HEMSON C o n s u l t i n g L t d.

Transcription

1 REVIEW OF DEVELOPMENT FINANCIAL INCENTIVES City of Saint John C o n s u l t i n g L t d. June 2010

2 TABLE OF CONTENTS I INTRODUCTION... 1 II CURRENT FINANCIAL INCENTIVE PROGRAMS... 2 A. City Has Offered Financial Incentives for Development and Heritage Conservation for Almost Forty Years... 2 B. Evaluation of Current Programs C. There Are Sound Reasons for Changing Current Incentive Programs III OPTIONS FOR UPDATING CURRENT PROGRAMS A. Review Program Objectives B. Set Clear Program Eligibility Criteria and Grant Terms C. Establish Program Performance Targets and Review Results D. Continue to Consult Development Industry Stakeholders IV RECOMMENDATIONS ON MOVING FORWARD A. Incentive Programs Need to Be Based on Fiscal Reality and Patterns of Development B. Financial Assistance for Residential Development Needs to Be Changed. 24 C. Financial Assistance to Large Scale Non-residential Development Should Be Cancelled D. Heritage Grant Programs Should Be Maintained with Minor Changes E. Implications of Making Changes to Incentive Programs APPENDIX A PLANNING FEES AND DEVELOPMENT INCENTIVE PROGRAM REVIEW MEETING #1 APPENDIX B PLANNING FEES AND DEVELOPMENT INCENTIVE PROGRAM REVIEW MEETING #2 APPENDIX C PROPOSED PROGRAM DETAILS

3 I INTRODUCTION The City of Saint John has, for many years, provided financial incentives to various forms of development. In light of the decision to undertake a comprehensive review of its Municipal Plan, the age of the incentive programs, and current real estate market conditions, the City has decided to review the terms and objectives of the current financial incentive programs. The review is not directly connected to the Municipal Plan review as actions relating to incentive programs will need to be undertaken in advance of Common Council formally adopting the new Plan. That said, the review will inform the background work to the Municipal Plan. Hemson Consulting Limited and CBCL Limited were retained to conduct the financial incentives review and this report summarizes the results. Hemson was also retained to review the fees the City imposes to recover the cost of processing planning applications. The results of the planning fees review have been issued in a companion report entitled Planning Fees Review, After this introductory chapter, this report is divided into three sections: Section 2 outlines the history of financial incentive programs provided by the City and evaluates current program terms and objectives. Section 3 discusses options available to the City for updating its current programs. Section 4 and the Appendix provide recommendations for moving forward. The report is based on a range of investigations, including: a review of municipal documents, including staff reports to Council, reports on development activity, financial returns, municipal by-laws, website materials, and consultants reports; review of publicly available census and real estate market data; telephone, , and face-to-face interviews with municipal staff; and, consultations with building and development industry representatives, consultant engineers, heritage architects, and housing groups.

4 2 II CURRENT FINANCIAL INCENTIVE PROGRAMS This section outlines the history of financial incentive programs provided by the City and evaluates the terms and objectives of current programs. A. CITY HAS OFFERED FINANCIAL INCENTIVES FOR DEVELOPMENT AND HERITAGE CONSERVATION FOR ALMOST FORTY YEARS The City of Saint John has offered financial assistance for new development and heritage conservation through a number of incentive programs since the early 1970s. 1. Previous Incentives To Promote Housing Financial assistance has been provided to encourage residential development and redevelopment through a number of different programs over the years. Collectively, the programs have targeted a range of housing types (low and high density, rental and owner-occupied) directly as well as various target groups (families, singles, seniors) and levels of household income more indirectly. Most of the programs set up in the 1970s and 1980s have since been discontinued. The objectives of the residential assistance programs can broadly be summarized as follows: a) Encourage Development On Municipal Services For almost forty years the City has been keen to promote new residential subdivision development on municipal (water and sanitary) services rather than on private well and septic systems. The earliest efforts to further this objective took the form of cost-sharing programs whereby the City would provide a grant to developers for piping materials and other site preparation costs (inspections, street lighting). In at least one case the program helped pay for the cost of a pumping station. Developers were typically responsible for the installation of the pipes. The cost sharing programs were administered under the City s subdivision by-law. By the 1980s the programs were restricted to areas immediately outside the existing developed areas of the City so as to promote the logical extension of development on municipal services.

