HomeMy WebLinkAboutCAO-14-006 - Downtown Development Charge Exemptions - Follow-Up Staff Report
ITC:HFI ? .R CA0 Office www.kitchenerca
REPORT TO: Finance & Corporate Services Committee
DATE OF MEETING: February 24, 2014
SUBMITTED BY: Jeff Willmer, Chief Administrative Officer
519-741-2200 ext 7350
Dan Chapman, Deputy CAO Finance & Corporate Services
519-741-2200 ext 7347
PREPARED BY: Cory Bluhm, Manager of Downtown Development
519-741-2200 ext 7065
WARD(S) INVOLVED: 9 & 10
DATE OF REPORT: February 1, 2014
REPORT NO.: CAO-14-006
SUBJECT: Downtown Development Charge Exemptions — Follow up
RECOMMENDATION:
That the City of Kitchener approve in principle that Downtown Kitchener be excluded from the
development charge calculations and application of the by-law, resulting in no growth-related
capital costs associated with Downtown Kitchener being included in the Background Study
and no development charges being levied on development in the Downtown, subject to the
2014 Development Charges Background Study being received, and the 2014-2019
Development Charges By-law being approved.
That the City of Kitchener approve in principle that the Downtown boundary would remain the
same as is used in the current Development Charges By-law, subject to the 2014 Development
Charges Background Study being received, and the 2014-2019 Development Charges being
approved.
That through the development of the 2014 Development Charges By-law, the City of Kitchener
establish the clear intention to discontinue the Downtown exemption prior to the subsequent
Development Charges Background Study and By-law, currently anticipated for 2019.
BACKGROUND:
In 2013, the City of Kitchener undertook a comprehensive review of the various financial
incentive programs offered Downtown, including exemptions from development charges (DC).
Presently, City and Regional DCs are waived for all new construction projects within the
Downtown boundary. The current DC By-law will expire in June 2014. In order to continue
imposing DCs, Council will need to enact a new by-law before the expiry date.
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Through the Downtown Financial Incentives Review, it was concluded that without DC
exemptions, new major residential intensification and new office construction projects would not
be financially feasible under the current and short term economic context. As a result, the City
will be challenged to meet the Urban Growth Centre targets of Places to Grow.
As part of the comprehensive review, Council directed staff to evaluate additional approaches to
providing DC exemptions, as well as different geographic options, which are outlined in the
report section below.
REPORT:
DIFFERENT APPROACHES
The following outlines 3 different approaches to providing DC exemptions, which are currently
under consideration, with a description of the pros and cons of each approach:
1. Current Approach - Tax Funded Exemption
Currently, development charges apply to new development within the downtown core area as
defined in the DC by-law. Under this approach, the City pays the DC that would otherwise be
payable into the DC reserve funds on behalf of the developer. These payments are currently
financed through the tax-supported Economic Development Investment Fund (EDIF). There is
no funding allocation beyond June 2014.
This approach provides the developer with a full exemption of the City's DC with a high degree
of certainty that the rebate will be in place for the entire duration of the DC By-law. However,
the funding shortfall arising from the exemption has to be covered by the tax base. With, in
theory, no limit to the number of exemptions, this shortfall is difficult to predict and therefore
leaves the municipality open to a high level of financial risk. The risk is magnified should the
City opt to discontinue exemptions from DCs, and a rush of building permit applications are
submitted before the program ends. In this case, the City could have to find a potentially large
source of funding to offset the cost of the exemptions. A similar situation was faced by the City
of Waterloo when it discontinued its Uptown core exemption in 2010.
2. Proposed Approach - Exclude Downtown
Under this approach, the Downtown would be excluded from the DC rate calculations and By-
law. As with the first approach, Developers would not pay development charges, and the City
would still have to fund the associated costs from the tax base. However, in this approach, the
tax base would have to pay a slightly higher portion of the overall project costs for capital
projects that are attributable to Downtown growth. No direct funding source is required as
additional costs are managed through the capital budget. A significant advantage to this
approach is that should there be a rush of applications, the City's exposure is limited.
This program provides the developer with certainty that there will be no development charges
for the entire duration of the DC By-law.
