Property Management A Regional report focusing on the GTA, Hamilton & Niagara March 2012
Vol.19 No 1
Report
Cost-cutting Considerations
Performance-based Conservation
Thrust for Thrift Restraint Could Propel Property Tax Reform By Barbara Carss
A proposed measure to capture lost
Fiscal Factors Underpin Density
Contents Drummond Commission Recommendations 1 Conservation Opportunities in the Public Sector 9 Development Charges and Growth Management 11
tax revenue in Ontario could deliver lower property taxes for commercial/industrial ratepayers in the cities of Toronto and Hamilton, albeit with counterbalancing increases for some of their contemporaries in other municipalities. One of the nearly 350 recommendations in the recently released report of the Commission on the Reform of Ontario’s Public Services – commonly know n as the Drummond repor t in reference to the Commission’s Chair, Don Drummond – reiterates longstanding calls from the Toronto Office Coalition and the Hamilton Chamber of Commerce for a single, uniform business education tax (BET) rate throughout the province.
“A level tax playing field across the Greater Toronto Area would certainly help reduce the regional disparity experienced in the Office Property class,” observes Jeff Orlans, the Chairman of the Toronto Office Coalition, which represents owners, managers and tenants of approximately 55 million square feet of commercial office space, primarily located in downtown Toronto. From the Drummond Commission’s perspective, such a move would eliminate an illogical revenue model that ties the education portion of the property tax bill to a patchwork of historical tax rates in Ontario’s municipalities that date back to 1998. A seven-year phased tax reduction program, now in its 5th year, to lower the Continued on page 4.
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From the Editor PUBLISHER Sean Foley EDITOR Barbara Carss barbc@mediaedge.ca Ext. 236 CONTRIBUTING WRITER Marion Fraser ADVERTISING SALES Sean Foley seanf@mediaedge.ca Ext. 225 Steve McLinden stevem@mediaedge.ca Ext. 239
Upload More Vulnerable than Electricity Rebates Go figure that an economist would deem the Ontario Clean Energy Bribe – er, I mean Benefit – an inefficient use of scarce government resources. The call to cancel the 10% discount on eligible customers’ electricity bills, which last year cost the Province $1.1 billion, is among the nearly 350 recommendations in the recently released report of the Commission on the Reform of Ontario’s Public Services. Like all studies of this kind, the Drummond Report – thus dubbed for the Commission’s Chair, Don Drummond – offers a cornucopia of possibilities. The four Commissioners were directed to find ways to balance Ontario’s budget within the next five years, but were prohibited from recommending tax increases or measures involving privatization of health care or education. The result is a thorough accounting of programs, approaches to service provision and lackadaisical fiscal oversight that the Commissioners contend are unduly siphoning funds. Regulatory Update summarizes just a few of the findings and recommendations with implications for the real estate and development industries. For many commercial/industrial property taxpayers, it equates to something of a good news/bad news story since the report recommends a single business education tax rate across the province, but also counsels a delay in uploading social service costs from the municipal tax base. Other highlighted recommendations are still vague and less likely to be implemented in time to make an impact on the budget during the next five years. In establishing an experts’ panel to provide advice, governments are typically looking for a fresh perspective from outside their own sphere of influence – i.e. well-regarded thinkers free from the organizational indoctrination that leads to a “this is the way we’ve always done it” mentality. The Drummond Commissioners have brought that astute outsiders’ sensibility to their task – questioning routines, customs and assumptions about returns on investment. Yet, invariably, political pressures determine the outcome of the recommendations. In that vein, few observers expect the Ontario government will discontinue its 10% electricity rebate for residential, small business and farm customers. Certainly, the Drummond Commission is not the first critic to suggest that the program actually undermines conservation goals. Many of the report’s recommendations similarly endorse courses of action that others have previously advocated, which is a good indication that the Commissioners approached their task conscientiously and weighed insight of those affected by a wide range of different and complex policy areas. Meanwhile, it’s at least positive validation for the original proponents of the action even if nothing comes of the recommendation. Indeed, the historical evidence shows that few governments act quickly on the advice they’ve solicited. Many proposals are outright rejected; others are studied interminably or timidly tested in pilot projects before they’re widely introduced. In this case, however, there is a stated deadline to cut the deficit by the 201718 budget year. That doesn’t necessarily paint an optimistic picture for municipal budgeters. Ultimately, it will be easier for the provincial government to prolong the status quo and delay the delivery of property tax relief than to roll back an entitlement it is already providing.
