Commentary

Re-Tooling Development Charges into a Sharp, Effective Revenue Tool

Today's development charges subsidize sprawl while making transit-friendly development more expensive. Smarter development charges could incentivize compact development and raise transit revenue at the same time.

By Cherise Burda
Published May 07, 2013

In the debate over which combination of revenue tools would best support the expansion of transit in the Toronto region, an unexpected option emerged as a top pick in the recent report [PDF] by City of Toronto staff that may be considered by council this week: the development charge.

In Ontario, development charges are fees that developers pay to municipalities to fund many capital costs and services resulting from growth such as sewer lines, road extensions and police stations.

This revenue tool could provide a means of paying for some of the costs to build new transit infrastructure, but the policy would first require an overhaul to encourage better urban planning in Toronto and in the greater Toronto area (GTA).

The Dirt on Development Charges

The development charge, as currently implemented in most Ontario municipalities, is crudely designed. There is a strong likelihood that it is subsidizing less-dense, single family homes while making compact, transit-friendly development more expensive.

Development charges also likely overcharge some commercial development, and this could be contributing to the flight of office space to the suburbs, in locations underserviced by transit.

In many Ontario municipalities, including Toronto, new development is charged based on who will use it. For example, many municipalities have a per-unit rate for apartment building units, and another rate for detached single-family homes, regardless of where the buildings are located within the municipality, how much land area they occupy and the cost necessary to service them.

Such user-based fees always raise the likelihood of hidden subsidies, because the cost of servicing development is based on where the development is located as well as who uses it. Empirical studies have shown that it costs more to service new sprawl development than dense developments.

Increasing development charges without tackling this fundamental problem could amplify the negative consequences of poor design.

Three Questions

Here are three questions we could ask in addressing these problems:

Problem 1: Is the playing field level?

Above we talked about "a strong chance" of a subsidy. We don't know for sure which developments cost more than their fair share and which cost less, because Toronto - like many Ontario municipalities - isn't providing good data on this point. This is a big problem because it keeps subsidies hidden.

Problem 2: Are we encouraging the kind of development we want?

Based on empirical studies of other cities in North America, and considering the City of Toronto's development charge schedules [PDF], dense, multi-unit residential development is likely subsidizing single-family homes, creating a financial disincentive to building "location efficient" housing.

If that is the case, and development charges are increased across the board, it may create an even greater disincentive to build exactly the type of housing we need in walkable, compact neighbourhoods with access to rapid transit. This is because the fees we charge via property taxes, development charges and other revenue tools can have an impact [PDF] on the form and location of development.

Problem 3: How can we discourage 'business flight'?

Taxes and fees paid by commercial properties in the City of Toronto are high compared to surrounding municipalities. This tax differential has been identified as a key factor in driving commercial development out of Toronto's transit-oriented core to surrounding municipalities that have even less transit service: the so-called "business-park badlands".

If we increase commercial development charges across the board, we may contribute to this problem, driving even more commercial development out of the City of Toronto.

This is a big problem because businesses without transit connections are even worse than houses without transit connections. You can park your car at a transit hub and ride to work, but most people aren't willing to dedicate a car just to take them from a GO Station to their sprawling office park.

How to Re-Tool Development Charges for Smart Planning

Step 1: We need to take a close look at servicing all types of new development in Toronto to figure out what it really costs. We need to understand the real capital costs of servicing the different types of new development and which areas cost more.

As Pamela Blais has argued in her book Perverse Cities, the "connection between cost causation and price must be made both accurate and apparent" if we're going to make good decisions.

Step 2: Once we have the data, we can adjust development charges for residential and commercial properties to function as "area-based charges" that more fairly charge for the space occupied and the capital investments needed to serve development.

We can consider not only the cost, but also the City of Toronto's planning objectives and the need to build transit-supportive residential development - in particular, more affordable and family-friendly compact housing, such as mid-rise and townhouse development - and commercial space for the jobs that our city needs.

The Bigger Picture: Transit, Sprawl and Gridlock

If city council recommends the development charge as a revenue option to fund transit, it should do so with the goal not just of raising money, but also encouraging better urban planning.

A study by RBC and Pembina found that 81 per cent of residents surveyed in the Greater Toronto Area (GTA) would give up a large house and yard for a townhouse, condo or small home on a modest lot with walkable access to amenities and rapid transit, and the option to spend less time behind the wheel.

There is a clear desire for smaller but family-friendly homes that are close to where people need to go everyday. But these options are currently beyond most homebuyers' budgets. Nearly 80 per cent of GTA residents indicated that housing cost influences where they live.

Developers continue to build in sprawling greenfields because it is often cheaper and easier than building developments in walkable, transit-oriented neighbourhoods. Lack of supply means homebuyers are priced out of these locations and are literally "driven" to the urban and suburban fringes, where long and stressful auto commutes are required - and this only leads to more congestion.

Building transit is only one half of the solution. Toronto also needs to make sure we get the right mix of development in the right places to support and use transit infrastructure. Perhaps this current process of examining revenue tools will create an opportunity to do so.

Written with Travis Allan, a partner at Zizzo Allan Professional Corporation.

First published on the Pembina Institute Blog.

Cherise Burda directs research and implementation strategies for transportation solutions in Canada, including policy initiatives for urban form. In addition to her role as transportation director, Cherise leads the Pembina Institute's Ontario policy program, focusing on research to advance renewable energy solutions, and is a regular spokesperson on transportation, renewable energy and Ontario policy issues.

Since joining the Institute in 2007, Cherise has written dozens of energy, transportation and urban development publications, including: Behind the Wheel, Live Where You Go, Making Tracks to Torontonians, the RBC-Pembina Home Location Survey, and Plugging Ontario into a Green Future.

Cherise's 17-year career as a policy specialist and senior manager includes past experience as a program director with the David Suzuki Foundation and a senior researcher with the Polis Institute at University of Victoria's Faculty of Law.

Follow her on twitter @CheriseBurda.

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By pearlstreet (registered) | Posted May 07, 2013 at 15:14:16

Today I paid a $211.00 building permit to remortar (tuckpoint) my house. No structural changes, nothing... Thanks Hamilton, no wonder this city is turning a leaf so fast - fucking cash grab. P.S. my taxes are $3200 a year! That is more than my parents house in downtown Oakville.

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By -Hammer- (registered) | Posted May 07, 2013 at 17:25:21

Hey, I'm all for charging more for sprawl, it's the best way to discourage it. I just feel why stop at transit, Hamilton has one of the largest combined sewage systems in the world, and getting off of that while improving the infrastructure in the core to facilitate higher density is something I can get behind.

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By car and driver (anonymous) | Posted May 08, 2013 at 03:01:37

i feel like this whole debate on how to pay for transit is a red herring. what we need to be talking about is how do we get drivers to pay an amount closer to the true cost of the roads we use. if we created a fair model then we would have plenty of cash left over to build world class transit. right now everyone pays for roads to some extent indirectly. we need to transfer those costs back onto us drivers so it becomes economically feasible to NOT drive. not that i'm blaming drivers, myself included; why pay double when you have already had to fork over a large portion of your taxes to pay for roads.

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