Assessment Review Board
Commission de révision de l’évaluation foncière
ISSUE DATE: May 20, 2020
Assessed Person(s): 700720 Ontario Inc., Helen Case, Wayne Hulton
Appellant(s): 700720 Ontario Inc., Gary Case
Respondent(s): Municipal Property Assessment Corporation Region 05
Respondent(s): City of Kingston
Property Location(s): 1020 Bayridge Drive
Municipality(ies): City of Kingston
Roll Number(s): 1011-080-200-15450-0000
Appeal Number(s): 3241238, 3292550, 3348205 and 3397915
Taxation Year(s): 2017, 2018, 2019 and 2020
Hearing Event No.: 729289
Legislative Authority: Section 40 of the Assessment Act, R.S.O. 1990, c. A.31
Parties
Counsel/Representative*
700720 Ontario Inc.
Gary Case
Municipal Property Assessment Corporation
Rox-Anne Poulain, Brian Leggett
City of Kingston
No one appeared
HEARD: March 30, 2020 by telephone conference call
ADJUDICATOR(S): Dan Weagant, Member
DECISION
OVERVIEW
1The subject property is a two-storey office building with a returned value of $1,523,000 for the 2017 through 2019 taxation years. Gary Case (the “Appellant’) appealed that value because he believed it was too high. Pursuant to s. 40(26) of the Assessment Act, R.S.O. 1990, c. A.31 (the “Act”), the Appellant is deemed to have brought the same appeal in respect of the 2020 taxation year.
2In preparation for the hearing, the Municipal Property Assessment Corporation (“MPAC”) amended its position on the current value and recommended a reduction from the returned value to $1,451,000. The Appellant believed this value was still too high.
3The Appellant’s position is that the Fair Market Rent (“FMR”) applied by MPAC is too high, resulting in an inflated Net Operating Income (“NOI”) which, in turn, results in a current value that is too high when the NOI is capitalized. He believes the correct FMRs to apply are the actual rents produced by the subject property, resulting in a current value of between $1,170,000 and $1,262,000.
Areas of Agreement
4The parties agree that the most appropriate method of determining current value is the income approach to value. They agree on the vacancy and expense allowances (7% and 5% respectively) and the capitalization rate (8.5%). They also agree that the Gross Leasable Area (“GLA”) of the subject property is 12,142 square feet.
Issues for the Hearing
The key dispute in these appeals is the appropriate rent to apply to the subject property in determining its capitalized net income. Rental income is a fundamental factor in determining the gross income which, in turn, is necessary to determine the current value.
Once the applicable rents are determined, the Board must decide the current value of the subject property for the years under appeal.
The Board must also decide if the current value determined represents an equitable assessment when reference is made to the assessments of similar properties in the vicinity.
Result
5The Board finds that market rents are the correct source in determining gross income for the subject property. The FMR to be applied to the subject property is $10.50 per square foot of GLA.
6The Board finds that the current value of the subject property is $1,325,000. The Board also finds that no reduction in this amount is necessary to make it equitable with the assessments of similar lands in the vicinity.
7Accordingly, the assessment of 1020 Bayridge Drive for the 2017, 2018 and 2019 taxation years is reduced to $1,325,000 in the Commercial Property Class. This result also applies to the deemed 2020 taxation year appeal.
analysis
Issue 1 – What Rents Determine Current Value?
8MPAC maintained that FMRs are the only suitable rents to use when determining current value for multi-tenanted office buildings. MPAC submitted that any other source of rental income, including actual rent, does not adequately reflect the market.
9MPAC further submitted that an FMR must be derived from the rents of comparable properties, according to their size, location, age and condition as compared to the subject property. For that reason, MPAC submitted that its sample of ten comparable rents are the correct means of determining the FMR in this case.
10The Appellant submitted that the only real indication of current value for the subject property is the capitalization of its actual rental income. According to the Appellant, every commercial office property has some unique characteristics. The subject property has had significant vacancy over the last few years for instance, which affects its profitability. He submitted that this unique situation makes the subject property less valuable as a result and that a sale price, at or near the valuation day applicable to the years under appeal would reflect a lower price for this lesser performing property.