Paul Murphy paulm@mediaedge.ca Ext. 264 Melissa Valentini melissaf@mediaedge.ca Ext. 248 Senior Designer Annette Carlucci Wong annettec@mediaedge.ca Ext. 231 Designer Jennifer Carter jenc@mediaedge.ca Ext. 243 Production MANAGER Rachel Selbie rachels@mediaedge.ca Ext. 261 Circulation Lina Trunina circulation@mediaedge.ca Ext. 232 Property Management Report is produced as a supplement to Canadian Property Management magazine, published 8 times a year by:
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Barbara Carss barbc@mediaedge.ca
PROPERTY MANAGEMENT REPORT March 2012 3
Regulatory Update Continued from page 1.
The Drummond Commission’s calculations over the seven-year period.” M o r e t h a n h a l f o f t h e r e p o r t ’s recommendations target health care and of Ontario’s fiscal outlook vary education, but the broader prescription also costs and services more directly related significantly from the scenario presented covers to real estate operations. This includes property tax, electricity rates, planning and in the provincial budget last year. development approvals and steps to control much faster – 3.5% per year on average
the underground economy in the construction and building trades sector. BET rate to no more than 1.6% by 2014 commits the Ontario government to cover an estimated $540-million funding gap over that period – a gap due to the concomitant pledge not to adjust rates in the municipalities where the BET rate is less than 1.6%. The Drummond report’s four authors argue that Ontario can no longer afford this kind of spending. They outline an ambitious strategy to keep public debt in check. The report calls for an annual 2.4% re d u c t i o n i n s p e n d i n g a c ro s s m o s t provincial programs for the next five years in order to allow modest funding growth in the key areas of health care, elementary, secondary and post-secondary education and social prog r ams. This would be
achieved through a combination of outright cuts, service rationalization and reclaiming p o t e n t i a l re ve n u e t h a t t h e O n t a r i o government now foregoes intentionally, inadvertently or due to illegal activity. The Drummond Commission’s calculations of Ontario’s fiscal outlook vary significantly from the scenario presented in the provincial budget last year. The report’s executive summary notes: “The 2011 Budget set out a track to 2 0 1 7 - 1 8 f o r s p e n d i n g o n p ro g r a m s (everything, that is, except interest on the debt) that involved growth of 1% annually from 2010-11 to 2013-15 and 1.7% per year from then until 2017-18. But if we assume that government programs continue as they are now delivered, then spending is actually on course to grow
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UPLOAD DELAY Despite the proposed relief for commercial/ industrial ratepayers who have carried a disproportionate share of the business education tax, other recommendations could have a more detrimental impact on property tax bills. First off, promised tax relief would be postponed somewhat with an extended timetable for the upload of social service expenses from the municipal tax base back to the provincial government. This addresses one of the most controversial initiatives of the tenure under the leadership of former Premier Mike Harris, when funding responsibility for general welfare assistance, public housing and other income support programs was transferred to municipalities. A nine-year phased upload of the most expensive component of those services – the income assistance program known as Ontario Works – began in 2010, when just 3% of program costs were transferred back to the provincial government. For 2012, that increment is slated to rise to 14%, with an annual step-up each subsequent year until 2018 when the transfer will be complete. However, the Drummond Commission calculates that prolonging the upload schedule to 2020 could save $165 million. In tandem, the Commission recommends accelerated cuts to transfer payments made through the Ontario Municipal Partnership Fund, which are already slated to drop as the upload of social services occurs. “We realize that any change in the upload simply shifts the fiscal problem in the province from one jurisdiction to another; it does not solve it. Most of the province’s municipalities are also struggling with their budgets,” the report states. “Nonetheless, we feel that to respect the overall spending restraint required at the provincial level, total transfers to the municipalities should increase by less than 5.2% per year.” Perhaps predictably, the Association of Municipalities of Ontario (AMO) disagrees. “Premier Dalton McGuinty has made it clear previously that his government would
