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 In the case of Toronto, the market is just responding to out-of-date zoning.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However, if the zoning was out of date and it was fairly clear that one could rezone the site and build up to 100,000 sf, then the market would no longer value the site based on its in-place zoning.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.