City of Toronto - SmartTrack

Transcription

1 City of Toronto - SmartTrack Review of the Funding and Financing Strategy FINAL 10 April 2018

2 -Confidential- Table of Contents Notice... iii Executive Summary... iv 1 Introduction Project Background and Description Project Costs Timeline Methodology and Assumptions Project Funding Overview of Funding and Financing Contributions from the City of Toronto Contributions from Other Levels of Government City of Toronto Funding and Financing Strategy Overview of the City s Funding and Financing Strategy Revenue Streams to Support the City s Strategy Tax Increment Financing Development Charges Property Tax Increases and Other Revenue Sources Other Considerations Tax Increment Equivalent Grants Assessment of the Funding and Financing Strategy Analysis of Tax Increment Financing Plan SRRA Commercial and Multi-Residential Forecasts Cushman & Wakefield Peer Review of SRRA Analysis Discussion of Tax Increment Financing Plan Analysis of Funding from Development Charges Quantitative Analysis of Revenue Streams to Support the Strategy Review of Financing Plans TIF Revenues as a Portion of Gross Revenue Review of Other Funding Opportunities Development Rights Other Revenue Tools Risk Assessment and Issues Identified Issues Identified i -

3 -Confidential- 7.2 Qualitative Risk Assessment Sensitivity of Analysis Test Cases Results of the Sensitivity Analysis Conclusion Tax Increment Financing Development Charges Other Revenue Sources Appendix A: List of Documents Reviewed by EY ii -

4 Notice Ernst & Young Orenda Corporate Finance Inc. ( EY ) was engaged by the City of Toronto (the City ) to develop a third party review (the Review or the Report ) of the City s funding and financing plan for SmartTrack. This Report was prepared on City of Toronto instructions solely for the purposes of the City. It should not be relied upon for any other purpose. The Report may not have considered issues relevant to any third parties. Any use such third parties may choose to make of the Report is entirely at their own risk and we shall have no responsibility whatsoever in relation to any such use, and to the fullest extent permitted by law we do not accept or assume responsibility to anyone other than the City of Toronto for our work, for this Report or for the opinions formed. We have not undertaken any form of investigation, audit, substantiation or verification procedures for the information, data and projections provided to us, except where otherwise stated in this Report. We have not sought to verify the accuracy of the data or the information and explanations provided. Our work has been limited in time and a more detailed/lengthy exercise may reveal material issues that this review has not. No obligation is assumed by EY to revise this Report to reflect any circumstances or information that become available subsequent to the date of this Report. - iii -

5 Executive Summary SmartTrack is an overland rail line with frequent, all-day service within the boundaries of the City of Toronto that will operate as part of the Province of Ontario s Regional Express Rail service. The City of Toronto has committed to funding the construction of SmartTrack stations and is in the process of developing a funding and financing strategy for the project. EY was engaged by City of Toronto Finance staff to review the funding and financing strategy and to assess a number of revenue streams identified by the City as potential mechanisms for raising the necessary funding for the SmartTrack project. The analysis focused on identifying the capacity of each of the available revenue streams to help bridge the funding gap that exists between the total cost of the project and the portion funded by other levels of government. The defined available revenue streams assessed include: Incremental property tax revenues or tax increment financing ( TIF ) Development charges ( DC ) Other revenue streams identified by City staff Each of the above noted revenue streams was analyzed to determine the funding capacity over the life of the SmartTrack project. EY identified and assessed factors that may affect the revenue streams; this assessment informed: The identification of key risks related to each revenue stream A high-level scenario and sensitivity analysis to stress test the capacity of each revenue stream (as applicable) EY was able to perform a quantitative and qualitative analysis of TIF revenues, the primary funding source for SmartTrack, but the review of DC revenues and other revenue sources was solely qualitative based on the information available at the time of EY s review. After completing the review of the various revenue streams and how they relate to the City s funding and financing strategy for SmartTrack, EY is generally comfortable with the City s approach to the development of the funding strategy. EY has, however, identified a number of risks related to the proposed funding and financing strategy that should be considered before the strategy is finalized (i.e., before the completion of the procurement of the City portion of the SmartTrack project (the SmartTrack stations)). - iv -