4 march 2012 PROPERTY MANAGEMENT REPORT Untitled-2 1
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Regulatory Update
honour the commitment to upload $1.5 billion in Provincial costs from the municipal property tax base by 2018,” an AMO response to the Commission’s recommendations counters. Advocates for commercial/indust r ial ratepayers – particularly in municipalities like Hamilton, which has struggled with social service costs while also burdened with one of province’s higher business education tax rates – also resist any suggestion of delay. “We’re very hopeful to see that date come sooner rather than later,” says David Adames, President and Chief Executive Officer of the Hamilton Chamber of Commerce. POTENTIAL HITS FOR MULTI-RES RATEPAYERS T h e D r u m m on d Com m i s s i on t u r n s i t s attention to the residential and multiresidential property tax classes as well, and questions the Ontario government’s practice of offsetting assessment related increases with a corresponding decrease in the education tax rate. Thus, the 0.231% residential education tax rate for 2011 falls below the 0.2644% rate in 2008, prior to the most recent province-wide reassessment. “While this has contributed to nominal stability in the property tax base, in real terms,
this practice has reduced provincial education tax revenues available to support Ontario’s education system,” the Drummond report states. “As property tax revenues decrease as a share of e d u c a t i o n ex p e n d i t u re s , p rov i n c i a l transfers to school boards increase to offset this decline.” The Commissioners advise the Ontario government to at least account for inflation. They point to British Columbia, where an inflationary factor is added to the calculation of the education tax rate to insure a continuing stable level of revenue. Although the Commission’s mandate from the Ontario government prohibited it from recommending measures that would increase taxes, this is arguably a case of taking advantage of existing tax room that the Province currently relinquishes. Multi-residential landlords have some room of their own to recoup property tax increases of a certain magnitude from their tenants, but much depends on the allowable rent increase guideline in any year. The provision under Ontario’s Residential Tenancies Act allows for what’s known as an “extraordinary increase” when an increase in proper ty taxes
surpasses the annual allowable rent increase by at least 50%. For 2012, when the allowable rent increase is 3.1%, property taxes would have to rise by 4.65% before a landlord could apply to the Landlord and Tenant Board for an extraordinary increase. An inflationar y factor on the education portion of the bill alone is unlikely to t r i g g e r t h o s e c o n d i t i o n s . Eve n i n combination with other tax escalators, recovering the expense would take some time and effort. “Landlords must still undertake the administrative task and delay of documenting and reporting property tax increases and must obtain an order from the Board allowing the rent increase,” explains Mike Chopowick, Manager of Policy with the Federation of Rentalhousing Providers of Ontario. The Drummond Commission’s call for t h e i m m e d i a te c a n ce l l a t i o n o f t h e Ontario Clean Energy Benefit (OECB) could have an even greater financial impact for rental housing operators. Few observers expect the provincial government will withdraw its pledged 10% discount on eligible customers’
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Conservation proponents concur with the Commission that a wider variance is needed between peak and off-peak pricing, including the introduction of a “critical peak” rate.
