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HomeMy WebLinkAboutCIS Agenda - 2023-12-041 KiTc�ivER Community and Infrastructure Services Committee Agenda Monday, December 4, 2023, 11:00 a.m. -1:00 p.m. Council Chambers - Hybrid City of Kitchener 200 King Street W, Kitchener, ON N2G 4G7 People interested in participating in this meeting can register online using the delegation registration form at www.kitchener.ca/delegation or via email at delegation(a)kitchener.ca. Please refer to the delegation section on the agenda below for registration in-person and electronic participation deadlines. Written comments received will be circulated prior to the meeting and will form part of the public record. The meeting live -stream and archived videos are available at www.kitchener.ca/watchnow. *Accessible formats and communication supports are available upon request. If you require assistance to take part in a city meeting or event, please call 519-741-2345 or TTY 1-866-969-9994.* Chair: Councillor M. Johnston Vice -Chair: Councillor D. Schnider Pages 1. Commencement 2. Disclosure of Pecuniary Interest and the General Nature Thereof Members of Council and members of the City's local boards/committees are required to file a written statement when they have a conflict of interest. If a conflict is declared, please visit www. kitchener. ca/conflict to submit your written form. 3. Consent Items The following matters are considered not to require debate and should be approved by one motion in accordance with the recommendation contained in each staff report. A majority vote is required to discuss any report listed as under this section. 3.1 Assisted Services Program - Grant, INS -2023-521 3 4. Delegations Pursuant to Council's Procedural By-law, delegations are permitted to address the Committee for a maximum of five (5) minutes. All Delegations where possible are encouraged to register prior to the start of the meeting. For Delegates who are attending in-person, registration is permitted up to the start of the meeting. Delegates who are interested in attending virtually must register by 9: 00 a.m. on December 4, 2023 in order to participate electronically. 4.1 None at this time. 5. Discussion Items 5.1 Speed Limits in School Zones, DSD -2023-512 30 m 5 (Staff will provide a 5 -minute presentation on this matter.) 5.2 Rental Housing, Eviction and Displacement 60 m 9 Study, DSD -2023486 (Staff will provide a 5 -minute presentation on this matter). 6. Information Items 6.1 None 7. Adjournment Mariah Blake Committee Administrator Page 2 of 101 Staff Report Infrastructure Services Department www.kitchener.ca REPORT TO: Community and Infrastructure Services Committee DATE OF MEETING: December 4, 2023 SUBMITTED BY: Jeffery Silcox -Childs, Director of Parks & Cemeteries, 519-741-2200 ext. 4518 PREPARED BY: Amy Salmon, Project Manager Infrastructure Services, 226-748-8514 WARD(S) INVOLVED: All DATE OF REPORT: November 13, 2021 REPORT NO.: INS -2023-521 SUBJECT: Assisted Services Program - Grant RECOMMENDATION: That subject to annual budget approval, Council provide a grant of up to $96k per year to The Working Centre to support the assisted services program (winter sidewalk clearing); and That such a grant be adjusted based on the number of residential properties serviced year over year and be reflective of the operational costs incurred by The Working Centre to deliver services; and further, That the grant is not eligible to be used for sub -contracting third party commercial contractors to perform the services outlined in this report, and further, That General Manager of Infrastructure Services be authorized to renew the grant agreement to provide the services outlined in this report and also in INS -20-010, subject to the satisfaction of the City Solicitor; REPORT HIGHLIGHTS: • The purpose of this report is to approve the grant amount of $96,000 per year in support of the Assisted Services Program implementation • The financial implications are $96,000 per year • This report has been posted to the City's website with the agenda in advance of the council / committee meeting • This report supports the delivery of core services. BACKGROUND: In September, 2020, Council provided direction to staff to implement an Assisted Services program on an ongoing basis to support residents who may be unable to clear residential sidewalks in front of their properties due to age or disability (INS -20-010). *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. Page 3 of 101 REPORT: Asper the approved Assisted Services Program, 171 residents participated in 2021, 247 in 2022, and 277 in 2023. The Working Center (TWC) has been the successful recipient of this grant opportunity since the program's start in 2020 and is prepared to partner with the City for the 2023/2024 winter season. The partnership between City and TWC provides multiple benefits to the community; it provides an effective way of clearing snow from properties in the assisted services program as demonstrated in previous years' programs, and also delivers significant social value. Through this program, TWC is able to provide meaningful employment to low-income and street -involved individuals. Sustained growth of the program will be pending annual budgetary approvals by Council and community demand. At this time, the program provides service to 325 participants with no wait list; indicating community demand is currently being met. STRATEGIC PLAN ALIGNMENT: The recommendation of this report supports the achievement of the city's strategic vision through the delivery of core services and the support of Equity, Diversity and Inclusion goals. FINANCIAL IMPLICATIONS: Funding to support the grant is referred to annual budgetary processes but is estimated at $96,000/year. The remaining services are provided via a tendered contractor. Funding is budgeted to support the program through contract services, Q23-118, but is estimated at $135,377/year. The recommendation has no impact on the Capital or Operating Budget as the funding is currently budgeted. COMMUNITY ENGAGEMENT: INFORM — This report has been posted to the City's website with the agenda in advance of the council / committee meeting. PREVIOUS REPORTS/AUTHORITIES: • INS -20-013 • INS -20-010, supported by INS -20-09 • This matter has also been raised in INS -18-023, and INS -19-009 in which Council directed staff to work on an Assisted Services pilot program working with the Working Center. APPROVED BY: Denise McGoldrick, General Manager, Infrastructure Services Page 4 of 101 Staff Report r NJ :R Development Services Department www.kitchener.ca REPORT TO: Community and Infrastructure Services Committee DATE OF MEETING: December 4, 2023 SUBMITTED BY: Barry Cronkite, Director, Transportation Services, 519-741-2200 ext. 7738 PREPARED BY: Aaron McCrimmon-Jones, Manager, Transportation Safety & Policy, 519-741-2200 ext. 7038 WARD(S) INVOLVED: Ward(s) DATE OF REPORT: November 14, 2023 REPORT NO.: DSD -2023-512 SUBJECT: Speed Limits in School Zones RECOMMENDATION: That school zones located on streets designated Major Community Collector and City Arterial maintain a consistent and static speed limit of 40 km/h; and further, That school zones located on streets designated Local and Minor Neighbourhood Collector maintain a consistent and static speed limit of 30 km/h. REPORT HIGHLIGHTS: The purpose of this report is to: o Review the appropriate speed limits in school zones for City of Kitchener street designations including Local, Minor Neighbourhood Collector, Major Neighbourhood Collector, and City Arterial designations; and, o Review the consistency of school zone speed limits with Region of Waterloo and other area municipalities; The key finding of this report is: o Given the community function of school properties and the presence of children and other vulnerable street users throughout the day and year, staff recommend maintaining a consistent and static speed limit of 40 km/h for all school zones on Major Community Collector and City Arterial streets (such as Westheights Drive and Franklin Boulevard) and maintaining a consistent and static speed limit of 30 km/h for all school zones on Local and Minor Neighbourhood Collector streets. This approach is generally aligned with other municipalities including Region of Waterloo, City of Cambridge, City of Guelph, City of Mississauga, and City of Waterloo; The financial implications are approximately $5,000 to change existing 30km/h school zone speed limit signage to 40km/h on higher order streets; This report supports the delivery of core services. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. Page 5 of 101 BACKGROUND: City Council approved a reduction in speed limits from 50 km/h to 40 km/h across neighbourhoods within the City of Kitchener (DSD -2021-189). Additionally, Council directed staff to reduce speed limits within school zones to 30 km/h within these neighborhoods. More information regarding the details of the Neighbourhood Speed Limit Project and results of the pilot project can be found in staff report DSD -2021-189. Throughout 2022, the speed limit in the majority of school zones in Kitchener was reduced to 30km/h. Due to feedback received from residents, Council passed a motion in March 2023 directing staff to review appropriate speed limits in school zones as follows: Whereas 30km1h school zones have been implemented across The City as per the Council approved Neighbourhood Speed Limit project; Whereas safety concerns regarding speeding and street safety continue to be a top concern for Kitchener residents,- Whereas esidents, Whereas school zone bylaws on Region of Waterloo and City of Kitchener streets are not consistent in terms of the speed limit and time of day and time of year; and, Whereas Automated Speed enforcement (ASE) has been installed on Westheights Drive and Franklin Street and residents find driving under the 30km1h hour posted speed limit extremely challenging,- Therefore hallenging, Therefore be it resolved that staff be directed to investigate appropriate speed limits and time of day restrictions in school zones on City of Kitchener streets and report back to Council prior to the start of the 2023 school year; Therefore be it resolved that staff be directed to review the appropriate speed limit in ASE zones for Westheights Drive and Franklin Street and report back on this matter prior to the fall 2023. In August of 2023, Council received Staff Report DSD -2023-286 in response to the motion passed in March 2023 as summarized above. At that time Council noted the different approaches taken by the Region of Waterloo and the City of Kitchener with respect to speed limits in School Zones, specifically citing time of day restrictions. As a result, It was resolved that: That staff be directed to report back with suggested "school hours" timing, where school zone speed limits may be restricted to 30 km/hr but outside school hours could be 40 km/hr, in tandem with the Region of Waterloo's discussions. The above noted motion was passed the specific intent of allowing additional time for The Region of Waterloo to complete their review of a Regional pilot project for school zone speed limits, and for staff to report back on those findings and consider additional recommendations. Page 6 of 101 REPORT: This report reviews and provides recommendations for appropriate speed limits in school zones located on City of Kitchener streets including Local, Minor Neighbourhood Collector, Major Neighbourhood Collector, and City Arterial designations. School Zones Speed Limits The reduction of posted speed limits was informed by a pilot project in three residential neighbourhoods in the areas of Doon South, Huron and Idlewood. This pilot project demonstrated the effectiveness of reducing neighbourhood speed limits to 40km/h and school zones speed limits to 30km/h. Data collected in school zones during the pilot showed a 12% (from 41.2 to 36.4 km/h) reduction in the average operating speed, and a 13% (49 to 42.4 km/h) reduction in the 85th percentile speed. School properties serve as important community hubs offering a diverse range of amenities such as school activities, daycares, after-school programing, public meeting spaces, summer schools and camps, and rental areas for recreational leagues. Furthermore, school properties provide outdoor sports facilities such as basketball courts, soccer fields, and parks. Given the role schools play within the neighbourhoods they serve, and the variety of services they offer residents at all times of the day and year, they attract children and vulnerable street users who rely on active transportation methods for accessing school properties. Staff conducted a comparison of speed limits and time restrictions in school zones across other municipalities. Other neighbouring municipalities have adopted a similar approach to the City of Kitchener regarding speed limits in school zones. These municipalities, which share similar road networks, and characteristics with Kitchener, have recognized the importance of implementing static 30 km/h speed limits in residential school zones. The consensus among these municipalities is that school zones attract children and vulnerable street users at all times of the day and serve as community hubs for programming and outdoor activities throughout the year. The following municipalities have implemented consistent and static speed limits in school zones: City of Cambridge, City of Guelph, City of Mississauga, and City of Waterloo. Transportation Services recommends a static and consistent speed limit in neighbourhood area school zones in an effort to develop consistent driver behaviours and prioritize the safety of residents of all ages who utilize school properties throughout the year and outside of regular school hours. Posted speed limits in school zones should be applicable at all times for consistency and enhanced safety. Studies indicate a direct correlation between vehicle speeds and the probability of a collision resulting in serious injury or fatality. Specifically, the likelihood of survival in a vehicle -pedestrian collision is approximately 15% when a vehicle is traveling at 50km/h. However, the likelihood of survival can increase to 70% when the vehicle is traveling at 40km/h, and to 90% when the vehicle is traveling at 30km/h. Currently, staff have implemented the 30 km/h speed limits in approximately 90% of school zones across The City with the remaining 10% underway and to be converted by end of 2023. Region of Waterloo & Local Consistency In an effort to achieve greater consistency with The Region of Waterloo and to address challenges with 30km/h speed limits on higher order streets that typically have a higher design speed, Transportation Services recommends a consistent and static speed limit of 40 km/h for all school zones located on Major Community Collector and City Arterial streets. Page 7 of 101 This would include examples such as the school zones on Westheights Drive and Franklin Boulevard which currently have Automated Speed Enforcement (ASE). Generally, setting the speed limit at a consistent 30km/h on streets that have a much higher design speed can lead to inconsistent driver behaviour, frustration, and a lack of public acceptance. The above noted recommendations will also address the validity concerns of ASE as a traffic safety initiative on higher order streets. Speed limits on Kitchener's higher order streets would then also be aligned with school zone speed limits on Region of Waterloo roads, leading to a more consistent approach throughout the city. Transportation Services continues to recommend a static and consistent speed limit of 30 km/h for school zones located on lower order streets to encourage appropriate driving behaviour on streets with lower volumes and added neighbourhood context. This approach maintains overall consistency with area municipalities such as Cambridge, Guelph, Mississauga, and Waterloo. STRATEGIC PLAN ALIGNMENT: This report supports the delivery of core services. FINANCIAL IMPLICATIONS: Capital Budget — The recommendation has no impact on the Capital Budget. Operating Budget — These recommendations have financial implications of approximately $5,000 to change existing 30km/h school zone speed limit signage to 40km/h on higher order streets. COMMUNITY ENGAGEMENT: INFORM — This report has been posted to the City's website with the agenda in advance of the council / committee meeting. PREVIOUS REPORTS/AUTHORITIES: • Report DSD -19-159— Neighbourhood Speed Limit Review • Report DSD -2021-189 — Neighbourhood Speed limit Review • Report DSD -2023-286 — Speed Limit Review — School Zones and Bingemans Centre Drive APPROVED BY: Justin Readman, General Manager, Development Services Department ATTACHMENTS: None Page 8 of 101 Staff Report r NJ :R Development Services Department www.kitchener.ca REPORT TO: Community and Infrastructure Services Committee DATE OF MEETING: December 4, 2023 SUBMITTED BY: Rosa Bustamante, Director of Planning, 519-741-2200 ext. 7319 PREPARED BY: Natalie Goss, Manager, Policy & Research, 519-741-2200 ext. 7648 Garett Stevenson, Manager, Development Review, ext. 7070 Richard Kelly-Ruetz, Senior Planner, 519-741-2200 ext. 7110 WARD(S) INVOLVED: All Wards DATE OF REPORT: November 15, 2023 REPORT NO.: DSD -2023-486 SUBJECT: Rental Housing, Eviction and Displacement Study RECOMMENDATION: That staff be directed to engage the development industry and community stakeholders on a rental replacement by-law as outlined in Option 3 of report DSD - 2023 -486; and, That staff continue to work with community stakeholders to explore additional tools that may be within Kitchener's jurisdiction to support the transitioning of displaced residents; and further, That staff continue to collaborate with the Region of Waterloo on shared solutions related to rental housing, eviction, and displacement. REPORT HIGHLIGHTS: • The purpose of this report is to provide an update to Council on Kitchener's rental housing, eviction and displacement study. • In the area of eviction and displacement there is currently one legislative tool available to Kitchener as a municipality: a rental replacement by-law. This tool only applies to displacements where a rental property with 6 or more units is demolished. • This report outlines considerations of a rental replacement by-law including the effectiveness of the tool in addressing displacement and the financial considerations and impacts of this type of bylaw on the development feasibility of existing rental properties with 6 or more units. Despite the financial considerations for future development, staff recommends moving forward with a rental replacement by-law to maximize protection of existing tenants. • Eviction and displacement are complex matters. Staff continues to have conversations with the Region of Waterloo and community stakeholders about the tools that are available to municipalities and all opportunities to partner with other orders of government and community stakeholders to address housing challenges. