Development charges have been the talk of the building industry for some time, especially in places like the Greater Toronto Area (GTA), where climbing fees have dramatically slowed the launch of new housing projects. Passionate voices, including those from the Building Industry and Land Development Association (BILD), say current sky-high fees are no match for Ontario’s housing supply crisis and are calling for an overdue change to the Development Charges Act, which was first rolled out in 1989.
A report released today, The State of Development Charges in Ontario, developed by Keleher Planning + Economic Consulting (KPEC) for BILD and the Ontario Home Builders’ Association (OHBA), recommends that the Province modernize the current 35-year-old development charge (DC) system to help reduce housing costs and increase its efficiency.
Of course, DCs are intended to offset the cost of providing infrastructure and municipal services – things like roads, transit, community centres, libraries, emergency service facilities, and water and sewer infrastructure – to support new housing growth. So, DCs perform a vital function, because new housing is obviously dependent on infrastructure. Nobody’s denying that.
It’s important to stress that the report acknowledges the crucial role DCs play in supporting housing in the province. Therefore, it emphasizes areas where the current legislation can be improved, rather than eliminated. “The overarching theme of the report is that we don’t want wholesale changes,” the report’s author, Daryl Keleher, tells STOREYS. “It’s important to maintain the current development charge system as a legal system, to maintain existing financial transparency about how the funds are calculated, collected, and spent. It’s an important legal background of the planning system. We do need to streamline its modernization and remove some of its kinks.”
BILD’s Justin Sherwood tells STOREYS that the report was under development for almost a year. “It’s a significant piece of work,” he says. “We have been taking a look at DCs for a number of years, but it's become particularly important now because of how high DC rates have gotten in the GTA and the current cost-to-build challenge.”
An Outdated System
Currently, DCs are calculated and imposed in a formalized manner prescribed by the Development Charges Act, which provides a legal framework to manage and allocate responsibility for funding growth-related capital infrastructure in Ontario. Municipalities charge DCs to residential builders and developers on a per-unit basis, and these costs are rolled into the final price of the home paid by the new home purchaser.
“Ontario’s DC system has been with us for over 35 years,” said David Wilkes, President and CEO of BILD. “The system has resulted in massive cost escalation of municipal fees on new homes, especially in the last 10 years [that] is creating a cost-to-build challenge and undermining housing affordability. An extra $100,000 to $150,000 per single-family home added by DCs across the GTA is simply not sustainable. When combined with the complexity of the system and the changing needs of Ontarians, there is an urgent need to modernize the DC legislation.”
Wilkes isn’t exaggerating: according to BILD’s GTA Municipal Benchmarking Study, released in September, municipal fees in the GTA rose by a tough-to-swallow $42,000 per unit on a low-rise development and $32,000 on a unit in a high-rise development since the 2022 study. Meanwhile, apartment fees have climbed $32,000 to $122,387. Total municipal fees per unit ranged from approximately $102,000 in Bradford West Gwillimbury to a high of just over $195,000 in the City of Toronto (Toronto) on a low-rise development.
The goal, outlined loud and clear in today’s report, is to lower development charges (DCs) by modernizing this outdated DC model. “Despite the beneficial features of Ontario’s Development Charge system, there are elements that desperately need to be updated and best practices from other jurisdictions that could be incorporated to simplify the system, right-size costs on new homes and modernize the legislative framework,” said Scott Andison, CEO of Ontario Homebuilders Association (OHBA). “The system as-is drives up the cost of housing due to the current DC calculation methodology."
Daryl Keleher
One of the most pressing issues, says Keleher, is Ontario’s current upfront nature of DCs, where the developer pays at the building permit stage. This cost inevitably get passed on to the homebuyer. “This can work, but it doesn't necessarily need to work that way for a couple of services, particularly water and sewer – so, wastewater treatment plants, water treatment plants, and pumping stations, ” he says, pointing to how larger municipalities like Peel and York Region debt finance pricey treatment plants, but also get upfront payments from developers along the way. “This doesn't really make a lot of sense when you think about where the costs are actually being incurred,” says Keleher. “Alternativelty, when you debt finance something, you get the money to build the thing, and then you slowly pay down that debt over time, just like a mortgage or any kind of debt.”
Another key issue, Keleher tells STOREYS, is the current importance placed on land values. “In the DC Act, there is currently the ability to include land and land values in both DC rate-setting and also what you use DCs for,” says Keleher. “So, on the DC rate-setting side, they’re allowed to recover through DCs what your existing service level is. So, if I’m providing library services and the value of all my existing library assets – buildings, books, vehicles, and the land – are valued $100 per capita, my DC going forward can be $100 per capita on future growth, because you can't exceed that number; that's kind of where your DC can get to without offending the Act.”