6 1 Introduction The City of Toronto (the City ) is in the process of developing a funding and financing plan for SmartTrack, an overland rail line with frequent, all-day service within the city boundaries. SmartTrack relies on using improved track infrastructure that will be developed as part of the Province of Ontario s (the Province ) plan to develop an all-day commuter rail service on the GO transit network, known as Regional Express Rail ( RER ). The City has committed to funding the construction of SmartTrack stations and has worked with a number of internal and external parties to develop a funding and financing plan for this work. The City has engaged Ernst & Young Orenda Corporate Finance Inc. ( EY ) to review this funding and financing plan (the Review or the Report ). EY involved David Amborski, the Director of the Centre for Urban Research and Land Development at Ryerson University, to provide input to this analysis. The Review will support City Council ( Council ) as they consider advancing SmartTrack to the next stage of the decision making process for major capital projects agreed to by the City and Province and discussed in more detail below. EY assessed a number of revenue streams identified by the City as potential mechanisms for raising the necessary funding for the SmartTrack project. The analysis focused on identifying the capacity of each of the available revenue streams to help bridge the funding gap that exists between the total cost of the project and the portion funded by other levels of government. The defined available revenue streams assessed include: Incremental property tax revenues or tax increment financing ( TIF ) Development charges ( DC(s) ) The following revenue streams are not currently a part of the City s funding and financing plan and will also be discussed, but in less detail: Incremental net operating revenues Co-owned development rights Other revenue streams for consideration Each of the above noted revenue streams will be analyzed to determine the funding capacity over the life of the SmartTrack project. The EY team will identify and assess factors that may affect the revenue streams; this assessment will inform: The identification of key risks related to each revenue stream A high-level scenario and sensitivity analysis to stress test the capacity of each revenue stream (as applicable) 1.1 Project Background and Description In July 2016, Council conditionally approved the SmartTrack concept, based on initial business cases that studied two components of SmartTrack. The first component is an integrated SmartTrack/RER service on the Kitchener and Stouffville/Lakeshore East GO corridors with service frequencies of 6-10 minute peak service and 15-minute off-peak service at fourteen stations, which includes six new SmartTrack stations. The second component is an extension of the Eglinton West Light Rail Transit ( LRT ) line. The focus of this report is the first component of the SmartTrack concept

7 Since 2016, the City, the Toronto Transit Commission ( TTC ), and Metrolinx have significantly advanced the concepts for each station, addressing the issues identified by City Planning in the initial business case designs. Considerations in station design have included: Platform and station access locations; Connectivity with TTC transit network; Locations for accessible transit pick up/drop off; Pedestrian and cyclist access and local circulation, including connectivity with adjacent development and context sensitivity; and Partnerships and property impacts for station elements and opportunities for integrated station and/or joint development. The station designs have also taken into consideration the need to coordinate with related infrastructure projects, including: East Harbour SmartTrack station with the Unilever Precinct Planning Study; East Harbour and Gerrard-Carlaw SmartTrack stations with the Relief Line Project Assessment; St. Clair-Old Weston SmartTrack station with the St. Clair Transportation Master Plan; Bloor-Lansdowne GO RER station and King-Liberty SmartTrack station with West Toronto Railpath extensions; and Lawrence-Kennedy SmartTrack station with Scarborough Subway Extension. Using the City's guiding principles for design, these concepts will form the basis for completing station design and advancing the stations through the Transit Project Assessment Process ( TPAP ) with Metrolinx. The station design work will also include an assessment of the technical feasibility of aspects of the station concepts. The location of proposed SmartTrack stations is illustrated in Figure 1 along with plans for future GO stations that will be developed as part of RER

8 Figure 1: Current plan for SmartTrack integration with Regional Express Rail 1.2 Project Costs The Province has agreed to integrate the six new SmartTrack stations into the RER program. The City had committed funding for 100% of the SmartTrack stations capital costs and the incremental operating and maintenance ( O&M ) costs resulting from SmartTrack on the Kitchener and Stouffville GO corridors; however, it now appears that Metrolinx will retain responsibility for ongoing operating costs and, as such, will retain all SmartTrack related revenues. The Province will own the stations and be responsible for the lifecycle maintenance costs. A Class 3 capital cost estimate (this represents estimates completed based on designs that are 10% to 30% complete) for the SmartTrack Project has been provided by Metrolinx. The cost estimate does not include short-term financing that may be incurred by Metrolinx, nor the cost of risk transfer through the Alternative Financing and Procurement ( AFP ) process contemplated by Metrolinx, as EY understands that these costs will be covered by the Province. A summary of the capital costs and capital funding contributions is shown in Table 1. Note, these capital costs reflect the Class 3 estimates; capital costs are currently being revised by Metrolinx. The cost estimate also includes integrated City Transit Infrastructure that will be constructed at the same time as the SmartTrack stations

9 Table 1: Summary of Class 3 estimates of SmartTrack capital costs Capital Cost Estimate of SmartTrack GO Stations ($ millions) Total Capital Cost Assumed Federal Government Contribution Estimated City Contribution 1, The capital cost breakdown is described in Table 2: Table 2: Breakdown of capital costs for SmartTrack Cost Item $ millions Base station elements* 1,195 Integrated City transit infrastructure^ 268 Total capital cost 1,463 *Excludes AFP costs as these costs will be covered by Metrolinx. ^Includes AFP costs as these costs will be borne by the City. City staff have indicated to EY that Metrolinx has agreed to cap the City s capital contribution for the base station elements at $1.195 billion. 1.3 Timeline In order to facilitate future required decisions for SmartTrack and an assessment of City conditions, the City and Province have established a Stage Gate Process. This process allows Council to make key decisions at pre-defined stages of the SmartTrack project. If City Council decides to cancel or alter the scope of SmartTrack, the City will be required to make the Province whole for costs incurred to-date. Council will be provided the opportunity to review key City conditions, such as the outcome of fare integration work currently underway, prior to advancing to subsequent stages of the Project. The Stage Gate Process is outlined in Figure 2. Figure 2: Schematic of the Stage Gate Process. The yellow diamond denotes the current stage in the process

