Appraisal Institute of Canada 2010 National Conference - Victoria Federal Properties –Valuation Issues June 3 rd, 2010 Carl Nilsen, AACI

Appraisal Institute of Canada

2010 National Conference - Victoria

Federal Properties –Valuation Issues

June 3rd, 2010

Carl Nilsen, AACI

Purpose and Intended UsePurpose and Intended Use

To identify issues that have arisen or which might arise in the valuation of military bases and other federal properties

No opinion is offered or intended regarding the appropriateness of methodologies referred to

Military Bases – ContextMilitary Bases – Context

DND Provides Support to Canadian Forces– 21,000 Buildings– 5,500 km Roads– 3,000 km water, storm and sewer pipes– 2.25 million ha (5.4 million acres) of Land

DND Infrastructure Replacement or Refurbishment

25% of holdings in 10 years

50% of holdings in 20 years

Valuation RequirementsValuation Requirements

Disposition, redevelopment

Payment in Lieu of Taxes (PILT)

Disposition, RedevelopmentDisposition, Redevelopment

Hunters Point Naval Shipyard, San Francisco

– Opened 1867, US Navy operations from 1941

– Closed 1974

– Development Concept 2000

– Grading operations and infrastructure 2007/8


– 1,400 acres

– 275 Buildings

– Fully Serviced

– Aerospace Industry

– Rental housing

– Commercial, Hospitality, Sports

– Summerside Airport

Slemon Park

Summerside,PEI


CFB Chilliwack

Opened 1943, closed 1998, transferred to CLC 2004

Demolition and Retention of Buildings

Renovation of former engineering School

Canada Education Park – UFV

Garrison Crossing – 153 acre, 1,500 unit housing project


Valuation Issues Highest and Best Use

– Large scale needs to be reflected– Building conversion and renovation or demolition– Land Use Plan required

Contamination and UXO

First Nations Land Claims

De-commissioning and demolition costs

Development time frame prior to and after commencement


Valuation Approach Valuation Method

– Direct Comparison

– Subdivision Development (DCF) Analysis

Consideration of potential land uses taking into account physical characteristics

Analysis of Supply and Demand for potential uses

Requirement for sound planning advice

Engineering analysis and infrastructure costs

Value of end product

Analysis of absorption and discount period


A well-insulated 20,000 square foot home complete with an airstrip and a Jacuzzi sounds really nice. This one is underground in an abandoned missile silo! It was once the home of an Atlas-F missile built for the Cold War, but it’s been converted into a luxury home.

PILTPILT

What is PILT? Government of Canada exempt from local taxation [Sec 125 Constitution Act 1867]

Since 1950 Canada has shared municipal costs

Current legislation is Payments in Lieu of Taxes Act, 2000

Payments under PILT Act roughly equivalent to taxes which might otherwise be payable

Payments reflect methods of valuation and taxation applicable in specific jurisdiction

Subject to Regulations under PILT Act (e.g. CCPR)

26,500 Federal facilities; $460 million in payments (2007)

See: Montreal (City) v. Montreal Port Authority, 2010 SCC 14

PILT ActPILT Act

The purpose is “to provide for the fair and equitable administration of payments in lieu of taxes” [ Sec 2.1]

PILT ActPILT Act

Defines “Federal Property”

Defines “Property Value”

– “The value that, in the opinion of the Minister, would be attributable by an assessment authority to federal property…as the basis for computing the amount of any real property tax that would be applicable to that property if it were taxable property.”

– Excludes mineral rights and “ornamental, decorative or non-functional features”

Sec 3 sets out specified exclusions

“Federal Property” does not include “any structure or work unless it is .. a building designed primarily for the shelter of people, living things, fixtures, personal property or moveable property.”

Excluded structures, works etc. in Schedule II

PILT ActPILT Act

Payments not to exceed the product of:

– The effective rate in the taxation year applicable

– The property value in the taxation year of the federal property

Effective rate is:

– “the rate of real property tax ..that, in the opinion of the Minister, would be applicable to any federal property if that property were taxable property.”

