M.C. Lount & Associates Decisions

3. Assessor of Area #09 – Vancouver v. Bramalea

Date: 19970320 Docket: CA021386 Registry: Vancouver

COURT OF APPEAL FOR BRITISH COLUMBIA

ORAL REASONS FOR JUDGMENT:

Before:

The Honourable Mr. Justice Hollinrake March 20, 1997 The Honourable Madam Justice Huddart The Honourable Mr. Justice Braidwood Vancouver, B.C.

BETWEEN:

ASSESSOR OF AREA #09 - VANCOUVER

APPELLANT (APPELLANT)

AND:

BRAMALEA LIMITED

RESPONDENT (RESPONDENT)

J.H. Shevchuk appearing for the Appellant B.T. Gibson appearing for the Respondent

[1] HOLLINRAKE, J.A.: The Assessor brings this appeal by way of Stated Case pursuant to the Assessment Act. It concerns the Hyatt Regency Hotel in downtown Vancouver.

[2] For the purposes of the 1993 Assessment Roll, the Assessor concluded that the Hotel's Actual Value was $74,869,000. The respondent appealed to the Assessment Appeal Board, taking the position that the Hotel's Actual Value was $47,000,000.

[3] At the Board hearing, Mr. Metcalf, the expert witness called by the Assessor, and Mr. Geddes, the expert witness called by the Respondent, agreed that the Hotel should be valued using the business income approach. The central issues before the Board were the following:

a. determination of projected income;

b. determination of the overall capitalization rate to be applied to the projected income; and

c. the appropriate method for extracting the value of furniture, fixtures and equipment from the overall value of the Hotel.

[4] On 1 August 1995, the Board published its decision. It held that the Hotel Actual Value was $59,750,000.

[5] On the request of both the Assessor and the Respondent, the Board filed a Stated Case on 6 September 1995.

[6] The Stated Case was heard by a chambers judge on 23 and 24 November 1995. The learned chambers judge rendered his decision on December 15, 1995, and provided supplementary reasons on February 5, 1996, and directing that the matter be remitted to the Board.

[7] Before this court, the Assessor submits that the Board made a fundamental error in its determination of the actual value of the Hotel for the 1993 assessment roll when it failed to honour the "principle of consistency", which we prefer to state as the concept of consistency. The Assessor also alleges an error in the manner in which the Board excluded furniture, fixtures, and equipment from the business income valuation to bring the valuation into accord with that required by the Assessment Act. The Act requires that only land and improvements be valued. Thus, the Assessor says, the chambers judge erred in his answers to his questions 3, 4, 5 and 7 and to the respondent's question no. 3.

[8] We will consider each in turn.

[9] Question 3 asks: Did the Assessment Appeal Board err in law by adopting an unreasonable view of the evidence in connection with stabilized room rates and occupancy figures to be used to derive Actual Value for the subject property?

[10] The Assessor says that the Board violated what he referred to as the internal consistency principle when it calculated revenue on the basis of a modified actual rate for the year 1992, on the one hand, and on the other hand, calculated occupancy on the basis of a five-year average.

[11] Like the chambers judge, we are of the opinion that this was a matter well within the discretion of the Board. There is no logical connection between the concept of room and occupancy rates such as to require that the same period be used to determine these two stabilized rates.

[12] Question 4 asks:

Did the Assessment Appeal Board err in law by not applying generally accepted appraisal principles in the determination of Actual Value for the subject property?

[13] The Appellant argued that the net income of the subject property should be computed by reference to industry averages. The Respondent contended that the Board should place primary reliance on the actual results of the Hotel unless there was evidence to suggest that the Hotel had been mismanaged.

[14] On this issue the Board found in favour of the respondent. It said:

Daily room revenue was quoted at $116.30 as a stabilized rate by Mr. Geddes. Mr. Metcalf used a rate of $125. The Board favours Mr. Geddes rate. Much discussion and argument took place over this issue. Mr. Metcalf and Mr. Shevchuk both argued that industry standards must be met. The rate of $125 was based on an average of competing hotels. Mr. Geddes and Mr. Gibson argued that prevailing rates should apply. The Board heard evidence from Mr. Anderson to the effect that a rate of $125 had never been attained nor had an occupancy rate of 70%. Evidence suggested that each hotel is unique. There is no reason to assume that one would be similar to the other as to income and expenses. A downtown hotel may exist for years and never reach the level of income or occupancy reached by the competition, assuming competent management which is apparent and accepted by the Board in this instance. Differences in hotels may result in an achieved rate of $116.30 as against $125 or an occupancy of 67.4% as against 70%. These differences may be as apparent as location but less obvious differences may be attributable to the age of the hotel, the hotel rating (4 star v. 5 star), the quality of the restaurants, the client mix, etc. Each hotel, being an entity unto itself, is fraught with guests. Even excellent management cannot control these variables. The Board is of the opinion that these factors would be considered in the market place and a purchaser would not knowingly pay a price based on a room rate of $125 and 70% occupancy when the facts indicate otherwise.

