HomeMy WebLinkAboutPSIC - 2023-06-19 - Item 6.1 - Attachment 2 - NBLC Inclusionary Zoning Model Update Memonb1c
N. Barry Lyon Consultants Ltd.
Memorandum
City of waterloo
To: City of Kitchener
City of Cambridge
Region of Waterloo
From: N. Barry Lyon Consultants Limited
Date: September 22, 2022
RE Inclusionary Zoning Development Model Update
User Manual
1.0 Introduction
N. Barry Lyon Consultants Limited (`NBLC') has been retained collectively by the Cities of Waterloo,
Kitchener, Cambridge and the Region of Waterloo (`the client group' to update a financial model that was
previously prepared for the same client group to consider opportunities for Inclusionary Zoning (IZ) in 2019.
This financial model is intended to aid key staff and decisionmakers in testing inclusionary zoning policy
parameters and their impacts on underlying development economics. This memorandum provides further
information on how to utilize the attached financial model, but also how to interpret its results.
2.0 Disclaimer, Model Use and Distribution
The attached Excel file contains spreadsheets related to research and analysis conducted in support of an
assessment of IZ throughout the study area. These spreadsheets have been provided to select staff at the Cities
of Waterloo, Kitchener, Cambridge, and the Region of Waterloo for internal review and testing purposes only.
Any structural changes made may cause the model to cease to function correctly.
The distribution of this material beyond the client group is prohibited. These spreadsheets and their results are
highly sensitive to changes in formulas or data. NBLC assumes no responsibility for the contents of these
spreadsheets after distribution to key staff in the client group. Moreover, NBLC makes no representation with
respect to financial modelling results without detailed study and independent verification.
Inclusionary Zoning Model Manual pg. 1
Kitchener Waterloo Cambridge, Septmeber 2022
NBLC Docket #22-3586
The conclusions and results contained in this analysis have been prepared based on both primary and secondary
data sources. NBLC makes every effort to ensure the data is correct but cannot guarantee its accuracy. It is also
important to note that it is not possible to fully document all factors or account for all changes that may occur in
the future and influence the viability of any development.
A major variable affecting the outcomes of this analysis is the rapidly changing cost of construction. The findings
of this analysis reflect market conditions (revenues and costs) as of mid -2022. The hard costs of high-density
housing have seen dramatic increases over the past two years because of supply chain and labour constraints
related to the COVID-19 pandemic. Combined with rising interest rates, there is currently a significant degree
of uncertainty in the near-term outlook for residential development projects. More importantly, while we have
developed hard cost assumptions using up to date industry information, the actual costing of each project could
vary significantly for many reasons including geotechnical complexity, environmental remediation, site scale
and location, among others. Additionally, the selection of the test sites and typologies, while intended to be
reflective of common forms of development in some of the Region's key market areas, are not able to capture
the nuance of all development fortes, ownership conditions, and site-specific characteristics across the cities.
Also related is the nature of development or redevelopment potential throughout some areas of the cities. This
analysis isolates evaluation to one single development phase. However, in some locations, the nature of
redeveloping areas is such that larger sites will result in multi -phase developments. Project pre -development
approval timelines are also consistent throughout the test sites in this review, however, we acknowledge that in
practice, some projects could get delayed while others may proceed faster. The pace at which a project proceeds
from conception to building permit can be a particularly important consideration.
This analysis cannot capture certain nuances arising from the nature of a historical land purchase or the
capitalization of land costs through the operation of an income -generating use. Nor can it contemplate the
acquisition of land at speculative values, not fully appreciating the magnitude of impacts from future policy
adjustments. Similarly, this analysis cannot account for all potential variations in the value of alternative land
uses in a given area. Actual valuations will vary from property to property according to a wide range of site and
incumbent landowner expectations.
NBLC, therefore, assumes no responsibility for losses sustained as a result of implementing any recommendation
arising in this analysis. This analysis has been prepared solely for the purposes outlined herein and is not to be
relied upon, or used for any other purposes, or by any other party without the prior written authorization from
NBLC.
