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Property Taxes - The Assessment “Game” Continues

By John G. Parkes, AACI, P.App.                                    January 5, 2007 
President
Parkes & Company Ltd.

Commercial property values are going through the roof – so what will happen to property taxes? They should stay the same shouldn’t they, as the rate of taxation should simply drop to compensate? Wrong! In Vancouver, for example, property values have dramatically increased, but the tax rate has remained basically unchanged at about $29,000 per $1 million of value in 2005 to $28,700 in 2006 -- only a 1.03% decrease. So if your assessment went up by 30% in 2006, your property taxes increased by, well, almost 30%.

The reality of the real estate market is that it has been booming, so when owners review assessment notices as they arrive early in 2007, they will likely seem pretty reasonable, and in fact may appear conservative. What options do you have then to reduce property taxes?

Fairness

In my opinion, the only avenue of appeal that remains in most cases in today’s market involves fairness or "equity". As mentioned in a previous article, if for example, the British Columbia Assessment Authority (BCAA) is valuing all office buildings in downtown Vancouver based on vacancy and expense allowances of 7% each, and capitalization rates of 8%, what does it really matter if the market would use a 3% vacancy rate, 1% for expenses and a 6.5% capitalization rate? A property owner should get the same conservative treatment on his property as his 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 277 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, and in essence notes that if all the other competitive downtown hotels are valued based on a higher 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.

Testing the Theory

Based on the above, it has long been my contention that it is more appropriate to complete a valuation for assessment purposes, not on market criteria, but rather upon the criteria used by the assessors to value other competitive properties in the "area". Not only that, if there were four identical properties situated on a street, at the following assessments…

…should the subject property be assessed at a figure in line with the lowest competitive assessment, an average of the assessments or the highest level? I believe that the property owner, upon undertaking the arduous process of appealing the assessment, should be entitled to the lowest assessment.

This theory was tested before the Board in an appeal involving a new "mini-storage" facility located in Coquitlam, where the assessment appeared to be fine in terms of "market value", but too high from a fairness perspective.

The original 2005 assessment for the property was $5,922,000. At the hearing, the BCAA, through an analysis by a "new" appraiser, suggested that the market value was $8,100,000 and that an equitable value would be $7,300,000, still well above their previous estimate. They asked that the Board increase the assessment to the latter figure. At the time, there were only four other competitive mini-storage facilities in Coquitlam on which to base an analysis, all of which were older than the subject. The BCAA essentially argued that as the subject was newer, it should be ascribed a much higher value. On the other hand, it was argued that, although the subject was newer, it was basically achieving the same rents as the other facilities, and therefore should be valued at the same level as the other storage outlets, approximately $4.9 million. No "market value" argument was made as it was readily apparent that the "equitable" value would provide for the lowest level of taxation.

The Board decision dated July 27, 2006 in Apex Self Storage Ltd. v. Area 10 Appeal No. 2005-10-00225 and a subsequent amend order , eventually derived "market" and "equitable" values, which are summarized following, along with the BCAA and appellants figures:

In view of the above, a property’s "actual" value is really not that germane to the assessment process, as all parties agreed that the market value was higher than the assessed value. Therefore, to ensure fair treatment in this case, the appellant had to go through the process of obtaining and analyzing assessment data on the similar, competitive properties in the area.

The Result

In spite of the fact that the original 2005 assessment was at about 9% below the Board’s estimate of "market value", the equity argument still produced an additional decrease of $616,500, 10% below the original assessment. Further, the BCAA followed the Board’s decision in 2006, recommending a value decrease from the $6,400,000 figure applied at the Property Assessment Review Panel to $5,400,000. In the end, although the assessed value was likely conservative from a real value perspective, significant tax saving were achieved through the equity argument, totalling close to $50,000.

Equity with What?

Although equity was the primary concern in the appeal, the hearing also focussed on which of the equity comparables the subject should properly be compared to. The Board’s decision in this respect is important from a taxpayers’ perspective, as it provides an additional argument based on the variety of values that may be ascribed to the other competitive properties. Section 19 of the Board’s decision states that:

…it is not up to the Board to pass judgment on the assessments of the comparables. Rather, we have to determine whether the Assessor has fairly assessed the subject in relation to the comparable set. We disagree with Mr. Holloway’s opinion that the subject only has to be comparable to some of the comparables, and not necessarily all of them. Rather, we accept Mr. Parkes’ contention that we should afford the subject every benefit even if that would cause inequity with some of the comparables. This is not the Board’s problem, but rather a valuation issue that the Assessor can address in the next roll value…

Accordingly, the assessor cannot simply prove that the subject is assessed equitably with one or two of the competitive properties, but must compare the subject with the entire set of comparables. Going back to our identical properties example, this would suggest that if the subject was to be "afforded every benefit" it should be valued at the low end of the spectrum. This is of course a hypothetical scenario, and no case will be this simplistic, but it does offer the taxpayer some additional leverage in the ongoing equity argument.

Considering an Appeal

As with most things in life, the assessment process is not as simple as it first appears to be. A successful assessment appeal takes considerable research, expertise, time and fortitude; however, the results can be worthwhile. Not only will an immediate tax refund occur, after a successful appeal, the revised lower value will form the base for future years, providing significant long-term tax savings.

 -- John G. Parkes

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