HomeMy WebLinkAboutFIN-20-054 - Development Charge & Community Benefit Charge UpdateREPORT TO: Finance and Corporate Services Committee
DATE OF MEETING: August31, 2020
SUBMITTED BY: Ryan Hagey, Director of Financial Planning, 519-741-2200 x 7353
PREPARED BY: Ryan Hagey, Director of Financial Planning, 519-741-2200 x 7353
WARD (S) INVOLVED: All
DATE OF REPORT:July 24, 2020
REPORT NO.: FIN-20-054
SUBJECT: Development Charge(DC) & Community Benefit Charge (CBC) Update
___________________________________________________________________________
RECOMMENDATION:
That financial policy FIN-PLA-XXXX “Development Charge Interest” be approved,
including an annual interest rate of Prime + 2% for:
Development Charge Rate Freezes
Development Charge Deferrals related to institutional and rental housing
development; and
That no interest be charged for Development Charge Deferrals related to non-profit
housing development.
BACKGROUND:
As part of the More Homes More Choices Act(Bill 108),the Plan to Build Ontario Together Act
(Bill 138),and the COVID-19 Economic Recovery Act(Bill 197),the Provincial government
enactedchanges to existing development legislation including the Development Charges Act,
and introduced new development legislation by creating a Community Benefits Charge.
Amongst other changes, the new legislation included two new provisions allowingdevelopers
tomodify their typicaldevelopment charges. The new provisions allow qualifying
developments to:
Freeze development chargeratesthrough the development process(section 26.2)
Defer development chargepaymentsover multiple years (section 26.1)
The new legislation also allows municipalities to charge interest when either of these
provisions is employed.
The purpose of this reportis to briefly outline the changes to the Development Charges Act
and introduce the proposed policy related to development charge interest.
REPORT:
1)Overview of Development Charges Act Changes
The end result of the multiple pieces of development legislation appears to be generally
positivefor municipalities.Changes proposed in earlier Bills would have been very costly to
municipalities and stifled growth, but the results of Bill 197 should allow municipalities to continue
growing and providing services to new residents. Some highlights of Bill 197 are provided below.
*** This information is available in accessible formats upon request. ***
Please call 519-741-2345 or TTY 1-866-969-9994 for assistance.
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Two-Year Transition
Any of the changes noted in the report below have a two-year transition windowfrom the point
of proclamation (Bill 197 has not yet been proclaimed). This is longer than the original one-year
window included in aprevious Bill, which is good news for municipalities since the number of
consultants that do this sort of work is very limited (Hemson Consulting Ltd. and Watson &
Associates account for the vast majority of DC studies completed by consultants).
Removal of the 10% Discount for “Soft” Services
Under previous legislation, “soft” services like recreation and parks had a mandatory 10%
reduction, meaning at least 10% of a new recreation facility had to be funded by the municipality
instead of development charges. Bill 197 removes this mandatory reduction and says that if a
service is DC eligible, the growth-related costs can be 100% funded by DCs. That means that
a new $30M recreation facility could be fully funded by DCs, instead of $3M (10% of the total
cost) needing to be funded by the municipality (typically through property taxes).
List of DC Eligible Services
The list of DC eligible services has changed multiple times through the different Provincial Bills.
The DC eligible services approvedin Bill 197 includes:
Services EmployedServices Not Employed
by Kitchenerby Kitchener
WaterElectrical Power
SanitaryToronto-York Subway
StormwaterTransit
Roads & RelatedWaste Diversion
Fire ProtectionPolicing
LibrariesAmbulance
Parks & RecreationLong-Term Care
Other Services (e.g. Studies)Public Health
Child Care & Early Years
Housing
Provincial Offences Act
Emergency Preparedness
Airports
It should be noted that Parking and Cemeteriesare currently included in Kitchener’s current DC
bylaw, butare no longer eligible services under Bill 197. The City can still collect for these
services under its current bylaw, but will have to deal with them differently in the future.
Community Benefits Charge(CBC)
If the City would still like to collect funds for growth related costs related toParking and
Cemeteries, it could be done through a CBC. The CBC legislation has changed significantly
through the various Bills, but highlights of CBCs as of Bill 197 CBCs are provided below:
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CBCs are a land value based charge and used to fund growth related capital costs
o Previously proposed amount was 10% of land value for lower-tier municipalities
CBCs are only charged to apartment buildings
o Defined as buildings with at least 10units and at least five storeys
CBCs can be used to pay for DC-eligible services,parkland acquisition, as well as other
recreation purposes, provided thecapital costs funded fromCBCs are not also funded
from DCs or Parkland Dedication
o No “double dipping”
Parkland Dedication
Bill 197 reintroduces a provision to calculate an alternative parkland dedication fees based on
the density of a development which was removed in an earlier Bill. This provision is currently
used by the City, so having it reintroduced is seen positively by the City.