5 3 b) Increase Market Share In the mid-1980s the City established a goal of increasing its share of the metropolitan area housing market to 35% (it stood at 17% in 1985). A number of incentive programs were used to achieve this. One program, the Greater Residential Incentive Program (GRIP), which ran from 1985 to 1989, provided a grant for every new lot developed in the City based on a percentage of the increase in assessment resulting from the lot. Another program, the Direct Homeowner Grant Program (DHGP), which was only in place for one year (1985), provided a grant after construction of a dwelling unit was completed equivalent to the first year s taxes on the property. The average grant paid out under the GRIP was about $6,000 per lot. In its brief existence the DHGP paid out about $1,000 per unit to 77 units. c) Promote Redevelopment On Existing Infrastructure For many years the City pursued the revitalization of existing neighbourhoods through the rehabilitation of the existing housing stock and the encouragement of infill development on vacant land. A number of financial incentive programs were implemented to further these objectives. The Housing Through Infill Development Program, which ran from 1986 until the late 1990s, provided a grant for every vacant lot redeveloped in Uptown, North End, and West Side neighbourhoods based on 15 per cent of the resulting assessment increase (similar to the GRIP program described above). An Upper Floors Program, which provided a grant to assist redevelopment of the upper floors of buildings, was implemented for a few years in the 1990s and again briefly in The Upper Floors Program was available to both residential and non-residential development in the Uptown. The Housing Through Infill Development Program was very popular with developers. City financial data shows that in the last two years of its existence about $1.5 million in grants was paid out under the program. This compares with about $270,000 disbursed for residential subdivision grants over the same period. A key goal of all the residential incentive programs was to increase the City s assessment base and, by extension, property tax revenue. However, the City does not appear to have ever undertaken a detailed analysis of the fiscal benefits arising from the programs.

6 4 2. Current Incentive Programs The City s current suite of incentive programs include grants for residential piping materials and site preparation, for servicing of commercial and industrial lots, and for conserving heritage buildings. a) Residential Incentive Program The City s current program for providing financial assistance for new residential development is the Residential Infrastructure Assistance (RIA) Program which has been in place since the mid-1990s. Building on previous programs, the RIA program provides grants for development of six or more new residential units that require the extension of water, sewer and stormwater services into new and unserviced areas. The grants are made in two payments. The first covers the cost of water and sewer piping materials required for development and is typically referred to as the materials rebate. This is similar to the subdivision cost sharing grant which had been provided in various forms since the 1970s (see above). A second payment may be made at the same time as the materials rebate. This top up recognizes that construction in Saint John (as opposed to other municipalities in the region) often involves sites with challenging conditions such as bedrock or waterlogged soils. It helps mitigate these site challenges by offsetting three types of additional cost: removal of rock or organic matter (only to allow services to be emplaced; the removal of similar material for building construction is ineligible for grant funding); provision of necessary sewage pumping capability; and, extension of or upgrading of off-site services (i.e. outside subdivision boundaries). Development where servicing work has already started on the property is ineligible for grant funding. Council approves all grants under the program. Under the terms of the program grants are to be paid out immediately after municipal infrastructure is vested to the City and provided the following conditions are met: that the extension of services begin within six months of approval; and, that at least six residential lots are serviced within three years of approval.

7 5 The maximum grant amount under the program is $6,000 per residential serviced lot regardless of the number of dwelling units to be built on the lot. Because the grant is lot-related the maximum amount could be the same for a multi-residential development on a single lot as for a single detached unit. Developers can choose to direct a portion of the grant to the purchaser of a new unit as a marketing incentive. It should be noted that the $6,000 includes both the materials rebate and the top up. As a result, there is rarely much grant money available to fund the top up. The $6,000 amount has not been changed since Prior to 2001 the maximum grant under the program was $10,000 per lot. Since the previous Housing Through Infill Development Program and Upper Floors Programs were discontinued no grant program has been available to assist the redevelopment of existing built up areas in Saint John. b) Incentives For Non-Residential Development The City has offered one-time grants of up to $150,000 to new commercial development since 2005 through a Commercial Infrastructure Assistance Program. As with the residential grants this grant aims to offset the challenges of installing water and sewer services on new lots. However, grant assistance is also available to fund the cost of road improvements (such as road widenings or traffic signalization). Only commercial development with a value exceeding $5 million, and where site development has not begun, is eligible for the grant. The grant is paid out after municipal infrastructure has been satisfactorily inspected and vested to the City. The City also offers financial incentives to business park developments through a Business Park Improvement Program. Only business parks of 30 acres or more are eligible for assistance. The program provides two separate incentives: an Infrastructure Development Incentive (implemented in 2000); and an Infrastructure Financing Incentive (implemented in 1999). The former is a grant that functions like the commercial grant in that it aims to offset the cost of installing water, sewer and stormwater services, as well as roadways. The maximum grant is $500,000 and it is paid out in two ways: as a one-time payment after approval of the subdivision plan; and, as subsequent annual payments for up to three years equal to 7.5 per cent of the assessment increment on the property (i.e. the difference between the assessed value before development and the assessed value at specific times

