Making the case for the redevelopment of rental properties Over the last few months, tenant advocacy groups have pushed the media to denounce “renovictions” as unfair to renters to pressure provincial governments to further restrict the rights of rental property owners. The advocates allege that rental property owners are using building renovations to force tenants out of their units and increase rents above the legally allowed amount. They’re making it seem like rental property owners are either breaking the rules or acting in a nefarious manner, using new legislation to their advantage. The reality is much different, as it usually is. Rental property owners have a right to earn a living from their rental properties. They must also regularly maintain and repair the units and buildings to ensure that they provide safe living conditions. There are times when it makes sense to demolish an existing rental property because it would either cost too much to repair or developing a new rental property would provide a better end result. 14 | March/April 2021
By David Gargaro
Redevelopment versus “renovictions” and “demovictions” Tenant advocates, by their name and nature, focus on how the actions of rental property owners impact specific tenants who happen to rent particular rental units at particular times. The advocates operate on the assumption that every tenant has the right to live in the apartment they rent, at a similar rent, for as long as they want to live there. They picture tenants as having all the benefits of home ownership without many of the costs. Tenant advocates often speak as though tenants should not have to pay for any major repairs their homes need, such as new roofs, balcony repairs, elevator replacement, or refurbishment of common areas or units. They seem to believe that repairs do not create noise or dust, and that major renovations can be split into smaller jobs over periods of many years while all the tenants individually choose to leave when it is convenient for them. They also speak as though every tenant in a six-, 12- or 20-unit building should not have to move for demolition until they each want to. Of course, if a building is to be demolished, all the tenants need to vacate at the same time for the building to come down. When tenant advocates complain about “renovictions” and “demovictions”, what they are actually referring to is redevelopment. By evoking eviction, those terms focus on how redevelopment will affect the current tenants. However, the rental property owner’s goal is to improve the use of the building and land, as well as the related income
stream and building value by providing better, more desirable housing for current tenants or future residents. The truth is that eviction is not the goal; it is a side effect of obtaining possession to improve the use of the land or the building.
Demolishing existing rental properties In built-up urban areas, there are few pieces of vacant land that are zoned as residential. Therefore, to build new rental properties, developers often have to demolish existing buildings, focusing on those that are lower density or in a poorer state of repair. Demolishing a threestorey building to replace it with an 18-storey building would typically provide six times as many rental units. The building location may be excellent; as a society, we should not force all development to take place on the outskirts of our communities. Having redevelopment take place near existing subways, transit lines, and other services is both cost effective and environmentally friendly. All buildings have a limited life span. Over time, even well-maintained buildings will, at a minimum, need major renovations or upgrades to be kept in a good state of repair. At some point, the only rational decision is to demolish or fundamentally transform a property into something much newer and better. Even if the property owner performs all required maintenance and upkeep throughout its lifespan, a building will eventually need to be replaced. “With 83 per cent of existing purpose-built rental units in Ontario built before 1980, many are in need of substantial upgrades to building
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infrastructure, such as heating systems, balconies, parking garages, and elevators,” said Tony Irwin, President and CEO, FRPO. “Those repairs often require access to multiple units and cause considerable disruption to residents. Many rental housing providers are also exploring ways to reduce energy consumption and greenhouse gas emissions. While nobody wants to be uprooted from their home, even temporarily, keeping residents safe and mitigating disruption dictates whether it is necessary for units to be vacant to perform the work. It is incumbent on rentalhousing providers to give adequate notice of major repairs and take care to minimize noise and disruption to the greatest extent possible.” Redevelopment that requires demolition involves removing tenants from their units or the building. This typically requires the tenants to leave. They need to find residence somewhere else, either temporarily or permanently. Some rental developers will help tenants to find new accommodation. However, developers cannot identify what will work for tenants as well as the tenants themselves. Tenant activists sometimes encourage tenants to reject alternate accommodation to “stay and fight for their rights,” which creates problems for everyone involved.
demand imbalance makes rental property owners more interested in seeing tenants move on so that they can achieve higher rents. Market rents have increased more than the costs to renovate or redevelop, although those costs have gone up too. Therefore, there is more interest in improving the use of the land to put more rental units or more condos on any given piece of land.
