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HomeMy WebLinkAboutDTS-06-098 - Development Charge Compensation RequestLR Development & Technical Services Report To: Councillor Berry Vrbanovic, Chair, and members of the Finance and Corporate Services Committee Date of Meeting: June 26, 2006 Submitted By: Pauline Houston, General Manager of Financial Services & City Treasurer Rob Browning, General Manager of Development and Technical Services / Fire Chief Prepared By: Dan Chapman, 741 -2347 George MacDuff, 741 -2974 Jeff W i l l m e r, 741 -2325 Ward(s) Involved: Ward 3 Date of Report: June 22, 2006 Report No.: DTS -06 -098 Subject: DEVELOPMENT CHARGE COMPENSATION REQUEST P KRUSE IN TRUST — HIDDEN VALLEY ESTATES SUBDIVISION 30T- 04201, HIDDEN VALLEY ROAD RECOMMENDATION: That the Mayor and Clerk be authorized to execute an agreement between the Corporation of the City of Kitchener and Hidden Valley Estates Inc. to the satisfaction of the City Solicitor, for the purpose of committing to compensating the subdivider for the difference between its costs for the design and construction of sanitary sewage facilities in the Lower Hidden Valley Community and the Development Charge credits to which the subdivider is entitled less any cost - sharing agreement with other benefiting landowners; and That the City commits to including the necessary funds in its 2007 -2016 Year Capital Forecast, for the year 2016, in the amount of approximately $800,000. That staff be directed to report back to the Finance and Corporate Services Committee with a proposed policy on Development Charge Refund Agreements, to be considered no later than the final approval of the 2007 -2016 Capital Forecast. BACKGROUND: Development of the Kruse subdivision and other adjacent lands requires construction of a sanitary sewage pumping station within the subdivision and a forcemain from the pumping station to the gravity sewer on the alignment of the future Wabanaki Drive. The project was included in the 2004 Development Charge Background study as 100% related to infrastructure needed to accommodate growth and therefore the cost is to be paid out of the Development Charge (DC) fund. Normally, such a project would be paid for up front by the subdivider, and the subdivider would be compensated by means of development charge credits at the time of building permit issuance. However, in this case the project cost is approximately $1.1 million and the eligible DC credits for lots within the Kruse subdivision amount to approximately $300,000. The DC background study sets out capital costs of infrastructure required to accommodate growth over a twenty year period (2004 — 2023). The 10 Year Capital Forecast sets out projects intended to be constructed (both those financed by DCs and those financed from taxes and other sources) over a ten year period. REPORT: The Hidden Valley Estates (HVE) subdivision received draft plan approval in 2005. Draft approval condition 6.11 (attached) sets out the terms and conditions for infrastructure financing and collection of credits. HVE is proceeding to construction and registration before any other benefiting lands, as the majority of the benefiting lands are within the HVE subdivision, and the pumping station site is within the HVE subdivision. The approximate total cost of design and construction for the sanitary facilities is $1.1 million; however, the total of all City DC credits which would be due to HVE is approximately $300,000 (55 single detached homes x $7,540 DC x 72% of DC for Engineered Services). HVE has requested that the City enter into a refund agreement to compensate HVE for the difference of $800,000. The request is for a two stage refund, with $200,000 paid in 2009 and the remaining $600,000 paid in 2016. The rationale for this timing is as follows: the DC background study estimated the project cost at just over $2 million; this amount is to be collected from development charges on city -wide development over the next 20 years; approximately one quarter of this total or roughly $500,000 would be collected in the 2004 -2008 time period; $200,000 is the difference between the amount that could reasonably be expected to be added to the DC fund by 2009 and the DC credits owing to HVE. The remaining amount of $600,000 is requested in 2016 acknowledging that the project is not in the City's 2006 -2015 capital forecast, but expecting that the project will be included in the forecast no later than 2023 which is the horizon year for the DC background study. The owners of other benefiting lands within the Hidden Valley area are not yet prepared to proceed to construction, and while an agreement may yet be reached between HVE and owners of those other benefiting lands, the actual number of lots registered (and ultimately receiving DC credits) remains unknown at this time, and very likely would fall far short of meeting the $1.1 million project cost. Under the terms of the requested agreement, HVE would pay the cost of the works and receive development charge credits upon building permit issuance; the City would commit to compensating HVE for the difference between the total cost of the works and the DC credits to which HVE is entitled less any cost sharing with other benefiting land owners. This commitment in the amount of approximately $800,000 would be paid to 14 HVE out of the DC fund, without interest, either in a lump sum on a date to be determined, or in