8 6 after grant approval). These annual payments are triggered either by completion of the development or upon receipt of a certificate(s) of assessment for all lands and businesses in the business park, whichever is later. An alternative Infrastructure Financing Incentive aims to accelerate the development of business parks where significant up front capital costs are an impediment. It involves the City paying for specific servicing costs in the public right-of-way of a proposed business park and recovering the costs from benefiting landowners at a later date. Repayments are pro-rated based on the amount of frontage and can be paid in annual installments of up to ten years. The financing incentive is available only to development fronting on the right-ofway and only when all properties on the right-of-way apply for assistance. Successful applicants must enter into legal agreements with the City that establish repayment terms and cannot receive assistance under the Infrastructure Development Incentive. Council is the sole authority for making decisions on all non-residential incentives. c) Heritage Grants The current Grants for Heritage Conservation Program was set up in the 1980s. The program is administered under the Saint John Heritage Conservation Areas By-Law. The main objective of the program is to encourage the conservation of character-defining elements of heritage buildings. Grants are available to property owners for both one-time rehabilitation work and ongoing maintenance. They are not contingent on any redevelopment of buildings taking place though it is recognized that the refurbishment of heritage buildings can result in increased owner occupancy of residential properties and can attract employment activities into buildings. Because the focus of the grants is on conserving historic buildings they serve a very different function from the grants provided to residential and non-residential development described above. The heritage grants are available in designated Heritage Conservation Areas, most of which are located in the City s older Uptown. Eligible costs include a wide range of exterior construction components: building structure; roofs; wood; masonry; architectural metals; windows; doors, verandahs; fire escapes; and decks. There are three types of grant: Heritage Maintenance Grant: provides up to 20% to a maximum of $1,000 of eligible costs provided at least $5,000 is spent. This grant is available for exterior work on heritage buildings whether they have a Conservation Plan in place or not (see below).

9 7 Heritage Conservation Grant: available for larger projects. The value of this grant is between 20% and 40% of eligible costs (the 40% applies only to masonry work and conservation work on windows and doors) up to $10,000 provided at least $25,000 is spent. To secure the grant a long term plan for conserving character-defining elements of the buildings a Conservation Plan must be in place. Heritage Conservation Plan Grant : to offset the cost of preparing a Conservation Plan. The maximum value of the grant is 50% of the cost of the Plan, up to $1,000 for a single unit building and up to $1,750 for a building of significant size or complexity. Property owners and their contractors must certify that work done on heritage buildings is done in accordance with a certificate of appropriateness issued by the City to enforce standards set by the Heritage Conservation Areas By-Law. Though the heritage grant program is administered by City staff, grant applications are reviewed by a Heritage Development Board. It is the Board that determines, based on staff recommendations, whether an application for a grant should be approved. Heritage Board members include private citizens with expertise or interest in heritage matters and one City councilor. No City staff sit on the Board. 3. Incentive Program Funding All financial incentive programs are funded through the City s capital budget. The total amount of funds to be made available for the year is approved in advance by Common Council. This approval is granted on an annual basis. Until 2009 funds for the RIA Program and the heritage grant program were treated as separate budget items. In the past two years funds for all grant programs were approved as a single item: $1.8 million in 2009 and $1.0 million in Heritage grants are paid only in the year in which funds are approved. Thus, should the annual budget provision run out during the year no further grants are made unless Council approves a top up. Top ups were approved in 2006, 2007 and When total grant payouts do not reach budget amounts excess funds are not carried forward into the next year. Table 1 below shows the total funds approved and spent under the program since 1999.

10 8 Table 1 Heritage Grant Program Outlay Year Applications Budget Actual Difference 1999 n/a $80,000 $42,001 $37, n/a $50,000 $39,588 $10, n/a $75,000 $41,011 $33, n/a $50,000 $41,624 $8, n/a $25,000 $24,183 $ n/a $25,000 $21,062 $3, $50,000 $38,866 $11, $100,000 $54,371 $45, $200,000 $180,670 $19, $400,000 $255,944 $144,056 Total $1,055,000 $739,320 $315,680 Note: Council topped up budget amount by $50,000 in 2006, $50,000 in 2007, and $200,000 in 2008 The table shows how, after a relatively steady take up of heritage grants between 1999 and 2006, total program outlay increased significantly in 2007 and From 2006 to 2008 additional funding was approved mid-year in order to meet the rising number of grant approvals. However, notwithstanding the additional funding in recent years, the actual amount of funds paid out has rarely reached the funds budgeted in the last 10 years. Similar figures for the RIA Program are provided below in Table 2. Because funds paid out under the program vary according to somewhat unpredictable local and seasonal housing construction cycles it is difficult to establish a budget requirement for the program. As a result the variance between funds approved and grants paid out has fluctuated greatly from one year to the next. The number of grants has risen in recent years reflecting the buoyancy of the residential market.

11 9 Table 2 RIA Program Outlay Year Budget Actual Difference 1999 $350,000 $236,583 $113, $700,000 $38,341 $661, $400,000 $508,064 ($108,064) 2002 $400,000 $458,611 ($58,611) 2003 $300,000 $326,288 ($26,288) 2004 $300,000 $706,522 ($406,522) 2005 $500,000 $1,410,664 ($910, 664) 2006 $1,000,000 $525,920 $474, $700,000 $404,985 $295, $1,075,000 $1,638,721 ($563,731) Total $5,725,000 $6,254,710 ($529,710) Note: $745,836 paid out in grants in 2009 (to Sep 2009). It is crucial to note that though the RIA grants are approved by Council prior to any work being done payment of the grants occurs only after various construction components have been completed. Therefore, in many cases there is a significant lag (sometimes years) between the City s commitment to provide a grant and actual payment. Under the terms of the RIA program applicants have three years to install services to secure the grant. However, the City has never enforced this three year construction window. Thus, as a matter of practice grants have been paid out many years after they were originally approved. Over the lifetime of the program the amount of approved but unpaid grants has steadily increased and is currently estimated to be $9.3 million. Of this $9.3 million approximately $5.0 million represents the maximum funds the City is required to pay out should all eligible residential development get constructed within the three year window. Notwithstanding that this rate of development is very unlikely to occur in the next three years no budget or reserve fund provision for this $5.0 million has been made. Funding for non-residential incentive programs is drawn from the RIA budget though payments made under these programs are not typically included in RIA budget projections. In the last decade four grants have been made under the programs.

12 10 B. EVALUATION OF CURRENT PROGRAMS This section evaluates whether the incentive programs currently offered by the City are achieving program objectives. 1. Residential Development Grants As described above there are three broad aims of the various forms of financial incentive offered by the City to residential development: increase the amount of taxable assessment in the City; encourage development on municipal water and wastewater services (and off private well and septic systems); and maximize the City s share of the regional housing market. For part of the 1980s and 1990s an additional objective was to encourage redevelopment in existing built up areas. The extent to which the programs have succeeded in achieving these objectives can be measured only in a limited way. Part of the reason for this is the lack of data on historical residential construction in the City. a) Regional Housing Market Is Influenced By Market Conditions And Planning Policy Rather Than Grant Program Figure 1 shows how the City s share of the regional housing market has changed since From 1985 until the early 1990s market share increased dramatically before levelling off between 35% and 45% for much of the 1990s. Market share dwindled to about 35% in 2003 before beginning a slow rebound in recent years. To what degree the housing grants affected this trend is uncertain but at best it is unlikely to have been very significant. Of much greater significance has been the effect of local real estate market conditions and planning policy decisions. For example: in the early 1980s the City amended its Municipal Plan to allow unserviced development to proceed in a number of areas where such development had previously been restricted. This policy change had the effect of stimulating unserviced development in Saint John and is almost certainly the main reason for the rapid increase in the City s share of the regional housing market between 1985 and 1990; the drop in market share in the early 1990s shown in Figure 1 is likely directly related to the opening up of lands for development in outlying suburban municipalities such as Quispamsis and Rothesay;

13 60% SHARE OF REGIONAL NEW UNIT HOUSING MARKET CITY OF SAINT JOHN Figure 1 City lessens restrictions on rural unserviced development 40% 20% Supply of developable land opens up in suburban municipalities Supply of developable land in Saint John becomes constrained 0% Source: Hemson Consulting Ltd. based on Statistics Canada Data. Note: 2009 data is up to and including September.

14 11 the second drop in market share from 1998 shown in Figure 1 corresponds with the supply of developable land in the City becoming gradually constrained; though the proportion of new development occurring in the City prior to 1997 that was unserviced is not known, data for the last ten years show that it remains significant. Specifically, 25% of all single detached residential units built between 1998 and 2007 were on private well and septic systems. The most recent version of the RIA Program seems therefore to have had limited success in reducing the amount of this development. Staff reports to Council in the mid 1990s suggest that, when first offered, the grant programs initiated in the mid-1980s did have a marginal effect on the decision of some developers to develop in Saint John and thus may explain part of the increased market share in the late 1980s. However, it is likely that by the mid-1990s the housing grants had become such a taken for granted component of residential development projects that their original stimulative effect had become eroded. b) Value Of Residential Grant Is Low Under the residential infrastructure grant programs of the 1980s and 90s the value of the grants relative to the price of new ground-related 1 housing in Saint John was as high as 15% for infill development and 10% for subdivision lots. However, in their current amount the residential grants no longer represent much of an incentive. Figure 2 shows how the effective value of the grant has declined over the last decade from about 8% of the total average house sale price in 1998 to about 2% in c) Complicated And Redundant Terms Contribute To Program Ineffectiveness As well as being an administrative challenge, a number of the terms of the residential grant program either do little to promote program objectives or are not enforced by the City. Specifically: because the City has never invoked the three year construction window for securing the grant the RIA Program is not acting as an incentive to encourage timely development. The practice of paying grants out long after approvals have been made also complicates program budgeting by making it very difficult to predict future levels of expenditure that are required; 1 i.e. all housing with the exception of stacked apartments.

