1230093 Ontario Inc. v. Municipal Property Assessment Corporation, Region No. 5, 2015 CanLII 55734

Assessment Review Board / Commission de révision de l’évaluation foncière

ISSUE DATE: September 1, 2015

FILE NO.: WR 133686

Assessed Person(s): 1230093 Ontario Inc. c/o Limestone Property Mgmt.

Appellant(s): 1230093 Ontario Inc.

Respondent(s): Municipal Property Assessment Corporation (“MPAC”) Region No. 5

Respondent(s): City of Kingston

Property Location(s): 303 Bagot Street

Municipality(ies): City of Kingston

Roll Number(s): 1011-030-090-00100-0000

Appeal Number(s): 2948266, 3018357 and 3073039

Taxation Year(s): 2013, 2014 and 2015

Hearing Event No. 591533

Legislative Authority: Section 40 of the Assessment Act, R.S.O. 1990, c. A.31, as amended

Heard: July 22, 2015 in Kingston, Ontario

APPEARANCES:

Parties	Representative
MPAC	Art Merrill
1230093 Ontario Inc.	Stan Siscoe
City of Kingston	Maureen Paterson

DECISION OF THE BOARD DELIVERED BY SCOTT McANSH

INTRODUCTION

1The La Salle Mews is an office building in Kingston with frontage on both Bagot and Princess Streets. There is a historic three story limestone section on Princess Street, dating from the 1880s, which has retail tenants facing the street. That is connected to a five story office tower on Bagot Street, built in 1976 as a hotel. The Appellant argues that this configuration lowers the income generating capacity of the building. As such, he suggests that the assessed value is far too high. He was clear that he viewed this property as a burden that is too costly to operate and too difficult to fill.

ISSUES

2The parties agree that the subject property is best valued on the income approach to value. This approach calculates the revenue attainable through rents at the property and removes allowances for vacancy and certain expenses to arrive at a net operating income for the property. A capitalization rate is applied to that net operating income to arrive at a value for the property. The parties disagree on all of the factors to be applied in that calculation. I must therefore determine the income attributable to the property, the appropriate vacancy allowance, the appropriate expense allowance and the proper capitalization rate.

3There are also two preliminary issues: the use of an appraisal report entered by the Appellant and the actual gross leasable area of the subject property. I will deal with those issues before turning to the elements of the income approach.

Legislation

4Section 44. (3)(a) of the Assessment Act (“Act”) requires me to “determine the current value of the land.” Current value is defined in s. 1 as “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.” That is, I must determine what the subject property would have sold for in an arms-length transaction on the relevant valuation day, set pursuant to s. 19.2 of the Act, as January 1, 2012 for the 2013, 2014 and 2015 taxation years.

Expert Report

5The Appellant entered an appraisal report prepared in September 2013 by consultants for a potential purchaser of the subject property. The authors of the report were not present at the hearing to be certified to give the expert opinions contained in the report or to be examined by MPAC on the contents of their report. For those reasons MPAC argues that I should place no weight on the report.

6The Appellant argues that he is not relying on the opinions expressed in the report, but rather the data collected by the appraisers. He actually disagreed with those numbers at the hearing, suggesting alternative values. As such I do not see any need to put weight on the report. However, if it were necessary, I would not rely on the report. The purpose for which an appraisal is prepared can have a significant impact on its results. Both the Appellant and MPAC expressed concerns with the report and without the authors present to defend their conclusions it would be unfair and unsafe to put reliance on the report.

Building Size

7Another threshold issue to determine is the leasable floor area of the subject property. The gross income from the property is calculated on a per foot lease rate, so it is essential that the area be accurately determined. The parties disagree on the leasable area. MPAC states that the gross leasable area is 54,029 square feet, while the Appellant argues that the leasable area is 51,400 square feet. MPAC did not seriously challenge the lower square footage and the Appellant, as owner, has better knowledge of the building. I therefore accept that the gross leasable area is 51,400 square feet.

Income Approach to Value

8The income approach assumes that certain properties are purchased solely for their income generating potential and that a prudent investor will expect returns comparable to or better than other forms of investment. There are four factors in the calculation of value: (1) the gross income expected from rents at the property; (2) the appropriate vacancy adjustment to that amount; (3) appropriate expense adjustments; and (4) the appropriate capitalization rate, or expected rate of return. There is no agreement on any of these values, and I decide each in turn below.