The Board accepts a room rate of $116.30 and occupancy rate of 67.4% as being representative of actual but also economic rates. This would suggest a gross room revenue of $116.30 x 67.4% x 365 days x 647 (rooms) = $18,511,293.

The Board recognizes that where a percentage is used, the higher the gross income, the higher the figures for all departmental incomes and expenses. This tends to distort the facts. The Board favours the use of stabilized actual costs or income rather than a percentage of gross costs or income.

[15] The Board was faced with a choice between using industry averages or figures derived from the actual experience of the Hotel. The Board accepted the submission of the Respondent that the actual rates experienced by the Hotel should be the foundation of the business income approach unless Hyatt was mis-managed. The nub of the answer to this analysis of which is the proper approach lies in the uniqueness of the hotel. The more one strays from actual experience, the more one introduces unreality that is not based on the uniqueness of the property being valued. The purpose of the income approach to valuation is to capture the unique value of the subject property, that is actual value. The income approach is designed to reflect many elements, including location, age, hotel rating and restaurant quality. Accordingly, we agree with the learned chambers judge that the Board did not fall into error when it chose the modified actual experience of the Hotel in preference to the evidence of industry standards.

[16] Question 5 asks:

Did the Assessment Appeal Board misapply the Income Approach to value and thereby err in law when it applied a capitalization rate derived from stabilized income figures based on hotel industry averages to a stabilized income for the subject property not determined on the basis of hotel industry averages?

[17] In calculating the capitalization rate, the Board placed reliance on Mr. Metcalf's comparables, and in calculating the net income, the Board placed primary reliance on Mr. Geddes' opinion as to income and expenses. The Appellant argued that this offends, again as he refers to it, the principle of consistency and that having adopted Mr. Metcalf's evidence to fix the appropriate capitalization rate, the Board had no option but to accept his evidence concerning the net income of the Hotel.

[18] We agree with the respondent's submission, as did the chambers judge, that the evidence does not demonstrate that Metcalf used industry averages. On a close analysis of the transcript it appears more likely that he was calculating the net income of the comparables by reference to the actual performance of those hotels at the time of sale. Accordingly, the foundation of this submission is not made out.

[19] Question 7 asks:

Did the Assessment Appeal Board err in law when it adopted a combination of income and expense figures and percentages taken from both the actual experience of the subject property and hotel industry averages to derive stabilized income to be applied to determine the Actual Value of the subject property?

[20] The chambers judge answered this question this way:

The Assessment Appeal Board did not err, except for failure of the Board to derive an appropriate expense percentage from the same years as the Board used to determine hotel room revenue.

[21] Counsel agreed that this answer is not correct. They agree that the answer must be Yes or No. The Respondent put its argument this way in its Factum:

In the hearing before the learned Chambers Judge, the Appellant took the position that the Board erred in placing any reliance on the actual income and expense figures. The learned Chambers Judge disagreed and echoed the sentiment of the Board ÄÄ that the actual income and expenses were the best evidence. This does not, of course, mean that the Board could not rely on or give weight to industry averages in appropriate circumstances. It is therefore submitted that the learned Chambers Judge ought to have simply answered the question in the negative.

The learned Chambers Judge nevertheless reviewed the Board's treatment of every item of income and expense. He concluded that they had erred in respect to the calculation of room expenses and telephone expenses and referred those two matters back to the Board.

The reasonableness of the telephone income and expenses had been expressly raised in the Appellant's Question 1 of the Stated Case. The reasonableness of the room expenses was not, however, one of the issues raised in the Stated Case. It is therefore submitted that the learned Chambers Judge went beyond the issues raised in the Stated Case when he expressed an opinion on the reasonableness of the room expenses adopted by the Board. It is submitted that the learned Chambers Judge ought to have confined himself to the question before him ÄÄ whether the Board erred in taking into account both the actual income and expenses and the industry averages, and simply answered the question in the negative.

[22] We agree. Consequently, the answer to Question Number 7 is NO and the appeal is allowed to this extent.

