Why understanding Developer Contributions is crucial - ASAP Finance Ltd

Why understanding Developer Contributions is crucial

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A key but often underestimated consideration for developers is the importance of taking into account the costs of Development Contributions (DCs). These costs are confirmed by council after lodging for Resource Consent; but getting a handle on what these costs will be prior to lodging for resource consent is key to understanding the profitability of your project. Furthermore, for land bankers, understanding future DC policy may significantly change your strategy as to how and when you lodge for consent.

DC’s are levies imposed by councils on a developer and are raised as contribution toward the cost required to upgrade and maintain infrastructure within a designated area. The size of these costs can vary according to the infrastructure requirements of the area, as well as the type and size of the proposed development being carried out (measured by the increased number of residential dwellings or Household Unit Equivalents — HUEs).

In Auckland, developers looking to complete a subdivision typically incur DC’s of between $27,000 – $33,000 per lot, depending on location and infrastructure demands in the area. This is in addition to paying for private infrastructure works within their subdivision which are funded by the developer and is commonplace in any resource consent.

In contrast, Levin, governed by the Horowhenua District Council, has no DC’s. Instead all infrastructure costs are effectively subsidised by rate payers. A strategy which was adopted to incentivise development in the area.

The purpose of DCs is to recover from developers a fair, equitable, and proportionate part of the total cost of capital expenditure necessary to service growth over the long term. So the standard approach whereby councils’ charge DC’s (as a percentage of total cost) isn’t altogether wrong. But how this is implemented can have a drastic impact on the supply of new sections.

Simply increasing DCs to a level that fully recovers costs could have serious consequences for home buyers, as developers can simply add it onto their section price, pushing house prices further out of reach.

Councils generally bank on the developer being willing to wear the cost or pass it on to the landowner or the housebuyer. But economists have argued with house prices at maximum affordability levels, developers won’t be able to keep passing these costs on to buyers. Instead, they will be building the cost of DCs into their feasibility studies, causing them to pay less for developable land in order to maintain margin. This will result in lower profits for the existing landowners, rather than increased house prices for the final buyers.

For developers buying bare land, increases to DC levies pose a significant risk. For example, between 2016/7 and 2019/20, DCs for Rotokauri catchment in Hamilton increased from approximately $30,000 for a standard resident lot, to $70,000 – a 130% increase. To put that into context, a small 20 Lot subdivision that would incur DCs of $600,000 in 2016/7, would cost $1,400,000 today. It is easy to see how this can quickly make any development unfeasible.

And remember that DCs can rise during the course of a four- or five-year project. For land bankers, understanding current and future policy is key. At ASAP, we accelerated a joint venture development in Hamilton in order to lock in lower DC’s that were about to be raised by the local council. This made sense as we were intending on starting works on the subdivision within the 5-year time restriction often imposed on resource consents.

For developers buying unconsented land, our message is clear – build in appropriate allowance for DCs and allow for unforeseen increases in cost that may arise as a result of council changing the DC policy.

Written by Ben Friedlander

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