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BC Property Taxes - The Assessment "Game"

By John G. Parkes, AACI, P.App.                                    December 18, 2002 
President
Parkes & Company Ltd.

Taxes!

We all have to pay them in all their various forms - GST, PST, personal taxes, corporate taxes, property taxes, and so on. Although we cannot avoid them, it is obviously financially prudent to reduce them to the lowest level possible.

Although most companies will hire experts to reduce personal or corporate income taxes, most property owners feel that they understand property values, and can realistically review their own assessment notice when it shows up in January. Perhaps they have had a recent appraisal done, or have had some interest from a purchaser, or recently acquired the property, all of which can provide some indication of value. So when the January 31st appeal deadline rolls around, they decline to send off an appeal.

The Game They Play

Value……clearly this is subjective to start with, and the British Columbia Assessment Authority (BCAA) universally use much more conservative value parameters to derive assessments than are typical in the market. Therefore, in most cases, the assessments "seem" quite reasonable. This is a preferable scenario for the Assessment Authority, as it reduces the number of assessment appeals they have to handle every year. For when the property owner asks for a "consultation" on the property in question - if he dares to rock the boat - the Assessor can logically explain that the assessment is actually on the low side, and any appeal "could lead to a higher value". Based on these factors, the thought of appealing an assessment is often fleeting. In fact, when preparing an actual appraisal report for the Property Assessment Appeals Board (PAAB), it is common for the Assessor to come up with a higher "market value" than noted on the roll, although in almost all cases, they note that they are not asking for an increase, only that they want the Board to support the value on the assessment roll.

This sleight of hand has been going on for some time, and the Assessors have fought long and hard to keep equity out of the process, so that they could continue this process. However, they lost this particular fight in the Courts, and equity remains in place and continues to be a cornerstone of the judicial process in Canada.

The New Assessment Reality

My view of the assessment system is that it is really a hypothetical marketplace, which the assessors have created, and as such, market data means little, except to muddy the waters for the property owner. Very simply, if the BCAA is valuing all office buildings in downtown Vancouver based on vacancy and expense allowances of 7% each, and capitalization rates of 8.25%, what does it really matter if the market would use a 3% vacancy rate, 1% for expenses and an 8% capitalization rate? As a property owner, I should get the same conservative treatment on my property as my competitors. This was the thesis put forward in the case of Bramalea Limited (Trizec Equities Limited) and T. Eaton Company v. Assessor Of Area 9 – Vancouver Case 2771 – continued - on page 1592-4, fourth paragraph, where it is noted that:

The present case shows that even where the same approach is used by the Assessor – here the ‘Income Approach’ – the actual value arrived at by application of different data may vary by 20 percent, a variance which could result in a difference in annual taxes of hundreds of thousands of dollars. It may be that either could be accepted as actual value, yet to assess one property in a class on a basis which arrives at an assessment 20% higher than that which would be arrived at on the basis employed in assessing other properties in the same class would result in a grossly inequitable result.

Where the taxpayer subjected to the higher assessment is in competition with others in the same class, and is for this reason unable to pass on the extra tax burden to customers, the unfairness of such a result becomes blatant.

It seems to me that the Assessment Authority has the duty of deciding, so far as possible, in respect of each class of property an approach most likely to arrive at "actual value", as defined in law, and thereafter to apply available data to each in such a way as to ensure that all within the class are valued, so far as possible, on the same basis. Except to the extent justified by particular characteristics of individual lands and improvements, the Assessor is not permitted to discriminate between them in arriving at assessed value.

It follows that I do not accept the contention that the Assessor may assess similar properties at "actual values" which do not bear a fair and just relationship to each other. The duty to deal equitably with all taxpayers is imposed not only on assessment tribunals, but on everyone engaged in the assessment process.

The above case involved a downtown hotel, but in essence notes that if all the other competitive downtown hotels are valued based on a lower than market capitalization rate, it would be inequitable to value the subject hotel at a lower rate, even if it is demonstrably accepted in the market. In other words, simply looking at the "market value" of your property is only a small part of the assessment equation.