10 The status of the SmartTrack/RER Integration project is outlined in Table 3. Table 3: Status of SmartTrack in the Stage Gate Process Stage Gate Date Planned/Completed 1. Approval to initiate Complete February Approval of concept Complete July Approval to undertake project design and Transit Project Assessment Process ( TPAP ) preparation Complete November Authority to proceed to TPAP Complete November Approval of procurement process and capital construction budget based on Class 3 estimate Q Information to City Council: contract award 2019 This Review of the funding and financing strategy will be presented to Council for information as part of the Stage Gate #5 review process. Stage Gate #5 includes Council approval of the following: Capital, financing, and escalation costs based on Class 3 (in this case, 10% design) cost estimates and satisfaction of whether key conditions have been addressed; Proceeding with the procurement process; and Entering into a formal Master Agreement(s) for SmartTrack. At this stage, the Minister of the Environment and Climate Change for Ontario must approve the TPAP in order for the project to progress to procurement

11 2 Methodology and Assumptions To complete this review of the City s funding and financing plan, EY completed the following: A review of City-prepared documents related to the funding and financing plan for SmartTrack. A review of reports prepared by other consultants related to growth projections and DCs relevant to the SmartTrack project. A review of the model used by the City and other consultants to project growth and incremental tax revenues relevant to the SmartTrack project; this review included the verification of TIF revenue projections based on EY s independent replication of the City s calculations as they relate to the determination of TIF only. Discussions with City staff and their banking syndicate related to possible financing tools that could be used for the SmartTrack project. The following was considered to be outside of EY s scope: Review of the detailed calculations involved in the estimation and allocation of DCs related to the SmartTrack project. Review of the underlying assumptions associated with the growth projections, including any verification of anticipated residential or commercial growth within any area of the City. This review was completed for the City by Cushman & Wakefield. Audit or test of the reasonableness of growth projections. Verification that changes and updates were made by other consultants as a result of peer reviews completed by others. Review of possible financing tools proposed by the City s banking syndicate. A complete list of documents reviewed by EY is provided in Appendix A to this Report. Our review of the funding and financing plan was limited to the information contained in these documents

12 3 Project Funding 3.1 Overview of Funding and Financing The Province is prepared to integrate the six new stations into GO RER procurement and implementation provided the City agrees to fund sunk costs and additional costs associated with planning, design, capital construction, financing and escalation costs for the six new stations. The City will commit to contribute towards the incremental planning, design, environmental assessment ( EA ) preparation, and property acquisition costs associated with the six new SmartTrack stations that are incurred up to Stage 5 in the Stage Gate Process up to a maximum of $22 million. The City s funding and financing strategy for SmartTrack indicates that funding refers to the sources of project revenue, including future revenue streams that the project owner will use, or pledge, to repay the financing of the project over time. Financing refers to the financial mechanisms or tools used to raise the initial funds to pay for the project. Financial mechanisms typically include debt (including debentures and bonds), equity and capital lease arrangements, but there are many tools and structures that can be used depending on the circumstances. Sometimes other levels of government or the private sector will contribute funding to a project, reducing the financing required to be borne by the municipality. The traditional approach in which a municipality finances infrastructure investments is by issuing debt for the capital cost of the project. The repayment obligation (debt charges) would typically be funded over time through property tax revenue, but other sources can also be used, such as development charge revenue or, in the case of SmartTrack, property tax increment revenue from new development. Through the AFP approach, a municipality will establish the scope and purpose of the project, while design and construction work is financed and carried out by the private sector. Costs of private-sector borrowing are typically higher than the costs available to municipalities, but the costs of private-sector borrowing are offset by the risks AFP developers assume for the project, including the risks of increased construction costs and/or schedule delays. Under the AFP model, the municipality typically funds the project through similar methods as the traditional approach. As noted in the SmartTrack Stage Gate Process presented in Figure 2, Stage Gate 5 involves the approval of the procurement process and capital construction budget and as such, the procurement process (including the choice of delivery model) has yet to be determined. Given that the City s capital cost contribution has been capped, and AFP costs for the base station elements will be covered by Metrolinx, the procurement delivery model is less relevant to the City s consideration of the funding and financing strategy. The selected procurement delivery model, however, could impact the cost of integrated city transit infrastructure. 3.2 Contributions from the City of Toronto As noted in Table 1, the City s contribution to the project is approximately $878 million, or 60% of the overall project capital costs. The City has committed to contribute 100% of the SmartTrack capital, property acquisition, financing and escalation costs associated with the six new SmartTrack stations, but it is assumed that the federal government will contribute 40% of capital costs aligned with federal infrastructure program guidelines

13 3.3 Contributions from Other Levels of Government As noted in Table 1, the assumed contributions from the federal government towards the SmartTrack/RER integration are approximately $585 million, or 40% of total project capital costs. This is assumed based on current federal infrastructure program guidelines. As noted above, the Province will be the owner of the SmartTrack stations and will be responsible for lifecycle maintenance costs. During the development of this Review, on 14 March 2018, the Province announced funding for $4.04 billion worth of transit projects in Toronto. Although these funds have not yet been allocated to specific projects, City staff have indicated that these funds will not be used to cover the costs of SmartTrack. As such, this funding source has not been considered in this analysis of the funding strategy

