Allied Properties Reit v. Municipal Property Assessment Corporation, 2017 CanLII 76229

Assessment Review Board

Commission de révision de l’évaluation foncière

ISSUE DATE: November 09, 2017

FILE NO.: WR 148192

Assessed Person(s): 1315806 Ontario Limited

Appellant(s): Allied Properties Reit

Respondent(s): Municipal Property Assessment Corporation (“MPAC”), Region 09

Respondent(s): City of Toronto

Property Location(s): 99 Yorkville Avenue

Municipality(ies): City of Toronto

Roll Number(s): 1904-052-060-01700-0000

Appeal Number(s): 2956205, 3011365, 3076052 and 3147309

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

Hearing Event No. 677284 and 686577

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

Heard: July 18, 2017 and August 15, 2017 in Toronto, Ontario

APPEARANCES:

Parties	Representative
1315806 Ontario Limited	James Brook
MPAC	Damian Bernacik
City of Toronto	No one appeared

DECISION OF THE BOARD DELIVERED BY S. LIGHT

ISSUE

1The subject property is a mixed use retail and office complex constructed in 1973. The complex has a 148 foot frontage on Yorkville Avenue. It contains a total Gross Leasable Area of 65,712 square feet on three levels containing a mixture of units reflecting a wide variety of quality. In particular, the retail space varies in terms of its exposure and visibility to pedestrian and street traffic. The property has a total of 17 parking stalls and some leased storage area.

2The assessment for the subject property was returned at $21,279,000 for the 2013 to 2016 taxation years apportioned between the office building (DT) and commercial (CT) property classifications. Based on inspections of the subject property conducted on April 2, 2015 and April 25, 2017, a review of the building tenancies and an analysis of the related income and expenses of the subject property, MPAC is recommending that the assessments be confirmed at $21,279,000. Its subsequent analysis for this hearing, determined that the correct current value of the subject property would be $21,426,636.

3The representative for the Appellant argues that based on its own review, the assessment for the respective taxation years should be reduced to $18,599,000.

4The Appellant submits that it is not seeking an adjustment pursuant to s. 44.(1)(b) and MPAC submits that the assessment is equitable. Therefore neither party submitted evidence respecting the assessment of similar properties in the vicinity.

5The Assessment Review Board (“Board”) must determine whether the returned assessment values for the 2013 to 2016 taxation years in the amount of $21,279,000 is correct and equitable.

DECISION

6For the reasons stated below, and as directed by s. 44.(3)(a) of the Assessment Act (“Act”), the Board finds that the current value of the subject property is $21,427,000. The Board also finds that there is no basis to adjust the current value for equity pursuant to s. 44.(3)(b) of the Act. However, MPAC is not seeking to increase the assessment as returned. The Board therefore confirms the assessment of $21,279,000, apportioned between $7,292,000 CT and $13,987,000 DT.

REASONS FOR DECISION

Legislation

7Section 1 of the Act defines “current value” as:

“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.

8Section 19.(1) of the Act states:

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

9Section 19.2(1)2 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.

10Section 44.(3) 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.

Analysis

Issues in Agreement

11The parties have agreed that the income approach to value is the most reliable methodology for the determination of the value of the subject property. They also agree that the appropriate capitalization rate to be applied to the entire property is 6.5%. They agree that the appropriate vacancy rate is 6%. Finally, they agree that the appropriate expense rate is 6% for most of the building, and 35% for the parking stalls.

Issues in Dispute

(i) Classification

12The parties disagree on the relative proportions of the various uses as between retail, office and storage components and this impacts their respective positions on current value since retail use commands a higher market value than an office use which commands a higher market value than a storage use. There are three units where the parties dispute the nature of the use.

13Firstly, they disagree on whether Unit 12-Lower should be classified as a storage unit or a retail unit. Unit 12-Lower is the basement space below Unit 12 Main and Upper floors, comprising about 1,244 square feet of rentable area.

14Ms. Subocz, the Property Analyst, who prepared the valuation analysis for MPAC, not only has had an extensive career in real estate matters and analyses, she actually shopped at the subject property for decades including at Unit 12-Lower while it was occupied by the previous tenant as retail space The current tenant assumed occupancy in 2017 and conducted extensive renovations.

15Ms.Subocz also inspected the subject property in 2015 during the relevant valuation cycle while Mr. Tran, the witness for the Appellant, only inspected the subject property in 2017 after the property experienced substantial renovations. Ms. Subocz testified that when she shopped at the subject property prior to 2012, she observed that Unit 12-Lower was being used for retail purposes to sell magazines and newspapers in conjunction with Hatchette Distribution’s business operations and this basement area was connected to the first and second floors of the same business by a spiral staircase. Her first hand evidence was not contradicted by Mr. Tran who just inspected the property for the first time in mid-2017 for this hearing.

