Werh Group Inc. v. Municipal Property Assessment Corporation, 2016 CanLII 6902

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

ISSUE DATE: February 10, 2016 FILE NO.: WR 136336 Assessed Person(s): Werh Group Inc. Appellant(s): Werh Group Inc. Respondent(s): Municipal Property Assessment Corporation ("MPAC") Region 25 Respondent(s): Municipality of Brockton Property Location(s): 10 Eastridge Road Municipality(ies): Municipality of Brockton Roll Number(s): 4104-360-001-01917-0000 Appeal Number(s): 3044584, 3044586, 3104236 and 3104237 Taxation Year(s): 2012, 2013, 2014 and 2015 Hearing Event No.: 602740

Legislative Authority: Sections 33 and 40 of the Assessment Act, R.S.O. 1990, c. A.31, as amended

Heard: October 28, 2015 in Walkerton, Ontario

APPEARANCES:

Parties Werh Group Inc. MPAC Municipality of Brockton

Counsel+/Representative Bonnie Petro Frank Shea+ Trish Baglole

DECISION OF THE BOARD DELIVERED BY DAN WEAGANT

INTRODUCTION

1The subject property is a restricted service hotel, under the Best Western brand that opened for business in 2012. It comprises 50 rooms (five of which are barrier free), a breakfast room with 18 seats, an indoor swimming pool, fitness centre and a business centre along with two hospitality rooms.

2The subject property is subject to six appeals; four related to omitted assessments applied by MPAC in 2012 and 2013 under s. 33 under the Assessment Act ("Act"), and two s. 40 appeals related to the current value of the subject property for the 2014 and 2015 taxation years.

3During the evidence portion of the hearing, the Appellant agreed to withdraw two of the appeals that related to changes in land classification. As this property was developed in 2012, appeal numbers 3044585 and 3044587, under s. 33 relate to the classification change from vacant land to commercial. There is no dispute with regard to classification, resulting in the Appellant's withdrawal of these two appeals.

4For the 2012 taxation year, MPAC added $3,671,000 to the value of the subject property to reflect the new construction of the subject hotel, effective May 17 of that year. For the 2013 taxation year, this added value was amended to $4,120,000. For the 2014 and 2015 taxation years MPAC returned an assessment of $4,201,000, including the value of the previously undeveloped land.

5For hotel properties like the subject property, MPAC applies a method of determining value that is based on 'stabilized' revenue and expenses. MPAC uses stabilized values because the subject property has not been operating long enough to establish reliable results from its operations.

6The Appellant believes the resultant, stabilized results derived from other similar properties is unreliable to apply to the subject property owing to their differences in operation when compared to the subject property. In addition, the Appellant believes that while the subject property has only been operating for a short time, its revenue results should be considered in determining the revenue and expenses used to determine the property's current value.

7The Assessment Review Board ("Board") must determine the current value of the property for the taxation years under appeal, as well as the current value of the omitted assessments applied by MPAC for changes that occurred in 2012, 2013 and 2014. Specifically, the Board must also determine the correct values of the inputs into the valuation method used to determine current value. Once the current values are determined, the Board must also decide, when reference is made to the assessments of similar properties in the vicinity, if the current value determined should be reduced for the purposes of equity.

DECISION

8The Board finds that the value of the s. 33 omitted assessments are as follows:

Appeal #	Returned Value	Reduced to
3044584 - 2012 Taxation year - Effective May 17, 2012	$3,671,000	$3,635,000
3044586 - 2013 Taxation Year - Effective January 1, 2013	$4,120,000	$4,084,000

9The Board also finds that the current value of the subject property, for the 2014 and 2015 taxation years is $4,165,000. Accordingly, the assessment of the subject property is reduced as follows:

Appeal #	Returned Value	Reduced to
3104236	$4,201,000	$4,165,000
3104237	$4,201,000	$4,165,000

10The Board finds that it has no evidence to suggest that a reduction in the current value determined is necessary for the purposes of equity of assessment.

Legislation

11In making its determination on these appeals, the Board must consider the following sections of the Act.

12Section 1 of the Act States:

"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.

