Assessment Review Board

Commission de révision de l’évaluation foncière

ISSUE DATE: November 21, 2017

FILE NO.: ID 148043

Assessed Person(s): Richmond Street West (555)

Appellant(s): City of Toronto (Revenue Services)

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

Respondent(s): City of Toronto

Property Location(s): 555 Richmond Street West

Municipality(ies): City of Toronto

Roll Number(s): 1904-062-410-02510-0000

Appeal Number(s): 3194361 and 3194362

Taxation Year(s): 2015 and 2016

Hearing Event No.: 686064

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

Heard: July 11, 12 and 26, 2017 in Toronto, Ontario

APPEARANCES:

Parties

Counsel

City of Toronto

Chris Henderson

MPAC

Melissa VanBerkum

Richmond Street West (555)

Michael Steinberg

INTERIM DECISION OF THE BOARD DELIVERED BY JOSEPH M. WYGER

INTRODUCTION

1The 12 storey office tower at 555 Richmond Street West sold twice within the space of three years. The first sale closed mere weeks before the January 1, 2012 valuation date for the sum of $55.7 million. There were arguments advanced that the rents being achieved in 2011/2012 were about 30% below fair market rent (“FMR”), leading to a below market sale price. The property was sold again for the sum of $100 million in August of 2014 to a real estate investment trust called Allied Properties REIT (“Allied”). It’s principals and witnesses like the earlier sale as reflective of the property’s current value, while the City urges that the latter sale is a better indicator of value, appropriately time-adjusted back to a 2012 value of $84 million.

2MPAC had concerns with both sale values, and came up the middle with an income approach value of $70.9 million based on projected FMRs in 2012 of $16 per square foot (“psf”). The three parties challenged the impartiality and competence of each other’s valuation witnesses with respect to the question of which sale was better evidence, and offered differing positions on FMRs, state and condition of the property for 2015/2016 taxation and whether there is surplus land with development value.

INTERIM DECISION

3The assessment will be increased from $43,361,000 to $60,422,700 for the 2015 and 2016 taxation years, with an apportionment to follow. There is insufficient evidence to make a finding of inequity, when this value is compared to the assessed values of similar lands in the vicinity, so no adjustment is warranted under s. 44.(3)(b).

REASONS FOR DECISION

The Facts

4The subject property at 555 Richmond Street West (“555”) is a 12 storey office building of approximately 297,000 square feet (“sq. ft.”), built in 1988 on a site of 50,094 sq. ft., and having underground parking for 220 vehicles. The underground parking garage extends underneath an above ground open area that has 38 parking spaces and provides an access route to four loading docks and the underground parking. The property is adjacent to four other Allied owned properties. There is some ground floor retail space occupied by a tuck shop and a café.

5In 2011, 555 and 543 Richmond Street West (“543”) were a single property that was offered for sale either as a single property or as separate properties pursuant to a severance application that was already in progress. The whole property was sold for $81.25 million. 555 was then severed from 543, and a purchase price of $55.7 million was allocated to 555. The property at 555 was sold again in 2014 for $100 million to Allied. The assessment as returned on the roll was $43,361,000.

City’s Position

6Chris Henderson, counsel for the City of Toronto, advanced the position that the 2011 sale was not the best evidence because the leases in place were well below market and that the law suggests that those encumbrances are not allowed to impact the valuation. He asserted that the sale closest to the valuation day is not always the best evidence of value. Mr. Henderson also made the case that the state and condition of the property at roll return for the taxation year 2015 was not the same due to major changes in the tenancies and plenty of building permits since the sale. While he urged me to consider the sale at $100 million, time-adjusted to $84 million to be the best evidence, the City was not averse to the Assessment Review Board (“Board”) accepting MPAC’s income approach valuation at $70.9 million.

MPAC’s Position

7The case for MPAC was presented by their counsel, Melissa VanBerkum. She indicated that her client adopts the City’s position with respect to the invalidity of the 2011 sale, but does not rely on the 2014 sale. In particular that a conservative income valuation based on the true FMRs in 2012 clearly shows that the $55.7 million sale price in late 2011 was a substantial bargain for the purchaser. Ms. VanBerkum cited the case BCE Place Limited et al. v. Municipal Property Assessment Corp., et al 2010 ONCA 672, 103 O.R. (3d) 520: 2010 ONCA 672 (“Bank Towers”) for the proposition that in those circumstances, such a sale is not to be relied on. Other reasons not to rely on it included the fact that the sale was actually of two properties with the total $81,250,000 price allocated between 555 and its severed neighbouring property at 543. Further that the highest price was not the sole consideration for the vendor which accepted a lower amount than the initial winning bid which failed to close.

