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.


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