I am of the strong opinion that, as a general rule, development charges should aim to capture the costs and impacts directly attributable to new development. This is why I prefer the term "impact fee" as opposed to "development charge." The latter makes it seem like a generic catch-all tax. But that's not the intent. The intent is that "growth pays for growth." At the highest level, this makes sense and sounds good. So with all the talk of lowering/eliminating DCs to help with housing affordability, I think a lot of people are rightly wondering: Is this actually feasible? What fees are actually needed to fund growth-related infrastructure? Let's talk about this today.
For reference, here are the development charge rates effective June 2024 in the City of Toronto.
Non-rental housing:
Rental housing:
In other words, if you were building 3-bedroom family-sized condominiums, the development charge would be $80,690 per home. And if you were building 3-bedroom family-sized rentals, the development charge would be $45,280 per home. But keep in mind that in addition to the above development charges, there are also other charges like the Community Benefit Contribution (Section 37), Parkland Dedication, Education Charges, Development Application Fees, HST, and so on.
Growing development charge reserve funds
Looking at just DCs, Ontario municipalities collected about $17.5 billion in development charge revenue over the last five years (according to the Missing Middle Initiative). But importantly, these same municipalities only spent $11.8 billion. The rest is sitting in DC reserve funds. Why is that? Well, part of this could be explained by timing. DCs are typically collected when a developer is issued their first building permit. But the costs associated with growth-related infrastructure may not happen at exactly the same time.
Except that these reserves have been growing. From 2010 to 2022, DC reserve funds across Ontario have increased from $2.6 billion to $10.7 billion (again, according to the Missing Middle Initiative). This is a 316% increase over 13 years. And in the case of Toronto — Ontario's largest city — reserves have grown 891% over the same period. This suggests that these charges aren't accurately tuned to actual impacts, because, in theory, these reserves should trend toward zero over long periods of time, as growth-related infrastructure costs are incurred.
Nexus between development charges and the impacts of new development
Let's get a little more specific. Over the last five years, DCs generated about $450 million for social services across Ontario. This includes things like long-term care, affordable housing, day cares, and public health; all of which are important and good things. But can all of these things be considered growth-related impacts? In other words, is it fair to say that because new housing got built, we now need more long-term care homes? I don't think so. Long-term care homes are certainly needed, but I don't think it's fair for new home buyers and renters to shoulder this cost.
Who is paying for the renaming of Dundas Square?
Let's consider another example. Back in 2014, Toronto City Council decided that Dundas Square should be renamed. I personally don't think this was at all necessary, but it got approved and the cost to do so was estimated at $335,000. At the time, it was also decided that this would be paid for through Section 37 funds as opposed to "taxpayer money." Section 37 of the Planning Act used to function in practice as "let's make a deal." It was a way for cities to extract money from developers in exchange for allowing more density. This has since been replaced by the Community Benefits Charge framework, but the intent is the same:
Section 37 of the Planning Act authorizes the City to adopt a community benefits charge (CBC) by-law and collect CBCs to pay for the capital costs of facilities, services and matters that are required to serve development and redevelopment. CBC funding will help support complete communities across Toronto.
In funding it in this way, the City of Toronto took a position. It basically said, "renaming Dundas Square is important to the city. We must do it. But we don't want all Torontonians to pay for it. We only want new home buyers and renters to pay for it." Because that's the effective outcome of using funds charged only to new developments. Is that fair? Once again, I don't think so. Because it's not reasonable to say that because new housing got built, it's now imperative that we rename Dundas Square. The two are unrelated matters.
By and large, this is the issue that many take with development charges. It doesn't appear to be "growth just paying for growth." It's growth paying for a lot of stuff. And it has a direct impact on housing affordability. In tomorrow's post, we'll expand on this last point and talk about what lowering/eliminating DCs could mean for apartment rents.
Back in 2022, Altus Group did a municipal benchmarking study where they looked at approval timelines, development charges, and a host of other factors that could be impacting housing affordability in Canadian cities. I blogged about it then and spoke specifically about its benchmarking of approval timelines. But I revisited it this morning after seeing Mike Moffatt tweet about it and I came across the below chart.
