420-450 Britannia Road East v. Municipal Property Assessment Corporation, 2016 CanLII 74071

Assessment Review Board

Commission de révision de l’évaluation foncière

ISSUE DATE:

October 26, 2016

FILE NO.:

WR 142542

Assessed Person(s):

420-450 Britannia Road East

Appellant(s):

420-450 Britannia Road East

Respondent(s):

Municipal Property Assessment Corporation (“MPAC”) Region 15

Respondent(s):

City of Mississauga

Property Location(s):

420-450 Britannia Road East

Municipality(ies):

City of Mississauga

Roll Number(s):

2105-040-116-34800-0000

Appeal Number(s):

2963570, 3033638, 3085221 and 3153514

Taxation Year(s):

2013, 2014, 2015 and 2016

Hearing Event No.:

630676

Legislative Authority:

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

Heard:

August 25, 2016 in Mississauga, Ontario

APPEARANCES:

Parties

Representative

420-450 Britannia Road East

Warren Hovius

MPAC

Haydn Johnstone and Malcolm Jones

City of Mississauga

No one appeared

DECISION OF THE BOARD DELIVERED BY SUBUOLA AWOLERI

BACKGROUND

1The subject property is a 43,825 square feet (“sq. ft.”) office building designated as Class “C”, which occupies 2.54 acres of land with 324 feet frontage and 334 feet of depth. This commercial building size is split between four office buildings, situated on the south side of Britannia Road East 300 meters south of Highway 401.

2The returned assessment for the subject property for January 1, 2012 was $5,182,000, apportioned as:

$2,957,000 – Commercial (Full) (“COM CT”)

$2,225,000 – Office Building (Full) (“COM DT”)

3The current value assessment (“CVA”) was determined using the income approach to value.

ISSUE

4The parties agree that the subject property ought to be valued using the income approach to value. There is no dispute as to the vacancy allowance of 9%, the expense allowance of 5% and the capitalization rate of 8%. However, they disagree on the rental rate.

5Haydn Johnstone, the assessor from MPAC, reviewed the subject property’s lease, all rent step ups, periods of free rent, and tenant inducements. On this basis, he provided a mean weighted rent for the subject property based on the lease agreements surrounding the 2012 CVA using the rents for each year of the duration of the term of each lease as $11.05.

6Warren Hovius, on behalf of the appellant, disagrees with this approach stating that in order to determine the market rental for the 2012 CVA, the lease activity that occurred around the valuation date of January 1, 2012 should be reviewed. He provided a weighted average rent of $10.36 as the correct rental rate for the subject property, which produces a value of $4,886,000 (rounded) as the 2012 CVA for the subject property.

7In addition to determining what the current value of the subject property is, the Assessment Review Board (“Board”) must determine if the assessment of the subject property is equitable with that of similar properties in the vicinity.

DECISION

8The Board orders that the assessment be reduced from $5,182,000 to $4,946,000 for the 2013, 2014, 2015 and 2016 taxation years, apportioned as:

$2,822,000 - COM CT

$2,124,000 - COM DT

9The Board also finds that this assessment at current value is equitable with the assessments of similar lands in the vicinity; hence no further reduction is required to achieve equity.

REASONS FOR DECISION

Legislation

10Section 44.(3)(a) of the Assessment Act (“Act”) requires the Board 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, for the 2013, 2014, 2015 and 2016 taxation years, the Board must determine what the subject property would have sold for in an arm’s length transaction on the January 1, 2012 valuation day set by the Act.

11Section 44.(3)(b) of the Act requires that the Board “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 land.”

Current Value - Evidence and Analysis

MPAC’s Position

12Mr. Johnstone, provided evidence on justification for the Fair Market Rent (“FMR”) for the subject property. He used actual rents from seven unit offices on the subject property, with lease terms between five to eight years, utilizing the rent roll to derive rents per square foot (“PSF”) for each year on these units and provided the weighted rent over these lease term for the units. He further utilized these weighted rents to derive a median weight rent for the subject property as $11.05, which he submits as confirming MPAC’s posted value of $10.94.

