Kimwest (Ontario) Investments Ltd. v. Municipal Property Assessment Corporation, 2015 CanLII 60937

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

ISSUE DATE: September 29, 2015

FILE NO.: WR 132786

Assessed Person(s): Kimwest (Ontario) Investments Ltd. and 2087673 Ontario Limited

Appellant(s): Kimwest (Ontario) Investments Ltd.

Respondent(s): Municipal Property Assessment Corporation (“MPAC”) Region 27

Respondent(s): City of Windsor

Property Location(s): 333 Riverside Drive West

Municipality(ies): City of Windsor

Roll Number(s): 3739-040-040-00202-0000

Appeal Number(s): 2957392, 3029164 and 3092911 (deemed 2015)

Taxation Year(s): 2013, 2014 (and deemed 2015)

Hearing Event No. 578832

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

Heard: May 25, 2015 in Windsor, Ontario

APPEARANCES:

Parties	Counsel⁺/Representative
Kimwest (Ontario) Investments Ltd.	Steve Pocrnic
MPAC	Francis Shea⁺ and Robert Chalk
City of Windsor	Guy Tudino

DECISION OF THE BOARD DELIVERED BY RICK LIMOGES AND VINCENT STABILE

INTRODUCTION

1The subject property is a 19 floor building with 207 guest rooms operating as a Radisson Hotel until April, 2011 when it was re-branded as 'Riverside Inn' until September 2013 when it was converted to 'Club Riverside' offering luxury, self-contained residential suites for students. The Appellants purchased the subject property along with the neighbouring 'Hilton' property in May of 2013 and subtract the agreed upon current value of the Hilton, along with the values attributed to chattels from the sale price to value the subject property at the residual of $3,043,000. MPAC have returned a value of $6,360,000 which the Appellants believe to be too high. The Appellants also believe that the subject property belongs in the Residential Tax Class and not Commercial and then changing to Multi Residential as preferred by MPAC.

2The Assessment Review Board (“Board”) must find the correct current value and property class for the 2013, 2014 and deemed 2015 taxation years.

DECISION

3The current value of the subject property for the 2013 taxation year is reduced from the $6,360,000 returned value to $5,062,000 with the property confirmed in the Commercial Property Class (“CT”) with no further adjustment required to make it equitable with similar properties in the vicinity.

4The current value of the subject property for the 2014 taxation year is reduced from the $6,360,000 returned value to $5,371,000 with no further adjustment required to make it equitable with similar properties in the vicinity. The property will reside in Commercial Property Class (“CT”) for the 2014 tax year.

5The current value of the subject property for the 2015 taxation year is reduced from the $6,360,000 returned value to $5,371,000 with no further adjustment required to make it equitable with similar properties in the vicinity. The property will reside in the Multi-Residential Property Class (“MT”) commencing in the 2015 taxation year.

Case For The Appellants

6Steve Pocrnic submitted Exhibit 3, the Appellant's presentation consisting of eight sections including: Statement of Issues, Subject Property Photographs, Transfer/Deed of Land, Agreement of Purchase and Sale, Order to Comply and Extension, MPAC Comparable Properties, Complainant Comparable Properties and finally, Case Law. He also submitted Exhibit 4 which includes copies of photographs of the interior of the subject property.

7Mr. Pocrnic refers to the Transfer/Deed of Land where the Transferee is named 2087673 Ontario Limited and also to the Purchase and Sale Agreement where the Purchaser is named 2087676 Ontario Limited. This discrepancy was not noted during the hearing and other documents refer to the Appellant and property owner as 2087673 Ontario Limited. The Transfer/Deed of Land for the subject property includes a total consideration of $3,250,000 less $207,000 for chattels and a net consideration of $3,043,000 for the subject property. No breakdown of the amounts for each property is included in the extensive Purchase and Sale Agreement on pages 18 through 51 of the presentation. Mr. Pocrnic testified that the numbered company (purchaser) is 50% owned by each of Mr. Farhi and Mr. Vranich whereas the parking garage on which it relies and other properties assembled in the immediate area are controlled by Mr. Farhi only.

8Mr. Pocrnic testified that 108 units are leased, out of 180 that have been converted from the total of 207 units available. It is Mr. Pocrnic's opinion that the units are not self-contained as they lack cooking facilities with only a microwave oven supplied and he described the units as less than a bachelor suite. The property also includes supplementary cooking facilities on alternate floors as well as laundry facilities on site. Photographs of the units depict a modular kitchenette added to the previous hotel rooms which include a sink, microwave oven, electrical plug, counter, cupboards, pantry, drawers and small fridge.

