Last week, we spoke about one of Toronto's failures when it comes to new "missing middle" housing, namely our inability to look forward to the Toronto of tomorrow, as opposed to only thinking about the Toronto of today. But let's not forget that there are greater biases at play here influencing these outcomes.

Beneath our concerns about not enough parking (how dare you wage a war on the car?) and congruency with neighbourhood character is a deeply rooted aversion toward higher-density apartment living; one that is arguably most prevalent in the English-speaking world.

Consider Toronto's response to the handsome Spadina Gardens apartment building at the start of the 20th century. We were certain that only people of questionable moral fibre would ever want to live in a four-storey apartment block!

Since then, we've become far more open-minded, but survey people in the Anglosphere about whether they'd like to live in an elegant Parisian block, and you'll often discover a stark preference for detached housing. In contrast, survey people on the European continent, or in Asia, and you'll often see different preferences.

Combine these preferences with the common law system prevalent throughout English-speaking countries — where individuals can more easily object to and block projects if, you know, the "vibe" is off — and the broad result is very different housing outcomes. There's data to suggest that civil law countries tend to build more housing.

Last week, we spoke about one of Toronto's failures when it comes to new "missing middle" housing, namely our inability to look forward to the Toronto of tomorrow, as opposed to only thinking about the Toronto of today. But let's not forget that there are greater biases at play here influencing these outcomes.

Beneath our concerns about not enough parking (how dare you wage a war on the car?) and congruency with neighbourhood character is a deeply rooted aversion toward higher-density apartment living; one that is arguably most prevalent in the English-speaking world.

Consider Toronto's response to the handsome Spadina Gardens apartment building at the start of the 20th century. We were certain that only people of questionable moral fibre would ever want to live in a four-storey apartment block!

Since then, we've become far more open-minded, but survey people in the Anglosphere about whether they'd like to live in an elegant Parisian block, and you'll often discover a stark preference for detached housing. In contrast, survey people on the European continent, or in Asia, and you'll often see different preferences.

Combine these preferences with the common law system prevalent throughout English-speaking countries — where individuals can more easily object to and block projects if, you know, the "vibe" is off — and the broad result is very different housing outcomes. There's data to suggest that civil law countries tend to build more housing.

It's fun to examine projects that I could never underwrite or build in Toronto. Here's another one from Tokyo — a 10-storey, single-stair apartment building on a busy street, next to a metro station.

It's fun to examine projects that I could never underwrite or build in Toronto. Here's another one from Tokyo — a 10-storey, single-stair apartment building on a busy street, next to a metro station.

Customarily, landlords induce tenants to lease space in a building by offering X months of free rent, as opposed to discounting the actual face rent.

For example, let's assume that the rent for a particular apartment is $3,000 per month or $36,000 per year. Assuming the inducement is equal to one month of free rent, the two logical options are: (1) offer the first month for free and then charge $3,000 for the remaining 11 months or (2) charge $2,750 per month.

Both options equal $33,000 in gross annual rent, but the second option permanently impairs the value of the real estate asset by lowering the overall rent roll on a go-forward basis. So when you capitalize the net operating income of the property, you end up with a lower value. For this reason, option one is the standard approach. You want to offer as much free rent as possible before touching your face rents.

But there can also be local nuances to consider on top of this standard practice. For example, I found this recent tweet from Paul, a multi-family landlord in Los Angeles, interesting. He notes that in rent-controlled buildings in Santa Monica, you also have to be careful not to offer free rent in the first 12 months of a lease. Instead, you need to offer it starting in month 13 or beyond.

His example:

• Lease rate of $3,000

• Inducement equal to 2 months of free rent ($6,000)

• Tenant pays 10 months x $3,000 = $30,000 in Year 1

Apparently, the way Santa Monica looks at this is that the tenant is paying $30,000 / 12 months = $2,500 per month in rent. So, after year one this becomes the Maximum Allowable Rent (MAR) going forward under the city's rent control policies. In other words, the monthly rent becomes the $2,500 number and not the $3,000 number that you thought you had contracted for.

It's an annoying gotcha detail, but it's a meaningful and permanent one until the apartment turns over. Landlord beware. Real estate may be subject to the flows of global capital, but in many ways, it still remains a local business.

Customarily, landlords induce tenants to lease space in a building by offering X months of free rent, as opposed to discounting the actual face rent.

For example, let's assume that the rent for a particular apartment is $3,000 per month or $36,000 per year. Assuming the inducement is equal to one month of free rent, the two logical options are: (1) offer the first month for free and then charge $3,000 for the remaining 11 months or (2) charge $2,750 per month.

Both options equal $33,000 in gross annual rent, but the second option permanently impairs the value of the real estate asset by lowering the overall rent roll on a go-forward basis. So when you capitalize the net operating income of the property, you end up with a lower value. For this reason, option one is the standard approach. You want to offer as much free rent as possible before touching your face rents.

But there can also be local nuances to consider on top of this standard practice. For example, I found this recent tweet from Paul, a multi-family landlord in Los Angeles, interesting. He notes that in rent-controlled buildings in Santa Monica, you also have to be careful not to offer free rent in the first 12 months of a lease. Instead, you need to offer it starting in month 13 or beyond.

His example:

• Lease rate of $3,000

• Inducement equal to 2 months of free rent ($6,000)

• Tenant pays 10 months x $3,000 = $30,000 in Year 1

Apparently, the way Santa Monica looks at this is that the tenant is paying $30,000 / 12 months = $2,500 per month in rent. So, after year one this becomes the Maximum Allowable Rent (MAR) going forward under the city's rent control policies. In other words, the monthly rent becomes the $2,500 number and not the $3,000 number that you thought you had contracted for.

It's an annoying gotcha detail, but it's a meaningful and permanent one until the apartment turns over. Landlord beware. Real estate may be subject to the flows of global capital, but in many ways, it still remains a local business.