3.0 Key Changes From Previous Model
Since the completion of our initial analysis (Spring 2020), several key changes have been made within our model
that are worth highlighting.
Revenue Inputs
New condominium apartment pricing in Waterloo Region has undergone substantial growth since the previous
study, as shown in Figure 1. During the previous study, our testing assumed average index values ranging from
$480 to $675 psf, which was based on market comparables at the time. Our current model utilizes significantly
Inclusionary Zoning Model Manual pg. 2
Kitchener Waterloo Cambridge, Septmeber 2022
NBLC Docket #22-3586
higher project index pricing, with values ranging from $847 to $1,044 psf These assumptions are supported by
several new projects that have successfully pushed pricing thresholds in Waterloo Region. Similarly, it is
increasingly common for new condominium apartment projects to charge an additional fee for parking. We have
included a separate parking fee at all of our test sites, whereas previously, many of the softer market areas
included parking in the purchase price.
As pricing has continued to grow, many new projects are offering increasingly compact unit sizing to keep end
pricing down for purchasers. Given this, we have modelled slightly smaller unit sizing than in the previous
iterations of this model. Most of the sites were previously modelled with an average unit size between 750 and
850 square feet. Our current model uses average unit sizing of between 618 to 713 square feet, depending on the
market area.
Finally, market evidence suggests that the level of demand for new condominium apartment units has grown
considerably since the previous study, likely as an increasing number of would-be low-rise purchasers have been
priced out of the market. This change has resulted in us using higher absorption rates than in the previous model.
Figure 1— Condominium Apartment Project Average Opening Index Price, KCW, 2013 to 2022 (Weighted by Number of Units)
$1,400
$1,200
W
a
$1,000
X
W
$800
W O O OWaterloo
O Kitchener
v $600 O —
CL
0 0 Cambridge
qpb
Q0 /'1C1 O 0)
$200�
$0
Jan -2013 Jan -2014 Jan -2015 Jan -2016 Jan -2017 Jan -2018 Jan -2019 Jan -2020 Jan -2021 Jan -2022 Jan -2023
Opening Date
Source: Altus Group
Cost Inputs
The cost of construction has experienced considerable escalation since the previous study. While Statistics
Canada does not produce a Building Construction Index for KCW, Figure 2 illustrates the rate of cost escalation
for new apartments in the GTA — a reasonably proxy for KCW. After modest growth for several years, supply
chain challenges and labour shortages have pushed the cost of construction up significantly since 2020. From
Q2 2020 to Q2 2022, the average cost of construction has risen by 36% for 5+ storey apartments and 61 % for
apartments under five storeys. Our current model has utilized the most up to date costing information from the
2022 Altus Canadian Construction Cost Guide. However, we note that this is published in the first quarter of
each year, and costs have continued to inflate throughout 2022.
Our current model has also used the most up to date soft costs, including the most up to date municipal fees,
many of which have increased since the previous analysis. This includes planning fees, building permit fees,
Inclusionary Zoning Model Manual pg. 3
Kitchener Waterloo Cambridge, Septmeber 2022
NBLC Docket #22-3586
parkland dedication rates, and development charges. Further, we have utilized a Community Benefit Charge
(`CBC') equivalent to 4% of the land value in our model. This charge was not present in the previous model.
Finally, it is worth noting that the current model uses construction loan interest rates that are much higher than
in the previous model. The current model uses a construction loan interest rate of 6.45% (prime plus 100bps),
whereas the previous model utilized a construction loan interest rate of 4.50%.
Figure 2 — Building Construction Price Index, GTA, Indexed to Q1-2017
190
180
170
160
150
140
130
120
110
100
Q1 Q2 Q2 Q4 Q1 Q2 Q2 Q4 Q1 Q2 Q2 Q4 Q1 Q2 Q2 Q4 Q1 Q2 Q2 Q4 Q1 Q2
2017 2018 2019 2020 2021 2022
5+ Storeys —<5 Storeys
4.0 Development Value vs. Existing Use Value
Underpinning our analysis is the concept that each parcel of land has both a Development Value (DV) and an
Existing Use Value (EUV). The DV is the parcel's value to someone who wants to build something on the land.
