Decision and Order
IN THE MATTER OF AN APPEAL PURSUANT TO S. 50 OF THE ASSESSMENT ACT
CONCERNING:
Salient Properties (Alhambra) Ltd
AND
Assessor Of Area #09 - Vancouver Sea To Sky Region
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Appeal Nos.: |
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Refer to as: |
Salient Properties (Alhambra) v. Area 09 (2010 PAABBC 20091520) |
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Date of Decision: |
January 27, 2010 |
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Property: |
1 Gaoler's Mews, City of Vancouver |
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Heard: |
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Submissions: |
From the Appellant, received September 30 & October 21, 2009 |
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From the Respondent, received September 30 & October 20, 2009 |
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Board Panel: |
Cheryl Vickers, Panel Chair |
INTRODUCTION
[1] The property that is the subject of these appeals is located at 1 Gaoler’s Mews, also referred to as 6 Water Street, in the Gastown area of Vancouver (the Property). It is located at the southwest corner of Water and Carrall Streets where Powell and Alexander Streets converge into Water Street. The Appellant says the Property has not been assessed equitably on the 2008 and 2009 rolls when compared to other similar properties in the area. The Assessor disagrees.
[2] The Assessment Act requires that a property be assessed at its actual or market value as of a specified valuation date. The Act gives the Board the power to reopen the whole question of a property’s assessment to ensure accuracy and that assessments are at actual value applied in a consistent manner in a taxing jurisdiction, or in other words, that they are fair and equitable (Assessor of Area 09 – Vancouver v. Lount (1995) Stated Case 353 (BCCA)). Equity requires that similar properties be assessed at values that bear a fair and just relationship to the assessed values of other similar properties, having regard to the particular characteristics of individual lands and improvements and to the market’s treatment of those characteristics (Ross and Grubb v. Assessor of Area 10 – Burnaby/New Westminster (1999) Stated Case 419 BCCA); Hilton v. Area 14 (2001 PAABBC 20014823). A taxpayer is entitled to be assessed at the lower of actual value or equitable value (Assessor of Area 09 – Vancouver v. Bramalea Limited, et al (1990) Stated Case 277 (BCCA)).
[3] Actual value and equity are distinct concepts. In either analysis, it is important not to confuse concepts of market value and equitable value; market value being that value determined from an analysis of market evidence, and equitable value being that value determined from a comparison of the assessments of similar properties having due regard to whether differences can be adequately accounted for with market evidence. Market value is determined without regard to equity or the assessment of other similar properties. Equitable value is determined from an analysis of the assessments of other similar properties but can never be determined without regard to the market.
[4] The valuation date for the 2008 roll is July 1, 2007. For the 2009 roll, the property is to be assessed at the lower of its actual value as of July 1, 2007 or July 1, 2008. Neither party has provided the Board with an appraisal estimating the market value of the Property as of either date. I, therefore, cannot confirm that the assessments reflect the actual or market value of the Property as of either date. I will assume, however, given the lack of evidence from either party to dispute actual value, that actual value is not in issue and that the 2008 assessment reflects the Property’s market value as of July 1, 2007.
[5] Further, given the lack of differentiation in the parties submissions between the two assessment years, I assume that both parties agree July 1, 2007 is the appropriate valuation date for the 2009 roll, that is, that the actual or market value of the property as of July 1, 2007 was lower than it was on July 1, 2008. On that assumption, the 2009 assessment would be the same as the 2008 assessment barring any change in the physical condition of the Property between October 31, 2007 and October 31, 2008. While the evidence is that as of October 31, 2008 the Property was vacant pending renovations, renovations had not started, and neither party suggests there was a change to the physical condition or permitted use of the Property as of October 31, 2008 from October 31, 2007. I also assume that the parties agree that the results of an equity analysis for the 2008 roll would likewise “flow through” to the 2009 roll. In the absence of any dispute over these matters in this appeal, I accept these assumptions as appropriate and will proceed to determine these appeals on that basis.
ISSUE
[6] The issue is whether the Property’s 2008 and 2009 assessments are equitable, that is, whether the Property’s assessment bears a fair and just relationship with the assessments of other similar properties in the municipality, and if not, to determine equitable value for the 2008 and 2009 rolls.
FACTS
[7] The Property has an irregularly shaped site with 147.31 feet of frontage on Carrall Street, 71.85 feet of frontage on Water Street, an interior western boundary of 142.98 feet and a southern boundary along Trounce Alley of 107.58 feet. It has an overall size of 12,740 square feet. It is improved with two storey heritage buildings known as the “Alhambra Building” and the “Stables” originally constructed in 1887. The main floor is devised into retail space with a leasable area of 11,304 square feet, and the upper floor into office space with a leasable area of 9,901 square feet. The retail space, therefore, comprises 53% of the gross leasable area and the office space comprises 47% of the gross leasable area. As of October 31, 2007, the retail space was fully occupied and the office space was 52% vacant. As of October 31, 2008, the buildings were completely vacant pending renovations.
