Dealing with developers: municipal bonusing spurs debate

In November of last year, a shouting match erupted in Toronto city council chambers. Mayor Rob Ford hurled accusations at Coun. Adam Vaughan, calling a $1 million deal that Vaughan secured with a developer a "shakedown." 

Ford’s outburst is just one snippet in a much greater debate over the ambiguous, ad hoc nature of Section 37 of the Planning Act, a "density for benefit" agreement introduced by the province in 1983. It allows municipalities in Ontario to secure benefits for a community undergoing significant land development. In Toronto, ward councillors can negotiate cash and in-kind benefits from developers looking to build higher and with greater density than is allowed in the zoning.

"Some people think that it’s just a form of blackmail," said deputy mayor Doug Holyday. "A developer can get more density and make more profit off of a piece of land by paying off the city. In some cases, the money coming into certain areas is astronomical."

A recent paper by Aaron Moore from the Institute on Municipal Finance and Governance reports that from 2007 to 2011, 159 agreements were reached under Section 37, which includes 386 separate benefits.  

'Too much power in councillors' hands'

These benefits included improvements to public parks, playground and commissioned public artworks. While almost half of these benefits were paid in-kind, the cash benefits alone garnered $137 million.

While the city planning department negotiates the value of the Section 37 benefits, it is up to the discretion of the individual ward councillor of the development area to decide how those benefits will be allocated. Holyday says the planning department needs to take a stronger role in these decisions.

"There is too much power in [the councillors’] hands," he said. "You run the risk of a councillor putting the money into things that could be the best for them come election time."

Vaughan vehemently disagrees. "The notion that politicians shouldn’t have any power is absurd," he said.

As a result of the condo boom his downtown ward (Ward 20, Trinity-Spadina) Vaughan has negotiated many Section 37 agreements with developers. Top on his agenda is securing these funds for affordable housing.

"When people say that the power should be trusted to bureaucrats, not to the democratically elected people, what they’re saying is that the community should have no power," said Vaughan. "I find that offensive."

Patrick Devine is a development lawyer who has practised municipal and planning law in Toronto for the past 35 years. He says these spending decisions lack oversight by the planning department, are not governed by a defined process and are not linked to a policy that addresses larger planning goals.

"There is a disconnect here between the development process, which is detailed and rigorous, and the more ad hoc approach followed by Section 37," said Devine.

Devine says that city staff has done a good job of trying to standardize the system by creating a set of guidelines. The problem, however, is that some councillors choose not to follow it.

"Section 37 is not being used in the way that it was intended," said Devine.

A tool for 'good planning'

Since the city’s Official Plan calls for increased development in certain areas — along major roads, near public transit, and within downtown — Toronto city council has approved many new developments that exceed the outdated zoning bylaws.

If city planning determines the development represents "good planning" and zoning approval is granted, then Section 37 benefit agreements are negotiated. They are meant to give areas experiencing growth a way to improve their community services and amenities.

"It’s a planning tool to enhance the quality of the environment where a development takes place to make good planning better," says Peter Langdon, acting manager of the city’s planning division.

The approval process: how it works

In Toronto, Section 37 agreements are negotiated on a case-by-case basis. Here is the process: 

• The developer approaches the city planning department to increase the density on the site to greater than what is permitted by the zoning bylaw.
• If the city planner agrees, the appraisals section of the city’s real estate services estimates the value of the additional density at that particular site.
• In many cases, the city planner tries to secure 15 to 20 per cent of the value for Section 37 benefits from the developer.
• The councillor approaches the developer with a list of benefits or amenities that they would like to secure, which they negotiate.

The city’s guidelines state that Section 37 agreements cannot be applied across the board as a standard percentage, for fear that the benefits could be construed as an illegal tax. Under these guidelines, each agreement is negotiated on a case-by-case basis.

Issues surrounding Section 37

A lack of clarity:  Aaron Moore, PhD, and post-doctoral fellow at the IMFG and author of "Trading Density for Benefits: Section 37 Agreements in Toronto" points to the vague wording of "facilities, services or matters" in the Planning Act. He sites this lack of clarity is as problematic, resulting in a number of contradicting interpretations of what constitutes Section 37 benefits.

For example, The Ontario Ministry of Municipal Affairs and Housing states that the benefits could be put toward "intensification, growth management and transit supportiveness." Meanwhile, the Ontario Municipal Board insists on a direct connection between the building proposal and the community benefit, such as building a park or playground adjacent to the new development.

In 2007, in  an effort to resolve the confusion, the City of Toronto created a set of guidelines and protocols. This document states that the Section 37 benefits have to be spent on  specific capital projects and goes on to list a number of permissible categories including heritage conservation, affordable housing, daycare centres, public art, playgrounds and improvement to transit facilities.

