Assessment Review Board
Commission de révision de l’évaluation foncière
ISSUE DATE: June 8, 2015
Assessed Person(s): Sam Kohl and Sheryl Joy Kohl
Appellant(s): Golfour Property Services Inc.
Respondent(s): The Municipal Property Assessment Corporation (“MPAC”), Region No. 9
Respondent(s): City of Toronto
Property Location(s): 1355 Kennedy Road
Municipality(ies): City of Toronto
Roll Number(s): 1901-043-590-01200-0000
Appeal Number(s): 2948455, 3010149 and 3075817 (deemed 2015)
Taxation Year(s): 2013, 2014, (and deemed 2015)
Hearing Event No.: 571550
Legislative Authority: Section 40 of the Assessment Act, R.S.O. 1990, c. A.31, as amended
Heard: January 12, 2015, in Toronto, Ontario
APPEARANCES:
Parties
Representative
Sam Kohl, Sheryl Joy Kohl
No one appeared
Golfour Property Services Inc.
Dorothy Marshall
MPAC
Sal Ladak
City of Toronto
No one appeared
DECISION OF THE BOARD DELIVERED BY SUBUOLA AWOLERI AND BERNARD COWAN
BACKGROUND
11355 Kennedy Road is a property having a 32,900 square foot (“sq. ft.”) owner-occupied and built retail furniture showroom building on a 1.53 acre site. Its gross leasable area (“GLA”) is 30,600 sq. ft.
2For the 2013, 2014 and deemed 2015 taxation years, the property’s assessment is $5,664,000, as was determined by MPAC using an income approach to value. This methodology established a gross income value based on MPAC’s market rent determination, reduced that to net operating income by applying percentage allowances for vacancy and non-recoverable expenses, and capitalized the result at 6% to achieve the assessed value.
3The percentage allowances utilized by MPAC respecting expenses were those that it used to establish assessments for national chain retail stores, totaling 3%. MPAC’s qualified expert witness, Yvette Koo, indicates that the subject property’s percentage allowances should total 5%, being the rate generally applied by it in the income approach for non-national retail enterprises. She accordingly recalculated the value and recommends a reduced assessment of $5,551,000.
4At an unspecified time prior to Ms. Koo’s involvement in preparation for the hearing, a predecessor MPAC representative had recommended a reduction in the assessment to $5,124,000 to the appellant, apparently based on using a 6.5% capitalization rate (“cap rate”) in lieu of the 6% that Ms. Koo considers to be correct. Sal Ladak, advocating for MPAC, has taken the laudable and honourable approach of not seeking a higher value than $5,124,000.
5While the appellant considers that value excessive and proceeded with the appeal, both parties agree that for this matter the current value shall not exceed $5,124,000.
ISSUES
6Ms. Koo’s income approach yields a value of $181 per sq. ft.(“psf”) of GLA for the subject property, based on dividing her recommended $5,551,000 value by the subject property’s 30,600 sq. ft. GLA. This falls below the $201 and $203 median and average sale prices psf of four sales transactions in the former Scarborough area that the subject property is located, and accordingly leads to Mr. Ladak’s argument that no reduction below that value is merited, were it not for honoring the predecessor MPAC assessor’s offered reduction to $5,124,000, which by our calculation equates to $167 psf.1
7Ms. Marshall rejects the suitability of the properties utilized by MPAC, principally because the properties used by Ms. Koo for her comparative assessment and sales values determination are based on properties all having smaller structures, some considerably so.
8The appellant’s expert witness, Adam Gocht, supports utilizing the cost basis in preference to the income approach to determine the subject property’s value. Employing MPAC’s Automated Cost System (“ACS”), he calculates the value sought in these appeals as $3,009,000, or $98 psf of GLA. It is his contention that MPAC’s methodology has failed to account for the impact of lesser values psf of GLA that economies of scale would have had on the smaller properties that it utilized. In this regard, Mr. Gocht has introduced a graphical analysis chart of what he considers to be six comparable properties’ current values. Inserting the subject property’s GLA into the chart he concludes that the indicated value of $4,039,000 is “within a close range”, thereby validating his conclusion that the subject property merits an assessment reduction to $3,009,000.