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(those participating in the Regulated Price Plan) electricity bills until the end of 2015, but the Drummond report is emphatic that annual costs in excess of $1 billion are undermining Ontario’s fiscal position. The Commission also calls for a review of four other energy tax credits/rebates for low-income ratepayers and residential and industrial ratepayers in Northern Ontario. “Each of these initiatives may offer relief to con su m er s i n ter m s of en er g y co s t s (electricity, gas, oil, diesel etc.), but over t i m e co u l d d i s co u r a ge con s er v a t i on , l e a d i n g to h i g h e r co s t s , a n d s h o u l d periodically be revisited to ensure they are meeting policy goals and represent value for money,” the report states. ELECTRICITY PROPOSALS PREVIOUSLY REJECTED Many of the other electricit y-related recommendations reinforce notions that electricity market analysts and energy management specialists have consistently promoted – some which the provincial government has heretofore rejected. For example, conservation proponents concur with the Commission that a wider variance is needed between peak and offpeak pricing, including the introduction of a “critical peak” rate. Yet, many observers question how such critical peak pricing could effectively be implemented through the proposed opt-in approach. “As it is not elaborated on, I am left to wonder who would choose to opt in?” says Mike McGee, Managing Director of the consulting firm, Energy Profiles Limited. “The recommendation is somewhat simplistic.” The Commission’s proposal to more accurately weigh transmission costs in wholesale electricity prices is in sync with o t h e r d i s c u s s i o n s o f h ow l o c a t i o n a l marginal pricing (LMP) could send better price signals and stimulate investment in generation and transmission capacity. Essentially, this approach categorizes the markets into nodes so that transmission congestion can be factored into the spot price in some areas – a pricing formula currently in place in much of northeastern United States. “The idea has been raised at the IESO (Ontario’s Independent Electricity System Operator) since 2002, but it has always appeared that the government does not support it,” McGee reports. “Arguably, it would be the r ig ht thing to do, but, unfortunately with the way the market has evolved and with the advent of the huge Global Adjustments, that would add even
Regulatory Update more complexity and inequity in allocating a site. A less capital burdensome risk industries, is not a straightforward polluterpay model as the Commission suggests. the Global Adjustment to locational prices.” management model would be welcomed. “If you quantify all the costs that “Non-polluters within particular industries WEAK ASSUMPTIONS, redevelopment of a brownfield site could pay for the polluters in that industry,” INCOMPLETE INFORMATION possibly generate, the dollar amount can be so Piccioni notes. i Elsewhere, the report eschews complexity for huge that it will essentially put the project out of w h a t m a ny o b s e r ve r s s e e a s s w e e p i n g business,” Willms says. “Instead of every single generalizations. Notably, proposals to reform operator putting up the full amount of financial The complete text of Public Services for a n d r a t i o n a l i z e t h e p l a n n i n g a n d assurance, it would be like paying premiums, Ontarians: A Path to Sustainability and environmental approvals processes provide and the government would have a fund it could Excellence, the report of the Commission on the Reform of Ontario’s Public Services can few details of how cost savings would be use if it needed it.” realized, particularly within the short-term Even so, the U.S. Superfund, which draws b e f o u n d a t w w w. f i n . g o v. o n . c a / e n / f i v e - y e a r h o r i z o n t h a t u n d e r p i n s t h e funding from the chemical and petroleum reformcommission. Commission’s objectives. Such a move seems more likely to spark a jurisdictional turf war. Similar measures in Ontario’s Green Energy and Economy Act to allow renewable energy projects to sidestep municipal planning approvals have proven controversial. Let Us Restore Them In-Place To a Better Than New Condition “ I t ’s o n e o f t h e H o l y G r a i l s o f env ironmental assessment and land use planning to somehow integrate those two processes, but the reality is that land use planning is clearly a municipal responsibility,” reflects John Willms, a Partner with Willms & Shier Environmental Lawyers. “Municipalities hold on to their land use planning decisionmaking power. It’s very important to both local autonomy and being answerable to their constituents. It would be a huge step and extremely difficult to ever take that authority away from municipalities.” The Commission’s diagnosis of problems with the Ministry of the Environment’s (MOE) • Ontario Building Code Approved financial assurance program diverges from the • 20 Year Warranty views of industry insiders working to remediate • Improved Water Quality - Reduced contaminated sites – although both parties agree Lead + Metal Content www.pipe-shield.com that a different approach is needed. • BPA FREE While the Drummond report suggests that the • Improved Water Flow MOE has made inadequate use of financial • Better than a New Pipe assurance to ensure that polluters cover the costs • Turn Key Installation of cleaning up land that reverts to Crown • Certified to NSF 61 ownership, other observers maintain that current requirements can be a disincentive to returning derelict sites to productive, tax generating uses. Epoxy Application parameters developed with our PIPE SHIELD™ BELT (blown Brownfield specialists see some merit in the epoxy lining technology) software program, developed with the assistance of Drummond Commission’s endorsement of a NRC-IRAP and the University of Toronto financial assurance tool somewhat like the U.S. Environmental Protection Agency’s Superfund, Pipe Shield™ AN500 Epoxy is manufactured with non-toxic base ingredients but not necessarily for the reasons the www.pipe-shield.com Commission cites. “Our system of environmental approvals and Division of: enforcement in Ontario is already heavily based on the polluter-pays principle,” observes Luciano Piccioni, President of RCI Consulting, a planning “Experience you can count on since 1985” firm specializing in brownfield redevelopment. For example, MOE’s current financial assurance system requires land owners/developers Toll Free: 1.800.463.0251 • Tel: 905.670.7481 • Fax: 905.670.7483 to provide upfront funds, which are held in a reserve account, to cover possible future costs Email: brad@bradleymechanical.com • www.bradleymechanical.com related to contamination on or migrating from
