Presentation on theme: "Appraisal Institute of Canada 2010 National Conference - Victoria Federal Properties –Valuation Issues June 3 rd, 2010 Carl Nilsen, AACI."— Presentation transcript:
Appraisal Institute of Canada 2010 National Conference - Victoria Federal Properties –Valuation Issues June 3 rd, 2010 Carl Nilsen, AACI
Purpose and Intended Use To identify issues that have arisen or which might arise in the valuation of military bases and other federal properties No opinion is offered or intended regarding the appropriateness of methodologies referred to
Military Bases – Context DND Provides Support to Canadian Forces –21,000 Buildings –5,500 km Roads –3,000 km water, storm and sewer pipes –2.25 million ha (5.4 million acres) of Land DND Infrastructure Replacement or Refurbishment 25% of holdings in 10 years 50% of holdings in 20 years
Valuation Requirements Disposition, redevelopment Payment in Lieu of Taxes (PILT)
Disposition, Redevelopment Hunters Point Naval Shipyard, San Francisco –Opened 1867, US Navy operations from 1941 –Closed 1974 –Development Concept 2000 –Grading operations and infrastructure 2007/8
Disposition, Redevelopment CFB Chilliwack Opened 1943, closed 1998, transferred to CLC 2004 Demolition and Retention of Buildings Renovation of former engineering School Canada Education Park – UFV Garrison Crossing – 153 acre, 1,500 unit housing project
Disposition, Redevelopment Valuation Issues Highest and Best Use –Large scale needs to be reflected –Building conversion and renovation or demolition –Land Use Plan required Contamination and UXO First Nations Land Claims De-commissioning and demolition costs Development time frame prior to and after commencement
Disposition, Redevelopment Valuation Approach Valuation Method –Direct Comparison –Subdivision Development (DCF) Analysis Consideration of potential land uses taking into account physical characteristics Analysis of Supply and Demand for potential uses Requirement for sound planning advice Engineering analysis and infrastructure costs Value of end product Analysis of absorption and discount period
Disposition, Redevelopment A well-insulated 20,000 square foot home complete with an airstrip and a Jacuzzi sounds really nice. This one is underground in an abandoned missile silo! It was once the home of an Atlas-F missile built for the Cold War, but its been converted into a luxury home.
PILT What is PILT? Government of Canada exempt from local taxation [Sec 125 Constitution Act 1867] Since 1950 Canada has shared municipal costs Current legislation is Payments in Lieu of Taxes Act, 2000 Payments under PILT Act roughly equivalent to taxes which might otherwise be payable Payments reflect methods of valuation and taxation applicable in specific jurisdiction Subject to Regulations under PILT Act (e.g. CCPR) 26,500 Federal facilities; $460 million in payments (2007) See: Montreal (City) v. Montreal Port Authority, 2010 SCC 14
PILT Act The purpose is to provide for the fair and equitable administration of payments in lieu of taxes [ Sec 2.1]
PILT Act Defines Federal Property Defines Property Value –The value that, in the opinion of the Minister, would be attributable by an assessment authority to federal property…as the basis for computing the amount of any real property tax that would be applicable to that property if it were taxable property. –Excludes mineral rights and ornamental, decorative or non-functional features Sec 3 sets out specified exclusions Federal Property does not include any structure or work unless it is.. a building designed primarily for the shelter of people, living things, fixtures, personal property or moveable property. Excluded structures, works etc. in Schedule II
PILT Act Payments not to exceed the product of: –The effective rate in the taxation year applicable –The property value in the taxation year of the federal property Effective rate is: –the rate of real property tax..that, in the opinion of the Minister, would be applicable to any federal property if that property were taxable property.
