Office Towers vs. MPAC and Toronto

[Glen]

On Tuesday the fight moves from the ARB to the courts.

Background.....

Toronto's biggest office towers are in line for potentially huge property tax reductions – leaving other taxpayers to pick up the difference – after a decision by an assessment panel.

The stunning decision by the Assessment Review Board also raises the prospect that the towers are owed millions in refunds dating back to 2001, an unexpected expense that lands on the city just as it is trying to pull this year's budget into shape.

While the board's decision doesn't calculate the amount of refunds and tax reductions owed, and an appeal is possible, the amounts in play are staggering:

The successful appeal was launched by the owners of 12 towers in Toronto's biggest office complexes: TD Centre, BCE Place, Commerce Court, First Canadian Place, Scotia Plaza and Royal Bank Plaza.

The combined assessed value of the properties, according to the decision, is more than $5 billion.

At the 2007 commercial tax rate of 4.09 per cent, the towers paid combined taxes of more than $200 million last year.

http://www.weirfoulds.com/showpublication.aspx?Show=688

It took testimony from nine experts, weeks of hearings, and a review of hundreds of exhibits to interpret a statute and determine how business property should be assessed for municipal taxes. For the owners of six office tower complexes in downtown Toronto, it was well worth the effort.


The February 22, 2008 Ontario Assessment Review Board decision involving six office tower complexes in downtown Toronto (the "Bank Towers decision") represented the culmination of one of the most lengthy and complex assessment appeals ever determined by the Board or its predecessors.


The decision – which sided predominately with the taxpayers' interpretation of how business property should be valued – could result in a retroactive savings of millions of dollars in assessed taxes for the property owners involved, and may have implications for other commercial property owners.


The City of Toronto and the Municipal Property Assessment Corporation (MPAC) have sought leave to appeal the decision to the Divisional Court, so a final determination of this case has not yet been made. But the findings of the Board will be of interest to commercial property owners throughout the province.


First step: Determine what has to be valued

At issue in this case was a 1998 amendment to the Assessment Act that required land (including buildings) to be valued at its "current value", defined to mean "the amount of money the fee simple, if unencumbered, would realize if sold at arms-length by a willing seller to a willing buyer."


MPAC argued that it's not enough to value land by reference only to the owner's interest where that land is subject to a lease that creates a tenant's interest of substantial value. It should be the totality of the interests in the property that are used to determine an assessment value.


The Assessment Review Board disagreed. It noted that the 1998 amendments removed the former requirement that land be assessed against tenants to the extent of their occupancy as the basis for business taxes – and it contrasted the Assessment Act definition of land (a physical description including buildings and structures) with that of the Expropriation Act, which specifically defines the interests in land to be valued, including those of tenants.


It further found that leases were legal encumbrances on an owner's fee simple interest, in that they limit an owner's ability to deal with its fee simple estate. The Board also noted that a tenant's interest in a lease was personal property, which was not subject to assessment.


In the end, the Board found that "fee simple, if unencumbered" did not express a legislative intent to assess all interests, including tenants' "market" interest or value (positive or negative) of its lease contract.


Next step: Determine how to value

Having determined the legal meaning of the statute, the Assessment Review Board had to decide which of the two competing valuation methodologies presented at the hearing best met this statutory definition.


MPAC proposed a method that replaced current contract rents with current market rents, with standard allowances for vacancy and management expenses and a capitalization rate determined from market sales of comparable properties.


The taxpayers also advocated a method that replaced current contract rents with current market rent. However, the capitalization rate was adjusted slightly upwards (from 8% to 8.75%) to reflect the added costs and risk of acquiring full current market rents for all leaseable areas for the entire property.


The Board accepted the taxpayers' methodology, noting that MPAC's own valuation guidelines provided that the unencumbered fee simple was to be valued "as if the subject space was vacant and available for let".


The Board also settled a number of corollary but important valuation issues, based on the extensive evidence given at the hearing:


Market rents. The Board found that market rents were to be determined for that of a typical tenant and a typical unit, in this case a tenant occupying one full floor or more. MPAC had used all market rents available in the relevant time frame, including less than full floor leases.


