Wesgroup SVP Of Development Brad Jones On The Challenges With DCCs, REDMA

Last week, a group of British Columbia's most prominent developers kicked off a letter-writing campaign against the Metro Vancouver Regional District and increases to its development cost charges (DCCs) that are set to materialize in the new year.

Similar to those charged by municipalities, Metro Vancouver collects DCCs on new construction projects to pay for new infrastructure — utilities, sewage, solid waste — the region needs as it continues to grow. Around this time last year, Metro Vancouver approved substantial increases to these DCCs — some were doubled, some were tripled — that are now set to come into effect in phases across the next three years.

These increases are coming at a time when the economics of real estate development have not been great. The cost of borrowing has been high (although now starting to decrease), the tempered pre-sale market means you may not even be able to secure financing even if you're okay with interest rates, and even if you pass those checkpoints, there are other obstacles such as the high cost of construction and labour shortages plaguing the construction sector.

These factors are generally out of the direct control of any one party, and that's why developers are turning their attention to the various fees that governments tax on new construction, which is something that's well within control of those governments.

The pushback against Metro Vancouver's DCC increases started last week with a letter by Beau Jarvis, President & CEO of Wesgroup Properties, emailed to Metro Vancouver's Board of Directors (as well as city councillors from across the region, Ravi Kahlon, David Eby, Sean Fraser, and a group of reporters). In his letter, Jarvis discusses economic conditions and how adding substantial DCC increases on top of them would further limit the supply of new housing and make the available supply of housing even less affordable.

Jarvis's letter was followed up by similar letters from executives, in chronological order, at: Edgar, Polygon, Anthem, Strand, Bucci, Intracorp, Beedie, StreetSide, Zenterra, Orion Construction, Third Space, Conwest, and PC Urban.

In an interview with STOREYS on September 19, Wesgroup Properties Senior Vice President of Development Brad Jones discusses how this letter-writing campaign came together, shares his first-hand experience with DCCs, and explains why the Province's Real Estate Development Marketing Act (REDMA) is also a challenge developers are facing.

I know you've been in the industry for a while. For historical context, what were DCCS like back when you first started in the industry?

If we go back to 2015, [for] a new apartment in Vancouver, DCCs combined for both Metro and City would be about $14,000 per unit. Since then, City of Vancouver obviously increases theirs, they introduced the Utilities DCL. We now have the TransLink DCC, the Metro Vancouver Water DCC. And then, with this large sewage [DCC] increase, in 2027, based on published rates and growth, these are going to be $53,000 per unit.

Metro alone used to be $1,082 — and to be fair to Metro, I'm pretty sure their DCC was $1,082 from the time my career started until four years ago — and then they started escalating. So it went to, I think, $3,500, but now it's going to $22,000. So the last few years have seen a staggering increase.

Obviously, there are variances based on jurisdiction, but the most common estimate I've seen is that all of these government fees total to about 30% of project budgets now. Does that seem accurate to you?

[The Urban Development Institute] did a really good study on this prior to the Metro DCC being implemented, and if you do the math on the Metro DCC coming in, I believe it was about 31%. [For] a project we started in 2018, fees and charges were 13% of the price. A 2020 project: 14%. I would say 10 years ago, it was probably about 10%, and a few years ago, it was 13% or 14%. And now, with these significant increases we've seen in the last few years, we're seeing it north of 30%.

When you buy a home, you don't get a receipt that shows you the tax other than GST, so one thing we've started doing, really just in the last year, is copying the gas tax effectively. When people move in, there's a piece of paper in their closing package and we give a breakdown of all the government fees and charges that made up the price of that home, so that purchasers can see it. Where did the money go? How much went to the City? What went to Metro? What went to the Province? What went to the feds?

What we want to illustrate is all of these charges get taxed again. There's a tax-on-tax component of this where when you pay GST, PST, HST on these purchase prices and you pay property transfer tax, it's on the total purchase amount, which includes a bunch of embedded taxes in it.

The letter-writing campaign was focused on Metro Vancouver DCCs, but obviously there's also the municipal CAC, DCCs, and also the new provincially-created ACCs. My understanding is that the Province was intending for CACs to essentially be replaced by ACCs, but local governments aren't really doing that, so it's resulting in developers potentially have to pay for all three fees. Is that an accurate description of the issue with ACCs?

It was a good idea with messy implementation. I think standardizing the approach to amenity contributions is a really good thing. There's been talk for years, over a decade, that the negotiated approach to density bonuses and CACs really stifles home delivery. I mean, we've had amenity negotiations that go on for over two years, delaying projects.

