SUPPORTS ITEM NO. 1 CS&B COMMITTEE AGENDA JUNE 19, 1997 POLICY REPORT URBAN STRUCTURE Date: May 28,1997 Dept. File No. 3430 C.C. File No. 4656-1 TO: Standing Committee on Planning & Environment FROM: Manager of the Housing Centre, in consultation with the Director of Central Area Planning SUBJECT: Payment-in-Lieu - Major Project Non-Market Housing RECOMMENDATION A. THAT Council adopt the following additional policies for non-market housing in the major projects: 1) In future major project rezonings, air-space parcels for non-market housing are to be avoided wherever possible, and where they cannot be avoided should be restricted to parking podia. 2) If senior government funding is not available for non-market housing sites that are air space parcels within larger market projects, when the market components are ready to proceed, Council is prepared to consider alternative affordable housing options or payment-in-lieu to allow the whole project to be developed at the same time. 3) For non-market sites that are air-space parcels, payment-in-lieu will be calculated as if senior government funding for non-market housing were available for the project. 4) If senior government funding is not available for non-market housing sites that are not air-space parcels, they are to be held in reserve, pending future senior government funding, at Council s discretion. B. THAT the Director of Central Area Planning and the Manager of the Housing Centre explore options to expand the capacity for non-market housing in the major projects, and in particular Concord Pacific Place, with the intent to maintain to the extent possible the objective of 20% non-market housing. GENERAL MANAGER'S COMMENTS The General Manager of Community Services RECOMMENDS approval of A and B. COUNCIL POLICY Council requires that 20% of the units in the major projects be designated for non-market housing, with a priority for core-need households, and requires that the non-market sites be made available at a price that allows the projects to be developed within the maximum budgets established by senior government non-market housing programs. This policy has been relaxed for major projects whose economic feasibility does not permit the full 20% to be achieved. Council policy is to consider affordable housing proposals not subsidized through senior government programs, or payment-in-lieu, for non-market sites that were submitted for senior government funding and did not receive it, or if there is little likelihood of funding forthcoming. SUMMARY There are a number of non-market sites that are air-space parcels located on podia. Some podia consist of only underground parking, but others also include at grade retail and second storey commercial space. When these sites were set aside for non-market housing, there was sufficient funding to expect that funding would be available when the integrated project was ready to proceed. Unfortunately, federal funding is no longer available and provincial funding is limited. The result is that funding may not be available for some non-market projects, in particular those intended to serve households without children; funding is very limited for non-family projects. This is a particular problem for the non-market sites located on podia. To minimize this problem, it is recommended that in future major project rezonings, sites on podia be avoided where possible, and if they cannot be that they be restricted to parking only. If funding is not available for a podium non-market site when the rest of the project is ready to proceed, Council must consider whether to hold non-market sites in the hope that funding will be sometime in the future, or consider other options. For the sites that are on podia holding them will not always be feasible. It is much more expensive and disruptive to return to a partially completed project to continue construction. It may not even be possible in some cases. It is recommended that Council be prepared to consider alternatives to holding the non-market sites that are on podia. Non-market sites that are not on podia can be held, without impeding the progress of the overall development, until funding is available or Council chooses to do something else with the sites, though developing the housing sooner rather than later is generally preferred. It is recommended that Council adopt the policy to hold such sites in reserve pending future senior government funding. Payment-in-lieu, whereby the developer pays the City the subsidy that would have gone into the non-market housing, is one option for dealing with the non-market sites that cannot be held and for which senior government funding is not available. This will reduce the percentage of non-market housing in the major project below the City s 20% target. To minimize the loss of non-market capacity, the report recommends increasing the capacity of the remaining non-market sites. A review of the sites indicates that there is potential to increase the non-market capacity. PURPOSE This report addresses the circumstance when funding is not available for non-market housing sites integrated within market projects when the market projects are ready to proceed. It recommends policies for dealing with this circumstance when it occurs, and policies to minimize its chances of occurring. It recommends that increasing the non-market capacity in Concord Pacific Place be explored to ensure the objective of 20% non-market housing is achieved to the extent possible. BACKGROUND In August 1988, in developing the False Creek Policies, Council established the objective of 20% core-need housing in the major projects. The 20% core-need objective was based on the senior government programs of the day which restricted eligible households to those in core-need, households that would have to pay more than 30% of their gross income to rent a unit in Vancouver. At the time an estimated 