9Mr. Gocht’s Hearing Report (Exhibit 3) reiterates the three classic concepts of appraisal methodology as the income, cost and sales comparison approaches to valuation. Properly utilized by the appraiser/valuator, all three methods can usually be expected to yield similar results. Here, the cost and income derived values are substantially divergent.
10We must determine the current value for the subject property as of the statutory January 1, 2012 valuation date. Additionally, we are legislatively mandated to have reference to the assessments of other similar properties in the vicinity, and to reduce that value if necessary to achieve equity with those assessments.
DECISION
11The assessments are reduced from $5,664,000 to $5,124,000 for the 2013, 2014 and deemed 2015 taxation years.
REASONS FOR DECISION
Current Value
12Section 19(1) of the Assessment Act (Act) states:
Assessment based on current value. – The assessment of land shall be based on its current value.
13The Act establishes January 1, 2012 as the valuation date for 2013 to 2016 taxation, and defines current value to mean:
“current value” means, in relation to land, the amount of money the fee simple, if unencumbered, would realize if sold at arm’s length by a willing seller to a willing buyer.
14The Act accordingly establishes the marketplace as being determinative of current values.
The Economies of Scale Issue
15The appellant maintains that MPAC’s approach in establishing the subject property’s current value (“CV”) has failed to account for the impact of the principle of Economies of Scale. We understand this to be a commonly-held concept whereby, in the marketplace, sales values and hence assessments of like properties will reflect a lesser value psf as building sizes increase. Most properties in evidence are smaller and many are considerably smaller than the subject property. As a result Mr. Gocht’s argument is that the subject property’s CV is excessive.
16Appendix C to his Report (Exhibit 3) is introduced to demonstrate the sensitivity of economies of scale in this matter by plotting on a chart the CV assessment (“CVA”) psf against building areas for six properties near the subject, all also on Kennedy Road. The subject property’s building size is inserted on the trend line indicating that it should be valued more closely to $132 psf, or $4,039,000.
17In her Assessment Report (Exhibit 1), Ms. Koo addresses the appellant’s economies of scale argument by indicating that it did not, but should have taken into consideration the age, condition and interior finishes of the buildings. Additionally, she maintains that the property at 1199 Kennedy Road included in the appellant’s Appendix C has been incorrectly coded, and hence incorrectly valued as a “409” property type, and should not be utilized for comparative purposes in this regard. While the subject and the other five properties used for this analysis by the appellant are all code “409” one storey retail structures generally over 10,000 sq. ft., 1199 Kennedy Road is in fact a two-storey multi-tenanted shopping centre, incorrectly coded and incorrectly valued according to Ms. Koo’s testimony.
18We attribute no determinative weight to the appellant’s evidence respecting the value ascribed by it to the Appendix C economies of scale analysis, because:
- we concur with Ms. Koo that 1199 Kennedy Road, being a 2-storey multi-tenanted shopping mall is unsuitable to be included in the chart’s analysis. Being of different character and function, its inclusion would carry the risk of skewing any conclusion. This reduces the chart to five properties meriting our consideration.
- the chart is not persuasive. The CVA psf of GLA for the five properties, in ascending building size, is: $242 (10,080 sq. ft.); $188 (13,419 sq. ft.); $178 (17,750 sq. ft.; $171 (20,500 sq. ft.); and then upward to $183 (23,358 sq. ft.).
To reduce an assessment, or even to consider doing so based on such a small sample of five remaining properties when the result is so substantial could be characterized as imprudent, at best. More specifically, commencing with the smallest 10,080 sq. ft. property assessed at $242 psf, the trend falls rapidly to $188 psf for a 13,419 sq. ft. building, and then arguably levels-off in the range of $171-$183 psf. In fact, the CVA psf of the largest of the four other buildings actually increases, contrary to the Economies of Scale principle espoused for these appeals by the appellant.
- the chart assumes a straight-line relationship between building size differential and CV psf, without any demonstrable evidence or published texts in support thereof. We acknowledge the subjectivity of this assertion, while we postulate that the principle might credibly provide for stages of diminishing values as sizes increase, such that there might be ranges of building size where the economies of scale “level off” as building sizes increase until another stage of diminished value psf “kicks-in”. We are nevertheless entirely comfortable with our finding to attribute no weight to economies of scale in this particular matter, whether or not the technical reality is that the psf values change on a straight-line basis, or otherwise.