16The Appellant’s own evidence further corroborates Ms. Subocz testimony that Unit 12-Lower was used for retail purposes in 2012. The Extreme Measure diagrams prepared in 2014 clearly show the existence of a spiral staircase connecting Unit 12-Lower with the first and second floors above it.

17The fact that the witness for the Appellant, Mr. Tran, identifies Unit 5-Lower located right next to Unit 12-Lower as superior retail space supports the notion that this basement space could be used for retail purposes.

18Furthermore the Appellant’s own evidence treats Unit 12-Lower as retail space in other contexts. Unit 12-Lower is shown in a chart prepared by Extreme Measures as an occupied area of 1,053.75 square feet while storage areas are normally listed as storage and comprise far less space. Also, the Appellant’s rent roll does not include Unit 12-Lower in its list storage spaces.

19Accordingly, the Board finds that Unit 12-Lower should be classified as retail space for the purpose of determining current value as of January 1, 2012.

20Secondly, the parties disagree on whether Unit 10-Main should be classified as a retail or office unit. Unit 10-Main is currently used as a lawyer’s office.

21The Board agrees with MPAC that Unit 10-Main should be classified as retail space because it has been occupied as a lawyer’s office for several decades and still continues to be used as such by the same tenant. A photograph of this space in evidence depicts a typical office unit. The Board does not agree with the Appellant’s position that this space should be counted as retail inferior space on the basis that its attributes are most similar to the space occupied by an adjacent electrolysis business which Mr. Tran has also classified as retail inferior. The Board considers the historical and actual use of the space to be determinative.

22Next, the parties disagree on whether the unit occupied by Lucid Fitness should be classified as office or retail. This unit is a basement area of about 660 square feet used for fitness purposes by other tenants. There is no lease in place for this unit.

23The Appellant argues that this space would not be suitable for retail purposes and should be classified as office space which it argues would be more in line with the unit’s income generating potential. However, the Appellant offered no empirical evidence to support this view.

24The Board agrees with the submissions of MPAC that this unit should be classified as retail based on its current use as a private gym area. It has been used historically as a fitness centre and continues to be used for fitness activities. Since it has no windows the Board agrees with MPAC’s submissions that the space would not be as suitable for office uses.

25Accordingly, the Board finds that the following apportionments between uses, submitted by MPAC, are correct:

• Retail - 22,391 square feet;
• Office - 40,161 square feet;
• Storage - 3,160 square feet;
• Parking -17 parking stalls.

(ii) Income

a) Stratified or Blended Average Fair Market Rent (“FMR”) for retail Area

26The retail units at the property vary a great deal in quality, and therefore in the rents that they can be expected to generate. Mr. Tran, for the Allied Properties REIT, argues that two categories of retail should be created, a superior and inferior category, and that different fair market rents should be applied to each. He calls this a stratified approach to rents. Ms. Subocz, for MPAC, argues that an average fair market rent, applied to all the retail units, is a superior way to calculate the potential income. She calls this a blended average approach to rents. Whether or not to use the proposed stratified or blended average FMR depends on the rent information available in a particular situation. The Board finds that in this case the proposed blended weighted average is the preferred method to determine income due to the wide variance in the quality of retail units.

27In addition to being an inappropriate methodology to apply due to the wide variation in the quality of rental units, the stratified rent analysis as applied by Mr. Tran is flawed. Firstly, there is insufficient data available to calculate a FMR for his proposed inferior retail category. Secondly, his proposed classification into superior and inferior retail units is not reflected by the actual rents generated by the units as classified. Thirdly, the difference in the FMR for superior and inferior retail uses is minimal. Therefore, the distinction between retail superior and inferior would serve no purpose.

28Since the Board has determined above that Unit 10-Main should properly be classified as office space, Mr. Tran is then left with only two leases in his proposed inferior retail class on which to calculate a rent associated with his inferior retail FMR category. That is simply an insufficient number of leases to determine a FMR which he can appropriately apply to the retail inferior space.

29Furthermore, Mr. Tran’s determinations respecting superior versus inferior retail area spaces is also contradicted by the evidence of the actual rents. The tenant at Unit18-Main, which he classified as retail inferior, pays $35 per square foot. That is more rent than the $30 per square foot the tenant at Unit 2-Lower pays for a unit Mr. Tran determined to be retail superior.

