Out with the old, in with the new

Considerations when replacing rental housing units with new condo developments

June 11, 2013

The Toronto Official Plan is the blueprint for development across the city over the next few decades.  It contains the policy directives that govern new development on lands currently occupied by rental apartments, and other forms of low cost housing.

Specifically, it establishes clear policies aimed at preserving the city’s existing rental and affordable housing stock (housing policies in Section 3.2.1), including thresholds for demolition and conversion of rental housing.

The Official Plan states that any new development that would have the effect of removing all or a part of a private building and would result in the loss of six or more rental housing units will not be approved unless certain conditions are met.

These conditions include:

  1. replacing the rental housing units with new units similar in size, type and rent to those effected;
  2. maintaining rent on those units in accordance with the Provincial Rent Increase Guideline; and
  3. providing acceptable tenant relocation and assistance during redevelopment, with a right for the return to return to occupy the replacement units.

These policies impose a substantial additional cost on developers which must be factored into the overall project outlook, and could fatally affect the viability.  The potential revenue is offset, but may still be justified by a market price for units that was sufficiently high so as to support the additional cost.

The City of Toronto Act, 2006, also addresses the demolition and conversion of residential rental properties.  Section 111 grants the City the ability to “prohibit and regulate the conversion of residential rental properties to a purpose other than the purpose of a residential property.”  It is limited to rental properties with six or greater units.

The Ontario Planning Act, Section 37 defers authority to a municipality to increase the density and height of a development in exchange for other things, such as a financial commitment to a local community institution.  Indeed, cash contributions are made in order to secure the rights to demolish certain rental properties.  In reviewing several applications for demolition of rental units located in the City of Toronto in 2010, the Section 37 payments ranged from $350,000 to $1.2 million, which included one instance of a $700,000 contribution to be used for on-site art.

Letters of credit may be required to demonstrate that the developer is “good for it” when it comes to replacing the rental dwelling units that would be demolition for the purposes of building the new development.

Are rental buildings a dying breed of housing stock?  Some of Toronto’s condominium buildings today are up to 85 percent rented, owned by investors.  The municipal government’s policies over the last couple decades may have discouraged developers from building rental buildings; however, in light of these high rental ratios in Toronto condominiums, it may be argued that new condominium developments are really rental buildings in disguise.  However, notwithstanding that rental housing in Toronto has shown very low vacancy rates, high construction and land costs have limited rental development.

Is the effect therefore a protection of rental tenants at the expense of deterring development?  Land development typically results in a revitalization of aging neighbourhoods, and often has positive economic effects as well as improvements in quality of life.  The improvement in quality of life, however, would be offset if current tenants are driven out of the neighbourhoods they know and love.  This is certainly the public policy concern that underlies the Official Plan; consumer protection and preservation of historically significant lands.

Concerns about redevelopment should start to mount, however, in the face of aging neighbourhoods and deteriorating buildings.  As these buildings age, the cost to repair and maintain becomes greater.  Some of the responsibility to repair and maintain an aging condominium falls at the feet of the board of the directors of the condominium corporation.  While Ontario legislation does mandate certain financial requirements with respect to the Reserve Fund designed to cover these potential expenses, the present author has seen in several instances a board that has declined to make certain preventative maintenance in the spirit of cost-savings, often in buildings with not only aging edifices, but aging owners as well.  Will it take a dramatic accident (a crumbling roof; an explosion;) in a deteriorating building to force the municipal government’s hand?

The current state of affairs seems to be that the high cost of replacement is a substantial impediment to new developments. When condominiums begin nearing the end of their lifespan, it becomes more and more prudent to attract a capital investment.  Developers are good candidates to put up the cash (not selflessly I assure you) to revitalize aging neighbourhoods, and perhaps rescue them from dilapidation.