2)Proposed PolicyRelated to Development Charge Interest
Under the new legislation,qualifying developments can freeze DC rates and/or defer DC
payments (both of theseare described more thoroughly later in this report).These two
provisions create more certainty for the developer about the amount of DCs thatwill be paidand
also spread out the timing of DC payments over multiple years. These two provisions are
beneficial to developerswho gain increased cost certainty and improved cash flows to aid in
their development, but detrimental to municipalities who use DCs to fund growth related
municipal capital projects.To help offset the negative impacts on municipal DCcash flows
caused by the items noted above, municipalities are permitted to charge interest on frozen or
deferred DC payments.
A Regional Approach: Prime + 2%
To ensure better consistency of approach and information amongst regional municipalities, and
thereby abetter customer experience for developers operating across the region, aregional
working group wasstruck which includes representation from all eight regional municipalities.
One of the primary topics discussed by the working group was interest rates for delayed DC
payments.
The working group agreed that for DC freezes and deferrals, all municipalities wouldpropose
the prime interest rate+ 2%. Theprime interest rate is a publicly available figureon the Bank of
Canada’s website and is determined by an independent third party, somewhat similar to CPI
inflation.And much like CPI inflation, the prime interest rate will fluctuate over time, based on
economic conditions. When times are good, the cost of borrowing will be higher than when the
economy is struggling. A premium of 2% on top of the prime interest rate is proposed to cover
an element of risk in the development process and tooffset interest rate fluctuations over the
course of a freeze/deferral.
One of the goals of new legislation is to provide cost certainty to the developer. In order to help
achieve this, the interest rate will be fixed at the appropriate time in the development process.
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The new legislation allows a developer to opt out of freezing/deferring DCs, so they have full
flexibility to choose the option that makes the most sense for their particular development.
DC Rate Freeze(DC Act Section 26.2)
Under the City’s current DC bylaw, the amount of DCs payable was calculated at the same
time DCs were paid, which was most commonly at the time of building permit issuance. So if a
developerwere getting a building permit in June 2022,theywould be charged the DC rate in
effect at June 2022.
Under the new legislation, the amount of DCspayable will be calculated based on the rates in
effect at the time of various Planning applications (e.g. site plan, zoning). The DC payment will
not actually be paid until later in the development process (typically at the time ofbuilding
permit issuance, but it could be a later date as outlined in the next section of this report).Any
“frozen” DC rate wouldalso be charged an interest rate of Prime +2% per year if the attached
policy is approved by Council. So if a developerwere getting a building permit in June 2022
but submitted a complete Planning application in June 2020, theywould be charged the DC
rate in effect at June 2020 plus interest.
DC Payment Deferral(DC Act Section 26.1)
As noted in the previous section of the report, DCs have typically been payable at time of building
permit issuance. Under the new legislation this will remain the case for mosttypes of
development, although it also allows certain types of development to defer their DC payments
over multiple years.A qualifying development would be allowed to instead make DC instalment
payments starting at occupancy with future annual instalment payments coming on the
anniversary date of the first payment.
Rental housing (that is not non-profit)and insitutional development areable to defer their
payments over 5 annual instalments beyond their first payment. The proposed policy includes
an interest charge of Prime + 2% for these deferred payments. An example calculation is shown
below for illustrative purposes.
Example of DC Deferred Payment Schedule
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Non-profit housing development (aka affordable housing) is able to defer their payments over
20 annual instalments beyond their first payment. In an effort to support the City’s Affordable
Housing Strategy, staff are proposing that no interest be charged for these deferred payments.
This policy decision will reduce the financial hurdles for affordable housing developers as they
will be able to spread one oftheir upfront costs (development charges) outover 20 years, interest
free.This will result in less revenue being paid into the City’s DC reserve over time, but staff
believe the relativley minor cost to the City is worth it to incent affordable housingdevelopment.
ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN:
The recommendation of this report supports the achievement of the city's strategic vision
through the delivery of core service.
FINANCIAL IMPLICATIONS:
Overall, the legislative changes from Bill 197 should have a positive effect on City finances,
primarily due to the removal of the mandatory 10% reduction to “soft service” areas like parks
and recreation facilities. Somewhat offsetting this, deferred DC payments will mean reduced
DC cash flows to the Citywhich could potentially delay the timing of some of the City’s growth
related capital projects that require funding to proceed.
