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Allowable Interest for Development Cost Charges
Since May of 2004, local governments have been able to include interest
costs when calculating a development cost charge in exceptional circumstances
where borrowing is required to finance infrastructure works.
The Inspector of Municipalities will consider allowing interest costs in exceptional circumstances only. Each of the three circumstances identified below necessitates the construction of specific infrastructure projects in advance of a local government receiving sufficient money from DCC's to finance a project in order to trigger investment in development.
- Fixed-capacity infrastructure, such as water treatment and/or sewage treatment plants. These facilities may need to be constructed before growth can occur, and before adequate development cost charges can be collected to finance them.
- Out-of-sequence projects, such as upgrading the main sewer or water trunk lines, where construction is brought forward from the timing set out in the DCC program.
- Greenfield, which is usually providing infrastructure to areas that have no services, so growth can occur.
In these circumstances, local governments or developers will need
to front-end the cost of the specific growth-related projects, and
recover their costs through DCCs as growth occurs. This, in some
cases, will necessitate either the local government or the developer
paying interest charges on the capital costs advanced. Interest
costs may only be included in those circumstances where payment of
interest is required.
The method by which a local government can forward DCC funds
to the front-ending developer is a "DCC Front-Ender Agreement." This
agreement is a legal contract between the local government and the
developer. It states that the local government will pass on all DCC
funds related to the specific works to the developer that front-ends the
cost of those works. The allowable interest provision allows the
local government to add an interest component to the DCC
payable by the other developers. By including interest in the DCC
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.
Conditions which apply
To include interest charges for the calculation of DCC's in exceptional circumstances, the following is required:- a council/board resolution to include allowable interest;
- a DCC bylaw to include the specific interest charges;
- confirmation that the interest rate applied to the DCCs does not exceed the MFA debenture rate (regardless of the amount of interest that developers pay on the front-ending);
- if borrowing is undertaken, the DCC should reflect the actual borrowing rate (not a projected rate) if this is less than the MFA rate;
- confirmation that the amortization period for the interest costs does not exceed the DCC program time frame (i.e., the period of time over which the DCCs for the specific projects are to be collected); and
- approval of the DCC bylaw by the Inspector of Municipalities.
It should be clear to the public and to developers when interest
charges are included in the calculation of a DCC. This interest
should be disclosed in the DCC report required by Section 934 of the
Local Government Act 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 DCC calculation,
then it should be applied to all DCCs levied for that project. If development
proceeds faster than planned and the borrowing is paid out early in relation to
a project, the DCC should continue to include the interest element so as to ensure
that all development, past and future, is charged on an equitable basis.
Approval of DCC Bylaws
A DCC bylaw cannot be adopted by a local government unless it has been approved by the Inspector of Municipalities. When a DCC bylaw is submitted to the Ministry for consideration by the Inspector, the following information will need to accompany the bylaw:- a clear indication that the DCC reserve fund for the works in question is in a negative cash flow position and that borrowing is required;
- demonstration that this is an exceptional circumstance;
- details of the interest rate and amortization period; and
- evidence that the amendment has been disclosed to the public in the government's financial plan, financial statements and DCC report.
Additional Comments
A local government's DCC program should be established in a way that limits the need for borrowing to exceptional cases where the application of interest may be contemplated. The ability to add interest in certain cases should not be the deciding factor in a local government's decision to agree to front-end, out-of-sequence and greenfield infrastructure costs. A reliance on front-ending exposes the local government to financial risk. The application of interest mitigates this risk, but does not eliminate it altogether.Local governments may want to consider creating DCC sectors and
sector-specific DCC reserves to isolate projects to which interest
has been applied. The use of such sectors and associated reserves
will increase the overall transparency of the approach, and will
promote equity among developers who benefit from, and contribute to,
the specific works.
The Development Finance Choices Guide 
(580 KB) (Chapter 4) discusses the full range of influencing factors when local
governments consider whether or not to front-end DCC funded infrastructure works.
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