Is Edmonton's tax regime targeting the very Projects that could help increase density?
By Michael Ganley | August 2, 2022
The Hendrix is a 30-storey, 260-unit apartment building at the south- eastern tip of Oliver, with a commanding view of the legislature and the river valley. When developer Henry Edgar sold the property shortly after completing construction in 2017, he says annual property taxes were about $564,750 or, as he puts it, $2,172 per door.
Fast forward to 2020, and Edgar’s development company, simply called Edgar, gets the tax bill for its latest project. The MacLaren is similar to The Hendrix — 27 storeys, 240 units, also in Oliver, also rental units — but when Edgar got his first tax bill in 2020, it was $829,000, or $3,454 per door. That’s a 59 per cent increase in just two years. “That represents an $8-million reduction in value at a time when the rental market is already down 25 per cent,” Edgar says. “And other operating costs, like utilities and insurance, are increasing as well. This matters because it affects the affordability for renters who need housing options downtown.”
The tax increase isn’t the result of any single decision by the City of Edmonton, but of a series of changes to the municipal tax code in the last few years. Brett Flesher is a real estate consultant with Altus Group and can talk valuations and mill rates with the best of them. He says the challenge for developers of rental buildings begins with the City’s property subclass of “other residential” properties, which includes anything with four or more rental units. He says that comes with an automatic 10 per cent tax increase over the residential rate applied to single-family homes and any building with up to three units.
Then there’s Edmonton’s “premium market” designation, which applies to rental high rises going up in the city’s three densest neighbourhoods: Oliver, Downtown and Garneau. Back in 2016, they were treated the same as any other multi-unit residential properties like row houses and low rises. But that year, out-of-province developers started paying more attention to the Edmonton market, and several paid above-market prices for high rises. In response — and this is where it gets a bit esoteric, but bear with me — the City-changed the gross income multiplier (GIM) that is applied to high rises. A GIM is a rough measure of the value of an investment property calculated by dividing the property’s sale price by its gross annual rental income.
The City made a new GIM to apply to high rises, leading to a further 20 per cent bump in their average tax bills. Finally, two years ago, the City changed how it models GIMs, adding another increase for new projects. Anything built since 2020 gets another premium addition of about three per cent per year.
What it all boils down to is the competitive disadvantage the City puts developers at when it comes to building and operating rental high rises in this city. At a time when many people are concerned about the cost and availability of housing in the City, and when the City’s new zoning plans are all about increasing density, it is also making developments prohibitively expensive.
“In Calgary there is no ‘other residential’ mill rate and that alone leads to about a 35 per cent premium in Edmonton over Calgary,” Flesher says.
In March, Edmonton City Council discussed doing away with the “other residential” category, a move Flesher says would be easy for Council to do. “It wouldn’t solve all the problems,” he says, “but it would help a lot.” Councillor Anne Stevenson, an urban planner by profession whose O-day’min ward includes downtown and Oliver, moved for city staff to investigate further, saying the current system penalizes renters. That report is not expected until later this year.
In the meantime, projects are being put on hold while developers see how things shake out. Edgar says when you’re making a $100 million investment decision, you’re basing it on the available information. “As an investor, you can expect and plan for a CPI-style tax increase, and if the economy is going wild it could be more, but that’s OK because your rents correlate with the taxes,” he says. “But for the City to make a decision to increase taxes dramatically in an environment where rents are down and costs up is short-sighted and counterproductive to city growth.”