HomeMy WebLinkAboutCAO-13-036 - Downtown Financial Incentive Review - Final Recommendations Staff Report
ITC:HFI ? .R CA0 Office www1itchenerca
REPORT TO: Finance & Corporate Services Committee
DATE OF MEETING: November 18, 2013
SUBMITTED BY: Rod Regier, Executive Director or Economic Development
519-741-2200 ext 7506
PREPARED BY: Cory Bluhm, Manager of Downtown Development
519-741-2200 ext 7065
WARD(S) INVOLVED: 9 & 10
DATE OF REPORT: November 8, 2013
REPORT NO.: CAO-13-036
SUBJECT: DOWNTOWN FINANCIAL INCENTIVE REVIEW—
FINAL RECOMMENDATIONS
RECOMMENDATION:
That staff commence implementation of the following nine activities in support of a
refreshed Downtown Financial Incentive Program, as outlined in report CAO-13-036:
Through the development of the 2014 Development Charges Background Study and
Bylaw, that staff propose to exclude Downtown Kitchener from the bylaw, resulting in no
growth-related capital costs or development charges being applied Downtown;
That through the development of the 2014 Development Charges Bylaw, staff establish
the clear intention to discontinue the Downtown exemption immediately prior to the
subsequent Development Charges Background Study and Bylaw, currently anticipated
for 2019;
That the Mayor and City staff work with the Region of Waterloo to strongly encourage the
Region to maintain their Downtown Kitchener development charge exemption through
the development of their 2014 Development Charges Background Study and Bylaw;
That staff prepare amendments to Council Policy 1-540 — Downtown Financial Incentives,
for Council consideration, which scale back the Planning & Building Permit Fee Rebates,
but continue to provide incentive for minor enhancements, subject to a phasing-out
process with input from stakeholders and immediately eliminate the 3-year Tax
Exemption;
That staff initiate the process to modify the Parkland Dedication policies and by-law to
discontinue the Downtown waiver and establish a maximum rate of 0.15 hectares per 300
units for residential development in the Downtown and Central Neighbourhoods;
That staff prepare amendments to Council Policy 1-535 - Combined Facade/Interior
Loan/Upper Storey Renovation Program and the Downtown Kitchener Community
Improvement Plan to extend the Facade Grant Program beyond 2013, to introduce
ongoing funding within the Capital Budget, by reassigning a portion of the budget
allocation for the Planning & Building Permit Fee Rebates, starting in 2014, and to allow
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more than $30,000 per building, to a specified maximum, where the building has more
than 3 separate storefronts;
That staff prepare amendments to the Downtown Kitchener Community Improvement
Plan to establish a grant program for Landing Pads geared towards start-up businesses,
similar to the Facade Grant Program, using the remaining funds from the Upper-Storey
Renovation Program;
That, through the development of the new Official Plan, the City establish clear Official
Plan policies that allow the City to hold recipients of any Downtown financial incentive to
a very high standard in terms of urban design; and
That, through ongoing discussions with the development industry and downtown
businesses, City staff communicate that there are no guarantees that any of the existing
financial incentives will exist beyond the current timelines and budget allocations of
each individual program.
EXECUTIVE SUMMARY:
The City of Kitchener is currently reviewing its Downtown Financial Incentive Program to ensure
the incentives offered are i) relevant to the development community; ii) reflect the City's current
policy objectives; and, iii) implement the Downtown Kitchener Action Plan 2012-2016. While
previous reports were intended as information and discussion papers only, this report provides
final recommendations for Council consideration. This report also provides additional
information as directed by Finance & Corporate Services Committee in August of 2013.
BACKGROUND:
The discussion paper, entitled "Downtown Financial Incentive Review — Discussion Paper" was
circulated to Finance & Corporate Services Committee on May 27, 2013, and presented in full,
at the August 12, 2013, Finance & Corporate Services Committee. Additional context and a
summary of the initial public input can be found in staff report CAO-13-20.
REPORT:
Summary of Additional Public Consultation
At the direction of Council, staff conducted additional public consultation, including the
publishing of an article in Your Kitchener and a web page which included options for providing
input and a question and answer discussion. Both were intended to provide citizens with
information that would make this complex subject matter easier to understand. Despite these
efforts, staff did not receive any additional formal comments. Staff did receive and respond to
emails from two individuals seeking more information, and met with one citizen in person.
Staff also presented the discussion paper to the Waterloo Region Homebuilders Association
Kitchener Liaison Committee. Their main concern was the fairness of offering incentives in just
one area of the city. In response, staff noted that anyone can build downtown, and nothing
would preclude any homebuilder from developing in the core. Their second concern is that
"growth should pay for growth". In response, staff note that the engineered services are already
in place, and in the unlikely event that there may be any capacity expansions that benefit
Downtown lands, the Downtown share of the project cost would have to be paid from the tax-
supported capital budget.
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Staff met with representatives of Fusion Homes. They wanted to confirm, based on the findings
of the Discussion Paper, that lands on King Street East, between Cedar and Betzner, would
more than likely command a lower purchase price for condominium units than properties to the
west (ie: in the City Centre District, Innovation District, King Street West Mixed-Use Corridor and
Uptown Waterloo). Based on the sale prices and rental rates identified in Section 2 (Downtown's
Current Economic Context) of the Discussion Paper, at present, it would appear as though the
lands east of Cedar Street would more than likely command a lower purchase price than lands
to the west.
Lastly, staff met with one member of the public who inquired about the assessment growth
attributable to the major redevelopments that have occurred in the last 10 years, which would
have benefited from financial incentives. Staff analysed the assessment growth for five
redevelopment projects, including the Kaufman Lofts, Eaton Lofts, The Regency, The Tannery
and the Synergy Centre:
Assessment 2012 Difference City Tax 2012 City Difference
Prior to Assessment Revenue Prior to Tax
Redevelopment Redevelopment Revenue
$7,032,500 $93,486,500 $86,454,000 $67,406 $459,084 $391,678
*Subject to tax rebates on brownfield development. ; This figure only represents the difference in the City's portion of total taxes.
The difference in all taxes collected was in excess of$1.6M per year.
Questions of Committee Members
In August, Finance & Corporate Services members asked staff to report back on the following
questions:
Q: In addition to financial incentives, are there application/permit processing incentives
the City can offer?
According to the City's Building and Planning Services, there would not be anything tangible the
City could offer. This is due to two main factors. First, these types of projects are highly
complex and require significant review time and extensive back-and-forth discussions with
applicants. Secondly, there isn't a significant enough volume of these major projects, such as in
cities like Toronto and Vancouver, whereby expediting one project over another can lead to
significant time savings for a developer. Similarly, the Ontario Building Code sets mandatory
timelines as to when permits have to be reviewed by.
Q: Are there alternate ways of calculating the parkland dedication rate?
The Ontario Planning Act only enables the parkland rate to be calculated based either on land
area or the number of units. It does not allow the rate to be based on the value of the
residential unit (for example).
Q: Historically, how much has been spent on downtown incentives?
The appendix of the Discussion Paper provides a summary of the amount spent on each of the
incentive programs where expenses have been tracked. Since 1995, this value is
approximately $3.65 million.
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Q: What is the value of incentives the City would be providing for the City Centre
Condominium project?
Based on a full build out of 360 units, and using the 2012 rates provided in the Discussion
Paper, the total value of incentives would be approximately $2.08 million. This includes actual
costs (ie: permit rebates) and foregone revenue (ie: parkland dedication fee waiver). In
addition, the estimated cost to the Region for the development charge waiver would be $3.35
million. Note that the final values will change based on the actual rates for each incentive in the
year the units are built.
Q: What is the development potential (in terms of residential units) of the lands on King
between Cedar and Betzner, and what would the resultant cost/tax revenue be?
The zoning bylaw currently permits development densities with a floor space ratio between 1.0
and 4.0. For the lands in question, the following chart outlines the potential number of
residential units, the value of the development charges if waived, and the associated projected
annual tax revenue. This chart does not include calculations for ground floor retail space:
FSR Potential Total City Total Regional Projected Projected
# of Units* Development Development Annual City Annual Regional
Charges Charges Tax Revenue** Tax Revenue**
1.0 454 $1.39 million $4.13 million $392,000 $612,000
4.0 1815 $5.56 million $16.5 million $1,567,000 $2,450,000
'based on an average unit size of 650 square feet.
.*based on an average residential condominium unit value of$200,000.
Based on the above figures, if the City were to exclude this area from development charges, it
would take 3.55 years (from the time of full occupancy and property reassessment) to generate
the equivalent amount of money in tax revenue. It would take the Region approximately 6.75
years. Note that this assumes redevelopment would not otherwise proceed on these lands.
Landing Pad Grant Program — Draft Program Structure
Report CAO-13-020 provided context to the purpose and goal of a Landing Pad Grant Program.
