Decision and Order
IN THE MATTER OF AN APPEAL PURSUANT TO S. 50 OF THE ASSESSMENT ACT
CONCERNING:
AND
Assessor Of Area #09 - Vancouver Sea To Sky Region
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Appeal No.: |
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Refer to as: |
Balomenos v. Area 09 (2009 PAABBC 20091457) |
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Date of Decision: |
October 19, 2009 |
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Property: |
2623 4th Avenue W, City of Vancouver |
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Heard: |
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Submissions: |
From the Appellant, dated August 24, 2009 |
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From the Respondent, dated August 24, 2009 & September 8, 2009 |
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Board Panel: |
Mark Goodall, Panel Chair |
INTRODUCTION
[1] This 2009 appeal arises from the decision of the Property Assessment Review Panel (the Review Panel) respecting the assessment of a commercial/residential property located in the City of Vancouver.
[2] The Review Panel determined the 2009 assessed value of the property at 2623 West 4th Avenue to be land at $1,765,000 and improvements at $38,000, for a total assessed value of $1,803,000.
[3] The Appellant, Mr. John Balomenos, represented by Mr. Peter Balomenos, contends that the assessment is too high, in particular in relation to the sale of a neighbouring property that occurred last year. The Assessor, represented by Ms. Dorothy Clark, a qualified property appraiser designated with the Appraisal Institute of Canada and Ms. S. D’Souza of B.C. Assessment Area 9, argue that there may have been building envelope issues with the neighbouring property, and that the Assessor has utilized sales of other properties which are comparable to the subject in its valuation.
[4] A fundamental concept underlying the Assessment Act is that, except where the Act has a different requirement, real property is assessed at actual value, which is defined in s. 19 as “the market value of the fee simple interest in land and improvements”. Section 18 requires that property be valued as of July 1 in the year that the assessment roll is completed, that is to say, the year preceding the assessment year under consideration. Property is to be valued as of July 1 and as if it were in the same state and condition that it was on October 31 of that year.
[5] Under the Economic Incentive and Stabilization Statutes Amendment Act, 2008 (Bill 45), for the 2009 assessment roll, the assessed value is stipulated to be the lower of the actual values determined as of July 1 in each of the two years preceding the assessment year in question, or for purposes of this enquiry, July 1, 2007 and July 1, 2008.
[6] The assessed value as of July 1, 2008 is $1,906,000 for land and $39,700 for improvements for a total of $1,945,700. As per Bill 45, however, the 2009 Assessed Value is the lower of the actual value estimated at July 1, 2007 or July 1, 2008. In this instance, the assessed value for 2009 is the July 1, 2007 value, being $1,803,000.
[7] The parties agree that the market value of the Property as of July 1, 2007 is represented by its 2008 Assessed Value of $1,803,000. However, the Appellant contends that the market has decreased since that time and the market value as of July 1, 2008 is lower than $1,803,000. The Assessor argues that the value has increased during that time period and that the value of the Property at July 1, 2008 is greater than the value of $1,803,000 as agreed upon for July 1, 2007, and requests that the 2009 roll value of $1,803,000 be confirmed.
ISSUES
[8] The issue in this appeal is what is the actual value of the Property as of July 1, 2008, in its state and condition as of October 31, 2008, and is this value lower than the agreed upon July 1, 2007 value of $1,803,000? Bill 45 dictates that the 2009 Assessed Value is to be the lesser of either the July 1, 2007 or the July 1, 2008 estimates.
DESCRIPTION OF THE PROPERTY AND ZONING
EVIDENCE AND ANALYSIS
[14] The evidence before me consists of: a written Submission by the Appellant, dated August 24, 2009 and by the Assessor, dated August 24, 2009; as well as a Rebuttal report by the Assessor, dated September 8, 2009.
[15] Ms. Clark has submitted an actual value appraisal of the Property as of July 1, 2008, based on its physical condition and permitted use of the Property as of October 31, 2008.