The Province, initially when that came out, signalled that there was going to be no more negotiated CACs. When it comes to implementation, ACCs are an option for municipalities, but they can also density bonus and do CACs on top of the ACC. It's a confusing framework. We have 21 municipalities in Metro Vancouver, we're probably going to have 21 different responses to how they use ACCs and CACs and density bonuses. So it makes it cumbersome.

The bigger point too, and we've tried to get this across prior to Metro voting on this fee increase, is all of the fees and charges are really coming out of the same place: they're getting charged to new housing development. So, when you reach the point where it's no longer viable to pay those fees, you don't get anything. What's been happening is we've had to go back to cities and tell them, "Hey, your density bonus charge was based on an environment before this Metro fee existed and when you factor in the cost of that Metro fee, there's no longer any capacity to pay for the amenity charges." So, Metro Vancouver as a Board, even though it's made up of local elected officials, kind of took a share of the pie that's so big that there's not anything left over for all of the other municipalities.

The overall cost is too high and that's why we've asked for a pause. The financial analysis raised a lot of questions, it signalled major impacts on housing, and we've asked them just to pause, slow down the implementation, and reconsider it. And one of the things that we've signalled that they should reconsider is what are the impacts on the viability of paying community amenity contributions? Because if the Metro fee is too high, there's nothing left over in the project to pay for [municipal] ACCs, CACs, and density bonuses.

In the letter, one of the asks was for Metro Vancouver to consider allowing these DCCs to be paid after construction is completed. Is that something that helps because you're paying later and there's less risk upfront, or are there other reasons why that would be helpful?

I'm glad you asked that. It's an important part. So that's for a couple reasons. If we go back, let's say ten years, you'd build most projects in 20 to 28 months. The projects have gotten so big and so complex now that in a typical construction schedule, nothing gets built in 20 months anymore. Even a wood-frame building is often pushing well over two years and larger concrete projects are beyond 48 months.

The project durations have gotten really long, so when that fee is paid at building permit, we're financing that with debt and we're paying interest on it over the duration of the entire project. These are big amounts of money. I just approved a cheque yesterday for a rental project in Vancouver — a CMHC RCFi-financed rental project — and the DCC cheque to the City of Vancouver was $4.8 million. We financed that, and we paid debt on that over the entire duration from payment to closing. It's not just the absolute cost of the fee, it's the cost of the fee plus the cost of the debt.

What we've been trying to talk to some municipalities about — and currently the Province needs to give municipalities the authority to do this in the Local Government Act — is to consider taking the payment at the end when the impact actually comes. They could have a mortgage on title or a charge on title that secures the payment and they get paid out at completion of the project. The actual cost of paying the fee upfront is astronomically more expensive than deferring it to the end. We've suggested to them to run that fee at inflation or construction cost inflation during that duration, so that obviously their costs go up during that time, but that's a better outcome that'll get more housing built.

The stat I always reference is the City of Vancouver has 14,600 units that have been approved and not started construction. And I was just told yesterday that the City of Surrey has over 40,000 units approved that haven't yet started construction. So just those two cities, that's one year of British Columbia's housing supply right there. That's projects that are sitting on the shelf that have been approved and they're not moving ahead because they're not viable. And so moves like what we just talked about with deferring the CAC to the back end of the project and paying it out of proceeds on completion would really help move a lot of that housing forward.

You said you raised this idea to some cities. How has the reception been?

I think the conversation is proceeding well. Every other city but Vancouver needs a change from the Province and the Local Government Act to do that, but they understand the pressure. So it's an open conversation we've been trying to have and I think the industry has been signalling some serious concerns for a while, but it hasn't really been getting as much traction as you would think until we've seen the serious declines in housing starts. And I think everyone's starting to realize it collectively now.

I think one of the great things about the housing targets is the updates that each city has to do. The conversation we've been having with cities is that there should be a massive KPI for you on how viable your housing is and how viable your policies are to get housing built. How many projects are approved and haven't haven't gotten built yet — when that number gets really big, it signals that something's wrong.

On the other side of all this is that the governments need money for infrastructure and amenities, and a lot of them are coming up short. What do you think are some of the potential solutions for governments? Are there any real solutions that you think are viable besides raising property taxes, which, I think, municipalities are kind of reluctant to do?

Municipalities are certainly nervous to raise property taxes. As a homeowner, I would actually say that my property taxes are probably too low, to be honest, but I don't think that property taxes are going to solve our infrastructure problem. I think we've hit the breaking point of infrastructure funding with the funding model that we have. I think this is a pretty significant federal issue that really relates to, in my mind, immigration policy. Canada is unique. It's a big country, but almost all of our immigration moves to a few urban centres, right? There's not a ton of job centres in in Canada. I believe it's about 40% of newcomers to the country move to the GTA or Metro Vancouver, effectively, so that places a huge demand on these municipalities to respond to that, and the typical method of a third, a third, a third for infrastructure projects between the feds, the Province, and local government is probably out-of-date.

