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

 

CONCERNING:

 

 

Maureen Hilton

Einar E Hilton

 

APPELLANTS

 

AND

 

 

Assessor Of Area #14 - Surrey/White Rock

 

RESPONDENT

 

Appeal Nos.:	2008-14-00028; 2009-14-00071
Refer to as:	Hilton et al. v. Area 14 (2010 PAABBC 20100005)
Date of Decision:	March 15, 2010
Property:	14-36-326-5230-00043-0 2428 King George Highway, City of Surrey
Heard:	By Written Submissions, closing February 3, 2010
Submissions:	From the Appellant received December 21, 2009, January 22 &
	February 3, 2010
	From the Respondent received December 18, 2009 & January 22, 2010
Board Panel:	John Bridal, Panel Chair

 

INTRODUCTION AND ISSUES

 

[1] This is an appeal respecting the 2008 and 2009 assessments of 2428 King George Highway, a mixed use commercial property in South Surrey.  The subject’s 2008 assessment is $5,006,200.  The Appellant argues the assessment should be reduced by 15% to $4,247,238.  The Assessor argues the subject’s market value is $5,306,000, but is not seeking an increase in the assessed value. 

 

[2] Under the Economic Incentive & Stabilization statute Amendment Act, 2008, a property’s 2009 assessed value is the lower of the market value on July 1, 2007 or July 1, 2008.  The parties agree that the July 1, 2007 market value will be lower, so this value conclusion will be relied on for both the 2008 and 2009 rolls.

 

[3] The submissions from both parties focus primarily on market value, but also touch on equity issues.  Thus, both market value and equity must be considered.  The issues are:

1.             What is the subject’s actual (market) value as of July 1, 2007?

and

2.             Whether or not the subject’s assessment is equitable, and if not, what is an equitable assessed value?

 

EVIDENCE AND SUBMISSIONS

 

[4] The following comprises the evidence and submissions before me:

 

·                Two submissions from the Assessor, including an appraisal report by James Loewen, RI(BC), received December 18, 2009, and a rebuttal submission from Doug Williamson, AACI, received January 22, 2010;

·                Two submissions from the Appellant, authored by John Parkes, AACI, including an assessment analysis received December 21, 2009 and a rebuttal received February 3, 2010; and

·                Email correspondence between the parties received December 21, 2009 to January 12, 2010.

 

PROPERTY DETAILS

 

[5] The subject is a 68,671 square foot mixed use commercial property in South Surrey, with 198 feet of frontage on King George Highway.  The two-storey improvements were built in 1998, offering 28,325 square feet of gross leasable area in retail, office, and service commercial tenancies, as well as one caretaker suite. 

 

[6] The property is zoned Highway Commercial (CHI) and the parties agree the existing use is its highest and best use.  The zoning limits the allowable retail uses to specified business types.  The improvements include two buildings in a V-shaped formation.  Mr. Loewen emphasizes this configuration is conducive to retailing and that the fire lane in the middle offers generous space for parking.  Mr. Parkes argues that the middle and eastern wings of the building have limited exposure and the irregular site shape results in irregular shaped units on the eastern side.

 

WHAT IS THE SUBJECT’S ACTUAL (MARKET) VALUE?

 

[7] Mr. Loewen provides an appraisal report on behalf of the Assessor, while Mr. Parkes provides an “assessment analysis” on behalf of the Appellant.  Mr. Loewen’s report provides a detailed market data review and appraisal analysis.  Mr. Parkes’ submission provides an analysis but little market evidence in support of his conclusions. 

 

[8] Mr. Williamson argues that Mr. Parkes’ submission has “significant and serious omissions of fact”, “does not contain expected supportive market data and analysis required within any written document providing a property value estimate”, and is unreliable and simplistic.  I find Mr. Loewen’s report is comprehensive and based on generally accepted appraisal principles and techniques, giving specific information and including detailed evidence to support his conclusions.  In contrast, Mr. Parkes submission offers limited data to support his opinions and conclusions.  Overall, I give Mr. Loewen’s expert evidence more weight in my analysis as will be seen below. 

 

[9] Both parties focus on the income method for valuing the subject, with Mr. Parkes relying on it entirely and Mr. Loewen emphasizing it in his reconciliation.  However, they disagree on the valuation inputs, specifically rents and the capitalization rate.  The table below summarizes the original assessment and the position of the parties.

 

** reported in error in Mr. Parkes’ submission as $184,958; estimated based on calculated market value.

 

Economic Rent

 

[10] Mr. Loewen estimates the subject’s gross potential revenue based on his estimates of economic (market) rents on a “turnkey” basis.  He explains that the local real estate market is active and shows increased demand for commercial space in this area.  He notes the subject is well-located and has had no vacancy problems.  In support of his economic lease rates, he provides a detailed market rental survey based on 12 lease comparables. 

