Assessment Review Board

Commission de révision de l’évaluation foncière

ISSUE DATE: March 06, 2020 FILE NO.: WR 163345

Assessed Person(s): Adelaide North Developments Inc. Appellant(s): Adelaide North Developments Inc. Respondent(s): Municipal Property Assessment Corporation Region 23 Respondent(s): City of London

Property Location(s): 863-869 Adelaide Street North Municipality(ies): City of London Roll Number(s): 3936-020-211-02411-0000 Appeal Number(s): 3227326, 3227325, 3241343, 3313036 and 3365796 Taxation Year(s): 2015, 2016, 2017, 2018 and 2019 Hearing Event No.: 726677

Legislative Authority: Section 33 and Section 40 of the Assessment Act, R.S.O. 1990, c. A.31

APPEARANCES:

Parties	Counsel+/Representative
Adelaide North Developments Inc.	Yossef Lavie
MPAC	William Somerville, Louis Biscaro and Jennifer Williston
City of London	No one appeared

HEARD: November 20, 2019 in person

ADJUCATOR: Dan Weagant, Member

DECISION

OVERVIEW

1The subject property, a multi-family project in three separate buildings, experienced a fire in one of the buildings prior to the 2015 taxation year. The damaged building was subsequently renovated and brought back to a leasable condition. The assessment had been reduced as a result of the fire damage. To reflect the property’s renovated condition, MPAC applied an omitted assessment, effective August 1, 2015, in the amount of $4,230,000 under s. 33 of the Assessment Act (the “Act”). This same amount was applied by MPAC on January 1, 2016 to reflect the added value of the fire repairs.

2The Appellant appealed the omitted values for the 2015 and 2016 taxation years along with the returned value for the 2017 taxation year, under s. 40 of the Act. The 2017 appeal was deemed for the 2018 and 2019 taxation years. The assessed value returned by MPAC for 2017, 2018 and 2019 was $5,189,000.

3The property was developed and constructed through an agreement under the Canada-Ontario Affordable Housing Program (“Program”). The Program supported the project through financing from the Municipal, Provincial and Federal governments. In turn, the proponent entered into an agreement that provides for the supply of housing at lease rates below market value.

Issues

4Issue 1a – The key dispute in these appeals is the appropriate rent to apply to the units at the subject property. Rental income is a fundamental factor in determining the gross income which, in turn, is necessary to determine the current value for the two valuation days under appeal.

5Issue 1b – The Board must also decide if the subject property’s status as a subsidized affordable housing project is a determining factor in what rents are used to calculate current value.

6Issue 2a – Once the applicable rents are determined, the Board must decide the current value of the subject property for the years under appeal.

7Issue 2b – The Board must also decide if the current value determined is equitable when reference is made to the assessments of similar properties in the vicinity. For this property, these two decisions must be made for each of the two valuation days applicable to the years under appeal. For the 2015 and 2016 taxation years, the valuation day is January 1, 2012. For the 2017, 2018 and 2019 taxations years, the valuation day is January 1, 2016.

8Once the Board determines the assessment of the subject property for the 2015 and 2016 taxation years, it must then determine the value of the omitted assessment applied by MPAC effective August 1, 2015 and January 1, 2016.

Areas of Agreement

9There is no dispute between the parties as to the effective dates of the omitted assessments applied by MPAC. The parties also agree that the income approach to value is the correct method of determining the current value of the subject property.

Result

10The Board finds that market rents are the correct source in determining gross income for the subject property. The Board finds the current value of the subject property, for the 2015 and 2016 taxation years is $5,091,000. The Board also finds that there is evidence to support a reduction in this amount in order to make it equitable with the assessments of similar lands in the vicinity.

11Accordingly, the assessment of 863 – 869 Adelaide Street North is reduced from $6,258,000 to $4,758,000 for 2015 (effective August 1, 2015) and 2016 (effective January 1, 2016). This result indicates that the value of the omitted assessment, with an effective date of August 1, 2015 is reduced from $4,230,000 to $2,730,000, in the Multi-Residential property class. This same result applies to the omitted assessment with the effective date of January 1, 2016.

12The Board finds that the current value of the subject property for the 2017, 2018 and 2019 taxation years is $5,189,000. The Board also finds that there is no evidence to support a reduction in this value when reference is made to the assessments of similar properties in the vicinity.

