HAC Toronto Airport Limited v. Municipal Property Assessment Corporation, 2018 CanLII 91619

Assessment Review Board

ISSUE DATE: September 24, 2018 FILE NO.: WR 149992

Assessed Person(s): HAC Toronto Airport Limited Appellant(s): HAC Toronto Airport Limited Respondent(s): Municipal Property Assessment Corporation ("MPAC") Region 15 Respondent(s): City of Mississauga

Property Location(s): 6080 Viscount Road Municipality(ies): City of Mississauga Roll Number(s): 2105-050-113-50250-0000 Appeal Number(s): 2965298, 3032502, 3087155 and 3151906 Taxation Year(s): 2013, 2014, 2015 and 2016 Hearing Event No.: 679769

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

Heard: August 21, 2017 in Mississauga, Ontario

APPEARANCES:

Parties	Counsel
HAC Toronto Airport Limited	Paul Chmeleski
MPAC	Frank X. Shea
City of Mississauga	No one appeared

DECISION OF THE BOARD DELIVERED BY MARCELLE BOURASSA

INTRODUCTION

1The Alt hotel ("Alt"), located at 6080 Viscount Road, is a limited service hotel that opened for business in June 2012. It comprises 153 rooms, a lobby bar with "grab and go" sandwiches, an exercise facility, and meeting rooms. There is no kitchen area or a swimming pool. Outside food and beverage catering is provided for events held in the meeting rooms. The property was last inspected on March 30, 2017.

2The Alt is located just west of Highway 409 between Viscount Road and Airport Road, at the end of the Terminal LINK Train line at Pearson International Airport ("Airport") that links Terminals 1 and 3 (and the Sheraton Hotel) and the Viscount Station. It is about 100 feet away from the entrance to the Viscount Station. Vehicle access to the hotel is from Viscount Road. The Viscount Station parking lot is to the south and the Toronto Pearson Airport value parking lot is to the west of the Alt. There is also a Mississauga Transit stop for routes 24 and 107 at the entrance to the Viscount Station.

3Both parties agree that the existing hotel use is the highest and best use of the subject developed area, as improved.

4Frank Shea, counsel for MPAC, states that the 2012 assessment was returned at $20,614,000 (CT) using the pro forma method of the income approach to value based on documentation available to the original assessor at the time. The actual results for the 2013 - 2016 years of operation were not available at that time. MPAC's expert witness, Biagio Galle, undertook a review of the additional results of operation for 2013 - 2016 and prepared a fresh valuation. He also conducted a direct comparison analysis of the as returned and fresh valuations and also considered a Revenue Per Available Room ("RevPAR") adjustment from the sold hotels that he considers as the best comparables. Mr. Galle concludes that the current value of the Alt is $20,727,000 based on the pro forma method of the income approach to value.

5Mr. Galle also considered the sales of 13 hotel properties located in Region 15 to address the equity test in s. 44.(3)(b) of the Assessment Act ("Act"). He concludes that similar properties in the vicinity have been assessed at their current values.

6His opinion of current value of $20,727,000 is slightly higher than the 2012 assessment as returned at $20,614,000. He concludes that the assessment as returned at $20,614,000 should be confirmed.

7Paul Chmeleski, counsel for HAC Toronto Airport Limited (the "Appellant"), states that the Alt opened in 2012 and that there were challenges in determining the 2012 assessment because the Alt had no track record. The Appellant's revised estimate is $15,365,000. The Appellant's expert witness, Andrew Jones, states that he reviewed the detailed valuations of comparable properties in the vicinity to assist with the development of an income pro forma estimate as of the January 1, 2012 valuation date. He also conducted RevPAR and Income Before Fixed Charges ("IBFC") comparison tests to measure the Alt's revised pro forma value to the performance of comparable properties in the vicinity. He also reviewed comparable sales in the vicinity as a check to ensure the indicated value produced by means of the income approach was an accurate reflection of the market.

8Mr. Jones concludes that the Alt's correct and equitable 2012 assessment for the 2013 - 2016 taxation years is $15,365,000.

ISSUES

9The issues to be determined are:

a) What is the correct current value of the Alt as of the January 1, 2012 valuation date?

b) Whether there should be an equitable reduction of the current value as determined by the Board and, if so, what should the amount of this reduction be?

DECISION

10As directed by s. 44.(3)(a) of the Act, the Assessment Review Board ("Board") finds that the current value of the Alt, as of the valuation day of January 1, 2012, to be $20,727,000 based on the pro forma method of the income approach to value. Furthermore, the Board finds that the evidence before it does not support the conclusion that an equitable adjustment is required under s. 44.(3)(b) of the Act.

11No notice of a higher assessment was filed with the Board. The Board confirms the assessment for the Alt hotel located at 6080 Viscount Road at $20,614,000 for the 2013 - 2016 taxation years.

RELEVANT LEGISLATION

12Section 1 of the Act states:

"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.

13Section 19.(1) of the Act states:

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

14Section 19.2(1) of the Act states:

19.2(1) Valuation days – 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.

15Section 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.

Analysis and Findings

What is the correct current value of the Alt as of the January 1, 2012 valuation date?

MPAC's Evidence and Submissions

16Mr. Shea called Mr. Galle as MPAC's expert witness. Mr. Galle describes the Alt as a unique property with a trendy and modern feel about it. It has a lobby bar with "grab and go" sandwiches. There is no kitchen area and events held in the meeting rooms are catered.

17Mr. Galle explains that MPAC's 2012 assessment was returned at $20,614,000 (CT) and was developed using the pro forma method of the income approach to value based on documentation available to the original assessor at the time. It was based on a 153 rooms, with a 73% occupancy rate, and an average daily rate ("ADR") of $149.