 

[11] In contrast, Mr. Parkes bases his lease rates entirely on the subject’s rent roll, focusing primarily on the actual contract rents.  He suggests that rents have been declining in the past few years with limited demand for the subject’s space due to the restrictions of the CHI zoning. 

 

[12] Mr. Williamson criticizes Mr. Parkes’ use of contract rents rather than market rents, noting that even recently negotiated lease rates are not automatically an indication of market value (emphasis his).  He argues that the income analysis requires first a review of a property’s current and past performance, then an analysis of market comparables to determine if the contract rents are reflective of market rents.  He notes this has not been done in Mr. Parkes’ submission.  He explains that Mr. Loewen accounts for the property’s CHI restrictions in his rent analysis by reviewing other CHI-zoned comparables.

 

[13] I find the lack of market analysis is a significant weakness in Mr. Parkes’ submission and, therefore, give more weight to the economic rents provided by Mr. Loewen.

 

[14] To evaluate the impact of these rent differences, I calculated the rental revenues using the rent roll figures and compared this to the economic rents suggested by the parties (ignoring the Genex storage space, to be discussed later in this decision).  I calculate that Mr. Parkes’ rents result in a gross potential revenue that is approximately 6% below the rent roll figures, while Mr. Loewen’s rents lead to revenues approximately 6% above actual figures.  This analysis highlights that the parties disagree on the rents, but the impact of these differences is relatively limited.  They appear to disagree on the strength of the local leasing market, with Mr. Parkes arguing for economic rents below actual levels, although he provides no supporting evidence for this opinion, and Mr. Loewen’s above.  However, as only Mr. Loewen provides an analysis of rents in the market to support his conclusion, I find Mr. Loewen’s figures more compelling, showing market rents that have increased slightly above contract rates.

 

Retail versus Office Space

 

[15] The parties disagree on the allocation of several units between retail or office use.  Mr. Parkes argues there is only one true retail tenant, Alpine Deli, with the remainder either service commercial or office.  He suggests that only the east wing fronting on King George Highway should be considered retail, with the rents highest for the corner unit and declining with poorer interior exposure.

 

[16] Mr. Williamson argues that Mr. Parkes’ submission considers only actual uses in the property and does not consider the potential of main floor space to be used for retail rather than office.  Furthermore, he points out that Mr. Parkes’ submission gives no indication of whether the space was inspected, noting one unit designated as office by Mr. Parkes has a display area for its medical products.

 

[17] I find there is insufficient market evidence to definitively determine the leasing potential of each unit.  However, I accept that an appraisal of a property’s fee simple interest must consider the most productive potential use of space, rather than be constrained by the actual current tenants.  I find Mr. Loewen has provided more persuasive evidence of the potential use of this space, based on his inspection of the subject premises and his market analysis.  However, I emphasize again the limited difference in gross potential revenue resulting from this disagreement. 

 

Genex Storage Space

 

[18] Mr. Parkes notes that 1,748 square feet of main floor area occupied by Genex was not included in the rent roll, because this area is used for storage space.  He characterizes this space as “akin to warehouse use” and assigns it a $5 per square foot rent.

 

[19] Mr. Loewen considers this space to be leasable as retail and assigns it a $14 per square foot rent.  Mr. Williamson argues that the owner’s decision to use this area for storage is irrelevant for both market value and assessment purposes, because the assessment should reflect the highest rent potential for all leasable areas.  He explains that BC Assessment’s inspection confirms the space is partitioned and finished, other than floor finish, and can be leased for retail or office use.  He notes that Mr. Parkes’ submission does not discuss the level of finish in this area or even note if this area of the property was inspected.  He argues that Mr. Parkes’ focus on actual use only, rather than potential use, and his assigning a non-market supported warehouse rent are contrary to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP), which specifies that rent and expense projections must be based on appropriate market evidence.

 

[20] I agree that leasable space must be considered at its maximum productive use, regardless of current use, when appraising the fee simple interest.  With no specific evidence to the contrary, and based on Mr. Loewen’s inspection and market analysis, I accept that this space is leasable as retail.

 

[21] However, I note a discrepancy between the reported leasable areas.  Mr. Loewen’s appraisal uses 1,500 square feet for Genex’s second floor space and 1,748 square feet for the main floor, while Mr. Parkes uses 1,748 square feet for both.  I accept Mr. Loewen’s figure, given his inspection and noting this difference is in the property owner’s favour.  I recommend this discrepancy be reviewed and corrected for the 2010 roll.

 

Caretaker Suite

 

[22] Mr. Parkes reports that the caretaker suite is rented for $350 per month and that the property manager says there is very limited demand due to its location in a commercial property.

