Density Bonus System / Density Transfer primer

[Bob van Wegen]

This is from material supporting the Beltline ARP

Note: FAR, or Floor Area Ratio, is a measure of density. Specifically, it is a measure of built volume. A one-storey building covering its entire site would be 1 FAR, a two storey building covering the entire site would be 2 FAR, a two storey building covering only half of the site would be 1 FAR. A 20 storey building covering half the site would be 10 FAR and so on....




What is a density bonus system?

A density bonus system is a way of achieving community amenities by selling or trading development rights. In effect, the developer acquires additional development rights from The City in exchange for the prescribed amenity.

What pre-conditions are necessary for a bonus system to work?

The system only works if the following conditions are true:
a. Development sites are designated for a base density that is lower than the density that is achievable by participating in the density bonus system.
b. Development sites on the market are trading at a value that reflects their existing land use designation value (not at a higher value that reflects the market’s perception of additional density that can be achieved without making a contribution).
c. The extra density is, from the developer’s perspective, physically achievable on the site, marketable, and profitable.
d. The value of the additional density is equal to or greater than the cost of providing the necessary amenity.
e. There is not another, less expensive way to achieve extra density (e.g. land use redesignation without making a contribution).

How much amenity can be generated from a bonus system?

The amount or value of amenity that The City can receive in exchange for a density bonus is inherently limited by the value of the land (i.e. development rights) in the area in which the density bonus is granted. If the land associated with an extra square metre of development entitlement is on the order of $150 to $300 per square metre (as it is in Calgary’s Centre City), then there is obviously less scope to achieve amenity than there is in a market in which additional density is worth over $1,000 per square metre (as it is in say, Downtown Vancouver).

Does a bonus system affect a developer’s profit?

Density bonus contributions have nothing to do with developer’s profit. The amount a developer contributes to obtain a bonus is part of the developer’s land acquisition cost. A developer who buys a site designated for 5.0 FAR and acquires an additional 2.0 FAR from The City by providing an amenity of comparable value, is in the same position as a developer who paid market value for a site designated outright for 7.0 FAR. Both developers have equal land acquisition cost and both developers (all other things being equal) will earn the same profit margin on the project. The only developers affected are those that purchased land at a price that assumed they could build more floor area than the current land use district allowed them. For instance, if a developer bought a piece of land that was designated for a maximum Floor Area Ratio (FAR) of 3.0, but paid the land vendor an amount that assumed they could get it re-designated for 9.0 FAR without having to provide any amenities or contributions, then the implementation of a new bonus system that required a contribution to get from 3.0 FAR to 9.0 FAR will affect their
project’s viability.

Will a lower amenity contribution rate be a greater incentive to a developer?

No. There is no point in providing bonus density at a large discount (e.g. 50% of the market value of the development rights) on the premise that this will provide extra incentive to the developer. In a well-functioning market, any discount provided by the City will very quickly be captured in prevailing land values, so the benefit of a discount flows to the land vendor, not to the developer to whom the City is trying to give an incentive. Bonus density should be valued at a level that is not far below market value. The developer should perceive that after “buying” the bonus density, absorbing any transactional costs associated with doing the bonus density deal (such as extra design, cost analysis, negotiation with the City), and paying the cost of the amenity, the developer is a little ahead.

What doesn’t the Beltline bonus system cover?

The bonus system is only intended to capture amenities or contributions from the density over and above the Base Density set out in the Area Redevelopment Plan. It does not intend to capture value from existing development or from development up to the Base Density. For this reason, additional investment is still required to provide amenities and services for existing residents and businesses as well as new residents and businesses from new developments up to the Base Density. In other words, if no developers chose to participate in the bonus system, significant public investment is still required to provide the desired public realm and community amenities for the Beltline.

This investment can come from several sources including direct public investment in infrastructure and the public realm (through mill rate support or other government funding such as grants) and other special measures such as local improvement bylaws. In this way, the improvement of the public realm and the provision of community amenities or benefits is a collaboration and partnership between The City, the development industry, and in some cases, benefiting landowners. No one source of funding will be adequate or appropriate to cover all costs.

Does the bonus system pay for basic infrastructure?

