The financial factors that have been considered in this analysis are as follows:

Transcription

1 5. Cost Structure This section assesses the competitive positioning of Halton in the GGH with specific regard to the cost structures that influence the location decisions of the non-retail, non-residential sector. It is intended to update previous studies that assessed the impact of DCs in Halton. Consequently, for the purpose of consistency, the following analysis is presented in the format adopted in previous studies. As in previous studies, it undertakes a comparison of significant cost factors as well as a specific analysis of the impact of DCs on industrial and office development in Halton. The costs of every development are different. However, through modelling sample projects, this analysis helps identify the scale and relative impact of DCs in terms of the overall cost of construction in Halton and in other municipalities in the GGH. Further sensitivity analysis helps position DCs and other construction cost factors in terms of annual costs and other operating costs. The financial factors that have been considered in this analysis are as follows: One time/capital costs Land costs; Hard construction costs (site, shell, fit-up); Soft costs, such as design/engineering and planning; Development charges Ongoing/operating expenses Rent and operating expenses; Property taxes Five broad areas are addressed in this analysis: A. A comparison of cost factors between Halton Region and other GGH municipalities. The cost analysis compares financial factors between Halton and other GGH municipalities and provides current background information on the cost factors that influence industrial and office project investment decisions. It assesses cost factors including land costs, DCs and annual property taxes. B. DCs impact analysis. This analysis examines the specific impact of DCs on the Region s attractiveness for industrial and commercial development investment. It includes the following: i. Overall impact on industrial development: An assessment of project costs for a typical model scenario of industrial development across the broader GGH has been used to present the impact of DCs in Halton. This impact analysis takes into account total development costs as well as property tax. An alternate scenario without land costs was also considered wherein land for expansion is already available, to understand the impact of DCs on business expansion projects. ii. Overall impact on commercial office development: An assessment of project costs for a typical scenario of commercial development in municipalities across the broader GGH has been used to present the impact of DCs in Halton. As with industrial development, an analysis has been conducted for a business expansion scenario for office development. Halton Region - Competitiveness Study of Office and Industrial Development 39

2 iii. Impact on operating cost: In order to understand the impact of DCs on tenants of industrial property, the impact of industrial DCs on the operating cost of a hypothetical business has been analyzed. This scenario has been developed for the North Oakville HUSP (Halton Urban Structure Plan) in particular because even with discounts, this municipality has the highest industrial DCs in Halton (indeed, in the GGH) and is therefore indicative of the highest impact DCs may have on operating costs. iv. Impact on development cost: An analysis of the sensitivity of DC rates on overall development cost has been undertaken. v. Impact on developer profit: An analysis to consider the impact of DCs on developer profits is also conducted, wherein developer profits are considered exogenous to the model. C. Residual land value analysis. This part of the section estimates the land value for a hypothetical scenario of investment in industrial construction as a residual component after considering the cost of developing a given type of building and the value that can be achieved for those uses. D. Sensitivity analysis. The sensitivity of residual value to various building typologies and cost structures is analyzed in this section. E. Payback period analysis: This section undertakes a evaluation of each of the Halton area municipalities with the comparison areas to identify the comparative time in years/months that it would take the average industrial and average office development to pay down the DCs versus taxes for each of the GGH municipalities F. Key findings and implications. This part of the section summarizes key findings, including the impact of DCs on total costs of development (which takes into account other major categories of cost) and analyses their impact on Halton s overall cost competitiveness. 5.1 Cost Analysis Tables 5.1 to 5.5 display the range in land values, DCs, and property tax rates across the GGH. Key data regarding these factors, as it pertains to Halton Region s competitiveness in the GGH, is highlighted below. a. Land values are influenced by factors such as site location, zoning, and the availability of serviced sites, as well as highway and overall transportation access. A review of the current average land prices indicates that land values in Halton Region fall in the higher range of land prices observed in the GTA (between $390,000-$495,000 per acre). They are lower when compared to the neighbouring municipalities of Mississauga and Brampton in Peel Region as well as York Region but higher than Durham Region and the municipalities outside the GTA. Table 5.1, on the next page, presents a comparative scenario of land values across the GGH municipalities. Current estimates indicate that overall land values in the GGH are found to range, on average, from a low of $120,000 per acre in Brantford to approximately $760,000 per acre in Vaughan. The greater demand for land in the western and northern GTA is reflected in the comparatively lower land prices in the eastern GTA municipalities such as Durham. 40 Halton Region - Competitiveness Study of Office and Industrial Development

