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www.oakvillebeaver.com The Oakville Beaver Weekend, Saturday January 10, 2009 - 5 Region plays hardball with developers By Tim Foran METROLAND MEDIA WEST GROUP A battered residential building industry, already suffering from a 25 per cent drop in new home sales through the first 11 months of 2008 and difficulty in getting financing for new projects, is warning Halton Region that its plan to jack up the costs to develop homes is going to hurt one of the area's largest employers, the construction industry. "Halton Region Chair Gary Carr's threat to freeze development is undoubtedly popular on the home turf, but it could come back to bite him and all Halton residents," Michael Moldenhauer, outgoing president of the Building Industry and Land Development Association (BILD), writes in the latest issue of Homes magazine. "If Halton were to freeze all of the approximately 40,000 housing units in the pipeline, it would be jeopardizing some 88,000 person-years of employment and more than $2 billion in tax revenues," writes Moldenhauer, a developer of residential projects in Halton. Moldenhauer says BILD has 70 member companies in the construction industry located within Halton. Currently, the residential construction industry in Halton is humming along. Carried by massive building in Milton, there were almost 25 per cent more housing starts in the Region in 2008 than in 2007, and almost 50 per cent more in December, according to the Canada Mortgage and Housing Corporation. However, housing starts are an indicator of the current economy, but not the future, as they're based on sales made in the boom period of 2007 and early 2008. New home sales, which will drive construction in future years, dropped a quarter from 2007 up to the start of this past December, according to Realnet. Sales of more expensive, lowrise homes, which make up the bulk of construction activity in Halton, dropped 38 per cent over the same time period. Already hurting by this market, residential developers in north Oakville and Milton are now up in arms over Halton Region's move to force them to pay massive amounts of money upfront to finance needed water, wastewater and roads construction, or socalled hard services. If they don't pay, the developers won't receive some of the future allocations of water and sewer pipes they need for developments in north Oakville and Milton. The Region is projecting a total take-up of 40,000 allocations in those areas by 2021, including 11,000 in the first allocation round of 2009-2010 starting this week. The Region was waiting for developers to submit this past Friday how many allocations they require for 2009. Regional staff are expected to make a verbal update on whether developers have requested fewer allocations than projected to the Region's Administration and Finance Committee on Wednesday. The main sticking point for developers is not just the extra money the Region wants, but when it wants the money and the fairness on how the municipality is financing infrastructure improvements. For the initial round of 11,000 allocations, the Region is demanding $80 million in cash-flow payments, essentially interest-free loans from the developers, to finance its expansion of the hard services. Developers must pay a portion of the money up front when they request an allocation, and they will be paid back by future developers who acquire allocations in 2011 and 2013. This up-front financing is necessary as a large portion of the $2.5 billion in water, wastewater and roads projects the Region must undertake between now and 2021, must be paid over the next few years, said Carr. "We don't do any building until we get money in hand," he said. The current credit market makes it extremely tough for developers to get money to build homes, much less finance municipal infrastructure, say real estate experts. "Developers can't get financing," noted municipal lawyer Michael Melling. "It's much more difficult due to the credit crunch." Generally, developers pay charges for hard services at the time they make subdivision agreements with municipalities. This is after they have already received draft plan approval, at which point they are allowed to start selling their homes under provincial law. Paying up front means developers must have a large amount of existing cashflow as they won't have any home sales from which to draw money. For industrial, commercial and institutional developments, the Region pays for the infrastructure itself and collects the money back in development charges later on. Yet, Carr said the Region has no interest in doing the same for residential development, as it may expose existing taxpayers to risk if the residential development doesn't happen. What risk?, asked BILD President Steven Dupuis. "The Province outlined growth in this area (Halton), there's going to be growth there," Dupuis said. "That just shows me that Halton's saying, `Just give us the jobs, not the people.' But people bring benefits." Regional staff said fronting the money itself would also increase Halton's debt capacity above its guideline of about 14 per cent. The Province's guideline is 25 per cent. Local Milton landowner, York Gruehl, who owns land expected to be used for higherdensity development, said the upfront costs strike hardest at condominium developers. Generally, a condominium developer has to sell about 70 per cent of the units in a building before banks would give them money to build, which means the planning and sales process can take years. Paying money up front is extremely difficult for high-density developers because they go long periods of time without cash coming in, said Gruehl. Condominium seller Brad Lamb agreed with Gruehl's assessment. "The more money they (condominium developers) put up, and the longer they put it up, the lower the return on their money," said Lamb, who pointed out it's already much more difficult to build condo- miniums as part of greenfield developments in the suburbs. "The Province wants high density," Gruehl said. "It's (The Region's charges) counter to high density." Despite these concerns, Gruehl admitted his company, Cancast, has asked for 500 of the new allocations. Along with the up-front costs the Region wants, developers are also concerned about an extra $4,500 per-unit contribution, some $138.5 million for the 40,000 allocations, they will have to pay the Region on top of $1.215 billion in development charges. 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