While expanding the city’s geographic footprint with 11 new communities takes a lion’s share of the conversation, two city councillors break it down to something simpler: Risk.
Business cases for 11 communities will come to a special meeting of Calgary’s Priorities and Finance committee on Monday. At this time, City of Calgary administration is recommending that none of the business cases be approved.
They’re recommending new business cases be presented along with future 2023 – 2026 budget planning.
Administration said these business cases are primarily low to medium density – like those proposed in 2018. Market slowdown and anticipated eight to 12 years of land available for development could mean longer development of the areas.
The business cases, which total 12,660 single- or semi-detached units, and 6,669 multi-family units, have a planned build out of between two and 15 years.
The city evaluated the current cases in three areas: Whether they align with the Municipal Development Plan (MDP), market demand and the financial impact to Calgary.
Five of the business cases show that no city cash would be required (until 2027). Those cases, however, didn’t meet the market demand requirements.
“Administration has assessed that none of the business cases meet the criteria under all three factors, and recommends that no business cases be supported at this time,” the administration report reads.
Market demand is a real issue, says Coun. Farrell
Coun. Druh Farrell raised concern about the 11 business cases earlier this week. She said Calgarians have already paid for new growth developments to the tune of a recent two per cent tax increase.
Further, city water rates were hiked in November 2019 because the off-site levies developers pay weren’t recouping the costs.
Simply, Coun. Farrell said, there’s an oversupply of new development.
“No business would flood the market with supply when the market demand is low,” she said, adding that Calgarians would be on the hook to pay should the ability to pay back levies remain weak.
“It really comes down to supply and demand and risk – and who takes on that risk.”
Calgary has committed to a zero per cent tax increase this year, and Coun. Farrell already said that the city is going to have to cut services to make that work. Adding further strain isn’t right.
“If we grow beyond what we need, it would be spreading less butter over more bread,” she said.
Farrell said the reason why the city put in place its growth management strategy was because by the time many of the communities in the 1990s were fully built out, it was time to do life cycle maintenance on them.
“We’ve never really caught up with paying for these communities,” Farrell said.
Developers worried it could show Calgary is closed for business
Qualico Communities, which has two of the 11 business cases, said they see the market demand in Calgary.
The administration report showed the group’s Qualico – West View development did meet the segment market demand and didn’t require additional city operating costs. It did however need an upfront capital spend. Their other project didn’t meet the market demand requirements, however it didn’t need any operating or capital cash.
“Consumer demand is there,” read an email response from Qualico.
“If Calgary doesn’t provide it, the surrounding municipalities will. Consumers use Calgary facilities and services, while their taxes go to another municipality.”
They went on to say that the business case approval is the first of a “lengthy process before development can actually happen, at least 2 years from this first approval step until a shovel hits the ground.”
“Approval of the recommendations in the report is a signal that Calgary is closed for business. Not good news given the challenges with the pandemic and other business sectors in Calgary.”
Earlier this year (prior to COVID-19), in a conversation on LiveWire Calgary’s Common Ground YYC podcast, BILD Calgary CEO Brian Hahn said he had little doubt the development would eventually catch up.
He said what area approvals like these do, is “ensure that there is a process for approval of new communities.”
“For any industry, the predictability and reliability of those processes is important.”
Actively developing communities are showing substantial growth in property tax generation, according to city data. So, they’re pointed in the right direction.
In the administration report, however, they felt in most of the business cases that adding in more units may “cannibalize the market as a whole.”
“There would be no net new benefit to the overall economy,” the report read.
‘Simple risk mitigation’
Calgary’s current off-site bylaw levy was approved in January 2016. It went into effect Feb. 1, 2016.
In that time, the city has collected $547,938,056 in off-site levies from developers. During the same period, the city spent $581,285,881 from their off-site levy accounts, according to information provided by the city.
Many developers paid their levies this year before the city deferred some payments because of lagging activity and COVID-19.
But, for Ward 3 Coun. Jyoti Gondek, this comes down to managing the city’s risk.
“My issue is that the agreement we have is that we put the infrastructure in the ground by taking on debt. I don’t know why we struck that deal. But, that’s the deal,” she said.
It becomes a significant cash flow issue for the city, Coun. Gondek said.
