Vacancy rebate program: Landlords say it’s fair, cities want it gone

For Ontario municipalities constantly looking to save money, the provincially-mandated commercial and industrial vacancy tax rebate has long been in its crosshairs.

Tapping into municipal coffers, the vacancy rebate program (VRP) offers commercial and industrial building owners a rebate on property taxes if the building is vacant for at least 90 days. The program is intended to help owners struggling to rent out space during rougher economic periods.

Municipal governments that have long bemoaned the program as overly burdensome on its finances and contributing to more empty storefronts were quick to move on plans to scrap the VRP when the provincial government signalled last year it would allow cities to decide what to do with it.

A vacant corner store, pictured above, stands on the corner of Gladstone Avenue. Landlords of vacant buildings such as this one have been eligible for the VRP since 2001. [Photo © Lindsay Campbell]

Hamilton, Windsor, Toronto and Ottawa currently have plans to drastically alter or scrap the program. These cities have lobbied the provincial government for years to change the VRP requirement, which was introduced in 2001 after building owners complained that changes to property tax rules in 1998 were unfair to them.

The issue is pitting city councillors against local building owners who believe the program helps struggling landlords and cite tax fairness as a reason for keeping it.

How it works in Ottawa and why it’s difficult to agree on the facts

Commercial building owners in Ottawa can fill out an application, and if approved, get 30 per cent of the amount they are supposed to pay in property tax returned. For industrial owners, the amount is 35 per cent.

In 2015, the latest year with available information from the municipal government, office vacancies in Ottawa rose from 11.3 per cent at the end of 2014 to 11.6 per cent by the end of 2015. Retail vacancies were up from 2.6 per cent to 4.6 per cent in the same period. Industrial vacancies also rose from 5.9 per cent to 7.1 per cent. Nine hundred and twenty applications were received by the city in 2015. According to the City of Ottawa, the rebate program cost the city $18.3 million that year in administration and reduction in tax revenue.

Currently, the City of Ottawa is conducting consultations with local business stakeholders with the intention to either phase out or scrap the plan entirely.

Using the city’s online property tax estimator, a commercial property assessed at $1 million would pay $26,535 in property taxes, of which roughly $8,000 could be rebated if the property is vacant for more than 90 days.

Such an example may be too simple since there are problems with getting property assessments accurate, according to Almos Tassonyi, an economist who spent 25 years working at the Ontario government on local taxation issues. Tassonyi says assessments sometimes poorly reflect the real value of properties because variables such as market value change frequently or are stated inaccurately.

“There may be some overstatement but there also may be some understatement,” he says, noting reassessment requests are common and that the effect of vacancy on value may not be considered immediately since assessments are periodic. Therefore, it is difficult to tell whether building owners get a break through the VRP and in property taxes if the vacancies are considered in the property assessment.

Tassonyi says measuring the overall success or failure of the program in helping promote business is difficult to track because of the lack of statistical evidence. He says the program may have helped some small landlords with cash flow issues or during tougher economic periods, although questions are left unanswered about the real economic benefit (or cost for city services) of the VRP and if it helps small store owners or big retail leasers like Cadillac-Fairview.

“I think the whole field is littered with empirical uncertainty,” Tassonyi says, adding that it would be a good topic for a future research paper.

Municipalities see the program contributing to empty storefronts

Critics of the program believe it is a disincentive for owners to more willingly seek out renters. A common argument is that property owners intentionally leave premises vacant to collect the rebate. Ottawa mayor Jim Watson has said the tax rebate is a reason for building owners to delay renovating their buildings, often in tougher economic times.

The result is a greater number of empty storefronts, according to Ottawa Coun. Mathieu Fleury, who represents the downtown Rideau-Vanier ward, which has the second highest number of vacancies in the city. He says that since there is no limit to the number of years building owners can participate in the VRP, there is less incentive to fix a property and rent it out.

“It’s like having Ontario Works the rest of your life without requirements,” Fleury says, referring to the province’s social assistance program. “It doesn’t make sense. There needs to be an endpoint to the program and it needs to be results-based.”