13Mr. Johnstone also reviewed the non - shoulder years leases of the subject property. He concluded from his analysis that the weighted rents for each unit reviewed did not provide a large discrepancy from what he had initially obtained within the shoulder years.

14He further reviewed other properties with the same office Class “C” as the subject property with Gross Leasable Areas (“GLA”) ranging from 10,000 – 46,825 sq. ft. and leases within and outside the shoulder years and obtained a FMR from $11.50 - $11.75. Mr. Johnstone submits that all his analysis reveals that MPAC was conservative in using a FMR of $10.94 to arrive at the CVA for the subject property and that the actual rents from the subject property are at market value and he requests that the Board confirm the assessment as returned.

15Mr. Johnstone testified that relying on a single year for the Net Operating Income will be deflating the value of the subject property. He further defended his use of future lease step ups in arriving at the FMR for the subject property, as being a proper method of appraisal by referring the Board to several excerpts from notable literature constantly utilized by MPAC.

16Mr. Johnstone concludes by submitting that equity has in fact been achieved and maintained, as there is a consistency in the application of the FMR for similar properties.

Appellant’s Position

17At the commencement of the hearing, Mr. Hovius initially disagreed with MPAC’s description of the subject property’s GLA, as 43,825 sq. ft. and he adjusted it as 43,639 sq. ft. However, during his submission, he conceded to the subject property’s GLA as provided by MPAC, since according him, it was not much of a difference.

18He disagrees with the method MPAC employed in arriving at the FMR for the subject property by using future step ups. He argued that MPAC wants to use future step ups without completing a discounted cash flow analysis, which will discount future rents back to the start of the lease, which will be the same way MPAC utilizes the time adjustment rate back to the valuation date. He submits that this is an incorrect appraisal practice, which produces higher rents PSF, and that only rents signed in the base year should be used and this will further be in line with what MPAC advocates on their website as the direct capitalization method.

19In determining the market rental rate for the 2012 CVA for the subject property, Mr. Hovius reviewed five tenants that signed leases within the shoulder years of the valuation date from 2011-2012 and obtained a weighted average rent of $10.36.

20In the alternative, he provided an analysis of rent step ups from 2011–2013 derived from the rent roll from the same leases signed in the shoulder years and obtained a weighted average for each of the units and from this derived a median weight of $10.50 for the subject property. He applied this to the subject property’s GLA of 43,825 sq. ft. and used the vacancy and expense allowance and the capitalization rate and obtained the 2012 CVA of the subject property as $4,972,631.

21Mr. Hovius also referred the Board to various published articles to prove that MPAC’s method is an incorrect appraisal practice, which results in a higher rent PSF.

22Under cross-examination, Mr. Johnstone challenged the validity of the opinion in one of the articles presented by Mr. Hovius as being the opinion of an individual and it may not be applicable in Canada. Mr. Hovius justified it by stating that the article published by the International Association of Assessing Officers (“IAAO”) is a reputable international organization, and MPAC often refers to this organization in assessment especially for equity analysis. Mr. Johnstone did not object.

Board’s Analysis and Decision

23The 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.”

24The best evidence of current value is the sale of the subject property on or close to the valuation day of January 1, 2012. If, as in this case, no such sale occurred, the sales of similar properties in the vicinity will be considered to establish current value of the subject property.

25The parties have presented the Board with various scholarly articles to justify their appraisal methodology in establishing current value of the subject property. The jurisdiction of this Board in determining the current value of the subject property is not to determine the validity of these articles. The Board does not doubt the authenticity of these articles written by reputable authors. These articles are not expert evidence in establishing current value. Furthermore, during cross-examination, Mr. Johnstone did not object to the fact that MPAC also makes reference to articles by the IAAO in its equity analysis. The Board is to make a determination on what the CVA of the subject property is, and to assess if the assessment at current value is equitable with the assessments of similar lands in the vicinity.