[8] For the 2008 roll, the Assessor assessed the Property using the income approach applying rent of $14/sq ft and vacancy and expense allowances of 10% to the office space, and rent of $24/sq ft and vacancy and expense allowances of 3% and 5%, respectively, to the retail space. The Assessor applied a 5.0% overall capitalization rate to the net operating income so derived, for a total value of $7,244,000 rounded. The Property is assessed at the same value for the 2009 roll. The valuation parameters are set out in chart form below.
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Type |
SF |
Rent |
Gross |
Vac |
Exp |
Net |
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Retail |
11,304 |
$24.00 |
$271,296 |
3.0% |
5.0% |
$ |
249,999 |
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Office |
9,901 |
$14.00 |
$138,614 |
10.0% |
10.0% |
$ |
112,277 |
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Total |
$ |
362,277 |
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Cap |
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5.0% |
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Value |
$ |
7,245,532 |
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[9] The actual contract rents in place at the Property as of July, 2007 ranged from $16.50/sq ft for a relatively large space negotiated in 2005, to $22.00/sq ft for the corner unit with Water Street frontage negotiated in 2006.
[10] The Assessor assessed other mixed office/retail properties in the Gastown area for the 2008 roll applying retail rents from $2.75 to $34/sq ft and office rents from $6.00 to $17.50/sq ft, vacancy allowances from 3% to 20% to retail space and 8% to 20% to office space, expense allowances from 4% to 20% for retail space and 7% to 20% for office space, and capitalization rates ranging from 5.0% to 7.75% as set out below.
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# |
Address |
GLA in sq. ft. |
Type of space |
% of GLA |
Rent/ sq. ft. |
Vacancy Allowance |
Expense Allowance |
Cap Rate |
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1 |
334 W Cordova |
40,436 |
Office |
93 |
$13 |
10% |
10% |
6.0% |
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Retail |
7 |
$15 |
5% |
7% |
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2 |
342 Water |
20,476 |
Office |
87 |
$17.50 |
10% |
10% |
6.5% |
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Retail |
13 |
$34 |
3% |
5% |
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3 |
73 Water |
24,627 |
Office |
86 |
$14 |
10% |
10% |
6.25% |
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Retail |
14 |
$24 |
3% |
5% |
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4 |
207 Hastings |
73,867 |
Office |
85 |
$10 |
12% |
12% |
7.75% |
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Retail |
15 |
$2.75/$4 |
20%/15% |
20%/15% |
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5 |
162 Water |
90,660 |
Office |
83 |
$17 |
8% |
7% |
6.5% |
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Retail |
17 |
$29 |
3% |
5% |
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6 |
311 Water |
19,950 |
Office |
83 |
$8 |
10% |
10% |
6.0% |
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Retail |
17 |
$34 |
3% |
5% |
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7 |
361 Water |
182,957 |
Office |
83 |
$11/18.75 |
8% |
7% |
7.0% |
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Retail |
17 |
$28 |
4% |
4% |
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8 |
321 Water |
41,281 |
Office |
79 |
$14 |
10% |
10% |
5.5% |
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Retail |
21 |
$15/34 |
3% |
5% |
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9 |
1 Water |
61,438 |
Office |
71 |
$14 |
10% |
10% |
6.25% |
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Retail |
29 |
$24 |
3% |
5% |
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10 |
12 Water |
25,467 |
Office |
64 |
$10/12.50 |
20% |
20% |
7.0% |
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Retail |
36 |
$24/26 |
4% |
4% |
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11 |
300 Water |
8,900 |
Office |
54 |
$12 |
10% |
10% |
5.5% |
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Retail |
46 |
$34 |
3% |
5% |
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12 |
325 Carrall |
4,032 |
Office |
50 |
$6 |
20% |
20% |
6.0% |
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Retail |
50 |
$11 |
12% |
12% |
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13 |
151 Water |
8,310 |
Office |
33 |
$8 |
10% |
10% |
5.0% |
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Retail |
67 |
$29 |
3% |
5% |
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14 |
328 Water |
14,698 |
Office |
32 |
$12 |
10% |
10% |
5.0% |
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Retail |
68 |
$11/28 |
3% |
5% |
[11] The Assessor assessed 100% office use properties in the Gastown area for the 2008 roll applying rents from $5.50 to $14/ sq ft, vacancy and expense allowances of 10% or 20%, and capitalization rates ranging from 5.75% to 6.5% as set out below.
