Brandon Donnelly

Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.

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Tag: development charges

  • Canadian cities will need to freeze their development charges if they want infrastructure fund money

    Here’s some positive news. This past week, the Government of Canada announced additional details around its $6 billion Canada Housing Infrastructure Fund (CHIF). The goal of the fund is to accelerate the construction of housing-supportive infrastructure (water, wastewater, stormwater, and solid waste), and the plan is to deliver it through two distinct funding streams.

    The first is what they are calling a “direct delivery stream”, and this is how the first $1 billion is going to be allocated. Municipalities and Indigenous communities will need to apply, and the funds are expected to be distributed over the next 8 years. But to be eligible — and this is the positive news — municipalities will need to have done the following:

    • Adopt zoning permitting “four units as-of-right” per lot in all low-density residential areas that have municipal servicing
    • Implement a three-year freeze on development charge increases beyond whatever rates were in place on April 2, 2024 (which is when the initial CHIF announcement was made)

    Toronto has already done number one. But many/most other municipalities have not, so this should provide a further incentive. As for requirement number two, my understanding is that this is not (yet) in place pretty much anywhere. I haven’t heard of any municipalities committing to this. So I’m taking this as incremental good news. (Please correct me if I’m wrong.)

    There are, however, important caveats: item number two only applies to municipalities with populations greater than 300,000 people. This seems unnecessarily high. And I can speak from firsthand experience working in communities below this threshold.

    Three-years also isn’t very long when it comes to development timelines, especially in this market. A complicated rezoning process might take 3 years, or even 10 years. So this is very much for small-scale projects, which may be impactful or it may not be, depending on quickly the market responds to policy changes like requirement number one.

    The last thing I will say, and this relates to yesterday’s post, is that freezing is good, but lowering is obviously better.

  • Taxopoly

    The Coalition Against New-Home Taxes (or CANT) is a group of home builders, led by Matt Young of Republic Developments, who are asking all levels of government in Canada to lower the taxes on new homes. In some cities, these taxes — which include everything from development charges to HST — can account for up to 30% of the cost of a new home. This is bad for housing affordability and runs counter to our publicly stated goals. So to drive this point home, the group created a cheeky game called Taxopoly: The Unwinnable Game of Canadian Homeownership. (Credit to Blackjet for the idea and design.) I don’t think that the average buyer understands what kind of taxes are being levied on new homes, and so kudos to CANT for being a loud advocate for positive change. To learn more, sign their pledge, and/or email your representative, here’s their website.

  • Development charges are an insidious problem

    Here is a recent chart from Mike Moffat showing how much development charges have increased in the City of Toronto from 2009 to today:

    We’ve, of course, seen this before. Back in 2020, I shared an article that developer Urban Capital published where they did a cost comparison between a project they had done in 2005 and a project they were doing in 2020. What they uncovered was that development charges alone had increased by 3,244%! The most of any line item in their pro forma.

    Development charges over the last real estate cycle have been an insidious problem. Meaning, the industry knew they were crazy high, and we were all trying to be vocal about it, but let’s face it — the general public doesn’t have a lot of sympathy for developers complaining about high fees. They are also largely hidden from purchasers and renters. The charges just get lumped in.

    If our industry could figure out how to be more transparent and separate out these charges, much like a sales tax, I think it would go a long way to showing consumers what they’re actually paying when it comes to new housing. And then maybe something positive would happen. Because this is a major reason why new housing has gotten so expensive in this region.

    Can you imagine if property taxes had increased by 3,244% over the last 15 years? I can’t. Because no one would have ever allowed that to happen.

    For better and for worse, the current market is going to serve as a rude awakening for municipalities. We’ve reached the breaking point. The housing market is, as we’ve talked about, in a “state of economic lockdown.” And when people don’t buy new homes, it means developers no longer have the money to pay development charges.

