IN THE MATTER OF AN APPEAL PURSUANT TO S. 50 OF THE ASSESSMENT ACT

CONCERNING:

Sears Canada Inc.

Cadillac Fairview Corporation Limited

Assessor Of Area #09 - Vancouver Sea To Sky Region

APPELLANTS

AND

527700 BC Ltd

527698 BC Ltd

Assessor Of Area #09 - Vancouver Sea To Sky Region

City Of Vancouver Cadillac Fairview Corporation Limited

RESPONDENTS

INTRODUCTION

[1] These appeals, from the decision of the 2008 Property Assessment Review Panel, concern the assessed value for the 2008 assessment year, of Block 52, one of three city blocks making up a mixed use commercial complex in downtown Vancouver. 

[2] Appeal 2008-09-00029 was filed by Cadillac Fairview Corporation Ltd. (Cadillac Fairview), the owner of the properties. Appeal 2008-09-00132 was filed by the Assessor or Area 09 – Vancouver Sea to Sky region (the Assessor).  Appeal 2008-09-00141 was filed by Sears Canada Inc. (Sears), a major retail tenant. 

[3] Block 52 comprises a city block of 130,000 sq.ft. that is bounded by Robson, West Georgia, Howe, and Granville Streets, in the heart of Vancouver’s Central Business District.  It forms part of a comprehensive commercial development known as Pacific Centre that extends over three city blocks (Blocks 32, 42 and 52) and comprises over 970,000 sq.ft. of retail area, several office towers, a luxury hotel, and underground parking garages.  The three city blocks are connected underneath West Georgia and Dunsmuir Streets by a series of volumetric parcels, as well as via an overhead walkway over Dunsmuir Street (connecting blocks 32 and 42).  Underground connections provide access to a freestanding Bay department store (620,000 sq.ft.), SkyTrain, and to the new rapid transit line.

[4] Roll number 09-200-026-600-126-06-0000 pertains to the land and improvements comprising Block 52, legally described as Block 52, District Lot 541, Plan 210, except that part in Plan 16405.  The remaining roll numbers listed above represent volumetric parcels, lands lying under the street, forming entrances to parking lots, and access corridors that are leased from the City.  Only the value of roll number 09-200-026-600-126-06-0000 is in issue.

[5] Specifically, Block 52 contains the TD office tower, an eight-level department store (leased to Sears), underground retail shops, and an underground parking garage.  The office tower is located at the northwest corner at West Georgia and Howe Streets.  The 30-storey building has a gross building area of 543,128 sq.ft. and a gross leasable area (GLA) of 470,536 sq.ft.  A TD Canada Trust banking pavilion is located at the base.  The department store offers eight levels including one underground at mall level, and a gross building area of 647,397 sq.ft. according to architectural drawings (in the briefs the referenced leased area relied on by both parties is 630,452 sq.ft., which is the figure relied on for calculation purposes).  The one-level underground shopping mall has a gross building area of 50,177 sq.ft. and a GLA of 30,385 sq.ft.  A 260,000 sq.ft. parkade with 850-stalls extends under the site.  The parkade is leased to and operated by the City of Vancouver.

[6] Pacific Centre opened in 1971 and the department store, then operated by the Eaton’s department store chain, opened in 1973.  This building, originally six floors (mall level to level 5), was enlarged by the construction of two additional floors in 1981.  These two floors were added to accommodate a planned expansion of the store, however changing economic conditions rendered this additional space surplus to Eaton’s needs.  Levels 6 and 7 are currently vacant and level 5 is used for storage.  Sears has operated the department store since 2000. Cadillac Fairview is a major developer and manager/owner of retail and commercial centres in Canada.

[7] The property was developed under the Downtown District “A” zone.  It was re-zoned CD-1 (455) effective April 17, 2007.  The rezoning was intended to accommodate existing improvements as well as to allow for future uses and density of Pacific Centre as it relates to the rapid transit line that runs down Granville Street adjacent to the subject.  A new station is located at the corner of West Georgia and Granville Streets.  The density specified in the CD-1 (455) zone is a floor space ratio (F.S.R.) of 9.47 over all three city blocks comprising Pacific Centre.  The parking provided on Block 52 is legally non-conforming with the CD-1(455) bylaw. 

[8] No party has filed redevelopment proposals with the City of Vancouver.  As of the dates relevant to these appeals neither the owner nor the tenant is proposing any change of use or significant renovations to the department store premises.  The use as at the state and condition date of October 31, 2007 was the same as at July 1, 2007.

[9] The 2008 assessment for Block 52 is $254,019,000.  Sears asserts that this is too high due to an incorrectly calculated contribution for the department store premises, which reflects land value rather than their state and condition as improved and occupied space which ought to be valued by the income approach.  The Assessor contends that the value should be higher, following his recalculation of the contributory value of the department store improvements, not as land, but rather as available for reconfiguration to mixed use retail and office. He has not asked for the assessment to be increased.

THE PANEL

[10] The Board originally panelled three members to hear these appeals: Rob Fraser (chair), Keith Pritchard and Audrey Suttorp.  Part way through the hearing, Mr. Pritchard’s term on the Assessment Appeal Board expired and was not renewed.  The hearing continued with the remaining two panel members.

WITNESSES

[11] The Board heard evidence and received expert reports from several witnesses.  Called for Sears were: John Glen, AACI; Tony Hernandez, PhD; David Nishi-Beckingham, B.Comm.; and George Evans, PQS(F).  Called for the Assessor were: David MacLaggan, AACI; Bruce Evans-Atkinson, AACI; Philip Boname, BA; and Elias Pang, PQS, B.Sc.

[12] Mr. Glen has a Masters Degree in Geography and is an accredited appraiser with the Appraisal Institute of Canada (Exhibit #7).  He is the director of Corporate Real Estate Advisory Services for AEC International and is a Course Director at the York University of Administrative Studies where he teaches several real estate courses.  He has extensive experience in consulting and valuation of commercial and industrial real estate.  He testified as an expert in the valuation of shopping centres.

[13] Mr. MacLaggan, an appraiser accredited by the Appraisal Institute of Canada, was for the majority of the hearing a senior appraiser of major retail properties at BC Assessment with the responsibility of settling major retail property appeals to the Property Assessment Appeal Board (Exhibit #65).  He gave expert testimony on retail property valuation. 

[14] Mr. Evans Atkinson, an appraiser accredited by the Appraisal Institute of Canada, is a senior appraiser and acting Deputy Assessor with BC Assessment (Exhibit #99).  He specializes in the valuation and roll defence of major office properties as well as appeal resolution.  He gave expert testimony on downtown commercial land values and office building valuation.

[15] Mr. Boname is the President of Urbanics Consulting Limited and holds a Bachelor of Arts (Exhibit #55).  He has extensive experience in the real estate consulting industry.  The panel accepted him as an expert in urban land economics, but not as an appraiser.

[16] Mr. Hernandez has a Ph.D. in Retail Management / GeoScience and is the Director of the Centre for the Study of Commercial Activity at Ryerson University (Exhibit #114).  He is also an Associate Professor at Ryerson University (Dept. of Geography) and holds the Eaton Chair in Retailing at that institution.  He testified as an expert in retail structures and trends. 

[17] Mr. Nishi-Beckingham, an appraiser accredited by the Appraisal Institute of Canada, has a Bachelor of Commerce, and is a senior consultant with AEC Canada.  The panel accepted him as an expert in appraisal matters, and he provided testimony related to equity.

[18] Mr. Pang, is a senior associate and professional cost consultant at BTY Group (Exhibit #136).  He has a Bachelor of Quantity Surveying and has considerable experience as a cost consultant for a wide range of projects in the education, health care, residential and commercial sectors.  Accepted as a chartered surveyor and construction cost estimator, he testified on the anticipated redevelopment costs. 

[19] Mr. Evans, PQS(F), is a professional quantity surveyor with LEC Quantity Surveying Inc. (Exhibit #142).  He has significant experience in all facets of quantity surveying and construction cost management.  Accepted as an expert in cost management, he testified on the anticipated cost of redevelopment of Block 52. 

[20] In addition, we heard from three employees of Sears Canada:  Mr. Greg Wallace, Vice-President of Store Planning and Space Productivity; Ms. Anita Short, Director of Real Estate; and Mr. Hal Zopf, Field-Projects, Energy Maintenance Manager, B.C.  Mr. Wallace testified about the department store industry in Canada and specifically about Sears stores in Vancouver and elsewhere.  Ms. Short spoke about the Sears lease at Pacific Centre and clarified various items of correspondence relating to Sears current use of the premises.  Mr. Zopf spoke about the condition of the existing mechanical and building systems at the subject improvements. 

[21] Other witnesses included Mr. Clive Grout, the architect responsible for the redevelopment schemes under discussion, and Mr. Ian Cooper, a planner with the City of Vancouver who discussed parking requirements in the Downtown core generally and specifically for Block 52.

[22] On December 11, 2008, the Panel inspected Block 52, accompanied by representatives from both parties.  The tour included all of the retail areas of Block 52, the unoccupied area of Sears, plus other areas not normally open to the public.