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. Page 9 of 101 • There are no financial implications of this report. • This report supports A Caring Community by directing staff to continue exploring tools and resources to support tenants in Kitchener. EXECUTIVE SUMMARY On January 30, 2023, Council passed a resolution addressing rental housing and displacement, directing staff to provide recommendations and review the rental replacement by-law tool under the Municipal Act. The report provides an update on the resulting Rental Housing, Eviction, and Displacement Study, focusing on a potential rental replacement by- law. The City retailed Parcel Economics ("Parcel") to conduct a financial feasibility analysis of a rental replacement by-law in Kitchener. Parcel's financial feasibility analysis assesses the potential impacts of a rental replacement by-law on residential development in Kitchener. Findings suggest an impact on the development feasibility of existing rental properties. Options for the parameters of a potential rental replacement by-law in Kitchener are outlined. Going forward, staff recommend engaging with community stakeholders and the development industry on a consistent City- wide approach which maximizes the protection of existing tenants. Recent changes to provincial legislation, particularly through Bill 97, grant the province the authority to prescribe additional regulations for rental replacement by-laws. The staff recommendation is for Council to direct the preparation of a rental replacement by-law, and continue engagement with the Region and community stakeholders to explore additional tools supporting displaced residents. BACKGROUND: On January 30, 2023, Council passed a resolution related to rental housing and displacement in Kitchener. At that time, Council directed that staff provide recommendations on how the City can support the transitioning of displaced residents; that staff review rental replacement by-laws in Ontario and assess its applicability in Kitchener; that staff work with community stakeholders to explore tools, and; that the resolution be circulated to the Region, local municipalities, and to the Association of Ontario Municipalities (AMO). Council requested staff to report back by the end of 2023. Since that time, staff initiated the ongoing Rental Housing, Eviction and Displacement Study. The purpose of this report is to update Council on this study and seek direction for next steps. This report is an important starting point of an ongoing conversation with Council regarding the specifics of available tools at the municipal level to support existing tenants. This report focuses on a rental replacement by-law as one tool that may be implemented in short order. While this report provides an update on staff's current understanding about legislative tools regarding eviction and displacement, it is not intended to provide a comprehensive list. Staff continue to learn and engage with community partners to gain a better understanding of this matter and will report back to Council further throughout 2024. Figure 1 depicts the recent and upcoming updates to Council for housing related studies and initiatives with this report highlighted in red below. Page 10 of 101 Municipal Housing Pledge Missing Middle and Affordable Housing Study Update F 2023 3 Bill 13, Bill 23, Bill 109 Implementation Plan Growing Together Engagement Summary Inclusionary Zoning Direction Lower Doon Land Use Study Implementation Eviction & Displacement Webpage & Online Reporting Update Proposed Lodging House Official Plan and Zoning Implementation r Lived Expertise I Working Group Year 2 Work Plan Development Eviction & Displacement Toolkit Options Rental Replacement By- law Information Report 2024+ Evictions & Displacement Toolkit Implementation Rental Replacement By- law Implementation Shared Accommodations Licensing By-law Updates Lodging House Official Plan and Zoning Approval Growing Together Implementation Inclusionary Zoning Implementation Figure 1: City of Kitchener Housing related studies and initiatives REPORT: The purpose of this report is to provide an update on staff's current understanding about legislative tools regarding eviction and displacement in response to Council's resolution in January 2023 as well as respond to the action item outlined in Kitchener's Housing for All housing strategy. This report primarily focuses on legislative tools regarding rental replacement and its potential applicability to Kitchener, with a secondary focus on other rental tools and initiatives to be further explored in a future report. Evictions & Displacement The Residential Tenancies Act, 2006, is the Provincial legislation which governs rental housing in Ontario, including matters related to evictions. Generally, when a tenant is evicted from their unit, they must be provided with an N12 or N13 notice from the landlord which provides the landlord's reason for the eviction. These notices are filed with the Landlord and Tenant Board (LTB). The LTB enforces the Residential Tenancies Act. The City obtained eviction data from the Landlord and Tenant Board for N12 and N13 forms that have been filed in Kitchener. Figure 2 explains the two notice types and Table 1 includes statistics from 2017 -present on the number of these notices processed by the LTB. N12 N13 • A notice provided to the tenant to end their tenancy because the landlord, a purchaser or a family member requires the rental unit • A notice provided to the tenant to end their tenancy because the landlord wants to demolish the rental unit, repair it, or convert it to another use Figure 2: Explanation of N 12 and N 13 Notices Page 11 of 101 Table 1: N12 and N13 notices filed to the Landlord and Tenant Board (LTB) Year N12 N13 2017 134 15 2018 32 10 2019 67 21 2020 49 7 2021 76 17 2022 132 28 1- 1. 1 7n74 9!ll n7 It is acknowledged that evictions may also occur informally and without proper notice, and thus would not be captured by the statistics above. Staff continues to work with community stakeholders to understand the depth of evictions and have also recently made available an evictions and displacement survey on the City's website to better understand the local context. Municipal Tools & Eviction Under the current Provincial legislative framework, the only legislative tool at the municipal level to directly regulate evictions is through a rental replacement bylaw passed under the Municipal Act. Evictions must comply with the Residential Tenancies Act, and disputes are settled by the Landlord and Tenant Board (LTB), which enforces the Act. Figure 3 outlines municipal jurisdiction for matters related to evictions in Ontario, based on staff's knowledge of the legislative framework in Ontario. Eviction via demolition Eviction via demolition r Eviction via of rental properties or buildings with less of rental properties / renovations of an than 6 units buildings with 6+ units existing building • No municipal tools • Rental replacement by- • No municipal tools available. Evictions law is available to available. Evictions must comply with the municipalies. must comply with the Residential Tenancies Residential Tenancies Act. � I Act. Figure 3: Jurisdiction for municipalities and evictions Staff continues to build an understanding of the complexities of eviction and displacement. Throughout 2023, staff has continued to engage with community and government partners on matters related to rental housing including through discussions with the Region of Waterloo, with the Lived Expertise Working Group (LEWG), and with community stakeholders. To provide further resources, staff has updated the corporate webpage in fall 2023 with: ➢ Anew webpage on the City of Kitchener website to provide resources and information to renters in Kitchener about their rights as a tenant. The webpage also links to external sources with additional information (i.e. Region of Waterloo resources). ➢ The webpage includes a survey that is available as a "self -reporting" tool where tenants can fill in details where they have been evicted. Page 12 of 101 Additionally, in June 2023 Council added a permanent dedicated staff resource in the Planning Division to lead and assist with policy related housing matters. Rental Replacement By-laws As outlined above, there is only one tool available to municipalities regarding displacement and eviction — a rental replacement by-law. Under Section 99.1 of the Municipal Act, 2001, municipalities may enact bylaws to prohibit and regulate the demolition or conversion of multi -unit residential rental properties of six or more units. There are three municipalities in Ontario which are known to have enacted a rental replacement by-law: Toronto (2006), Mississauga (2018), and Oakville (2023). A rental replacement by-law can ONLY be applied to properties with 6 or more rental units which are proposed for demolition or conversion. The Municipal Act currently contains flexibility on parameters a municipality can include within a rental replacement by-law; the main one being limiting applicability to properties with 6 or more rental units. Typical parameters included in the Toronto, Mississauga, and Oakville by-laws are: ➢ Applies to properties with 6 or more rental units proposed to be demolished; ➢ The replacement units must be comparable in size, quality, and rent price to the original unit; and, ➢ The replacement unit must be retained as rental unit for 10 to 20 years. Financial Feasibility Analysis — Rental Replacement By-law in Kitchener Following Council's motion in January, the City retained Parcel Economics ("Parcel") to complete a feasibility assessment of a rental replacement by-law in Kitchener including assessing the financial impacts on residential development. Parcel is a land economics firm who also led the City's Enabling Missing Middle and Affordable Housing Feasibility Study endorsed by Council on May 8, 2023. Parcel's rental replacement report includes background information including the policy context in Ontario for rental replacement by-laws, an overview of the rental housing market in Kitchener, a financial feasibility analysis of impacts of a rental replacement by-law, conclusions, and appendices with their detailed assumptions which informed their analysis. Parcel's report (Rental Replacement By-law, Financial Feasibility Study) is included as Attachment A. This report will focus on summarizing the key findings from the financial feasibility analysis of Parcel's report on a rental replacement by-law in Kitchener. Parcel's financial feasibility analysis focused on two key questions: 1. Will a new rental replacement by-law risk materially impact residential development in Kitchener? 2. If a rental replacement by-law is pursued in Kitchener, what are the optimum parameters to balance the need to accommodate new growth while encouraging the maintenance (or expansion) of local purpose-built rental inventory? Page 13 of 101 Methodology Consistent with Parcel's approach to the Enabling Missing Middle and Affordable Housing Feasibility Study, Parcel undertook financial analysis for 3 development typologies in condo and rental tenures to assess financial impacts of a rental replacement by-law. To account for different land values across the city, the typologies were assessed in a central and suburban context, as further outlined in Figure 4. Central and Suburban geographies in Kitchener High -Rise (20-5torey) Analysed in Central & Suburban Areas 3 Analysed in Central & Analysed in Central Areas Suburban Areas Only Figure 4: Graphic of the geographies and 3 development typologies analysed by Parcel Parcel's report assessed how many rental units each typology could "replace" in a new building while maintaining typical development return metrics (i.e., profitability). In other words, finding the point at which a development is no longer profitable when existing rental units must be replaced. The findings of this analysis will help inform staff, Council, and developers of the potential impacts of a rental replacement by-law on the future supply of new housing units. There are 21,400 primary rental units in Kitchener (i.e. purpose built rentals). Of these, 20,500 (96%) would be eligible for rental replacement (6+ units). Of these only 17% / 3,600 of them have redevelopment potential (-215 buildings). Page 14 of 101 Findings — Question 1 (Impacts of a Rental Replacement By-law on Development) Parcel found that a rental replacement by-law is likely to be a deterrent to intensification of existing rental properties with 6 or more units across the city. Among the development typologies tested in central and suburban areas, only the central High -Rise Condo (45 - storeys) demonstrated return metrics that are consistent with those a developer may consider pursuing. Parcel found that existing rental buildings with more than 50 units are highly unlikely to be redeveloped, whether a rental replacement by-law is in place or not. Findings — Question 2 (Optimum Parameters for a Rental Replacement By-law) In light of findings from question 1, should the City pursue a rental replacement by-law, Parcel recommended the following parameters: ➢ A "blanket" approach City-wide that treats all areas the same and would provide clarity and certainty for developers; ➢ A replacement by-law would apply only where 6 or more rental units are proposed to be demolished, and only where the existing rents are at or below the Average Market Rent (AMR); ➢ Replacement units should be similar in mix, size, and quality as the original units; ➢ The replacement units must remain rental for 10 years, or until the tenant moves out; ➢ Cash -in -lieu payments and off-site units should be permitted; ➢ Rental replacement should not apply when the vacancy rate is above 3%; and, ➢ The by-law should be phased in (i.e., by geography, or by incremental introduction of requirements). Options & Recommendation — Rental Replacement By-law in Kitchener In consideration of the Rental Replacement Financial Feasibility Study, and ongoing conversations with the Region of Waterloo and community stakeholders about eviction and displacement, staff have outlined 3 options available to Council. These options are: Option 1 Do Nothing — Do not pursue a rental replacement by-law. Rental properties / buildings with 6 or more units proposed for demolition will continue to be addressed on a case-by-case basis, primarily between the proponent (developer/landlord) and the existing tenants in accordance with the Residential Tenancies Act. Any risk to the ability or willingness of developers to deliver housing supply on properties with 6 or more rental units is avoided. Option 2 Develop a Rental Replacement By-law (consultant recommendations) — Direct staff to undertake further engagement on a rental replacement by-law and return to Council in Q1 2024 with a rental replacement by-law for consideration. The by-law will include parameters generally consistent with Parcel's recommendation. As such, the starting parameters for engagement on a rental replacement by-law would include: ➢ A "blanket" approach to rental replacement, where all geographies (i.e., central and suburban) and typologies (i.e. mid and high rise) are treated the same; ➢ An option to provide units off-site (instead of in the new building); ➢ Replacement units must remain rental for at least 10 years, or until the tenant moves out; ➢ An option to provide will include cash -in -lieu of replacement units; and, ➢ Consideration of "phasing -in" of rental replacement by-law requirements. Page 15 of 101 Option 3 Develop a Rental Replacement Bylaw (different parameters) — This option is the same as Option 2, with differing parameters to maximize protection of existing tenants as follows: ➢ No ability for developers to provide cash -in -lieu of replacement units. Replacement