 

[23] Mr. Loewen estimates a market rent of $800 per month.  He bases this on three comparables renting for $750 to $841 per month, two of which are also caretaker suites.  Mr. Williamson criticizes Mr. Parkes for accepting the $350 rent as reflective of market rent without support, arguing he has not considered the highest and best use for this space.

 

[24] I find Mr. Loewen’s rent estimate is more persuasive, based on his market support.

 

Capitalization Rate

 

[25] With no substantial disagreement on the vacancy or operating expenses rates, these require no elaboration.  For the capitalization rate, Mr. Loewen analyzes six sale comparables.  Based on actual rents and net operating income (NOI), he calculates a capitalization rate range of 5.36% to 8.82%; based on economic rents and NOI, he calculates a range of 4.78% to 8.31%.  Relying on the economic rent figures, he reconciles a capitalization rate of 6.75% for the subject.

 

[26] Mr. Parkes maintains the 7% capitalization rate reported in the PVS and used to calculate the roll value.  He questions why BC Assessment has decided to change from 7% now.  He notes Mr. Loewen did not time adjust the comparables’ sale prices or explain the massive disparity in rates found.  He argues that Mr. Loewen has relied on capitalization rates based on income in place, rather than a fee simple scenario, and that he has not adjusted for the risks of upside or downside potential, actual rents being above or below market, beneficial financing, or quality of tenants. 

 

[27] Regarding the income in place argument, I point out that Mr. Loewen has in fact provided capitalization rates under both actual and economic scenarios.  Regarding the criticism of BC Assessment not continuing with the 7% from the PVS, I find this highlights a possible misunderstanding of the intent of written submissions in support of an assessment appeal.  Mr. Williamson explains the intention of the Assessor’s appraisal in his January 11, 2010 email:

 

“BCA is under no requirement to conclude a value which exactly replicates the assessment under appeal….Our appeal submission is an independent retrospective non-mass appraisal value estimate for the property – it is a standalone value. Regardless of what assessment is on the roll, the written submission (brief) and the value conclusion tendered in it by BCA, meets AIC professional standards.  It provides a value conclusion reached through reference to comparative market rent indices and comparative analysis of same”. 

 

[28] I find it perfectly reasonable, and perhaps expected in most cases, that an appraisal professional’s valuation analysis using single property techniques will differ from the mass appraisal valuation outcomes shown on the PVS.  An appeal is an opportunity to question or confirm whether an assessed value is accurate relative to appraised market value.  Both parties are encouraged to review market evidence and apply generally accepted appraisal techniques to estimate the subject’s market value.  Thus, I find no issue with the Assessor’s appraisal expert concluding a different capitalization rate than that shown on the PVS.

 

[29] Mr. Parkes argues “there is nothing to suggest that the 7% is not a proper ‘market rate’ and … there is no valid data to support the change to 6.75% as applied by the BCAA in its new analysis”.  I disagree with this argument, because Mr. Loewen has provided a comprehensive and well-reasoned market analysis to substantiate his chosen capitalization rate.  Whether this rate is more appropriately 7% or 6.75% is a matter of professional opinion that must be supported by evidence.  I find Mr. Loewen has done so, while Mr. Parkes has provided no market evidence in support of his conclusion of capitalization rate.  Given this, I find Mr. Loewen’s capitalization rate conclusion is more persuasive.

 

Market Value Conclusion

 

[30] Mr. Loewen’s market value conclusion is 6% above the $5,006,200 assessed value, while Mr. Parkes’ is 15% below.  Overall, I find Mr. Loewen has provided a better substantiated and more persuasive appraisal than Mr. Parkes, based on the strength of both his market data and analysis.  Therefore, I accept Mr. Loewen’s $5,306,000 conclusion as the best estimate of the subject’s market value on July 1, 2007.

 

[31] Mr. Loewen’s appraisal submission also provides detailed analysis of the subject’s land value and its overall value based on the direct comparison approach.  However, I find it unnecessary to detail these here. 

 

IS THE SUBJECT’S ASSESSMENT EQUITABLE, AND IF NOT, WHAT IS AN EQUITABLE ASSESSED VALUE?

 

[32] The Assessment Act specifies a requirement for accuracy in assessments, calling for properties to be assessed at their actual (market) value, and also calls for consistency in assessments across a jurisdiction.  The Courts have further stated that taxpayers have the right to an assessment at the lower of either market value or an equitable value compared to the assessment of similar properties [British Columbia (Assessor of Area #14 - Surrey) v. Lount, [1995] B.C.J. No. 1574; Bramalea Limited v. Assessor of Area 9 - Vancouver (1989), Stated Case 277 (B.C.C.A.)].