ISSUE

[23] The overarching issue is: What is the market value of the unencumbered fee simple interest of Block 52?  Market value is defined as the “most probable price which a property should bring in a competitive and open market as of the specified date under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus” (Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP), Appraisal Institute 2008 [Sec.12.16.1] p.42).  The effective date of valuation is July 1, 2007.  The assessed value must reflect the value the property would have had if, on the valuation date, its permitted uses and physical state and condition were as they were on October 31, 2007.  Specifically, the issue is: what is the highest and best use of Block 52 considering that the property is built to full permitted density under the zoning in place? 

[24] The parties agree to the contributory value of some of the components of Block 52, specifically the office tower, underground retail shops and parkade, but they disagree on the contributory value of the department store improvements.  Although this is their only point of disagreement, it is the whole of Block 52 that is under appeal.  The area occupied by the department store forms an integral part of the whole and is not a separate legal parcel to be valued apart from the whole, as it cannot be sold except in conjunction with the whole of the folio that constitutes Block 52. 

[25] To determine the value of Block 52, we must first analyze the highest and best use of the whole property as if vacant, and then compare this to the highest and best use of the whole site as improved. 

[26] But before considering the highest and best use of Block 52, we need to address whether this block can be valued independently of Blocks 32 and 42 since the three blocks operate as one economic entity.  According to Mr. Glen, the department store is an integral part of the whole of the Pacific Centre Mall and consequently part of its value is intertwined with the value of the retail units in Blocks 42 and 32.  He quotes from the Appraisal of Real Estate Thirteenth Edition that according to the appraisal principal of balance “…real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium.  The principle applies to relationships between the costs of production and the property’s productivity…the principle of balance and the principles of contribution, surplus productivity, and conformity are interdependent and crucial in highest and best use analyses and market value estimations.”  He considers that the shopping component on the three city blocks are designed and act like a single commercial entity, namely the Pacific Centre Mall, with connections that run under and above ground between the blocks.  Removing a substantial component of the shopping centre, for example the department store on Block 52, would have significant effects on the operation and value of the remaining components.  While we agree that the retail in the three blocks together form the Pacific Centre Mall, which acts as one entity, we are not persuaded that the department store contributes to Pacific Centre in such a manner that some of its value is already reflected in that of the other retail areas through higher rents.  Neither of the parties is proposing a change of use from retail on the lower levels of Block 52, or a change to the underground connection between Blocks 52 and 42.  We are satisfied, that Block 52 can be valued independently from the Blocks 42 and 32.

HIGHEST AND BEST USE

[27] Appraisal standards require the appraiser to determine the highest and best use of the property first as if vacant, and second as improved.  Highest and best use is defined by the Appraisal Institute of Canada as “that reasonably probable and legal use of vacant land or an improved property which is physically possible, appropriately supported, financially feasible, and that results in the highest value” (CUSPAP, Appraisal Institute 2008 [Sec.12.34.1] p.51).  The criteria that form the basis of all highest and best use analyses are that the use must be physically possible, legally permissible, financially feasible, and maximally productive (Appraisal Institute “The Appraisal of Real Estate” (2002) p.121).  Highest and best use is a market driven concept and requires careful analysis of the real estate market. 

[28] The Appraisal Institute of Canada in their text “Basics of Real Estate Appraising” 4^th edition (1995) p.95, states further, regarding highest and best use, that

This estimate is perhaps the most important one that a real estate appraiser has to make.  If the estimate of highest and best use is in error, then it follows that the valuation is based on an unsound premise and becomes virtually worthless.  The appraiser, when estimating highest and best use must consider the following:

-          The use must be legal

-          The use must be within the realm of probability, i.e. it must be likely, not speculative or conjectural

-          There must be a demand for such use

-          The use must be profitable

-          The use must be such as to provide the highest net return

-          The use must be such as to deliver the return for the longest period of time.

[29] Both Mr. MacLaggan, for the Assessor, and Mr. Glen, for Sears, discuss the highest and best use, both as if vacant and as improved. 

Highest and Best Use As Vacant

[30] The property has a site area of 130,000 sq.ft. and a permitted density of 9.47 floor space ratio (FSR), or a maximum permitted gross building area of 1,231,100 sq.ft. 

Assessor’s Evidence

[31] Mr. MacLaggan reviews different uses as permitted under the CD-1 (455) zoning.  He concludes that that highest and best use of the property as if vacant is for a mixed retail/office redevelopment, comprising four levels of retail: one at the mall level (underground) and three above.  The retail building with a 104,000 sq.ft. floor plate would offer a total gross area of 416,000 sq.ft. above a newly constructed three-level 1,275 stall parkade.  Two office towers would complete the development, each building comprising 38 stories with 10,725 sq.ft. floor plates.  The towers would be located along West Georgia Street and have a combined gross building area of 815,100 sq.ft.

[32] Mr. MacLaggan allows for the cost of demolition of the existing structures including the existing two-level parkade and 543,128 sq.ft. TD office tower, despite considering both of these improvements to be maximally productive components.  He values the land using the direct comparison approach and the development approach. 

[33] In his direct comparison approach, he initially relies on the following four sales to indicate land value.  He indicates in his testimony that, while he is familiar with land values, he is not an expert on commercial land and office building valuation in Downtown Vancouver and thus initially relied on Catherine Shultz (a former employee of BC Assessment) and more recently, on Mr. Evans-Atkinson, currently with BC Assessment.  The site areas detailed in the chart below are from Mr. Evans-Atkinson’s report (Exhibit #99) as he is the accepted expert in commercial land.  The areas differ slightly from those of Mr. MacLaggan’s report (Exhibit #28).

[34] Mr. MacLaggan’s initial analysis reflects a range of $71 to $104 per sq.ft. buildable.  He does not make adjustments for location or parcel size, and except for the first sale, does not allow a deduction for demolition costs or an addition for holding income.  He concludes a land value of $95 per sq.ft. buildable.  Later, he corrects his analysis of the sale of 1180 West Hastings Street resulting in a change to the price paid to $63 per sq.ft. buildable.  However, in spite of this correction he does not change his conclusion of land value at $95 per sq.ft. buildable.  In later evidence the Assessor, through Mr. Evans-Atkinson, introduces three additional sales to indicate land value, namely the Bay Parkade sale, 536 West Broadway, and 534 Seymour Street.

[35] Mr. MacLaggan notes that the earlier sales require an adjustment for change in market conditions.  He does not include these calculations but verbally applies a figure of 12% per year based on changes to the subject property’s assessment from the 2004 roll (mid 2003 value) to 2008 roll (mid 2007 value).  Mr. Evans-Atkinson relies on three different indicators to support market movement, namely a resale of a primarily residential redevelopment site, an increase in office rents, and the resale of a downtown office building.  He concludes a monthly increase of 1% to 2.25% from 2004 to 2008.

[36] In his initial analysis of the subject, Mr. MacLaggan does not deduct demolition costs (Exhibit #28 p.51a), which he later states was in error.  He subsequently relies on the demolition costs of $11,892,168 (p.51c), which is close to Mr. Evan’s figure of $11,628,000.  Based on his land value of $95 per sq.ft. buildable applied to the developable density of 1,231,000 sq.ft. less the demolition costs, Mr. MacLaggan finds the net land value of Block 52 is $105,052,832.

[37] In the development approach, Mr. MacLaggan calculates the finished value of the proposed re-development, estimates the costs to complete development, applies a developer’s profit, and arrives at a net value of $6,413,000.  This is over and above his land value at $95.00 per sq.ft. buildable.  His calculations are:

Estimate of Finished Value:

Office buildings (net leasable 603,212 sq.ft. @ $24)                     $      14,477,088

Retail CRUs (124,800 sq.ft. @ $105)                                                    13,104,000

CRUs & Category Killers (135,200 sq.ft. @ $82.50)                             11,154,000

Parking (1275 stalls @ $1,325)                                                                1,689,375

Total Gross Potential Revenue                                                      $      40,424,463

Less vacancy (office @ 7%, retail & parking @ 5%)                     (        2,310,765)

Less expenses (office @ 6%, retail @ 5%,

parking @ 50%)                                                                              (        2,762,530)

Net Income                                                                                     $      35,351,168

Estimated value (income capitalized at 6.5%)                               $    543,864,123

Estimate of Costs (Exhibit #28, p.51c):

Land: 130,000 sq.ft. x 9.47 FSR @ $95 per sq.ft. buildable          $    116,954,000

Hard Costs                                                                                           279,796,000

Soft Costs @ 8% of hard costs                                                             22,383,680

Financing @ 5%                                                                                     15,703,592

Demolition Costs                                                                                    11,892,168

Total Costs before TIs                                                                    $    446,729,440

Developers Profit @ 15% (on all above costs)                                      67,009,416

Tenant Improvements (office @ $35/sq.ft.,

retail @ $10/sq.ft.)                                                                                  23,712,000

Total Costs                                                                                     $    537,450,856

[38] Based on the above noted estimates, Mr. MacLaggan calculates the net return on the project as follows:

Value of completed project (rounded) as at July 1, 2007               $    543,864,000

Less total costs (rounded) including land                                            537,451,000

Net Return                                                                                      $        6,413,000

[39] He states that his analysis supports his land value at $95 per sq.ft. buildable and the proposed development as outlined. 