[16] She quotes the definition of actual value from the Assessment Act as the “market value of the fee simple interest in land and improvements”, and notes that fee simple interest means the unencumbered fee simple interest as per the 1997 BC Court of Appeal decision of the Standard Life Assurance Company v. Assessor Area #01-Capital.
Highest and Best Use
[17] Ms. Clark considers the highest and best use of the site as if vacant. She refers to the development allowed by the current zoning, demand factors, and current development trends, and determines that the highest and best use would be for a mixed use development with retail on the main and residential units above.
[18] She values the Property by the cost approach, the income approach, and by the direct sales comparison approach, and determines that the capitalized income of the Property produces a value, which is less than land value. She determines that the current development does not constitute highest and best use and that redevelopment to a higher FSR mixed-use improvement would achieve this. Her overall conclusion is that the highest and best use of the Property is for redevelopment to a higher FSR, approaching 2.5 with combined retail and residential.
[19] Mr. Peter Balomenos also provides an appraisal of the Property as of July 1, 2008. He states that the highest and best use is its current use, however, does not provide any analysis or justification of his reasoning in arriving at this conclusion. He concludes a value of the subject by the income approach of $1,310,700 and for land alone by the comparison approach of $1,398,375.
[20] If the Property is developed to its highest and best use, then the value as improved must be greater than the land value alone. Accordingly, I accept the conclusion of Ms. Clark that the highest and best use is for redevelopment and the current use does not represent the highest and best use of the Property.
Cost Approach
[21] In her estimate of land value in the cost approach, Ms. Clark considers 3 properties, which sold in the area between September 5, 2006 and February 8, 2008. She adjusts these for improvements, time, corner and location. Sale No. 1 and No 3 have minimal improvements whereas Sale No. 2 has no improvements. All of these properties have either been redeveloped since time of sale or a new development is being planned.
[22] To determine a time adjustment, Ms. Clark considers arms-length resales of two properties to establish an upward trend in value of 0.5% per month to July 1, 2008. She makes a positive adjustment of 2% for corner location. She provides no actual data to back up this adjustment, however, only one of the properties considered is located on a corner.
[23] Ms. Clark also makes adjustments for location by considering both paired sales analysis and rent differentials and from this, determines that land in the Point Grey area is 10% to 12% superior to that of the subject location. She relies on the paired land sale analysis as the best indicator and concludes that Point Grey land is 10% superior to the subject and adjusts Sale No. 3 accordingly.
[24] However, I have checked her calculations in the paired sales analysis and note that she has used a time adjustment of 1% per month rather than 0.5% per month as she has earlier determined. The correct calculation indicates an 8% positive difference between the Point Grey property and the subject property rather than 10%, which Ms. Clark has concluded.
[25] The corrected adjustments indicate a range in value for the subject land of $355 s.f. to $374 s.f. Ms. Clark concludes that Sale No. 1 at $355 s.f. is most comparable to the subject, as it requires only minimal adjustment, is nearest to the valuation date and closest in proximity to the subject. She concludes a land value for the subject of $355 s.f. or for 5,650 s.f. $2,005,000.
[26] In valuing the improvements, she uses the Marshall-Swift Commercial computer program that she says is widely used and recognized in the industry. She says that this program estimates that the reproduction cost new, reflecting local market conditions is $796,453. Similarly the Marshall-Swift depreciation tables indicate a suitable depreciation rate of 60% for the improvements.
[27] However, considering that the highest and best use is for holding/redevelopment, the depreciation applied is 95%. She states that no developer would build on this site to an FSR of only 1.29, and therefore, there is no entrepreneurial profit applicable. The depreciated value of the improvements, therefore, is $39,823 and she estimates the value of the Property by the cost approach to be $2,050,000 (rounded).
[28] Mr. Balomenos does not provide a cost approach and states that this approach is unreliable due to deteriorating market conditions. Mr. Balomenos has not provided any evidence to support this contention of a deteriorating market.