Renewal rents. While the taxpayers proposed assessing the value based on new leases of full floor tenants and not renewal rents, the Board found that renewals, expansions and "blend and extends" for a full floor or more were part of the market, and should be included in the analysis.


Adjustments to face rent. The Board also determined that face rents should be adjusted to reflect cash inducements, lease takeovers, rent-free periods and lease commissions. It also found that the standardized vacancy allowance should reflect the actual revenue loss incurred and be applied to the estimated potential gross revenue of the property, not the revenue after deduction for non-recoverable operating costs.


Parking income. The Board determined that parking revenue should reflect monthly charges for unreserved parking spaces applied to all parking spaces, and that income from transient (daily and hourly) use was not to be added.


Tenant improvements. There was extensive, non-contradicted evidence that new typical tenants attributed no value in exchange to the existing improvements, and the Assessment Review Board determined that the fair market rent was not to be adjusted upwards to reflect any value of tenant improvements. The Board clearly noted however that this finding was restricted to the facts of this case, and that the assessed value in other cases could include the value of tenant improvement.

Based on these new ground rules, the Board asked the parties to determine the appropriate market rents and resultant changed assessments. Both the results of the final assessments – and the status of the leave to appeal application – remain to be determined.

 

[Whoaccio]

Man what I wouldn't give for Ontario to stop taxing property values and just tax income, on behalf of municipalities. Or maybe sales.

 

[Hipster Duck]

^American cities that tend to tax sales more than property values find themselves up the creek come recession time. Sales plummet while property values tend to be more resilient.

 

[nfitz]

^American cities that tend to tax sales more than property values find themselves up the creek come recession time. Sales plummet while property values tend to be more resilient.

Is that what destroyed New York City finances for a couple of decades in the 1970s and 1980s?

 

[Observer Walt]

^American cities that tend to tax sales more than property values find themselves up the creek come recession time. Sales plummet while property values tend to be more resilient.

That's one of the biggest arguments in favour of property taxation. Values do tend to be "resilient" (less likely to change than the basis for other forms of taxation). As the need for municipal services also tend to remain relatively static regardless of economic conditions, a resilient tax source is matched up against a similarly resilient spending requirement.

That said, it's time for the Province to overhaul assessment regulations. I think this is the second time the big downtown towers have gone through tis process, since the assessment reforms of 1998. If some things are not clarified, we'll see this again in a few years.

 

[Whoaccio]

I would prefer income tax to either VAT or property, so lets just be clear on that.

BUT. VAT is still a fairer and more equitable method of taxation compared to property tax. It would be a better underlying measure of prosperity (non-essential consumption) than property and be far easier to administer. It would also include non-residents who regularly spend time in the city, using our services and, frankly, ignore those who live in the City but spend most time elsewhere. Most importantly, it wouldn't discourage investment in housing and office stock.

The argument about sensitivity to economic cycles is valid, but maybe somewhat overstated. Its also not necessarily unreasonable that if the population's ability to pay tax is hurt by a recession, then governments should plan accordingly. It goes without saying that the same 'resiliency' that benefits governments implies baseless for the tax payer. (Taxes are supposed to be based on the population's ability to pay, not poll taxes).

 

[Glen]

Other municipalities have also take an interest in the potential of this decision to stand. The impact of this could be huge. There are some predictions that it could translate to a big increase in residential property taxes.

http://www.ottawa.ca/calendar/ottaw...6 - Assessment Appeal Authorization Final.htm

This appeal is significant not only because of the total annual assessment at risk for the specific properties under appeal but also because there are new and broad implications for the assessment and taxation of property everywhere else in Ontario, including Ottawa. Based on information currently available, it is estimated that the property assessment at risk in Ottawa amounts to approximately $4.3 billion corresponding to potentially $100 million in property taxes.

http://www.brantford.ca/pdfs/6.2.1 CM2009-003.pdf

MPAC has indicated that there could be a 25% value reduction for properties that benefit from this decision. This decision then has the potential to shift almost $2 million in annual property taxes from the commercial property class. 75% of this amount would be shifted to the residential property class with the industrial and multi-residential property classes receiving most of the balance. This shift would result in an approximate 2% increase in the property taxes levied against the City’s residential class property owners, which equates to an increase of approximately $45.00 to the average residential taxpayer

and the list go on.

