Public Infrastructure, Private Finance

Developer Obligations and Responsibilities

Demetrio Muñoz Gielen, Erwin van der Krabben, Demetrio Muñoz Gielen, Erwin van der Krabben

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351129145
• Edition: 1
• Topic: Arquitectura
• Subtopic: Planificación urbana y paisajismo

Traditionally, the public sector has been responsible for the provision of all public goods necessary to support sustainable urban development, including public infrastructure such as roads, parks, social facilities, climate mitigation and adaptation, and affordable housing. With the shift in recent years towards public infrastructure being financed by private stakeholders, the demand for transparent guidance to ensure accountability for the responsibilities held by developers has risen.

Within planning practice and urban development, the shift towards private financing of public infrastructure has translated into new tools being implemented to provide joint responsibility for upholding requirements. Developer obligations are contributions made by property developers and landowners towards public infrastructure in exchange for decisions on land-use regulations which increase the economic value of their land. This book presents insight into the design and practical results of these obligations in different countries and their effects on municipal financial health, demonstrating the increasing importance of efficient bargaining processes and the institutional design of developer obligations in modern urban planning.

Primarily written for academics in land-use planning, real estate, urban development, law, and economics, it will additionally be useful to policy makers and practitioners pursuing the improvement of public infrastructure financing.

1 Development obligations in Canada

The experience in four provinces

Eran S. Kaplinsky and David Amborski

1. Introduction

Canadian governments have used a variety of land value capture (LVC) tools for many years. Many of these tools were not specifically or even primarily designed for value capture, but sometimes captured land value inadvertently or incidentally to other policy objectives (Smolka & Amborski, 2000). In recent years, however, local governments facing fiscal pressures – mainly due to ageing infrastructure, mass-transit projects, and other growth-related costs – have begun to enlarge the use of developer obligations (DOs) and other policy tools to focus more explicitly on LVC objectives (Trillium Business Strategies Inc, 2009).

This paper provides an overview of LVC in Canada, followed by a summary of DOs in four of the 10 Canadian provinces comprising approximately 65% the total population: Ontario, Nova Scotia, Alberta, and British Columbia. DOs have long provided significant revenues for local governments, especially in high growth municipalities in Ontario and British Columbia (Amborski, 1988), and more recently in Alberta. A comparison of the policies across the four provinces follows, with discussion and conclusions.

2. Canadian experiences with LVC and DOs

In Canada’s federal system, jurisdiction over land and property is reserved almost exclusively to the provinces (British North America Act, 1867). All LVC tools rely on provincial enabling legislation. Municipalities are legally “creatures of the province” and have only those powers delegated to them by provincial enactments. Moreover, Canadian municipalities have very limited capacity to raise revenues and are heavily reliant on property taxes, and to a lesser degree on shrinking capital/infrastructure grants from senior governments (Kitchen, 2003). Most LVC tools and DOs tend to be employed by local governments.

There has been significant Canadian experience with the application of land value capture tools, including Public Land Banking, Public Land Leasing, Density Bonuses, Tax Increment Financing, Joint Development or Public Private Partnerships, and Developer Obligations (which are the focus of this paper), covering the full range of categories proposed by Alterman: macro, direct, and indirect land value capture tools (Alterman, 2011).

DOs in Canada include development charges, dedication of land for public purposes, and provision of infrastructure and amenities; their relative importance varies across different jurisdictions. DOs help finance (and shield local taxpayers from) growth-related capital costs, and in some cases provide for general needs of the community such as affordable housing. Development charges have a long history (over 50 years) in Canada, and in some jurisdictions their quantum is very high both relative to the cost of housing and in absolute terms. Development charges are typically not negotiable, but negotiations of the other two DOs are more common.

2.1 Development charges in Ontario

Development charges were first regulated by the Development Charges Act, 1989, but go back 60 years. Prior to that Act, municipalities relied on the Planning Act, but the vagueness of this legislation led to numerous appeals before the Ontario Municipal Board and the courts.

Development charges evolved from a range of obligations imposed by municipalities as a condition of development or subdivision approval, based on fiscal lessons learned in the years following WWI and the Great Depression, and especially during the post-WWII housing boom. The legality of subdivision agreements, too, was not established until 1960, when they were explicitly authorized by statute. By the 1960s, developers had been made to pay for the cost of the infrastructure internal to new subdivisions, but municipalities began to struggle with significant off-site growth-related capital costs. Local councils began levying additional costs on developers, which became known as municipal imposts, lot levies, or development charges. Over time the magnitude, scope, and popularity of these charges increased (Amborski, 1988).

As charges increased more rapidly than house prices, it also became obvious that the methodology for calculating charges often lacked fairness, consistency, and rationality, resulting in new legal challenges by the development industry. These challenges centred around the range of services to be funded by development charges, the calculation of the costs, and the apportionment of the costs between new and existing residents. Questions were raised as to whether charges could include “soft services”, such as fire halls, recreation centres, police vehicles, and even conference centres (Kaplinsky, 2006). Some appeals challenged development charges calculated based on the average cost of roads and sewers across the jurisdiction, as opposed to the marginal cost of serving specific developments. Even if there was agreement that average cost calculations were appropriate, there could be questions about how the average is calculated, i.e. based on historic costs or projected costs.