units would be required to be offered to tenants on-site, or at a similar site (off-site) nearby; and, ➢ A rental replacement by-law would immediately take full effect (no phasing in). Table 2: Summary of Options — Rental Replacement By-law Option 1 Option 2 Option 3 Pursue a rental replacement by-law X r/ V Parameters of By-law Same approach City-wide V V Replacement units provided on-site OR off-site V V Replacement units must remain rental for 10 years n/a V Cash -in -lieu of providing replacement units V X Phasing -in of by-law requirements V X Staff Recommendation — Option 3 Staff recommend pursuing the development of a rental replacement by-law as outlined in Option 3. This would maximize protections of existing tenants using an existing tool available under the Municipal Act, without adding significant administrative responsibilities to the City of Kitchener. This approach is consistent with Council guidance in January 2023 and the actions outlined in priority 6 of Housing for All. It is worth nothing that Option 3 may have impacts on the long-term development potential of properties with 6 or more rental units, which could impact housing supply over the longer-term. Staff see the risk as low given the relatively small overall number of properties with rental units which would be likely to be redeveloped. Parcel notes that approximately 17% (3,600) of all existing rental units in Kitchener are a candidate for redevelopment (properties which contain 6-30 rental units). This represents around 215 buildings. Should Council proceed with a rental replacement by-law, staff will monitor any potential impacts on Kitchener's housing supply. Option 3 leverages the authority of the Municipal Act to apply a rental replacement by-law and offers the strongest protection for tenants. It is the opinion of staff that these protections outweigh the potential risks outlined above. Further, the parameters proposed through Option 3 are reasonably balanced and a "blanket" approach to rental replacement City-wide would offer predictability and guidance to the development community while perhaps shifting redevelopment opportunities away from properties with 6 or more rental units. Recent Changes to Provincial Legislation Rental Replacement By-laws As part of Bill 97, the province amended the Municipal Act to provide the Minister of Municipal Affairs and Housing (MMAH) with the authority to prescribe additional regulations for a rental replacement by-law. Bill 97 received Royal Assent in June and as such, the province can now prescribe changes to municipal authority for rental replacement which could impact the parameters of a potential by-law in Kitchener. Page 16 of 101 The province sought feedback on which potential regulations that would apply to municipalities that pass rental replacement by-laws and no additional changes have been proposed to -date. A Provincial webpage notes that "the government is considering the feedback received to inform the development of future regulations, if any, under this new authority". At this time no additional regulations have been included in the Municipal Act on rental replacement by-laws. Recent Changes to Provincial Legislation — Residential Tenancies Act Earlier this year, the Province tabled Bill 97 (Helping Homebuyers, Protecting Tenants Act) and it received Royal Assent on June 8, 2023. Changes to the Residential Tenancies Act were passed regarding evictions. When evicting a tenant to renovate a unit, landlords would be required to: • Provide a report from a qualified person stating the unit must be vacant for renovations to take place. The report must state that the repairs or renovations are so extensive that they require the vacant possession. • Update the tenant on the status of the renovation in writing (if they plan to return) • Give them a 60 -day grace period to move back in, once the renovations are complete. • If the landlord doesn't allow the tenant to move back in at the same rent, the tenant would have two years after moving out, or six months after renovations are complete (whichever is longer), to apply to the Landlord and Tenant Board for a remedy. • Increase the maximum fines from $50,000 to $100,000 in the case of a person other than a corporation and from $250,000 to $500,000 in the case of a corporation. Bill 97 received Royal Assent on June 8, 2023, but has not vet come into force as a proclamation has not been issued by the Lieutenant Governor. Region of Waterloo — Plan to End Chronic Homelessness In early November Regional staff provided an update to Regional Council on the Region of Waterloo's Plan to End Chronic Homelessness project. The purpose of this work is to provide a "roadmap for strategies, resources and timelines to end chronic homelessness in Waterloo Region". During a November staff report one of the directions requested by Regional Council was: ➢ Direct [Region] staff to work with community to develop a suite of policy incentives supporting the creation of new affordable housing and/or for preventing the loss of existing affordable housing stock and tenant displacement in Waterloo Region and bring forward any further recommendations to Regional Council for consideration and approval. The staff report also directs Region staff to "work with area municipalities to develop and implement housing programming and policy that prevents displacement and the loss of existing affordable housing". City staff will continue to collaborate with Region of Waterloo staff on the implementation of the Plan to End Chronic Homelessness work, particularly as it relates to maintaining rental housing stock and preventing tenant displacement. In summary, it is recommended that Council direct staff to prepare a rental replacement by-law as outlined in this report and that staff continue to work with the Region of Waterloo and community stakeholders to explore additional tools that may be within Kitchener's jurisdiction to support the transitioning of displaced residents. Page 17 of 101 Should Council wish to advocate to other orders of government on matters related to eviction and displacement, there may be opportunities to do so in the areas of "renovictions" as there are currently no legislative tools for municipalities to pass by-laws in this area. Since 2020, Council has passed several resolutions or actions related to housing and affordability, including the following: ➢ On October 5, 2020, Council requested that the Province reinstate the Planning Act provisions enabling a municipality to apply Inclusionary Zoning provisions within its entire jurisdiction, or at minimum, enable Inclusionary Zoning along Major Transit bus routes throughout the City, rather than only in Major Transit Station Areas (MTSAs). ➢ On October 18, 2021, Council passed a resolution to take additional and meaningful steps to address the ever increasing problem of "Renovictions" and that the motion be sent to the Association of Municipalities of Ontario, the Premier of Ontario, the Ministry of Municipal Affairs and housing, the Region of Waterloo and other Municipalities in Ontario for their consideration and possible endorsement. ➢ On September 25, 2023, Council called on the Provincial Government to double current social assistance rates for ODSP and OW recipients to reflect the cost of living and to tie these new rates to inflation so that people can afford to live a dignified life in the Province of Ontario. ➢ On September 25, 2023 Council called on the Provincial Government to support Feed Canada's recommendation to stop the clawbacks meaning OW and ODSP will allow recipients their first $1000 earned without penalty and to exempt benefits such as CPP, WSIB, EI and the upcoming CDB from clawbacks as well. ➢ On October 16, 2023, Council directed staff to propose a zoning by-law amendment that would permit "as -of -right" permissions for up to four (4) residential units on a property wherever zoning permits single detached, semi-detached or street townhouse dwelling units on sufficient lot sizes and report back to Council in Q1 2024. STRATEGIC PLAN ALIGNMENT: This report supports A Caring Community by directing staff to continue exploring tools and resources to support tenants in Kitchener. FINANCIAL IMPLICATIONS: Capital Budget — The recommendation has no impact on the Capital Budget. Operating Budget — The recommendation has no impact on the Operating Budget. COMMUNITY ENGAGEMENT: INFORM — This report has been posted to the City's website with the agenda in advance of the council / committee meeting. Page 18 of 101 PREVIOUS REPORTS/AUTHORITIES: • DSD -20-214 — Housing for All — City of Kitchener Housing Strategy • COR -2022-104 — Housing for All Program Update — 2022 Year in Review • DSD -2023-160 — Enabling Missing Middle and Affordable Housing • DSD -2023-295 — Housing for All Strategic Lived Expertise Working Group — First Year Review and Rental Housing, Eviction and Displacement Study Update • DSD -2023-446 — City-wide Lodging House Review • Municipal Act, 2001 • Planning Act APPROVED BY: Justin Readman, General Manager, Development Services Department ATTACHMENTS: Attachment A — Rental Replacement By-law Financial Feasibility Study, Parcel Page 19 of 101 V IN - IF9TT F@,: vir � r I, vr� r TT I rim, 'Fu 'I Tl Tj I 1,17 110r,"I TP ' rR fMF'� T -1 woo-! I 'H Parcel IT"I r-7 7' 17M, _r . r 7 7�_ I 14=�� Page 20 of 101 PREPARED FOR: The Corporation of the City of Kitchener 200 King Street West, Kitchener, Ontario, N2G 4V6 PREPARED BY: Parcel Economics Inc. 250 University Avenue, #221, Toronto, Ontario, M51-1 3E5 info@parceleconomics.com • .. November 22, 2023 2023-0035 This document is available in alternative formats upon request. Cover Image: The Record Page 21 of 101 Table of Contents ExecutiveSummary................................................................................................................................................ i 1.0 Introduction...................................................................................................................................................1 1.1 Purpose..................................................................................................................................................2 1.2 Scope.....................................................................................................................................................3 1.3 Study Parameters..................................................................................................................................4 1.4 Assumptions & Limitations..................................................................................................................8 2.0 Policy Context...............................................................................................................................................9 2.1 Legislation (Provincial Context)........................................................................................................10 2.2 Policy Precedents (Municipal Context)............................................................................................10 3.0 Market Context............................................................................................................................................12 3.1 Primary Rental Universe.....................................................................................................................13 3.2 Secondary Rental Universe................................................................................................................17 3.3 Renter Household Projections..........................................................................................................21 4.0 Financial Feasibility.....................................................................................................................................23 4.1 Baseline Financial Feasibility.............................................................................................................24 4.2 The Effect of Rental Replacement....................................................................................................30 4.3 How Many Units are Affected?..........................................................................................................36 5.0 Conclusions.................................................................................................................................................39 Appendix A: Glossary of Terms........................................................................................................................45 Appendix B: Financial Analysis Background...................................................................................................50 Appendix C: Other Background Material........................................................................................................72 Page 22 of 101 Table of Figures Figure 1.1 Central vs. Suburban Neighbourhoods..........................................................................................5 Figure 1.2 Overview of Mid -Rise and High -Rise Building Typologies for Testing.......................................6 Figure 2.1 Components of Rental Replacement By-laws...............................................................................1 1 Figure 3.1 Percentage of Primary Rental Units by Neighbourhood (2022) ................................................14 Figure 3.2 Primary Rental Units by Structure Size (2022)...............................................................................14 Figure 3.3 Primary Rental Universe Average Rents (All Bedroom Types) (2022) .......................................15 Figure 3.4 Growth in Average Ownership Prices and Rents (2013 -2022) ...................................................15 Figure 3.5 Asking Rents vs. CMHC Average Rents by Bedroom Type........................................................16 Figure 3.6 Primary Rental Universe Vacancy Rates (All Bedroom Types) (2022) ........................................17 Figure 3.7 Rental Units in Kitchener -Cambridge -Waterloo CMA.................................................................18 Figure 3.8 Kitchener Apartment Starts by Tenure (2013 to 2022)...............................................................18 Figure 3.9 Comparison of Average Rents in the Primary and Secondary Rental Markets (2022) ............ 19 Figure 3.10 Kitchener Units Owned by Investors (2020)...............................................................................20 Figure 3.11 Change in Renter and Ownership Households (2016 -2021) ...................................................21 Figure 3.12 Renter Households by Housing Typologies...............................................................................22 Figure 4.1 Potential Profit/ Loss of Baseline Scenarios.................................................................................26 Figure 4.2 IRR & EMx of Baseline Scenarios....................................................................................................27 Figure 4.3 Potential Cash -on -Cash Returns of Baseline Rental Scenarios...................................................28 Figure 4.4 Summary of Baseline and Rental Replacement Redevelopment Feasibility ............................34 Figure B.1 The "Sweet Spot" for Successful Development Projects.............................................................51 Figure B.2 Basic Structure of Financial Feasibility..........................................................................................53 Figure B.3 Pro Forma Use Cases.......................................................................................................................55 Figure B.4 Summary of Assumptions...............................................................................................................59 Figure B.5 Baseline Financial Feasibility Analysis - All Typologies, Tenures & Locations .........................61 Figure C.2 Primary Rental Units by Neighbourhood and Structure Size (Six -Plus Units) (2022) ..............74 Figure C.3 Recently Completed Rental Projects.............................................................................................74 Page 23 of 101 Parcel Executive Summary Background • Parcel Economics Inc. ("Parcel") has been retained by the City of Kitchener to support their investigation into the merits of a potential new rental replacement by-law. • Our role forth is study has been to provide additional research, analysis and strategic insight on the proposed new policy framework from a market and economic perspective. Study p115..1w,o* • A key underlying condition that is important to acknowledge in interpreting the results of this research is that the rental housing "universe" effectively comprises two different types of supply: (i) the primary rental market is relatively stable, with units that were built with the intention of being used as rental units (i.e., "purpose-built" rental units); and, (ii) the secondary rental market consists of units that were built for purchase (i.e., ownership housing, including condominiums that are being rented to tenants). • We have continued to focus on two key areas of the City: the Central and Suburban Neighbourhoods, as defined in Kitchener's Development Charge By-law. • To evaluate impacts to development feasibility under a rental replacement by-law, we have identified