Sears’ Evidence

[40] Mr. Glen, for Sears, takes the position that as the Assessor is treating the department store density as a redevelop able parcel separately from the rest of the property (roll value is 630,452 buildable sq.ft. x $94.50 per buildable sq.ft.), the 630,452 sq.ft. of developable area must be legally severed to create a separate parcel.  In order to estimate market value it has to be saleable, and to be saleable it has to be severed for which he allows costs.  He does not value Block 52 in its entirety, although his analysis of land value per sq.ft. buildable could be applied to the entire site as he estimates “downtown Vancouver commercial land value” for this location.

[41] Mr. Glen examines seven sales of developable land in the downtown that sold between mid 2005 and mid 2007 (Exhibit #10).  As the majority were purchased for primarily residential development, which commands higher land values, he focuses on the sales which have proposals for substantive commercial uses.  The first sale is 1180 West Hastings, a site proposed for development of a hotel as well as some retail use.  The second sale is an assembly forming part of the Bay Parkade sale, although he excludes in his final calculation the site occupied by Dunsmuir House, which has a residential density.  In the analysis of the Bay Parkade sale, he does not include revenue from the existing improvements, demolition costs, costs to rebuild covenanted 500 parking stalls for the Bay, future revenue from these stalls, cost to rehabilitate Dunsmuir House, or the cost of purchasing additional density if required.  What makes the Bay Parkade sale more difficult for analysis and comparison purposes is that while it has an outright density of 5.0 F.S.R., only 2.0 are required to be commercial leaving 3.0 F.S.R. for residential.  Mr. Glen analyses the sale at a 10.0 F.S.R. in accordance with his research with the City of Vancouver, stating that this higher density is achievable if the developer builds the full outright density of 5.0 F.S.R. as commercial, thereby permitting residential density of 5.0 F.S.R.

[42] Mr. Glen does not adjust for site size, location or market changes.  The straight average of the two sales is $64.59 per sq.ft. buildable, which he applies to the developable area currently occupied by the department store of 630,452 sq.ft. to arrive at a land value of $40,721,000.  He then deducts demolition costs (of the department store improvements only) of $5,195,000, asbestos abatement of $62,525 (this was later increased and is addressed separately), demolition fees, and severance and survey costs.  Mr. Glen also deducts $3,183,783 to terminate the existing department store lease to reflect that, as at the state and condition date, the premises were occupied.  He calculates this figure by taking the difference between market rent and the actual rent in place for five years.  Finally, he takes the net land value and discounts it one year at 11% for a final “land” value as vacant of $29,061,000 for the density currently occupied by the department store (Exhibit 38).  If we apply Mr. Glen’s land value of $64.59 per sq.ft. buildable to the entire block 52 (maximum permitted gross building area of 1,231,100 sq.ft), the value is $79,516,749.  Deducting the Assessor’s demolition costs of $11,892,168 results in a net value of $67,624,581 for all the land in Block 52 before other allowances. 

[43] In his development approach, Mr. Glen (Exhibit #10) does not consider complete redevelopment of Block 52, but rather examines various redevelopment scenarios of all or a portion of only the department store improvements.  This evidence will be discussed in more detail under the Highest and Best Use as Improved analysis. 

Analysis and Findings of Highest and Best Use as Vacant

[44] Mr. MacLaggan concludes that the highest and best use for the site as vacant is for a mixed retail/office development to similar density as currently in place.  Mr. Glen does not conclude a value for the entire site as vacant, but rather concludes a highest and best use for the department store density as a redevelopment site with the remainder of the site “as is”.  In essence, both appraisers agree on a mixed retail/office development to full density.  They both rely on the direct comparison approach to estimate land value, with support given by the development approach.  According to the Real Estate Investment Analysis and Advanced Income Appraisal (Appraisal Institute of Canada (R1B33108) p.8.30, p.8.33-35), the acceptable ways of valuing developable land are as follows:

There are several methods of determining the value of developable land.  Perhaps the simplest method is to compare the plot of land to other similar plots which have recently sold...However, it can be difficult to apply this approach if the property in question is unique or if there are no similar sales...This problem of unique parcels of land is particularly relevant for valuing potential commercial developments in urban areas.  These properties are often unique in size and attributes, and each alternative use has its own subset of desirable features.  Two lots which are in the same neighbourhood and are identical in size may have very different values if one has attributes required for a shopping centre, while the other is best suited for a warehouse.  In these cases, it is often difficult to find sales which are similar enough to the property in question to be able to infer value.  The direct sales comparison method cannot be used to value many of these properties.

Rather than examining sales of other lots to determine the value of a particular piece of land, the development method focuses the appraisal on the property in question. ...This is the basis of the development method of appraisal; the price of land is determined by what developers of end use products can afford to pay after accounting for all costs of development.

[45] The text goes on to specify the framework for the development residual method:

       Gross value upon completion (at highest and best use)
-      costs of sale (closing and marketing costs)
=     Net value upon completion
-      hard costs (expenses directly associated with construction)
-      soft costs (overhead costs, often expressed as % of hard costs)
-      development financing costs (cost of debt financing)
-      developer’s profit (can be lump sum, or % of gross or net, or % of total cost)
=     Residual to land and land financing cost
-      Land financing cost (cost of financing all or portion of land acquisition)
=     Land residual

[46] Both parties met obstacles in obtaining useful land sales evidence due to the dearth of sales for office/retail redevelopment.  Of the larger sites downtown that sold for redevelopment, both 1153 West Georgia Street and 1180 West Hastings Street were purchased for hotel development, and one includes a residential component.  The Bay Parkade sale (599 West Georgia Street and 619 Richards Street) has many inherent difficulties due to the presence of a single room occupancy building (Dunsmuir House which is to be retained with appropriate residential bonusing to reflect this requirement), an existing parkade structure with a requirement for stalls to be provided on a rental basis to the Bay upon redevelopment, and the potential for adding residential density.  The two appraisers do not agree as to the appropriate analysis or the density expected by the purchaser at the time of sale and the costs to achieve this build out.  The as-of-right density is 5.0, of which 2.0 is required for commercial.  Evidence indicates that the City may allow 10.0 F.S.R. if the full as-of-right density of 5.0 F.S.R. is built out as commercial.  However, neither the cost of achieving this additional density nor what the purchasers were thinking at the time of sale is available to us.  More importantly, it is evident that residential land is worth more than commercial land and based on the as-of-right density, 60% of the land can be developed with residential.  We cannot use this sale reliably due to the difference in analysis, the uncertainty as to the density and potential cost of increased density, and the allowed residential use.

[47] Three additional downtown sales were improved properties with viable commercial buildings generating acceptable capitalization rates and no development proposals are pending on these properties.  Furthermore, two are small sites (5,500 and 9,360 sq.ft.) that cannot be developed on their own.  The only land sale that would reflect a purely commercial land sale is 536 West Broadway, which is located outside the downtown core and is proposed for a much lower density of only 3.0 F.S.R.  It sold at $206 per sq.ft. buildable according to Mr. MacLaggan’s calculation.  The evidence is unclear whether the 3.0 F.S.R. is the correct potential density, and certainly the difference in location and significantly lower density needs to be addressed. 

[48] That leaves only one sale on which both parties agree, namely 1180 West Hastings Street which sold in mid 2005 for $62.73 per sq.ft. buildable.  Mr. Glen states that no time adjustment is needed, stating there is no market evidence to suggest that land prices have increased.  With respect to the time adjustment discussed by the Assessor, Mr. MacLaggan relies on the change in assessed values for block 52 (subject) to establish the market shift in land values.  This approach is inherently flawed, as the assessments should reflect market activity, not themselves be the evidence of market activity.  He further supports this adjustment by showing the difference in price per buildable of the October 2003 sale of 1153 West Georgia Street ($71.35 per sq.ft. buildable) and the August 2005 sale of 1180 West Hastings Street ($87.62 per sq.ft. buildable, which he later corrects to $62.73 per sq.ft. buildable).  The corrected price clearly does not support an upward market adjustment, but rather supports a downward adjustment.  Mr. Evans-Atkinson’s market evidence for his time adjustment also has serious weaknesses.  His first indicator is the resale of a development site intended for a primarily residential development outside the downtown.  This does not provide any indication for market movement of commercial land in the downtown core.  His second and third indicators reflect office rents and an office building sale.  The parties agree that office rents have increased, but we find on the evidence presented, that this does not mean the value of the underlying land increased.  There are two aspects to the calculation, namely the revenues and the costs, and the cost of construction was not addressed in the time adjustment discussion.  Similarly, we find that to consider an office building resale without addressing changes in the leasing situation and rents being achieved, results in an incomplete and, therefore, unusable analysis.  We do not accept the time adjustments presented as they do not reflect changes in the value of commercial development land in a climate of rapidly rising construction costs.