  • Where 3+ bedroom homes are getting built in Ontario (Hint: It’s not Toronto)

    Here’s an interesting, though not shocking, chart from a recent Globe and Mail article talking about “Canada’s dysfunctional housing market.” What is noteworthy is that Toronto is dead last when it comes to the number of new 3+ bedroom homes built between 2016 and 2011.

    Peterborough, for example, is a census metropolitan area with somewhere around 130,000 people. And yet, based on this data, it is building more family-sized homes than Toronto.

    Why this is not surprising is that the vast majority of new homes now built in Toronto are high-density and built out of reinforced concrete. This means that they are relatively expensive on a per square foot basis.

    In fact, you could argue that mid-rise housing — the exact high-density type that is supposed to be most attractive to families — is the most expensive to build. What this means is that if you’re building a 3+ bedroom home in this way, it’s not going to be affordable to most.

    It also means that people are going to go shopping elsewhere: Ottawa, York, Simcoe, Durham, and so on. The expected market outcome is decentralization. But in my mind, this raises an important question: Is this what people really want?

    This is a great debate. And many will argue that grade-related suburban housing is exactly what people want. What we are seeing is a result of raw consumer preference.

    However, the costs are so skewed in favor of low-rise housing, that I think it’s hard to say with absolute certainty the degree in which this is true. What if higher-density 3+ bedroom homes were the cheaper option? My bet is that we would see a lot more centralization.

    The development charge rate for a 2+ bedroom apartment in the City of Toronto is currently $80,690 per unit (effective June 6, 2024). As development charges work, this is supposed to pay for the growth-related impacts of adding a 2+ bedroom apartment in the city.

    However, the above chart suggests that there are also impacts to not building that 2 or 3 bedroom apartment in an already developed area next to existing infrastructure. It means the home goes somewhere else (further away) or doesn’t get built at all.

    Both of these outcomes also have costs.

  • Development charge litmus test

    Development charges are a topic that is near and dear to this blog.

    In theory, development charges are supposed to be “growth paying for growth.” In other words, they are intended to pay for the incremental services and infrastructure required strictly because of new development. This, of course, sounds right. More people will equal more demand on city services.

    However, development charges also increase the cost of new homes and there is a growing concern that development charges now pay for more than they should. Meaning, they have become a “housing tax”, which is more or less the opposite of what you want if you think there’s a shortage of new homes.

    Frances Bula recently wrote about this in the Globe and Mail.

    Part of the challenge, I think, is that city budgets are complicated. As far as I know, it’s largely impossible for the average person to try and figure out which municipal costs are associated with growth and which are associated with ongoing operations (i.e. they should be paid for through things like property taxes).

    That said, I think this current market environment could create a bit of a litmus test for development charges. As most of you know, new home sales in Toronto have fallen to levels not seen since the global financial crisis and the early 90s.

    This means that construction activity has now also fallen and that, in turn, fewer developers are paying development charges. I haven’t seen the exact numbers, but intuitively the drop in development charges paid should be precipitous.

    Now, if these charges are strictly paying for growth, then in theory, cities should be completely agnostic to this decline. Sure, they’re collecting less revenue, but they also don’t have the new growth. Any growth that is still in the pipeline (i.e. under construction) would have already paid for their impacts.

    However, if this is not the case, and municipal budgets start getting negatively impacted by this drop in development charge revenue, then it suggests that one of two things could be going on.

    Either development charges aren’t enough to cover the true cost of growth and the whole thing is a bit of a Ponzi scheme. That is, we need a constant flow of new developments to pay for the shortfalls of the last. Or, we’re overtaxing new homebuyers for the benefit of incumbent ratepayers.

    I’m sure it’s more complicated than I’m making it seem right now. But this is the crux of this debate: Are we equitably levying development charges on new homes? This current market could offer a clue. If cities start running out of money, it might suggest the answer is no.

  • A lot less new housing

    During COVID, every developer was terrified that their costs were going to run way from them. According to this recent Globe and Mail article, residential building costs increased 55% since 2020. At the same time, city fees were being increased and some people, for whatever reason, believed this would not have an impact on home prices. Developers will always seek to profit maximize and charge whatever the market will bear, so why bother trying to reduce costs? This is/was one school of thought.