13Accordingly, the assessment of 863-869 Adelaide Street North is confirmed at $5,189,000 for the 2017, 2018 and 2019 taxation years, in the Multi-residential property class.

analysis

Issue 1a – What Rents Determine Current Value

MPAC’s case

14MPAC maintained that Fair Market Rents (“FMR”) are the only suitable rents to use when determining current value for multi-residential properties. MPAC submitted that any other source of rental income, include actual rent, does not adequately reflect the market and consequently, would not meet the definition of current value in the Act.

15MPAC further submitted that the actual rents generated from the property could reflect property management and financing decisions that are specific to one property. In this case, it submits that the actual rental income of the subject property is controlled by an agreement with the local, provincial and federal governments. This agreement sets rents at affordable levels that are below market rents.

16MPAC maintained that the agreement, while it set rents to levels below the wider market place, also provided financing to support the project in its construction. In MPAC’s view this financing component compensates the owner/operator of the project for the reduced rental income over the life of the agreement. MPAC views the agreement as a financing instrument and is no different from any financing on any other comparable property in the market.

17To support its position, MPAC cited two previous decisions of the Board: Elgin and St. Thomas Housing Corp. v. Municipal Property Assessment Corp. Region No. 23, [2008] O.A.R.B.D. No. 222 (“Elgin”) and Reeves Realty Corp. v. Municipal Property Assessment Corp., Region No. 23, [2016] O.A.R.B.D. No 74 (“Reeves”).

18In Elgin, the subject property was developed through an agreement under the Social Housing Reform Act that required the proponent to agree to reduced rents for a period of time, with an element of financing at the outset of the project to compensate the proponent for the loss of revenue represented by the affordable rents. MPAC submitted that Elgin and the current property under appeal are identical situations. In the present case the social program has a different name, but the effects of the program are the same.

19MPAC submitted the Board’s decision in Elgin should be applied in this case. That decision, in paragraphs 21 and 22 states:

21 The Board finds that the constraints of the Social Housing Reform Act are an encumbrance against the subject property, and that the price it would realize if sold at arm’s length by a willing seller to a willing buyer should be calculated on the basis of the typical market rents it would achieve if not subject to these constraints, and not on the basis of the much lower actual rents it achieves because of the restraints.

22 If this were not so, it would result in the absurd situation of two identical buildings on identical lots, next to each other, being assessed at significantly different current values, because one is subject to the constraints of the Social Housing Reform Act, and the other is not.

20In Reeves, the Board made the same finding, for the same reasons. MPAC summarized its position by submitting that making a current value decision on the reduced rents stipulated by the subject agreement would provide the proponent with the financial incentives included in the agreement as well as reduced property taxes for the life of that agreement.

The Appellant’s Case

21The Appellant submitted that the reduced rental income from the property over the life of the agreement means that it cannot be sold for a price that reflects the open market. In addition, the Appellant adduced a rent roll summary showing that when the actual rents are used, the property operates at a loss. He submitted that a property subject to such an agreement would have to operate at a loss as all other expenses are equal to the levels present in the broader market place.

22The Appellant summarized his position as being unfair because of the agreement he signed under the Program. He argued that to determine a current value based on FMR puts the operator of the subject property at a financial disadvantage.

Finding on Issues 1a and b

23An informative case related to the use of market vs. actual rents for the purposes of determining current value is Cardinal Plaza Ltd. et al. and Regional Assessment Commissioner, Region No. 19 et al., 1984 CanLII 1841 (ON CA), 49 O.R. (2d) 161 (“Cardinal”) whereby the Ontario Court of Appeal found that “…an equitable assessment of multi-residential properties based on the income approach must necessarily use economic rents rather than actual rents.”; adding: “The Court rejected the argument that the calculation should be based upon the actual rents then payable under existing leases.”

24Cardinal is clear. When the income approach is being used to calculate current value, economic or market rents must be used over actual rents. Elgin further refines this approach by confirming that, even when the actual rents are restricted to levels below market rents by a government agreement, FMR must still be used. Otherwise, to quote member Birnie in Elgin, “If this were not so, it would result in the absurd situation of two identical buildings on identical lots, next to each other, being assessed at significantly different current values…”

25The Board finds that both Cardinal and Elgin are on point in the present case. Accordingly, the Board finds that the market rents in evidence are the correct rents to be used in the calculation of current value of the subject property.

