Braebury Development Corporation v. Municipal Property Assessment Corporation, 2018 CanLII 70337

Assessment Review Board

Commission de révision de l’évaluation foncière

ISSUE DATE:

July 23, 2018

FILE NO.:

WR 149343

Assessed Person(s):

Braebury Development Corporation

Appellant(s):

Braebury Development Corporation

Respondent(s):

Municipal Property Assessment Corporation (“MPAC”) Region 05

Property Location(s):

955 Futures Gate

Municipality(ies):

City of Kingston

Roll Number(s):

1011-080-180-07025-0000

Appeal Number(s):

3230760

Taxation Year(s):

2016

Hearing Event No.

687981

Legislative Authority:

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

Heard:

November 16, 2017 in Kingston, Ontario

APPEARANCES:

Parties

Representative

Braebury Development Corporation

Maria Throop

MPAC

Rox-Anne Poulain

City of Kingston

Maureen Petersen Jeff Walker

DECISION OF THE BOARD DELIVERED BY WARREN MORRIS

INTRODUCTION

1The subject property at 955 Futures Gate is 1.5 acre property containing a one-story building built in 1993, with a gross leasable area of approximately 21,244 square feet. Although the building has an industrial appearance, from 2012 through 2015, the subject property was used as an office building. As of January 1, 2016, the building began being used as a gym by a single tenant. For the 2013 to 2016 assessment cycle, MPAC’s general assessment as of January 1, 2012 of the subject property value is $2,941,000. The Appellant, Braebury Development Corporation, appealed the assessment for the 2016 taxation year.

2At the hearing, MPAC modified its position and recalculated its assessment based on the change in use of the property. MPAC now takes the position that the current value of the subject property for the 2016 taxation year is $2,892,000. The Appellant asserts that this value is too high and takes the position that the correct current value is $1,900,000.

3At the conclusion of the hearing, the Assessment Review Board (“Board”) reserved its decision.

ISSUE

4The issues are to determine the current value of the subject property for the 2016 taxation year, and to ensure that the current value is equitable relative to the assessed values of similar properties in the vicinity.

5This appeal is for the 2016 tax year only. As such, the Board is tasked with determining the current value and equitable adjustment (if necessary) for the subject property as of January 1, 2012 as if the subject property were in its January 1, 2016 new use and condition.

DECISON

6The Board finds that the current value of the subject property is $2,892,000.

7Further, the Board finds that there is insufficient evidence before it leading to the conclusion that the current value, as determined above, requires an adjustment in accordance with s. 44.(3)(b) of the Assessment Act (“Act”).

REASONS FOR DECISION

The Legislation

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 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.

10Section 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.

Current Value

MPAC’S Evidence

11MPAC presented two comparable properties, 940 Futures Gate (Property 1) and 1683 Bath Road (Property 2) that sold very close to the valuations date. MPAC applied both a sales approach and an income approach to both of these comparable properties, which are summarized in the following chart:

Subject Property (Recommendation at Hearing)

Subject Property (At Time of Roll)

Property 1

Property 2

Address

955 Futures Gate

955 Futures Gate

940 Futures Gate

1683 Bath Road

Sale Price

$2,950,000

$1,050,000

Sale Date

Feb. 23, 2012

Dec. 15, 2011

Square Footage

21,244

21,244

20,000

13,000

$/sq. ft.

$147.50

$80.77

Year Built

1993

1993

1993

1959

Site Area

1.5 acres

1.5 acres

2.15 acres

0.74 acres

CVA

$2,892,000

$2,941,000

$2,769,000

$1,134,000

ASR

0.94

1.08

Vacancy, Expense, and Cap Rate used for CVA

5% - 3% - 8% (large retail)

6% - 5% - 9% (office)

6% - 5% - 9% (office)

5% - 3% - 8% (large retail)

Fair Market Rent used for CVA

$11.82

$14.00

$14.00

$7.58

Comments

Leased to Farm Boy at the Time of Sale

Large Retail, tenanted by a Dollar Tree Store

12Using a sales approach, MPAC testified that Properties 1 and 2 had a sale price per square foot (“psf”) $147.50 and $80.77 respectively. MPAC’s evidence was that Property 1, categorized as office, is similar to the subject property whereas Property 2, used as large retail, was considerably inferior. MPAC calculated their recommended assessment for the subject property by using an income approach as follows:

Fair Market Rent (FMR): $11.82

Annual Potential Gross Income (GPI): $251,104 (21,244 x $11.82)

Less Vacancy/Collections (5%): $ 12,555

Effective Gross Income: $238,549

Less Non-Recoverable Expenses (3%): $ 7,156

Net Operating Income (NOI): $231,393

Capitalization Rate: 8%

Total Current Value: $2,892,000 (rounded)

13MPAC provided an explanation as to why they used a FMR of $11.82 psf when the actual rent being paid by the tenant is $10.00 psf. MPAC explained that the tenant was paying less than market rent to compensate for the considerable leasehold improvements made and paid for by the tenants. As evidence, MPAC presented a Lease and Permit Application. The Lease showed that the landlord/owner (assessed party) was to provide the leased premises to the tenant in a “Vanilla Box” condition, which was described as being gutted and having minimal interior improvements - being free of interior walls, ceilings, cabinetry, toilet fixtures, floor or duct work. The Permit Application indicated that the tenant had applied for and received permission to construct interior improvements valued at approximately $750,000.

14To corroborate the recommended assessment, MPAC used a comparative sales approach. MPAC identified the sale of Property 1 as being across the road from the subject property and very similar. The location is virtually identical to the subject property. MPAC submitted pictures into evidence showing the style/construction (industrial looking retail or office) to be very similar to the subject property. MPAC’s witness, Emily Corsi, testified that she visited Property 1 and that both the interior and exterior finishes were similar to the subject property. When the sale price per square foot is applied to the subject property, the value amounts to $3,133,400, which is well in excess of the recommended assessment for the subject.

Appellant’s Evidence

15Maria Throop, on behalf of the Appellant, testified that at the time this appeal was made, there was no tenant at the subject property. The property was vacant for a period of approximately 1.5 years. Ms. Throop objected to MPAC use of $11.82 psf as a reasonable fair market rent, given that the actual rent being charged was $10 psf. Further, Ms. Throop stated that in order to obtain a tenant, the appellant had to provide landlord inducements, which included five months free rent and spending $450,000 in improvements. Ms. Throop factored in the $450,797 over a five-year lease and calculated that the actual net rent being achieved is only $5.76 psf based on this adjusted rent at a capitalization rate of 8%, Ms. Throop calculated the value of the property at $1,527,882.

16Ms. Throop also presented data on nine comparable properties in the area. The nine properties had current value assessments (“CVA”) ranging from $67.65 to $128.99 psf. Based on the nine CVAs of the comparable properties, Ms. Throop submitted that a reasonable assessment for the subject property would be $89.45 psf or $1,900,000.

ANALYSIS

17The thrust of the Act is to rely on current value as the basis for assessed value. Current value means “…in relation to land, the amount of money, the fee simple, if unencumbered, would realize if sold at arm’s length by a willing seller to a willing buyer.” The best evidence of current value is the sale of the subject property on or close to the valuation day of January 1, 2012 (keeping in mind that it is the January 1, 2016 use and condition of the subject property that is relevant). In this case, no such sale occurred. Other methods to determine current values are direct comparison (or sales) approach, income approach, and cost approach.

18To enable an estimate of value for the subject property to be derived from a comparable sales approach, there must be sufficient elements of similarity, in terms of location and physical factors such as building area, site area, age and quality/style of construction, so as to enable a direct comparison to be made between the proposed comparable properties and the subject property. The most important element to establish similarity is location, with the remaining elements being of somewhat less importance.

19The most persuasive evidence presented at the hearing is the sale of the property located across the road from the subject property at 940 Futures Gate (Property 1).

20On behalf of the Appellant, Ms. Throop indicated that the sale price for Property 1 was unusually high largely due to the fact that an attractive lease to Farm Boy Market, a well-established grocery chain, was in place at the time of the sale. The Board also notes that the site area for Property 1 is almost 50% larger than the subject, yet it features a building that is slightly smaller. No evidence was tendered regarding the value of the excess land at Property 1. Although the Board appreciates there are some similarities between Property 1 and the subject property, the Board finds that the subject property is inferior and therefore must have a current value that is considerably less than the $147.50 psf sale price of Property 1.

