Skepticism Around Vancouver’s Multiplex Zoning Plan: Is It Really Worth It?
Vancouver’s new multiplex zoning laws are being promoted as a way to address the city’s notorious housing affordability issues. By allowing multiplex developments on single-family lots, the goal is to increase housing options while maintaining the character of established neighbourhoods. But from a homeowner’s or developer’s perspective, the financial viability of these projects may not be as promising as it seems. While the idea of converting single-family lots into multiplexes may sound attractive on paper, the reality is far more complicated and expensive, and there is a better alternative for homeowners considering developing a multiplex.
What is a Multiplex?
A multiplex is a residential building containing two to eight units, positioned as a middle-ground solution between high-density apartment buildings and detached single-family homes. Vancouver’s recent zoning changes allow up to six strata units or eight secured rental units on single-family lots, supposedly providing more affordable housing options. However, this doesn’t account for the significant costs, taxes and financial risks involved in such developments, which leaves homeowners and developers wondering if this strategy is really worth pursuing.
Zoning and Sustainability Requirements: Is 1.0 FAR Enough?
The city’s zoning regulations allow a 1.0 Floor Area Ratio (FAR) for new build multiplexes (compared to 0.6 FAR for a single family home), meaning the total buildable area can be equal to the square footage of the lot. For a standard Vancouver lot of 33’ x 122’, that means a maximum of 4,026 square feet of buildable space for a multiplex. However, once you account for setbacks, height restrictions, and parking requirements, the actual usable space may be considerably less.
Additionally, construction costs for a multiplex are notably higher than for a standard custom home. On average, the cost of building a custom single family home in Vancouver ranges from $350 to $450 per sqft. A multiplex, however, requires more complicated plumbing, electrical, sprinklers and firestopping between units, increasing costs to between $400 to $500 per square foot, meaning that a 4,000-square-foot multiplex would cost between $1.6 million and $2 million to build. These figures don’t include financing costs, legal fees, or taxes, which all add up quickly.
Financial Realities for Homeowners: Does It Make Sense To Develop Your Property Into A Multiplex?
Let’s say your principle residence or rental property is on a standard Vancouver lot (33' x 120') and is currently valued at $2.8 million. Borrowing against that equity to finance a four-unit multiplex could cost you $1.6 million to $2 million for construction alone (with development cost levies considered). If you decide to sell all four units for $1.15 million each, you would generate $4.6 million in revenue. After subtracting the construction costs, your profit would range from $2.75 million to $3.15 million—before taxes. On the surface, that may seem like a great outcome than simply selling your property, but, we then have to consider taxes.
Taxes... ugh... this is where things get tricky.
- Developing your property into a multiplex: The development of any property, whether it is your principle residence or a rental property, falls under the CRA rules for subdividing a property. Thus, any profit generated from the subdivision of a property that is not sold to a family member or common-law partner will be taxed as "business income". Let's say that your net profit was $2.95 million on a four-unit multiplex development, if you were taxed 40%, you’d owe roughly $1.18 million in taxes, leaving you with around $1.77 million net cash. While that may seem like a decent return, consider what simply selling your property for $2.8 million would net you.
- Selling a rental property: Let's say that you own a rental income property worth $2.8 million. The rental income property, you purchased for $400,000, that leaves you with a $2.4 million capital gain on your property. Capital gains tax applies to only 50% of that capital gain. The calculation goes like this, $2.4 million * 50% taxable capital gain x 40% business income tax = $480,000. $2.8 million - $480,000 = $2.32 million net cash, $550,000 more than if you developed a multiplex. Even when you consider realtor, legal and moving fees, maybe $100k, you're still way ahead of the game by selling rather than developing that property.
- Selling your principle residence: There's no point in dissecting the financials of developing your principle residence into a multiplex, as you would qualify for the principle residence tax exemption (PRE) on that property. On the sale of your principle residence, you'd net the entire $2.8 million if you sold it (unless you rented it out for a period, which requires some additional tax math, but you'd still be WAY ahead), thus it makes absolutely no sense to develop your principle residence into a multiplex as simpky selling your property would net you just over $1 million more than if you developed your principle residence into a multiplex.
From a Developer’s Point of View: Margins Are Slim To None
For developers, the situation is even worse. If a developer buys a property for $2.8 million and spends another $1.6 million to $2 million on construction (with development cost levies considered), they’ll be into the project for $4.4 million (best case) to $4.8 million (nominal case). Selling four units at $1.15 million only generates a $200k profit in a best case scenario and leave the project with a debt of -$200k in a nominal case scenario. Development projects cannot go bankrupt in a nominal case scenario; the banks won't finance them, and all developers rely on the banks for financing.
The average developer aims for at least a 10-15% profit margin on any project to justify the risks involved. In this best case scenario, the margin is razor-thin and if the project performs nominally, it's bankrupt, and that’s before accounting for unpredictable market fluctuations and construction delays.
It has been suggested that developers could make multiplexes work by potentially building multiple multiplex sites at once. The idea is that by running multiple sites, economies of scale would come into play making the margins attractive for developers. For example, the cost to have a framing company build one fourplex vs ten fourplexes should be lower... right? Certainly there will be some savings by buying lumber in bulk. However, shipping ten deliveries to ten different addresses to a crew running around to ten different sites to receive them will likely cost more than any savings achieved by the bulk purchase. It is also argued that the same crew operating across ten buildings should also increase productivity and reduce errors, however, moving crews between ten different sites, heading back to sites to fix deficiencies and dealing with ten independent city inspections will more than offset those productivity and reduced error savings. The more likely scenario is that constructing ten buildings with 40 units spread across them, will increase permit administration, financial administration, shipping costs, labour and management costs thus making the cost to build per sqft at least 10 to 15% higher than constructing a single site 40 unit building.
For developers, the financial returns on building these multiplex projects simply do not exist.
Streamlined Permits: A Promise That Aims To Reduce Interest Carrying Costs... But Will It?
The city has promised a new building development permit process by 2025, aimed at streamlining approval times for multiplexes and other housing projects. One of the goals by implementing this expedited permitting process is to reduce the developers interest carrying cost on payments to the bank while they are waiting for permits to be issued. While this will save the developer some money, the profit will still fall far short than the 10~15% profit they command on a typical single building 40 unit structure with interest carrying costs considered.
Given the city's complex bureaucratic systems, overregulation, risk aversion, poor history of innovation implementation and the fear of changing anything that jeopardizes city workers job security, I have little to no hope that this goal will come to fruition. Even if these improvements come to pass, the permitting process will remain cumbersome, and there’s no guarantee that timelines will be "drastically shortened". In a city known for its complicated building codes and lengthy approval periods, relying on this system to cut down costs and time seems like optimistic political rhetoric at best.
Conclusion: The City’s Plan Doesn't Add Up
Vancouver’s multiplex zoning plan offers a glimmer of hope for addressing housing affordability, but it falls short when viewed through a investment return lens. Homeowners will find that the costs of construction, taxes, and financing eat into their profits far more than expected. Developers, too, are likely to see slim margins on individual or multiple tandem projects, making this type of development a dead-end.
If the city was truly serious about addressing the missing housing middle, they would create a market environment that would attract developers into the space to take on smaller less risky projects with the same margins as larger projects. Until then, the risk and reward equation for the cities proposed multiplex developments simply doesn't add up.