“While nobody wants to be uprooted from their home, even temporarily, keeping residents safe and mitigating disruption dictates whether it is necessary for units to be vacant to perform the work.” Allowing residential development on land that is zoned for commercial or industrial uses would enable more residential development without the need to demolish existing rental buildings. Owners can seek zoning changes, but the process is time consuming and onerous. That could work well, provided enough commercial space is left to serve residents, and is subject to the question of where people will work in the community. “An adequate supply of units across the housing continuum are important to have so that tenants have housing options when renovations or demolitions need to occur,” said Cameron Choquette, CEO, SKLA. “To support an adequate supply, governments need to have developmentfriendly policies and incentives that encourage investments into Canada’s rental housing supply, including affordable or subsidized housing for low-income renters.”
Dealing with reasons for conflict Terminations have always been a source of conflict. However, depending on the economic cycle, tenants used to have less incentive to try to stay, while rental property owners used to have less incentive to see them leave. Over the last few years, the supply of rental housing has not kept up with the increase in demand for rental housing. That has left tenants with fewer options, particularly tenants with low incomes. As a result, tenants are more inclined to stay where they are, and tend not to move without termination notices. At the same time, the supply-
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How provincial governments are addressing the issue BC has just implemented new legislation specific to renovations that will increase transparency and provide landlords with a clearer path to proceed with renovations that may necessitate vacating of the unit, thereby eliminating tenant conflicts. In addition, BC has introduced a new Additional Rent Increase (ARI) process for capital expenditures that is also transparent and more streamlined than the AGI process that exists in Ontario. “LandlordBC led much of the conversation with the Residential Tenancy Branch to design the continued on page 20
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process and we are pleased with the outcome,” said David Hutniak, CEO, LandlordBC. “The new ARI process will benefit the rental housing ecosystem in BC by providing a vehicle for partial recovery of important capex investments for landlords, while ensuring the quality of housing for tenants is maintained at the highest standard.” In Ontario, legislation that was enacted a year or two ago is being brought into force as of September 1, 2021. It provides that, on many eviction applications, landlords must disclose if they have previously evicted tenants from any address for demolition, renovations or personal use. The LTB can consider those other evictions and what ended up happening; and the LTB can provide more compensation than it could before in situations where the landlord gives notice in bad faith.
Trying to dictate market prices never works. When prices (or rents) are constrained by law, shortages and misallocations always result. Those provisions should help ensure that terminations for demolition or renovations are legitimate, and not an excuse to try to move a tenant out who is paying a low rent to move a different tenant in at a higher rent. That happens occasionally, and most rental housing providers agree that tenants should have the right to stop that. That right assumes rent control for renewing tenants is the norm. In numerous countries, provinces, and states, rental property owners have the right to insist that a tenant pay the market rent at each renewal date. Rent control provides substantial benefits to renewing tenants. However, it comes at a substantial cost to landlords, and at a substantial cost to people seeking accommodation who want to rent the units that specific tenants occupy at any particular time. Under Ontario’s rent control system, rentalhousing providers can apply for an above guideline increase (AGI) in some or all the rents in their building. If the application is approved by the Landlord and Tenant Board, the LTB’s order allows the recovery of a portion of the cost of the major repairs through an approved rent increase over time. The recovery takes place through an AGI that stays in the rent for the length of time the LTB