[49] Thus, we are left with one agreed commercial sale at $62.73 per sq.ft. buildable, and even this sale is a poor comparable as it represents a site intended for hotel development, not office/retail.  Mr. Glen, Mr. MacLaggan and Mr. Evans-Atkinson each conclude a higher value, namely $64.59 (Mr. Glen) and $95.00 per sq.ft. buildable (BC  Assessment).  We find that the sale better supports Mr. Glen’s land value conclusion at $64.59 per sq.ft. buildable.  However, he concludes that value based on an average of 1180 West Georgia Street and the flawed analysis of the Bay Parkade, which we find not usable.  Without the latter sale, his land value would be indicated at $62.73 per sq.ft. buildable.  Another piece of evidence that sheds light on downtown office land values is the Altus Insite Investment Survey (Exhibit #10) relied on by both parties.  While based on investor surveys rather than specific sales, it indicates a value in the second quarter of 2007 at $60.63 per sq.ft. buildable, increasing to $68.08 per sq.ft. buildable by the fourth quarter.  Our valuation date is July 1, 2007.  Finally, we heard that the City of Vancouver charges $55 per sq.ft. for transferable density in the heritage transfer bank, although we do not know what that figure is based on.  The evidence supports a land value as that for 1180 West Georgia Street, at $62.73 per sq.ft. buildable.

[50] With respect to the development approach, Mr. Glen does not complete a full redevelopment scheme, but focuses on whole or partial redevelopment of the density occupied by the department store.  Mr. MacLaggan does consider the site as vacant in his analysis, but does not follow the framework as outlined in the appraisal text.  He inputs a figure for the land and developer’s profit, and then arrives at a net return figure.  The appraisal texts specify that you find either the land value using a given profit level, or you determine the profit at an estimated land value.  There are also some significant differences between his costs and those of Mr. Glen.  We will outline two such differences by way of example.  Mr. MacLaggan does not include financing charges on the land, stating that as Cadillac Fairview already owns the site, no financing costs are applicable.  Similarly, he does not include leasing fees to achieve occupancy, stating that the owner, Cadillac Fairview does their leasing in-house.  For assessment purposes, the Board cannot consider value to owner.  If a developer were to buy the subject, there may an interest cost to investing in the land, either in the form of debt servicing or in forgone opportunity costs in that the money cannot provide a return elsewhere.  The text quoted earlier makes reference to some financing costs on land, although it is inconclusive as to whether financing costs on only some or all of the land should be included.  With respect to leasing costs, whether leasing is done in house or by an outside agent, there are costs involved with this service, which we find should be properly reflected. 

[51] In his highest and best use as vacant analysis, Mr. MacLaggan demolishes everything on the site, and then replaces it with two office towers, three levels of underground parking and a retail building that extends underground.  He concludes a net land value of $105,052,832.  This figure is based on the direct comparison approach land value at $95.00 per sq.ft. buildable less demolition costs.  It is supported by the development approach.  Interesting to note is that in the total redevelopment scenario he proposes 50% additional parking for a development similar to the present density, whereas in the highest and best use ”as is” he considers the current parking configuration to be adequate.

[52] According to Mr. Glen, the office building and parking improvements reflect highest and best use and therefore he considers only a portion of the property, namely the density currently occupied by the department store.  He concludes a land value of $64.59 per sq.ft. buildable less demolition costs.  Applied to the entire site, his net land value for Block 52 is $67,624,581.  In his analysis, the development approach does not support his land value and he concludes that the highest and best use is the current configuration.

[53] The highest and best use of the site as vacant is agreed to be development with a mixed office and retail development (whether in its current configuration or not, the uses are similar namely retail and office).  Although Mr. MacLaggan and Mr. Evans-Atkinson consider inflationary pressure on the land, we do not have evidence to support their assertion.  We find that the limited evidence leads us to the conclusion that the best estimate of land value is $62.73 per sq.ft. buildable. 

Highest and Best Use As Improved

[54] The highest and best use analysis of a property “as improved” considers not just the existing use and configuration but can also include consideration of “…renovation or rehabilitation, expansion, adaptation or conversion to another use, partial or total demolition, or some combination of these alternatives...if capital expenditures are required, rates of return for each potential use must be calculated, considering the total investment in the property and all capital expenditures.  These rates of return can then be compared with rates of return for other similar types of investments to determine whether the potential uses are financially feasible.”  (The Appraisal of Real Estate, Second Canadian Edition (2002) p.12.9-12.10).

[55] Mr. Glen and Mr. MacLaggan considered maintaining the existing department store as well as a number of alternate scenarios including a complete gutting of the improvements and conversion to smaller format retail and office premises (“reconfiguration”).  In the “as improved” analysis, the experts assume no changes to the existing office building or to the parkade.  Of significance is that no official application has been made to the City of Vancouver regarding a redevelopment or reconfiguration of the building, and no redevelopment or reconfiguration proposals are underway by the owner or the lessee.  However, the tax implications of the proposed redevelopment being considered by BC Assessment caused Mr. MacLaggan and Mr. Nishi-Beckingham to hold a preliminary meeting with a senior rezoning planner from the City of Vancouver about partial redevelopment or reconfiguration of Block 52.  In this meeting, Mr. Mondor with the City of Vancouver indicated that for a reconfiguration of the department store improvements:

·        Seismic upgrades would be required;

·        Building codes would have to be met;

·        A review of uses would be required as the uses are conditional (i.e. the City does not need to give approval to any change in use);

·        In order for the City to grant a change of use, concessions would be required.  The City wants 1) ground level oriented pedestrian traffic, 2) multi entrances to the building, 3) a change of shape (building is too boxy), 4) allow more floors (maybe break the department store improvements up into 2 or 3 buildings), 5) removal of white panels on exterior, and 6) secured bicycle parking and storage.

[56] The evidence indicates that the above concessions, which BC Assessment took into consideration in their reconfiguration proposal, are the pedestrian orientation of the ground level, removal of the white panels, and inclusion of bicycle parking.  Seismic upgrades are addressed by Abbarch Architects and Glotman Simpson in the BTY Report (Exhibit #137).  The parties agree that the 2006 Building Code would have to be met.  A review for Building Code compliance has not yet been undertaken.

Assessor’s Evidence

[57] Mr. MacLaggan takes two approaches in his highest and best use “as improved” analysis (Exhibits #28 and #83).  Initially, he calculates the value of Block 52 with the department store intact, utilizing a market rent from a 2003 board decision (Sears Canada Inc. v. Area 09 (2005 PAABBC 20040345)).   By this approach, his value for Block 52 is $230,472,000.  Subsequently, he completes a detailed review of what ideal uses could be for the department store premises, should they be retained and reconfigured.  Based on the events at other malls where department stores vacated, he concludes that conversion to several large format retailers and a mix of smaller retail units would be optimum for the first four levels.  For the upper four floors, he proposes conversion to Class A office premises complete with an atrium to maximize daylight serviced by a newly built office lobby and elevator bank.  In this redevelopment proposal, Mr. MacLaggan relies on a report prepared by Mr. Boname (Exhibit #56) and architectural drawings by Mr. Grout (Exhibit #64).  He concludes a value for Block 52, before costs, of $475,071,581.  (We have revised this figure to $485,466,543 based on the amended gross leasable office area of 259,231 sq.ft. as per Exhibit #102.)  He notes that considerable monetary expenditure is required to accomplish this redevelopment and relies on costing by Mr. Pang from BTY Group.  He concludes that converting the department store premises to mixed use retail/office is optimal.

[58] Mr. Boname discusses the highest and best use of the department store improvements only (not the whole of Block 52).  He examines the demand and supply of retail space in the Downtown and notes the outstanding locational attributes of the subject property as it relates to retail and office use.  Mr. Boname concludes that a department store is not the highest and best use of the existing improvements, due to the decline in general of Canadian department stores and the decline of their importance as anchor tenants.  He reviews a number of shopping centres throughout Canada where department stores have vacated (when first Woodward’s and then Eaton’s closed) with the space back-filled by other retailers at no detriment to the mall operations.  In his testimony, he references that the owner, Cadillac Fairview, has tried to replace Sears with other options but to no avail.  He proposes vacating Sears and gutting the department store premises to accommodate several large format retailers and numerous smaller retail units.  In his opinion, this would be beneficial as it could both increase the rent per sq.ft. significantly and improve the draw to Pacific Centre by taking advantage of the location of the improvements along Robson and Granville Streets.  For his revenue stream, Mr. Boname relies on general research of rents in the area, not specific to the sizes of units proposed.  He draws on past experience for many of his assumptions related to timing, discount periods and rates, and merchandising mix.  For costs he uses those supplied by BTY Group.  He concludes that reconfiguration of the department store improvements to retail on the lower four floors with office above represents the highest and best use.

[59] The drawings relied upon by Mr. MacLaggan and Mr. Boname are “concept drawings” prepared by Mr. Grout as per Mr. MacLaggan’s instructions.  From these drawings, the concept was roughly priced out by BTY Group.  Not yet completed are the ensuing steps shown on the non-exhaustive list (and not in any particular order) below:

·        Mechanical inspection of all the equipment (test proposed concept against capacity of existing equipment);

·        Review by structural engineer of proposed atrium design;

·        Review of proposal by electrical consultant (including review of existing capacity);

·        Review by structural consultant (including seismic requirements and testing whether the building is supported by cores);

·        Testing of glass rotunda at corner for code compliance and seismic strength;

·        Review by environmental consultant of mechanical systems and testing for asbestos;

·        Review by elevator consultant;

·        Review by acoustics consultant;

·        Review by envelope consultant of the building skin (with respect to potential light pollution, HVAC, and maximizing daylight);

·        Review by a code consultant.