15 10% Grant as % of House Price CITY GRANT VS. NEW HOUSE PRICE SAINT JOHN CMA House Price ($000) Average New House Price ($) Max Value of Residential Grant (%) Figure 2 $300 8% $250 6% $200 $150 4% $100 2% $50 0% $ Source: Hemson Consulting Ltd. based on CMHC data (2009 data is estimated). Note: Maximum value of grant reduced from $10,000 per unit to $6,000 per unit in 2001.

16 12 allowing developers to pass the RIA grant on to home buyers appears to add little value to the program as not one grant has been transferred in this way; the RIA Program is onerous to administer and places significant time demands on City staff who have to review work invoices for grant eligibility; and, the program can also be onerous for developers. It is often long, complicated by the large amount of documentation that is required, and invasive: developers have to open their books to municipal scrutiny. 2. Non-Residential Development Incentives Because the commercial development grant program is designed to assist only large retail developments (more than $5 million in value) the maximum grant of $150,000 made available by the City generally represents a minor part of the overall cost of development. It is difficult therefore to conclude that the grants for commercial development serve in any way as an incentive. Also, for many years Council has provided additional funds to encourage large commercial developments to be located in the City. The value of these additional funds is often substantially greater than the formal grant. Moreover, decisions to provide these funds are usually made through an ad hoc process, unlike the grants which undergo a formal review. The City has approved one infrastructure development incentive and three infrastructure financing incentives under the Business Park Development Incentive Program. No financial assistance has been approved under the program since Acknowledging that the development cycle for business parks can be lengthy it is difficult therefore to conclude that the program has acted as an incentive over the last decade. Non-residential incentives are funded through RIA budgets. However, as RIA budget estimates do not project non-residential payouts (they are too rare and unpredictable) any payment to a large business park or commercial development could inhibit the City s ability to assist residential development. 3. Heritage Grants Investing in Saint John s heritage buildings brings with it many benefits to both property owners and the City. Not surprisingly, these grants are very popular with owners of properties in Heritage Conservation Areas. However, it is important not to overemphasize the effect of the grants on heritage work as the value of the grants can only ever offset a small portion of the overall cost of improvements. Property owners

17 13 need to make significant investments in order to secure the grants: the ratio of cost incurred to grant amount is 3 to 1 for major grants and 4 to 1 for maintenance grants. 1 The number of applications for heritage grants has risen in recent years: from 82 in 2005 to 119 in 2009 (see Table 1). The current scale of the grant program and the potential for further increase in the number of applications as more Heritage Conservation Areas become designated may make it difficult for City staff and the Heritage Development Board to effectively manage the program. A number of drawbacks in the existing program and its administration are evident: The review process is limited in scope. Grant approvals, though based on recommendations by City staff, are made by the Heritage Development Board. The result is that substantial City expenditures are effectively being made by an armslength body with only minimal oversight by the City. This situation can work well a number of municipalities in Canada make use of special purpose bodies to supervise and make decisions on operations that require specific expertise. However, given the increasing volume of grant applications it would be prudent to modify the review process to ensure greater transparency and accountability. Eligible costs under the program, though well defined, do not address a range of soft costs such as legal work, transportation, or time incurred by property owners, all of which have been elements of some grant applications in recent years. Notwithstanding the requirement for property owners and contractors to certify that work is done according to heritage by-law standards there is no formal auditing procedure for heritage grants. Responsibility for ensuring that work is being done properly lies with City heritage staff. However, the increase in the number of grant applications may place limitations on the ability of staff to carry out this oversight function. Although both the program objectives and scale of work done for major grants and maintenance grants is somewhat different there is no formal mechanism under the heritage grant program to ensure that funds are allocated between the various grants to ensure maximum program benefits. As financial assistance provided under the heritage grant programs does not result in the City acquiring capital infrastructure (unlike the RIA Program) the program should be funded through the City s operating budget. 1 Property owners can, however, apply for additional funding in the form of provincial and municipal property tax forgiveness under the Provincial Property Tax Abatement Program for Heritage Properties.