14 4 City of Toronto Funding and Financing Strategy 4.1 Overview of the City s Funding and Financing Strategy In October 2016, the City Executive Committee approved the preliminary Funding and Financing Strategy for SmartTrack. The following section outlines this strategy as it was presented to Council. The City s plan involves the issuance of debentures for the SmartTrack Project that will give rise to debt charges that will have to be funded over the term of the debentures. The debt repayment will be funded through the following potential revenue streams: 1. Incremental municipal property tax revenue from new development along the SmartTrack Corridor (i.e., TIF); 2. DCs for the eligible costs of SmartTrack imposed on new development city-wide; and 3. Property tax increases or equivalent sources of annual revenue, as sources for any funding shortfalls. The City s plan also envisions that a Reserve Fund could be established to receive these dedicated funding sources (with the exception of DCs, which must be segregated within their own DC reserve fund group), and used to fund the debt charges. 4.2 Revenue Streams to Support the City s Strategy Tax Increment Financing TIF refers to committing future increases in property taxes to pay for current investments in infrastructure. The presumption is that these infrastructure investments will lead to increased private development and property values, which in turn result in higher tax revenue that would not have otherwise occurred (referred to as the tax increment ). The future increases in tax revenues within a defined area are allocated as the funding source and/or security to obtain the financing/borrowing for the investments. At the maturity of the debt, all of the tax revenues revert back to the taxing authority. Any discussion of TIFs in this report relates only to the municipal portion of property taxes and excludes the education component of property tax. Strategic Regional Research Associates ( SRRA ) has prepared a forecast of development activity in the City and along the GO/SmartTrack corridor. The purpose of identifying development areas is to provide a basis for estimating incremental tax revenues arising from SmartTrack and for testing the applicability of other area-specific revenue tools, such as DCs and TIF. The TIF Zone provides the geographic boundaries wherein municipal property tax revenue may be allocated to the SmartTrack project. The SmartTrack TIF Zones identified by SRRA are illustrated in Figure

15 Figure 3: Map illustrating primary (dark orange) and secondary (light orange) TIF zones for SmartTrack as defined by SRRA (source: SRRA, Commercial & Multi-Residential Forecasts for the Review of SmartTrack, 2016) It would be a City policy decision to notionally allocate all or a portion of the tax increment revenue to fund the debt charges associated with the SmartTrack Project. The risks that must be mitigated in this approach, however, are twofold. If all of the future incremental property tax revenues are pledged for the capital project, then insufficient funding would be available to fund the increase in demand for services arising from this growth. Similarly, forecasted development activity and property value increases may not materialize, leaving a shortfall in funding availability for debt charges. The default position in this case would be to turn to property taxes to cover any shortfall. For the reasons noted, City staff believe it be prudent to allocate only 40% of the projected tax increment revenue from new development to the SmartTrack Project. Based on the real estate forecast inputs prepared by SRRA, City staff have included the following estimates of the projected TIF revenues over a 25-year period from 2019 to 2043 in their funding and financing strategy. TIF revenue is projected to be between $1.41 billion and $1.75 billion over 25 years, and $0.56 billion and $0.70 billion based on allocating 40% of the revenue to the SmartTrack Project

16 Figure 4 depicts the taxes and total tax increment over a theoretical forecast period. As shown, the projected incremental tax revenue from new development is small in early years, but grows significantly over time. Figure 4: Municipal Tax Revenue (Base) and Tax Increment (source: City of Toronto) Recently, City staff have suggested that the City Building Fund could be an alternative to a tax increase this proposal is discussed in more detail later in this section Development Charges DCs are one-time, upfront fees levied on land development projects under the provincial Development Charges Act. The fees help fund a portion of the growth-related share of capital costs. Under current legislation, prior to implementing a DC by-law, municipalities must, amongst other things, undertake a detailed background study supporting the level of the charge; the preparation of such a background is currently underway and is expected to be delivered to the City in spring The following must be evaluated in preparing the statutory background study, which typically takes 12 to 18 months to complete: The increase in need for service attributed to growth Estimated capital costs Historic service levels Forecast population and employment growth Forecast of anticipated amount, type and location of new development

