(58) Development Charges Explained: The Growth Cost No One Can Ignore

Development Charges Explained: Why They Rose, What Went Wrong, and What DC Relief Means for Housing

In this episode, Payam discusses development charges (DCs) as one-time fees on new developments intended to fund growth-related municipal infrastructure such as roads, transit, water, parks, libraries, and emergency services, noting the costs are often passed through to end users. He argues DCs became unsustainably front-loaded as market conditions worsened, using the “beer distribution game” to explain how reasonable decisions across the system can create unreasonable outcomes due to timing lags between long-term infrastructure planning and upfront project financing. He outlines reasons DCs rose—larger capital programs, higher land and construction costs, bylaw changes, and annual indexing—and highlights Toronto’s unique transit-heavy DC structure, with about 60% directed to mobility. He cites Toronto DCs rising from about $11,700 in 2010 to over $137,000 in 2024, indexing paused for 2025–26, Bill 23 exemptions, and a 2026 federal-provincial program incentivizing 30–50%+ reductions; Toronto plans 40–60% cuts (2026–29) supported by $1.5B. He says reductions help viability (CMHC estimates ~5% viability lift at 50–60%) but won’t be a silver bullet, and raises concerns about replacing lost municipal funding and the need for broader, less DC-reliant infrastructure financing.

• Development Charges Explained
• Who Really Pays DCs
• Beer Game Analogy
• Timing Mismatch Problem
• Why DCs Skyrocketed
• Toronto Transit Factor
• Numbers and Indexing
• Legislative Changes and Relief
• Will DC Cuts Restart Housing
• Municipal Pushback
• Better Funding Alternatives

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Transcript

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Hello, everyone, and welcome to another episode of the Real Estate Development Insights podcast, where we bring you ideas, experiences, and best practices. My name is Payam Noorsalehi, and I'm your host here. For this episode, I don't have a guest. I just wanna have a quick chat about one of the topics that has been on my mind for a while, and recently has been dominating news. The topic that I'm referring to is, development charges. And if you've been listening to news or podcasts, You probably have heard a lot about it, That being said, it seems like most of what we've heard over the years has been complaints that it's too high, it's not working, I wanted to dig into it a little bit more in this episode because I think it's only fair to give it a little bit more time and see what went wrong, what happened, and what can be learned from it But before we start, and to be clear, I'm not claiming to be a researcher or running a think tank or an economist or anything else but being who I am, which is a construction guy. And, you should take anything you hear about the DCs, in this episode with a margin of error. This is simply my attempt at wrapping my head around some of the main questions about development charges, and I hope you find it useful. In particular, in this episode, I wanna answer the following questions: What are the development charges? What are they supposed to be used for? Why did they start going up a few years back? And what went wrong that now we've introduced these reliefs, which has been on the news for the past little while? Did the government become greedy? Is it's a matter of government efficiency Or is it timing issue? Also, is there a better way of dealing with this so we don't end up repeating the same issues and the same mistakes 10 years down the road and have to pay the price again? and probably one of the more critical questions that have come up, is what will these DC reliefs that have happened recently will do to the industry? Will they actually solve anything? if any of these questions are of interest to you, please stick around and we'll try to answer them for you. As always, you can find all the information about our podcast on our website, realestatedevelopmentinsights.com. Realestatedevelopmentinsights.com. And please, if you find anything here interesting, please ensure to share it with a friend or a coworker. It really helps us grow the show Okay, so let's start from top. What are development charges? if you want to go by the definition, a development charge is a one-time fee that is collected on a new development to help pay for the infrastructure needed to support the growth. In plain English, if a developer is building a new project and then that project brings new needs to the system of a municipality and in, in the infrastructure that is existing over there, the idea is that the development fee will help fund the infrastructure and services needed for that growth. That's... Sounds great, right? It's not that crazy. These growth could include and do include roads, transit, water, wastewater, storm water, parks, recreation centers, li-libraries, emergency services, childcare, and other growth-related services. And we'll talk about this a little bit further down the road that there are nuances to this and different municipalities have different breakdowns. So in theory and at a high level, this is pretty reasonable. It makes total sense. if the growth is creating new burden on your infrastructure, then growth should pay for it, right? That's the logic that has been going on for a long time, and you might have heard it before that says growth pay for growth. And that's part of the problem these days that we're dealing with. these fees They're usually