The following identifies the program structure that City staff would likely propose, as part of:
Eligible Properties— limited to traditional mixed-use buildings along commercial streets like King
Street and Queen Street. Office towers, shopping centres, factory conversions and single
detached homes would not be eligible.
Eligible Work — grants would only be provided for those improvements to the space which will
permanently reside with the building, such as new walls, flooring, wiring, washrooms, etc. This
would include new windows. Non-permanent improvements, such as light fixtures, furniture,
etc., would not be eligible.
Design Requirements — the City would establish interior design requirements to ensure the
spaces are designed to be lasting and can function as turnkey operations (ie: if one tenant
leaves, the space is suitable for a new tenant).
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Financial Assistance — grants of up to $20,000 per floor to assist with the renovation of the
space, plus up to an additional $40,000 per building to assist with common area \such as new
elevators, stairwells, shared washrooms and lobby entrances. The City would pay no more than
50% of the total value of the eligible work done.
Lease Requirements — the City would establish a screening process for potential tenants to
ensure landing pads are only being rented to companies with growth potential. Building owners
would be required to enter into an agreement with the City requiring them to rent the space only
to screened companies for a minimum of 5 years. Building owners could lease the space to a
series of different tenants over the 5year term as long as all tenants are screened companies.
Likewise, all improvements would need to be maintained for a minimum of 5 years. Failure to
meet these terms would result in the owner repaying the grant in full.
Payment of the Grant—the grant would only be paid upon full occupancy of the space.
FINANCIAL IMPLICATIONS:
The refreshed downtown incentive program has been designed with the intent of funding it from
within existing balances or budget provisions. No new funding is required. Rather, funds for
existing programs are proposed to be repurposed. Notably, the current budget allocation for
Building Permit Rebates would be used to fund Fagade Grants on an on-going basis, and the
capital fund for the Upper-Storey Renovation program would be used to fund the Landing Pad
Grant Program. Any revisions to the growth-related capital program related to the downtown
Development Charges exemption will be managed through the 2014 Background Study
process.
COMMUNITY ENGAGEMENT:
See report CAO-13-020 and the `Report' section of this report for a summary of all public
consultation.
CONCLUSION:
Based on the findings of the Discussion Paper, and subsequent stakeholder engagement, staff
believe that the proposed changes to the Downtown Financial Incentives, support the City's policy
objectives in a more targeted manner. They would provide greater financial predictability and should
reduce the amount of work required to administer the numerous programs. Above all, they continue to
provide a necessary financial incentive to encourage redevelopment in Downtown Kitchener.
CKNOWLEDGED BY: I Jeff Willmer, CAO
Attachments: CAO-13-020
Downtown Financial Incentive Review- Discussion Paper
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Staff Report
ITC:HFI ? .R CA0 Office www.kitchenerca
REPORT TO: Finance & Corporate Services Committee
DATE OF MEETING: August 12, 2013
SUBMITTED BY: Rod Regier, Executive Director or Economic Development
519-741-2200 ext 7506
PREPARED BY: Cory Bluhm, Manager of Downtown Development
519-741-2200 ext 7065
WARD(S) INVOLVED: 9 & 10
DATE OF REPORT: August 6, 2013
REPORT NO.: CAO-13-020
SUBJECT: DOWNTOWN FINANCIAL INCENTIVE REVIEW-
SUMMARY OF PUBLIC CONSULTATION
RECOMMENDATION:
That report CAO-13-020 be received for information; and further,
That, subject to any direction provided by the Finance & Corporate Services Committee,
staff present final recommendations on the Downtown Financial Incentive Review to a
future Finance & Corporate Services Committee meeting in the Fall of 2013.
EXECUTIVE SUMMARY:
The City of Kitchener is currently reviewing its Downtown Financial Incentive Program to ensure
the incentives offered are i) relevant to the development community; ii) reflect the City's current
policy objectives; and, iii) implement the Downtown Kitchener Action Plan 2012-2016. This
report summarizes the feedback received thus far.
The attached discussion paper entitled "Downtown Financial Incentive Review" outlines staff's
findings of this review. The discussion paper includes an analysis of today's current economic
context, an evaluation of the existing incentive programs, a discussion on the City's capacity to
fund incentives, and options for moving forward. In short, the discussion paper concludes that
incentives are still necessary to attract investment to Downtown Kitchener, but that the City can
no longer afford to offer incentive programs where the City's financial commitment is open-
ended. The discussion paper also identifies the need for the City to impose greater design
requirements to ensure incentives stimulate high quality developments, and that the City needs
to consider a new incentive program to encourage emerging start-ups, such as those graduating
from the hub, to locate Downtown.
BACKGROUND:
The Downtown Kitchener Action Plan 2012-2016 recommends that the City review its financial
incentive programs to ensure they support and enable the objectives outlined in the Action Plan.
The review of the Downtown Financial Incentive Program will occur in two phases:
1) Phase 1 - Discussion Paper/public consultation leading to recommendations on what
changes, if any, should be made; and,
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2) Phase 2 - If as part of Phase 1, City Council resolves to modify or repeal any of the
incentive programs, or establish any new programs, such changes would occur in
accordance with the processes prescribed by the Ontario Planning Act and the Municipal
Act (beginning as early as late Fall 2013).
As such, a discussion paper, entitled "Downtown Financial Incentive Review — Discussion
Paper" was circulated to Finance & Corporate Services Committee on May 27, 2013, for
information purposes and staff have undertaken public and stakeholder consultation.
REPORT:
Summary of Public Consultation
To date, staff have received formal comments from three downtown developers. Staff have also
met with two other downtown developers who provided input verbally. Generally speaking, all of
the developers who commented agree with the approach suggested by staff. They all strongly
noted that if not for the financial incentives, most notably the development charge exemption,
the likelihood of them carrying out projects in Downtown Kitchener would be far less. In
addition, the following key issues were raised:
Issue #1 - For projects currently in the planning and building permit stages, which have been
initiated based on the current set of incentives, that the City should provide a reasonable
timeframe for these projects to be completed prior to modifying or eliminating any programs.
Staff Response - Staff are in agreement and suggest that appropriate sunset timelines can be
established for each program through Phase 2 of this review.
Issue #2 - That when considering changes to the Parkland Dedication Fee Exemption, that the
City consider it in context with its cash-in-lieu policy for the entire city.
Staff Response - As part of Phase 2 of this review, staff intend to review the cash-in-lieu policy
as it relates to infill (or reurbanization) projects which would include an area much larger than
just Downtown Kitchener.
Issue #3 - That the City consider extending the Community Improvement Plan east towards
Betzner Street, as a means of stimulating intensification and revitalization of the Market District
and lands surround the Kitchener Market and future LRT station.
Staff Response - staffs position on this issue is contained in the Discussion Paper on page 21
and remains unchanged.
Staff presented the findings of this review to the Downtown Kitchener BIA who passed a motion
of support for the preliminary recommendations. Staff also presented the findings to a joint
meeting of the Downtown Action & Advisory Committee and the Economic Development
Advisory Committee. Committee members asked numerous questions and made a number of
comments generally in support of the preliminary recommendations, but given the complexity of
the subject matter, were not prepared to pass a formal motion.
Net Tax Assessment vs Cost of Incentives
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Staff were asked to determine the number of years it would take for the City to recoup
incentives through new tax assessment. In particular, how many years would it take before the
amount of assessment collected on a new residential condominium unit would be equivalent to
the value of the financial incentive provided for that unit.
Using 2012 rates, the following chart identifies the length of time it would take the City to collect
an equivalent assessment for the following condominium units:
�rjilll�(eil;l)
l�
$200,000 $3,066 $1,573 $864 3.55 1.82 5.37
$250,000 $3,066 $1,573 $1,080 2.84 1.46 4.30
Using 2012 rates, the following chart identifies the length of time it would take the Region to
collect an equivalent assessment for the following condominium units:
�j
F� J)9j ,
$200,000 $9,111 $1,350 6.75
$250,000 $9,111 $1,688 5.40
Landinq Pad Program - Additional Context
As part of EDIF, the City made a strategic investment in the Communitech Hub. This facility not
only develops emerging start-up companies, but has attracted similar companies to the core. A
number of these companies graduate from the Hub and need a new location to grow their
company from. They often have access to venture capital (funding provided by investors,
typically focused solely on research and development functions) but are not yet generating
income. Thus, they are often unable to pay high rents or pay for extensive leasehold
improvements. These start-ups typically have 2-5 employees but have short term growth
potential of up to 20 employees, with long-term potential to grow to 50+ employees. While most
prefer to remain close to the Hub, without the appropriate type and price of office space, it is
possible that the city could lose these companies to other cities, including places like Toronto,
New York City and Silicon Valley. This space typically needs to be affordable but also
contemporary/funky so as to attract high quality employees and develop a brand image for their
company. Most companies are not at a point where they can afford the size or price of prime
office-type space in buildings like Breithaupt Block or the TD Tower. So in order to retain these
growing companies within the Downtown, it is vital that the City work closely with downtown
stakeholders to facilitate the creation of such space where these companies can land (hence
the term "Landing Pad Space").
