DENSITY BONUS AND AFFORDABLE HOUSING POLICY: ANALYSIS AND RECOMMENDATIONS

6. Bonus office floorspace supports a very low CAC per square foot. In addition, office projects generate significant positive economic impacts in comparison to residential projects. The City should consider exempting office rezonings from CACs.

3.3.2 Affordable Housing Analysis

1. The financial ability of apartment rezonings to provide affordable housing varies significantly depending on the definition of affordable housing. Therefore, if the City wants to define an affordable housing target or requirement for rezonings, it should clearly define the type of affordable housing that the City wants rezonings to provide. For example, the City should identify whether the affordable housing will be rental or ownership, the discount from market rents (or sales prices), any minimum unit size requirements, the amount of off-street parking that will be required, and the preferred location of the affordable housing units within an overall project. Without this information (plus the amount of affordable housing required), developers will not be able to anticipate the impact of an affordable housing policy on the financial performance of a planned rezoning. This will make it difficult to plan projects and acquire sites at prices that make rezoning and redevelopment financially viable.

2. The cost of creating affordable housing (as tested for our analysis) is higher than the value of the completed affordable housing units. Therefore, a significant share of any bonus floorspace will need to be allocated to strata market residential space in order to off-set the losses to the developer from the affordable housing component. In addition, a portion of the bonus floorspace (at most sites) is required (with no amenity contribution or affordable housing contribution) to make rezoning and redevelopment financially viable. The combination of these two factors means that most rezonings in the study area will not support a significant amount of affordable housing (under current market conditions). For the sites and affordable housings scenarios that we tested inside the Core Area, most projects will only be able to provide a small share of affordable housing (3% to 8% of total bonus floorspace). The amount that is supportable depends on the City’s definition of affordable housing.

3. Increasing the available bonus density beyond the existing maximum OCP density increases the affordable housing that can be supported by a rezoning. We estimate that about 15% of the floor area associated with any additional density beyond the current total OCP maximum density could be allocated to affordable housing if the affordable housing is comprised of rental units with rents set at 100% of HILs. The share would be lower if rents were set below the HILs rate.

4. An affordable housing contribution reduces (or eliminates) the potential for a rezoning to make contributions toward other types of amenities (such as public realm improvements or contributions toward the seismic improvement fund)^7. Therefore, if the City wants to obtain amenity contributions as well as affordable housing from individual projects, any affordable housing component will need to be calibrated to leave room for other amenity contributions. This would further reduce the amount of affordable housing that can be supported by a rezoning.

5. Depending on the target market for the affordable units and the strata market units, an affordable housing requirement could impact the marketability of the market units in the project given that the units will be mixed within the same building. In addition, the affordable housing units could create other issues for the developer, such as a requirement for legal agreements (with the City) as well as different unit finishing specifications and a separate marketing approach for the affordable units.

6. An affordable housing requirement will create administrative and management work for the City.

7. Unless a project is very large, the total number of affordable housing units that it can support will be very low. For example, our analysis suggests that a 100-unit project could support a maximum of about 5 affordable housing units (or less depending on the definition of affordable housing). Given that the inclusion of affordable housing within a project will create impacts on the developer’s plans and create an administrative load on the City, the City should consider setting a project size threshold below which the City would seek a cash-in-lieu contribution of affordable housing units.

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^7 The estimated impact on the supportable CAC from one affordable housing unit is as follows (under the definitions in Section 3.2.1):

• At 50% of HILs, $206,250 per unit concrete unit and $176,250 per unit woodframe unit.
• At 90% of HILs, $153,750 per concrete unit and $123,750 per woodframe unit.
• At 100% of HILs, $138,750 per concrete unit and $108,750 per woodframe unit.
• For affordable ownership units, $127,600 per concrete unit and $96,800 per woodframe unit.

3.4 Policy Options to Consider for Sites in the Core Area

3.4.1 Identification of Policy Options

Because the ability of a rezoning to provide public benefits is finite, the City needs to decide on an allocation of any contributions between affordable housing and other amenities. For example, the City could decide to only seek contributions toward amenities, but not affordable housing units. This could be done through a fixed rate CAC target or through site-by-site negotiations.

However, the City asked us to identify approaches to consider that would include contributions toward affordable housing as well as other amenities, so our policy options focus on this objective.

There are three general policy approaches that the City could consider to obtain affordable housing units and amenity contributions from rezonings in the Core Area.

1. Negotiate a package of amenity contributions and affordable housing from projects that rezone to obtain bonus density. The City would continue to negotiate an overall package of affordable housing and amenities that can be supported by individual rezonings on a site-by-site basis. Under this approach, the City could:
   • Decide on a site-by-site basis whether the rezoning is a candidate to provide affordable housing units or make a cash contribution toward affordable housing or other amenities.
   • Identify an explicit target for affordable housing (say 6% of bonus floorspace up to the OCP maximum plus 15% of an floorspace beyond the OCP maximum – although this would depend on the definition of affordable housing^8) and the type of affordable housing that it would like to achieve at rezonings. The target may not be achieved by all projects (depending on the specifics of the application and the results of any financial analysis), but it would provide City staff and applicants with a guideline for the amount of affordable housing that should be considered at an individual rezoning.
   • Establish priorities for allocating cash contributions between affordable housing and community amenities.