18In order to form an opinion as to whether the 2012 assessment as returned is fair, reasonable, and correct, he states that he undertook a review of the additional results of operation for 2013 - 2016 and prepared a fresh valuation of the subject property. He conducted a direct comparison analysis of the as returned and fresh valuations and also considered a RevPAR adjustment from the sold hotels that he considers as the best comparables. He also conducted a review to form an opinion as to whether the 2012 assessment as returned is equitable with similar lands.

19He states that in hotel valuation, a pro forma is used to represent stabilized income, expenses and capitalization of the Net Operating Income ("NOI") into an estimate of value. A pro forma is a stabilized income and expense statement reconstructed from an analysis of actual results of operation of the subject property together with a review of similar properties, industry standards, as well as factors pertaining to the assessment of hotels as directed by legislation. The purpose of stabilizing the income and expense of a hotel property is to exclude any abnormal relation of supply and demand, exclude any transitory or non-recurring conditions that my result in unusual revenues or expenses, and determine what may be considered typical for the property rather than to a specific owner or operator. The goal is to reflect the property's full economic potential by representation of the income and expenses that a hypothetical competent operator would achieve.

20Stabilization is used to explain when a property has reached market occupancy, or the projected occupancy level it will reach. In determining stabilization, he states that he reviewed the subject property's results of operations from 2013 to 2016 and the as returned 2012 assessment pro forma, as found at page 20 of his Report. He states that he did not consider the 2012 operating results as in his opinion, they reflect the startup period and were unstable results of operation as the Alt opened for business in July 2012. Typically, hotels require three to five years to reach a stabilized level. In his opinion, the Alt began to stabilize in years 2015 and 2016.

Revenue Analysis

Room Revenue

21Mr. Galle states that the as returned 2012 assessment pro forma guest rooms' revenue is based on an ADR of $149. Actual results indicated that the Alt had ADRs of $125.58 in 2014, $139.83 in 2015 and $151.60 in 2016. He revised the ADR to $140 in the Revised 2012 assessment pro forma.

22An occupancy level of 73% was utilized in the as returned 2012 assessment pro forma. Actual results indicate an occupancy level of 53.32% in 2013, 66.24 % in 2014, 74.91% in 2015 and 81.17% in 2016. Less weight was given to 2013 and 2014 as those years were 1.5 to 2 years into operation and results showed unusual revenues when compared to the 3rd and 4th years of operation. Mr. Galle states that he retained the 73% level of occupancy in the Revised 2012 assessment pro forma as it was reasonably close to what the Alt was achieving in 2015 after about 3 years into operation.

23In his opinion, the RevPAR is a good indicator of how a hotel is performing. The RevPAR for the Alt was $60.82 in 2013 versus a RevPAR of $121.87 in 2016 which represents a 200% change. Other nearby airport hotels had around a 30% change over the same period.

24Mr. Galle states that he compared the Alt's ADR of $140 and the occupancy level of 73% to a competitive set of hotels in the airport market area as set out at page 22 of his Report. These properties are all full service hotels and include properties both inferior and superior to the Alt. The range of the ADRs is $105 to $150 and the range for the level of occupancy is 60% to 87%.

25Mr. Galle states that the Sheraton Gateway Hotel at Terminal 3 sets the upper limit of the range in terms of location, type and quality. It is a superior property as reflected in its 2012 assessment ADR of $150 and occupancy level of 87%. It exhibits a tremendous locational advantage being integrated into Terminal 3 at Pearson Airport. In addition, it has extensive food and beverage revenue with roughly 16,000 square feet of conference space as compared to the Alt which is a limited service hotel.

26Mr. Galle states the he considers the properties located at 3279, 3299 and 3311 Caroga Drive (Hampton Inn & Suites, Fairfield Inn & Suites and Hilton Garden Inn), 6257 Airport Road (Four Points Sheraton) and 801 Dixon Road (Sheraton Toronto Airport Hotel) as inferior to the Alt in terms of location. They are located in the vicinity of the Alt and compete for market share. The Alt is located on the airport site at the end of the Train Link Viscount Station Terminal and has a significant competitive advantage over the other hotels on Caroga Drive that rely on a shuttle service to the Train Link Station. While the shuttle service may be three to five minutes away, the wait for a shuttle can be around 20 minutes or so. He would expect a higher occupancy and ADR for the Alt than for these hotels located further away from the airport.

27Mr. Galle states that the Alt's ADR was $117 in its first year of operation in 2013 and that it was already hitting the median ADR of $118 for the competitive set of hotels and had exceeded it in its second year of operation.

28He states that he considers the Sheraton Gateway as superior to the Alt and it had a 2012 assessment ADR of $150. Inferior properties on Caroga Drive had 2012 assessment ADRs of $105 to $120. He lowered the Alt's ADR to $140.

29Similarly, the Alt's occupancy rate was 53% in its first year of operation in 2013 and 81% in 2016. The Sheraton Gateway had a 2012 assessment occupancy of 87% while the range for inferior properties was between 60% and 70%. The occupancy level of 73% as used in the as returned 2012 assessment pro forma was reasonably close to that found in year 2015 which was about 3 years into operation. Mr. Galle states that he retained the occupancy percentage of 73%.

30Given the quality, age, design and superior location of the Alt hotel, Mr. Galle opines that the ADR of $140 and occupancy level of 73% are fair and reasonable with nearby airport hotels.

31Based on an ADR of $140, an occupancy level of 73% and 153 rooms, he estimates room revenue at $5,707,400 in the Revised 2012 assessment pro forma. This amount is slightly lower than what was achieved in 2015 and well below what was achieved in 2016.

Food and Beverage Revenue

32In the as returned 2012 assessment pro forma, food revenue was estimated at $1,000,000 and Mr. Galle states that he considered this low. He reviewed the results of operations at page 23 of his Report. The Alt has no restaurant on site but does have a bar and grab and go sandwiches and food is brought in for people using meeting room space and for special events. Based on the results of operation for 2015, he states that he revised the food revenue to $1,700,000 which he considers a reasonable stabilized amount for the as returned 2012 assessment and which represents 21% of total revenue. The Alt reported $1,825,000 for food revenue in 2015 and $2,033,783 in 2016.