13Section 19.(1) of the Act states:

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

14Section 33 of the Act States:

33.(1) Change re land omitted from tax roll – The following rules apply if land liable to assessment has been in whole or in part omitted from the tax roll for the current year or for all or part of either or both of the last two preceding years, and no taxes have been levied for the assessment omitted:

1. The assessment corporation shall make any assessment necessary to correct the omission.
2. If the land is located in a municipality, the clerk of the municipality shall alter the tax roll upon receiving notice of the change, and the municipality shall levy and collect the taxes that would have been payable if the assessment had not been omitted.
3. If the land is located in non-municipal territory, the Minister shall alter the tax roll upon receiving notice of the change, and shall collect the taxes that would have been payable if the assessment had not been omitted.

15Section 40 of the Act states:

40.(1) Appeal to Assessment Review Board. – Any person, including a municipality, a school board or, in the case of land in non-municipal territory, the Minister, may appeal in writing to the Assessment Review Board,

(a) on the basis that,

(i) the current value of the person's land or another person's land is incorrect,

(ii) the person or another person was wrongly placed on or omitted from the assessment roll,

(iii) the person or another person was wrongly placed on or omitted from the roll in respect of school support,

(iv) the classification of the person's land or another person's land is incorrect, or

(v) for land, portions of which are in different classes or real property, the determination of the share of the value of the land that is attributable to each class is incorrect; or

(b) on such other basis as the Minister may prescribe.

MPAC's Evidence

16Frank Shea called Margaret Bossy, an experienced assessor with MPAC to describe the approach taken by MPAC in determining the current value of the subject property. Ms. Bossy explained the Pro Forma income capitalization approach to valuation which calculates the present worth of 'anticipated future benefits' (income) to the owner over a specified period of time. Ms. Bossy further explained that the process of converting an income stream to a single capital value is called capitalization. MPAC uses the direct capitalization method to make this conversion and Ms. Bossy testified that this is the method commonly used to determine current value for hotel properties.

17The net income for the base years (2008 and 2012 in this case) are capitalized with an overall rate that reflects investment characteristics of hotel properties. This method involves several steps:

1. Estimation of the total departmental and other applicable revenues;
2. Deduction of normalized departmental costs and expenses;
3. Deduction of normalized undistributed operating costs, including management fees; and
4. Deduction of total fixed charges including insurance and a reserve for renewals.
5. Application of a capitalization rate to net income.

18Hotel properties include four components: land, improvements (buildings), personal property and business. In this procedure, personal property and business value are excluded from the total to achieve market value for assessment purposes. Income statements are evaluated to identify the relevant income values. In this valuation method, the end figures are anticipated to represent a 'typical' current and forecast years' expenditures, ongoing inflation or changes in purchasing power.

19Typically, two to three years of recent income results are used by MPAC to evaluate the typical and current forecast years' results. This step is used to determine whether or not the actual results represent 'normalized' results that reflect market conditions. If the results are not consistent with the results reflected in the broader market, they must be 'stabilized' so the results from the subject property can be relied upon for the purposes of valuation.

20When stabilized income and expenses cannot be determined from actual values for the subject property (as is the case in these appeals), MPAC stabilizes these results by comparing them to the actual results from comparable properties in the market area. This comparison ignores any irregularities in market conditions and non-recurring conditions that might result in unusually high or unusually low revenues or expenses.

21The term 'stabilization' applies to a condition where a specific property has reached market occupancy or a projected occupancy level that is reasonably forecast. Stabilization is used when a property has not operated long enough to use actual income and expense results to determine a current value. MPAC defines stabilized occupancy as "the optimum range of long term occupancy which an income producing real estate project is expected to achieve under competent management after exposure to leasing in the open market for a reasonable period of time and conditions comparable to competing offerings".

22To create the necessary stabilization for the subject property, MPAC identified the applicable comparative market within which it operates, defined by the following properties:

1. Holiday Inn Express and Suites, Kincardine;
2. Best Western Plus Governor's Inn, Kincardine
3. Super 8, Port Elgin
4. Best Western Inn on the Bay, Owen Sound

23These four properties constitute what MPAC considers the 'Market Set' in determining the stabilized income and expenses for the subject property since it has not yet been in operation long enough to deliver its own stabilized operating results.