2. Establish a fixed rate target approach toward CACs and affordable housing for rezonings^9. Under this approach:

   • The City would establish a target fixed rate CAC per square foot of bonus floorspace and a target requirement for a share of bonus floorspace to be allocated to affordable housing. The type of affordable housing would need to be explicitly defined in order to determine the appropriate target for the affordable housing share and to calibrate the affordable housing target to ensure that the CAC rate and the affordable housing contribution are approximately equivalent from a financial perspective to the developer.
   • A minimum project size could be used to identify rezonings that would provide the affordable housing units rather than a cash CAC.
   • Rezonings would either provide a contribution toward amenities based on the target fixed rate CAC or affordable housing based on the affordable housing target (or a combination of each that is equivalent to the overall value of the target fixed rate).
   • The City could establish priorities for allocating any cash amenity contributions between affordable housing and community amenities.

3. A combination of the two approaches where a fixed rate CAC is applied to projects under a specified size threshold and a negotiated site-by-site approach is used for projects over the specified threshold.

Under each approach, we recommend that bonus office floorspace be excluded from CACs and affordable housing contributions.

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^8 These figures assume that affordable housing is rental housing with rents at 100% of HILs. ^9 The City could use this same approach if it wanted to establish density bonus zoning districts in the Core Area.

3.4.2 Evaluation of Policy Options

A summary of the advantages and disadvantages of each of the policy options is outlined below.

1. Negotiate CACs and affordable housing contributions on a site-by-site basis for rezonings.

Advantages include:

• Individual negotiations ensure that the CAC and/or affordable housing contribution does not exceed the amount that can be supported by each rezoning, particularly if a rezoning application does not seek all of the bonus floorspace that is permitted.
• The City can determine when it would prefer affordable housing units to be incorporated within the overall project and when it would prefer to collect a cash contribution to fund affordable housing on an alternate site.
• The City could be flexible in its definition of affordable housing as the impact of the affordable housing would be determined individually for each rezoning.
• The City could manage the split of any contributions between affordable housing and other amenities on a site-by-site basis.
• A negotiated approach has the potential to achieve larger contributions toward affordable housing and amenities than a fixed rate approach as the fixed rate approach needs to ensure the target is low enough that it works for most rezonings.
• A negotiated approach takes into account changes in market conditions over time to ensure the City optimizes contributions.

Disadvantages include:

• A negotiated approach is less likely to be supported by the development industry and property owners than a fixed rate approach.
• The cost and timing of negotiations can be an impediment to rezoning and redevelopment for smaller projects.
• The negotiated approach creates uncertainty for developers, land owners, the City, and the community.

2. Apply a fixed rate CAC target and an affordable housing target.

Advantages include:

• The fixed rate approach creates certainty for developers, land owners, the City and the community.
• Any cost associated with process of negotiating the value of a CAC or the amount of affordable housing is eliminated by a fixed rate approach. This is particularly helpful for smaller projects. However, there would still be negotiations required to determine the details associated with the affordable housing units (i.e. size, mix, rent, parking, location in project).
• If the fixed rate CAC target is low and the affordable housing target is low, it will not affect the financial viability of many (if any) redevelopment sites so it should not slow the pace of redevelopment. Sites that are not currently viable for redevelopment will continue to be unattractive for rezoning and redevelopment (with or without a CAC or affordable housing target).

Disadvantages include:

• If the CAC rate or affordable housing target is set too high, it will reduce the number of sites that are financially attractive for rezoning and redevelopment which will make it difficult for the City to meet its growth objectives inside the Downtown Core Area. Under this approach the targets will need to be set toward the lower end of the estimated potential range in our financial analysis to ensure there is a supply of sites that are financially viable for redevelopment.
• Some rezonings would have been able to support a CAC or affordable housing contribution that is higher than the fixed rate or affordable housing target, so the fixed rate approach will likely see lower overall contributions toward affordable housing or other amenities. Given the relatively large size of projects in the Core Area (and the large amount of bonus floorspace), this could be a significant dollar value.
• Once targets are established, it is challenging to adjust the targets to reflect changes in market conditions (particularly upward). Therefore, if the value of bonus floorspace increase over time (due to increases in strata residential values), a fixed rate approach will likely achieve lower amenity and affordable housing contributions than a negotiated approach.
• To determine the target share of bonus floorspace that should be allocated to affordable housing, the City will need to define the type of affordable housing required by rezonings upfront. This will reduce the flexibility to obtain different types of affordable housing over time.

3. Mix of fixed rate approach or negotiated approach depending on project size.

• This approach captures the benefits of a fixed rate target approach for smaller rezonings and uses the more complicated negotiated approach for larger rezonings. The potential benefits associated with a larger rezoning can off-set the costs, risks and complications associated with the negotiated approach.