Also, approval timelines are less of a concern today. There are lots of zoned sites that are ready to go, but can't because of the market. Instead, what the below charge does is compare municipal charges on a per square foot basis for low-rise and high-rise housing. What's interesting is that in most cases, but in all cases in Ontario and BC, the charges are higher for high-rise housing.
Example: If you bought an 800 sf condominium in Toronto and the fees were based on the numbers in this report, you'd be paying $125 psf x 800 sf = $100,000 in municipal charges alone. Once again, I am of the opinion that our industry should find a way to transparently itemize these charges so that people/purchasers can see where their money is going.
Now, part of this has to do with higher land values for higher-density housing and municipal fees that are calculated based on appraised land value. But it's also driven by suite sizes becoming smaller (to make the end price more affordable for buyers and renters).
Here in Toronto, it doesn't matter if you're building an 800 sf two-bedroom or an 8,000 sf two-bedroom apartment, the development charge fee would be the same. And so it is perhaps not surprising that as suite sizes have come down and charges have gone up, so too did the costs on a per square foot basis.
But it raises an important and obvious question: Is this what we want? I mean, aren't we trying to encourage more infill housing in places where people don't need to drive and we can leverage existing services? Yes, that's what we are saying. Unfortunately, our charges suggest the opposite.
If you'd like to download a copy of the report, you can do that over here. Please keep in mind that this is data from 2022 and there have been changes since then. In many cases the fees are now higher, but in some cases, like in the City of Vaughan, the fees are now lower.
Cover photo by Scott Webb on Unsplash
If you're a longtime reader of this blog, you might remember this post from 2020, which was about a cost comparison that developer Urban Capital had done between a project they completed in 2005 and a project they were doing in 2020. What they uncovered was that the biggest culprit in terms of rising costs was none other than development charges. This line item had increased by 3,244%!
Everyone in the development industry knows that this is the reality. Not only have developers needed to carry a big budget for development charges, but they've also had to carry allowances for escalations; and that's because they have tended to jump multiple times throughout the course of a single project. It's frankly hard to keep up.
So for anyone to say that development charges have generally increased at the rate of inflation -- which some do say -- I'm guessing they don't know math, they don't know how inflation works, or they're lying because taxing new homes is politically easier than the other ways of collecting municipal revenue.
Thankfully, the Bank of Canada has an easy-to-use inflation calculator. And if one were to plug in 2005 and 2020, it would tell you that over this 15-year period, the average annual rate of inflation was 1.63% and that, as a total percentage change, this equates to 27.43%. So, 3,244% vs. 27.43%. It's not even close.
For a long time, nobody cared to listen to developers complain about this. The market was, you know, too good. Isn't this just developers being greedy? Well, that is no longer the case and consumers are waking up. Here's an excerpt from a Globe and Mail article published this week:
But cities started to enjoy that revenue stream too much. They began to gorge on development fees, a flow of money that allowed politicians to keep property taxes low. Who was going to complain? Future owners of homes are often people who don’t yet live in the city and can’t vote. It’s the city-building equivalent of that Monty Python joke about an innovation in how to raise government revenue: taxing foreigners living abroad.
But even more importantly, municipalities are now waking up. Last week, the City of Vaughan -- which previously had the dubious distinction of the highest DCs in the Greater Toronto Area -- announced that it would be reverting back to the rates they had in effect on September 18, 2018, and that these rates would remain in place until November 19, 2029.
This takes the development charge for a single-family home from $95,466 per unit back down to $50,193 per unit. This is significant! And given the current strains on housing affordability, these savings will almost certainly flow through to end purchasers. (FYI, all of the developers who have signed the CANT pledge have all agreed to pass on any tax savings dollar for dollar.)
Here's a quote from Vaughan Mayor Steven Del Duca:
Development charges have become an unfair tax burden on homebuyers. Too many of our residents, in particular young families in our community, have seen their dream of buying a home close to where they grew up, disappear completely as housing prices have spiraled out of control. We have a housing affordability crisis and it’s time for us to get real about the solutions needed to solve it. Today’s decision by Vaughan Council to dramatically reduce our development charges for the foreseeable future is a strong step in the right direction. I urge other municipalities to follow our lead and do the right thing.
He makes a good point. It behooves other cities in Ontario to follow their lead.