“Re-tooling” development charges into a sharp, effective revenue tool

Blog - May 6, 2013 - By Cherise Burda

Travis Allan and Cherise Burda take a closer look at the development charge and its potential to fund transit and improve urban planning at the same time.

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 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 chance 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.

Road development

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.  

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, 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 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 the development charge 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.

Medium-rise apartment building

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 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.

Cherise Burda is director of Ontario policy at the Pembina Institute. Travis Allan is a partner at Zizzo Allan Professional Corporation.

Follow Cherise on Twitter @CheriseBurda

Cherise Burda

Cherise Burda is Ontario director at the Pembina Institute, directing research and implementation strategies for transportation and renewable energy solutions, including policy initiatives for urban form.


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