After my recent post on inclusionary zoning in Ontario, I was asked to provide my comments on the draft regulation and on how inclusionary zoning could and will impact development feasibility. So I will endeavor to do that today.

It’s important to first understand the costs and inputs that go into a development pro forma and how overall project feasibility is determined. For simplicity, let’s breakdown the costs as follows:

- Land

- Soft Costs

- Financing Costs

- Municipal Fees/Charges

- Hard Costs

All of these costs buckets are significant. For a project to be feasible, you obviously need the revenues of the project to be greater than the above costs. There also needs to be a remaining profit margin that is commensurate with the risk profile of the project and that meets your investor’s return expectations. Most developers rely on outside equity and debt to finance their projects.

One of the misconceptions that I often hear is that people seem to think that the profit margin on projects is so great that developers could simply build affordable housing (or do many other things) if they weren’t so greedy. The reality is that development happens on the margin. It’s not easy to find sites and projects that make any sort of financial sense. More often than not they don’t.

The other reality is that in a growing market all of the above costs are also continually increasing. If revenue (i.e. rents and condo prices) is also growing, as has been the case here in Toronto for many many years, then developers can generally absorb reasonable increases and continue building. But if revenue stops growing, grows at a slower pace or, worse, shrinks, then feasibility could disappear and development would stop.

Now let’s talk specifically about inclusionary zoning. IZ is typically an incentivized or mandated requirement to provide a certain number of below-market housing units as part of new developments. Affordable housing is important. That’s why a number of cities already have inclusionary zoning policies – though it remains a fairly controversial tool.

From a development feasibility standpoint, a mandatory inclusionary zoning requirement represents a decrease in revenue. There’s now a percentage of the units that can no longer be rented or sold at market prices. And so to maintain the project’s feasibility – because remember development happens on the margin – something has got to change.

There are a few options.

Option One: You could simply try and pay less for the land. As we have talked about many times on this blog, land is supposed to be the residual claimant. Work backwards from revenues and your other costs to determine what can be paid for the land. The problem with this option is that land prices tend to be sticky.

Many or most landowners don’t give a shit about your development pro forma. They often have a number in mind and if you try and tell them that development charges just went up and you can’t pay as much for their land, they’ll simply sit on it and wait for someone else – even if that means waiting for the market to catch up (i.e. waiting for rents to go up).

Option Two: Charge more for the remaining market units. If the market is sufficiently robust, perhaps this is an option. This is one of the reasons why inclusionary zoning often produces more units in markets where there’s already strong demand for new housing.

But it’s also one of the reasons why IZ is controversial. You’re asking the other renters/buyers in the project to effectively subsidize the below market units. And there is research out there (previously posted on this blog) suggesting that in some instances IZ policies have created additional upward pressure on market rents and home prices.

Option Three: Incentives are provided by the municipality to offset some or all of the additional burden placed on the project. This could come in the form of a density bonus, financial contribution, a waiving of other municipal charges/fees, and so on.

Though I have questions about the details, this is something that was proposed in Ontario’s draft regulation (albeit not to the extent that the industry wanted). Now you know why I said and why I believe that these offsets are important to the industry and to overall housing affordability.

My hope with this post was to provide the developer’s perspective, but also take a very matter of fact approach to inclusionary zoning. Most people recognize the importance of affordable and accessible housing. The question is how best to execute.

Photo by Toa Heftiba on Unsplash

This afternoon I stood up at the Committee of Adjustment (Etobicoke York) to present the laneway house proposal that Gabriel Fain Architects and I have been working on for the past year and that I have been working on since 2009.

But before I could start I was told that Councillor Palacio had just submitted a last minute letter to the Committee. I was given a few minutes to read it, but the big bold “REFUSE” was probably the only word I needed to read.

I was then asked if I had read planning staff’s report. I acknowledged that I had read it and that I was aware that they were also recommending refusal of the application. I also noted that a number of my immediate neighbors sitting behind me were also opposed to the proposal.

That’s how my presentation started. 

At this point you might be wondering: why bother?

I stood up today because, as most of you already know, laneway housing is something that I feel strongly about. This isn’t just about my individual project. I mean, why do all of this work for one small dwelling unit? For me, this is about city building and trying to affect positive change. (I would also love to live on a laneway.)

I could go on here about how the proposal was shorter than other existing structures on the lane, how the FSI was in check, how we had carefully studied shadows, and how planning staff had already supported greater densities and multiple dwellings on lots of similar size in the area. 

But that’s not what today was really about.

Today I heard loud and clear that whether the proposal was a laneway tiki hut or a 2 storey laneway suite, the community did not want more people living in the area and they most certainly did not want more renters living in the area.

My message to the Committee was that in my humble opinion this is inevitable. Look to Vancouver. Look to Edmonton. Look to many other cities. What we are debating today, or at least what we should be debating today, is what these laneway houses or suites or tiki huts are going to look like.

Right or wrong, our proposal was an attempt to answer that question. We looked carefully at what others had done before us, including our friends at Lanescape and Evergreen, and we proposed something that we believed was sensitive to its context.

We were unsuccessful.

But here’s the silver lining. At the end of it all, and right before a motion was made to refuse the application, one of the committee members said something very impactful. He more or less said: “I agree with you. This is inevitable.”

Sadly today was not that day.

I would like to thank everyone who came out today and everyone who got up to speak in support of laneway housing. It meant a lot to me. Some of you are also readers of this blog and it was great to meet you in person. Thank you.

In 2015, Studiolada Architectes (of Nancy, France) completed a 117 square meter home for a retired couple. On the firm’s website they call the project: Réalisation d'une maison individuelle à Baccarat. 

Here are two photos (1 exterior and 1 interior) via the architects:

Most of the house is finished in wood. It was a modest build costing 174,361 € in total before taxes. The house itself cost 146,506 € and the standalone garage cost 20,245 € (both before taxes). The balance of the costs seem to have gone to exterior landscaping.

If you consider only the house, that works out to be about 1,252 € per square meter or about 115 € per square foot. Speaking of reasonable.

What’s particularly interesting about this project though is that after it was completed the architects published what they call a dossier de synthèse en Open Source (click through to download) – effectively an open source file of all the project’s documents.

Included are all of the plans, assembly details, construction photos, and even the entire construction budget. The ambition was to build an affordable and sustainable house and then make all of the information publicly available so that others might replicate what was done.

I think this is great.

So I’ve decided to publicly commit to doing the same for my proposed laneway house. If and when it gets built, I will document and publish the entire journey – including all development/construction costs – and make it freely available on this blog and probably elsewhere.

I got a bit of flak (on the internet) for calling my laneway house a “prototype” project. But that’s truly what I want it to be for Toronto. Hopefully sharing more, rather than less, information will help it to serve that purpose.