Somebody on Twitter responded to my recent post about inclusionary zoning and asked: Aren't all the upzonings that the City is already doing a kind of density bonus? In other words, and this is me elaborating here, why is there an economic "shortfall?" Why does there need to be any other sort of subsidy in order to mitigate the economic impacts of inclusionary zoning?

A density bonus can mean and can be used in a number of different contexts. Sometimes it is used as an incentive with landowners, whereby they get a bonus on top of their sale price if the developer manages to achieve a certain amount of density on the site. But in this particular case -- IZ subsidies -- we're talking about something else.

We're talking about density above and beyond what you might normally achieve on a particular site in order to directly offset -- maybe partially or maybe entirely -- the economic shortfall brought about by inclusionary zoning. The fact that upzonings are happening all over the city doesn't necessarily qualify them as bonuses. In the case of Toronto, the market is just responding to out-of-date zoning.

Here's a specific example.

Let's say you have a development site with in-place zoning that would allow you to build 20,000 sf of density. This is the as-of-right or by-right density. No need to rezone the site. Just file your building permits and you're off making things. If this is the most you could build, then the market would value the land based on this density. As we have talked about before, land is the residual claimant in a development pro forma.

However, if the zoning was out of date and it was fairly clear that one could rezone the site and build up to 100,000 sf, then the market would no longer value the site based on its in-place zoning. It would instead value it based on its future expected density. Again, because land is the residual claimant, more density = higher land value.

In this second scenario, the additional 80,000 sf is, in my view, not a density bonus. Give or take a bit here and there, it is the density that everyone is generally expecting. The market has already priced it in. A true bonus / subsidy, would be something above and beyond the base of 100,000 sf. Something that is only available to developers if they do X -- which could be build affordable housing.

Maybe the bonus is perfectly tuned to exactly offset the economic drag of doing X, or maybe the bonus is designed to serve as an incentive to do X. In this latter case, the bonus would more than offset the drag and be accretive to the pro forma, which would mean that every sensible developer would now want to do X. More carrot, less stick.

One of the challenges with this hypothetical scenario is that, for such a bonus structure to work, you need to know the baseline that you're bonusing against and you need to ensure that nobody gets the bonus unless they do the thing -- the X. Using the above example, that means that the 100,000 sf needs to be fairly firm and that anything above that number only happens with the delivery of affordable housing.

Vitalik Buterin -- who is best known as the cofounder of Ethereum -- recently penned this post on his blog where he argues that "crypto cities broadly are an idea whose time has come." (Credit to Shamez Virani for sending the post to me this morning.) There has been a lot of discussion over the years about the rise of smart cities. I for one am not really sure what that means besides the fact that it sounds good and it likely involves a bunch of tech and data collection. But maybe crypto can help.

What Vitalik argues in his post is that we are now at a point in time where blockchain technologies have the opportunity to do two things for cities. One, we can take existing systems and processes and use blockchains to make them more "trusted, transparent, and verifiable." That would be a very good thing. But the more interesting one is number two. We have the opportunity to use blockchains to create radically new forms of asset ownership (land and other scarce assets) and municipal governance.

One specific example is that of a "city coin", which cities like Miami are already experimenting with. Supposedly they are one of the first, which of course aligns with Mayor Suarez's vision to position Miami as a preeminent tech and crypto hub. Though as Vitalik points out in his post, it's important to maintain some optionality, especially since we are still very much in the early innings of this new frontier. (This recent episode on the Tim Ferriss Show had a great analogy in saying that the anthem at the beginning of the game isn't even over yet.)

So how might a "city coin" living on a blockchain work?

Well let's imagine that there are incentives in place for all of us who live in Toronto to own the Toronto coin (there's still time to come up with a better name). You need it to pay your property taxes, you need it to pay for parking, and you need it to vote in the next election, among many other things. So there's an incentive to buy and hold it if you're a resident of this great city, but there is far less incentive to hold it if you don't live here. (Maybe you own a bit of it because you're a frequent visitor and/or your relatives live here.)

One of the interesting things about something like this is that it would immediately create economic alignment. Now all of a sudden, everyone who lives in Toronto and owns Toronto coin would have a vested interest in seeing Toronto thrive. At the very least they would want to see the coin hold its value and ideally they would hope to see it appreciate.

At the same time, the Toronto coin could be used for all sorts of governance matters. Take for example, land use and zoning decisions. What if we set things up such that these decisions weren't made by the people who show up to community meetings in the basement of their local church but that they were instead made by everyone who holds the Toronto coin? i.e. The entire city, all of whom are, in a way, equity holders.

In theory we could do this kind of voting today. However, part of the problem is that the economic alignment isn't there without something like a Toronto coin. Right now a big part of the economic incentive rests with homeownership. If I own a home and a new development is proposed next to me, I am incentivized to do whatever it takes to selfishly maximize my own individual outcomes. And if that means no development and no more homes for people, then so be it.

But what if we all had part of our net worth tied up in the Toronto coin? And what if when housing supply did not meet housing demand, the value of our coins dropped because it meant fewer residents (less demand for Toronto coin) and more people voting with their feet and moving to other geographies (more demand for some other coin)? This is one of the things about the crypto space. It turns everyone into evangelists because there are now strong economic incentives to be that way.

Who knows if this is the way that things will actually play out. But it is part of the promise of crypto and it is not some pipe dream. It is already starting to take hold around the world and in the US in places like Wyoming and Colorado. For more on this topic, make sure to check out Vitalik's full blog post.

There was a good discussion on Twitter this morning about small-scale commercial uses in residential neighborhoods, like the coffee shop shown above on Shaw Street. In most residential neighborhoods in Toronto, this kind of commercial activity is not permitted if you were to try and initiate it today. The small convenience stores and bodegas that remain are often legal non-conforming uses. And while generally considered desirable in their current confirm, if you were to try and make a change, you could get caught in some municipal red tape where your grandfathered status suddenly no longer applies.

That is exactly what happened in the case of the above coffee shop and, from the discussions that happened on Twitter this morning, it is a problem that is not unique to Toronto. Alex Bozikovic wrote about this coffee shop and this project in the Globe and Mail over seven years ago. Getting it approved and built was no easy task. And my friend Jeremiah Shamess -- who renovated a similar and formerly commercial corner building in the area -- ran into the exact same challenges.

But let's consider the other side of this argument for a minute. It's easy to look at a great and well-designed neighborhood coffee shop like this one and say to yourself that it is obviously a desirable use and that we should be encouraging more of them in our residential neighborhoods. But what if it was a noisy late-night bar, a nail salon, or a massage parlor? Would your opinion change? Would it change if you were an immediate neighbor? It is perhaps easy to see why the fear of the things we don't want has led us to sterilize our neighborhoods to the point where we no longer allow the things that we may in fact want.

And herein lies the immense frustration that many of us have with our land use policies. There are countless examples of obviously desirable uses and built forms that are exceedingly difficult to execute on because of the barriers that we ourselves have put in place. Whether it's a cool neighborhood coffee shop or new affordable housing, there are far too many examples of these sorts of projects being stuck in some kind of planning ether -- sometimes for decades. We say and know that we want these things, but then it is frequently the case that we can't get out of the way so that they can actually happen.