8Ms. VanBerkum also echoed the City’s argument that the state and condition of the subject property had changed between the sale date and roll return for the 2015 taxation year, so that essentially the 2011 sale reflected the value of a different property. Since neither sale was really reflective of market value, she urged the income approach as the best method to get to this property’s market value. Her valuation witness proposed an FMR of $16 psf for the office space, leading to a current value of $70.9 million. This figure included $2 million for the development value of some surplus land behind the building.

Allied’s Position

9Representing the owners as counsel, Michael Steinberg argued that the arm’s length free market sale of the subject property, practically on the valuation date, was clearly the best evidence for its current value. The property was widely marketed by a reputable commercial realtor, attracting substantial attention, site tours and numerous serious bids. He made the point that increasing rents and upgrading tenancies along with the usual tenant improvements do not change the state and condition of an income property, but are in the usual course of business for downtown office towers. He explained the seemingly massive increase in value from $55.7 million to $100 million over 32 months as a product of two factors: first, the much improved operating performance of the property and second, the significant drop in capitalization rates for office buildings in downtown Toronto.

10Mr. Steinberg asserted that MPAC and the City have misinterpreted the Court of Appeal in the Bank Towers in which there was no sale of any of the subject properties. He submits that the Court’s direction to use market rents does not mean market rents should be resorted to and used despite the existence of an open-market transaction occurring near the valuation date, particularly where there are no long-term leases at highly depressed rents leading to tenants holding interests of substantial value.

11In the alternative to the 2011 sale, Mr. Steinberg urged me to accept his witness’s income approach value of $59.9 million using $14 psf, based on the appropriate leases, over MPAC’s valuator who ignored short term leases and used step up rents from beyond 2013 from clearly superior buildings in her analysis.

LEGISLATION

12Section 19.(1) of the Assessment Act (“Act”) states:

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

13Section 44.(3) of the Act 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.

QUESTIONS:

1. Is the sale of the subject property in 2014, 32 months after the valuation day, any evidence for its current value on that day?

2. Is the sale of the subject property in late 2011 near the valuation day, the best evidence for its’ current value on that day?

3. What is the correct current value derived from the income approach to value?

4. Is there any surplus land with development value?

5. Is the correct current value inequitable relative to the assessed values of similar properties in the vicinity?

ANSWERS:

1. Because there was a sale of the subject property near the valuation day, the other sale of the subject property in 2014 has little probative value for determining current value.

2. The sale of the subject property in late 2011 is some evidence for its current value, being more probative than the 2014 sale, but it is not the best or only evidence.

3. The correct current value derived using the income approach is $60,422,700 rounded.

4. The highest and best use of the surface parking and loading area is its current use rather than development land, and has no value independent of the current value of the building.

5. With respect to s. 44.(3)(b), I conclude that the median or mean assessment to sale ratio (“ASR”) derived from a few properties is not nearly enough evidence to support a finding that the correct current value I have determined is inequitable relative to those properties.

EVIDENCE

City’s Evidence

James Petrin

14Mr. Henderson called as his witness James Petrin, who performed a financial analysis and assessment review on behalf of the City. He was previously a valuation manager for MPAC in the area of commercial and industrial properties and had familiarity with Toronto business properties. The subject property’s January 1, 2012 valuation came to his attention when he received word of the 2014 sale for $100,000,000.

15Mr. Petrin did some research and found that the near doubling of the value of 555 was not consistent with the 28% increase in office values over the same period as reported by Realnet. He discussed a 2013 zoning application for the property which sought a change to the less restrictive zoning enjoyed by other properties in the area. He noted a press release by Allied touting “significant surplus land” came with its purchase. Finally, Mr. Petrin referenced numerous interior alterations at the building evidenced by 19 separate building permits between 2012 and 2016, with a total value of $3.6 million, which he contended constituted a change to the state and condition of the property to some extent. He calculated the time adjustment that resulted in his $84 million valuation, based on the rate that other office buildings were appreciating, but conceded that MPAC’s income approach was probably a preferable methodology.

16Mr. Petrin’s analysis appeared to be clouded by his apparent initial shock in the massive difference between the 2014 sale price and the returned assessment which was less than half that value. His rush to judgement that the sale which occurred over two years after the valuation day must be better evidence than the sale two weeks before it, was not persuasive in the face of all the other evidence.

MPAC’s Evidence

Irene Subocz

17Ms. VanBerkum had her witness Irene Subocz, qualified to give expert opinion evidence on the valuation of the subject office building. Ms. Subocz inspected 555 on two occasions and formed opinions on how the various spaces should be valued. A 7,610 sq. ft. showroom should be retail rather than office. The new Goodlife fitness center on the second floor was more suitably office than retail.

18Ms. Subocz analyzed 19 leases of three years duration or more and calculated a weighted average rent of $16 psf. She compared this conclusion favourably with the FMR of other Class B buildings in the vicinity, which ranged from $15 to $18 psf. Ms. Subocz conceded that her comparable properties were closer to the downtown core than 555, and most were superior in other respects.

