Manchester Court Land Holdings II ULC v. Municipal Property Assessment Corporation, 2018 CanLII 14229

Assessment Review Board

Commission de révision de l’évaluation foncière

ISSUE DATE:

March 14, 2018

FILE NO.:

WR 149543

Assessed Person(s):

Manchester Court Land Holdings II ULC

Appellant(s):

Manchester Court Land Holdings II ULC

Respondent(s):

Municipal Property Assessment Corporation (“MPAC”)

Region 15

Respondent(s):

Town of Caledon

Property Location(s):

4-6 Manchester Court

Municipality(ies):

Town of Caledon

Roll Number(s):

2124-010-003-22801-0000 and

2124-010-003-00207-0000

Appeal Number(s):

3055734, 2951034, 3055735, 3008235, 3086133 and 3268005

Taxation Year(s):

2013, 2014, 2015 and 2016

Hearing Event No.:

686972

Legislative Authority:

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

Heard:

September 18 and 19, 2017 in Caledon, Ontario

APPEARANCES:

Parties

Counsel+/Representative

Manchester Court Land Holdings II ULC

Paul Grosman

MPAC

F. X. Shea+ and Calvin Ho+

Town of Caledon

G. Tudino and V. Gowans

DECISION OF THE BOARD DELIVERED BY SONIA LIGHT AND MARK SPRAGGETT

ISSUE

1The subject property municipally known as 4-6 Manchester Court is an industrial property comprising a total of 55.8 acres of land. 41.7 acres of the property has been improved with two large warehouse buildings constructed in 2007 containing a total floor area of 828,406 square feet ("sq. ft."). These existing buildings are fully occupied by three tenants plus a rooftop solar facility. In the 2016 taxation year the remaining 14.1 acres of vacant land was consolidated with the improved lands into a new single roll number. The parties agree that the current value of these vacant lands would be $3,856,000 in the XU tax class. In October 2014 an omitted assessment (to be effective January 1, 2013) was issued respecting new interior office fit-outs and partition walls, thereby increasing the current value. The parties agree that the appeal of the omitted assessment should be withdrawn at the hearing as the value of the related office improvements will be reflected in the Boards determination of the current value of the subject property that includes the office areas.

2The total current value assessment for the subject property (including supplementary assessments) for the 2013 - 2015 taxation years is $70,240,000 and for the 2016 taxation year it is $73,225,000 due to a slightly higher assessment and the consolidation of the subject lands with additional excess lands. The representative for the Appellant argued that the correct current value of the subject property for the 2013 - 2015 taxation years is $56,580,000. The representative for MPAC argued that the correct current value for these taxation years is $59,087,000. The representative for the Municipality argued that the total assessment of $70,240,000 for the 2013 - 2015 taxation years is correct and should be confirmed based on its determination that the “equitable current value” of the property is $70,971,000.

3The Assessment Review Board (“Board”) must determine whether the total assessment for the 2013 - 2015 in the amount of $70,240,000, and the 2016 taxation year in the amount of $73,225,000 is correct and whether the current value of the subject should be reduced to make it equitable with similar lands in the vicinity.

DECISION

4The Board finds that the correct current value as of January 1, 2012 of the subject property without the excess lands is $58,668,000 and that there is no basis to adjust the current value for equity pursuant to s. 44.(3)(b) of the Assessment Act (“Act”).

5Accordingly, the total assessment in the XT tax class for the 2013 to 2016 taxation years is reduced to $58,668,000. The parties agreed that the omitted assessments for 2013 and 2014 are withdrawn as the value of the related office improvements are reflected in the Boards determination of the current value of the subject property that includes the office areas.

6In addition, as agreed by the parties the correct current value and total assessment of the excess lands consolidated with the subject property for the 2016 taxation year is $3,856,000 in the XU tax class.

REASONS FOR DECISION

Legislation

7Section 19.(1) of the Act states:

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

8Section 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.

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. 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 supplemental assessment for the office improvements is included in the current value assessment to be determined by the Board for the taxation years under appeal and they have also agreed that the current value of the excess industrial lands for the 2016 taxation year is $3,856,000. They also agree that the current value should be determined based on its current use as a large warehouse property.

Issues and Findings

Valuation Methodology

12The Appellant and MPAC both agree that the subject property should be valued using the income approach for determining value. The experts for these parties used this approach to determine current value and then completed a separate analysis using the direct comparison approach to value to support the respective values they determined based on the income approach.

13The Municipality argued that the subject property should be valued using the direct comparison approach to value. The expert for the Municipality used this approach to determine current value and then reduced this value for equity based on his own equity analysis. Although, he did not agree that the income approach to value is an appropriate methodology to determine current value for the subject property, he did perform his own analysis using this approach.

14The Board finds that the income approach to value would be the most reliable approach for determining the value of the subject property because it is the approach normally used when the purchase price of the property depends on the income it can generate. For the subject property, the direct comparison sales approach is useful only as a check on the value determined based on the income approach to value, as there were so few properties of the same vintage, location and size sold within a year of the valuation date. The cost approach to value is the least reliable method for calculating the current value of the subject property in this case, because the value generated using this approach produces a much higher and apparently outlier value than do the income and direct comparison approaches to value.