 

[makattack]

Other municipalities have also take an interest in the potential of this decision to stand. The impact of this could be huge. There are some predictions that it could translate to a big increase in residential property taxes..

Wouldn't that bring Toronto in line with the other 905 municipalities, in which the commercial/residential property taxes are more in line with each other?
In Toronto, commercial is subsidizing residential property taxes (roughly 4% tax on commercial vs 0.8% tax on residences, compared to 905 where it is generally more equal between residential and commercial).
Plus, it could help stem the flow of business to the 905. This would be of great help to business in areas of Scarborough, North York and Etobicoke where many are shutting down and moving 5-10 min away to Markham and Mississauga with their lower taxes.

 

[Glen]

Wouldn't that bring Toronto in line with the other 905 municipalities, in which the commercial/residential property taxes are more in line with each other?
In Toronto, commercial is subsidizing residential property taxes (roughly 4% tax on commercial vs 0.8% tax on residences, compared to 905 where it is generally more equal between residential and commercial).
Plus, it could help stem the flow of business to the 905. This would be of great help to business in areas of Scarborough, North York and Etobicoke where many are shutting down and moving 5-10 min away to Markham and Mississauga with their lower taxes.

No, it would not change the tax rate differences between municipalities. If it stands it would mean that the methodology that MPAC has been using is flawed. This is not simply about the "Bank Towers" appealing there assessments, it is an appeal of the method of assessment.

 

[Glen]

It is interesting that MPAC would urge municipalities to contact the province. It certainly doesn't look impartial.

http://www.region.waterloo.on.ca/web/Region.nsf/8ef02c0fded0c82a85256e590071a3ce/A78C812A580C4A4385257547005D6051/$file/F-09-009.pdf?openelement

In December of 2008, MPAC wrote to municipalities across Ontario noting that “provincial government intervention, in the form of a legislative amendment to the definition of “current value,†is necessary to avoid lengthy and unpredictable appeal litigation and financial uncertainty for municipalities.†In that letter, which is attached as Appendix 1, MPAC urges Ontario municipalitiesto raise this concern to its local members of provincial parliament.

 

[Glen]

Of the top of my head, a 25% reduction in Toronto commercial / industrial assessment base might lead to a a loss of revenue of ~250 million per year.

 

[taal]

Wouldn't think lower the tax rate on commercial properties though?
Is this a one time deal thing or will it effect the future as well?
Wouldn't think mean it would be more lucrative to build office towers in Toronto - not any office building, but whatever the ones in question are?

Sorry, I know these questions are silly but I haven't been able to sit down and read through all the articles. Anyway, Glen, you do a better job answering these questions

 

[Glen]

Wouldn't think lower the tax rate on commercial properties though?
Is this a one time deal thing or will it effect the future as well?
Wouldn't think mean it would be more lucrative to build office towers in Toronto - not any office building, but whatever the ones in question are?

Sorry, I know these questions are silly but I haven't been able to sit down and read through all the articles. Anyway, Glen, you do a better job answering these questions

Yes it would lower the tax on commercial properties, by up to an estimated 25% province wide. As for the second question, yes it would be more lucrative to build office buildings in Toronto (or any type of commercial building). Though it would not effect the comparative advantage of the other municipalities because this would effect assessments and not tax rates. On the other hand with Toronto's rates being twice that of the surrounding region, its burden would fall the greatest in acutal dollars.

 

[Paleo]

Wouldn't that bring Toronto in line with the other 905 municipalities, in which the commercial/residential property taxes are more in line with each other?
In Toronto, commercial is subsidizing residential property taxes (roughly 4% tax on commercial vs 0.8% tax on residences, compared to 905 where it is generally more equal between residential and commercial).
Plus, it could help stem the flow of business to the 905. This would be of great help to business in areas of Scarborough, North York and Etobicoke where many are shutting down and moving 5-10 min away to Markham and Mississauga with their lower taxes.

Maybe once they get rid of education tax pooling?

 

[taal]

Maybe once they get rid of education tax pooling?

That's something Ontario wide no... ?