Now is the time to take some chances

AACI | Vice President, The Regional Group of Companies Inc.
  • May. 20, 2015


Ontario has become rather messy with derelict industrial corpses lying around.

John ClarkSeven years after the recession first hit, the once-mighty manufacturing engine of the nation’s economy is still sputtering along, a shadow of its former self. Shuttered factories are legion across the province.

This isn’t only the mega-factories typical of the auto industry, but smaller sites in many cities and towns.

Economists are less than enthusiastic about the odds of these sites becoming active again. In my recent piece on industrial policy, I touched on the economic and social impact of this dilemma at the local level. Young people with no local opportunity either leave or may slide into a less-productive future.

It helps to explain why Canada’s big six urban centres now boast such a large percentage of the country’s population, and much of the younger population.

What to do with these abandoned industrial sites and how to revive them is a conundrum that falls first on the shoulders of the local community. Even with a diligent owner who invests in proper security measures, these sites can quickly become an “attractive nuisance” that draws vandals, squatters, criminals or even kids whose curiosity is bound to put them at personal risk.

A headache for local residents

Abandoned properties can ultimately end up the responsibility of the local municipality. In situations where there is no user or buyer and previous ownership is gone, the now-abandoned building remains as a liability to the community. Even if the local municipality doesn’t seize the property for back taxes, it is, along with residents, left holding the bag.

Without another buyer or user, it just becomes an eyesore or hazard and an impediment to other development.

Even the cost of bulldozing the thing can be prohibitive if local market conditions don’t put enough value on the land.

There is a rough rule of thumb in Canada that a typical demolition will cost you about $10 per square foot per floor. For a five-storey building with a footprint of 10,000 square feet (so 50,000 square feet in total) on a 20,000-square-foot lot, the cost of demolition could be about $500,000, assuming there is no associated environmental contamination.

To break even, the land has to sell for at least $25 per square foot. That’s a price that may not be possible in a depressed market.

The much better alternative, of course, is to figure out a way to put that property back to work. This is where local government and the province need to engage in some creative thinking and look long term.

It’s not like there isn’t inspiration to be found by looking a little further south to America’s so-called Rust Belt.

Golden ideas from the Rust Belt

Take Allentown, Pa. The state has designated a 128-acre area of the city core a “neighbourhood improvement zone” or NIZ. For a 30-year period that began in 2009, the majority of taxes collected from residents will be reinvested in the form of debt-financing for developers to support redevelopment, make it possible to offer lower rents and attract young professionals to the area.

Allentown’s story (along with others that warrant careful consideration by politicians on this side of the border) was told in a great article by Adam Radwanski that ran in The Globe and Mail in January.

An idea Radwanski found south of the border was tax-increment financing, or TIF, in which local governments forfeit property tax gains in designated downtown zones from rising land values and direct them back into infrastructure. This is intended to encourage developers to make use of existing developed land rather than expanding outward.

But we don’t need to engage in a solution that is new and foreign to risk-averse politicians here. It’s already common in many Canadian municipalities, including Ottawa, to provide tax credits as an incentive to developers.

Think brown

I am talking about tax breaks that can be provided to encourage redevelopment of old industrial “brownfield” sites that are labelled as such because of contamination from past activities.

Brownfield tax credits encourage developers to invest in the cleanup and remediation of sites polluted with whatever manner of contaminants.

In small towns that once had vibrant industrial sectors, why not extend the same concept to any abandoned and idle industrial site? It doesn’t have to qualify as a brownfield site to serve as a new and relatively inexpensive enterprise zone.

It’s much more efficient and has less of a negative impact on the environment to repurpose existing real estate and municipal infrastructure while it is still salvageable. The alternative is the Detroit option where these older areas just get ploughed over and abandoned, possibly for good.

Take the long view

Politicians need to take the view that offering a tax incentive will pay off in spades in the long run if it attracts employers and creates a stable base of quality employment that drives up the local standard of living and local consumer spending.

Is this a gamble? Yes, but we have a history of taking risks. Almost 150 years ago, a small group of political leaders had the audacity to lay claim to the northern half of this continent. Not bad, eh!

With vision, nerve and the right due diligence, the risks are reasonable. If the status quo is sitting on derelict buildings that contribute nothing, not even property taxes, what is there to lose?

Encouraging entrepreneurship while providing reasonable regulation to minimize the risk of crooked behaviour can create some winners and weed out potential losers.

We should be focusing on how we can make towns and small cities across Canada more attractive to employers, not by targeting specific industry sectors with incentives, but by tackling what matters most to any employer: the basic costs of doing business.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more

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