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# |
Address |
GLA |
Rent |
Vacancy Allowance |
Expense Allowance |
Cap Rate |
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15 |
314 Water |
21,665 |
$14 |
10% |
10% |
6.25% |
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16 |
211 Columbia |
17,805 |
$14 |
10% |
10% |
6.0% |
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17 |
81 W Cordova |
4,026 |
$12.50/14 |
20% |
20% |
6.0% |
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18 |
40 Powell |
24,700 |
$5.50/12 |
20% |
20% |
6.5% |
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19 |
191 Alexander |
13,687 |
$12 |
10% |
10% |
5.75% |
[12] The Assessor assessed 100% retail use properties in the Gastown area for the 2008 roll applying rents from $9.75 to $34/ sq ft, vacancy allowances from 3% to 12%, expense allowances from 5% to 12%, and capitalization rates ranging from 4.75% to 5.25% as set out below:
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# |
Address |
GLA |
Rent |
Vacancy Allowance |
Expense Allowance |
Cap Rate |
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20 |
50 Water |
91,955 |
$14.25/24 |
3% |
5% |
5.0% |
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21 |
65 Water |
20,428 |
$23-$25 |
3% |
5% |
5.25% |
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22 |
115 Water |
4,356 |
$29 |
3% |
5% |
5.0% |
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23 |
335 Water |
17,139 |
$34 |
3% |
5% |
5.5% |
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24 |
350 Water |
14,362 |
$11/34 |
3% |
5%/12% |
5.25% |
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25 |
52 Alexander |
1,700 |
$19 |
5% |
7% |
4.75% |
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26 |
15 Cordova |
2,964 |
$14 |
12% |
12% |
4.75% |
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27 |
160 Cordova |
4,246 |
$13 |
12% |
12% |
4.75% |
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28 |
228 Abbott |
6,000 |
$14 |
12% |
12% |
5.0% |
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29 |
333 Carrall |
2,320 |
$9.75 |
12% |
12% |
4.75% |
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30 |
2 Powell |
8,632 |
$14/19 |
5% |
7% |
5.0% |
[13] The Assessor assessed other mixed use retail and warehouse properties in the Gastown area for the 2008 roll applying retail rents from $4 to $32/sq ft and warehouse rents from $4.50 to 5.50/sq ft, vacancy allowances from 3% to 20% to retail space and 8% to 20% to office space, expense allowances from 4% to 20% for retail space and 5% or 6% for warehouse space, and capitalization rates ranging from 5.0% to 5.75% as set out below.
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# |
Address |
GLA in sq. ft. |
Type of space |
% of GLA |
Rent/ sq. ft. |
Vacancy Allowance |
Expense Allowance |
Cap Rate |
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31 |
1 Hastings |
10,248 |
Retail |
50 |
$4 |
20% |
20% |
5.0% |
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Warehouse |
50 |
$4.50 |
3% |
5% |
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32 |
314 W Cordova |
18,100 |
Retail |
47 |
$15 |
5% |
7% |
5.0% |
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Warehouse |
13 |
$5.50 |
3% |
6% |
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33 |
305 Water |
16,500 |
Retail |
20 |
$32 |
3% |
5% |
5.75% |
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Warehouse |
80 |
$5.50 |
3% |
5% |
EVIDENCE AND SUBMISSIONS
[14] Both parties present evidence of the 2008 assessments of other properties to support their respective case that the Property either is, or is not, assessed in a consistent manner, and is, or is not, therefore, equitable. John Parkes, AACI, provides written evidence and submissions on behalf of the Appellant; Sarita Zugazaga, AACI, provides written evidence and submissions on behalf of the Assessor. Neither of the reports constitutes a market value appraisal of the Property, but are characterized, in Mr. Parkes’ case as an “Assessment Analysis”, and in Ms. Zugazaga’s case, as an “Equity Review”. While both parties approach the appeal from an equity perspective, the arguments and evidence of both sometimes strays into actual value and mix considerations for an actual value appraisal and an equity review.
[15] The Appellant relies on the assessments of four properties in the area, those identified as #6, #10, #15, and #16 above, and principally on #10 at 12 Water Street, next door to the subject, to submit that the Property has not been assessed equitably. The Assessor says the capitalization rate of 7.0% used to assess 12 Water Street (#10) was in error for the 2008 roll and should have been 5.0%, and that the vacancy and expense rates of 20% applied to the office income were also in error. The Assessor submits that other than for these mistakes, the Property was assessed in a consistent manner with other properties with comparable ratios of retail to office space.
Retail Rent
[16] In light of the actual contract rents at the Property of $16.50 to $22/sq ft, the Appellant submits the $24 rent applied by the Assessor is excessive for a building requiring renovation, and suggests $20/sq ft is applicable to the retail area. The Appellant submits 12 Water Street (#10) assessed using retail rents of $26 and $20/sq ft is a similarly unrenovated building with better exposure to Water Street, and that 311 Water Street (#6), assessed using a retail rent of $34/sq ft is a renovated project.
[17] The Assessor says the contract rents in the Property are not economic and that economic rents have been applied to generate the assessment. Ms. Zugazaga provides evidence of six retail leases from the neighbourhood, including two renewals in 2008 at the subject, indicating rents of $18.00 to $31.87/sq ft. Ms. Zugazaga also provides a copy of the Barnicke Retail Report for 2007 the net rental rate range for 2007 on Water Street was $35-$50/sq ft.
[18] The evidence indicates that the Assessor has used a wide range of retail rents throughout the Gastown neighbourhood. Retail rents applied to the five comparables principally relied on by the Appellant range from $24 to $34/sq ft and to other Water Street properties range from $11 to $34.
Office Rent
[19] Mr. Parkes argues 12 Water Street (#10) is valued using office rents of $10 and $12.50/sq ft, whereas a superior renovated building at 311 Water Street (#6) is valued using an office rent of $8/sq ft. He argues these rents make no sense and that an equitable rent for the Property should be $10/sq ft. However, as 12 Water Street is valued using a 20% vacancy, and anticipating higher vacancy at the Property, he accepts the use of $14/sq ft office rent.
