The Edmonton Disadvantage

Yes, we know property tax is not the most exciting topic.

But if you own your own property (whether it’s commercial or residential) you probably got your tax notice in the mail this week.  And if you’re a tenant, you’re going to hear about the change to your operating costs soon enough.

In short, property taxes affect every single business and property owner, so it’s a topic we write about often.

Last week we addressed how needlessly complicated property taxes are, and this week we’re addressing how Edmonton has dug itself a huge hole on the tax front.  We get into a bit of math, but stick with us here, this is equal parts fascinating and frustrating.

Now as a quick refresher, the assessed value of your property multiplied by the tax rate (sometimes called a mill rate) yields the amount you pay in property taxes.

As an example, let’s assume an industrial property in Edmonton was assessed for $1,000,000.  At the current non-residential tax rate of 0.0218496, the 2019 tax bill would be calculated as follows:

$1,000,000 x 0.0218496 = $21,849.60

Now let’s compare that to an identically assessed industrial property in Nisku, where the current non-residential tax rate is 0.010737:

$1,000,000 * 0.010737 = $10,737

Notwithstanding the fact that Edmonton’s non-residential property tax rate is more than double what it is in Leduc County, there is another problem at play.

When the City of Edmonton passes a budget that calls for a 2.6% increase (2.7% when you factor in the education tax), this increase has a larger effect simply because the base number it is being applied to is larger than Leduc County’s base number.

To elaborate, let’s assume that the assessed values remain the same next year but both municipalities see a 2.6% increase in the non-residential tax rate:

Edmonton: $1,000,000 * (0.0218496 + 2.6%) = $22,417.69, which is a $622.09 increase.

Leduc County: $1,000,000 * (0.010737 * 2.6%) = $11,016.16, which is a $279.16 increase.

Stated another way, a 2.6% increase places a higher burden on an Edmonton property owner (and corresponding business) much more than Leduc County and other surrounding municipalities.

And this problem looks even worse when we extrapolate it over time.  Let’s take two scenarios comparing Edmonton with Leduc County to illustrate this further.

In scenario #1, we will assume that there is no increase in property assessments from now until 2030.  We also assume that there is a constant 2.6% yearly increase in property taxes (which in itself is very generous considering the rampant increases year-over-year).  This is based on a hypothetical $1,000,000 property and shows what the corresponding annual tax bill would be based on a 2.6% increase each year.

YearEdmontonLeduc County
2019$21,850$10,737
2020$22,418$11,016
2021$23,001$11,303
2022$23,599$11,596
2023$24,212$11,898
2024$24,842$12,207
2025$25,488$12,525
2026$26,150$12,850
2027$26,830$13,184
2028$27,528$13,527
2029$28,243$13,879
2030$28,978$14,240

You’ll see that over the next 11 years, a $1,000,000 property owner in Edmonton (that does not have any increase in property value) would see property taxes increase over $7,000 per year, whereas a similar property owner in Leduc County would see a $3,500 per year increase.

This problem gets even worse when we factor in appreciation of the properties.  Using 1.5% (which should be a conservative estimate of CPI), here is how the increases could look until 2030:

YearAssessmentEdmontonLeduc County
2019$1,000,000$21,850$10,737
2020$1,015,000$22,754$11,181
2021$1,030,225$23,696$11,637
2022$1,045,678$24,677$12,103
2023$1,061,364$25,698$12,581
2024$1,077,284$26,762$13,070
2025$1,093,443$27,869$13,572
2026$1,109,845$29,023$14,085
2027$1,126,493$30,224$14,611
2028$1,143,390$31,475$15,149
2029$1,160,541$32,778$15,701
2030$1,177,949$34,134$16,265

Assuming a 1.5% yearly increase in property assessments and a 2.6% increase in taxes, an owner of a $1,000,000 property in Edmonton today would see a $12,000 yearly increase in taxes, versus a $5,500 yearly increase in Leduc County.

So what does all this mean?

We have three general observations:

1.  The City of Edmonton has an out of control spending problem.  And unlike every business and home owner that have to spend within a budget, the City of Edmonton continues to spend with reckless abandon and subsequently passing the increases onto businesses and home owners.

2. If the City of Edmonton cannot get costs under control, businesses and homeowners are going to be financially incentivized to locate outside of the City.  With the development continuing to push towards Edmonton city limits, these surrounding municipalities no longer seem that far out.  Amazon is savings millions of dollars per year simply by locating literally on the other side of the road.

3.  Compound interest is starting to work against the City of Edmonton.  Warren Buffett said his wealth “has come from a combination of living in America, some lucky genes, and compound interest”.  Edmonton has a massive problem, and if city council stays asleep at the wheel, we’ll soon be in some combination of living in Edmonton, no money in our jeans and compounded frustration.

 

Our Team

Chad Griffiths

Chad Griffiths

Partner, SIOR, CCIM

Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.

Ryan Brown

Ryan Brown

Partner, BCom, SIOR

Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.

Darcie Bouteiller

Darcie Bouteiller

Associate

Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.

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