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Inside This Issue

2ROELAND AND PIKE DECISIONS

8A CASE FOR A FIXED INTEREST RATE

11THE TAX IMPLICATIONS OF AN EXPROPRIATION

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PARTIAL TAKING EXPROPRIATION:

EDITOR Ian Mathany

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At the OEA’s 2013 Fall Seminar, Guillaume Lavictoire of Rueter Scargell Bennett presented an Annual Case Update including a discussion of the Roland v. Manitoba (Court of Appeal) decision. This case was further dealt with in a commentary by Matthew Owen-King and Ashley Metallo of the same law firm in the OEA’s Winter 2013 newsletter. The purpose of this article is to add to and encourage discussion, not in legal terms but from an appraisal perspective. !!!!!Section 13(2) of the Ontario Expropriations Act indicates that compensation is payable to the owner of expropriated land based on a number of items including subsection (b) the damages attributable to disturbance, however where the market value is based upon a use of the land other than the existing use, no compensation shall be paid. This leads to a discussion of the meaning of “use” and “existing use”.

All market valuations have highest and best use as their foundation. Briefly, highest and best use is dependent on the legality of the use or prospect of the use becoming legal, the physical characteristics of the property,

the financial feasibility (i.e. does the investment versus the costs result in a positive return?) and whether the use maximizes profitability over a reasonable period of time. Related to physical characteristics of the subject property are those of surrounding properties; that is, is the s u b j e c t l a n d u s e c o m p a t i b l e w i t h neighbouring properties? Related to financial feasibility is the concept of marketability; notwithstanding the legal and physical attributes, is there a reasonably strong and competitive market for the use?

With respect to the Roeland and Pike decisions, the judges appeared to have struggled with the determination of the “existing use”. For example, in both cases the ex i s t ing u s e w a s f a r m l a n d however the value of that farmland was elevated due to prospects in the future for u r b a n development. I n t h e s e s i t u a t i o n s where there is probability for future development, does that nullify farmland as the existing use? In the Roeland decision the answer was yes.

ROELAND AND PIKE DECISIONS, FROM A VALUATION PERSPECTIVE

Keith Anderson

The judges appeared to have struggled with the determination of

the “existing use”

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In the Pike decision the answer was no. In the latter, it was determined that the period of time before development might occur was considerable (20 years or more), whereas in the former it was reported that no evidence was provided that i n d i c a t e d t h e r e w a s a significant time period prior to development such as in the P i k e c a s e , e x c e p t t h e reference to eight years having passed based on hindsight, not evidence at the time of the taking.

A s n o t e d o n p a g e 1 0 , p a r a g r a p h 2 1 o f L a n d Compensation Reports, 109 L.C.R., Part 1, August 2013, the common law principle enunciated by the English Court of Appeal in Horn v. Sunderland Corp., is that disturbance damages will not be awarded with respect to land that is found to have a higher market value for a use other than what it was being used for at the time of the taking. The rationale is to prevent double recovery or duplicate compensation. At first this may seem reasonable given that even if the farmer wants to continue a farm operation, there would be plenty of excess cash from the compensation for the land with its elevated value due to future development potential, to cover the disturbance damages. On the other hand, the land owner/farmer is entitled to be made whole if expropriated. In order to continue farming, he would have to look to purchase another farm nearby which may also benefit from an elevated market value due to the potential for urban development in the future. Thus he would spend all compensation from the expropriation on the purchase of the replacement property. Why then should he not be entitled to disturbance damages such as moving costs, the value of items not reflected in the market value, inconvenience and so forth? The Roeland case is different in that the expropriation was a partial taking, but the principle is the same; if the taking meant the owner/farmer had to acquire additional lands nearby to replace those lost to expropriation, he would presumably have to purchase said lands at the same elevated price per acre as the lands taken.

On page 10, paragraph 22 of the Land Compensation Report cited above, is a discussion of Avoidance of Double Recovery that was contained in the Report of the Ontario Law Reform Commission on the Basis for Compensation on Expropriation, dated September 21, 1967, which prepared the way for the enactment

Why then should he not be entitled to disturbance

damages such as moving

costs, the value of items not

reflected in the market value, inconvenience and so forth?

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of the new Expropriation Act in 1968. It’s an interesting discussion with the recommendation that compensation should not exceed the greater of 1) the existing use value plus disturbance damages, or 2) the value based on the highest and best possible use. The problem with this interpretation is that treats disturbance damages as black and white. No mention is made of the element of time and the grey area that arises, as in the Pike case where the existing use is very real but temporary (eg. exists for 20 years), and the “highest and best possible use” (eg. future development land) will not be realized for 20 or more years.