[20] Ms. Zugazaga says that the actual office rents in place at the Property of $14, $15, and $16/sq ft are not indicators of economic rent as they were negotiated in 2003. She provides evidence of six office leases ranging from $15.33 to $33.45/sq ft.
[21] The Assessor has applied a wide range of office rents to the assessments of Gastown properties. The office rents applied to the assessment of the properties principally relied on by the Appellant range from $8 to $14/sq ft and to the other properties on Water Street range from $8 to $18.75/sq ft.
Vacancy and Expense Allowances
[22] The Appellant does not dispute the 3% and 5% vacancy and expense allowances applied to the assessment of the property’s retail space.
[23] Based on the 20% vacancy applied at 12 Water Street (#10), and because actual office vacancy at the Property as of October 2007 was over 50%, Mr. Parkes submits the Property should also be valued with a 20% vacancy rate for the office space. Ms. Zugazaga says the 20% vacancy rate was applied in error to the assessment of 12 Water Street. She says the vacancy and expense rates have been applied to the subject the same way as what is most typical in the area save for inferior streets or derelict buildings. Ms. Zugazaga says 12 Water Street is the only other Water Street property to be assessed with a 20% vacancy rate and, relying on the Board’s decision in Tessaro v. Area 15 (2005 PAABBC 20051630), that this single anomaly should not be used to lower the assessment of the subject.
[24] Mr. Parkes applies a 20% expense rate to the office income in his final valuation. Presumably this is because that is the rate applied at 12 Water Street, but no explanation is given.
Capitalization Rate
[25] The Appellant submits the Property should be assessed using the same capitalization rate as that applied to the neigbouring property at 12 Water Street (#10). Mr. Parkes’ submission is based on the assumption that rate is 7.25%, but the PVS evidence provided indicates it is actually 7.0%. He submits the Property is highly similar to 12 Water Street in terms of location and that both buildings were unrenovated as of the relevant valuation dates. He submits 311 Water Street (#6) and 314 Water Street (#15) are superior to the subject yet they were assessed using capitalization rates of 6.0% and 6.25% respectively. He submits 211 Columbia Street (#16) is also a superior building to the subject having undergone renovation and having on site parking, but it was assessed using a 6.0% capitalization rate.
[26] Ms. Zugazaga says that, but for 12 Water Street (#10), which she says was assessed in error, and 361 Water Street (#7) and 207 Hastings Street (#4) which had other distinguishing factors, the addresses with greater than 45% retail space were capitalized at rates between 4.75% and 5.5% and those with a high percentage of office space were capitalized at rates predominantly between 5.5% and 6.5%. Ms. Zugazaga says 361 Water Street is distinguishable because of its size, and 207 Hastings Street is a poor location. Her evidence is that the median capitalization rate for predominantly retail buildings is 5.0% and for predominantly office buildings is 6.25%. Ms. Zugazaga submits that as the retail space at the Property comprises 53% of the gross leasable area, the capitalization rate of 5.0% is not inequitable.
[27] Ms. Zugazaga argues that retail occupancy provides an appreciably higher rental rate per square foot than office occupancy and that retail space typically experiences lower vacancy than office space making an income stream based on retail occupancy superior and less risky than one based on office occupancy. She submits a commercial retail unit provides a higher yield per square foot and a more reliable income stream as compared to office space, all else being equal. Ms. Zugazaga submits that the market does not react in the same manner to a property that is predominantly office as it does to a property that is predominantly retail and that is why lower capitalization rates were applied to the assessment of properties with greater than 45% retail occupancy, and higher capitalization rates applied to those properties with less than 30% retail occupancy.
[28] Mr. Parkes disputes that there is greater risk associated with a building with predominantly office space than one with predominantly retail space. He argues there is no evidence to support the application of differential capitalization rates to buildings based on the proportion of office to retail space, and no evidence to support 45% as being the threshold level of retail occupancy to attract a lower capitalization rate.
[29] Ms. Zugazaga’s evidence is that the correct capitalization rate for 12 Water Street (#10) is 5.0%. Mr. Parkes argues that the Assessor cannot claim to have valued a property in error to combat an equity argument. He argues the Property and 12 Water Street were assessed with the same capitalization rate in previous years and disputes that 12 Water Street would be correctly assessed using a 5.0% capitalization rate.
[30] Ms. Zugazaga provides evidence of the sale of 353 Water Street indicating an economic capitalization rate of 4.76%. This is a five storey building with a gross leasable area of 23,871 sq ft, 79% of which is office space and 21% of which is retail space. The evidence is unclear as to the date of this sale; Ms. Zugazaga’s initial submission says it sold in March 2007 and her rebuttal submission says it sold in April 2008. She also says the sales of 120 E. Cordova Street and 157 Alexander Street reflect capitalization rates of 4.95% and 4.37%. There is no evidence provided as to the date of these sales or any information about the properties, such as their size or the relative proportions of office and retail occupancy.
