Amalie Holdings Limited v. Municipal Property Assessment Corporation, 2017 CanLII 38312

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

ISSUE DATE: June 12, 2017

FILE NO.: WR 146292

Assessed Person(s): Amalie Holdings Limited

Appellant(s): Amalie Holdings Limited, c/o Staples Canada Inc.

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

Respondent(s): City of Burlington

Property Location(s): 1881 Fairview Street

Municipality(ies): City of Burlington

Roll Number(s): 2402-050-502-02800-0000

Appeal Number(s): 2950144, 2962504, 3006871, 3030846, 3083780, 3086229, 3153802 and 3154973

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

Hearing Event No.: 670166

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

Heard: March 28, 2017 in Burlington, Ontario

APPEARANCES:

Parties	Representative
Amalie Holdings Limited	Paul Grosman
Staples Canada Inc.	No one Appeared
MPAC	Christeen Mattat
City of Burlington	Paul Lacelle

DECISION OF THE BOARD DELIVERED BY DAN WEAGANT

INTRODUCTION

1Amalie Holdings Limited (“Amalie”) and Staples Canada Inc. (“Staples”) have appealed the current value assessment (“CVA”) returned by MPAC for the 2013 to 2016 taxation years at 1881 Fairview Street in Burlington.

2In order to fulfill the statutory mandate set out in the Assessment Act (“Act”), the Assessment Review Board (“Board”) must determine the current value of the subject property and, when reference is made to the assessments of similar properties in the vicinity, the Board must also decide if the value determined should be reduced to make the assessment of the subject property equitable. To make these determinations in these appeals, the Board needs to answer the following questions:

• What are the Fair Market Rents (FMR’s) of the Units in the subject building?
• What is the Vacancy Allowance to be applied to the subject property?

BACKGROUND FACTS

31881 Fairview Street is a commercial property located near the intersection of Brant Street in the City of Burlington. It comprises a single building, containing five separate units; four of which were occupied as follows at the valuation date of January 1, 2012:

• Unit 1 - Staples Business Depot
• Unit 2 - Michaels
• Unit 3 - Mandarin
• Unit 4 - Beddingtons
• Unit 5 - Vacant

4The building was constructed in 1993 and has a total of 63,476 square feet (“sq. ft.”) of leasable area on a site of 5.07 acres. The Parties agree that the site is somewhat difficult to access. It has two separate entrances. One entrance is off of a local side street known as Gray’s Lane, which in turn connects with Brant Street at a full movement intersection with traffic lights which allows left and right turns to and from Gray’s Lane. The second access is a restricted intersection that allows left and right turns into the property but only allows exiting traffic to turn right onto Fairview Street. There are no traffic control lights at this second intersection.

5The property also has site specific challenges with respect to exposure. First, there is a dramatic rise in the elevation of Fairview Street as it goes westerly, past the site to cross over existing railroad tracks. This creates a sloped area that is heavily treed, restricting visibility from anywhere west of the subject property. The exposure from Brant Street is also restricted as there are intervening buildings between Brant Street, north of Fairview and the subject property.

6MPAC describes the property as being in good condition and fully built. For the years under appeal, MPAC returned a current value of $14,960,000, with $6,016,000 in the Commercial property class and $8,944,000 in the Shopping Centre property class.

7In preparation for the hearing, MPAC prepared a valuation analysis leading to a recommendation of $13,873,000 with $5,463,880 in the Commercial property class and $8,409,120 in the Shopping Centre property class.

Preliminary Matter

8Staples Canada Inc. (“Staples”) is the tenant of Unit 1. Its appeals relate to the lease rate for Unit 1 applied by MPAC for the purposes of determining the current value assessment (“CVA”) of the property. While Staples was not represented at the hearing, its representative Altus Group issued email correspondence to the other parties, indicating their agreement to the lease rate, or FMR, applied to Unit 1 of $16.00 per sq. ft. MPAC confirmed at the hearing that this is the lease rate applied to determine current value. Amalie confirmed their agreement with this FMR as well. Accordingly, the Board finds that the FMR for the Staples Unit is $16.00 per sq. ft., which disposes of appeals 3154973, 3086229, 3006871 and 2962504, filed by Altus, on behalf of the tenant Staples Canada Inc.

Where Amalie and MPAC Agree

9The Parties agree that the income approach to value should be used in this case. The income approach applies fair market rents to the units in the building to arrive at a gross annual income. The gross income is then reduced by separate percentages to reflect operating expenses and vacancy. The resulting net income is then divided by a capitalization rate to arrive at the property’s current value.

10The Parties agree that the FMR for Unit 1 (Staples) is $ 16.00 per sq. ft. and that the FMR for the vacant Unit 5 is $12.40 per sq. ft. The Parties also agree that the expense allowance is 2% of gross annual income and that the applicable capitalization rate is 7%.

11There is no dispute with respect to apportionment of the current value between the Commercial and Shopping Centre property classes. These percentages are 39.38% and 60.62% respectively, based on the recommended current value assessment submitted at the hearing by MPAC.