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Energy Management Commentary
Value for Money a Universally Applicable Message Room for Greater Water and Energy Savings in Broader Public Sector By Marion Fraser
Beyond the headlines about draconian c ut s to O n t a r i o’s p u b l i c s e c tor, t h e Drummond Report (formally known as the report of the Commission on the Reform of Ontario’s Public Services) may offer billions of dollars of savings with no service cuts. T h e Re p o r t’s m a n t r a i s s i m p l e a n d straightforward: Value for money. These fundamental principles for reforming Ontario’s public services closely match the approach to energy and water conservation that the Toronto and Region Conservation Authority (TRCA) has been deploying in growing numbers of schools, hospitals and municipal buildings since 2004. More recently, owners and property managers are adopting the same approach in Class A commercial buildings. The core of this evidence-based, systematic approach to conservation is benchmarking, education, resources and
under-pricing of such valuable resources contributes to waste and overuse. If the Commissioners had addressed the full potential for energy and water savings in Ontario’s public sector – the Canada Green Building Council estimates that buildings and homes in Canada can reduce their consumption by at least 50% in the near term – they may have recognized the savings to be found, not just in provincial buildings, but in the broader public service as well. O t h e r s h ave a l s o ove r l o o ke d t h a t oppor tunity. Traditional conser vation programs have focused on high-cost capital retrofits and subsidies for higher efficiency e q u i p m e n t , j u s t i f i e d by e n g i n e e r i n g estimates of savings – an approach that Although the Report does not focus always seems to leave the broader public s p e c i f i c a l l y o n e n e r g y a n d w a t e r sector clamouring for more provincial conservation, it does note that the current funding, not less. ongoing monitoring to guide continuous improvement in energy and environmental performance. The principles are good common sense and reflect the best practices of excellent organizations: • constantly benchmark effectiveness and efficiency • set clear objectives, use proper metrics to measure progress and provide clear accountability for results • focus on outcomes, not inputs • bridge organizational silos and reduce administrative red tape • maximize the value of capital assets • drive relentlessly towards effectiveness and efficiency
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PROPERTY MANAGEMENT REPORT March 2012 9
Energy Management Commentary
In contrast, high-cost solutions have not been required for the Hospital for Sick Children (Sick Kids) to achieve savings of more than $2 million per year in energy and water costs. Rather, it has improved operations and maintenance, and implemented thoughtful control improvements, while par ticipating in TRCA’s Greening Health Care program. This program’s on-line management system contains the largest dynamic database of hospital energy performance in Canada and provides metrics and standards that allow each participating hospital to self-assess, set targets and monitor savings over time. Regular forums enable facility managers to share savings results and best practices. Using these standards and methodology, t h e No r t h S i m c o e Mu s k o k a L H I N c o l l a b o r a t i ve ( c o m p r i s i n g Mu s ko k a Algonquin Healthcare, Georg ian Bay G e n e r a l Ho s p i t a l , O r i l l i a S o l d i e r s ’ Memor ial Hospital and Collingwood General and Marine Hospital) is embarking on a joint project to fully exploit conser vation potential, share resources and achieve economies of scale. The project is forecast to produce more
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than $2 million in annual savings and a net positive cash flow within six years. Any needed capital investments in higher efficiency equipment or building upgrades will be financed entirely through savings. This appears to be exactly the kind of Value for Money that the Drummond report commends. Fitting ly, the repor t also points to Infrastructure Ontario’s expertise in real asset management. It, too, has been following the basic tenets of performancebased conservation with a number of its properties for the past three years. G i v e n t h e O n t a r i o g o v e r n m e n t ’s $14-billion real estate portfolio – much of it older and more expensive to maintain – there is great potential to expand this performance-based approach. The tools to make this happen were introduced in the Energ y Conser vation Leadership Act in 2006, but only recently have enabling regulations been posted to get action underway. The Drummond Repor t makes two other keen observations that apply to conservation. 1. “The Ontario Clean Energy Benefit which provides a taxpayer funded 10
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per cent rebate on electricity bills for residential, farm and small business customers distorts the true cost of electricity and discourages conservation.” Achie v ing the ful l p otent ial of conservation could reduce bills much more at no cost to taxpayers. Any new electricity resources will cost much more than current supplies, whether renewable or not. Only conservation is cheaper than new supply and can reduce bills even if rates go up. 2.