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3. Alternative Approach - Unit Thresholds
Under this approach, the percentage of a development charge rebate would decrease as more
units are built. For example, the first 1000 units would receive a 100% rebate, the next 1000
units would receive a 75% rebate, and so on.
This approach limits the City's financial exposure, as the maximum amount of rebates could be
established through the pre-determined thresholds. However, this approach would have to be
financed through the same method as the current approach, to which there is presently no
identified funding source.
From the developer's perspective, this approach provides limited certainty. As major
redevelopment projects can take up to 48 months to complete, a developer would be unable to
predict what percentage of the rebate they are going to receive.
Lastly, the projected growth downtown is estimated to be far less than 1,000 units. If the core
area was expanded to Betzner Avenue, or even to all lands within a 10-minute walk of
downtown, the growth is estimated to be less than 2,000 units. As such, it is conceivable that
the pace of growth may not reach the various thresholds during the life of the DC By-law.
Conclusion
Based on the foregoing, staff recommend using Approach #2 where Downtown is excluded from
the rate calculations and DC By-law.
DIFFERENT BOUNDARIES
With a desire to increase residential densities in order to support existing amenities (such as the
Kitchener Market) and attract new amenities to the core (in particular a grocery store), staff were
directed to evaluate different options for expanding the DC exempt Downtown core area. The
three boundaries that were analyzed are shown on the map in Appendix A. These include:
i. the current Downtown core area;
ii. the Downtown core area expanded east to include the Mixed Use Corridor lands
between Cedar Street and Betzner Avenue; and,
iii. all lands within a 10-minute walk of the current Downtown core area.
Based on forecasted growth over the next 5 years, the anticipated DC revenue under current
DC rates that would be foregone through an exemption is estimated as follows:
i) Current Boundary $2,176,000
ii) Expanded to Betzner $3,407,000 +$1,231,000
iii) Expanded to 10-min Walk $4,343,000 +$2,167,000
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Options (ii) and (iii) would certainly encourage new residential development that can support
existing amenities such as the Kitchener Market, existing retailers, the Downtown Community
Centre, Centre In The Square, etc. They would also help to encourage new amenities, such as
a movie theatre, new restaurants, etc.
However, based on discussions with operators of major grocery chains, Downtown's challenge
is not necessarily one of a lack of residents in the surrounding neighbourhoods, but a lack of
residents directly in the core. Urban format grocery stores rely on customers making multiple
purchases per week, rather than one large purchase per week. As such, they require a critical
mass of customers within a 5 to 10 minute walking radius of the store. As such, concentrating
density through option (i) may be more beneficial than spreading density out over a wider
geographic area. Depending on the ultimate location, expanding the boundary via option (ii) or
option (iii) may or may not be of direct benefit. One grocer in particular noted a preference to be
located in the west end of the Downtown, in part due to the growth of high rise residential
development, but also to distance themselves from the Kitchener Market. In this case,
development east of Cedar may be too far to provide customers within the preferred 5 to 10
minute walking radius. This does not mean that residents east of Cedar would not utilize a
grocery store in the west end. Rather, it simply suggests that these resident are less likely to
make multiple visits to a Downtown grocery store in a given week.
Conclusion
Based on the foregoing, staff recommend retaining the current Downtown boundary, although
staff recognize that residential growth east of Cedar would provide new customers for some
amenities, primarily the Kitchener Market.
ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN:
`Downtown as a place to live' is a key priority under `Dynamic Downtown'. Exempting
development charges is critical to ensure high density residential development is financially
feasible and the City is able to achieve the urban growth centre targets of Places to Grow.
FINANCIAL IMPLICATIONS:
Approach #2 would be implemented through the update to the development charges
background study and associated capital forecast. Any increases in the tax-supported share of
projects benefitting the downtown would be addressed through one-time adjustments to the
timing of the overall program of growth related projects.
Funding approaches #1 and #3 would require the creation of a new funding source by Council.
The extent of funding required is estimated in the chart above. Approach #1 leaves the City
open to significant financial risk should there be a rush of development applications immediately
prior to the expiration of the exemption as has been the experience in other jurisdictions.
COMMUNITY ENGAGEMENT:
Broad public consultation was held on the overall Downtown Financial Incentives Review.
CKNOWLEDGED BY: Jeff Willmer, CAO
APPENDIX A—Map of Boundary Considerations
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