The Beltline bonus system is not intended to fund basic infrastructure such as water, sewer and roads. These will be financed in part by municipal investment and in part by a “levy” system being developed through the Cost of Growth study, subject to approval by Council. The bonus system and the levy system should be complementary to one another. For example, if a levy is being used to fund upgrades to public sidewalks, then the bonus system should not duplicate this effort.

Shouldn’t the increase in property tax revenue as a result of new development pay for Beltline amenities?

Yes, property tax revenue should cover some of the cost of the required amenities and improvements, but it is also required to fund other city-wide programs and projects that also benefit the Beltline. It is most effective when leveraged with other funding sources such as Provincial or Federal grant money, local improvement bylaws and amenities or contributions provided through the bonus system.

The following are excerpts from the Beltline ARP dealing specifically with heritage bonusing.

4. Heritage Designation

Description:
A building or portions of a building are designated
as a Municipal Historic Resource.

Rationale:
As allowable density increases, the pressure
to redevelop heritage sites also increases.
To counterbalance this situation, incentives
are required to preserve and re-use heritage
resources.

Eligibility:
A heritage resource on a proposed development
site must be designated a Municipal Historic
Resource. The upgrade to the structure shall be
consistent with the Standards and Guidelines for
the Conservation of Historic Places in Canada
and to a degree that will allow for residential
or commercial occupancy under the Alberta
Building Code. Any cost estimates for the
preservation, rehabilitation or restoration shall
be submitted by the applicant and prepared
by a Registered Architect with demonstrated
experience in heritage conservation. Agreement
on the cost estimates shall be determined
through negotiations with the applicant and the
Senior Heritage Planner.

Bonus Rate:
The amount of additional floor area that may
be earned through the preservation of heritage
features will be determined through negotiations
between the owner/developer and The City,
based on the overall cost of the preservation,
rehabilitation or restoration and any other related
costs, depending on the specific circumstances
of each building. As with other bonus items, the
floor area bonus will relate to the average land
value per square metre of buildable floor area
for the area. For example, if the total cost is
determined to be $500,000 and the average land
value per square metre of buildable floor area for
the area is $270, then the amount of the bonus
floor area will be calculated as follows:
Total cost / (Average land value x 75%) =
Allowable Bonus Floor Area
$500,000 / ($270 x 75%) = 2,469 m²
Any bonus floor area over and above the
maximum allowable FAR for the subject
property will reside with the property through
an agreement acceptable to The City and may
be transferred or sold to other sites within the
Beltline.

5.4 Density Transfer

5.4.1 Density Transfer for Heritage
Preservation.

1. Source Sites:

Unused density rights on an individual lot,
created as a result of the formal designation of
a building as a Municipal Historic Resource may
be transferred or sold to another development
site or sites within the Beltline. No limit shall be
placed on the amount of density rights that can
be assigned to, or transferred from, a designated
site. At a minimum, the unused density shall
be determined by subtracting the existing floor
area from the total maximum allowable floor
area. For example, for a 1,500 m² site in Density
Area A that contains a 6,000 m² building on the
heritage inventory, the minimum unused density
upon formal designation would be calculated as
follows:
(Site Area x Maximum Density) – Existing Floor
Area = Minimum Unused Density
(1,500 m² x 7.0 FAR) – 6,000 m² = 4,500 m²
Additional unused density rights may then be
assigned over and above the 4,500 m² based
on the bonus determined under section 5.3.2,
subsection 4 Heritage Designation. These
unused density rights shall be secured through
an agreement acceptable to The City and where
possible, registered on title.

2. Receiving Sites:

Sites receiving heritage density transfers may
exceed their maximum allowable floor area by
up to 10 percent, provided the additional 10
percent is entirely the result of a heritage density
transfer. For example, if a site in Density Area
A with a maximum allowable density of 7.0
FAR can achieve a floor area of 10,000 m², the
development could achieve 11,000 m² provided
the additional 1,000 m² is the result of a heritage
density transfer.

Receiving sites may exceed their maximum
allowable floor area by more than 10 percent
with a heritage density transfer subject to a
comprehensive evaluation through a Land Use
Redesignation application. The additional density
must be appropriate must be appropriate and supportable given the
local site context.