[60] The evidence of Mr. Pang from BTY Group is that he did not inspect the existing building but did have a quick un-escorted walk through.  In his walk-through he did not have access to the mechanical rooms, the closed off upper levels, or the roof.  He assumes all building systems to be in good working condition with adequate capacity to service the re-configured building.  He also confirms that he did not directly include the above-noted costs, but did include contingency allowances.  He ultimately revises his costs to include some of these figures. 

Sears’ Evidence

[61] In his highest and best use analysis as improved, Mr. Glen only considers the department store element of Block 52.  He is in agreement with BC Assessment with respect to the valuation of the office, mall retail, and parking components. 

[62] Mr. Glen begins his analysis by asking three questions.  First, “Is a department store a necessary element of a regional shopping centre in downtown Vancouver and more specifically of the Pacific Centre?”  If the answer is yes, then he asks, “Can a portion of the Sears store be put to a different use?”  If the answer to the first question is no, then his question is, “Would conversion of the entire Sears store to other uses produce a higher return?”

[63] After examining the principle of balance and principle of contribution, Mr. Glen concludes that a department store serves as an anchor and is a necessary element.  He refers to the lease signed between Cadillac Fairview and Sears in 2000 as evidence that the former, a sophisticated landlord, considers a department store necessary.  He calculates the contributory value of the department store improvements using a market rent of $5.00 per sq.ft. applied to the occupied premises (mall through level four) of 398,210 sq.ft. less vacancy and expenses, capitalized at 6.5% (the Assessor’s capitalization rate for the rest of Block 52).  Using these figures, he concludes an assessed value of $228,461,000 for Block 52.  (Using the Assessor’s figures for the other components and Mr. Glen’s market rent and area for the department store, we calculate this figure to be $231,095,000.)  He also calculates an alternate value using a four-level department store using the same market rent of $5.00 per usable sq.ft.

[64] Acknowledging that the department store is too large for the tenant’s current needs, Mr. Glen considers whether the upper unused floors could be put to another use.  In doing so he examines other permitted (as per zoning) and probable uses, demand for such space, and the related costs to achieve occupancy.  He eliminates most uses due to the floor height and difficulty in attracting people vertically into the building, the large floor plate and thus distance to access natural light, and specific requirements by some uses not met by the existing improvements.  He finds that the only possible alternate use is office.  Based on his estimates of potential rent and costs to provide access, convert the floors to office use, and time to achieve occupancy, Mr. Glen concludes that while office use may be physically possible through upgrading, it is not economically viable.

[65] Finally, Mr. Glen considers his third question, namely whether conversion of the entire department store is financially optimal.  In his calculation, he assumes demising following the Assessor’s initial conversion proposal, which includes smaller retail units on the mall and first level, category killers/large format retailers on the second and third levels, and office on levels four through seven.  (In the Assessor’s analysis submitted at the hearing, they present an updated proposal from that initially shared with AEC.)  Mr. Glen discounts the resultant net value three years at 11% to reflect the time to properly plan the proposal, obtain necessary approvals and permits, rebuild, and complete tenant improvements and leasing.  He finds that conversion is not a viable option due to the considerable costs involved in taking a multi-storey department store and converting it to mixed uses including required seismic and code updates, access concerns, and parking.

[66] Mr. Glen concludes that the existing department store represents the highest and best use of the improvements.

Analysis and Findings of Highest and Best Use as Improved

[67] Mr. Glen and the Assessor both conclude a similar highest and best use of Block 52 as improved, namely office and retail use in the current building form.  Where their views diverge is whether the department store improvements should remain “as is” or undergo a costly reconfiguration to realize higher potential rental revenue.  We accept the highest and best use of Block 52 for the components agreed upon by the parties (Exhibit #1), and thus will limit our comments below to the department store improvements only.

[68] Mr. Glen feels that although there is economic obsolescence in the improvements for department store use, due to their sheer size as well as numerous levels, the cost of converting to another use renders such reconfiguration economically unviable.  He cites numerous concerns with the Assessor’s proposal and concludes that the existing use represents the highest and best use.  He argues that the department store is an integral and critical component of Pacific Centre as a whole. 

[69] Mr. MacLaggan deems the improvements not to be utilized to their highest and best use and offers research suggesting that a department store is not required as an anchor tenant for Pacific Centre to be a successful regional shopping centre.  He pursues a reconfiguration of the building to accommodate smaller retailers and office, with support provided by Mr. Boname and Mr. Evans-Atkinson. 

[70] Before delving into the contentious matters, we understand the following to be factual: 

·        The improvements were built for department store use, and other than a brief renovation period between tenancies, have been used by a department store for the duration of their existence.  The exception to this is the top two floors (added in 1980/81) which have not consistently been in use.  As at the state and condition date, Sears used the mall and floors 1 through 4 for retailing.  Some space on the upper levels has been used for storage. The evidence shows that a department store is operating profitably in the improvements in their current configuration.

·        Pacific Centre is one of the most successful shopping centres in Canada.  Sears operates under a viable long-term lease and is connected to Pacific Centre where it participates fully as a tenant.  We are not aware that it has defaulted on any lease obligations.  When Eatons closed at Pacific Centre, the landlord, Cadillac Fairview, actively negotiated with Sears to occupy the space and accommodated them to first operate as an “eatons” store and later convert to Sears.  Significant renovations took place at that time to modernize the store.

·        There is economic obsolescence in the improvements, which are too large for a modern department store.  The experts estimate that an ideal size for a department store is closer to 250,000 sq.ft. as compared to the gross size of 630,452 sq.ft.  The landlord has granted Sears written permission to convert the upper floors for office use, but except for Sears’ own use in a portion, this has not materialized.  Although the landlord and tenant have had discussions regarding reconfiguration of the premises, they have not seriously considered any proposals, and are not actively pursuing any at the time we heard evidence. 

·        The property is currently built to full density as permitted under the zoning.  Preliminary discussions with the City revealed that they would like to see a change to this portion of Block 52 to improve its integration with the streetscape both in terms of accessibility and visibility through a removal of the white exterior paneling, orientation to the street, and a redesign of the boxiness inherent in the current design. 

·        Another full-line department store, The Bay, operates in the vicinity with a similar single underground connection to Pacific Centre in an owner-occupied situation. 

[71] In order to ascertain what the highest and best use of the improvements is, we will examine the various alternatives presented, and consider each scenario in turn:

1)      “As is” with department store use on the lower five levels (mall to 4^th floor), and no income producing use on the upper three levels.  The parties agreed to a contributory value for the department store based on an area of 398,210 sq.ft. representing the mall level through to the 4^th floor input at a rent of $5.00.  This rent of $5.00 per sq.ft. is the rate agreed to be the economic rental rate for a typical department store building.  Vacancy and expenses were deducted at 2% each, and the net income then capitalized at 6.5% which is consistent with the capitalization rate applied to the balance of Block 52. 

2)     “As is” with department store mall to 5^th floor.  During the course of the hearing, it became evident that the 5^th floor is being utilized by Sears for storage.  Applying similar inputs as agreed to by the parties, a value reflecting the actual space in use can be calculated.  Evidence as to whether the $5.00 rent is applicable to a larger store was not presented. 

3)     “As Is” with a department store occupying the full eight floors. 

4)     Reconfiguration of department store by gutting the interior, re-cladding the building with fenestration, adding an atrium on the upper four floors, and re-demising to accommodate higher revenue-generating office and retail use.  There is no dispute that higher rents could be achieved in re-configured and renovated premises, particularly if optimum consideration is given to maximizing street exposure and careful consideration of tenant mix.  However, there is disagreement as to the probability of such a proposal, the potential revenue achievable, as well as the time and costs involved.

5)     Partial redevelopment of Block 52 through demolition of the department store improvements and re-development of the density in another form.

Scenarios 1-3: Continuation of existing department store use

[72] In considering continuation of the existing use, we deliberated whether a department store is a viable and feasible use of the existing improvements on Block 52.  Mr. MacLaggan and Mr. Boname say it is not, with Mr. MacLaggan relying heavily on Mr. Boname’s advice in this regard.  Although it is clear from his testimony that Mr. Boname has a fine understanding of the retailing industry generally and the supply and demand therein, he does not adequately reflect on the existing use and considers only one option for the department store improvements, namely gut and reconfigure to half retail/half office.  He concludes at the outset that the department store is not the highest and best use although he was not accepted as an expert in real estate appraisal.  However, his focus appears to be on the specific department store in place on Block 52, rather than a department store in general.  He states that Sears “has consistently manifested a suburban-like merchandising concept” and that it has “maintained its location at Block 52 primarily because of the extremely low lease rate that it inherited from the takeover of the Eaton’s chain in 1999”.  He states that the Bay is a much stronger retailer and would be a better fit in the subject location.  When asked whether Nordstrom (an American department store chain) would represent a highest and best use, he was not sure, saying only that they were a much stronger merchandiser.  Mr. Boname considers the nearby premises occupied by The Bay to be at their highest and best use.  We cannot ignore the fact that the Bay operates nearby in a very similar downtown location, and also in an older multi-storey building with functional obsolescence similar to that existing in Block 52.  Mr. Hernandez, accepted as an expert in retail structures and trends, expresses concern about the lack of objective data regarding the role of Sears in the mall, in that no intercept survey was undertaken to assess Sears’ viability and contribution to Pacific Centre.  He states that Mr. Boname’s opinions about Sears appear to be based largely on conjecture informed through anecdote and his unstructured observation.