3 b. Construction Costs are assumed to have no material variation across the GGH, in terms of hard and soft costs. Financing costs for capital are also assumed to be relatively consistent across the comparison areas. c. DCs. Halton s undiscounted DCs are the highest in the GGH, for both industrial and office development (but comparable to Peel and York Regions for retail development). Even with the current level of discounts, DC rates in Halton Region remain amongst the highest in the GGH for industrial uses Oakville, Milton, and Halton Hills HUSP (Halton Urban Structure Plan) rates remain higher than elsewhere, but Burlington becomes comparable with Mississauga, Brampton, Markham and Richmond Hill. The comparative scenario for office development is considered to be slightly favourable for Halton Region, largely because the Peel municipalities have higher office rates as compared to industrial rates, allowing Halton to be marginally more competitive for office uses than industrial uses. Durham has no Regional development charges at all, partly in response to the relative weakness of the eastern GTA market compared to the west GTA. Tables 5.2, 5.3 and 5.4 present comparative scenarios of industrial, retail and office DCs across GGH municipalities. Note that HUSP rates were used for Oakville, Halton Hills, Milton in these tables. Detailed DC rates for Halton municipalities are presented in Appendix AA.2. Halton Region - Competitiveness Study of Office and Industrial Development 41

4 42 Halton Region - Competitiveness Study of Office and Industrial Development

5 Halton Region - Competitiveness Study of Office and Industrial Development 43

6 TABLE 5-4 OFFICE DEVELOPMENT CHARGES PER FULLY SERVICED SQUARE FOOT OF GFA Region Muncipality City Region Education Total Peel Region Mississauga Brampton Caledon Durham Region Oshaw a Whitby Pickering Ajax York Region Vaughan Markham Richmond Hill New market Aurora Outside GTA 0.00 Hamilton Brantford Guelph Cambridge Waterloo Kitchener Barrie Halton Region Undiscounted Rates Oakville - HUSP Burlington Milton - HUSP Halton Hills - HUSP Discounted Rates Oakville - HUSP Burlington Milton - HUSP Halton Hills - HUSP Toronto Source: Finance and Building Depts of municipalities, D.C Study by Watson and Associates Notes: 1 All of Halton Region's HUSP and non-husp discounted and undiscounted rates are presented in Appendix AA2. 44 Halton Region - Competitiveness Study of Office and Industrial Development

7 Several regional and municipal governments in the GGH have effected changes to DC rates recently Peel and York Regions and the Municipalities of Hamilton and Halton Hills introduced new bylaws in Durham, the City of Barrie, and several other local municipalities are working on new by-laws at the present time, for passage in The Region of Waterloo, and many other local municipalities will have new bylaws in The 2007 increases in DC rates in Peel Region, York Region, and the City of Hamilton are relevant changes that have occurred in the DC policies of Halton s immediate neighbours since the last DC review. Peel Region s increase is immediate but even with the full increase implemented at once, Peel s office and industrial rates will remain lower than Halton s discounted rates. York Region s increase is to be phased in with annual increases until 2012, at the end of which the York municipality rates will be comparable to Halton s current undiscounted rates for both office and industrial development. Hamilton s industrial rates (currently discounted from $16.51 per square foot to $3.35 per square foot) are increasing as well but, at an annual increment of $0.50 per square foot, the impact of this increase will occur over a longer timeframe. Figure Industrial Development Charges in the GGH Industrial Development Charges Per SF $- $2 $4 $6 $8 $10 $12 $14 $16 $18 Peel Region Mississauga Brampton Caledon Durham Region Oshawa Whitby Pickering Ajax York Region Vaughan Markham Richmond Hill Newmarket Aurora Outside GTA Hamilton Brantford Guelph Cambridge Waterloo Kitchener Barrie Halton Region Undiscounted Rates Oakville Burlington Milton Halton Hills Discounted Rates Oakville Burlington Milton Halton Hills Toronto Halton Region - Competitiveness Study of Office and Industrial Development 45