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Landing pad space can come in various forms: co-working space at facilities like Treehaus,
Workplace One and Regus; affordable office space in existing buildings like 305 King; and
former factory space such as the artisan wing of the Tannery. But more interestingly, staff
believe there is a significant opportunity to repurpose under-utilized or under-performing space
in upper-storey units along King Street and side streets such as Queen Street. These older
buildings, such as the recently redeveloped Simpson Block, have the type of character
emerging companies are looking for, and additional employment would provide additional
customers to local retailers. At the same time, refurbishing this space would ensure these older
buildings are brought up to fire and building code standards. However, these buildings are the
most challenging to convert. As such, staff recommend developing an incentive program, such
as a grant program, to encourage the conversion of this space to landing pad space.
Staff are currently meeting with various stakeholders to better understand the type and nature of
incentives necessary to develop such space. As part of Phase 2 of this review, staff would
develop a draft program for Council to consider. As a preliminary concept, staff have suggested
offering grants to either building owners or tenants for physical improvements/renovations to
upper-storey space, of up to $40,000 per floor, provided the total cost of construction is at least
$80,000 (ie: the City's grant would cover no more than 50% of the construction costs). Grants
would be concentrated on the historic, mixed-use building stock along King and Queen Streets.
The City would establish clear design requirements, to ensure any improvements are generic in
nature and could be reused by subsequent tenants. In return, the landlord would agree to
reserve the space for growing start-up companies, for a set period of time at a predetermine
lease rate. To assist in the program, the City would work with partners such as Communitech
and the Small Business centre to identify and screen potential tenants that would qualify as an
emerging company with growth potential. The program could be funded by repurposing up to
$600,000 from the existing Upper-Storey Renovation Program account. This would enable the
renovation of at least 15 upper-storey floors.
In addition, Community Improvement Plan (CIP) legislation enables municipalities to acquire,
sell or lease land and buildings for economic development purposes. The landing pad program
could enable the City to lease any of its current buildings, such as the Kitchener Studio Project,
Kitchener Market, etc., for landing pad type space. The majority of City buildings are currently
within the existing CIP boundary with the exception of 79 Joseph Street. Staff suggest
expanding the boundary to include this property. This would enable the City to enter into a
lease agreement either with the current tenant, Treehaus, or any future tenant for the provision
of Landing Pad space.
Preliminary Recommendations
The initial findings of City staff's review of the existing Downtown Financial Incentive Programs
are contained in the attached Discussion Paper. Staff have concluded that the current
programs, most of which were established in 1995, no longer effectively implement all of the
City's policy objectives and interests. Most specifically:
i) the set of programs do not provide the City with the ability to impose any requirements to meet our
policy objectives (such as high quality urban design, sustainable design, etc.); and,
ii) the set of programs do not provide the City with predictable financial certainty.
As such, staff recommend exploring the following changes to the Downtown Financial Incentive
Program:
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a)Through the development of the next Development Charges Bylaw, exclude Downtown Kitchener
from the bylaw, resulting in no development charges being applied Downtown, as is currently the
case;
b)Work with Region of Waterloo staff to strongly encourage the Region to maintain their Downtown
development charge exemption;
c) Scale back the Planning & Building Permit Fee Rebates to target minor enhancements, and
eliminate the 3-year Tax Exemption, subject to a phasing-out process,with input from stakeholders;
d) Modify the Parkland Dedication Waiver to establish a reurbanization cash-in-lieu rate of 0.15
hectares per 300 units for the Downtown, subject to a phasing-out process, with input from
stakeholders;
e) Extend the Facade Grant Program beyond 2013 and consider options for allocating ongoing
funding within the Capital Budget, such as reassigning the budget allocation for the Planning &
Building Permit Fee Rebates, starting in 2014. Consider allowing more than $30,000 per building
where the building has more than 3 separate storefronts;
f) Develop a grant program for Landing Pads geared towards start-up businesses, similar to the
Facade Grant Program, using the remaining funds from the Upper-Storey Renovation Program;
and,
g) Establish clear Official Plan policies that allow the City to hold recipients of any Downtown financial
incentive to a very high standard in terms of urban design.
In addition to the above recommendations, which generally mirror the recommendations of the
discussion paper, staff recommend the following additional actions:
h)That as part of the Landing Pad program, the City consider expanding the Community Improvement
Plan boundary to include 79 Joseph Street; and,
i) Establish clear timelines for the phasing out of current incentives.
Staff believe that these changes support the City's policy objectives in a more targeted manner. They
would provide greater financial predictability and should reduce the amount of work required to
administer the numerous programs. Above all, they continue to provide a necessary financial
incentive to encourage redevelopment in Downtown Kitchener, but only until such time as purchase
prices and lease rates reach a point where the City no longer needs to support such projects.
FINANCIAL IMPLICATIONS:
None at this time. Any budget implications will be outlined in detail once formal
recommendations are presented in the Fall. The preliminary recommendations do suggest the
following:
- Using the pre-2009 DC exemption format to eliminate uncertainty with respect to the
ultimate impact on the tax levy;
- redirecting funds from the Upper Storey Grant Program to a new Landing Pad Grant
Program;
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- redirecting annual capital funding from the Building Permit Fee Rebate program to the
Facade Grant Program; and,
- begin to collect revenue from downtown developments for Parkland Dedication.
In essence, these changes shift the majority of the costs associated with the Downtown
Financial Incentive Programs from tax supported, open-ended costs to foregone revenues,
creating greater financial predictability. Over time, the incentive programs should be phased out
as market forces shift and the rapid transit era begins in earnest.
COMMUNITY ENGAGEMENT:
Information packages were sent to developers and land owners currently in the planning phases
of downtown development projects. A newspaper advertisement was placed in The Record
inviting community and stakeholder input. A public information session was held on July 17th.
Interested stakeholders, developers and land owners were invited to participate in one-on-one
meetings. Staff provided formal presentations to the Downtown Kitchener BIA, Economic
Development Advisory Committee and the Downtown Action & Advisory Committee. City staff
had preliminary discussions with Regional staff. All comments formally submitted have been
attached to this report. No formal comments were submitted to staff by the general public. It is
normal for issues such as this to receive little or no input from the general public. One resident
provided questions and comments to Councillor Davey, however, these comments were not
formally submitted to staff.
CONCLUSION:
Subject to input and feedback from Finance & Corporate Services Committee, staff believe it is
appropriate for Council to consider formal recommendations on the Downtown Financial
Incentive Review in the Fall of 2013.
ATTACHMENTS:
Downtown Financial Incentives Review— Discussion Paper
Current Community Improvement Plan Boundary
Advertisement - The Record
Stakeholder Comments
CKNOWLEDGED BY: I Jeff Willmer, CAO
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SPRING 2013
CAO's Office-Economic Development
Downtown Financial Incentive Review
Discussion Paper
r :fry `1N1`1 w ,
6 - 12
Table of Contents
1.0 Overview............................................................................................................................. 2
2.0 Downtown's Current Economic Context ........................................................................... 5
3.0 Evaluation of Existing Downtown Financial Incentive Programs................................... 12
4.0 City's Capacity to Fund Financial Incentives .................................................................. 17
5.0 Options for Incentive Programs Moving Forward ........................................................... 18
6.0 Preliminary Recommendations........................................................................................ 22
7.0 Appendices ....................................................................................................................... 23
PAG6 - 13
Sedon
Overview
Purpose
The purpose of this discussion paper is to evaluate the existing Downtown financial incentive programs to
determine if they are still relevant and purposeful given the current, and near future, economic conditions as
well as current municipal policy objectives. While this paper does make preliminary recommendations for
City Council to consider, formal changes to any programs would happen through subsequent decisions. In
essence, this paper is simply phase one of a two phase process. The second phase could include such
actions as the development of the new Development Charges Bylaw, repealing or modifying existing
Community Improvement Plans (ie: incentive programs) or the development of a new Community
Improvement Plan(s). Phase two would only happen once City Council has provided direction on this
discussion paper.
Historical Context
Much of today's Downtown financial incentive program originated as a response to the 1995 Mayor's Task
Force report. At that time, the community was just beginning to emerge from one of the worst recessions in
history. Big-box retail was becoming a dominant new format in the retail industry, creating even more
competition with Downtown merchants. Significant suburban expansion in Grand River East, Doon South
and Laurentian West would continue to shift our community towards a primarily suburban lifestyle while
further de-intensifying the centre of the city. Multiple downtown factories had been boarded up or were on
the brink of closure. Both Market Square and King Centre malls were sitting largely vacant. To help
Downtown reclaim its commercial relevance, and to attract new investments to the core, the City endorsed
a `pro-business'solution that included:
• Streamlining of development approvals;
• Wide-open zoning; and,
• A package of financial incentives that would eliminate most development fees:
• A 3-year exemption from 50% of any post-redevelopment tax increase (1997 -
present);
• Rebates for planning application and building permit fees (1997- present);
• Exemptions from parkland dedication fees (1995- present)
• Afagade improvement loan/grant program (1997-2009); and,
• Exemptions from development charges (1999- present).