3.5 Recommendations for the Core Area

We think there are a variety of reasons that the City should continue to negotiate CACs and affordable housing contributions on a site-by-site basis from most rezonings in the Core Area^10:

• There is wide variation in the amenity contribution and affordable housing that can be supported by rezonings in the Core Area. Some rezonings can support much higher contributions than other rezonings.
• There is not a large number of sites that are financially viable rezoning candidates in the study area, so we do not expect a high volume of rezoning applications in the area in any given year.
• The inclusion of on-site affordable housing units within a rezoning will likely require negotiations (even if a target is established).

However, based on our analysis, it is clear that there will be cases where negotiations would result in a cash CAC rather than affordable housing units because the rezoning is not large enough to support the creation of any (or at least very little) on-site affordable housing.

Because of this, there is a case to be made for setting a threshold below which rezonings would be expected to make a cash CAC based on a fixed rate target, rather than going through a negotiated CAC process (resulting in little or no affordable housing).

Therefore, the City should establish a threshold below which a target fixed rate CAC would be used to negotiate a contribution toward amenities (the cash contribution could be used to help fund affordable housing or fund other amenities). Above the threshold, the City would negotiate the delivery of affordable housing units (or combination of affordable housing and other amenities) on a site-by-site basis.

For rezonings that will be negotiated on a site-by-site basis, the City should introduce policies which:

• Define the type of affordable housing that the City would like to be contributed as part of rezonings (rental or ownership, unit mix, discounts on rents or sales prices, parking requirements).
• Identify a target for affordable housing that the City would like to achieve at rezonings. The target will depend on the City’s definition of affordable housing (and whether the City wants to obtain other amenities from rezonings), but our financial analysis indicates that it could be in the range of 3% to 8% of bonus floorspace up to the OCP maximum total densities. Beyond the OCP maximum total density, up to 15% of bonus floorspace could be supported as affordable housing, assuming affordable housing is defined as rental housing with rents set at 100% of HILs (the share would need to be lower if rents were lower than the HILs rate). This will provide developers and staff with an understanding of the maximum amount of affordable housing that is expected at any project. If the City wants to also obtain contributions toward other amenities from projects providing affordable housing units, it will need to set the affordable housing target lower.
• Establish priorities for allocating any cash amenity contributions from negotiated rezonings between affordable housing and other community amenities.

The total value of a negotiated CAC or affordable housing contribution should take into account the cost of creating the amenities that the City wants in the neighbourhood and any affordable housing targets. However, the cost of the overall contribution should not exceed 75% of the increase in property value created by the rezoning over the higher of (a) the value under existing use and zoning or (b) the land value under the base density permitted in the OCP. Otherwise, the rezoning may not be financially viable for developers.

For smaller rezonings that are subject to a fixed rate target CAC, the City should:

• Establish a target fixed rate CAC per square foot of bonus floorspace. Based on our analysis, we would recommend a fixed rate CAC target of about $12 per square foot for bonus floorspace up the current OCP total maximum densities. For any bonus floorspace beyond the current OCP total maximum density, we would recommend a CAC target of about $30 per square foot of additional bonus floorspace.
• Establish priorities for allocating any cash amenity contributions between affordable housing and other community amenities.
• Monitor the fixed rates and affordable housing targets to ensure they are adjusted to reflect changes in market conditions and development policies over time.

Under both approaches, we recommend that the City exclude bonus office floorspace from CACs.

The City will need to determine the threshold for rezonings to be subject to site-by-site negotiations rather than a fixed rate target CAC. Negotiating a CAC involves time, costs and risks to the applicant as well as administrative time for City staff. In addition, including affordable housing within a project involves some additional costs to the developer (e.g., legal, marketing) and could impact project design. Therefore, the threshold for negotiations should be set high enough that projects that go through the site-by-site negotiations can be expected to deliver a meaningful number of affordable housing units. We think that rezonings should be able to support a minimum of about three affordable units to be subject to site-by-site negotiations. Rezonings that can only be expected to deliver zero to two affordable units should be in the fixed rate CAC category.

Based on our analysis, we would expect rezonings that involve about 30,000 square feet of bonus residential floorspace to be able to support up to three affordable housing units (depending on the definition of affordable housing and the size of the affordable units). Therefore, we suggest that the City consider establishing 30,000 square feet of bonus residential floorspace as the threshold below which rezonings would be subject to a fixed rate CAC target.

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^10 The Provincial guide encourages municipalities to use a fixed rate CAC approach or density bonus zoning whenever practical. However, we do not think a fixed rate approach is appropriate for the Core Area due to the variation in supportable CAC rates across different sites and the City’s interest in securing on-site affordable housing units (which will require negotiations).

4.0 Analysis for Rezonings Outside the Core Area

4.1 Evaluation of Potential Fixed Rate CAC Outside of the Core Area

In 2015, Coriolis evaluated the feasibility of implementing a fixed rate target CAC approach for bonus density outside the Downtown Core Area.

Our recommended approach for rezonings outside of the Core Area is to apply a fixed rate CAC target to smaller site rezonings, but continue to negotiate major rezonings on a site-by-site basis. This section summarizes our recommended approach.