Issue 2a (2015, 2016) – What is the Current Value of the subject property for the 2015 and 2016 taxation years?

MPAC’s Case – Application of GIM

26For all taxation years with the January 1, 2012 valuation day, MPAC applied the gross income approach to value. The gross income approach takes the Gross Potential Income (“GPI”) of a property and applies a Gross Income Multiplier (“GIM”) to arrive at a current value. The GIM applied by MPAC is derived from the sales of other comparable properties in the market and their respective gross incomes. The GIM considers the operating costs and capitalization of Multi-residential properties in the same market.

27MPAC testified that different types of Multi-residential properties reflect different GIMs. Walk up apartments represent a different market than Townhouse dwellings. For that reason, the three buildings at the subject property were divided into the two housing types for valuation purposes. By applying the FMRs to the subject property, MPAC determined the current value of the subject property, as follows:

Walk up Apartments Gross Potential Income: $470,122 Market GIM: 10.52 Indicated Current Value: $4,947,155

Row / Town Houses Gross Potential Income: $109,584 Market GIM: 11.96 Indicated Current Value: $1,310,949

Total Current Value: $6,258,104

28On further review of the sales of the six most similar walk-up apartment properties in MPAC’s sample of comparable properties, the GIMs were considerably smaller than 10.52 as applied originally.

29This analysis resulted in MPAC revising the GIM applicable to walk up apartments to 8.04. When applied to the Gross Potential Income of the walk-up apartment portion of the site, the indicated current value of the entire property was reduced to $5,090,740, or $5,091,000, rounded. MPAC submitted this lower value as a reasonable current value, base on the best sales evidence available.

The Appellant’s Case

30The Appellant held to his belief that the FMRs were wrong in this case, because of the influence of the reduced rental income derived from the social housing agreement. He adduced no further evidence with respect to the current value determination for the 2015 and 2016 taxation years.

Findings on Issue 2a, Current Value (2015, 2016)

31The best evidence of current value when a sale of the subject property is not available, are the sales of comparable properties in proximity to the valuation day. In this instance, the calculation of a current value on the subject property is complicated by the two types of multi-residential units present. The Board heard from MPAC that sales of walk-up apartments in the London area that occurred within 12 months of the valuation day indicated a median GIM of 8.04, as opposed to the 10.92 GIM applied when the current value of the subject property was returned. By applying the lower GIM, MPAC arrived at a current value of the subject property of $5,091,000.

32MPAC’s approach to determining this current value was not refuted by the Appellant. The Board finds MPAC’s approach to be a correct one in the circumstances. The current value of the subject property is reduced from $6,258,000 to $5,091,000.

Issue 2a (2017, 2018, 2019) – What is the Current value of the subject property for the 2017, 2018 and 2019 Taxations years?

MPAC’s Case – Net Income Approach to Value

33For taxation years with a valuation day of January 1, 2016, MPAC applied the net income approach to value, whereby the FMR are used to generate a gross income. This gross income is then reduced by two market-based allowances: one to account for vacancy and one to account for expenses. The result is the net income for the property. This value is then divided by a market-based capitalization rate that has been derived from the sales of comparable properties in comparison to their respective net incomes.

34MPAC’s calculations are summarized as follows:

Walk up Apartments Gross Income*: $436,608 Vacancy Allowance: 4.3% Expense Allowance: 44% Net Operating Income: $233,986

Row / Town Houses Gross Income*: $102,420 Vacancy Allowance: 4.3% Expense Allowance: 38% Net Operating Income: $60,769

*Based on Fair market Rents

35MPAC totalled the Net Operating Income (NOI) from the two different building types at $294,755. To capitalize the NOI MPAC applied two different capitalization rates, as follows:

Walk Up Apartments Net Operating Income: $233,986 Capitalization rate: 5.5% Estimate of Current Value: $4,254,290

Row / Town House Net operating Income: $60,769 Capitalization rate: 6.5% Estimate of Current Value: $934,907

Total Estimated Current Value: $5,189,197

36The total estimated current value calculated for the two housing types at the subject property by MPAC is $5,189,197 ($5,189,000, rounded).

The Appellant’s Case

37The Appellant submitted only that the actual rents should be used to arrive at a current value for the years under appeal. It had no issue with the approach taken by MPAC in arriving at its finding.

