Development, Developers, Builders, Buyers, Taxpayers

The following reflects only the author’s understandings. This is a ‘generic’ overview and does not make any implications, accusations, allegations about any particular person, organization, developer, etc.

Developers are generally in the business of converting land surfaces from what exists at any point in time into something else. There may be areas of land that have something located on it, and the developer will remove or convert it into something else.

In inhabited areas, there is usually an existing structure that is removed or converted into something else if it is deemed to be a profitable action. In ‘open’ areas the vacant space is built upon from its vacant state.

Often developers will look for ‘open’ land that does not have anything built on it and purchase it for future development. If a large project is envisioned by a developer, it will seek out and purchase large tracts such as farmland, greenfields, bush lots, wet areas that can be affordably filled by grading soil from nearby areas – preferably on the tract itself.

Developers are taking a risk that the land they purchase or make a legal agreement for future closure on, will appreciate in market value from the time of ‘purchase’ until it is sold. In recent decades the risk of land depreciating has been non-existent and market values have increased exponentially. It is widely recognized by all with any connection to marketing real estate, that it is the developer that has the greatest likelihood of making the largest long-term profits in a development project.

Developers have investment expenses before they sell and determine profit:

  • Land acquisition;
  • Application fees to the municipality;
  • Zoning change fees;
  • Building permits;
  • Regional development fee;
  • Provincial education fee?
  • Archaeological study;
  • Consultants’ fees.

It is extremely rare for a development company to use its own capital/cash instruments to purchase land for future development. The optimum business practice is to use other entities’ monies. A developer will borrow money, often using other instruments as collateral, and the carrying costs are managed and reconciled between the developer and its accountants reporting to the Canadian Revenue Agency. In any case, a developer does assume a financial risk when undertaking a project.

An experienced or well-informed developer mitigates that risk by how it bundles the initial borrowing, how it ‘plans’ the development (what, how many, how tall, how big or small each portion/unit, how many units it can place within the land space), and how it manages the regulatory and supervisory processes in place.

There are regulatory pieces of legislation for the entire province, for specific types of geography, and different geo-political regions such as counties, regions, cities, townships.

Astute developers will acquire land in areas that are most likely to generate the most profit by:

  • minimizing the cost of the land originally;
  • find land that is vacant;
  • find land that is available in suitably-sized parcels that can be combined if necessary;
  • avoid municipalities that have large populations of aware and involved citizens, politicians and a large professional staff that have individual specialties and thus, that can make the approvals process detailed, lengthy and require a lot of overview time before the land units/lots in the ‘plan’ are approved, and sold to sub-contractors for building, and thus sale;
  • implement an approvals process that is least likely to legally permit wide-spread involvement by the public citizens/taxpayers who have to live with the resulting environment and pay for fallout costs unforeseen by the Municipal staff or were overridden by the process itself;
  • the traditional zoning and subdivision approval process takes more time and is riskier for a developer because it requires public notification PLUS ongoing ability to determine approvals;
  • the easiest, fastest process is an MZO because once a municipality passes a by-law of support, it is on its slide through a regional government process, and off to a provincial politician. Once it leaves a municipality’s control at the very start, it is really out of their hands – it can have some input but can be overridden by a higher-tier government that has connections and influences with unknown inputs;
  • if a developer approaches a municipality for a zoning change and subdivision approval, the fastest and cheapest route is an MZO. Using an MZO application a developer does not even have to cover the municipality’s own legal costs and staff time ($5,000 and higher) to review the request. In other words, the developer has tossed its normal business costs onto the local taxpayers.
  • (A recent president bragged to his citizens/taxpayers, “Of course, I don’t pay taxes. A smart businessman does not pay taxes. Taxes are for little people. Paying fees and taxes is stupid!”, and a previous Prime Minister wrote, “What’s in it for me?” in a book.)

After a developer has received approval to proceed the land units/lots are sold to sub-contractors who do the actual construction of buildings, facilities on the land. The sale of these land units is where a developer makes its profit. Because its actual ‘input costs’ are ‘relatively’ small even after buying the land, (remember the land was originally purchased for very much less than its present market value for sale) its ‘mark-up’ to the sub-contractor / builder can be very large. This is why the developer makes the proportionately largest profit in any community development.