The problem is that, particularly in the last five to ten years, land value has escalated. “So, the calculated dollar level of that service level has gone way up, because the land value under that library has gone way up, because we’re using highest and best-use land values,” says Keleher. “Whether the municipality builds an extra square foot of library or not, their dollar value service level has gone way up. But, when you look at the square foot per capita – which is all that matters to the end-user -- I don’t care if the library is on a two-acre plot of land or a 100 acre piece of land. I'm just going to the library.”
Keleher says that this has created an abundance of room to pad ambitious capital programs. “They’re so ambitious that a lot of the works that are in DC studies never happen or get deferred and delayed because they are expensive works,” he says. “So, as land values have escalated, DC rates have [gone] up, and this is why you see DC rates in the GTA in particular being so much higher than other places in Ontario, because of the high land values.”
This has resulted in a cycle, adds Keleher. “Higher land values are created by housing shortages; and higher land values mean higher housing shortages,” he says. “So, the inclusion of the DC may have made sense 20 years ago when land values were $200,000 an acre. Now, there are GTA municipalities where it’s $4- or $5-million an acre. So, this has put a lot of pressure on DC rates.”
The numerous legislative and regulatory changes made since the 1997 version of the Development Charges Act have increased the complexity and difficulty of calculating and applying DC rates for all stakeholders. This has resulted in confusion, varied interpretations, conflicts, and legal disputes. Therefore, a simpler, clearer system is needed to address these issues, Keleher highlights throughout the report. “Some elements may have worked in the past, but there are some antiquated provisions that perhaps couldn’t have foreseen the development environment we’re working in today,” Keleher tells STOREYS.
building permits
building permits
Key Findings
Modernizing the current Act will significantly re-orient the incidence of capital costs while maintaining the current DC model's rigorous and transparent system, stresses Sherwood. Most notably, the recommendations include changing the way water and sewer DCs are funded and calculated. The report suggests shifting responsibility for DCs from developers to a utility-funded model, changing how land values are included in DC rate setting, and only permitting actual land costs, rather than projections of future land costs, to be funded by DCs.
The report also recommends updating the DC Act to enhance clarity and both mitigate and simplify legal conflicts, including mandate preparation of local service policies and standardize certain specific elements to ensure they are clear and easily interpretable. It recommends enhancing clarity and mitigating and simplifying legal conflicts by updating the DC Act. This includes mandating the preparation of local service policies and standardizing specific elements to ensure they are clear and easily interpretable.
Furthermore, it recommends reducing subjectivity and variability in the estimation of “Benefit to Existing” allocations by promoting standardized calculations and formulating guidelines for estimations. It suggests standardizing inputs to historic level of service calculations; meaning, values used to set DC rate caps should be consistent with parallel financial documents regularly prepared by municipalities (such as Financial Information Returns, Asset Management Plans, etc.). Finally, it recommends increasing provincial oversight through various changes.
Apartment Condominium Complex, Wood Frame Construction, Victoria, Canada. Blue Sky backgroundstoreys.com
A Page From Other Jurisdictions' Books
In short, there's a better way to deal with the infrastructure tab. The report highlights jurisdictions across Canada and North America that all have different ways to fund growth and housing-related infrastructure. For example, Keleher points to Texas and Florida, two states that debt finance certain infrastructure projects through sources like the public sector or institutional entities like pension funds.
“They debt finance things like treatment plants and pumping stations and get repayment over time from the ratepayers themselves – almost like a surcharge on your water or hydro bill,” he says. “As growth happens and new homes are occupied and businesses come along and pay taxes and water and sewer bills, you add a surcharge on to that to pay back DCs. So, you’re leveraging the public sector borrowing and credit rather than relying on private mortgage holders to finance these things through higher home prices for the end-user.” Instead of embedding these costs in the price of the real estate, the payment is spread out over time.
Sherwood also highlights Quebec, which relies on a utility model to fund its moving water and waste water treatments. “They don’t have the DC prices we do, but they still have the money to be able to build the water and wastewater treatment plants, the water filtration plant, and put all the pipes in the ground, but it’s done differently. It’s billed on a monthly basis to the new homeowner, versus baking it into the upfront cost that has to go into a mortgage and have interest paid on it.”
