should be set aside for affordable use varies by dwelling type and the area of the city in which the development will take place. This reflects the need for flexibility and alignment with local context to effectively deliver affordable housing. For example, some of the suburban areas of the city are exempt from the policy because there is not enough projected growth to absorb the costs of IZ. Over time, purpose built rental units have lower set aside rates partly because of greater uncertainty associated with returns on investing in such buildings. Adding stricter conditions may disincentivize construction of this much needed housing option.

Indeed, concerns around shocking the markets on account of the new policy, and in turn restricting supply, have helped shape an approach that slows the phasing in process of the policy and lowers the set aside rates of all property types relative to earlier estimations calculated by the same city commissioned third party organization (NBLC). Remarkably, purpose-built rentals do not face any requirements for the first five years.

In practice, such conclusions are based on two tests. The first calculates whether a certain area’s land value increases by at least 10% after rezoning and the introduction of IZ. Lower rates are assumed to render the policy unviable in that area. This threshold has been applied in all the feasibility analyses (In addition, the profits of developers are also accounted for, at 15%, as part of expected costs of development).

A second test was recently introduced to measure the drop in potential land values after an area is rezoned. It is conceivable that in a rezoned land, projected profits from land price increases might drop dramatically after factoring in IZ costs while still remaining above the 10% threshold. The test posits that a drop of anything beyond 15% could spook the markets, potentially prompting landowners to withhold their assets from sale in anticipation of prices to increase at an undetermined later date.

The rationale for this second test, in particular, is flawed. It adds an additional layer to maximize profits for a group that are already guaranteed windfalls on account of the first threshold. Second, the limits on the drop seeks to create a floor so that speculative behaviour can continue, a practice the policy is supposed to dampen significantly. Thirdly, it would not make sense for landowners to sit on their assets for a prolonged period in anticipation of land increases given that the program is here to stay, permanently. Four years of study, and two years of consultations that IZ is coming has been a clear signal for markets to start adjusting. Plus, earlier versions also gave room for the program to be phased in albeit at a quicker pace. The additional test therefore looks unnecessary and can be removed.

Incentives and alternatives

IZ programs tend to have incentives and alternatives that are meant to help developers manage their costs and effectively deliver. However, only a few seem to work. The City’s limited menu demonstrates its cognizance of such evidence. First, newly zoned areas where IZ is applied will allow for more density. However, no further density bonuses are made available unless developers volunteer to add more affordable units than what is required. This is a fiscally responsible approach that also ensures projects are financially viable.

Second, developers are given some room to construct affordable units off-site so long as the options are made available in the same market area and in a timely manner. Such requirements mitigate the real risks of less lucrative options being constructed later, when affordable housing is desperately needed, and ensures that they are not located in less resourced areas, depriving lower income communities from accessing key amenities and opportunities that are critical requirements for an adequate home. The process for availing of this option is also laid out meticulously in the City’s implementation guidelines.

Definition of affordability

The City has also proposed revising its definition of an affordable IZ unit using two steps. First, the average market rate of a particular unit is compared to whether income groups that fall below the 50th to 60th percentile, depending on the unit size, are paying no more than 30% of their income on shelter. Second, whichever option is the lowest amount determines what is deemed affordable for that unit size. Currently, this means that most unit types are pegged against income, and in turn imply that they are to be made available at below market rates. However, the average market rate metric continues to be adopted for two-bedroom rental units given that the calculated amount is lower than the income-based measure in this case. While this arrangement accounts for market and demographic variations over time and attempts to prioritize lower income earners, households on the lowest end of the income spectrum are likely not able to live in these units unless they receive additional financial supports.

Coverage and cut off

Provincial restrictions on where the City can apply IZ is at odds with an otherwise broad framework that affords considerable flexibility for municipalities to craft its own IZ policy according to its own needs. Indeed, the policy typically works better when applied as widely as possible given that this strategy offers more variety of options and creates mixed income communities across the city.

The City has tried to counter part of these restrictions through barring developers from adding replacement units as part of new proposals. Only new developments are considered to ensure that affordable stock is increased. However, project plans with less than 100 units or with a gross floor area of less than 8000 metres squared are exempt. This is less expansive than earlier proposals developed by the City, limiting the range of housing options for prospective tenants.

Period of affordability

It is required that units built through IZ remain affordable for 99 years, allowing for an arrangement that is effectively permanent. The challenge will be in enforcement, a consideration that appears to have received significant attention. In the proposed arrangement, the City has articulated high level roles and responsibilities along with annual reporting requirements to track and ensure compliance. A process is also in place to enable resale of units by owners during this period while maintaining that they remain affordable. However, there is likely room for more iteration, for example, in more clearly detailing out the function of third-party administrators, actors who are expected to manage much of the affordable units.

Other implementation considerations

The policy stands out in its requirements that prospective residents of affordable units have the same access to amenities and other dwelling services, and that the quality of the unit be the same as their market counterpart. Such provisions ensure affordable housing is accessible and livable. In addition, it also accounts for demographic variations, such as family needs, through requiring that there are sufficient multi-bedroom options available at affordable rates for projects that have a significant number of units with more than one-bedroom.

The selection process of tenants or owners consists of clear allocation of roles and responsibilities to minimize any uncertainties. In addition, it appropriately leverages City resources to administer the process and is reasonably inclusive which is demonstrated in eligibility criteria that includes citizens, permanent residents, and temporary residents who have applied for permanent residents.

Moving Forward

The City’s policy has many important ingredients to increase the supply of affordable housing options for those living on low to moderate incomes. In addition, through extending the period of affordability into perpetuity, this policy can ensure that prospective residents are afforded a much needed degree of tenure security.

But there is room for this policy to evolve beyond its current form to become more effective and inclusive. It is still unclear how many affordable units the policy can truly create. Data gaps need to be filled to form clearer conclusions about the variety of housing options that can be created, whether the threshold for where IZ can be applicable can be lowered, and whether a larger portion of units within a building can feasibly be set aside for affordable use. In particular, assumptions around how the market will react need to be revisited keeping in mind that the policy ought to reduce some speculative behaviour.

The policy also creates innumerable new opportunities for collaboration with civil society and non-profit housing providers, many of whom will likely be tasked with administering the affordable units. It will be imperative to create platforms for such entities to engage consistently and share lessons learned from their day-to-day management experiences. Plus, there will likely be a role for the province to reconsider its current restrictions as the program evolves.

Inclusionary Zoning alone cannot create enough affordable housing options for the growing housing needs of Torontonians. Indeed, it is not feasible to rely exclusively on extracting value from private development to create deeply affordable homes. A major reason for the housing crisis in Toronto is due to federal and provincial governments retreating from their traditional obligations to support the creation of affordable housing, such as social housing options for lower income households.

While the federal government stepped up its commitments through its National Housing Strategy, there has been limited focus on increasing deeply affordable housing options and maintaining social housing. Plus, there is room for greater intergovernmental collaboration, for example, through ensuring provinces cost-match funds made available through federal initiatives. In addition, local level barriers to development, such as NIMBYISM and rickety approvals processes also warrant attention. Such issues must be considered alongside policies such as IZ to deliver on a comprehensive approach to addressing Toronto’s affordable housing crisis.

Get the latest updates about the right to housing in Canada