17 Deductions for grants and subsidies, benefits to existing development (non-growth shares), statutory deduction (e.g., 10%), and post-planning period benefits Cash flow timing and financing costs Benefitting areas (municipality-wide or area-specific) Allocations between residential and non-residential uses Property Tax Increases and Other Revenue Sources The City s funding and financing strategy presented to Council on 31 October 2016 goes on to note that property taxes are the default source for any funding shortfalls for SmartTrack, as for any other major expenditures. The strategy notes that a one-time 1% property tax increase raises $26.8 million annually (based on current policy of one-third of the increase on non-residential). The City is considering alternative revenue tools for operating and capital purposes. Should suitable alternate revenue sources be identified, they could serve as an alternative to a property tax increase. Accordingly, the City s strategy notes that any reference to property tax increase could be substituted for alternative revenue sources. Given the revenue profile of TIF and DC revenues, where revenues are generated following the completion of the capital project, there may be insufficient revenue from these sources to meet funding obligations in the early years of the project (Figure 5). This would mean that alternative revenue sources may be required to cover the funding gap until such time that the incremental revenues increase to the magnitude required to cover the cost of debt charges. Figure 5: TIF revenues and cumulative debt charges over the lifetime of the SmartTrack project (for illustrative purposes only; actual cash flows may differ) The City notes that in this case, following the point in time when the cumulative debt charges are equal to the incremental revenues, an overall surplus will be realized as revenues continue to increase and exceed debt charges. This also means that a higher amount of additional revenue is required in earlier years than would otherwise be required if the debt repayment obligation could be more closely matched with the project revenue stream

18 The City s 2016 strategy goes on to note that in order to cover the shortfall, a property tax increase of between 2% and 3% is projected based on the City's preliminary capital cost obligation. The 2018 update to the financing strategy notes that the estimated 2% property tax increase forecast in November 2016 is no longer necessary due to the exclusion of the Eglinton West LRT from the financing strategy and the identification of the City Building Fund as an alternate revenue source Other Revenue Sources: City Building Fund The City s 2018 update to the funding and financing strategy suggests the use of Toronto s City Building Fund as an alternative to a dedicated property tax increase. In 2017, Council directed a dedicated property tax increase of 0.5% be imposed in each of the next five years, totaling 2.5%, to fund this reserve. Staff note that since the purpose of the reserve is for two uses (transit and affordable housing), it may be appropriate to allocate up to one-half of this funding towards the SmartTrack project. Table 4 was prepared by the City and illustrates the revenues collected under this fund. Table 4: Toronto City Building Fund ($ millions) City Building Fund Tax Increase: 0.50% 0.50% 0.50% 0.50% 0.50% Annual Tax Revenue Collection Other Considerations Tax Increment Equivalent Grants The City s strategy describes a Tax Increment Equivalent Grant ( TIEG ) as an economic development tool wherein the City provides grants directly to developers to build eligible property developments. The program is based on the assumption that development would not occur but for the incentive made directly to the developer to build. Since 2008, the City has been offering a TIEG program (called IMIT for Imagination, Manufacturing, Innovation, and Technology). This provides for a municipal property tax rebate program for eligible commercial uses, and in particular reference to SmartTrack, for office uses around transit nodes. Eligible recipients are entitled to receive a rebate totalling at least 60% of municipal taxes over 10 years, on a sliding scale. The recipients would receive 100% rebate in year 1, 90% in year 2, and so on to 20% by year 10. Staff estimate that if the IMIT program were continued along the SmartTrack corridor on a go-forward basis, the City would be required to make an estimated $500 million in grant payments from tax increments to developers of new developments over the next decade or so, thus reducing the amount of funding available to pay for SmartTrack. Staff have recommended that the financial district be excluded from IMIT grants and that the IMIT grants be subject to a 10-year phase-out in the East Harbour and Liberty Village zones. The impact of this recommendation on revenues is discussed in more detail later in the Review

19 5 Assessment of the Funding and Financing Strategy 5.1 Analysis of Tax Increment Financing Plan SRRA Commercial and Multi-Residential Forecasts As mentioned previously, the City engaged SRRA to determine the impact of SmartTrack and other transit projects in the GTA on the location of jobs in office buildings and multi-residential development. The assignment was to provide forecasts of employment in office buildings for transit ridership analysis by the University of Toronto Transportation Research Institute ( UTTRI ) and forecasts of commercial development and multi-residential development for TIF analysis by the City of Toronto's Corporate Finance Division. 1 SRRA note that their forecasts assign projected total growth in the City of Toronto, and the rest of the GTA, to traffic zones. City Planning staff provided the projections of total employment in offices and in multi-residential units in the City of Toronto and the rest of the GTA. SRRA's forecasts in major office nodes in the GTA were informed by the data accumulated through their own previous research. Forecasts of growth with and without SmartTrack used 2011 as a starting point. Its assessment of the future growth prospects in each traffic zone relied on the desirability for growth within existing planning framework within each traffic zone and considered other relevant transit initiatives, including the Provincial commitment to RER. Forecasts were developed for three scenarios of regional growth developed by City Planning staff. The first scenario reflected Provincial forecasts contained in the Growth Plan for the Greater Golden Horseshoe (the Growth Plan ). 2 The next two allocated more growth to the City of Toronto (and correspondingly less to the rest of the GTA). The forecast methodology involved redistributing office and multi-residential growth to reflect the impact of SmartTrack; this meant that allocating additional growth around SmartTrack stations resulted in less growth being allocated to non-transit areas. SRRA forecasted the rate of office growth after 2011 in each node and then allocated the resulting jobs in the node to the traffic zones in that node, taking into account the capacity of each zone to accommodate new office buildings. SRRA examined in detail the conditions on the ground in all traffic zones where employment exists in the region (the balance of zones are predominantly residential or recreational). To inform its projections of growth, both with and without SmartTrack, SRRA relied on findings from its proprietary research on what drives the decisions of employers to commission the development of new buildings. SRRA also utilized its unique employer functionality growth capabilities to estimate likely responses to effective transit implementation, as well as input from the Region of York, the City of Mississauga, the Building Industry and Land Development Association ( BILD ), and the Greater Toronto Airports Authority. For the multi-residential forecasts, SRRA took projections of apartment growth in each TIF Zone developed by City Planning staff and reallocated them to reflect the impact of SmartTrack on future 1 SRRA s report, delivered to the City in January 2016 can be found at the following link: 2 More information on the Provincial Growth Plan can be found at the following link: -