19On the 2011 sale, Ms. Subocz surmised that a $44 million HSBC mortgage was not likely predicated on the $55.7 million sale price because that represented 81% loan to value ratio; the implication being that the bank appraised it much higher. She thought that the 80% price appreciation between 2011 and 2014 might indicate that the 2011 price was too low. She suggested that the rents at the time of sale were 32% below market rents and so $55.7 million did not represent the true value. She also speculated that Allied may have paid a premium for 555 due to its ownership of abutting properties and the future intensification that might entail.

20On the valuation of the surplus land, Ms. Subocz was of the view that 21,000 sq. ft. was large enough to develop, but she was unaware when she wrote her initial report that underground parking that served 555 extended approximately two thirds of the way under those surplus lands. She revised her land value down from $8,967,000 to $2,283,909, based on a rate psf of permitted, buildable sq. ft. of gross floor area of $65 times 35,137 sq. ft. which represented projected Building “C”, a structure that was allowable under current zoning. This re-think brought Ms. Subocz’s total value down from $77.6 million to her final conclusion of value at $70.9 million.

21Ms. Subocz’s background is largely on the insurance risk and lending side of real estate. She has performed a reasonably competent income approach valuation, yet appeared slightly out of her element in the areas of highest and best use and development potential. Preparing an expert valuation report on a 12-storey office building, while being unaware of the extent of underground parking did not aid her credibility.

Allied’s Evidence

Tyrone Bowers

22Mr. Steinberg called as a fact witness, Tyrone Bowers, the Vice-President of Acquisitions for Allied. He characterized the area around 555 as a weak corner for leasing office and retail, affected by being on a one-way street. There are run-down, boarded-up buildings across the street, a halfway house and other properties populated by some tough-looking characters. Mr. Bowers described Ms. Subocz’s Class B designation of the building as generous since it was located far from any transit, has finishes that are out-dated, and he considered the entire structure “aesthetically brutalistic.” He detailed the many difficulties he encountered leasing various parts of 555.

23Mr. Bowers was not impressed with MPAC’s FMRs derived from buildings closer to the core, with half of them on King Street that he variously contrasted as premium, superior, desirable, vibrant and gorgeous. The proximity of transit and the vitality of King Street and the others were of much more interest to tenants than his ugly building on the western reaches of the downtown core in 2012. In Mr. Bower’s estimation, the FMR rents for 555 should be about $3 psf lower than any of those premium comparable office buildings.

24On surplus land, Mr. Bowers made the point that the surface parking was an integral attribute of the tenancies because it made up for the lack of transit. The laneway across it to the loading docks was equally essential to the operation of the building. Furthermore, the underground parking extended under the majority of the so-called surplus land and to develop over it would disrupt all tenant parking. He swore that Allied had no intention for the foreseeable future to develop the surplus area, particularly not the small and very inefficient 4,980 sq. ft. floorplate Building “C”. Allied intends to retain the same character, function, use and operation that the current building has for the foreseeable future.

25To the suggestion of Mr. Henderson from the City, that a developer could build over the underground parking garage, much like Yonge Street condos are built over the subway line, Mr. Bower indicated that in addition to being an engineering nightmare, it was simply not financially viable without the requisite huge density allowance similar to that permitted at Yonge and Bloor.

26Mr. Bowers gave the self-assured performance of someone who believes he knows what he is talking about. I believe he knows more about the leasing and valuation parameters in the downtown west office market, than do the City or MPAC witnesses.

Jason Smalley

27Mr. Steinberg called Jason Smalley, a Vice-President at commercial realtor CBRE, to give evidence on the sale transaction in 2011. He prepared the Confidential Investment Memorandum (”CIM”) inviting interested parties into a data room to read all about the property offered. The CIM was accessible to 1,500 industry players, enticing 70 confidentiality agreements and 17 site tours over five weeks. Mr. Smalley characterized these as higher than normal and extremely active. The first round attracted 12 bids from potential buyers, seven of them for both buildings at 543 and 555. Three bids were for 555 only, while two bidders were interested only in the 2-storey tear-down at 543. Mr. Smalley indicated the severance of these two properties was “always in play”, as an application to sever was made in November of 2010.

28The successful bidder for the whole property was a residential developer referred to as “Muzzo”. Within weeks, Muzzo canceled the purchase agreement, being uncomfortable operating a 12-storey office building. Two investment groups, “Canderel” and “Kingsett” (“Canderel/Kingsett”) stepped in with an offer to purchase the whole property, having a side deal with Muzzo to take the 543 property. These transactions were all scheduled to close concurrently with the registration of the severance of 543 from 555. The total purchase price offered was $81.25 million dollars, which Mr. Smalley stated was about $6.75 million less than the original Muzzo bid. The purchase prices of each severed property were “established”, resulting in consideration paid for 555 in the amount of $55,668,480, which Mr. Smalley maintained was the market value at that time base on all of CBRE’s metrics.