[73] We find that the evidence clearly supports the opinion that the existing department store represents a viable use.  A department store has been operating out of this space since it was originally built, excepting the time when Eatons closed and Sears remodelled to accommodate the “eatons” store.  It has never been put to another use.  When Eatons closed there was an opportunity for the landlord to use the space differently, yet they actively pursued Sears.  Sears, a well established major retailer and Cadillac Fairview, a sophisticated landlord with extensive Canadian and international real estate holdings, have not chosen to use the space otherwise.  Mr. MacLaggan cites the low sales per sq.ft. of Sears as evidence of poor performance in this downtown market and, thus, evidence that they do not represent the highest and best use.  No one is denying the economic obsolescence present in the improvements resulting in a store area that is too large, even at its reduced size of five floors.  This observably distorts the sales per sq.ft. figures and renders them of little use in comparison to those of newer built department stores that offer modern configurations, design, and size. 

[74] This leads us to ask whether the department store’s viability is due to its favourable lease (i.e. low rent), as suggested by Mr. MacLaggan and Mr. Boname.  We find the answer to this question to be a negative.  The Bay operates a similar multi-level department store in an owner-occupied situation.  It has similar access to Pacific Centre, namely one underground connection on the mall level.  There are no favourable leases in place to give The Bay a benefit. 

[75] Scenario 1 represents an agreed configuration by the parties as it relates to the value as a department store.  We find it to be a viable and supported use.  Scenario 2 is similar to Scenario 1 except that occupancy includes an additional floor for storage as evidenced during the hearing.  The concern with this scenario is that all the experts agree that less not more space is optimum for the profitability of a modern department store.  We did not hear evidence as to whether the agreed $5.00 per sq.ft. market rent for a modern department store would extend to an additional level used intermittently for storage.  Scenario 3 was rejected by all parties due to the economic obsolescence present in the improvements.

[76] To review the four requirements for a highest and best use analysis as it relates to Scenarios 1, 2 and 3, we conclude that the existing use is physically possible and legally permissible.  If an existing use creates a positive return on the investment, that use is financially feasible, as we can conclude is the case for the subject (The Appraisal of Real Estate, Second Canadian Edition (2002) p.12.11).  The existing use is not considered to be maximally productive by Mr. MacLaggan as higher rent can be achieved through other uses.  To assess whether the current use is maximally productive, the return on the investment in its current configuration should be compared to the return on the investment when reconfigured with higher rents but also a significantly larger investment due to the capital costs required to achieve the higher rents.  This is reviewed in Scenario 4.

Scenario 4: Relinquish department store lease and reconfigure improvements

[77] The concept of reconfiguring the improvements to accommodate smaller retail on the lower four levels with office above hinges on such a re-use being physically possible, legally permissible, financially feasible and maximally productive.  In a renovation or rehabilitation situation, “if capital expenditures are required, rates of return for each potential use must be calculated, considering the total investment in the property and all capital expenditures.  These rates of return can then be compared with rates of return for other similar types of investments to determine whether the potential uses are financially feasible.”  (The Appraisal of Real Estate, Second Canadian Edition (2002) p.12.9-12.10)

[78] With respect to physically possible, the evidence indicates that it may be possible to gut and reconfigure the premises, provided due consideration is given to hazardous materials abatement, building code compliance, and structural issues related to work over an existing parkade on a site surrounded by busy streets and heavy pedestrian traffic.  We heard that other malls have successfully realized the re-use of former department store premises, however, the examples discussed did not have the constraints associated with the subject.  More importantly, we did not hear testimony as to the costs to achieve reconfiguration at these other properties, which relates to a project being financially feasible.  We note that in the other malls presented as examples, the landlords were faced with vacant department store premises and the need for activity to draw customers to the mall and ensure its success.  That is not the situation with the subject where the premises are occupied by a successful retailer.  The design drawings relied on by Mr. MacLaggan and Mr. Boname, are incomplete as they relate to building code compliance, access between floors and optimum retail configuration.  The drawings are confusing in many respects, including: elevator shafts that are drawn in on floors that they do not access and that are missing on other floor plans, concerns with the atrium configuration and gross leasable area should the elevator shaft confusion be corrected, corridors on the retail levels that may or may not provide adequate access and fire exiting, the removal of stairwells providing parkade access, retail storefronts along Robson Street that have been enlarged to include sidewalk area thereby removing sidewalks and thus pedestrian access, and so on.  Albeit hazardous material abatement costs were entered into evidence later in the proceedings, they were not considered by Mr. MacLaggan in his conclusion that the highest and best use is to reconfigure the improvements. 

[79] The proposed reconfiguration appears legally permissible.  The proposed uses are conditional uses with retail already in place as well as some office (for Sears).  The density is within the allowable following the zoning bylaw.  The site is currently under-parked as per the bylaw, with fewer stalls in place than required.  Mr. Cooper, a senior planner with the City of Vancouver said the parking is currently legally non-conforming and that office and retail have the same parking requirements, thus re-using the existing improvements would not necessarily result in a higher parking requirement.  He indicated that the City is not looking for more parking downtown, but that ultimately such decisions are up to Council.  We find that the legally non-conforming nature of the parking in itself would not deem the reconfiguration proposal beyond the bounds of possibility.

[80] Finally, we can consider whether the proposal is financially feasible and maximally productive.  In order to establish financial feasibility, market demand for the proposed uses must be established.  Mr. MacLaggan and Mr. Boname show general demand for the lower retail levels and the office use, although provide only limited support for the retail rents applied.  Mr. Glen agrees with Mr. Hernandez’s opposing view, namely that the proposed configuration is largely unsubstantiated in terms of the broader retail environment in which the improvements are located and the mix of tenants existing in the proximity of the site.  Mr. Hernandez states there is no substantiated rationale as to the untapped potential for the proposed retailers in Mr. MacLaggan and Mr. Boname’s reports.  In summary, his concern about the proposal is that “it represents a unique and untested reconfiguration of a vertical retail space in a downtown market” without support and a solid retail rationale.

[81] Based on his study of successful redevelopment of department stores in regional enclosed malls elsewhere in the Lower Mainland, Mr. MacLaggan concludes that the owner of the subject would consider an office/retail redevelopment financially feasible if it were not contractually obligated to Sears (through a private contract which cannot be considered for assessment purposes).  However, he provides neither the capital costs of those redevelopments nor their return.  Rather, he infers that the conversions at other malls were financially feasible simply because they took place, which he takes as support for the financial feasibility of converting the department store premises on Block 52.  Whether the new uses will create a positive return on the investment is not known without delving into the capital costs required and the return on investment inclusive of those costs.  Neither Mr. MacLaggan nor Mr. Boname were able to explain why, when Sears has had opportunity to convert the upper unused levels to office use they have chosen not to do so.  Their only answer was that the lease rate is so low they do not need to.  Surely, between one of the largest retailers in Canada and one of Canada’s largest retail land owners and developers, if there was money to be made from converting a portion of the store to other uses they would have done so, or at least performed some serious investigations into realizing this untapped potential. 

[82] With respect to the costs presented by Mr. MacLaggan, he relies to a large extent on figures from Mr. Boname and BTY Group.  According to appraisal theory (quoted previously), any capital expenditures applicable must be considered.  Mr. Boname excludes allowances for:  land cost, potential financing on land, developer’s profit on land, retail tenant improvements, leasing commissions, severance costs for existing leases, parking requirements, hazardous materials abatement (his report notes that this has not yet been considered), and partial demolition costs to accommodate redevelopment of the upper levels to office use.  We are missing his discussion and reasons for why these figures are excluded from his analysis.  A number of other cost items are unsubstantiated namely his soft costs at 8% and financing at 5%.  Mr. Glen’s costs are higher, but likewise, largely unsubstantiated.  Mr. MacLaggan’s figures show that the retail income is sufficiently high to support conversion of the lower levels given his costs.  From our understanding of the upper levels, we are not confident that the proposed rents provide an adequate return given the high cost of conversion, even before we consider the higher costs presented during the hearing.  Mr. Glen questions Mr. MacLaggan’s costs, and presents higher costs to achieve reconfiguration including retail tenant improvements (later agreed to by Mr. MacLaggan) as well as a longer time to achieve construction and full lease-up. 

[83] Mr. MacLaggan arrives at his final value based on a hypothetical condition.  He assumes that the improvements and equipment therein are in good condition and can be re-used in a reconfigured format for smaller retail and office users.  He assumes that the building can be vacated at no cost and that full approvals will be granted by the City of Vancouver without any costly concessions or time delays.  His hypothetical condition is not based on market activity or actual proposals, but rather on his opinion that the current use as a department store is obsolete.  Valuation based on a hypothetical condition is permitted by the Appraisal Institute of Canada under certain conditions.  According to CUSPAP Section 7.12, “Hypothetical Conditions may be used when they are required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison.  Common hypothetical conditions include proposed improvements and prospective appraisals.  When appraising proposed improvements, examine and have available for future examination:

7.12.1.i. plans, specifications, or other documents sufficient to identify the scope and character of

7.12.1.ii. the proposed improvements;

7.12.1.iii. evidence indicating the probable time of completion of the proposed improvements; and

7.12.1.iv. reasonably clear and appropriate evidence supporting development costs, anticipated earnings, occupancy projections, and the anticipated competition at the time of completion.”

