Here we go with a deep dive into the numbers behind the rental incentive pilot program name MIRHPP (introduced by the previous City Council but still being implemented), and yet another controversial rezoning application by Westbank Projects Corp (CEO Ian Gillespie).
This analysis is in a letter sent from a person with a lifetime of experience in the banking industry to Mayor Kennedy Stewart and Councillors prior to the Public Hearing slated for Tuesday. For background, please refer to our recent post “Controversy: Public Hearing 27-Oct-2020 (Tues) for 172 foot Westbank tower at 3701-3743 West Broadway (corner of Broadway & Alma).” We copy the content below, with permission.
At this point CityHallWatch wishes to make the point that our elected officials on City Council have a fiduciary duty to look after the finances of our municipal government with due care and attention. They are also not bound by the decisions, policies and programs of a previous Council, including the MIRPP pilot program. After a careful read and armed with this analysis, perhaps it is time to pause and even cancel MIRHPP.
To get the bottom line, the Overview section at the very start is a good summary of the main points. Key words: “Windfall” profits through taxpayer subsidies. This letter focuses on one rezoning coming up on October 27, but also raises much deeper and broader issues of the City’s developer incentive programs and housing policies that deserve future in-depth review.
With this post, Mayor and Council will also now know that the public knows that the Mayor and Council know the information provided in this letter.
October 23, 2020
Dear Mayor Stewart and Councillors:
Re: Alma and Broadway Rezoning – Financial Analysis Shows Windfall Profits for Developer
I am writing to oppose the proposed rezoning of 3701 – 3743 West Broadway, which is coming forward under the Moderate Rental Income Housing Pilot Program (“MIRHPP”).
This MIRHPP project, as is typical of the MIRHP Program in general, delivers mainly expensive market rental suites (see “Market Rents Upon Completion” below) with only a few “moderately affordable” units. The program provides a significant subsidy (see “Cost of MIRHPP Subsidies” below) through the waiver of development fees (DCLs and CACs) for this project. In this instance the MIRHP Program is also being used to justify an huge density and height bonus, which creates an out-of-scale precedent for the surrounding area. The low cost base for land, which was acquired in 2011, means the developer gets “windfall” profits through the taxpayers’ subsidies (see “Delivery of Low Cost Housing Projects” below); that low cost base does not justify the project’s large scale of 14 storeys, or the resultant run up in land values and development pressure in the surrounding area.
In addition, the staff-recommended parking relaxation of only 27 parking stalls being provided for 161 units – of which 80% are market rentals – is a further developer subsidy.
The original Rental 100 application for 6 storeys of 94 secured rentals with 99 parking spaces would still provide a large developer profit, without as much impact on unaffordability and displacement in the surrounding area.
The City has ambitious objectives to see “affordable” rental housing built. It is axiomatic that if you want rental housing to be affordable for a particular income range, the costs of the project have to be such that the property owner can earn an acceptable rate of return, based on “affordable” rents. That being the case, the lower the project cost, the better, from a housing affordability perspective.
The MIRHP Program delivers subsidized “affordable” suites, in limited quantities, in expensive secured market rental properties, but does not encourage the construction of “affordable” rental buildings that would help alleviate the City’s shortage of “affordable” housing. As currently structured, MIRHPP allows developers with lower cost bases to enjoy “windfall” profits through the taxpayers’ subsidies. The costs to the taxpayers of the subsidies provided to developers are not reflected, or included, in any financial statement of the City. These subsidies are entirely hidden from public scrutiny, other than when disclosed through a Public Hearing process.
The City is facing ongoing revenue challenges. A project such as this one, which confers substantial subsidies on the developer in return for limited benefits for the City, is simply not defensible. It is quite clear the cost of the MIRHP Program subsidies are such that the City simply can’t afford to either borrow or raise $331,000,000 in taxes, to offset the foregone revenue, in order to achieve its target of constructing 4,000 developer-owned “affordable” units. The City would be far better off to take CACs from developers and use same to buy land it can then lease at favourable rates to not-for-profits or co-ops, on the basis the buildings constructed will serve those seeking “affordable” rental housing.
Delivery of Low-Cost Housing Projects
It is widely agreed that the major barrier to the development of “affordable” rental housing is the high cost of land in Vancouver, yet the Moderate Income Housing Pilot Program does not adjust the subsidies to reflect the relative cost of the sites being developed, as shown below:
The comparison between the Alma and Broadway project and Birch and Broadway site is striking: Alma and Broadway enjoys a cost advantage of $55.86 per buildable foot, or $6,836,000. Despite a significantly lower cost base, the City is giving the developer the same subsidy via DCL waivers that it gives a higher cost project. Jameson will do well financially with the Birch and Broadway project, while Westbank will make out like a bandit on the Alma and Broadway site, thanks to the taxpayers’ generous provision of subsidies.
The MIRHP Program is supposed to compensate the developer for the impact of 20% of floor space devoted to “affordable” housing. The subsidies and benefits being offered here are substantial: Not only are the DCLs of $3,139,276 being waived, CACs are also waived and, in addition, the applicant also is seeking to construct 14 floors over [instead of] the previously considered six floor project. Given the significant cost advantage this project holds over the Birch and Broadway site, it is incomprehensible that 14 floors, plus the subsidies, is required to offset the impact of the MIRHPP units.
No analysis has been provided by staff as to why the additional density is required, or why there is no land lift. Citizens are entitled to see this analysis, given the subsidies given to the developer are paid by the public through higher taxes, and the planning precedents set.
The table also demonstrates the MIRHP Program does nothing to address the real challenge of affordable housing – delivering a low-cost building – not just a limited number of subsidized suites – to the market.
