Higher construction and borrowing costs have seen developers struggle to launch projects and build.Sammy Kogan/The Globe and Mail
The city of Toronto has taken the first step toward eliminating development charges on thousands of new housing rental units if developers ensure that 20 per cent of the homes are affordable.
Development charges are fees the city requires developers to pay to help cover the cost of providing infrastructure such as roads, sewage and transit to a new building. They are becoming more expensive. This year, the city increased the rate by 24 per cent for rental bachelor and one-bedroom apartments.
With higher construction and borrowing costs, developers have found it more difficult to launch projects and build. That will slow the pace of new home building at a time the country is wrestling with a shortage of affordable housing.
In a report issued on Wednesday, city of Toronto staff recommended that development charges be deferred indefinitely if certain conditions are met, and recommended a 15-per-cent property tax reduction for 35 years. The staff report said these actions could help kickstart construction of 20,000 new rental units. The recommendations need to win approval from the majority of city council for the new policy to become law.
“It’s a step in the right direction,” said Adrian Rocca, chief executive of Fitzrovia Real Estate, a rental apartment developer that has nearly 6,000 units under construction in Toronto. But Mr. Rocca said it would only benefit a small number of projects.
That is because, in order for a developer to win the reprieves, at least 20 per cent of the building’s units must have affordable rents and the building must remain a rental for at least four decades. Construction has to start by the end of 2026.
But because the cost of construction and borrowing is high, most new buildings would not be able to earn enough rental revenue to cover the development and maintenance if a developer has to offer below-market rent or affordable rent on 20 per cent of the building’s units, Mr. Rocca said.
The federal government has a $55-billion program that provides low-interest loans for developers to build rental apartment buildings if certain conditions are met.
Mr. Rocca said only one of his new apartment buildings would have the potential to be eligible for the city’s waivers and he would need access to the federal government’s cheaper financing. “The vast majority of rental projects are not eligible for federal grants and will not benefit,” he said.
Ottawa is funding affordable rental projects that aren’t actually affordable
The federal government has already made it easier for rental apartment builders by eliminating the federal goods and services tax on rental construction. That tax cut was enacted last fall and applies to rental construction that begins by 2030 and is completed by the end of 2035.
Mr. Rocca said the tax break did help, but the municipal charges and taxes are still too high. He said his company has about 4,000 rental units on hold because “the math does not work.” His company has been pushing for a waiver on development charges and tax abatement.
The Building Industry and Land Development Association, which represents builders in the Toronto region, has been lobbying the municipal, provincial and federal levels of government to reduce the costs of building. Chief executive Dave Wilkes said the city of Toronto’s recommendation is “a recognition that the government fees and taxes must come down.”
As of June, Toronto’s development charge for a rental bachelor or one-bedroom unit is $33,497 compared with $26,978 previously, according to the city of Toronto’s website. For a rental two-bedroom, the current charge is $48,299 up from $38,899.
For condos, which are individually owned, the development charges are higher. Condo developers have increased their prices to cover the higher development charges and construction expenses. Slowing sales suggest prices are now too high for many investors and prospective homeowners.
Buyers have recoiled from preconstruction condos in the Toronto region and across most of the country. In the Toronto and Hamilton region, preconstruction condo sales in the third quarter were 87 per cent below the 10-year average, according to condo research firm Urbanation Inc. The lack of interest means developers are not selling enough units to get construction financing to start building and dozens of projects are on hold.
To help fund the loss of revenue from the development charges and tax break, Toronto city staff recommended asking the provincial government for about $1-billion and the federal government to help with $7.3-billion in low-cost financing for the new builds.