29Mr. Smalley was also involved in the 2014 sale of 555 to Allied for $100 million. He explained the seemingly massive increase in value as resulting from two factors:

1. The western fringe of the Downtown West area had improved dramatically in suitability and attractiveness to commercial tenancies from the very western fringe with lower rents than to the east, to a place where many more businesses wished to locate, increasing rents considerably; and

2. Demand had soared for income properties in Downtown West since 2011, putting significant downward pressure on capitalization rates.

30As an example, Mr. Smalley referenced the two sales of 111 Peter Street a comparable property nearby, competitive with 555 in the rental market. That nine- storey office building sold in September of 2011 for $51,700,000 at a cap rate of 6.8% indicating a Net Operating Income (“NOI”) of $3.52 million. It sold very recently in April of 2017 for $125,600,000 at a cap rate of 4.8% indicating an NOI of $6 million. Mr. Smalley testified that 555 sold at a very similar 6.9% cap rate in 2011 and a much lower 5.3% in 2014. The sale of 111 Peter Street showed the continuing compression of cap rates down about two full points by 2017, suggesting the subject’s lower cap rate in 2014 was on that trend line. The increase in net income of 70% over six years similarly supported the contention that rents were improving as well.

31Mr. Smalley also weighed in on the City and MPAC’s “misguided and erroneous” argument that the surface parking has development value. He echoed Mr. Bower’s assertions that the area is integral to the access, loading and shipping requirements of many of the building’s fashion and light manufacturing tenants; that it sits atop a large underground parking garage that stretches two-thirds of the way across it; and that the area is too small to be developed in any financially feasible way. His view and experience was that there was minimal contribution to the values ascribed by the parties in either of the two sale transactions.

32I found Mr. Smalley to be an impartial and objective witness with a great deal of knowledge of both sale transactions, and no interest in the result of this litigation. He was able to provide a rational explanation for the wide divergence in the sale prices between the 2011 and 2014. Mr. Smalley did admit that after the Muzzo bid fell through, the vendor in 2011 wanted to deal only with experienced players like Canderel/Kingsett who would close on the deal. This leaves the possibility that the vendor left money on the table by not re-visiting any of the other high bidders.

Paul Grosman

33Mr. Steinberg called as his chief valuation witness, Paul Grosman, who was qualified to give his expert opinion despite the misgivings of counsel for the City and MPAC. As always, this expert tribunal is better placed to determine just how expert or impartial those opinions are after hearing them. They are not automatically accepted, but are given weight in direct correlation to their credibility. Mr. Grosman has significant experience in the field of assessment, has appeared before me many times and is not known for stretching the limits of that credibility.

34Mr. Grosman inspected the property in June 2017 and also characterized the area in unflattering terms, referencing nearby run-down subsidized housing and a homeless drop-in centre. The building has dated finishes, overly wide hallways, with truck doors and freight elevators originally designed to accommodate the shipping requirements of fashion oriented tenants. Common areas and washrooms were never upgraded and there were no significant renovations between the sales in 2011 and 2014, aside from the usual tenant improvements.

35Mr. Grosman opined that the sale in 2011 was two weeks prior to the valuation day of January 1, 2012, and that it doesn’t get any better than that. He contended that the 2011 sale was an open market, arm’s length transaction that resulted from a widely circulated offering package and a competitive bidding process overseen by a widely respected international commercial brokerage. He dismissed the City’s reliance on the 2014 sale, time-adjusted with no supporting evidence, as nonsensical, ludicrous and just wrong, making the point that the Board rarely accepts sales outside the shoulder years.

36Mr. Grosman challenged Ms. Subocz’s income analysis resulting in an FMR of $16 psf, on the basis that she included step-up leases that included rents in 2013 and beyond. His analysis relied only on rents applicable in the years 2011 and 2012, resulting in a FMR of $14 psf. This analysis resulted in a value of $60 million, although Mr. Grosman was clear that his final opinion of value was the 2011 sale price of $55.7 million.

37Mr. Grosman also concluded that no additional value should be attributed to the surface parking lot for all of the reasons enunciated by Mr. Bowers and Mr. Smalley.

38On the question of whether the suggested current value of $55.7 million was equitable with similar lands in the vicinity, Mr. Grosman provided a level study comprising ten sales of large Downtown West office properties. The median ASR was 0.79, with a range from 0.69 up to 1.21. Applied to the sale price, the resulting equitable value he proposed was $43,978,000. He later amended that value to $50 million, based on six properties and an ASR of 0.90.

ANALYSIS

Sale of 555 in 2014

39The sale of the subject property in 2014 for $100 million has much less probative value for determining current value than it normally might, given that there is another open market sale that transacted within weeks of the valuation day.

