Community Amenity Contributions: an explainer

A major obstacle to more housing

Why is it illegal to build anything other than a single-detached house or duplex on so much land within walking distance of a SkyTrain station? A big part of the answer: Community Amenity Contributions (CACs). The city collects CAC revenue whenever it allows more housing to be built. Removing zoning restrictions means giving up a lot of CAC revenue, which means having to raise property taxes.

The spot rezoning process

The city of Vancouver has extremely restrictive zoning laws, preventing new housing from being built almost everywhere (see above). This depresses the value of the land, like pushing down on a balloon.

We have people who want to live here, and other people who want to build housing for them. Say that you're someone who wants to build new housing, whether it's for-profit or non-profit, and the zoning doesn't allow it (which is almost always the case). What do you need to do?

You need to first buy the site from the landowner, then go through the "spot rezoning" process. Basically, you beg city hall to give you permission to build more housing.

• You negotiate with city staff to change the law for the site to allow the new housing. The city takes 70-80% of the expected increase in land value (selling price of new building minus all construction costs), in the form of Community Amenity Contributions (CACs).

• City staff do a number of careful studies of the impact of the new housing, and prepare a report for city council.

• Before voting on a change to the law, the city is required to hold a public hearing where anyone can speak to council for up to five minutes. There's no limit on the number of people who can speak, so it can be extended indefinitely. The people with the strongest incentive to speak are those who most fear and oppose the new housing.

• Council then votes on whether to approve or reject the rezoning.

Why does the city have such a slow and difficult process to get approval to build more housing, given the desperate shortage of housing? Couldn't the city just legalize more housing everywhere?

Incentives for the city are backwards

An expert panel set up by the provincial and federal governments, headed by Joy MacPhail, took a close look. Their answer is that it’s the CACs. Incentives for the city are backwards:

• Rezoning to allow more housing means forgoing CAC revenue. Over a 10-year period, average annual CAC pledges were about $250 million per year, which is 1/6 of the city's operating budget.

• The higher housing prices are, the more "land lift" you get from rezoning, and the more CAC revenue the city collects. The latest economic analysis from the city has selling prices of up to $1600 per square foot on the West Side ($1.6M for 1000 square feet), $1200 on the East Side.

CAC revenue is important because it allows the city to keep residential property taxes low. Giving up CAC revenue and raising property taxes by 1/6 would be politically painful.

From the MacPhail Report:

A dominant theme throughout the Panel’s consultations and analysis was the slow and unpredictable pace at which new housing — both for-profit and non-profit — receives regulatory approval from government authorities. Speeding up or streamlining processes, such as rezoning and development applications, was identified as critical to enabling a more responsive housing supply.

CACs are negotiated in exchange for rezoning property to accommodate more homes. As a result, local governments that proactively increase zoned capacity or update zoning codes to better reflect anticipated growth and community priorities (as outlined in regional growth strategies and official community plans) lose that revenue opportunity. Indeed, local governments can generate CAC revenue by keeping zoning below levels that make redevelopment possible, and selling additional “air rights” through the zoning powers they have been delegated. Consequently, the additional costs, time, and uncertainty associated with the rezoning process—including their negative impacts on housing supply—persist.

Gradual reform

Canadian policymaking usually proceeds by gradualism - one step at a time. What steps would help to improve this system?

(1) Use fixed CAC fees (e.g. per square foot) instead of negotiating them, which will be faster and more transparent.

(2) Regularly review housing starts, and adjust CAC fees to target the desired rate of new housing.

With fixed CAC fees, there should be a clearer tradeoff between CAC revenue and new housing. The city can adopt an OPEC-like approach of maximizing revenue by keeping new housing to a trickle, or follow Montreal’s approach of keeping taxes on new housing low and building a lot of new housing, or somewhere in between.

Mario Polese:

[Montreal] largely remained true to a philosophy of urban planning wherein the infrastructure costs of new housing developments are shared by all residents, not just newcomers, via local property taxes and provincial taxes. Primary and secondary schools are, for example, almost entirely financed by the province. Quebec’s conservative-leaning government is in the process of eliminating local school taxes altogether, to be replaced by provincial transfers to local school boards.

The result: Montreal levies no impact fees on developers. So-called auxiliary fees are sometimes charged, generally for immediately proximate amenities (such as parks), but according to recent estimates, the total sum of local charges imposed on developers for comparable new housing units is between one-fifth and one-sixth of those in Toronto.

Impact on redevelopment

From the staff report:

2. Because the fixed rate (like any other development cost) affects the amount that a developer can afford to pay for land, the rate that is established will affect the number of sites that are financially attractive for redevelopment. A higher rate reduces the number of sites that are attractive for redevelopment while a lower rate increases the number of sites that are financially attractive for redevelopment.

3. The rate that is selected should be low enough that it is supportable by a significant number of sites that are intended to be redevelopment sites in the foreseeable future. Otherwise, the rate will restrict the number of sites that are attractive for development which can slow the pace of development and the supply of new units. Reduced supply in the face of continued demand will lead to market-wide price increases.

4. Any increase in existing target fixed rate CACs will have a downward influence on the existing value of development sites so increases in a fixed rate will negatively affect existing land value.