18 C. THERE ARE SOUND REASONS FOR CHANGING CURRENT INCENTIVE PROGRAMS 14 The effectiveness of some aspects of the current financial incentive programs, both with respect to the manner in which financial assistance is granted and the program objectives, is questionable. However, a number of other factors contribute to the need to update programs. The first, and most obvious factor, is that no comprehensive review of the programs has been undertaken for some time. The last detailed review of the heritage grant program was in For the RIA Program no assessment of program benefits has been made since the 1990s (though some of the terms of the program were revised in 2003). Second, given that a key objective of the RIA Program is to influence the housing market the fact that market conditions in the City have changed in recent years should warrant a program review. For many decades out-migration and population decline were the dominant features of Saint John s demographics and its real estate market. The preferred new housing form across the Saint John region and the City has been low density forms in greenfield areas. This included a preference by a large segment of the market for rural unserviced development. More recently many young families have chosen to avoid the fog belt in and around the older central city by moving to newer suburban housing. Some of the new housing is in outlying areas of the City but a significant amount is in the Kennebecasis Valley, where single detached housing has typically been priced at about $10,000 to $20,000 lower per unit in part because of lower servicing costs. There is evidence, however, that this historic pattern of residential development is changing: The Saint John housing market, though still very much a greenfield market, has displayed a greater diversity of housing forms in recent years. Figure 3 demonstrates that the number of newly constructed rowhouse and apartment forms in the City has risen since This phenomenon has not occurred in the Kennebecasis Valley (see Figure 4). Development industry stakeholders have indicated that market demand for redevelopment of the Uptown is increasing (albeit slowly) and point to the success of the housing infill grants in the 1990s in revitalizing Uptown neighbourhoods.

19 100% PERCENT SHARE OF RESIDENTIAL BUILDING PERMITS SAINT JOHN CMA Single/Semis Rows Apartments Figure 3 75% 50% 25% 0% (to Sep) Source: Hemson Consulting Ltd. based on Statistics Canada data.

20 100% PERCENT SHARE OF RESIDENTIAL BUILDING PERMITS QUISPAMSIS AND ROTHESAY Single/Semis Rows Apartments Figure 4 75% 50% 25% 0% (to Sep) Source: Hemson Consulting Ltd. based on Statistics Canada data.

21 15 House prices have risen sharply over the last decade, from about $130,000 per new unit in 1998 to about $280,000 per new unit in 2009 (see Figure 2). 1 This has occurred in the context of rapidly rising construction costs to 2008 (though construction costs have since fallen as a result of the economic slowdown). The third factor is that environmental and municipal property and development standards, particularly for residential subdivisions, have tightened in recent years. Stormwater standards are higher and in many cases the City now requires that the downstream effects of proposed development be studied at the cost to developers. This has had the effect of making residential subdivision construction both more complicated and more expensive. Finally, the City is undertaking a major review of its Municipal Plan which has the potential to fundamentally alter the planning policy framework under which building and development takes place in Saint John. The financial incentive programs should support this new framework. How best to proceed with updating the current financial incentive programs is discussed in the following section. 1 Higher house prices from 2007 to 2009 may have partly been the result of market speculation arising from now delayed or cancelled energy sector investments. Nevertheless a sustained upward trend is apparent over the last decade.

22 III OPTIONS FOR UPDATING CURRENT PROGRAMS 16 In this section the various steps for updating the City s financial incentive programs are discussed in the context of best practices. A. REVIEW PROGRAM OBJECTIVES The first step to updating the incentive programs is to review the objectives for offering financial assistance. By way of context it should be recognized that there will always be development projects in Saint John where the revenues of development are such that there is no need for a financial incentive. Conversely, there will be projects where potential costs are so high that development is not economically feasible without an unrealistically large amount of assistance. In both cases, a practical financial incentive will be ineffective and, from the City s perspective, a waste of resources. There will, however, be development projects where costs are manageable and where adequate profitability can be achieved given the right incentive. Thus, when establishing financial incentives the first question the City needs to address is: For what types of development would incentives make a difference? Within the broad range of projects where incentives could make a difference the City needs to identify those which would help fulfill its specific policy objectives. The second question the City therefore needs to address when establishing incentives is: What particular types of projects should be supported in order to further City objectives? Both these questions must be addressed with reference to the policy framework being developed through the new Municipal Plan.

