AIC NATIONAL CONFERENCE VICTORIA 2010

Appraisal Institute of Canada 2010 National Conference – Victoria

AIC NATIONAL CONFERENCE VICTORIA 2010

HIGHEST AND BEST USE THE ELUSIVE CONCEPT

D Allan Beatty, AACI, P.App


Debate rages on between theorists and practitioners

Last probed at NFLD conference – and again in Vancouver, but its still evolving

Additional cases have been decided – what can be taken from them

Outcomes of proper resolution CAM, AATME, KEOBU

H&BU – Finding the “H” Spot


H&BU – Creative Co-Use


Theorists maintain that the only legitimate approach is either:

Market, market, market, or Income based on fiction

Question #1: Does this truly (correctly) reflect market?

Question #2: Who’s domain does this fall into?

Question #3: Is this a matter of theory, or a matter of evidence?



Examine how we got here, and see if there’s a way forward

Preface discussion by broadening view – inevitable that H&BU and MV definition be considered together

Also without fail, must understand how the interpretation of the concept will connect with CAM

Have gotten over the barrier of MPFU



THE DEBATE

Needless to say, each assignment presents unique challenges

Clear examples where Sales Comparison and Income methods are difficult or not reliable

Others where these approaches are used in conjunction

Theory taken to extreme suggests some property types cannot be valued or that H&BU cannot be resolved


THE DEBATE

To address:

Outline the issues

Examine leading cases

Identify gaps between theory and practical resolution

Suggestions for Identifying Conflicts


THE DEBATE

This Presentation Does Not:

Deal with H&BU for vacant land

Present legal argument

Suggest that there are not alternative solutions

Put forward issues that are not debatable

Like every appraiser – these are my limiting conditions


Examples

Why me?

Property types Include:

Youth Rehabilitation Camp

Pulp &/or Paper Plants

Plywood Plants

Munitions Depot

Nuclear Power Plant

Research Greenhouses

Potash Mine

Uranium Mine

Deep Sea Terminals

Radar Station

Creamery

Gyproc Plant

Farm Equipment Plants

Slaughtering Plants

Meat Packing Plants


Examples

Why me?

Rail Facilities

Canola Oil Plant

Food Processing Plant (NJ)

Historic Properties

Institutional: Schools, Hospital, Nunneries, Churches

For Various Purposes

Market Value in Use

Purchase Price Allocation

Finance

Property Tax

Insurance

Damage Claims

Rental Rate Determination


THE DEBATE

My fundamental premises:

Every property has a highest and best use

Every property can be valued

Most probable future use is closely aligned with highest and best use

Utility creates value


THE DEBATE

My fundamental premises:

Exchange of capital is a broad concept, and should not be looked at too narrowly

If the beneficial use of a property is not unduly impaired, it cannot be assumed to be so (i.e. you can’t prove a negative)

All geared towards CAM, AATME, and KEOBY


SOME CLIENTS DON’T AGREE


THE DEBATE

Court decisions began with Southam News

Printing plant in Greater Vancouver area Prints two largest newspapers in lower mainland State of the art Developed new and former plant closed, then sold Appellant and appraiser agreed that the new plant, if

discontinued as plant for printing would have a value roughly half the assessment


THE DEBATE

Goes through channels

Decisions says that it was not demonstrated that more than one purchaser existed

Therefore H&BU could not be resolved sufficiently to satisfy the “open and competitive” nature of the market (in MV definition)

Court found that the alternative use value (agreed statement of fact) was the proper measure


THE DEBATE

Reading the ruling suggests that the Supreme Court judge connected these two concepts very directly

Found that this case was distinguishable on this basis from other cases that supported using a cost approach to value

Also found (my opinion) that the agreement between assessor and appellant was determinative


THE DEBATE

My view is that without the agreement (which is described as evidence of the property value for some other use) the ruling could well have gone the other way

Considerable case law was overcome in this ruling – and upheld on appeal


THE DEBATE

Appeal in subsequent year, PAAB sustained the assessment, finding that the assessor did address some of the shortcomings

Appeal goes up the line to Court of Appeal

Appeal is upheld, based on the finding that PAAB should have been bound by earlier ruling – also comments on sales of going concern not evidence of RE demand


THE DEBATE

Judge writing in the minority states that he would have found for the assessor

My take: The finding of whether there is demand shown for the RE asset is a finding of fact and should be up to the Board (in this case) to consider the evidence before it

While there is no doubt of what the court ruling says – questions do arise as to how it should be interpreted


THE DEBATE

Two cases polled the first decision and make reference to it:

Labatts Breweries in St. John’s

Gander Airport, Gander, Nfld

The Citadel, Halifax contains a passage from the Gander ruling

First two are readily distinguishable


THE DEBATE

Labatts plant in St. John’s located in transitional area

H&BU had changed, but Labatts chose to operate at a higher cost due to liquor rules in the Province

Gander Airport improvements were written down to $1 as the airport could not be operated profitably – even with subsidy


THE DEBATE

Both cases suggest that they follow the principles of Southam, but do they?

Labatts is probably correctly decided – but for different reasons

Gander – better solution to value the improvements as if appropriately sized?


THE DEBATE

Most recent case is a Saskatchewan assessment appeal.

Saskatchewan Creamery – Property owner anonymous

Only one in Province – processes all milk Farmers would incur $5.0 million extra Operating at over 90% capacity


THE DEBATE

Has changed hands through acquisition or merger more than once (this was in evidence)

Each case has continued in operation, and will continue Argument, by appellant, is that it could not be proved there

wasn’t obsolescence, so there had to be Property should be valued as a shipping warehouse


THE DEBATE

BOR sustained the assessment – will be appealed

But – what did the Board hear?

