I assume / hope your readers follow Chuck Marohn at Strong Towns. Part of his thesis is that big developers are just churning out a product that sells, so they can bundle and flip to MBS dealers on wall street. Instead good, fine-grained urbanism that we’d all like to live near and walk past is built by many individuals over time. Chris Leinberger has some good work on the 19 securitisable types of real-estate.

I think many would like Vancouver’s tax base to be built from many small projects, whose ongoing property tax revenue is sufficient to sustainably fund our amenities.

Instead we seem to have a handful of large developers who make big one-off contributions – in a non-transparent way (are they paying enough? by what metrics?) – to upzone. This often pits large developer (wants short-term profit) and city (wants short-term contribution) against the community (wants long-term nice place to live / walk past).

In my opinion, a transparent form-based code (zoning by transect; quick & cheap – i.e. same-day & <$1000 – approval for development proposals that meet code) would be a big help in this. Community plans are too wordy (lets see a 3D model on the web of the whole area today, and as permitted) and often too ambiguous.

On balance, transparency by municipalities is a desireable outcome. It is not the present situation.

But I would point some questions to the municipal accountants who should not be able, at a stroke of a pen, to comingle DCC funds on paper with taxation income.

If not, as cities, we are merely behaving as if the DCC is a medieval “indulgence”. And in doing so, there is no across-the-board consistency.

I think the developers have a reasonable point to make.
-30-

Lewis, CACs are not the cause of high housing prices. That’s completely false.

Telling the “full story” of the economic or political side of Community Amenity “Contributions” (CAC) risks upsetting a hugely overloaded apple cart, and I am certainly glad I didn’t start this conversation. Nor will I finish it. Thank you, Frances.

Let’s first be clear that outside of Vancouver, and maybe a few wannabe neighbouring municipalities, no other cities on earth have a formalized development “tax” keyed to land lift. I call it a tax, because there is an explicit–albeit not transparent–formula of some 80% of the increase in “land life” or project value from a rezoning. Said tax and value are of course subject to “negotiation,” which is code for the applied discretion of City staff. Many attempts at forensic audits of these payments show extremely high variability in the implied tax rate.

Of course, we cannot call this a “tax,” as it would be illegal under Common Law, federal and provincial tax legislation, and the Vancouver Charter. It is a of course a voluntary “donation.”

But let’s leave tax lawyers out of it and be clear from an economist’s perspective just what is occurring. Most development taxes are proportional, fee-based payments related singularly and linearly to the square footage built, i.e. Development Cost Levies (DCLs, or DCCs in other jurisdictions). These often vary by geographic area or zoning within a city, but they are predictable and directly proportional to the size of the development and thus the sale or lease value of the building.

Predictability is key, as the functioning of a free market depends upon it. All market players face the same costs and thus compete on level ground. Such fees are priced both into the value of land and land-with-improvements. Every city has also a different rate, in part as a means of competing for development, paying for infrastructure, encouraging growth, and building amenities.

Now imagine another form of development tax, a form of ad valorem “windfall profits” scheme, that applies a variable, negotiated rate to the imputed profit from a range of development outcomes. The CAC is just such a squirrelly beast, and like a squirrel it goes many places you might not like.

A developer prices and buys a building lot with exactly no idea what may be allowed to be built there, nor how long it will take to secure permission. Uncertainty #1. And please note that Zoning Bylaws, District Schedules, Design Guidelines, lot-specific Regional Growth Strategies, Regional Context Statements, Official Development Plans, and Community Plans are ALL of little or no help. They are ALL “guidelines.” A CD-1 rezoning is highly unpredictable, highly political, and highly variable in outcome, at least for most developers.

And then there is Uncertainty #2. Assuming a developer gets City Staff and Council majority support for what he or she wants for building use, type, style, height, and square footage, what’s due?

Well, that depends. It depends upon how much was paid for the land and how long it’s been held, the agreed cost of construction (including contractual, scheduling, and geotechnical uncertainties), the assumed unit sales prices and net present value of lease payments, and even the financial risk assessment that prices the cost of capital to fund the construction. So, the developer must now start meeting with the City Real Estate Department, BEFORE a building is even proposed, to negotiate some hypothetical profits tax based on so much uncertainty that anyone’s head would spin.