The Current Value
19Turning to the evidence from the marketplace, we have sales transactions in evidence exclusively from MPAC. Ms. Koo has included data in her Report on four property sales transacted within the range of $193-$2172 psf of GLA, the median and average approximating $202 psf. This value psf exceeds her recommended assessment of $181 psf, and obviously the $167 psf that Mr. Ledac has proposed to adopt based on an earlier recommendation by MPAC.
20Disputing this evidence by maintaining that there are too few sales of properties, most differing substantially from the subject property, all lacking time, size and feature-differences adjustments, Ms. Marshall urges us to disregard MPAC’s sales evidence. Likewise, she considers MPAC’s capitalized income methodology to have utilized properties of differing sizes and condition, without Ms. Koo having adjusted for these features, and without providing evidentiary proof of their rental incomes or of MPAC’s basis for determining the 6% cap rate used. Consequently the appellant implores us to reject MPAC’s evidence, and to default instead to the cost methodology utilized by Mr. Gocht.
21Mr. Gocht’s Report indicates that MPAC has utilized all three valuation methodologies in establishing assessments for other owner-occupied and/or big box retail properties in southern Ontario, and has changed from using the income to the cost basis for some retail stores between the 2013 and 2014 taxation years. Mr. Gocht has correctly observed that parties may employ and rely on any of the three valuation methodologies. The Act does not mandate methodology for determination of current value, and MPAC and other parties are accordingly at liberty to employ varying valuation approaches among like or dissimilar properties, whether or not sizes, use, location or other criteria differ. It remains our challenge to consider whether the cost or income approach is a preferable proxy to establish market-like current value in this particular instance.
22The initial burden of proof rests with MPAC, and we find that it has met this obligation. Ms. Koo has introduced evidence of a relatively conventional nature that is demonstrative of a capitalized income value for the subject property that, when corrected respecting the percentages of expenses, closely correlates to the initial assessment. Its conclusion is supported by reference to actual sales transactions.
23In arriving at this determination, we have considered the purported weaknesses in Ms. Koo’s evidence as addressed by the appellant or as recognized by us. These diminish the strength of our conviction respecting MPAC meeting its initial onus, but on the balance of probability do not override it. These purported weaknesses include:
a) Rent rates.
MPAC has established the fair market rent (“FMR”) for the subject property as $11.45 psf of GLA. This is slightly below the average and median FMR of the five properties located on Kennedy Road near the subject property that are introduced by Ms. Koo for comparative CVA analysis. Based thereon and on her reference to having reviewed three retail leases that were renewed or signed in 2010-2012 at rents between $10.00 and $18.55 psf, she concludes that the FMR upon which the subject property’s assessment was based is not excessive. Ms. Marshall points out that no leases are introduced in support of the data, that the rent rates may be based on step-up leases signed before the shoulder year to the valuation date, and/or based on renewals with existing tenants that were not likely listed for rent in the open market.
In this regard, we are satisfied that Ms. Koo’s expertise and knowledge of the specific area of the municipality from an assessment standpoint has equipped her with an understanding of an appropriate level of comparative rents to impute to the owner-occupied subject property. However, two of the five properties utilized by her are coded as “436”, being freestanding large national chain retail stores. The evidence indicates that both of these properties’ FMRs exceed the level of the three others coded like the subject property as “409”, and merit no weight in our comparative analysis of rents and/or values derived therefrom. Ms. Koo was not specific when addressing which leases among the five were examined, nor which property code they applied to. The remaining three “409” coded rents range from $10.80-$11.85 psf, averaging $11.40. This varies by less than 1% from the $11.45 psf employed by Ms. Koo, notwithstanding the sparse number of comparable rents utilized, and the lack of specific lease data upon which it is based.
b) Cap rate.
No evidence of cap rates based on a comparative analysis of those attributable to actual sales, or otherwise determined, has been introduced. A mere one-half percent increase to the subject property’s rate, from 6% to 6.5% appears to substantially account for the reduction from Ms. Koo’s recommended value of $5,551,000 to the $5,124,000 advocated by Mr. Ladak.