a series of annual payments continuing until the debt is repaid. Staff acknowledge the City's obligation to grant credits to the subdivider, and the subdivider's entitlement to receive such credits instead of paying the full DC with each new house on each new lot. In the opinion of City staff that is the full extent of the City's obligations under the Development Charges Act. We understand that the subdivider has obtained a legal opinion demonstrating otherwise. The issue at hand is whether the subdivider should be compensated for the difference between the sum of credits and the project cost, and if so, when. Lyndale Precedent There is one precedent in Kitchener for such a refund repayment agreement (staff acknowledge that HVE is not relying on this precedent, but without this precedent staff would rely on the conditions of subdivision draft approval which do not provide for a refund beyond DC credits). The Zeller Drive pumping station and related forcemain were constructed at the cost of Lyndale Estates. The difference between the project cost and the eligible DC credits was approximately $720,000 and the City agreed in 2003 to a scheduled repayment for the difference in the amount of $200,000 per year starting in 2005. The staff report recommending that agreement included the following: "While the recommended approach may be considered to be a departure from the City's usual approach to development- driven infrastructure, the circumstances warrant such an approach: • the entire community cannot develop without the sanitary sewage facilities; • the cost of the works (approximately X4.0 million) is substantial and exceeds the total of DC credits owing to any one subdivider; • the probable timing of development of other benefiting lands will contribute revenue to the DC fund to coincide with the schedule of the City's payments; and • there is a net benefit to the DC fund from development in the Grand River South community. FI NA NCIA L I MPL I CA TIONS: Commitment of approximately $200, 000 per year starting in 2005 is intended to coincide with collection of development charges from other benefiting lands. There is a risk that such lands may not develop until later, resulting either the delay of other DC- funded works or the need for the City to debenture the costs if the DC fund is depleted. The possibility that other benefiting lands never develop is so remote that it is not a real consideration. Total expected City DC revenue from development of the four draft approved plans in Grand River South as well as the three plans scheduled for draft approval in 2004, as 3 shown on the attached Key Map, is $11.1 million. The Engineering Services portion of this 71.58% or X7.9 million. If the City does not make a commitment to Lyndale, it appears that the development of the entire community would be delayed indefinitely, until the owners of the benefiting lands reach agreement on sharing the initial cost of the required works, or one subdivider assembles enough land and DC credits to justify proceeding alone. " The HVE request differs from the Lyndale request as follows: • the Zeller Drive infrastructure would facilitate the development of an entire community of approximately 230 hectares, with 11,200 residents in a wide range of housing types, and including two elementary schools, one district park, a neighbourhood institutional block, and at least three neighbourhood parks, whereas the Lower Hidden Valley infrastructure would benefit an area of approximately 34.5 hectares, with approximately 89 lots all of the large lot residential type, and 3.5 hectares of commercial land. In this regard, the Zeller Drive infrastructure project was considered to be among the highest priority DC- funded infrastructure projects, whereas the Lower Hidden Valley project is considered to be among the lowest priority DC- funded infrastructure projects • the Zeller Drive infrastructure had already been committed to in the 10 Year Capital Forecast at the time that the refund request was made, whereas the Lower Hidden Valley infrastructure is not included in the 2006 -2015 Capital Forecast (although it is acknowledged that when the HVE subdivision was considered for draft approval in 2005 the project was included in the 2005 -2014 Capital Forecast as a developer- financed project expected to proceed in 2005); • the Zeller Drive pumping station off - loaded a portion of the sewage volumes being handled by existing sanitary sewage pumping stations in this drainage basin, which were operating at or near their capacity, and was therefore of benefit to the overall east -side sanitary facilities network, whereas the Lower Hidden Valley sanitary facilities benefit primarily the HVE lands, and in fact include a throw -away cost of approximately $100,000 for a section of forcemain which will become redundant when Wabanaki Drive is extended eastward from Wilson Avenue to Goodrich Drive (That project is currently in the capital forecast for 2007 but is not likely to proceed until 2008 given the timing of the Region's EA for the South Kitchener Transportation Corridor, and the subsequent Regional road design work to be coordinated with the Highway 7 widening). The Wabanaki Drive project would include a gravity sanitary sewer extending within the right -of- way (actual length of sewer not yet determined). • DC revenues (Engineered Services portion only) expected to be generated from imminent development