The bottom line of course is that the development will not proceed and no CAC at all (or even the proportional fees, DCLs) will be collected by the City if no deal is struck. And the more apparent market value created and the higher the project leverage or risk, the more “tax” is assessed. The City’s incentives are to push the envelope on size and profitability (and thus the imputed land value lift), and the developer’s entry and carrying costs are so high that they must be spread over more saleable yield despite the exponentially higher risk.

In the academic world of objective decision analysis, this situation goes by a name that cannot be published, and goes by the acronym CF.

The outcome of such extreme market uncertainty to any economist is clear: extremely high fixed costs, high barriers to entry, and highly variable and temporally volatile returns. This looks almost exactly like the mining industry, and perhaps this is no surprise given where we are.

But the highest cost is not in extreme market distortion (high land values) or economic inefficiency (high development costs), but it is political. The “free market” does not run this system, but rather political influence. No “democratic” model of governance can survive an economic system that rewards only the deepest pockets with huge reserves of capital AND political influence, and punishes everyone else.

This development system has to go, and we can look ALL over the world to find a better one. One new acronym: TIF. Not perfect, but much better.

The problem with Community Amenity Contributions (CACs) is that they result from an adhoc process of negotiation and therefore represent the sale of zoning. It like a Persian Market. The City only can make money from developers when they rezone. If the developer is held to the zoning bylaw no amenity payment is required.

The City makes money by selling extra height or density or use to the developer i.e. by departing from its own regulations. The burden of the development is transferred to the neighbours whose properties are either overshadowed or affected in some other way. The affected neighbours are the ones who should be compensated – not the city. The amenity contribution does not even have to benefit those neighbours.

This is completely different from development cost charges.

Jonathan Baker

@neil21 // Jul 25, 2013 at 9:30 am #1

I disagree with the idea of models as they don’t fuly compare with a street level view, in the pouring rain on an adjacent sidewalk.
Lets require quick frame scaffold and balloon skin full sized “models” so we can get a better view.
It has been done in the area for several storey residences sometimes.

And re: your reference to Charles Marohn of the Minnesota planning mafia
The blog is called Strong Towns Journal
http://www.strongtowns.org/journal/
(Statement of mission link: strongtowns.org/quantifying-strong-towns )

And while we are on about outside reading

I see that “Rebel Cities” (2012), “Paris, Capital, Of Modernity” (2003), “Social Justice and the City” (1973, revised 2009) and “Critical Reader” (2006) among others by David Harvey are downloadable as TXT or PDF files free at ScribD.com (You might trade, and upload random city council memo PDFs for download “credit”)

What a mess of a merry-go-round.

Here we have developers, on one hand, saying that they need predictability and surety in order to figure out fixed costs for their projects. Is it really them alone who push up the FSR’s? On the other hand, don’t many of them also buy locations looking for that much valued change in zoning (from city halls, everywhere)?

Civic governments, then use unpredictabilty (so throw out all those Neighbourhood Plans, people!) in order to ratchet up the ‘donations’ they can get from developers to add to their general revenues (and pet projects, that they then claim THEY have built!). Tony Soprano would be so proud.

Who loses?

The taxpayers, who always sit outside the glassed walls of City Planning/Development and have nary a real say in final outcomes.

The same people who must deal with higher housing costs, and density numbers that seems to change from definition to defintion (or changes due to the current revenue needs at City Hall) . The same people who have no assurance that monies from develoments in their neighbourhood will provide them any attributable, site specific ammenities.

Here’s a solution: build surety into the system. Put on your big boy/girl pants and DESIGN this city, according to best practices in mixed housing (heights and density) and how they could could accomodate neighbourhoods—and vice versa. Have a 50 year plan for ‘gentle’ upgrowth/rezoning. But don’t piddle this opportunity away.

The fact that we seem to be throwing up buildings willy nilly (height,/density/unit size) lead me to several conclusions: we are in panic mode with regards to civic revenue, so let’s latch on to all the investor money we can grab so as to stay afloat in the short -term ( and of no use as long term strategy). AND that we have absolutley NO CLUE about affordability or jobs for people who would LIKE to pay thier taxes into their communities.

(On the revenues side: I want our civic and provincial governements to push the Feds into ensuring that everyone who has a property here AND enjoys the benefits of our health and education system are required to contribute some of their world wide income to the national income tax base—not just the local property tax base. And for those who are only part-timers here from outside Canada, or who hold property only as investments, I think a property tax of 3-5x thegoing rate would be fair. Or, if you are a non-resident, but hold a property, that you pay capital gains when you go to sell the property. Done in many other places—hello, Scottsdale, Palm Springs, etc, so no whining that we al merrily use others systems the way people use ours).