Essentially, the City was `open-for-business', willing to accept any and all development activity in the core,
with very few imposed requirements. These incentives proved critical in attracting new high-quality
developments, such as the Kaufman Lofts, Lang Tannery, Breithaupt Block, etc. However, the lack of
requirements meant any and all projects would be funded, even if they were not necessarily the highest
quality use or design. For example, the apartment building at 57 Queen Street North has been publicly
criticized for its building design, yet received in excess of$1 million in waivers and exemptions.
In 2005 and 2009, two new programs, the Upper-Storey Renovation Program and the Facade Grant
Program respectively, were introduced. Both programs were developed in concert with the City's Economic
Development Investment Fund (EDIF) and intended to compliment major capital investments, such as the
new King Street Streetscape. With greater importance being placed on high quality urban design, these
programs included stricter eligibility requirements. In the case of the Facade Grant Program, applications
must generally satisfy the goals of the King Street Facade Guidelines, which were approved by Council in
2008. As a result, these programs consistently produced higher quality projects.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAG 1 T
Current Context
Today, Downtown's economic climate has improved remarkably since 1995. EDIF investments, such as the
UW School of Pharmacy, WLU Faculty of Social Work, King Street Streetscape and Communitech HUB
have been successful in stimulating private sector interest in major redevelopment projects. Successful
private sector investments, such as The Tannery, Kaufman Lofts and Le Marche Condos, have helped
showcase new market opportunities in the core. The impending arrival of light rail transit (LRT) and the
central transit hub have also generated new optimism and interest from the private sector. As a result,
Downtown Kitchener is poised to enter perhaps the most significant redevelopment era of its history - with
projects such as the Breithaupt Block, Consolidated Courthouse and Arrow Lofts already underway.
But it is only now, that the programs developed in the 90s are beginning to bear fruit. The City Centre
Condominiums and One Victoria are the first non-adaptive reuse, high density, private sector projects to test
the market for new construction. And as the `Downtown's Current Economic Context' illustrates (see section
2), these types of projects may not be feasible without the aid of financial incentives. Purchase prices for
downtown projects are still not at a point where major redevelopment can attract the market rates required
for projects to proceed without incentives.
Relevant Policy Objectives
The are many municipal policy objectives that could be addressed through incentive programs. The
following is a list of the objectives most likely to achieve results:
1) Residential Intensification - presently more than 13,000 people work Downtown but just over 2,000 live
directly in the core. As a direct result, King Street is bustling from 9am to 5pm, but is much less vibrant
during evenings and weekends. The Kitchener Growth Management Plan, Kitchener Economic
Development Strategy, Downtown Kitchener Action Plan, Regional Growth Management Strategy and
Places to Grow Act all place an emphasis on correcting this imbalance by attracting high density
residential development.
2) High Quality Urban Design - high quality architecture has always been important to the Downtown
community. Developers and building owners, however, have not always delivered the level of quality the
community expects. With greater emphasis being placed on urban design, placemaking, architectural
excellence and mixed use developments, the City can use financial incentives as a way of achieving good
design. This is relevant for both major developments as well as facade improvements. The City's Official
Plan, Urban Design Manual, Kitchener Economic Development Strategy and Downtown Kitchener Action
Plan all promote high quality design.
3)Attraction of New Retail and High Traffic Generators - The Downtown Kitchener Action Plan and the
Kitchener Economic Development Strategy both identify the need for key high-traffic generators, primarily
a grocery store and a movie theater. They also identify the need to continually enhance the quality and
mix of retail shops Downtown.
4) Environmental Building Design - new construction that is LEED certified or Energy Star rated typically
costs more than typical construction. Using incentives to assist with these additional costs support the
City's Strategic Plan for the Environment, the Kitchener Strategic Plan and the Downtown Kitchener
Action Plan.
5)Attract New Landing Pads-to ensure that the companies emerging from the Communitech HUB, as well
as other emerging startups, stay within Downtown Kitchener, landing pad space needs to be created.
This space is typically priced mid-range as a step between the subsidized rent of the HUB, and full market
rent. Upper storey space in the Downtown could be ideal for such uses. Using incentives to support the
creation of such space would support the Kitchener Economic Development Strategy and the Downtown
Kitchener Action Plan.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAG IS
Other Programs Not Included in this Review
There are other financial incentives available within the Downtown. Most notably, the Brownfield
Remediation Program and various heritage preservation incentives. Given the importance and relative
newness of the Brownfield Remediation Program, it was not included in this review. As the primary purpose
of the heritage preservation incentives is to encourage the conservation of historic features, regardless of
whether or not new development is involved, they were also excluded.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAG 16
Sedon
2 • •wn's Current Economic Context
Downtown Kitchener is clearly in transition. The catalyst projects of EDIF (Economic Development
Investment Fund), coupled with private sector investments (ex: the Kaufman Lofts and The Tannery) and the
anticipation of the light rail transit system/transportation hub has created significant redevelopment interest
from the private sector. However, Downtown Kitchener is still not over the hump. Despite having more than
2,800 residential units in the planning and design stages for the Downtown and surrounding
neighbourhoods, developers remain cautious. Many are waiting for projects like City Centre Condominiums
and Arrow Lofts to test the price and absorption limits of Downtown's residential market. Likewise, while
office space in converted offices has received considerable press as of late, buildings like the Breithaupt
Block are still not fully leased. And while Downtown's office vacancy rate is at an all-time low, no new major,
private sector office buildings have been built since 1992.
To better understand Downtown's current economic context, the following section evaluates three different
types of high density development - residential condos, residential rental and office. As the comparisons
below are based on the availability of data, the geographic areas differ for each type of development. For
each type, a redevelopment scenario has been developed to illustrate the current relationship between
construction costs and sale prices.
Residential Condo Development
The following charts compare Downtown Kitchener's asking rates versus other urban rates in KW:
Average Condo Listing Prices (Recent Construction Projects Only)-2012
Downtown Kitchener Uptown Waterloo Mitt-Town
Kaufman Lofts $324/sq.ft The 42 $403/sq.ft Belmont V Condos $267/sq.ft
Le Marche $229/sq.ft BPR Lofts (p.c.) $358/sq.ft Bauer Lofts $362/sq.ft
Arrow Lofts $316/sq.ft BPR Lofts $369/sq.ft 144 Park (p.c) $350/sq.ft
City Centre (p.c.) $343/sq.ft
One Victoria (p.c.) $362/sq.ft
Average $315/sq.ft Average $379/sq.ft Average $326/sq.ft
Note- (p.c.) stands for pre-construction pricing. All other prices are based on resale list prices.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAG 1 7
Scenario#1 - High Rise Residential Condominium
Number of Units = 300
Land Costs = $1.5 million/acre
Financing, Legal, Marketing &Sales Costs = 15% of construction costs
Design &Contingency= 15% of construction costs
The following graph illustrates the required per square foot sales price required for a developer to achieve a
15% profit, thus making the project viable, without the aid of financial incentives. For example, if purchasers
are willing to pay $315/square foot (using the average asking price in Downtown Kitchener), a developer
could build a building at approximately $170/square foot and make a profit. Unfortunately, buildings with a
high quality of urban design and architecture, using only high quality materials, with the inclusion of
sustainable features, typically cost anywhere from $175 to $200/square foot. As such, there is a $5-25/
square foot gap. For a 300-unit development, this would equate to a shortfall ranging between $1.75 and
$10.5 million.
Residential Condo Analysis
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Sale Price (per square foot) Required to Achieve a 15% Profit Margin
111, Average Downtown Sale Price (per square foot)
Highest Downtown Sale Price (per square foot)
*Three of the prices shown are based on observed Canadian construction costs for medium quality, high density residential
development, according to Hanscomb Yardstick for Costing 2012. $146.60 is the lowest observed cost, $162.89 is the average cost,
and$179.18 is the highest observed cost.