COMMUNITY ENGAGEMENT:
INFORM – This report has been posted to the City’s website with the agenda in advance of the
council / committee meeting.
ACKNOWLEDGED BY: Jonathan Lautenbach, Chief Financial Officer, Financial Services
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POLICY Policy No: FIN-PLA-XXX
Approval Date: August 31, 2020
Policy Title: DEVELOPMENT CHARGE
INTERESTPOLICY
Reviewed Date: August2020
Policy Type: COUNCIL
Next Review Date: August2025
Category: Finance
Sub-Category: Financial Planning
Amended: Click here to enter a date.
Author: Ryan Hagey,Director of
Financial Planning
Replaces:Click here to enter text.
Repealed: Click here to enter a date.
Dept/Div:Financial Services Department
/Financial Planning
Replacedby: Click here to enter text.
Related Policies, Procedures and/or Guidelines:
Development Charges Act, 1997, S.O. 1997, c. 27, Sections 26 & 27
1.POLICY PURPOSE:
The primary purpose of this policy is to establish the interest rate to be charged
for delaying development charges, whether it relates to the rate to be charged or
the timing of payment. As well, this policy establishes the process whereby a
developer could elect toopt out of incurring interest charges.
2.DEFINITIONS:
Agreements –a legally binding arrangement between a developer and the
municipality as toDC payments terms that differ from what is permitted in the DCA,
as allowed under Section 27 of the DCA.
Complete Applications –Pursuant to Section 26.2 of the DCA, the City considers an
application of a Site Plan or Zoning Amendment to be made as of the date that the
submitted application is deemed to be complete according to the City’s Planning staff.
DC/DCA –Development Charges/Development Charges Act
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Policy No: FIN-PLA-XXX
Policy Title: DEVELOPMENT CHARGE INTEREST
Development Charge Deferral –the ability of qualifying developmentsto spread their
DCs over multiple annual instalment payments as defined in Section 26.1 of the DCA
Development Charge Freeze –the locking inof DC rates as defined in Section 26.2
of the DCA
Institutional Development – is defined by O. Reg. 454/19, s. 3 (1)and means
development of a building or structure intended for use,
(a) as a long-term care home within the meaning of subsection 2 (1) of the
Long-Term Care Homes Act, 2007;
(b) as a retirement home within the meaning of subsection 2 (1) of the
RetirementHomes Act, 2010;
(c) by any of the following post-secondary institutions for the objects of the
institution:
(i) a university in Ontario that receives direct, regular and ongoing
operating funding from the Government of Ontario,
(ii) a college or university federated or affiliated with a university
described in subclause (i), or
(iii) an Indigenous Institute prescribed for the purposes of section 6 of
the Indigenous Institutes Act, 2017;
(d) as a memorial home, clubhouse or athletic grounds by an Ontario branch
of the Royal Canadian Legion; or
(e) as a hospice to provide end of life care.
Non-Profit Housing Development – is defined by O. Reg. 454/19, s. 3 (1) and means
development of a building or structure intended for use as residential premises by,
(a) a corporation without share capital to which the Corporations Act applies,
that is in good standing under that Act and whose primary object is to provide
housing;
(b) a corporation without share capital to which the Canada Not-for-profit
Corporations Act applies, that is in good standing under that Act and whose
primary object is to provide housing; or
(c) a non-profit housing co-operative that is in good standing under the Co-
operative Corporations Act.
Prime – means the Primeinterest rate as indicated on the Bank of Canada website
Rental Housing Development – is defined by O. Reg. 454/19, s. 3 (1) and means
development of a building or structure with four or more dwelling units all of which are
intended for use as rented residential premises
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Policy No: FIN-PLA-XXX
Policy Title: DEVELOPMENT CHARGE INTEREST
Qualifying Developments – are defined in Section 26.1 (2) of the DCA and include:
Rental housing development that is not non-profit housing
Institutional development
Non-profit housing development
3.SCOPE:
POLICY APPLIES TO THE FOLLOWING:
All Employees
ManagementPermanent Full-Time Employees
Permanent Full-Time Non UnionPermanent Full-Time C.U.P.E. 791
TemporaryPart-Time Non-Union
StudentPermanent Full-Time Union
Continuous Part-Time EmployeesPart-Time Employees
Continuous Part-Time Non-UnionContinuous Part-Time Union
CouncilLocal Boards & Advisory Committees
Specified Positions Only:
4.POLICY CONTENT:
The City’s DC interest policy is provided belowand only provides the specifics of
the City’s policy without reiterating most aspects of the DCA itself.The City’s policy
is meant to be interpreted in accordance and in conjunction with the DCA.To help
clarify, example calculations are provided.