PILT Act – Schedule II Schedule II describes structures, works, machinery or equipment not considered to be federal property Includes, among others: –Docks, wharves, piers etc. –Drydocks –Fortifications –Pole lines, transmission lines, light standards –Reservoirs, storage tanks –Roads, sidewalks, aircraft runways, paving, railway tracks –Water mains, sewer mains
PILT – Dispute Advisory Panel (DAP) Provides advice to minister of PWGSC on resolution of disputes DAP is subject to Rules of Practice Hearing Panel comprises from 1 to 3 members One member to be from the province or territory of the dispute origin Panel holds hearings and hears witnesses. Parties may be represented by counsel Principles of natural justice followed DAP provides advice, not a decision
Provincial Legislation Provincial Acts guide how property is valued with respect to: –Base date –State and condition date –General market level –Specified valuation approaches/manuals –Uniformity –i.e. PILT Act respects local process
PILT Act/CCPR - The Montreal Cases Montreal City v. Montreal Port Authority, 2010 SCC14 Involved 3 federal agencies: CBC, Montreal Port Authority and PWGSC Issues: Interpretation of PILT Act and Crown Corporation Payment Regulations (CCPR) –Discretionary powers regarding corporation effective rate –Whether certain improvements in the Port should be excluded under the PILT Act Discretionary powers of Crown Corporations –Standard is reasonableness –Exercise of discretionary powers held unreasonable in this instance
Best Practices Altus Group retained in 2003 by AIC to: –Identify and Address Differences in Approach Methodology Policy –Propose solutions –Require discussion/review –Require testing in Case Study Stakeholders involved in the process Properties included Military Bases, Ports, Historic Sites, Penitentiaries and Wilderness Land in National Parks Report remains in draft Federation of Canadian Municipalities withdrew in February, 2006
Key Valuation Issues Market Value where no or limited market –Special Purpose –Value in Use –Value in Exchange –Value to owner Valuation methodology –Cost Approach –Income/Direct Comparison Land Value –Impact of land use restrictions – local and federal –Treatment of Excess land –Size Exemptions Depreciation in Cost Approach
Limited Market – The Southam Case Features are: –Specialized improvement with a limited market. –Utility for the current owner. –Limited market appeal for other users except at significant discount from replacement cost Example: Pacific Press Building, Surrey, BC
Limited Market – The Southam Case State of the art newspaper building specially designed and built Replacement Cost in excess of $40,000,000, the value for assessment purposes. Owner would not sell for less Market Value for an identified alternative use under Income Approach was $25,000,000 Assessed value held on appeal to be $25,000,000.
Limited Market – The Southam Case Identifies challenges of limited use properties Value in Use or Market Value Two appeals to BCCA (2004 and 2008) –Southam Inc. v. Assessor of Area #14 (2004 BCCA 245) –Pacific Newspaper Group v. Assessor of Area #14 (2008 BCCA 284) Concept challenged in other jurisdictions
Restricted Use – Western Stevedoring Lease from Vancouver Port Authority to bulk break terminal Restricted uses in lease No identified prospect for change of use Restricted use affected value –Use of comparables not subject to restrictions not appropriate –Land rented at market –Land valued by capitalized rental income Court (2006) largely upheld Board decision Whether restricted use = HABU will depend on facts
Building Inventory –Pre - WW I44,977 m 2 (484,144 sf) –1915 -194528,386 m 2 (305,554 sf) –1950 -199065,368 m 2 (703,638 sf) –1990 -201032,133 m 2 (345,888 sf) –Total170,864 m 2 (1,839,224 sf)
General Principles - PILT HABU – What should be assumed? –Existing Use –Alternate Use Cost Approach – When applicable Land Value –Federal Land not subject to Zoning –Subject to federal land use planning and regulation –Are federal use restrictions self-imposed – should they be ignored?
General Principles - Land Land Use considerations –Principle of Consistent Use –Federal land use regulations reflect mandates and policy Excess Land –Areas may appear under-used –Considerations are: –May reflect expansion plans –Required as buffer –Contamination –Environmentally sensitive –Land use regulations –Restricted use requires consideration of appropriate comparables
General Principles - Land Land Value considerations –If current use assumed to be highest and best use, should land value reflect current use and density, even if appears under-utilized? –Should land value reflect value of entire parcel or the sum of the parts? Challenges –Limited comparables for larger parcels –May consider smaller sales and adjust as appropriate –Land use needs to be reflected in comparable analysis –Potential for use of subdivision residual approach –Roads and services to be ignored –Value as if serviced to periphery only? –Value lands as serviced but with no additional value for services?