There's a great study out of Ontario that looked at taxation on new housing, and I believe what they found was the feds take the most money out of new housing and return the least. I think they only return about 7% of what they collect, and I think that's the infrastructure problem in our country. I think the feds need to respond to the demands that are being placed on urban markets. Population growth is an important part of our economic situation in Canada and if the demands go to a few of those locations and it puts a serious demand on housing and transit and water and sewer and all those things, there should be a funding response from the federal government on that.

Look at the way the federal government has funded other industries. The real estate and housing sector got CMHC's RCFI financing program — low-cost financing — and it generated the most significant period of rental construction since the 1970s. But that was a low-cost financing program. Imagine what we could do if we got treated like EV battery manufacturing. There's a plant in Quebec that was supposed to be built, but now might be scuttled, that got over $4 billion in funding from the Province of Quebec and the federal government. I think there needs to be a different funding response to the homebuilding industry, which I believe represents about 6% of Canada's GDP — far, far bigger than the clean tech industry and the EV battery manufacturing industry that gets multiple times the support that our industry gets or that local governments get on infrastructure.

These Metro Vancouver increases were approved almost a year ago. Why begin this letter-writing campaign now?

There was a period where some in-stream applications were protected and it's been a bit of a process of data-gathering. So the financial analysis that Metro Vancouver did, while I would call it relatively inadequate, it predicted the outcome that we're in right now. We thought it was a good time [now]. The market is really struggling, housing starts are way down, project launches are stalling, and yet this fee increase is still coming in.

It ended up being convenient that it was [the same week as the UBCM convention] — it wasn't strategic. I wish I could say we were smart enough to, but we just thought the timing was appropriate where it was time to do a check-in with Metro and say "It's been almost a year, here's the impacts we're seeing, we are struggling to move projects ahead, we're seeing the land market stall because a shopping mall is worth more as a shopping mall than it is as a transit-oriented redevelopment." We wanted to see if there was an openness to revisit that.

There's obviously been a serious response from the industry. I know there are more letters continuing to go in, there are letters from groups in the Fraser Valley coming in, because everyone's facing this and seeing this now. I think it signals the challenge facing the industry. And I'd say some of the conversations we've had with Metro Vancouver Board members, who are elected officials, is an openness to hear the concerns. We're excited about that.

How did this effort come together? Did other developers know you guys were gonna do this? Was it timed so the letters would come one after the other, rather than have everyone sign one letter? What was the coordination that went into this?

It's been relatively organic. It's something the industry's been talking about since it came into place. A few of us talked about how we should do something and we should see if there's an openness to reconsider it. It's hard to do things in an overly coordinated way, because we're a really fragmented industry. I don't even know how many homebuilders there are in Metro Vancouver. In terms of reasonably-sized groups that do multi-family, it's probably a hundred groups. How do you coordinate that?

So we thought it would be more impactful to have each group kind of speak for themselves, but a few of us met and kind of debated what we are asking for. And that's why a lot of groups have followed that four-point request that we made: pause, reconsider, do more financial analysis, and let's work together earnestly to figure out how we can address this in a way that doesn't cripple housing starts.

There were a few of us that did that piece together and the message has caught on, and it's kind of just grown organically. I think a lot of development shops are small companies, and they're trying to keep their couple projects going — Metro Vancouver is a challenging group to interact; you can just go on the website and see what the process to make a delegation is like — and they feel like their voice isn't heard. It's really just grown organically. Happening during the week of UBCM, like I said, it was a bit of a happy accident, but it's created an opportunity for the conversation to happen quite quickly.

The goal of the letter was to speak to the Metro Vancouver Board. What else do you guys hope to communicate to the Board?

It's really just to follow up [the letter]. It's been almost a year since this went into place, the conditions have gotten worse, yet this fee increase is still coming. We think there needs to be an opportunity to revisit this, we want to have an open conversation about it. Our industry is here to work with that, and really what we've asked for is let's not cripple housing starts. That's the two-year delay [request]. There are a lot of projects right now that are on the precipice of moving ahead and this fee increase does hit in-stream projects. The in-stream window is really inadequate, so those projects where an investment decision was made, land was purchased, a rezoning was done, let's let those projects move ahead under the economic conditions that they started under.

And then, let's have an honest conversation about upfront payment of these massive fees, which really impacts projects. Let's take a bit more time on this. We understand the infrastructure demands, but if this goes ahead and housing starts slow down because of it, that's a bad outcome. And if housing starts slow down, no one's paying their fee either, so they're collecting 100% of nothing.

Have you guys heard back from Metro Vancouver?