8 Figure 5-3 Office Development Charges in the GGH "Office" Development Charges Per SF Note: Comparability is limited due to extensive local exemption, area-related polices $- $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 Peel Region Mississauga Brampton Caledon Durham Region Oshawa Whitby Pickering Ajax York Region Vaughan Markham Richmond Hill Newmarket Aurora Outside GTA Hamilton Brantford Guelph Cambridge Waterloo Kitchener Barrie Halton Region Undiscounted Rates Oakville Burlington Milton Halton Hills Discounted Rates Oakville Burlington Milton Halton Hills Toronto 0.00 $6.11 $7.15 $8.74 $8.70 $8.04 $8.45 $7.60 $6.95 $5.84 $7.01 $5.89 $7.80 $5.65 $9.70 $10.81 $9.32 $9.61 $10.10 $12.23 $11.75 $13.23 $ $15.20 $14.62 $16.52 $17.31 Since the overall DC rates applicable in most areas are usually a combination of municipal and regional rates, the variance in total DC rates is best explained by distinguishing between DCs on two bases the share of DCs between region and municipality, and the categorization of development type by the concerned jurisdiction (and resultantly different rates). Across the GGH as well as in Halton Region, the regional proportion of DCs is greater than the municipal portion. However, regional DCs in Halton are higher than those levied by other upper-tier municipalities in the GGH, even with discounts. Considering discounts, this difference ranges from $1.33 per square foot (between Halton and Peel Regions) to $4.34 per square foot (between Halton and Waterloo Regions). In the most of the higher cost municipalities, individual municipal rates are similar to regional rates for industrial development (Halton Region s rates are higher than municipal rates). Single-tier municipalities generally have lower rates than those in a two-tier structure, the general exception being Durham Region where there is no Regional charge for industrial uses and overall rates are lower than anywhere else in the GGH. 46 Halton Region - Competitiveness Study of Office and Industrial Development

9 d. Property taxes are levied annually and constitute a significant expense for non-retail development. Halton Region s industrial tax rates are higher than Peel and York. The highest rates for industrial properties in the GGH are in effect in Brantford, followed by Guelph, Hamilton, and Waterloo Region. With regard to office tax rates, Halton Region s rates for both high-end and typical commercial development are in the same range as those in the Peel and York and generally competitive with other GGH municipalities; the highest commercial tax rates are found in Waterloo Region and the City of Toronto. Table 5.5 presents an overview of overall industrial, office and commercial property tax rates in the GGH. TABLE PROPERTY TAX RATES Region Muncipality Commercial Office Industrial Peel Region Mississauga Brampton Caledon Durham Region Oshaw a Whitby Pickering Ajax York Region Vaughan Markham Richmond Hill New market Aurora Outside GTA Hamilton Brantford Guelph Cambridge Waterloo Kitchener Barrie Halton Region Oakville Burlington Milton Halton Hills Notes Toronto Source: Finance and Building Departments of Municipalities, and Toronto Real Estate Board 1 - Tax rates for Hamilton are rates for regions supported by transit. 2 - For Halton Region Tax rates applicable to urban areas have been considered. Halton Region - Competitiveness Study of Office and Industrial Development 47

10 5.2 Cost of Construction Analysis The analysis of cost of construction is based on underlying assumptions that are detailed in Appendix A. Key findings are as follows: a. Impact of DCs on project cost for industrial development. To understand the share of DCs in total development costs, a typical model scenario of industrial development was prepared. The typical industrial building was assumed to be a single-storey warehouse-style building developed on a 4-acre plot area, with a covered area of 75,000 square feet. Costs for land procurement, construction, and specific municipal DCs for the industrial use were included in the estimation of total development costs. Developer profit (assumed at 5.0%) was also included in the assessment of total development costs. These costs were annualized at current long-term lending rates. To provide a blended assessment of the total annualized costs, the annualized development costs were considered alongside the annual charges accruing from property taxes in each municipality 14. b. The analysis shows that, on average, the total annualized costs for the said industrial unit ranges from a low of approximately $10.25 per square foot in Barrie to a high of approximately $12.92 per square foot in Mississauga. Considering undiscounted DC rates, Halton Region s costs are found to be in the range of $11.80 to $12.84 per square foot, which is comparable to Peel and York Regions. When undiscounted DCs are considered, the total annualized costs in Halton Region, especially in Oakville, are relatively higher but still comparable to Mississauga, Brampton, Vaughan, Markham, Richmond Hill and Brantford. Discounted DCs across Halton Region make the Region more competitive than York and Peel regions, as well as comparable to Waterloo Region and Hamilton. Halton still remains at the upper end of the range of DCs seen across the GGH. A detailed assessment for overall project costs for industrial development in the GGH is presented in Table Typically, one would not compare capital costs with ongoing costs; however for the purpose of continuity with previous studies this scenario was prepared. Note that taxes per square foot have been calculated assuming the assessed value is equivalent to the total cost of construction; in practice, MPAC assesses properties using a complex formula and actual assessed values may be somewhat different. 48 Halton Region - Competitiveness Study of Office and Industrial Development

11 TABLE 5-6 ASSESSMENT OF LAND COSTS, DEVELOPMENT CHARGES, TAXES USING INDUSTRIAL TAX RATES Sample Industrial Building - 75,000 Sq. Ft. Region Muncipality Average Land Value Construction Development Developer Total Annualized Tax Rate Taxes Per Total Land Value Per Sq. Ft. Costs Charges Profit (5%) Dev't Costs Dev't Sq. Ft. Annualized Per Acre of Building Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Costs % Costs Peel Region Mississauga 700, Brampton 650, Caledon 418, Durham Region Oshaw a 200, Whitby 235, Pickering 275, Ajax 255, York Region Vaughan 760, Markham 700, Richmond Hill 650, New market 450, Aurora 450, Outside GTA Hamilton 269, Brantford 120, Guelph 250, Cambridge 200, Waterloo 200, Kitchener 180, Barrie 250, Halton Region Undiscounted Rates Oakville - HUSP 495, Burlington 400, Milton - HUSP 390, Halton Hills - HUSP 400, Discounted Rates Oakville - HUSP 495, Burlington 400, Milton - HUSP 390, Halton Hills - HUSP 400, Toronto 400, Note: All of Halton Region's HUSP and non-husp discounted and undiscounted rates are presented in Appendix AA2. Note: HUSP Rates used for Halton Hills, Oakville, Milton DC rates Box: Comparison of Cost Components to 2004 Analysis The 2004 competitive analysis used a very low construction cost for a typical project. For comparative purposes, we have adjusted the calculation of the difference in total development costs from 2004 to 2007, for a typical industrial building of 75,000 SF, to use a comparable construction cost amount for 2004 instead of the amount that was used in the prior study. DCs move from being 8-10% of the overall cost of construction in 2004 to 12-13% of overall costs in The tables below show the change in the cost components, first for a sample development in Oakville, then comparing the DC and other costs for all four municipalities. Cost Components - Oakville, 75,000 SF Industrial Building 2004 Analysis 2007 Analysis Difference Land Value $ $ $ 9.73 Construction Costs $ $ $ Development Charges $ 7.05 $ $ 9.47 Developer Profit $ 3.54 $ 5.91 $ 2.37 Total $ $ $ DC's/sq. ft. Total Cost DC % DC's/sq. ft. Total Cost DC % Oakville $ 7.05 $ % $ $ % Burlington $ 6.67 $ % $ $ % Milton $ 8.22 $ % $ $ % Halton Hills $ 8.22 $ % $ $ % Halton Region - Competitiveness Study of Office and Industrial Development 49

12 Figure 5-4 Total Cost of Development Per SF, Sample Industrial Building, 75,000 SF 50 Halton Region - Competitiveness Study of Office and Industrial Development

13 Table 5.7 presents analysis of total annualized costs in the case of business expansions, where land is already owned and therefore not considered in overall costs. In this scenario, Halton Region is found to be less competitive than Peel and York Regions and more competitive than municipalities outside the GTA (with the exception of Barrie). The higher land values in certain Peel and York municipalities become irrelevant in this case, and eliminating them from the analysis demonstrates that these neighbours are more conducive for business expansions than Halton with its higher industrial DCs and tax rates. In this analysis, total annualized costs vary from a low of $8.14 per square foot in Vaughan to a high of $11.39 per square foot in Brantford. Halton Region s total costs (considering discounted rates) present minor variations from $9.36 per square foot to $9.69 per square foot. Using undiscounted rates, the annualized charges remain in the same range with the exception of Oakville where they increase to $10.03 per square foot. Of course, the issue of competitiveness for expansion is much less about a choice of business location by definition, businesses have no choice about where to expand their facility, so a comparison among municipalities of expansion-related costs is relevant only to the extent that firms may consider future expansion costs in their initial location selection decision. TABLE 5-7 ASSESSMENT OF DEVELOPMENT CHARGES, TAXES USING INDUSTRIAL TAX RATES FOR EXISTING BUSINESS EXPANSION PROJECTS Region Muncipality Construction Development Developer Total Annualized Tax Rate Taxes Per Total Costs Charges Profit (5%) Dev't Costs Development Sq. Ft. Annualized Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Costs % Costs Peel Region Mississauga Brampton Caledon Durham Region Oshaw a Whitby Pickering Ajax York Region Vaughan Markham Richmond Hill New market Aurora Outside GTA Hamilton Brantford Guelph Cambridge Waterloo Kitchener Barrie Halton Region Undiscounted Rates Oakville - HUSP Burlington Milton - HUSP Halton Hills - HUSP Discounted Rates Oakville - HUSP Burlington Milton - HUSP Halton Hills - HUSP Toronto Note: All of Halton Region's HUSP and non-husp discounted and undiscounted rates are presented in Appendix AA2. Halton Region - Competitiveness Study of Office and Industrial Development 51

