Thursday, July 22, 2010

Job City before Transit City

The Graph speaks for itself. Traditionally transit ridership is correlated with employment, not population density. The graph shows this tight relationship. This trend diverged somewhat starting in 2003. This coincides with escalating oil prices and is a trend seen throughout NA. Transit expansion in Toronto, to be utilized, is going to require employment expansion. Without it, it is a waste of money.

Toronto Poised to sit out on economic expansion- Again

While Toronto sat out the last round of economic expansion, never having employment levels return to 1989 levels, it appears ready to repeat this feat of stupidity.

Looking at the most recent Toronto economic indicators it shows Toronto three month unemployment rate average (seasonally adjusted) went from 10.2% to 10.6% in the last twelve months. The Toronto CMA (including Toronto) the rate went down, from 9.7% to 9.5%. Keep in mind that the CMA had declining unemployment despite having Toronto’s increasing unemployment included in the figures.

Thursday, May 6, 2010

Forest through the trees and Budget through the condos

If one was to see all the development activity going on in Toronto, they would be hard pressed to assume anything other than this city is booming. In fact, there was a recent Toronto Life article about just that. Things, as they often are, are not as they appear.

Toronto has been in a persistent budget crisis for what seem like forever. Every year we are warned that this city is on the verge of a calamity. The cause for this, as least by what we are told, is due to underfunding from upper levels of government. There is some merit to that. But that is not the only reason.

Residential development itself is hastening the city's deteriorating financial health. How can that be you ask? Wouldn't the addition of new tax paying developments help the city out by providing additional revenue? Yes, and more importantly No. Nearly all development in Toronto over the last twenty years has been residential. Residential development does expand the tax base, but it also greatly adds to the city's costs.

If the added costs exceed the added revenue then things will get worse, which is what they are doing. So how do we know if new development adds more expense than it generates in revenue. First off, upfront costs associated with new development is paid for from development fees. These fees cover the costs to expand water, sewer, transportation and other fixed assets needed to service them. The issue at hand is what ongoing services cost and do they scale with density.

A large portion of the Toronto's spending does not scale with density. In fact there is much research that shows large city's are not cheaper, ie. that they do not benefit from economies of scale. Looking at Toronto, new residents increase the need for larger police, fire and EMS departments. Plus more Libraries, parks and recreation, health services etc.

In a report titled "Are Ontario Cities at a Competitive Disadvantage Compared to U.S. Cities?", Toronto's Dr. Enid Slack compiled some data regarding the costs associated with providing municipal services in Toronto. In the year 2000, it reports that the cost to provide Transportation (not public Transportation) , public safety, Sewage, Water Solid Waste, Parks and Rec, Admin, and Libraries at $1,553 per person in Toronto. Per household this would equal approx. $3,800. These are not programs downloaded on the city. These are traditional municipal services. On average the city received $2,200 (not incl. the education portion) in property taxes per household. Seeing that these services are primarily for residents and not greatly consumed by businesses it is obvious that the residential sector is being subsidised.

While that is typical, most cities charge higher taxes to business properties than residential, it does create a major caveat. If growth in the residential sector is not matched by equivalent increase in the non residential sector the imbalance will increase. With property taxes already so high on non residential properties, the city has had virtually no growth in this sector. Except for four large projects, all which received a preferential tax rate, they has been nothing to offset the growth in the residential sector. The city is constrained by both reality and policy, in being able to increase non residential taxes, at the same time it is under pressure to keep residential taxes in line with inflation.

Toronto needs to have growth in the portion of the tax base that generates excess revenue. So long as there is an increase in the proportion of the class of properties that consume more than they produce in revenue, Toronto will still be chased by a financial snowball.

Thursday, March 4, 2010

Duke's Revisited

A few years ago, a fire on Queen St. West (near Bathurst) destroyed a number of buildings. Among them was was the property 623-625 Queen St. West, owned by the Duke family. The building housed there own store, Dukes Cycle, and above there were some rental apartments. The old building was paying property tax of (commercial portion) $8,671 per year, based on a 2008 CVA assessment of $654,975. This amount was only 32.6% of the full tax rate, as it was protected by a cap. Unprotected the tax would climb to $ 26,598 per year. The cap was set to diminish over the years until 2016 when all properties in Toronto would be taxes at the full CVA rate. Now, with the building destroyed, any new building will face paying taxes at the full CVA rate. As such the viability of the commercial space is in question.

Councillor Adam Vaughan has been working diligently to help address the difficulties in the redevelopment of these properties. This is what he found….

” Through the process of working with the six property owners of these buildings in the aftermath of the fire, I have discovered that any new buildings constructed on the fire site would pay property taxes at the full CVA rate, and would be ineligible for capping protection. The reality of the significant tax increases facing these property owners threatens the viability of redeveloping these properties with street-related commercial uses. The longer the fire site remains vacant, the more severe the social and economic impacts facing Queen West and the broader neighbourhood become. This is why it is in the City’s interest to facilitate a timely and appropriate replacement of the lost fabric of this street. ”

Think about this. It is not viable to rebuild commercial space on Queen West, on land that is already owned. If the redevelopment of these properties had included the need to purchase the land also, it would have only compounded the problem and made it even more un-viable. The added cherry on top is that the calculation of the new tax burden were based on the 2008 MPAC assessments. In the case of Dukes cycle (623-625 Queen St. West) it was woefully under-assessed. The 2008 assessment has these properties valued at $ 654,975.00. As someone who is very familiar with the area, this assessment does not reflect the market. The Cameron house, a much smaller building of similar age is currently listed for more than 2 million. In light of this it is fair to say that being un-viable at a full CVA tax rate of $ 26,598 per year, think about what might happen with a more realistic assessment. If the commercial portion of the assessment was updated to a more realistic 1.5 million, the taxes would rise to more than $60,000 per year.

How sad. It is barley viable to rebuild commercial space on Queen West, one of the most vibrant retail streets in Toronto, on land that is already owned. With a undervalued assessment and a million dollars in insurance money. If the redevelopment of these properties had included the need to purchase the land, had a realistic assessment, and a greater need for financing, the notion to rebuild would be dead in the water.

If your wondering about how a property that is un-viable retain it value, there is a answer to this. MPAC!. MPAC will heavily rely on comparable sales, instead of income, for valuing small properties. On the one hand, this makes sense. Market value is reflected by recent purchases. What MPAC does not do is account for two extremely important issues. Firstly, there is the speculative value of such properties. Properties such as these sell at a premium to their value if one was to rely solely on projected income (Cap values). The reason for this is their value is not captured in there present form, but once they can be converted to residential condos. Secondly MPAC is oblivious to the fact that the rate of tax itself has an effect on value. Even though this is a well covered area in academia and reality….