Brandon Donnelly

Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.

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Tag: zoning

  • Displacement and gentrification

    Let’s consider a scenario where we have a relatively affordable 20-unit apartment building in a rapidly growing global city. This particular building happens to be of an older vintage and so let’s say that the in-place rents are about 40% below market.

    Next let’s assume that the zoning has just been updated for the land and it is now possible and economically feasible to build a total of 300 housing units in a new high-rise building. This would mean demolishing the existing 20 apartment units.

    But because this global city has rental replacement policies in place, these 20 units would need to be rebuilt within the new high-rise and offered to the current residents at exactly the same rents. So same price, but new housing.

    Compensation would also need to be provided to these residents to cover the cost of moving around. Because they would obviously need to move off site to allow for construction and then, if they’d like, move back once construction is complete.

    How would such a scenario make you feel?

    The typical objections usually involve, among other things, concerns around displacement, gentrification, and overall built form. There is a concern that investments of this magnitude might push people out of the area and also change the character of it.

    But at the end of the day, these 20 existing homes are not disappearing from the market. They will remain part of the housing stock, but now with the addition of 280 new market rate homes.

    I think it’s important to remember that in a rapidly growing city, trying to maintain the status quo by limiting new development can actually have the opposite effect. Because what you end up doing is creating a scenario where more and more people are fighting for a relatively fixed supply homes. And that is certainly one way to encourage displacement and gentrification.

  • Density bonus as inclusionary zoning offset

    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.

  • The inclusionary zoning shortfall

    Colliers recently hosted a webinar about inclusionary zoning here in Toronto. On the panel was Jeremiah Shamess (SVP at Colliers / moderator), David Bronskill (partner at Goodmans), Giulio Cescato (senior planner at IBI Group), and Richard Witt (principal at BDP Quadrangle). I wasn’t able to attend (either because of a critical meeting or because I was off attending to a gluttonous lunch burrito), but the slides are now available online. I was going through them this morning and I came across this chart from NBLC:

    What you are seeing here is a comparison between a typical market development before IZ and a development after IZ. As you can see, soft costs remain the same, hard costs remain the same, and the profit margin remains the same. What changes is the overall revenue. Market revenue goes down because you now have fewer market-rate units and a new IZ revenue is added, which is the revenue generated from the addition of affordable units to the project.

    But when you add up the market revenue and the IZ revenue, you don’t get back to the same economic equilibrium. In other words, there has been a destruction of value, and so something is going to have to give in order for this project to pencil and remain financeable. Otherwise, no development will take place. This shortfall is the red box area in the above graph that says, “impact of inclusionary zoning.”

    We have discussed this red box gap a lot on the blog, because how you think this gap gets filled might determine how you think of inclusionary zoning as a policy tool. In this particular instance/graph, the gap is filled by a reduction in the value of the land. Everything else remains static. So what is effectively happening in this model is that the landowner, who has decided to sell their land to the above developer, is now the one who has to indirectly pay for this new affordable housing.

    This may seem like a sensible way to go about it. I mean, people who own land must be rich. Let’s make them pay. But is this actually what is going to happen in practice and over extended periods of time? Soft costs — things like development charges — are always going up. Why aren’t land values perpetually declining in order to offset these additional costs? It is largely because market revenues have also been increasing. Housing keeps getting more expensive. And that is what has been keeping the market going.

    I suspect that over an extended period of time, the same thing will happen here.

  • Informal settlements are the desire lines of housing

    Toronto’s new garden suite (accessory dwelling unit) policies are headed to Planning and Housing Committee this week for approval. If you’d like to leave a supportive comment, you can do that over here by clicking “submit comments” at the top of the page. I just finished doing exactly that.

    Given that this is happening, I figured I would share this related article from the New York Times talking about ADUs and informal housing in Los Angeles. I discovered it through this Strong Towns article by Jay Strange. And I love how he refers to informal structures as the “desire paths” of housing.

    Desire paths, for those of you who may be unfamiliar, are the naturally formed paths and lines that get created when people just walk where they want to walk. Usually these are the shortest and/or most logical routes and, by definition, they don’t align with any designed paths or walkways.

    Jay’s point with informal housing is that it is similarly what people actually want to do, but maybe can’t, usually because of restrictive zoning and/or building codes.

    The New York Times gives the example of a family that illegally built an accessory dwelling unit at the back of their house in the 1990s. It was rented to friends and family, and it helped them get through some difficult financial times. But again, it wasn’t lawful.

    According to some researchers at UCLA, Los Angeles County is estimated to have some 200,000 informal units. Many are forced into demolition, but many, like the above example, manage to sneak under the radar because lots of other people are building them and nobody in the community wants to disrupt things.

    Of course, Los Angeles now allows backyard cottages. And so what was once illegal is now not only permitted, but encouraged. Funny, isn’t it? I don’t know if it was the “desire housing” that ultimately made it happen. But it is clear that many people wanted it and they were voting with their actions.

  • Toronto has issued nearly 200 building permits for laneway suites — is that enough?

    We talk a lot on this blog about laneway housing and ADUs, including, of course, the one that Globizen built earlier this year. But beyond being exceedingly cool (see above), what has this policy change meant at the macro level? To what extent is it actually helping housing supply? Let’s consider Toronto.

    As a reminder, “laneway suites” became permissible in the former/old City of Toronto in 2018. The policies where then expanded to the entire city of Toronto in the summer of 2019. So we’ve had just over 2 years of this housing type being fully allowed city-wide.

    Though it’s worth keeping in mind that there are only so many laneways in Toronto (which is why “garden suites” are going to be important and may actually end up being more impactful):

    Between the introduction of laneway suites and June 2021, the City of Toronto received 306 permit applications to construct, of which 238 were associated with a unique address (the same address can have multiple permit applications).