of lands benefiting from the Zeller Drive infrastructure totaled $3.9 million more than the cost of the sanitary facilities, resulting in a net increase for the DC fund, whereas Lower Hidden Valley DC revenues will be less than the project cost, resulting in a net decrease to the DC fund; • At the time the Lyndale request was considered, there was a surplus balance in the DC fund, whereas there is a deficit balance projected — not only now but throughout the 2007 -2023 period (see attached reserve fund projection) — in the DC fund, meaning that the fund will have to borrow /debenture monies to pay for DC funded capital projects (we acknowledge that the projected deficit is attributable to a wide range of projects, of which the Lower Hidden Valley facility is only one, and further acknowledge that the cost of borrowing would not be a taxpayer cost, but would be borne by new development city -wide through its future development charges); and • The development of the Grand River South community was not proceeding until Lyndale secured the financing to construct the sanitary facilities and the City's approval of the refund agreement assisted Lyndale in securing the necessary financing to proceed, whereas HVE has stated that its development has proceeded to a point where there is no going back, and they will be proceeding to construction regardless of the response to its request. Alternatives and Implications Staff have met several times with the subdivider and his representatives. Eight different alternatives were considered, as discussed briefly in the May 5 letter attached. The remaining distinct alternatives are as follows: 1. City agrees to compensate the subdivider in 2024 when it is expected that the entire project cost will be collected from city -wide DCs based on the current background study; 2. City commits to including the project in the next 10 Year Capital Forecast as a 2016 project, and agrees to compensate the subdivider in 2016; 3. City agrees to the subdivider's request and commits to including the project in the next 10 Year Capital Forecast as a 2016 project, and agrees to compensate the subdivider by a payment of $200,000 in 2009 and the balance of approximately $600,000 in 2016, less any cost - sharing agreement with other benefiting landowners. Alternative 1: • Although in staff's opinion there is no legal obligation on the City's part — beyond DC credits -- to compensate a developer who chooses to construct City infrastructure at his own cost in advance of the City's timing, it is reasonable, since the City expects to collect the entire project cost from city -wide development charges over the 2004 -2023 period, that the City direct these funds to the Lower Hidden Valley sanitary facilities project by compensating the developer who paid for the construction of the facilities. • The 2024 time frame acknowledges that the Lower Hidden Valley sanitary facilities are a very low priority compared to other Engineered Service projects in the 2004 -2023 time period of the 2004 DC Background Study. • There is a risk that by 2024 the DC fund would not have collected the entire amount, but this risk is minimized by the following factors: o the estimated project cost in the 2004 DC Background Study is $2.12 million whereas the currently estimated project cost is $1.10 million, 5 meaning that for the 2004 -2009 time period the DC Fund is accumulating monies for this particular project at almost twice the actual rate; • actual growth rates have continued to surpass projected growth for the mid -2004 to mid -2006 period since the adoption of the 2004 DC By -law; • even if actual growth declines below forecast rates, there are at least 3 more opportunities (i.e. 2009, 2014 and 2019 assuming maximum 5 -year by -law periods) to do new DC background studies with new growth forecasts before 2024. Alternative 2: • Because the Lower Hidden Valley sanitary facilities are not included in the current 2006 -2015 Capital Forecast, staff have interpreted Council's intent to be that this project is not a priority within the next 10 years (i.e. that if no land developers were willing to pay the project cost up front, the City may choose to defer the project indefinitely, or otherwise facilitate the completion of said facility no sooner than 2016). • Committing to this or any earlier time -frame for scheduling a refund payment may limit the City's ability to allocate DC funds to higher priority projects in 2016. • This alternative would necessitate one of two actions: either competing projects are rescheduled to a later time, or more funds are borrowed to allow both the competing projects and the refund payment to proceed. Alternative 3: • The subdivision is likely to complete grading and servicing in late 2006 /early 2007, with potential Plan Registration and subsequent building permits issued starting in spring 2007. Assuming a build -out period of 5 years, all eligible DC credits would be granted by 2011. Since it is the builder /purchaser who directly benefits from the DC credit, the subdivider realizes this benefit at the time of sale of the lot, as the pending DC credit adds to the value of the lot. • The subdivider's representatives correctly point out that if there were 170 lots in their subdivision plan rather than 55, the City would automatically grant DC credits with each building permit, the subdivider would be fully compensated, and the Engineered Services