“The provincial and federal governments should reduce overlap and duplication of services.” This recommendation also should also be heeded within Ontario where a plethora of public and private sector organizations are delivering publicly funded traditional conservation programs of suspect value, given their focus on estimated savings, large incentives and significant capital investments. i Marion Fraser is President of Fraser & Company, and has more than 30 years of experience in sustainable energy issues in Ontario.
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Development Charges Could Promote Cost-Effective Infrastructure
Development charges have historically been based on the principle that growth should pay for itself. The national public policy think tank, Sustainable Prosperity, argues that more nuanced development charge formulas are now required to encourage intensification and transit-oriented development that makes more e f f i c i e n t u s e o f re s o u rc e s a n d h e l p s municipalities to more cost-effectively maintain infrastructure. The following is an excerpt from a recent policy brief – Editor. Development charges are out of sync with growth management policies in many municipalities. Developers submit the fees to municipalities to cover the upfront costs for sewer systems, roads and other infrastructure that serves new development, but too often the design of the charge incents low-density, automobile-centric development, which in turn necessitates investment in new and more costly infrastructure. Zoning by-laws, planning policies and market factors affecting supply and demand all influence where development happens, while development charges are a significant cost that can influence location and timing of development and other decisions. If better
As funding from upper levels of government diminishes, development charges are one of the few methods most municipalities have to pay for growth-related infrastructure. However, as currently designed in most municipalities, they do not work to encourage more compact and sustainable development patterns. aligned with growth management goals, development charges could provide an incentive for more compact urban development. Low-density development on the urban fringe may appear cheaper, but it carries many hidden costs, including traffic congestion and duplication of infrastructure. For municipalities, this type of development engenders costlier upfront and lifetime infrastructure costs than does more dense development in established urban areas.
UNIVERSAL vs. PROPORTIONATE RATES Many factors shape where development happens, but development charges (DCs) can be significant enough that revising the rate structure or the timing of payments can influence developers’ decisions. Municipalities have some flexibility because DCs can be calculated in different ways. Using the average-cost pricing formula, municipal officials estimate all infrastructure costs necessitated by all new development PROPERTY MANAGEMENT REPORT March 2012 11
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RECOMMENDATIONS 1. Promote better understanding of the correlation between development charges and growth management. Tailor urban planning policies to ensure land development and community growth is more efficient. 2. Provincial governments should amend development charge legislation to explicitly require municipalities to collect 100% of the financial costs imposed on them by new developments. Artificially low cost recovery limits, such as Ontario’s limit of 90% of costs, should be removed. 3. Provincial governments could amend development charge legislation to include the costs of providing transit services related to growth, and to remove any restrictions on developing new transit-related development charges. Allowing development fees to go toward growth-related transit services will free up other revenues to support transit for more compact, nodal, transit-oriented communities. 4. Provincial leadership in the form of ongoing support and guidance is needed to ensure development charge programs are designed and used effectively. Information and background studies could demonstrate how development charges can produce a different outcome depending on the desired planning goal. Studies should also examine how development charges could be used to address the non-financial, externalized costs of urban sprawl (e.g. smog, greenhouse gas emissions, health, etc.).