On page 13, paragraph 25 of the L.C.R. cited above is an excerpt from Southey J. on the Pike decision, as part of a panel of the Divisional Court of the Ontario High Court of Justice. At page 174-75 he wrote,

“In the circumstances of this case, in my judgement, there is no inconsistency or duplication in awarding the appellant damages for disturbance in addition to a market value based largely on the value of the land’s potential for development, and only to a small degree upon its value for agricultural use. That potential for development is sufficiently remote in this case that its value is not conditional upon the owner’s willingness to give up farming on the lands. Continued use of the lands for farming for another 20 years is quite consistent with the potential for development for which the appellant is being paid. Had he not been expropriated, he might well have been able to realize the value of that potential in a private sale, while reserving the right to continue to occupy and farm the lands for the next 20 years. Moreover, there would be no duplication in compensation, if he were awarded damages for disturbance to his agricultural operation. The payment of such damages, as I have explained, would do no more than save him from suffering a loss due to the expropriation, if he wished to continue farming after being forced to leave the expropriated lands.”

It is my view that there would be no duplication in compensation if he were awarded damages for disturbance to his agricultural operation, provided: 1) the award for compensation was based on actual costs incurred, or 2) the disturbance damages were a function of agricultural land value exclusive of the value premium due to the prospect of future development, subject to the proviso that in each scenario the disturbance damages amount was discounted to reflect the expected duration of the existing agricultural use.

It has been said that a property cannot have more than one highest and best use at any given point in time. That does not mean a property cannot have a mixed use such as a commercial and mult iple res identia l development, but it does mean a property cannot be both industrial and recreational at the same time, nor can a property be farmland and development land ripe for construction of an urban subdivision at the same time. A property however, can have

multiple highest and best uses over a period of time. Over time, property uses typically reflect periods of growth, stability and decline and regeneration; or renewal to another use, depending on the conditions and demands of the marketplace. This is obvious if one considers the changes in land use that have occurred over time along the Toronto waterfront, with the ever expanding residential condominium towers on former industrial and railway lands.

Since there cannot be more than one highest and best use at the same time, there is good justification for Section 13(2), which implies t h a t d i s t u r b a n c e d a m a g e s a r e n o t compensable to a farmer whose property is ripe for urban development; that is, the farming use has or will soon cease and therefore the existing farm operation and property improvements are fully depreciated, both physically and functionally. Now, compare this to a situation similar to the Pike case, where the property has utility as a farm for 20 years or more and will not have the

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capability (legal approval through the OP and zoning, access to services, market demand, etc.) to be used as urban development land until then. The highest and best use is the existing agricultural use for 20+ years and “holding for imminent urban development” thereafter. It seems unfair not to compensate the land owner/farmer for the disturbance damages inflicted upon him for the interim period during which farming is the highest and best use.

Given that scenario, how would the disturbance damages be valued? It appears that it is the practice of the Manitoba Land Value Appraisal Commission (LVAC) to base the amount of disturbance damages on the market value of the land (20% of market value for fixed machinery cost). In the Roeland case, the LVAC in its first decision granted compensation for disturbance damages based on the speculative or elevated market land value. Upon the first appeal of the LVAC’s decision to the Manitoba Court of Appeal, the matter relating to land value was dismissed and the issue related to disturbance damages was referred back to the LVAC. In response the LVAC upheld its earlier decision to grant compensation for disturbance damages but reduced the market value of the land to reflect agricultural land use only as it recognized that it is not appropriate to base disturbance damages compensation on the value component of the future development land use.

The merits of the decisions of the LVAC and Manitoba Court of Appeal to grant or not to grant compensation for disturbance damages are difficult to judge given the apparent lack of evidence regarding the timing of potential development of the property. Instead, consider a hypothetical situation similar to Pike, where the current existing land use is agricultural, but with a potential to become land ripe for urban development in 20 years. The assumption in this instance is that in 15 years, the property will still be in the rural area as determined in the official plan, but at that time there would be a high probability

that the lands would be brought into the urban boundary in 5 years. In 15 years the land use would be in the process of transitioning from agricultural to rural land holding for urban development. In other words, at that time it is reasonable to assume that agriculture as the “existing use” would have ceased.

