HomeMy WebLinkAboutDSD-20-150 - Inclusionary Zoning for Affordable HousingREPORT TO:Planning & Strategic Initiatives Committee
DATE OF MEETING:September 28, 2020
SUBMITTED BY:Justin Readman,General Managerof Development Services 519-
741-2200 ext. 7646
PREPARED BY:Tim Donegani, Senior Planner 519-741-2200 ext. 7067
WARD(S) INVOLVED:3, 9, 10
DATE OF REPORT:September 14,2020
REPORT NO.:DSD-20-150
SUBJECT:Inclusionary Zoningfor Affordable Housing: Background and
Fiscal Impact Analysis
RECOMMENDATION:
THATCouncil Report DSD-20-150(Inclusionary Zoning for Affordable Housing:
Background and Fiscal Impact Analysis)be received.
BACKGROUND:
TheHousing Needs Assessment prepared as part of Phase 2 of the Affordable Housing
Strategydemonstratedunserved needs for affordable housing across the housing continuum for low,
moderate and middle incomehouseholds. Municipalities have a range of planning and financial tools
to supportand enablethe creation of affordable housing. Inclusionary Zoning (IZ) is a new tool that
allows municipalities to require residential developments to include affordable housing units.When
used alongside federal, provincial, regional and local initiatives, IZcanbe effective inincreasingthe
supply of affordable housing.Inclusionary zoning is one of the actions included in the draft Affordable
Housing Strategy that was received by Council in August.
The provincial requirements for developing and adopting an IZprogram are summarized in Appendix
A.IZ can only apply to multi-residential developments with 10 or more unitswithin Major Transit Station
Areas (generally within 500-800 metres of ION stops).Prior to approving an inclusionary zoning by-
law, municipalities must first prepare a housing assessment report to understandlocal demographics
andhousing supply and demand.Kitchenerhas largely addressed this requirement through the
completion ofits Housing Needs Assessmentpresented to Council in January 2020.Municipalities
must alsoconduct a financial impact study to evaluate the viability of development under an
inclusionary zoning framework. The City, in partnership with City of Waterloo, City of Cambridge and
Regionof Waterloocontracted consulting firm N. Barry Lyon Consultants Limited to carry out a
financial impact studyincluded asAppendix B.This work isbeing undertaken through the Kitchener-
Waterloo Joint Services Initiative. Staffatall four municipalities continue tocollaborate on data
sharing, analysis, stakeholder engagement,policy developmentand action planning towards common
affordable housing objectives.
*** This information is available in accessible formats upon request. ***
Please call 519-741-2345 or TTY 1-866-969-9994 for assistance.
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Inclusionary Zoning has been used extensively in the United States and some Canadian cities. While
several other Ontario municipalities are working to advance inclusionary zoning, no IZ policies have
been adopted yet.
How Does Inclusionary Zoning Work?
Inclusionary zoning works by leveraging increases indensity and value achieved through development
approvals, investment in LRT and increasing demand for centrally-located housing to provide affordable
housing. In this way inclusionary zoning programs canbe designed to work withoutgovernment subsidies.
Because inclusionary zoning programs result in lower revenues for developers through lower rents or
sales prices than would otherwise be the case, the provincial legislation requires thatIZ programs be
designed to ensure that residential development continues to be financially viable for private market
housing providers. Key considerationsthat affect the achievement of affordable housing objectives and
influence development feasibility include:
The
the duration of affordability, range of household incomes addressed by the affordable units,
and
the tenure of affordable units (rental vs. ownership).
Where the economics of site development cannot support inclusionary zoning on its own, programs can
include measures to offsetthe financial impact so thatthe development projectsbecome financially viable.
They can also be usedto deepen the degree of affordability to serve a broader range of household
incomes.Measures could include the phasing in of the program, increased height or density permissions,
or financial incentives.
REPORT:
Financial Impact Analysis Approach and Key Findings
financial impact study uses an approach called residual land value (RLV)analysisto testif
prototypical residential projectsin 10 Major Transit Station Areas across the Region are financially viable
under four scenarios:
1.No IZ policy
1
2.10% of units are required to bepriced at the affordable benchmark
3.5% of units are required to be priced at 60% of the affordable benchmark
4.Determine the maximumviable set aside rate that could be supportedat the affordable benchmark
Fiscal Impact Analysis Highlights
The costs of inclusionaryzoning cannot be passed onto the market rate units in abuildingthrough
higher prices/rents because developers are already pricing units as high as the market will bear.
Developer profits are not reduced under IZ. Without the prospectforsufficient profit,developers
will not be motivated to build.
Instead, an inclusionary zoning policy will put downward pressure on land value.
If an inclusionary zoning policyistoo onerous, land valuewill be reduced by toomuch,so a
residential redevelopment project cannot displacethe existing land use andwill not be viable.
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Affordable Rental Benchmark: Bachelor $810/mo; 1 Bedroom $1,045/mo; 2 Bedroom $1,231/mo; 3 Bedroom
$1,300/mo
Affordable Ownership Benchmark: $350/square foot
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Amodest and carefully designed inclusionary zoning policy is financially viable in the near term
insome Major Transit Station Areaswiththestrongestresidential market conditions.
Major Transit Station Areasarenot all equally capable of delivering new units through IZ as
illustrated in Figure1, and in more detail on pg 54-59of Appendix B.Currently, IZ policy is viable
in a few MTSAs but not others.Ageographically uniform approachto IZ is not recommended.
Instead,the initialfocus of Inclusionary Zoning should be on MTSAswith strong residential
markets.
The analysis does not include any new municipal incentives. NBL
quantify how incentives could help achieve more affordable units, deeper levels of affordability,
or longer duration than policy alone.
In weaker submarkets, the policy framework should be set up now, with very low affordability
requirements in the near term. These requirements can increase gradually as weak submarkets
improve. IZ candeliver a modest but meaningful number of affordable units in the near term.
There is significant value however in setting up an IZ framework toprepare for a more ambitious
policy asdevelopment economics improve in the future.Frequent monitoring and adjustment of
an IZ policy is critical.