9Tab 5 includes orders to comply from the City of Windsor Building Department as the kitchenettes were installed without permits and sinks were not properly connected or vented as per the Ontario Building Code. Mr. Pocrnic testified that a vendor's disclosure of these orders would affect the market value of the property. Under cross-examination it was admitted that he had no knowledge of any prosecution although they still have not applied for building permits and are summoned to appear in court on July 15, 2015 for failure to comply.

10Tab 7 includes a list of suggested comparable properties (student residences, seniors’ residences or nursing homes) that are in the Residential property class. It was revealed in cross-examination that the list of suggested comparable properties does not include values or other relevant information to demonstrate that they are similar to the subject property.

11Tab 8 includes case law in support of the Appellant's case as follows:

1. Stoney Lake Holdings Inc. v. Municipal Property Assessment Corp., Region No. 7, [2006] O.A.R.B.D. No. 517 where in paragraph 19 the Board finds that the strongest evidence of value is the sale of the subject property in the shoulder year. This case differs since the subject property sale is combined with another property, the vendors had listed the properties pursuant to corporate direction to divest from 23 properties nationwide and the purchasers or related parties controlled the adjacent and only parking for the facility.

2. Simcoe (County) v. Municipal Property Assessment Corporation Region No. 16, [2009] O.A.R.B.D. No. 30 Mr. Pocrnic suggests that this case finds the sale as the best evidence of value however the property sold for $7,300,000, none of the parties supported that value and the Board found the current value to be $2,239,000 for the 2008 tax year.

Case For MPAC

12Robert Chalk, Senior Valuation Specialist, Hospitality Group of MPAC submitted Exhibit 1, his report containing 9 Tabs and a total of 63 pages. The site is zoned Downtown Commercial District (CD 3.1) which permits a wide variety of commercial uses including a hotel and student residences. The property is described as a multi-level commercial property with a pedestrian bridge to a three storey parking garage owned by a related party. The hotel, built in 1989, rises above a commercial mall with interior access to the Hilton and the St. Clair College for the Arts complex (former Cleary Auditorium and Convention Centre) to the East. The hotel includes a 19 storey tower with 207 guest rooms in downtown Windsor. The first three floors include the lobby and reception, administrative services, commercial space, meeting rooms, indoor pool, fitness area and sauna. In September 2013 the hotel operations ceased and the property was converted to residential accommodations intended for students.

13The property was sold on May 21, 2013 in a deal which included both the subject property along with the neighbouring 'Hilton' property for a total of $11,680,000 including chattels. The two properties are listed as security on a mortgage registered to Windsor Family Credit Union on the closing date for $15,000,000 at Prime plus 10%, due on demand, the amount actually advanced is not known. MPAC does not use the sale as a reliable indicator of current value because the subject sale includes another property, the vendors had listed numerous properties for divestiture and finally, MPAC found that the sale does not conform to the market as it falls outside of the expected range.

14Mr. Chalk provided extensive relevant descriptions and background information on pages 4 through 13 of his report. The City of Windsor has experienced a decline in employment, population, border crossings, GDP, manufacturing and construction reflecting a weakened local economy with reduced discretionary spending. Recently, the University of Windsor and St. Clair College with a combined enrollment of about 36,500 students have begun to create a downtown post-secondary cluster through key acquisitions of several significant but underutilized properties. The hotel industry has been negatively affected during recent years as reflected in declining occupancy, average daily room rates and revenue per available room per day (RevPar), all of which bottomed out in 2009 through 2011. The RevPar is calculated by multiplying the hotel's average daily room rate by its occupancy rate and is a reasonable analysis tool for quantifying an adjustment in this situation since it generally explains in dollar terms, the dissimilarities in product, market orientation and location.

15By way of background, Mr. Chalk advised that in April 2011 the former Radisson hotel became an independent hotel operating as the Riverside Inn. This watershed event dramatically affected occupancy and room rates of the subject property which was no longer considered to have a stabilized revenue stream. Thus valuations going forward would depend on historical results which provide a picture of a normalized operation of the hotel. On May 21, 2013 the Hotel was sold by Kimwest to 2087673 Ontario Limited. September 1, 2013 was the start date for student resident rentals with all hotel operations ceased on September 22, 2013. Only 180 units are converted to date while awaiting anticipated market demand and the resolution of the Building Code violations which could potentially affect future uses of the property.