In our circumstances, this refers to what a residential developer would be willing to pay to acquire the parcel.
The EUV is the value of the land based on its existing use. When the DV is greater than the EUV, redevelopment
is likely. When the EUV is greater than the DV, redevelopment is unlikely.
On their own, inclusionary zoning policies will reduce a parcel's DV as the developer would be required to
construct a portion of units at a production cost that is below the market value of those units. This reduction in
DV can be sustainable if a parcel's DV remains above its EUV, however, the rate and magnitude of change can
also be notable and significant as it relates to projects which are currently in the development pipeline, and/or
where developers have already acquired parcels with intentions for near-term development. If the policies
become so onerous that the DV falls below the EUV, this parcel would no longer be considered a candidate for
redevelopment. This would reduce the supply of land that could be used for new housing — an unintended and
undesirable consequence.
Inclusionary Zoning Model Manual pg. 4
Kitchener Waterloo Cambridge, Septmeber 2022
NBLC Docket #22-3586
Conversely, municipalities can offer incentives, both financial and non-financial, that help to offset the reduction
in DV brought on by the introduction of inclusionary zoning policies. These offsetting measures can help ensure
that the municipality is still able to achieve its affordable housing objectives through inclusionary zoning,
without negatively impacting the supply of land available for redevelopment. In many jurisdictions where IZ
policies are considered to be successful, offsetting measures play a significant role in policy design and
calibration.
5.0 Interpreting the Dashboard
Understanding this economic concept of DV and EUV, our model attempts to quantify the impact that
inclusionary zoning policies and offsetting measures may have on the DV value of typical sites across a variety
of geographies in Waterloo Region. In the chart at the bottom of our dashboard, a test site's DV is shown as a
bar for each of the four adjustable policy arrangements. This DV can then be compared against the site's EUV,
as input by the user, which is displayed as a line in the same chart. From this, two key findings should be
considered:
The DV Relative to the EUV.
Most importantly, if the DV of the test site falls below the EUV value, this would be considered an undesirable
outcome. It would mean the inclusionary zoning policy has sterilized the site from redevelopment, thereby
restricting the potential supply of new housing, both market and non -market.
The Rate/Magnitude of Change in the DV From the Status Quo.
The rate of change in the DV is also important. Too significant of a drop in a short period of time could lead to
landowners withholding their lands from the market, even if the DV remains above the EUV, until pricing has
recovered. Again, this too could mean that the inclusionary zoning policy has restricted the supply of new
housing, both market and non -market.
6.0 How to Utilize the Dashboard
Under the tab `Land Values and User Inputs' tab of the workbook, existing land values can be input for each of
the ten MTSAs. This value should be expressed on a $million per acre basis. These values could represent the
value of a prevailing land use typology, more general averages, or a specific site value within that MTSA's
market area, presumably based on data provided by realty services or appraisals. However, it is also important
to acknowledge instances where a premium could be required as part of a land transaction in order to entice an
existing land/ business owner to sell their site.
Once these existing land use values have been entered, various policy parameters can be adjusted under the
`Dashboard' tab in the workbook to arrive at a DV for each scenario. To begin, the MTSA to be tested can be
selected in cell H10. Various policy parameters and offsetting measures can be selected in columns C through
Column F. As these parameters are adjusted, the DV bar will adjust in real-time.
Inclusionary Zoning Model Manual pg. 5
Kitchener Waterloo Cambridge, Septmeber 2022
NBLC Docket #22-3586
Of note, while the parameters can be adjusted in the first Column (Column C), it is optimal to leave this column
,as is', so that it represents the existing baseline policy. This allows the user to easily see the impact of
inclusionary zoning policies and offsetting measures on the DV.
Figure 3 — All Four Policy Scenarios Produce a DV that is Higher than the EUV (Redevelopment is Likely)
=Development Value —Existing Use Value
Figure 4 — Three of the Four Policy Scenarios Produce a DV that is Lower than the EUV (Redevelopment is Unlikely)
E 0
=Development Value —Existing Use Value
Some Scenarios May Not be Viable
In some instances, a combination of development and policy parameters may not `pencil', meaning that even if
there were no land costs associated with the development, the costs of the project would outweigh the potential
revenue. In these instances, a developer would not go ahead with the development under any circumstance.