    Despite this cost fear, the market managed to keep up for a period of time. Capital was cheap, as we all know. And that kept things going, until it was no longer the case. According to the same Globe article, there are 83 residential projects and 28,428 homes that have not launched (sales) over the last two years in the Greater Toronto Area because of market conditions. This year alone, the number is estimated at 14,000 homes. So supply has fallen off, and that’s because demand and buying power have fallen off.

    But let’s think of this in economics terms. Price and quantity demanded are usually inversely correlated. Meaning, if the price of something goes up, demand will go down. And if the price of something goes down, demand will go up. So in theory, there are still prices that will get 28,428 people excited to buy a new home. I mean, if I were to list a condo in downtown Toronto for $500 psf right now, I’m pretty sure that most with the means would jump at the opportunity.

    The problem is that whatever these prices are, they are largely beneath the floor price of where most developers can build to today. Developers weren’t bluffing, costs really are too high now. And when this happens, the answer is simple: you can’t build. A new equilibrium will eventually be found. But in the short-term, we should all expect new housing supply to remain limited. And because there’s always a lag with real estate, the effects of this shortage will be felt in the years to come.

  • Higher development charges, less federal money

    Metro Vancouver, which includes the City of Vancouver and 20 other municipalities, is proposing to increase its development cost charges (DCC):

    Metro Vancouver is proposing to increase DCCs by roughly $23,000 per new single-family home; $21,000 per new townhome; and $14,000 per new apartment. For example, fees for a townhouse in Vancouver will rise from $10,027 today to $30,861 by 2027.

    In response to this, federal housing minister, Sean Fraser, has just pulled $138 million in funding that was intended to accelerate housing permits and new affordable housing projects in Surrey and Burnaby.

    This makes some sense. Because it is pretty weird to say, “Hey, we need more affordable housing. Give us some money for this and, while you do that, we’re also going increase the cost of building new housing.”

    Of course, this is the whole growth-should-pay-for-growth mantra. And supposedly, there’s growth-related infrastructure that needs to be built.

    To be fair, Metro Vancouver is also proposing to increase its property taxes: 12% in the first year, 11% for the next two years, and then 5% for the next three years. So this is not all going onto new supply.

    I don’t know enough about the finances of Metro Vancouver to comment on these numbers specifically, but I do think it’s important that policy makers understand what the current market environment means for new housing.

    It is difficult, and in many cases impossible, to underwrite new housing projects today. Which means that even if all fees and charges were to remain unchanged, we are going to see a decrease in new housing supply.

    Photo by Matt Wang on Unsplash

  • Two ideas for increasing the supply of new rental housing

    There are lots of ideas out there for how to improve the supply of new rental housing. But it is important to remember, at least here in our market, that the playing field is not level between new condominiums and new rental homes. We have spoken about this before, over here, where I compared the (per square foot) revenue generated from your average new condo against that generated by your average new rental home. Of course, since I wrote that post in 2020, we have seen upward pressure on cap rates (meaning downward pressure on values). So feasibility has gotten even more challenging.

    The important thing to remember is that developers do not have some philosophical aversion to building more rental housing; it is that the math is challenging. You generally need economies of scale (really big projects), patient long-term capital, and a belief that rents will continue to exhibit meaningful positive growth. If you want to negatively impact new supply, cap rental growth. But if you want to encourage new supply, somebody needs to pull out a development pro forma and make the call to improve the cost structure for new rental housing.

    In my opinion, two obvious line items to focus on are development charges (as well as the other government levies) and HST (our harmonized sales tax). The point of development charges, as we always talk about, is for growth to pay for growth. They are intended to pay for municipal services like roads, transit, water and sewer, and so on. In the other words, they’re supposed to capture of the cost impacts of new housing. But what about the impact of not building enough new rental housing? Are we thinking about this the right way? Especially if you consider the possibility of more new rental housing in our existing transit nodes.

