Assessment Of Residential Sites Under Construction
Last 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 land value and add development costs in place to obtain the total assessed value.
However, a building that is more than 10% complete has been valued by the Residual Approach, whereby the retail value of the residential and commercial space is determined, and the cost to complete deducted.
Building value may be valued as a proportion of GBA or based upon the value of each component. The cost approach has often produced the lower value.
Issues to consider:
- Which approach to value (Cost or Residual) is appropriate;
- In the residual approach, what costs should be deducted, and have BCA deducted them;
- Are costs and income used by BCA relate to the same year;
Approach to value
In the Westbank case 2010-09-00256, BCA used a cost approach, while the appellant used the residual approach, providing substantive appraisal evidence and theory as to why this approach was appropriate for an incomplete building. The Board accepted the appellants approach as being the appropriate method of valuing a partially complete building. The building was 82% complete. Most components could be specifically costed.
Sales of incomplete buildings generally only take place under duress and hence if they did exist, would not reflect market value.
BCA advise uncompleted buildings will be valued using the Residual Approach provided they are more than 10% complete. For those under 10%, BCA will continue to use the cost approach.
Practically speaking a new purchaser might well value the project based upon land value and add cost to date in the early stages.
The total value of each component is determined and the costs to complete deducted. The important consideration is the physical state and condition of the property at October 31st (Sect 18 of the Assessment Act). Market value is still to be determined, which is between willing buyer and seller without duress.
Costs could include, but not be limited to:
- Sales commissions
- Developer overhead costs
- Tenants move in costs
- Construction costs to complete
- Purchasers’ due diligence costs
- Carrying costs
- Risk allowance
- Property purchase tax
- Stratification costs
The carrying costs and unit sale prices will be affected by the rising interest rates.
The various components need to be checked (such as size of development; Net rentable/saleable areas) and any restrictions on the property or City requirements that affect value, such as Daycare or community centres. One question is whether the costs being deducted by BCA are great enough and whether the unit sales represent July 1.
Land value split
The Assessment Act requires that BCA provide a separate value for 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. BCA to date have 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’s methodology was challenged in the Holborn case, 2013-09-00087.
The Board’s comments were: (Paraphrased)
- Without evidence, the Board was forced to apportion the land value on the same basis as the building value in the Westbank case.
- Legislation does not define what is meant by “attributable”.
- Based upon dictionary interpretation, the property is to be assessed according to the proportion each share “makes up” of total actual value.
- Clause 19 explains the exact circumstances regarding valuation as exists in the case at bar. Land value should be determined at market rates for each component.
- % Split based upon proportionate GBA, does not necessarily reflect “share ….”.
- There is nothing in S10 of the Act that mandates the use of an area (GBA) based formula.
- Creative Community case says “Only factors or techniques in apportioning value between classes used in the original valuation can be considered in determining proportionate share.
- Assessor says the Act does not allow for one split for land and one for improvements.
At present, therefore we may be left with two approaches, neither of which relate to GBA %:
- The component valuation on a $/sf x GBA (Holborn)
- Value based upon economic value of each component based upon the residual land value (Westbank)
But an old London Drugs case 2006-09-00142, found that determining class split based upon completed value ignored the current state and condition contrary to S18 of the Act. The Board concluded it was to determine “share” of actual value and S10 did not require assessor to determine share by use (but neither does it say it cannot). It opted for split based upon GBA of each use. It is noted that no evidence of land value for each component was submitted by the appellant in this case, hence the Board could not contemplate the issue raised in Holborn.
There will be continued discussions of when to adopt the residual and cost approaches and what costs should be included or deducted.
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.