When this happens, the DV bar will display as a negative and the residual land value shown in row 45 will be
highlighted in red.
Solving Calculation Errors
As the Dashboard's background model utilizes multiple circular references (e.g., often elements related to
parkland calculations/ property tax/ land transfer tax), there may be instances where iterative calculations
produce an error, outputting "N/A" instead of numerical values. If this happens, the calculation error can be
broken with the `Model Fix Button' on the `Dashboard' tab (1-113). Simply select "Fix" from the drop-down
menu, then revert to "OK". This button must be set to "OK" for the model to calculate properly.
Inclusionary Zoning Model Manual pg. 6
Kitchener Waterloo Cambridge, Septmeber 2022
NBLC Docket #22-3586
If this does not properly fix the broken calculations, please ensure that iterative calculations are turned on within
Excel's options. To do this go to Excel's options page under the `File' tab, and under `Formulas', ensure that
`Enable Iterative Calculation' is selected.
7.0 Model Parameters Descriptions
The following section describes the selection parameters from our dashboard.
Development Selections
■ MTSA — Selects one of the ten MTSAs. Each MTSA has been assigned market parameters that best reflect
its local area.
■ Lot Size (Site Area) —Can beset between 0.5 acres and 1.5 acres. Of note, in order to accommodate parking,
smaller lot sizes may result in some high-rise building typologies surpassing the standardized 24 -storeys.
Information regarding building height is shown in row 28 in the `Dashboard' tab of the workbook.
■ Development Type — This selects the building typology to be tested. This is based on a high-level review of
recent apartment projects in Waterloo Region, with input from staff. The following table highlights key built -
form parameters.
■ Principle Tenure — This selects the principle tenure for the market units in the development. Of note, due to
prevailing economic conditions, most rental projects do not `pencil' in Waterloo Region, and therefore do
not represent the DV of these hypothetical developments.
■ Commercial Space At -Grade — This selection determines whether the hypothetical development includes
commercial space at grade, or if the building is entirely residential.
Table 1
InputsBuilt Form
Input Low -Rise
Apartment
Mid -Rise
Apartment
High -Rise
Apartment
Comments/
Source/Units
Site Area 43,560
43,560
43,560
square feet
Gross Floor Area (GFA) 90,000
130,000
225,000
square feet
Residential GFA 85,000
125,000
217,000
square feet
Commercial GFA 5,000
5,000
8,000
square feet
Total Storeys Before Bonus Density 6
12
24
storeys
Construction Period 1.5
2.5
3.5
estimate
Podium Storeys 6
4
6
estimate
■ AA Set Aside Rate — This selects what percent of the building's residential GFA will be dedicated to non -
market housing.
■ lZ Unit Tenure — This selects the tenure of the non -market housing units with options for either
condominium ownership, purpose-built rental, or rented condominium units. Of note, affordable
condominium ownership rates have not been provided to NBLC. As such, under the `Land Values and User
Inputs' tab, these values can be input manually.
Inclusionary Zoning Model Manual pg. 7
Kitchener Waterloo Cambridge, Septmeber 2022
NBLC Docket #22-3586
■ Duration of Affordability — Selects whether the non -market housing units will be maintained at affordable
rates for 25 years or in perpetuity. This only applies to rented non -market units, not affordable ownership
units.
■ Set Aside Application —Selects whether the affordable housing set aside rate is applied to the project's total
residential GFA or just to any bonus residential GFA that may be provided as an offsetting measure.
■ Depth of Affordability — Selects the depth of affordability for the non -market housing units as a percentage
of AMR (CMHC average market rent).
■ Additional Density — Sometimes additional density can offset the negative impact of inclusionary zoning
policies. This allows bonus density to be applied to the project as a percent of the total residential GFA.