20% of the households in the Vancouver region were in core-need and 23% of the households in the City s development on the south shore of False Creek would have been in core-need if they were not in non-market housing. The policies require that at least half the non-market housing had to be designed for families. The major project developers have to make the non-market sites available at a price that works within the budgets set under senior government non-market housing programs. To the extent that this value is less than market value the developers provide a subsidy for the non-market housing. In 1992 the provincial government established the Commission on Housing Options to review its role in housing in the face of declining federal funding. Federal funding for new non-market housing ceased in 1993. The Commission recommended that the Province maintain its funding, and that the Non-Profit Rental Housing Program be revised to serve market renters as well as core-need renters, and that families have priority. In response to these changes, Council in April 1993 amended its 20% objective. Core-need households were to continue to have priority, under a requirement that 20% of the units be designated for non-profit housing. Council reserved the right to consider alternative affordable housing programs not subsidized by senior governments, and in the absence of feasible alternatives payment-in-lieu, if funding was unavailable or unlikely to be forthcoming from provincial or federal non-market housing programs. The City's 20% non-market housing policy has created a capacity for 2,760 units in the major projects across the City. 705 units have been built or funded, leaving a unfunded capacity of 2055 units. These are located in the downtown major projects around False Creek and along Coal Harbour, with the majority of the unfunded units, 1,300, in Concord Pacific Place. The Province maintained its funding for non-market housing until last year when it reduced the units funded from 900 to 600. As well, the program was revised to require seniors projects to include substantial equity. The scarcity of senior government non-market funding, in particular for non-family housing, led the City to give approval in principle to an alternative affordable housing proposal for the Roundhouse non-family site and to convert the non-family non-market site in the first phase of Marathon's Coal Harbour project to family non-market housing. DISCUSSION The first request for payment-in-lieu has now come forward for two non-family non-market sites in the Quayside Neighbourhood of Concord Pacific Place. The review of the proposal raised several general policy issues. These are the use of air-space parcels for the non-market sites, how payment-in-lieu is to be calculated, and the potential to increase the capacity of non-market housing in the major projects, and in particular in Concord Pacific Place. Air-Space Parcels In the high density major projects around False Creek and along Coal Harbour, many of the non-market housing sites are air-space parcels. These include two non-market sites in the waterfront portion of the Quayside Neighbourhood of Concord Pacific Place, which have been referred to public hearing, future Quayside projects north of Pacific Blvd., the non-market sites in Bayshore and the non-market sites in International Village. They are components of larger market projects, and are located above an underground garage that provides parking for market condominiums along with their own parking, and sometimes above one or two floors of commercial space. There are several reasons for air-space parcels. The market projects are higher density than the non-market projects and have a higher parking requirement per unit. This means that several floors of underground parking are required which can be very expensive. Non-market projects are lower density and have a lower parking ratio with the result that a smaller underground garage and less excavation is required. It is more efficient to equalize the excavations, and to build some of the condominium parking under the non-market housing projects. In some cases, commercial space is located under non-market housing located on the arterials and other streets where the zoning requires retail at grade. These tend to be the non-family non-market projects. The provincial programs do not fund commercial space within non-market projects, and consequently these are also air-space parcels with the market developer responsible for the commercial component. Non-market housing projects located above condominium parking and commercial space have successfully been developed in the major projects. Two projects in CityGate and one in Concord Pacific Place located above shared parking and a floor of retail. A project is now under construction in Coal Harbour that includes a floor of commercial parking. In all these cases the senior government funding for the non-market housing was available when the larger project, within which the non-market housing was integrated, was ready to proceed. With declining funding, at least in the near term, it is unlikely that funding will always be available when it is time to develop a non-market site, in particular a non-family project integrated within a larger project. If funding is not available when the larger project is ready to proceed, the City could hold the site until funding is available, which would mean returning after the market components are completed to build the non-market component. This would require that the podium for the non-market component be built, including lobbies, the required parking, vertical circulation and other services, in advance. This is not impossible, for instance the Four Seasons Hotel was built after the Pacific Centre was completed, but it should be avoided. Building codes and housing programs can change with the result that the podium