paid, uh, by developer at different points in time, but most commonly at the issuance of permit and just before start of construction And traditionally, developers have been forced to pay these things. And it forces them, for-forces the developer to consider these DCs as a significant chunk of the project economics and how they run their pro forma. And at the end of the day, development is a system, and it has a process, and if you're adding costs up front, there's a very good chance that it will get baked into the system, pass through different stages, and end up with the end user, the purchaser, the renter, whoever gets to carry the burden of this additional cost for the long term. And that's where one of the issues is. So it's not as simple as saying the developer pays it, because basically developer is paying it up front and then transitioning to other people down the road. So the cost doesn't really disappear, it just moves through the system When the market was good, which it was for a very long time in Toronto and Ontario for the most part, and even in Canada, the market was really good. Anything you built was being absorbed at a very high rate, and people could afford it. money was cheaper. the buyers and renters were able to come up with the difference, and, this formula worked until it just didn't, A lot of market, uh, forces have moved in the, the other direction over the past few years, as you know. And, uh, one thing after another has weakened, the industry and the market as a whole. So this whole thing just became a little bit unbearable at the front end and, uh, has caused a lot of projects just, just on the shelf, not by itself, but it definitely has played a significant role in it Bottom line, Development charges are not the main issue, but they're one of the lines that adds to the issues we're facing As I was doing my research on this topic and trying to wrap my own head around the whole development charge discussion, It reminded me of a book I read about twenty years ago. the book is called The Fifth Discipline by Peter Senge from, uh, MIT Business School. it describes a beer game. It's called the beer distribution game. And it lines up to some extent with what we have seen about the development charges, at least in Toronto. the analogy goes like this. Just imagine for a second that you own a small retail shop and you, carry a certain brand of beer that is not very popular, not very unpopular. It's somewhere over there. And you usually, sell four cases a week. It doesn't go up, doesn't go down that often, and you keep a small amount in stock. You order a small amount every time that you place an order with your wholesaler, and the same applies all through the supply chain. And then all of a sudden, without you knowing why, the demand for that one particular type of beer goes up very significantly. And over the first few days of the week, you get whole bunch of people come in. They buy it, the whole thing out, and you're basically out of stock. You panic, you call your wholesaler, you place an order for the wholesaler, and they say, "Sure. Next week when I come by, we'll send you more than that, more than usual quota." And, uh, while this is happening, more people are coming in, more and more and more. And what ends up happening is that you end up placing another call, another order, and say, "Listen, this thing is going up. People are coming in. We're busy. I really need this. So why don't you when come back, instead of four cases give me, I don't know, twelve or sixteen cases? So just imagine the scenario, and obviously we're oversimplifying everything for the case of the analogy here. But the wholesaler takes that. They basically repeat the same behavior with their distributor. The distributor repeats the same behavior with the manufacturer. And each of them, depending on where they are in their cycle, they have a little bit of a lag in their system. What it means is that just because you place an order doesn't mean the beer is going to show up right to your door the next morning. It will take a few days. And by the time everything is said and done, and who knows, maybe the original surge in the demand for that one type of beer was due to the fact that some viral TikTok game was happening And now when things go back to normal, you've ended up with a significant stock of that particular type of beer. Your wholesaler has the same problem. And the worst of all is the manufacturer who has gone ahead and retooled a whole bunch of the production line just to create enough capacity to support that type of demand, which at this point is not there anymore. To some extent, and again, I'm oversimplifying over here, this is what happened to our development charges and our industry, our development industry as a whole. We ramped up the estimates for what the growth would be. We budgeted for massive, massive projects, a lot of spending. And with that was the requirement to push up the development charges. And We also experienced a whole bunch of factors in the macroeconomic and global scale that were not of our choosing and are under control. And, they brought us to the point that we are in. If you look at the analogy, the bottom line is that no one needs to be an evil or bad actor to cause a problem. The analogy is meant to show you that reasonable people within reasonable time frames and reasonable zone of influence can make reasonable decisions. When added together, it can cause unreasonable results. And I think that's one of the things that happened here to us. The municipality is trying to fund their