Office tower developers have encountered unanticipated restrictive criteria for a property tax grant tied to Toronto’s economic development strategy. A report prepared for Toronto Council recommends rejecting six applicants collectively investing more than $3.5 billion in the city’s financial district because property tax relief is not deemed critical to their projects’ viability.
Rules for the program are set to change after the City conducted a review, including public consultation and insight from a stakeholders panel, of its Imagination, Manufacturing, Innovation and Technology (IMIT) property tax incentive program last year. This makes the timing less than ideal for eight development proponents now awaiting a decision on their grants — assessed under the original program rules in place when their applications were submitted — which is to be made at the same City Council meeting later this month where the new program rules will be formerly adopted.
Representatives for at least one of the spurned developers are now questioning the scheduling. “Staff did not process the application in a timely manner and instead delayed the process by waiting for changes to be adopted by Council that were highly prejudicial,” submits Joel Pearlman, senior vice president, investments, with Menkes, in a letter to Toronto’s Economic Development Committee.
The IMIT program was launched in 2008 to encourage redevelopment and upgrades or expansion of facilities that support employment. Qualifying recipients get a property tax discount in diminishing increments over a 10 to 12-year period to recognize the additional tax revenue that the City will reap from property improvements and reward the investors who enable it.
As part of last year’s review, Hemson Consulting Ltd. summarized the gains from the 31 grants issued through the program to that date. “These development projects are expected to total 11 million square feet and will accommodate the addition or retention of over 47,000 jobs. The financial benefits of these projects are substantial: it is estimated that the 31 approved projects will yield $889 million in new taxes over the 10- to 12-year grant payment period while they will be eligible to receive $566 million in grants. On an annual basis, the City can expect to receive an average of $29 million in net new tax revenue from these developments during the grant payment period. Following this, the developments will generate $79 million in annual new tax revenue (in 2016$),” the report states.
The City is now set to adopt revised rules that outright disqualify most office development within newly expanded boundaries for the financial district. This primarily stretches south of Front Street to encompass the burgeoning area known as the south core, but also includes more blocks between Queen Street and Front Street that are outside the traditional east and west boundaries of Yonge Street and University Avenue. Beyond the financial district, office development will have to meet the more stringent Tier 2 of the Toronto Green Standard in order to qualify.
Advocates for the commercial real estate industry weigh the new limitations against the possibility of losing the grants entirely. “We were pleased to see that the IMIT program was retained, though in a scaled-back form,” says Brooks Barnett, manager, government relations and policy, with REALPAC who was one of the 11-member advisory panel the City established to provide input to the review.
However, applicants still in the pipeline of the expiring system argue they have been inappropriately scrutinized. Notably, the six developments recommended for rejection all failed what the City report terms as the “but for” test — meaning that the developers have a business case to proceed with projects even in the absence of the grants.
“Consistent with provincial regulations, the IMIT program is intended to operate under the general premise that ‘but for’ the grants, the investment would not occur. Hence, the grants are notionally being paid from tax revenue that the City would otherwise not receive,” explains accompanying analysis from Hemson Consulting.
Legal advisors for the developers suggest that’s revisionist history, especially since the enabling community improvement plan (CIP) bylaw does not refer to the site-specific ‘but for’ test that has been applied to evaluate their applications. “The City has never refused an application which meets all of the eligibility criteria under the applicable IMIT program bylaw,” notes Ian Andres of Goodmans LLP in a letter to the Economic Development Committee, on behalf of Brookfield Property Partners’ Bay Adelaide North project.
Complicating the decision, the City has earmarked the $364 million that the six proponents would collectively save on their property tax bills over the next 10 years for its SmartTrack initiative.
“Estimates of funding from tax increment revenues were premised on the proposed changes to the IMIT program, including the elimination of office eligibility from IMIT grants in the expanded TOcore Financial District,” the City staff report to the Economic Development Committee advises. “If Council approves IMIT grants for office in the Financial District, Council will be required to identify an alternative funding source for the SmartTrack Program and identify and incorporate the change in future budgetary plans.”