Cities should provide an early signal to residential developers and MTSA landowners that an
inclusionary zoning policy is coming. When coupled with transition policies, this approach
providestime for the market to adjustto aninclusionary zoning policyand minimize land market
disruption.
This analysis is limited to a point in time. Residential development economics are dynamic due to
changing constructioncosts, changes in the real estate marketdue to COVID-19, the introduction
of Bill 108, Bill 197and its impacts on Development Charges, Community Benefit Charges,
Density Bonusing and Parkland dedication.
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Figure 1 -Financial Viability of Inclusionary ZoningCondominium with 10% of units as
permanently affordable rental units -100% of Average Market Rent
Viable
Marginal
Challenge
Peer Review
Per provincial regulations, the Citiesretainedthe consulting firmurbanMetricsto provide a peer review
review, included asAppendix E,confirms thatmeets the statutory
requirements,confirms the appropriatenessof themethodology,key assumptions, findings, their
interpretation andrecommendations.suggestions surroundingthe complexity of
monitoringandmaintainingaffordability in perpetuity will require consideration in the next phase of
thisproject.
WhatWeHeard
Engagement to date has focused on key stakeholders from the development and affordable housing
advocacy communities.These conversations are further detailed in Appendix B.Highlights include:
In person meetings with key MTSA residential developersto introduce the project and learn
about their concerns
Zoom meeting with 49key development industry and affordability advocate stakeholders
regarding preliminary study findings
One-on-one follow up meetings with key developers to verify study proformas with real world
examples
Project webpage https://www.engagewr.ca/inclusionary-zoninglaunched on April 1
Presentation to Affordable Housing Strategy Advisory Committee
Council Strategy Session
Meetings with Yes inMy Backyard Waterloo Region (affordability advocates)
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Conclusions and Next Steps
Inclusionary Zoning policy has potentialto deliver a modest but meaningful number of affordable units
within market developments.The study shows that under ,IZis fiscally
viable in Downtown and Midtown. Usingmanagement assumptionthat half
of the total number of units currently allowed in zoning will be constructed,there is potential for up to
1,500affordable rental unitsin the long term.If residential development economicsimprove,the IZ policy
could be expanded to other MTSAsto deliver moreaffordable units.
IZ is one tool that can be used alongside policy and investment by Local, Regional,Provincial and Federal
governments together with the to
achieve affordabilityobjectives. Staff recommend that Inclusionary Zoning warrants further research,
policy and program development and broader community consultation. Staff recommend that these
principlesguide this next step.
1.Affordability -Secure affordable housing that is not otherwise being provided by the market.
2.Partner with development communityTo achieve housing targets the Cityneedsdevelopers
to build new affordable units under IZ. Residential development projects must continue to be
viable.
3.Minimize landmarket disruption Provide early signals and transition time for the land market
to adjust to IZ
4.Longterm sustainabilityIZpolicy should be viable without financial incentives. Incentives may
beusedto achieve affordability objective beyond what is supported by land economics
Appendix C is an initial list of policy and program questions to be considered in the next phase. Staff plan
to continue to collaborate with the Cities and Region. The integrated nature of our residential real estate
markets would makeit challenging for any one municipality to implement this kind of policy in isolation.
Furthermore, collaborationprovides more staff resources,opportunitiesto cost share,economies of scale
in program delivery,and ultimately better policy.Staff at the municipalities intend to continue to work
together on policy and program development and report back to Council.
Key milestones
Council
Financial Key
Background Work
Housing Needs direction to
Impact Stakeholder
Assessmentcontinue
Jan-Sept 2020
AssessmentMeetings
working on IZ
Explore Community
Policy
set aside, price
Ownership and and
Development
point, duration,
operation stakeholder
tenure etc.
Q4 2020-2021
modelsengagement
Finalize
ROP amended Adopt OPA and
Policy Finalization
ownership and
to delineate Zoning By-law
operation
2021/2022+
MTSAsamendment
models
New affordable
Policy IZ applies to monitoring
Implementation
units
Approved by new reports and
constructed
2022/2023+
Regionapplicationsadjustment
and occupied
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ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN:
2019-2022 Strategic Plan Caring Community Theme
Strategic Plan Action: Create an Affordable Housing Strategy for Kitchener by 2020 in collaboration with
Waterloo Region, community groups and the development industry.
FINANCIAL IMPLICATIONS:
Most of the work in developing an IZ policy, regulations and programwillbe completed by staff, and are
includedin departmental work plans.However, the report and peer review both recommend
frequent monitoring and adjustment of an IZ policy to ensure its success. An update or addendum to the
fiscal impact model report is likely required, prior to implementation to account for COVID-related
changes to developmenteconomics,market conditionsand changesin legislation that affect soft cost.
This required update will likely have resource implications that are currently unbudgeted. Staff are
exploring opportunities to build capacityto undertake monitoring andfinancial modelingin-house,
potentially in collaboration with the partner municipalities.
Staff are proposing to develop an inclusionary zoning framework that is sustainablewithout municipal
financial contributionor subsidies towards providing affordable units. Should Councilwish toachieve
additional affordability objectives above what is supported by land economics, financial incentives may
be required. The cost of implementing an IZ policy and program will be considered in a subsequent report.
Staff have identified a potential for the non-profit housing sector (e.g. Kitchener Housing) to provide
mutually beneficial assistance with ownership and operation of affordable units long-term.
COMMUNITY ENGAGEMENT:
Given the technical nature of thisstage of the project,community engagement was primarily addressed
to key stakeholders, informing them about this tool and the fiscal impact study and receiving feedback.
In person meetings with key MTSA residential developers to introduce the project and learn
about their concerns
Zoom meeting with 49 key development industry and affordability advocate stakeholders
regarding preliminary study findings
One-on-one follow up meetings with key developers to verify study pro formas with real world
examples
Project webpage https://www.engagewr.ca/inclusionary-zoninglaunched on April 1
Presentation to Affordable Housing Strategy Advisory Committee
Council Strategy Session
Meetings with Yes in My Backyard Waterloo Region (affordability advocates)
The next phase of the project will include broad based community engagement, including but not
limited to the questions included in Appendix C.
