Farhi Holdings Corporation v. Municipal Property Assessment Corporation, Region 23, 2022 CanLII 40451

Tribunals Ontario

Tribunaux décisionnels Ontario

Assessment Review Board

Commission de révision de l’évaluation foncière

ISSUE DATE:

May 12, 2022

FILE NO.:

WR 178592

Assessed Person:

Farhi Holdings Corporation

Appellants:

Farhi Holdings Corporation; Shmuel Farhi

Respondent:

Municipal Property Assessment Corporation, Region 23

Respondent:

City of London

Property Location:

383 Richmond Street

Municipality:

City of London

Roll Number:

3936-060-030-02600-0000

Appeal Numbers:

3234638, 3312899, 3365790, 3410049, 3448112 and 3490106

Taxation Years:

2017, 2018, 2019, 2020, 2021 and 2022

Hearing Event No.:

763875

Legislative Authority:

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

APPEARANCES:

Parties

Representatives

Farhi Holdings Corporation; Shmuel Farhi

Steve Pocrnic

Municipal Property Assessment Corporation

Michael Radan

City of London

No one appeared

HEARD:

May 4, 2022, by video

ADJUDICATOR:

Jean-Paul Pilon, Member

DECISION

OVERVIEW

1Farhi Holdings Corporation (the “Appellant”) is the owner of an office building at 383 Richmond Street in the City of London (the “Subject Property”).

2The Municipal Property Assessment Corporation (“MPAC”) returned an assessment of the Subject Property of $4,993,000 for the 2017 taxation year and the Appellant appealed that assessment. Further appeals were then deemed for the 2018 to 2022 taxation years pursuant to section 40(26) of the Assessment Act, R.S.O. 1990, c. A.31 (the “Act”). The City of London did not participate in the appeals.

3At the hearing, MPAC’s position was that the Assessment Review Board (the “Board”) should confirm its assessment for all taxation years despite its evidence that the current value of the Subject Property was $6,994,000. The Appellant argued at the hearing that the assessment should be reduced to $2,140,000 for all taxation years in dispute.

The Subject Property

4The Subject Property is a 14-storey class C office building in downtown London near the Covent Garden Market. Built in 1969, it has a gross leasable area (“GLA”) of 143,364 square feet (“sq. ft.”) and does not include parking, although there is parking available in the area.

Areas of Agreement

5The parties agreed as to the physical attributes of the Subject Property described above.

6The parties further agreed that the income approach was the appropriate means of determining current value. In essence, the income approach in this instance begins with taking the gross income of the Subject Property, subtracting a vacancy allowance and then an expense allowance to determine the Subject Property’s net operating income (“NOI”). The last step using this method is to divide the NOI by a capitalization or cap rate to determine the current value of the Subject Property.

7Within that formula, the parties agreed to a cap rate of 9.5%.

8The parties further agreed to a vacancy rate of 30% but not to MPAC’s submission that that vacancy rate should then be reduced by 50%.

9The parties did not make any submissions on apportionment even though the issue was raised by the Board at the hearing. As a result, this decision apportioned the current value of the Subject Property in the same ratio as returned: 82.6% in the office building property class and the remaining 17.4% in the commercial property class.

10Equity was not raised as an issue in this proceeding. The Board assumed this to mean that the parties were in agreement that no adjustment was required to make the assessment of the Subject Property equitable with similar lands in the vicinity pursuant to s. 44(3)(b) of the Act.

Issues for the Hearing

11At issue in this proceeding were the remaining components of the income approach:

a. Gross Income;

b. Vacancy Allowance; and

c. Expense Allowance.

Result

12The assessment of the Subject Property is reduced from $4,993,000 to $4,732,000, with $3,900,000 in the office building property class and the remainder of $832,000 in the commercial property class.

ANALYSIS

Issue 1 – Gross Income

13The first input into the formula that makes up the income approach is the potential gross income (“PGI”) of the Subject Property.

14MPAC’s expert witness Josh Morgan testified that MPAC had requested rent rolls from the Appellant in order to determine the PGI of the Subject Property, which information was not provided. He testified that $6.10 per square foot (“sq. ft.”) for all floors was a reasonable fair market rent (“FMR”) to assume for the Subject Property, but MPAC had no evidence to support it. As the Subject Property had a GLA of 143,364 sq. ft., the gross income figure used by MPAC was $874,520.

15The Appellant’s expert witness Jim Betteto testified that $6.10 per sq. ft. was a reasonable FMR for the main floor and upper floors of the Subject Property. He testified, however, that space previously occupied by Royal Bank of Canada (“RBC”) suffered from various forms of obsolescence, and that the FMR for that space should be lower. Basing his opinion on that and on FMRs for five comparable properties in the immediate area of the Subject Property, Mr. Betteto testified that a weighted FMR of $5.78 per sq. ft. was appropriate, resulting in a PGI of $828,644.

Findings on Issue 1

16The Board prefers the Appellant’s evidence on this point because it was based on uncontested evidence of FMRs for five comparable properties in the immediate area of the Subject Property. MPAC’s evidence on the other hand had no evidentiary support.

17In addition, while it may have been the case that the Appellant did not respond to MPAC’s request for information, MPAC’s remedy would have been to seek a reversal of MPAC’s burden of proof pursuant to section 40(18) of the Act which MPAC did not do.

18As a result, the best evidence of the PGI based on FMRs for the Subject Property was that it was $828,644.