20 multi-residential development. SRRA used findings from its research with residential developers and consultants on how SmartTrack would change the attractiveness of the TIF zones for multi-residential development. The resulting changes in the TIF zones were then allocated to individual traffic zones based on potential capacity for housing development in each zone as analyzed by City Planning staff for the City's 2012 Comprehensive Municipal Review of its Official Plan. As the foundation for its growth forecasts, SRRA used the assumption that municipalities would follow the guidelines of the Ministry of Transportation with respect to Transit Oriented Development ( TOD ). The forecasts in this report assumed that over time TOD would occur at these higher order transit locations. This, in turn, leads to sustaining ridership for the transit projects. It was noted that the underlying condition in the scenarios of a single constant GTA employment and population forecast presented their team with challenges. Simply moving growth around from one area to another depending on what transit solutions are put in place does not account for the impact of transit implementation on overall growth in the region. SRRA submits that economic research strongly suggests that a transit improvement like SmartTrack will likely result in greater regional growth than would have occurred without it. SRRA s research from other cities indicates that effective transit tends to generate more growth when TOD is aligned with transit implementation. SRRA states that for the present exercise neither SRRA nor the City of Toronto were in a position to estimate the region-wide productivity and agglomeration benefits that may result from SmartTrack, or how they may be distributed across the region. SRRA TIF Analysis As discussed, SRRA s commercial and residential forecasts were required to complete an analysis of the potential to use TIF revenues near SmartTrack stations to fund the project. SRRA notes that estimating the tax increment requires the following: i. A forecast of the development (and related tax revenue) that will result from the new infrastructure and that would not otherwise have occurred. ii. An estimate of the land value uplift that will accrue to existing properties as a result of the new infrastructure. iii. Identifying an area known as the TIF zone within which the new infrastructure prompts increased development, an increase in land values and resultant tax increments. For SRRA s study, the TIF analysis was limited to the City of Toronto. The forecast of increased development consists of two components: i. Commercial (office buildings) development, which uses forecasts used for the input to the employment projections for the ridership modelling; and ii. Multi-residential development, which is based on the City s population projections for the ridership modelling. SRRA defined the TIF zones associated with SmartTrack, in consultation with City staff. Two types of TIF zone were identified (Figure 3):

21 i. Primary zones are located directly adjacent to the planned SmartTrack stations (within about 800m) or on very good transit (bus) access to the stations. Wherever possible, focus was on lands zoned for commercial uses rather than low-density residential. ii. Secondary zones are located on existing or planned higher order transit that will benefit from system-wide improvements related to SmartTrack. Secondary zones also include other areas well served by transit with links directly to SmartTrack, making them potential locations for new development stimulated by SmartTrack. SRRA notes that once the TIF zones were identified, their boundaries were refined to conform to the relevant traffic zone boundaries. This helped ensure that the TIF forecasts would align with the population and employment projections as used in ridership modelling. These traffic zones include mixeduse and low-density areas that may not intensify but will benefit from land value increase. SRRA produced forecasts for a range of scenarios for the TIF analysis from which the City selected three growth scenarios and one reference scenario for further analysis; the cases selected by the City are summarized in Table 5. The starting point for the forecasts was the population and employment forecasts used in the ridership modelling to ensure consistency between the TIF analysis and the ridership modelling. Some scenarios were constrained by the Growth Plan forecasts for population and employment growth in the GTA, while others used an All Boats Rise ( ABR ) scenario of growth that were developed by City staff. These had varying implications for generating incremental taxes as follows: Employment forecasts with Growth Plan GTA Total: The forecasts of employment, including commercial employment, in Toronto resulted in greater growth with SmartTrack than without; i.e., SmartTrack resulted in a redistribution from the rest of the GTA to Toronto. Employment forecasts with ABR GTA Total: These scenarios also resulted in greater growth in Toronto with SmartTrack than without. The additional growth generated by the ABR scenario increased the incremental growth resulting from SmartTrack. Population forecasts with Growth Plan GTA Total: The forecasts of total population, including multi-residential population, in Toronto resulted in the same growth with SmartTrack as without; i.e., increased development in a zone resulting from SmartTrack was balanced by less growth in other zones, generally those less well-served by transit. Population forecasts with ABR GTA Total: These scenarios resulted in greater growth in Toronto with SmartTrack than without. The additional growth amplified the redistribution effects of SmartTrack seen when using the Growth Plan GTA total. Table 5: Scenarios used by SRRA to project commercial and residential growth associated with SmartTrack Case Case 1 Case 2 Case 6 GTA Forecast Base Growth Plan* Growth Plan* ABR^ Commercial Development Medium growth without ST Medium growth with ST Medium growth with ST Multi-residential development Low growth without ST Low growth with ST Low growth with ST (1) firm planning constraints Use in TIF Analysis Base for estimating tax without SmartTrack Difference between Case 1 and Case 2 is used to estimate potential tax increment Difference between Case 1 and Case 6 is used to estimate potential tax increment

