Direct Benefits of LICs

September 2013

A few months ago I heard through the Yellowknife grapevine that the City of Yellowknife had quietly stopped offering a Lot Improvement Charge (LIC) option on its Niven Phase 7 lots. This fee made it more affordable for developers and potential homeowners to build new housing by decreasing the equity that was required to purchase a lot. Curious, I asked the city but was told the LIC was removed at the request of the Municipal and Community Affairs (MACA) as they did not approve of it.

With both territorial and local governments constantly working in the public sphere to deal with, study and discuss the benefits of  economic development in the territory I wondered why this concrete benefit that encouraged investment in housing development had been quietly removed by MACA.

As I know the only way to get any answers out of the GNWT is to ask your MLA, that’s what I did. I contacted my MLA, Bob Bromley, and asked him to look into this for me. He responded to my request for information with a promise to follow up on this which he did. Below are the briefing notes he received back on this issue from MACA. Please read carefully at their rationale for this decision below.


 

YELLOWKNIFE - LOCAL IMPROVEMENT CHARGES ON NIVEN LAKE PHASE 7

ISSUE:

Concerns have been raised regarding Municipal and Community Affairs (MACA’s) role in the City of Yellowknife changing their pricing of the Niven Lake Phase 7 properties.     

CURRENT STATUS:

  • In November 2012, the Minister, based upon a recommendation from MACA staff and a legal opinion from the Department of Justice, rejected a bylaw that would support the borrowing of money for a local improvement combined with a lot development scheme.

  • A letter went out to the new Mayor in early November 2012 explaining why the bylaw was not approved and suggesting an alternative approach.  MACA officials met with the Mayor and the Acting Town Manager to further discuss the decision and the alternative approach.

  • After the borrowing bylaw was rejected, the City of Yellowknife changed the prices of the unsold lots on Niven Lake Phase 7 to remove the local improvement charge (LIC) and have just one lot price.  For example, a lot that was previously priced at $100,000 plus $60,000 LIC would now be sold for a total price of $160,000.

  • Recently, there has been interest in the Northwest Territories to broaden the application of the local improvement charge to address energy conservation issues.  This may be part of the general review of local improvement charges and the development of suitable regulations.

BACKGROUND:

  • Local improvements are projects that councils consider to be of greater benefit to an area of the municipality rather than the whole municipality and charges to recoup the costs of the improvements are added to the property taxes in that area.  The Cities, Towns and Villages (CTV) Act requires agreement from 60% of property owners in the area and a representation of at least 50% of assessed value.

  • The Council of the City of Yellowknife approved a local improvement bylaw in conjunction with the development of lots in the Niven Lake Phase 7 development.

  • Their rationale for this separation of development and local improvement was that potential landowners could have more success in borrowing money to buy lots if the sale price was lower.

  • A borrowing bylaw to support this project was sent to the Minister at which time a number of questions on this combining of lot sales, land development and local improvement taxation were raised.

  • The issues included whether this was truly a local improvement as contemplated by the authority in the CTV Act and whether this was really a loan to the purchaser (municipalities do not have the authority to make loans to individuals).

  • A legal opinion was obtained from the Department of Justice that viewed this scheme as non-compliant with the requirements for local improvements under the CTV Act.

  • The Act requires that at least 60% of the landowners who will be paying the local improvement charge must agree to the bylaw.  At the time, the majority of the lots were not sold and as such, the City considered itself to be the landowner of the unsold lots and ‘agreed’ to the LIC on behalf of those lots.

  • In line with the legal opinion, the recommendation to the Minister was to reject the borrowing bylaw per se and to offer the City the option of developing a new bylaw(s) for those properties in private ownership that it could include a local improvement.

ANALYSIS:

  • The Local Improvement Bylaw for the Niven Lake Phase 7 development did raise some questions about the desirability of combining a local improvement charge with a land sale.

  • The suggestion that this would make lots more affordable is misleading as it does not reduce the price of the lot overall, but simply divides the cost between two lenders (the Bank and the City).

 

As you can see MACA kind of missed the real benefits of the LIC as I detail below in my letter of response to MLA Bob Bromley. Mr. Bromley has said he will raise this issue in the next session this fall.   

 
Mr. Bromley,

Thank you for sending me this and it seems that MACA completely missed the benefits of this LIC to the purchaser and developers. Please note the following sections from their briefing as most pertinent.

-Their rationale for this separation of development and local improvement was that potential landowners could have more success in borrowing money to buy lots if the sale price was lower.

-The suggestion that this would make lots more affordable is misleading as it does not reduce the price of the lot overall, but simply divides the cost between two lenders (the Bank and the City).

On the first point I do not know of any conventional bank that will lend money on a mortgage to buy land. Land purchase is based solely on the purchaser having the equity to pay for the lot in cash. The rationale is incorrect as the average person building a home cannot borrow money for land.

This leads to the second point where they call it misleading as it does not decrease the cost of the land. No it doesn’t, but that is not the benefit of the LIC. The benefit is that the LIC deferred $57,000 in equity from the land purchase to the end of the project. Once the house is built the LIC could be paid out once the home is eligible (i.e. completed) for a conventional mortgage.

Before the LIC was removed you required approximately 50% of the building costs in cash equity to build. Based on a single family $400,000 construction price this means you needed $200,000 in equity which is already one of the highest equity requirements in the country. Now with the LIC included in the lot price the equity requirements just went up by almost 30% to $257,000.

Please note that this increase in equity has shelved two single family home developments my company was working on for Niven Phase 7 based solely on the drastic increase in equity requirements. Increased equity requirements equals increased risk to the developer by drastically decreasing returns on this investment. Ultimately the assessment was that this was too much risk for my equity which I will invest elsewhere.

Thank you for your interest on this Andrew and Bob. Let me know if this isn’t clear but I assume I assume Andrew having just bought a lot he will understand this process very well.

Rob Warburton
 

I fully appreciate that MACA is working within the confines of their legal and legislated position. My question to them, and hopefully from Mr. Bromley as well, would be why are we not looking at the benefits of LIC’s and ways to make economic development more attractive? We can do this by addressing legal and legislative barriers in a positive way instead of simply removing beneficial components because they don’t fit into our bureaucratic little boxes.