Appellant’s Equity Valuation
[31] The Appellant submits an equitable valuation of the subject would be $4,097,186. This is the value indicated by the application of a $20/sq ft rent, 3% vacancy and 5% expense allowance to the retail space, a $14/sq ft rent, and 20% vacancy and expense allowance to the office space, and an overall capitalization rate of 7.25% as follows:
|
Type |
SF |
Rent |
Gross |
Vac |
Exp |
Net |
|
Retail |
11,304 |
$20.00 |
$226,080 |
3.0% |
5.0% |
$ 208,333 |
|
Office |
9,901 |
$14.00 |
$138,614 |
20.0% |
20.0% |
$ 88,713 |
|
|
Total |
$ 297,045 |
||||
|
Cap |
7.25% |
|||||
|
Value |
$4,097,186 |
|||||
ANALYSIS
[32] The parties use what the Board has referred to as the “Valuation Parameters Analysis”. This method of determining equity compares the inputs used to develop the assessments of the subject and other similar properties. In the absence of evidence to account for any dissimilarity in the inputs used to develop the assessments, the Board may conclude that use of an inconsistent input would result in a determination of value that does not bear a fair and just relationship to the value determined for similar properties (Hilton, supra).
[33] The Board has generally found the “Valuation Parameters Analysis” weak as an equity analysis because isolating the income approach inputs used to generate an assessment, without an analysis of market evidence or a determination of actual value tends to confuse the concepts of actual and equitable value and often results in more confusion than clarification (Broadway Properties et al v. Area 09 (2009 PAABBC 20090187). More importantly, a “Valuation Parameters Analysis”, in the abstract makes it difficult to determine whether the use of any one valuation parameter is likely to generate a value that does not bear a fair and just relation to the assessed values of similar properties (Wal-Mart Canada Inc v. Assessor of Area 26 et al (1995) Stated Case 492 (SCBC)). In this case, both parties compare valuation parameters with limited reference to the market and without an analysis of the actual value of the subject or the various comparables referred to.
[34] The Appellant argues that several of the valuation parameters used in the development of the assessment are either wrong or inequitable resulting in an assessment that is inequitable. Equity does not require the use of the same methodology or the same variables within any one method in the valuation of similar properties (Wal-Mart, supra). If different variables are used to assess a property than are used to assess other similar properties, equity requires an analysis of whether the calculation of actual value using the different variables results in a value higher than if the same variables were used (Wal-Mart, supra). It is not use of a differential variable itself that is determinative of an inequity, but the value determined as a result of using a differential variable, if that value does not bear a fair and just relationship to the assessed values of other similar properties.
[35] Further, the Board will not simply consider the assessment of the appeal property compared to the assessment of one or two other properties and adjust the rates used. For the Board to make any adjustments there must be evidence of a group of similar properties, and the assessments of those properties as a group must be looked at, not just one or two from among the group. Simply because one or two other properties may be under-assessed does not mean another property’s assessment should be adjusted. For an adjustment to be made there must be evidence that the property’s assessment is not fair and equitable compared to the group as a whole (Hilton, supra).
[36] I will consider the evidence and arguments respecting each of the valuation parameters used in the 2008 assessment of the Property as compared to other similar properties in an effort to determine whether their application to the Property is likely to generate a value that is inequitable compared to the assessed values of similar properties. I will analyze the use of the various valuation parameters, using the limited evidence before me, from both an actual value and equity perspective in an effort at determining whether the use of any particular parameters may produce a valuation that falls outside of the range of either actual value or equitable value. As indicated earlier, I have assumed, in the absence of a market value appraisal disputing that the Property’s assessed value reasonably reflects its market value, that the Property is assessed at or close to its market value.
Retail Rent
[37] The Assessor used $24/sq ft; the Appellant says it should be $20/sq ft. From an actual value perspective, I am not convinced that the use of $24/sq ft for retail space at the Property is uneconomic. That rate falls squarely within the range of other market rents in the area. From an equity perspective, $24/ sq ft falls at the low end of the range of retail rents applied to the assessment of the comparables relied on by the Appellant and within the range of retail rents applied to other Water Street properties. I find that use of a $24 retail rent to the assessment of the Property is not likely to generate a value that is outside of the range of either actual or equitable values.
Office Rent
[38] The Assessor used $14/sq ft; the Appellant says it should be $10/sq ft but accepts $14 if a 20% vacancy rate is applied. From an actual value perspective, I suspect the use of $14/sq ft may be low as it falls outside the range of other office leases in the area commencing in 2007. I find it is possible that use of a $14/sq ft rent may generate a value that falls below the range of actual value. From an equity perspective, the use of $14 is at the high end of the office rent range applied to the comparables the Appellant relies on, but well within the range of the office rent range applied to the assessment of other Water Street properties. Mr. Parkes submits the other low Water Street rents “do not make sense” given that some of the properties were renovated. I am not convinced that the Assessor’s application of office rents throughout Gastown generally, or on Water Street in particular, has been consistent having due regard to all of the factors that may justify use of a higher or lower rent. But neither am I convinced that the use of $14/sq ft for the subject is outside of an equitable range or likely to generate a value that is outside of the range of equitable values.