Issue: Application of Income Approach to Value

15The Appellant’s expert Brain Wagner has extensive experience as an appraiser accredited by the Appraisal Institute of Canada.

16Mr. Wagner first determined market rent for the subject property by comparing the rent generated at the subject property with rents generated by relatively similar properties in the valuation year. He found that the rent generated by the subject property to be at market.

17Mr. Wagner then considered the appropriate adjustment for vacancy and expenses to use in his analysis. He determined that no deduction would be appropriate because the rents for the subject property, as well as the comparable sales he selected and relied on, were all net of expenses. He indicated that “as long as the comparables were analyzed on a similar basis to the subject, where no vacancy allowance is made, the comparison of the sales to the subject would be similar.”

18In his report, Mr. Wagner considered five sales between April, 2011 and February, 2012 that he considered to be comparable to the subject. He also considered that these sales were of leased properties that would be reflective of capitalization rates for such properties at the valuation date. Although, he did not explain why his sample did not contain any sales of larger industrial properties between January and March, 2011 inclusive and between March and December 2012, the other parties did not challenge this aspect of his evidence. The Board, therefore, finds that these properties would be “reflective of the capitalization rates existing in the market at the valuation date.”

19Mr. Wagner also acknowledged in cross-examination that another comparable sale presented by MPAC should perhaps have been included in his study: 8574 Boston Church Road, sold on June 24, 2011, with a capitalization rate of 6% as reported by a reporting service named RealNet. When the 6% capitalization rate is included in Mr. Wagner’s analysis of his six other suitable capitalization rates, the Board finds that the average and applicable capitalization rate is 6.51% instead of the 6.75% figure applied by Mr. Wagner in his analysis. When the rental income is divided by this adjusted value, the total current value calculation based on the income approach methodology changes from $56,580,000 (rounded) to $58,668,000 (rounded).

20Todd Willson, the expert called by MPAC, has been a property valuation specialist with MPAC since 2016 and a property valuation analyst with MPAC since 2013. He was accredited by the Institute of Municipal Assessors in 2013. Mr. Willson applied a vacancy allowance of 3% and expense allowance of 2% to determine a net operating income (“NOI”) of $3,545,226 for the subject property. Mr. Willson states in his report, that the total allowance for vacancy and expense normally applied by MPAC to distribution centers or large scale industrial buildings over 500,000 sq. ft. is 1%. However, he explained that the subject property lacks internal automation systems unlike distribution centers generally, and the subject property has experienced some vacancy in the past.

21Mr. Willson also considered the vacancy and expense allowances for Industrial Malls, being 5% and 3% respectively and determined that these values should be reduced taking into account that the subject property was different from these multi-tenanted buildings designed to accommodate open access from customers or the general public and that typically have isolated shipping and receiving areas to the rear of the buildings and lower clear heights than distribution centers. Considering all of these factors, Mr. Willson determined that a vacancy allowance of 3% and expense allowance of 2% is appropriate. The Board finds Mr. Willson’s assumptions respecting vacancy and expense rates to be reasonable.

22Mr. Willson selected four sales between October 28, 2010 and April 16, 2013 that he considered to be the most comparable to the subject property and determined a median cap rate of 6% based on these sales. Dividing the NOI, which he considered to be $3,545,226, by this 6% capitalization rate, he calculated the current value to be $59,087,100.

23Mr. Donald Davies, the expert called by the Municipality, holds the position of senior valuation consultant with Municipal Tax Equity Consultant Inc. (”M. T. E.”), the same firm that represents the Municipality in this proceeding. He does not hold any formal accreditation as an assessor or appraiser but has been employed as a valuation consultant since 1983. He also prepared an analysis applying the income methodology approach to value, although he made it clear that he did not consider this methodology to be the most suitable method for the determination of current value respecting the subject property. He determined a much higher NOI than the experts called by the other parties, because he relied on the much higher rental rate of $5.17 per square foot (“psf”). The experts for the other parties considered the rental rate for the subject property to be the actual rent rate in effect on the valuation day. Mr. Willson, MPAC’s witness also considered periods of free rent in calculating NOI. Since the applicable legislation requires the valuation as of the valuation date, in this case, January 1, 2012, the Board prefers the approach of the other experts in calculating the applicable rental rate.

24It appears that Mr. Davies determined the capitalization rate as 5.8% based on the capitalization rates derived from sales of three of MPAC’s comparable properties. For purposes of valuation, sales should occur on or near the valuation date of January 1, 2012, ideally within one year of this date. However, two of the sales he relied on occurred outside of this “shoulder period”, being sales from 2010 and 2013. As such the Board finds that the capitalization rate determined using this approach would not be a reliable indicator of the capitalization rate to be applied when determining value on the January 1, 2012 valuation date.