14 c. Impact of DCs on project cost for office development. Table 5.8 presents the assessment of project costs for a typical office development project. The costs considered include total development costs as well as property tax. For the purpose of assessing total development costs, land costs, construction costs and specific municipal DCs for a typical office project were annualized and consolidated with the annual charges accruing due to property taxes for each municipality. The resulting analysis shows that, with regard to the total annualized costs for an office of 75,000 square feet, Halton Region s costs are not only competitive but fall in the lower range when compared to most GGH municipalities. Milton and Burlington are somewhat more competitive than other Halton municipalities, even when undiscounted DCs are considered. York Region, on the other hand, is found to have a marginal advantage with its municipalities exhibiting lower annualized costs than other GGH regions. Halton is also found to be competitive against these neighbouring municipalities in the scenario projection for high-end commercial office development (Table 5.9). TABLE 5-8 ASSESSMENT OF LAND COSTS, DEVELOPMENT CHARGES, TAXES USING OFFICE TAX RATES Sample Office Building - 75,000 Sq. Ft. Region Muncipality Average Land Value Construction Development Developer Total Annualized Tax Rate Taxes Per Total Land Value Per Sq. Ft. Costs Charges Profit (5%) Dev't Costs Dev't Sq. Ft. Annualized Per Acre of Building Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Costs % Costs Peel Region Mississauga 700, Brampton 650, Caledon 418, Durham Region Oshaw a 200, Whitby 235, Pickering 275, Ajax 255, York Region Vaughan 760, Markham 700, Richmond Hill 650, New market 450, Aurora 450, Outside GTA Hamilton 269, Brantford 120, Guelph 250, Cambridge 200, Waterloo 200, Kitchener 180, Barrie 250, Halton Region Undiscounted Rates Oakville - HUSP 495, Burlington 400, Milton - HUSP 390, Halton Hills - HUSP 400, Discounted Rates Oakville - HUSP 495, Burlington 400, Milton - HUSP 390, Halton Hills - HUSP 400, Toronto 400, Note: All of Halton Region's HUSP and non-husp discounted and undiscounted rates are presented in Appendix AA2. 52 Halton Region - Competitiveness Study of Office and Industrial Development

15 TABLE 5-9 ASSESSMENT OF LAND COSTS, DEVELOPMENT CHARGES, TAXES USING OFFICE TAX RATES - (11-20 STOREY OFFICE BUILDING) Land Value Land Value Construction Development Developer Total Annualized Tax Rate Taxes Per Total Per Acre Per Sq. Ft. Costs Charges Profit (5%) Dev't Costs Development Sq. Ft. Annualized Average ($) of Building Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Costs Costs Peel Region Mississauga 700, Brampton 650, Caledon 418, Durham Region Oshaw a 200, Whitby 235, Pickering 275, Ajax 255, York Region Vaughan 760, Markham 700, Richmond Hill 650, New market 450, Aurora 450, Outside GTA Hamilton 269, Brantford 120, Guelph 250, Cambridge 200, Waterloo 200, Kitchener 180, Barrie 250, Halton Region Un Discounted Rates Oakville 495, Burlington 400, Milton 390, Halton Hills 400, Discounted Rates Oakville 495, Burlington 400, Milton 390, Halton Hills 400, Toronto 400, Note: All of Halton Region's HUSP and non-husp discounted and undiscounted rates are presented in Appendix AA2. Table 5.10, on the next page, assesses Halton s competitiveness for office business expansions wherein land cost is not a factor in total project costs. This scenario reveals that for office expansion projects, Halton s competitiveness in the GGH remains similar to the scenario considering land prices, with Halton comparable to Peel Region, higher than York Region, and most competitive against Waterloo Region and other municipalities outside the GTA. Halton Region - Competitiveness Study of Office and Industrial Development 53

16 TABLE 5-10 ASSESSMENT OF DEVELOPMENT CHARGES, TAXES USING OFFICE TAX RATES FOR EXISTING BUSINESS EXPANSION PROJECTS Region Muncipality Construction Development Developer Total Annualized Tax Rate Taxes Per Total Costs Charges Profit (5%) Dev't Costs Dev't Sq. Ft. Annualized Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Per Sq. Ft. Costs % Costs Peel Region Mississauga Brampton Caledon Durham Region Oshaw a Whitby Pickering Ajax York Region Vaughan Markham Richmond Hill New market Aurora Outside GTA Hamilton Brantford Guelph Cambridge Waterloo Kitchener Barrie Halton Region Un Discounted Rates Oakville - HUSP Burlington Milton - HUSP Halton Hills - HUSP Discounted Rates Oakville - HUSP Burlington Milton - HUSP Halton Hills - HUSP Toronto Note: All of Halton Region's HUSP and non-husp discounted and undiscounted rates are presented in Appendix AA2. 54 Halton Region - Competitiveness Study of Office and Industrial Development