Valuation as a Hotel

16Mr. Chalk explained his approach, analysis and reasoning for his valuation as a hotel in detail on pages 13 through 25 and Appendices of his comprehensive report. He estimated the value of the subject property as a hotel at $5,369,000 or $25,937 per room using the Income Approach and Direct Capitalization as explained on pages 15 through 19 and in Appendix D. Using the Direct Comparison approach with the median of seven comparable properties detailed in Appendix H and the RevPar technique, he estimated the hotel's value at $5,062,000 or $24,454 per room. He further tested his findings by using equity tests with nine comparable properties in the vicinity. The equity test using comparable properties returned a value of $4,978,000 or $24,050 per room. The equity test using the median of Assessment to Sales Ratios (“ASR's”) of six comparable properties on page 24 returned a value of $5,193,000 or $25,087 per room. The estimate of value is supported by the two equity tests with 1.0 being the ideal: Comparable Property Equity of .9834 and the ASR test of 1.025; after deducting for chattels the ASR is less than 1. In view of the changes to the operation in recent years, including the loss of Radisson brand and resultant destabilized revenue stream, Mr. Chalk concluded that $5,062,000 using the Direct Comparison Approach provides the best estimate of value for the subject property as a hotel for tax year 2013.

Valuation as a Multi-Residential Property

17Club Riverside was personally inspected by Mr. Chalk on January 21, 2014 when the property was already in use as a student residence with about 100 units occupied. He noted that the former hotel rooms were converted through the installation of a wall module fitted with a counter, bar fridge, sink and microwave. The units were also furnished with a bed, desk and four piece bathroom. Every second floor had a common area equipped kitchen and laundry and former hotel common areas, pool and gym were available to residents. No food services or restaurants are provided or available for tenants.

18Mr. Chalk testified that multi-residential properties are transacted in the market based on income, thus such properties are valued by MPAC using a gross income approach to value. MPAC uses the Gross Income Multiplier (“GIM”) method to value rental apartment buildings. This involves a comparison of sales of similar buildings and their gross potential annual income. This method estimates the potential gross annual income that can be generated by a property, based on fair market rents. A multiplier or GIM is applied to the potential gross annual income to arrive at a current value for the property. GIM's are calculated from information obtained from the sales of similar Multi-Residential buildings. Rents are obtained from annual operating statements and rent rolls provided by owners. For the subject property, the actual rents were used as the basis for the determination of potential gross income. Using 207 studio style apartments and a fair market rent (annualized) of $496 per unit, Mr. Chalk calculated the annual fair market rent for the property at $1,232,064.

19Mr. Chalk compared the sales of six multi-residential properties in close proximity to the University which are known to attract mostly student residents. There are no other converted hotels to use for comparison and so the most similar properties are multi-residential properties that cater to students. The subject property offers superior amenities and a better location than each of the comparables. Direct sales comparisons examine the cost of acquiring similar substitute properties. Sale characteristics reflect time, location, age, size and the quality and design of the improvements. Using the GIM of 4.36 calculated from the sales of six properties principally used for student rentals, he finds a current value of $5,371,000 (rounded) or $25,946 per unit for the subject property while used as a Multi-Residential property in 2014 and 2015.

20Mr. Shea suggested several cases including the following case law in support of MPAC's case:

1. Lester Shoalts Ltd. v. Ontario Property Assessment Corp., Region No. 18, [2001] O.A.R.B.D. No. 365 Paragraph 12 reads:

Mr. Burke provided the following definition of a self-contained unit as used by OPAC:

• Independent cooking facilities
• Independent bathroom
• A separate entrance, from either inside or outside of the structure.

Paragraph 18 goes on

...When determining the correct classification, the Board must look specifically at the property.

21While Mr. Pocrnic noted that the subject units were much more modest than these independent living units intended for seniors, the Board finds that though the facilities may be humble, they pass the test of being self-contained by providing kitchen and cooking facilities, independent eating, sleeping and bathroom accommodations along with controlled access, similar in function to a small apartment.

The Legislation

22The Board’s jurisdiction to make corrections to an assessment is found in the Assessment Act (“Act”).

23Section 19.(1) of the Act provides that the assessment of a property must be based upon its current value:

19.(1) Assessment based on current value. – The assessment of land shall be based on its current value.

24Section 1 of the Act:

“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.

25Section 19.2(1) of the Act provides:

19.2(1) Valuation days – Subject to subsection (5), the day as of which land is valued for a taxation year is determined as follows:

1. For the 2006, 2007 and 2008 taxation years, land is valued as of January 1, 2005.

2. For the period consisting of the four taxation years from 2009 to 2012, land is valued as of January 1, 2008.

a. For each subsequent period consisting of four consecutive taxation years, land is valued as of January 1 of the year preceding the first of those four taxation years.

26Section 44.(3) of the Act states:

44.(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.