PREVIOUS CONSIDERATION OF THIS MATTER:
DSD-19-134Affordable Housing Strategy Work Program Overview
DSD-20-006-Affordable Housing Strategy Phase 2: Housing Needs Assessment
DSD-20-034-Council Strategy Session Affordable Housing Issues and Options
DSD-20-108Draft Housing Strategy
REVIEWED BY:Karen Cooper, Manager, Strategic and Business Planning, City of Kitchener
Michelle Lee, Senior Policy Planner, City of Waterloo
Valerie Spring, Senior Planer -Reurbanization, City of Cambridge
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Judy Maan Miedema,Principal Planner, Region of Waterloo
ACKNOWLEDGED BY: Justin Readman, General Manager of Development Services
APPENDICES:
Appendix A: Provincial Requirements for an Inclusionary Zoning Study
AppendixB:Evaluation of Potential Impacts of anAffordable Housing Inclusionary Zoning
Policy
Appendix C: Key Questions to be answered in next phase
Appendix D: What we heard
Appendix E: Peer Review Letter of Opinion onInclusionary Zoning Financial Impact Analysis Report
7
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Appendix A-Inclusionary Housing Assessment Information Requirements
Inclusionary Housing Assessment and Monitoring Requirements-(From Ontario Regs)
An assessment report required by subsection 16 (9) of the Act shall include information to be
considered in the development of official plan policies described in subsection 16 (4) of the Act,
including the following:
1.An analysis of demographics and population in the municipality.
2.An analysis of household incomes in the municipality.
3.An analysis of housing supply by housing type currently and planned for in the municipality.
4.An analysis of housing types and sizes of units that may be needed to meet anticipated demand
for affordable housing.
5.An analysis of the current average market price and the current average market rent for each
housing type, taking into account location in the municipality.
6.An analysis of potential impacts on the housing market and on the financial viability of
development or redevelopment in the municipality from inclusionary zoning by-laws, including
requirements in the by-laws related to the matters mentioned in clauses 35.2 (2) (a), (b), (e)
and (g) of the Act, taking into account:
i. value of land,
ii. cost of construction,
iii. market price,
iv. market rent, and
v. housing demand and supply.
Provincial policies and plans and Official plan policies
A written opinion on the analysis from a person independent of the municipality and who, in the
opinion of the council of the municipality, is qualified to review the analysis.
Monitoring reports to include:
1. The number of affordable housing units.
2. The types of affordable housing units.
3. The location of the affordable housing units.
4. The range of household incomes for which the affordable housing units were provided.
5. The number of affordable housing units that were converted to units at market value.
6. The proceeds that were received by the municipality from the sale of affordable housing
units.
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Usvtufe!bewjtpst!tjodf!2:87/!
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SOURCE: Google Earth (2020)
EVALUATION OF IMPACTS OF
INCLUSIONARY ZONING POLICY
Peer Review
Kitchener / Cambridge / Waterloo, Ontario
Prepared for the Cities of Kitchener, Cambridge, Waterloo
September 16, 2020
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This document is available in alternative formats upon request by contacting:
info@urbanMetrics.ca
416-351-8585 (1-800-505-8755)
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September 16, 2020
Cities of Cambridge, Kitchener, Waterloo
c/o Tim Donegani
Senior Planner
City of Kitchener
200 King Street West
Kitchener, Ontario
N2G 4G7
Dear Tim:
RE: Evaluation of Impacts of Inclusionary Zoning Policy Peer Review (Kitchener / Cambridge /
Waterloo, Ontario)
, April
2020 draft report titled Evaluation of Potential Impacts of an Affordable Housing Inclusionary Zoning
Policy, prepared by NBLC on behalf of the Cities of Cambridge,
Kitchener, Waterloo and Waterloo Region.
Based on our review of the subject report and our own re-cast of selected elements of the associated
financial analyses relied upon to inform the findings of the study, we ultimately support the work
prepared by NBLC and are confident that the study adequately addresses the requirements set out
in Ontario Regulation 232/18 with respect to the implementation of new Inclusionary Zoning
programs. In particular, we have not identified any material deficiencies in the work prepared by
NBLC and generally note that they appear to have completed a detailed, thorough and accurate
financial analysis. This analysis appropriately captures the required nuance and submarket-specific
conditions across the various subject communities while also having regard for the inherently high-
level nature of this type of analysis in informing municipal land use planning policy.
The following opinion letter provides a more detailed overview as to the underlying purpose and
scope of our review, urbanMetrics commentary as to the appropriateness of the underlying
methodology employed by NBLCincluding associated analytical assumptions and statistical inputs
as well as our own professional opinions as to the interpretation of the research findings presented
and final recommendations advanced by NBLC.
www.urbanMetrics.ca | 67 Yonge Street, Suite 804, Toronto, ON, M5E 1J8 | 416-351-8585 (1-800-505-8755) | info@urbanMetrics.ca
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Evaluation of Impacts of Inclusionary Zoning PolicyPeer Review(Kitchener / Cambridge / Waterloo, Ontario)| 1
1.0Introduction
1.1Background
In 2018, the Provincial government passed Regulation 232/18, which allows municipalities to
implement Incertain predefined conditions and parameters.
Simply put, IZ is essentially a housing policy approach that seeks to secure non-market housing as a
biproduct of broader market developments. The policy tool has been implemented in many
jurisdictions throughout the United Statesto varying degrees of successand the approach is now
being actively studied and considered in many Canadian cities, including across Ontario.
In response to the above policy direction at the Provincial level, the Cities of Cambridge, Kitchener,
Waterloo and Region of Waterloo collectively commissioned a study specifically targeted at preparing
a more detailed investigation and testing of local development conditions; ultimately informing
whether the adoption of an IZ policy framework is economically feasible in this jurisdictional and
locational context. More specifically, the purpose of this study has been to explore how the
implementation of a new IZ framework could impact development activity in these communities, with
the objective of maximizing the creation of new affordable housing units and minimizing any
unwanted impacts on investment interest, land values or overall market affordability.