Point 3, saying that the city can keep the rate low enough to avoid impacting development, seems overly optimistic, especially given that sales prices and construction costs are a constantly shifting target. The MacPhail Report:

Fees on development can reduce the amount of developable land

The selling price of new housing is determined by the ability and willingness of buyers to pay at a given point in time, limiting the ability of developers to immediately raise selling prices. As a result of this effective “ceiling” on prices at a given point in time, the additional costs imposed by fees and charges must replace other items in developments’ cost structures. Developers don’t determine construction or material costs, and they cannot reduce profits below that required to obtain project financing, leaving the initial purchase price of land to absorb the cost of development fees.

When developers offer less for land, more properties remain in their current use, and do not get turned into additional homes, exacerbating supply shortages and their resulting pressures on prices citywide. While new development or redevelopment should be expected to pay its share of infrastructure or amenity costs incurred by cities, setting fees too high means unnecessarily raising the price of both new and existing housing across the city.

How fixed CAC fees are set

There's a number of areas, shown above, where the city is already using fixed CAC fees. Council just unanimously approved a staff report making changes to those fees. Reading through the report, the goal appears to be maximizing city revenue.

The calibration process involves looking at specific neighbourhoods, working out the business case for sample redevelopments in those neighbourhoods, and calculating how much revenue the city can take as CACs. This seems like a rather slow and inflexible process: it normally happens every four years.

An alternative would be "price discovery": adjust the fixed CAC fee up or down to target a desired rate of redevelopment, as proposed by Thomas Davidoff and Tsur Somerville. This would be faster and more flexible.

Having a schedule of fees with different rates for different neighbourhoods seems unwieldy. An alternative would be to have a uniform fee, resulting in more redevelopment happening in areas where the selling price per square foot is high.

Slowing down development

Industry feedback was that interest rates and construction costs have been rising, and selling price per square foot has been falling, so the calculations are out of date.

The staff response, if I understand correctly, is that things haven’t changed that much since Q3-Q4 2022 - the third-party economic analysis was done using sales data from Q3 and Q4 2022. I don’t want to say that staff are wrong, but the Bank of Canada has been raising interest rates very rapidly during exactly this period. The overnight rate went from 1.5% at the start of Q3 to 2.5% in July, 3.25% in September, 3.75% in October, 4.25% in December, and 4.5% in January. And there’s some lag in sales data being available.

Combined with the staff observation that CAC rates set at too high a level will slow development: If costs are rising and sale prices are falling, and the city’s not going to change these rates for four years, the city is shooting itself in the foot.

Fixed CACs for low- and medium-rise projects

For low- and medium-rise projects, it makes even more sense to use fixed CAC fees instead of negotiating them. From the city's point of view, negotiating CACs simply doesn't scale when you have a large number of small projects - you'd need a huge number of city planners. From the industry's point of view, the cost and uncertainty of negotiation can be absorbed by a large developer planning a large project, but not a small builder doing a small project.

The city is planning to go through the same kind of time-consuming, inflexible calibration exercise to determine a schedule for low- and medium-rise projects. Again, it seems like price discovery, adjusting the fee up or down to target a desired rate of redevelopment, would be faster and more flexible.

From the staff report:

Staff are in early discussions with a third-party consultant who will conduct economic analyses on low/mid-rise development opportunities across the city, while also building upon the analysis for the Broadway Plan pre-set development framework and the multiplex density bonus contributions. These analyses would occur over the Summer and Fall of 2023, engagement with the development industry in the Winter of 2023/2024, and a report back to Council on the proposed pre-set contributions (including rates and affordability/amenity requirements) in early 2024.

Note: Below-market requirements are an in-kind CAC

CACs may be in cash or in kind, e.g. a project may be required to build social housing which is then handed over to the city.

A requirement to include below-market housing (sometimes called “inclusionary zoning”) is a form of CAC, one that’s quite expensive. In a rental building, the market-rate apartments end up subsidizing the below-market apartments.

To make inclusionary zoning economically viable, projects usually need more “Vitamin D” (as Michael Mortensen calls it) - density.

A typical program in Vancouver is that a purpose-built rental building which includes 20% below-market rentals can get a density bonus. For examples, see Broadway and Granville and 1805 Larch.

It’s also worth noting that people are willing to pay roughly 50% more for a condo compared to a purpose-built rental. The city wants more purpose-built rentals (which provide more secure housing for renters compared to condos), so it’s willing to charge lower fees for rental projects.

More:

• Staff report on raising CAC targets, with recommendations. Staff presentation. Referred to public hearing by a unanimous vote at the April 11 council meeting. Approved by a unanimous vote at the May 9 public hearing.

• More Housing posts: Bottlenecks to building more housing. CACs as a brake pedal.

• The MacPhail Report.

• The Economics of Community Amenity Contributions (June 2021), by Thomas Davidoff and Tsur Somerville. Proposes having a fixed fee, adjusted once or twice a year to target a desired rate of redevelopment - like a retailer holding a spring sale to clear inventory. Thomas Davidoff’s 2022 letter to council on the Making Home multiplex proposal describes a similar mechanism, and estimates that allowing a floor space limit of 1.5 FSR would generate perhaps $1.2 million per lot.

• Financing Growth (June 2002). City report laying out the argument for using development charges, including CACs.