25Mr. Davies also did not provide any rationale for selecting a 3% rate for unrecoverable expenses.

26For the above reasons, the Board does not accept Mr. Davies calculation of current value based on the income approach to value. Instead, the Board accepts the analysis of the other two witnesses, which places the current value in the range of $58,668,000 to $59,087,000. The Board finds their analyses to be the most reasonable and persuasive in determining the current value of the subject property.

Application of Direct Comparison Approach to Value

27Mr. Wagner for the Appellant relied on the same six sales as he did in his analysis based on the income approach to value. Using the average rent psf of these properties and the consideration paid for these properties, he calculated multipliers for each of them. He determined the average multiplier for them to be 15.22. At the hearing, he calculated for the Board the multiplier of 16.64 respecting 8574 Boston Church Road property, and then calculated the revised average multiplier for all the properties, being 15.42. He then multiplied the average rent of the subject property ($4.61 psf) by this revised average multiplier, which results in a sale price psf of $71.09. He applied this value to the 828,406 sq. ft. of the property to determine a revised current value of $58,816,826 for the subject property based on the direct comparison approach.

28Mr. Willson, for MPAC, relied on the same four sales he used in his income approach analysis for his direct sales comparison analysis. First he made adjustments for time and land/location to the sale prices of his four comparable sales. He then determined the sale price psf of each property. However, he preferred to base his final calculation on the prices psf of what he considered to be the most comparable sales, due to the fact that these two comparable sales both have two detached warehouses located on their respective lots, which he considered to be a “unique characteristic that is similar to the subject property.” The average adjusted price psf of these properties was $72 psf and applying this value to the subject’s building site he calculated a current value of $59,737,000 for the subject property.

29Mr. Davies, for the Municipality, relied on all four comparable sales submitted by MPAC and adjusted the sales values for age, size, height, time and density. He applied an adjustment of 1% for age, 0.2% for size, 1.3% for height, 0.05% for time and 1.0% for density and adjusted the price psf obtained in respect of each of the comparable sales accordingly. However, he did not provide any rationale to support his adjustments. His analysis appears to be that if the adjusted values of the comparable sales were very similar, then the median price psf based on these values would be a reliable value for the price psf of the subject property. However, since he offered no empirical evidence to support his adjustments, the Board is not persuaded that his percentage adjustments are realistic. Consequently, the Board does not accept his determination of psf values. He further adjusted the psf obtained in his analysis for equity. However, since the Board does not accept his adjusted psf calculations, there is no need to discuss his application of equity to the values he obtained. The issue of equity is discussed below.

Application of Cost Approach to Value

30As mentioned above, the cost approach to value is the least reliable method for calculating the current value of the subject property in this case because the value generated using this approach produces a much higher and apparently outlier value then the income and direct comparison approaches to value.

31Mr. Davies, for the Municipality, maintains that the cost approach used by MPAC to determine the returned assessment for the relevant taxation years must be accurate because the replacement cost new (“RCN”) psf used for the buildings of the subject property is similar to rates applied by MPAC to other properties. However, the Board finds that this begs the question whether the cost approach to value is appropriate for the purpose of calculating the current value of the subject property. Mr. Davies did not provide a persuasive rationale for applying the cost approach to value to determine the current value of the subject property that the other experts agreed would be purchased based on its income generating potential.

Equity Analysis

MPAC presented an equity study containing a total of 24 industrial properties that were similar to the subject in terms of nature, character and function and valued on the 2012 assessment roll under the same methodology as the subject being the cost approach via the automated cost system. The median Assessment to Sales Ratio (“ASR”) was calculated as 0.98 and the time adjusted ASR was calculated as 0.97. No figure was provided to the Board respecting the coefficient of dispersion for this study and, therefore, the Board finds that this study does not provide sufficient detail for the Board to conclude that the current value should be reduced to make it equitable with that of similar lands in the vicinity.

32Mr. Davies, for the Municipality, presented an analysis in which he calculated a median ASR of 0.944 based on the four suggested comparable sales submitted by MPAC. However, the Board finds this sample size is far too small to provide a reliable indicator that the current value should be adjusted for equity.

Therefore, the Board having considered all the evidence submitted, finds that there is no basis to conclude that the current value should be reduced to make it equitable with that of similar lands in the vicinity.

CONCLUSION

33The Board has accepted Mr. Wagner’s conclusion respecting the correct current value of the subject property as revised by the Board in accordance with his acknowledgement that an additional property should be included in his study. Therefore, the Board finds that the correct current value of the subject property for the 2013 - 2016 taxation years without the excess lands is $58,668,000 in the XT tax class. In further support of this finding, the Board notes that this value is also supported by the conclusion in Mr. Todd’s analysis, who also used the income approach to determine value, where he concluded that the correct current value should be $59,087,000. Mr. Wagner’s conclusion using the sales comparison approach, as revised by the Board based on his testimony at the hearing, results in a current value of $58,816,826, which also supports the Board’s finding.