Our detailed analysis and recommendations are contained in a report entitled “City of Victoria Density Bonus Policy Study: for Sites Outside the Downtown Core Area”.

4.1.1 Smaller Rezonings

A fixed rate CAC target should apply where the rezoning involves a small site and the rezoning is from residential or commercial to apartment or mixed-use residential and commercial. We recommend that:

1. The fixed rate be set at $5 per square foot of additional floorspace that is permitted over the greater of the OCP base FSR or existing zoning FSR (the existing zoning for some sites allows greater density than the base OCP density).
2. Projects that include at least one floor of upper floor office space should be exempt from CACs.
3. Projects where the City requires new rental apartment units or the replacement of existing rental apartment units (either on-site or at an alternate site) should be exempt from CACs.
4. Rezonings of sites in the Small Urban Village designation should be exempt from CACs (unless the density exceeds the 2.0 FSR identified in the OCP).

There may be rezoning applications where the developer determines that the fixed rate CAC target is inappropriate and in those cases, the developer should have the option of requesting a negotiated CAC (at the applicant's expense).

4.1.2 Major Rezonings

It is not possible to determine the potential CAC from major rezonings outside of the Core Area in advance of a detailed development application that outlines the mix of uses, heights, density and on-site servicing and infrastructure requirements. Therefore, these large rezonings are not good candidates for a fixed-rate target CAC.

CACs should continue to be negotiated for:

1. Rezonings of large sites (e.g., over one City block) that will require the dedication of part of the site for new roads and services.
2. Rezonings involving sites that have been identified as a location for a large on-site amenity or public facility as part of the rezoning process (e.g., park space, community centre).
3. Sites that are being rezoned from industrial or institutional uses to residential or mixed-use.
4. Rezonings that exceed the density identified in the OCP.

The total value of a negotiated CAC should take into account the estimated cost of creating the amenities that the City wants in the neighbourhood, but the CAC should not exceed 75% of the increase in property value created by the rezoning over the higher of (a) the value under existing use and zoning or (b) the land value under the base density permitted in the OCP. Otherwise, the rezoning will not be financially viable for developers.

4.2 Evaluation of Potential Affordable Housing Contributions from Rezonings Outside the Core Area

Drawing on the financial analysis completed for our previous 2014-2015 analysis, we evaluated the opportunity for rezonings outside Core Area to provide affordable housing rather than an amenity contribution.

4.2.1 Approach

We used the results of our financial analysis for two case study sites from our 2014-2015 analysis to estimate the potential amount of affordable housing that could be supported by a typical rezoning outside of the Core Area. The case study sites we selected supported an estimated CAC of about $5 per square foot of bonus floorspace (matching our recommended rate for rezonings outside of the Core) so the affordable housing estimates will be consistent with the recommended fixed rate target.

For each of the two case study sites and for each of the four affordable housing scenarios, we estimated the amount of affordable housing that could be funded by the calculated total value of the amenity contribution (i.e. 75% of the estimated increase in property value associated with the bonus floorspace).

Our estimates assume that all of the calculated amenity contribution value is used to fund affordable housing, leaving no room for contributions toward other amenities.

Therefore, our estimates assume that each rezoning provides affordable housing, but no additional amenity contribution.

4.2.2 Summary of Estimates of Supportable Affordable Housing

Exhibit 6 summarizes our findings for the two case sites that we examined outside of the Core Area. For one of the sites, we included some sensitivity analysis showing the impact of increasing the permitted by 10% beyond the density indicated in the OCP.

For each site, the exhibit shows:

• The density bonus subarea.
• The site size.
• The current use and current zoning.
• The base OCP density and maximum OCP density.
• The assumed number of residential units in the redevelopment scenario.
• The estimated increase in property value due to the permitted bonus density (in the absence of any affordable housing or amenity contribution).
• The calculated amenity contribution at 75% of the estimated increase in value due to the bonus density in the absence of any affordable housing.
• The estimated amount of affordable housing that can be funded by 75% of the estimated increase in value created by the bonus density for each of the four affordable housing scenarios. This affordable housing potential is expressed in a variety of different ways, including (a) the total square footage of affordable housing floorspace (gross square feet), (b) the share of bonus floorspace allocated to affordable housing, (c) the maximum number of affordable housing units supportable by the project and (d) the maximum share of affordable housing units in the total project.

Exhibit 9: Estimated Supportable Amount of Affordable Housing from Rezonings Outside of the Core Area

As shown in Exhibit 9:

• The amount of affordable housing that can be supported by a rezoning varies depending on the type of affordable housing. As the required discount in rents (or sales prices) increases, the amount of affordable housing that is supportable by the project decreases.
• The cost of creating the affordable housing (in all scenarios) is higher than the completed value of the affordable housing, so a significant share of the bonus floorspace needs to be allocated to market strata housing in order to off-set the losses incurred on the affordable housing units. If strata residential unit prices increase, the share of the bonus floorspace that needs to be allocated to market strata housing would decline.
• The total number of affordable housing units that can be supported at the case study sites that we analyzed ranges depending on the value of the site under its existing use, the amount of bonus density available, and the type of affordable housing. The amount of affordable housing that is supportable at the case studies we analyzed is summarized in the Exhibit 10.