40In his report, Mr. Grosman wrote that “…only in rare or exceptional circumstances has the Assessment Review Board accepted the sale of a subject property outside the shoulder years.” This statement is incorrect insofar as there is precedent for using the sale of a subject property several years removed from the valuation day, on the premise that such a sale is in a preferential category over sales of comparable properties. The sale of the subject property itself can provide some insight into the general range within which the current value should reside, even when it is not within a year of the valuation day. The caveat attached to the use of such sale is the requirement that there be persuasive and compelling evidence to show the direction and magnitude of any change in market value over the intervening time period. In this case, the City’s time adjustment falls far short of that standard.

41More importantly perhaps is the fact that there is another sale that is for all practical purposes, on the valuation day of itself. Where there is a sale of the subject so close to the valuation date, other comparable sales, and two expert income analyses, then resort to the sale that is 32 months away from the valuation day should be unnecessary. I give little weight to the 2014 sale for those reasons, as well as the fact that there are reasonable explanations for the wide divergence in the prices between the 2011 and 2014 sales. There was a “paired sale” of a similar office building in the vicinity at 111 Peter Street, which sold in September of 2011 for $51,700,000 and again in April of 2017 for $125,600,000. This is a total increase of 143% or 23.8 % per year. The subject property at 555 increased by 79.5% or 26.5% per year between the 2011 sale and the 2014 sale, not so much higher than 111 Peter Street. The hypothesis that the sale of 555 manifested a one-off, unexplainably massive increase, was significantly weakened by this other building that underwent a similar increase, providing support to Allied’s theory of the market in Downtown West.

Sale of 555 and 543 in 2011

Sale Process

42The sale of the subject property in late 2011 provides better evidence for its current value than does the sale in 2014, but it is not the best or only evidence. Ordinarily a recent free sale of the subject property so close to the valuation day would be the best evidence for its current value. The circumstances behind such a sale needs to be examined to ensure that it represents the market, and is not a bargain price or otherwise lower than it could or should be. There are circumstances here that suggest that $55.7 million might not represent the actual market value in 2012. Those circumstances are:

1. The purchase agreement with Canderel/Kingsett did not result from the open bidding process, but came about after that initial bidding process failed to close with the highest bidder who was referred to as Muzzo. The highest bid from Muzzo from that open bidding process was $6.75 million higher than the eventual total sale price of $81.25 million for both 555 and 543 that was negotiated with Canderel/Kingsett.

2. The $55.7 million figure for 555 was not a result of an open bidding process targeted to that property, but was “established” by the purchasers themselves. The allocation of the $81.25 million total price between 555 and 543, was negotiated by Canderel/Kingsett and by Muzzo, the initial highest bidder.

3. Muzzo would seem to have benefited by acquiring the property it really wanted, with a saving of up to $6.75 million from its original value appraisal in the process, unless that saving was passed on or shared with Canderel/Kingsett.

4. Two separate income analyses conclude with values that are several million dollars higher than $55.7 million, based on actual leases negotiated in 2011 to 2013.

5. Using the rough measure of sale value per square foot, the sales of other office buildings at significantly higher values per square foot, do not provide corroboration that the subject sale at $195 psf was at market value.

43The arrangement between Canderel/Kingsett and the original high bidder Muzzo, and the division of the total price between them, gives me pause in concluding that the figure decided on represents the current value of 555. The vendor did not go back to the other original bidders as might be expected, but was approached by Canderal/Kingsett and the deal was made. Whether price maximization through this arrangement was the highest priority, is in some doubt.

Below Market Rents Means Invalid Sale?

44Ms. Vanberkum and Mr. Henderson also advanced the principle that there should not be reliance on the sale of a subject property that suffers from below market rents at the time of sale, because the sale price does not include the tenant’s interests in their below market rents, but the current value must. They cited CBRE’s information memo that “in-place rents are up to 32% below market…” MPAC and the City relied on the decisions in BCE Place Limited et al. v. Municipal Property Assessment Corp., et al 2010 ONCA 672, 103 O.R. (3d) 520: 2010 ONCA 672 (“Bank Towers”) and the dissent in Regional Assessment Commissioner, Region No 11 and Nesse Holdings Ltd et al (1986), 1986 CanLII 2497 (ON CA), 54 O.R. (2d) 437 (C.A.) (“Nesse Holdings”) for the proposition that a sale of a property with below market rents will underestimate the current value of such of a property.

The Bank Towers

45Mr. Steinberg countered that MPAC and the City were misrepresenting what Nesse Holdings and the Bank Towers stand for, principally because the Bank Towers did not involve any market transaction, but simply affirmed that market rents must be used “where the income approach is taken.” Mr. Steinberg argued that this does not mean market rents should be employed despite the existence of an open market transaction near the valuation day. He asserted that MPAC and the City stretch the Bank Towers decision to ignore a market transaction, which invariably will have numerous existing leases below the current market rent at the time of sale. The logical extension of their reasoning is that very few market transactions would qualify to be the basis for a current value determination, a result not intended by the Court of Appeal in the Bank Towers.