three (3) development typologies that are most likely to replace existing rental units: _a Rental Replacement By-law - Financial Feasibility Study on Page 24 of 101 Parcel Policy Context • Existing rental replacement by-laws typically apply to demolition and/or conversion of six (6) or more primary rental units. • Other key components of replacement by-laws are that replacement units must be provided at a similar number, mix, size, quality, and rent as the original units and be retained as rental units for between 10 and 20 years. • In some instances, replacement by-laws permit cash -in -lieu payments and off-site units as alternative delivery methods for replacement units. There are certain conditions where rental replacement does not apply. Market Context There are approximately 21,400 primary rental units in Kitchener, 96% of which would be eligible for replacement based on the six -unit replacement threshold. • Condominium units (i.e., secondary rental units) have been responsible for a progressively larger portion of the rental supply over the years, especially since 2018. • Overall, trends indicate strong and sustained demand for rental housing in Kitchener as a function of increasing rents, low vacancies and increasing number of renter households. Financial Feasibility Context • Mid -Rise buildings across both tenures are challenged to earn sufficient returns, even in the absence of a rental replacement by-law and regardless of location. • 20 -Storey High -Rise condo buildings have strong potential in the Central Neighbourhoods, with some ability to replace existing rental units at average market rents. Rental buildings are on the cusp of feasibility, however, a replacement by-law would likely push into infeasible. • 45 -Storey High -Rise condo buildings have strong potential in the Central Neighbourhoods, with some ability to replace existing rental units at average market rents. Rental buildings are generally more challenged than their shorter and less expensive -to -build counterparts, also rendering them infeasible. Rental Replacement By-law - Financial Feasibility Study ii Page 25 of 101 rnnclusions Question #1: Will a new rental replacement by-law risk materially impacting residential development in Kitchener? Question #2: If pursuing the implementation of a new rental replacement by-law, what are the optimum parameters to effectively balance the need to accommodate new growth while simultaneously encouraging the maintenance—or expansion—of the local purpose-built rental inventory? Parcel • A rental replacement by-law is likely to deter all types and tenures of intensification of existing rental buildings across the city. • This will be especially true while alternative, non -rental apartment redevelopment sites remain available and viable. • It is highly unlikely that existing rental buildings over 50 units will be redeveloped. • If the City decides to move forward with a rental replacement by-law—despite its negative effects on financial feasibility—the keywill be to remove as many barriers as possible. • This will effectively reduce the risk of sterilizing existing rental sites from new development and/or pushing development to other areas of the community. • To this end, the following directions should be considered by the municipality: (1) Keep it simple and straightforward. (2) Set similar parameters to existing policy precedents. (3) Phase implementation, to avoid unwanted impacts to active development projects being advanced to market. (4) Allow for flexibility, including potential off-site delivery and/or cash -in -lieu options. Rental Replacement By-law - Financial Feasibility Study Hill Page 26 of 101 Introduction Parcel Rental Replacement By-law - Financial F- "' `- 1 Page 27 of 101 Parcel 1.1 Purpose In parallel to other active policy reviews and housing - based planning initiatives, the City of Kitchener is in the process of investigating the merits of a potential new rental replacement by-law. To this end, staff from the City's Planning Division have been tasked with conducting a study that considers the overall appropriateness—and ultimate feasibility—of implementing a rental replacement by-law. In support of this exercise, Parcel Economics Inc. ("Parcel") has been retained to provide additional research, analysis and strategic insight on the proposed new policy framework from a market and economic perspective. The primary purpose of our work on this assignment has been to answer the following key questions: Question #1: Will a new rental replacement by-law risk materially impacting residential development in Kitchener? Question #2: If pursuing the implementation of a new rental replacement by-law, what are the optimum parameters to effectively balance the need to accommodate new growth while simultaneously encouraging the maintenance—or expansion—of the local purpose-built rental inventory? Rental Replacement By-law - Financial F- - - " `- 2 Page 28 of 101 Parcel 1.2 Scope Context: Enabling Missing Middle & Affordable Housing Study It is importantto note atthe outset ofthis reportthat ourteam recently completed a related study on behalf of the City of Kitchener that evaluated and developed recommendations relating to the key market, policy and regulatory solutions capable of maximizing the provision of missing middle and affordable housing in the community. Titled the Enabling Missing Middle and Affordable Housing ("Enabling MM+AH") study and dated April 11, 2023, our previous work was completed alongside subconsultants Smart Density and StrategyCorp. This latest engagement—now focusing more specifically on the topic of rental replacement—leverages much of the supporting research, analysis and key findings already established through our original work forthe City on the Enabling MM+AH study. As such, we recommend that this work be considered as a companion document to our original Enabling MM+AH study, where necessary. The scope of this assignment has involved a combination of: a) A scan of relevant policy contexts and comparisons to the experiences in other Ontario municipal jurisdictions; b) Establishing a reasonable baseline characterization of local market conditions for development; c) A detailed testing of prototypical development concepts for financial feasibility predicated on a potential future policy direction; and, d) The preparation of recommendations focused specifically on the manner in which the proposed new rental replacement policy framework should be integrated, if at all. Rental Replacement By-law - Financial F- - - " `- 3 Page 29 of 101 Parcel 1.3 Study Parameters The following provides a high-level overview as to some of the basic parameters of our study, including clarity as to some of the nuances among and between different types of rental housing markets, as well as an introduction to the specific building typologies and subject geographies considered as part of our supporting research program. Rental Housing "Universe" Rental housing is generally provided by either the primary or secondary rental markets. Primary Rental Housing Secondary Rental Housing Primary rental housing consists of units that were built with the intention of being used as rental units. Rental housing in this market is often referred to as "purpose- built rental". It is seen as desirable because it is typically the most stable form of rental housing. Primary rental units typically remain rental units in perpetuity and tenants have security of tenure. Secondary rental consists of units that were built for purchase (i.e., ownership housing, including condominiums) and are now being rented to tenants by their owners. The secondary market can be a less stable form of rental housing, as owners can move back into or sell their units at any time. Rental Replacement By-law - Financial F- - - " `- 4 Page 30 of 101 Parcel Consistent with the main geographies identified in our original Enabling MM+AH study, we have continued to focus on two key areas of the City for this latest rental replacement research: the Central and Suburban Neighbourhoods, as defined in Kitchener's Development Charge By-law. For selected supporting information (e.g., local market conditions, etc.), we have also considered more granular geographies based on pre -defined submarket areas identified by the Canada Mortgage and Housing Corporation (CMHC). Figure 1.1 Central vs. Suburban Neighbourhoods Central Consistent with Schedule'C1' of the Development Charges By -Law 2022-071 to align with applicable rates. Central Neighbourhoods contain most of Kitchener's recent high-rise + other infill developmer Suburban Consistent with Schedule'C2' of the Development Charges By -Law 2022-071 to align with applicable rates. Suburban Neighbourhoods make up the balan of the City and contain most of the community's rece greenfield development. Source: Parcel, based on Schedules 'Cl' and 'C2' of the Development Charges By -Law 2022-0071. Rental Replacement By-law - Financial F- - - " `- 5 Page 31 of 101 Parcel To test the financial impact of a rental replacement by-law, we have identified three (3) development typologies that are most likely to replace existing rental units across the Central and Suburban Neighbourhoods of the city: For consistency with the Enabling MM+AH study, we again considered a Mid -Rise (6 -Storey) typology across both condo apartment and purpose-built rental building formats in both the Central and Suburban Neighbourhoods, as well as a High -Rise (45 -storey) condo apartment and purpose-built rental building typology exclusively in the Central Neighbourhood. In recognition of existing and recently completed apartment buildings across the city that fell in between this range, we also tested an alternative High -Rise (20 -storey) option for condo apartments and purpose-built rental buildings in both the Central and Suburban Neighbourhoods. Figure 1.2 Overview of Mid -Rise and High -Rise Building Typologies for Testing Location Indicators: 10 Included in Financial Analysis 10 Not Included in Financial Analysis Lot Size: Gross Floor Area: FSR: Storeys: Units: 0.11 ha (0.27 ac) 2,750 mz(29,500 ftz) 2.51 6 32 Average Unit Size: 70 mz (765 ftz) ,a -" Parking: 25 underground Central • Suburban 11 Rental Replacement By-law - Financial F- "'1 `- 6 Page 32 of 101 Parcel Lot Size: 0.28 ha (0.69 ac) Gross Floor Area: 16,955 mz (182,500 ftz) Central FSR: 6.1 • Storeys: 20 Units: 225 Suburban Average Unit Size: 65 mz (710 ftz) • 95 underground Parking: (Central) / 116 underground and surface (Suburban) Lot Size: 0.28 ha (0.69 ac) Gross Floor Area: 33,445 mz (360,000 ftz) Central FSR: 12 Storeys: 45 Units: 425 ` - - Average Unit Size: 65 mz (710 ftz) Parking: 201 underground Fall Source: Smart Density and Parcel. Gross floor areas and average unit sizes have been rounded. Suburban • Rental Replacement By-law- Financial F "' l 7 Page 33 of 101 Parcel 1.4 Assumptions & Limitations When considering the type of high-level financial feasibility modelling that has been undertaken forth is study— which is not specific to anyone site and/or landowners)—it is important to identify the key assumptions and limitations inherent to this more conceptual approach. Furthermore, consistent with other financial analyses focused on policy -level observations, we note that the modelling presented herein should not betaken as a conclusive nor definitive representation of financial feasibility, or lack thereof, for individual properties. Rather, it is intended to provide a more general and preliminary understanding as to the relative feasibility of conceptual developments and prototypical building designs, as well as to provide a more general indication as to the key drivers of financial performance when developing new residential uses in Kitchener, especially in the context of replacing existing purpose-built rental units. A detailed overview of the key assumptions that must be understood as limitations to the analysis undertaken as part of this assignment—and our previous Enabling MM+AH study—has been provided in Appendix B. In the event that material changes occur that could influence the assumptions identified, the analysis, research findings and recommendations contained in this report should be reviewed or updated, accordingly. Rental Replacement By-law - Financial Feasibility Study 8 Page 34 of 101 Policy Context Key Findings • Legal authority for municipalities to enact residential replacement and demolition control by-laws come from the Municipal Act and Planning Act. However, the recently passed Bill 23 and Bill 97 grants the Province the authority to limit and/or apply conditions to these by-laws. • There are currently three Ontario municipalities with rental replacement by-laws: Toronto, Mississauga, and Oakville. • Existing rental replacement by-laws typically apply to demolition and/or conversion of six (6) or more primary rental units. Parcel • Other key components of replacement by-laws are that replacement units must be provided at a similar number, mix, size, quality, and rent as the original units and be retained as rental units for between 10 and 20 years. • In some instances, replacement by-laws permit cash -in -lieu payments and off- site units as alternative delivery methods for replacement units. • There are certain conditions where rental replacement does not apply, namely when vacancy rates are high and the units that are being replaced have rents above a certain threshold (i.e., more expensive units). Rental Replacement By-law - Financial F---"-" `- 9 Page 35 of 101 Parcel 2.1 Legislation (Provincial Context) Legal authority for municipalities to enact residential rental replacement and demolition control by-laws come from Section 99.1 of the Municipal Act, 2011 and Section 33 of the Planning Act, 1990. However, the recently passed Bill 23, More Homes Built Faster Act, 2022 and Bill 97, the Helping Homebuyers, Protecting Tenants Act, 2023 grants the Minister of Municipal Affairs and Housing the authority to make regulations imposing limits and conditions on the powers of local municipalities to prohibit and regulate the demolition and conversion of residential rental properties. As such, any rental replacement and/or demolition control by-law passed by the City of Kitchener may be amended or superseded by the Province. 2.2 Policy Precedents (Municipal Context) There are currently three Ontario municipalities with rental replacement by-laws: Toronto, Mississauga, and Oakville. Of these, the Toronto by-law has been in effect the longest and retained an estimated 5,000 rental units over 17 years. The Mississauga and Oakville by-laws are the newest, having been adopted in 2018 and 2023, respectively. It is unknown at this time how many units have been retained via these more recent by-laws. All three by-laws stipulate conditions of rental replacement units, including when rental replacement requirements apply, how long replacement units must be retained as rental units, the nature of replacement units (mix, size, rents), options for alternative delivery of replacement units, and exemptions. Some by-laws include other components, such as requirements for a tenant relocation plan. Though there are some nuances, by and large, all three by-laws share similar conditions: • Rental replacement only applies to primary rental market units; • Rental replacement applies when six (6) or more units are proposed to be converted / demolished; • Replacement units must be provided at a similar number, mix, size, quality, and rent as the original units; Rental Replacement By-law - Financial Feasibility Study 10 Page 36 of 101 Parcel • Replacement units must remain rental for 10 to 20 years; • Cash -in -lieu payments and off-site units are permitted (except in Toronto); and, • Rental replacement does not apply when vacancy is above 3% and / or rents are above a predefined threshold (except in Oakville). =figure 2.1 Components of Rental Replacement By-laws Qualifying Threshold • The number of demolished/converted units that triggers a rental replacement requirement. Retention • How long replacement units must remain rental. Replacement Mix and Size • Unit mixes and sizes of replacement units. Replacement Rents • Monthly rent for replacement units. Alternative Delivery Method • Whether cash in lieu and/or off-site units are permitted as an alternative to replacing units on site. Tenant Relocation Plan • Whether a proponent is required to create a relocation plan and/or compensate tenants while their units are being replaced. Exemptions • Rental market conditions in which rental replacement policies do not apply. Source: Parcel • Housing tenures to which rental replacement policies do not apply. Rental Replacement By-law - Financial Fe—"- �- -' 11 Page 37 of 101 Market Context Key Findings • There are approximately 21,400 primary rental units in Kitchener, 96% of which would be eligible for replacement based on the six -unit replacement threshold. • Average rents, low vacancy, and an increasing number of renter households are putting strain on the rental market. Average rents have increased by more than double the rate of inflation over the past 10 years. • Condominium units (i.e., secondary rental units) have been responsible for a progressively larger portion of the rental supply over the years. It is anticipated that this trend will continue as condominiums have made up the majority of apartment starts since 2018. Parcel • The number of renter households