It should be noted, however, that certain areas of the Downtown are more likely to command higher sales
prices than others. Most notably, projects near King and Victoria, Victoria Park and the Civic District should
be able to command a higher sales price which help achieve a higher quality of design. This is due primarily
to the proximity of marketable amenities such as the future transportation hub, Victoria Park, Centre In The
Square and the KPL Main Library. However, it should be noted that no projects have been constructed in
these areas, thus this is an unproven assessment. On the other hand, projects on King Street near active
nightlife or within the Market District may command lower sales prices.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAG 18
Residential Rental Development
The following charts compare Downtown Kitchener's asking rates versus other urban rates in KW:
Monthly Average Apartment Rental Rates (Recent Construction Only)-2012
Downtown Kitchener Central Neighbourhoods Uptown
The Regency $1.25/sq.ft Victoria Park Place $1.05/sq.ft Seagram Lofts $1.22/sq.ft
Kaufman Lofts $2.29/sq.ft Victoria Towers $1.12/sq.ft William Apartments $1.30/sq.ft
Iron Horse Towers $1.28/sq.ft Westmount Grand $2.11/sq.ft
Margaret Place $1.26/sq.ft Red Condos $1.47/sq.ft
Betzner Brownstones $1.37/sq.ft
Average $1.77/sq.ft Average $1.22/sq.ft Average $1.53/sq.ft
Scenario#2 - High Rise Residential Rental
Number of Units = 300
Land Costs = $1.5 million/acre
Legal, Sales& Marketing Costs = 10% of construction costs
Design &Contingency= 15% of construction costs
Lending Rate =4% amortized over 25 years
The following graphs illustrates the required per square foot sales price required for a developer to achieve a
15% profit, thus making the project initially viable. However, this chart does not include ongoing
operating and maintenance costs. As such, the chart is simply for illustrative purposes only. It
demonstrates that in order to build a high quality building between $175-$200/square foot, a developer
would have to achieve lease rates of approximately $1.65-$1.86/square foot/month plus any operating
costs. For a 750 square foot unit (ie: standard one bedroom), this equates to a monthly rent of $1,238 to
$1,395 plus operating costs. Based on comparable rental rates in KW (and excluding the Kaufman Lofts
which appears to be an anomaly)this could be difficult to achieve.
DOWNTOWN FINANCIAL INCENTIVE REVIEW FAG 19
Residential Rental Analysis - Long-Term Ownership
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Lease Rate (per square foot) Required to Achieve a 15% Profit Margin
111, Lowest Asking Lease Rate (per square foot)
Average Asking Lease Rate (per square foot) in Downtown Kitchener
Highest Asking Lease Rage (per square foot) in Downtown Kitchener
Average Asking Lease Rate (per square foot) in the Central N'hoods
Does not include revenue required to fund ongoing operating and maintenance costs.
**Three of the prices shown are based on observed Canadian construction costs for medium quality,high density
residential development, according to Hanscomb Yardstick for Costing 2012. $146.60 is the lowest observed
cost,$162.89 is the average cost,and$179.18 is the highest observed cost
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAG6 - 20
Office Development
The following charts compare Downtown Kitchener's asking rates versus other urban rates in KW:
Office Rental Rates (excluding Common Area Maintenance fees)-2012
Downtown Kitchener Uptown Waterloo Downtown Cambridge(Galt)
Low $6.00/sq.ft
Average $11.67/sq.ft Average $13.62/sq.ft Average $9.52/sq.ft
High $21.95/sq.ft
Note-rates shown are for net rent only,and do not include and CAM fees or taxes.
The following chart compares the average asking lease rates for office space in each of the region's three
cities and their core areas since 2004. While Downtown Kitchener has seen steady increases, they are still
almost $2/square foot below Uptown Waterloo and more than $3/square foot below the City of Waterloo
average.
Average Asking Lease Rate (Office): 2004 to 02-2012
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DOWNTOWN FINANCIAL INCENTIVE REVIEW PAG 2 1
Scenario#3-Office Development
Total Square Feet=200,000
Leasable Square Feet= 180,000
Land Costs = $1.5 million/acre
Marketing, Sales &Legal Costs = 7% of construction costs
Design &Contingency= 15% of construction costs
Interest Rate =4% amortized over 25 years
The following graphs illustrates the required per square foot sales price required for a developer to achieve a
15% profit, thus making the project viable. For example, to build a building at $198.16 per square foot, a
developer would need to rent space at$26.68 per square foot. Buildings with a high quality of urban design
and architecture, using only high quality materials, with the inclusion of sustainable features, typically cost
anywhere from $220 to $242/square foot. Such buildings would require lease rates of$28.77/square foot to
$30.93/square foot respectively. These rates are far above the highest asking lease rates in the region. This
analysis explains why no new office towers are being built in Waterloo Region unless they are purpose built
for a single client or surrounded by surface parking.
Office Development Analysis - Long-Term Ownership
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Cost of Construction (per square foot)**
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Highest Asking Lease Rage (per square foot) in Downtown Kitchener
*assumes that all space is leased and that all operating costs and taxes are paid for by the tenants through CAM fees.
**Three of the prices shown are based on observed Canadian construction costs for medium density office development,
according to Hanscomb Yardstick for Costing 2012. $198.16 is the lowest observed cost,$220.18 is the average cost,and
$242.20 is the highest observed cost.
If an office building was built for the sole purpose of being sold to a holding company (such as a REIT or
Trust Fund), the building would need to achieve a capitalization rate (annual net revenue divided by the cost
to purchase the building) of at least 5%. In this case, an office building could be built if the developer could
achieve lease rates between $21.13 and $24.50 per square foot. This would appear to be much more
achievable. However, it should be noted that these rates are still well above the highest asking lease rate. It
would be risky to build such a building on speculation without having signed tenants and there is no
guarantee that a holding company would purchase the building.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 2 2
Office Development Analysis - Short-Term Redevelopment
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Cost of Construction (per square foot)**
Lease Rate (per square foot, excluding CAM) Required to Achieve a 5% Capitalization Rate*
!110, Average Asking Lease Rate (per square foot) in Downtown Kitchener
Highest Asking Lease Rage (per square foot) in Downtown Kitchener
*assumes that all space is leased and that all operating costs and taxes are paid for by the tenants through CAM fees.
**Three of the prices shown are based on observed Canadian construction costs for medium density office
development,according to Hanscomb Yardstick for Costing 2012. $198.16 is the lowest observed cost,$220.18 is the
average cost,and$242.20 is the highest observed cost.
Conclusions
Downtown Kitchener is still at a competitive disadvantage when attracting new development. Based on
current market rates for both office space and residential condos, Downtown Kitchener is underperforming
relative to Uptown Waterloo and Midtown/Belmont Village. If Kitchener wants to attract this form of
redevelopment to the core, particularly residential condominiums, a financial incentive could help to
compensate for lower market rates.
As a result, and based on the three redevelopment scenarios, it is clear that Downtown Kitchener is not yet
in a position to attract new high quality development without the aid of financial incentives or realizing a
market increase in sale prices and lease rates. There are areas of the Downtown which may be closer to
achieving these prices than others, particularly those areas close to key amenities including Victoria Park
and the future transportation hub. Similarly, it is possible that upon completion of the LRT, lands near rapid
transit stops (ex: Charles & Cedar, Duke and Ontario, etc.) may also have a greater chance of achieving
these prices. However, only once actual projects are completed will such assumptions be tested.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 2 3
Sedon Evaluation of Existing Downtown
3 Financial Incentive Programs
Each incentive program provides a differing level of financial support. The following chart provides a relative
comparison for the four programs intended to support major redevelopment projects:
Financial Incentive Program Comparison (using 2012 rates)
Residential Residential Residential Loft Office Office Loft
Condo —Apartment Conv.Condo Conversion
3-Year Tax Exemption 1,229/unit 1,000/unit 1,000-1,229/unit* $275/1,000 sq.ft 1,050/1,000 sq.ft
Planning&Building Permit 844/unit 844/unit 278/unit $2,134/ 427/1,000 sq.ft
Fee Rebate 1,000 sq.ft
Parkland Dedication Fee 1,850/unit 1,850/unit 1,850/unit $172/1,000 sq.ft 172/1,000 sq.ft
Waiver
Development Charge Waivers 12,177/unit 12,177/unit 12,177/unit** $1,670/1,000 sq.ft 1,670/1,000 sq.ft**
TOTAL$116,11 00 1unit 15,871/unit 3,128-$15,5341 $4,25111,000 sq.ft $3,31911,000 sq.ft
unit***
$1,000 is for a rental unit;$1,275 is for a condominium unit.
"Only applies to new floorspace,not converted space.
"'Low range represents rental units built within converted space($3,128 assumes rental rate and excludes Development Charge Waiver)
Development Charge Waiver includes the Regional waiver. The City portion in 2012 was$3066.
Note-"unit'calculations are based on a 650 square foot unit valued at$204,750($315/sq.ft). Brownfield Tax Increment Grants are not included.
Evaluation Criteria
Each of the five existing programs, as well as the discontinued Upper Storey Renovation Program, were
evaluated based on the following six criteria:
1. Is the program financially relevant (ie: does it provide a significant enough grant to either stimulate
redevelopment or enable the City to negotiate for performance objectives, such as high quality design)?
