Understanding Development Charges
If you purchased a pre-construction condo in the past or are in the market to buy one, you may have heard the term Development Charges. These charges are considered a closing cost that you would pay on final closing when you receive the title transfer to your new home.
However, many people do not consider closing costs when they think about their budget, and these costs should be accounted for when you are looking for a new condo investment.
Development Charges are defined as a fee charged by municipalities to recover the cost of growth. These charges are governed by the Province of Ontario and identified under the Development Charges Act, which gives every municipality the opportunity to impose development charge bylaws as long as they follow the rules and regulations defined by the Act.
In this article, you will learn what development charges are, how they are charged and how you can make sure that you are not overpaying for these charges.
Development Charges and Levies
What Are Development Charges and Levies?
Development Charges are defined as a fee charged by municipalities to recover the cost of growth. To simplify this a little bit more, development charges are based on the basic principle that growth should pay for growth. This means that anytime a new development is built, whether residential, commercial, institutional or industrial, these fees are used to build the new infrastructure that supports this growth.
So, anytime a developer builds a new pre-construction condo or commercial property, it is their responsibility to pay for the new infrastructure that’s required to live there. Development charges are also used to avoid charging taxpayers for costs that serve this growth.
Development charges are necessary because as the population in a municipality increases so does the need for services from these new developments. Development charges can include anything needed to support the new infrastructure, such as water management, wastewater, building new roads and much more. To understand how development charges work, let’s look at an example that might explain it better.
When a pre-construction condominium is ready to be built it will need a stormwater management facility and new sewer pipelines. These services are paid for by the municipality, and they start the groundwork needed for developers to start building on the land.
Once the development is built and people start moving in, the area around this new development may need a park or community centre. These services are paid for by the city, and development charges are needed to fund them. So, development charges ultimately help the growth and the influx of people that are coming to live in this area.
This is just one example, but there are many other types of development charges that are needed by the city before construction can begin.
Types of Development Charges and Levies
The services that can be charged by the municipality are outlined in the Development Charges Act and can be used to pay for the increased capital costs that are required from new developments. These services include:
- Water supply services, including distribution and treatment services.
- Waste water services, including sewers and treatment services.
- Storm water drainage and control services.
- Electrical power services.
- Transit services and the construction of new transit.
- Waste diversion services.
There are also soft services that are used to support the new population coming into the city. These services include:
- Police services.
- Fire protection services.
- Ambulance services.
- Long-term care services.
- Parks and recreation.
- Public health services.
- Child care services.
How These Charges Are Calculated
To calculate development charges, there are rules municipalities must follow to determine a Development Charge rate. These rules are outlined in the Development Charges Act. This rate is calculated by the dollar value of major growth projects divided by the projected growth. The major growth projects value is determined by a few factors, including the number of major growth projects, projects' timing, and more.
To determine how development charges are collected, the city will issue a background study to establish how much they can charge a new development based on the location, the type of development (whether its a low-rise or high-rise), and an estimation of how much it will cost to build services that will support this development and the incoming population.
From there, the city creates these charges based on the square footage of the proposed building. This means that the developer is getting charged by each residential unit. Therefore, depending on the size of the unit you are purchasing and which city you are investing in depends on the amount of development charges you will receive. This is also known as a proportionate contribution towards development charges which is a term you may see on your Agreement of Purchase and Sale. This term essentially means that you are paying for your portion of the development charges based on the size of your unit.
Who Pays for These Charges?
Although buyers of pre-construction condos ultimately pay for development charges, they are not charged by the municipality. Developers actually pay for these charges upfront when they receive their building permit from the city, and then they pass these charges on to the buyer during final closing.
These development charges are stated in a buyer’s Purchase Agreement, however, the charges are an approximation of what a buyer will be paying based on the size of their unit.
Although these charges are stated in an Agreement of Purchase and Sale, the buyer is not required to pay for these charges until the final closing date when they receive their Statement of Adjustments.
Remember, a developer doesn’t pay for these development charges until they receive their building permit from the city, and it could be years later from the time a buyer signs their Purchase Agreement to the time a developer receives their building permit, which means that the cost of development charges could have increased.
This means that development charges are subject to change from the time the Purchase Agreement is signed to the time the buyer receives their Statement of Adjustments, and it is the buyer’s responsibility to pay for these development charges even if the prices have increased. But we will tell you what to do to avoid this tricky situation so that by the time the final closing comes, there are no surprises.
What It Means to Cap Development Charges and Levies
When a buyer approaches final closing, they will meet with their pre-construction lawyer to go through any final paperwork before receiving a title transfer to their new property. The buyer will then pay for their final closing costs and the outstanding balance listed on their final Statement of Adjustments.
This statement will show the purchase price of the condo unit, the HST tax/rebate, total deposits paid, occupancy fee, realty taxes, and a list of development charges (also stated as levies). These development charges can include but are not limited to:
- General Levies
- Education Levies
- Parkland Contributions
- Public Art Levies
- Green Standard Levies
- Section 37 Levies which has recently been changed to Community Benefits Charges
So, how do you avoid overpaying for Development Charges and Levies? When searching for your pre-construction condo property, the key is to look for buyer incentives that state Capped Development Charges.
Capped Development Charges means that you and the developer agree on a price that you will pay at final closing. This capped development charge is stated on your Purchase Agreement when you buy the property, so by the time you’re ready for final closing three or four years down the line, you know exactly how much you are paying. This way, you will be protected if the city decides to increase the development charges between the time you buy your unit and the time the condo project receives its building permit.
Remember, our platinum agents are experts in the pre-construction condo market, and they will help you every step of the way throughout the buying process so that you understand your rights as a buyer and how you can protect yourself from unexpected costs.
What Are Development Caps and How Are They Charged?