There's interest from board members in hearing the delegation. We're working on getting some conversations set up. To make a delegation to the board, there needs to be an agenda item, and there's currently not an agenda item, so we're trying to resolve that. We've been invited to speak to the finance committee, which I think is a good thing, but where we're going with the scale of this now we think it would be great for there to be an industry group delegation where there's one or two speakers and all the groups that sent letters are there and there can be an open conversation about the challenges.

Are you aware of the group of Ontario developers that formed a coalition essentially against these government fees? Was any inspiration taken from that and what do you think of their pledge to cut their prices dollar for dollar, for government fees cut? Do you think that's something developers here would consider?

I think what they did is great. We're seeing an organic growth of individual development groups responding to this pressure because some of these fees and charges are going to massively impact the industry and the ability to build homes. I like their campaign a lot. We've talked a lot about that concept and our position at Wesgroup is we need to see margins in homebuilding return to what banks require, because there's projects right now where developers are making less money than if they'd invested the same money in a GIC. That's not a sustainable industry. We'd be happy to have that conversation about responding on a dollar-for-dollar basis, but we need the economics of homebuilding to return to what they were first. We're just trying to get to a place where projects can even get built and move ahead.

I saw you comment last month on an article about REDMA and its 12-month requirement. Can you elaborate on the requirement and why it's become a challenge for developers?

The Real Estate Development Marketing Act has been around for a while in British Columbia. It's effectively a consumer protection legislation that really enforces the way that presale homes are sold. That, on its face, is a really good thing. However, REDMA has not really responded to the scale of growth in our region and the scale of projects.

It used to be a nine-month window to presale your project. So, nine months, banks require — it depends on the structure of the project — let's call it 65% of the project to be presold to finance it. So we need — it was a nine-month window and it's now a 12-month window — to get our building permit from the city, which has gotten really, really hard to do in that period of time, and we need to get a satisfactory financing commitment from a bank to move the project forward. So that means we roughly need to sell 55% of the homes. When projects were 150 units, that wasn't a big deal, but we're seeing projects throughout Metro Vancouver now that are 350 units. There's projects in Surrey that are single phase, one tower, 720 to 750 units, and so the prospect of being able to presell 500 homes in that period of time is really challenging, and we believe is actually holding housing back from the market.

I know two projects in Metro Vancouver, fairly large projects, that just deferred their anticipated launch. It was going to be in the fall and they just moved them into next year because they don't think they can hit the REDMA window if they launch right now. What we've been advocating for is an amendment to REDMA where projects over 100 units get 18 months to get to that presale period, because it doesn't benefit anyone if a project fails, right? No one wants that. It costs millions and millions of dollars and an incredible amount of time at the city and in our offices and architects' offices and sales and marketing firms to get a project to that point. And if there's a restriction that's putting a timeline on there, it's really not feasible anymore because of the size. That's not an outcome that's serving anyone well, so we are looking for an amendment to that act where larger projects get an additional six months to get through that presale period and it'll help keep projects in the market and give groups more confidence to be able to launch.

Under the current regulations, what happens if projects don't hit that requirement?

If it doesn't hit that requirement, you effectively have to stop marketing. You can't sell the project anymore until you hit that point, but you end up in this quagmire where you can't progress because you can't sell, and so ultimately the project needs to collapse and you need to give the purchasers their deposits back at that point.

How often does that happen?

You haven't seen it in this market that often because our real estate market has just been relatively robust for a pretty long period of time, but I also say you don't see it happen as much because groups are really careful about when they launch and their confidence to get to that point because the cost of doing that is so high. There are many projects where you will spend $5 million or $6 million to get to the point of launching, and so there's a huge penalty just in getting to that point and then relaunching or whatever has to happen. Basically, only a third of [launches] this year have been pre-sold, so there are a lot of projects that have been in the market for six, seven, eight, nine months and they're approaching their 12-month window in the next two quarters and they've only pre-sold 15%, 20%, 30%, 40% of their units. I don't think we've seen the problem really materialize yet, but when it does, it's a scary thing for housing starts because that just means there's a whole bunch of housing approvals in the system that can't move ahead because of the legislative framework that we operate under.

I think people generally know that lenders require developers to hit pre-sale targets, around 65% or 70%, to get financing, but I understand there's also a profit margin requirement, around 15%?

Absolutely. You need to have a project that covers risk. It kind of varies depending on structure of projects, but 15% return on cost has really been the number for the last number of years. And I would say the vast majority of projects in our market right now probably aren't hitting that. It's a really concerning place for housing starts where, effectively, a new housing project is an incredibly risky venture right now that's paying you the same or less than the returns you could get by buying a GIC. That's a bad prospect for the housing industry and it's troubling and it's indicative of the policy framework. You would think in the midst of a housing crisis, we would be able to build housing, and it's never been harder.

Responses have been edited for length and clarity.