infrastructure. The province is setting housing targets and changing it all the time, by the way. The developer is trying to protect their feasibility and profitability and their response to their investors. The lender is trying to protect their risk. The buyer or renter is trying to find a place that they can afford, and the politicians are trying to respond to their voters. Everyone is reacting to pressure in their own part of the system to the best extent that they can with the most information available to them and trying to act as reasonably as po-possible. But part of the problem is, the timing is off. The infrastructure projects are planned, and they will take ten, twenty, thirty years in some cases. The development charges are paid upfront, way in advance of any final products hitting the market. The housing projects need financing immediately, and buyers and renters have affordability issues yesterday. As a result, we have a system where the cost of long-term infrastructure is being loaded or front-loaded onto the most fragile moment in the development process, which is at the very front. And I think that's one of the key issues that we're dealing with as an industry So now let's go to the other question. Why did the development charges increase so much? Looking back at the past, let's say ten or 15 years, it's a very obvious trend that the development charges have gone up. No one's gonna argue with that, and no one's gonna discount it because it has also been very significant. Is it just because the government got greedy? I have to say that it's not as simple as it sounds The better explanation is probably a few different things. First, back somewhere in the 2010s, the capital projects and programs got significantly bigger. The construction cost and land cost went up as a result of all developments and whole bunch of other factors, including COVID and the COVID whiplash effect that we're seeing in the, in the supply chain that caused the cost, of the land and the construction material to go up. The rules changed about what the municipalities could actually recover in terms of costs from based on the property taxes and development charges and, and few other tools that they have to fund their projects. The fourth one, which was kind of surprising to me at least, was, uh, annual indexing of these, DC changes, which basically meant it kept going up and up and up with the inflation. In Toronto specifically, there's a little bit of a different dynamic going on as well. In Toronto, one might argue that the DC problem is partly a transit funding problem wearing a development charge label. What does that mean? The way Toronto's DCs are structured are different from many other municipalities because transit and roads make up a very large portion of that charge when we talk about Toronto's DCs, we're not just talking about parks and libraries. We're talking about a city that trying to fund a massive mobility infrastructure through, growth-oriented development cycle. To give you an idea Somewhere around sixty percent of Toronto's DCs have been used toward mobility-related, meaning transit and roads i-in the budget, which is very different from what we see in the other municipalities, at least in Ontario. And in case you were to thinking that it has to do all with the Eglinton or LRT, I have to disappoint you and say that actually that's not the case. The it has, uh, the Sig-Eglinton LRT has a little bit of a impact on that number, but the bigger number i-is the broader TTC and transit capital program, where subway capacities and streetcars and buses and station upgrades and planning and equipment and running a massive transit operation, So when you hear DCs have gone up, the question should not be why did the city increase the fee? I guess a better question is, what infrastructure cost is the city trying to recover, and why are they asking the next project, the new development, the new homeowner, the new renter, to carry the cost of that project upfront? As I mentioned briefly, the increases came from two main sources. One was the changes in the bylaws which created significant jumps in the development charges as a whole. And the second part had to do with the annual indexing, where the inflation dictated part of the increases. And if you have lived in Toronto and GTA in Canada, for the past decade, you know that we've had significant inflation that has, added to this situation. Just to give you a sense of scale with the numbers Development charges for the same type of dwelling in 2010 used to be eleven thousand seven hundred dollars. Went to, from 2010 to 2014, went up to roughly twenty-four thousand. Stayed there almost until 2017. 2018 is when one of the bylaw jumps happened, and this twenty-four thousand dollars jumped all the way up to forty-one. And if I wanna give a drum roll, that same number for the same type of dwelling went all the way up to more than hundred and thirty-seven thousand in 2024. So that's ridiculous. that's crazy how far it went up, and I can't really judge how valid that number was, but I guess by the signs of us now reversing course and giving credits and tax cuts to the provinces and to municipalities, it seems like it's, uh, it went up a little bit too much. at the end of the day, if a small number goes up by five percent, you might not notice it. But if it's a big number, if it goes up by five percent as a result of annual indexing, definitely you'll notice it, and it might even derail your project. So I guess part of the good news is also that Toronto has now removed annual indexing for 2025 and 