[29] Ms. Clark has provided sales evidence to determine land value and has demonstrated that land values were increasing until the date of this valuation at least. As Mr. Balomenos has not provided any evidence to the contrary, I accept the cost approach as provided by Ms. Clark indicating a value of $2,050,000.
Income Approach
[30] Ms. Clark provides an income approach of the Property. She summarizes the key lease details of the subject 2,300 s.f. retail area stating that it is a 10 year lease with the lease rate from May 1, 2004 to April 30, 2009 being $18.00 s.f. and for the next 5 years from May 1, 2009 to April 30, 2014 it is to be $22.00 s.f.. She wrongly refers to this second 5 year period as an option period; however, the lease as provided is contradictory stating in one section, that there is no option to renew and in another section, that there is a 5 year option to renew. In her estimation, the average rent then becomes $20.00 s.f.
[31] She examines rental rates of four West 4th Avenue retail units and determines that the economic rental rate of the property is $20.00 s.f., and that the potential gross income from this space is therefore $46,000 per annum. She does not specify if the $20.00 s.f. is gross or net, however in her determination of net rent, she treats it as triple net income.
[32] In reviewing the one page lease, I find no evidence that this is a triple net lease; the income statement provided by Mr. Balomenos to the Assessor shows it to be a gross lease with the landlord being responsible for utilities, taxes, insurance, repairs and maintenance and management. In his valuation evidence, Mr. Balomenos states that a rate of $16-$18 s.f. is reasonable. He does not provide any evidence of how this is derived or state whether it is net or gross, however, in his determination of net rent, treats it as gross income.
He states that the tenant cannot afford to pay any increase in operating cost due to the recession and that even Starbucks’s is requesting a 30% reduction in the rental rate. There is no back up references or documentation to support these contentions.
[33] In determining the retail rental value, I prefer the evidence of Ms. Clark as she has provided concrete examples of retail lease deals. Mr. Balomenos has not provided any actual evidence of lease rates. Accordingly, I accept Ms. Clark’s estimate for the gross potential retail income as being $46,000 per annum.
[34] Ms. Clark has also undertaken a detailed residential rental rate discussion in her appraisal. She comments that according to Mr. Balomenos, four of the tenants have been in place 5 to 8 years and he chooses not to increase rents on an annual basis. The rents vary from $750 per month for the 2 one bedroom suites and $900-$1,000 per month for the 3 two bedroom suites. She quotes from the CMHC Rental Market Report for Fall 2008 whereby in the subject neighbourhood average rents are determined to be $953 per month and $1,365 per month for one and two bedroom suites, respectively.
[35] In addition, Ms. Clark has analyzed four mixed-use residential/commercial and multi-family rental buildings located in the general neighbourhood. After taking into account, specific location, building quality and condition and age of the improvements, she concludes that the comparables support economic rents for the subject of $860 per month for the one bedroom suites and $1,100 per month for 2 of the two bedroom suites and $1,300 per month for the large third floor two bedroom suite. The concluded rents are still below the CMHC reported average rents for the area.
[36] Mr. Balomenos provides no evidence as to residential rental values in the area other than the rent roll of the subject property. As no evidence has been presented which would contradict the evidence of Ms. Clark, I accept the evidence on residential rents as provided by Ms. Clark.
[37] The estimated potential gross annual income based on economic rents is summarized as:
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Retail: 2,300 s.f. @ $20.00 s.f. p.a. |
$46,000 p.a. |
Residential:
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2 one bedroom suites at $860 per month |
$1,720 |
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2 two bedroom suites at $1,100 per month |
$2,200 |
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1 two bedroom suite at $1,300 per month |
$1,300 |
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Total |
$5,220 per month |
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$62,640 per annum |
[38] From this potential income, Ms. Clark has provided estimates of expenses, which must be deducted in order to derive the net income. She cites a CB Richard Ellis study, which states that retail vacancy in the City of Vancouver in 2008 was less than 1%. She supports this study with her own survey of 74 retail units in the subject area, which showed a retail vacancy rate of 0.8%. She determines that a 3% vacancy rate would be conservative and adequately reflect any potential vacancy.
