Letter from Invictus Commercial Investment Corp. (Doug Foord)
Feedback on the CAC policy, supporting target rates but warning that uncertainty in 'lift' options deter developers.
Town Of View Royal 45 View Royal Ave. Victoria, BC V9B 1A6
July 8, 2019
Dear Mayor and Council:
Thank you for the opportunity to offer our opinions regarding “Community Amenity Contributions.”
We support the concept of setting target rates and would like to suggest a lower (incentive) rate for rental over market condos.
The notion that developers receive large profits on any deal is a myth. In many cases, developers lose money. There are so many variables at play. We conduct a tremendous amount of due diligence to determine the level of risk and potential profit. Many of the risks are definable, and to some extent quantifiable, however, some are simply not.
Not only is there a risk in terms of whether a property can be rezoned, but also what the rezoning will allow. As pointed out by Council, the Neighbourhood Plans and OCP provide only a guideline of what the neighbourhood will accept and do not necessarily reflect the current vision of Council.
The inability to know what the Council will decide in advance creates a substantial level of risk. Also, the timing of the potential rezoning is also undetermined. A developer must provide a significant array of information, including drawings, studies, and reports along with the application to staff. The cost of these required items can exceed $100,000. These funds are totally at risk as a developer does not know beforehand if the rezoning will even be approved.
Adding a target rate to CACs will assist developers in quantifying the total costs. The requirement of a land lift analysis (the analysis being another developer cost) and a payment of 50% of net property value gain provides further uncertainty for the developer and does not reflect the fact that he is taking all the risk.
In making the decision, we would ask Council to reflect on the communications released by the Ministry of Community, Sport and Cultural Development as it would appear considerable thought was given to the to the policy for Community Amenity Contributions to provide insight as to what the CAC was created for as well as recommended practices:
Extracts from the Guide:
- Since CACs increase the cost of a project, it is important to consider who ultimately pays for these additional costs, and how they affect the housing supply and housing prices. As developers, we must create a minimum 15% profit to justify the risk. That is not reduced by these additional costs, which is inevitably passed on to the tenant or purchaser.
- Be aware of how CACs could impact projects and their viability, to avoid contributing to higher housing prices.
- Ensure CACs are proportional to the impact of the development and consistent with the CACs made by other applicants/developers. All developers should be treated equally and should, therefore, pay a similar amount per unit.
- Adopt an “affordability by design” approach to writing zoning bylaw.
- Use density bonus zoning – modest levels of density bonus tied to modest contributions, encourage new development while minimizing the impact on housing affordability.
- Set targets for CACs – and be open to negotiation at the time of zoning. These targets should be modest to minimize the impact on housing affordability.
- Negotiating CACs based on “lift” approach is inconsistent with the principals set out in the Guide, and is the approach most likely to reduce the supply of developable land and housing, thereby contributing to higher costs.
Choosing a Strategy for Obtaining Amenities
Overall, it is recommended that local governments make density bonus zoning their starting point when seeking amenities and affordable housing….
Where “pre-zoning” land with density bonus may not be practical, local governments are encouraged to set targets for CACs, and be open at the time of rezoning.
Negotiating CACs based on “lift” approach is inconsistent with the principals set out in the Guide. These principals support an approach that clearly identifies community needs and the impacts associated with new development, and links the CAC not to the “lift” in land value, but rather to the cost of providing a package of amenities that makes sense given the development being proposed.
For your convenience, we have positioned “Part 4” of the Guide regarding affordability at the end of this letter.
In summary, it is our opinion that the CACs should be negotiated and set by target rate as well as form part of the Development Permit. It would not have to be registered against the property in any way. It would be subject to receiving and payable for the Building Permit. It is paid to the Municipality for their discretionary use or if the developer provides the amenity/amenities in a Bond or LC. The agreed amount would be determined and held by the Municipality and drawn down as the amenities are provided. This too can be negotiated at the time.
The carrying cost of the CACs will contribute to the overall cost inevitably borne by the tenant or purchaser so the payment should come as late in the process as possible.
The targeted amount of the CACs should not be determined by what other Municipalities are charging rather by how much new development is desired in the Municipality. It can differ by neighbourhood depending on the amenities required in that particular neighbourhood.
The combined cost of CACs and DCCs are a major factor in determining what community a developer wishes to invest in.
The uncertainty of the “lift” option will be a deterrent to developers.
Again, thank you for the opportunity to express our opinions, thoughts, and concerns.
Kind regards,
DOUG FOORD PRESIDENT / CEO Invictus Commercial Investment Corp. Real Estate Development Division
Part 4: CACs and Housing Affordability
Local government plans, regulations, and policies can have a significant impact on housing prices because they affect the supply of developable land, as well as the cost of developing that land. Understanding potential impacts allows local governments to make informed choices, including how and when to try and secure CACs.
