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Vancouver CACs hurt growth B.C.-wide, industry says

June 1, 2016

Vancouver doesn’t know what it’s missing, says a commercial real estate industry group that’s taking the city to task for what critics say is an opaque system of negotiating community amenity contributions (CACs).

“I know quite a few projects and pension funds that have walked away from the city,” said Gord Wylie, who co-chairs the development issues and government relations committee for commercial real estate association NAIOP.Despite guidelines released in 2014, the process in Vancouver is largely a mystery that costs developers millions – and costs the city millions more in lost tax revenues.

And the projects that Vancouver discourages aren’t going to surrounding municipalities; the developers are simply leaving the province for cities where they can build a downtown tower with fewer hassles.

“If they can invest in Chicago, where they’re going to give them the approvals they need in a timely manner, and also not go through a lengthy negotiation process with a black-box formula, they’re going to go there,” Wylie said.

Provincial guidelines stipulate that municipalities must negotiate CACs when land is rezoned, and that the charges should reflect the estimated lift in the value of the land.

NAIOP has prepared a report that suggests the city might negotiate a $3 million CAC with the developer of a 345,000-square-foot office tower – but at the risk of losing $29 million in property taxes and other revenue over the next 10 years if the developer balks and walks.

“There’s very little CAC value, and you’re turning away hundreds of millions of dollars in investment, which generates hundreds of millions of dollars in tax revenues,” Wylie said. “It’s a bit nearsighted.”

CACs are challenging for office developers because, unlike with residential real estate, office towers are leased rather than sold. Returns are typically narrower than on residential and flow in over a longer period of time. Buildings generally aren’t fully leased and yielding maximum cash flow in their first year, but this is often the assumption when calculating a CAC.

“They don’t look at the fact that we need to hold those assets for a number of years to stabilize the cash flow. They assume we stabilize the cash flow in Year 1,” Wylie said.

He points to SwissReal Group’s project at 475 Howe Street, which the city trumpeted as a win for office development in the city. SwissReal agreed to a $15.7 million CAC, delivered through a heritage revitalization of the old stock exchange building.

But the amount is an upfront cost that will take years to recover from rents, with just one tenant set to move in when the 370,000-square-foot tower completes next year.

Similarly, the city negotiated a $6.6 million CAC with developer PCI Group for Marine Gateway, another project yet to be fully occupied and enjoying maximum cash flow.

“The CAC process wouldn’t reflect any of those risks,” Wylie said of the lag in operating income.

The process has prompted some owners to step away altogether.

Sources indicate that Caisse de dépôt et placement du Québec, owner of Ivanhoé Cambridge, sold stakes in Bentall Centre and Oakridge Centre because of the challenges of redeveloping the properties in the face of municipal processes.

Whether or not CACs are even appropriate for office development is another question, given the limited demand for civic amenities accompanying such projects.

“It just doesn’t make sense,” said Anne McMullin, president and CEO of the Urban Development Institute. “There is some justification for some CACs on the residential, but on the commercial there isn’t. You’re creating jobs, people are paying taxes and [landlords] are already paying five times the property taxes.”

The volume of CACs municipalities received rose from $100 million in 2000 to $720 million in 2010, and many feared that municipalities were using negotiations to extract cash from developers in lieu of traditional methods such as development cost levies.

With other municipalities such as Coquitlam and North Vancouver following Burnaby’s lead with a fixed-rate charge at rezoning, and negotiations focused around density bonusing, the case-by-case approach in Vancouver frustrates McMullin’s members.

The City of Vancouver did not respond by press time to a request for comment.

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