Guidance on Development Contributions
Guidance on Development Contributions
Tuesday 14 September, 2021
New Zealand’s current housing shortage has demonstrated that New Zealand urgently needs to build more houses. However, new developments can create challenges for councils, as they need to put infrastructure in place to accommodate these new developments. The problem is exacerbated for greenfields developments, where there is no existing infrastructure at all. Councils fund development infrastructure through a variety of sources, including by requiring developers to pay contributions towards new infrastructure as a requirement of obtaining resource or building consent.
Development contributions enable councils to obtain funding for infrastructure even where the infrastructure serves several different developments to varying extents or needs to be constructed before any development has taken place. The Local Government Act 2002 gives councils the power to charge development contributions and requires them to have a Development Contributions Policy (DCP) in place to provide certainty about sources and levels of funding. In simple terms, a council’s DC policy sets out:
- the projects the council expects to undertake to cater for growth;
- how the council has calculated the share of costs to be borne by the development community (as opposed to ratepayers generally); and
- how the council then allocates those costs between individual developments.
These are complex questions, requiring different groups’ interests to be taken into account, and it is unsurprising that DCPs are often controversial. Councils and developers will therefore welcome the High Court’s recent decision in AGPAC Limited and others v Hamilton City Council  NZHC 222 —the first major substantive decision on development contributions since 2008, which will provide valuable guidance on the several key issues facing councils and developers.
The case arose from a judicial review by a group of 19 developers against the Hamilton City Council, challenging its DCP on 17 different grounds. HCC was successful on all grounds. Here are some of the key takeaways from the decision:
Approach to review
Different challenges required different approaches to review. Some involved pure questions of compliance with the LGA. Others involved policy judgements by HCC. The Court confirmed that the LGA framework leaves room for policy judgements:
However… the threshold requirements are met, Neil Construction and the concepts in ss 197AA and 197AB, including fairness, equity and proportionality, require (and leave room for) policy judgements to be exercised when preparing a development contributions policy. Those policy judgements include the proportion of capital expenditure on growth assets that is to be borne by way of development contributions, and how development contributions are to be allocated. The statutory purpose and principles that must be taken into account when preparing a development contributions policy are not to be converted into a test against which individual development contributions subsequently charged are measured based on information then known.
Development contribution remission and materiality
HCC charges development contributions for commercial and industrial development based on average demand for infrastructure and allows developers to apply for remission if “actual” demand for infrastructure (or “site-calculated” demand- recognising that this was still an assumed demand) is less than the average demand and a developer can show that this lower demand has a material impact on the capacity on the infrastructure network. The Court held that the principle against over-recovery in s 197AB(b) was concerned with over-recovery in the aggregate and does not require DCs and remissions to be assessed on the basis of ‘actual” demand. HCC was entitled to take into account whether the lower site demand had any impact on the infrastructure required to service growth.
Site credits instead of refunds
HCC’s policies required payment of development contributions when resource consent was granted, which can be before the full type and scale of developments are known. These contributions result in site credits, which are then used for site development when the developer applies for building consents. If the development has lower demand than anticipated at resource consent stage, HCC does not refund the overpaid contributions, but allowed these to be retained as credits towards any future development on the site. By the time of hearing, HCC had removed the no refunds rule from the policy. The Court held that it was consistent with the Act for HCC to give site credits instead of refunds, but that a blanket no refund policy was problematic.
Low demand and growth infrastructure
Before a council can charge a development contribution, the development must have the effect of requiring new or additional assets or assets of increased capacity, resulting in capital expenditure on infrastructure. The developers argued that certain specific developments did not place demand on specific infrastructure and those developments should only have to contribute to infrastructure they required. If a development generates demand on infrastructure, then a development contribution can be charged, even if the demand will be low. Councils do not need to isolate the specific infrastructure components that will be directly affected by the development.
A similar principle also applied to the developers’ challenge to HCC’s inclusion of canopies in the gross floor area (GFA) (which determines the level of development contributions charged to a commercial development). HCC’s policy includes canopies in the GFA when calculating the amount of the development contribution, but HCC had also developed a practice of excluding canopies if they are incidental and do not extend the principal economic activity of the development. The Court accepted that GFA was a proxy measure of demand and that it was the development as a whole that needed to generate demand for infrastructure, not each specific component. The Court concluded that there were a range of options for defining GFA and held that including canopies in GFA was not precluded by the Act and would not lead to over-recovery. However, the Court considered that the DCP policy should be transparent about when canopies will be included and on what basis.
Allocating costs to catchments and projects outside catchment areas
DCPs require strategic decision-making around how to fund infrastructure (between developers and the general body of ratepayers and then between developers in different areas). In their DCPs, councils can allocate the costs of some capital expenditure projects on a citywide basis, others to an identified smaller catchment area, and others apportioned between the two. The Court’s decision confirmed that councils can allocate catchment area costs across the catchment, not just to developers whose land connects with a particular project.
If a project benefits a catchment area, the project does not have to be physically located within that catchment, provided that the development generates demand for the project.
Roading and arterial roads
HCC’s policy split costs for roading projects between a catchment area and the citywide catchment based on expert advice about which areas generate demand for the roads. The Court upheld this approach and confirmed that allocating part of the cost of an arterial road to a growth area is not double counting for that area, as the costs are apportioned between the growth area and citywide.
Charging for intangible assets
HCC includes certain intangible assets in its schedule of assets for development contributions, including a transport model, wastewater master plan, and studies and plans on its stormwater catchment networks, which it is required to have under its stormwater discharge consent. Development charges are calculated based on the assets included in the schedule. The Court accepted the plain meaning of infrastructure was not limited to physical assets and that the intangible assets were part of the cost of providing infrastructure and could be included in its Schedule of Assets. The models or concept designs are necessary “building blocks” to the provision and development of infrastructure and the cost of network infrastructure is not limited to physical construction costs.
Litigation and Dispute Resolution Partner, Kate Cornegé, was co-counsel and successfully represented Hamilton City Council. If you have any questions about how this decision might affect you, Kate and our other local government experts can help.