Exhibit 10: Summary of Supportable Affordable Housing at Case Study Sites outside the Core Area

• The total number of affordable units supported by the typical case study rezonings outside of the core is very low (1 unit at most), in part due to the small size of most rezonings outside of the Core.
• If affordable housing units are required, it eliminates the opportunity to obtain any contributions toward community amenities^12.
• Increasing the permitted OCP maximum density has a positive impact on the amount of affordable housing that can be supported by a rezoning. The City asked us to test the impact of a 10% increase in permitted total maximum density. Our analysis indicates that a 10% increase in the OCP maximum density, generates an increase in the share of bonus floorspace that can be allocated to affordable housing by about 5 to 9 percentage points of total bonus floorspace (including the 10% additional density). However, the total number of affordable units that is supportable is still very low at about 1 or 2 units (due to the small size of typical rezonings outside of the Core).

4.2.3 Recommended Approach to Affordable Housing Outside the Core

Typical, smaller rezonings outside of the Core Area cannot provide any material number of affordable housing units (likely 1 unit at most). Any requirement for affordable housing units within the smaller rezonings will leave no room for contributions toward other amenities. Therefore, we recommend that smaller rezonings outside of the Core not be required to include affordable housing units.

The City should determine whether it would like to allocate a portion of any cash contributions (from a fixed rate CAC) from smaller rezonings outside the Core toward an affordable housing fund.

If the City wants to secure affordable housing units at rezonings outside of the Core, it should only consider this approach for the major negotiated rezoning applications outside of the Core Area.

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^11 The estimated supportable affordable housing floorspace is generally between about 200 and 550 square feet, depending on the type of affordable housing. This is less than one full unit at the assumed unit sizes and mix used in our analysis. However, if the City was interested, these rezonings could likely support one small affordable unit. ^12 The estimated impact on the supportable CAC from one affordable housing unit at the case study rezonings outside of the Core is as follows (under the definitions in Section 3.2.1):

• At 50% of HILs, $161,250 to $191,250 per unit, depending on the property location.
• At 90% of HILs, $108,750 to $138,750 per unit, depending on the property location.
• At 100% of HILs, $86,250 to $123,750 per unit, depending on the property location.
• For affordable ownership units, $83,600 to $114,400 per unit, depending on the property location.

5.0 Recommendations

5.1 Inside the Core Area

There are a variety of reasons that the City should continue to negotiate CACs and affordable housing contributions on a site-by-site basis from most rezonings in the Core Area:

• There is wide variation in the amenity contribution and affordable housing that can be supported by rezonings in the Core Area. Some rezonings can support much higher contributions than other rezonings.
• There is not a large number of sites that are financially viable rezoning candidates in the study area, so we do not expect a high volume of rezoning applications in the area in any given year.
• The inclusion of on-site affordable housing units within a rezoning will likely require negotiations (even if a target is established).

However, based on our analysis, it is clear that there will be cases where negotiations would result in a cash CAC, rather than affordable housing units, because the rezoning is not large enough to support the creation of any meaningful amount of on-site affordable housing. Therefore, we have the following recommendations:

1. The City should establish a threshold below which a target fixed rate CAC would be used to negotiate a cash (or in-kind) contribution toward amenities (the cash contribution could be used to help fund affordable housing or fund other amenities). Above the threshold, the City would negotiate the delivery of affordable housing units (or combination of affordable housing and other amenities) on a site-by-site basis. We suggest that the City consider establishing 30,000 square feet of bonus residential floorspace as the threshold below which rezonings would be subject to a fixed rate CAC target, rather than site-by-site negotiations.

2. For rezonings that will be negotiated on a site-by-site basis, the City should introduce policies which:

   • Define the type of affordable housing that the City would like to be contributed as part of rezonings (rental or ownership, unit mix, discounts on rents or sales prices, parking requirements).
   • Establish a target requirement for a share of bonus floorspace to be allocated to affordable housing. This will provide developers and staff with an understanding of the maximum amount of affordable housing that is expected at any rezoning. Based on our analysis, we would recommend an affordable housing target of about 3% to 8% of bonus floorspace (depending on the definition of affordable housing) with a higher share for any floorspace bonus beyond the current OCP maximum density. For example, if affordable housing is defined as rental housing with rents set at 100% of HILs, we would recommend a target of 6% of bonus floorspace up to the OCP maximum density and 15% for any additional bonus floorspace beyond the OCP maximum. If the City wants to also obtain contributions toward other amenities from projects providing affordable housing units, it will need to set the affordable housing target lower. The City needs to explicitly define the type of affordable housing in advance in order to determine the appropriate target for the affordable housing share and calibrate the affordable housing target to ensure that the fixed rate CAC target and the affordable housing contribution are approximately equivalent from a financial perspective to the developer.
   • Establish priorities for allocating cash amenity contributions between affordable housing and other community amenities.

The total value of a negotiated CAC or affordable housing contribution should take into account the cost of creating the amenities that the City wants in the neighbourhood and any affordable housing targets. However, the cost of the overall contribution should not exceed 75% of the increase in property value created by the rezoning over the higher of (a) the value under existing use and zoning or (b) the land value under the base density permitted in the OCP. Otherwise, the rezoning may not be financially viable for developers.

3. For smaller rezonings that are subject to a fixed rate target CAC, the City should:

   • Establish a target fixed rate CAC per square foot of bonus floorspace. Based on our analysis, we would recommend a fixed rate CAC target of about $12 per square foot for bonus floorspace up the current OCP maximum densities. For any bonus floorspace beyond the current OCP maximum density, we would recommend a CAC target of $30 per square foot of additional bonus floorspace.
   • Establish a minimum project size to identify rezonings that would provide the affordable housing units rather than a cash CAC.
   • Establish priorities for allocating any cash amenity contributions between affordable housing and other community amenities.
   • Monitor the fixed rates and affordable housing targets to ensure they are adjusted to reflect changes in market conditions and development policies over time.

4. The City should exclude bonus office floorspace from CACs.

5.2 Outside the Core Area

1. A fixed rate CAC target should apply where the rezoning involves a small site and the rezoning is from residential or commercial to apartment or mixed-use residential and commercial. We recommend that:

   • The fixed rate be set at $5 per square foot of additional floorspace that is permitted over the greater of the OCP base FSR or existing zoning FSR (the existing zoning for some sites allows greater density than the base OCP density).
   • Projects that include at least one floor of upper floor office space should be exempt from CACs.
   • Projects where the City requires new rental apartment units or the replacement of existing rental apartment units (either on-site or at an alternate site) should be exempt from CACs.
   • Rezonings of sites in the Small Urban Village designation should be exempt from CACs (unless the density exceeds the 2.0 FSR identified in the OCP).

2. There may be rezoning applications where the developer determines that the fixed rate CAC target is inappropriate and in those cases, the developer should have the option of requesting a negotiated CAC (at the applicant's expense).

3. Smaller rezonings outside of the Core should not be required to include affordable housing units. Otherwise, there will be no room for contributions toward other amenities. The City should determine whether it would like to allocate a portion of any cash contributions (from a fixed rate CAC) from smaller rezonings outside the Core toward an affordable housing fund.

4. It is not possible to determine the potential CAC from major rezonings outside of the Core Area in advance of a detailed development application that outlines the mix of uses, heights, density and on-site servicing and infrastructure requirements. Therefore, these large rezonings are not good candidates for a fixed-rate target CAC. CACs should continue to be negotiated for:

   • Rezonings of large sites (e.g., over one City block) that will require the dedication of part of the site for new roads and services.
   • Rezonings involving sites that have been identified as a location for a large on-site amenity or public facility as part of the rezoning process (e.g., park space, community centre).
   • Sites that are being rezoned from industrial or institutional uses to residential or mixed-use.
   • Rezonings that exceed the density identified in the OCP.

The total value of a negotiated CAC should take into account the estimated cost of creating the amenities that the City wants in the neighbourhood, but the CAC should not exceed 75% of the increase in property value created by the rezoning over the higher of (a) the value under existing use and zoning or (b) the land value under the base density permitted in the OCP. Otherwise, the rezoning will not be financially viable for developers.

5. If the City wants to secure affordable housing units at rezonings outside of the Core, it should only consider this approach for the major negotiated rezoning applications.

6.0 Attachments - Financial Analysis

These attachments summarize the approach and main assumptions that we used for our case study financial analysis for sites in the Core Area. The approach, assumptions and analysis used for our analysis of sites outside of the Core Area is contained in our separate report “City of Victoria Density Bonus Policy Study: for Sites Outside the Downtown Core Area”.

6.1 Approach to CAC Analysis

To estimate the CAC that is likely supportable for rezonings inside the Downtown Core Area, we analyzed the financial viability of rezoning and redevelopment of a variety of different case study sites throughout the study area.

We used the financial analysis to model the likely performance of rezoning and redeveloping each site under the maximum density identified in the OCP on the assumption that the developer purchases the site at its current market value under existing use and zoning (i.e., the developer does not pay the rezoned value of the site).

The analysis allows us to determine whether rezoning and redevelopment of each case study is financially viable and, if so, whether the rezoning supports a CAC.

Our analysis was completed in six main steps:

1. We identified case study sites for the financial analysis. Sites were either vacant or improved with older, low quality improvements, similar to the types of properties that have been the focus of development in Victoria. The sites were selected to represent a cross-section of the different density bonus subareas, zoning districts and existing uses inside the Downtown Core Area.

2. We estimated the existing value of each case study in the absence of any bonus density. For this estimate, we considered three different values:

   • Value supported by existing use (income stream or house value).
   • The land value under existing zoning.
   • The land value under base OCP density. The highest of these three indicators used for analysis

3. We estimated the land value supported if the site was rezoned to the maximum identified in the OCP, with the bonus density but without any amenity contribution. If the estimated supportable land value with the bonus density is higher than site’s existing value, then site is viable for redevelopment. Otherwise, it is not yet financially viable for rezoning and redevelopment.