2026, with the indexing expected to return after 2026. we'll see how that goes because that has been a major player. To sum up when went wrong, why did these numbers have to change? Why did we have to increase development charges to begin with? It was more a At the beginning, it was more a matter of updating the numbers because they were just older. We had older assumptions, older capital plans, older growth forecasts, The problem is that the system became too front-loaded w-- for the market we have now. That's bottom line. At this point in time, we kept growing it. Now the market cannot bear it. And I think what happened was that, the legislation inherently assumed that regardless of how much we increasingly seized, the market will react the same. Between twenty twenty-two and twenty twenty-five, the city has approved more than n- one hundred and ninety thousand units through the official plan and zoning bylaw amendment process. While the actual construction started over the same period of time has been around eighty-seven thousand units. That's less than half. So for every two units that went through the approval process, only one of them was able to actually start. And I have a feeling that, that, that includes some of the good days, and we will see a sig-- more significant drop even ha-after this. And this is where we have the housing gap or the development cliff, however you wanna call it. As a corollary of, uh, the question about did the governments become greedy, I couldn't stop my thinking. we've been collecting all this money, and we've been putting these DCs in place. Did the municipalities actually have the proper capacity and the efficiency and effectiveness to actually do this much project? that's the part I can't really get a good answer on. We... I can see that there's a huge volatility and ab-about the collection side of these DCs. So the numbers have changed significantly. There are years that we've collected half of, uh, what was expected, and there are years that DCs have gone up significantly in the, in terms of actual DCs being collected. But I can't really find any good information about how much of that, how much does that translate and how much of does correlate with the projects being done. Probably partially because the projects are very planned for very long-term pro- periods, and they don't necessarily correspond with the collection process itself. what has changed legally? From the legal perspective, from twenty ten to twenty seventeen to twenty eighteen, twenty twenty-two, twenty twenty-four, twenty twenty-six now, there has been no lack of legislative changes and upgrades and bills, on this topic. It's been a very busy topic from that perspective. There's a bill, Bill twenty-three in twenty twenty-two, which introduced several changes, including exemption for affordable residential units, nonprofit housing, inclusionary zoning, and also some incentives for bigger units. So try and push the market supply toward family-oriented units. Three-bedroom units, in particular, were getting twenty-five percent exemptions, which was a meaningful change, uh, and it pushed the market toward rental and larger family-sized units, which as part of that result we're witnessing today with what is happening in Toronto. Then we get to the big reset basically. The 2026 Federal-Provincial Development Charge Reduction Program. Canada and Ontario have announced that an up to eight point eight billion dollar partnership over the next ten years to support municipal DC reductions. The program prioritizes municipalities that reduce development charges for all residential types by thirty to fifty percent or more and maintain it for at least three years. Toronto has announced, this is a good, this is the good part. Toronto has announced reductions in the range of forty to sixty percent between 2026 and 2029, backed by one point five billion dollar from that funding program. This is not a small tweak. This is a pretty major change, And we're gonna talk about how it can potentially change the market in Toronto and GTA. At the end of the day, this is a major political and practical acknowledgment that the, uh, acknowledgment that the old way just, was just not working, and it was blocking the housing viability. So The big question, will these reductions restart the market? The answer is they will help, but probably marginally, and they will not be a silver bullet, and I don't think it was meant to be a sign-- s-silver bullet. The most reliable data that I can find at this point in time is a CMHC report where they've modeled the effects of this decision. So here are the numbers. if the municipalities decide to lower the DCs by ten to twenty percent, they probably have almost no real impact on the projects. Which is not the case, thankfully for Toronto, as they're mentioning forty to sixty percent reduction, which goes to the second bracket of the CMHC modeling. In the fifty to sixty percent range, these deductions have a more significant and meaningful impact. CMHC estimates that in Toronto, this level of reduction could increase the viability of a project by about five percent. Five percent is big number, especially when you're talking about bigger projects I think this could really move the needle. And if they were taking out the whole thing and eliminate, obviously eliminate the DCs entirely, this could have more than ten percent impact on the project viability, which definitely will do something. It just begs the question of how the city is gonna pay for, the city, if we were to cut the whole thing. as I was reading news, and