17 d. Impact of DCs on land costs. Total land costs have been estimated on a per square foot basis for all GGH municipalities, by combining the two major one-time costs i.e. cost of land and DCs. Table 5.11 summarizes the bundled value of these costs. The total land costs per square foot range from a low of $12.00 per square foot in Brantford to a high of $51.02 per square foot in Mississauga, with Vaughan, Markham and Richmond Hill also at the high end of the range. Halton s total land cost with DCs included remains below the urban municipalities in Peel and York, but higher than most other jurisdictions. TABLE 5-11 TOTAL LAND COST BY MUNICIPALITY Region Muncipality Average Land Value Development Total Land Value Per Sq. Ft. Charges Land Costs Per Acre of Building Per Sq. Ft. Per Sq. Ft. Peel Region Mississauga 700, Brampton 650, Caledon 418, Durham Region Oshaw a 200, Whitby 235, Pickering 275, Ajax 255, York Region Vaughan 760, Markham 700, Richmond Hill 650, New market 450, Aurora 450, Outside GTA Hamilton 269, Brantford 120, Guelph 250, Cambridge 200, Waterloo 200, Kitchener 180, Barrie 250, Halton Region Undiscounted Rates Oakville - HUSP 495, Burlington 400, Milton - HUSP 390, Halton Hills - HUSP 400, Discounted Rates Oakville - HUSP 495, Burlington 400, Milton - HUSP 390, Halton Hills - HUSP 400, Notes: All of Halton Region's HUSP and non-husp discounted and undiscounted rates are presented in Appendix AA2. Halton Region - Competitiveness Study of Office and Industrial Development 55

18 e. Impact of DCs on development costs. The share of DCs to developer costs was estimated for a typical industrial development for municipalities in Halton. Undiscounted DCs represent 12% to 13% of total cost of development for industrial development, and 9% to 11% of total costs using discounted rates. Table shows this calculation using discounted rates. By comparison, construction costs accounted for approximately 59% of total capital cost, followed by land cost at approximately 21% of the development costs (Table 5.14). The share of costs represented by DCs varies among the municipalities. For example, in Burlington, undiscounted DCs comprised 11.5% of the total capital costs for the modelled development. Discounting the DCs brings this proportion down to 9.1%. TABLE 5-12 DEVELOPMENT CHARGES AS A SHARE OF COSTS OF DEVELOPMENT FOR INDUSTRIAL USES Oakville Burlington Milton Halton Hills Per Sq. Ft. Share Per Sq. Ft. Share Per Sq. Ft. Share Per Sq. Ft. Share Total Development Costs % % % % Discounted Development Charges Local % % % % Regional (Discounted) % % % % Education % % % % Total Development Charges % % % % Total Development Costs % % % % Undiscounted Development Charges Local % % % % Regional (Undiscounted) % % % % Education % % % % Total Development Charges % % % % Note: Development costs are based on assumptions for typical industrial development f. Impact of DCs on the operating cost of business. To assess the overall impact of DCs on the operating cost of a business, DCs were estimated as a share of occupancy costs for a typical business in Oakville, since this municipality has the highest industrial DCs in the GGH. The total DC applicable was annualized, and the overall occupancy costs per employee were estimated on the basis of current lease rates. The results indicate that DCs represent 12.7% of occupancy costs for this sample of an industrial user (Table 5.13). Discounting reduces the percentage of occupancy costs represented by DCs to 10.7%. Viewed on an annualized basis, DCs decreased from $1.15 per square foot to $0.96 per square foot when DC rates for Halton Region were discounted. TABLE 5-13 IMPACT OF DEVELOPMENT CHARGES ON OPERATING COSTS Oakville Using Undiscounted Development Charge Using Discounted Development Charge Development Charge $ per sq ft Development Charge $ per sq ft Total Development Charge $ 1,239, Total Development Charge $ 1,037, Annualization Rate 6.96% Annualization Rate 6.96% Development Charges annualized $ 86, Development Charges annualized $ 72, Employment Employment Square feet per employee 750 Square feet per employee 750 Number of employee 100 Number of employee 100 Rent TMI Total Rent TMI Total Rent per sq ft Rent per sq ft Annual rent $ 677, Annual rent $ 677, Occupancy Costs Per Employee $ 6, Occupancy Costs Per Employee $ 6, Development Charges annualised per employee $ Development Charges annualised per employee $ Development Charges annualized per square foot $ 1.15 Development Charges annualized per square foot $ 0.96 DC's as Share of Occupancy Costs per square foot 12.74% DC's as Share of Occupancy Costs per square foot 10.67% Source: Rent per sq ft and TMI values are based on discussions with real estate consultants and Real Estate Broker Publications, Third Quarter Halton Region - Competitiveness Study of Office and Industrial Development