24To clarify the concept of stabilization, Mr. Shea called Robert Chalk who has experience with MPAC in determining stabilized income and expense values for hotel properties. Mr. Chalk explained the concept by presenting a brief application of the foregoing to an unrelated market set. He noted that, to determine revenue for hotel properties, a stabilized Average Daily Rate ("ADR") is multiplied by the number of rooms, with this total multiplied by 365 nights annually. This total is then multiplied by the stabilized occupancy indicated for the market set to arrive at a total room revenue amount. His conclusions were that if the actual figures generated from the subject property in 2012 through 2014 were used to determine current value, that value would be too low as occupancy and income are still on a continual rise and do not represent the stabilized revenue stream that would reflect a reasonable future benefit to the owner.

25To determine stabilized income and expenses for the subject property, as derived from the market set, MPAC considers the following:

• Occupancy rates
• Market Share and Stabilized Occupancy
• Stabilized Average Daily Rate (ADR)
• Revenue per Available Room (RevPar)
• Other Operating Departments
• Room Costs
• Undistributed Expenses
• Management Fees
• Combined Expenses including marketing, franchise fees, energy costs, property operation and maintenance, insurance and renewals.

26Ms. Bossy submitted Exhibit 2 including the pro forma breakdown for the subject property including the elements above used to make a determination of the net capitalized value of the property for both the 2008 and 2012 base years. For the 2008 base year, Ms. Bossy used an average room rate of $131.05, based on the performance of the four properties in the market set, resulting in a value of $2,391,700 for the subject property. She then applied an occupancy rate of 58% derived from the market set to arrive at a stabilized room revenue amount of $1,387,200.

27For the 2012 base year, Ms. Bossy began with a stabilized average daily rate of $137.00 based on the performance of the four properties in the market set. This results in a value of $2,500,256 for the subject property. Ms. Bossy applies an occupancy rate of 58%, derived from the market set to arrive at a room revenue amount of $1,450,145.

28For the 2008 base year, Ms. Bossy started with the stabilized room revenue of $1,430,100 and after adding revenue from other operating departments, reduced this figure by applying departmental costs and expenses, undistributed operating expenses and fixed charges to arrive at a net income figure of $554,900. By applying the overall capitalization rate (including a basic capitalization rate and a tax rate) of 12.58 % Ms. Bossy arrives at a value of $4,410,969. When the value of chattels is removed from this indicated value, the net value determined is $3,749,000.

29For the 2012 base year, Ms. Bossy took an identical approach to the 2008 calculations and, using a starting stabilized revenue of $1,494,000, arrived at a net land and building value of $4,201,000.

Appellant's Evidence

30Bonnie Petro is the General Manager of the subject property and has extensive experience in the management and operation of hotel properties. Ms. Petro's concern about MPAC's approach revolves around two aspects. Firstly, she believes that the market set used by MPAC is not sufficiently similar to the subject property to be used in determining stabilized revenue. Secondly, she believes that the actual performance of the property during its early time of operation should be used in determining the stabilized operating revenue, which eventually leans to a valuation for assessment purposes.

31Ms. Petro provided the Board with an alternative set of properties that she believes have more in common with the subject property that those properties used by MPAC. This alternative market set is made up of:

• Travelodge, Owen Sound
• Comfort Inn, Owen Sound
• Day's Inn, Owen Sound
• Howard Johnson, Kincardine
• Lighthouse Motel, Walkerton
• Traveller's Inn, Hanover

32These six properties in Ms. Petro's comparative market set range in size from 17 rooms to 79 rooms and are representative of the same geographic area as the market set submitted by MPAC. Ms. Petro pointed out that the assessment value of these properties range from $14,866 per room (Howard Johnson) to $52,061 per room (Traveller's Inn), whereas the assessment value reflected in MPAC's valuation for the subject property is $77,240.

33Ms. Petro submitted that the market set submitted by MPAC reflects hotel properties that are more accurately described as 'full service' hotels that include meeting rooms and in some cases on-site or adjacent restaurant properties, thereby making a significant distinction between them and the subject property which has very limited meeting space and no nearby restaurant opportunities for guests.

34In further making the distinction for the subject property, Ms. Petro called Michael McIntee, an experienced commercial real estate broker in the area. Mr. McIntee's opinion was that the subject property is distinct from MPAC's market set owing to its specific location (approximately 40 kilometres from the Lake Huron shoreline). He submitted that the four comparable properties in MPAC's market set have advantages with respect to location, particularly their proximity to the Lake Huron and Georgian Bay waterfronts which attract a higher tourism market than the subject property.