    The HST charged on new rental housing is also significant. There is a new residential rental property rebate available to builders (not tax advice!), but the thresholds have not been indexed and so it’s grossly out of date compared to where values sit today. In any event, if the goal is more homes, why not make new rental homes exempt? Developers are simple. If the math works, they will build. If the math doesn’t work, they will not build. And these two line items, alone, would go a long way to helping the former.

    Photo by Pierre Châtel-Innocenti on Unsplash

  • Beautiful brick mid-rise proposed for Toronto’s Junction neighborhood

    Last week, Sierra Communities (developer) and my friend Gabriel Fain (architect of Mackay Laneway House fame) submitted the above development proposal for 2760 Dundas Street West in the Junction. It is a beautiful proposal. So not surprisingly, the response has been overwhelmingly positive. Here are the first batch of comments from Urban Toronto:

    It also happens to be one block west of our Junction House project, so I definitely would have been annoyed if somebody proposed something ugly here. I am 99.9% biased, but I think the Junction has some of the best new mid-rise buildings in the city. Presumably, this is what “Mrgeosim” was getting at with their comment about “the number of good proposals for this neighbourhood.”

    But here’s the thing. This is a relatively small proposal. It’s a 6-storey mid-rise building with 28 new homes on top of a tiny 482 square meter site (16m frontage). This makes it a challenging new development to execute on. So the fact that this is required to go through the typical rezoning and site plan processes is, in my opinion, a painful problem.

    We should be doing everything we can to encourage these kinds of new housing developments all across the city. And that necessarily means removing as many barriers as possible. A pair of development applications and a few community meetings may seem benign, but they’re not. They add time and real costs that then need to be passed onto future residents.

    There is also a very valid question around what kind of development charges (or impact fees) we should be levying on projects of this scale. If you want to build a laneway suite in the City of Toronto, you can have the development charges deferred and eventually forgiven. Why? Because we want more rental housing and we have arguably recognized that it’s important for project feasibility.

    Should the same apply if you’re building 2 new homes, or perhaps 28 new homes? At what point should the “impacts” kick in and the fees be levied? And might there be an argument that adding many new homes on top of small 482 square meter parcels is actually an incredibly efficient way of using existing public infrastructure? I think so.

    Congratulations to the team on a beautiful proposal! I’m looking forward to this being our neighbor.

    Image: Gabriel Fain Architects

  • Multiple on land cost

    Following yesterday’s post about the most expensive home in Brooklyn’s Dumbo, Jed Bryne of Oak City CRE fame shot me a note asking about the typical land multiple that developers need in Canada in order to make a project feasible. In other words, if your land cost is $X, what multiple on this would your top line number need to be in order to have a project? And he mentioned that in North Carolina, he often sees multiples in the range of 3-5x the land acquisition cost.

    My initial response was that we don’t typically look at this metric. Many years ago, the rough rule of thumb for new condominiums here in Toronto used to be 10x the land price per buildable square foot. So if you were buying development land at $100 per buildable square foot (calculated as land price divided by the total gross floor area of the project), then you likely needed to sell your condominiums for somewhere around $1,000 per square foot.

    On some level this can be a useful metric, because it allows you to quickly tell if a parcel of land is too expensive. And in some situations, it might allow you to compare sites/markets. If you have two different markets and land at the same $X price pbsf, but one requires a 10x multiple to be feasible and the other a 5x multiple, then it tells you something about the cost structures of these two markets. Construction costs probably won’t vary all that much (assuming similar builds), but project timelines, development charges, and many other things sure can.

    But again, this isn’t a number that we typically care a great deal about.

    There are a lot of variables in a pro forma and the “required” multiple can change overnight. Maybe it’s 10x today, but then development charges go up by 49% and now you need an even higher multiple in order to make the project feasible. So for us, the salient land number is the price per buildable square foot. What is the price per pound of development density? And the way you determine if you have a reasonable number is by doing a residual land value calculation.