Nesse Holdings

46Mr. Steinberg went on to emphasize the dissent in Nesse Holdings for the rationale in determining the fee simple unencumbered. The majority in that case held that the sale of a shopping centre was the best evidence of the market value despite the property having below market rents. In dissenting, Justice Robins disagreed with using the sale as it represented only the owner’s interest, and not the substantial tenant interests that arose from “…long-term leases at highly depressed rents.” Justice Robins stated that a recent arm’s length sale will be the best evidence of market value, except where there are tenant interests of substantial value. His dissent was the impetus for the 1997 amendment to the Act requiring that the fee simple be valued, as if unencumbered by such leases at depressed rents.

47With respect to the leases at 555, Ms. VanBerkum’s own written submission that “the leases in place at the time the Property was marketed in 2011 were short-term…” would seem to distinguish them from the long-term leases at highly depressed rents that Justice Robins set as a guide for determining whether a fee simple is unencumbered. Furthermore, I find that the $11.62 psf average rent in place in 2011 is not 32% below the market rent of $14 being negotiated in that year and 2012, nor does it reach the standard of being “highly depressed.”

48The reason that highly depressed rents over long-term leases should be the standard is that willing buyers have no ability to increase those rents in the near term, and will base their valuations on the low rents, because they represent the actual return on investment that can be expected for some time. Where leases are regularly turning over and of short duration as they were at 555, and buyers and sellers can project to receive market rents in short order, there is no substantive tenant interest to be valued. I find it is more than probable that interested parties were not basing their bids on existing rents of $11.62, but on projections of what could be obtained in the market in that near term. The CBRE projected NOI in 2012 of $3.827 million, when grossed up by 6% vacancy and 6% expense, roughly extrapolates to a projected $14.50 psf market rent. It is more than likely that the highest bids were formulated based on a market rent closer to that figure than the short-term, marginally lower, in-place rent of $11.62.

49I find that it is incumbent on the party challenging a recent free sale to demonstrate that it was transacted on the basis of long-term leases at highly depressed rents. MPAC and the City have failed to establish that the sale should be rejected outright for the reasons set out in Nesse Holdings, but I still have some concerns with the sale as the best evidence of current value.

50In this case, the recent free sale in 2011 is good evidence of the general range within which the current value should fall, but by itself is not the best evidence for the reasons cited earlier. So while the 2011 sale is better evidence for the current value than is the 2014 sale, in this case it is not the best evidence for the property’s value on January 1, 2012. For that reason, I need not consider all of the evidence and argument on whether that sale was reflective of the state and condition of 555 in the taxation years 2015 and 2016, other than to observe that tenant improvements would not ordinarily qualify for such treatment. The best evidence for the value of this income property is to be found in the income approach.

Income Approach

Office Space

51I accept that leases that commenced in 2011 and 2012 are the best indicators of value for office space FMR as of January 1, 2012, but do not accept that “step-up” rents commencing several years after the valuation day should be included in the analysis. I have determined an FMR of $14 psf to be applied to the office space for the following reasons.

52I found issues with both of Ms. Subocz’s and Mr. Grosman’s selections of leases for a FMR analysis. Mr. Grosman included rents from very short term leases, some owner occupied units and a month to month lease at $8 psf. Ms. Subocz selected some leases that had commencement dates later in 2012, and averaged in “step-up rents” from 2013 and later years, which skewed her weighted average higher. For example, Unit 1210 occupied by Devanlay Canada Inc. was renting for $13 psf on the valuation day and up until September 30, 2012. Under a new lease, its’ new rent was $15 psf on October 1, 2012 and $16 psf on October 1, 2013. Ms. Subocz assigned a rent of $16.50 to this unit, as representative of the income earned on or about January 1, 2012.

53Another example is Unit 915 occupied by Cintas Canada Limited. While the lease commenced in April 2011 at a rent of $12.90 psf, the step-up to $14 was not until May of 2016. So while the actual rent on the valuation day and the four years which followed was $12.90 psf, Ms. Subocz averaged in the rent from 2016 to get to her FMR for this unit. I agree with Mr. Grosman that averaging in rents from 2016 and 2017, many years past the valuation day, will not provide an accurate portrayal of the building’s income or value in 2011/2012.

54Six properties with FMRs ranging from $15 to $18 were used to support Ms. Subocz’s FMR of $16, but the evidence persuades me that these are largely superior properties in superior locations in 2011/2012. I accept Mr. Bower’s observations that the market rent for 555 would fall below that range in 2012. Other evidence that asking rents for 555 in 2016 were still only at $16.80 psf casts further doubt that $16 was the market rent four years earlier, given the rising trend line discussed earlier.