To complete this study, the subject municipalities have retained the services of NBLC, a consulting
practice specializing in housing, development feasibility analysis and real estate strategy. As outlined
in more detail herein, the NBLC study has largely been completed at this stage, including an extensive
supporting research program, the preparation of financial pro forma analyses for a number of
different submarket areas (10), consideration for a range of alternative scenarios or potential
outcomes sitivconsultations with local real estate
professionals active in the Waterloo Region market (i.e., the development community), and delivery
of a complete draft report inclusive of all related research findings, conclusions and recommendations
as of April 2020.
1.2Purpose
The aforementioned introduction of new IZ policies by the Government of Ontario under the Planning
Act resulted in Ontario Regulation 232/18, which was filed on April 11, 2018. The study
commissioned by the subject municipalities and completed by NBLC is ultimately intended to satisfy
the requirement for the identified under this regulation and as part of the
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Evaluation of Impacts of Inclusionary Zoning PolicyPeer Review(Kitchener / Cambridge / Waterloo, Ontario)| 2
for developing new Official Plan policies. As noted in the NBLC report,
thi
and on the financial viability of development or redevelopment in the municipality from inclusionary
zoning by- the following factors:
value of land;
cost of construction;
market price;
market rent; and
housing demand and supply.
analysis
described above that is prepared by a independent of the municipality and who, in the
In satisfying this
measure, the Cities of Cambridge, Kitchener and Waterloo have now retained the services of
urbanMetrics to undertake this peer review and written opinion of the NBLC study.
Although the consideration for implementing IZ policies is a relatively new concept for Ontario
municipalities and therefore very few of these peer reviewsif anyhave been completed to date,
we note that they are commonplace in various other areas of land use planning and the municipal
development approvals process. In particular, they are perhaps most common as part of critiquing
other types of land economics assignments, including market demand and impact studies and/or in
support of dispute resolution (e.g., in preparation for OMB/LPAT hearings, etc.).
In our experience, these types of studies are typically intended to provide a municipality or other
public sector organization with an unbiased, third-party perspective and to further validate (or
refute) the findings presented as part of an original research assignment. To this end,
role for this assignment has ultimately been to ensure the underlying appropriateness, accuracy and
suitability of the study prepared by NBLC, thereby providing the subject municipalities with
additional confidence in the findings presented.
1.3Scope
It is important to make clear at the outset of this review the underlying extent and scope of our
involvement with this assignment. As established in the original Terms of Reference with the City of
Kitchener (and also on behalf of the City of Waterloo and City of Cambridge), this review has generally
been intended to address a number of core elements of the NBLC study and ultimately to prepare the
following key tasks/deliverables:
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Evaluation of Impacts of Inclusionary Zoning PolicyPeer Review(Kitchener / Cambridge / Waterloo, Ontario)| 3
Written opinion of NBLC draft report of April 2020 (as presented in this document).
Determination as to whether the draft report meets the requirements in Ontario Regulation
232/18.
A review of the: (i) appropriateness of the methodological structure of the analysis; and (ii) the
validity of the key assumptions and inputs relied upon by NBLC.
Review of 3-4 sample pro forma analyses prepared by NBLC (assumed to be sufficiently
representative of the larger body of work undertaken).
Commentary on the key findings and recommendations provided, including in the context of
.
In addition to the specific tasks identified above, we have also engaged in ongoing and active
discussions with municipal staff and appropriate representatives of NBLC at a number of occasions,
including liaising with relevant technical/analytical staff to clarify our understanding of the analysis
and key data inputs, as needed.
In light of the above scope of work, and as agreed upon with the subject municipalities before
undertaking this review, we further note that there are a number of specific exclusions and/or
limitations to our review, including but not necessarily limited to the following:
We have not validated the calculation of relevant development-related municipal fees and
charges (e.g., development charges, planning application fees, etc.), which are all assumed to
be sufficiently accurate for the purposes of this review and have already been vetted by each
of the lower tier municipalities involved.
Beyond a high-level review of their general suitability and consistency with current
development patterns, we have not provided a direct critique nor other commentary on the
conceptual developments considered by NBLC within each of the ten submarket areas
identified (e.g., with respect to overall scale of development, densities, consistency with
municipal policy and development permissions, etc.). We assume that these have all been
appropriately reviewed and accepted by municipal staff before being tested for viability.
We have not prepared a detailed, line-by-line audit of the 140 financial pro forma analyses
produced by NBLC and all corresponding spreadsheets, cell references, etc. Instead, and
respecting the propriety nature of many of these elements of the study, we have undertaken a
more high-level review and recast of sample pro forma analyses provided by NBLC in PDF
format. Given that all of the distinct feasibility analyses and related sensitivities follow a
similar/identical analytical structure and format, these are generally assumed to be
appropriately representative of the entire body of work prepared by NBLC as part of this
assignment.
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Evaluation of Impacts of Inclusionary Zoning PolicyPeer Review(Kitchener / Cambridge / Waterloo, Ontario)| 4
2.0Review
2.1Methodology
The following section details our high-level review of the methodology employed by NBLC to evaluate
the effects of IZ on the financial feasibility of development in each MTSA considering a combination of
tenures (i.e., condo and rental) and affordability types.
Analytical Structure & Approach
In completing this type of community-wide feasibility analysis and ultimately informing future
municipal policies, it is important to emphasize that no two development sites are the same and
individual developers will have varying motivations and return expectations (or requirements) to
consider when investigating a new development project. This presents one of the single greatest
challenges in assessing the impacts of IZ on the financial viability of development across broad market
areas. With this in mind, the following provides a brief overview of our review, understanding and
commentary on the fundamental methodologies and approach adopted by NBLC as part of this study.
The approach taken by NBLC was to first develop prototypical development concepts for each
of the ten submarkets identified based on emerging development trends, as well as
consultations with City staff and the development community. These development concepts
considered both purpose-built rental and condominium/ownership tenures in each
submarket. In our experience, although not without its pitfalls in terms of appropriately
reflecting the potential unique conditions or requirements of individual sites, this general
approach is certainly most common and can generally be considered an emerging
for such high-level analysis. Similarly, we can confirm that urbanMetrics has regularly
employed a similar methodology in other municipal jurisdictions where this type of high-level
demonstrative or illustrative analysis was required.