portion of the DC fund would be no further ahead. Because there are only 55 lots, they describe Alternatives 1 and 2 as a windfall to the DC fund (i.e. that only 55 DC credits totaling $300,000 are granted during build -out of the subdivision, and the remainder of the compensation is made at a later date) • However, with the hypothetical 165 lot subdivision there would be no need for the City to "write a cheque" from the DC fund to the subdivider. The DC credits would simply be foregone revenue. The reality is that the subdivider is asking for a cheque to be written, at a time when the DC fund is forecast to be in a deficit. • Committing to 2009 for scheduling a refund payment in 2016 restricts the City's flexibility to allocate DC funds to higher - priority capital projects funded by DCs. Policy & Precedent When the Lyndale request was brought forward staff were careful to point out distinguishing factors so that any precedent- setting effect would be extremely limited. The Hidden Valley Estates request is distinguished from the Lyndale example on a number of factors, as discussed above. The Hidden Valley Estates request highlights the fact that City of Kitchener policy is silent on the matter of refund agreements. The standard condition of subdivision draft approval neither provides for nor rules out such an agreement. Past actions illustrate that there are some circumstances in which the City would be willing to enter into a refund agreement. The Development Charges Act, while being specific on DC credits and front - ending agreements, does not specifically provide for refund agreements, leading to the interpretation that a municipality is not obligated to enter into such agreements, but may do so without contravening the spirit of the act. The 2004 DC Background Study includes several projects which are expected to be paid for up -front by developers. Some of those fall into the same category as Hidden Valley Estates, in that the sum of eligible credits is less than the estimated project cost. In order to provide certainty to developers, and to minimize the risk to which the DC reserve fund is exposed, it is recommended that a policy be developed to give direction to such matters as the following: - whether DC- funded capital projects paid for up -front by developers should be compensated by means of DC credits at the time of building permit issuance or compensated by means of DC credits in the year that the project is included in the 10 Year Capital Forecast; - whether DC- funded capital projects expected to be paid for up -front by developers should be included at all in the 10 Year Capital Forecast; - whether approved subdivision conditions require formal modification to provide for refund agreements; - providing clarification that subdividers choosing to proceed with projects that are otherwise DC- funded, in advance of City timing, will not be compensated for their carrying costs and that refunds are for the purpose of enabling the subdivider to recover out -of- pocket costs and are not indexed to compensate for inflation; - under what circumstances the City is willing to consider entering into refund agreements. FINANCIAL IMPLICATIONS: The commitment by the City to compensate the developer for a shortfall in credits at any time prior to 2023 will result in payment out of a deficit balance in the DC Reserve Fund (see attached projection). While a Reserve Fund deficit may be recovered through future charges, the City has a fiduciary responsibility to prudently manage the balance in the DC Reserve Fund to avoid compromising the ability to fund priority growth - related projects in the future or require extreme fluctuations in the development charge. The 7 commitment to fund a low- priority project reduces the flexibility of Council to manage project priorities and the overall balance in the fund into the future. COMMUNICATIONS: No public notice is required. CONCLUSION: To minimize the risk to the DC fund, and provide Council the most flexibility on prioritizing DC- funded capital projects, Alternative 1 would be preferred. In the interests of finding a compromise solution that is more acceptable to the subdivider, while still keeping the DC fund's risk at an acceptably low level, Alternative 2 provides a reasonable solution, by providing the refund to the subdivider at a time when the City expects to have collected approximately 62% of the refund amount through DC payments city -wide. If, as expected because of the projected deficit balance, the City needs to borrow in order to pay the refund, the cost of borrowing is also paid by development charges. Any precedent- setting effect of Alternative 2, which may be considered to leave the City open to similar requests, is limited by the proposed new policy referred to in the recommendations of this report which should establish a new standard going forward from early 2007. Based on the foregoing, staff recommend that the City commit to compensating Hidden Valley Estates in the year 2016 as set out in Alternative 2. Jeff Willmer, MCI P, RPP Director of Planning Dan Chapman, C.A. Director of Financial Planning & Reporting List of Attachments: George MacDuff, C. E.T. Manager of Development Engineering Key Map Draft Approved Plan of Subdivision Draft Approval Condition 6.11 April 26 2006 letter from MHBC May 5 2006 letter from J Willmer Development Charges Reserve Fund Projection (Engineering Services) P