Ms. Koo’s experience in assessing retail properties of the same general nature as the subject property lends credibility to the underlying basis for her opinion. The evidence indicates uniformity in the cap rate used to establish the assessments for these properties, thereby mitigating concerns about the absence of any cap rate study being introduced as evidence.
c) The principle of Economies of Scale.
Having addressed this issue above and having rejected its use in this particular matter to establish a specific value in accord with Mr. Gocht’s chart, we are nevertheless aware of a potential distortion of most values psf of GLA, as almost all properties in MPAC’s report are smaller than the subject property. Lacking any adjustments by Ms. Koo in recognition of this circumstance, we comprehend the appellant’s concerns.
Because there is no determinative evidence to establish whether this principle is in fact applicable to retail buildings such as the subject, and if so to quantify the impact, we accept the evidence as presented, aware that Ms. Koo’s conclusion likely represents the upper limit of an appropriate value.
d) Sales adjustments for timing differences.
In cross-examination, Ms. Marshall elicited an admission by Ms. Koo that the four sale transactions were not time adjusted to the January 1, 2012 valuation date. We are accordingly urged to disregard this evidence, particularly in reference to the two sales in 2014. Both MPAC’s Report and Mr. Gocht’s testimony indicate this type of adjustment to be appropriate.
Ms. Koo testified that these 2014 sales were included as there were few sales in the vicinity, and that these two were nevertheless “indicative of the market in the specific area”. Although she indicates that the appellant did not raise time adjustments as an issue, we note that the appellant’s Report in response to MPAC’s earlier Hearing Report did raise the issue, albeit in a cursory way.
We would have preferred to have such evidence. However, we accept and rely on the sales as presented for two primary reasons, notwithstanding the resultant concern that the failure to time-adjust the sales has raised.
Firstly, one of the two 2014 sales was in June of that year. Of the two sales that preceded the 2012 valuation date, one was in June of 2010. Hence these two sales would likely have mitigated the time-adjustment differential, albeit to an indeterminate extent.
Secondly, Mr. Gocht, who was qualified for this hearing as having expertise in valuation of industrial and commercial properties, quite properly indicated the appropriateness of time-adjustments. He has chosen to rely on this assertion repeatedly while ignoring the opportunity to provide evidence as to the impact of time on the four sales relied upon by MPAC. This leads us to a negative inference that on the balance of probability, a substantial change to the range of sales values psf indicated in Ms. Koo’s Report is not necessary. Neither Ms. Koo nor Mr. Gocht offered us a time-adjusted value for any of the sales and neither indicated that failure to do so in this particular instance would materially skew the result. Ms. Marshall’s urging that we place no weight on the sales transactions for this omission by Ms. Koo appears misdirected.
e) Sale of 1165 Kennedy Road.
1165 Kennedy Road, as included in MPAC’s Exhibit 1, is a “436” coded property that, as addressed above, merited no weight by us in Ms. Koo’s rental analysis. This property is also included in her Report in the comparative sales analysis on page 14.
In cross-examination of Ms. Koo, Ms. Marshall introduced as Exhibit 2, a realtor’s marketing material and a reporting service’s report on the sale. It is asserted by the appellant, and not challenged by MPAC, that this exhibit details a retail investment portfolio of three properties offered for sale, all tenanted by The Brick, a national furniture chain. The evidence is that 1165 Kennedy Road and one of the other properties sold together as a portfolio in June 2014. Ms. Marshall accordingly implies that in addition to her concern respecting no time-adjustment (addressed by us above), the total selling price may be inappropriately allocated over the two properties, leading to an unreliable sales value psf of GLA being utilized for this element in the average/median sales values derived.
We are aware of the risk of utilizing a portfolio sale, but nevertheless find that this particular sale merits inclusion in our sales analysis for two reasons. Firstly, there is a very strong correlation between 1165 Kennedy Road’s sale price of $5,855,000 and its assessment of $5,827,000. Secondly, the $200 sale price psf of GLA is within the range of other sales psf in evidence and is very closely in accord with the average and median values of $203 and $201 respectively.
f) Differences in comparability among properties.
