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Immaculate construction

Emily Badger’s recent piece on “how ‘developer’ became such a dirty word” has been getting passed around within the industry over the last few days. I had a chuckle when I read this bit:

The notion that development is inherently bad, or that developers are inherently bad actors, seems to ignore that the communities residents want to protect from developers were once developed, too, and often by people who made money at it. (That is, unless you believe in “immaculate construction.”)

The article hits on a number of points that are absolutely true. There’s generally a lack of understanding around the economics behind new housing. And the cost structures, today, are dramatically different compared to the suburban-industrial complex.

To provide one example, our cost consultant, Finnegan Marshall, recently shared with me a chart (dated April 2019) that broke down the various government fees that typically make up every new condo suite in Toronto.

What it showed is that between 20-24% of the price of a new condo is generally compromised of government fees and taxes that span all three levels of government. This includes everything from development charges (impact fees) to parkland dedication.

Similarly, the article quotes one developer from Montgomery County who estimates that the impact fees alone for his projects are usually upwards of $60,000 per housing unit. (This is pretty cheap compared to Toronto.)

I raise this as an example because development charges/impact fees have become an important source of revenue for cities across both Canada and the US. They often offset lower property taxes. (Whether this is appropriate is an entirely other debate.)

And so I find it paradoxical that many homeowners would like to simultaneously see lower property taxes, no new development, and more public services and infrastructure.

Photo by EJ Yao on Unsplash

4 Comments

  1. Hi Brandon.
    Your developer friend is spot on. A couple of years ago I found a breakdown for various housing units. And the fees and regulatory charges were 23% of new construction. This does not take into account the land restrictions various levels of government have also enacted which drives the cost up even more. Developers have become a scape goat for poor leadership and fiscal policy.

    Like

  2. Scott Baker

    Lower property taxes have another anti-development effect. They result in higher prices for land. It’s a losing proposition (13) in California, for example. Understanding that the property tax is really two taxes gets to the root of the solution – untax the buildings, but increase the tax on land (location) to make up for it. This encourages building and discourages hoarding land or speculating upon it.
    This idea is not new and its most well-known proponent was Henry George, who wrote a best-seller “Progress and Poverty” based on “the solution.”
    But actually, it’s been tried and proven going all the way back to Biblical times (see John Kelly’s: The Other Law of Moses).
    Fees are the wrong way to go. They are one time costs, jacking up the cost of buying a home, and don’t capture future site value, which tends to increase. This rewards people with big loads of upfront cash and penalizes people with steady but average incomes.

    Liked by 1 person

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