55I have reviewed and adjusted MPAC’s list of leases commencing in 2011 and 2012 and included step-ups through 2013 only, a shoulder year to the 2012 valuation date. After those adjustments, the median rent of these 19 leases is $14.75 psf while the weighted average is just below $14 psf at $13.79 psf. These numbers support Mr. Bower’s and Mr. Grosman’s views that $16 psf does not provide an accurate reflection of the building’s income in 2012. I accept Allied’s position that the appropriate rent to employ is $14 psf for the office space. Applying this figure to 295,260 sq. ft., results in a potential gross income of $4,133,640, an NOI of $3,652,484 and a value of $56,192,061 when capitalized at the agreed rate of 6.5%.

Retail Space

56Mr. Grosman had 2,469 sq. ft. of ground floor retail valued at $18 psf based on an adjustment to the FMR of the superior retail space at 720 King Street West. Ms. Subocz included a third ground floor unit with 5,141 sq. ft. used as a showroom, for a total of 7,610 sq. ft. of retail which she assigned an FMR of $25 psf. This number was based on historical leases and information from Co-Star a real estate research firm, although she conceded that “…this stretch of Richmond is still relatively moribund from a retail perspective.”

57Mr. Bowers blamed the dearth of retail on the fact that a one-way street like Richmond “…kills retail.” He explained that the third unit used as a showroom is closed to the street. Mr. Bowers testified that Allied was unable to lease the unit to a retailer and so received office rather than retail rent for the unit. The tenant information supplied to MPAC showed that in 2012, the two small retail tenants paid $22 psf and $22.50 psf. I accept that the showroom space cannot be rented as retail and should remain valued as office space at $14 psf. The FMR of the retail component of 2,469 sq. ft. is $22 psf leading to an NOI of $47,995 for a value of $738,385.

Parking

58The parties could not agree on the number of parking spots to be valued. Ms. Subocz appears to have removed the 38 surface parking spaces that she re-classified and valued as surplus land. Since I have determined that the parking and access across it are integral to the use of the building, remains the highest and best use and so is not surplus land, the full allotment of 258 parking spaces should be valued. Ms. Subocz supported her value of $120 per space by gleaning from the revenue statement that an average of $133 per space was earned and a 2012 TIP statement indicating a rate of $130 per space. She supported this further with a review of other parking facilities in the vicinity earning in a range of $100 to $120 per space. Mr. Grosman did not provide any meaningful support for his use of $110 per space. The parking income is 258 spaces at $120 per space for an NOI of $226,999 and after the agreed vacancy and expense allowances for a value of $3,492,292.

Income Approach Conclusion

59The sum of the office space at $56,192,061, the retail component at $738,385, and the parking areas at $3,492,292 is a total indicated value of $60,422,738. That is my best estimate of the current value of 555 Richmond St. as of January 1, 2012.

Surplus Lands?

60MPAC and the City maintained that the surface parking area behind the building on 555 is surplus land and should be valued based not its current use, but on a potential developed use as represented by the permitted Building “C”. I find that the presumption that the current use is the highest and best use has not been rebutted, and I conclude that any value of that land is found within the total current value of the office building.

Building “C”

61MPAC and the City maintained that the surface parking area behind 555 that they characterized as 21,000 sq. ft. of surplus land, had additional value because it could be developed. This was represented by Building “C” allowed under By-Law 195-85, having a footprint of 4,980.68 sq. ft. Ms. Subocz calculated the permitted gross floor area (“GFA”) for Building “C” was 35,137 sq. ft. and applied the $65 psf used to settle the s. 40 appeals for 543. She projected a development value of $2,283,909.

62Mr. Bowers the Vice-President for Allied, heaped scorn on the idea that any building with a footprint of less than 5,000 sq. ft. would be financially feasible, or that a development could be built over top of the underground parkade. I believe his assertions that such a development was not contemplated at the time of purchase nor is it contemplated any time soon. All of Allied’s witnesses testified that there is no plan to develop the parking lot for several reasons, not least of which is that there is already an underground parking structure beneath the majority of that land. I accept that together with the surface parking, loading docks and ingress and egress to the building are all integral to the functioning of the building and are likely to remain so for the foreseeable future.

Highest and Best Use

63The basis for any valuation is to value the highest and best use of the land. The Board has taken the view that where a property has a current use, then there is a rebuttable presumption that the current use is the highest and best use. This is based on the entirely reasonable assumption that it already meets the tests of being physically possible, legally permissible and financially feasible.

