Assessment Review Board

Commission de révision de l’évaluation foncière

ISSUE DATE: April 25, 2016

FILE NO.: WR 138536

Assessed Person(s): Kilmanagh Developments Ltd.

Appellant(s): Kilmanagh Developments Ltd.

Respondent(s): Municipal Property Assessment Corporation (“MPAC”) Region 15

Respondent(s): City of Brampton

Property Location(s): 249 Queen Street East, Plan 518 PT BLK K

Municipality(ies): City of Brampton

Roll Number(s): 2110-020-009-23800-0000

Appeal Number(s): 2944181, 3008350, 3084130 and 3152077 (deemed 2016)

Taxation Year(s): 2013, 2014, 2015 (and deemed 2016)

Hearing Event No.: 613033

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

Heard: January 26, 2016 in Brampton, Ontario

APPEARANCES:

Parties	Representative
Kilmanagh Developments	Bryan Sullivan
MPAC	Ron Franklin
City of Brampton	Aida Karreman

DECISION OF THE BOARD DELIVERED BY ANTHONY LaREGINA

ISSUE

1The subject property, located at 249 Queen Street East, is a multi-tenanted neighbourhood shopping center with approximately 10,179 square feet of gross leasable building area on a 1.07 acre parcel of commercially zoned land.

2MPAC’s position is that the current value of the subject property effective January 1, 2012 is $2,535,000. Mr. Franklin used the income approach in support of the valuation utilizing fair market rents to establish income, 3% vacancy allowance, 2% expense allowance and a capitalization rate of 7%. In addition, Mr. Franklin also entered two similar properties in support of the subject property’s Current Value Assessment (“CVA”).

3Mr. Sullivan, representing Kilmanagh Developments Ltd. (the “appellant”) agreed to use the income approach to value but argues that the fair market rents used by MPAC are too high and that the actual rents should be utilized to establish income. Mr. Sullivan argues that the current value of the subject property using actual rents as opposed to fair market rents is $2,440,000.

DECISION

4The Board finds the current value of the subject property to be $2,440,000 for the 2013, 2014 and 2015 taxation years and that the current value is equitable with the assessments of similar properties in the vicinity.

5The decision of the Board, therefore, is to reduce the assessment of the subject property from $2,683,000 to $2,440,000 for the 2013, 2014 and 2015 taxation years.

REASONS FOR DECISION

Subject Property

6The subject property, located at 249 Queen Street East, is a multi-tenanted neighbourhood shopping center with approximately 10,179 square feet of gross leasable building area on a 1.07 acre parcel of commercially zoned land. The property is located at the southeast corner of Queen Street East and Hanson Road. The three tenants are Wild Wings and Hakim Optical facing Queen Street and Silver Spoon facing Hanson Road. The gross leased area for Wild Wings is 5,029 square feet, Silver Spoon is 2,150 square feet and Hakim Optical is 3,000 square feet. The property CVA was returned at $2,683,000 but Mr. Franklin recommended that based on the income approach this value be reduced to $2,535,000 for the 2013, 2014 and 2015 taxation years.

Case for the MPAC

7Mr. Franklin submitted in evidence Exhibit 1, MPAC’s report comprising of a property description, map identifying the location of the subject property, photographs of the subject structure showing the location of each tenant and the valuation methodology. In addition, the document also has four tabs: 1) subject property valuation, 2) subject property rental information, 3) similar comparable properties and 4) curriculum vitae for Mr. Franklin.

8Mr. Franklin explained both at the hearing and in his document that the income approach relies on fair market rents and in determining the fair market rents MPAC considers leases signed or renewed by the tenants in base and shoulder years for the property and comparable properties in the area. Mr. Franklin estimated the fair market rents by analyzing the actual rents over the lease terms for the subject property. Mr. Franklin also stated the fair market rent is the rent a typical tenant would be willing to pay for the occupancy of a particular property if it was available on the open market.

9In the case of the subject property Mr. Franklin established the fair market rents for each unit as follows:

• Unit A (Wild Wings) – Fair Market Rent = $17 per square foot. Mr. Franklin reviewed the lease signed July 2011 for a ten year term. Mr. Franklin determined that the average rent on this lease was $17.75 and therefore concluded that a fair market rent of $17 per square foot was reasonable.