26Mr. Johnstone presented the Board with sales of properties within the same Class “C” as the subject property with GLAs ranging from 10,000 – 46,825 sq. ft., the lease terms are both within and outside the shoulder years, with rents from $9.00 – $13.50 PSF. He used this to confirm that the actual rent step ups utilized by MPAC in establishing the CVA of the subject is conservative. This FMR analysis was not used to set the CVA of the subject property but was used as a comparison to show that MPAC is correctly valuing the subject property. The actual rent PSF for the units utilized by MPAC in Exhibit 1 which is MPAC’s valuation report is $10.50. Calculations based on the future rent step ups for the terms of the lease provided a median weighted rent of $11.05. Consequently, using the future rent step ups has raised and provided a higher rent per square footage for the subject property, which Mr. Johnstone defended as the correct appraisal method using the literature adduced before the Board. The future lease step up over a period of time is speculative of what the rent would be as various factors could further influence the rents over time. The preferable and best evidence is what the rent is at the start of the lease, this on the balance of probabilities reflects what the FMR of the subject property should be. The current rental rates near the shoulder years has more weight than the market rents from other buildings as most buildings with unique positive and negative features has this reflected in their rents. The actual lease rent from the subject property is the best evidence.

27Both parties have used actual rents from the subject property. The best evidence is the lease signed within the shoulder years of the valuation date, using the rent step up also within the shoulder years.

28In Exhibit 7, Mr. Hovius provided the rent step ups within the shoulder years (2011 – 2013) for five tenants that signed leases within the valuation date of January 1, 2012 (2011 – 2012) as can be seen in Schedule 1 attached to this decision.

29From this table, he obtained the annual rent for each of the five tenants based on the actual rent obtained from the rent roll and derived the weighted average for each year to obtain a median rent of $10.50 PSF.

30The median weight rent for the subject property within the shoulder years for leases signed in the shoulder years is $10.50. This applied to the subject property’s GLA of $43,825 and using the 9% vacancy allowance, 5% expense allowance and 8% capitalization rate provides a CVA of $4,972,631, which is $4,973,000 (rounded). This amount was provided by Mr. Hovius at the summation of his evidence. Mr. Malcolm Jones, also representing MPAC, corrected Mr. Hovius advising that imputing $10.50 PSF into MPAC’s system applied against the subject property’s GLA will provide a lower CVA of $4,946,000. This was accepted by Mr. Hovius. The Board hereby accepts and sets the current value for the subject property for 2013, 2014, 2015 and 2016 taxation years as $4,946,000.

Equity Analysis

31Section 44.(3)(b) mandates and directs that after determining current value, the Board shall have reference to the value at which similar lands in the vicinity are assessed. The Assessment to Sales Ratio (“ASR”) is a tool often used to determine if a reduction in the assessment below current value is required to make an assessment equitable with the assessments of similar lands in the vicinity. The ASR is determined by dividing the assessment as returned by the time-adjusted sale price.

32At the commencement of the hearing the parties advised the Board that this was not an issue. Mr. Hovius in Addendum “C” of Exhibit 6 which is the Appellant’s report referred the Board to an equity study of 10 properties, all of which were Class “B” properties. He submits that for the vacancy allowance, expense allowance and capitalization rate, equity is being achieved but not for the rental rate.

33The parties made no further submissions under s. 44.(3)(b). There is no evidence before the Board leading to a conclusion that the assessments of the properties at current value require any further adjustment.

CONCLUSION

34Based on all of the evidence, the Board determines the current value to be $4,946,000 and finds this value to be fair and equitable. Consequently, the Board reduces the subject property’s returned assessment from $5,182,000 to $4,946,000 apportioned $2,822,000 COM CT and $2,124,000 COM DT for the 2013, 2014, 2015 and 2016 taxation years.