2. Is the program user friendly to the applicant, and not a cumbersome process?
3. Does the program allow the City to use discretion on the types of projects eligible to receive funding?
4. Does the program allow the City to impose performance objectives, such as urban design standards?
5. Does the program provide a predictable and controllable financial impact to the City (ie: can the City
accurately budget for and limit the amount of funding provided in a given year)?
6. Can the program be administered without requiring significant staff resources?
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 2 T
Program-by-Program Evaluation
City staff reviewed each of the existing programs and offer the following evaluations. For detailed
information on each program, see the appendices in Section 7.
3-Year Tax Exemption (1997—present)
Projects which result in an increase to property taxes are eligible for a 50% exemption to the tax increase for
a period of three years, subject to the availability of funding.
The financial value of this program is very modest. It equates to approximately $1 per square foot of office
construction or$2 per square foot for residential construction. As such, this program alone will not make or
break whether a project proceeds. The City could impose requirements or performance standards to ensure
only high quality projects receive the exemption. Presently, however, all projects are eligible. Predicting the
exact value of the exemption is challenging and cannot be determined until tax reassessment occurs. Tax
exemptions tend to be unattractive to developers of condominium projects as the exemption benefits the
purchasers, not the builder. Due to the nature of this incentive, administering this program requires
considerable staff time. However, it appears that no projects have ever been approved for this program.
Based on the foregoing, staff do not see sufficient value in continuing this program.
Planning Application and Building Permit Fee Rebates (1997—present)
Any completed construction project in the core is eligible to receive rebates on their development fees.
Funding is limited and provided on a first-come first-serve basis.
For new office construction, this program can provide significant value. For example, for a new 200,000
square foot office building, the incentive could exceed $425,000. For residential projects, the value of the
program is very modest. For small businesses and retailers, the value of the permit rebate, while minor
relative to major new construction projects, is a significant motivator for undertaking facade enhancements,
interior enhancements and adding new patios.
The City could impose requirements or performance standards to ensure only high quality projects receive
the exemption. Presently, however, all projects are eligible. Administering this program is relatively simple.
However, given the first-come first-serve nature of the funding for this program, the City cannot guarantee
that any project will receive funding. For example, one major project could use all of the available funding,
meaning no other projects completed in the same calendar year could receive funding. As a result,
developers are given little certainty that this program will be available for them.
Given the difficulty in guaranteeing available funding, staff suggest discontinuing this program and diverting
the funding toward existing incentive programs, such as the Facade Grant program. Alternatively, staff
suggest maintaining a scaled back version of this program targeted at assisting small businesses with minor
improvements.
Exemptions from Parkland Dedication Fees (1995—present)
Municipalities can, as part of most new developments, require either the dedication of parkland, or an
equivalent cash-in-lieu payment.
For non-residential developments, a municipality can acquire 2% of the land or cash-in-lieu up to the
equivalent of 2% of the value of the land prior to development. Such an exemption provides minimal value
to the developer.
For residential developments, the municipality can acquire 5% of the land or cash-in-lieu up to the equivalent
value of 1 hectare of land for every 300 units. In most cases, taking land is either non-beneficial to the City
as the park space would be relatively insignificant or has the potential to complicate new construction.
However, the cash-in-lieu rate for redevelopment projects has the potential to stifle redeveloper t prof t�
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE((iSf
particularly where land values are high. At a land cost of$1.5 million per acre, a 300-unit project would be
required to pay $3.7 million in parkland fees (or in excess of $12,000/unit). On a recent intensification
project, the City opted to impose a lesser rate of 0.15 hectares for every 300 units. Currently, the Downtown
is the only area of Kitchener where developers are exempt from parkland dedication requirements.
While exempting parkland dedication fees does not result in a direct cost to the taxpayer, it does result in lost
revenue which limits the City's ability to acquire or purchase parkland in or near downtown. The City does
not have any ability to impose requirements or performance standards when exempting parkland fees. All
projects would be exempt. No administration of this program is required.
Based on the City's inability to limit this exemption only for high quality projects, staff recommend
discontinuing this program. Staff suggest that if this exemption is lifted, that new development downtown be
subject to a new cash-in-lieu rate of 0.15 hectares for every 300 units, as opposed to the full rate allowed by
the Planning Act.
Exemptions from Development Charges (1999—present)
Any project within the Downtown boundary, adding new commercial floor space or new residential
units, are currently exempt from paying development charges (DC). DC exemptions typically provide
the greatest financial impact for a development. Historically, when the City has offered DC exemptions
in the downtown, the Region of Waterloo has done the same. For example, the exemption saves
residential developers over$12,000 per unit, of which the City's portion is $3,066. Developers have
noted that, since DC charges were reinstated in Uptown Waterloo in 2009, Downtown Kitchener has
become a much more attractive location for these types of redevelopment projects.
There are two methods of foregoing development charges Downtown. Prior to 2009, Downtown
Kitchener was excluded from the Development Charges Bylaw, thus no DC charges were applied to
development Downtown. The "downtown portion" of any growth related capital works was funded
through non-DC sources in the City's capital budget (e.g., capital out of current or utility rates).
From 2009-2013, the Downtown was not excluded from the Bylaw. Under this scenario, developers
are still exempt from the fee, but the City back funds the Development Charge Account for all
exemptions, resulting in a levy impact to the tax base. For a 100-unit residential development, for
example, the City will have to back fund $306,600, while the region would have to back fund $911,100,
resulting in an incentive worth $1,217,700. As every project receives this exemption this approach is
more difficult to budget for than the previous approach. For example, if 500 units were built in one
year, the City would have to find over$1.5 million to fund the exemptions. In contrast, the previous
approach provided much greater financial certainty as the split between DC and other funding would
be established through the background study and then be provided for as part of the City's capital
budget and forecast.
When the City of Waterloo discontinued its DC exemption for Uptown, the City received a rush of
building permit applications prior to the sunset date. This resulted in a significant cost to Waterloo's
tax base. By returning to the pre-2009 approach, the City could set a sunset date, in 2019 for
example, and not be at risk of having to back fund an influx of DC waivers as the downtown cost of
growth-related projects would be established up front and built into the capital budget and forecast.
While DC exemptions provide great financial impact for a developer, the City has no ability to use
discretion over who receives the exemption. However, if the City were to include specific policies in its
Official Plan, the City could hold DC exempt projects to the highest standard of urban design. These
policies would provide the basis for the City to refuse a site plan application if the design quality was
insufficient.
Based on the importance of the DC exemption, yet recognizing the financial uncertainty of the
2009-2013 approach, staff recommend using the pre-2009 approach for the next DC Bylaw. In
addition, staff recommend incorporating special policies in the Official Plan to ensure high quality
design.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 2 6
Facade Improvement Grant Program (2009-2013)
Building and business owners can receive up to $10,000 per storefront, to a maximum of $30,000 for
buildings with multiple storefronts. The grant cannot exceed 50% of the value of work done. From 2009 to
2012, 34 projects were approved covering 48 facades. If all approved projects are completed, the program
will stimulate more than $1.4 million in construction value, of which the City contributed $390,000.
For most of the applicants, without the facade grant they would not have undertaken their project. For the
remainder, the grant enabled them to use higher quality of materials and/or allowed them to expand the
scope and scale of work. The incentive acts as a key tool for attracting new businesses. The program is
efficient and simple for both staff and applicants, yet the City has full discretion over which projects receive
funding. All projects must generally support the King Street Facade Guidelines. The number of projects
approved is limited to the amount of funding available, giving the City certainty over the costs of the program.
Based on the popularity of the program, the positive results produced, and the efficient administrative
approach, staff recommend continuing this program. Should the program continue, there are multiple
potential projects which would have more than three storefronts per building. As such, staff will re-evaluate
the need for the $30,000 per property cap in order to facilitate the comprehensive improvements of larger
buildings.
However, almost all of the initial funding set aside for this program is currently allocated to approved
(although not all completed) projects. Staff recommend finding an annual source of capital funding for this
program.
Upper-Storey Renovation Program (2005-2010)
The Upper-Storey Renovation Program was targeted at vacant or distressed space above ground floor retail
(primarily on King and Queen Streets). Applicants could receive up to $100,000 per project, of which 50%
was in the form of a loan, and 50% in the form of a forgivable loan/grant. Only residential units that were 650
square feet or greater could be eligible. Six projects were successfully funded using this program.
The program produced less than expected results. This was due to a variety of issues. The program was
difficult to administer and cumbersome for applicants. This is primarily due to the requirements to issue
loans (credit checks, legal documentation, etc.). Low interest rates at banks made the City loans less
enticing. The Downtown rental market was soft and typical rental rates at the time were low. Most upper
storey spaces require extensive work to where the$50,000 grant was not a sufficient incentive.
As a result, the City discontinued the program in 2010.