Eventually, the province undertook background work in the late 1980s and prepared a discussion paper. The Development Charges Act, 1989, was passed and the charges were based on all growth-related capital costs, leading to increases in the quantum of the charges. The Act required that development charges be imposed by bylaw (to be renewed every five years at most), on the basis of a capital cost study taking into account growth projections and corresponding service needs indicated in the municipal (master) plan. The Act limited the service standards that used to compute the charges to the highest local standard that existed in the past 10 years. Payment was required upon the issuance of the building permit (meaning the homebuilder would pay the charge and not the land developer, where they were separate entities). A development charge could be appealed by any property owner in the municipality.

Typically in the Greater Toronto Area, there would be three components to a development charge: a local municipal charge for the capital cost of services provided by the local municipality, a regional charge for regional services, and a school board charge for contribution to the capital cost of new schools. The structure of the development charges is such that there are different charges applied to different types of housing and non-residential development. Since charges on residential development are calculated per capita, the charges are highest for single family detached units, as they have the highest number of persons per household, and lower for residential development associated with smaller households. The legislation attempted to hold municipalities more accountable by requiring development charges to be deposited in special reserve funds and earmarked for the specific purposes for which each was collected. Municipalities must report annually to the provincial government regarding the existing balance and use of these reserve funds.

Dissatisfaction with the application of the Development Charges Act by the development industry, lobbying, and changes in the provincial government led to the legislation being amended in 1997. The changes to the legislation restricted the range of services that could be funded by charges and required that for certain services; there was a mandatory reduction of 10% of the costs to reflect benefits from these services to existing residents. The service standard used to calculate the charge was changed from highest to the average locally provided during the preceding 10 years. The effect was to slow increases in development charges.

The other major change in the legislation was the opportunity to use area-specific basis for engineering services. This means that rather than using average costs across all new development, the charges are based on an approximation of the marginal costs in various areas of the municipality. This approach represents an increase in equity and economic efficiency over average-cost pricing (Kaplinsky, 2006). Not all municipalities opted to ally this approach, but several did in the Toronto area, including Markham and Richmond Hill.

The most recent changes to development charges came with the passing of the Smart Growth for Our Communities Act, 2015. This legislation is intended to help municipalities fund growth, as well as make the development charges system more predictable, transparent, and accountable. More specifically, increasing the funding for growth is facilitated by eliminating the 10% reduction in calculating the costs of transit infrastructure, and permitting municipalities to use development charges to help fund waste diversion, including recycling.

There are also provisions in the legislation to increase predictability, transparency, and accountability, including requiring better integration of land-use planning with development charges, clarifying reporting requirements for the collection and use of charges collected and in higher and denser developments including park land funds, and requiring payment when the first building permit is issued for a building to provide greater certainty for developers. Despite these changes, the new legislation didn’t increase the funding opportunities for growth-related costs to the degree municipalities had hoped.

Currently, development charges in Ontario are among the highest in North America. In Brampton and Mississauga, the 2017 combined development charge, regional, local and school board, exceeds $83,000 CDN for a single family detached house (BILD, 2017). Recently, the City of Toronto – which has historically had some of the lowest charges in the Greater Toronto Area – has proposed dramatic increases in its development charges. For example, the single and semi-detached unit rate from $40,067 to $88,391 (121% increase) and multiples two plus bedrooms from $33,744 to $73,058 (117% increase) (Hemson Consulting Limited, 2018). The scope of development charges has been recently expanded to include a charge for transit services (in addition to roads), and in some cases, a contribution for affordable housing is also required. These two items have had a significant impact on the proposed increases in the Toronto development charge. The increase in the charges is at cross purposes with policies to encourage affordable housing.

In addition to development charges, the Planning Act requires a 5% land dedication for park land, or a payment in lieu based on the value of land, at the discretion of the municipality (or alternatively, based on calculations specified in the municipality’s official plan).

2.2 Infrastructure charges in Nova Scotia

Of the four provinces discussed, Nova Scotia is the last jurisdiction to implement development charges, and only in its major city, the Regional Municipality of Halifax. The advent of capital cost charges in Halifax has been precipitated by sustained growth in the region since the 1980s. This growth also encouraged the creation of the Regional Municipality of Halifax in 1996, amalgamated of the municipalities of Halifax, Bedford, Dartmouth, and Halifax County. It is the largest municipality in Atlantic Canada, with a population of 420,000 and an area of 5,500 square kilometres. The Regional Municipality is responsible for the delivery of all municipal services within its jurisdiction. As the growth absorbed the available trunk infrastructure capacity, a study was undertaken in 1999 to assess the future needs of the Regional Municipality. The study identified a substantial need for new infrastructure to meet to serve growth in the core area of the municipality.

