January 19, 2022—Thoughts after attending the Mayor’s Zoom presentation about his ‘Making Home’ Initiative—trying to make Making Home work.
6 into 1 goes…just show me the numbers, please!
“Darn, I just can’t make the numbers work!” I exclaimed, throwing my pencil down as my son entered my study, my fancy name for a desk by a window in the basement.
“What can’t you make work?” he asked, a bit surprised at the vehemence of my reaction. It looked like I was doing some simple math, surely not something to get excited about.
“I attended the Mayor’s Making Home zoom presentation last night and I’m trying to make sense of the costs and benefits of what he’s proposing…and so far, I can’t.”
My son looked puzzled. “Didn’t the Mayor provide the numbers?”
“No,” I responded, “and his staff moderating the Zoom questions and answers (Q&A) did not pass through any questions about costs and benefits for homeowners or the city. I know because I asked two simple questions early on and they were never addressed.”
“Well,” he suggested after a short pause, “others in attendance must have asked practical questions around costs and benefits?”
“If they did,” I responded, “they never made it to the Mayor. And the way the Zoom session was monitored, I could only see other attendees’ questions after they had been answered. In other words, we only saw the questions that were answered, not those that weren’t. Very frustrating, with lots left unaddressed.”
“So what’s with the numbers?” he asked, changing the subject before I went on an ‘I hate Zoom’ rant.
“Well,” I answered as I laid out two hand written sheets in front of him, “the Making Home program is presented as a way for younger and less affluent folks to ‘get onto the property ladder,’ as the Mayor likes to say, and for older and more established Vancouverites to stay in their neighbourhoods while cashing in on their value in a way that allows, for example, younger family to live near them. In exchange for sharing the increase in value that comes with building up to six homes on a 33-foot lot like ours,” his eyebrows raised at that thought, “the homeowner gets to build way more than would otherwise be allowed, at least double what the maximum current zoning allows.”
“Sounds good so far, other than where do six homes go on this lot,” my son interjected. “What’s the issue?”
“The issue is that it makes no financial sense.” I laid two sheets of paper in front of him.
First cut at a pro forma for Making Home
“I used the Mayor’s own suggested starting points—an existing home worth $1.8 million (mainly land, a value about midway between east side and west side 33-foot lot properties), proposed for redevelopment into six homes of, say, 800-1,000 square feet (sf) each (I used an average of 900sf). I got estimated construction costs from the Altus Group 2021 Canadian Cost Guide. Altus is a major property valuer with offices all across Canada. I used the average of the cost range of prices for wood-frame with a partial underground parking garage. I didn’t update them to 2022 costs—my builder friends say my numbers look low, especially for a tight site, but I wanted to have solid numbers, so my pro forma is conservative—I’m trying to make this work, don’t want to inflate the costs.”
“Why the garage?” he asked.
“City staff seem determined to keep all parking onsite. A 33-foot lot is only wide enough for two surface parking spots plus recycling bins plus a ramp down to the other four spots. Actually, in this case I have to agree with them. I can’t see fitting six ground-oriented homes plus six surface parking spots on a 33-foot lot.”
“Maybe they should just reduce the parking requirement?” he suggested.
“You take that suggestion to the Engineering Department and see how it goes down.” I smiled, kept going.
“No surprise, half the basic costs are in the land,” I started, but he interrupted.
“You’re going to have to walk me through some of these line items, starting with Fees and Permits.”
“Fair enough,” I responded. “Fees and permits are all the things the regulators add on—development and building permits, trade permits, sewer and water connection fees and a few others I’ve already forgotten—they’re buried in various documents in various departments. I think I found them all.” He could hear my gentle exasperation.
“Seems a lot, but what’s the $100,000 in design fees?” came next.
“That’s 7% of the construction costs, my allocation for architects and engineers—turns out I’m probably light on that.”
“What are the numbers below the subtotal line?” came next.
“Two interesting numbers folks often forget about,” I continued. “As these are private developments, someone will need to borrow money to cover costs until sales. The Mayor says this can be up and running in a year, three months for design and permitting, nine months for construction. Setting aside the extreme optimism of that timeline, the $83,800 is what’s needed to finance the subtotal costs for one year at current prime rate, 2.45%.”
“But I’ve been reading prime is about to go up!” he interjected. I was impressed he was paying attention to that kind of news.
“So my 2.45% is also conservative, meaning I’m trying to make this work so ignoring possible upticks in finance costs.” He looked skeptical but I kept going.
“DCLs are one of the costs of development in Vancouver, and many other cities in BC—stands for Development Cost Levies. Vancouver has DCLs for TransLink, for Greater Vancouver sewerage infrastructure and, well, just for revenue for the city to supposedly cover knock-on development costs such as for new schools, roads, parks, etc.”
“Finally, every project has risks and unknowns, what are called contingencies. 10% is actually a fairly conservative dollar figure for all the things that could cost more.”
“So what’s the bottom line,” he asked with a smile, using one of my favourite terms.
