THE DEVELOPER : Looking beyond development fees for revenue

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By Scott McLellan
Plaza Corporation

Development charges in the City of Toronto are increasing again and while that’s unwelcome news for builders, it’s even worse news for homebuyers. Over the next three years, the fees will increase by a whopping 85 per cent. Let’s take the example of a two-bedroom condo suite in the downtown core. In the City of Toronto, we are currently paying $25,366 in development charges on that type of unit. For projects that don’t have an above-grade permit by November 1 of this year, fees on that unit will rise to $36,165. By November 1, 2019, they will hit $42,644 and reach just under $47,000 as of November 1, 2020.

This is concerning for homebuyers. Let’s say a purchaser signed an Agreement of Purchase and Sale earlier this year and was aware that their development charges were $25,366. Two and a half years from now, and depending on the status of the above grade permit, those fees will be approximately $21,000 higher – and we all know it takes several years for condo projects to be built. Depending on how the Agreement of Purchase and Sale is worded, the builder can pass on those increased fees to the purchaser.

Think of how this will affect the first-time buyers who have these higher costs passed on to them. They are already grappling with new stress tests to qualify for mortgages. These added fees could slow the real estate market significantly. And it’s only going to exacerbate the affordability problem, as real estate prices continue to rise.

Young families who are not in a position to buy single-family homes have been turning to two-bedroom or three-bedroom condos as an alternative. But with development charge increases pushing the costs of condo ownership higher, they will be hard-pressed to afford units suitable for raising their children. This is a huge market segment that will be negatively impacted by the increases.

If people can’t afford to buy, where are they going to live? Renting also poses challenges. The Toronto Census Metropolitan Area (CMA) vacancy rate is just 1 per cent, rents are rising and there is low supply and high demand. Purpose-built rental buildings aren’t economically viable for developers to build, and the fee increase will make them even less viable.

What can we, as builders, do in the face of the hefty development charge increases? The first thing I suggest is to do everything you can to get your above-grade permits before November 1 this year to protect purchasers. What Plaza is doing is capping the rate and incorporating the fee increases into our pro formas. This means the initial purchase price of our new condo units will be higher, but there will be no unpleasant shock in store for our purchasers down the road. Real estate lawyers should also be giving a heads-up to their clients about the coming increases so buyers will be prepared.

With housing affordability a serious issue in Toronto, hefty fee increases such as these are only adding to the problem. Perhaps it’s time to look at other sources of revenue to help fund the city’s infrastructure – such as increasing taxes on commercial buildings – to take some of the burden off residential development, as ultimately, it’s the homebuyer who pays the price.

Scott McLellan is senior vice president of Plaza Corporation.
http://www.pureplaza.com/