35Ms. Petro also prepared a summary of sales of seven similar properties that occurred in 2012. These sale values ranged from $30,800 per room to $47,600 per room. She suggested that the valuation of the subject property of $73,420 for the 2012 taxation year and $84,020 for the 2013 and 2014 taxation year are too high by comparison. The sales selected by Ms. Petro were for properties in Windsor, London, Guelph, Midland, Brampton, Toronto and Gananoque.

36Ms. Petro also provided a profit and loss statement for the operation of the subject property for the 2012, 2013 and 2014 taxation years, noting that the 2012 results were for a partial year only, starting in mid-May and comprising the first seven and half months of the hotel's operation. Revenue for 2012, 2013 and 2014 were reported at $628,793, $1,080,879 and $1,240,131 respectively, which Ms. Petro submits is an indication that revenue from the subject property is below that determined by MPAC.

37Lastly, Ms. Petro prepared and submitted a pro forma document that compares the actual financial performance of the subject property to the two Best Western properties in MPAC's market set. This document indicates that revenue per available room (RevPar) is $79.46 for the subject property, $86.31 for the Best Western, Kincardine and $74.13 for the Best Western Owen Sound. Under cross-examination on this document, Ms. Petro acknowledged that there was some confusion on her part as to the allotment of room revenue versus food, beverage and meeting room revenues in the comparison.

38Ms. Petro concluded her evidence by stating that, although the approach by MPAC seems to be governed by the regulation under the Act and that their approach is consistent with the approach taken for similar properties in the Province when stabilized revenues are not yet achieved on new properties, there ought to be some consideration made for operators who are just starting out and may not have sufficient revenues to meet the property tax obligations derived from the resultant artificial valuation determined from stabilized revenue.

Analysis

39The issues related to these appeals are driven by the fact that the subject property has been operating for a limited period of time and that the valuation method normally used to determine current value for limited service hotels is derived by the revenue generated. MPAC submitted that in order to reach a fair and equitable valuation on such a property for assessment purposes, normalized or stabilized revenue must be used. Otherwise, they further submit, the resultant valuation would not truly reflect the reasonable future expectation of financial benefit which is the basis of valuation of hotels in the Province. This issue is eliminated, according to MPAC, when hotel properties have an established revenue stream over a number of years (three to five full years according to Mr. Chalk, depending on individual circumstances), that truly reflect the performance and hence, the future performance of the property.

40There appears to be little dispute between the Parties about the overall valuation method used by MPAC, if the subject property had in fact reached its own stabilized revenue stream to use as a basis of valuation for assessment purposes. Indeed, the approach taken by MPAC is consistent with the approach used across Ontario for these kinds of properties. In support of this, Mr. Shea submitted that s. 17 and s. 45.3 of Ontario Regulation ("O. Reg.") 282/98 stipulates details of valuation when the pro forma income approach is used, clearly indicating that this approach is considered standard in the valuation of hotel properties.

41Mr. Shea also cited cases that he suggests gives the Board guidance with respect to the method used to determine current value for the subject property, and in particular the application of stabilized revenue as a basis of calculation. The most relevant is Valbay Hotel Ltd. v. Municipal Property Assessment Corp., Region No. 32 [2002] O.A.R.B.D. No. 466 ("Valbay"). In this decision, the Board found that "...valuation necessitates a process referred to as stabilization of income. The objective is to mitigate 'peaks and valleys' in order to achieve an appropriate income to which the cap rate is applied." (Emphasis added). Valbay also cited specific evidence submitted at the hearing from Stephen Rushmore who was described as highly regarded by the parties to that hearing: "The process of deriving the stabilized net income for a lodging facility requires the appraiser to look into the future and estimate operating revenues and expenses".

42Accordingly, the Board is satisfied that the approach used by MPAC is the correct one and that stabilization of income is required to achieve the correct future estimate of operating revenues and expenses. Two questions remain as to whether or not the basis of the inputs used by MPAC in their valuation is correct. The first is the issue of the market set used and the second is the specific values of the inputs used by Ms. Bossy in her valuation process.

