Fixed rezoning fees for smaller projects

A flexible way to target the rate of development

At its December 7 meeting, Vancouver city council passed a motion unanimously asking staff to look at using fixed development fees (“Community Amenity Contributions”) when rezoning for smaller projects across the city.

It’s a somewhat abstract issue, so I was the only public speaker. Speaking notes:

I’m really glad to see the initiative to move to fixed CAC fees when rezoning for low-rise and mid-rise housing projects. The current process, where the city negotiates with the developer to take 70-80% of the increase in land value whenever rezoning land, is time-consuming, uncertain, and non-transparent. Switching to a fixed fee per square foot would be much simpler and faster.

A further suggestion, from economists Thomas Davidoff and Tsur Somerville, would be to combine the fixed fee with a target. The target would be the total amount of additional residential space per year. You adjust the fee a couple times a year to meet the target. If you’re getting too few development applications, you lower the fee, like a spring sale to reduce inventory. Or if the rate of development is too high, you raise the fee.

The fee basically acts like a brake pedal on development. The higher it is, the fewer projects are economically viable. This gives council a flexible way to control the overall rate of development.

I would also add that this fits nicely with ABC’s initiative to streamline the permitting process. The more that the city is able to speed up permitting, particularly the risk of unexpected delays, the more developers will be willing to pay for CAC fees.

My impression is that when the city develops policy right now, it tries to calibrate the restrictions on building height and total floor space (FSR) to result in a limited number of economically viable projects. For example, see Appendix K of the Broadway Plan.

The problem with this approach is that economic viability also depends on construction costs, which have been going up - materials, labour, interest rates - and on the expected selling price, which has been going down (as interest rates go up). So the city’s carefully calibrated and inflexible restrictions can very quickly end up out of date, resulting in fewer projects than expected, and then nothing gets built until prices and rents go up further. (Or, when economic conditions are shifting the other way, they can result in more projects than expected.)

Using the CAC fee as a brake pedal is a much more flexible mechanism. If there’s less redevelopment than desired, the city can lower the CAC fee. If there’s more redevelopment than desired, the city can raise the fee. Gordon Price: “People are willing to accept change. What you have to watch out for is the rate of change.”

(This would also make the tradeoff between rapid redevelopment and CAC revenue explicit. To illustrate the extremes, the city can follow an OPEC-like strategy of maximizing CAC revenue while allowing only a trickle of housing, or it can follow a Montreal-like approach of using low fixed fees and allowing a lot of housing.)

Links:

• Tom Davidoff and Tsur Somerville, The Economics of Community Amenity Contributions and Real Estate Taxes. A 2021 report to the expert panel on housing supply in BC, headed by Joy MacPhail.

• Bottlenecks - economic viability is one of the most important bottlenecks to building more housing.

• A specific example of land value calculations: “Seeing the math” section of this previous post on the Broadway Plan.

• Order Without Design, by Alain Bertaud - urban economics for urban planners. Provides a good explanation of how people want to be within reasonable commuting distance of jobs, and how this leads to higher land prices in a geographically central location. Restrictions on building height and floor space push down land prices (by reducing the expected selling price), but it’s like pushing down on a balloon: the people who would have lived there don’t vanish, they move further out, resulting in higher land prices and more development further out. This also results in a shortage of floor space (which is what people really want), driving up rents.