Findings on Issue 2a, Current Value (2017, 2018, 2019)

38The Board finds that the current value of the subject property for the 2017,2018 and 2019 taxation years is $5,189,000.

39When the subject property has not sold, the best means of determining its value is using the sales of comparable properties. MPAC used the market-based vacancy allowance and expense allowance for the two multi-residential unit types present at the subject property. This was the best evidence of current value for the 2017, 2018 and 2019 taxation years.

Issue 2b – Is a Reduction in the Current Value necessary to achieve Equitable Assessment when reference is made to the Assessments of similar Properties in the Vicinity for the 2015 and 2016 taxation years?

The Appellant’s Case

40The Appellants did not make a submission on the specific question of equity of assessment.

MPAC’s Case

41MPAC submitted an equity analysis that compared the sale values (time adjusted to the January 1, 2012 valuation day in the Act) of 27 multi-residential properties in the vicinity of the subject property to their corresponding assessments. This type of comparison is a common means of determining if similar properties in the vicinity are equitably assessed. The comparison of these time adjusted sale values to assessments is called the Sale to Assessment Ratio (“SAR”). The range of SARs in the sample was from 0.54 to 1.30, with a median of 1.07.

42The median SAR, according to MPAC, means that properties that are similar to the subject property and in the same vicinity, have current values that are higher than their respective assessments by approximately 7%.

Findings on Issue 2b, Equity Reductions (2015-2016)

43The concept of reducing the current value determined to make the subject property’s assessment equitable with that of similar properties in the vicinity requires the Board to change a correct assessment finding to one that is incorrect to make it fair and equitable. Adjustments for this purpose cannot therefore be made without strong evidence to do so.

44MPAC’s equity analysis indicates that, when the assessments of 27 similar properties in the vicinity of the subject property are compared with their time adjusted sale values, the result shows that properties are generally assessed below their current value, by approximately 7%. This is strong evidence that assessments of similar properties in the vicinity are assessed below their respective current values.

45Accordingly, the current value determined of $5,091,000 is reduced by a factor of 7%, for a value of $4,757,943 ($4,758,000 rounded), for the purposes of achieving equitable assessment.

Issue 2b – Is a Reduction in the Current Value necessary to achieve Equitable Assessment when reference is made to the Assessments of similar Properties in the Vicinity for the 2017, 2018 and 2019 taxation years?

Appellant’s Case

46The Appellant did not make a submission on the question of equity of assessment for the 2017, 2018 and 2019 taxation years.

MPAC’s Case

47MPAC submitted a table that compared the sale values (time adjusted to the January 1, 2016 valuation day in the Act) of 30 multi-residential properties in the vicinity of the subject property to their corresponding assessments. This type of comparison is a common means of determining if similar properties in the vicinity are equitably assessed. The comparison of these time adjusted sale values to assessments is called the Sale to Assessment Ratio (“SAR”). The range of SARs in the sample was from 0.745 to 1.343, with a median of 1.012.

48The median ASR, according to MPAC, means that properties that are similar to the subject property and in the same vicinity, have current values that are higher than their respective assessments by approximately 1.2%. This is not strong evidence that similar properties in the vicinity are assessed at a value below their respective current value. No adjustment to the current value of $5,189,000 is therefore necessary for the assessment to be considered equitable.

CONCLUSION

49The Board finds the current value of the subject property, for the 2015 and 2016 taxation years is $5,091,000. The Board also finds that there is evidence to support a reduction in this amount in order to make it equitable with the assessments of similar lands in the vicinity.

50Accordingly, the assessment of 863 – 869 Adelaide Street North is reduced from $6,258,000 to $4,758,000 for 2015 (effective August 1, 2015) and 2016 (effective January 1, 2016). This result indicates that the value of the omitted assessment, with an effective date of August 1, 2015 is reduced from $4,230,000 to $2,730,000, in the Multi-Residential property class. This same result applies to the omitted assessment with the effective date of January 1, 2016.

51The Board finds that the current value of the subject property for the 2017, 2018 and 2019 taxation years is $5,189,000. The Board also finds that there is no evidence to support a reduction in this value when reference is made to the assessments of similar properties in the vicinity.

52Accordingly, the assessment of 863-869 Adelaide Street North is confirmed at $5,189,000 for the 2017, 2018 and 2019 taxation years, in the Multi-residential property class.