Vacancy and Expense Allowances
[39] The Appellant does not dispute the application of the 3% vacancy allowance and 5% expense allowance applied to the retail income. These rates appear to have been applied reasonably consistently by the Assessor, and I agree that their application to the subject assessment is not likely to generate a value that is outside of the range of equitable values. I have no evidence to confirm that their use is economic from an actual value perspective, but given they are not disputed and the Assessor has used them reasonably consistently at most other buildings, I infer they are likely economic and that their use is not likely to generate a value that falls outside of the range of actual value.
[40] As to the vacancy and expense allowances applied to the office income, the Assessor used 10% for each, whereas, the Appellant suggests they should each be 20%. The Assessor applied 10% vacancy and expense allowances to the office income in the assessment of most of the office or mixed use office properties in the area. The Assessor applied 20% vacancy and expense rates to the assessments of 12 Water Street (#10), 325 Carrall Street (#12), 81 W Cordova (#17), and 40 Powell (#18). Ms. Zugazaga says the 20% vacancy was applied in error to the assessment of 12 Water Street. Its use at the other three buildings may be because of their inferior location or derelict state, being the reasons given for inconsistent application by Ms. Zugazaga, but the evidence is not clear on this point. Two of these buildings are 100% office use buildings, and not strictly comparable to the Property. The Assessor has applied a 20% capitalization rate to only two buildings, 12 Water Street (#10) and 325 Carrall Street (#12) that are mixed retail/office buildings.
[41] From an actual value perspective, I have no evidence from which to establish that the use of a 10% vacancy and expense rate is economic, but on the basis of Ms. Zugazaga’s evidence that the use of the 20% rate at 12 Water Street was in error, and the Assessor’s reasonably consistent use of 10% at most other office buildings, I infer the use of a 10% rate is likely economic and will not result in a value that is outside the range of actual values. From an equity perspective, is possible that the use of a 20% vacancy and expense rate at two other properties including 12 Water Street, may generate assessments of those properties that do not bear a fair and just relationship to the subject, assessed using a 10% vacancy and expense rate. As most other similar properties both in the area and on Water Street were assessed applying 10% or lower vacancy and expense allowances to the office income, it is not likely that use of a 10% vacancy and expense allowance for the Property generates an assessment that is outside of an equitable range.
Capitalization Rate
[42] The Assessor applied a 5.0% capitalization rate to the assessment of the Property; the Appellant says it is inequitable to assess the Property using a lower capitalization rate than that applied to 12 Water Street, which is 7.0%. The Assessor says the application of a 7.0% capitalization rate to 12 Water Street was in error and that 12 Water Street should have been assessed using a 5.0% capitalization rate. The Appellant disputes that 12 Water Street would be correctly assessed using a 5.0% capitalization rate but provides no market evidence with which to determine an appropriate market capitalization rate.
[43] From an actual value perspective, I have Ms. Zugazaga’s evidence of three sales suggesting a capitalization rate below 5% may be appropriate, but the information about these sales falls far short of what is generally required to properly determine a market capitalization rate. On the other hand, I have no market evidence to support the use of capitalization rates above 5.0%. I conclude use of a 5.0% capitalization rate is likely appropriate.
[44] From an equity perspective, the Assessor applied capitalization rates ranging from 4.75% to 7.75% to the assessment of properties in the Gastown area. The Assessor’s explanation for the use of differential rates is that the market treats properties with an income stream that comes predominantly from retail occupancy differently from properties with an income stream that comes predominantly from office occupancy.
[45] The evidence is that the retail space at addresses #1 through #9, #15 through #19, and #33 is less than 30% of the total leasable area. The Assessor applied capitalization rates ranging from 5.5% to 7.75% in assessing these properties for the 2008 roll. The two properties with the highest capitalization rates, 361 Water Street (#7) and 207 Hastings Street (#4) have distinguishing characteristics that may explain the use of a higher capitalization rate. Excluding these two properties, the highest capitalization rate applied to the properties in this group is 6.5%.
[46] The retail space in the Property and at addresses #11 through #14, and #20 through #32 is greater than 45% of the total leasable area. The Assessor applied capitalization rates ranging from 4.75%, for 100% retail properties located on Alexander, Cordova and Carrall Streets (#25-27, and #29), to 6.0% for a property located at 325 Carrall Street (#12). No explanation is given for the use of a higher capitalization rate for 325 Carrall. This property has clearly been treated differently from other properties, however, not only as to capitalization rate, but also in the application of relatively low rents and high vacancy and expense allowances.
[47] The Water Street properties with greater than 45% retail are assessed using capitalization rates of 5.0% to 5.5%. The Water Street properties with less than 45% retail are assessed using capitalization rates of 5.5% to 7.0%. Ms. Zugazaga distinguishes 361 Water Street (#7) because of its size, and says 12 Water (#10) is assessed in error. The retail space at 12 Water Street (#10) comprises 36% of the gross leasable area. If the Assessor is correct in assessing properties with greater than 45% retail occupancy with lower capitalization rates, it is not clear to me why a 5.0% capitalization rate would be appropriate for 12 Water Street as it does not have greater than 45% retail space.