22 GTA Forecast Commercial Multi-residential Case Base Development development Low growth with ST Medium growth Case 8 ABR^ (2) relaxed with ST planning constraints * GTA forecasts based on the Growth Plan ^ GTA Growth Plan forecasts with 10% more growth per decade after 2021 Low growth is based on the Growth Plan forecasts for the City of Toronto Use in TIF Analysis Difference between Case 1 and Case 8 is used to estimate potential tax increment Of the scenarios detailed in Table 6, City staff have made the decision to move forward with Cases 1, 2, 6 and 8. The City has asked EY to consider Cases 2, 6, and 8 compared to Case 1, as a base case. The City used SRRA s projections to develop tax increment forecasts for the aforementioned growth cases. EY replicated the City s calculations of TIF revenues; the results of this analysis are illustrated below in Table 6. 3 The values in Table 7 exclude revenues from the two Primary TIF zones along the Eglinton West LRT corridor. Table 6: Tax Increments for TIF zones based on SRRA forecasts and growth assumptions Tax Increments for SmartTrack Primary TIF Zones Nominal Case 1 Case 2 Case 6 Case 8 Tax Revenue from New Development Less Reference Commercial 665,019,007 1,069,412,738 1,166,822,949 1,165,165,063 Residential 2,425,069,213 3,440,324,436 3,455,310,805 3,676,132,463 Sub-total (New development) 3,090,088,221 4,509,741,490 4,622,138,459 4,841,305,027 (3,090,088,211) (3,090,088,211) (3,090,088,211) Net Tax Increment 1,419,653,270 1,532,050,238 1,751,216,806 *Values may not sum due to rounding Cushman & Wakefield Peer Review of SRRA Analysis Following the receipt of a draft report from SRRA, the City engaged Cushman & Wakefield s Valuation & Advisory division to conduct a Peer Review (the Peer Review ) 4 of the SRRA analysis: the Commercial and Multi-Residential Forecasts for the Review of SmartTrack Draft Report, dated 25 November This Peer Review was intended to provide additional information to the City Manager and staff in the development of recommendations to Council regarding SmartTrack. The following provides a summary of the Peer Review elements: 1. Review the methodology used by SRRA, focusing in particular on: 3 Adjustments made by the City to development projections in one TIF zone appear to have resulted in small difference (less than 1%) in EY s calculations of TIF revenues and those calculated by the City. The City s projections appear to be appropriately conservative as it relates to this difference. 4 A complete version of the Cushman & Wakefield Peer Review can be found at the following link:

23 Its validity, design, reliability and robustness in delivering the work included in their Terms of Reference The variables and assumptions used Identified gaps and shortcomings 2. Review and evaluate the research analysis conducted by SRRA, focusing in particular on: The extent to which it delivers the work included in SRRA s Terms of Reference Data quality and data problems The comprehensiveness of the analysis, and possible gaps in the analysis How the analysis identifies and resolves risks and uncertainties especially those related to forecasting future growth and development 3. Provide an overall assessment of the reliability and validity of the results of the research as inputs into ridership forecasting and transit financing analysis, and as a basis for transit investment decisions. 4. Provide comments and suggestions to SRRA based on the evaluation and assessment of the methodology and analysis. Cushman & Wakefield provided a detailed review of each aspect of SRRA s analysis as well as recommendations, some of which were incorporated into SRRA s final report. However, it appears that not all of Cushman & Wakefield s recommendations have been addressed in the final SRRA report. Overall, it is the opinion of Cushman & Wakefield that SRRA (in conjunction with City staff) has developed a comprehensive approach and methodology to this assessment of commercial and multi-residential demand forecasting. The approach is considered to be robust and well designed, and the methodology is comprehensive; it considers various inputs to determining potential demand for both the commercial and multi-residential market segments. Numerous scenarios were tested to examine various sensitivities in the overall forecast approach. Additionally, insights from the real estate landlord and developer community have been sought to provide guidance as to key assumptions made in the modeling. Cushman & Wakefield does draw the reader s attention to key assumptions used in the analysis that deserve added attention. In the following discussion, EY has identified a number of the key assumptions discussed by Cushman & Wakefield that may directly impact the City s revenue projections and may not have been fully addressed by SRRA. Office Densities Cushman & Wakefield notes that the trend toward a declining amount of office space per worker is well established. However, Cushman & Wakefield disagrees that the continuation of this trend will have only a marginal impact on the total amount of future office space. SRRA correctly states that the existing stock of office space (current inventory) has certain limitations with respect to accommodating increased office employment density, such as:

24 Physical constraints (access/egress, right to light principles) Regulatory limitations (fire code, health and safety regulations) HVAC limitations (air handling capacity) External factors (such as parking capacity) Additionally, the move towards higher density office space is driven by: More efficient office building design allowing greater utilization of floor plates Higher occupancy costs (net rental rates, operating costs, and taxes) contributing to reduced space allocation on a per employee basis by firms Greater use of technology, reducing paper filing and storage requirements Increased telecommuting and desk sharing among co-workers Cushman & Wakefield notes that since the employment projections used for the ridership modeling of SmartTrack are based on the number of employees (not the amount of space they occupy), the trend towards declining space per office worker has no impact on that part of the analysis. It does, however, impact the City s revenue projections associated with future office development. Given the importance of office density to revenue projections, Cushman & Wakefield identifies the figure of 209 sq. ft. per office worker as a critical input to the model, and one that requires close scrutiny. This figure was sourced through SRRA s license of Real Estate Search Corporation s density calculations of office space (including related retail within office buildings). According to SRRA, this factor reflects the current average density capacity of all types of office buildings in the region. In considering an appropriate benchmark for modeling the future office space that will be demanded by office-type employment growth, it is important to examine more recent office building construction, rather than relying on the older (existing) stock of office buildings. Cushman & Wakefield continues by stating that the figure of 209 sq. ft. per office worker is reflective of a suburban office format. It would be anticipated that office employment densities in a more urban environment (such as Downtown Toronto) would be lower, due to the higher cost of occupancy compared to Mississauga (higher achievable rents in Downtown Toronto). A region-wide figure, as employed by SRRA in its model, should blend a downtown and suburban rate of office employment density. While SRRA states that this factor (209 sq. ft. per office worker) reflects the current average density capacity of all types of office buildings in the region, Cushman & Wakefield cautions that the trend towards declining space per worker should be reflected. Anecdotal information from Cushman & Wakefield s Strategic Occupancy Planning division indicates that for recent projects they have been involved with, the allocation of office space has been below 125 sq. ft. per person (excluding law firms, which have a higher utilization rate). Cushman also notes that the Government of Canada (via Public Works & Government Services Canada) has adopted Workplace 2.0 standards for office accommodation. The following is an extract from the PWGSC Fit-Up Standards document: This workplace is characterized by open, flexible, and dynamic workspaces, which allows for innovative designs and better use of space. This approach is based on extensive research on how other public and private sector organizations are modernizing their workspaces. The standards continue to provide effective and productive work environments for employees, accommodating

25 individual work styles, alternative work strategies, and sustainable design principles, while also reducing the amount of space allocated for offices by 2 metres squared per person (from 16 m² [172 sq. ft.] to 14 m² 151 sq. ft.]). As a result, Cushman & Wakefield recommends that SRRA consider an additional scenario that utilizes a lower office space per worker figure, to test this sensitivity in the model. A region-wide figure in the range of sq. ft. of leasable space per office worker may be considered appropriate for this sensitivity test. This reduction could be phased in over time in the model. This change is not currently reflected in SRRA s model and will be discussed further later in this Review Discussion of Tax Increment Financing Plan It is important to note that the approach to TIF being applied by the City is not being undertaken based on the TIF legislation passed by the Province in 2007, nor is it being undertaken under TIF protocols of methodologies typically being employed in other jurisdictions across North America. Rather, the City s approach uses aspects of TIF applications in that it is only undertaking some aspects of more typical TIF tools. The generic TIF approach is to: Designate TIF zones (i.e., the geographic areas to be affected that experience an uplift in property values and an increase in development due to the public investment); Issue a TIF Bond that ties the resulting increased property tax revenues to the funds allocated to pay off the bond; Establish the current assessment/property tax base for the properties in the TIF zone; and Direct all of the increased revenues above the established base to pay back the bond for the duration of the bond repayment. This was in fact the method used to test the application of using TIF funding for West Donlands and East Bayfront prior to the Province passing its TIF legislation. The increase in revenues results from both new development in the TIF zone and increased assessment (uplift) of the existing properties. Despite the Province passing TIF enabling legislation in 2007, the TIF tool has not been applied under the legislation to date. The reason for the lack of application is that the Province has never created and passed the regulations for the Act. Although the SRRA report does not undertake a complete TIF background study (i.e., the type required by the Province prior to receiving permission to establish a TIF district and apply a TIF tool), it does make several important contributions to the background analysis to apply a TIF or a TIF-like tool. First, it establishes TIF zones or districts, both a primary zone and a secondary zone. This was undertaken by an examination of the current land uses and zoning around the proposed Smart Track stations. The second important analysis is the projection of the residential and non-residential growth that can be used to project the income steam from the TIF development. With regard to defining the TIF zones, the detailed analysis in defining the zones appears to be quite comprehensive; the question is which zone to use for the analysis of projecting the TIF revenues and ultimately applying the tool and collecting the revenue. The general approach in most jurisdictions is to define the zone as broadly as can be justified. This would suggest that both the primary and secondary TIF zones should be included for both the TIF analysis and application