“Well,” I responded, “you can see the average home cost is $658,000, or $730+ per square foot.”
“So that’s what these homes would need to sell for to break even?” he asked. “In Vancouver’s market that may be seen as a bargain!”
“I wish it were that affordable,” I answered. “The Mayor kept on and on about the city sharing in the increase in land value resulting from six new homes versus one old—without any numbers, the implication was that the profit resulting from this mini-redevelopment would be shared between the city and the original owner, with the city’s portion going to improved amenities such as childcare and libraries.”
“So then,” my son chimed in, “the $658,000 per home is NOT what the five new homeowners would be paying?”
“Correct, and it unfortunately gets worse,” I continued. “I was worried my cost figures might be challenged, so I found a recent BC Housing Management Commission (BCHMC) spreadsheet that’s their pro forma for developing social housing in Vancouver, arguably modest rather than luxurious:”
Another Making Home pro forma based on BCHMC data
“Wait a minute!” he jumped right in. “This indicates that for more modest housing, the costs are actually higher than your first pro forma! What’s going on?”
“At the very bottom I’ve added a line called CACs. That stands for Community Amenity Contributions, which is a developer’s contribution for broader uses, such as the Mayor’s suggestion that part of the increased value of a project as a result of the redevelopment goes to broader uses such as funding below market rental housing elsewhere in the city. The Mayor was vague about how the land value increase would be calculated or shared, so I used the city’s existing CAC formula—I’m guessing the city would have a hard time justifying more than what they charge a conventional developer, but I could be wrong.”
“I see some of the other costs are also higher,” noted my son. “What’s going on there?”
“Very observant,” I replied. “I used BCHMC’s percentages for a comparable wood frame project in Vancouver. Their allowance for fees is higher—I like that—I guess that’s their experience working in Vancouver. That together with the CACs and a couple other tweaks increases the cost of each home by $80,000 for a total average of $738,000 cost, or $820 per square foot.”
“That’s still cheaper than many newer condos in the city,” he responded.
“Yes, except you’ve not noticed that’s just the development costs—there’s no profit for the original homeowner for the risks associated with development, for the time they are out of their original home while redevelopment is proceeding, for the increase in the value of the land, what the Mayor calls land lift and wants a piece of, etc. And if a homeowner hired someone to manage this for them, they would expect a significant fee. When you add in a reasonable developer profit/project manager fee (20%), then that $658,000 home has blown through $738,000 to become a $885,000 home, basically $1,000 per square foot. And that’s with modest finishes, last year’s construction costs and low interest rates.”
“So much for affordability,” he answered after a few moments thought. “Why do you think he’s proposed Making Home, when you can buy a condo apartment in Vancouver for $760,000, a townhouse for $1 million?” I was impressed he was tracking current prices so closely, although a bit worried that research meant he was going to hit me up for a massive downpayment loan of money I don’t have.
“As to why the Mayor has proposed a questionable scheme such as Making Home, with so few details provided yet going for City Council approval next week? If I were a cynic I would suggest that the timing means home affordability can be promoted but no details will be understood until after the next city election, by which time it will be too late.”
“Too late for what?” my son asked.
“Too late to address Vancouver’s real home affordability issues unless there is the leadership to make the real changes needed in the city.”
This is the first part of City Conversations about affordable home ownership in Vancouver.
Brian Palmquist is a fully vaccinated Vancouver-based architect, building envelope and building code consultant and LEED Accredited Professional (the first green building system). He is semi-retired for the moment, still teaching and writing, so not beholden to any client or city hall. These conversations mix real discussion with research and observations based on a 40+ year career including the planning, design and construction of almost every type and scale of project. He is the author of the Amazon best seller “An Architect’s Guide to Construction.” He is also a member of team for a livable Vancouver, a new political party dedicated to restoring a livable Vancouver starting with the 2022 civic election.
I was at the webinar as well. If you can get six homes on a 50-foot lot, about 1000 square feet each, I think the market price would be comparable to a townhouse (i.e. about $1M). As I understand it, the builder can either (1) make two of the homes permanently affordable at a lower price, or (2) just pay a fixed fee to the city (CAC) that then goes into paying for social housing and/or local infrastructure. You can find some pro formas in this report from Small Housing BC: http://www.smallhousingbc.org/wp-content/uploads/2019/03/PAH-report_final.pdf
Just completed an infill. While your totals are about right, some adjustments. Design fees can be done for 1/2 of that. Construction costs are 30-50% higher. City fees are triple yours. Finance costs are much higher without full collateral. CACs, well they told me they would "probably" be waived. They were imposed anyway. Then there's all the extraneous costs, new underground hydro service, sewer rebuild with separations (pray that you can do gravity), water was free but now meters, and timing - good luck with that. 3 years, not 3 months for permitting, 18 months not 9 months for construction, if you're lucky. Any change, any question, can add months of resubmissions, rechecking each department etc. I could write a book. And code requirements. Don't get me started.