would no longer to usable without a retrofit. Even if the podium was still suitable, the disruption to the residents and commercial business occupying the completed portion of the project could be serious, and there would be a substantial increase in the construction costs because of the constricted site once the market components are built. As a result, if funding is not available for the non-market component of an integrated project when the market component is ready to proceed, in most cases it will be unreasonable to leave the non-market components undeveloped. Given the limited senior government funding for non-market housing, at least in the near term, it is recommended that in future major project rezonings, air-space parcels for non-market housing be avoided wherever possible. It may not be possible to avoid shared parking garages because of site conditions, but non-market air-space parcels integrated into commercial and market residential projects can be avoided. Shared parking garages, as long as they are underground, can be capped and the infrastructure for the future non-market component installed. For those non-market sites that are air-space parcels integrated within larger projects, it is recommended that Council be willing to consider ways to ensure the non-market component can be developed at the same time as the rest of the project if senior government funding is not available when the market components are ready to proceed. These options could include the conversion of non-family non-market housing to family non-market housing, if funding for the former is not available but funding for the latter is, as was the case with Coal Harbour; affordable housing proposals that are not subsidized by senior government programs; or payment-in-lieu. Calculating Payment-in-Lieu The April 1993 report set out the method for calculating payment-in-lieu. In essence, payment-in-lieu is the difference between the market and non-market value of a site. The market value is the value of the residential space developed as condominiums. The non-market value is determined by the senior government housing programs. These are based on the typical price of land in the region which is often lower than the market value of the land in the major projects. The difference between the market and non-market values is the subsidy the developer is putting into the project, which the City can take as payment-in-lieu if the developer is allowed to convert the project to market housing. The subsidy will vary from major project to major project, and from site to site, as market land value will vary by location but the non-market value will not. For better located sites the subsidy will be higher. In some cases the market and non-market value of a site could be the same, in which case the subsidy would be zero. The 20% policy does not require a subsidy, only that major project developers make sites available at the non-market land value. Air-space parcels integrated into larger market projects complicate the payment-in-lieu calculation. If senior government funding were available for the non-market component, when the market components of a larger project were ready to proceed, the project would be built out as a piece avoiding the significant construction costs and disruption if the non-market component had to built later. Payment-in-lieu, in the absence of senior government funding, allows the major project developers to escape these additional costs. The question is whether the City should share in these savings, and whether payment-in-lieu should be calculated as the difference between the market and non-market values for a site plus some portion of these savings. These savings could be larger than just the construction savings. The City holds 80 year options on the non-market sites and the City can require developers to hold them until funding is available. The developers are required to pay taxes but the sites offer little opportunity to generate a return until non-market funding is available. In present value terms, the longer the sites have to be held the lower their non-market value today. The City could take the position that it should share in the construction cost savings and that the non-market value of the site should be discounted to reflect the risk that senior government funding may not be available for many years. This would increase the payment-in-lieu amounts for non-market sites and increase the subsidy the major project developers would be paying for non-market housing. The major project developers have consistently argued, since the 20% policy was revised in 1993, that they should not have to pay for the reduction in senior government funding for non-market housing. The 80-year options the City holds on the non-market sites have as much to do with the uncertainty with how fast the market development would proceed as it did with any uncertainty over funding for non-market housing. Requiring that developers discount the value of a non-market site and share in the cost savings from building out a project, including the non-market component, as a piece, would complicate the payment-in-lieu negotiation. There is no formula to determine what the discount in value should be, as it is not clear how long a site would have to be held, and it is difficult to determine the cost savings from building out the site, as it is not possible to predict what the changes in codes and non-market housing programs will be. What portion of the savings or discount should be the City's and what portion the developers would be an open question. It is important that the major project developers have an incentive to negotiate payment-in-lieu. The method of calculation payment-in-lieu as the difference between the market and non-market values of the site remove any windfall. Allowing the developers to keep the construction savings would provide