Telephone Revenue

33No telephone income was reported in the results of operation and $0 was applied in the as returned 2012 assessment pro forma. Mr. Galle states that telephone income is on the decline for the hotel industry as more people use personal cell phones.

Parking Revenue

34Mr. Galle states that the as returned 2012 assessment pro forma applied zero dollars for parking revenue as this estimated revenue was accounted for in other Operated Department Revenue at $310,000. He states that he considered the actual results of operation and he stabilized the parking revenue at $400,000, which is below the parking revenues of $461,060 in 2015 and $493,050 in 2016.

Total Operating Revenue

35For the Revised 2012 assessment pro forma, he concludes that the total operating revenue was $7,807,400, as compared to $8,090,528 that was achieved in 2015 and $9,322,668 in 2016.

Departmental Expenses

Guest Rooms Expenses

36Mr. Galle explains that wages and benefits make up the majority of the guest rooms expenses and that the rooms expense in a pro forma is entered as a percentage of the rooms' revenue. He notes at page 23 of his Report that the Alt's room expenses have trended down from 35.66% in 2013 to 27.15% in 2016. He adds that a start-up property incurs more expenses. As a property stabilizes, the numbers tighten up. The median rooms expense for the Region 15 hotel market ranged from 32% in 2010 to 33% in 2012. Given the median rooms expenses for the Region and what the Alt achieved, he states that he applied a 30% rooms expense ratio in the Revised 2012 assessment pro forma, resulting in the value of $1,712,200. This is in line with what was achieved in 2015 (29.37%).

Food and Beverage Expense

37The actual food and beverage expense was 68.17% in 2015 and 64.79% in 2016. Mr. Galle states that he applied a 68% expense ratio for the food and beverage expense in the Revised 2012 assessment pro forma, resulting in the value of $1,156,000.

Parking Expense

38Mr. Galle states that he applied a 65% expense ratio for the parking expense in the Revised 2012 assessment pro forma, resulting in the value of $260,000.

Undistributed Expenses

39Mr. Galle states that these are expenses that are not associated with one specific department and include Administration. He referred to the chart at page 25 of his Report that lists each of the actual expenses for 2013 - 2016 and also as a percentage of the total revenue. He states that A & G expenses represent the costs associated with the administration of a hotel property and were very high in the Alt's first year of operation and then came down, ranging from 9.03% in 2013 to 6.94% in 2016. He was of the opinion that a rate in this range of 8.5% was reasonable based on the population of airport hotels for A & G. Marketing expenses ranged from a low of 4.03% in 2016 to 7.94% in 2013 at the start of operations. He states that he gave more weight to years 2015 and 2016 which ranged from 4.03% to 5.34%. He estimates a rate of 5.50% of total revenue for a stabilized Revised 2012 assessment pro forma.

40He states that he revised the undistributed expenses as follows: A & G at 8.5%, Management Fees at 5.0% of total revenue and Marketing at 5.5% of total revenue. A Franchise/Royalty Fee was not included in the Revised 2012 assessment pro forma as no fees were declared. The total aggregate expense of 19% of total revenue is slightly higher than the actual expenses in 2015 and 2016. He did not look at the actual results for 2012 to 2014 as these figures were considered to be unstable due to start-up operations.

Energy Expense

41Mr. Galle states that energy costs are property specific and are a reflection of the age, construction and condition of the property. He referred to the table at page 26 of his Report summarizing the results of operation for 2013 - 2016. He states that he kept the Energy Expense at 3% of total revenue which is line with what the Alt was achieving.

Property Operation and Maintenance Expense

42Mr. Galle states that property operation and maintenance costs are also a reflection of the age, construction and condition of the property. Occupancy also has an impact. He referred to the table at page 26 of his Report summarizing the costs incurred from 2013 - 2016. He states that he stabilized the property operation and maintenance costs at 4% which is on par with the 2015 and 2016 years and can be considered stable for the Alt.

Income Before Fixed Charges (IBFC)

43He states that this represents the hotel's income before the deductions for insurance, property tax and depreciation and is a good measure of a property's performance. It is commonly referred to as the house profit line. He referred to the table at page 27 of his Report summarizing the results of operation for 2013 - 2016. Mr. Galle states that he revised the IBFC figure in the Revised 2012 assessment pro forma valuation to $2,649,300 or $17,314 per room and 33.93% of the total revenue.

44Mr. Galle states that he compared the Alt's IBFC per room to the hotels in the comparative set and noted that the IBFC per room was below the IBFC per room of $18,993 for the Sheraton Gateway and well above the IBFC value per room for the Caroga Drive properties (range of $9,616 to $12,159). In fact, the Alt was outperforming the three Caroga Drive properties in 2014 (year 2) with an IBFC per room of $12,476.

Non-Operating Income and Expenses

Insurance

45Mr. Galle states that insurance costs are property specific. He referred to the table at page 28 of his Report summarizing the results of operation for 2013 - 2016. He states that he stabilized the insurance expense at $35,000 or $229 per room in the Revised 2012 assessment pro forma which is above all years from 2013 to 2015.

Reserve for Replacement

46He states that a reserve for replacement was set at 4% of total revenue ($312,000) in the Revised 2012 assessment pro forma.

Net Income After Fixed Charges (or the Net Operating Income (NOI))

47Mr. Galle states that he calculated the NOI as $2,302,000 ($2,649,300 (income before fixed charges) - $347,300 (total fixed charges)).