• Unit C (Silver Spoon) – Fair Market Rent = $17 per square foot. Again, Mr. Franklin reviewed the lease for this unit signed June 2011 for a five year term and determined that the average rent was $17 per square foot. Mr. Franklin therefore concluded that the fair market rent of $17 was reasonable.

• Unit B (Hakim Optical) – Fair Market Rent = $21.60 per square foot. Once again Mr. Franklin reviewed the step-up lease which was signed in February 1998 for a five year term with two five-year renewal options for an additional ten years. Mr. Franklin determined that this was a very old lease and established the fair market rent at $21.60 per square foot which represents the actual rent for the period of June 1, 2012 to May 31, 2013 in the last year of the lease.

10Mr. Franklin used the fair market rents as outlined above in conjunction with a vacancy and collection allowance of 3%, an expense allowance of 2% and a capitalization rate of 7% to determine a current value of $2,535,000 (see Exhibit 1, Tab 1).

11In support of the valuation Mr. Franklin also introduced the valuation of two comparable properties in the vicinity of the subject property (Exhibit 1, Tab 3). Mr. Franklin demonstrated that the average CVA rate per square foot of the two comparable properties is $258.86 which is higher than the subject property’s rate per square foot of $249.04 therefore concluding that the CVA is reasonable when compared to similar properties in the area.

Case for the Appellant

12Mr. Sullivan, the appellant’s representative, presented Exhibit 2 as his evidence package which includes:

• appellant’s case summary
• geowarehouse aerial photographs
• photographs of the subject property
• City of Brampton zoning report
• property leasing summaries
• 2012 property rent review
• appellant’s income valuation

13Mr. Sullivan submitted that he is in agreement with Mr. Franklin on all aspects of the income model except the fair market rents.

14Mr. Sullivan argued that the rents used should be the actual rents for the 2012 valuation year as opposed to the fair market rents put forth by Mr. Franklin.

15Mr. Sullivan outlined in Tabs 8 and 9 the impact of the actual rents on the income model and concluded that the current value of the subject property as of January 2012 should be $2,440,000.

16The valuation of $2,440,000 is based on the actual 2012 rent for all three tenants; Wild Wings at $16.25 per square foot, Hakim Optical at $21.60 per square foot and Silver Spoon at $15.50 per square foot.

17Mr. Sullivan argued that if MPAC uses fair market rents to value the property the true fair market rent for Hakim Optical should be $16.50 to $17.00 per square foot not $21.60. He further stated that the actual rental rate for Hakim Optical for the 2012 year is based on an old step-up lease which was signed in 1998 and is therefore, no longer reflective of the true market or fair market value.

18Mr. Sullivan stated that he agreed with the rent of Hakim Optical at $21.60 per square foot as part of a settlement discussion in an effort to settle the appeal. At the same time he also requested the actual rents for both Wild Wings and Silver Spoon be utilized to establish the valuation. Mr. Sullivan concluded that Mr. Franklin conveniently used part of their agreement to establish current value.

MPAC’s Summation

19Mr. Franklin submitted that there is no dispute with respect to most elements of MPAC’s valuation. There is an agreement between the parties on method, property description, gross lease area, use, vacancy allowance, expense allowance, cap rates and on the income approach to determining Current Value. Mr. Franklin further submits that they have an agreement to use the fair market rent of $21.60 on one unit out of three and that is Hakim Optical. With regards to the other two units, the fair market rent of $17.00 falls within the range of actual rents over the entirety of the leases. The fair market rent for those units, namely Wild Wings and Silver Spoon, is neither at the high or lower end. In fact, in one case the average lease value would produce a higher number of $17.75.

20Mr. Franklin also submitted that MPAC is applying a 3% vacancy rate where vacancy does not exist which means that the appellant is getting an additional benefit of 3%.

21Mr. Franklin argues that the appellant has not analyzed any comparable properties in support of his valuation and therefore has shown no inequity in comparing the subject property to similar properties.

22Mr. Franklin introduced the Ontario Court of Appeal decision Cardinal Plaza Ltd. et al. and Regional Assessment Commissioner, Region No. 19 et al. 1984 CanLII 1841 (ON CA), 49 O.R. (2d) 161 (“Cardinal”) and Ray Lawson Corner Ltd. v. Municipal Property Assessment Corp., Region No. 15 [2012] O.A.R.B.D. 215 (“Ray Lawson”). In the Cardinal decision the panel supported the economic rents or fair market rents for a multi-residential tower as opposed to the actual rent citing that these values are more indicative of the market. In the Ray Lawson decision the panel supported the fair market rent for a financial institution as opposed to the actual rent because the fair market rental rate was the same rate used for all other similar financial institutions in the vicinity. Mr. Franklin pointed out that the Ray Lawson property is very similar to the subject property, a strip mall with three tenants.