Where Amalie and MPAC Disagree

12The Parties disagree on the FMR applied to Units 2, 3 and 4:

Unit	Tenant	MPAC FMR	Appellant FMR
2	Michaels	16.00	14.00
3	Mandarin	17.50	14.70
4	Beddingtons	15.50	14.00

13The Parties also disagree on the vacancy allowance percentage to be applied to the gross annual income. MPAC applied a standard, market based allowance of 3%. Amalie believes this vacancy rate should be 6% due to the chronic vacancy of Unit 5.

ISSUES

14In determining FMRs for the three units in dispute, the Board considered the following:

• Rents from leases in other buildings;
• Rents from leases in the subject building; and
• Characteristics of the subject building that distinguish it from other comparable properties and leases.

Issue 1 - What is the Fair Market Rent for Unit 2?

15Michaels occupies Unit 2 and is identified as being a ‘Big Box Franchise’ tenant by MPAC with an occupancy code of 622. Mr. Galle compared Unit 2 with two other code 622 tenants in other commercial properties to determine its FMR. Both of those properties are 43 kilometres from the subject property:

• A 17,422 sq. ft. Unit with a rent of $18.25 per sq. ft.
• A 25,779 sq. ft. Unit with a rent of $14.50 per sq. ft.

16Mr. Galle calculated the weighted average of these two Units at $16.00, which he applied to the subject Unit, noting that the larger of the two Units demonstrates the concept of diminishing returns, where larger Units are rented at a lower rate per square foot. Mr. Galle believes the weighted average is a reasonable FMR for Unit 2.

17Paul Grosman submitted that the comparable Units cited by Mr. Galle are too far away from the subject property for meaningful comparison. He also submitted that the rents of the two comparables do not account for the exposure and access issues present at the subject property.

18Mr. Grosman called Michael Tylman, representing the owner of the subject property. Mr. Tylman indicated that he believes the FMR must reflect the exposure and access issues and added that the Michaels store shut its doors in 2016, demonstrating that the location is not viable, even at the lease rate of $13.00 per sq. ft. which applied at the January 1, 2012 valuation date.

19Mr. Grosman concluded that, even if the comparable weighted average was used, a reasonable reduction for exposure and access and a slight reduction to reflect diminishing returns on the 20,732 sq. ft. Unit 2 would result in a reasonable rent of $14.00 per sq. ft.

20The Board finds the best evidence of FMR on Unit 2 is a rent of $14.00 per sq. ft. The Board agrees with Mr. Grosman that the properties cited by Mr. Galle are not suitably comparable and that a selection of two properties, 43 kilometres from the subject property, do not provide a sufficient indication of the FMR at the subject location. The Board also agrees with Mr. Grosman that $14.00 per sq. ft. makes a reasonable adjustment for exposure and access.

Issue 2 – What is the Fair Market Rent for Unit 3?

21Unit 3 is occupied by a Mandarin Restaurant. Mr. Galle applies an occupancy code of 701 to reflect the restaurant use. Starting with the $14.00 per sq. ft. rent in the current lease for the 2012 taxation year, Mr. Galle added the cost of improvements to the shell of the Unit of $806,685. By applying this cost to the term of the lease, he adjusted the FMR on Unit 3 upward to $17.59 per sq. ft.

22Next, Mr. Galle compared Unit 3 with two other restaurant Units with a 701 occupancy code:

• An 8,244 sq. ft. Unit, 29 kilometres away with rent of $19.00 per sq. ft.
• A 6,000 sq. ft. Unit, 60 kilometres away with a rent of $28.00 per sq. ft.

23Using these two comparable Units, Mr. Galle determined that the FMR determined at the subject location of $17.59 was reasonable. He further compared the subject Mandarin Unit with four other Mandarin restaurants in the Peel and York Regions. He suggested that the Mandarin location in Newmarket was the best comparison at $19.49 per sq. ft. because:

• Socio-economic factors in Newmarket are similar to Burlington;
• The Newmarket rent of $19.49 could be reasonably reduced to reflect the exposure and access issues at the subject property to $17.59;
• The Newmarket and Burlington locations were built at a similar time (1990 and 1993 respectively) and no adjustment would be needed for the effects of age.

24Mr. Tylman testified that the costs of preparing the property for the Mandarin tenant are reflected in the lease, as part of the 15 year term. He added that these improvements do not add value to the real property, as any future tenant would not be able to make use of the improvements made for Mandarin.

25Mr. Grosman further submitted that the comparables are too far away from the subject property to be a reliable indicator of FMR and that the exposure and access issues are reflected in the rent reflected in the lease for 2012, of $14.00 per sq. ft.

26Board finds best evidence of FMR is the rent of $14.00 in the subject lease, for the following reasons:

• The comparable properties in Mr. Galle’s study are too far from the subject property to be reliable indicators of FMR;
• Mr. Galle did not provide any documentary evidence of his assertion the socio- economic factors in Newmarket and Burlington being similar; an assumption he relied on for comparison;
• There is no evidence of the value of adjustments for exposure and access that differ between the Newmarket and Burlington locations; and
• The rents in the lease in force on the valuation date most reasonably reflect the cost of improvements for the tenant. Mr. Galle made no such adjustment for any other units at the subject property or in his analyses to reflect these types of improvements.