The Decision

Based on the above, it has long been my contention that it is more applicable to complete a valuation for assessment purposes, not on market criteria, but rather upon the criteria used by the assessors to value other similar properties in the "area". I got the chance to try out my theory before the Board on a neighbourhood shopping center, which had recently sold for a price of $3,300,000 and was assessed at $3,177,000 for 2000. The owners felt the assessment was clearly fair, at about 4% below the selling price. However, I suggested that we appeal to ensure the assessment was equitable, as in my experience the BCAA has a habit of increasing values when a property sells to just under the selling price, although the assessments of other properties in the area are left unchanged. This obviously creates inequity.

As is often the case, the BCAA appraisal for the Board found that the assessment was in fact conservative, and that the "market value" was $3,525,000, or 11% above the assessed value. This is really not that surprising, as the valuation parameters had now changed to those outlined in the following table:

Original Assessment Value

BCAA "New" Appraisal

Capitalization Rate

8.50%

7.80%

Average Rental Rate

$18.43

$20.26

Vacancy

5%

3%

Expenses

7%

5%

Net Income

$270,184

$298,392

Value Calculation

$3,178,635

$3,525,000

Any argument based on market value would be fruitless, as the property was clearly assessed at market levels. Therefore, I did not prepare a typical appraisal at all, but rather, prepared an equity brief and a rebuttal document which focused on the assessor’s comparables. As is often the case, the value parameters applied to the comparables outlined in the BCAA report for assessment purposes were much more conservative than those applicable in the market transaction, and the assessments of these properties, rather than the actual market sale involved, formed the thrust of the equity argument. In the Board decision, Einar E. Hilton vs. Assessor off Area #14 – Surrey/White Rock (Appeal No. 20014823), the Chair agreed with this argument, and came to what I would consider to be a ground breaking decision on how assessments should be argued in the future, noting that:

"For equity in this case, the Board finds that the assessment of this property ought to be compared with the assessments of other similar properties within similar markets, which are subject, as best as can be determined to the same market conditions and perceived by the market as similar and comparable investment opportunities. For this purpose, the Board is willing to accept that the assessments of the comparables selected by Ms. Smith in her appraisal are indicative of the assessments of similar properties for equity purposes. That is, it is reasonable to determine whether the subject has been fairly and consistently assessed to compare that assessment to the assessment of these properties, because they are the same type of properties and share similar market characteristics. That, in the Board’s opinion is the appropriate unit of comparison, not all of the properties in Class 06-Business and Other in the City of Surrey."

In view of the above, the knowledge an owner may have in regard to a property’s value is really not germane to the assessment process. To ensure fair treatment, the appellant must go through the process of obtaining and analyzing assessment data on similar, competitive properties in the area, which may have values varying from 5% to 20% below "market value" levels. This is obviously an arduous process, and the assessors will not provide this information without a Board order, maintaining that it is confidential. As such, the Appeal Management Conference process must be undertaken to obtain the required information.

The Result

In spite of the fact that the assessment was at 4% below the sale price, and on the surface seemed quite reasonable, the Board decision based on the equity argument, resulted in a decrease in the assessment to $2,961,000, or more than 10% below the sales price.

Equity Isn’t the Only Point

Although equity is arguably the primary concern in most appeals, further decreases in the assessment of a property may be warranted due to excess vacancies (physical state as of October 31st.), capital repair requirements, classification, contamination, improper sizes, etc., all of which must also be reviewed. As well, market rents must consider inducements, while buildings under construction might have much lower values than the cost in place, once again depending on equity and possible economic obsolescence if the market has experienced a downturn. Recently, we achieved a reduction through a negotiated settlement in the assessed value of the Glenayre office property in Vancouver, of close to $14 million, resulting in tax savings of just under $400,000, although the assessment did accurately reflect the cost to construct the project. However, the decline in the office market had clearly led to a high level of depreciation (functional obsolescence).

As with most things in life, the assessment process is not as simple as it first appears to be, and for assessments to be successfully appealed takes a high level of research, expertise, time and fortitude. However, the results can be well worthwhile. In fact, over the past several years I have been successful in achieving tax reductions in over 90% of the appeals I have taken to the Board level, with the refunds varying from under a thousand dollars to over half a million dollars. It must also be stressed that after a successful appeal, the revised lower value typically forms the base for future years, and can provide for long term tax savings.

 -- John G. Parkes

Footnote:
1 Indexed as Vancouver Assessor, Area 9 vs. Bramalea Ltd., Court of Appeal, Carrothers, Lambert, Taylor, Cummings and Gibbs JJ.A. Heard Nov. 9 & 10, 1990, Judgment on Dec. 14, 1990. No web link available.

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