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CITY OF VANCOUVER POLICY REPORT
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Date: |
January 27, 2004 | |
Author: |
Ronda Howard | |
Phone No.: |
873-7215 | |
RTS No.: |
3924 | |
CC File No.: |
1755 | |
Meeting Date: |
February 10, 2004 |
TO: |
Vancouver City Council |
FROM: |
Director of City Plans |
SUBJECT: |
Economic Conditions Impacting Development and Relation to Development Cost Levies |
INFORMATION
This report is submitted for the INFORMATION of City Council
CITY MANAGER'S COMMENTS
For projects that were in process by June 23, 2003 when Council approved the higher DCL rates, the February 1, 2004 effective date for the new rates was unanticipated. Some of these projects received their Building Permits before February 1 and paid the lower rate of $2.50. The larger, more complex projects have not yet received their permits and are thus faced with the higher DCL of $6.00. The consultant has reported that this unanticipated increase for in-stream projects creates a hardship for many of them, due to increasing construction costs. The City Manager, therefore, recommends a phased rate increase approach that will assist with the financial constraints facing these developments, and at the same time will help to address the City's needs for DCL revenue. Consequently, the City Manager RECOMMENDS A and B:
A. THAT Council approve a DCL rate of $4.00 per square foot ($1.60 per square foot in industrial areas) between now and July 1, 2004, at which time the rate of $6.00 per square foot ($2.40 per square foot in industrial areas) will be reinstated.
B. THAT Council instruct the Director of Legal Services to report back on February 12,
2004 with the necessary amendments to the DCL by-law.
COUNCIL POLICY
On June 23, 2003, City Council approved policies arising from the Financing Growth report. These included the following:
· An increase in the City-Wide Development Cost Levy rate from $2.50 per square foot to $6.00 per square foot ($1.00 to $2.40 in industrial areas), and
· A February 1, 2004 date for the new rates to come into effect.
On January 15, 2004, Council instructed staff to review economic conditions with respect to construction costs, and any significant changes such as property values, housing prices, including the phasing in of Development Cost Levy rates, which impact development and report back by February 10, 2004.
PURPOSE
The purpose of this report is provide information on the impact of changing economic conditions on developments in process at the time Council approved increased DCL rates.
BACKGROUND
On June 24, 2003 Council approved new DCL rates and an effective date of February 1, 2004.
On December 4, 2003, at Council's request, staff reported on Development Permit Applications that had been submitted prior to Council's June decision. Twenty-two applications that were in the system as of July 1, 2003 were larger, more complex projects, unlikely to have their permits by February 1, and thus would pay the new, higher DCL rates. It was anticipated that most, if not all, would be able to satisfy their requirements by July 1, 2004, or one year after Council's decision on DCLs. (Legally, DCLs are payable at Building Permit issuance and cannot be paid in advance, nor can projects be "grandfathered.")
The December report arose from requests to Council by several developers and the Urban Development Institute, that the effective date for the DCL increase be extended from February 1, 2004 to July 1, 2004 - i.e., a one-year grace period, instead of the seven months provided.
The focus of these requests was on developments already in the system before Council decided on the new rate and its effective date. The developers who wrote to, or spoke at, Council had expected a one-year grace period, similar to the one-year provided when the Interim DCL was introduced in 2000. The concern expressed was that rising construction costs had worsened economic conditions for these developments, thus making it more difficult to be faced with an unanticipated higher DCL.
On January 15, 2004, Council directed staff to report on the changing economic conditions, in relation to the ability of these developments to pay the increased DCL.
DISCUSSION
Consultant terms of reference:
Coriolis Consulting Corp. was hired to address Council's request for information. City staff supplied the consultant with a list of the projects in the Development Application process as of July 1, 2003, along with information on their land use, floorspace, and DCLs. The consultant looked at trends in key economic factors over the last eight months to one year, including trends in residential unit selling prices, trends in construction costs, and interest rates. The consultant terms of reference, as expressed in their letter of proposal to the City, were as follows:
"The City wants to know whether economic conditions that will affect the financial performance of these development projects have changed materially over the period June 2003 (when Council approved the new DCL rate and effective date) to the present, in order to help the City gauge the impact of requiring these in-stream projects to pay the new rate. We will comment on the general impacts of these changes, and we will comment on whether these projects generally are or are not able to absorb the new DCL even though they were planned on the premise that they would be developing under the old DCL rate structure."
Consultant findings:
The consultant's main findings are:
· For residential development (projects where residential land use is the primary determinant of profitability): Construction costs and unit sales prices have increased, so that if a project had a locked-in land price and had not committed to pre-sales prices for units, it could absorb the additional DCL without a negative impact on financial performance or profitability. A project that had committed its units in pre-sales would not be able to absorb the additional DCL without eroding financial performance. It is not possible to know which of the in-stream projects are in these two categories without reviewing each project individually in detail.
· For commercial development (projects where commercial land use is the primary determinant of profitability): Construction costs have increased, but lease rates have not increased. Profit expectations from a year ago have eroded. The unanticipated increase in the DCL is not the major impact on project financial performance over the last year, but it makes a difficult situation worse.
The consultant report concludes that an unanticipated increase in the DCL for these in-stream projects creates or exacerbates a hardship for many of them.
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FINANCIAL IMPLICATIONS
As noted in the December 2003 Council report, with the approved DCL rate increase on February 1, 2004, the difference in DCL paid per square foot of new development is the difference between the $2.50 Interim rate and the $6.00 new rate - i.e., $3.50 per square foot difference ($1.40 difference for industrial areas).
The 22 applications not obtaining their Building Permits before February 1, 2004 collectively represent approximately $6 - $7 million in additional DCLs that will have to be paid by these developments when they receive their Building Permits after this date.
There would be an equivalent amount of foregone DCL revenue to the City if Council now reduced the rate back to the Interim rate of $2.50 per square foot until July 1, 2004. The City is faced with the same increased construction costs, as are the private developments, for the public projects for which DCL revenue is collected.
If a phased rate system were put in place as mentioned in the Council resolution of January 15, the DCLs paid by the developers and the revenue foregone by the City would be less. For example, if the DCL were $4.00 per square foot between now and July 1, as mentioned at one of the Council meetings, the additional amount that developments collectively would pay would be approximately $3 million ($4.00 vs $2.50 per square foot), while the City would forego approximately $3.9 million ($4.00 vs $6.00 per square foot).
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CONCLUSION
A higher DCL rate was approved in June 2003 to come into effect on February 1, 2004. Council has heard from several developers who submitted Development Applications prior to the June decision, but who will not receive their Building Permit before February 1, 2004 and who will therefore pay the higher DCL. They have expressed the concern that they expected a one-year grace period, rather than the seven-months provided, before the higher DCL would come into effect, and that recent economic conditions (e.g., rising construction costs) have made it more difficult to be faced with the unanticipated higher DCL.
To address these concerns, Council asked for a report on the impact of changed economic conditions on these developments. A consultant has now reviewed the projects and concludes that the unanticipated increase in the DCL for these in-stream projects creates or exacerbates a hardship for many of them, as their Development Applications were submitted before the DCL increase was established.
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