PILT Act – Schedule IIPILT Act – Schedule II

Schedule II describes structures, works, machinery or equipment not considered to be federal property

Includes, among others:– Docks, wharves, piers etc.– Drydocks– Fortifications– Pole lines, transmission lines, light standards– Reservoirs, storage tanks– Roads, sidewalks, aircraft runways, paving, railway tracks– Water mains, sewer mains



PILT – Dispute Advisory Panel (DAP)PILT – Dispute Advisory Panel (DAP)

Provides advice to minister of PWGSC on resolution of disputes

DAP is subject to Rules of Practice

Hearing Panel comprises from 1 to 3 members

One member to be from the province or territory of the dispute origin

Panel holds hearings and hears witnesses. Parties may be represented by counsel

Principles of natural justice followed

DAP provides advice, not a decision

Provincial LegislationProvincial Legislation

Provincial Acts guide how property is valued with respect to:

– Base date

– State and condition date

– General market level

– Specified valuation approaches/manuals

– Uniformity

– i.e. PILT Act respects local process

PILT Act/CCPR - The Montreal CasesPILT Act/CCPR - The Montreal Cases

Montreal City v. Montreal Port Authority, 2010 SCC14

Involved 3 federal agencies: CBC, Montreal Port Authority and PWGSC

Issues: Interpretation of PILT Act and Crown Corporation Payment Regulations (CCPR)

– Discretionary powers regarding “corporation effective rate” – Whether certain improvements in the Port should be excluded under

the PILT Act

Discretionary powers of Crown Corporations– Standard is “reasonableness”– Exercise of discretionary powers held unreasonable in this instance

Best PracticesBest Practices

Altus Group retained in 2003 by AIC to:

– Identify and Address Differences in • Approach• Methodology• Policy

– Propose solutions

– Require discussion/review

– Require testing in Case Study

Stakeholders involved in the process

Properties included Military Bases, Ports, Historic Sites, Penitentiaries and Wilderness Land in National Parks

Report remains in draft

Federation of Canadian Municipalities withdrew in February, 2006

Key Valuation IssuesKey Valuation Issues

Market Value where no or limited market– Special Purpose – Value in Use– Value in Exchange– Value to owner

Valuation methodology– Cost Approach– Income/Direct Comparison

Land Value– Impact of land use restrictions – local and federal– Treatment of “Excess” land– Size

Exemptions

Depreciation in Cost Approach

Limited Market – The Southam CaseLimited Market – The Southam Case

Features are:

– Specialized improvement with a limited market.

– Utility for the current owner.

– Limited market appeal for other users except at significant discount from replacement cost

Example: Pacific Press Building, Surrey, BC


State of the art newspaper building specially designed and built

Replacement Cost in excess of $40,000,000, the value for assessment purposes. Owner would not sell for less

“Market Value” for an identified alternative use under Income Approach was $25,000,000

Assessed value held on appeal to be $25,000,000.


Identifies challenges of limited use properties

Value in Use or Market Value

Two appeals to BCCA (2004 and 2008)

– Southam Inc. v. Assessor of Area #14 (2004 BCCA 245)

– Pacific Newspaper Group v. Assessor of Area #14 (2008 BCCA 284)

Concept challenged in other jurisdictions

Restricted Use – Western StevedoringRestricted Use – Western Stevedoring

Lease from Vancouver Port Authority to bulk break terminal

Restricted uses in lease

No identified prospect for change of use

Restricted use affected value

– Use of comparables not subject

to restrictions not appropriate

– Land rented at market

– Land valued by capitalized rental income

Court (2006) largely upheld Board decision

Whether restricted use = HABU will depend on facts

DND EsquimaltDND Esquimalt





Building Inventory

– Pre - WW I 44,977 m2 (484,144 sf)

– 1915 -1945 28,386 m2 (305,554 sf)

– 1950 -1990 65,368 m2 (703,638 sf)

– 1990 -2010 32,133 m2 (345,888 sf)

– Total 170,864 m2 (1,839,224 sf)

General Principles - PILTGeneral Principles - PILT

HABU – What should be assumed?

– Existing Use

– Alternate Use

Cost Approach – When applicable

Land Value

– Federal Land not subject to Zoning

– Subject to federal land use planning and regulation

– Are federal use restrictions self-imposed – should they be ignored?

General Principles - LandGeneral Principles - Land

Land Use considerations– Principle of Consistent Use– Federal land use regulations reflect mandates and policy

“Excess Land”– Areas may appear under-used – Considerations are:

– May reflect expansion plans– Required as buffer– Contamination– Environmentally sensitive– Land use regulations

– Restricted use requires consideration of appropriate comparables

General Principles - LandGeneral Principles - Land

Land Value considerations– If current use assumed to be highest and best use, should land value

reflect current use and density, even if appears under-utilized?– Should land value reflect value of entire parcel or the sum of the parts?