The rationale for the LVAC to base its disturbance damages calculation on the base agricultural land value was a step in the right direction, however it is flawed because in the hypothetical situation similar to the Pike case, that would assume the agricultural use will continue in perpetuity. The agricultural land value should be discounted recognizing that the agricultural use will only continue for 15 years. Beyond that time, the highest and best use of the land and therefore for t h e p u r p o s e o f Section 13(2)b the “existing use”, is expected to have changed to “holding f o r u r b a n d e v e l o p m e n t ” . C o n s e q u e n t l y compensation for disturbance damages r e l a t e d t o t h e current agricultural use would no longer apply after 15 years. F o r i l l u s t r a t i o n purposes, assume three scenar ios . The assumed values are hypothetical but are generally in line with current market values for a 50 acre agricultural property in Hamilton.

In the first scenario the agricultural property has no prospect for future urban development. Assume this property that has an agricultural highest and

The rationale

for the LVAC to base its

disturbance damages

calculation on the base

agricultural land value was a step in the right direction, however it is flawed…1

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best use in perpetuity and has a current market value of $10,000 per acre. This property if expropriated would qualify for compensation for disturbance damages.

In the second scenario this agricultural property has imminent potential for development and is now considered as “holding for urban development”, meaning that within 5 years more or less, the property will be designated Urban in the official plan and have potential to be developed for urban housing. Assume this property with a “holding for urban development” highest and best use has a current market value of $80,000 per acre. This property if expropriated would not qualify for compensation for disturbance damages.

In the third scenario the potential for development falls between the first two scenarios on the time horizon. The agricultural property has reasonable prospects for future development in 20 years, meaning that in 15 years it will be considered as “holding for urban development” but still within the rural area (same status as the second property). Assume this property with a dual highest and best use (agricultural for 15 yrs. and holding for urban development thereafter) has a current market value of $25,000 per acre. Therefore, it will be used for bona-fide agricultural uses for at least 15 years, at which time it becomes a property in transition to a holding for development use. It is suggested that if expropriated, this property should qualify for compensation for disturbance damages, but to a limited extent.

In theory the value of the property in the third scenario should be equal the value of the second property after being discounted for

15 years (the reversion) plus the present value of the agricultural land for the next 15 years. The value of the agricultural land for the next 15 years can be calculated based on the present value of the potential net income stream during that period, or alternately, it would be the difference between the fee simple value and the value of the reversion (value in perpetuity starting from 15 years out). While investment properties in Hamilton such as apartments and shopping plazas are experiencing overall capitalization rates ranging from 5 to 7 percent, speculative

properties holding for development represent far riskier investments. The prospect for a return of the capital investment a couple decades away is speculative and very uncertain in terms

Three Scenarios

to Illustrate

23

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the order of 10 percent. Discounting for 15 years at a 10 percent rate equates to a discount factor of 0.2394, rounded to 0.24 or 24%. Discounting the value of the property in the second scenario for a period of 15 years to reflect the present value of the reversionary interest of the property in the third scenario, or the present value of its “holding for urban development” future use, is as follows: $80,000 per acre X 0.24 = $19,200 per acre. Next, the current value of the agricultural use for 15 years must be estimated and added to the above value to calculate the total value or fee simple value of the property in the third scenario. Since the fee simple interest equates to a 100 percent interest and the value of the property beyond 15 years is a 24 percent interest, the remaining interest representing the immediate 15 year period is equal to a 76 percent interest. Thus, since the fee simple value (value in perpetuity) of the agricultural use is $10,000 per acre, the value of the agricultural use for the first 15 years is 76 percent of that or $7,600 per acre. Adding this amount to the value of the revers ion in the “holding for urban development” highest and best use, would equal the total fee simple value of the property in the third scenario, being $19,200 + $7,600 = $26,800 per acre. This is fairly close to the estimated $25,000 per acre value noted above for the third scenario. Minor changes in assumptions such as the discount rate would close the gap.

As indicated above in the third scenario, the value of agricultural land for only 15 years is $7,600 per acre, versus $10,000 per acre in perpetuity. Therefore, if it is accepted that disturbance damages should be calculated

only on the basis of the agricultural land value, the land value in this example would be $7,600 per acre, not the going $10,000 per acre agricultural land value which was the approach of the LVAC in Manitoba in the Roeland case the second time around. Additionally, if the disturbance damages are not related to land value, such as relocation costs related to the agricultural operation, or the value of agricultural assets not reflected in the market value of the land taken, then compensation for those costs should be 76% of actual costs.