Utilising these prototypical developments, NBLC then assessed the financial viability of
development using a residual land value (RLV) approach to estimate the maximum land value
a developer may be willingor ableto pay for a development site while also meeting their
own internal development return requirements. Often utilized in the development community
ntial development site acquisitions, an RLV
assessment requires less detail and specificity than a more comprehensive discounted cash
flow (DCF) proforma modelling technique typically relied upon once a site has already been
identified as having some underlying development potential. The latter DCF approach is
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generally more appropriate when a detailed site-specific development concept is being tested
and optimized to ensure returns will be met and financing can be secured. In our experience, if
a development site is unable to pass the preliminary RLV test, it is unlikely to be feasible when
modeled on a DCF basis. As such, while this general approach will not necessarily guarantee
the future feasibility of a given development project, it typically provides an appropriate
measure of viability and economic promise at a much earlier stage such as this (i.e., as part of
a municipal policy exercise).
Given the challenges of evaluating IZ policies across ten distinct submarkets and hundreds of
unique sites, we believe that the RLV approach is appropriate for informing policy-based
decisions such as this, whereas a DCF model is only appropriate for site-specific analysis when
more detailed development plans are available (i.e., detailed design stage of development or
immediately approaching market entry).
Additionally, we note that the NBLC analysis involved the creation of some 140 unique
proforma models, which would have otherwise required an unnecessarily burdensome
amount of time and resources to complete as a DCF for each scenario. It is our opinion that
this additional effort would have been of little to no value to the subject municipalities,
yielding marginalif anybenefit. Similarly, we note thatas a perquisite to undertaking any
more detailed analysis than already prepared by NBLCadditional design conceptualization
and site-specific considerations would have been required, which are not necessarily available
from the three lower-tier municipalities at this time.
In order to estimate the impact to land values associated with the implementation of IZ, NBLC
undertook the following specific work steps:
Firstly, estimates of the base land value for each prototypical development were
established based on prevalent existing under-utilized uses in each submarket area.
Next, redevelopment for both condo and rental residential uses were tested under the
current policy (i.e., with no IZ) to understand if development is viable before an IZ
policy is implemented.
Finally, various implementations of IZ were tested considering different levels of
affordability (condo) and affordability periods (rental). If the land value of any
redevelopment scenario approached (within 10%) or fell below the base value of a site,
NBLC assumed that the viability of the development project would be in question. This
assumes that if a residential developer cannot offer the existing landowner at least
10% higher than a base value, it will not be enough to motivate a landowner to
close their business and sell their site to the developer.
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In executing this assessment, NBLC also notes that: The policy framework is forward looking.
It considers the implications for development if a developer were to pursue land acquisition
and development under current market conditions. Perhaps more accurately, we would
suggest that it rather takes into account current market conditions to then forecast potential
or likely future conditions (e.g., considering growth in both revenues and costs, etc.), which is
a suitable approach in our opinion.
Overall, we find this to be a reasonable approach for understanding the high-level implication of
implementing IZ within each submarket. We do, however, caution that it is unlikely that the
prototypical base land values assigned to each submarket will be consistent with current landowner
actual or perceived values on a more site-by-site basis. NBLC also recognizes and acknowledges this
limitation as part of the following note in Section 5.5 of their report:
This analysis cannot capture certain nuances arising from the nature of a historical land
purchase or the former capitalization of land costs through the operation of an income-
generating use in the interim. Nor can it contemplate the acquisition of land at speculative
values, not fully appreciating the magnitude of impacts from future policy adjustments.
To appropriately reflect this limitation, it will be important for the subject municipalities to provide
sufficient flexibility in their IZ policies, even in areas where financial viability may appear strong with
IZ, as presented in the analysis prepared by NBLC.
Application & Accuracy
As part of our methodological review, NBLC has provided us with detailed RLV models for four sample
submarkets representing varying locational and market conditions across the Region. These include:
the University of Waterloo MTSA, the Central/ Victoria Park/ Queen/ Kitchener City Hall/ Frederick
MTSA, the Fairway MTSA, and the Downtown Cambridge/ Main (Existing BRT/ Future LRT) MTSA.
Although it is outside of the scope of this peer review to perform a line-by-line audit of each model,
we have ensured that the mathematical approach to calculate the residual land value under each
scenario is sound and that the general equations appear to be correctly formed. Furthermore, we
have also conducted a high-spot check across each of the RLV models to identify any obvious
inconsistencies or analytical deficiencies.
Through our review of the sample models provided, we have co-ordinated directly with NBLC on
numerous occasions to obtain further clarification in several areas. These topics and discussions
included, but were not necessarily limited to, the following:
the application of parking requirements and suitability of parking types;
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the use of market revenue assumptions which are higher than their market research reflected
in Table 1;
property tax assumptions;
construction financing rates and construction draw schedules;
the inclusion of HST in both the revenue and cost calculations;
the methodology for valuing the affordable rental scenario with a 25-year term; and
the appropriateness of the discount rate applied.
Based on the high-level scope of this peer review, we cannot be certain that the NBLC analysis is
completely error free, however, based on our detailed discussions and additional background
research, combined with our own review and spot check, we are sufficiently confident that the RLV
approach described above has been applied correctly and accurately.
2.2Inputs & Data
Based on the general analytical structure set out in the previous section of this review, the following
provides a more detailed overview of our findings with respect to a number of the more specific sub-
elements of the NBLC study. This includes the range of specific inputs, assumptions and other
statistical sources relied upon to complete the subject analyses.
Development Concepts
Table 3 of the NBLC report summarizes the prototypical site assumptions (e.g., site area, building
height, Gross Floor Area) while Table 4 summarizes prototypical units and parking assumptions (e.g.,
average unit size, parking ratio, unit and parking pricing, absorption) for each of the ten submarkets.
