1 PORTER GROUP LIMITED REMARKABLES PARK LIMITED SHOTOVER PARK LIMITED ORAL SUBMISSION LOCAL GOVERNMENT ACT 2002 AMENDMENT BILL No 3. LOCAL GOVERNMENT AND ENVIRONMENT SELECT COMMITTEE Introduction My name is Alastair Porter. I am the co-managing Director of the companies making this submission. I am joined by Roger Taylor. Until August last year he was a senior manager at the Queenstown Lakes District Council. He is now an executive consultant to our companies. In our written submission we have set out the history of these companies and their experience in development for more than 40 years. We do not repeat that history now Thank you for opportunity Firstly, can I take a moment to thank you for the opportunity for speak to you regarding our submission. As property (land) developers, we are concerned about the impacts that local council's actions can have on the supply of land for development. In our assessment, there are three core areas where we believe local government reform is important to reduce or remove impediments to the supply of affordable development land. The points in our written submission provide a more comprehensive overview of the constraints on development, which we are not going to repeat. This submission focusses on the development contributions part of the problem. We are going to give you some real examples of the cost of development contributions and the problems they cause and to recommend solutions. In particular, we make recommendations which we believe would result in a better funding regime that releases more land for development more quickly. Points of Submission 1. Cost of Development Contributions and the impacts of those costs on the supply of land. Three examples are provided: 1. Development contributions on a bulk title subdivision
2 o Bulk title subdivision takes a large land area and divides it into multiple titles generally aligned to activity type. o No land use requirement and no services provided at bulk title o Makes development more flexible for developer o Provides greater flexibility of security for financiers - more titles to secure against- easier to sell in default. o DC assessment for the Remarkables Park bulk title subdivision $32 million - no land-use activity, no connection to services, no road connections. o Bulk title subdivision did not go ahead. Land-owner sacrifices the benefits. The supply of affordable land is delayed for at best many years. 2. Developer margins on a small residential development. o Land cost $1 OO/m2 - $2 million o After development into 26 lots sells for $400/m2 - $6.8 million o Net developer margin $245 k = 12.3% on development achieved in three years. 4.1% per annum -excluding any financing costs o Development contributions $733k. o Council takes 3 times the amount the developer makes. 3. Development contributions for a mixed use commercial and visitor accommodation development. o For example: A four-story mixed use commercial and visitor accommodation (VA) development. Footprint 1,031 m 2 ; GFA 4, 124m 2 ; site area 2,768m 2 o Development contributions at subdivision and land-use estimated at $744,615 o Value of land $1.384 million o DC = 53% of improved land value o 63% of the DC is for reserve land and social amenities o 20% of the DC is for transport Conclusion: In our view, these examples demonstrate that development contributions are an expensive and inefficient way of funding local infrastructure that impede the timing and affordable development of land and, hence, affordable end purchase price of land. 2. Methodology for calculating development contributions o Methodology is opaque -what are growth projects and what aren't? o When is additional capacity required? How much additional capacity? Just In Time versus gold standards? These decisions directly affect development contributions, but the development community gets no say in them. o How do Councils assess growth scenarios. What do they do if they are wrong? Commercial Land Needs Analysis example o Need to be a forensic accountant (or be able to afford the cost to hire one) to understand the methodology and policy - it is not transparent to the community
3 o It is different in each district - not just the numbers, but the methodology behind the calculations. We have looked at a number of different districts, but do not have the resource for a complete analysis. MBIE or DIA may be able to undertake a detailed comparative analysis. o How is local development generated growth separated from visitor development generated growth? o Charged on proposed developments that do not proceed, or if they do proceed, they are pushed out in time. o Charged in advance of any connection to infrastructure - don't pay, don't get 224c certificate and can't get titles. No titles, can't settle land sales. o Does not ensure that network infrastructure is available for I to encourage zoned development- spatial planning and asset planning link. Development contributions funding comes too late for pre-funding network investment. Is it better funded from rates? o In our written submission we provided an example of QLDC capex budget versus actual expenditure to highlight: Continuous delivery lag Over-calculation of development contributions Conclusion. In our view there are serious deficiencies in the calculation methodology for development contributions which have significant implications for the supply of affordable land. 3. Development contributions greatly increases risk - for developers and for Councils o Development contributions presents a risk to development through increasing uncertainty and cost; o Risk comes at a cost- financiers don't like risk and either don't lend or factor risk into higher lending rates; o The high risks of property development means many developers will only be able to access more expensive mezzanine finan ce; o Developers have to factor in an increased margin for increased risk, increasing the price of land; o Councils have no certainty of timing or quantum of development contributions o Because Councils don't know the drivers for new capex projects, or the costs of the projects, they add a margin for risk into their development contribution calculations and developers are forced to pass on the costs of overestimation to their end purchasers. Conclusion. Development contributions increase risk to developers and Councils and as a result increase the price of land.
