Tribunals Ontario / Tribunaux décisionnels Ontario

Assessment Review Board / Commission de révision de l’évaluation foncière

ISSUE DATE: August 02, 2023 FILE NO.: WR 184493

Assessed Person(s): The Allen Building Inc. Appellant(s): The Allen Building Inc. Respondent(s): Municipal Property Assessment Corporation Region 21 Respondent(s): City of Kitchener

Property Location(s): 108 Ahrens Street West Municipality(ies): City of Kitchener Roll Number(s): 3012-010-007-06000-0000 Appeal Number(s): 3374878, 3409327, 3447514, 3489808 and 3513592 Taxation Year(s): 2019, 2020, 2021, 2022 and 2023 Hearing Event No.: 780573

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

APPEARANCES:

Parties	Counsel/Representative*
The Allen Building Inc.	Michael Steinberg*
Municipal Property Assessment Corporation	Montanna Hill-Sooley
City of Kitchener	Paul Yeoman

HEARD: June 14, 2023 by video conference

ADJUDICATOR(S): Dan Weagant, Member

DECISION

OVERVIEW

1For the 2019 taxation year, the Municipal Property Assessment Corporation (“MPAC”) returned an assessment of $2,585,000 for the property at 108 Ahrens Street West (the “subject property”). The Allen Building Inc. (the “Appellant”) believed this assessment was too high and filed an appeal.

2The original 2019 appeal filed by the Appellant has been deemed to apply to the 2020 through 2023 taxation years in accordance with s. 40(26) of the Assessment Act, R.S.O. 1990, c. A.31 (the “Act”).

3For the 2020 through 2023 taxation years, MPAC has returned an assessment of $2,233,000. The Appellant believed this assessment was still too high.

4The Respondent City of Kitchener (“City”), upon receiving the notice of appeal, viewed the returned assessments as being too low.

Areas of Agreement

5The parties agree that the correct approach to the valuation of the subject property is the income approach. They also agree to the following parameters:

• Gross Leasable Area: 16,666 square feet
• Vacancy allowance: 10%
• Expense allowance: 8%
• Capitalization rate: 7%

6The parties also agree that the Fair Market Rents (“FMR”) must reflect ‘net rent’ and not ‘gross rent’.

7Lastly, the parties agree that a finding of current value in this case would also represent equitable assessment.

Issues for the Hearing

8The only issue remaining in dispute is a determination of the correct FMR to apply to the subject property so that the income approach to value can be completed. The Assessment Review Board (the “Board”) must also apply the correct FMR to determine the correct current value.

Result

9The Board finds that the correct FMR for the subject property is $9.28 per square foot.

10The Board also finds that the correct current value of 108 Ahrens Street West is $1,829,000 in the Commercial property class and that there is no evidence to support a reduction in this value for the purposes of equitable assessment.

PRELIMINARY MATTERS

11At the outset of the hearing, MPAC submitted that, due to the sensitive nature of some of the data in evidence, the Board should bar two members of the City’s staff who were in attendance.

12MPAC noted that sensitive data was redacted in the materials produced by the parties, but during the normal course of the hearing, those figures would need to be disclosed and that only counsel, advocates, expert witnesses and MPAC staff were bound to keep that data confidential.

13The nature of the data in question are certain figures related to rental rates, expenses and capitalization rates of buildings in the City that compete in the same market as the property under appeal.

14The City questioned why MPAC’s observer would be permitted to stay in the hearing. MPAC responded that all staff at MPAC are sworn to keep confidential and sensitive information protected, and that was not true for employees of corporations or municipalities.

15The Appellant agreed with MPAC and added that, in many ways, excluding the affected City staff was a form of protection of their integrity, should confidential aspects of the case, disclosed through testimony, somehow find itself in the marketplace.

16The Board’s proceedings are open to the public, unless a confidentiality order is issued or, if in the view of a presiding member, the sensitive nature of data or other information disclosed at the hearing warrants the hearing being closed to the public. The Board must also consider the prejudice to parties and others that arises from the barring of certain individuals from the Board’s proceedings.

17In this case, the observers from the City were not participating in the hearing itself. They were only intending to witness the proceeding. The confidential data to be disclosed by the parties in the course of the hearing is sensitive enough that, were it to be disclosed to competitors inadvertently or otherwise, it would potentially have a negative effect on future business dealings in the Kitchener office market.

18The Board found that the sensitive nature of the data in question and its importance to the disposition of this case, outweighed the City’s intention to have its staff observe the proceeding. At the Board’s direction, those City staff members not participating in the hearing left the proceeding.

ANALYSIS

Description of Subject Property

19The subject property is a converted light industrial / warehouse building in the City of Kitchener. It has 16,666 square feet of gross leasable area on two storeys. On-site parking is available for tenants. The building is occupied by a range of office users.

20The lot is triangular in shape and is defined by the CN Railway mainline on one side, Ahrens Street on another side and a railway siding on the third side.