Capitalization

48Mr. Galle states that the Alt was returned for the 2012 assessment with a capitalization rate of 7.5%. The range in capitalization rates for airport hotels in the competitive set ranged from 7.5% to 8%. The Sheraton Gateway was also retuned with a capitalization rate of 7.5% whereas the Caroga Drive properties were returned with a cap rate of 8%.

49Mr. Galle opined that the base capitalization rate for the Revised 2012 assessment pro forma should remain at 7.5 %. He states that he considered the Alt's location and remaining economic life. The Alt is located at the airport directly adjacent to the end of the Train Link Terminal at the Viscount Station. It is considered to have a competitive advantage and less risk than a property further away that doesn't benefit from the ease of passenger traffic to and from the terminals at Pearson airport. In addition to being built in 2012, it is the youngest hotel at Pearson Airport and is considered to have less risk as the remaining economic life would be longer than older more depreciated properties within the vicinity of the Alt.

50He states that the effective tax rate is 1.94% for an overall cap rate of 9.44%. He adds that there was no issue with respect to the effective tax rate of 1.94%.

Assessed Value

51Mr. Galle states that the assessed value was calculated by dividing the NOI ($2,302,000) by the overall cap rate (9.44%) for an indicated value of $24,385,593 and then subtracting 15% to account for personal property for a total value of $20,727,200 (rounded) or $135,471 per room.

Direct Comparison Approach

52As a check on the reasonableness of the income approach conclusion, Mr. Galle states that he completed a direct comparison approach of the Alt to the sales of seven hotels in Peel and Halton Regions from January 1, 2010 to December 31, 2013. He considered two hotels on Creekbank Road (Residence Inn by Marriott and Courtyard Marriott) and one hotel on Caroga Drive (Fairfield Inn & Suites) to be the most comparable properties. He put the most weight on their proximity to the Alt. Mr. Galle opines that the best unit of comparison is the sale price per room. The properties on Creekbank Road are older having been constructed in 2005 and are approximately eight kilometres further away from Pearson Airport than the Alt. They had sale prices per room of $139,924 and $135,751, respectively, as set out at pages 34 and 35 of his Report. The property on Cayuga Drive is located in close proximity to Pearson Airport and was constructed in 2004. It had two sales and the sale price per room for the 2014 sale was $114,706 and represents the low end of the range.

53Mr. Galle opines that the sales are inferior in value to the Alt with its contemporary and modern design and superior location on the airport property with proximity to the Train Link that goes to Terminals 1 and 3.

54Due to the inherent differences between the Alt and the three comparable properties, Mr. Galle states that he determined that adjustments to the sale prices were necessary. A reliable way to adjust a particular hotel sale is through its RevPAR calculations.

RevPAR Adjustments

55Mr. Galle states that the RevPAR is a primary consideration of hotel purchasers as the RevPAR is a reflection of revenue producing ability. He summarized the RevPAR adjustments for the two properties on Creekbank Road and the Cayuga Drive property in the chart at page 38 of his Report. He states that the adjustment was calculated by determining the difference between a comparable hotel's RevPAR at the time of sale for the Creekbank Road properties ($101and $97, respectively) and the 2012 assessment for the Cayuga Drive property($68.25) with the Alt's proposed stabilized RevPAR of $102. The adjusted comparable sales indicated a value range from $141,132 to $172,059. To make a meaningful comparison, he states that the legislated 15% for personal property was deducted to arrive at a range of $119,962 to $146,250 per room. The RevPAR value based on the Alt's Revised 2012 assessment of $135,471 per room falls within the range. He concludes that the Alt is fairly assessed.

56Under cross-examination:

• Mr. Galle agreed that he had placed significant weight on the 2015 and 2016 results of operations as this was a unique situation in the hotel airport market citing the Alt's approximate 200% increase in the RevPAR. He opined that in a mature market with a lot of supply, the Alt was still outperforming other hotels (other than the Sheraton Gateway).
• In this particular instance, Mr. Galle did not agree that the normal starting point was to review and analyze results of operations two to three years prior to the effective date. He states that there was nothing like the Alt hotel. Even in 2012, the Alt was at the high end of its competitive set and had exceeded them in its second year of operation. He states that he used the ADR of $140 in the Revised 2012 assessment pro forma which reflected the actual ADR value in 2015.
• He agrees that 3299 Caroga Drive had two sales and that the June 2013 sale was for $16,000,000 or $94,118 per room. The adjusted sale price (less the legislated 15% for personal property) should be $120,000.

Appellant's Evidence and Submissions

57Mr. Chmeleski called Andrew Jones as the Appellant's expert witness.

58Mr. Jones states that he reviewed the detailed valuations of comparable properties in the vicinity to assist with the development of an income pro forma estimate as of the January 1, 2012 valuation date. He also conducted RevPAR and IBFCs comparison tests to measure the subject's revised pro forma value to the performance of comparable properties in the vicinity. He also reviewed comparable sales in the vicinity as a check to ensure the indicated value produced by means of the income approach was an accurate reflection of the market.

59Mr. Jones states that the pro forma valuation is a normalized income and expense statement (estimate) reconstructed from an analysis of actual results of operation and comparable properties.

60He states that as the Alt started operating in mid - 2012, there was limited financial data available to rely on to produce a 2012 assessment pro forma. Mr. Jones states that he relied on assessment data of similar properties in the vicinity that were considered to have stabilized operating statements in 2012. He agrees that the Alt had stabilized in 2015 and used these results as a check.

61Mr. Jones states that he identified six properties that he considers most similar to the Alt and its competitive set: Four Points by Sheraton Toronto Airport, the Courtyard Toronto Airport, the Hampton Inn Suites Toronto Airport, the Fairfield Inn & Suites, the Hilton Garden Inn Toronto Airport and the Sheraton Gateway Hotel Toronto Airport. He states that he reviewed the detailed valuations for these properties. The Sheraton Gateway is the top performer of the competitive set. The other hotels are similar in design to the Alt albeit that some have kitchens whereas the Alt has no kitchen. The three hotels on Caroga Drive have a shuttle bus service to the LINK Terminal that runs every 30 minutes and takes about 5 minutes. The Four Points hotel also has a shuttle service.

