Development Charges and the Effects

Development Charges and the Effects

With many city centers, like Barrie, going through cycles of population growth, a  natural product in such cases is a need for residential, commercial, and industrial new developments. New development, in any form, requires tedious planning on both the municipality and developers behalf.   The positive outcomes of these new developments are large capital injections and increases in operational revenue through increased taxes. In Barrie’s situation, according to Mayor Lehman on his blog, “100% of growth related costs will be paid for by the development community”. The costs associated with new development consist of an array of infrastructure with large bills associated. The two methods that the City of Barrie and other cities intend to recoup these costs are through Development Charges(DCs) and taxation. Development Charges are a strong additional cost associated with any type of new development and are in place to provide large capital injections to councils. Councils must be careful when increasing DCs as they may have adverse effects on a city’s competitiveness.

In the scenario of residential new developments, DCs certainly cost the builder more upfront, but you can be sure that they will be recovering those costs through passing the burden onto the end consumer. As a result this increases the cost of purchasing a home and puts the quality at risk. In order for a builder to be able to supply homes at a competitive price compared to other markets, they must be able to deliver their product at a price representative of the market whilst retaining their margins. In order to do this there are costs that must be shed to compensate for the development charge or the final price must reflect the full cost of development charges. Developers are and will continue to be starting off at a disadvantage if they are facing a significantly higher Development Charges compared to other markets. If you aren’t able to deliver a quality product at similar price, what would compel someone to purchase these residences, often the largest investment any individual will make?

Commercial and Industrial development charges are even more of a competitive nightmare for developers. Some municipalities have figured this out and use DCs directly for competitive gain by having them at greatly discounted rates. The rationale behind a low or no DC is that it will encourage industrial and commercial companies to set up within the area. This is a bonus for the company whether they are building the building themselves or having built to suit and leasing. A developer of commercial or industrial property is unable to immediately recover the cost of DCs when leasing and is only able to recover these costs over time which can lead to increased rental rates to compensate for the increased investment. The issue with increased rental rates is that they may make your development unattractive to potential tenants as it puts them at a greater amount then existing developments which have lower DCs and new developments in competitive municipalities who have lower DCs. With technology being as accessible as it is, there is nothing stopping companies from opening up in a city halfway across the province where their initial investment is less and are able to obtain the same financial success.  As well, developers will begin to change their thought process when building and will be looking for low DC markets with the same demand for new development. The reason for this is they can see a higher return on their investment and less risk.

The thought process behind Development Charges has always been to use these costs to pay for the infrastructure stress caused by the new development. However, with DCs rising disproportional to the increase in infrastructure costs, sometimes it brings to question if the DCs are truly paying only for the stress of the additional development or are these fees being utilized to temporarily benefit other parts of the municipality that are in disrepair. In hindsight, DCs are an excellent way to put a Band-Aid on large debt, but it is far from a long term solution. The long term solution to be able to properly address operational costs is through various forms of perpetual revenue generators of which DCs are not.


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