23Mr. Franklin concluded that both decisions support the use of economic or fair market rents as opposed to actual rents and therefore, he requested that the current value of the subject property be set at $2,535,000 and that the assessment be reduced from $2,683,000 to $2,535,000 for the 2013, 2014 and 2015 taxation years.

Appellant’s Summation

24Mr. Sullivan submitted that in the Ray Lawson case the fair market rent for a financial institution was based on a model of fair market rents for similar financial institutions in the vicinity as opposed to the fair market rents in this case which Mr. Franklin proposes to base on the average actual rents determined from the individual leases of Units A and C.

25Mr. Sullivan submitted that in the Cardinal decision the subject property was a high rise multi-residential property where again the model used fair market rents and not actual rents. It is not clear whether leases existed in the Cardinal case and no evidence is available to determine the similarity of the two cases. Mr. Sullivan concluded that it is likely a completely different set of facts and evidence supporting the Cardinal decision including the fact that the Cardinal is a multi-residential building as opposed to this subject property which is a commercial strip mall.

26Mr. Sullivan submitted that MPAC has analyzed the lease for Unit A, which stretches over a 10 year period from 2011 to 2020 and has taken an average value of $17 per square foot. Mr. Sullivan submitted that this is a dangerous and inaccurate approach as the valuation date is 2012 not 2020. Mr. Sullivan stated that MPAC has done the same for Unit C. Mr. Sullivan suggested that we should be looking at the shoulder years if we want to use averages not the entire lease period.

27Mr. Sullivan submitted that in this case MPAC did not use a model to establish fair market rents. They looked at each of the leases and calculated the averages for two leases namely for Units A and C and used the actual rent for Unit B for the 2012 year.

28Mr. Sullivan acknowledged that he agreed to a rental rate of $21.60 per square foot for Hakim Optical as the actual rent and as part of a negotiation to settle the appeal.

29Mr. Sullivan requested that the Board use the actual market rents presented in his report, which are based on the 2012 lease rate for each unit, to set the CVA of the subject property at $2,440,000 for the 2013, 2014 and 2015 taxation years.

Legislation

30The Board must have regard to s. 1, 19.(1), 19.2(1), 40.(19) and 44.(3)(a) (b) of the Assessment Act (“Act”) when determining whether or not the assessment under appeal is correct.

31Section 1 of the Act defines current value as follows:

“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.

32Section 19.(1) of the Act states:

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

33Section 19.2(1) of the Act states:

Valuation days

19.2 (1) 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.

3. 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.

Exception

(5) Subsection (1) does not apply in respect of the valuation of land for a taxation year after 2004 if the Minister prescribes a different day as of which land is valued for that year.

34Section 40.(19) of the Act states:

40.(19) Board to make determination. – After hearing the evidence and the submissions of the parties, the Board shall determine the matter.

35Section 44.(3) of the Act states:

44.(3) Same, 2013 and subsequent years. – For 2013 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.

Board’s Analysis and Conclusions

Current Value

36The thrust of the Act is to rely on current value as the basis for assessed value. 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.”

37The best evidence of current value is the sale of the subject property on or close to the valuation day of January 1, 2012. In this case, no such sale occurred and no sales of comparable properties were presented in support of current value. In this case, MPAC utilized the income approach to establish the current value of the subject property.

38All elements of the income approach were agreed to by both parties except for the rental rates. MPAC wanted to use fair market rents whereas the appellant wanted to use actual rents for each unit as of the 2012 base year.

39The definition of fair market rent is the most typical rent that a unit would rent for on the open market. The Board is very much in agreement with the definition and supports both decisions presented by Mr. Franklin that fair market rents are much more indicative of market value than actual rents.

40In the Court of Appeal Cardinal decision it was clearly stated that,

The assessor analyzes the actual rents that are submitted to the assessment department by the owners of the properties in a particular area under consideration, and conducts a survey of monthly apartment rents by type of unit, the property, the location and other factors, in order to establish a median rent paid for different sized units. This median rent is categorized as the “economic rent”.