them with the necessary incentive. Whether or not to consider payment-in-lieu is up to the City, so the City can always choose to hold an air-space parcel site for the future. It is recommended that the City adopt a policy to calculate payment-in-lieu as if senior government funding would have been available, and not to require a share of the potential construction savings or a discount in the non-market value of a site. In return for considering alternative affordable housing proposals or payment-in-lieu for non-market sites that are air-space parcels within integrated projects, if non-market funding is not available when the market components are ready to proceed, it is recommended that payment-in-lieu or alternative affordable housing proposals generally not be considered for non-market sites that are not air-space parcels. These can be built independently of adjacent market development, and should be reserved for future senior government funding at the City s discretion. The major project developers would prefer to see these sites developed as soon as possible to complete the projects and realize the sites' non-market value. The City would also like to see the neighbourhoods completed and the housing built, and in all likelihood would not want the non-market sites that are not air-space parcels to remain undeveloped for many years. The longer a site remains vacant the more difficult it will be to develop as nearby residents become accustomed to views and open space. However, the scarcity of funding for non-market housing, in particular non-family non-market housing, may not be permanent. If the federal deficit is eliminated as fast as recent reports imply, the federal government may within 5 or 10 years fund non-market housing, as it did before, or increase transfers to Provinces so they can fund it. Council could still consider alternatives to non-market housing funded through senior government programs, but there would have to be a clear public benefit. Achieving the City's objective of 20% non-market housing in the major projects may be difficult, but it should not be compromised more than necessary. Without senior government funding, alternative affordable housing has a very limited ability to accommodate core-need households, and payment-in-lieu reduces the total percentage of non-market housing in the major projects. These may be necessary for air-space non-market sites, but for those that are not, the priority should be senior government funded non-market housing. (NOTE: Payment-in-lieu for non-market housing was applied to the International Village rezoning approved in December 1995. However, the circumstances were very different. In that case the whole of International Village was rezoned to convert commercial space, in particular a hotel, to residential use. This generated an increased requirement for non-market housing which could not be accommodated within the project. Payment-in-lieu was not required because senior government funding was unavailable, but because of a lack of sites. The value of the payment-in-lieu was not the difference between the market value and non-market value of a site, but a share of the increase in value generated by the overall rezoning. This was sufficient to provide funds to buy a site nearby for non-market housing and funds to buy park land.) Increasing Non-Market Capacity It can be expected that over the next few years alternative affordable housing or payment-in-lieu will be required to deal with non-market housing sites integrated into larger market projects, in particular for non-family non-market sites that are air-space parcels. This would result in some erosion of the City s 20% objective for the major projects. It may be possible to minimize this erosion by increasing the capacity of the non-market housing sites that remain. This would involve increasing the number of units allowed in the major projects but restricting the increase to non-market housing. A rezoning would be required, and the potential to increase the non-market housing capacity would have to be evaluated on a case by case basis. However, in the case of Concord Pacific Place at least, there appears to be some opportunity to increase capacity without compromising the integrity of the overall plan for the project. In most cases, the density allocated to the non-market sites was not based on the maximum the sites could support as determined by urban design and land use planning principles, but on the need to create projects not so large that they could not get funding through non-market housing programs. In the case of the non-market non-family housing, this meant projects of 100 units or less. The full density potential of these sites may not have been realized. It would be worth reviewing these sites to see if they could support higher densities. There are several benefits if they can. One is the recovery of any non-market housing lost due to payment-in-lieu. It would also increase the value of the sites, if they need to be converted to payment-in-lieu. The major project developers would receive the same price for the site as they would under the existing density; any the increase in value due an increase in density would be the City's. If developed as affordable housing outside of senior government funding, larger projects would increase the internal subsidies available so that more households or lower income households could be subsidized. The major project developers should be supportive if it makes the sites more competitive, because of the lower land cost per unit, and it may also make alternatives to senior government funded projects more viable. It is recommended that Council instruct the Director of Central Area Planning and the Manager of the Housing Centre to explore the potential to increase the non-market housing in the major projects, for report back to Council early in 1998. * * * * *