In our opinion, these assumptions appear reasonable and reflective of both existing policies and
emerging development trends present in each submarket. The general scale and nature of
development contemplated is also consistent with our own professional experience in this part of the
Province, including work directly on behalf of the local development community and/or other
landowners and investors.
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Market Information
The base land values upon which all development scenarios were judged have been calculated
using land values of existing low-density commercial uses. While this may not be a perfect
solution, it likely represents the most appropriate high-level and consistent assumption
available to NBLC in this particular application (i.e., that which best reflects the current
identified). As noted earlier, there are some inherent and unavoidable limitations to this type
of analysis in terms of potential disconnect between the land values modelled in the analysis
versus the actual or perceived values for specific landowners throughout these areas.
This is a distinct challenge of introducing any new IZ policy framework, whereby local
landowners could be reluctant to acknowledge or accept downward pressures on land values.
This reluctance to accept downward pressure on land values can be particularly strong for
sites that currently may be worth more to the owners based on the existing income generating
operations than the one-time payout of selling the site for re-development. NBLC provides an
illustrative example of such a situation on page 6 of their report. Furthermore, we also note
that land values do tend to be more resilient to change or market fluctuation and generally
exhibit a certain level of
per square foot sales levels, which are more immediately responsive to changing market
conditions or consumer preferences, land use policy amendments, infrastructure
announcements, etc.). As highlighted by NBLC, the resulting risk of this dynamic is that overall
development activity is thereby reduced given the weakened financial prospects resulting
from the lower revenue-generating opportunities inherently presented by non-
market/affordable housing options.
As recommended by NBLC and discussed further herein, there are nonetheless a number of
approaches that can potentially be utilized by the subject municipalities in addressing these
risks, including gradual introduction of policy changes, continued monitoring of market
impacts on a go-forward basis, as well as a broader commitment to frequent and direct
communication with the local development community/landowners.
Revenue Assumptions
Table 1 in the NBLC report summarizes the results of their high-level scan of condominium sale
prices and rents across the ten submarkets, while Table 2 details the affordability levels
considered in the RLV models. Through discussions with NBLC, we note that the market sales
assumption ultimately input into the RLV models (as contained in Table 4) are slightly higher as
they are based on the most recently launched projects captured within the research sample
and therefore most indicative of potential ongoing or future market conditions. Based on our
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high-level review, the revenue assumptions (including additional interim occupancy charges
and various recoveries) appear reasonable.
We will, however, underscore the importance of updating these assumptions regularly on a
go-forward basis, especially considering the potential short/medium-term effects of the
ongoing COVID-19 pandemic.
Ground Floor Commercial Uses in Mixed Use Developments
Although not directly related to the core housing focus of this analysis (i.e., including both market and non-market
components), NBLC acknowledges thatin some areasprevailing planning policy would require developments to be
mixed-use, thereby incorporating some commercial uses within the development on a given site. It is our understanding,
however, that the RLV models prepared by NBLC assume that these types of commercial spaces would be
and therefore have been excluded from their analysis, accordingly.
Based on our experience across suburban and emerging urban markets across Ontario, we note thatwhile nonetheless
important in achieving active and animated complete communitiesthese grade-related retail and service commercial
spaces can, in many cases, remain vacant for many years and indeed reduce the profitability of broader mixed-use
projects. We further note that, during underwriting, it has become increasingly common for developers to assume
revenues from this portion of a given building, yet still consider the associated costs as a more conservative approach
(i.e., appropriately reflecting the potential risks associated with investing in the construction of these non-residential
spaces yet not necessarily realizing the corresponding revenues). Therefore, although we generally agree with the
approach adopted by NBLC in this regard (particularly for the sake of simplicity), we would recommend that any
requirements to include commercial spaces as part of future should be carefully
considered before or in parallel to the implementation of new IZ policy.
Hard Costs Assumptions
The RLV models rely on the hard cost estimates from the Altus Construction Cost Guide. It is
our understanding that these costs per square foot ratios were also vetted and confirmed by
representatives from the local development community as being appropriate in this
application. Given the high-level nature of the development concepts considered and in the
absence of more site or development-specific cost estimates from a quantity surveyor, we
consider the hard costs in the Altus Guide appropriate for inclusion in this type of RLV
analysis.
Soft Cost Assumptions
Municipal development fees (including planning application fees, building permit fees,
development charges, parkland contributions, and property taxes), which make up a large
portion of soft costs, have been included by NBLC as direct inputs from the Region and local
lower-tier municipalities. Other soft costs have been estimated as a percentage of hard costs
utype ratios, a common technique across all real estate
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proforma analysis. In our opinion, this is an appropriate level of detail to have included in this
portion of the analysis and consistent with the approaches commonly utilized by
urbanMetrics.
Other Assumptions
In addition to the more targeted market-based assumptions, the RLV models require several
assumptions that research reveals and therefore incorporate an
element of professional judgement. These include:
Capitalization Rates (Cap Rates)
Combined with the net operating income (NOI) expected from the new buildings, cap rates are
used to estimate an income-value upon completion. Market cap rates across
all asset classes are readily reported on for both current and historical periods, however,
future cap rates are unknown and must be forecast based on the modellbest estimate of
future market conditions and expected investment returns. The cap rates utilized by NBLC are
generally in-line with the current cap rates reported by CBRE in KitchenerWaterloo as of Q2
2020 and in our opinion, are reasonable to assume over the short- to medium-term in the
Region.
Revenue & Cost Growth
The RLV models utilized by NBLC involve consideration for market conditions over future
periods and as such, current market revenue and cost assumptions were assumed to grow into
the future. In particular, NBLC has conservatively assumed that both revenues and costs will
grow by some 2% annually on a go-forward basis. We appreciate this conservative growth rate
(by comparison to recent/historical patterns) and believe that by assuming revenues and costs
will grow equally, the future value of development land is not reliant on growth in market
demand (i.e., revenue growth) outpacing the corresponding growth of costs, which would
then speculatively add value to land into the future.