Progress on Housing Affordability Requires a Focus on Supply
Fundamentally, actions that expand the supply of housing units will help keep housing costs down, while actions that restrict supply will contribute to higher prices. In other words, if there is a lot of housing available then buyers are in a relatively strong position, and prices go down, but where the demand is greater than the supply, there is more competition and prices go up.
Local governments make a major contribution to ensuring a diverse and ample housing supply by adopting regional and community plans that identify housing needs and designate adequate locations to accommodate anticipated demands. As outlined earlier, a variety of zoning measures can also help increase supply, as can incentives such as fast-tracking development approvals.
Local government processes and requirements also affect the actual cost of producing housing. Since CACs increase the cost of a project, it is important to consider who ultimately pays for these additional costs, and how they may affect housing supply and, ultimately, housing prices. This issue is of particular concern in areas where land is in short supply.
Who Ultimately Pays for CACs?
It is commonly assumed that when a developer agrees to provide CACs, the cost is borne by the developer, or they deduct the amount from what they would have paid for the land. In other words, CACs reduce the developer’s return on their investment or the land owner’s profit but do not affect the cost of housing. This assumption is worth a closer look.
Are CACs Likely to Reduce Developer Profit?
A common assumption is that, if a local government obtains CACs from a developer, it simply reduces the return on the investment made by the developer. Real estate market economists and historical evidence indicate that this is unlikely. The cost of development has increased significantly over time, with increases in the cost of land, materials, labour, DCCs, etc. There is no evidence to show that such cost increases have reduced developer profits. In fact, developer profit margins have remained remarkably stable over time.
To the extent that developer profits vary, they are primarily affected by the business cycle. Developers make more money when markets are vibrant, mainly because they sell more units in a good market. They make less money when markets are slow, but again, this is mainly because they sell fewer units in those conditions. The reality is that developers and their financial backers only pursue projects if they feel that they can achieve their expected return on investment, which for a typical project is around 15 percent.
It is more logical to assume that if CACs reduce a developer’s expected return by a significant amount, they would either decide not to undertake a project or would not be able to find investors for the project. The concern with this outcome is that fewer projects/new housing will be built in the community, which in turn will put upwards pressure on housing prices.
Are CACs Likely to Reduce Land Owner Profit?
Developers know that they cannot simply raise their asking prices when faced with additional costs; that the selling price is set by the market. They also know that the costs of labour, materials, DCCs, return on investment, etc. are also fixed. Therefore, a developer faced with increased costs, such as CACs, will try and find savings in the cost of land, offering less than they would have otherwise.
Where there is a healthy supply of land available for development, it is more likely that the developer will find an owner willing to accept the lower price. However, where the supply of developable land is limited, as in B.C.’s growing urban areas, land owners are in a strong bargaining position and are less likely to accept a significantly lower price. Faced with significantly lower bids, the more likely result is that fewer land owners will be willing to sell. As with the above, the concern is that fewer projects will proceed, new housing units will not satisfy demands, and this will put upwards pressure on housing prices.
While CACs cannot directly increase the price of housing for a particular development, if they are widely used, CACs can push up prices in the overall market.
The amount of the CAC requested is paramount. If the value of CACs adds a relatively small amount to the cost of a project, the CACs may push the price of land down slightly and/or the developer might take slightly less profit, but the CAC amount is unlikely to prevent the project from:
- Initial market price for land -> Developer buys and builds -> Developer bids for land -> Housing supply meets demand -> Market prices remain stable
- CACs -> Developer LOWERS bid for land -> Initial market price for land -> Reduces land owner incentive/ willingness to sell -> Housing supply does NOT meet demand -> Market prices INCREASE -> Fewer units built
Community Amenity Contributions: 16 Ministry of Community, Sport Balancing Community Planning, Public and Cultural Development Benefits and Housing Affordability proceeding. Alternatively, when the value of CACs is significant, it is more likely that the project would not proceed, and that the result will be upwards pressure on housing prices.
Land Owner Incentive to Sell is an Important Consideration
Developers often do not own the land they want to develop. They often have to purchase the property, and in many cases have to assemble a number of independently-owned parcels. Their ability to proceed with projects depends on whether land owners see it in their best interests to sell their property, and this will vary from person to person.
Consider two contrasting scenarios:
A. A vacant, low-density commercial site, where the owners are known to be motivated to sell or redevelop. CACs may not present an obstacle to the owner redeveloping the site themselves or selling the land to a developer.
B. An established residential area, with homeowners who are reluctant to sell and relocate their families, but where the community plan calls for higher density. A developer trying to assemble land in these circumstances would likely have to pay a premium to convince owners to sell. The developer would be less able to provide CACs, without jeopardizing the viability of the proposed development.
This suggests that an “across the board” approach to CACs is more likely to be problematic, at least in some parts of the community, and local governments should be flexible in their approach and in any policies, they establish related to contributions.
Some local governments have developed information on CACs for land owners and developers to increase awareness that CACs are likely to affect land values and to help them understand the rationale behind their CAC policies.
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