Issue 3 – What is the Fair Market Rent for Unit 4?

27Unit 4, occupied by Beddington’s has a General Retail occupancy code of 510. Mr. Galle compared Unit 4 with four other retail Units in Burlington with similar sizes, ranging from 3,230 to 3,888 sq. ft. His comparison revealed rents of 19.15 to 23.00 with a weighted average of $21.28. Mr. Galle adjusted this weighted average to account for the exposure and access issues at the subject property, concluding that the rent indicated on the lease for Unit 4 ($15.50 per sq. ft.) is a reasonable indication of its FMR.

28Mr. Tylman testified that the $15.50 figure represents the net rent of the space and that since 2012, his company has entered into lease amendment agreements with the tenant. These adjustments were intended to reflect the difficulty that the tenant was having in meeting its obligations under the original lease. In response, Mr. Tylman’s company set gross rents, commencing in October 2012 and October 2013 of $5,000 and $5,250 respectively. Mr. Tylman estimated that these gross rents are equivalent to net rents of between $10.00 and $11.00 per sq. ft.

29Mr. Grosman submitted that Mr. Tylman’s testimony indicates that $15.50 is too high given the circumstances at Unit 4 and that $14.00 would be a more reasonable rent.

30The Board finds that the best evidence of FMR on Unit 4 is the rate of $15.50 stipulated in the lease agreement applicable on the valuation date. This rent is well below the rents charged at similar properties as demonstrated in Mr. Galle’s study. Further, it represents a reasonable rate that was applicable on the valuation day. The rent adjustments cited by Mr. Tylman both occurred after the January 1, 2012 valuation date and, as a result, are less persuasive indicators of FMR.

Issue 4 - What Vacancy Allowance should be applied to reduce the Gross Income?

31Mr. Galle testified that the 3% standard vacancy rate is one that is applied to all commercial and shopping centre properties of this type in the market area, including the Region of Halton and the Region of Peel. To maintain fairness, consistency and predictability, Mr. Galle believes the vacancy rate of 3% applies to this property as well.

32Mr. Grosman submits that the difficulty in leasing Unit 5 reflects a special case and that its continued vacancy provides rationale for a higher vacancy allowance for the entire property. He cites Mr. Tylman’s testimony that since 2010, the Unit has remained vacant and that all reasonable attempts at renting the space have failed. Mr. Tylman believes the visibility and access issues at the site are the root cause of his inability to rent the vacant space.

33By dividing the leasable area of Unit 5 into the total leasable area of the building, Mr. Grosman submits an appropriate vacancy allowance would be that percentage, or roughly 6%. Ms. Mattat submitted that, to apply a 6% vacancy allowance over the entire property would suggest that the vacancy allowance should be twice what is normally applied in the market place. She cited Mr. Galle’s testimony that vacancy allowances are not meant to reflect chronic vacancy, but are used as a market wide allowance on all similar properties to recognize a standard property management cost of vacancy. She also reminded the Board that the agreed-to FMR applied to Unit 5 is in fact reduced to reflect its unfinished condition; a condition reflective of its chronic vacancy.

34The Board finds that any special considerations of this subject property, brought on by its location and access issues are adequately reflected in the reduced rents found above for the three Units in dispute. The Board selected the rents reflected in the applicable lease agreements, as they reflect the root causes of the vacancy cited by Mr. Tylman; those being the visibility and access issues. The Board finds that the applicable vacancy allowance is 3%.

DECISION

35The Board finds that the current value of 1881 Fairview Street is $12,599,000, determined as follows:

Tenant	Square Footage	FMR	Total Rent
Unit 1 Staples	20,322	16.00	$ 325,152
Unit 2 Michaels	20,732	14.00	$ 290,248
Unit 3 Mandarin	14,969	14.00	$ 209,566
Unit 4 Beddingtons	3,546	15.50	$ 54,963
Unit 5 Vacant	3,907	12.40	$ 48,447
Gross Income			$ 928,376
Vacancy Allowance (3%)			-$ 27,851
Expense Allowance (2%)			-$ 18,567
Net Income			$ 881,958
Capitalization Rate			7%
Current Value			$ 12,599,000 (rounded)

36The Board finds that the Fair Market Rent of Unit 1, leased to Staples Canada Inc. is $16.00 for the 2013, 2014, 2015 and 2016 taxation years.

37The Board also finds that it has no evidence before it to suggest a reduction in this value is required for the assessment to be equitable.

38Accordingly, the assessment of the subject property for the 2013, 2014, 2105 and 2016 taxation years is reduced from $14,960,000 to $12,599,000, apportioned as follows:

• Commercial property class - $4,961,500
• Shopping Centre property class - $7,637,500