Issue 1 – What is the correct FMR to apply to the subject property to determine the correct current value using the income approach?

21The dispute in these appeals is the correct FMR to apply to the income approach to value. The parties’ positions at the outset of the hearing were as follows:

• MPAC: $9.00
• City: $12.00
• Appellant: $8.38

MPAC’s evidence and submissions

22MPAC derived its FMR by using the rents included in six leases, effective at or near the January 1 2016 valuation day, for portions of buildings within five kilometres of the subject property. These rents applied to units ranging from approximately 1,100 to 4,000 square feet.

23Rents included in these six leases ranged from $8.06 to $16.47 per square foot. MPAC considered three of the six to be superior properties in terms of tenancy, building size, condition and location and removed them from its consideration.

24The three rents remaining in MPAC’s sample were $8.06, $8.95 and $9.00 per square foot. The median net rent of these three most comparable leases, as determined by MPAC, was $8.95.

25MPAC also considered the rents derived from the subject property in its analysis. MPAC used eight separate leases with start dates in 2015 and 2016. The rents charged by the Appellant are gross rents. Gross rents include recoverable expenses.

26MPAC calculated net rents by reducing the gross rents by the value of the recoverable expenses provided by the Appellant. Those expenses totaled $94,486 in 2015, $108,308 in 2016 and $128,796 in 2017. MPAC took the average of those three totals and divided the result by the Gross Leasable Area (“GLA”) of the subject property (16,666 square feet) to arrive at an average recoverable expense of $6.63 per square foot.

27MPAC’s median gross rent per square foot derived from the eight leases at the subject property was $15.68. When the average recoverable expense cost is removed from that median gross rent, the result is $9.03.

28MPAC arrived at a FMR of $9.00 per square foot, as that figure falls within its analysis of leases at the subject property and the leases from three other buildings it deemed most comparable.

City’s evidence and submissions

29The City reviewed five leases of space within office buildings located less than 500 metres from the subject property. Two were for units at 100 Ahrens Street West and three were from other buildings. The City did not include the actual rents from the subject property.

30The resulting rents from leases in other buildings selected by the City ranged from $10 to $13.50 per square foot. The City determined that the mid-point of this range is approximately $12.00.

31The City noted that MPAC applied a FMR to 100 Ahrens Street West of $12.75 per square foot. As 100 Ahrens Street West is in very close proximity to the subject property, the City’s view was that $12.00 per square foot was reasonable for the subject property when compared to other properties and, specifically, was equitable and fair when compared to 100 Ahrens Street West.

Appellant’s evidence and submissions

32The Appellant submitted that gross leases were the preferred method of rental at this property because the tenant mix included start-up companies and small businesses that have no leasing history and require relatively short term, gross rents so they can establish themselves with predictable costs.

33The Appellant relied entirely on the actual rents at the subject property. Thirteen of the 14 leases in evidence were based on gross rents. The 14th was a month-to-month agreement and was removed from consideration by the Appellant. The median contract rent generated from the Appellant’s data was $14.94. The value deducted from that median gross rent by the Appellant for recoverable expenses was $6.56, for a total median net rent of $8.38 per square foot.

34The Appellant submitted that the majority of the comparable properties cited by the other parties, and the City in particular, were not comparable to the subject property.

Findings on Issue 1

35FMR is a component of the Income approach to value method that is, by definition, subject to the market conditions applicable.

36The Board heard three different versions of the determination of the FMR. The Appellant used the actual, converted gross to net rents existing at the subject property, MPAC also used actual rents but considered other market rents as a test of the accuracy of the subject property’s actual rents. The City derived a FMR from comparisons with rents from other buildings.

37The Board has a total of 24 leases in evidence. Thirteen of those are leases at the subject property that were negotiated, or that became effective, in either 2015 or 2016. The City did not consider these leases in its opinion of FMR because those leases were gross rents and not net rents. The City also submitted that to determine a FMR from the market, rents from other properties must be used.

38Both the Appellant and MPAC considered the actual rents in their determinations of FMR. The Appellant relied solely on those rents owing to the unique characteristics of the subject property and its lack of comparability to other properties where net lease information was available.

39MPAC included eight leases from the subject property along with rents derived from leases in three other buildings.

40The Board has widely held that FMRs, where adequate data is available, must be derived from the ‘market’ and not from the actual rents at the subject property. This follows an informative case related to the use of market versus actual rents for the purposes of determining current value: Re Cardinal Plaza Ltd. et al. and Regional Assessment Commissioner, Region No. 19 et al., 1984 CanLII 1841 (ON CA) (“Cardinal”).

41In 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.”

42In some circumstances however the Board has, where the specifics of the case dictate, deviated from the direction in Cardinal. In Donview Management Ltd. v. Municipal Property Assessment Corp. Region No. 14, [2011] O.A.R.B.D. No. 254 (“Donview”), the Board accepted actual rents to determine the current value of the subject property.

