Assessment Of Residential Sites Under ConstructionLast year, we found a number of overvalued development sites under construction. Until a few years ago, BC Assessment primarily used the Cost Approach, whereby they take the land value and add the development costs in place to obtain the total assessed value.
However, a building that is more than 10% - 15% complete, is valued by the Residential Approach, whereby the retail value of the residential and commercial space is determined and the cost to complete is deducted. The cost approach has often produced a lower value.
Building value may be allocated to class (01), (06) or (08) as a proportion of GBA or based upon the value of each component.
Issues to consider:
- Which approach to value (Cost or Residual) is appropriate? How should you calculate % of completion?
- In the residual approach, what costs should be deducted and have BCA deducted them?
- Are the costs and the income used by BCA appropriate?
- Is the classification split correctly?
The total of each component is determined and the costs to complete are deducted. The important consideration is the physical state and condition of the property at October 31st (Sec 18 of the Assessment Act). Market value is still to be determined, which is between a willing buyer and seller without duress.
Costs could include, but not be limited to:
- Sales commissions
- Developer overhead costs
- Tenant move-in costs
- Construction costs to complete
- Carrying costs
- Risk allowance and profit
- Property purchase tax
- Consultants fees
The various components need to be checked (such as the size of development; net rentable/saleable areas) and any restrictions on the property or City requirements that affect value, including requirements to include public facilities. Is the cost to complete what it would cost today?
If your site has abnormal costs, in relation to a flat, stable site, such as the need for a retaining wall or removal of contamination, those costs should be deducted from the assessed value.
Land Value Split
The Assessment Act requires that BCA provide a separate value for the Land and each different type of land needs to be given an appropriate classification.
So why is this an issue? Generally, commercial land is worth less than residential land. BCA, to date, has been dividing the land value based upon GBA after valuing the land on a total $/sf. However, if each component is valued on its own, the total value of the commercial component could be less.
Hence, it is often beneficial to have component values applied to each component separately.
BCA does not have all of the information that the owner has. Hence, a detailed valuation, by a professional tax consultant, might produce a lesser value or a different class split.
Peter Austin is the Principal of Austin Real Estate Consultants, a past president of the Canadian Property Tax Association and acts on behalf of a number of developers in BC.