30The Board also agrees with MPAC that since the two remaining units classified by Mr. Tran as retail inferior, Unit 9 and Unit 18-Main, indicate a combined weighted average FMR of $33.54, the result is only marginally lower than the $34.29 per square foot he has calculated for the space he has classified as retail superior.

31This demonstrates the superiority of the approach taken by Ms. Subocz where she considered it inappropriate to categorize the units into inferior and superior given the wide variation in the qualitative attributes of the units for lease at the subject property. Her methodology using a blended weighted average means that the FMR may be higher than the actual rent for some units but lower than the actual rent for other units.

32Accordingly, the Board finds that a blended market FMR as calculated by Ms. Subocz is the appropriate methodology to apply in the circumstances.

b) Fair Market Rent for Retail

33The Board agrees with MPAC that the FMR for retail space at the subject property would be $38 per square foot based on the methodology employed by Ms. Subocz. The values submitted by the Appellant of $34.29 for retail superior space and $31.35 for retail inferior space were calculated using a flawed methodology and incorrect classifications as noted above.

34Ms. Subocz also used leases to calculate the average weighted rent for the subject property that represented 54% of the property. In her analysis, she considered older leases that occupied about 7,569 square feet of the 14,071 square feet of retail space in her sample that were not considered by Mr. Tran in his analysis. Certainly a purchaser in 2012 would have considered this rent in determining what he/she would pay for the subject property.

35For the leases that commenced during the shoulder years, she determined a weighted average FMR of $34.17. When she included the dated these leases in the subject property, executed outside the shoulder years but in effect during the shoulder years, she calculated a weighted average FMR of $38 per square foot. Since these leases included several of the premium leases at the subject property, excluding them from the analysis as did Mr. Tran would result in a determination insufficiently representative of the property.

36Ms. Subocz was also careful to exclude leases from her analysis that were short term leases, based on her experience that the rents generated by these leases may reflect anomalous situations and would therefore not be reliable indicators of FMR. However, even if the one year lease respecting Unit 3-Lower had been included in her analysis at the rent of $39.82 per square foot, as argued by the Appellant, this would only have tended to support the retail value of $38 per square foot recommended by Ms. Subocz for the FMR of retail space in the subject property.

37She also looked at a leasing advertisement from 2014 respecting Unit 8-Main at the subject property, which showed an asking rate of $70 per square foot. While it is just an asking rate outside the shoulder years, it certainly suggests that the fair market rent she was recommending at $38 per square foot was likely fairly conservative for the subject property.

38She also looked at the average market rents of competing properties in the immediate vicinity and based on 11 retail leases calculated an average rent of $44.09 per square foot for this space. This value supports her recommended FMR of $38 per square feet for retail spaces at the subject property as being on the conservative side.

39Due to her vast experience and expertise respecting real estate analyses, Ms. Subocz was able to provide the Board with an expert opinion on how FMR should be determined taking into account rents of other properties in the vicinity after considering adjustments for differences between these properties and the subject property.

40Therefore the Board agrees that her value is a conservative value respecting the FMR of retail space at the subject property as the evidence indicates that the retail spaces could likely command even higher rents.

41Her approach in looking beyond the actual rents the subject property is receiving complies with the finding of the Court of Appeal in Cardinal Plaza Ltd. et al and Regional Assessment Commissioner, Region No, 19 et al., 1984 CanLII 1841 (ON CA), [1984] 49 O.R. (2d) 161 (“Cardinal Plaza”) that when applying the income approach to value an assessment should use “economic rents” rather than just the actual rents a property is receiving. Mr. Tran only considered actual rents in his analysis and only leases he believed to have been negotiated or having commencement dates in the shoulder period.

42Ms. Subocz was also more meticulous in calculating the rental amounts attributable to the leases in her sample of leases at the subject property (both current and dated) because she included free rent periods and step-ups in her calculations. Mr. Tran did not consider these matters.

43For all of these reasons, the Board adopts her methodology and conclusion that an FMR of $38 per square foot is correct for the retail space at the subject property.

c) Fair Market Rent for Office

44As mentioned above, Mr. Tran did not include Unit-10 Main as office space in calculating the FMR for office space. The Board does not agree with the Appellant’s position that this space should be counted as retail inferior space on the basis that its attributes are most similar to the space occupied by an adjacent electrolysis business which Mr. Tran has also classified as retail inferior.