is projected to increase by 11,300 to 2041. An additional 8,000 apartment units would be required to accommodate this growth based on the existing share of renter households living in apartment units. • Overall, trends indicate strong and sustained demand for rental housing in Kitchener. Rental Replacement By-law - Financial Fe—"- �- 12 Page 38 of 101 Parcel 3.1 Primary Rental Universe A variety of factors—increasing rent, low vacancy, increasing ownership prices—highlight the need for rental housing in Kitchener, including at affordable prices. Supply • There are approximately 21,400 primary rental units in Kitchener. • The South -East neighbourhood has the single greatest share of rental units (31 %), whereas the Central - West neighbourhood has the smallest share of rental units (6%). • Approximately 96% of purpose-built rental units would be eligible for replacement based on the six - unit replacement threshold outlined in Provincial legislation. • The average building size is approximately 50 units. Rental Replacement By-law - Financial Fe—"- �- -' 13 Page 39 of 101 Parcel Figure 3.1 Percentage of Primary Rental Units by Neighbourhood (2022) NORTH-EAST CENTRAL �r SOUTH-EAST NORTH-WEST 4 rrr�. CENTRAL -WEST Source: Parcel, based on CMHC Rental Market Survey Figure 3.2 Primary Rental Units by Structure Size (2022) 3-5 Units ■ 4% 6-19 Units 170/ 20-49 Units M 19% 50-199 Units 44% 200+ Units 16% Source: Parcel, based on CMHC Rental Market Survey. SOUTH-WEST Rental Replacement By-law- Financial F�--"- `'l -' 14 Page 40 of 101 Parcel Rents • Average rents in Kitchener are the second lowest in the Kitchener -Cambridge -Waterloo CMA. • However, they have grown at more than double the rate of inflation over the past 10 years. Figure 3.3 Primary Rental Universe Average Rents (All Bedroom Types) (2022) South -East $1,458 Waterloo South-West $1,407 $1,474 Ontario Kitchener CSD $1,358 Kitchener -Cambri dge- North-West $1,356 WaterlooCMA Central $1,326 Kitchener North-East $1,229 Central -West Cambridge � $1,319 $1,171 Source: Parcel, based on CMHC Rental Market Survey. Figure 3.4 Growth in Average Ownership Prices and Rents (2013-2022) +82 +689 +52 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 E *Absorbed units Source: Parcel, based on CMHC Rental Market Survey, Costar Realty Inc. data, and Bank of Canada Inflation data. Rental Replacement By-law - Financial Fe—"- �- -' is Page 41 of 101 $1,547 $1,474 ■ $1,390 $1,358 Rental Replacement By-law - Financial Fe—"- �- -' is Page 41 of 101 Parcel • It is also important to note that average rents reported by CMHC include rent -controlled units, which command lower rents than units currently for rent on the market. This is true in Kitchener where the average asking rent for a unit on the market is approximately $550 more than the CMHC average rent . • As rental replacement by-laws typically require existing rents to be maintained, this "gap" between current rents and asking rents will negatively impact a developer pro forma. Section 4 discusses these financial implications in greater detail. Figure 3.5 Asking Rents vs. CMHC Average Rents by Bedroom Type Bedroom Type Bachelor 1 Bed 2 Bed 3+ Bed All Units Average Asking Rents CMHC Average Rent $1,067 $1,214 $1,427 $1,562 $1,358 Source: Parcel, based on Costar Realty Inc. 2022 Q4 data and CMHC Rental Market Survey. Vacancy Delta +$278 +$496 +$557 +$631 +$537 • Rising rents, in part, may be due to a vacancy being below the 3% threshold generally considered to be a good match between rental supply and demand. Low vacancy rates typically put upward pressure on rents as more tenants compete for fewer available units. • Of note, vacancy is under 2% in all Kitchener neighbourhoods, as well as neighbouring municipalities and the province as a whole. The 2022 city-wide vacancy rate of 1.2% is the lowest it has been since 2011. • Rising home ownership prices may also contribute to growing rents and low vacancy as households priced out of the ownership market are forced to enter the rental market, further increasing competition. Average asking rents reported are based on Costar Realty Inc. data from Q4 2022 to be consistent with CMHC average rents reported as of October 2022. Rental Replacement By-law - Financial Feasibility Study 16 Page 42 of 101 Parcel Figure 3.6 Primary Rental Universe Vacancy Rates (All Bedroom Types) (2022) North-West 1 ar Ontario 1 ar South -East 1.5 % Cambridge CY 1.4% South-West 1 ar Kitchener -Cambridge- KitchenerCSD Uzi 1 2% Waterloo CMA Central -West 09% Wate rloo CY 1.v Ce ntra l 09% .v North-East 07% Kitchener CY 1 Source: Parcel, based on CMHC Rental Market Survey. 3.2 Secondary Rental Universe CMHC secondary rental data for the Kitchener -Cambridge -Waterloo CMA only goes back to 2015 and as such is limited compared to primary rental market. Nevertheless, some important information can be gleaned from the data that does exist. We note that CMHC does not collect secondary rental data at the census subdivision level (i.e., specifically for the City of Kitchener). • Condominium units (i.e., secondary rental units) have been responsible for a progressively larger portion of the rental supply over the years. • It is anticipated that this trend will continue as condominiums have made up the majority of apartment starts since 2018. Rental Replacement By-law - Financial Fe—"- r- - 17 Page 43 of 101 Parcel Figure 3.7 Rental Units in Kitchener -Cambridge -Waterloo CMA 45,063 43,251 43,911 Est. Condo 40,765 40,446 Rental Units 39,028 36,345 34,387 Purpose - Built Rental Units 115 16 17 18 119 '20 '21 '22 Source: Parcel, based on CMHC Rental Market Survey. Figure 3.8 Kitchener Apartment Starts by Tenure (2013 to 2022) 2% 19% 35% 34 52% ■ 44% 311 Ren V 98 81% 65% 66% 69 56 48 40 Source: Parcel, based on CMHC Rental Market Survey. Condo Rental Replacement By-law- Financial F�--"_ � 18 Page 44 of 101 Parcel Rents • Recent data shows that secondary rental rents are higher than average rents in primary rental market, but close to asking rents. • This is likely due to secondary rental units being provided in new buildings that are not subject to rent control and therefore have greater ability to set rents at current asking rates`. Figure 3.9 Comparison of Average Rents in the Primary and Secondary Rental Markets (2022) Primary Market Average Asking Rents $1,895 CMHC Average Rent $1,358 Secondary Market Source: Parcel, based on Costar Realty Inc. 2022 Q4 data and CMHC Rental Market Survey. �•,�o-n.,�d Units Average Rent $2,086 Recently, Statistics Canada began reporting on investor-owned' units as part of the Canadian Housing Statistics Program (CHSP). Based on this information, the investor category can include secondary residence owners, landlords, short-term rental owners, developers, for-profit businesses and speculators. As such, it is important to note that not all investor-owned units make their way to the secondary rental market. For example, CMHC estimates that there were 3,902 condominiums for rent in the secondary rental market across the CMA in 2020, however, the CHSP estimates that 9,375 condominium apartments were investor-owned in the same year. This does not necessarily suggest that those units were sitting empty, but more likely that they were secondary residences for the owners (e.g., students living in a property purchased by their parents). 2 Rent control in Ontario currently only applies to units that were used as rental units prior to November 15, 2018. a An investor is defined as an owner who owns at least one residential property that is not used as their primary place of residence. Rental Replacement By-law - Financial Fe—"- �- -' 19 Page 45 of 101 Parcel Based on the CHSP, some one in five units in Kitchener was classified as owned by an investor as of 2020. Figure 3.10 breaks down the more than 15,300 investor-owned units by typology. Unsurprisingly, approximately two thirds of condominium apartments are investor owned. Figure 3.10 Kitchener Units Owned by Investors (2020) 67% or 5,240 units 8% or 3,965 units 29% or 3,250 units 68% or 21 % or 1,710 units 1,155 units Single Semi Row /Townhouse Condo Apt Property w/Multi Units Source: Parcel, based on Statistics Canada's CHSP. A property with multiple units is a property containing more than one set of living quarters, such as a duplex. The CHSP data also reveals the following, specific to the City of Kitchener: • Approximately two-thirds of investor-owned units in Kitchener are owned by individuals, with the balance owned by business and governments. • 68% of investor-owned condominium apartments are owned by business and government. • Investor ownership is more prevalent in recently constructed units (i.e., since 2011). Condominium apartments are the exception with 57% of the 1,255 condominium apartments built since 2011 owned by investors, compared to 67% of the total stock of condominium apartments across the City". 4 We note that across the Kitchener -Cambridge -Waterloo CMA an even higher proportion of recently constructed condominium apartments constructed since 2016 are owned by investors (i.e., some 77%). Rental Replacement By-law- Financial F�--" `'l -' 20 Page 46 of 101 Parcel 3.3 Renter Household Projections Renter households makeup 40% of all households in Kitchener, a slight increase from 38% per the 2016 Census. The total number of renter households increased by 15% between census periods. For comparison, the number of ownership households increased by 4% over the same period. Renter household growth has also outpaced ownership household growth in neighbouring municipalities of Cambridge (+13%) and Waterloo (+45%). Regionally, the number of renter households grew by 20%. The total number of households in Kitchener is projected to increase to 128,000 by 2041. Assuming renters continue to make up 40% of households, this will result in an additional 11,300 renter households in the city. Seventy-one (71 %) of renter households live in apartment units, a slight decrease from 74% in 2016. Assuming the current share is consistent to 2041, growth in renter households will result in a need for an additional 8,000 rental apartment units. Calculating 2041 projections based on 2021 percentages is an inherently conservative approach. As such, if renter households continue to grow, the number of renter households may be higher. However, overall, trends indicate strong and sustained demand for rental housing in the Kitchener area. Figure 3.11 Change in Renter and Ownership Households (2016-2021) Kitchener CSD Cambridge CSD Waterloo CSD Kitchener -Cambridge -Waterloo CMA Source: Parcel, based on 2016 and 2021 Census. Change in Renter Households 2016-2021 Change in Ownership Households 2016-2021 +4% +4% +4% +4% Rental Replacement By-law - Financial Fe—"- �- 21 Page 47 of 101 Figure 3.12 Renter Households by Housing Typologies Apartment < five storeys Apartment > five storeys Apartment or flat in a duplex Sub -Total 2021 Renter Household Share Parcel 2041 Projected Units 34% +3,834 32% +3,636 5% +520 71% +7,990 Single -detached house 11% +1,260 Other single -attached house 0% +13 Row house 15% +1,655 Semi-detached house 3% +356 Movable dwelling 0% +3 Total 100% +11,277 Source: Parcel, based on 2021 Census. Rental Replacement By-law - Financial Fe—"- �- 22 Page 48 of 101 Financial Feasibility Key Findings The feasibility of new residential developments has been tested, including their ability to replace rental units at Average Market Rent (AMR). This analysis has been undertaken for both tenures (ownership and rental); across two key subject geographies (Central and Suburban Neighbourhoods), as well as for all three pre- defined building typologies: Mid -Rise (6 -Storey) • Mid -Rise buildings in both geographies and of both tenures are challenged to earn sufficient returns even without a rental replacement by-law. High -Rise (20 -Storey) • 20 -Storey High -Rise condo buildings have strong potential in the Central Neighbourhoods, with some ability to replace existing rental units at AMR. Parcel • In large part due to recent tax rebates, 20 -storey High -Rise rental buildings are on the cusp of feasible in both geographies, however, a rental replacement by-law would likely push feasibility firmly back into infeasible on existing rental apartment sites. High -Rise (45 -Storey) • 45 -storey high-rise condo buildings have strong potential in the Central Neighbourhoods, with some ability to replace existing rental units at AMR. • 45 -storey high-rise rental buildings are more challenged than their shorter and less expensive -to -build counterparts. A rental replacement by-law would ensure they remain infeasible on existing rental apartment building sites. Rental Replacement By-law- Financial F�--"- �- -' 23 Page 49 of 101 Parcel 4.1 Baseline Financial Feasibility Conducting abase line analysis based on today's market conditions and policy context has allowed us to establish an important starting point forth is study. It has also helped us to compare the feasibility of a variety of unique development conditions that vary by Typology, Location and Tenure. By testing five (5) baseline analyses, we have gained a more nuanced understanding as to why certain typologies or tenures are—or are not—being built in the Kitchener market today, in addition to identifying several key themes. Additionally, by leveraging these baseline results as a tool for comparison, we can better predict the likelihood of a rental replacement policy deterring investment in a particular typology, tenure or geography based on its effect on the financial feasibility compared to the corresponding baseline scenario. Current State of the Market (Fall 2023) Development conditions across the country are extremely challenging at the time of this report, with few development opportunities being underwritten as "feasible". This can be attributed to record growth in construction costs and interest rates, as well as an ever -tightening lending environment as banks seek to limit their risks. Given that policy is largely forward-looking and considers the development of a given community over the medium- to long-term horizon, our approach to this analysis considers a return to historical growth conditions, including with respect to construction cost growth and interest rates. This means moving toward the pre-COVID average year -over -year (YoY) construction cost growth rate of approximately 3.5% and the 20- and 30 -year prime rate average of between 3.75% and 5.0%. The construction cost index tracking high-rise apartment buildings (five (5) or more storeys) illustrates that YoY changes appear to have peaked and are declining. While interest rates have flattened somewhat in recent months, timing is still unclear as to when they may retreat toward historical averages, or if further increases lie head. Rental Replacement By-law - Financial Fe— �- 24 Page 50 of 101 Year -over -Year Construction Cost Growth is Starting to Calm VoV Change 25.0% 20.0% 15.0% 10.0% 5.0 (5.0)% Source: Parcel, based on the Statistics Canada Construction Cost Index. interest Rate Increases Have Flattened 8.00 7.00 6.00% 5.00 4.00 3.00% 2.1 2.00 1.00% Prime Rate Has Increased 4.75% igh-rise apartment ilding (five or more storeys) 3 7.201 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep '22 '22 '22 '22 '22 '22 '22 '22 '22 '22 '22 '23 '23 '23 '23 '23 '23 '23 '23 '23 Source: Parcel, based on the Bank of Canada. Parcel Rental Replacement By-law- Financial F�--"- c'1 -' 25 Page 51 of 101 Parcel Part I.