4 4. Recommended Solutions- Rates Option owe strongly recommend other funding mechanisms be considered, which are more equitably spread and are not an impediment to development. Rates funding is one obvious consideration, but not the only option. o We believe that funding capex for growth related development through rates an economically efficient and effective mechanism. o As we demonstrated in the example in our written submission, the rates generated from the new properties developed provide a new income stream to fund loans and provide an annuity for renewals. o Using the rates mechanism does not necessarily mean substantial increases for existing ratepayers. Increases in economic development will provide more rates income. o It eliminates the need for arbitrary, complex determinations of what are growth projects and when those projects will be required; o It increases transparency, accountability and financial management ability for loca l government. 5. Politics o Local government, of course, will for short-term political expediency, seek to keep rates down to win votes at the expense of the hand-full of developers who have no effective voting power. o But, Councils high development contributions approach is driving up land prices and impeding the supply of affordable development. For these reasons, we strongly recommend central government reduces local government's ability to charge development contributions wherever possible. o To the extent that is not possible, we recommend: There should be no development contributions charged on bulk title subdivisions - they create no demand for any physical or social amenity. They do provide a good signal to Councils of future development intentions and they assist with bringing forward development. There should be no social infrastructure (community facilities, reserve improvements or reserve contributions) based development contributions charged on any commercial or industrial types of development, including visitor accommodation. The government should impose caps on the amount of development contributions that can be charged on residential development. Leaving Councils with a discretion to charge less rarely works; Councils will charge the maximum. A standard methodology for the allocation of capital project costs to growth and for the calculation of development contributions from the pool of growth costs should be set by central government and a
5 council's application of the methodology should be reviewed as a part of its annual audit. We consider that the current land development system - not just development contributions, but resource management and infrastructure delivery are major impediments to the provision of affordable land. These proposed changes are beneficial, but at some point, a fundamental resetting of the development process is required if we are going to significantly increase the supply of affordable land. We recommend that Government initiate a development summit to begin this re-setting process, including developers, financiers, local and central government officials, economists and futurists (and a minimum of RMA experts) to identify the constraints impacting on the supply of land for affordable development and to make recommendations for removing those constraints. Conclusions We are unaware of the balance of submissions you have received, but have no doubt many will be from local government, funded by their rate-payers. Unfortunately, although possibly well intentioned, local government actions in interpreting legislation and imposing development contributions significantly hinders rather than helps economic development, in particular the supply of affordable land. We are here as developers because we are of sufficient size as master-pian developers that we cannot afford to not make these submissions. However, most developers will have neither the time nor the in-house expertise or, after paying their resource management bills, development contributions and infrastructure costs the appetite or money for this process, albeit without reform there will most likely be an ever decreasing supply of developers and as a result land development. Finally, we would like to dispel some development myths that lead lots of Councils (and especially their young staff) to make business difficult for developers: o o o That we clever people trying to defeat the system; That we land-bank land; and That we make large profits. Firstly, we are not that clever, or we wouldn't be in property development; Those that think they are too clever generally go broke; Large scale developers build up land to provide high-quality mixed use developments;
6 Or they hold land because they can't afford the development contributions or risks of land development; Yes, we may appear to make high margins to survive, but when divided by the years taken to complete a property development these turn into a very poor return, especially relative to risk. Thank you for listening to our submissions. We are happy to take any questions you might have. Questions
