Developers paying too little
June 19, 2006

A review of new growth costs to the city has revealed that current development charges are much too low. As a result, substantial increases are being proposed by city staff, but are being softened by numerous discounts and delayed application. An amended development charges bylaw is going to the corporate administration committee on Wednesday morning, and if adopted will take effect on July 6.

Development charges are calculated by adding up expected costs of servicing new growth, and then collecting this from the developers of new subdivisions and commercial/industrial facilities. The most recent calculation of Hamilton's rates took place in 2004, but a new study has now revealed those amounts failed to cover actual project costs, and also left out some growth projects, such as pending upgrades to the sewage treatment plant.

"With the amendments, the full calculated rate that could potentially be charged to residential developments is $17,615 per single detached equivalent unit," says the staff report. "That is an increase of $3,482 (25%) from what the rates would have been on July 6, 2006 if the bylaw were not amended."

The report says the proposed change is "a result of significant cost increases and the inclusion of new projects", but recommends that the residential fees be phased-in, with 50% being added next month and the other 50% a year later.

Development charges (DCs) are supposed to cover the extra costs of servicing growth, so that existing taxpayers don't have to bear this burden. However, provincial rules restrict municipalities from actually recouping all the costs. And cities may decide to collect less than they are allowed to charge.

For example, developers can't be charged for waste management spending such as the new composting facilities, or for the renovations at city hall - two of the most expensive projects facing the city. Similarly, 10 percent of the costs of so-called 'soft' services like policing and fire protection cannot be claimed.

Even with those restrictions, the city's consultants have determined that the city can legitimately increase the residential charges to $17,615 per single-family house.

The parallel calculation for industrial and commercial development works out to $16.02 a square foot - a 46% increase over the $10.97 the city determined it was eligible to collect in 2004. But staff are recommending that council continue to drastically discount the industrial charges, and only slowly phase-in the commercial charges.

The proposed new industrial charges will be $2.58 a square foot - only 16% of what could be collected. That means the taxpayer must pick up the remaining costs - in addition to anything that the provincial rules have already excluded from the calculations.

The proposed phase-in plan for the commercial sector means that the rates will actually go down by 22% from what they would otherwise have been on July 6. That's because the phase-in process that initially began in 2004 is now being re-started.

Instead of paying $16.02 a square foot, new commercial developments up to 5000 square feet will be charged $4.81. For larger developments, the rate for the second 5000 square feet will be $7.22 and any space over 10,000 would be charged at $9.62.

That compares to $6.18, $9.24 and $12.32 charges if the city hadn't found out they could raise the rates by 46%. The discounts mean a new 100,000 square foot superstore, such as Wal-Mart or Home Depot, would see DC savings of about $675,000.

The steep discounts for commercial and industrial development may mean a further exacerbation of the city's difficulties in paying to service 'shovel-ready' land for new businesses. City officials argue that the discounts are necessary to attract new growth, but a comment in the draft 2004 development charges report suggests this may be problematic:

"The consultant has stated that DC exemptions are not an effective incentive tool to attract development but DCs can be an inhibitor (i.e. areas with the highest DCs have the most industrial growth - this suggests that DCs are not a main factor in location decisions). The Industrial Business Park analysis conducted to date by the Planning and Development Dept concludes that the lack of a comprehensive, predictable and properly funded infrastructure servicing program for the City's industrial lands is a major contributing factor to our unusually weak rate performance in industrial development."

That advice was edited out of the final version of the 2004 report and nothing like it appears in the 2006 report. But the new report does warn that "any discount in rates given to industrial developments cannot be imposed on other types of developments." That is, what isn't collected from commercial and industrial growth, can't be charged to residential developers.

Provincial rules also exempt expansions of existing industrial businesses for up to 50 percent of their existing floor space. The proposed rate of $2.58 a square foot for new businesses will be slightly lower than Brantford 's and about half those charged in Guelph, Ottawa and Grimsby. Burlington's rates are over $8.00 a square foot and Oakville's about $11.00.

The phase-in of the residential development charges appears to be a response to demands by the Hamilton-Halton Home Builders Association (HHHBA). In a letter attached to the report, their president calls the increases "staggering" and says imposing them next month "does not provide for sufficient notice for new home purchasers to absorb".

The letter, dated May 26, specifically calls for the phase-in that is now being recommended by city staff. It also suggests that some reduction in the rates have also taken place since the HHHBA wrote their letter. That's indicated by a sentence stating that "the proposed increases . would see a single family home development charge increase from approximately $13,422 to $18,415 - a 37.2% increase." That's $800 per house more than the $17,415 now being recommended by staff.

Other changes to the development charges include the introduction of a $186 per unit fee to go towards the growth plans of GO Transit service. Up until now there has not been any charge for this, although the city is required to make a substantial contribution to GO expansion.

The report notes that "Hamilton's contribution [to GO] over the ten year period from 2006 to 2015 is approximately $13 million of which $3.8 million is recoverable from development charges." This is another example of the provincial restrictions that shift growth costs to existing taxpayers.

The report is available on the city's website at
http://www.myhamilton.ca/NR/rdonlyres/B19C152E-9C51-4071-9837-
2A7324F4A6B2/0/Jun21FCS06063DCBylaw04145AmendmentsandGODCBylaw.pdf.

It includes the letter from the HHHBA as well as critical comments from Don McLean, a citizen member of the city's Development Charges Stakeholder Committee.