Financing Growth in Vancouver: Why the current approach isn't working

BobRansford Bob Ransford

Vancouver's development taxes (CACs) are inhibiting housing supply and affecting affordability.Read my Sun column http://tiny.cc/pqeyb

Bob Ransford has an excellent article in today's Vancouver Sun challenging the new municipal approach to financing growth by seeking to share in the 'profits' resulting from rezoning. Coincidentally, I had similar concerns which prompted me to write an op-ed piece earlier this year. Rather than wait for it to be published, here is what I have to say on the same topic...

At a meeting of Vancouver City Council last summer, Councillor David Cadman asked the Director of Planning an interesting question. Does new development pay for itself? You may be surprised by the answer.

For years, municipalities across Canada have been struggling with how best to finance the costs associated with new development. Charging new development to help finance the costs and impacts of growth has evolved in Vancouver since the 1980’s. In 2004, City Council approved a report entitled “Financing Growth” which identified two revenue sources: Development Cost Levies (DCL’s) that would be charged on all new developments to help pay for facilities; and Community Amenity Contributions (CAC’s) that would be charged when new development occurs through a rezoning.

These DCL and CAC fees are used to help finance childcare centres, parks, and social and replacement housing. However, the Financing Growth report raised an important question. Who really pays these fees?

While the cheque is written by the developer, City staff concluded that the fees are not really paid by the developer or ‘end user’ of the homes or businesses. Rather, they determined that the DCC’s and CAC’s are paid by the land owner, since these fees have a downward pressure on land values.

Most Vancouver developers and economists do not agree with this analysis. Instead, they contend new purchasers and tenants ultimately pay these additional costs through higher cost housing and commercial rents.

So is this a bad thing? Many would say there is nothing wrong with a system that charges new homeowners or office tenants for the additional services they consume. While I agree in principle, there is a serious problem with the City’s approach to financing growth, especially when it comes to rezonings.

Rather than charge a CAC based on the cost of providing services, the city calculates the CAC based on the increased value of the land. That’s right. The city’s policy is to collect about 75% of the increase in value or ‘lift’ from the developer. It is described as a ‘voluntary payment’ since a city is not supposed to sell zoning.

Again, some might think it is a good idea for the city to share in the increase in land value resulting from rezonings. However there are unforeseen problems with this approach, from many perspectives.

Firstly, it gives the city an incentive to improperly zone land and cause developers to bring forward rezoning applications which will hopefully result in payments to the city. However, if developers do not accept the rezoning risks, there will be insufficient zoned land for certain types of development resulting in higher housing costs. This is happening right now. New townhouse developments are very expensive since there are virtually no zoned townhouse sites in most parts of the city.

Furthermore, if landowners price their properties too high, there may be no ‘lift’ for the developer and City to share. This is happening now along the Cambie corridor where single family properties are priced well above their zoned value. Under this scenario, how will the city collect funds to pay for the required additional community amenities?

Neighbourhood associations should also be concerned with Vancouver’s current policy. When the payment to the city is tied to ‘the lift’ in value, politicians and officials may approve projects at much higher densities, just for the money. While they will deny this could ever happen, I am not so sure.

Finally, if rezonings do not get approved, there may be insufficient funds to finance much needed community services. Currently, most new childcare facilities are built by developers and financed through rezoning profits. No rezoning, no childcare. This is no way to plan a city.

So what is the solution?

New developments should be required to pay for themselves over time. However, rather than an ad-hoc ‘let’s make a deal approach’, the city should pre-zone land through a proper planning process, and impose pre-determined DCL’s and CAC’s to offset the cost of new community services.

While some might fear that ‘pre-zoning’ land will result in existing owners having to pay higher taxes, with assistance from BC Assessment, I am confident new zoning categories can be designed so that properties are assessed on their current use, not their future development potential.

Now, as for the answer to Councillor Cadman’s question, the Director of Planning reported that the city collects about 70% of the costs associated with development through DCL’s and CAC’s. However, if new developments are not allowed to go ahead, the overall costs to the city and region would be much greater. But that’s another story.