1) Appellant was clearly relying on same issues as Southam/Pacific Newpaper Group Inc:

2) Also suggested no more than one purchaser

3) All other plants sold for alternative uses

4) Sale of going concern not evidence of demand


THE DEBATE

4) Evidence put forward on rents and costs to convert to alternative use

Respondent points out:

1) More than one way to look at “open and competitive”

2) Sale as part of going concern should not be overlooked

3) If not present owner, high probability another competitor or farmer co-op would form to process milk in Province


THE DEBATE

4) Common for owner/operators of special purpose property to self-supply

5) Cost to create is a form of exchange of capital, just as purchase and renovate is

6) Inconsistent to say the only sales data that exists cannot be used, then to say the property cannot be valued due to lack of sales

7) Agreed that on the balance of probabilities milk processing would continue


THE DEBATE

Also point that obsolescence allowance is two step process

Identification before quantification – sometimes the answers are complex

Difficult to bifurcate the issues, between H&BU and the methodologies that will appropriately be applied


GETTING A GRIP


GETTING A GRIP


THE DEBATE

Some benefit from looking from bottom up

Three options to value (special purpose) property

As it exists For adaptive re-use or alternative use As vacant


THE DEBATE

Which is best?

The one that most closely mirrors the thoughts and actions of market participants or potential purchasers

Let’s expand on the concept of exchange of capital Not get boxed in by too narrow a view on market activity Better understand the views of the market we are trying to

simulate


THE DEBATE

Observations:

Adaptive re-use seldom captures real-life examples, but is useful in proper situations

Must look past irrelevant information Must consider non-realty influences


THE DEBATE

Factors to consider:

Definition of market value contains verbiage “open and competitive” market

Narrowly defined in present court rulings No reason current owner should be left out of the

consideration, if other owners would act similarly Exchange of capital is a valid concept Least cost alternative drives market


THE DEBATE

Factors to consider:

Allows owner/user to fulfill needs without profit motive Customize operations, innovate design So long as value doesn’t include very specific customized

features Beneficial use will assist in judging Balance of probabilities argument


CASE STUDY - SCHOOLS

Edmonton – Satellite Community 4 to 5 other sales, including

other satellite areas Examples of both school being

re-used and site re-developed Property had both features High land values for MF Conclusion – to retain school

but release part of site to alternative uses

Saskatchewan – Small Town No demand for school Population of school aged

children dropping Other closures in District Some students already being

bused past community Low land values Some demand for alternative

uses Low probability for significant

adaptive re-use


Same time, same property type, two different outcomes in Highest and Best Use

AATME – Appraise According to Market Evidence

Not an examination of market evidence first – much broader view is required in initial steps

Many have suggested that business concerns should be left out of the equation – cannot support this


Case Study – Pulp Mills

Pulp mill in north central Alberta

Operating at fairly high efficiency – required in order to make even a meagre return on operations

Significantly, this does not provide any replenishing capital and virtually no return on capital investment

Series of sales have occurred in US and Canada since 2001 (now 10 or so transactions available)



However, none sell on the basis of just RE or just M&E

So, available data needs to be broken apart between the two asset classes

Meanwhile macro factors are easily identified as a major contributor to the state of the market

Sales show major and progressive gap between RCNLD and proportionate SP



Macro factors include

Comparatively high transportation costs and labor costs

Improvement in technologies and reliability of international competition

Ability for new producers to regenerate raw product in half the time – less distance to market



These are real market impacts

Without the ability to examine, where would that leave the valuer?

How can the position be supported to say “disregard any information that involves multiple asset sales”, then say, I can’t value the property due to lack of data



Is it within the realm of the appraiser to provide evidence that there is a market?

How will this assist in resolving valuation properties for truly unique properties – one per Province?


Observations (More) – Video to Follow

Cost will remain as one of the key approaches

Its death is highly exaggerated

Talked about exchange of capital – consider also if the balance of probabilities would see a competitor jump into the gap

Some cases will involve a MPFU that is similar if not identical to present use


Key Concepts

This does not signify that there isn’t obsolescence

Market and income data can be use to assist in identification and in quantification

This is where the consideration of beneficial use is paramount

Bakery and/or creamery are examples – changes to the market don’t necessarily signify lack of demand for large efficient solution


Key Concepts

Courts will continue to make rulings – but don’t expect all problems to find resolution

Expect to be challenged on justifying the Highest and Best Use

My take is “Use Value” is narrowly defined, and unnecessarily expanded in some of the current rulings


Key Concepts

Use value applies to artificial constraints on trade, or involves an asset that that may not have a value that can be readily defined in monetary terms (ferries, bridges, public spaces, wilderness property)

Should not assume that this applies to special purpose property unless circumstances dictate

I don’t believe this was the case with PNG, but that’s personal – its still precedent setting in BC


Key Concepts

Notwithstanding other rulings are coming out that poll the same decisions:

But, let’s revisit key points. Successfully resolving H&BU will help avoid pitfalls.

Available evidence will continue to dominate the most effective valuation techniques (maybe in combination)

So, there is a roadmap:


Key Concepts

Determine MPFU

Seek evidence of impairment of beneficial use

Choose best method of reflecting market reaction/behavior

Value according to CAM, AATME, KEOBU.

Documents

AIC NATIONAL CONFERENCE VICTORIA 2010