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throughout the municipality. They then divide that sum by the estimated number of new units to determine a DC rate. This is a universal rate, which does not reflect the actual cost of infrastructure required in any given area. Alternatively, marginal-cost pricing sets the DC rate based on the actual costs of the development in question. Meanwhile, an area-specific DC rate is a hybrid approach, which calculates an average DC rate based on the infrastructure necessitated by new development in a given geographical area larger than a single development, but smaller than the entire municipality. Often, municipalities will employ a combination of methods, with a city-wide DC charge, as well as area-specific charges for certain geographic and/or development areas. As funding from upper levels of government diminishes, development charges are one of the few methods most municipalities have to pay for growth-related infrastructure. However, as currently designed in most municipalities, they do not work to encourage more compact and sustainable development patterns. Ongoing maintenance and infrastructure renewal costs are rarely considered. Even though DCs do not fund maintenance, policy makers should be aware of the immense lifecycle costs of maintaining the infrastructure and services
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spawned by inefficient growth patterns. Adjustments – such as lower rates for high-density projects, mixed uses and intensification of builtout areas – could provide an incentive for more compact forms of urban growth. Average-cost development charges subsidize low-density development that has higher per-unit growth-related capital costs. This ultimately raises costs for higher-density development. In comparison, area-specific pricing has been shown to encourage more efficient land development and equitable distribution of costs related to development. Under the area-specific DC model, established districts will generally have lower development charges. Thus, redevelopment and intensification within such areas would benefit from lower charges. Development that is farther away from existing infrastructure or requires extensive service or infrastructure provision would bear a cost proportionate to that location. VARIABLES TIED TO COST FACTORS Municipalities could also vary development charges based on factors such as location, type of development, density or unit size. Infrastructure unit costs depend on linear distances (e.g. for roads, sewers or water) so factors such as lot size, density and development design will have an impact on total costs. Lot size has a significant influence on infrastructure costs for both commercial and residential developments. Traditional 11231_Altamira_2011.indd 1 development charges are calculated on a per-unit basis and do not account for unit size or linear distances, which effectively subsidizes the construction of large units and low-density development at the expense of smaller units and dense development. DCs based on unit size would eliminate that subsidy. Municipalities could pursue revenue enhancement, which would increase overall development charge revenues, or revenue neutrality, by using new revenues from higher development charges to offset reduced or waived development fees for preferred forms of development. DCs should at least be set at the level required to cover infrastructure costs to prevent future fiscal shortfalls and avoid market distortions. Some provincial governments have also established upper limits to ensure that DCs do not exceed the cost of required infrastructure. Requirements for upfront payment – usually at the subdivision or building permit stage – may influence developers to opt for low-rise development, which allows them to more quickly recoup their costs from new homebuyers. Delayed or staggered payment schedules could help developers with the financing of denser high-rise projects that take much longer to construct.
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PRESSURES & CONSTRAINTS Fiscal, legislative, administrative and institutional challenges can pose some obstacles to DC reforms. Clearly, municipalities would have a difficult time implementing changes that result in lower overall revenues. In fact, municipalities tend to actively look for ways to increase, not decrease, these charges. A March 2011 report highlighted that fiscal pressures in Ontario municipalities have resulted in more jurisdictions “try[ing] to increase development charges to the greatest extent possible,” often without regard for other policy objectives or the incentives created by the development charges. Municipalities will need to raise some charges if they lower others. Provincial governments set rules for how development charges are calculated and the types of services for which they can be collected to impose some degree of consistency across municipalities. However, provincial rules can also inhibit the ability of municipal governments to apply development charges more broadly as a growth management tool. In Ontario, a requirement to discount many services by 10% hampers some municipalities in efforts to collect development charges for improved and expanded transit service levels. Given that transit is an integral component of developing more compact and transit-oriented communities, the ability to fund it adequately is crucial for growth management. Smaller municipalities, in particular, may struggle with the burden of managing multiple 11-06-08 1:06 PM area-specific development charges. For example, the Town of Markham, in the Greater Toronto Area’s York Region, had 31 different area-specific charges until 2008. This has since been reduced to 19 – partly, it is claimed, to streamline administrative demands. In any case, municipalities must keep meticulous records for DC revenue and spending since developers and others keenly observe how DCs are spent. Within this context, researchers found little evidence that areaspecific charges are more complicated to administer. Departmental segregation within municipalities can shape and/or undermine development charge design. Staff from the planning and financial departments may not have much interaction on a regular basis, but an integrated approach is needed to resolve issues of competing interests. i
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Sustainable Prosperity is a national research and policy network focused on market-based approaches to support a competitive green economy. The complete text of Managing Urban Sprawl: Reconsidering Development Cost Charges in Canada can be found at www.sustainableprosperity.ca 14 march 2012 PROPERTY MANAGEMENT REPORT Untitled-4 1
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