- Basic Profitability It is helpful to first focus on the simplest of return metrics: does the scenario offer the potential to make a profit? Figure 4.1 demonstrates that all but the Suburban Mid -Rise condo baseline scenarios have the potential to make a profit, with a positive revenue -to -cost relationship. Figure 4.1 Potential Profit/ Loss of Baseline Scenarios Profit $100.0 million $90.0 million $80.0 million $70.0 million $60.0 million $50.0 million $40.0 million $30.0 million $20.0 million $10.0 million -$10.0 million 0 yrs Source: Parcel • Ownership ♦ Rental e 2 yrs 4 yrs 6 yrs 8 yrs 10 yrs 12 yrs 14 yrs 16 yrs 18 yrs Rental Replacement By-law - Financial 26 Page 52 of 101 Parcel Q�r* ?: Layering Return Metrics IRR & EMx Figure 4.2 further confirms that the rental scenarios generate a much lower Internal Rate of Return (IRR) and similar, or slightly higher Equity Multiplier (EMx), particularly given their longer timeframe. The clear "winners" of housing development in Kitchener begin to emerge here via the typologies capable of generating an IRR of 15% or more and achieving a reasonable EMx - in some cases over a much shorter period (i.e., "quick wins"). This exact pattern is evident through recent development activity in Kitchener, which continues to favour high-rise apartments (equivalent to the Central High -Rise typology), among other ground -oriented housing in more suburban contexts. Figure 4.2 IRR & EMx of Baseline Scenarios • Ownership . Rental 35.0% 40 Central 20st High -Rise 30.0% 25.0% 1 19 Central 45st High -Rise 20.0% 10 Central Mid -Rise 15.0% 19 Suburban 20st High -Rise 10.0 5.0% Suburban 20st High -Rise Central 20st High -Rise . Central Mid -Rise 45st High -Rise Suburban Mid -Rise Suburban Mid -Rise EMx 0.60x 0.80x 1.00X 1.20x 1.40x 1.60x 1.80x 2.00x Source: Parcel Rental Replacement By-law- Financial F�--" `'l -' 27 Page 53 of 101 Parcel Cash -on -Cash It is also important to recognize that return expectations for rental housing can be different, particularly when adopting a "build -to -hold" strategy. In rental pro formas, both IRR and EMx can be heavily influenced by the reversion value at the end of the hold period (i.e., how much the owner is expecting to sell the building for in the future). Because it is hard topredict the future—especially decades out—many rental apartment developers will focus on the potential Cash -on -Cash (CoC) return of a property each year in the more immediate future. This effectively isolates for the immediate value of cash flows from the building rather than any appreciation of building value over time. Figure 4.3 illustrates that, based on CoC alone, a rental developer is unlikely to be enticed by the IRR and EMx metrics in any of the rental scenarios identified for this study. In all cases, a "safer" investment in 10 -year government bonds will generate superior cash flow in this regard, without the risk and effort required to construct and manage a building. Furthermore, a real estate focused ETF can be used as a more risk-adjusted measure which again, none of the rental apartment scenarios match. Potential Cash -on -Cash Returns of Baseline Rental Scenarios 10.00 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Average Cash -on -Cash 0 yrs 2 yrs 4 yrs 6 yrs 8 yrs 10 yrs 12 yrs 14 yrs 16 yrs 18 yrs S'1111111&cw;�E _ rrsx Source: Parcel No scenario is expected to yield as much as a real estate focused ETF has returned overthe last 10 years All rental scenarios generated lower CoC returns than a 10 - year government bond Rental Replacement By-law - Financial Fe— �- ` 28 Page 54 of 101 Parcel Interpretating the Results Which return metric is the most important? No single return metric in isolation defines whether a building typology is feasible and will be constructed. Different developers will have different goals and different risk tolerances. For example, a 20 -storey rental apartment building which does not quite match the CoC return of a 10 - year government bond may still go ahead if the developer has faith that the value of the building will appreciate substantially into the future, providing additional profit when the building is sold at reversion. Total profit would then exceed the cumulative yield of the bond substantially, as would the apartment's potential IRR, which considers the profit from the sale of the building that happens well into the future. Relying on the future sale of the apartment adds more risk, especially if it accounts for the bulk of the returns over the course of the investment and is likely better compared to the real estate focused ETF. We compute potential profit, IRR, EMx and CoC for each scenario to function as a baseline. Changes to these metrics allow us to measure the effect of a rental replacement policy, as well as predict whether these changes are substantial enough to dissuade development. What are the typical "goal posts" for feasibility? Through this analysis, we focused on the ability of development projects to reach the following "goal posts"—or "hurdle rates"—as determined to be reasonable minimum measures of financial performance that suggest some promise of feasibility: • At least 15% IRR (depending on development on timeline); • At least 1.6 EMx(depending on development timeline); • A CoC return that surpasses the 10 -year bond yield of 4.1%, in the case of rental scenarios. Rental Replacement By-law - Financial Feasibility Study 29 Page 55 of 101 Parcel 4.2 The Effect of Rental Replacement To test the effect of a rental replacement by-law, we have assumed that units would be replaced at the CMHC Average Market Rent (AMR) forth Central and Suburban Neighbourhoods. Although this assumption has been made for simplicity and consistency, proposed replacement units on a site -by -site basis may have a lesser impact if existing rents are above AMR or a greater impact if existing rents are below AMR. GST (and PST) Rebate on New Rental Construction The federal government recently announced the full rebate of GST on all new rental apartment construction projects started by 2031 and completed by 2035. The Province has indicated they will follow suit and rebate the PST, resulting in the removal of the 13% tax on the fair market value at completion of new rental buildings. This is a significant savings to rental apartment developments and has resulted in several of our baseline rental pro formas improving dramatically to the point of being much closer to feasibility. The implementation of a rental replacement policy would erase a large portion, if not all of these savings. For example, the 20 -storey High -Rise scenario tested will save some $8.6 million in taxes, however, replacing just 15 units at AMR reduces revenues by $5.0 million and profits by $4.9 million over a 10 -year hold period. This is essentially a "two steps forward, one step back" dynamic when it comes to improving the feasibility of rental housing development. Feasibility Indicators: * Infeasible * Unlikely 0 Possible Rental Replacement By-law - Financial Feasibility Study 30 Page 56 of 101 Parcel A 6 -storey mid -rise building is likely to replace an existing 6 -unit building -the rental unit threshold typically included in similar by-laws (see Section 2.2). 6 -unit buildings represent some 6% of existing apartment buildings in the Central Neighbourhoods and 5% in the Suburban Neighbourhoods'. Together they account forjust 1.5% of the City's supply of rental units6. Condo Ownership • In the Central Neighbourhoods, the requirement to replace six (6) rental Central units at AMR will reduce potential profitability of a Mid -Rise building to the point where losses are likely. Baseline Replacement • It is unlikely the burden of rental replacement can be overcome without • • adding additional market residential units, effectively pushing densities beyond the mid -rise built form. • In the Suburban Neighbourhoods, a 6 -storey Mid -Rise building is Suburban challenged to realize a profit, even absent a requirement for rental replacement. As such, rental replacement would further exacerbate these Baseline Replacement challenges. • Purpose -Built Rental • Although 6 -storey Mid -Rise rental buildings have the potential to make a Central profit in both the Central and Suburban Neighbourhoods, the potential return metrics—particularly CoC—are well below the targeted metrics Baseline Replacement outlined at the beginning of this section. • • A rental replacement policy will further impede financial feasibility, to the point where losses are possible. Suburban s Based on CoStar Realty Inc data. e Based on Costar Realty Inc data. Baseline Replacement • • Rental Replacement By-law - Financial Fe �- ` 31 Page 57 of 101 Parcel Condo Ownership • In the Central Neighbourhood, up to 15 rental units at AMR could be Central replaced while still achieving the minimum goal return metrics, however, replacement of additional units will require cost savings (e.g., surface Baseline Replacement parking, development charges rebates) or additional market residential • density. Example: Up to 30 units could be replaced if at least 50% of the parking is surface parking. Approximately 23% of existing apartment buildings in the Central Neighbourhoods are between seven (7) and 30 units', representing 7% of rental units in the city. • In the Suburban Neighbourhoods, the baseline analysis suggests that Suburban targeted return metrics are unlikely to be achieved, even with the assumption of 50% of total parking being delivered as more cost-effective Baseline Replacement surface parking. Reducing parking ratios may not be palatable to end users, therefore, this typology likely requires savings elsewhere. Adding a • rental replacement policy is likely to result in losses. Purpose -Built Rental • A 20 -storey rental apartment in both the Central and Suburban Central Neighbourhoods has the potential to be profitable and generate a CoC just below that of a 10 -year government bond. These building are on the Baseline Replacement cusp of feasible and could be nudged across the finish line through a variety of cost reductions, most notably a reduction in underground parking and a waiving of municipal fees and charges. • A rental replacement policy will reduce the CoC to the point where Suburban development will not be feasible, even with cost-saving measures. Baseline Replacement ' Based on Costar Realty Inc data. C7 Rental Replacement By-law - Financial Fe—"- �- 32 Page 58 of 101 Condo Ownership • In the Central Neighbourhoods, up to 30 rental units at AMR could be replaced while achieving the minimum return metrics, however, replacement of additional units will require cost savings (e.g., surface parking, development charges rebates) or higher revenues. Example: Up to 50 units could be replaced if 50% of the parking is surface parking. Approximately 5% of existing apartment buildings in the Central Neighbourhoods are between 31 and 50 units8. Together they account for some 4% of rental units' in the city. Purpose -Built Rental • Similar to the 20 -storey format, a 45 -storey High -Rise rental apartment is profitable, however, the expected return metrics are below the stated "goal posts", casting doubt on whether a project will go ahead. • As expected, a rental replacement policy only makes this worse, pushing a project firmly onto the sidelines. a Based on CoStar Realty Inc data. 9 Based on Costar Realty Inc data. Parcel Central Baseline Replacement Suburban Baseline Replacement n/a Central Baseline Replacement Suburban Baseline Replacement Rental Replacement By-law - Financial Fe— �- ` 33 Page 59 of 101 Parcel Figure 4.4 Summary of Baseline and Rental Replacement Redevelopment Feasibility Typology Tenure Geography Baseline Replacement Mid -Rise Ownership Central • • (6 -Storey) Suburban • • Rental Central • • Suburban • • High -Rise Ownership Central (20 -Storey) Suburban • Rental Central • Suburban • High -Rise Ownership Central 0 (45 -Storey) Suburban n/a n/a Rental Central • Suburban n/a n/a • = Infeasible # = Unlikely • =Possible Rental Replacement By-law - Financial Fe—"- �- -' 34 Page 60 of 101 Parcel Smaller Apartment Buildings Have Lower Than Average Rents Although our analysis includes a rental rate assumption tied to the weighted average AMR by bedroom type and neighbourhood zone for existing units, we acknowledge that rents in smaller buildings—such as those contemplated for replacement in our analysis—are often below AMR. Therefore, financial feasibility is likely to be further impeded for both ownership and rental tenures because of a rental replacement policy relative to what has been shown in the foregoing analysis, as these buildings are the ones most likely to be replaced. AMR by Building Size (2022) $ 2,000 $ 1,800 $ 1,600 $ 1,400 Kitchener Average, $ 1,353 ........................................ ....... $ 1,200 $ 1,000 •• $ 800 $ 600 $ 400 $ 200 3-5 Units 6-19 Units 20-49 Units 50-199 Units 200+ Units Redevelopment Potential High 4 Io Low Source: Canada Mortgage and Housing Corporation information portal. Rental Replacement By-law - Financial Fe—"- �- -' 35 Page 61 of 101 Parcel 4.3 How Many Units are Affected? Approximately one quarter of the existing rental units (some 5,300 units) in Kitchener are in buildings with redevelopment potential (i.e., identified as those between 6 and 50 units and affected by a rental replacement by- law)". Buildings larger than this are much less likely to be redeveloped, regardless of whether a rental replacement by-law is in place. Moreover—and per our more detailed findings presented herein for the Central and Suburban Neighbourhood contexts specifically—it is our opinion that a more likely (realistic) replacement range would be for buildings containing between 6 and 30 units (equivalent to some 3,600 units or some 17% of total existing rental supply)". • The baseline High -Rise condo developments tested in the Central Neighbourhoods, had strong profit potential. A rental replacement by-law could still allow for condo intensification of sites with up to 30 existing rental units, provided enough density is permitted. This amounts to some 1,684 units (i.e., 8% of the City's existing rental supply) spread across 105 buildings which would be protected while still allowing for redevelopment potential • However, a more likely outcome of a rental replacement by-law will be to discourage the redevelopment of these sites altogether and redirect attention toward non -rental apartment redevelopment sites (e.g., commercial plazas, parking lots, etc.). If the supply of redevelopment sites without existing rental properties wears thin, the City could see a reduction in the number of new condo apartments constructed in the future. • We estimate that if each one of these sites were to be redeveloped with the prototypical condo apartments considered in this section, they could likely yield more than 30,650 units. If 2/3rds'' of these units are ultimately purchased by investors who rent them out in the secondary market, the secondary rental market will grow by more than 20,500 new secondary rental units. We understand that units in the secondary market will be rented out at higher monthly rents, however, more supply and competition from new units will increase competition and force older units to reduce rents to compete. 10 Minimum 6 -unit building based on policy context for rental replacement. Maximum 50 -unit building represents upper limit aligning with our corresponding sensitivity / scenario analyses that includes the provision of incentives to enable development. " Minimum 6 -unit building again based on policy context for rental replacement. Maximum 30 -unit building represents upper limit aligning more directly with baseline financial feasibility analysis and therefore more reflective of prevailing market conditions (absent incentives). Z Costar Realty Inc. 3 See Figure 3.10 in Section 3.2. Rental Replacement By-law - Financial Feasibility Study 36 Page 62 of 101 Parcel • Based on current market conditions, the vast majority of the existing rental units in Suburban Neighbourhoods are likely to remain untouched even without a rental replacement by-law, as indicted by our baseline analyses which did not meet the goal return metrics. • If conditions improve in the future, the existing 110 buildings with between 6 and 30 existing rental units are likely to see the most redevelopment interest, accounting for just over 1,950 units (i.e., 9% of the City's existing supply) . However, given that the baseline analyses for Mid- and High -Rise developments produced such poor potential returns, market conditions would have to improve dramatically for a rental replacement by-law not to impede the redevelopment of these sites. As such, we suspect redevelopment will be on more of a "one-off" basis and a rental replacement by-law may be less impactful. Alternative Approach: Cash -in -Lieu of Replacing Units Replacing rental units significantly reduces revenues in the feasibility testing completed in this study. For condo (ownership) tenure, this loss includes not only a discount on the sales value per unit, but also reduced revenues over a much longer period. For rental tenure, this loss includes both a decreased net operating income (NOI) and a decreased reversion value in the future when the building is sold. The development community will typically choose the most straight forward, easiest -to -execute option when it comes to investment decisions. To this end, cash -in -lieu ("CIL") of replacing units allows the developer to write a cheque to the City instead of physically delivering the units. This transfers much of the responsibility to the City, however, it also provides the City with more control. We note the following for additional consideration by the City in this regard: • In assigning a CIL of Replacement rate, the City should decide on its goals and expected tools for implementation. For example, will the municipality use the collected funds to develop new units off-site via a municipal development corporation (i.e., development of municipally -owned lands), or will they create a fund to subsidize rents of the tenants to be displaced in existing privately -owned rental units elsewhere in the City? • The City should also determine the period of retention to ensure that the CIL of Replacement is sufficient (e.g., maintain the units at current rents for 25 years). 