Building owners have responded in a position paper by saying the theory of landlords preferring to collect the vacancy rebate over renting out their property goes against economics 101. Landlords still pay two thirds of the regular tax burden for their vacant space.

“There’s no self-respecting landlord that wants their space empty,” says Dean Karakasis, executive director of the Building Owners and Managers’ Association of Ottawa. “There may be non-self-respecting landlords that are trying to take advantage of the system. No examples have been presented to us.”

Dean Karakasis, executive director of the Building Owners and Managers’ Association of Ottawa, above, says politicians are mischaracterizing the issue of vacancy. [Photo © Lindsay Campbell]

Karakasis says vacancies are instead overwhelmingly a result of local and wider economic factors that contribute to fluctuations in demand and supply for space.

Tassonyi agrees that landlords in general are not likely to intentionally keep properties vacant so that they can take advantage of the rebate, though he says there could be exceptions.

“I don’t think anyone’s trying to get this [tax credit] as a matter of a business practice. I think the nuance part of this is . . . what’s the business decision in making the property leasable,” he says. “Does this create some incentive at the margin to not move as quickly or as assiduously as you like?”

Pedestrians pass by neglected Somerset House on the corner of Bank Street and Somerset Avenue. According to program regulations, if a building’s condition deteriorates enough, the city can allow full or part of the structure to be torn down. [Photo © Lindsay Campbell

One example would be with derelict and vacant heritage buildings in which leaving the property empty and collect the rebate could be a better business decision than renovating or restoring it at a high cost to make it suitable for renting out. If the building’s condition deteriorates enough, the city can eventually order the structure or part of it to be torn down. This process is commonly known as demolition by neglect.

However, it can be financially risky to let the building deteriorate to the point of possible expropriation by a city or other means of getting the owner to pay for fixes or to sell it, according to Tassonyi.

“It’s more interesting to strike a deal and come up with a more interesting way of preserving the façade and building behind it,” he says.

Former city councillor Peter Hume said in 2013 that Ottawa could consider denying vacancy rebates for derelict properties to ensure building repairs were dealt with.

Building owners say it’s about history

Karakasis says critics of the VRP don’t understand the history of the program. Before property taxes were reformed in 1998, vacant commercial and industrial buildings paid lower taxes compared to occupied premises.

Owners of vacant buildings didn’t have to pay the business occupancy tax (BOT) and instead paid at 15 per cent lower than the commercial tax rate. After the BOT was scrapped, the VRP was brought in through the Municipal Act to mitigate the burden on building owners who now had to pay the regular property tax rate. Getting rid of the VRP would add back that burden, Karakasis says.

“This was created for a reason: to be fair,” he says, “Now it’s being categorized as a benefit or a subsidy.”

City coffers and the bigger picture

What is certain is that the VRP has gobbled up more and more of cities’ annual budgets. In 2009, the program cost Ottawa $9.2 million, including lost tax revenue and administration costs. In 2015, the cost almost doubled to $18.3 million. Toronto mayor John Tory, who is proposing scrapping the program entirely, said doing so would save the city roughly $22 million a year. Between 2001 and 2013, the city gave out $367 million in tax credits for the program.

Due to a limited number of revenue tools available to them, municipalities often face fiscal constraints. Cities deal with them by cutting costs by reducing services or – if politically feasible – levying new taxes or raising property taxes, the largest revenue stream for municipalities.

For a mid-sized city like Ottawa with a $3 billion operating budget, a deficit of a few million dollars could mean laying off city workers. The municipal government laid off 177 workers last year as a cost-cutting measure after it faced a $42 million deficit in 2015.

Tassonyi says the broader question of whether there should be lower municipal taxes or tax rebates should also consider its effect on necessary future investment in infrastructure.

“If we don’t invest in the infrastructure and if we don’t invest in this, then the opportunities for business and the resilience of the Canadian economy goes down.”