1.Development Charge Freeze(Section 26.2 of the DCA)
Under this section of the DCA, the amount of DCs payable will be calculated based
on the rates in effect at the time of various Planning applications (e.g. site plan,
zoning). The DC payment will not actually be paid until later in the development
process (typically at the time of building permit issuance). The City’s policy
regarding rates for DC Freeze includes:
a)An annual interest rate of Prime + 2% will be charged for any DC rate frozen
during the development process.
b)The Prime interest rate to be used will be the rate in effect when complete
applications are submitted. As noted in Subsection 26.2(1) of the DCA, the
rate can be frozen for either:
i.Site Plan – Subsection 41(4) of the Planning Act, or
ii.Zoning - Section 34 of the Planning Act.
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Policy No: FIN-PLA-XXX
Policy Title: DEVELOPMENT CHARGE INTEREST
For illustrative purposes, an example of a frozen DC rate calculation is shown in
the table below. At the time a complete applicationwas received, the DC per unit
cost was$10,000 and the Primeinterest rate was5.25%. The development takes
18 months (or 1.5 years) to proceed to building permit, so an interest rate of
7.875% (5.25% x 1.5 years) results in a DC of $10,787.50 per unit.
DC Freeze Rate Example
DC Rate$10,000per unit
Prime Interest Rate5.25%per year
Years Frozen1.5years
Effective Interest Rate7.875%
Applicable DC Rate$ 10,787.50per unit
2.Development Charge Deferral(Section 26.1 of the DCA)
Under this section of the DCA, instead of making full DC payment at the time of
building permit issuance, a qualifying development would be allowed to instead
make DC instalment payments starting at occupancy with future annual instalment
payments coming on the anniversary date of the first payment. The City’s policy
regarding rates for DC Freeze includes:
a)An annual interest rate of Prime + 2% will be charged for any DC charges
deferred in relation to:
i.Rental housing development(that is not non-profit)
ii.Institutional development
b)The Prime interest rate to be used will be the rate in effect at the time of building
permit issuanceas noted in Subsection 26.1(7) of the DCA.
c) No annual interest rate will be charged for any DC charges deferred in relation
to non-profit housing development
For illustrative purposes, an example of a deferred payment schedule is shown in
the table below. DCs of $120,000 are calculated at the time of Building Permit
(BP)issuance, when the Prime interest rate is 2.45% (meaning the applied interest
rate is 4.45%).Instalment payments begin at occupancy, which is 6 months after
BPs are issued. Interest is charged for the 6 months between BP issuance and
occupancy. Interest continues to be charged on the outstanding balance for future
instalment payments, which occur on the anniversary of occupancy.
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Policy No: FIN-PLA-XXX
Policy Title: DEVELOPMENT CHARGE INTEREST
DC Deferral Payment Example Interest Rate4.45%
Outstanding Principal Interest Total
Date
Balance Payment Payment Payment
Building Permit (BP) $ 120,000 $ - $ - $ -
Occupancy = BP + 6 months$ 120,000$ 20,000$ 2,670$ 22,670
Occupancy + 1 year$ 100,000$ 20,000$ 4,450$ 24,450
Occupancy + 2 years$ 80,000$ 20,000$ 3,560$ 23,560
Occupancy + 3 years$ 60,000$ 20,000$ 2,670$ 22,670
Occupancy + 4 years$ 40,000$ 20,000$ 1,780$ 21,780
Occupancy + 5 years$ 20,000$ 20,000$ 890$ 20,890
TOTAL$ 120,000$ 16,020$ 136,020
3.Agreements(Section 27 of the DCA)
Under this section of the DCA, a municipality may enter into an agreement with a
person who is required to pay a development charge providing for all or any part
of a development charge to be paid before or after it would otherwise be payable.
The City’s policy regarding Agreements includes:
a)If a developer and the municipality preferto negotiate different DC payment
terms, they are permitted to do so by agreement
b)The Treasurer has delegated authority to enter into such agreements on behalf
of the municipality
4.Other Matters
Upon approval by Council, this policy shall take effect retroactive to January 1,
2020.
5.HISTORY OF POLICY CHANGES
Administrative Updates
Formal Amendments
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