[39] Similarly, Ms. Clark provides evidence of residential vacancy rates in Vancouver. She cites CMHC statistics between 2007 and 2008 and notes that buildings of a similar size as the subject in Kitsilano showed vacancy rates of 0.1%-0.4%. Allowing for long term stabilized market conditions, she makes an allowance of 2% p.a. to reflect residential vacancy and collection loss.
[40] The retail rents, which Ms. Clark estimates, are on a triple net basis, however, she makes deduction allowances to reflect any structural maintenance (1%), management (3%) and expenses relating to vacant space and contingency (1%), or a total of 5% per annum.
[41] Citing undocumented market research, which shows residential buildings generally experience operating expenses in the range of 20% to 35%, Ms. Clark makes an allowance for residential operating expenses of 35% of the gross potential income. Mr. Balomenos notes that the residential tenants of the Subject Property pay their own hydro, heat and hot water.
[42] As this valuation is to reflect current market conditions, it is necessary that as many elements of the appraisal are as current as possible. Mr. Balomenos has provided a list of the operating expenses for the subject in his appraisal, however, has not stabilized them to reflect market conditions, nor has he provided any documentation to support them as being reflective of market. In light of the lack of evidence to the contrary being presented, I accept Ms. Clark’s estimates of expenses as being reasonable and reflective of market.
[43] In order to convert the income of the Property into capital value, Ms. Clark examines in detail four properties, which sold in 2007, 2008, and 2009. In analyzing these properties, Ms. Clark uses economic rents rather than contract rents and market derived vacancy and expense allowances. This results in stabilized net incomes and capitalization rates which are generally higher than those derived by using the unadjusted raw data. She provides market evidence and support for these adjustments in this section and the previous section of the report.
[44] Ms. Clark concludes a range in capitalization rates of 3.91% to 5.07%. However, in checking the calculations, small errors have been made in the analysis of two of these comparables. In Sale No. 3, she has made an error in addition resulting in the gross potential income being understated, and in a corrected slightly higher capitalization rate of 4.75% v. 4.58%. In sale No. 4, she has made an error in the calculation of the residential vacancy and expenses, resulting in a corrected slightly lower capitalization rate of 3.84% v. 3.91%. The corrected range of indicated capitalization rates therefore is 3.84% to 5.07%. In summation, Ms. Clark concludes a mid-point capitalization rate of 4.25%. Ms. Clark states that in deriving the 2008 assessment roll, the Assessor used a capitalization rate of 4.75% and for the 2009 assessment roll, the Assessor used a capitalization rate of 4.50%.
[45] Mr. Balomenos provides no independent evidence of capitalization rates, however, states that he is in agreement with the Assessor’s capitalization rate of 5%. Ms. Clark in fact does not conclude a 5% capitalization rate, but rather a lower rate of 4.25%. Ms. Clark provides comprehensive and detailed evidence as to capitalization rates and based on this evidence, I accept the capitalization rate of 4.25% as concluded by Ms. Clark.
[46] Ms. Clark derives the capital value by the income approach as follows:
Gross Potential Income: $108,640
Less Vacancy and Expenses:
Net Operating Income $82,291
Capitalize at 4.25% $1,936,259
Estimated value by the income approach: $1,900,000.
[47] Using below market rents and unsubstantiated market expenses, Mr. Balomenos concludes a net income of $65,535, and capitalizes this at the unsupported 5% capitalization rate to derive a final estimate by using the income approach of $1,310,700.
[48] As I have noted, none of the elements of the income approach used by Mr. Balomenos are supported by market evidence, and therefore I reject his valuation, and confirm the value of $1,900,000 as derived in this approach by Ms. Clark.