Moreover, based on follow-up discussions and responses to targeted questions posed by
urbanMetrics, we understand that NBLC have not applied a unique growth rate to the future
municipal fee portion of soft costs (e.g., development charges). This was an active decision on
their part to hold the rate of growth for municipal fees directly in line with other hard and soft
construction costs, with recognition and acknowledgement of the fact that these could
ultimately fluctuate in time. While we note that this could ultimately understate the potential
future costs associated with increased municipal feeswhich could very likely increase at a
rate of greater than 2% on average in the coming yearswe appreciate that this is difficult to
pinpoint based on uncertainty in the future cost recovery needs of the subject municipalities
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in future periods. Regardless, we do not anticipate this will necessarily result in a material
impact on feasibility, as characterized in the context of this study. In particular, as confirmed
and noted by NBLC, these fees are typically levied relatively early on in the development
process (upon issuance of building permits), so any impacts of applying a unique growth rate
to these figures would only be marginal. That is, they are unlikely to deviate significantly from
current rate structures in a relatively short period of time.
A key component of any RLV model is to account for, and preserve, a reasonable developer
profit. NBLC has set-aside a total of 15% of project revenues to reflect this opportunity for
profit-generation. It is important to note thatalthough developers often do not achieve the
targeted profit margin included in their RLV upon completion of a development project
assuming anything less at this early stage of the development process would not allow for the
that development projects often need to see them through more
detailed site-specific planning process and execution. This, in effect, serves to reflect an
appropriate continge on any profit margins, thereby allowing for potential
future fluctuations (increases) in costs, poor sales performance and/or other potential
unforeseen circumstances. Furthermore, a healthy profit margin ensures that projects will
secure financing in terms of presenting more favourably to prospective lenders.
Overall, and in consideration for the above factors, developers typically underwrite their
projects at a baseline or starting point of 15% (in our experience), although anywhere in the
range of 10-20% is generally considered reasonable or an appropriate benchmark in this type
of applicationto target the middle end of this range is appropriate both in
terms of exercising reasonable conservatism, but also in terms of consistency with our own
work and practices of the development community itself.
Discount Rate
The NBLC models assume will occur more than 5
years after land acquisition and a 6.0% discount rate was applied to calculate their present
value and the amount that the developer would be able to pay for land today. Through
supplementary conversations with NBLC, we understand that this discount rate was chosen in
large part through their previous consulting experience with the development community in
comparable Ontario communities. Although it is impossible to know each individual
discount ratewhich undoubtably will vary, typically somewhere in the range of
6% to 12%we believe that 6% is an appropriate keted assumption in this case where
there is a need for consistent and blended averages across multiple properties and
geographies. If anything, however, we do note that this may be potentially optimistic.
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Overall, we believe that the assumptions requiring professional judgement have been reasonably
considered by NBLC and serve to ensure that land values across all scenarios and submarkets are
comparable to their base values.
2.3Interpretation of Findings
As is the case with any land economics assignment of this nature, it is important to not only ensure
the quantitative methods and underlying calculations, assumptions and statistical inputs are sound
and appropriately representative of potential real-world conditions, but also to validate the resulting
interpretation of the analysis and any key takeaways and recommendations. That is, the analysis
achieve some substance in more practical vs. theoretical
applications.
Whereas the previous sections of this review substantiate the more technical aspects of the NBLC
study, the following focuses on providing a secondary review of their end conclusions and
recommendations to the subject municipalities from the perspective of future implementation.
Overall, we agree with the general advice and observations made by NBLC in light of the analysis
presented. There is a direct and immediate connection to the analytical findings established and the
recommendations thereof.
Flexibility in Policy
As noted previously in this reviewand as addressed directly by NBLCit will be critical to ensure
that appropriate flexibility is built in to any future IZ policy established by local area municipalities. In
our opinion, this is generally two-fold:
Firstly, given the hypothetical nature of this analysis for demonstrative parcels of land within
each submarket, there will undoubtedly be unique development conditions, expectations and
resulting land pricing for individual sites in practice versus theoretical development projects.
Although it is impossible to truly capture all the distinct conditions on each of these sites, it is
nonetheless important to accommodate the range of possibilities or potential outcomes in this
regard. As such, a future policy implementation that avoids being overly prescriptive while also
maintaining sufficient protection of the underlying objectives or strategic goals of the
municipalities will be important.
Secondly, and notwithstanding the above, NBLC highlights the obvious diversity of market
conditions across the Region. In addition to general flexibility to bridge the gap between policy
and the realities of the real estate market, it will also be important to encompass the full range
of development conditions presented across the various submarketsand/or individual
sitesidentified within each municipal jurisdiction. At its most basic manifestation, we agree
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cial incentives may be required to
compensate for the obvious reduction in revenues associated with affordable housing
minimums; particularly in the context of poorer-
addition, however, we further note that there could be a myriad of other parameters or
that can potentially be considered by the subject municipalities to improve feasibility
conditions in more isolated cases, including:
adjusting the quantum of affordable housing required (i.e., total % of units or floor
areas required);
or
representation for low and moderate income households;
considering reductions in parking requirements (although we do note that the rates
assumed by NBLC are already relatively low); as well as
offering opportunities for additional density permissions (i.e., simple exchange for
additional market-based height or density).
Further to above, it could be important to consider appropriate policy mechanism(s) that allow
for site-specific exemptions or other accommodations to achieve appropriate conditions on
unique and/or strategic sites. For example, there will inevitably be sites that are particularly
challenging from the perspective of viability (e.g., severe contamination and remediation
costs, difficult or complex physical/location/access characteristics, awkward relationship with
surrounding land uses, exceptionally large sites for which unique challenges are presented
with respect to phasing and possible absorption timelines, etc.). Loosening of some of the IZ
policies may be required in order to continue to incentivize and/or allow for development to
occur for these types of sites. Similarly, there may be specific strategic sites for which the
various lower-tier municipalities would like to secure additional development to achieve other
planning or economic development-related objectives, which require discretionary relaxation
of policy to alleviate constraints to develop relating to reduced opportunities for revenue
generation.