She’d prefer to see the city put a timeframe in place for the return of the infrastructure cash. It would coincide with that tipping point where property tax accounts could cover the operating cost.
“If the developer isn’t done by that point, you’re still on the hook for paying us back,” she said.
“That’s simple risk mitigation. But, we never did that.”
Pay back in the business cases
That’s what’s at stake here, said Gondek. They can’t approve most of these 11 communities because there’s a high degree of risk, with low market demand for the foreseeable future, that the city could be carrying the cost for an extended timeframe.
That puts current taxpayers on the hook.
“We are in a situation where we’ve put leading infrastructure in the ground in some areas where the payback hasn’t come, because those developments haven’t moved as quickly as we anticipated they would,” Gondek said.
“What I want to see in the business cases is which ones are actually paying back for the infrastructure that we’ve put in the ground.”
Gondek warned that it’s a dangerous “us versus them” mentality for a city when they’ve already put in the infrastructure and they’re waiting to be paid back. Further, there are established communities still looking for infrastructure improvements planned years ago.
She used the example of a much-needed overpass on 14 Street in her ward.
“We couldn’t get that because that project is tied to an off-site levy bylaw, which is, if you don’t approve new growth, you can’t get it funded,” she said.
Coun. Farrell said, however, the problem is the levy system itself.
“If you need more and more people to pay for what you’ve got, then you’re really talking about a Ponzi scheme,” she said.
“And when does that end? Every time we do that there’s cost and we go deeper in the hole. There needs to be a better system.”
Magic 8-ball: It doesn’t look good
Neither Gondek or Farrell believed the odds were good fellow councillors would approve any of the 11 business cases.
Last week, Mayor Naheed Nenshi said he wondered why these were coming forward when there was already a “dangerous oversupply” on the market.
Coun. Farrell said we’re getting back to a near record number of communities under development, at a time when Calgary can’t buck the economic malaise.
Last year, when they talked budget cuts during the November budget adjustments, she said the only thing that wasn’t on the table was the 14 new communities approved in 2018.
“Half of them haven’t even gone forward yet,” she said.
“So, it makes sense to me to say it’s even worse now.”
But, it’s not that these communities won’t ever come online, said Farrell. There will come a time, when aligned with the 50/50 development split in the MDP, that these areas will be approved.
“Bringing it all on at once makes no financial sense and it puts city services at risk,” she said.
Groups like the Calgary Firefighters Association have expressed concern. Adding new communities without commensurate funding affects the ability to provide coverage, they said.
Chance to revisit budget for new growth
Coun. Gondek said every time new communities come up, the conversation is the same. It’s a question of established area growth versus new growth.
She said the city wants a 50/50 growth split but doesn’t fund it that way. We have an off-site levy bylaw for new growth, but nothing like it in place for established area growth.
“In established areas, even through we value them enough to say 50 per cent of our growth should go there, we have no financial tools to demonstrate that kind of investment partnership,” Gondek said.
“I think that’s fundamentally the reason why we get into these debates and arguments, because of the inequity.”
Since the 2019 census, the city estimates that 9,700 units came online (to April 2020). Roughly 43 per cent of that growth is in established areas.
Gondek said this growth discussion Monday could offer a chance to come up with a plan to put money in the right places to meet the MDP targets.
She proposes going back through the city’s budget to see how much capital has been set aside for projects in new areas.
“Look at what’s moving and what’s not and be realistic about whether we over-proposed the infrastructure,” Gondek said.
“I’m very interested in diverting some of that existing capital that we’ve got in this budget towards established areas, so we can demonstrate good faith as a city and ask our partner investors to come put their money there.”
City data paints bleak picture
Poring over the city data, it’s clear there’s a strong headwind for any further community expansion.
High unemployment. Low number of housing starts. An increase in 2020 greenfield development over 2019. Slowing natural population increase and slowing net migration. Stubbornly low oil prices. Low absorption of land in new communities.
Not to mention another tax shift that’s going to place substantial pressure on the city’s high-rise apartment owners. And the city’s industrial sector.
They say there’s five years of market growth supply in the single/semi detached dwellings.
Adding to the market just isn’t right, said Farrell.
“When the supply exceeds the market to this extent, there’s a big risk to Calgarians, because Calgarians help pick up part of the tab,” she said.
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