    During this same time period, 183 permits were issued. 107 were still under review at the time this report was written. 15 were refused. And 1 was classified as “unknown”, which I guess means it got lost in the ether or under someone’s desk.

    Some of you will probably argue that this isn’t enough new housing for a city of 3 million people with high home prices, high demand, and high immigration. And I would agree.

    But it’s still early days, there will be an adoption curve, and the policies are still being tweaked to further remove some of the barriers associated with delivering this housing type. Of the 238 unique addresses that submitted a permit application, just over a quarter of them had an associated minor variance application, which means that they did not fully conform to the current laneway suite by-law.

    The most common obstacles appear to be the 1.5m laneway setback, the soft landscaping requirements, and the required fire access. But I know that there are others too. I could have used another foot or two in height on mine.

    But as I mentioned before, there are more areas in this city without laneways than with. And so garden suites are going to be an integral component of city-wide ADUs. This will certainly help the adoption curve.

    I continue to believe that these are all steps in the right direction and that this is an exciting time for Toronto. We are in the midst of transforming our laneways. But we’re not done yet. We’re going to have to make many other tough decisions in order to further increase housing supply. I’m positive we’ll get there.

  • The real smart city is going to be a crypto city

    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.

  • Pretextual planning

    Strong Towns recently published an interesting set of articles talking about something they refer to as “pretextual planning.” Articles here and here. What they mean by this is that sometimes we create planning rules not necessarily because we think they are the right thing to do, but because they serve as good bargaining chips when dealing with developers and builders. For example, let’s not eliminate parking minimums but instead concede on it during the entitlement process. This, the articles argue, is not good practice. And I would of course agree with that.

    But here is another very valid point that is made: when you make building so painfully complicated you end up creating a whole bunch of negative externalities. Not only does the cost of housing and building go up, but you also 1) make it more difficult for smaller builders to participate in the market and 2) you end up increasing the minimum size of new developments. And that is because as projects get more complicated and expensive, you end up needing larger and larger projects to amortize / justify the development expenses.

    It’s really too bad.

  • Rich people and single-family zoning

    This is a chart from Abundant Housing LA (a YIMBY group), via City Observatory, showing the relationship between median household income and single-family zoning across the 88 cities that make up L.A. County. On average, about 80% of the land in the County is zoned for single-family housing. This is also true for Los Angeles, which is not surprisingly its biggest city. What is pretty clear from this chart is that the richest areas tend to have a higher percentage of single-family homes. If you read Anthony Dedousis’ post, you’ll also see that the housing tends to be more expensive (makes sense) and that the homeownership rates are higher in these single-family areas. One obvious takeaway is that it shows you how clearly we are dividing our cities. Zoning is regulation. And here we are seeing some of the socioeconomic implications. But I’m curious if this relationship would be as strong in other cities around the world and at different scales (i.e. neighborhood levels). When it’s made available (not all cities have this much space), how universal is this pull toward single-family housing?

  • The climate idol of the unimaginative

    Here’s some food for thought around electrical vehicles. In this recent article in The American Conservative, Jordan McGillis argues that, “the electric vehicle is the climate idol of the unimaginative.”

    Rather than simply changing what’s under the hood of our cars, we should be reexamining the broader impacts that the car has had on the urban landscape. Here’s an excerpt that speaks to this:

    “All of the effort directed towards EV adoption would be better expended on improving our development patterns, bringing them to human-scale and reducing the necessity of the automobile. The obvious reform candidate is zoning. According to the New York Times, it is illegal to build anything other than a single-family home on 75 percent of land zoned for residential use in the United States. Zoning exclusively for single-family homes artificially flattens our cities, necessitates daily automobile commutes, and increases our greenhouse gas emissions. As Istvan Bart has documented for the Climate Strategy Institute, suburban sprawl bears more responsibility for increased emissions from transportation than either population or GDP.“

    There is no question that electric vehicles are helpful to addressing climate change. But Jordan is also not wrong. We can’t ignore that built form is crucial to this discussion, and likely even more important.

  • Garden suites are coming to Toronto next year

    With laneway suites permitted as-of-right across the entirety of Toronto, the City is now looking to other forms of accessory dwelling units and other ways to increase the supply of rental housing. The next frontier is likely to be something that the City is broadly referring to as garden suites. And the timing is likely to be as early as next summer. Here’s how they’re defining it (taken from this recent report):

    Garden Suites are sometimes referred to by other names, such as “coach houses”, “tiny
    homes”, and even “granny flats”. However they are all effectively the same idea – a
    detached accessory dwelling unit generally located in the rear yard of a detached
    house, semi-detached house, townhouse, or other low-rise dwelling. It is generally
    smaller in scale, functioning as a separate rental housing unit. Garden Suites are similar
    in form and function to Laneway Suites, which are currently permitted across the City in
    all low-rise residential zones in the city-wide Zoning By-law, 569-2013. To avoid any
    confusion between these terms, the City is considering all types of detached-accessory dwelling-unit to be a Garden Suite, for the purpose of this review, with the exception of a
    Laneway Suite, which is already permitted and defined within the Zoning By-law.

    The above report will be going to Planning and Housing Committee on December 8, 2020. The goals are to kickstart the public consultation process and to come up with the necessary recommendations to permit garden suites by the second quarter of 2021. Like laneway suites, they are expected to be as-of-right. That means straight to building permit. No variances (and contentious Committee of Adjustment meetings) required.

    This is great news and I’m looking forward to seeing garden suites become a reality in 2021. For more information about what’s happening on December 8th, click here.