Allowable Development Cost Charge Interest
Municipalities and regional districts may borrow to finance a project before receiving sufficient development cost charges. Local governments may include development cost charge interest when calculating a development cost charge. The Inspector of Municipalities will allow interest costs in exceptional circumstances only.
Borrowing may be necessary when infrastructure must be constructed and operational before sufficient funds have accumulated in the development cost charge reserve fund. Interest may be included in DCC calculations under certain circumstances when approved by the Inspector of Municipalities. Examples include:
- Fixed-capacity infrastructure: Infrastructure such as water treatment and/or sewage treatment plants that need to be constructed before development can occur.
- Out-of-sequence projects: Construction is brought forward from the timing set out in the development cost charge program to upgrade the main sewer or water trunk lines.
- Greenfield development: Greenfield developments that require infrastructure for areas that have no services.
A reliance on borrowing exposes the local government to financial risk. The inclusion of interest in development cost charge calculations mitigates this risk, however it does not eliminate the risk altogether.
Bylaw Review Requirements
A development cost charge bylaw cannot be adopted by a local government until it has been approved by the Inspector of Municipalities. If a a development cost charge bylaw includes interest costs in the charge calculation, the following information must be included when it is submitted for consideration by the Inspector:
- A council or board resolution to include allowable interest
- A clear indication that the development cost charge reserve fund for the works in question will be in a negative cash flow position and that borrowing is required
- Demonstration that this is an exceptional circumstance
- Confirmation that the amortization period for the borrowing does not exceed the development cost charge program time frame (in other words, the period of time over which the development cost charges for the specific projects are to be collected)
- Calculations showing that the interest rate applied to the development cost charges does not exceed the lesser of Municipal Finance Authority debenture rate for the amortization period or the actual rate paid by a developer.
- Evidence that the amendment has been disclosed to the public in the government's financial plan, financial statements and development cost charge report
It must be clear to the public and to developers when interest charges are included in the calculation of a development cost charge. The inclusion of interest must be disclosed in the required development cost charge report and reflected in the local government’s financial plan, long-term capital plans and the annual financial statements.
If a local government includes an interest component in the development cost charge calculation, then it must be applied to all development cost charges levied for that project. If development proceeds faster than planned and the borrowing is paid out early in relation to a project, the development cost charge will continue to include the interest element so as to ensure that all development, past and future, is charged on an equitable basis.
The allowable interest provision allows the local government to add an interest component to the development cost charge payable by the other developers. By including interest in the development cost charge calculations for the specific works, some of the debt servicing costs incurred by the front-ending developer are spread equitably over the developments that benefit from the works.
Local governments may want to consider creating area-based development cost charges that contain projects to which interest has been applied. This may increase the overall transparency of the approach, and will promote equity among developers who benefit from, and contribute to, the specific works.
Learn about the full range of influencing factors when local governments consider whether or not to front-end development cost charge funded infrastructure works: