Rhino's Ramblings: Razor's Edge on Development
It is one of the most difficult decisions facing Council in a long while and it literally is a decision which has massive, long-reaching ramifications in the future development of Moose Jaw. It’s something called the Off-Site Levy.
The Off-Site Levy is a charge a municipality, like the City of Moose Jaw, charges on top of the price of land to pay for infrastructure the new development uses elsewhere in the city. It might be difficult to understand but what this levy is intended to pay for are things like parks, recreational facilities, off site upgraded water and sewer lines and roads that the new development needs and uses from the city. In Moose Jaw's case the proposed levy is based on 40 years.
So how did the Administration come up with the 40 year basis the proposed levy is to pay for. Well the City called in a consultant who did what is called a high level study of developing 2820 acres of new land in a 40 year span and it said the cost would be $227,264,000. In an effort to make this cost fair to all the study’s authors simply divided the cost by the amount needed by the number of acres and arrived at $80,580 as the levy needed. As a high level study it never dealt in great depth to determine a more precise levy.
It all sounds simple and fair, now doesn’t it?
Well here is where it gets tricky and it all comes down to things such as the demand for development, other available properties, economics here and elsewhere, competition, labour costs and acceptable profit for developers.
In submissions to the City, stakeholders pointed out what they viewed as some very major concerns. One of the major ones was the state of the local economy and how difficult it has been to sell and develop the available property as it is.
For example, in the area of building permits, over the past year we have seen a major drop in new housing starts and right now in the existing home market that is best described as a buyers market.
In an October 5th report from the Regina Realtors Association (which includes Moose Jaw) September sales in Regina and region have not been this low since 2005. In Moose Jaw residential housing permits so far for 2018 there are less than ten new housing starts.
For new or greenfield area developers, where the Off-Site Levy is going to apply, this is an added cost of building new homes. With house prices under market pressure due to a weaker economy and new federal buying rules there are less buyers, and as a result, less demand and potential profit. An increase in the present levy price of $32,804 to $80,580 per acre adds additional costs and reduced profits on every new home built, which will dampen developers desire to build new homes or commercial development.
The argument is if there is presently no development or a rush to develop with the present rate how are proposed higher rates going to reverse this?
Worse yet, for some developers there is now a two-tier system in development because there are a few developments which have locked in the older $32,804/acre amount. For some developers they will be facing competitors with a $47,776/acre pricing advantage once the new higher levy is enacted. The residential and commercial rate in Regina is $178,900/acre.
Given the housing market it’s a very tough cost to pass onto a buyer and absorbing it as a cost means less potential profit. In these stakeholders minds it could well mean more risk and costs and investing in development might well be more profitable on some big island off the coast of Belize.
Of course I’m being facetious but my point is, for some stakeholders, it almost means a total pull-out of the developing new residential and commercial properties in a greenfield or undeveloped area. Although economically it seems to potentially stimulate new housing starts in infill areas. Some might call it a new development sin tax that tries to curb economic expenditure in certain areas.
The problem is if there is an envisioned reduction in development of new homes in new neighbourhoods the city potentially loses those construction jobs which in turn impacts the local economy.
Already Council has signalled that outside factors, as in competitors, are coming into play in potential new industrial developments. Our largest local competitor, Regina, has already cut their industrial off-site levy rate from $178,900/acre to $59,600/acre meaning or a drop of 66 percent. In response Administration proposed Moose Jaw charge $49,600/acre to give Moose Jaw a $10,000/acre price advantage.
It also needs to be noted that Council can, and apparently has in the past, adjust that rate on a project by project basis.
On the other side of the equation, if the City were to leave it’s rate at $32,804/acre it means there is a loss of $47,776/acre on every acre developed. What that means is all taxpayers would be in fact subsidizing any new development when it comes to off-site infrastructure.
Although it does not seem like a problem in Moose Jaw, urban sprawl and low density housing was identified as a problem in Saskatoon, as the Bridge City did a study and discovered that not enough was charged for lots to pay for the infrastructure to add the new neighbourhoods to the city. Roads and sewers connecting the new neighbourhoods to existing ones was paid for by property owners elsewhere in Saskatoon.
It is a great quandary because development means the desperately needed expansion of the tax base but at the same time it’s muted by existing property owners paying for a large portion of the Off-Site infrastructure tied to the new developments.
Additionally, it needs to be noted there have been moves made elsewhere in the City to slowly transfer costs from taxpayers to the actual user. A good example of this is seen in recent increases and the projected increased rates – still officially 15 percent - to help pay for necessary upgrades to water and sewer utility upgrades.
An underlying argument in Off-Site Levy charges is it forces those using infrastructure to pay for that use. It means no incentive to build a new home or a commercial property when it comes to existing or supporting infrastructure. The rate is set and needs to be paid.
But it’s a razor’s edge for Council. Given the slow movement of many properties not only do you threaten needed jobs by increasing costs to developers you also risk taking away tax base expansion. On the other hand the City is hard pressed when it comes to infrastructure dollars, not charging for it from new developments only exacerbates the problem as the City grows. It’s a question of how much more can taxpayer's handle when it comes to rising property taxes.
Negotiating on a project to project basis might seem like a great out because rates can be adjusted based upon the economic conditions but then you run the risk of fairness and really not having a stable rate.
You could have, as an example, two hotels adjacent to one another and the unique situation where one gets an incentive and the other doesn’t. It leads to an inefficient process where every development, irregardless of size, fishes for the same or larger incentives. If the developer doesn’t like the offer they walk away when they may have been locked in earlier by a fixed rate.
Council does not want to kill jobs, development and growth but at the same time they have got to be fair to present property owners.
Despite being for many a boring subject, the Off-Site Levy issue is a mine field the City must navigate carefully.
EDITOR'S NOTE - Rhino's Ramblings is an opinion column designed to add greater insight and debate on various issues including the proposed Off-Site Levy.
Readers comments, letters or even counterpoints and opinions on this highly important economic issue are welcomed. Drop us a line all we ask is you keep it clean and within community standards.