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expects the work to benefit the building and the tenants. “Even though the cost of the repairs can exceed the building’s total annual rent, the AGI is limited to a maximum of 3 per cent of each tenant’s rent in each of three years, for a total maximum AGI of 9 per cent,” said Irwin. “That means the rental provider pays the repair costs up-front, and through their rents, residents reimburse the rental-housing provider for a portion of the costs over 10 to 20 years.” These conflicts are less prevalent in Manitoba, but major renovations are also less prevalent in Manitoba. Unlike most other provinces, Manitoba controls rents when rental units turn over. Historically, that discouraged new rental construction and building upgrades. In fact, until recently, rent control, the income tax rules, and the economics of rental development had resulted in rental housing shortages, and a negative impact on Manitoba’s economy. However, in the last five years, a fair bit of new housing has come online. In the last year or two, excess new rental stock has become available, which has created vacancies in the existing rental stock. Now, fewer renovations are taking place because the new rental supply makes it difficult to recover the costs of renovations through higher rents for the improved units, especially with all the administrative burden required. “The Manitoba rules allow a landlord to apply to the Residential Tenancies Branch for the approval of a rehabilitation scheme as defined under Part 9 of our Act,” said Avrom Charach, Director of External Relations, PPMA. “That can be either a whole building program or for 10 per cent of the suites or fewer. There are pre-renovation inspections of the building and the suites, and post-renovation inspections, before the landlord is allowed to adjust the rents. The application process is a significant restriction on the ability of rental providers to improve and modernize buildings. In addition, in the case of single unit rehabilitations, the government forces a landlord to prove the previous tenant left voluntarily.” Saskatchewan has not experienced as many conflicts relating to building rehabilitation or renovation as other provinces. The province has had a consistent supply of new units come onto the market over the past five years. Rents have remained stable for the past three to four years, trending near or below inflation, and the vacancy
rate has varied from 6 to 9 per cent. The rental landscape is also made up of numerous small and medium-sized providers who cannot renovate entire buildings at once due to capital constraints. All of these factors have influenced rental housing providers to renovate during turnover so that capital costs can be stretched over a longer period of time, vacancy can be mitigated, and cash flow can be maximized. “In the single family market, we have seen more evictions due to renovation because property owners have chosen to sell their property in the rising real estate market and are renovating to maximize their properties’ value,” said Choquette. “This trend seems to be a symptom of the pandemic, and we don’t expect it to continue over the longer term.”
Understanding the need for evictions Major renovations are disruptive. Often the power or the water needs to be turned off. Tearing out walls removes fire separations. It is not safe or practical to perform major renovations with tenants in place. Some rental providers raise rents when they do renovations or major repairs to recover the cost of the repairs. Some tenants find it hard to
“In the single family market, we have seen more evictions due to renovation because property owners have chosen to sell their property in the rising real estate market and are renovating to maximize their properties’ value.” pay the higher rents. Yet buildings have aged. Standards are higher today than they were when the buildings were originally constructed. Governments want higher railings for safety, better insulation and better heating plants to reduce greenhouse gas emissions, and a whole variety of other upgrades. At a certain point, elevators need to be replaced. In buildings with single elevators, that leaves some tenants unable to come and go. Other repairs create a great deal of noise and dust, making it unpleasant to try to stay in the rental units.
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The cost of the upgrades needs to come from someone. Rental housing providers bear the initial costs, but they understandably want to recover those costs over time. “Manitoba’s AFRI program allows cost-recovery, over time, for renovations done while tenants occupy suites,” said Charach. “AFRI orders allow a calculated rent increase based on passing through the actual costs of work completed, over time periods that vary with the expected useful life of the major repairs. One can see that landlords always need either pre-approval or post-work audits to ensure that rent increases are appropriate. There are flaws in this system as well, not the least of them being how onerous those applications can be; and so, removing some of those barriers would help.”
Conclusion Redevelopment of rental properties is a necessity. Major building renovations and demolition require tenants to vacate for the work to be done, which often necessitates evictions. Rental property owners have a right to recoup the costs of the work, which means higher rents for better quality and safer units. Vilifying rental property owners in the news, holding tenant strikes, and imposing stricter legislation won’t change these facts, although it can reduce the availability of rental stock and drive rental property owners out of the market, thereby reducing rental supply and making tenants worse off across the board rather than better off.
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