4. We determined whether rezoning and redevelopment of each case study site is financially viable.

5. For the financially viable case study sites, we estimated:

   • The increase in property value due to the bonus density (estimated value in step 3 less estimated value in step 2).
   • The potential CAC amount at 75% of the increased value (the current City practice).
   • The equivalent fixed rate CAC in terms of dollars per square foot of floorspace over the base OCP density.

6. We completed sensitivity analysis on a few key variables:

   • For some sites that are improved with existing low density buildings, we tested the impact on the calculated CAC assuming that the property was vacant (not improved). This reduced the estimated value under existing use and zoning (the existing value) resulting in a higher supportable CAC estimate.
   • For some sites, we tested the impact of increasing the permitted density to 10% beyond the OCP designation. This allowed us to evaluate the potential impact on the estimated CAC (and affordable housing contribution) of a small increase in permitted density.
   • For sites east of Cook Street, we tested the impact on the estimated supportable CAC of the assumed construction material for the new development project. The OCP indicates heights in the range of 6 to 8 storeys in this subarea so it is uncertain whether projects in this area will be built using woodframe (permitted up to 6 storeys) or concrete (required beyond 6 storeys). The change in construction material has an impact on construction costs and development economics so it affects the potential supportable CAC.

6.2 Key Assumptions for Financial Analysis

This attachment summarizes the key assumptions used in our case study financial analysis for sites in the Core Area. Some assumptions vary on a property by property basis (to reflect building form, property assessments and servicing costs).

The key assumptions for are strata residential and mixed use case study analysis are as follows:

1. Average sales price assumptions vary by form of construction:

   • Woodframe strata apartment projects are assumed to achieve average sales prices of $450 per square foot (at sites east of Cook). Some new projects currently marketing in Victoria are achieving higher average prices, but these projects are located in unique, high amenity locations (such as adjacent to Beacon Hill Park).
   • Concrete strata apartment projects are assumed to achieve average sales prices of $520 per square foot, consistent with projects currently marketing in (or near) the study area.

2. Average lease rates for new retail space is assumed to be $25 per square foot net. Net operating income from retail space is capitalized at 6.0% to estimate total market value.

3. Residential commissions are assumed to be 3% of sales revenue.

4. Marketing is assumed to total 2% of sales revenue.

5. Leasing commissions on the commercial space are set at 17% of Year 1 lease income.

6. Rezoning costs (application fees, architects, consultants, management, disbursements) are assumed to total $100,000. This assumes that rezoning is consistent with the OCP plan so costs are minimized, otherwise the cost would likely be higher.

7. Construction cost assumptions are as follows:

   • Hard construction costs (excluding parking) for woodframe apartment buildings are assumed to range from about $130 per square foot to $150 per square foot depending on the number of storeys.
   • Hard costs for concrete apartment buildings (excluding parking) are $210 per square foot.
   • Costs for grade level commercial space in mixed-use buildings is assumed to be $175 per square foot (for shell space).
   • Parking costs are assumed to average $35,000 per stall to $40,000 per stall (depending on the number of levels of underground parking). In total, hard costs including parking range from about $190 to $200 per square foot for mixed use lowrise buildings and $255 for concrete buildings. The construction costs are based on information published by BDC Development Consultants, Altus Group, BTY Group and on discussions we had with developers who are active in the Victoria multifamily residential market.

8. A separate landscaping cost allowance of $10 per square foot of site area is included.

9. An allowance of $2,500 per lineal metre of site frontage is included for upgrades to the adjacent sidewalks, boulevard, street trees, lighting, and road to centre line.

10. Connection fees are assumed to total about $50,000 per site.

11. Soft costs and professional fees (permits, engineering, design, legal, survey, appraisal, accounting, new home warranties, insurance, deficiencies and other professional fees) and development management total 12% of hard costs. This excludes the soft costs and professional fees associated with the rezoning process.

12. Post construction costs are included for six months following project completion.

13. A contingency allowance of 3.5% of hard and soft costs is included.

14. Interim financing is charged on all costs (including land) at 5% per year. In addition, a financing fee equivalent to 1% of total projects costs is included.

15. Residential and commercial DCCs are included at current rates.

16. Property taxes are based on 2015 mill rates and our own estimate of the assessed value during development.

17. Developer’s profit margin is set at 15%, which is the typical minimum profit margin target for new multifamily development in Victoria.

The key assumptions for are office case study analysis are as follows:

1. Average lease rates for new office space is assumed to be $29 per square foot net, assuming a $25 tenant improvement allowance. This may be optimistic under current market conditions.

2. Parking income is assumed to average $125 per stall per month.

3. Net operating income from retail space is capitalized at 5.75% to estimate total market value.

4. Rezoning costs (application fees, architects, consultants, management, disbursements) are assumed to total $100,000. This assumes that rezoning is consistent with the OCP plan so costs are minimized, otherwise the cost would likely be higher.