[84] In conclusion, we find that Scenario 4, which considers a highest and best use as reconfigured, is not properly supported.  We rely on an article written by Gary Abson in 1989 “Highest and best use: theory and practice” (The Canadian Appraiser, Spring 1989 (p.4 in Exhibit #14A) that reads:

“The existence of improvements necessitates a separate and distinct feasibility analysis or analyses depending on re-use capabilities.  The analyst must consider such factors as remaining economic life; structural capacity for addition of floors; cost of demolition; revenue generating capability; opportunities, costs and time frames for re-use conversions; and operating, maintenance and modernization costs and horizons….  In any event, the existence of structures on a site being evaluated as to its highest and best use requires additional data and careful analysis prior to the determination of the property’s highest and best use.”

[85] Mr. MacLaggan relies on Mr. Boname, who has not completed a proper highest and best use analysis and relies on general trends and ranges rather than primary research.  The proposed reconfiguration is significant and must be properly supported by appropriate and detailed lease comparables and independently researched capitalization rates.  We find that there is insufficient support for the viability of retail use on level 3, and that the projected construction costs and timeline are not substantiated. 

[86] Frankly, the reconfiguration plan appears to be based on a flawed and incomplete highest and best use analysis.  It is the highest and best use analysis which is the basis of any appraisal assignment.  While a hypothetical condition is permitted in appraisal theory, it must be done carefully and be appropriately grounded in market evidence.  For assessment valuations in particular, valuations cannot be based on the whim of the appraiser, but must reflect market activity.  Assessment valuations are conducted each year and thus development potential or plans can be reflected once such potential is properly supported and indicated by the market.  The parties did not provide appropriate support for a vertical reconfiguration of the type presented, both with respect to demand (particularly for retail on the fourth level) or with respect to the considerable capital costs and time that are inevitably attributable to such a massive redevelopment. 

Scenario 5: Demolish department store and rebuild density in another form. 

[87] The experts did not directly address this option but we find that it warrants our attention as it is the basis of Mr. MacLaggan’s original roll value that is in evidence.  By applying a straight land value to the density of only this one component of Block 52, Mr. MacLaggan, in essence, is stating that the current department store improvements have no value and should be demolished.  Demolition and rebuilding would address the City of Vancouver’s concern that the department store building is “too boxy”, and accommodate their preference for higher elevation, perhaps in the form of several towers.  It would also allow optimum floor plates and higher rents to be achieved for the office component, and most advantageous retail layout and access.  Limited evidence was submitted (Exhibit 30) in the form of an e-mail between Cadillac Fairview and Sears regarding costs of such an endeavour, however, the participants to this e-mail were not available for testimony.  Unfortunately, this alternative was not explored by either party. 

[88] Mr. MacLaggan, in his highest and best use as vacant analysis contemplates clearing Block 52 in its entirety, and in doing so concludes the need for additional parking (an increase of 50%).  Firstly, we question why additional parking is required in a total redevelopment that does not increase the density from the current improvements and envisions similar use as in the reconfiguration scenario, yet no extra parking was considered in the latter concept.  Furthermore, he does not discuss demolition and rebuilding of the department store improvements only and the associated logistics of building over an existing parkade.  He does not complete any consideration for demolition costs, asbestos abatement, or lease severance costs.  Regardless of specific lease terms, which in this case cannot be considered in the assessment valuation, as at the state and condition date the premises were occupied by a tenant under a long term lease.  The premises are also acknowledged to be contaminated with hazardous materials and these would have to be removed to achieve any redevelopment. 

[89] Mr. Glen takes the approach that the density must be legally severed for this value to be realized.  We find this premise to be unsound.  Furthermore, to support this scenario, he would need to show comparable sales that indicate what a willing purchaser would pay for a site that is improved with underground parking, mall retail, and an office tower, with surplus density that may be actualized over time at some cost. 

[90] Based on the above, we find Scenario 5 does not represent a viable approach. 

Conclusion of Highest and Best Use “As Is”

[91] We conclude that the highest and best use “as is” is for the current use and configuration as a department store, with occupancy on the mall and levels 1 to 4 above grade (total of five levels). 

[92] With respect to the upper three levels (floors 5, 6 and 7), although they were built as part of the larger department store, current marketing has changed and the top three levels are economically obsolete.  Neither the tenant nor the landlord has been able to find an economically viable alternative.  They can, and some areas have been, used for storage, although of limited usefulness as access is provided only through the department store.  There is no evidence that the space is required for storage to support the department store on the lower five levels, as those levels in and of themselves are already over the optimum size.  The evidence suggests that while some alternative use may be found, it is not economically viable at this time.  Therefore, we have not attributed any rental income to these levels.  This corresponds with the memorandum of understanding between the parties on the contributory value of these improvements should we find the highest and best use of the department store improvements to be their current use. 

MARKET VALUE

[93] The main issue is what is the market value of the unencumbered fee simple interest of Block 52 as at July 1, 2007?  Market value is defined as “the most probable price, as of a specified date, in cash, or in terms equivalent to cash, or other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and for self-interest, assuming neither is under undue duress” (The Appraisal of Real Estate 2^nd Canadian Edition (2002) p.2.3).

[94] Market value is based on the highest and best use of a property.  We have found that the highest and best use is “as is” with all improvements used as at the state and condition date, including office use (TD Tower), retail use (mall level retail units), department store use (mall to level 4), and parking.  Both Sears and the Assessor have relied on the income approach to value the property.  They have further agreed to the economic rents, vacancy allowances, expense allowances and capitalization rates applicable.  The parties have a Memorandum of Agreement on Issues (Exhibit #1) that states that “if the Board should determine the present use (i.e. a department store forming an integral part of the Pacific Centre Shopping Centre) is the highest and best use of the subject premises then the value to be attributed to that component of Block 52 is $29,418,530”.  We find that the department store is an integral part of the Pacific Centre Shopping Centre.  Using those inputs, and the leasable areas of the various uses (including the department store mall to level 4), we calculate the market value (before deductions and allocation of value to the volumetric parcels) as follows:

[95] We find it appropriate to comment on the Assessor’s contention that the department store rent of $5.00 per sq.ft. results in a value for that component that is less than the value of the underlying land.  In response we reiterate that the property under appeal is not the department store in isolation, but rather the entirety of Block 52.  It is the whole of Block 52 that must be valued as an integral development.  The value of Block 52 as improved is considerably higher than the underlying land, by either Mr. Glen’s valuation or Mr. MacLaggan’s. 

[96] Although the Assessor concludes a value for the property based on a reconfiguration of the department store improvements to smaller retail and office use, the roll value reflects the density occupied by the department store at land value.  Despite this significantly higher value as per the reconfiguration analysis, the Assessor requests only that the Board sustain the roll value. 

[97] The approach on the roll assumes demolition of the department store improvements at no cost, and without due consideration for the feasibility and cost of construction.  Furthermore, it ignores the integrated nature of the entirety of Block 52 and Pacific Centre.  This was previously summarized under Highest and Best Use, Scenario 5.

[98] At the end of the day, the site is built out to full as-of-right density, excepting a small amount of density that the City will permit to be placed on any of the three legal blocks comprising Pacific Centre.  Even though there may be some significant obsolescence, this does not mean that the existing improvements can simply be wished away for a higher revenue draw without due consideration for the time and costs involved as well as the feasibility of a redevelopment or reconfiguration scheme.

ASBESTOS

[99] Both parties recognize the presence of asbestos in the office tower and department store premises.  The reported cost-to-cure from the property owner, Cadillac Fairview, for remediation in the TD office tower is accepted by the parties at $2,477,518.  This figure is reflected on the roll and we rely on this figure in our valuation.

[100] With respect to the department store improvements, asbestos is acknowledged in a number of areas.  A detailed cost-to-cure report is not available.  What is in evidence is a calculation of the cost-to-cure one particular area of contamination, namely the asbestos laden firestopping at the precast concrete panels on the exterior of the building.  The estimate, completed by Mr. Evans is based on similar work done by Quantum Environmental Group in a portion of the department store premises several years prior when renovations occurred for the “eatons” concept.  Mr. Evans took the cost per sq.ft. of the estimated area remediated, multiplied this figure by the area still to be remediated and then applied an inflation escalation, overhead and soft costs.  The escalation factor and overhead and soft cost allowances were not contested.  No other estimates were provided.  The figure of $3,459,600 calculated by Mr. Evans appears to be based on reliable historical figures and appropriately adjusted; we accept it and deduct this cost from the final value.