The MIRHPP subsidy is available regardless of the actual cost of a project: Given the disparity noted above, one would expect that either: (1) Birch and Broadway would be disqualified because the land is very high cost, or (2) Alma and Broadway receives a lower subsidy given its much lower land cost, however this is not the case. This reinforces the fact that the MIRHPP does not require developers to deliver affordable housing at the lowest reasonable cost – which would in turn allow owners to charge lower rents and still earn a reasonable return on their investment. As currently structured, MIRHPP simply provides a subsidy, regardless of land cost, which ultimately benefits a limited number of tenants.
As noted previously, the developer is also applying to supply only 27 residential parking spaces for 161 residential suites (third parties estimate a parking stall costs $50,000 – $70,000 to build). While this may be permitted under the City’s By-laws, this represents a significant cost saving which falls straight to the developer’s bottom line. This is particularly galling given whatever public transit facilities that the developer would likely be using to justify the reduction in parking spaces have been paid for with public dollars, and the fact the developer is making no contribution, of any amount, towards any public infrastructure in this project.
Put simply, the optics are terrible.
Cost of MIRHPP Subsidies
Page 12 of the staff Referral Report dated September 1, 2020 noted that the City has set a goal for itself of having 4,000 developer-owned below market rental units constructed over the ten years ending in 2027. The table below shows what I believe are all the applications approved by the City to date under the MIRHP Program.
In order to meet the City’s objective of 4,000 units, a further 3,745 units must be constructed, and the total subsidy borne by the taxpayers of this City will be $331,115,012, based on the average subsidy/unit. If Birch and Broadway is the “best” the City can get away with in terms of building height for MIRHPP projects, it would require a further sixty-five buildings, each twenty-eight floors tall, to reach the 4,000 unit goal.
It is also worth noting that the MIRHPP program has cost the City in almost as much in the DCL waivers for these nine projects above, as staff reported were expended from 2010 – 2018 ($24mm, ~$8,800 per unit) in housing subsidies in its Housing report to Council last year.
Those reported costs of housing incentive programs do not include the cost of CAC waivers. I have reviewed referral reports going back three years and, while I don’t guarantee I am 100% correct, I could not find a single instance where a developer seeking a rezoning to construct secured market rental housing was required to pay a CAC, which is unexpected, in my mind.
In point of fact, there was at least one instance where the staff recommended a CAC waiver on the premise the proponent was developing a secured market rental building with no controls on starting rents, on the basis of the Secured Housing Agreement proposed to be signed by the developer. In a subsequent application under the MIRHP Program, staff recommended the CAC waiver on the basis of the MIRHPP units and the Secured Housing Agreement. Given the stark differences in the proposed buildings, one would have expected that the first application should have paid CACs since the only benefit was a Secured Rental Housing Agreement.
I have spoken with both appraisers and the BC Assessment Authority, and asked if the Secured Housing Agreement the City requires developers sign impacts the valuation of the property.
The answer was no.
The only time a property value would be impacted is if there was a restriction on rents registered on title, such as the vacancy-controlled MIRHPP units. The assessed value of the property would be based on an adjusted valuation of those “affordable” units, plus the market value of the balance of the building.
As an editorial observation, the City’s Policy on Community Amenity Contributions provides a broad overview of how CACs ought to be determined. However, the discussion is lacking in specificity with respect to a number of key inputs to the valuation process, any of which could have a material impact on the outcome.
Market Rents Upon Completion
Although not always commented on in these hearings, 80% of the units will be rented at market rates upon building completion. I was able to find a rental building which is just coming to market now, and then looked back to see what the reference rents were at the time of the Public Hearing in 2017. These are summarized below.
Given the current pandemic environment we are all living in, it is interesting to see the rents being achieved in a new building are still substantially above the maximum rents that would have been permitted had the project developer applied for a DCL waiver. The developer clearly made the right call in not seeking the DCL waiver in 2017.
More importantly, this table demonstrates another reality: Without any restrictions – as is the case with the current iteration of the MIRHP Program – developers will always charge what the market will bear. The rents sought on the project above are clearly affordable for only those in upper income brackets. There is nothing to stop that from happening at Alma and Broadway, and in the end, little is actually done to solve the housing affordability crisis through this project.
If approved, this project will inevitably drive up land values in the adjoining area, which will translate into higher rents and displacement in the market, as affordability will become a greater issue.
The above table also underscores one other matter that relates back to the previous discussion of CACs – one of the key assumptions driving CAC negotiations is around rental rates upon completion. The writer has passing familiarity with pro forma projections and would draw your attention to a comment made by Michael Geller [prominent Vancouver architect and developer] on Twitter regarding proformas, which is relevant to this discussion:
I once told a judge as an expert witness in trial on what constitutes financial viability, don’t look at proformas. Developers often prepare 4 for each project, 1 for themselves, 1 for the bank, 1 for the city & 1 for their partners!
Rental construction project pro formas received by banks are supported by arm’s length appraisals, which include an analysis of projected rental income. This is a critical part of the assessment, as the rental stream is what facilitates the mortgage financing which repays the construction loan. Banks often back test the rents realized upon completion against the pro formas originally provided and, anecdotally I would say the experience is that the forecast rents can be aggressive, however they are generally attained. It would be instructive for the City to compare the pro forma it received from the developer to the pro forma provided to a bank for construction financing.
Summary and Recommendation
Given the limited number of “affordable” units MIRHPP produces, the provision of taxpayer subsidies without regard to the cost of a development, the overall cost of the MIRHP Program, the fact the rents for the remainder of the units constructed are well beyond any definition of “affordable” and will drive up rents in the adjoining area, I oppose this application. I urge you to vote against this rezoning.