The lot-buying ‘builders’ then make their profit by calculating their cost to purchase each space unit/lot, adding their real expenses for overhead, materials and labour, and adding whatever margin they can. The builder then markets each unit on a lot, selling each at whatever the market will bear. In the case of multi-unit buildings such as townhouses or multi-level apartment buildings, for example, each individual apartment or townhouse is sold separately.

Thus, a builder will buy from the developer a lot size that is large enough (in the original municipal approval) to build as many saleable units within the given space as possible. An astute developer presents a ‘plan’ to the municipality that allows for defined minimums but no maximums for how many people can be placed into a unit of space. Thus, if a municipality has a defined minimum of 45 pj/ha (person jobs per hectare of land), it is to the advantage of the developer to request a larger number, a much greater degree of density, placing more people into a smaller space. If a developer can get approval from the municipality, for example of 65 pj/ha, then it can sell each unit of land to the builder at a much higher price, because it knows that the developer can cram more units into a smaller space, meaning there are more units to sell, meaning the builder makes more profit. It’s almost like magic, with the approval of a by-law by a Council, the developer’s nickel can be converted into a dime or quarter.

The larger the number of units the developer can get at the front end, the larger to profit for both the developer and builder at the back end. Of course, a builder can market its units at the desired price, but if the units are perceived by the public as not being attractive, then the units will not sell at all, or at another market’s price.

In large units such as apartment buildings there are great economies of scale by using one foundation for all 50 or 100 units, fewer inputs for potable water, and outputs for sewage, fewer inputs for energy, etc. and simply connecting everything together as per building codes provincially and in the municipality. If a builder is ‘permitted’, because there is no maximum number of units that be put into a unit of space, a builder will make more, smaller units on each level/storey, and add as many storeys as possible. This may, but does not necessarily make the purchase price of each unit any less, it just means it sells more units for the same price.

The developer plays a role here by putting as many storeys as it thinks it can get away with from the municipality. Thus, 3-storeys is better than 2, and 6-storeys is better than 3. It does not matter what the surrounding environment looks like, if a developer can negotiate it, it will put a city into the countryside.

This is where the definition of “affordability” hits reality. It is not the municipality or the developer that sets the price of a unit built, it is the ‘builder’ determining what the market will carry, and more is obviously better than less. The developer, as stated, has set the stage for greater profit for itself and the builder by allowing for more units to be sold in the same piece of land. But it is the builder that sets the final sale price unless the municipality has negotiated specific numbers at the very beginning that determine the outcome. It is a negligent developer that does not mention “affordability” in any proposal. An astute developer knows that Councils are receptive to the concept because developers know that it is only a conscientious council that actually directs its professional staff to do the detailed cost/benefit analysis of the project, and does not trust that the colour pictures and detailed charts from consultants will come true.

Hint: Verify first, conduct the complete approval process with ongoing public consultation, then trust! Trust comes after the development has been legally turned over to the municipality. Before that, “it’s just business”.

The development of any piece of land is a negotiation between a developer and the local government which represents the interests of its citizens.

On any issue of development, it is the responsibility of a Council to provide full opportunity for all citizens/taxpayers, to whom it is accountable under the law, to provide ongoing input. Sometimes, it is the case that a Council believes in their hearts that they know what is best for their citizens/taxpayers in spite of what they may hear from the 1 – 10% of voices that talk out to them. Sometimes, hubris kicks in for Councils and they conclude that they have only heard from “the usual voices”, and the other 99% would agree with whatever they decide. (Hubris: excessive pride or self-confidence or, in Greek, defiance of the gods. Hubris results in nemesis – downfall, injury, retributive justice)

Thus, a developer will try to eliminate any accountability to the citizens/taxpayers by eliminating them from the process. This is obviously because it takes longer to complete a project, and there are usually changes that the citizens/taxpayers require to make the project compatible with their community’s environment. Thus, a developer will use the MZO process if it can get away with it. When the citizens provide nemesis, retributive justice, it is too late and is imposed upon the council members, and the developer still gets its profit.