Issue 2 – Vacancy Allowance

19MPAC relied on uncontested evidence that the Appellant filed vacancy rebate applications with the City of London to inform its opinion of the vacancy allowance to be applied in the income approach. These applications disclosed vacancy rates in the following calendar years: 19.30% in 2013, 19.80% in 2014, 17.96% in 2015, 28.13% in 2016, 30.21% in 2017 and 33.45% in 2018.

20From these figures, MPAC took the position that the vacancy rate as of the valuation date of January 1, 2016, should be determined to be 30%.

21Mr. Morgan also argued that the vacancy rate should be reduced by 50% to 15% to account for chronic vacancy, but on cross-examination he could not explain why.

22The Appellant’s witness testified that the Subject Property was affected by chronic vacancy, particularly in 2019 when RBC vacated its space and the vacancy rate in the Subject Property rose to 66%. In his expert report, however, Mr. Betteto indicated that the vacancy rate for the Subject Property fluctuated in the range of 26% and 29% between 2016 and 2019. The Appellant concurred that the vacancy rate used in the Board’s calculation should be 30%.

Findings on Issue 2

23Without any explanation as to why the agreed to vacancy figure of 30% should be reduced to 15% as MPAC set out in its report, the Board does not accept that there should be any reduction. As a result, it determines the correct vacancy rate to be used to be 30%.

24Having determined the gross income to be $828,644 above, 30% of that amount is $248,593 and is the vacancy allowance for the Subject Property. $828,644 less $248,593 is therefore the effective gross income (“EGI”) of the Subject Property prior to any non-recoverable expense allowance. The EGI is therefore $580,051.

Issue 3 – Expense Allowance

25Determining the non-recoverable expense allowance for the Subject Property was the major point of contention between the parties in these appeals.

26MPAC’s approach was to use 75% of its reduced vacancy rate of 15% which amounted to 11.25%. This was the deduction it applied to the EGI for non-recoverable expenses.

27The Appellant however argued that it had non-recoverable expenses of $468,048 for 2016, and that had similar expenses for subsequent years. It argued that using a conservative approach, 65% of the of that amount should be deducted for non-recoverable expenses.

28The Board focused on the Appellant’s analysis for the 2016 taxation year because the valuation date was January 1, 2016. In that year, the Appellant determined its non-recoverable expenses to be $1,560,061, which included expenses for repairs and maintenance, taxes, and utilities. It then multiplied this amount by 0.30 or 30%, its vacancy rate, to determine its unrecoverable expense allowance of $468,048.

29The Appellant’s analysis was based on unaudited expense statements from the Appellant with no witness to explain them, nor any documentation to support them. In addition, these statements were confusing because they were not clear in some cases as to which expenses were recoverable or not, and the Appellant’s representative admitted that statements for 2018 and 2019 were erroneous because they were identical.

30In one sense, it was logical for the Appellant to want to deduct 30% of its actual expenses as its expense allowance. This is because 30% of the GLA of the Subject Property was vacant, and the expenses for that part of the Subject Property would have been unrecoverable from anyone. However, those expenses included expenses for repairs, and some of those were shown in the Appellant’s expense statement as recoverable, in this case recoverable from other tenants of the Subject Property. It would not therefore be correct to treat those amounts as entirely unrecoverable when some were recoverable.

31In addition, the format of the Appellant’s financial statements made it impossible to accurately determine in totality which expenses were recoverable and which were not. With substantial doubt as to the accuracy of the underlying figures used by the Appellant and their descriptions, the Board rejected the approach it used to determine its non-recoverable expense allowance.

32MPAC’s expert report first opined that the non-recoverable expense allowance should be 22.50%. It then went on, however, to note that that figure was inaccurate without explaining why, and that it should reflect 75% of its vacancy allowance of 15% and therefore be 11.25%. The Board assumed that the first number was based on a vacancy allowance of 30%, as 75% of 30% is 22.5%). No further explanation was given in the report to the rest of its analysis on this point, nor was one provided at the hearing.

33Despite this lack of analysis, the Board prefers MPAC’s objectively fairer approach of deducting a percentage of the vacancy allowance over the approach advanced by the Appellant which relied on flawed financial statements and logic.

34The vacancy allowance was determined above to be 30%. Therefore, 75% of the expense allowance to be applied is 22.5%.

Finding on Issue 3

35The expense allowance to be applied to the EGI of $580,051 is 22.5% or $130,511.

CONCLUSION

36The income approach involves determining first, the gross income of the Subject Property, then subtracting a vacancy allowance and an expense allowance to arrive at an NOI. Finally, to determine the current value of the Subject Property, the NOI is divided by a cap rate.

37The Board determined the gross income of the Subject Property to be $828,644.

38The Board determined the vacancy allowance to be 30%.

39The Board determined the expense allowance to be 22.5%.

40The parties agreed that the cap rate was 9.5%

41The current value of the Subject Property is therefore determined as follows:

Gross income: $ 828,644

Less: Vacancy Allowance 30%: $ (248,593)

Less Expense Allowance 22.5% $ (130,511)

Equals NOI: $ 449,540

Divided by cap rate of 9.5% $ 4,732,000

42The Board therefore finds that the current value of the Subject Property is $4,732,000.

ORDER

43The Board orders that the assessment of the Subject Property is reduced from $4,993,000 to $4,732,000, with $3,900,000 in the office building property class and the remaining $832,000 in the commercial property class.