Decide on zoning designations, NOW. This will give us all an opportunity to know what could be coming down and possibly (ha) end property speculation that helps drive up prices/’CAC’ in the long term.

Instead of these STIR cookie cutter tower monstrosities that sprout up like nuclear mushrooms on steroids throughout the city, creating upset and constantly pitting neighbourhoods against planning/politicians/developers, create the conditions where neighbourhoods see and participate in LOGICAL plans that show–in advance–the possibilities.

There MUST be mixed housing types—even at the transit hubs/intersections which are now being used more as an excuse to build UP rather than as a reason to build BETTER.

Now back to your original q, Frances.

I don’t mind if the ‘contributions” a developer gives to CoV is announced.

But not before my name as a taxpayer goes on a burnished plaque on a patch of sidewalk, or politicians stop implying that the taxpayer money they use comes from them!

If it was true that CACs were being passed on to homebuyers, then final sale prices of units should be equal between projects that were rezoned and paid a CAC versus projects that were built under current zoning and did not pay a CAC. I can tell you that there is no price difference between those two types of projects. Both projects will charge market averages largely based on location and level of finish.

@Randy Chatterjee,

I really appreciate your very thorough expose of what happens at the developer level and the inner workings at Planning/City Hall with regards to this cluster pluck.

The politicians are of course both afraid and contemptuous of process—and always seemingly on the lookout for friendly contributors they can shake dow…er…encourage for ‘more’.

It is a ridiculous process all way round and costs the economy in every single way.

I agree, maybe if the public was a little bit more aware of just how much development fees pay for, they would be a little less inclined towards severe nimbyism.

To add a twist to the conversation there is an ideology of laissez-fair lying thinly veiled behind the CD-1 re-zonings.

By taking the planning process, and the community vision and voice, effectively off the table the industry gets to do pretty much what they want.

Some propose it as unfettered capitalism.

Interesting this issue is coming up now. In normal times these costs are simply passed on to the buyers. But today, with all objective measures showing prices well beyond the average buyer, and a dwindling number of speculators anxious to take up the slack, developers are going to have to absorb more of the cost.
If they are losing money they could always stop development. But the City, needing development revenue almost as much as the developers, does not want that. So, despite a stagnant economy, we must urgently continue to build and must urgently go bigger and higher.
I wonder how an economist who thinks in terms of incentives would view this. It seems to me the incentive to the City is to go as big as possible. That way, with the CAC revenue, they can appear to be doing great things and Councillor Reimer can tweet to her followers how much social good they are creating.
I’ll make an outrageous prediction that within a decade thousands of the condos (in reality, lightly regulated derivative investments) being built today will be picked up at huge discounts by vulture funds. They will then hit the rental market creating a glut of rental properties.

Oh those poor, poor unappreciated developers. My heart bleeds for them. By tossing a some extra dough the City’s way, they basically get carte-blanche to build whatever they want wherever they want regardless of neighborhood wants and needs.

We already have a shining monument to the development industry. His name is Gregor Robertson.

…the City, needing development revenue almost as much as the developers, does not want that. So, despite a stagnant economy, we must urgently continue to build and must urgently go bigger and higher.

PW 23

I find this to be PWs more telling statement. Earlier today I was having a chat with two other people replying on this thread about just this point.

We were recalling for each other how the largest and most ostentatious buildings always seem to come just before the market crashes. The Chrysler Building in NYC before the 1929 crash; and the Marine building in our city, more or less an exact contemporary. Paid for in cash if memory serves—Major Matthews reprints a letter from the architects specifying this and other facts on that last piece of urban fabric to go before the bottom fell out.

Of course, these are also signs writ large all over the globe that we are changing paradigm from the megastructure dominated (and benefiting) by the very circumscribed few, back to the vernacular that can be built and enjoyed by everyone.

The objects of permanence we are striving to build are not the buildings in themselves, authored by the few, but rather the neighbourhoods and public places accented to by the community as a whole, and sites of true and meaningful human interactions.

PS

More and more I am reading our blog hosts slowing down in the pace of posting stories about the city as the mask coming down to reveal—somewhat to our surprise—that even she has been taken aback by the failure of the Gregor Robertson regime to live up to its hype.