Revenue Analysis

Rooms Revenue

62Mr. Jones states that he referenced the actual results of operation for the Alt and the 2012 assessments of the competitive set for the ADR, occupancy rate and RevPAR (ADR x occupancy) and the total guest room revenue to determine the stabilized amounts for the Alt. He opined that an ADR of $120 and a 70% occupancy rate should be applied with a resulting RevPAR of $84.

63He referenced the 2012 assessment ADRs, occupancy rate and RevPAR of the competitive set at page 26 of his Report. The average 2012 assessment ADR of the six hotels is $118 and the average occupancy is 69.33%.

64In oral testimony, he referenced the Hotel Valuation Index for Toronto Airport West that indicates RevPARs steadily increasing year over year and which he opines tells of the need to make an adjustment. He applied the average market differential with a resulting RevPAR of $87. He concluded that his RevPAR of $84 is reasonable and in line with the market and the performance of the Alt.

Food and Beverage Revenue

65Mr. Jones states that the Alt offers a lobby bar which serves drinks and an "Altcetera Counter" with beverages and ready to eat dishes that is open 24 hours a day. The hotel also offers meeting room rental space with outside food and beverage catering. Mr. Jones relied on the 2014 - 2016 actual profit and loss statements for the Alt to arrive at a reasonable income as he is of the opinion that this is more accurate than relying on the market or other comparable hotels. Food and beverage revenue is typically unique to a specific hotel.

66He analyzed the 2014 - 2016 food and beverage revenue as a percentage of guest room revenue at page 27 of his Report. He calculated the food and beverage revenue as a percentage of guest room revenue (average of 31.95%) multiplied by guest room revenue of $4,690,980 for a resulting value of $1,456,549.

Other Operated Department Revenue

67Mr. Jones opines that other operated departmental income is typically unique to a specific hotel and, in this case, mainly parking revenue. He states that he relied on the 2014 - 2016 actual profit and loss statements to arrive at a reasonable income rather than relying on the market or other comparable hotels. He calculated the other operated department revenue as a percentage of guest room revenue (average of 8.62%) multiplied by guest room revenue of $4,690,980 for a resulting value of $404,362.

Total Revenue

68He states that he calculated the total operating revenue as $6,551,892.

Departmental Expenses

69Mr. Jones referenced the 2012 assessment guest room expenses of the competitive set at page 28 of his Report noting the average is 30.83%. He states that he applied a 31% rooms expense ratio which is in line with what the Alt achieved in 2015 (29.5%) and which is at the lower end of the range of the competitive set.

Food and Beverage Expenses

70Mr. Jones referenced the 2012 assessment guest room expenses of the competitive set at page 29 of his Report noting the average is 78.60%. He notes in his Report that the Alt has a large portion of food and beverage revenue generated from food and beverage catering and meeting room rental. He opined that a 65% food and beverage expense (which is at the lower end of the range of the competitive set) is reasonable.

Other Operated Departments

71Mr. Jones stated that other operated departmental income and expenses is property specific. He states that he relied on the Alt's actual 2014 - 2016 departmental expenses (primarily parking) as referenced at page 29. He applied a 50% other operated departmental expense.

Undistributed Expenses

A & G Operating Expenses

72Mr. Jones referenced the 2012 assessment A & G expense as a percentage of total revenue of the competitive set at page 30 of his Report and noted that the average is 10.5% and the median is 10%. He opines that 10% is a reasonable percentage for the A & G expenses. The resulting A& G expense is $655,189.

Sales and Marketing Expense

73Mr. Jones referenced the 2012 assessment sales and marketing expense as a percentage of total revenue of the competitive set at pages 30 and 31 of his Report and notes that the average is 6.17 % and the median is 5.75%. He is of the opinion that 6% is a reasonable percentage for sales and marketing. He states that the total sales and marketing expense is $393,114.

Maintenance and Repairs (R & M)

Utilities

74Mr. Jones referenced the 2012 assessment utilities expense as a percentage of total revenue of the competitive set at page 31 of his Report and notes that the average is 4.33% and the median is 4.5%. He opined that 4% is a reasonable percentage for sales and marketing. The total utilities expense is $262,076.

Management

75He states that a 5% management fee is uniformly applied by MPAC to all hotel properties under Ontario Regulation 370/03.

76The total aggregate expense is 21% of total revenue.

Fixed Charges

Insurance

77Mr. Jones is of the opinion that an insurance expense should be stabilized at $35,000.

Reserve for Replacement

78Mr. Jones states that he applied an allowance for reserve for replacement of 4% of total revenue ($6,551,892 X 4%) resulting in the value of $262,076.

Net Income After Fixed Charges (or the NOI)

79Mr. Jones states that the NOI is $1,751,625.

Overall Capitalization Rate

80Mr. Jones states that MPAC applied a base capitalization rate of 7.5%. MPAC also applied base capitalization rates of 7.5% to the Sheraton Gateway, the best performer, and 8.0% to the other five properties in the competitive set.

81Mr. Jones opined that the base rate should be higher than the Sheraton Gateway but lower than the remaining competitive set and should be set at 7.75%. The Alt has greater accessibility to the Airport than the remainder of the competitive set that requires shuttle buses from their respective locations. The Sheraton Gateway has advantages to the Alt in terms of being directly accessible to Terminal 3 via a walkway and access to on-site covered parking. The parking for the Alt requires crossing Viscount Road to an uncovered parking lot.

Determination of the Revised 2012 Assessment

82There was no issue with respect to the effective tax rate of 1.94%. Mr. Jones divided the net operating income ($1,751,625) by the overall capitalization rate of 9.69% to yield a value of $18,076,630. He then applied the standard deduction for personal property of 15%.