23 17 1. Program Objectives Should Reflect City Planning Policies Although the Municipal Plan process is not yet complete there will be themes that should guide program objectives. These include: the City s recent initiatives to revitalize existing priority neighbourhoods and the Uptown core as well as promote environmental sustainability, transit supportive development, and housing affordability; the planning principle that higher density development as well as the redevelopment of existing areas ( intensification ) is, on balance, more environmentally sustainable than lower density development in greenfield areas (the pattern of development which has been typical in Saint John until very recently). Redevelopment makes more efficient use of land and can, in certain circumstances, reduce the need for additional infrastructure by making use of capacity in existing infrastructure. Other than perhaps the heritage grants, the City s current incentive programs do not encourage either higher density housing forms or intensification. In fact, because the RIA grant is provided on a per lot rather than a per unit basis, the current terms favour lower density, ground-related built forms at the expense of higher density stacked duplex or apartment forms that favour locations in existing developed areas. Higher density housing forms effectively receive lower grants. 2. Program Objectives Must Recognize Market Conditions Incentive program objectives must acknowledge that the greatest factor influencing development in Saint John is the local real estate market. Moreover, the extent to which the market can be influenced by planning policy is limited. Incentives must therefore complement market conditions and will only be effective when they support development that would not necessarily be achieved through normal market forces (e.g. mixed use development; green building initiatives; environmental remediation; rehabilitation and reuse of older buildings). In this regard, the City s own history of providing incentives is the best guide when setting program objectives. As demonstrated in section 2 the City has had success in encouraging conservation of heritage buildings through heritage grants. Incentive programs have proved less successful in stimulating large scale commercial and industrial development (though the City has provided significant one-off assistance to major projects in recent years). Grants for residential development have influenced the form of development that has occurred (by promoting development on municipal services and redevelopment through infill). However, efforts to influence the rate of

24 18 residential development in the City have been ineffective; the market remains the dominant factor in this important respect. B. SET CLEAR PROGRAM ELIGIBILITY CRITERIA AND GRANT TERMS The second step to updating the programs is to establish eligibility criteria and terms for receiving financial assistance that will achieve the program objectives. In this regard the City must decide whether to establish criteria according to geography (as with the heritage grants), or with reference to the form of development, or a combination of both. The eligibility criteria under the current residential grant program is both vague and not necessarily reflective of City priorities. The program provides grants to offset specific costs associated with providing municipal services without regard to the form of housing being proposed. Nor does the program have a geographic focus for example it does not support recent initiatives by the City to support priority neighbourhoods in existing built up areas. When establishing criteria, careful consideration needs to be given to the costs that financial assistance is aiming to defray and the planning implications of targeting certain costs. In this respect: While the heritage grants identify the type of construction costs that are eligible for grant funding it is not clear whether these costs include only materials and labour or whether they also include indirect or soft costs. Depending on the nature of a project these indirect costs can be significant. However, they are incidental to achieving the program objective of conserving the character-defining elements of heritage buildings. It is also uncertain whether labour costs includes only work done by third party contractors. A major component of the residential infrastructure grant is essentially a subsidy to pay for the installation of municipal infrastructure. In light of the new Municipal Plan policy framework, the City should carefully consider the degree to which it wants to be in the business of paying for infrastructure that is required for residential subdivision development. In many other jurisdictions in Canada, this kind of growth-related infrastructure is paid for by developers as lot levies or development charges.

25 19 If the City is going to focus on providing incentives to infill development then eligible costs should include those costs which make redevelopment prohibitively expensive. Such costs might include the cost of demolition, the cost of installing parking, 1 or the cost of infrastructure upgrades. The terms for receiving assistance need to be focussed and definitive. Specifically: The timing of payments is critical to program success. The best financial incentives can be those that can trigger the decision to initiate either development activity or actual construction. In this way, incentive programs that provide financial assistance up front, when risks are greater, can overcome the hesitation to initiate projects. Given the high initial costs required to develop in Saint John many developers may find that early financial assistance is more critical than the magnitude of assistance. That said, grants paid early in the development process may not always lead to actual unit construction. In other jurisdictions, grants paid after construction has been completed act as a better incentive to speed up the development process. The form of assistance can also be an important element of program success. Incentive programs that provide fixed funding, like the RIA grant, can provide certainty when evaluating the viability of a project and when securing credit. The nature of fixed funds therefore often provides added value beyond the actual grant amount. This is not often the case with financial assistance which is dependent on a future calculation of the quantum of assistance (e.g. payments under the Business Park Incentive Program which are tied to the increased assessment of the property). The City should also carefully consider establishing eligibility criteria and terms that, from staff s perspective, make programs easy to administer and, from a developer s perspective, are easy to understand and do not involve onerous steps in order to secure approval. C. ESTABLISH PROGRAM PERFORMANCE TARGETS AND REVIEW RESULTS The effectiveness of the City s incentive programs will in part be limited by the amount of funding that is approved by Council in its annual budgets. When making a decision 1 Stakeholders have indicated that it is very difficult to provide off street parking in compact urban areas and for multi-residential condominiums, where parking may require digging into bedrock.