[48] Neither party provides market evidence to support their respective theories that the market would or would not treat buildings with a high percentage of retail compared to office space differently. While in theory, it seems reasonable that a building with higher rents and less vacancy would be a less risky investment than one that attracts lower rents and is prone to higher vacancy, I do not have market evidence to support that theory. In fact, the only sale before me with evidence of the relative proportions of office and retail space, that of 353 Water Street, does not support the Assessor’s theory. The evidence is that the retail space at this property comprises only 21% of the gross leasable area, yet the capitalization rate indicated by the sale is less than 5.0%. There is certainly no market evidence that supports 45% retail as the threshold upon which use of a lower rate becomes appropriate.
[49] From an actual value perspective, there is insufficient evidence before me to support either party’s proposition that the use of a differential capitalization rate depending on the proportion of office to retail space is or is not warranted. Both parties make bald assertions as to the nature of the relative risks associated with buildings with more or less retail space compared to office space, but neither has provided evidence in support. From an actual value perspective, the only market evidence before me suggests use of a 5.0% capitalization rate, regardless of the relative proportions of retail and office occupancy is not inappropriate.
[50] I find the use of differential capitalization rates is not satisfactorily explained by the evidence.
[51] From an equity perspective, if market capitalization rates, even for buildings with small proportions of retail space compared to office space are generally below 5%, then the evidence suggests there may be many properties in the Gastown area that have not been assessed using an appropriate capitalization rate. I find it is likely that the assessments of many of the Gastown properties will not bear a fair and just relationship to the subject or each other, assuming use of higher than market capitalization rates have not been counteracted in particular buildings by other valuation inputs.
[52] Further, from an equity perspective, while the Assessor has generally applied lower capitalization rates to the assessment of those buildings with higher proportions of retail space and higher capitalization rates to those buildings with higher proportions of office space, close examination of the evidence reveals that the application of differential capitalization rates on the basis of the relative proportions of office to retail space has not been entirely consistent. 12 Water Street (#10) was assessed inconsistently with a capitalization rate of 7.0%, which falls outside the higher range applied to most buildings with less than 45% retail. There are examples of other Water Street properties on both sides of the 45% retail space threshold, such as 300 Water Street (#11) with 46 % retail space, 335 Water Street with 100% retail space, and 321 Water Street (#8) with only 21% retail space, all assessed using a 5.5% capitalization rate. 65 Water Street (#21) also with 100% retail space was assessed using a 5.25% capitalization rate, higher than the 5.0% rate applied to the subject with 53% retail space. It is possible that the application of differential capitalization rates, even if warranted by market evidence, may result in values that do not bear a fair and just relationship with each other because the differentiation has not been consistent.
[53] Specifically comparing the assessment of 12 Water Street (#10) to the Property’s assessment, the Assessor agrees the vacancy and expense allowances applied to the office income and the capitalization rate applied to the assessment of 12 Water Street are wrong. I agree the evidence before me does not justify application of a higher vacancy and expense allowance to the office income at 12 Water Street, nor does it justify use of a 7.0% capitalization rate. The retail rents are similar to those applied to the subject within the range of market rents, but the office rents are lower and would appear to be below the range of market rents in the area. I have no evidence to explain why lower office rates were applied to 12 Water Street. On a review of all of the evidence, I am satisfied that it is not likely that the assessment of 12 Water Street reflects its actual value. Rather, it is likely that the assessment is below market value. I find that 12 Water Street, a similar property next door to the subject, was not assessed consistently with the subject for the 2008 and 2009 rolls due to the inconsistent application of a higher than normal vacancy and expense allowance to the office income, and the capitalization of the income using a 7.0% capitalization rate. I find that the application of these inconsistent rates to the assessment of 12 Water Street likely produces an assessment that is below actual value and that does not bear a fair and just relationship to the assessment of the subject.
[54] As to other Gastown properties with mixed office/retail use, the Assessor applied capitalization rates ranging from 5.0% to 7.75%. The average capitalization rate applied to the assessment of mixed office/retail properties in the Gastown area, inclusive of the subject and 12 Water Street, is 6.08%. The average capitalization rate applied to the assessment of mixed office/retail properties on Water Street is 5.96%. I find it is likely that mixed use retail/office properties in the Gastown area and on Water Street in particular, that are comparable to the subject, are not assessed at a level that bears a fair and just relation to the subject’s assessment because of the application of higher capitalization rates. The Assessor’s explanation for the application of higher capitalization rates is not supported by the evidence.
Equitable Valuation
[55] The issue becomes how to adjust the assessment of the Property to a more equitable level. The Appellant argues that the subject should be assessed consistently with 12 Water Street. The Assessor argues a single anomalous assessment should not be used to lower other assessments. Previous Board decisions are inconsistent on this point.
[56] In Tessaro, supra, the Board found that “a single anomalous assessment should not be used as the basis for lowering the assessments of other properties in the same area”. The Board reasoned that “mass appraisal systems almost always produce some anomalies” and rather than lowering the assessment of properties to conform to the anomaly, “the anomalous assessment should be adjusted to bring it in line with its true fair market value although that might not occur until the next year’s assessment roll is prepared.”