7 Supplementary Notes 1. Providing a greater supply of more affordable land? o Means both new and existing land o Inextricable price link between new supply and existing supply o Yet, new supply is a tiny fraction of existing supply o Making new development more affordable will make existing development more affordable. 2. Business people are attracted to businesses that: o Have relatively low risk o Reasonable capital requirements o Not too complicated o Profitable 3. The property business is: o High risk o Highly capital intensive o Very complicated o Requires high margins which, because of the time it takes to bring product to market converts to low profits 4. Development contributions are not the not the only factor making the business of supplying property unattractive, but they are a key factor. 5. Development contributions are inequitable. They are only charged on new supply, but not to anything like the same extent, if at all, on existing supply. That is not only inequitable, but is a major factor in holding down the volume of new land supply 6. Everything in life is a trade-off. Right now as we see it in New Zealand we need more affordable development, leading to more affordable land, leading to more affordable housing and goods and services. We need this more than we need more social infrastructure - reserves, pools and community centres. If these are facilities that the market wants, or perceives will enhance the value of their property when they come to sell, then developers will provide them. 7. Will having to fund social good out of alternative funding sources such as rates be such a bad solution? o Arguments they will drive up rates will only be to the extent there is not sufficient increase in new rate payers to offset the residual development contribution income; o Rates are much more transparent and assist accountability o Do the community want their rates to go up to pay for more social amenities? o Quite possibly a lot less so if they are paying. o Alternatively, developers will provide them if the market will pay for them. 8. At the rate-payers' expense, during these hearings you will not doubt have heard from "experts" why it is a good idea to maintain the status quo; and argue about fine-tuning the wording of increasingly complex matters surrounding the supply of land. The
number 1 reason we ask you to consider our views is because the supply of affordable land in New Zealand is totally inadequate. What we need is more land to be supplied. So we ask you in deliberating the provisions of this Bill to always ask one question. Will it help or hinder the supply of land? And vote for the help against the hinder. 8
V ~~ ' "<'' '1 -- --- - ----.. J Q!JJEJEl\TSTOVVl~ lal<jes DISTRICT COU~JCIL -.. ~- --.-::-: ~ j UPN 130224 LOCAL GOVERNMENT ACT 2002 DEVELOPMENT CONTRIBUTION NOTICE (SUBDIVISION CONSENT) Resource Conseni: RM090321 - Remarl<ables Park Ltd Date: 20 October 2010 Site: Hawthorne Drive, Frankton, Queenstown Legal Description: Lot 5 DP 25644 & Lot 26 DP 304345 Lot 6, 27 DP 304345 Lot 1 08 DP 25645 Lot 109 DP 25645 Lot 7, 24, 25 DP 304345 & Lot 8 DP 386734 Lot 6 DP 25112 Lot 2 DP 25643 Description of proposal: The applicant has consent to subdivide 7 underlying titles into 83 lots, over 32 stages_ SUMMARY OF CONTRIBUTIONS: Stage Toi:al Contribution incl GST 1 $325,568.50 2 $1,856,428.86 3 $0.00 4 $612,866_79 5 $663,805_81 6 $0.00 7 $0.00 8 $137,528.03 9 $1,212,077.18 10 $314,179.21 11 $640,130.39 12 $663,941.47 13 $6,873,576.28 14 $6,605,888.88 c:======:j Lakes Environmental Limited, Private Bag 50077, Queenstown 9348, Tel 03-450 0300, Fax 03-442 4778
Stage To~al Contribution incl GST 15 $330,164.96 16 $540,637.56 17 $836,662.45 18 $1,404,544.29 19 $239,902.74 20 $495,467.58 21 $340,208.55 22 $267,398.23 23 $734,341.44 24 $956,125.27 25 $460,519.78 26 $1,297,962.61 27 $990,709.70 28 $960,538.53 29 $828,000.67 30 $659,967.61 31 $568,951.52 32 $411,285.30 The total contributions due for all 32 stages of development is $32,229,380.19 Please see the individual Development Contribution Notices issued for each stage of development for details, as enclosed. UPN 130224-2-
Developer Cash Flow - $000 26 lot residential sub-division 3,000 3,000 2,000 1,000 1,000 {1,000) {2,000) {3,000) 1 2 3 4 5 6 7 8 9 10 11 12 I I I ~ II ll II II ll II 20 22 23 24 25 26 27 28 29 i Development contributions paid before titles issue. I I I 36 (1,000) {3,000) (4,000) (5,000) {5,000) {6,000) {7,000) (7,000) -Cash Flow -cumulative Cash Flow
Example 3 Total Development Contributions Estimate Mixed Use- Commercial Visitor Accommodation (or apartment option) 2013/14 QLDC Policy, Actual GFA calculations Option A Option B Ground floor Retail, Ground floor Retail, 3 floors of Accommodation 2062m2 Accommodation, 1031 m2 Multi-unit residential Use type GFA $ GFA $ Commercial 1,031 67,835 1,031 67,835 Accommodation 3,093 676,780 2,062 452,291 Multi-unit residential 1,031 183,848 Total 4,124 $744,615 4,124 $703,974
Example 3 Option A- Commercial and VA only Commercial Accommodation Total GFA 1,031 3093 4,121 Water 7,190 23,032 30,222 Wastewater 1,253 93,981 95,234 Stormwater 0 0 0 Reserve 551 33,471 34,022 Improvements Community 1,445 87,812 89,257 Facilities Reserve Land 5,671 344,483 350,154 Transport 51,725 94,000 145,725 Total 67,835 676,780 $744,615 Option B - Commercial, VA and Residential Commercial Accommodation Multi Unit Total Residential GFA 1,031 2,062 1,031 4,121 Water 7,190 16,460 10,747 34,397 Wastewater 1,253 62,654 38,845 102,752 Stormwater 0 0 0 0 Reserve 551 22,314 8,540 31,405 Improvements Community 1,445 58,541 22,405 82,391 Facilities Reserve Land 5,671 229,655 87,893 323,219 Transport 51,725 62,667 15,418 129,810 Total 67,835 452,291 183,848 $703,974