Overall Evaluation
1. Financially 2. User 3.Allows 4. Impose 5. Financially 6. Easy to
Relevant -Friendly Discretion Objectives Predictable Administer
3-Year Tax No No No* No* No No
Exemption
Planning&Building Partially** Yes No* No* Yes/No*** Yes
Permit Fee Rebate
Parkland Dedication Partially** Yes No No No Yes
Fee Exemption
Development Charge Yes Yes No Yes Yes/No**** Yes
Exemption
Facade Grant Yes Yes Yes Yes Yes Yes
Program
Upper-Storey Yes No Yes Yes Yes No
Renovation Program
Programs are not currently set up to allow discretion or impose objectives,however these programs could be modified to enable discretion.
"The program is financially relevant only for certain uses.
"'The Planning&Building Permit Fee Rebate is financially predictable for the City as it is subject to available funding,but not financially predictable for developers as
there is no guarantee that funding will be available for their project.
*" The DC exemption is financially predictable if the Downtown is excluded from the Bylaw. If Downtown is not excluded,requiring the City to back fund all exemptions,
the program is not financially predictable.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 2 7
Based on the foregoing, only the Facade Grant Program satisfies all criteria. Given the tremendous
popularity and effectiveness of the program, staff recommend continuing the program on an ongoing basis,
subject to the availability of funding.
For all other financial incentive programs, it is clear that their current forms no longer effectively address
today's context. Most notably, the City should explore modifying the DC exemption to the pre-2009 format.
All options for modifying the current incentive package are identified in Section 5.
Note-staff recommend that prior to discontinuing any program, sunset timelines and a phasing out policy be
established for each.
Additional Program Worth Considering - Landing Pad Grant Program
Landing pads are an essential component of the City's "Start Up City" strategy, and is a place for emerging
companies to locate once they have graduated from tech incubators like The Communitech HUB and the
Accelerator Centre, or outgrown co-working spaces like Treehaus and Workplace One. In order to
encourage new Landing Pads (see public policy objective #5 in section 1), the City could create a capital
reserve account for the purposes of providing grants for such projects. For example, the City could set
aside $200,000 and offer up to 5 grants, totaling $40,000 each, for new landing pads. The program could
operate similar to the Facade Grant Program. Grant money would cover up to a maximum of 50% of the
construction costs, and could be applied to interior and exterior enhancements for commercial projects.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 2 8
Sedon Capacity to •
4 Financial Incentives
The following are the funds currently available, or budgeted for, to fund financial incentives:
Economic Development Investment Fund
Development Charge Exemption = $1,494,000*
Upper-Storey Program = $919,000
Capital Budget
Planning &Building Permit Fee Rebate Program:
Current Balance = $878,000*
Budgeted 2013 = $203,000*
Budgeted 2014 = $149,000
Budgeted 2015-2019 = $92,000/year
Capital Reserve
Downtown Facade Grant Program = $30,000 (not yet allocated to approved projects)
Total
All totaled, in 2013, the City would have only approximately$3.5 million to fund financial incentives. A large
portion of this funding could be spent during the sunset period for existing programs.
*If the City were to establish sunset clauses for these programs, all funds could be exhausted based on developments currently
under development or in the planning phases.
Additional Fundina
Presently, no additional funding has been built into the City's capital budget. Should the City wish to
establish an ongoing funding source through the capital budget, a one-time 1% increase to the tax levy
would provide$1 million of annual funding (for example).
Conclusion
The current incentive package includes two types of programs: those that have upset funding limits (Facade
Grant Program, Building Permit Rebates and Upper Storey Renovation Program), and those that are open-
ended (Development Charge exemption, Waiver of Parkland Dedication Fees, and the 3-year Tax
Exemption). Programs with upset funding limits are typically subject to the availability of funding. City
Council can limit or increase the amount of funding as it sees fit. This provides good financial certainty. The
open-ended programs, most notably the Development Charge exemption, do not provide the same financial
certainty. Simply put, the City no longer has the financial resources to fund the current Downtown incentive
programs without the potential imposition of a significant increase to the tax levy. As such, the City can no
longer continue to offer open-ended financial incentives with no ability to cap the total impact on the
municipal budget.
However, it its clear from the analysis in Section 2, that there is still a need to provide some form of financial
incentive in order to stimulate redevelopment. Using the pre-2009 DC exemption format would allow the
City to offer incentives without creating a greate deal of uncertainty with respect to the ultimate impact on the
tax levy. Doing so may also allow the City to repurpose funds for new incentives or to provide ongoing
funding for the Facade Grant Program.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 2 9
Sedon
Options f• r Incentive Programs Moving
5 Forward
The following provides a series of incentive package options the City could consider.
Based on the success, importance and support from the business community for both the Brownfield
Remediation Program and the Downtown Facade Grant Program, all options below assume the continuation
of these programs:
Option 1 -Status Quo
This option would extend all existing programs through to 2019. All forms of development would be exempt
from development charges and park land dedication fees, would be eligible for a three-year tax increment
exemption,while being eligible to receive rebates for planning and building permit fees.
Discontinue: None
Continue:All
New Incentives: None
Pros: an attractive package of incentives for the development industry, this package would generate the
most development activity, thus generate the greatest potential long-term assessment growth.
Cons: the City would have limited control of the quality of projects that receive funding, and could end up
funding projects that do not require financial support. This option could force automatic, uncontrollable
increases to the tax base. There is no ongoing funding source beyond EDIF.
Estimated Cost to the City: in excess of $4.5 million if all projects currently in planning phases were
completed by 2019, plus a loss of approximately$2 million in potential parkland dedication fees.
Option 2 (Preferred)- Modify Development Charge Exemptions and Realign Funding to Key Programs
This option would see the City exclude the Downtown from the next development charges bylaw (starting in
mid-2014) and fund any growth related capital works in the Downtown through the capital budget. This
would be implemented in concert with new policies in the Official Plan that enable the City to hold all
recipients of this development charge exemption to high urban design standards. Most of the other
programs would be discontinued or modified in some manner. The majority of the annual budget allocation
for Planning & Building Permit Fee rebates would be redirected to fund the Facade Grant Program on an
annual basis. The Planning & Building Permit Fee rebate program would be scaled back to focus only on
minor improvements. EDIF funds previously allocated to the Upper-Storey Residential Program would be
used to fund a new Landing Pad Grant Program.
Discontinue: Parkland Dedication Fee Exemption, 3-Year Tax Exemption, Upper-Storey Renovation
Program
Continue: Facade Grant Program, Brownfield Remediation Program
Modify: Planning &Building Permit Fee Rebates
New Incentives: Landing Pad Grant Program
Pros: this package continues the Development Charges Exemption without creating unpredictable financial
impacts on the municipality's budget. It also enables the continuation of the Facade Grant Program and the
establishment of a new Land Pad Grant Program.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 3 0
Cons: the City would not have full control of the quality of projects that receive the eliminated DC rate, as this
would be subject to Site Plan Control.
Estimated Cost to the City: the capital costs related to downtown growth would be established through the
upcoming DC Background Study to be completed by mid-2014. Through that process, staff will advise
Council as to whether or not existing capital budgets provide sufficient non-DC funding to cover the costs
related to growth in the Downtown.
Option 3-One Consolidated Grant Contingent Upon High Quality Urban Design
This option would see all existing incentive programs repealed and replaced with one new grant program.
Only a limited number of projects would be approved each year, and could be based on a competition-type
approach,whereby only the best designed projects would receive incentives.
Discontinue: Development Charge Exemption, Parkland Dedication Fee Exemption, 3-Year Tax Exemption,
Planning &Building Permit Waiver, Upper-Storey Renovation Program
Continue: Facade Grant, Brownfield Remediation Program
New Incentives: Urban Design Development Grant
Pros: this option directly supports larger public policy objectives to achieve high quality urban design and
architecture in the Downtown. The City would have control over which projects receive funding. All projects,
regardless of use,would be eligible. This option provides greater financial certainty for the City.
Cons: only a small number of projects would receive funding. Projects which are still high quality in design,
but not the best design proposal in a given year, would not receive incentives. A lack of certainty in funding
may delay a project, or cause the developer to push it into the following funding year. A certain level of
subjectiveness would be used in the selection process.
Estimated Cost to the City: would be based on the availability of funding. To provide funding that is sufficient
to stimulate investment, the City would likely need to generate in excess of $2 million per year to fund this
program.
Option 4- Replace Incentive Programs with Strategic Municipal Investments
In an effort to increase purchase prices and absorption rates, instead of reducing development costs, the
City could opt to fund enhancement projects instead of incentive programs. Under this scenario, funds
normally directed to incentives could be directed to beautification initiatives, enhanced event programming,
catalyst partnerships, etc.
Discontinue: Development Charge Exemption, Parkland Dedication Fee Exemption, 3-Year Tax Exemption,
Planning &Building Permit Waiver, Upper-Storey Renovation Program
Continue: Facade Grant, Brownfield Remediation Program
New Incentives: none
Pros: this option provides greater financial certainty for the City. Enhancement projects could be targeted to
support the marketability of City owned lands.