26 20 on its investment the City will need to assess how much intervention it will take to influence the market to achieve program objectives. It will also be important that the benefits resulting from the investment be monitored and reported on a regular basis. The funding approved for 2010, $1.0 million, represents a reduction from the previous year s investment of $1.8 million (itself the largest ever investment in the incentive programs). This sum is small in the context of the overall cost of development and heritage conservation in the City and it is uncertain, in the current fiscal context, what the willingness of Council is to increase this amount going forward. The key consideration then is how to use the available funds in the most effective way. The amount of any one grant has to be significant enough to make a difference to the level or form of development that the City wants to promote. At the same time, if individual grants are too great then the number of people receiving assistance can be prohibitively small. Consideration should also be given to whether funds for financial incentives could be better spent to achieve similar results. For example, while the City provides RIA grants to offset certain residential servicing costs it also requires developers to pay for studies to examine the downstream effects of their developments. The City could divert RIA funds to pay for its own comprehensive City-wide review of existing water, sewer and storm system capacities thereby removing the burden (and potential duplication of effort) of assessing localized downstream effects by individual developers. It must also be understood that, notwithstanding the objective of the City s past incentive programs, increasing the level of assessment in the City by itself does not necessarily bring with it a net fiscal benefit. New assessment does generate new property taxes. However, assessment growth also brings with it new costs. The fiscal impact of different forms of development in Saint John has not been analysed as part of this report. However, two general points can be made: Non-residential development is typically a net revenue generator for Canadian municipalities. The fiscal benefit of residential development depends greatly on the form that development takes and the demands made by that development on municipal services.

27 21 It has been argued that more compact residential development is more fiscally sustainable for municipalities than lower density housing forms. This can be the case in situations where infill development and redevelopment can make use of capacity in existing infrastructure without having to construct new infrastructure. However, the extent to which higher density forms in greenfield areas are of greater (if any) fiscal benefit than lower density greenfield forms varies greatly from jurisdiction to jurisdiction. It should not therefore be treated as fact that higher density housing translates into a fiscal benefit for the City. From a financial management perspective, budgeting for incentives should be set on an annual basis. The City s current practice of carrying forward commitments made under the residential infrastructure assistance program into future budget years should be discontinued. Incentive programs should establish benchmarks for success through the budget process which can inform and determine future levels of funding. Wherever possible, incentive programs should be funded out of the proceeds that accrue from the resulting development. This is the principle that underpins the concept of tax increment grants whereby the tax increment generated by a development or redevelopment is used to pay for the eligible costs associated with the development. Tax increment grants have advantages for both the City and developers. For developers they can provide relatively high levels of assistance. They are attractive from the City s perspective as the funding comes from tax revenue that, but for the development, would not otherwise have been available. The City has experience with tax increment grants of this kind as the Housing Infill Grants of the 1990s were paid out on this basis. D. CONTINUE TO CONSULT DEVELOPMENT INDUSTRY STAKEHOLDERS Before initiating any significant changes to its financial incentive programs the City should solicit the opinions of the full range of development industry stakeholders. Stakeholders are the best resource for assessing the viability of new programs and stakeholder buy in will be critical to any new scheme s success. As part of this review the City held two workshops with representatives of the local building and development industry, consultant engineers, heritage architects, and housing groups. The first workshop focussed on discussing the merits and shortcomings of current financial incentive programs. There was broad agreement that incentives

28 22 were an important element of the development process in Saint John but that the effectiveness of current programs was limited and needed to be reviewed. Minutes of the workshop are provided in Appendix A. The review findings were discussed at the second workshop. The minutes of the second workshop are provided in Appendix B.

29 IV RECOMMENDATIONS ON MOVING FORWARD 23 In light of the evaluation of the current incentive programs and the principles and practices set out previously this section contains recommendations for updating existing programs and implementing new programs. The implications of these program changes are also discussed. Details about proposed new programs and changes to existing programs are provided in Appendix C. A. INCENTIVE PROGRAMS NEED TO BE BASED ON FISCAL REALITY AND PATTERNS OF DEVELOPMENT The City s financial incentive programs need to be restructured in light of current fiscal constraints and the pattern of development that is anticipated in Saint John. In particular: Financial assistance for residential development should focus on the form of development that fits with City planning policies and good planning practice specifically higher density development in greenfield areas and redevelopment of existing areas. The current programs offering financial assistance for large-scale non-residential development should be cancelled. Other than the heritage grants, the City should not restrict financial assistance to specific eligible costs. In the interest of equity and transparency grants should be reviewed collectively and at specific points during the year. Council should play an active role in determining program budget provisions and program criteria. In the absence of formal delegation of its authority to a special purpose body like the Heritage Development Board, Council should be the sole authority for approving financial assistance. Total budget provisions for incentive programs should be reviewed annually within the context of the City s fiscal health and anticipated patterns of development.