Thursday, August 16, 2012

Calculating Community Amenity Contributions to Finance Growth

There is a discussion taking place in many municipalities around the topic of how best to determine the payments by developers when they are undertaking new developments, especially those involving the rezoning of land.  This discussion is also happening on Frances Bula's Blog, following a recent story she wrote for the Globe and Mail

Many of the readers of Frances' blog seem to confuse, in my opinion, the question of whether developers should pay CAC's, or the amount of the CAC's, with the methods used to determine the amounts. This prompted me to draft the following comment on the Fabula Blog, that I have decided to reprint here.

The key issue to my mind is not whether community amenity contributions and development cost levies should be collected, or the amount of the payments…it is how should they be determined?

Right now, in many neighbourhoods in Vancouver and other municipalities, CAC/DCL’s are clearly set out, based on a determination of the community needs and the cost of financing growth. They are generally expressed on a square foot basis and known when a developer purchases a piece of property. There are some problems with this approach that need to be resolved, especially when non-profit and charitable projects must pay the fees, but in principle, I do not object to this approach.

Where the problem arises, in my opinion, is when the CAC/DCC’s are not predetermined. Rather they are calculated on a case by case basis, not based on the cost of providing services or financing growth, but rather on the ‘value’ of the land before rezoning, and the ‘value’ of the land after rezoning. Again, this is not happening just in Vancouver. It is happening in other municipalities that are copying Vancouver.

I am not making this up!

I put value in quotes since it is often a very subjective thing, especially when a rezoning results in a new form of development, or development in a new neighbourhood, and there is uncertainty as to what might happen in the future.

Even the city’s best appraisers will admit that there are many variables affecting value, both before and after rezoning, and a ‘good’ appraiser can assist the landowner/developer in his negotiations with the city or a municipality to achieve a lower number.

I am not making this up.

At one time, the city calculated the difference in value or ‘lift’ relying in part on the price paid for the land. Staff requested copies of Purchase and Sale Agreements. However, this created problems when sites were purchased at too high a price, as was the case back in the 90′s for a property I rezoned on West 41st. More recently, we witnessed the phenomenon along Cambie Street where some inexperienced developers paid much too much for the land not understanding that the city would be expecting additional payments.
Today staff generally ignore the price paid, or claim to ignore it, and simply look at ‘appraised value’ before and after rezoning.

The problems with this entire approach are too numerous to list. However, the net result is that many good developers have decided not to play the game and have moved their activities to municipalities that offer greater certainty. (Burnaby, Coquitlam and Richmond come to mind along with others.)  They know it is too difficult to assess a project’s viability when you don’t know whether you might have to pay millions to the city in CAC’s based on ‘lift’.

Some developers, who I won’t publicly name, but are well known in the industry, have managed to determine exactly how to play the game. They often come forth with a variety of ‘amenities’ that invariably cost much less to produce than the value ascribed in staff reports, and are confident enough in their relationships at the Municipal Hall, that they can buy sites and take chances that others pass on. Invariably they succeed.

I am not making this up!

Moreover, let me clarify that this happens under all political jurisdictions….In Vancouver it is not a Vision vs NPA or COPE issue. Indeed, as most industry insiders know, some developers are equally adept at working with any administration!

Now, everyone knows that sometimes property values go down as well as up. They must be wondering what happens in such cases. If the city calculates a $4M CAC based on certain assumptions and the assumptions change, does the city give the developer some of his money back? Of course not!
Although in the past the city has ‘helped’ at least one developer when faced with such a situation. While this is well known in the industry, it is not talked about publicly.

No, I am not making this up either.

So…while fixed predetermined CAC/DCL’s may not fully address the vagaries of the market, along with its ups and downs, this would be a much fairer system in the minds of most knowledgeable real estate professionals.  Sure, it would result in less work for the appraisers, and less work and less bonuses for some real estate and development consultants who often assist developers going through the process. But it would result in a more certain, equitable development approval process.

And believe it or not, a more certain, equitable and less arbitrary system would not only benefit the city and developers, it would benefit neighbourhood organizations and future buyers. But that’s another story!


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