 

[33] Equity was not stated as a reason for appeal for the subject and the initial submissions from both parties focus on market value.  However, I find equity arguments have implicitly crept into the submissions.  Mr. Loewen’s market value conclusion is 6% above the subject’s assessed value, yet Mr. Williamson states that BC Assessment is not seeking an increase in the assessment in order to preserve equity.  He points out that the subject is assessed at 94.3% of its market value and that Class 6 Commercial properties in the subject’s taxing jurisdiction have a 95% average assessment-to-sale ratio (ASR), based on 161 sales during 2007.

 

[34] Mr. Parkes questions why BC Assessment never indicated the assessment was too low during the appeal management process.  He notes that economic rent had been the only factor in dispute and so he questions why BC Assessment has produced a comprehensive report with different values for land, rents, and the capitalization rate.  He argues that this higher market value conclusion illustrates a “disconnect” that raises questions of the consistency of the subject’s assessment relative to other properties, and, therefore, equity must be explicitly considered.  In particular, he questions the relationship of market and assessed capitalization rates.  He argues “the question now becomes ‘if the market value is higher than the roll value is this equitable and based on data in BC Assessment’s report what is an equitable value?” 

 

[35] Mr. Parkes outlines his equity arguments in a January 22nd, 2010 rebuttal document and the Assessor objected, since equity had not been raised as an issue to that point.  The Board’s Vice-Chair, Ms. Simmi Sandhu, responded to this objection in a January 28th, 2010 letter, ordering Mr. Parkes’ rebuttal not be considered and offering him the opportunity to produce a redacted version.  His revised February 3^rd, 2010 rebuttal was included into evidence for this hearing.

 

[36] In her reasons for allowing this objection, Ms. Sandhu notes that if the Assessor were seeking an increase in the assessment to reflect the higher market value conclusion, then equity would automatically be an issue.  However, with the Assessor not seeking this increase, then the only possible equity issue is whether the current assessed value is equitable.  Ms. Sandhu concluded it was too late to argue this issue, when the equity of the assessed value had not been questioned earlier in the proceedings. 

 

[37] I concur with Ms. Sandhu’s conclusion, with reference to the decision in West 8^th Holdings v. Area 09 (2009 PAABBC 20092165).  If the Appellant found the original assessed value was inequitable, then this should have formed part of the arguments in initial submissions.  By not arguing the initial assessment was inequitable, this presumably implies acceptance that the assessment was at or near market value and that this 100% ASR was equitable.  With its assessment now appearing to be 6% less than its market value, it seems that the property is under-assessed, however, BC Assessment is not seeking an increase to the assessed value.  The limited ASR evidence shows that the subject’s level of assessment is close to the average in the jurisdiction and, therefore, appears equitable.  Because owners have the right to be assessed at the lower of either market value or an equitable value, I find I cannot recommend raising the subject’s assessment to its market value.

 

[38] With regard to Mr. Parkes’ question of equitable capitalization rates, I again refer to the West 8^th Holdings decision.  The primary basis for assessment appeals is the accuracy of assessment in relation to market value.  To address this, the parties provide market evidence to substantiate the subject’s estimated market value.  In a market value analysis, it is largely irrelevant what factors may have been applied in the assessment and it is inappropriate to “mix and match” market-based factors with factors used in the assessment.  The secondary basis for appeal is equity, or the consistency of assessment.  This is most appropriately based on how the estimated market value relates to the assessed value, in terms of the level of assessment.  Again, the inputs applied in the assessment are largely irrelevant to this analysis, because it is the value or end product of these inputs that is the basis for comparison.  Equity comparisons are most readily and successfully made by reviewing the outputs of the valuation process, not the inputs.

 

[39] In conclusion, I find the subject’s $5,006,200 assessment is equitable and should be maintained, despite the subject’s higher market value. 

 

CONCLUSION

 

[40] I find the best estimate of the subject’s market value as of July 1, 2007 is $5,306,000.  This is 6% higher than the subject’s 2008 assessment.  However, the Assessor has not requested an increase in the assessment and I find it would be inequitable to order one.  Therefore, I conclude the subject’s assessment should remain unchanged in order to preserve equity.  Under the requirements of the Economic Incentive & Stabilization Statute Amendment Act, 2008, the 2009 assessed value should also remain unchanged at $5,006,200.

 

ORDER

 

[41] The Board confirms the decisions of the 2008 and 2009 Property Assessment Review Panels as follows:

 

Roll No. 14-36-326-5230-00043-0:

Land:	Class 1 - Residential	$	34,800
	Class 6 - Business and Other	$	1,479,000
Improvements:	Class 1 - Residential	$	80,400
	Class 6 - Business and Other	$	3,412,000
Total Assessed Value:		$	5,006,200