General Motors

64I agree with Members A. LaRegina and S. McAnsh in General Motors of Canada Limited v Municipal Property Assessment Corp., Region No. 27, 2017 CanLii 3664 (ON ARB) that “the use a property is put at any given time is presumed to be its highest and best use. Parties seeking to prove a different highest and best use will require compelling evidence of how another legally permissible, physically possible and financially feasible use is more productive than the current use…”

Toronto Airways

65Toronto Airways Ltd. v. Municipal Property Assessment Corp., Region No. 14 2014 Carswell Ont 15057, [2014] O.A.R.B.D. No. 500 (“Toronto Airways”) was another decision of the Board which set a standard for determining highest and best use, based on the authoritative real estate text before it, that included the requirement for market analyses that include a fundamental analysis, an inferred analysis, a market study and a marketability study. Members S. McAnsh and P. Andrews concluded that “It makes a great deal of sense that market information and reasonable predictions of future market demand would be required to determine the highest and best use of land. Without a prediction of future demand that is supported by market evidence, it is impossible to say what the best use of land would be.”

66In her report, Ms. Subocz writes that she valued the surplus land as development land “… notwithstanding that the developer did not have formal approval for the applied for density.” She further writes that “It is acknowledged that this site area will not be fully utilized in any future development as parking /loading access to 555 Richmond will need to continue to be provided…” Her use of the settled value of 543 for the 555 surplus land was based on “…proximity of and probable similarity of development potential…” These assumptions and projections regarding potential development are insufficient evidence and do not meet the elementary tests to prove a change to the highest and best use of this land, having regard to the appraisal standards as set out by the Board in Toronto Airways.

67I accept the evidence that the current use of the land behind 555 is productive to the operation of that building. Even if there was some intention to develop the land sometime in the future, that intention alone would fall far short of the evidence required to change its highest and best use. The airport under appeal in Toronto Airways, at least had an active development application for a change in use, and that was insufficient to change the highest and best use away from the current airport use. Here, the case for the City and MPAC is not based on development activity or market analyses, but rather on conjecture about Allied’s motivations based on internet information, self-serving press releases, and the usual sales brochure puffery.

68The presumption that the current use is the highest and best use has not been rebutted, and I conclude that any value of the land behind 555 is found within the total current value of the office building.

Equity

69Mr. Grosman’s original equity study encompassed 10 office buildings of varying similarity, with ASRs ranging from 0.69 to 1.21, with a median of 0.79. Mr. Grosman applied the median to the 2011 sale price and calculated an adjustment to bring the assessment down to $43,978,000. In his testimony, Mr. Grosman revised his table to remove four of the properties, for a median and average ASR of 0.80 and 0.91 respectively.

70Both Mr. Petrin and Ms. Subocz challenged one of the six properties, at 215 Spadina Avenue, as being not listed on the open market or to be found on Realnet, having a purchaser more motivated by the building’s “high corporate social responsibility” than by price. When that property is removed, the median and mean ASR’s of the remaining four properties changes to 0.94 and 0.95 respectively, numbers that generally signify insufficient evidence of inequity. Both Mr. Petrin and Ms. Subocz also questioned the inclusion of 545 King Street, a property evidently priced based on a highest and best use of re- development value, and not reported on Realnet or Marsh. When the 0.72 ASR of that property sale is removed, we are left with only three properties with an average ASR of 1.03 and a median of 1.08.

71Mr. Grosman conceded that five or six ASR’s was a thin sample size for the purpose of s. 44.(3)(b). That proposition is amply demonstrated mathematically in this case where the addition or subtraction of one or two properties can reverse the inference to be drawn. An ASR of 1.08 suggests that similar properties are not at a lower level of assessment than the level of sales and so there is no inequity; an ASR of 0.80 suggests an inequitable under-assessment of similar lands at 80% leading to a downward adjustment of 20% or $12 million on a $60 million dollar correct current value.

72I disagree with Mr. Steinberg’s written submission that an equity adjustment based on six sales is fair and reasonable because it is based on “…a sufficient number of sales given the character and nature of the property involved.” I think the character and nature of the $60 million property involved requires that the Board exercise great care in an application of s. 44.(3)(b). That correct current value is meticulously derived using a complex income method based on an analysis of much market data, an approach that is employed by all parties in the office building market. To reduce that correct current value to an incorrect figure by up to 12 million assessment dollars on the statistically unreliable basis of a few simple ratios is a misapprehension of the judicial concept of equity and does a disservice to the scheme and purpose of market value assessment.

73I conclude that the “equity study” and the ASR evidence before me, is not nearly enough evidence on which to base a finding that the $60,422,738 correct current value is not equitable.

CONCLUSION

74After careful consideration of all of the evidence and the applicable law, I conclude that the correct current value of 555 Richmond Street for the 2015 and 2016 taxation years is $60,422,738 and that this value is not inequitable relative to the assessment of similar lands in the vicinity. The assessment will be increased from $43,361,000 to $60,422,738. There was no evidence or submissions on the apportionment of office, retail and parking values to the two classifications, office and commercial. Counsel is requested to agree on the appropriate apportionments and forward to the Board for inclusion in this decision, within 60 days of release, or the Board can be spoken to on a teleconference call to be arranged on short notice.