Were ACCs a mistake?

Cost of amenities shifts from high-rise to medium-density projects, which lack land lift

The old system of CACs

Before the recent provincial reforms in BC, there were basically two kinds of up-front lump-sum charges on new housing, used to fund capital costs:

• Development Cost Charges (DCCs, called DCLs in Vancouver), which pay for water and sewer infrastructure, roads, and parks, plus capital costs for fire, police, and garbage pickup. These are fixed, charged per unit or per square foot, typically with different rates for low-, medium-, and high-density.

• Community Amenity Contributions (CACs), which pay for amenities such as community centres, libraries, and daycares. These are an attempt to capture most of the “land lift,” the increase in land value that comes from removing restrictions on density. This is usually highest for high-rises, and minimal for medium-density projects like a six-storey apartment building. Some municipalities (like Burnaby and Coquitlam) use a fixed density bonus fee per additional square foot of floor space, above the base density. Other municipalities (like Vancouver) negotiate CACs with each individual project, which is a complex, time-consuming, and opaque process. Low-trust voters often accuse city staff of not setting a high enough price.

(An alternative to paying for capital costs in this way is to borrow the money using long-term low-cost bonds, and to pay down the debt over the lifetime of the infrastructure, for example using full-cost water charges for water and sewer infrastructure. See Benjamin Dachis’s proposal.)

The MacPhail Report observed that because municipalities collect a lot of revenue from CACs, allowing them to keep property taxes low, their incentives are backwards. That revenue depends on redevelopment land values being high, which in turn depends on housing being scarce and expensive, so that projects are willing to pay a lot in order to redevelop land for higher density. If municipalities were to allow a lot more housing by right and housing became less scarce and expensive, it would be a financial disaster for them.

Medium-density projects don’t have land lift to absorb costs

One of the recent provincial reforms was to replace Community Amenity Contributions with Amenity Cost Charges. In particular, ACCs are fixed, not negotiated, which is simpler and more transparent.

ACCs look a lot like DCCs in the way that they’re calculated and allocated, except that they pay for the up-front capital costs of planned amenities like community centres or libraries.

The reasoning for paying for amenities like this through up-front taxes on new housing is unclear. A community centre or a library is available to the entire community. So it seems like it would be natural to spread the cost over the entire property tax base, instead of putting the cost onto the narrow base of new housing.

I think what happened was something like this:

• Municipalities were capturing land lift using CACs, and using the money to pay for community amenities.

• The province wanted to switch from negotiated fees to fixed fees, which would be simpler and more transparent.

• The municipalities still wanted to use the revenue from the fixed fees to pay for community amenities.

The result is that the municipalities are still trying to cover the cost of planned community amenities from up-front charges on new housing, but the distribution of the charges is different: they’ve shifted more towards mid-rise projects, like six-storey apartment buildings, and away from high-rise projects.

The problem is, it’s high-rise projects that typically have the land lift to absorb these costs. Mid-rise projects don’t. The result will be to slow down or halt mid-rise projects.

A May 2022 analysis by Coriolis of a six-storey rental project in Vancouver:

A March 2019 analysis by Coriolis of a high-rise rental project in Burnaby:

An example

From Coquitlam’s public consultation summary report to council on June 9, page 6:

2. Low-Rise Residential and Mid-Rise Apartments

UDI expressed concern with the proposed rates for low- and medium-density development given the proposed rates are significantly higher relative to contributions under the existing CAC system. As highlighted in previous reports, low and medium density, under the current CAC system, pay a comparatively low amenity burden of $6.44 per sq.ft. for new multi-family residential developments requiring rezoning and $10,732 per new single-family lot created through subdivision and rezoning.

Developments in Housing Choices zones have not been subject to CACs as they do not typically require rezoning; however, under the provincially mandated ACC framework, these developments will be required to pay ACCs at the building permit stage. The approach to ACC rate setting is mandated by provincial legislation which uses a calculation based on capital project costs and population projections which is different from the current CAC system which was solely based on the recovery of funding for recreation amenities.

In more concrete terms, from someone who works in the industry. Landowners are only willing to sell their land for redevelopment if they’re going to get a significant increase compared to the current value of the property with the existing building; if not, nothing happens.

To build low rise at 2.3 FSR near Burquitlam Station, there was a small density-bonus fee of about $6 per square foot on the increase in density from the base zoning. Let's say that was roughly $4 per square foot on the entire building's density, when you consider the base density.

Now: there's a $21.31 per square foot ACC on density. More than 5x increase. That increase equates to more than 10% of land value. So land values dropped 10% just because of the ACC. In a lot of cases, that will be enough to tip highest and best use from “development site” to “existing house,” and less new development.

Thus more projects get pushed underwater.

“There was an old lady who swallowed a fly…”

CACs were targeted at projects with a lot of land lift. ACCs are simpler and more transparent, but not targeted in the same way. The unintended consequence of the transition from CACs to ACCs is a shift from medium-density projects to high-rise projects.

The problem is, high-rise projects take a very long time to plan and build, so this will further reduce the responsiveness of housing supply.

This suggests that ACCs need to be rethought. (For example, should they only be applied to high-density projects?)

From a recent interview with Josh White:

Those are the types of changes we will be introducing right away in June, but it needs to be part of a longer-term sustained effort to make sure we're more conscious of the impact of our policies and our expectations on the viability of projects. For a long time in Vancouver, this sort of ever-increasing price of homes always bailed us out in terms of those layered costs on development, but we've hit a bit of a reckoning point in terms of hitting the upper limit on those costs and how much the prices and rents can contribute to that. So we need to address the cost side of the equation, and that's what we're doing.

More

• Development Finance - provincial government page describing DCCs and ACCs

• Development Cost Charges (DCC) Best Practices Guide - guidelines for municipal and regional governments

• Amenity Cost Charges (ACC) Best Practices Guide