[101] Mr. Evans also estimated the cost-to-cure the remaining asbestos material in the building.  In reviewing the historical invoices from Quantum Environmental Group from 2000, he noted that approximately half the cost was for remediating the fire-stopping material as noted above.  The other half was for asbestos removal to areas of pipework, ductwork, drywall, and flooring in addition to removal of pcb-ladened light fixture ballasts.  Based on these figures, Mr. Evans took the same amount he estimated for the fire-stopping remediation and applied it to “other remediation”.  It is unclear from the evidence as to the extent of asbestos in the interior of the building and how much has been remediated and what is remaining.  Thus, we do not accept this rough estimate and advise the owner to have a cost-to-cure estimate prepared for future consideration on the roll.

DEFERRED MAINTENANCE

[102] We heard evidence of required roof repairs as it related to the redevelopment of the department store premises (identified as Scenario 4 in this decision).  For the preparation of his report, Mr. Pang assumed that the roof was in good condition.  He had no evidence for this as he did not conduct an inspection.  Mr. Evans allowed for replacement after inspecting the roof and noting leakage problems.  The parties agreed to hard costs of $1.1 million for re-building the roof structure for promenade deck in the retrofitted building, plus associated soft costs.  They also agreed to $1,400,000 plus soft costs to re-finish the balance of the roof, however, Mr. Klassen did not agree that these were costs associated with redevelopment.  He did state that the Assessor agrees that the roof is leaking, but stated further that he does not consider this a cost of redevelopment.  

[103] Given our finding of highest and best use as the existing department store, no redevelopment is reflected.  Thus, are roof repairs required?  We asked Sears and the Assessor what the cost would be to refinish the entire roof in an “as is” scenario given that the hard costs to replace a portion the roof were agreed at $1.4 million.  No figure was forthcoming.

[104] The department store is functioning with the existing roof.  Some of the premises are affected but as these are the un-used levels it does not impact the existing use.  Without clear evidence as to the nature of the roof leaks, the immediacy of required repairs/replacement, and the cost to address the existing roof, we cannot make a deduction for deferred maintenance.  The parties can explore this area and arrive at some understanding if not for the 2008 roll, then for future rolls. 

EQUITY

[105] As the Assessor did not seek an increase to the roll based on the redevelopment scenario but rather put forward a value based on land for the department store area, we restricted equity arguments to land only.  On that basis, we heard evidence on equity from Mr. Nishi-Beckingham (Exhibit #117) and Mr. Bruce Evans-Atkinson (Exhibit #121). 

[106] It is the whole of Block 52 that is under appeal.  As per the 2008 roll, the income value on Block 52 exceeds the land value.  Mr. Nishi-Beckingham states that a review for equity purposes of the assessed land value for the entirety of Block 52, if vacant, shows that a vacant fee simple assessment for the land value is $90.00 per sq.ft.  However, Mr. Nishi-Beckingham continues by stating that the area occupied by the department store is not fee simple land as it is density that forms part of the larger Pacific Centre, thus using an assessment rate of $90.00 per sq.ft. buildable is not equitable.  He presents evidence that the land value for the “excess” land, being that land representing the density of the department store premises, is worth between $0 and $55 per sq.ft. buildable minus the costs to demolish the existing improvements.  The low end is based on assessments in which excess density has not been valued on the roll, including some 70,000 sq.ft. permissible density (as yet unused) on any of the three blocks comprising Pacific Centre which is not reflected on the roll value of any of the three blocks.  The high end is represented by the value applied for the transferable density that forms part of the Bay site, resulting from its heritage designation. 

[107] Mr. Evans-Atkinson supports the current assessment at $94.50 per sq.ft.  He explains that the other blocks comprising Pacific Centre are assessed at $90 per sq.ft., with a 5% premium applied to Block 52 due to its Robson Street frontage.  The site on which the Bay is situated is also assessed at $90 per sq.ft. buildable.  He refers to a number of other large parcels (the competitive set) which are assessed at $150 per sq.ft. buildable, which have a lower permitted density at 5.0 F.S.R. versus the Pacific Centre parcels on which a density of 9.47 F.S.R. is permitted.  He supports his argument with a number of land sales including those previously discussed as well as several residential development sites.  He argues that one cannot rely on the value of transferable density at $55 per sq.ft. buildable as the Assessor applies the higher value of the underlying recipient site once the density has been transferred.

[108] We accept that the whole of Block 52 is valued on the income approach and the income approach exceeds the land value.  The land representing the density occupied by the department store forms part of the whole of Block 52 and is not a separate density that can be sold and transferred to another parcel outside the Pacific Centre development.  The evidence shows that the Assessor was unable to show any other improved property where a portion of the property is valued by the income approach and a portion by the land.  We reiterate that it is all of the land in Block 52 that is under consideration for equity, not only that portion occupied by the department store. 

[109] The test for equity is consistent with the competitive set which includes the other two blocks of Pacific Centre (Blocks 32 and 42).  These parcels too were valued on the income approach.  The attribution to land of those parcels is $90 per sq.ft. buildable.  The land underlying block 52 is assessed at $94.50 per sq.ft. buildable reflecting a superior location.  On that basis, we find that the methodology is consistent.  Block 52 should be valued in its entirety on the income approach including the department store portion, in similar fashion to Blocks 32 and 42.  As per the revised 2008 assessment, The Bay property is similarly valued on an income approach, although as that property falls under a heritage classification, the attribution to land and improvements differs from the approach taken for the properties comprising Pacific Centre. 

[110] Given that it is all of the land underlying Block 52 that is to be considered for equity purposes, we find that the value attribution to the land at $94.50 per sq.ft. buildable is not inequitable.  This land value is not relevant, however, as we found that the market value of the land is lower.

CONCLUSION

[111] The duty of an assessor in estimating a value for a property for the assessment roll is to find its market value.  Market value is defined in CUSPAP as the “most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus”.  Market value, thus, is an expression or embodiment of the marketplace.  It is based on the highest and best use of the property.

[112] The highest and best use analysis is a critical component of any appraisal.  In this case we found that the Assessor did not conduct a proper highest and best use analysis.  The result was that the Assessor concluded a value for the subject not based on market evidence but rather on speculation, specifically on a conceptual exercise of a potential use that is not being viably contemplated by the owner, the lessee, or any other market participant.  While any number of conceptual ideas may be considered from time to time by prudent owners seeking to maximize their property values, they are not relevant to market value until such time that they are deemed feasible by the market and they influence how the values of such properties are determined by knowledgeable purchasers and sellers.  The Assessor should not speculate or lead the market.  Rather, it is his or her job to reflect the market and apply proper appraisal principles in roll valuation.  Due to the annual nature of roll values, the Assessor has the opportunity to revalue the property each year, and thus has the ability to reflect development potential in the future, once such potential becomes probable.

[113] We turned our minds to the leading case that deals with speculation versus a likely probability in regards to the highest and best use of a property.

[114] In Petro-Canada Inc. (Gulf Canada Ltd) v. Assessor of Area 12 – Coquitlam (1991) SC 321 (B.C.S.C) the Court determined the Board must value lands based on their highest and best use and when there are questions regarding the probability of reaching that highest and best use the acceptable lowest threshold is something higher than a 50% probability.

[115] We found the highest and best use for Block 52 in general to be its current use and for the portion in dispute we found that, although there is economic obsolescence, it is operating at its highest and best use.  For these reasons Petro-Canada does not apply in reaching a decision regarding either value or equity in these appeals.

[116] However, Petro-Canada is important when considering assessments alleged to be in their foundation more speculative than probable.  Petro-Canada says that it would not be speculative to consider a change in use if the probability for that change is greater than 50%.  There must be some measurable difference between the two situations or some market derived evidence pointing to a probability higher than the threshold before the Assessor embarks on setting an assessment not founded on market realities.

[117] A telling point in Petro-Canada, where part of the dispute revolved around whether industrial lands ought to be valued as residential, was the fact that the owner commissioned an appraisal that suggested redeveloping some of the lands as residential.  The same facts do not exist in this dispute.  In this case, the Assessor valued the department store improvements based on the value of the underlying land and then attempted to support this as a valuation methodology that was more conjecture and speculative than soundly market based. 

[118] We have found that the highest and best use of Block 52 is its current mixed use that includes the existing department store improvements.  The value of Block 52 is summarized below.  The value includes deductions for the cost to cure tenant termination/relocation for the transit station (a previously agreed upon amount that was not contested during the hearing) and the asbestos work in the TD tower, which parties previously agreed on.  It also reflects a deduction for asbestos remediation work for the department store premises as accepted above.

[119] We find the actual value of all components of Block 52 is $227,635,000 (rounded).

[120] Following the Assessor’s assessment methodology, the total value is split between land and improvements using a market value applied to the land with the residual then attributable to the improvements.  In accordance with our findings, the land portion is valued at $62.73 per sq.ft. buildable applied to the site area of 130,000 sq.ft. at an F.S.R. of 9.47.

ORDER

[121] The Board orders the Assessor to amend the 2008 assessment roll as follows:

Roll No 09-39-200-026-600-126-06-0000 – Block 52

[122] The Board confirms the decisions of the 2008 Property Assessment Review Panel with respect to the volumetric parcels as follows:

Roll No. 09-39-200-026-602-124-46-0000 – Volumetric Parcel “A”

Roll No. 09-39-200-026-600-124-74-0000 – Volumetric Parcel “B”

Roll No. 09-39-200-026-600-126-66-0000 – Volumetric Parcel “C”