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By Andrew Prior, Senior Director, Property Tax | October 15, 2020

COVID-19 impacts construction schedules, productivity, costs

With pent-up demand in numerous asset classes, the development sector is emerging from the COVID-19 crisis in relatively good shape. Current and projected construction starts provide insight into the effects of the pandemic.

Developments across most of Canada are continuing, albeit at  slower pace. We don’t yet know the mid-term to long-term impact of delays, extra costs or immigration deceleration. What we do know is that purposefully managing property taxes can mitigate bottom line risks.

Andrew Prior

Senior Director, Property Tax, Altus Group

National market activity

Delayed schedules, reduced productivity

During the first month that COVID-19 impacts were felt in Canada, the initial general loss of productivity was 40-50% as construction companies tried to make working conditions safe. By June, most developers were running at 75% to 90% productivity, still needing schedule extensions to deal with distancing requirements.

Escalating costs

From March through June, costs increased for general conditions of all assets. ICI projects also experienced formal delay claims and change orders. As well, there were still labour shortages because of workers and their families at higher risk for COVID-19. From July into September, there were more formal claims on ICI projects and these, along with change orders, permeated residential projects. Productivity issues are now filtering into trade bids.

Cost increases for general conditions of all assets continue. The supply chain should begin to even out over the mid to longer term, depending on the status of shipping. Meanwhile, the US exchange rate is impacting equipment and materials.

Moderating the impact of property tax on the bottom line

For most developers, property tax is a direct carrying cost, with minimal to no flow-through to tenants. This often represents a major expense – and one that should be carefully managed to maintain it at the lowest possible level.

Monitor key changes to the property through the development process

A typical timeline to hold interests in a property for development is in the range of seven to 10 years. During this period, developers should review the development status onsite annually to assess what may have changed. Potential opportunities for tax relief differ among provinces as well as municipalities. For example, upon a change in use of a property, there can be a change in the tax class assigned. In Ontario, the tax class is based on the use of a property and, upon the start of demolition of a commercial building for instance, the property owner can apply to have the tax class changed. Changing the class results in a change in the mill rate and the tax rate that is applied. The difference can be sizable. If the tax rate on a commercial property worth $10 million is 2% and the tax class is changed to a residential rate of 1%, the savings are apparent.

To benefit from these opportunities, be sure to track development timelines and key dates such as cessation of operations, start of demolition and first occupancy.

Review the property tax assessment for equity and fairness

Since development properties vary so widely in current and future uses, inequitable assessments are not unusual. Several municipalities and provinces incorporate an equity provision to ensure development properties are assessed and taxed fairly in relation to similar sites. By comparing similar properties and their assessments, you can determine if your property assessment is equitable and fair.

Ensure pro forma accurately reflects taxes

To ensure accurate projection of a project’s anticipated profits, when updating a pro forma during the transition between pre-construction and construction, it’s important to determine specifically what property taxes will be and when.

Looking forward: Pent-up demand may push through pandemic tumult

So far, discounts on land value are not arising – although there are three ways the pandemic could impact future value.

Extra costs incurred in response to COVID-19

Should health and safety requirements continue to escalate expenses – these could reach a ceiling that drive values down.

Delays

Should construction projects continue to face disruptions to supply chains, worksite adjustments for COVID-19 protocols and slow processing of planning and building applications, more projects will have start delays. Into 2021 there will likely be more delay claims and change orders among residential assets. As trades and general contractors begin to better understand the impact of the pandemic, there will be productivity increases in division 1 and longer duration of projects. At the same time, there’s higher risk of trade defaults and developments facing potential receivership.

Slower immigration

Immigration fuels construction activity. If the immigration slowdown1 continues, this will have longterm impacts on development across the country. Most immigrants settle in Toronto, Vancouver, Montreal and Calgary. These areas experienced a 60% slowdown in immigration in March/April year over year.

Managing Property Taxes Through a Pandemic report cover

Manage the property taxes for all of your assets, through the pandemic

To help you closely align property tax mitigation strategies with the current marketplace, this white paper presents a current picture of the challenges facing nine distinct asset classes in the time of COVID-19, along with steps to mitigate the impact of this consequential expense.

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