takes three to tango

It’s encouraging that Section 37 deals are starting to get the attention they deserve.  For example, Mayor, John Tory, wants to review the practice, and columnist, Edward Keenan, has tried to explain why.  Other organizations, including the City, have sought to improve the general understanding of this practice, if only to counter insinuations that it is, in the words of former Mayor Rob Ford, nothing more than a shakedown.

Section 37 agreements are a useful means of directing revenue from intensified development into amenities that improve life in those taller, denser neighbourhoods.  In practice, they are producing important benefits.  In principle, more should be possible.

They’ve taken on new importance as a tool for cultural development in Toronto.  In a city where real estate is appreciating quickly and old buildings are being cleared to make way for new ones, it’s tough for artists to find secure living and work space.  Since most artists are impoverished and have greater space needs than the rest of us, this will result in a long, slow cultural purge unless something is done.  Section 37 deals can help to reverse these forces, guaranteeing affordable space for cultural groups where they would otherwise be priced out.

At a time when the City most needs its artists to leaven the leaden dough of densificaztion, and to maintain Toronto’s lucrative cultural industries, it would be disastrous to let artists be centrifuged out to more affordable jurisdictions.  The displacement of artists has been occurring for decades, which is why Artscape Toronto was formed.  It has successfully led the development and operation of cultural facilities in places where they would be unaffordable otherwise.  Their advocacy and community mobilization skills have saved and repurposed a significant number of buildings, and they have new projects in the pipeline.

However they are unique among cultural groups in Toronto.  Their mandate has obliged and enabled them to acquire a deep understanding of the development industry and the politics of cultural investment.  In fact, they have become part of the industry and an extension of government in some respects, doing what their private and public sector counterparts won’t or can’t do.

A client of ours reported a conversation with a major condo builder who asked about Artscape’s possible role in a project.  When it was explained to him, he said, “I think I get it… Artscape is a developer – with an angle.”  In a sense, he was right.

Developers are coming to grips with the fact that all the best building sites are already gone.  The best way to unlock desirable sites is to promise community benefits that are  aligned with the City’s plans.  For them, this is the new normal, but Artscape has always understood this premise.  Now, after more than 20 years in operation, Artscape’s expertise is sought for projects in all three sectors.

However Artscape is limited in the number of projects it can manage at any given time.  It’s also a multimillion dollar operation that carries significant overhead costs into any deal it signs onto.  Consequently, its projects deliver space to some artists at below market rates, but at higher rates than many other artists can afford.  So, despite a great record of success, their participation comes at a cost, and they can meet only part of the need.

In my last post (http://bit.ly/1CfrAwx ), I talked about arts groups that lack Artscape’s expertise, yet must work in partnership with business and government to secure long-term deals for space at below market rates.  Even with Section 37 financing in place, these groups can still be thrown into crisis by the stress placed on them by these developments.

They have no reason to possess the expertise in finance, law, engineering, construction, architecture, facility operations, project management, and real estate development required to navigate one of these deals.  Even if they are given sufficient resources to engage experts, they may still lack the ability to manage them effectively.  These arts organizations and their volunteer Boards will face these challenges only once in a lifetime, after all.  Their expertise lies elsewhere.

Instead of acquiring a facility that advances their mandate, they risk having their mandate subordinated to the building project.  Dwarfed in scale and complexity, ongoing operations and program development can be neglected when capital and construction issues are on the agenda, month after month, year after year.  In short, the more money, time, and expertise a Section 37 deal demands of the end user, the less the deal is worth in the end.

These unintended effects are worth considering, but have been largely overlooked, by policy analysts like the Munk School.  Discussion so far has focused on the roles of government and industry partners, to the oblivion of the third party to these agreements.  The eventual operators of this community space, be they in culture, childcare, social work, or education, are the most vulnerable partners by far.  If flaws are found in the way these deals are fashioned by developers and City Councillors, it will be these end users who will suffer directly.

“Affordability” means something different to them than it does to their industry and government partners.  It’s not enough to provide space that’s just a little below market, in a market that’s wildly overheated.  With notable exceptions, charitable organizations cannot rely on funding that keep up with CPI, never mind the galloping appreciation of Toronto real estate.  For them to take on long term lease or ownership obligations, they require assurances about cost that may seem absurd to their government and business partners.

To illustrate, I attended a meeting at which a developer was being pressed to estimate utility costs so that the non-profit occupant of a nearly finished project could finally forecast their operating expenses.  The developer’s lawyer responded somewhat tersely that it shouldn’t be a concern, that energy costs are non-negotiable.  In summary, he said, “It is what it is.”  In this instance, the estimated range of geothermal heating and cooling costs was $90,000 per year, which might have been enough to put the whole deal in jeopardy.  To the developer, this was an insignificant and uninteresting number that would be calculated in the goodness of time.  For our client, this was vital information.

My point is that some Section 37 deals suffer from problems inherent in the relationships between the end user and the other two parties, whereas the focus is currently on how the government and business arrive at the deal.  It would be a mistake to believe that these problems can be corrected just by tightening up the process of negotiation and approval, or by bringing greater rigor and consistency to the concessions being demanded of developers.  That may address the concerns of government and industry, but ignores the problems of the third party to these deals.

For them, it’s in the implementation of these deals that the problems lie.  That’s where the transmission of Section 37 value presents a challenge, not upstream at the bargaining table.  That’s where unanticipated and avoidable demands detract from the benefits to end users, diminishing the value of deals that we all pay for in one way or another, and that could benefit us more than they do.  Specific measures to streamline the process and protect the end users’ interests should be part of the public discussion.

The transmission of value, from the deals as they are brokered between the City and the developers through to the delivery of benefits to end users, needs to consider the capacity of the groups they’re trying to help.  Participation in one of these deals is more disruptive and demanding than it needs to be for the small, vulnerable, voluntary organizations that we’re trying to preserve.  This detracts from the intended benefits.  From a value-for-money perspective, this diminishes the impact of the City’s contribution to the developer, the developer’s contribution to the community, and the community’s enjoyment of the resulting facility.

My hope is that the Mayor’s review of these deals will continue all the way around the triangle of partnerships to include the perspective of end users.  If it does, it will reveal the same problems of implementation that we’ve observed in our client work.

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