21None of the Appellant’s suggested comparable properties had market sales close to the valuation date. The Appellant uses its comparable properties to compare assessed values. Assessed values are arrived at either by MPAC mass assessment process, negotiated settlements with property owners, or through the Board’s appeal process. Assessed values for these properties are not the same as market values, and are not useful evidence in determining current value. For example, MPAC’s equity study shows 30 property sales in the vicinity of which only a small minority (five of the 30 or 16.7%) have assessment within 5% of their adjusted sale prices. This indicates that the assessed values are not a reliable metric for market value.

22In applying the comparable sales approach, the Board finds that only Property 1 is reasonably similar and useful in determining current value. However, considering just one comparable property is generally insufficient when determining current value. For this reason, the Board has considered the income approach as well.

23There is no dispute between the parties with regard to the figures used for vacancy/collections, non-recoverable expenses and capitalization rate in the income approach calculation. The sole area of difference is the rental income. MPAC uses a fair market rent of $11.82 psf whereas the Appellant uses and the actual rent of $10 psf adjusted downwards to $5.76 psf to account for landlord inducements. In general, where there are no unusual factors, actual rent is a good reflection of fair market rent (FMR). However, when they differ, the Board prefers FMR to actual rent, especially when there is a reasonable explanation as to why the property is not achieving market rents. For the subject property, the fact that the tenant’s lease indicated that the landlord is to provide the property in a “vanilla box” condition and that the tenant put approximately $750,000 in improvements into the property, is strong evidence that the actual rent of $10 psf is below market rent. Using the income approach, the extra $1.82 psf in rent translates to an additional $445,361 in value. Had the Appellants been required to pay for costs of the improvements instead of their tenant, a rental income of $11.82 would be considered reasonable. Consequently, the Board finds that $11.82 is the FMR and, therefore, $2,892,000 as the current value.

24The Board also notes that a current value of $2,892,000 translates to $136.13 psf, which is below the value of the most comparable sale located at 940 Futures Gate.

25Based on the above analysis, the Board finds that the CVA for the 2016 taxation year is $2,892,000.

Equity

26The Act requires the Board to address the issue of equity by having reference to the assessment of similar lands in the vicinity of the subject property. The Appellant has the burden of proving that the current value of the subject property for the 2016 taxation year is not equitable relative to similar lands in the vicinity of the subject property. The Appellant proposed nine properties it considered similar or superior to the subject property yet all were assessed, on a psf basis, lower than the subject property. The nine properties had CVAs ranging from $67.65 to $128.99 psf, with a mean and median CVA of $101.59 and $105.54 psf respectively. The subject property’s current value is $136.13 psf.

27At the hearing, the MPAC representative cross-examined Ms. Throop in regard to each of these nine properties. Due to negative factors such as location (street exposure, ease of access, general neighbourhood), quality of construction and use (quality and type of tenant), the Board finds that they are all inferior to the subject property. Therefore, the Board finds that they are not sufficiently similar to the subject property to warrant them having the same or similar assessment.

28MPAC presented an Equity Analysis consisting of the assessment and time adjusted sales of 30 similar properties in the vicinity of the subject property, all sales which took place in 2011, 2012 or 2013. When taking the assessments as a percentage of sales value, known as the Assessment Sales Ratio (“ASR”), MPAC determined a median ASR to be 0.97, which indicates that similar properties in the vicinity are generally slightly under assessed by approximately 3%. Consequently, MPAC concluded that an equity adjustment is not warranted.

29Based on the above analysis, the Board finds that, for properties similar to, and in the vicinity of the subject property, there is no general trend of under assessment that would warrant a reduction of the current value of the subject property for the 2016 taxation year pursuant to s. 44.(3) of the Act.

CONCLUSION

30The Board finds that the current value of the subject property for the 2016 taxation year is $2,892,000, and that an equitable reduction pursuant to s. 44.(3)(b) of the Act is not required.