43Ms. Petro made a distinction in her submissions between the subject property, which she considers a 'limited service hotel' and the four properties used by MPAC in their market set. Ms. Petro believes these to be 'full service hotels' and by definition, should not be used to determine stabilized revenue. She submits that other regional motel properties are more comparable to the subject property owing to their limited range of services for overnight guests. The Board does not agree. It is clear from the photographic evidence and the descriptions of both the Appellant's set and MPAC's set, that the subject property has more in common with the properties in MPAC's market set. For instance, many of the properties put forward by the Appellant do not have interior hallway access to guest rooms; they are one to three storeys in height as opposed to the five storeys at the subject property; they have very little common area amenity (like a breakfast area and hospitality rooms); they are of a generally lesser category of accommodation. The Board is satisfied from the evidence that the market set put forward by MPAC is the correct one as the four properties in that set all have similar characteristics to the subject property. The Board notes that the subject property is newer than all of those properties that it is compared to in MPAC's market set and no direct adjustment for value has been made for the different in age; which is to the owner's advantage and reasonably leads to a lower valuation. Secondly, in the calculation of total revenue, MPAC made a distinction between room revenue and other revenue, and used only the room revenue data from the market set to establish stabilized room revenue for the subject property. The Board is satisfied that the most meaningful data, that being room revenue has been used by MPAC in their determination of the stabilized revenue for the subject property.

44In reviewing the considerations used by MPAC in estimating future income, the Board finds that MPAC's application of specific inputs is reasonable, with one exception; that being the stabilized ADR. MPAC uses $137, derived from the ADRs of the market set used in the analysis. The Board notes that the average ADR of the four properties in the market set is $134.96, with a median of $133.48. There is no evidence as to why the $137 figure by MPAC, except that it reflects a reasonable estimate by a knowledgeable and experienced assessor. The Board does not take issue with Ms. Bossy's experience or credentials. However, the documentary evidence of the median ADR is most compelling to the Board, where MPAC relies on the four properties in this market set.

45Accordingly, the Board finds that for the purposes of determining the estimated, stabilized income for the subject property, the median ADR of $133.48 in the Market set is the best indicator of value. As a result, the Board further finds the total, stabilized room revenue is as follows, consistent with the method demonstrated by MPAC at the hearing for the 2012 valuation date:

• $133.48 ADR multiplied by 50 rooms = $6,674 / night
• $6,674 multiplied by 365 nights / year = $2,436,010 potential annual revenue
• $2,436,010 multiplied by 58% occupancy rate derived by MPAC = $1,412,886
• $1,412,886 plus non-room revenue of $44,800 = $1,457,686
• $1,457,686 multiplied by 34% (net income by pro forma) = $495,613
• $495,613 divided by overall capitalization rate of 10.27% = indicated value of $4,825,832
• Subtract chattels of $741,550 = $4,084,282 value net of land and buildings.
• For the 2012 valuation date applicable to the 2013-2015 taxation years, MPAC adds $81,000 for land value which is not in dispute. The Board finds that with the land value added, the total current value of the subject property for the 2012 valuation date is $4,165,282 or $4,165,000, rounded.

46For the 2008 valuation date, MPAC took a simplified approach whereby they apply an adjustment factor to the 2012 valuation. This adjustment factor is known as a Municipal Discount Factor that takes into account the general market conditions within a Municipality to derive a 2008 value from the 2012 value as determined. As there are only results for 2012 onward for the subject property, the Board finds that this approach is reasonable to 'go back in time' to make a determination based on the 2008 valuation date.

47The Municipal Discount Factor for the subject property is 0.9566. When applied to the RevPar of the subject property and through adjustments to ADRs of the market set, the impact of this approach is a value of 89% of the 2012 value as determined. Therefore, the Board finds that on the basis of the evidence submitted, for the 2008 valuation date, the value of the omitted assessment of the subject property is $3,635,010 or $3,635,000 rounded.

DECISION

48The Board finds that the value of the s. 33 omitted assessments are as follows:

Appeal #	Returned Value	Reduced to
3044584 - 2012 Taxation year – Effective May 17, 2012	$3,671,000	$3,635,000
3044586 – 2013 Taxation Year – Effective January 1, 2013	$4,120,000	$4,084,000

49The Board also finds that the current value of the subject property, for the 2014 and 2015 taxation years is $4,165,000. Accordingly, the assessment of the subject property is reduced as follows:

Appeal #	Returned Value	Reduced to
3104236	$4,201,000	$4,165,000
3104237	$4,201,000	$4,165,000

50The Board finds that it has no evidence to suggest that a reduction in the current value determined is necessary for the purposes of equity of assessment.