The city’s guidelines state that planning staff should assist the ward councillor with negotiating the benefit agreements. Staff is supposed to recommend when it is appropriate to ask for benefits, what types of benefits to request and how to uphold Official Plan policies. But these guidelines are often not followed.

Power concentrated in the hands of the ward councillor: The ward councillor decides whether or not to take the advice of the planning department and whether to consult with the public after the benefits have been secured.

"The ward councillor and the community council are not bound by the opinion of the planning staff," said Langdon.

"There are some councillors who will negotiate directly with the developer about community benefits," says Langdon. He says that although it is not in line with the protocol, it sometimes has a beneficial effect.

"The ward councillor has a lot of influence with the developer with respect to the approval of the application at the community council level," said Langdon. "Sometimes they can negotiate benefits of a higher value then staff might be able to do."

But he says this approach comes with drawbacks: the Official Plan policies may not be followed if Section 37 funds are negotiated without consultation with city staff.

"The art of city building is properly invested in the politicians that run council. And to pretend that technocrats who have a job at the City of Toronto can come in and change that, is absolute insanity," says Vaughan.

Councillors can act as 'ward dictators'

Former Toronto budget chief David Soknacki recently wrote an article titled "Reforming City Revenue" for Novae Res Urbis, an urban planning and municipal government publication. 

He writes: "City planning officials have little defence against the practice of councillors acting as ward dictators — establishing personal priorities for amenities and inserting them into negotiations ....To ensure a consistent, meaningful use of Section 37... all development decisions should be approved at city-wide committees and from there, at council."

How the money is being spent

Moore notes in his paper there has been little public debate about these agreements and, so far, the majority of the spending has been varied, inconsistent and spread across a number of small projects.

One key trend identified in Moore’s paper is that most of the spending has been in the form of "desirable visual amenities" such as parks, roads, streetscapes and public art.

He points out that to date, only six per cent of the funds have gone toward affordable housing, an area where other municipalities in Canada and the United States have focused their density agreement funds.

Vaughan is working to change that trend. He has backed a motion in council that is part of an overall objective to establish a framework for securing affordable housing through Section 37 agreements. 

"We’ve been doing it on an ad hoc basis, and we want a legal and policy framework so it becomes consistent on a site-by-site basis."

But he strongly opposes the criticism of Toronto’s Section 37 agreements in Moore’s paper.

"Could it be more prescriptive? Yes. But I take issue with the underlined assumptions which are present in this report," said Vaughan. "Priorities aren’t always set by government. If the people of the city aren’t setting the priorities, then it’s not a democracy."

Money left unspent

Most of the Section 37 funds the city has secured has not been spent.

Of the $137 million in cash benefits that have been secured by the city from 2007 to 2011, $63 million has been received, and only $11 million has been spent.

The city doesn’t receive any funds until the development is in use, but Moore explains that even once the city has the money, often it remains frozen in bureaucratic processes.

Sometimes this is due to a lack of communication between the ward councillor who secures the benefit and the various city departments that co-ordinate city projects, such as the parks department or the transportation department. Also, if a city department has other priorities they may not have the time to focus on a new project. In some cases, they may not even be aware that the money has become available.

"The delay on spending the funds is a dilemma for us," said Langdon. "We wish the money could be spent more quickly then they have been." He says they are trying to address the issue through better communication.

Confusion over development charges vs. Section 37

The funds that come under Section 37 are not the only funds that municipalities receive from a new development. Other charges include a land transfer tax, an assessment of growth, as well as ongoing tax revenues.

Most notably, there is the Development Charges Act, which follows that a municipality should not have to carry the financial burden of new development.

The city undergoes a detailed analysis and comes up with a list of development charges that includes funding for police services, libraries, parks, waters, sewers and roads, to determine the funding needed for a new development to pay for itself.

This set of itemized development charges must be paid by the developer before a building permit is granted, to cover the impact that the new development places on city services.

Critics of the Section 37 agreement say that this rigorous process of establishing development charges, stands in stark comparison to the ad hoc application of Section 37 funds.

Sharing the wealth

Moore’s paper also points to the fact that most of the Section 37 benefits secured have been concentrated in a few downtown wards, including Vaughan’s, as a result of the condo boom. Councillors who represent wards outside these high-growth areas have expressed concern that Section 37 money should be spent in a way that benefits the entire city.

"You can say Section 37 lands in just a few neighbourhoods, because that’s what it’s there for," said Vaughan. "There are development dollars that get accrued in the city that never get spent in the wards that are experiencing growth, because they have enough capital through Section 37."

Vaughan says it’s possible to secure more city-wide money from developers by increasing the rate of development charges.

"The councillors who want more money out of a development, don’t want to take it from a developer, they want to take it from communities that are experiencing the growth," said Vaughan.