Challenges– Limited comparables for larger parcels

– May consider smaller sales and adjust as appropriate– Land use needs to be reflected in comparable analysis– Potential for use of subdivision residual approach

– Roads and services to be ignored– Value as if serviced to periphery only?– Value lands as serviced but with no additional value for services?

General Principles - BuildingsGeneral Principles - Buildings



Improvement Cost– Replacement v. Reproduction Cost

– Exclude decorative, ornamental and non-functional item– Treatment of GST/HST [See Executive Director of Assessment v.

Food City, 2005 NBCA 65]

– Method of calculating costs: – Costing manual– Quantity Survey– Recent Base construction cost experience

– Use of Actual cost requires care– Inclusion of other costs (e.g. demolition, relocation, site clean-up)– Specialized features– Exclusions under PILT Act


Depreciation– Physical

– Age/life tables– Observed condition

– Functional– Special purpose facilities subject to changes in technology,

equipment, mission and policy– Proper understanding of base dynamics required– Review of MRADP, Demolition Plan, Realty Rationalization Plan – Increased or excessive operational costs– Excessive size in relation to current needs – Inefficient design

– External ( Economic,Locational)– Planned base closure


Use of Income Approach– Check on cost approach or stand alone– Assistance in estimating functional and/or external obsolescence– Most appropriate for standard uses– Consideration of alternative “market” uses

Income Approach – Issues– Recognize that income approach includes land– Need to adjust for size differentials– Use of market-derived inputs– Assume typical not specific tenant– Capital deficiencies reflected

Halifax Citadel - A Case StudyHalifax Citadel - A Case Study

“To say the Halifax Citadel is Priceless is obvious; to say what its value may be for taxes is less clear” [Phelan,J]


Background– 48 acre site close to downtown Halifax– Built 1828-56– Use restrictions imposed by Canada National Parks Act– Land zoned Regional Park by HRM– Highest and Best Use agreed to be National Historic Site– Value considered by PILT DAP in 2007; Judicial Review by Federal Court

2009.

Valuation Issues– Effect of restricted use on land value– Implication of land used as part of fortifications (the “glacis”)– Reproduction v. Replacement Cost for value of eligible improvements– Whether functional obsolescence applicable


Land Value– Assessor’s Position

– Value entire site (48 acres) by reference to alternative uses– Adjust comparables for large size (-84%)– No specific adjustment for density or use restrictions– Estimated Land Value $19,000,000

– Appellant’s Position– Took use restrictions into account– Nominal value ($10) for land being part of fortifications (“glacis”)– Value of land under “eligible” improvements – based on actual

density– Estimated Land Value $286,010


Renovated Casemate


Value of Eligible Improvements - Casemates– Assessor’s Position

– Used QS estimate of Reproduction Cost – Adjust for physical depreciation based on remaining economic life– No adjustment for functional obsolescence based on current use as

a “living history museum”

– Appellant’s Position– Value based on Replacement Cost– Adjustment for physical depreciation– Adjustment for Functional and economic depreciation


Recommendation to Minister by DAP– Land Value

– Restricted use to be taken into account – Land value only relates to 60,542 sq. ft. or 3% of total site area

– Eligible Improvements Value– Value based on Reproduction cost preferred in this instance because

of specific use– Physical Depreciation at 40%– Casemates unused or partially used: 50% economic/functional

depreciation


Minister’s Decision– Acceptance of DAP Decision

Judicial Review by Federal Court [Halifax Regional Municipality and HMQ, as represented by PWGSC 2009 FC 670]

– Review of Minister’s decision not DAP recommendation per se– National Historic Site restrictions to be taken into account– Market value to be determined (per NS Assessment Act)– Cannot equate Market value to subjective value– DAP land valuation deemed “unreasonable”– 50% discount for functional depreciation lacked rationale– Minister’s decision quashed


Federal Court of Appeal

– Federal Court decision appealed

– Hearing held last week of May, 2010

– Decision yet to be handed down

Thank YouThank You

Documents

Appraisal Institute of Canada 2010 National Conference - Victoria Federal Properties –Valuation Issues June 3 rd, 2010 Carl Nilsen, AACI