5. Construction cost assumptions are as follows:

   • Hard costs for the office building (excluding parking) are $210 per square foot for shell space.
   • Parking costs are assumed to average $35,000 per stall to $40,000 per stall (depending on the number of levels of underground parking).
   • An allowance of achieving LEED Gold certification is also included. In total, hard costs including parking range from about $270 to $275 per square foot.

6. A separate landscaping cost allowance of $10 per square foot of site area is included.

7. An allowance for site servicing is included for upgrades to the adjacent sidewalks, boulevard, street trees, lighting, and road to centre line.

8. Connection fees are assumed to total about $50,000 per site.

9. Soft costs and professional fees (permits, engineering, design, legal, survey, appraisal, accounting, new home warranties, insurance, deficiencies and other professional fees) and development management total 15% of hard costs. This excludes the soft costs and professional fees associated with the rezoning process.

10. Leasing commissions on the commercial space are set at 17% of Year 1 lease income.

11. A separate marketing allowance is included.

12. Post construction leasing costs are included for twelve months following project completion.

13. A contingency allowance of 5% of hard and soft costs is included.

14. Interim financing is charged on all costs (including land) at 5% per year. In addition, a financing fee equivalent to 1% of total projects costs is included.

15. Commercial DCCs are included at current rates.

16. Property taxes are based on 2015 mill rates and our own estimate of the assessed value during development.

17. Developer’s profit margin is set at 15%.

6.3 Approach to Affordable Housing Analysis

We used the results of our financial analysis for each of our case study sites in Section 3.1 to estimate the potential amount of affordable housing that could be supported by rezonings in the Core Area.

Our affordable housing estimates focused on the strata residential (or mixed strata residential and commercial) sites. The office sites were excluded from our affordable housing analysis on the assumption that office projects would not include affordable housing.

For each case study site and for each of the four affordable housing scenarios, we estimated the amount of affordable housing that could be funded by the calculated total value of the amenity contribution (i.e. 75% of the estimated increase in property value associated with the bonus floorspace).

The affordable housing component is assumed to replace space that would otherwise have been used for strata residential. Because the affordable housing has less value than the strata residential space, it negatively impacts the financial performance of the overall project and reduces the estimated increase in value associated with the bonus floorspace. For our calculations we determined the “net cost” per square foot of the affordable housing component for each of the four different types of affordable housing. The net cost was determined as follows:

• Estimated completed value per square foot of the affordable housing.
• Less total cost (and profit margin) per square foot of the affordable housing.
• Less completed value per square foot of the forgone strata residential space.
• Plus total cost (and profit margin) of the foregone strata residential space.
• Equals net cost per square of the affordable housing.

The estimated net cost per square foot for the different types of affordable housing that we tested is summarized in the following exhibit. As shown in the exhibit, the net cost varies by the type of affordable housing, location and type of construction material (as woodframe has a different completed value construction cost than concrete).

Estimated “Net Cost” PSF of Affordable Housing by Location and Construction Type

Our affordable housing analysis assumes that all of the calculated amenity contribution value is used to fund affordable housing, leaving no room for contributions toward other amenities.

Therefore, our estimates assume that each rezoning provides affordable housing, but no additional amenity contribution.

6.4 Representative Case Study Financial Analysis

Because of the number of sites and scenarios analyzed, we have not included all of the detailed proformas for each site and each scenario in this report. This section provides an example of our analysis for one site.

The case study site shown in this example is located in the Core Area. It is a 14,600 square feet site that is currently improved with an older 9,000 square foot office building. The property is currently zoned S-1, Limited Service District allowing a wide range of commercial and service uses at a maximum density of 1.5 FSR. It is located within density bonus subarea B-1 allowing apartment or mixed use development at a base density of 3.0 FSR with an opportunity for bonus density up to a maximum overall density of 5.0 FSR.

Existing Value

To estimate the existing value, we examined a number of indictors of potential value:

• The capitalized value of the net income that could be generated by the existing commercial building.
• The land value of the property as a development site at the base density of 3.0 FSR.
• Recent sales of similar properties.
• The existing assessed value.

The highest estimated of value is based on the capitalized value of the potential net income from the existing commercial building of $2.2 million. Therefore, for our analysis we use a base existing value of is $2.2 million.

Estimated Land Value Assuming Mixed Use Development at the Maximum Density of 5.0 FSR

The following proforma shows our estimate of the site's value if rezoned and redeveloped to mixed use retail and strata apartment at a density of 5.0 FSR (the maximum permitted) without any amenity contribution for the bonus floorspace. As shown in the proforma, the estimated land value under this scenario about $2,675,000 million and the estimated supportable CAC is $12 per square foot of increased permitted floorspace.

Land Residual – Mixed Use Redevelopment at 5.0 FSR - Assumptions

(shading indicates figures that are inputs; unshaded cells are formulas)

Land Residual – Mixed Use Redevelopment at 5.0 FSR – Analysis and CAC Calculation