43In Grewal v Municipal Property Assessment Corporation Region 15, 2015 CanLII 78968 (ON ARB) (“Grewal”) the Board also accepted actual rents as being a component of the market within which they existed. In Grewal, the subject property had a similar mix of tenancy as the comparable properties in that market, but the Board found the rents derived were lower, owing to detrimental characteristics of the subject property as compared to the other properties in the same market.

44The Board finds that the same situation applies here. The subject property occupies a specific position in the market, as an entry level address for small technical companies with no rental credit history and other tenants who require a modest amount of space, where location is less of a concern than utility and cost.

45The subject property occupies a physical location that is different from all of the properties cited by the parties as comparable. It is hemmed in between the CN Railway mainline running from the City of London to points east and a siding from that same line. There is no access across the mainline for either vehicles or pedestrians toward the Kitchener city centre. In order to exit the neighbourhood it lies in, tenants of the subject property must travel on Breithaupt Street, either north or south, then access the City’s broader street network.

46There is no evidence as to what an adjustment to rents might be for these disparate characteristics. The only evidence of the difference in market rents between the subject property and the comparable properties adduced are the actual rents themselves.

47The Board finds therefore, the actual rents at the subject property are part of the rental market and are relevant to the FMR to be determined.

48The Board disregards the proposed comparable rents adduced by the City. The rents relied on by the City were at 100 Ahrens Street West, Duke Street and Charles Street West. The 100 Ahrens Street West property is not sufficiently comparable to the subject property owing to its accessibility and tenancies.

49While 100 Ahrens Street West is technically near to the subject property (without the railroad tracks adjacent, they would be neighbours), it is in a different neighbourhood. It has direct access to Victoria Street, a major thoroughfare and, as was agreed to in evidence by all parties, it has direct access to the VIA / GO station right across Ahrens Street.

50In contrast, the subject property can only be accessed by side streets that are, in turn, accessed from local streets that have connections to major thoroughfares in the City. It is highly probable that 100 Ahrens and 108 Ahrens would have different rents for similar space, given these locational differences.

51The property on Duke Street is a three-storey, brick building, converted from an institutional use. While it is a converted building of similar size, it lies within a different emerging commercial district with high profile technology companies in newer buildings as neighbours.

52The Charles Street address is improved by a multi-storey building with prominent street front access. It bears no resemblance to the physical characteristics of the subject property.

53The Board finds that the Appellant’s approach in using only actual rents at the subject property does not fulfill the definition of the FMR, as it ignores the rents paid by tenants in other buildings, in the broader market.

54The Board finds that the best evidence of the correct FMR for the subject property is derived from the approach taken by MPAC. In the Board’s view, MPAC’s approach of combining the rents at the subject property and the best comparable properties correctly sets the resulting FMR in the correct context.

55While the Board accepts MPAC’s approach in determining the deduction for recoverable expenses, the Board also finds that the value of that deduction is incorrect.

56MPAC used the recoverable cost summary provided by the Appellant for 2015, 2016 and 2017. The gross rents adduced by MPAC were for leases negotiated or effective starting in 2015 and 2016. The recoverable expense portion of the gross rents is correctly derived by averaging the per square foot values in 2015 and 2016, of $5.67 and $6.50 respectively. The result is $6.08 per square foot. When deducted from the average gross rent of the 2015 and 2016 leases of $15.68, the resulting net rent is $9.60.

57The Board finds therefore that the correct FMR for the subject property is $9.28 per square foot, based on the average of MPAC’s net rents for the subject property ($9.60), and the median net rents used by MPAC in its rent comparison study ($8.95).

Issue 2 – What is the correct current value of the subject property using the FMR as determined by the Board?

58On consent, the parties submitted the following approach to determine the correct current value from the FMR determined:

• Multiply the FMR ($9.28) by the agreed-to GLA (16,666 square feet) = $154,660 (rounded) Potential Gross Income (PGI)
• Reduce the PGI by 10% to account for vacancy and collection costs allowances = $139,194 Effective Gross Income (EGI)
• Reduce the EGI by 8% to account for Non-Recoverable Operating Expenses = Net Operating Income (NOI) of $128,059 (rounded)
• Divide the NOI by a Capitalization Rate of 7% = Current value of $1,829,414

Findings on Issue 2

59The correct current value of the subject property, based on the FMR determined is $1,829,000 (rounded).

CONCLUSION

60The Board finds that the correct FMR to apply to the subject property is $9.28 per square foot. The Board also finds that this FMR results in a current value of $1,829,000.

61The Board finds that there is no evidence to support a reduction in this value for the purposes of equitable assessment.

ORDER

62The assessment of the subject property at 108 Ahrens Street West, for the 2019 through 2023 taxation years, is reduced from the assessments returned, to $1,829,000 in the Commercial property class.

"Dan Weagant"

DAN WEAGANT MEMBER Assessment Review Board

Website: www.tribunalsontario.ca/arb