[23] Respondent's Question 3:

Did the Assessment Appeal Board err in law in acting without evidence or upon a view of the facts which could not be reasonably be [sic] entertained, when it failed to take into account the cost of replacing and updating the furniture, fittings and equipment?

[24] The chambers judge answered:

The Assessment Appeal Board erred in failing to make an allowance for a furniture, fittings and equipment reserve.

[25] The Board ruled as follows:

The Board favours the approach used by Mr. Metcalf. Both parties agree that the cost for FF&E per room is $25,000. The Board accepts a 50% depreciation rate which leaves a value of $12,500 per room x 647 rooms or $8,087,500 which must be deducted as non- assessable. The Board agrees with Mr. Shevchuk that there is a real danger of double counting if this expense is shown as a reserve for replacement. There is a sizable repair/maintenance budget which could, in part, find its way into the FF&E component. The Board must emphasize, however, that no objective argument was heard in this respect.

[26] The respondent submitted the Board had the uncontradicted evidence of Peter Anderson, the Hotel's comptroller who provided them with the actual costs the Hotel incurred to upgrade and replace its FF&E. He testified that the 4% allowance required by the management contract had been inadequate and that during the last 11 years, the Hyatt had spent $26,728,635, or $2,429,876 per year, to upgrade and replace the FF&E.

[27] The Assessor's response was to say that some of these costs might also have been included in the figures that the Hotel reported for "repairs and maintenance." Mr. Anderson said that expenditures on FF&E-type items were either capitalized and went into the FF&E budget, or were expenses and shown as repairs and maintenance. He did not, however, suggest that there was any double counting ÄÄ the FF&E expenditures that he gave the Board were over and above what had been expense as repairs and maintenance, and his evidence was uncontradicted.

[28] The Appellant does not, in this appeal, take issue with the general proposition that it is necessary to make allowance for the costs of replacing the FF&E. Rather, he takes the position that the learned chambers judge erred when he interfered with a finding of fact made by the Board.

[29] While the court should not generally interfere with findings of fact made by the Board, the Court may do so if the Board acted without evidence or upon a view of the facts that could not reasonably be entertained.

[30] We agree that the Board did act without evidence in this case. Thus, the chambers judge was correct to answer this question in the affirmative.

[31] Accordingly, we agree that this matter must be remitted to the Board for a determination of the appropriate allowance.

[32] The Appellant further submitted that the Chambers Judge erred in law when he failed to direct the Board to reconsider the capitalization rate when he ordered that the Board make an allowance for a F.F. & E. reserve.

[33] In his supplementary reasons, the chambers judge said: There was no appeal by the assessor in the stated case from the Board's finding that 8.5% was the right capitalization rate. The respondent challenged that rate but lost, so the Board's choice of rate was found to be correct. The assessor, when arguing against the allowance of a F.F. and E. reserve did not ask that the capitalization rate should be adjusted accordingly. In my opinion, this circumstance is different from the question of the amount of the F.F. and E reserve where the Board had made no decision about the proper rate. Here, the Board reached its decision that 8.5% was the proper capitalization rate and that was not appealed by the Assessor. I have sustained the Board's finding on that point. The capitalization rate of 8.5% must stand. If that is too high a rate after the F.F. and E. reserve is taken into account in finding the capitalization rate used for the comparables, that is an error which will affect 1993 only. It can be corrected, if necessary, for subsequent years. It is not certain that it will lead to inequity with respect to other hotels because presumably they too were valued with reference to the capitalization rate derived from the same sales without inclusion of the reserve. It is only with respect to the four comparables themselves that the wrong capitalization rate may have been derived, but their values were presumably achieved from the actual sales. They did not depend on calculations based on income streams.

[34] We agree.

[35] HUDDART, J.A.: I agree.

[36] BRAIDWOOD, J.A.: I agree.

[37] HOLLINRAKE, J.A.: Consequently, the appeal is dismissed except that we would answer question 7 in the negative without the exception.

[38] The respondent is entitled to its costs of the appeal.

"The Honourable Mr. Justice Hollinrake"

Michael C. Lount, B.A. Sc., AACI, is president of M.C. Lount & Associates Ltd., a leading expert in the field of property tax assessments. Mr. Lount is a 30-year member of the Appraisal Institute of Canada and holds their senior AACI designation. He also holds a Bachelor of Applied Science degree in Civil Engineering from the University of British Columbia. He can be reached at 604-727-7902 or contact us here

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