19 g. Impact of DCs on developer profits. In order to assess overall impact of DCs on developer profit, a sample business in Oakville was considered (Table 5.14). Given the current average sale price, the effect of discounting DCs is to improve potential developer profit. For the sample building analyzes, the result is an increase in developer profit from $1.86 per square foot to $4.54 per square foot. 5.3 Residual Land Value Analysis Residual land value analysis compares the cost of developing and operating a given type of building to the revenues and value that can be achieved for those uses to determine the residual land value. As in the previous competitiveness studies, this study has also included a residual land value analysis, shown in Table The analysis indicates that on the basis of current capitalization rates 15 the given structure of the lease rents supports capital investment in the range of $70.33 per square foot (Ajax) to $96.62 per square foot (Richmond Hill). In Halton Region, this value is highest for Milton at $93.15 per square foot. Assuming a 5% profit margin, and allocating DCs and building costs the overall residual land value in fact turns to a negative value indicating that at current levels of costs, investment in the model scenario considered is not attractive from the builder s perspective in the comparison areas. The analysis indicates that the current structure of rents does not cover the cost of developing and operating building for industrial uses. This apparent discrepancy has been noted by market commentators (that rents do not seem to support the level of development costs in many parts of the GTA for industrial development). However, the current pattern of investment in industrial buildings is such that many buildings are purpose built and increasingly many developers are building to specific requirements of users and build a management fee into the project cost to provide return for undertaking projects. The 15 Assumptions for costing analysis are included in Appendix A Halton Region - Competitiveness Study of Office and Industrial Development 57

20 major exception is speculative warehouse and industrial multiple space, which is a common form of development in Milton and elsewhere. This development equation is positive because of the much lower construction costs associated with large, warehouse style buildings, and because the proponents may be larger, deep-pocket developers with a longer term view in terms of return on investment. Finally, rents for newer buildings may be considerably higher than the typical rates reported in the various sources of lease data (real estate broker reports, economic development departments). 5.4 Sensitivity Analysis To understand the impact of different cost structures, sensitivity analysis to other cost factors for businesses and/or developers were assessed. a. The residual value analysis was tested using sensitivity analysis for different building types. Six scenarios were considered with range of building typologies considered. The analysis included different sizes of warehouses from 20,000 square feet to large units with 200,000 square feet. Factory buildings covering 100,000 square feet to over 600,000 square feet were also considered. Overall the results show that for smaller sized warehouses and factories the residual value of land is negative (Table 5.16). However, when larger industrial warehouses are considered the profitability changes for investment in industrial property, primarily due to lower building costs in per square foot terms. 58 Halton Region - Competitiveness Study of Office and Industrial Development

21 TABLE 5-16 SENSTIVITY ANALYSIS DEVELOPMENT COST STRUCTURE - RESIDUAL LAND VALUES Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 Coverage 40% 40% 40% 40% 40% 40% Building (sq.ft.) 20, , , , , , Property (acres) Building Cost ($/sq.ft.) Un Discounted Rates Oakville - HUSP (635,742.68) (181,394.45) 48, (178,013.50) (118,410.21) (695,196.15) Burlington (652,161.69) (197,813.47) 32, (194,432.52) (134,829.22) (711,615.17) Milton - HUSP (564,332.45) (109,984.23) 119, (106,603.27) (46,999.98) (623,785.93) Halton Hills - HUSP (744,052.67) (289,704.44) (59,781.26) (286,323.49) (226,720.20) (803,506.14) Discounted Rates Oakville - HUSP (588,959.24) (134,611.01) 95, (131,230.06) (71,626.77) (648,412.71) Burlington (597,554.88) (143,206.65) 86, (139,825.70) (80,222.41) (657,008.35) Milton - HUSP (517,531.59) (63,183.36) 166, (59,802.41) (199.12) (576,985.06) Halton Hills - HUSP (697,182.11) (242,833.88) (12,910.70) (239,452.93) (179,849.64) (756,635.58) Building Typology Warehouse, Mini Warehouse Warehouse Warehouse Factory Factory Construction details 1 storey building w ith 12' storey height 24' storey height 24' storey height 24' storey height 20' storey height 12' storey height Source- R.S Means b. In order to understand the cost burden accruing from DCs, the total on development charges was amortized for the sample industrial project. Average worker salary was assumed at $34, per annum based on average hourly wage rates for occupations unique to processing, manufacturing and utilities, from Statistics Canada. Table 5.17 presents the analysis for comparison areas in the municipalities across the GGH when the amortized costs of the estimated DCs are considered in relation to salary of a factory worker. For an industrial developer, the higher DCs in Halton Region (as compared with Peel and York Regions), would amount roughly to the annual cost of hiring one extra employee, or less. Halton Region - Competitiveness Study of Office and Industrial Development 59

