Tuesday, June 16, 2015

Opinion: REW.ca Financing Growth – New Condo Buyers Paying More Than Their Fair Share

Amenity levies charged to developers, such as CACs, are ultimately passed on to the buyer – and that’s the wrong approach, argues housing expert Michael Geller
The developer of this Cambie Street condo had to pay a CAC equal to $55 a foot buildable to the City of Vancouver. This adds more than $75 a foot to the saleable price, when you add in financing, profit, etc.
For years, municipalities across Canada have been struggling with how best to finance the costs from new development. While Canadians pay a lot in taxes, only eight cents of each dollar goes to municipalities, generally in the form of property taxes and fees.

The concept of charging new developments to help finance the costs association with growth has evolved throughout Metro Vancouver over the past few decades.

In 2004, Vancouver City Council approved a report entitled Financing Growth, which identified two revenue sources: Development Cost Levies (DCLs), which would be charged on all new developments to help pay for roads and other infrastructure; and Community Amenity Contributions (CACs), which would be charged to pay for additional amenities such as affordable housing and childcare, when new development occurs as the result of rezoning.

Financing Growth raised a most important question: Who really pays these fees?

While the cheque is written by the developer, staff concluded that neither the developer nor future homebuyers pay. Instead, they concluded the DCCs and CACs would be paid by the land owner whose property is being rezoned, since the fees would have a downward pressure on land values.

Neither I, nor most Vancouver urban land economists and developers, agree with this analysis. Instead, we believe that new purchasers and tenants ultimately end up paying for these additional fees.

So is this a bad thing? Many would say there is nothing wrong with a system that charges new residents for the additional services they consume. While I might agree in principle, there are serious problems with the City’s approach to financing growth, especially when it results from rezonings.

My concerns relate to both the method of determining the amount of the CACs, and the concept of burdening new buyers and renters with these costs.

Rather than charge a CAC based on the cost of providing services, the City of Vancouver and more recently other Metro municipalities usually calculate the CAC based on the increased value of the land. As a rule, they try to collect 75 per cent of the land value increase, either in cash or in-kind facilities such as childcare facilities or social housing units.

Again, while it may seem like a good idea for municipalities to share in the land value increase resulting from rezonings, this approach can lead to unintended consequences.

For one thing, it encourages municipalities to improperly zone land, so that developers will bring forward rezoning applications for townhouses or apartments and be required to make CAC payments.

However, if developers do not come forward, the result will be an insufficient supply of suitably zoned land for certain types of housing, leading to higher costs.

We are now seeing this happen. In many locations around Metro Vancouver, new townhouse and apartment developments are very expensive, since there are so few suitably zoned sites. As an illustration, I cannot think of any available townhouse sites in either the Westside of Vancouver or West Vancouver.

Neighbourhood residents should also be concerned with this approach. When the city receives the major portion of the land value increase resulting from a rezoning, politicians and officials may be prepared to approve projects at higher densities than good planning might dictate, knowing the money can be put to good use. While they deny this would ever happen, I know otherwise.

New homebuyers and renters should also be concerned with the current approach since they are effectively paying to fund social housing, parks and community centres in other parts of their municipality; facilities that really should be paid for by a broader segment of society, and over time.

Conversely, if rezonings are not approved, there may be insufficient funds to finance new or upgraded community services. In Vancouver, most new childcare facilities are built by developers and financed through rezonings. No rezoning, no childcare. This is no way to plan a city.

So what is the solution?

New developments should be required to offset the costs of growth, but over time. Rather than the current ad-hoc “let’s make a deal” approach, municipalities should pre-zone land through a proper comprehensive city planning process, and impose DCLs and CACs which reflect a portion of the cost of providing additional services.

While some might fear that “pre-zoning” land will result in higher taxes, zoning can be designed so that properties are assessed at their current use, not their future development potential.

We should also look to past practices when new infrastructure and facilities were financed over time through local improvement charges and other forms of taxation. We can also learn from other cities which use bond financing and other approaches to more evenly spread out the costs.

As Metro municipalities consider how best to include greater housing choices in new and existing neighbourhoods, it is a good time to reconsider how best to zone land and finance growth.

We desperately need new approaches that will contribute towards the cost of subsidized housing, affordable childcare and other amenities, without burdening new buyers and renters with more than their fair share of these costs.

Michael Geller is an architect, planner, real estate consultant and developer with more than four decades of experience in the public, private and institutional sectors. Some of his notable projects include the redevelopment of the South Shore False Creek, Bayshore in Coal Harbour and UniverCity at SFU. He is an adjunct professor at Simon Fraser University and is an affiliate of the UBC Masters in Urban Design program. Michael is a well-known commentator on real estate and housing and an adviser to the City of Vancouver's Affordable Housing Task Force. He is also a past president of UDI Pacific and UDI Canada, and has been honoured as a Fellow of the Canadian Institute of Planners and a Life Member of the Architectural Institute of BC.



Unknown said...

Thanks for this post. Its an important topic that I think doesn't get discussed enough. That said, you have not convinced me. I've read the Coriolis report that addresses this question of whether CAC's increase the cost of housing (as Im sure you have) and I've looked at the BC governments guidebook to CAC's. Both of these documents come to the same conclusion: the cost of housing is set by the market and is based on the supply. In other words, Michael, you would not simply increase the purchase price of a town home you develop because of CAC charges; that price would be based on what the market will pay for it.

Can you please explain further what these two studies have gotten wrong? Thanks!


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