Based on his site visit, Mr. Gocht describes the subject property as having had no apparent renovations and appearing to be tired and below average in respect to condition and/or features. For example, he refers to worn carpeting, broken vinyl tiles, and a deficiency in tractor-trailer (un)loading facilities. He has offered no basis to quantify the impact of these circumstances, if any, in any comparison to MPAC’s sales evidence. Nor has he introduced any alternative property sales for our consideration.
24Having satisfied ourselves that MPAC has not overwhelmingly but on probability met its statutory burden of proof, the onus shifts to the appellant.
25In that regard, we find that the appellant’s use of the cost methodology is not persuasive in this instance, for several reasons, set out below in no particular order.
26Firstly, Mr. Gocht has utilized MPAC’s ACS that adds a land value to depreciated replacement costs new. His firm having purchased access thereto from MPAC, it can manipulate the entries formulating the outcome. In this regard, we do not know whether or not MPAC would arrive at the same result for the subject property.
27Secondly, Ms. Koo, being with the assessment corporation for over 10 years and responsible for commercial valuation for at least the past 5 years, is a more experienced expert in recognition of influences in the ACS than Mr. Gocht, who graduated in his chosen field of property valuation from Seneca College in 2012.
28We accordingly prefer Ms. Koo’s description from her site visit to the subject property that both the front building façade and the windows appear to have been updated. This contrasts with Mr. Gocht’s testimony that everything respecting the property appeared as original, leading to his application of a uniform 47% “Good” or a 53% depreciation factor to all of the individual structure’s elements in his ACS calculations.
29Thirdly, and related to the uniformity in depreciation applied by Mr. Gocht, in reply to a question posed by us, he indicated that he never asked his client if any of the finishes to the property were other than original. This is viewed by us as a serious flaw in the appellant’s depreciated cost methodology.
30Fourthly, that flaw might have been overcome if Mr. Gocht had correlated his proposed methodology to the marketplace. As Mr. Ladak argues, it is acceptable to utilize the ACS cost-based methodology in the absence of sales. However, here we do have sales in evidence, notwithstanding the appellant’s reluctance to utilize them, adjusted or unadjusted.
31Fifthly, we note that Mr. Gocht has no explanation for the substantial differential between the subject property’s assessment as returned and the cost-based methodology he has used.
32Finally, confronted with two methodologies yielding substantially different valuations, our determination in these appeals, on the strong balance of probability, should favour the methodology that more closely correlates to the sales evidence. In this instance, the sales that average $203 psf of GLA have a reasonable correlation to Ms. Koo’s recommended value that equates to $181 psf. Furthermore the value equating to $167 psf that Mr. Ladak has agreed to honour is also considerably closer to the sales values in the marketplace than the $98 psf that Ms. Marshall urges us to adopt.
33In our view, MPAC’s sales evidence, somewhat questionable but nevertheless reasonable as demonstrated by that evidence, prevails over the cost methodology which, as employed by the appellant, is unpersuasive. Utilizing the $5,124,000 value that MPAC at one time considered appropriate, in lieu of the value recommended by Ms. Koo, affords us the opportunity to recognize both the weaknesses addressed in her evidence and the property’s dated but unquantified deficiencies described by Mr. Gocht. We accordingly determine the best indication of the subject’s current value to be $5,124,000.
34Our confidence in this determination is bolstered by Ms. Marshall’s reference to the oft-cited Sunlife decision. She did not enter this case as an authority, but utilized it in arguing that “all three [valuation] methods can be used” to establish “market value”. We take no exception to the list described by her from that landmark decision. We paraphrase her description as starting with the recent free sale of a particular property, and moving therefrom to a recent sale of identical properties, to recent sales of comparable properties, to the value revenue will command [the income basis], and concluding with the depreciated cost approach. It is our view that Sunlife creates a hierarchy whereby the depreciated cost basis is to prevail for properties when the previously-listed methodologies are indeterminate or absent. In this matter, we have comparative sales evidence, and we have some corroborating market-related rental income-derived evidence. These have been found by us to constitute better evidence than the ACS as utilized here by the appellant.
35Other cases introduced as authorities by Ms. Marshall are unpersuasive and/or can be distinguished because they address unique circumstances, lack determinative sales or lease evidence, or relate to different legislation respecting equity.