27Section 45 of the Act states:

45. Powers and functions of the Assessment Review Board. – Upon an appeal with respect to an assessment, the Assessment Review Board may review the assessment and, for the purposes of the review, has all the powers and functions of the assessment corporation in making an assessment, determination or decision under this Act, and any assessment, determination or decision made on review by the Assessment Review Board shall be deemed to be an assessment, determination or decision of the assessment corporation and has the same force and effect.

28Ontario Regulation 282/98 ss. 4(1) states:

The multi-residential property class consists of the following:

1. Land used for residential purposes that has seven or more self-contained units other than land included in the residential property class under paragraph 1 of subsection 3 (1).

2. Vacant land principally zoned for multi-residential development.

Board Deliberations

29The Board must have regard to the legislation, in particular, s. 19.(1) of the Act, which provides that the assessment of a property must be based on its current value. Current value is also defined for us in the Act as noted above.

30Classification is as of the classification day, June 30 of the previous taxation year. The property was sold to the Appellant in May 2013 and the intended use changed to student residence in September 2013. The classification for 2013 remains commercial as the classification day is June 30, 2012. In September 2013 the Appellant declares the he is changing the use to student accommodation however he has missed the classification day again (June 30 2013 for the 2014 taxation year) and accordingly the classification for the 2014 taxation year remains commercial.

31The next task is to find the correct current value as of January 1, 2012 while used as a hotel property in 2013. The Board places limited weight upon the sale of the subject property as a reliable indicator of current value since the sale is bundled with another property, individual valuations were declared only after the sale, the vendors had listed the properties pursuant to corporate direction to divest from 23 properties nationwide and the purchasers or related parties controlled the adjacent and only parking for the facility thereby potentially limiting the market. Finally, as noted by MPAC, the sale does not conform to the market as it falls outside of the range expected from the sales of similar properties in the vicinity.

32The Board recognizes and accepts MPAC's argument that the subject property's two years as an unbranded hotel did not fairly represent the potential income generating capacity or value of the hotel with normalized income. Thus using the Direct Comparison Approach provides the best estimate of value for the subject property as a hotel for tax year 2013. We find as Mr. Chalk concluded, that $5,062,000 using the Direct Comparison Approach provides the best estimate of value for the subject property as a hotel for tax year 2013.

33The Board finds that the former hotel units now leased out for long term tenancies which include a counter, bar fridge, sink and microwave and also furnished with a bed, desk and four piece bathroom, although modest living space, are considered and intended to be self-contained units. The Appellant's argument that one cannot cook with a microwave oven is not credible by definition or application. Since the property clearly includes more than seven of such self-contained units, it properly belongs in the Multi-Residential tax classification.

34The next task is to find the correct current value as of January 1, 2012 while used as a multi-residential property in 2014 and 2015. Following the conversion to a multi-residential property, MPAC's analysis and valuation using a gross income approach to value along with a GIM method as used for other multi-residential properties is appropriate in the circumstances. This involves a comparison of sales of such properties and their gross potential annual income. Since such properties are bought and sold based on income, it stands to reason that a potential purchaser would compare the income potential of similar properties in the vicinity when making a decision to purchase. As there are no comparable properties that converted from hotels to multi-residential in the vicinity, reasoned adjustments and assumptions were made in order to arrive at the best possible estimate of current value using comparable multi-residential properties that focus on the student rental market in the vicinity.

35The subject property has superior amenities and location to the selected comparable properties and thus using the median GIM of such sales as applied to the annualized rental income drawn from the actual rental rates of the subject property is not unreasonable. The median GIM of 4.36 calculated from the sales of six properties principally used for student rentals multiplied by the $1,232,064 annualized rental income, the Board finds a current value as of January 1, 2012 of $5,371,000 (rounded) for the subject property while used as a Multi-Residential property in 2014 and 2015.

36The Board has received no evidence to suggest that the subject property’s assessment is not equitable when compared to the assessments of similar properties in the vicinity for the January 1, 2012 valuation date.

CONCLUSION

37The current value of the subject property for the 2013 taxation year is reduced from the $6,360,000 returned value to $5,062,000 with the property confirmed in the Commercial Property Class (“CT”) with no further adjustment required to make it equitable with similar properties in the vicinity.

38The current value of the subject property for the 2014 taxation year is reduced from the $6,360,000 returned value to $5,371,000 with no further adjustment required to make it equitable with similar properties in the vicinity. The property will reside in Commercial Property Class (“CT”) for the 2014 tax year.

39The current value of the subject property for the 2015 taxation year is reduced from the $6,360,000 returned value to $5,371,000 with no further adjustment required to make it equitable with similar properties in the vicinity. The property will reside in the Multi-Residential Property Class (“MT”) commencing in the 2015 taxation year.

2015 DEEMED APPEAL

40An 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.

41Section 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.