Gross Income

9MPAC applied a net rent per square foot of $13.25 on the main floor and $12 on the upper floors. They stated that these were market averages for the Kingston area and provided examples where they had used similar rates. With 20,298 square feet on the main floor MPAC calculates $268,948 in gross income from the first floor units. Applying $12 to the remaining 31,102 square feet leads to a gross income of $373,224 for the upper floors. Effectively, MPAC suggests that the gross income should be $642,172 for the subject property.

10The Appellant suggested a gross income of $904,000 was appropriate based on how he had leased the building in the past. The difference in the amounts relates partly to the degree of expenses applied to those amounts. The Appellant collects gross rents, and thus has higher expenses. MAPC relies on net market rents and therefore applies a lower adjustment for expenses. It is therefore necessary to look at the expenses before deciding which value is more reflective of potential income.

Expenses

11MPAC reduced the gross annual income by 7% to account for expenses. Applied to the $642,172 calculated above, that amounts to $44,952 in expenses. The Appellant claims that this is far too low. He estimates his expenses at $400,000 per year and claimed property taxes of $160,000 and structural repairs of $20,000. Taxes are an expense dependent on the value calculated in these reasons and it would therefore be inappropriate to include them in the calculation of value. A structural allowance is also not generally calculated as capital costs do not factor into the operating costs on which the income method is based. The $400,000 claimed, with no supporting documentation, amounts to approximately 45% of his suggested gross annual income.

12Without supporting documents it is very difficult for me to accept that the expenses at the subject property amount to nearly half of the income. The claimed expenses were not itemized and I have no way of determining if they are as high as claimed. They may very well contain items that are not appropriate to include in a net operating income, such as mortgage interest or depreciation. While MPAC’s adjustment of 7% is somewhat arbitrary, it appears to me more standardized than the Appellant’s cost estimate. MPAC applies percentage amounts of 5% or 6% to many buildings across the province. That does not make it correct, but I am much more comfortable with that value than the unsupported estimate of $400,000. For those reasons I accept MPAC’s net income after expenses, which is $597,220.

Vacancy

13MPAC used a vacancy allowance of 15% on the subject property, while the Appellant argues that he has never been able to do better than 20% vacant. MPAC indicated that they used 15%, which is higher than their usual 6%, due to the difficulties with vacancy at the subject property. They did not, however, indicate that 15% accurately reflected the vacancy at the subject property. If MPAC is willing to deviate from market averages it is only logical to use the actual value in its place. I accept the evidence of the Appellant that 20% vacancy is average for the subject property.

14A vacancy adjustment of 20% amounts to $128,434. Applying that the values calculated above leads to a net income of $468,786. The only remaining factor to determine in determining current value is the capitalization rate.

Capitalization Rate

15A capitalization rate is a reflection of the risk of an investment. A higher rate of return is expected on investments that carry more risk. Thus a capitalization rate of 5% indicates a fairly safe investment and is usually reserved for Class A office buildings with stable leases. This property is not a Class A property and carries a high rate of vacancy and increased operating costs. The Appellant was clear that he viewed this as a very difficult property for income purposes.

16MPAC applied a capitalization rate of 9%, which it claimed was standard for a Class B office building in Kingston. The Appellant suggested a capitalization rate of 7.75% and provided no rationale for that selection. The evidence provided by the Appellant supports the higher capitalization rate proposed by MPAC and I accept 9% as an appropriate capitalization rate for this property. Applying a capitalization rate of 9% to the net operating income of $468,786 leads to a value of $5,408,733. I accept that as the current value of the subject property, but would round that value to $5,410,000.

Equity

17The Appellant did not present any evidence that his assessment was inequitable when compared to similar properties in the vicinity. As such, I have no basis on which to adjust the current value of $5,410,000.

CONCLUSION

18The current value of the subject property is reduced from $5,838,000 to $5,410,000. I heard no submission on how the property is partitioned between property classes. The vacancy complained of related to office space and the modified square footage was likely an error in the measurement of the office building, being the larger structure. As such, I confirm the $2,826,640 in the commercial property class and reduce the value in the office building property class from $3,011,360 to $2,583,360.