[57] More recently, in Broadway Properties et al v. Area 09, (2009 PAABBC 20090187) the Board reduced an assessment on the basis that one of the subject’s competitors had been assessed using an erroneous capitalization rate. The Board determined that “it was not the Board’s mandate to protect the mass appraisal system, but to review the individual assessments of properties under appeal to confirm they are accurate and consistent”. The Board came to this conclusion on a review of the Bramalea decision.
[58] While I agree that Bramalea stands for the principle that taxpayers have the right to an assessment that is not in excess of actual value, and the right to an assessment that is not in excess of that which can be regarded as equitable, and directs that the Board’s function is to give effect to the rights of taxpayers that come before it, I disagree that Bramalea necessarily requires the Board to adjust an assessment on the basis of a single anomaly. In Bramalea, the Board had increased the value of the subject hotel by applying a market derived capitalization rate when the evidence was that all other comparable hotels in the City had been assessed with a higher capitalization rate. The Court’s concern was that increasing the assessed value of the subject through the use of a different capitalization rate may result in an assessed value that did not bear a fair and just relation to the assessments of other similar properties in the same group, i.e. other comparable hotels, if application of differential capitalization rates were not warranted to reflect differences in the characteristics of individual hotels. The Court remitted the appeal to the Board to reconsider its decision with a view to equity. Bramalea does not stand for the proposition that a single assessment should be adjusted to reflect a fair and just relation to the assessment of a property whose assessment is anomalous. It stands for the proposition that a taxpayer is entitled to have his or her property assessed at a level that bears a fair and just relation to other similar properties within a comparable group. Bramalea speaks to there being a range of both actual and equitable value. The taxpayer is entitled to have his or her assessment within the lower range – not necessarily at the lowest point of the range.
[59] I have found that the Property’s assessment is not equitable compared to the assessments of other similar properties in the Gastown area. The taxpayer is entitled, therefore, to have its assessment lowered to a value that is more equitable. I do not have evidence of the average relative comparability of other Gastown assessments to their actual value, so cannot adjust the assessment of the subject on that basis. As indicated earlier, nor do I agree with adjusting the Property’s assessment based on the single anomalous assessment of 12 Water Street. In the circumstances and in the absence of better evidence, given the wide differential in capitalization rates applied to mixed retail/office properties in the Gastown area, I find that application of a 6.0% capitalization rate, reflecting a capitalization rate close to the average rate applied to other similar properties in the Gastown area and on Water Street in particular, will result in an assessment that falls within an equitable range.
[60] If I apply a 6.0% capitalization rate to the net operating income of $362,277 generated with the same valuation parameters used for the 2008 and 2009 assessments, the value would be $6,037,933 as follows:
|
Type |
SF |
Rent |
Gross |
Vac |
Exp |
Net |
|
|
Retail |
11,304 |
$24.00 |
$271,296 |
3.0% |
5.0% |
$ |
249,999 |
|
Office |
9,901 |
$14.00 |
$138,614 |
10.0% |
10.0% |
$ |
112,277 |
|
|
Total |
$ |
362,276 |
||||
|
Cap |
6.0% |
||||||
|
Value |
$ |
6,037,933 |
|||||
[61] I find that an equitable valuation of the Property for the 2008 and 2009 rolls is $6,037,900 (rounded).
CONCLUSION
[62] I conclude that the Property has not been assessed equitably with other similar properties in the Gastown area. The Assessor has not been consistent in the application of differential capitalization rates to properties with greater than 45% retail space and those with less than 45% retail space. In any event, there is no market evidence before me to support the differential application of capitalization rates based on the relative proportion of office space to retail space and, in particular, to support commencing any such differentiation at the 45% retail space threshold. The assessment of Gastown properties with capitalization rates ranging from 4.75% to 7.75 % may result in assessments that do not bear a fair and just relationship to the assessment of the subject.
[63] I conclude that the Property’s assessment must be adjusted to a value that is more equitable with the assessments of other similar Gastown properties. An adjustment for equity should not be made on the basis of a single anomalous assessment. The taxpayer is entitled to an assessment within the lower range of the range of actual or equitable values for comparable properties. In the absence of evidence of the average relative comparability of other Gastown assessments to their actual value, application of a capitalization rate of 6.0%, close to the average of the rates applied to other mixed retail/office use properties in the Gastown area and to other similar Water Street properties will likely result in a value that is within an equitable range.
[64] The Property’s assessment is not equitable and should be reduced to $6,037,900 for the 2008 and 2009 rolls.
ORDER
[65] The Board orders the Assessor to amend the 2008 and 2009 rolls as follows:
Roll No. 09-39-200-026-580-172-92-0000:
|
|
|
FROM |
TO |
||
Land: |
Class 6 - Business and Other |
$ |
$ |
5,493,900 |
|
|
Improvements: |
$ |
$ |
544,000 |
||
|
Total Assessed Value: |
$ |
$ |
6,037,900 |