■ Parking Ratio (Relative to Market) — This selection allows a reduction in the number of parking units that
are required for the non -market units relative to what is required for the market rate units. For example, if a
parking ratio of 1.0 is utilized for the market rate units, a 50% reduction would mean the non -market units
have a parking ratio of 0.5.
■ DC Waiver — These selections allow for a percentage reduction in the Development Charges (both local and
regional).
■ Parkland Waiver — This allows for a percentage reduction in the parkland dedication fees.
■ BP Fee Waiver — This allows for a percentage reduction in the building permit fees.
■ Planning Fee Waiver — This allows for a percentage reduction in the planning fees.
■ Waiver Rebate Application —This determines whether the DC waiver, the parkland waiver, the BP waiver,
and the planning fee waiver are applied to all units in the development or just the non -market units only.
■ Property Tax Abatement —This allows for a percentage reduction in property taxes (either local or regional)
for the non -market units for the duration of their affordability period.
■ Capital Subsidy — This allows for an upfront, one-time capital subsidy contribution to any of the
development scenarios.
Market Areas
Finally, while not a selectable parameter, our model has three categorical market areas — Prime, Established, and
Emerging — with each MTSA being assigned one of these market areas. Each of market areas comes with a set
of parameters that best reflect existing market conditions in Waterloo Region. These parameters are shown below
in Table 2 and the market area assigned to each MTSA is shown in Table 3.
Inclusionary Zoning Model Manual pg. 8
Kitchener Waterloo Cambridge, Septmeber 2022
NBLC Docket #22-3586
Table 2
Market Area Inputs
MTSA
Municipality
Prime
Established
Emergin
Unit Mix and Size
University of Waterloo
Waterloo
Prime
Avg. Unit Size
618
650
713
Studio (%)
10%
10%
0%
One -Bedroom (%)
50%
45%
50%
Two -Bedroom (%)
40%
45%
50%
Three -Bedroom (%)
0%
0%
0%
Parking & Locker
Downtown Cambridge/ Main
Cambridge
Prime
Residential Parking Ratio (Market)
0.5
0.7
1.0
Commercial Parking Ratio
2.0
2.0
2.0
Visitor Parking Ratio
0.1
0.1
0.1
Storage Locker Ratio
0.75
0.75
0.75
Pricing and Absorptions
Market Index Price (Condo)
$1,040
$920
$850
Parking Sale Price (Condo)
$50,000
$40,000
$30,000
Locker Sale Price (Condo)
$7,500
$7,500
$7,500
Sales Absorption Rate
40
30
20
Market Index Price (Rental)
$3.30
$3.05
$2.75
Parking Price (Rental)
$150
$120
$100
Locker Price (Rental)
$75
$75
$75
Net Lease Rate
$30
$25
$20
Rented Condo OpEx Excl. Property Tax
$5,311
$5,590
$6,128
Table 3
MTSA Market Areas
MTSA
Municipality
Market Area
Conestoga
Waterloo
Established
University of Waterloo
Waterloo
Prime
Uptown Waterloo
Waterloo
Established
Midtown
Waterloo
Established
Downtown Kitchener
Kitchener
Prime
Rockway
Kitchener
Emerging
Fairway
Kitchener
Emerging
Preston
Cambridge
Emerging
Hespeler Road
Cambridge
Emerging
Downtown Cambridge/ Main
Cambridge
Prime
Disclaimer: The conclusions contained in this analysis have been prepared based on both printary and secondary, data
sources. NBLC makes every effort to ensure that data is correct but cannot guarantee its accuracy. It is also important to note
that it is not possible to fully document all factors or account for all changes that may occur in the future and influence the
viability of any development. NBLC, therefore, assumes no responsibility for losses sustained as a result of implementing any
recommendation provided in this analysis.
This report has been prepared solely. fbr the purposes outlined herein and is not to he relied upon, used for any other purposes,
or by any other party without the prior written authorization fi-om N Barry Lyon Consultants Limited.
Inclusionary Zoning Model Manual
Kitchener Waterloo Cambridge, Septmeber 2022
NBLC Docket #22-3586
Pg. 9