it seems like everything is cheery and rosy, and everyone's getting federal money to help them with development charges cut, you can also see some munici-municipalities are pushing back and saying, "You know what? Thank you, but no, thank you. We don't want your money. We don't wanna implement this reduction program, and we don't want no part of it." So I was kind of surprised, to be honest with you. I thought everyone would say yes. And once you start digging a little bit deeper to see why do some municipalities hesitate and reject what's going on, The answer is not that they don't care about housing. The answer is they're worried about what's gonna replace th-this significant source of funding. If a municipality has built its critical plan around development charges, and then the province and federal says, "You know what? Reduce those charges," it's very reasonable for them to ask, how are we gonna bridge the gap in the fund? And what will happen after the fourth year?" Because it's a three-year program. How will this impact? And quite honestly, it's very hard to answer those questions. A lot of this is politically driven. It depends on which parties and policies are being promoted at the time. market factors play a huge role in this whole equation, so you can't necessarily blame them for being suspicious and cautious if they already have, allocated and committed a lot of these funds to projects that could get into huge trouble and derailed if something goes wrong here. And I guess we'll have to wait and see if the federal government and the province ha-- can come up with good enough answers for all these municipalities to sign up and get the ball rolling is there a better way of doing this? I'm sure we're not the only ones in the world dealing with this issue. is there a way to solve this mismatch of a problem? The mismatch in timing, the mismatch in the fact that you are making the newer, most vulnerable homeowner section to pay for the longest term capital expenditure in our communities. is there a better way? I think the answer is yes. Going through different sources, looking at different documents, I couldn't really pinpoint a magic tool, but I think it's fair to say when looking at, our Canadian way of funding our municipalities and comparing it to countries such as the OECD which are, like, very developed coun-countries in the world, one thing stands out, and that is we as a country and many of our municipalities have over-reliance, I'm probably oversim-simplifying it here, but we're over-reliant on development charges to fund our Infrastructure. Other places in the world, their development charges seem to be only one of the many tools in the toolbox of the municipalities to be able to get funding for their projects. There are different sources of doing that. bottom line is there are-- fewer of them are actually front-loading it all the way on the newer projects and new developments, and it seems to be we're just overdoing that portion I think the final takeaway from my endeavor into the wrapping my head around this whole development charges is that development charges are not just a builder fee. They're part of how Ontario pays for the growth, and it's not the developer who's paying for it, and by the way, it's passed through the system to the end user and people who live in these communities. the second takeaway was that Toronto's DC issue is partly a transit issue, which is using a lot of, city's resources to just run the transit and the road systems. And we don't-- if we don't understand what these fees are funding, we're basically oversimplifying problem and probably overspending for them The third one is that the issue is not just amount. Timing plays a huge role. When do you need to pay the development charges? At what stage? Can you get it in installments, which I know you can these days with a lot of these rental pro- projects. And it's funny how sometimes the right hand and left hand are not really talking to each other. Cities and municipalities have done a lot of work to try and fast-track a lot of approvals, which is awesome and great, and Thank them for that. But if you approve something and only half of them can get built, partially because we're charging them too much, did we actually make an impact or did we just use a whole bunch of resources? Lastly, DC reductions will help, especially in high-cost markets like in Toronto, but they will not solve the housing crisis issue. I'm gonna go out on a limb, and I'm gonna say more efficiency in the system and decision-making and running our communities is probably part of the key, and also a little bit less conservatism in terms of how the funding for these municipalities are provided, which could be through capital markets, debt products and public investments coming from the community and so my final thought is this. The development charge system worked exactly as designed until the market changed, and we need to change with it. So now the key question is, how do we finance the growth without killing the housing projects we say we need so much to solve our affordability and housing crisis? I hope you have found some of the information here useful, And as always, I would love to hear your thoughts. Please leave us a comment, shoot us an email, and if you're a developer, planner, or someone working through this process, I hope you found something here that would help you make better sense of what's going on with the development charges. As always, thank you for listening, and please remember to subscribe to our show. Thank you and have a great day