On Wednesday, the Auditor General for the City of Vancouver, Mike Macdonell, published his report examining the Development, Buildings, and Licensing Department (DBL), particularly as it relates to building permit fees.
The 34-page report found that the City of Vancouver issued a total of 1,457 new building permits in 2022, and collected $29,258,384 in fees from those permits. The amount of new building permits issued was the highest since the 1,674 issued in 2018, while the dollar amount collected was more than double what was collected in nearly every year during that same timespan.
(Auditor General / City of Vancouver)
Building permits are issued by two branches of the DBL: the Housing Review Branch (HRB), which oversees permits for single-family and row houses; and the Building Review Branch (BRB), which oversees the higher-density projects.
The audit found that, as a whole, the DBL's processes for assessing building permit fees were mostly compliant with Vancouver's Building By-law, with a few "significant exceptions."
Building Permit Fees, Explained
The issuing of building permits is a process that ensures construction projects are in compliance with the bylaws and regulations governing safety, livability, accessibility, and sustainability.
Building permit fees primarily exist to recover the expenses incurred while processing permit applications, rather than as a source of revenue the City uses to fund other things.
In Vancouver, as well as numerous other municipalities in British Columbia, building permit fees are determined based on the construction value of the project, which -- under the Building By-law -- should reflect the market value of all labour, fees, and materials.
One key thing about that construction value, however, is that it's a value that applicants self-report.
"The use of cost estimates provided by applicants as the foundation for calculating fees has inherent limitations," the Auditor General wrote. "Estimates can vary widely depending on the estimation method and assumptions used and may not be fully reflective of actual project costs due to the uncertain nature of the estimation process."
As an example, Macdonell said that one of the permit applications he reviewed had a self-reported construction value of $30M. However, using the industry-standard Marshall & Swift method, the estimate was closer to $23M. A third industry method landed at approximately $48M.
"When you’re a builder, you’re incentivized to state a value that's beneficial to you," Avi Barzelai, of Barzelai Building, a Licensed Residential Builder that has served Vancouver for 10 years, tells STOREYS. (Not that he does that himself.) He says that this makes the fee assessment process subjective, rather than objective, as most other development-related fees are.
Barzelai is an advocate for switching to a straight-forward square-footage multiplier to determine building permit fees, just like how the City of Vancouver determines its Development Cost Levy for projects.
But here's the thing: while the Building By-law outlines the construction value method, the DBL -- and particularly the HRB -- have largely been ignoring the By-law and using a straight-forward $250 square footage multiplier. Moreover, they were also inconsistent with the multiplier, only using it part of the time.
"Staff told us that their administrative process was designed to use the value of the proposed work to calculate the building permit fee if it was a higher value than HRB's calculation using the $250 multiplier," the audit found. "We reviewed 64 of the 1,096 permit applications and found that the multiplier was used to calculate the fee for 97% of these applications. The cost estimate provided in the application was used for only 3%."
Furthermore, construction estimates were also not always provided by applicants, and the DBL didn't always follow-up with the applicant, as they used the square footage multiplier instead.
This is, however, not to say that the City of Vancouver has been arbitrarily charging high fees to swell their coffers. The Auditor General found that the DBL's decision to use the square footage method -- while not authorized by the Building By-law -- may have actually resulted in the City under-collecting in permit fees, not over collecting.
The DBL "would have collected an additional $27,394, or 11.4% of the overall fee value, had the value provided by the applicant been used to calculate the fees," the audit found. "As the 64 permits we reviewed represent only 6.3% of the total value of HRB-processed permits in the audit period, the under-collected permit revenue may be significantly higher than the amount we observed."
Asked about this finding, Barzelai told STOREYS that permit applicants obviously would not care because real-world construction costs are closer to $400 per square foot rather than $250 -- which the audit found to be an unwritten number that has been used for at least 10 years and is based on historical data. He says that he thinks the City likely also does not care because applicants don't make a fuss about the fee, which covers staffing costs.
"It's sort of a truce that's developed over time in response to an onerous and subjective bylaw based on construction costs," he added. "If the City decided tomorrow to enforce the letter of the bylaw, there would just be absolute chaos."
Macdonell, who was appointed as the City's inaugural Auditor General in 2021, concluded that aside from the aforementioned exceptions, using a fee assessment method that isn't allowed by the By-law and applying it inconsistently, "for the projects that were reviewed, the value of the proposed work used as a basis to calculate fees was reasonable" and that "fees were charged accurately, in accordance with the City's Schedule of Fees."
Nonetheless, Macdonell made a series of recommendations, the biggest of which was to resolve the discrepancy between the Building By-law and the actual building permit fees process by either making formal amendments to the By-law or re-designing the current process to comply with it, while also addressing the risks of under-charging or over-charging fees.
Other recommendations include documenting standard operating procedure in formal writing, enhancing guidance for building permit applicants, developing a process to monitor for administrative discrepancies, and for the BRB to be more involved with confirming the construction values applicants provide.
In an official statement on Wednesday, the City of Vancouver's General Manager of Development, Building, and Licensing, Andrea Law, said that she accepts the Auditor General's recommendations and thanked him for his report.
The City has also already created an action plan, setting targeted deadlines to follow through on the recommendations. The City has asked staff to develop a set of standardized and consistent processes by Q2 2023, enact solutions to the other recommendations by Q3 2023, and present formal By-law amendment recommendations to Council by Q4 2023.