Equity with Other Properties’ Assessments
36Section 44(3) of the Act states:
(3) Same, 2009 and subsequent years. – For 2009 and subsequent taxation years, in determining the value at which any land shall be assessed, the Board shall,
(a) determine the current value of the land; and
(b) have reference to the value at which similar lands in the vicinity are assessed and adjust the assessment of the land to make it equitable with that of similar lands in the vicinity if such an adjustment would result in a reduction of the assessment of the land.
37MPAC did not introduce evidence specifically for this equity test. Nor did the appellant, even though it bears the burden of proof to demonstrate inequity. Nevertheless, we are obligated by the legislation to have reference to other properties’ assessments to ensure that an appealed property’s assessment is equitable.
38The evidence leads to our finding that no reduction to the $5,124,000 current value is necessary to achieve equity with the other properties’ assessments.
39As was done for our current value analysis, we find it appropriate to compare values on the basis of psf of GLA. This affords what we consider to be the best basis for comparison in this instance where building sizes vary, considerably in some instances, and no adjustments are made for other variables. All are primarily structures of relatively similar type and utility, and all serve a like purpose of housing the occupants’ chosen enterprise. The most defining comparative element is most probably the value psf.
40Page nine of Ms. Koo’s Report lists the current value psf of GLA for each of the five properties she utilized to demonstrate the range of lease values psf that she considered in supporting the rental value imputed into her income based methodology. We exclude 1141 Kennedy Road as being dissimilar because it is a property 30 years newer than the subject property. We include 1165 Kennedy Road in our reference, notwithstanding having excluded it from our current value analysis because it was a “436” code property that was assessed by a differing methodology. Nevertheless, we find it suitable for our s. 44(3)(b) reference, being of like size, age and use as the subject property. The assessments for these four properties range from $171 to $199 psf of GLA. All exceed the subject’s current value, as found by us to be $167 psf.
41Page 14 of Ms. Koo’s Report sets out the four sales transactions upon which she has relied. In response to our questioning, she indicated the assessed values for these properties, which we calculate on a psf of GLA to range from $116 to $240. As the average is $186 psf this does not lead us to conclude that the subject property’s current value is excessive.
42Appendix C to Mr Gocht’s Report utilized six properties’ assessments in the chart developed by him in attempting to demonstrate the impact of economies of scale on assessed values. 1199 Kennedy Road is not similar to the subject property, being a two storey shopping centre. Although the remaining five properties include some duplication with the four properties referenced above in paragraph 39, the remaining five assessments in Appendix C meriting our reference range from $171 to $242 psf of GLA. Again, these all exceed the $167 psf established for the subject property.
43While the parties jousted as to the differing attributes among the properties whose assessments are in evidence, the evidence is found to clearly indicate that no downward adjustment to the subject’s current value of $5,124,000 is necessary to achieve equity with the assessments of similar lands in the vicinity.
2015 DEEMED APPEAL
44An appeal for the 2014 taxation year is presently before the Board. Section 40.(26) provides that the appellant is deemed to have made the same appeal for the subsequent taxation year if the appeal is not finally disposed of before March 31 of the subsequent taxation year. The Board has not disposed of the 2014 appeal before March 31, 2015. For that reason, this decision also applies to the 2015 taxation year.
45Section 40.(26) of the Act directs:
Deemed appeals, 2009 and subsequent years
For 2009 and subsequent taxation years, an appellant shall be deemed to have brought the same appeal in respect of a property,
(a) in relation to the assessments under sections 32, 33 and 34 for the year; and
(b) in relation to the assessment, including assessments under sections 32, 33 and 34, for a subsequent taxation year to which the same general reassessment applies, if the appeal is not finally disposed of before March 31 of the subsequent taxation year or, if an assessment has been made under section 32, 33 or 34, before the 90th day after the notice of assessment was mailed.
“Subuola Awoleri”
SUBUOLA AWOLERI
MEMBER
“Bernard Cowan”
BERNARD COWAN
MEMBER
Assessment Review Board
A constituent tribunal of Environment and Land Tribunals Ontario
Website: www.elto.gov.on.ca Telephone: 416-212-6349 Toll Free: 1-866-448-2248