Improvement Cost –Replacement v. Reproduction Cost –Exclude decorative, ornamental and non-functional item –Treatment of GST/HST [See Executive Director of Assessment v. Food City, 2005 NBCA 65] –Method of calculating costs: –Costing manual –Quantity Survey –Recent Base construction cost experience –Use of Actual cost requires care –Inclusion of other costs (e.g. demolition, relocation, site clean-up) –Specialized features –Exclusions under PILT Act
General Principles - Buildings Depreciation –Physical –Age/life tables –Observed condition –Functional –Special purpose facilities subject to changes in technology, equipment, mission and policy –Proper understanding of base dynamics required –Review of MRADP, Demolition Plan, Realty Rationalization Plan –Increased or excessive operational costs –Excessive size in relation to current needs –Inefficient design –External ( Economic,Locational) –Planned base closure
General Principles - Buildings Use of Income Approach –Check on cost approach or stand alone –Assistance in estimating functional and/or external obsolescence –Most appropriate for standard uses –Consideration of alternative market uses Income Approach – Issues –Recognize that income approach includes land –Need to adjust for size differentials –Use of market-derived inputs –Assume typical not specific tenant –Capital deficiencies reflected
Halifax Citadel - A Case Study To say the Halifax Citadel is Priceless is obvious; to say what its value may be for taxes is less clear [Phelan,J]
Halifax Citadel - A Case Study Background –48 acre site close to downtown Halifax –Built 1828-56 –Use restrictions imposed by Canada National Parks Act –Land zoned Regional Park by HRM –Highest and Best Use agreed to be National Historic Site –Value considered by PILT DAP in 2007; Judicial Review by Federal Court 2009. Valuation Issues –Effect of restricted use on land value –Implication of land used as part of fortifications (the glacis) –Reproduction v. Replacement Cost for value of eligible improvements –Whether functional obsolescence applicable
Halifax Citadel - A Case Study Land Value –Assessors Position –Value entire site (48 acres) by reference to alternative uses –Adjust comparables for large size (-84%) –No specific adjustment for density or use restrictions –Estimated Land Value $19,000,000 –Appellants Position –Took use restrictions into account –Nominal value ($10) for land being part of fortifications (glacis) –Value of land under eligible improvements – based on actual density –Estimated Land Value $286,010
Halifax Citadel - A Case Study Renovated Casemate
Halifax Citadel - A Case Study Value of Eligible Improvements - Casemates –Assessors Position –Used QS estimate of Reproduction Cost –Adjust for physical depreciation based on remaining economic life –No adjustment for functional obsolescence based on current use as a living history museum –Appellants Position –Value based on Replacement Cost –Adjustment for physical depreciation –Adjustment for Functional and economic depreciation
Halifax Citadel - A Case Study Recommendation to Minister by DAP –Land Value –Restricted use to be taken into account –Land value only relates to 60,542 sq. ft. or 3% of total site area –Eligible Improvements Value –Value based on Reproduction cost preferred in this instance because of specific use –Physical Depreciation at 40% –Casemates unused or partially used: 50% economic/functional depreciation
Halifax Citadel - A Case Study Ministers Decision –Acceptance of DAP Decision Judicial Review by Federal Court [Halifax Regional Municipality and HMQ, as represented by PWGSC 2009 FC 670] –Review of Ministers decision not DAP recommendation per se –National Historic Site restrictions to be taken into account –Market value to be determined (per NS Assessment Act) –Cannot equate Market value to subjective value –DAP land valuation deemed unreasonable –50% discount for functional depreciation lacked rationale –Ministers decision quashed
Halifax Citadel - A Case Study Federal Court of Appeal –Federal Court decision appealed –Hearing held last week of May, 2010 –Decision yet to be handed down