41In the Ray Lawson case MPAC proposed that the fair market rent of Toronto Dominion Bank should be similar to the fair market rent of other financial institutions in the vicinity.

42Mr. Franklin stated in his report that generally, in valuing such properties, MPAC considers leases signed or renewed in the base and shoulder years for the property and comparable properties in the area. Fair market rents are estimated by analyzing actual rents over the lease terms for the subject property, and /or comparable properties in the vicinity of the subject, for the valuation period.

43The Board notes that no evidence was provided by MPAC to substantiate the fair market rents of similar type units in the vicinity as demonstrated in each of the cases presented and as referenced by Mr. Franklin in page 6 of his report. MPAC did not use a model or survey to establish fair market rents as indicated in the Cardinal and Ray Lawson decisions. Mr. Franklin indicated that he established the fair market rents for Units A and C by analyzing the leases and using the average rate in the case of Unit C and slightly less than the average rate of Unit A. With regards to Unit B, Mr. Franklin used the actual 2012 rent of $21.60 per square foot which Mr. Sullivan agreed to as part of a negotiation. These are not fair market rents based on typical units of this size in the vicinity rather, averages of the actual rental rates for Units A and C over the duration of their respective leases and the actual rent for Unit B for the 2012 year, the last year of a 15 year lease.

44Mr. Franklin also entered into evidence two properties, namely 75-85 Clarence Street and 269 Queen Street as similar properties indicating that the average rate per square foot is higher than that of the subject property. The Board notes that two properties both of which did not sell, is not a large enough sample to establish a rate per square foot for comparative purposes. Furthermore, only one of the two comparable properties is located on Queen Street, as is the subject property and no evidence to support the fair market rents was entered for the two comparables. In fact, Mr. Franklin admitted during cross-examination that he had no lease information to support the fair market rents and therefore valuation for the comparable properties.

45While the Board prefers to use fair market rents to establish the current value, in the absence of those rents the Board will establish current value based on the actual rents as presented by Mr. Sullivan which are based on the valuation day of January 1, 2012. The Board is in agreement with Mr. Sullivan that the lease for Hakim Optical is a very old lease and therefore, it is questionable whether this lease reflects the fair market value as demonstrated by the Wild Wings or Silver Spoon leases signed very close to the 2012 valuation day. The Board is also in agreement with Mr. Sullivan that it is not fair to set the fair market rent for a January 2012 valuation based on the average market rent from a lease which starts in 2011 and ends in 2021.

46For the above reasons, the Board will therefore set the current value of the subject property at $2,440,000 for the 2013, 2014 and 2015 taxation years based on the actual rents outlined at Tab 8 of Exhibit 2, as presented by Mr. Sullivan.

47With regards to the 3% vacancy allowance which Mr. Franklin deems as a benefit to the appellants, there was no evidence presented by either party to support any vacancy allowance, and, therefore, the Board will make no adjustment to current value for vacancy. Furthermore both parties agreed to a 3% vacancy allowance and therefore this was not an issue.

Equity

48The Board is required by the Act to:

a) determine the current value of the land

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 land

49Mr. Franklin submitted the CVA per square feet of two properties listed in Tab 3, Exhibit 1, in support of his determination of current value of the subject property calculated by using the income model. Mr. Franklin also attempted to use the CVA per square foot of these two comparable properties to show that the CVA of the subject property as proposed by MPAC was reasonable. The Board rejects this argument on two accounts, first the two comparable properties did not sell and furthermore the CVA per square foot of two properties is not a large enough sample to make any conclusions supporting an equity argument.

50Mr. Sullivan submitted no evidence in support of an equity argument.

51For the purposes of s. 44.(3)(b), the Board finds that the current value, as determined above, does not require any further adjustment to make it equitable with the assessments of similar lands in the vicinity.

52The decision of the Board, therefore, is to reduce the assessment of the subject property for the 2013, 2014 and 2015 taxation years from $2,683,000 to $2,440,000.

2016 DEEMED APPEAL

53An appeal for the 2015 taxation year is presently before the Board. Section 40.(26) of the Assessment Act 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 2015 appeal before March 31, 2016. For that reason, this decision also applies to the 2016 taxation year.

54Section 40.(26) of the Act directs:

Deemed appeals, 2009 and subsequent years

(26) 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.