83Mr. Jones is of the opinion that the Revised 2012 assessment for the Alt is $15,365,000 (rounded).

84Mr. Jones states that the Alt's indicated Revised 2012 assessment per room is $100,425. He referenced the average and median assessments per room of the competitive set of $85,573 and $77,069, respectively. In his opinion, the Revised 2012 assessment for the Alt is in line with the competitive set.

85Mr. Jones states that another check to show the reasonableness of the Revised 2012 assessment is the RevPAR comparison and the IBFC comparison. He referenced the RevPAR and IBFC comparison for the competitive set at page 37 of his Report. The median RevPAR multiplier is 1,011.12 and the median IBFC multiplier is 7.31. He states that the RevPAR multiplier and the IBFC multiplier for the Alt are 1,195.53 and 7.50, respectively. He asserts that as the multipliers of the Alt fall above the competitive set, this indicates that the Revised 2012 assessment is reasonable.

86Lastly, as another check, he looked at sales of comparable hotels between 2011 and 2013. He adjusted the sale prices by 15% to account for the removal of chattels. He determined a range of adjusted sale prices per room from $42,000 to $118,935. He asserts that the Alt's Revised 2012 assessment per room of $100,425 falls within the range.

87Mr. Jones concludes that the Alt's correct and equitable 2012 assessment for the 2013 - 2016 taxation years is $15,365,000.

Board's Analysis and Findings

Current Value

88The Alt is a unique property in terms of its contemporary and modern design, its superior location on airport property at the end of the Terminal LINK Train line and its runaway success. It opened in mid-2012 and has since enjoyed tremendous success.

89Both parties agree on the use of a pro forma valuation to represent stabilized income, expenses and capitalization of the NOI into an estimate of value. They also agree that the Alt's income stabilized around 2015 and that the Sheraton Gateway is at the top end of the competitive set of hotel properties. There is no issue with the 4% of total revenue for property maintenance and repairs, the insurance expenses cost of $35,000, the 5% management fee, the reserve for replacement expense fixed at 4%, the effective tax rate of 1.94% of total revenue. However, they differ in their approach in estimating the ADR, the level of occupancy and the base capitalization rate.

Revenue Analysis

Room Revenue

90The as returned 2012 assessment pro forma guest rooms' revenue is based on an ADR of $149 and an occupancy level of 73%. Actual results indicate that the Alt had average daily rates of $116.56 in 2013, $125.58 in 2014, $139.83 in 2015 and $151.60 in 2016 and occupancy level of 53.32% in 2013, 66.24 % in 2014, 74.91% in 2015 and 81.17% in 2016.

91MPAC's expert, Mr. Galle, revised the ADR to $140 and retained the 73% level of occupancy in the Revised 2012 assessment pro forma.

92The Appellant's expert, Mr. Jones, revised the ADR to $120 and the level of occupancy to 70%.

93Both experts referred to a competitive set of hotels. They differed in that MPAC's set includes an additional hotel, the Sheraton Toronto Airport Hotel.

94The Board prefers Mr. Galle's approach. He compared the Alt's ADR of $140 and the occupancy level of 73% to a competitive set of hotels in the airport market area. These properties are all full service hotels and include properties both inferior and superior to the Alt. The range of the ADRs is $105 to $150 and the range for the level of occupancy is 60% to 87%.

95The Board finds that the Sheraton Gateway Hotel at Terminal 3 sets the upper limit of the range in terms of location, type and quality. It is a superior property as reflected in its 2012 assessment ADR of $150 and occupancy level of 87%. The Board finds that it exhibits a tremendous locational advantage being integrated into Terminal 3 at Pearson Airport. In addition, it has extensive food and beverage revenue with roughly 16,000 square feet of conference space as compared to the Alt which is a limited service hotel.

96The Board finds the properties located at 3279, 3299 and 3311 Caroga Drive (Hampton Inn & Suites, Fairfield Inn & Suites and Hilton Garden Inn), 6257 Airport Road (Four Points Sheraton) and 801 Dixon Road (Sheraton Toronto Airport Hotel) are inferior to the Alt in terms of location. They are located in the vicinity of the Alt and compete for market share. The Alt is located on the airport site at the end of the Train Link Viscount Station Terminal and has a significant competitive advantage over the other hotels on Caroga Drive that rely on a shuttle service, with wait times, to the Train Link Station. The Board agrees that one would expect a higher occupancy and ADR for the Alt than for these hotels located further away from the Airport.

97The superior hotel, the Sheraton Gateway, has a 2012 assessment ADR of $150 and an occupancy level of 87%. Inferior properties on Caroga Drive have 2012 assessment ADRs of $105 to $120 and occupancy levels of 65% to 70%. The average and median 2012 assessment ADRs of the seven properties in the competitive set are $121 ($118 if the Sheraton Toronto Airport Hotel is excluded) and $118 ($114 if the Sheraton Toronto Airport Hotel is excluded), respectively. The average and median 2012 assessment occupancy levels of 69% (69.3% if the Sheraton Toronto Airport Hotel is excluded) and 67% (67% if the Sheraton Toronto Airport Hotel is excluded).

98The Board finds that the Alt was already hitting the median 2012 assessment ADR of $118 for the full competitive set of hotels and had exceeded it in its second full year of operation and had reached an ADR of $151.60 in 2016.

99The Board also finds that the Alt was almost hitting the median 2012 assessment occupancy level of 67% for the full competitive set of hotels in its second full year of operation and had reached an occupancy level of 81.17% in 2016.

100The Board finds that the Alt's results stabilized in 2015. Mr. Galle lowered the Alt's ADR to $140 which reflects what it was achieving in 2015 at $139.83.