Gradual Introduction
In their draft reporting, and based on our own discussions with relevant members of their team, NBLC
appears to advocate for introducing any new IZ policies gradually , so as
to provide appropriate advanced warning to landowners and the development community. Although
in theoryand perhaps at face valuethis could delay the delivery of new affordable housing supply
to the Region, we ultimately agree with their assessment and believe that this is a necessary first step
to ensure the longer-term sustainability of the new policy framework. This may also serve to avoid
any unwanted immediate or short- in the local market area(s).
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In addition to establishing a reasonable timeline for introduction of the new IZ policy, this initiative
should also be accompanied by active and regular communication, education and outreach with the
development community to ensure clarity of the intended direction and motivations of this policy, as
well as the anticipated outcomes from the perspective of each of the municipalities.
Monitoring Framework
Consistent with the notion of a gradual introduction of new IZ policies, per above, a related and
subsequent task for the municipalities will be to continuously monitor the market impacts of the new
IZ policy and to actively adjust in response to any unwanted changes. This will also be required to
simply update and reflect constant changes in a dynamic real estate market, including: evolving
construction cost profiles and rates, changing revenue/demand prospects, adjustments to developer
preferences, ongoing supply/demand relationships, broader macroeconomic trends, etc. Similarly, as
alluded to in some of the case study examples identified by NBLC (e.g., New York City), there may be a
need to hear appeals or challenges to the policy in circumstances for which a reasonable agreement
cannot be established between municipal authorities and local landowners/developers.
With respect to future monitoring, however, we recognize that this will be particularly challenging in
an environment of limited financial and/or staff resources and potential lack of in-house subject
matter expertise within each of the subject municipalities. These challenges could also be further
exacerbated by the fact that there likely will not be sufficient scale or magnitude of IZ-related
development activity to justify the costs of monitoring in this manner (e.g., relative to other larger
municipalities where there could be a critical mass of development to warrant such a framework).
One potential solution to this problem would be to simplify the analyses prepared by NBLC and
effectively isolate or reduce to the model to its core principles
same modelling that follows the same general RLV structure but with fewer individual assumptions or
statistical elements to be updated). This may facilitate any future updates by municipal staff and/or
others involved that may not be able to offer the same level of expertise as external consultants.
Although we generally caution municipalities against updating or re-running these types of financial
models in isolation and without an appropriate understanding of the underlying concepts and
requirements for said inputs, this approach may nonetheless offer an interim or temporary solution
that requires less significant time and effort (as well as reduced risk of inaccuracy or
misinterpretation). For example, it is our opinion thatwhile the NBLC analysis may be appropriately
detailed to inform the development of the new IZ policies under consideration as an initial baseline
the modelling structure may be overly or even unnecessarily detailed to be updated on an annual
basis. That said, we would generally encourage the municipalities to leverage this additional rigour
and specificity to best inform the introduction of the new IZ policies at the outset, but thereafter seek
to prioritize the frequency of any monitoring or update schedules established rather than necessitate
a similar level of detail in this monitoring process. Based on our earlier discussions, we believe that
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NBLC shares the same sentiment with respect to the importance of frequent updating, wherever or
however possible.
Perpetuity of Affordable Units
Another one of targeted recommendations is to seek affordability for units created through
IZ in perpetuity, where possible in
support of ongoing municipal strategic objectives (e.g., increasing the supply and indeed the term of
affordable housing supply), we certainly agree with this direction. As noted as part of previous
discussions with representatives of each of the lower-tier municipalities, however, we will caution
that this often places undue pressure and reliance on external sources of funding from other levels of
government (i.e., depending on the depth of affordability being pursued and/or the specific
parameters established as part of the resulting IZ policies and opportunities for exemptions,
additional financial incentives, etc.). More broadly, we note that there will undoubtedly continue to
be a finite source of provincial and federal funding available to support the creation of affordable
housing and municipalities in Waterloo Region will continue to vie for these moneys in direct
competition with other parts of the province and country.
As such, we would simply suggest that the subject municipalities carefully consider the extent to
which they are willing, capable and prepared to support this type of housing over the longer-term
planning horizon, if and where applicable.
3.0Conclusions
Based on our review of the NBLC report and supporting financial analyses, we support their research
conclusions and recommendations with respect to the feasibility of introducing new IZ policies in the
Cities of Cambridge, Kitchener and Waterloo. The following provides a summary of our specific
findings in this regard:
We believe that the RLV approach and analytical structure adopted by NBLC represents a
reasonable and reliable methodology for understanding the high-level implication of
implementing IZ within each submarket.
Although we cannot necessarily guarantee the full accuracy and completeness of the 140
proformas prepared by NBLC, we are sufficiently confident that the RLV approach and analysis
described above has been applied correctly, accurately and in a comprehensive manner.
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The various statistical inputs and other assumptions requiring professional judgement relied
upon by NBLC as part of their analysis appear to be entirely reasonable and consistent with
our own research and experience in this market area.
Although we have identified a number of potential alternative approaches, assumptions
and/or considerations for selected elements of the NBLC study, these would not result in a
material impact to the end results of the study, nor any of the associated study conclusions
and recommendations provided to the municipalities.
Based on our review of the NBLC findings and recommendations, including in the context of
agree with the advice and observations made by NBLC
in light of the analyses presented.
Overall, no fundamental deficiencies nor other issues were identified as part of our review, which
need to be addressed as part of any future updates or re-issuing of the draft reporting prepared by
NBLC to date. Consequently, and as identified at the outset of this opinion letter, it is the professional
opinion of urbanMetrics that the study prepared by NBLC on behalf of the subject municipalities
adequately addresses the requirements set out in Ontario Regulation 232/18 with respect to the
to be prepared in support of the implementation of new IZ policies.
It has been a pleasure conducting this study on behalf of the Cities of Cambridge, Kitchener and
Waterloo and we hope that you find this information helpful in your continued efforts to explore the
appropriate application of new IZ policies across the Region. Please do not hesitate to contact the
undersigned with any questions or comments that you may have, or if further discussion and
coordination is required with relevant members of NBLC.
Yours truly,
urbanMetrics inc.
Christopher White, PLE Matthew Paziuk
Partner Senior Project Manager
cwhite@urbanMetrics.ca mpaziuk@urbanMetrics.ca
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