Direct Comparison Approach
[49] Ms. Clark has utilized the same four sales, which she used to derive her capitalization rate to establish the value of the Property by the direct comparison approach. She adjusts these sales by the previously established amount of 0.5% a month to reflect their increase in value over time, and determines their time-adjusted values per square foot of gross building area to be $310 s.f. to $342 sf. By this method, she concludes a value for the subject of $310 s.f. or for 7,277 s.f. of gross building area, $2,255,870, rounded to $2,500,000.
[50] Mr. Balomenos also presents a direct comparison approach in his appraisal, however, only discusses one sale at 1955 Trafalgar Street, which sold September 1, 2008 at $3,350,000 for a site of 8,522 s.f. and with a building of 13,000 s.f.
[51] His quoted gross building area of 13,000 s.f. is significantly different than the area of 10,813 s.f. quoted by Ms. Clark in her analysis and in her rebuttal. Without any demonstrated justification, he estimates the new construction cost at $160 s.f. or a total building cost of $2,096,000 (sic). The math is not correct here, as based on 13,000 s.f. and using $160 s.f., the replacement cost new would be $2,080,000. Again, without any supporting evidence, he estimates the depreciation at 50%, and concludes a rounded depreciated building value of $1,000,000 and a residual land value of $2,350,000 or $275 s.f.
[52] Mr. Balomenos then values the subject land of 5,650 s.f. at $275 s.f. less 10% for its non-corner location, or $1,398,375. No market evidence is referenced for this non-corner adjustment. In addition, while he has concluded that the highest and best use of the Property is its current use, he does not accord any value to the improvements. This is not correct, as the value as improved should be greater than land alone, if it were in its highest and best use.
[53] Ms. Clark comments that the sale price of this comparable used by Mr. Balomenos reflects water penetration problems, that extensive work has been under way since the date of purchase, and renovations were needed to bring rents up to market levels. Mr. Balomenos provides no response to these assertions.
[54] Given the superior evidence presented by Ms. Clark and the inadequate evidence presented by Mr. Balomenos, I accept the evidence of Ms. Clark and her estimate of value of $2,500,000 by the direct comparison approach.
Final Estimate of Value
[55] Ms. Clark has provided justifiable estimates of value for the subject by three recognized approaches, being, the cost approach at $2,050,000, the income approach at $1,900,000, and the direct comparison approach at $2,250,000.
[56] Ms. Clark estimates the final value at $2,050,000 as of July 1, 2008, based on the cost approach, but supported by the other values in the other two approaches. I agree that this is the best method of valuation in this case because the Property is no longer developed to its highest and best, it has a low FSR making it a redevelopment target, and because it has a relatively small improvement value.
[57] Mr. Balomenos concludes a final value for the subject of $1,350,000 based on his income approach value of $1,310,700 and his direct comparison approach value for land alone of $1,398,375. However, based on the evidence provided, in each of these valuation approaches, I have accepted the value conclusions provided by Ms. Clark and rejected those of Mr. Balomenos. Accordingly, I accept Ms. Clark’s final value estimate for the Property as at July 1, 2008 as being $2,050,000.
[58] Ms. Clark concludes her narrative by stating that according to Bill 45, the 2009 assessment roll value is to be the lower of the July 1, 2007 actual value estimate and the July 1, 2008 actual value estimate. The July 1, 2007 value is $1,803,000 and the July 1, 2008 frozen roll (is frozen roll the correct terminology here?) estimate of actual value is $1,945,700. The appraisal prepared by Ms. Clark determines the market value to be $2,050,000 as at July 1, 2008, and therefore, the 2009 roll value is $1,803,000, being the lower of the July 1, 2007 and the July 1, 2008 values.
ORDER
[59] The Board confirms the decision of the 2009 Property Assessment Review Panel as follows:
Roll No. 09-39-200-002-640-072-73-0000:
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Land: |
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Class 6 - Business and Other |
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688,000 |
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Improvements: |
$ |
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Class 6 - Business and Other |
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14,800 |
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Total Assessed Value: |
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$ |