101Similarly, the Alt's occupancy rate was 53% in its first year of operation in 2013 and 81% in 2016. The Sheraton Gateway had a 2012 assessment occupancy of 87% while the range of inferior properties was between 60% and 70%. The occupancy level of 73% as used in the as returned 2012 assessment pro forma was reasonably close to that found in year 2015 which was about 3 years into operation. Mr. Galle retained the occupancy percentage of 73%.

102Given the quality, age, design, and superior location of the Alt hotel, the Board finds an ADR of $140 and an occupancy level of 73% to be fair and reasonable in comparison with hotels in its competitive set.

103Based on an ADR of $140, an occupancy level of 73% and 153 rooms, room revenue is estimated at $5,707,400. This amount is slightly lower than what was achieved in 2015 and well below what was achieved in 2016.

Food and Beverage Revenue

104In the as returned 2012 assessment pro forma, food revenue was estimated at $1,000,000. Both Mr. Galle and Mr. Jones referenced actual operating results for the Alt in revising the food revenue amount for the 2012 assessment. Mr. Jones considered results for 2014 - 2016 as a percentage of guest room revenue for an average value of 31.05%. The Board prefers Mr. Galle's approach based on the results of operation for 2015. The Board agrees that the revised food revenue of $1,700,000 (or 21.77 % of total revenue) is a reasonable stabilized amount as the Alt reported $1,825,000 for food revenue in 2015 and $2,033,783 in 2016. It represents 29.79% of room revenue and is reasonably close to the average of 30.82% for stabilized years 2015 and 2016.

Telephone Revenue

No telephone income was reported in the results of operation and $0 was applied in the as returned 2012 assessment pro forma and in Mr. Galle's Revised 2012 assessment pro forma. Mr. Jones did not specifically address this revenue item. The Board will apply zero dollars for telephone revenue.

Parking Revenue

105Mr. Jones opined that other operated departmental income is typically unique to a specific hotel and, in this case, mainly parking revenue. His revised figure is $404,362 as a percentage of guest room revenue (average of 8.62% for 2014 - 2016) multiplied by guest room revenue. Mr. Galle stated that the as returned 2012 assessment pro forma applied zero dollars for parking revenue as this estimated revenue was accounted for in other operated department revenue at $310,000. He considered the actual results of operation and he stabilized the parking revenue at $400,000, which is below the parking revenues of $461,060 in 2015 and $493,050 in 2016. The Board prefers Mr. Galle's approach based on stabilized years 2015 and 2016 and includes parking revenue at $400,000 as a reasonable stabilized amount.

Total Operating Revenue

106For the Revised 2012 assessment pro forma, the Board estimates a total operating revenue of $7,807,400.

Departmental Expenses

Guest Rooms Expenses

107Mr. Jones applied a 31% rooms expense ratio which is in line with what the Alt achieved in 2015 (29.5%) and which is at the lower end of the range of the competitive set. Mr. Galle explained that the Alt's room expenses have trended down from 35.66% in 2013 to 27.15% in 2016 as the property stabilized. The median rooms expense for the Region 15 hotel market ranged from 32% in 2010 to 33% in 2012 and given what the Alt achieved, he applied a 30% rooms expense ratio in the Revised 2012 assessment pro forma, resulting in the value of $1,712,200. The Board prefers Mr. Galle's approach as it is in line with what the Alt achieved in 2015 (29.37%).

Food and Beverage Expenses

108Mr. Jones referenced the 2012 assessment guest room expenses of the competitive as an average of 78.60%. He was of the opinion that a 65% food and beverage expense (which is at the lower end of the range of the competitive set) is reasonable. The actual food and beverage expense was 68.17% in 2015 and 64.79% in 2016. Mr. Galle stated that he applied a 68% expense ratio for the Food and Beverage Expense in the Revised 2012 assessment pro forma, resulting in the value of $1,156,000. The Board prefers Mr. Galle's approach as it is line with what the Alt achieved in 2015.

Other Operated Departments

Parking Expense

109Mr. Jones relied on the Alt's actual 2014 - 2016 departmental expenses (primarily parking) and applied 50% expense ratio as other operated departmental income and expenses is property specific. Mr. Galle applied a 65% expense ratio for the Parking Expense in the Revised 2012 assessment pro forma, resulting in the value of $260,000. The Board prefers Mr. Galle's approach as the resulting value of $260,000 is more in line with 2015 expenses of $250,700.

Total Departmental Expenses

110For the Revised 2012 assessment pro forma, the Board estimates total department expenses of $3,126,200.

Total Departmental Profit

111For the Revised 2012 assessment pro forma, the Board estimates total department profit of $4,679,200.

Undistributed Expenses

A & G Operating Expenses

112Mr. Jones referenced the 2012 assessment A & G expense as a percentage of total revenue of the competitive set with an average of 10.5% and a median is 10%. He is of the opinion that 10% is a reasonable percentage for the A & G expenses. Mr. Galle considered actual results that were very high in the first year of operation and then came down, from 9.03% in 2013, to 8.58% in 2014, to 7.52% in 2015 and to 6.94% in 2016. He was of the opinion that a rate in the range of 8.5% was reasonable based on the population of airport hotels for A & G. The Board agrees with Mr. Galle's approach and notes that actual results were always below 10%. The Board sets the resulting value at $663,600.

Sales and Marketing Expense

113Mr. Jones referenced the 2012 assessment sales and marketing expense as a percentage of total revenue of the competitive set with an average of 6.17% and a median of 5.75%. He is of the opinion that 6% is a reasonable percentage for sales and marketing. Mr. Galle noted that marketing expenses ranged from a low of 4.03% in 2016 to 7.94% in 2013 at the start of operations. He gave more weight to years 2015 and 2016 which ranged from 4.03% to 5.34% for an estimated rate of 5.50% of total revenue. The Board agrees with Mr. Galle's approach. The estimated rate of 5.50% is in line with the actual result of 5.34% for 2015 and the median of 5.75% for the competitive set. The Board sets the resulting value at $429,400.

