Downtown building fee exemptions cost the city over $11 million last year – more than ten times the usual cost of these growth subsidies and greater than the normal annual total across the entire city. This unusually large hit comes as the city begins to gradually reduce these exemptions in order to finance promised infrastructure for greenfield subdivisions.
Current city policies exempt downtown construction from 85 percent of the development charges that are applied across the rest of the city. The justification has been both to encourage downtown redevelopment and to acknowledge that actual growth costs are much lower where roads, pipes and other city services are already in place.
The discount cost the city a cumulative total of just over $7 million in the nine years ending in 2013, but then ballooned last year to $11,095,535 according to a report provided to councillors last week. That included $6.5 million to Darko Vranich’s condo project that is reusing part of the former federal building and the adjacent property on Main Street West. Another $2.6 million discount went to the McMaster Children’s Health Centre on Wellington North, and nearly one million to Jackson Street apartments at 137-149 Main West.
There are numerous other council-approved discounts to the growth fees that the city is entitled to charge under provincial legislation. Such subsidies add up to around $10 million a year with close to half of that usually the result of the 55% reduction for industrial development.
The resulting losses to the water and sewer budget have been added to water rates for several years, but those affecting roads and other infrastructure have been either covered by borrowing or by delaying projects. This year’s capital budget was the first one to start charging these losses directly to taxpayers with $1 million earmarked “to repay development charge reserves to compensate for exemptions”. The ten-year capital budget projects this payment will climb a million dollars a year until it hits $6 million by 2020 “to ensure that the development charge reserves continue to be sustainable.”
A decision last June to reduce the steep discounts in the downtown by 5 percent a year (bringing the subsidy to 70% by 2018) led councillors to ask staff for a report “providing the rationale for the recommended reduction” which was delivered to the Audit and Finance committee this week. It defends the gradual change.
“Exemptions place pressure on the overall property tax base and rate base on existing property owners/ratepayers by requiring foregone growth revenues (DC’s) to be replaced by levy and rate funding sources,” it notes. “Increased demand and the resultant increased multi-residential unit prices in the downtown have partially offset the need for the DC exemption.”
The report points to an increase in condo prices from $300 a square foot in 2011 to over $400 today as providing “an increased ability for developers to earn a fair rate of return on their investment with a reduced DC exemption.” The $11 million discount last year supported 658 residential units and 225,000 square feet of commercial development.
Four years ago councillors were advised to use an alternative approach that would set larger development charges for greenfield areas where the vast majority of new infrastructure is being built. Advocated by acclaimed planner Pamela Blais and already in place in some other municipalities like Ottawa and Waterloo Region, the approach matches actual growth costs in different areas with the amount the city has to spend to accommodate development there.
In her acclaimed book “Perverse Cities”, Blais argues that sprawl occurs mainly because of subsidies such as DCs that make it more financially attractive despite the higher costs it imposes on cities. Former councillor Brian McHattie invited Blais to speak to his colleagues and pushed for adoption of her recommendations.
“We shouldn’t have a zero DC plan downtown, but in fact the amount that people pay should be calculated on the services that they require throughout the city,” McHattie argued. “The further you go away from the core, from the downtown which has all the existing services – transit, all the pipes and the garbage pickup, all that sort of thing – the further you go out the more developers should pay for development charges just based on the increased city services, increased city costs.”
That appeared to have staff support, but when DC rates were revised last year, developers successfully argued that the city couldn’t justify such a shift without first completing detailed studies. The threat of an OMB challenge led staff to back down on the change, and left the city with the same DC rate across Hamilton, and a continuation of the downtown discounts that are now proving to be very costly.
Pressure from developers also convinced council to delay growth fee increases – a move expected to cost about $7 million.