45He also did not include the lease for Temple Tours at Unit 212 on the second floor commencing in May, 2010 as office space on the premise that this lease may have been negotiated prior to 2010. However, he did not have any information to base this conclusion on. The Board finds that this lease was properly included in MPAC’s analysis of FMR for office space at the subject property.

46Had Mr. Tran included both of the aforementioned leases in his analysis then the Appellant’s proposed FMR would have been substantially higher than the $13.60 per square foot he calculated without these leases since the rental rate was $16.80 per square foot for Temple Tours and $22 per square for the lawyer’s office. Together these leases occupied a substantial proportion of the office space.

47Ms. Subosz reviewed the office rents at the subject property both current (ie signed in the shoulder year period) and dated (signed outside the shoulder year period) and determined an average rent of $16.92 per square foot for this space.

48As required by the Court of Appeal in Cardinal Plaza, Ms. Subocz also considered comparable office rents in the vicinity. She looked at 22 comparable office rents that commenced within two years of the valuation date and calculated an average of $16.40 per square foot for office space.

49Both calculations support her recommended value of $16 per square foot for office space at the subject property.

50Accordingly, the Board finds it is appropriate to apply a FMR of $16 per square foot to the 40,161 square feet of office space at the subject property.

d) Fair Market Rent for Storage

51The parties are in agreement that the storage units should be assessed at 80% of the fair market rent applied to the office units.

52As the Board has determined above that the FMR for office space should be set at $16 per square foot then applying 80% to this value, as agreed by the parties, results in a FMR for office space of $12.80 per square foot.

e) Fair Market Rent for Parking

53MPAC recommends a FMR of $300 a month for parking spaces at the subject property and has used this value in its revised valuation summary. MPAC’s review of FMR for parking facilities indicates that this value is the prevailing rental rate for parking in the vicinity, and Mr. Tran agrees with this value.

54Therefore, the Board agrees with the parties that the FMR applicable to the 17 parking spaces at the subject property would be $300 per space.

Current Value Conclusion

55The FMR value of $38 per square foot applied to the 22,391 square feet of retail space at the subject property results in a gross income of $850,858. Applying a 6% vacancy rate to this value means that $51,051.48 should be subtracted for vacancy. Applying a 6% expense rate means that another $47,988.39 should be subtracted for expenses. Removing those values from the gross income leaves a net operating income of $751,818.13. Applying the cap rate of 6.5% results in a current value of $11,566,433 applicable to the retail areas of the subject property.

56The FMR value of $16 per square foot applied to the 40,161 square feet of office space at the subject property results in a gross income of $642,576. Applying a 6% vacancy rate to this value means that $38,554.56 should be subtracted for vacancy. Applying a 6% expense rate means that an additional $36,241.28 should be subtracted for expenses. Removing those values from the gross income leaves a net operating income of $567,780. Applying the cap rate of 6.5% results in a current value of $8,735,079 applicable to the office space of the subject property.

57The FMR value of $12.80 per square foot applied to the 3,160 square feet of storage space at the subject property results in a gross income of $40,448. Applying a 6% vacancy rate to this value means that $2,426.88 should be subtracted for vacancy. Applying a 6% expense rate means that an additional $2,281.27 should be subtracted for expenses. Removing those values from the gross income leaves a net operating income of $35,740. Applying the cap rate of 6.5% results in a current value of $549,844 applicable to the storage areas of the subject property.

58The FMR value of $300 per parking stall applied to the 17 spaces at the subject property results in a gross income of $61,200. Applying a 6% vacancy rate to this value means that $3,672 should be subtracted for vacancy. Applying a 35% expense rate means that $20,134.80 should be subtracted for expenses. Removing those values from the gross income leaves a net operating income of $37,393. Applying the cap rate of 6.5% results in a current value of $575,280 applicable to the parking spaces of the subject property.

59The Board finds that the current value of the subject property would be determined by adding the following values calculated above:

• $11,566,433 retail
• $8,735,079 office
• $549,844 storage
• $575,280 parking

60This results in a total current value of $21,426,636 which the Board would round to $21,427,000.

Equity

61The parties have submitted no evidence respecting the assessment of similar properties in the vicinity for consideration by the Board.

62Therefore, the Board finds that there is no basis to adjust the current value for equity pursuant to s. 44.(3)(b) of the Act and this issue.

CONCLUSION

63The current value of the property for the 2013, 2014, 2015 and 2016 taxation years is $21,427,000 and there is no evidence that it would be inequitable to assess the property at its current value. However, MPAC is not seeking an increase in the assessment as returned. Therefore, the returned assessment of $21,279,000 and relative apportionments of $7,292,000 CT and $13,987,000 DT are confirmed.