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Researcher: Cutting development costs likely means higher taxes and not much else

Meanwhile, builders say Nickel City's reno market is hungry, while the appetite for new homes just isn't there
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home construction
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The debate over development charges (DSs) in Greater Sudbury may not dominate headlines like the new arena or casino, but an upcoming decision by city council on the future of the charges could have a major long-term impact on taxpayers.

And the public can have their say on what councillors should do at a public meeting today at 6 p.m. at Tom Davies Square. Here's some background on what DCs are, and what supporters and opponents have to say about them.

What are they?

In simple terms, DCs are added fees to construction projects aimed at paying for the infrastructure — water, sewer, etc. — needed to service the new development. The rationale is that it should be the people who will actually use the new infrastructure who should pay most of the costs. Otherwise, existing property taxpayers would have to pay for infrastructure used by other people.

Builders normally pay DCs when they take out building permits for construction, a cost passed to home buyers or people who rent the apartments or industrial/commercial building. Current rates are more than $17,700 for a single family home, $14,200 for semi-detached homes and $10,200 for each unit in an apartment building.

While DCs have been around for a long time, they soared in Greater Sudbury in 2010 under former Mayor John Rodriguez, when the fees increased from about $3,000 per single-family home to $13,800. The rate for apartments went from $1,800 per unit to $8,646.

Since 2010, new home construction has slowed in the city, with developers arguing the charges are a major factor driving customers away.

What the experts say

Adam Found is a researcher who prepared a report on DCs earlier this year for the Institute on Municipal Finance and Governance, a non-partisan think tank based in the Munk School of Global Affairs and Public Policy at the University of Toronto.

Found said the basic idea behind DCs is that, as a city grows, new infrastructure is needed to accommodate that growth. But it makes no sense to build a new water treatment plant just to serve existing residents – you build it larger than your current needs to accommodate future growth.

DCs are a way of spreading out those infrastructure costs over several years, Found said. As new development takes place, the city gains more revenue from DCs, which pays for the infrastructure. Parts of Maley Drive and the South End Rock Sewer Tunnel, for example, are to be funded by future DCs.

In his statistical analysis, he found that taxpayers in communities that don't use DCs end up paying a lot more in property taxes in the long term. In communities that average 1.5-per-cent growth, the tax bill would be as much as 30 per cent higher over 35 years.

“There's going to be scenarios that are not as bad as that, and scenarios that are worse than that, depending on the nature of the capital work and how fast the community is growing,” Found said. “But that gives you a flavour of what would happen if you didn't use development charges.”

When asked whether DCs discourage building of new homes, he said there's no evidence that's true. For cities experiencing slow growth over the long term, Found said it's on municipal leaders to be more “cautious” about building infrastructure, rather than pointing the finger at DCs.

“It probably means you would want to focus much more on just the essential projects, and then try to put off as much as possible the other types of projects until you do realize that growth,” he said.

When asked whether cutting the charges in half — as Greater Sudbury is considering — would lead more building, Found said he's unaware of any community that has successfully done so.

For example his community (Found is manager of corporate assets at the City of Kawartha Lakes) slashed DCs in 2009 after an economic downturn hammered local construction. 

“We did that, and construction actually went down — and went down considerably,” he said. “So we didn't notice any increase in growth at all.

“And DCs went up in 2015 dramatically and we've actually seen a boom since then,” he said. “If the predictions of the developers were correct, then you wouldn't have observed that here. It was the exact opposite, really, of what was what was predicted.” 

What it all means, Found said, is that overall economic conditions and demand for housing determine how much building there is, not DC rates. 

“It's a relatively minor factor when it comes to all the factors that must be considered by the developer – or homeowner, for that matter,” Found said. “That's not to say it's not a factor, it's just to say that it's a lot lower on the list.”

But by reducing or eliminating DCs, Found says cities are favouring future taxpayers by forcing existing ones to foot a much larger part of the infrastructure bill.

What the industry says

Karla Colasimone, president of the Sudbury and District Home Builders Association, said in an interview Monday the entire building industry in the city is hurting.

“We're hoping for some sort of relief,” Colasimone said. “It's a tough market.”

While Found said DCs are good for cities that are growing, Colasimone said despite low unemployment in Greater Sudbury and a (slowly) growing population, the cost of a new home is driving buyers away. 

Between the HST being added to the cost of a new home a few years ago and the astronomical rise in DC rates in the city, as much as $50,000 in new costs are added to each home. In real terms, she said it means the local renovation market is booming, because it's cheaper to buy older homes and renovate instead.

“People are choosing existing homes just to avoid the cost of building new,” Colasimone said. 

That has led to strong demand in the resale market, and renovation, plumbing and other home improvement companies are doing well. And the demand for apartments is also strong, as people avoid building new homes.
 
“If you talk to any of our suppliers — all of our kitchen people, our flooring people, plumbing warehouses, they are swamped with renovation work,” she said. “It's not a bad economy for renovation, but when you're just looking at the housing market as a whole, people just aren't moving.”

Reducing development charges, she said, would at least give local builders a chance to be competitive with the resale market. Any reduction would bring relief.
 
“I know a lot of people are saying scrap them all together, but I don't think that's realistic,” Colasimone said. “But any concessions they make would be beneficial because we could pass those savings along to our buyers.”

And in arguing for reducing the rates earlier this year, Mayor Brian Bigger said the actual amount collected in DCs is a small fraction of what was predicted by background studies.

One study estimated the city would collect $55 million in fees 10 years, but since 2010, only about half of what the city expected has actually been collected — $38 million compared to the $76 million forecast.

“Or about one per cent of our tax levy,” Bigger said. “That's what we're talking about.

“We need to strategically look at reducing development charges to attract investment to our community. Our community is not growing at the same rate as the GTA.”

Today's public meeting will be livestreamed beginning at 6 p.m. You can follow along at Sudbury.com.

And if you want even more information on DCs, here's the position of the Association of Municipalities of Ontario, and a staff report prepared for the May 2 city council meeting. 

A decision on DC rates is expected at the May 28 city meeting.




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