Minimizing Property Taxes on Development Sites

By Paul J. Sullivan, BCS Property TaxCo LTD.

Many developers are aware that the value and classification of their property each year hinges on the statutory date of October 31st. There are numerous strategies which ought to be considered in advance of this date. Both upon initial classifications and valuations by the applicable authorities and during assessment appeals, certain factors and criteria commonly arise. These are considered below.

Classification

There are two ways a development property can get Class 1 - residential classification: 1(a) used for residential purposes; or 1(c) zoned for residential purposes and not specifically zoned for commercial. 1(a) has a long list of precedent setting cases based largely on Intracorp - Stated Case 416 (criteria discussed in A to D below). 1(c) generally falls under Eccom - Stated Case 269, but this has changed with recent amendments to the Prescribed Classes of Property Regulation, which amendments will be discussed in E below.

  1. Documentation – photo document your site as of October 31st as this will be critical evidence in the event of an appeal. The assessor does visit and photograph development sites in and around this date.
  2. Agreements – development sites on the cusp of obtaining residential classification (typically the case when construction has not quite started at October 31st) can win a classification challenge if there are enough agreements in place that the developer is committed to the proposed project. Key examples are as follows:
    1. Pre sales
    2. Residential Financing
    3. Construction contracts
    4. Issuance of a Development Permit or Building Permit
    5. Other legal agreements
    Recent Property Assessment Appeal Board decisions, Pure Developments and Pinnacle International have said that residential class can be achieved on a mixed use development site with something less than actual construction. The more binding agreements there are, the better off you will be. Have dated notes and photos when changes occur on your site. There is no prescribed set indicia on this point, but examples from these two cases are as follows.
# Indicia Pure Developments Pinnacle International
  Roll Year 2007 2010
  State and Condition Date (as of) 31-Oct-06 31-Oct-09
1. All Buildings demolished Yes Yes
2. Hoarding was placed around property Yes Yes
3. Site Construction was erected Yes Yes
4.a Environmental remediation commenced Yes Yes
4.b Soil compaction underway N/A N/A
5. Disclosure Statement Filed Yes Yes
6. Incurred costs Yes Yes
7. Spent additional money to acquire density Yes Yes
8. Entered agreement with realtor Yes Yes
9. Entered into a purchase and sale agreement with a res Yes Yes
  Residential Strata units sold 1 of 73 44 of 105
10. Construction Contract with related party Yes Yes
11. Subcontract entered Yes ???
12. Committed for financing Yes No
13. Excavation of the site No No
14. Construction equipment or machinery on the site No No
15. Building Permit issued No Yes
  1. Improvements – commercial improvements or commercial parking on a site tend to cause the assessor to place a property in the commercial tax class. There is much case law (summarized in Bastion) around this point; however, not having a pre-existing commercial use is typically of assistance. If you have a residential use, say an old house, be sure NOT to demolish it.
  2. Commencement of Construction – the best strategy to secure residential tax treatment is to get underway prior to October 31st. Projects under construction rarely fail to achieve residential classification.
  3. Zoning – as it stands today, vacant land proposed as a mixed use development site without clear allocations of land specified in each use will attract commercial taxation. It may be a benefit to have your rezoning complete as of October 31st. Please note that the regulation for vacant land with no use has been amended. The interpretation of this amendment is that the Land must have no present use and commercial use must be restricted through an agreement (e.g. covenant under section 219 of the Land Title Act). The restriction does not permit a portion or percentage of the land to be used for business purposes. If this type of zoning or agreement is in place, the vacant land will be classified as a split class in part residential.

Valuation

  1. Highest and Best Use – the assessor values land at highest and best use and not necessarily on existing zoning. To assess a property in another use he must prove there is at least a 51% probability of achieving this use. Depending on where a developer might be in the rezoning stage may cause a trigger in the assumption an assessor will make on highest and best use.
  2. Density – if you obtain a development permit by October 31st that amends your allowable density, the assessor will then assess you for this extra density. If it is approved after this date he will not.
  3. Costs in Place – the assessor will ask for a declaration of costs in place as of October 31st. Some developers provide them, others do not. If you do not, the assessor will estimate them, and the developer can appeal this determination prior to January 31st. Not all costs hold "market value" and are assessable.
  4. Land Value – the assessor must consider the value of the determined highest and best use as of July 1st. Sales in and around this date are the most relevant.

Saving tax dollars requires good planning. Tax consultants and lawyers may be able to offer you advice on your specific projects. If you have a question please feel free to contact me directly. The above notice is a cursory overview of the many issues involved and in no way should be exclusively relied upon.

Paul J. Sullivan, BCS Property TaxCo LTD.