14 CoStar Realty Inc. Rental Replacement By-law - Financial Fe— �- ` 37 Page 63 of 101 Parcel • The formula for calculating CIL of Replacement should be transparent and as straight forward as possible, allowing the developer to build it into their own pro formas early (e.g., pre- acquisition of the site). This provides some element of certainty and clarity to inform decision- making within the private sector. • The City should be prepared with systems and procedures to follow through and retain the units the funds are meant to preserve in the first year the option is made available. Rental Replacement By-law - Financial Fe—"- �- -' 38 Page 64 of 101 Conclusions Parcel Rental Replacement By-law- Financial 39 Page 65 of 101 Parcel Question #1: Will a new rental replacement by-law risk materially impact residential development in Kitchener? • Overall, a rental replacement by-law is likely to deter all types and tenures of intensification of existing rental buildings across the city, particularly while non -rental apartment redevelopment sites remain available (e.g., neighbourhood retail centres). • Some of the stronger scenarios tested (e.g., condo High -Rise) could accommodate the replacement of some rental units, albeit at significantly lower return metrics than our baseline analysis suggests. Developers are more likely to look elsewhere for "easier wins". • It is highly unlikely that existing rental buildings over 50 units will be redeveloped, whether there is a rental replacement policy or not. Question #2: If pursuing the implementation of a new rental replacement by-law, what are the optimum parameters to effectively balance the need to accommodate new growth while simultaneously encouraging the maintenance—or expansion—of the local purpose-built rental inventory? If the City decides that it wants to move forward with a rental replacement by-law—despite its negative effects on financial feasibility on all types of rental building redevelopment projects—the key will be to remove as many barriers as possible. This will effectively reduce the risk of sterilizing existing rental sites from new development and/or pushing development to other areas of the community (e.g., greenfield development). To this end, the following key directions and potential unintended consequences should be considered by the municipality. Keep It Simple and Straight Forward... A more consistent "blanket" approach to a rental replacement policy is preferred for a variety of reasons. The city could look at requiring rental replacement on a more site -by -site or "case-by-case" basis in response to challenging market conditions, however, this ultimately provides less clarity and certainty for developers and could risk being perceived as a "shakedown" negotiation. Rental Replacement By-law - Financial F�- -"- ` - -' 40 Page 66 of 101 Parcel A simplified, citywide by-law will ideally apply the same replacement conditions across all geographies and should be transparent so that developers can build these associated extra costs into their underwriting process as early as possible. Set Similar Parameters to Policy Precedents As detailed in Section 2.2, rental replacement policies already exist in other Greater Golden Horseshoe municipalities. Based on our review of those existing by-laws, we recommend consideration of the following parameters: • rental replacement should apply when six (6) or more units are proposed to be converted / demolished and in-place rents are at or below current AMR, as published by CMHC; • replacement units should be provided at a similar mix, size, and quality as the original units, and at the AMR at time of completion; • replacement units must remain rental for at least 10 years or until the tenant moves out; • cash -in -lieu payments and off-site units should be permitted; and • rental replacement should not apply when vacancy is above 3% and / or in-place rents are above AMR. Phase Implementation Similar to what is often recommended for the implementation of other new housing -based policy frameworks (e.g., Inclusionary Zoning), we recommend that any rental replacement by-law be phased in so that recently acquired redevelopment sites are not unduly interrupted from advancing to market in the short-term. This type of phasing could be achieved by initially limiting the policies by geography (e.g., consider beginning in the Central Neighbourhoods only, as this is only location with sufficient density to absorb some replacement units) or based on other parameters in the by-law (e.g., a softening of some of the requirements until development conditions improve). During a phase-in period the City should monitor broader macroeconomic conditions and look for signs of the development market improving. The results of this study are a "point -in -time analysis" only, which are inevitably subject to change and potential improvement longer-term. As development conditions improve, for example, the by-law could be gradually updated and expanded to cover the entire City and/or require more demanding replacement parameters. Rental Replacement By-law - Financial Fe— �- ` 41 Page 67 of 101 Parcel The City could also consider exempting specific types of future development projects based on tenure, typology, or other housing forms that are desirable to the City yet the most challenged from a financial feasibility perspective today (e.g., new purpose-built rental buildings or Mid -Rise housing typologies). Allow for Flexibility Replacing rental units on-site can often be challenging for practical reasons, particularly when redevelopment is for a condominium building which will not have the same supporting functions as a rental building (e.g., a leasing office or on-site super intendent). Similarly, in this case the rental replacement units are likely to account for only a small portion of the total housing units in the new development. Off-site replacement can allow for replacement units to "cluster" in like -tenured buildings where the supporting functions and economies of scale exist. For example, several distinct redevelopment projects could consolidate their delivery of required replacement units into a small-scale rental building. Cash -in -lieu of replacement units could also be collected as an alternative mechanism, similar to parkland dedication. This would effectively transfer the responsibility of the replacement unit delivery onto the City, however, the City would have more control over how and when they are provided. While this still adds a cost line item to a developer's pro forma, the relative ease of compliance could soften the burden. This would be especially true if the methodology (i.e., supporting calculations to determine the value of replaced units) is simple and transparent, thereby allowing for it to be planned for early in the redevelopment / acquisition process. Additional Context: Cash -in -Lieu of Replacement Units Cash -in -Lieu of replacement units could be used to relocate tenants in existing market rental units elsewhere while subsidizing their rents, or through the development of new rental units in a new building(s) through a municipal development corporation. Whereas collecting cash -in -lieu to fund the development of a new stand-alone development is likely to require significant dedicated resources within the City and a relatively long period of time to collect sufficient funds to reach the scale of constructing a new building, a rental subsidization program could be implemented much quicker and subsidize more units over a longer time. Rental Replacement By-law - Financial Fe— �- 42 Page 68 of 101 Parcel Rental Subsidy New Construction (Affordable Rental) Capital Approx. $310,000 / unit' Requirement Implementation < 1 year Operations 25 years • Quickto implement Strengths • Lower City overhead • Less capital intensive • Low vacancy challenges ability to find existing units to subsidize Challenges • Shorter operational timeframe • No increase to supply Approx. $560,000 / unitz, excluding land and ongoing operations upon completion 7-10 years 50 + years • More control • Longer operational timeline • Could increase overall supply • More capital intensive • Slowerto implement • Requires more City overhead and expertise Based on the rental rates in Figure 3.5 in Section 3. z Based on the Central Neighbourhoods mid -rise rental building concept in Section 4.2. Understand Likely Side Effects of a Rental Replacement Policy In addition to preserving affordable rental units, a rental replacement by-law is likely to result some unintended consequences. These could include: • Increased density required on redevelopment sites where existing units must be replaced; • Increased prices or rents to compensate for the lost revenue on currently viable projects (subject to market strength), further reducing affordability of local housing supply; • Disincentive to the intensification of sites already residentially designated / zoned within the built boundary, particularly the Central Neighbourhood where greenfield lands no longer exist; Rental Replacement By-law - Financial Fe— �- ` 43 Page 69 of 101 Parcel • Increased redevelopment pressure on commercial sites (e.g., neighbourhood retail centres); • Increased development pressures in the Suburban Neighbourhoods where more unimproved development lands exist and existing transit infrastructure is less robust; • A reduction in the overall development pipeline, reducing future housing supply and indirectly reducing affordability longer-term too; and, • Potential cannibalization of the growth in the secondary rental market by rendering some condo projects infeasible and with purpose-built rental not able to pick up the slack due to already infeasible conditions. Understand Rental Replacement in Context of Full Housing Spectrum It is imperative forth City to understand the potential opportunities—and limitations—associated with the implementation of a new rental replacement bylaw: • First and foremost, this type of bylaw is not capable of yielding a net increase in the rental supply, but rather is intended to preserve existing units. Additional measures are required to keep pace with future growth in demand and associated new housing development needs. • Based on the current—and anticipated future—context for financial feasibility, rental replacement generally does not represent an effective tool or policy mechanism for addressing supply issues relating to deeply affordable units. Other parallel programs are necessary to balance needs across the full housing spectrum, such as this. • Rental replacement bylaws are also not focused explicitly on the preservation of actual existing physical spaces and/or buildings (i.e., dissimilar to heritage preservation, or similar). Instead, they are inherently more focused on tenant rights and preserving more macro -level housing supply issues, even if manifesting themselves in ways that are specific to individual sites, developers and/or tenants. • Units eligible for rental replacement have been estimated at some 20,500 individual units in total (i.e., 96% of the total primary rental units in Kitchener in buildings with a minimum of 6 units). However, in light of other practical limitations to implementation—including conditions for financial feasibility—less than one fifth of the total supply of rental units in the city are actually likely to be redeveloped and replaced (i.e., more in the range of 6 to 30 -unit buildings, amounting to some 3,600 units / 17% of existing supply). • Overall, rental replacement represents just one of many different facets of housing supply and demand imbalances that must be addressed by municipalities. Furthermore, the actual number of units that will be delivered to market through a replacement bylaw will undoubtedly be more limited under "real world" conditions than via the more theoretical research exercise explored underthis study. Rental Replacement By-law - Financial Feasibility Study 44 Page 70 of 101 m E m E Le7 UUi> 0 L U Q v C U 7 C N 4� Q s U s 4' O L s 3 U O L O C 3 c O L cn 3 � Q O s o � O M L O O s N in O X O > s N o N O C: n 0 y Q O s X s U E� EO u s O � Q +' U o O s O Q E N O 30 _ 3 U (D — N O :3U O L ~- C C U M O U N + s N +� V) m E m E Le7 R 0 Q v C 3 o � o m a y = Q Q Q Q ca R � y . / \ D \ y \ ƒ / � \ . ƒ° \ ƒ ± 6 / k ƒ G t G \ e \ u u / o _e k k u m % y \ ) \ a \ / E \ $ � $ { g % = 2 2 2 7 \ 9 \ \ \ 2 ® 0 / \ m E m 2 B y \ * ° ƒ� ƒt § (n // \ \ \ V) 2 u 0 7 %— 0 7 » 0 / ® E E 2 / ® j \ \ \ { \ ( ƒ ( G ± 2 \ 2 )_0 7 ƒ 2 / & ° ° \ { ƒ E $ ? m / 0,6 / n 's $ y e $ ± 0 § \ \ . La [ [ _§ 7 6 == e o m o a .e o G\ 2 E{ E 7/ } — E \ ( § \ § � 4 2 < o U U .2 U£\ f / 2 m � m 2 LLI 0 � ° u § tA § t « m u 2 o - IL \ k u - s t m u u w u LL * 0 m H 2 s 0 V) Q) U `2 D N Q) Q) 3 N C) D E U O V) L O V) _N N O _N C) N Q) U Q C7 m m m m N m d J H H 0 N Z m m Q m m d m N L E L > O N s O L N CL Y C m m L O U N O c E N O s V) Lel u LL N IL 0 0 L m m 7 N d IL LL c a0 4- 0 T Lo A 1 LL LL T m C N E N U Q N 4� C Q) ry N V N L L _N a� O cn O) O O L .N L O Q L O 0- C Q _O � C N ry O N U a0 4- 0 T Lo A 1 LL LL T m C N E N U Q N 4� C Q) ry m c O L Im mmvV m m Parcel Financial Feasibility Basics ey Determinants The development of new real estate—whether market or non -market (affordable)—can be extremely complex given that its success is dependent on a multitude of factors spanning countless industries and professional disciplines. Similarly, development can be heavily influenced by both broader macroeconomic conditions and more site- specific factors, all of which are key determinants in the ultimate viability of a given project. For simplicity, we often synthesize this to four key factors that can have some of the most significant impacts on financial feasibility: Policy, Market, Land and Capital. The successful integration of all of these factors is required to set the groundwork for viability. The "Sweet Spot" for Successful Development Projects Is there debt and equity available to finance the construction of the building at a reasonable cost? Source: Parcel Does public policy support the built -form and scale necessary to achieve both financial feasibility and community building aspirations? Capital Policy Is there market demand for the product at prices conducive to Market development? Are the building cost inputs reasonable? Land Is land available in the right location at a reasonable price? Rental Replacement By-law - Financial Fe �- ` 51 Page 77 of 101 Parcel General Structure There are two common types of pro forma analysis: • A Back -of -the -Envelope (BOTE) is a static analysis that assumes revenues and costs are all paid at once (i.e., "Day 0"). It is not intended to predict the level of profitability for a project, but rather to assess whether a project has potential to be profitable and warrants additional time and resources. This can be a helpful tool when limited information is available (e.g., early-stage development concept, policy -direction, etc.). • A Discounted Cash Flow (DCF) additionally considers the timing of the development cash flows, recognizing that development projects occur over many years. It reflects the Time Value of Money (TVM), which captures the reality that "a dollar in your hand today is worth more than a dollar tomorrow". To be reasonably accurate (or useful), this type of analysis requires a much more detailed development concept to best estimate the associated revenues, costs, and timing of the development. Notwithstanding the foregoing differences, it is helpful to keep in mind that the overall structure of any financial feasibility modelling is effectively the same. Both simplified and very detailed development pro forma analyses can always be simplified to their core elements: Revenues, Costs and Profits. How certain revenue / cost and profit assumptions are applied can also vary when dealing with different tenures in the case of residential development (i.e., ownership vs. rental housing). The key difference being that most ownership (condo -based) residential developments are focused on relatively short-term investment horizons consisting of predominantly one-time cost/ revenue streams, whereas purpose-built rental housing requires a much different investment "lens", that can span many years (i.e., including operation of the new asset upon its completion and market entry). Rental Replacement By-law - Financial Fe— �- 52 Page 78 of 101 Figure B.2 Basic Structure of Financial Feasibility Source: Parcel Revenues... Revenue from Unit Sales (NSF x $PSF) Rental Revenue (Rent - Expenses) x Hold Period Est. Value @ Completion (NOI _ Cap Rate) Common Return Metri Parcel Costs... Profit ($/Ac, $PBSF) Hard Costs Developer's C -E? (GSF x $PSF) _ Profit (before Tax) Soft Costs (% of Hard Costs) Not all developers are alike and there is no single return metric that signifies a financially viable project. Each participant in a development project looks at a unique subset of variables and return metrics under different conditions, based on their own requirements and/or expectations. Common measurement tools include: • Net Profit / (Loss) The total amount of money made (or lost) over the course of a project. • Internal Rate of Return (IRR) The expected compound annual return (%) over the course of the project. • Equity Multiplier (EMx) The number of times a project's original equity investment is returned to investors. • Cash -on -Cash Return (CoQ Rental Replacement By-law - Financial Fe— �- ` 53 Page 79 of 101 Parcel The cash flow after financing (%) generated by the equity invested to date. It does not take into account the value of the building or any appreciation of value overtime. • Timing Opportunistic investors look for quick returns (e.g., condo apartments) while long-term investors value consistent returns over a longer period (e.g., rental apartments). Measurements of Risk (Lenders): Loan to Value, Debt Service Coverage Ratio, Debt Yield, etc. Proforma analyses are important to all facets of urban development, with wide-ranging private and public sector applications. Financial feasibility modelling is—at its core—a tool for evaluating potential future outcomes. Whether motivated purely by profit or driven by other city -building objectives and social purpose, this type of analysis can be applied to any number of different "use cases" to maximize opportunities to achieve preferred outcomes. Broadly speaking, development pro forma analyses can be relied upon at various stages of the