Cons: redevelopment projects would likely be delayed until such time as the Downtown market reaches the
point where projects are feasible entirely based on purchase prices. There is no certainty that such a time
would occur. Realistically, it would not occur until some time after the opening of the LRT. The City would
have less control over the type and design quality of redevelopment projects in the core.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 3 +
Estimated Cost to the City: new projects would be based on the availability of funding. Projects in excess of
funds currently attributed to financial incentives would have to be funded out of increases to the capital
budget.
Option 5- Discontinue all Incentive Programs
The City could opt to eliminate all Downtown financial incentives entirely.
Discontinue: Development Charge Exemption, Parkland Dedication Fee Exemption, 3-Year Tax Exemption,
Planning &Building Permit Waiver, Upper-Storey Renovation Program
Continue: Facade Grant, Brownfield Remediation Program
New Incentives: none
Pros: funds used to support financial incentives could be redirected to other budgets, or assumed as an
overall budget savings.
Cons: based on the research contained within this study, redevelopment would likely be significantly delayed
until such time as the Downtown market reaches the point where projects are entirely feasible based on
purchase prices alone. Certain redevelopment projects could be abandoned entirely. The City would have
less control over the design quality of redevelopment projects in the core. This option could limit the City's
ability to achieve public policy objectives such as growth management and urban intensification.
Estimated Cost to the City: this approach would result in a savings to the City.
Implications of the Regional Development Charge Exemption
Historically, where a local municipality has offered a development charge exemption, the Region has
followed suit. Given the value of the Regional exemption (ex: $9,111 per residential unit in 2012, or 75% of
the total development charge) it is imperative that the Region also maintain their exemption. Without the
Region's support, and based on the analysis of section 2, it is likely that redevelopment projects could be
delayed until market rates increase to a point where each projects can proceed with a significantly reduced
value of incentive.
Treatment of Parkland Dedication Fee Exemption
A number of the options listed above suggest eliminating the Parkland Dedication Fee Exemption. However,
as discussed in section 3, imposing the highest cash-in-lieu fee would potentially stifle development by
counteracting the value of the incentives being proposed. As such, it is recommended that removal of the
waiver occur in concert with a new Council policy that establishes an intensification cash-in-lieu rate for the
Downtown (and potentially other appropriate reurbanization areas)of 0.15 hectares for every 300 units. The
City would still retain the option to obtain 5% of the land under redevelopment,where appropriate.
Sunset for Discontinued Programs
Where any programs are recommended for discontinuation, staff suggest establishing a reasonable end
date to each program, allowing those developments that are proceeding based on the existing incentive
package, to complete their projects and claim their incentives. This could be done in concert with the new
DC Bylaw expected in mid-2014.
It is also imperative for the City to advise the development industry that all financial incentives are not
intended to be offered on a perpetual basis. They are intended as tools for facilitating redevelopment of the
core only when market rates are not strong enough to enable financial viability. It is likely that incentives,
such as the development charge exemption, could be discontinued following the implementation of LRT.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 3 2
Expansion of the Downtown Boundary
Over the past few years, a number of developers have asked if the City would consider expanding the
Downtown boundary to allow their projects to be eligible for Downtown incentives. Currently the Downtown
boundary aligns with the Urban Growth Centre Boundary of the City and Regional Growth Management
Strategies. Upon review, staff have determined that there is no logical location to redraw the boundary lines
where redevelopment opportunities do not exist on the opposite side of the line. In particular, redevelopment
opportunities on King East extend past Ottawa Street, redevelopment opportunities on King West and
Victoria Street north extend to the City limits, redevelopment opportunities in North Ward extend to the
expressway, and redevelopment opportunities in Mill-Courtland extend past Ottawa and Mill Streets.
Such expansions could add significant additional strain and unpredictability on the City's budget, particularly
if the expansion is for the purpose of extending the development charge exemption. Expanding the
boundaries using option 3 would provide greater financial certainty, but could potentially dilute the impact of
the incentive program. Redevelopment projects would be scattered throughout the Central Neighbourhoods
as opposed to concentrated Downtown.
Based on the foregoing, staff recommend against expanding the boundary, in favour of retaining a
harmonized boundary of both the Urban Growth Centre and the Downtown incentives.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 3 3
Sedon
• PreliminaryRecommendations
Based on all of the analysis contained within this discussion paper, it is clear that the current Downtown
financial incentive package, much of which was established in 1995, no longer effectively implements all of
the City's objectives and interests. Most specifically:
i) the set of programs do not provide the City with the ability to impose any requirements to meet our policy
objectives (such as high quality urban design, sustainable design, etc.); and,
ii) the set of programs do not provide the City with predictable financial certainty.
As such, staff recommend exploring the following changes to the Downtown Incentive Program:
a)Through the development of the next Development Charges Bylaw, exclude Downtown Kitchener from
the bylaw, resulting in no development charges being applied Downtown;
b)Work with Region of Waterloo staff to strongly encourage the Region to maintain their Downtown
development charge exemption;
c)Scale back the Planning & Building Permit Fee Rebates to target minor enhancements, and eliminate the
3-year Tax Exemption, subject to a phasing-out process, with input from stakeholders;
d)Modify the Parkland Dedication Waiver to establish a reurbanization cash-in-lieu rate of 0.15 hectares per
300 units for the Downtown, subject to a phasing-out process, with input from stakeholders;
e)Extend the Facade Grant Program beyond 2013 and consider options for allocating ongoing funding
within the Capital Budget, such as reassigning the budget allocation for the Planning & Building Permit
Fee Rebates, starting in 2014. Consider allowing more than $30,000 per building where the building has
more than 3 separate storefronts;
f) Develop a grant program for Landing Pads geared towards start-up businesses, similar to the Facade
Grant Program, using the remaining funds from the Upper-Storey Renovation Program through EDIF;
and,
g)Establish clear Official Plan policies that allow the City to hold recipients of any Downtown financial
incentive to the highest possible standard in terms of urban design.
Staff believe that these changes support the City's policy objectives in a more targeted manner. They would
provide greater financial predictability and should reduce the amount of work required to administer the
numerous programs. Above all, they continue to provide a necessary financial incentive to encourage
redevelopment in Downtown Kitchener, until such time as purchase prices and lease rates reach a point
where the City no longer needs to support such projects.
Looking Forward
Just as today's context is very different than 1995, the post-LRT context will be very different than today. As
such, staff anticipate conducting a similar review of Downtown Financial Incentives a few years after LRT is
operational. At such point, staff should have a better understanding of the impacts of rapid transit on the
economic viability of redevelopment projects. There is a strong likelihood that financial incentives, such as
the development charge exemptions, may no longer be necessary to enable projects to reach financial
profitability.
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 3 T
Sedon
7 Appendices
1.3-Year Tax Exemption (1997—present)
Number of Applications: None
Total Cost to the City: N/A
Funding Source: funded through the City's Capital Budget
2.Planning Application and Building Permit Fee Rebates(2006—present)
Number of Applications: 21
Total Cost to the City: $403,244.17
Funding Source: funded through the City's Capital Budget
3.Exemptions from Parkland Dedication Fees(1995—present)
Funding Source: None. The municipality is not required to offset the waiving of parkland dedication fees.
As a result, there is no direct impact to the tax base. However, the waiver does equate to lost revenue that
otherwise would be placed in the Park Dedication Trust Fund.
4.Fa(;ade Improvement Loan/Grant Program (1997—2009)
Value of Incentive: interest free loan of$15,000 per storefront($7,500 for exterior renovations and $7,500 for
interior renovations). A maximum of$45,000 could be given to any one building or owner. 15% of the loan
was forgiven, acting as a grant.
Number of Applications:
pplications Value of Loans Advanced Value of Loans Forgiven
1997-2005 134 $2,248,000 $422,000
006-2008 13 $435,000 $62,250
Funding Source: Capital Account
5.Exemptions from Development Charges(1999—present)
Value of exemptions since 2001:
Year Total Exemption Year Total Exemption
001 $472,937.70 2006 $223,261.58
002 $259,357.83 2007 $200,215.56
003 $0.00 2008 $205,771.68
004 $19,536.00 2009 $282,979.24
005 $56,626.95 2010 $24,619.44
011 $419,986.41
Total $2,165,292.39
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGE 3 5
6.Upper-Storey Renovation Program (2005-2010)
Number of Approved Applications: 6
Number of Residential Units Renovated: 26
Funding Source: EDIF
Total Construction Value: $489,250
Value of Loans Forgiven: $200,500.
7.Fa(;ade Grant Program (2009-2012)
Number of Approved Applications: 34
Number of Storefronts/Facades/Signs Renovated: 48
Funding Source: Capital Reserve
Total Construction Value to Date: $1,439,000
Value of Grants Paid to Date: $390,000
DOWNTOWN FINANCIAL INCENTIVE REVIEW PAGA 3 6