The municipality prepared a Multi-Year Financial Strategy to determine how to finance the necessary infrastructure. Legislative basis for development charges in Nova Scotia is found in the Municipal Government Act. It enables municipalities to impose an infrastructure charge to recover the capital costs incurred by a municipality to service new subdivisions. Prior to 2000, no municipality in Nova Scotia had exercised this power.

In 2000, Halifax undertook a study and consultation to develop a policy to impose infrastructure charges consistent with the legislation. This document provided a basis for the municipality to specify policies that set out a capital cost contribution policy. Although Section 274 of the Act authorizes infrastructure charges to recover capital costs associated with new development via a subdivision bylaw, the report anticipates that some changes were required to existing legislation. Based on this background work, Halifax’s Capital Cost Contribution Policy was adopted in 2002. The policy is based on a charge that is applied to a specific area. A similar approach is used by the Halifax Regional Water Commission. The approach requires the designation of a master planning area within which a specific charge will be applied. For each master planning area, the developer’s contribution is based on meeting the demand generated by the new development, and the municipality’s cost is based on the demand and associated cost created by a specific development as determined by the municipality. The boundaries are defined based on the methodology set out in the Best Practices Guide (Halifax Regional Municipality, 2000).

In 2006, a Regional Municipal Planning Strategy (MPS) was approved by the Halifax Regional Council. The plan is significant in that it is the first regional plan for Halifax prepared since the mid-1970s. In addition to indicating that growth should be allocated among a hierarchy of centres, urban, suburban and rural, the plan forms the basis for the distribution of future growth, which in turn is used as the basis for future infrastructure and related capital cost charges. At this point, capital cost contributions (CCCs) were implemented for the Russel Lake Master Plan via a site-specific amendment to the subdivision bylaw. However, the use was limited. This suggests a need and motivation by local governments to increase the use of these types of charges.

In 2007, the regional sewer charge was transferred to the jurisdiction of Halifax Water. This was the precursor to the changes that took place in 2013, where the sewer charge was replaced with a development charge for wastewater. In addition to the power to levy this charge, all assets were transferred to Halifax Water.

Prior to the 2013 development charge for wastewater, the Regional municipality initiated a study in 2011 to review the current applications and legislative basis of charges, and to develop a methodology to apply capital cost contributions to a range of services including fire, parks and recreation, libraries and growth-related studies.

In 2014, as the concerns for financing the capital costs of infrastructure by Regional Council extended to transit, the Council approved a method for adopting charges for transportation and transit services. However, these charges were not implemented. Later, the Halifax Regional Municipality (HRM) Charter was amended to permit charges to be applied to a broad range of services. These services now include parks and recreation, fire, and library services.

More recently, in 2016, the Regional Municipality of Halifax engaged a consultant to undertake a comprehensive review of the approaches to infrastructure charges currently applied in the Halifax Region and elsewhere, and to recommend how the Regional Municipality should apply new charges for all eligible services. The review will also entail consultation with the development and building industry.

2.3 Developers’ obligations in Alberta

Developer obligations may be imposed in accordance with the Municipal Government Act of Alberta (MGA) depending on the type of planning permission sought. Obligations fall into one of three categories: first, to dedicate for public purposes part of land proposed to be subdivided, or to make a cash tribute in lieu of land, as required by the subdivision authority; second, to make local improvements and provide or pay for on-site services according to the specifications of the development authority; and third, to pay an off-site levy or a redevelopment levy to defray certain capital costs as set out in the municipality’s bylaw.

2.3.1 Land dedication

The MGA (Di...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Contents
• List of contributors
• List of figures
• List of tables
• Acknowledgements
• Introduction
• 1 Development obligations in Canada: the experience in four provinces
• 2 Developer obligations in the US
• 3 Developers’ obligations as a land value capture tool: practice and lessons from Colombia
• 4 Charging building rights as non-negotiable developer obligations: the case of Brazil
• 5 The progressive acceptance of developer obligations in Chile, 1990–2017
• 6 Poland: ban on conditioning the land-use plan to developer obligations diminishes their effectiveness
• 7 The Netherlands: developer obligations towards cost recovery
• 8 The influence of politicization on the implementation of developer obligations in a federalist country: evidence from Switzerland
• 9 Developer obligations for public services: the Italian mix
• 10 Spain: developer obligations and land readjustment
• 11 Developers’ obligations in Portugal: the imperfect equation for value capture
• 12 Use of Negotiable Developer Obligations (NDOs) in urban planning and land development systems in Turkey
• 13 Infrastructure contributions and negotiable developer obligations in China
• 14 A proposed framework of developer obligations to unleash land supply in Hong Kong: land readjustment
• 15 Value capture from development gains towards public utility: the case of Seoul, Republic of Korea
• 16 Developer obligations in relation to land value capture in Taiwan
• 17 Indonesian experience with non-negotiable and negotiable developer obligations: case study of Surabaya City
• 18 Developer obligations under the New South Wales, Australia, planning system
• Conclusions
• Index
• Institutions
• Cases