real estate development life cycle, including during the early stages of concept development (Pre -Development); throughout the entitlements and government approvals process (Approvals & Funding); as well as to inform the creation of sound land use policies that are mindful of the current—and anticipated future—conditions within a given market (Policy Development). Rental Replacement By-law - Financial Fe— �- ` 54 Page 80 of 101 Figure B.3 Pro Forma Use Cases PRE - DEVELOPMENT • Validate financial feasibility (pre- and post- land acquisition) • Early-stage development scoping and concept testing Source: Parcel APPROVALS & FUNDING • Optimize development program (project "right -sizing", determine ideal land use mix, etc.) • Optimize delivery of social benefits (affordable housing, community amenities, etc.) Parcel POLICY DEVELOPMENT • Inform land use policy direction / special projects (OP Reviews, SP's, other municipal strategies, etc.) • Prioritization of preferred municipal / city -building outcomes (DC's, parkland dedication, retail @ grade, affordable housing, urban design, etc.) For this study, pro forma analysis and financial feasibility in general has been utilized primarily as a tool for comparison rather than profit maximization. Furthermore, the analysis presented in this study has not been relied upon as an exact predictor of actual profits, nor profit maximization more broadly. It is more intended to help the City identify the effect a rental replacement policy could have on future development, in the context of its objective to ensure a stable rental supply across the city. We acknowledge that some typologies and scenarios which may appear unprofitable could very well be profitable under the right circumstances and conditions, which deviate from our broad baseline assumptions. Rental Replacement By-law - Financial Fe— �- ` 55 Page 81 of 101 Parcel Assumptions & Limitations Identification of Development Concepts • The prototypical Mid -Rise (6 -Storey) and High -Rise (45 -Storey) development concepts established for testing as part of our assessment have been developed by Smart Density in direct collaboration with staff from the City of Kitchener as part of the previous Enabling MM+AH study. In addition, the High -Rise (20 - Storey) concept represents a new development prototype specific to this new research, which has been based on parameters established through the previous Enabling MM+AH study. They are not intended to be indicative of any specific property nor landholdings within the City of Kitchener, but rather are characteristic of the types of development that could ultimately prevail on typical properties within the community, across all typologies. • The preliminary development concepts established for each typology are hypothetical only, based on a combination of: (i) the general nature, scale and density of development being contemplated across the City historically; (ii) recent market-based precedents; and, (iii) the type of new buildings that are best situated to advance broader city -building and housing -specific objectives. Although as -of -right permissions have been considered, Smart Density took a design -first approach to the typologies which pushes the boundaries on some elements (e.g., parking and right-of-way requirements), which may require the City to update its Official Plan and/or Zoning by-law, or the future developer to apply for an amendment. • Recognizing that each property and landowner will have different perspectives and requirements as it relates to financial feasibility in the "real world", we have attempted to capture the full range of possible outcomes within the City of Kitchener through related sensitivity analyses, which adjust selected input assumptions (including to reflect nuances across different pre -defined policy areas and geographies within the City). The development concepts established by Smart Density have served as a critical baseline to this portion of our analysis. Financial Feasibility Approach • Notwithstanding the preliminary and conceptual nature of the development concepts considered in this study—as well as the relatively limited statistical detail available at this early stage of the planning process— we have adopted a relatively detailed discounted cash flow approach to assess the financial feasibility of development in Kitchener. As previously explained, this is generally a more advanced type of financial feasibility testing than is typically employed for other policy -level exercises and/or equivalent early-stage, conceptual development scoping. Although we felt this more detailed approach was necessary for accurate results, it has its inherent strengths and weaknesses. Rental Replacement By-law - Financial Fe— �- ` 56 Page 82 of 101 Parcel • Our analysis is limited to evaluating the feasibility of the development concepts being constructed in isolation, including articulation of distinct policy areas identified within the City (e.g., Central vs. Suburban contexts, etc.). As such, no site-specific municipal infrastructure costs to be borne by developers have been incorporated into our analysis. These costs could represent an additional construction cost when advancing actual development on a given site, which we have assumed will be determined based on supplementary technical engineering work, site and block planning, as well as additional discussions with City of Kitchener staff as part of more site-specific applications. • The financial analyses included in this report have been undertaken as more of theoretical exercise only and do not necessarily constitute advice to proceed with the specific development concepts identified. Rather, our financial analyses are intended to help determine whether the concepts—and related incentives and/or policy mechanisms—appear to be promising at first glance and are therefore worthy of further investigation. A more detailed and comprehensive development pro forma analysis will ultimately be required by the owners/operators of individual properties across the City to consider the actual costing, phasing and refinement of any new site-specific development plans before proceeding with such an endeavour (including determination of the optimal building typology and/or affordable housing delivery). • Similarly, the findings presented as part of our analysis do not account for the unique financial expectations, strategic positioning and/or development capacities of current or future owners of real property in the community. As such, although each project may demonstrate a positive or negative preliminary finding as it relates to financial viability, it does not necessarily assert that such a finding—nor the related assumptions incorporated into the analysis—will ultimately be consistent with the perspectives or parallel analyses of each individual landowner across the City. Ultimately, it is those organizations who will establish internal financial thresholds, development parameters and conditions which implicate the scope and scale of any new developments proposed moving forward. Approach: Discounted Cash Flow Analysis Historically, most policy -based financial analyses prepared on behalf of public sector organizations like the City of Kitchener are structured around a more simplified BOTE approach. Although Parcel regularly relies upon this approach in the right context, these financial assessments generally are not equivalent to the more detailed and traditional pro forma financial analyses that are typical of most individual real estate development projects (i.e., as prepared by private sector participants, such as developers, property managers and other real estate investors). Namely, BOTE assessments are often simplified to the identification of a reasonable "break-even" point that could yield a reasonable return on investment to the owners of a given development site while also maintaining (or enhancing) the value of their existing real estate assets. Based on the more extensive and nuanced scope of this study, however, we felt that it was necessary to complete a more rigorous DCF analysis. As previously described, this type of analysis is capable of Zental Replacement By-law - Financial F�- �, 57 Page 83 of 101 Parcel more appropriately capturing: (a) the time -value of money; (b) the full timeline of development projects; (c) the nuances of operating rental buildings over many years; as well as, (d) a more comprehensive subset of common risk/return metrics. Overall, although the analysis presented in this report has continued to be relied upon as more of a comparative tool than an explicit predictor of investment returns (i.e., all the same as a more simplified RLV), the DCF approach has allowed us to prepare a more defensible and flexible analysis that responds to the unique objectives of this study. Other Assumptions • The various other statistical inputs relied upon in our analysis are considered sufficiently accurate forthe purposes of this conceptual analysis. These statistical sources—including available municipal information, datasets and previous reporting, as well as third -party industry data—have ultimately informed a number of the key underlying assumptions and inputs utilized in our analysis. • It is assumed that a reasonable degree of economic stability will prevail in the Province of Ontario, and specifically in the context of the City of Kitchener market, over the course of the development planning horizon identified in this study. • It is important to recognize that the lingering effects of the COVID-19 pandemic will continue to result in a significant amount of uncertainty as it relates to current and potential future market conditions. At the time of reporting, there is not a complete understanding of the potential longer-term implications of the pandemic on economic conditions nor real estate development patterns across the City of Kitchener and beyond. • References to the Canadian dollar in this report generally reflect its 2023 value, including the range of supporting statistical inputs and research that have informed our baseline financial assumptions. Additional adjustments have also been made to reflect growth in costs / revenues for future periods, where applicable. Rental Replacement By-law - Financial Fe—"- �- -' 58 Page 84 of 101 Parcel Statistical Assumptions Figure B.4 Summary of Assumptions Development Timeline Entiti1emem6 g sales up SraHlized Operations Site state 5guare Feet Sguare Meves V M 4cguisitian Building Stats ResNemul F—A— Gross Floor Ares eplacemenz Un la Net Floor Area Efficiency g "—(1.1) Condominium Ownership 6-Smsey Mid Rize 20-S—y High Rise 45-Smsey High Rize 24 ma(4 24 ma(s) 24 ma(s) 12 ma(sf 12 ma(s) 12 ma(s) 30 mals) 36 mals) 36 mals) 3 ma(sl 3 ma(sl 3 ma(s) O ma(4 . 120ma(s) $1588,888 $921000 $6500,000 $4,/5o,000 $14,000,000 $61 PSF $31 PSF $36 PSF $2 PSF $39 PSF $6.7 — $3.5 6Nac $9.4.- $69 W/ $203 — $56250 128.906 $33,333 $24,359 $34,568 Purpose -Built Rental 6-Smsey Mid Rize 20-Smsey High Rize 45 -Storey High Rize 24 ma(.) 24 ma(s) 24 mW { 12 malsl 12 mals) 12 ma(sl 30 mals♦ 36 ma(sl 36 ma(4 3 ma(sl 9ma(s) 9ma(s) 0 120 ma(4 12D ma(s) $1,888,888 $92s000 $6500,000 $a,3se,oee $14,000,000 $61 PSF $31 PSF $36 PSF $2 PSF $39 PSF $6 ] — $3.5 M/ac $9A — $6.9 M/ac $203 M/ac $56,258 $28,986 $33,3 $34,568 29,5490 29,5490 1]8,5000 1]8,5000 355,0110029,549 s1 29,549 sf 128,5000 128,5000 355,0000 24, u i 24, 69, 64,;49,, 64,, 69a 2a -u.. 24,009x1 '1, u,1 84,7.1,, ,6 32..- 5,5404 5,5404 13,7314 13,]31 26,296s 404 5404 13r]314 13,7 26 2. 24,2004 24,208d 137,925d 137,9254 286,9]54 24,2004 24,2004 137,9254 131,9254 286.9]54 81.9% ll% 256x{ 736 901x; 941x{ 20➢si 7.0 256 si 101 si 941x{ 909x; sm 70.M 7u sm sm 5.000 d - - 8.008 d 5 surreys x 2.1. 1 — x x 42% 32 un4s 32 units 198 units t94units 405 units 32 units 33 units 195 units 195 units 405 units 19 units 19 units 119 units 119 units 243 uni¢ 19 units 19 uni 119 uni. 119 um 243 units 13 units 13 units 65 units 65 H. 140 umt 13 units 13 units 65 H. 65 H. 140 M. 0.65/unit 0.65/unit 21 pace(.) 21w@fsl 0.40/umt u.58/uni -N 98 spa_(.) 0A0/uni pace(.) uni 0.10 0.1/- spare(=♦ 3 10 -(4 10 20pads) 20/10o sur 2.0/100 sur - 2.0/100 sur 2.0/loos - - 2.0/loos spare(sl 50% 1 Op% 50% 4 0.65/unit 0.65/unit 21 N 21 ) ­umt 0.40/unit 0.50/unit 78 0.40/uni 1. 1 uni 0.10 0.1/- spare(=♦ 3 0.05�/@umt 0.05�i�um) 1 1 D -(s) ­5/un' 2Dpa�lsl spa Ysl 50% 1 Op% 50% 4 Rental Replacement By-law- Financial F�,--1'_ `'l -' 59 Page 85 of 101 Parcel $1.I0 PSF $1.I4 PSF PSF $1.82 PSF $1.85 PSF Condominium Ownership $1,28]/mth $1,318/mtn Purpose -Built Rental $t,3o]/mth $1,293/mtM1 6 -Surrey Mid Rise 20 -Surrey High Rize as-smrey High Rise High Mid Rise 20 -Surrey High Rise asRi- Highgh Rise Revenues ax z ax s.o% Market$ PSF $941 PSF $803 PSF $1041 PSF $894 PSF $1,11,11 PSF $1.I0 PSF $1.I4 PSF 81 69 PSF Market $ Unit S/t t,s2o E6o/393 S-,211 E632583 $I3I,OSJ 51,198/mtn tax Et,2t3/mM 2- 2-$2s Et,200/mth zo% Market $ Parking Sp ESs,00p E55000 PSF Market $ ­rg - $5,000 $5,000 $5r" nual Growh Market Rem $ PSF Market Rent $ Unit Market Rent $ Parting Space Rent Grovxh (Pre -Lege Up) Rem G,-h(Gperatl Q Replacement Rent $ PSF Replacement Rent $ Unit Replacement R-$ Parking space Rent Grovxh )Pre -Lege UP) Rem Growth (operauons, Reoil Net Rem $PSF Renin Rent Groan Hard toss Above Grade Hxd Com Parking Com re Above Grade Below Grade g nual G ­Demolition Site Prep Se dng Connection Landcaping Soft Cosh Planning Appliauons Building Permir, Development Charges, perry Taxes Communiy Benefo CM1arges CIL Pxkland -H,-& En gineering gal Sales & Marketing Development Fee W I Otner Consslonts Finan ng(Land) Loan-roValue Finan ng lConsovmon) Loan-toCo.4 --mg (Permanent Deal Loan-mValue p o ss% $1.I0 PSF $1.I4 PSF PSF $1.82 PSF $1.85 PSF $1.82 PSF $1,28]/mth $1,318/mtn $1,290/mM $t,3o]/mth $1,293/mtM1 2.p% 2. 20% 20% 5.0% 5.0% s.o% 50% $1.I0 PSF $1.I4 PSF PSF $1.82 PSF $1.85 PSF $1.82 PSF $1,28]/mth $1,318/mtn $1,290/mM $t,3o]/mth $1,293/mtM1 2.p% 2. 20% 20% 2. -z 2S285 50% ax z ax s.o% 20% 20% 20% 8330 PSF 8360 PSF $6,000/spa $61,000/spare 893,000/spam sp ].s% "­ / sl­­g$0.00/slexi.9ing $1,000/unit $1,000/unit A, Plan o! SPA, Plano! GPA, ZBA, GPA, ZBA, $PA, � condo co�wo Plan ort nao GPlan ort ndo Plan orconao Currem Gry Raesaso$ segember 2023 1o.G%0! Dev Und s.Oh o! Hard Cott, 2.0%0! Hard tom 2.0%0! Hard Com 2.0%0! Hard Cmss 2.0%o$Total Com 20%0! Hard Com s.o%o$ Tool Cosa ]50% 6.25% 0%0$ Iran 4.25% $3.12 PSF $2.99 PSF $3.38 PSF $3.23 PSF $3.38 PSF $2,359/mth $2,259/mtn $2,390/mtn $2,285- $2,393/mtn $too/mM $0/mth $150/mth w- $150/mA 50% 50% 5- 5- s.o% 20% 20% 20% $1.I0 PSF $1.I4 PSF 81 69 PSF $t.]2 PSF $t.69 PSF $128]/mth 20% $1,318/mtM1 20 51,198/mtn tax Et,2t3/mM 2- 2-$2s Et,200/mth zo% PSF $­ PSF $330 PSF $36o PSF $6,000/space $6t,00p/spa $93,Oo0/s ].s% $8.00 / slexiting $0.00 / slexim�g $100o/unit $1,o0o/unit zar., SPA zar., S-OPA, zar., SMI s PA, zar., sPA Current Gry Raesas o! Segember 2023 1S.o$ Dev Land s.11%o$ Hard Cos¢ 2.0%0$ Hard Com 2.0%0! Hard Com 20%0$ Hard tom 2.0%0! Tool Com 2.0%0! Hard Gods 50%0! 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Cash in Lieu Permitted? Tenant Relocation Plan Required? Exemptions No Yes, in a comparable location Yes, in a comparable location No Yes (some geographic exceptions) Yes Undefined Rental replacement does not apply to: • Condominium units • Life lease projects • Accommodation described in Section 5 of the Residential Tenancies Act, 2006, except non-profit housing cooperatives described in clause 5(c) Rental replacement does not apply if: • Vacancy rate is > 3% • Rents exceed mid-range re nts Rental replacement does not apply to: • Second units • Equity co-operatives • Co -ownership properties • Lodging homes • Life lease projects • Peel Region Housing Rental replacement does not apply if: • Vacancy rate is > 3% • Rents > 1.75 AMR by unit type Source: Parcel, based on City of Toronto, City of Mississauga, and City of Oakville Rental Replacement By-laws. Yes Undefined Rental replacement does not apply to: • Secondary rental market units • Equity co-operatives • Co -ownership properties • Lodging homes • Halton Region housing Rental Replacement By-law - Financial 73 Page 99 of 101 Parcel Figure C.2 Primary Rental Units by Neighbourhood and Structure Size (Six -Plus Units) (2022) Neighbourhood South -East South-West Central North-East Central -West North-West Total 3-5 Units 65 97 151 199 127 112 751 Structure Size 6-19 Units 20-49 Units 50-199 Units 200+ Units 682 910 2,990 2,000 460 1,048 2,580 628 611 505 1,985 420 787 997 1,216 - 657 403 554 - 470 138 137 472 mom 3,667 4,001 9,462 3,520 Eligible for rental replacement per Provincial regulations Source: Parcel, based on CMHC Rental Market Survey. Figure C.3 Recently Completed Rental Projects Year 2023 2022 2021 Name Address Civic 66 66 Weber St W The Village of Winston Park 1000 Westmount Rd E The Carmine 528 Lancaster St W Avalon Urban Towns & Lofts 1430 Highland Rd The Market Flats 388 King St Highland Square 220 Ira Needles Blvd The Scott 63 63 Scott St Source: Parcel, based on Costar Realty Inc. data Total 6,647 4,813 3,672 3,199 1,741 1,329 21,401 Storeys Number of Units Average Rent 11 173 $2,387 11 212 $4,648 8 127 $2,115 8 32 $1,957 7 73 $2,125 16 344 $2,346 11 135 n/a Rental Replacement By-law - Financip' _ � 74 Page 100 of 101 Parcel info@parceleconomics.com 416-869-8264 250 University Avenue, #221, Toronto, Ontario, M5H 3E5 LOJ Page 101 of 101