11The Appellant summarized MPAC’s position as being unfair because it relies on other properties that may or may not be under the same constraints as the subject property. For that reason, he submitted that comparison to these other properties is unfair.
Finding on Issue 1
12To determine a current value that reflects the definition in the Act the Board must use the best evidence submitted and accepted at the hearing. Section 1(1) of the Act defines current value as “…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…”.
13An informative case related to the use of market versus 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”). In Cardinal 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.”
14Cardinal is clear. When the income approach is being used to calculate current value, economic or market rents rather than actual rents must be applied. The Board finds that Cardinal is 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 2 – What is the current value of the subject property?
15MPAC calculated the current value of the subject property using the lease rates per square foot of GLA of ten class “B” properties in Kingston. These ten properties were selected for their similarity to the subject property in terms of age, size, condition and location.
16The ten properties had leases that began from 2014 through 2017. The median lease rate of these ten properties was $11.50 per square foot. MPAC calculated its current value as follows:
Potential Gross Income (median market rent / square foot X 12,142 square feet)
$139,633.00
Less 7% Vacancy & Collection Loss Allowance
$9,774.31
Effective Gross Income
$129,858.69
Less 5% Non-Recoverable Expense Allowance
$6,492.93
Net Operating Income
$123,365.76
Divided by Capitalization Rate of 8.5%= Current Value
$1,451,361.88
17Five of the comparable leases cited by MPAC began their respective terms after August 2016, or eight months after the valuation day. The remaining five began with terms starting in April 2014 through to October 2015. MPAC testified that these remaining five leases were in effect on the valuation day.
18The Appellant relied entirely on the financial performance of the subject property to arrive at a current value. He cited the two Property Income and Expense Reports (“PIERS”) he disclosed to MPAC for the 2016 and 2018 taxation years. By using the income generated by the subject property and applying the vacancy and collection loss and non-recoverable expenses allowance, he arrived at an NOI of between $99,463 and $107,275, resulting in a current value of between $1,170,153 and $1,262,059.
Finding on Issue 2
19The only aspect of the current value calculation that is in dispute is the lease rate per square foot to apply to the subject property’s 12,142 square feet of GLA. The question of market rents versus actual rents having been decided, the Board looks at the source of the market rents in evidence.
20Section 19.2(1) of the Act states that, for the 2017 through 2020 taxation years, property shall be valued as of January 1, 2016. MPAC’s sample of ten market rents includes five properties where leases started after January 1, 2016. This means that those five rates were not in effect on the valuation day. For that reason, the Board disregards the rates of those five leases.
21MPAC testified that the average rate per square foot of GLA of the remaining five leases was $10.50. This is the best evidence of the FMR available at the hearing, because it reflects a market rent, effective on the valuation day. Accordingly, the Board finds the current value of the subject property is calculated as follows:
Potential Gross Income
($10.50 FMR X 12,142 square feet)
$127,491.00
Less 7% Vacancy & Collection Loss Allowance
$8,924.37
Effective Gross Income
$118,566.63
Less 5% Non-Recoverable Expense Allowance
$5,928.33
Net Operating Income
$112,638.30
Divided by Capitalization Rate of 8.5%= Current Value
$1,325,156.47 ($1,325,000, rounded)
22The Board finds that the current value of the subject property is $1,325,000.
Issue 3 – Does the current value determined represent an equitable assessment when reference is made to the assessments of similar properties in the vicinity?
23Neither the Appellant nor MPAC made submissions on the question of equitable assessment.
24Accordingly, the Board finds that no reduction in the current value determined is necessary to make it equitable with the assessments of similar lands in the vicinity.
CONCLUSION
25The Board finds the assessment of the subject property for the 2017, 2018 and 2019 taxation years is $1,325,000.
ORDER
26The Board orders the reduction of the assessment of 1020 Bayridge Drive from $1,523,000 to $1,325,000, in the Commercial property class for the 2017, 2018 and 2019 taxation years. This order also applies to the deemed 2020 taxation year appeal.
"Dan Weagant"
DAN WEAGANT
MEMBER
Assessment Review Board
A constituent tribunal of Tribunals Ontario - Environment and Land Division
Website: www.elto.gov.on.ca Telephone: 416-212-6349 Toll Free: 1-866-448-2248```