Property Operations and Maintenance Expense

114Both parties agree that 4% is a reasonable percentage of total revenue. The Board sets property operations and maintenance expenses at $312,300.

Utilities

115Energy costs are property specific and are a reflection of the age, construction and condition of the property. Mr. Jones referenced the 2012 assessment utilities expense as a percentage of total revenue of the competitive set noting that the average is 4.33% and the median is 4.5%. He is of the opinion that 4% is a reasonable percentage for utilities. Mr. Galle referenced the results of operation for 2013 - 2016. He kept the energy expense at 3% of total revenue which is line with what the Alt was achieving in 2015. The Board prefers Mr. Galle's approach as it is more reflective of the age and condition of the Alt and sets the utilities expense at $234,000.

Total Undistributed Expenses

116The Board sets total expenses at $1,639,500.

Management Fees

117The parties agree that a 5% management fee is uniformly applied by MPAC to all hotel properties under Ontario Regulation 370/03.

Income Before Fixed Charges (IBFC)

118The Board sets the IBFC value at $2,649,300 or $17,314 per room and 33.93% of the total revenue.

Non-Operating Income and Expenses

Insurance

119The parties agree on a stabilized insurance expense of $35,000.

Reserve for Replacement

120The parties agree on a 4% allowance as a reserve for replacement.

Net Income after Fixed Charges (or NOI)

121The NOI is set at $2,302,000 ($2,649,300 (income before fixed charges) - $347,300 (total fixed charges)).

Capitalization

122The Alt was returned for the 2012 assessment with a capitalization rate of 7.5%. The range in capitalization rates for airport hotels in the competitive set ranged from 7.5% to 8%. The Sheraton Gateway was also retuned with a capitalization rate of 7.5% whereas the Caroga Drive properties were returned with a capitalization rate of 8%.

123Mr. Galle was of the opinion that the base capitalization rate for the Revised 2012 assessment pro forma should remain at 7.5 %. He considered the Alt's location and remaining economic life. The Alt is located at the airport directly adjacent to the end of the Train Link Terminal at the Viscount Station. It is considered to have a competitive advantage and less risk than a property further away that doesn't benefit from the ease of passenger traffic to and from the terminals at Pearson Airport. In addition to being built in 2012, it is the youngest hotel at Pearson Airport and is considered to have less risk as the remaining economic life would be longer than older more depreciated properties within the vicinity of the Alt.

124MPAC also applied a base capitalization rate of 7.5% to the Sheraton Gateway, the best performer, and a base capitalization rate of 8.0% to the other five properties in the competitive set.

125Mr. Jones opined that the base capitalization rate should be higher than the Sheraton Gateway but lower than the remaining competitive set and should be set at 7.75%. The Alt has greater accessibility to the Airport than the remainder of the competitive set that requires shuttle buses from their respective locations. The Sheraton Gateway has advantages to the Alt in terms of being directly accessible to Terminal 3 via a walkway and access to on-site covered parking. The parking for the Alt requires crossing Viscount Road to an uncovered parking lot.

126The Board agrees with Mr. Galle's approach and sets the base capitalization rate at 7.5%. The Board finds that the Alt's base capitalization rate should remain at 7.5%. Like the Sheraton Gateway, it enjoys a locational advantage. Being "new", it has a long remaining economic life. It also has a distinct competitive advantage over the Caroga Drive properties due to its unique location directly adjacent to the end of the Train Link Terminal and its age and remaining economic life.

Determination of the Revised 2012 Assessment

127The Board has divided the net operating income of $2,302,000 by the overall capitalization rate of 9.44% (that includes the effective tax rate) to yield a value of $24,385,593. The Board then subtracted the standard deduction for personal property of 15% for a total value of $20,727,200 (rounded).

128The Boards finds the current value of the Alt is $ 20,727,200.

Whether there should be an equitable reduction of the current value pursuant to s. 44.(3)(b) of the Act, and, if so, what should the amount of this reduction be?

129Mr. Galle states that he considered 13 hotel properties located in Brampton and Mississauga in Region 15 with sales between October 2011 and September 2013 to address the equity test in s. 44.(3) (b) of the Act. He referenced them at page 41 of his Report.

130Mr. Galle states that the standard for hotel properties is a 0.85 ratio due to the legislated deduction of personal property of 15% in calculating current values of hotels. A median Assessment to Sales Ratio ("ASR") that falls reasonably close to the standard of 0.85 tells the assessor that the current value assessments are reflective of sales in the vicinity.

131Mr. Galle states that the sales of similar properties in the vicinity disclose ASRs ranging from 0.61 to 1.00 with a median ASR of 0.89. He concludes that he was satisfied that similar properties in the vicinity have been assessed at their current values.

132Mr. Galle concludes that the correct current value of the Alt is $20,727,000 based on the pro forma method of the income approach to value which in his opinion provides the most reliable indication of current value. He recommends that the Board confirm the 2012 assessment as originally returned at $20,614,000 that is slightly lower.

133The Appellant did not take a position on whether an equitable adjustment is required.

134The Board finds that the evidence before it does not support the conclusion that an equitable adjustment is required.

CONCLUSION

135As directed by s. 44.(3)(a) of the Act, the Board finds that the current value of the Alt, as of the valuation day of January 1, 2012, to be $20,727,000 based on the pro forma method of the income approach to value. Furthermore, the Board finds that the evidence before it does not support the conclusion that an equitable adjustment is required under s. 44.(3)(b) of the Act.

136No notice of a higher assessment was filed with the Board. The Board confirms the assessment for the Alt hotel located at 6080 Viscount Road at $20,614,000 for the 2013 - 2016 taxation years.