22 TABLE 5-17 AMORTISED DEVELOPMENT CHARGES AND TAXES AS COMPARED TO ESTIMATED COST OF LABOUR Region Muncipality Development Taxes Development Amortised Estimated Cost Charges and Charges taxes Development Man Years Per Sq. Ft. Per Sq. Ft. Total Charges Equivalent Peel Region Average , , Mississauga ,103, , Brampton ,006, , Caledon , , Durham Region , , Oshaw a , , Whitby , , Pickering , , Ajax , , York Region , , Vaughan , , Markham ,074, , Richmond Hill , , New market , , Aurora , , Outside GTA , , Hamilton , , Brantford , , Guelph , , Cambridge , , Waterloo , , Kitchener , , Barrie , , Halton Region Un Discounted Rates Average ,431, , Oakville - HUSP ,581, , Burlington ,322, , Milton - HUSP ,442, , Halton Hills - HUSP ,378, , Discounted Rates Average ,213, , Oakville - HUSP ,372, , Burlington ,077, , Milton - HUSP ,233, , Halton Hills - HUSP ,168, , Toronto , , c. The impact on industrial development costs due to change in developer profit requirements has been studied assuming a range of values of profit from 6% to 10%. Detailed charts are presented in Appendices AA.3 to AA.7. d. Finally, at the request of DCAC at the January 10, 2008 meeting, the residual value analysis was reversed to calculate the rent required both to support development at today s average land values in the Region, and simply to achieve a net positive land value. Tables 5.18 through 5.21, below, outline this analysis. 60 Halton Region - Competitiveness Study of Office and Industrial Development

23 Halton Region - Competitiveness Study of Office and Industrial Development 61

24 5.5 Sensitivity Analysis on DC Payback Point It is sometimes assumed that lower property tax rates compensate for higher development charges in terms of the overall cost associated with locating in one municipality or another. An analysis has been conducted of industrial property tax rates and industrial DCs, to examine where Halton has a tax advantage, and where so, how long it takes the tax savings to compensate for Halton s higher development charges. Note that HUSP undiscounted rates have been used for this analysis. In order to properly conduct this analysis, the difference in the DCs per square foot for a sample industrial building of 75,000 sq. ft. was compared to the difference in property taxes per square foot. The assessed value of the building for the purpose of this analysis was assumed to be the total development cost (land plus construction) for this building, as shown in Section 5.2 above. Tables 5.22 through 5.25 present the findings of this analysis for each of the four local municipalities. As noted earlier, Halton s industrial taxes are in fact higher than many of the comparison municipalities, meaning there is no point at which the taxes will compensate for higher DCs. For a company, this situation means there is no competitive advantage either on taxes or on DCs; Halton is a higher cost location. This being said, although results differ by Halton local municipality, there is generally a tax advantage over Outer Ring municipalities, which results in the tax advantage reaching the same total amount paid as the development charges (payback point). Tables 5.26 through 5.29 present the same analysis, but considering land costs and development charges per square foot together. As this total is considerably higher than the DCs alone, the payback period is much longer for this measure. Figure 5.5, below, shows the relationship graphically for two comparison municipalities. The difference in DCs paid per square foot between Oakville and Hamilton is $13.06; the differential in property taxes per square foot is $1.61 annually, resulting in a payback period of about 8 years. Figure Halton Region - Competitiveness Study of Office and Industrial Development

25 Figure 5-6, below, shows the relationship for two comparison municipalities where there is no tax advantage. The tax differential is negative so no payback point is ever reached. Figure 5-6 Halton Region - Competitiveness Study of Office and Industrial Development 63

26 64 Halton Region - Competitiveness Study of Office and Industrial Development

27 Halton Region - Competitiveness Study of Office and Industrial Development 65

28 66 Halton Region - Competitiveness Study of Office and Industrial Development

29 Halton Region - Competitiveness Study of Office and Industrial Development 67

30 68 Halton Region - Competitiveness Study of Office and Industrial Development

31 Halton Region - Competitiveness Study of Office and Industrial Development 69

32 70 Halton Region - Competitiveness Study of Office and Industrial Development

33 Halton Region - Competitiveness Study of Office and Industrial Development 71