This opinion article is an attempt to address the problem that has surfaced in the Pike and Roeland court decisions, which is: in the instance of agricultural land with an elevated market value due to its potential for future development, is the “existing use” at the date of expropriation agricultural or development land? Where the prospect of development is sufficiently far in the future as determined by a court based on evidence, and where two highest and best uses can be reasonably expected over the time horizon, the current use should be considered as the “existing use” (in the cases discussed would be agricultural). Therefore, compensation for disturbance damages would be justified under Section 13(2) based on the value of the existing use, excluding any premium in value due to anticipated higher value future uses. Further, as noted above, the value of that “existing use” be it agricultural or some other use, for the purpose of determining disturbance damages, should be discounted to account for the limited time horizon during which the use is expected to exist.

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Ian Mathany, BLG [email protected]

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A CASE FOR A FIXED INTEREST RATE

Eric R. Finn1

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INTRODUCTION Over the years the fixed interest rate of 6% per annum set out in section 33 of the Expropriations Act, has undergone some criticism. In days of high interest rates, whether for borrowing or investing, owners argued that the fixed rate was not sufficient to cover the real cost of money. Conversely, in leaner times, authorities have questioned whether owners were being overpaid. Prior to the enactment of the present legislation, the Ontario Law Reform Commission stated that “the awarding of interest should be regarded as compensation for a temporary loss of capital.” The temporary period was seen to be the period between the date when title passes or when the owner ceases to use the property productively.2 At the time the Expropriation Procedures Act, 1962 – 63 p r o v i d e d a f i x e d i n t e r e s t r a t e o n compensation of 5% per annum. The Law Reform Commission recommended that the rate should be ½ of 1 percent above the current National Housing Act rate for ordinary home owner loans.3 In 1968, when the present legislation was enacted, the rate was fixed at 6% payable on market value and injurious affection.

In his Report on the Expropriations Act, in 1974, R.B. Robinson, Q.C., commented on the use of a fixed rate as compared to the approach used in several other jurisdictions. He concluded “that a fixed rate is much more desirable than a fluctuating rate”.

!He then went on to recommend that the rate of interest be fixed by regulation so as to allow ease of amendment.4

A CASE FROM ALBERTA In comparing the Ontario legislation to other jurisdictions, Robinson referred to the interest section in the Alberta legislation. That legislation now provides, at section 66(1) of the Alberta Expropriation Act, that:

“An expropriating authority shall pay interest at a rate the Board [the Land Compensation

Board] considers just…”5

In 2013, in the case of Gimbel v. Alberta,6 the Alberta Court of Appeal had to interpret these words fo r the second t ime in th i s compensation claim and, at the same time, deal with the precedent nature of other cases that had proceed it.

The history of the case is interesting in itself. The claim was initiated at the Land Compensation Board in 1995 as a result of an acquisition of the Claimants lands for a transportation and utility corridor. The first decision of the Board was rendered in 1997.7

The Claimants appealed the decision to the Court of Appeal which, in 1999, ordered a new hearing.8 The rehearing was eventually held in 2004 and, in 2006, the Board issued its second decision ordering the authority to pay the Claimants $1,550,000,9 which was paid in 2006.

PLEASE SEE PAGE 37 FOR ALL ARTICLE FOOTNOTE REFERENCES


With a decision on compensation and the payment of same, it was now time for the Claimants to deal with interest and costs. The Board issued its decision on these aspects of compensation in 2007.10 In applying section 66(1), the Board declined to award interest based on the “cost of borrowing” and decided that the “just” rate of interest would be best achieved by awarding interest to all Claimants at an investor’s rate of a 90-day T-bill.11 The decision was appealed to the Court of Appeal which released its decision in 2008.12

The Court of Appeal had to wrestle with the issue of whether the interest rate should be based on the cost of borrowing or an investment rate. Referring to previous decisions on the determination of interest, the Court concluded that the “default position” for the award of interest is investment interest, “unless the claimant can illustrate that he ought to receive the cost of borrowing.”13 The Court went on to decide that the Board was aware of the correct test but had not applied it correctly. In addition, as the Claimants were seeking interest based on the cost of borrowing, they had provided no evidence on investment rates and the Board, therefor, had no basis for the use of the 90 day T-bill rate.14 In the end result, the question of interest was referred back to the Board.

After a further hearing before the Board, another decision on interest was issued in 2012.15 This time evidence was given on the borrowing and investment practices of the Claimants and the Board applied the direction of the Court of Appeal in determining whether the Claimants were entitled to interest based on a borrowing rate or whether the “default position” of an investment rate should apply.16 The Board concluded that the corporate Claimant had proved that for a period it was in a debt position and, for that period, it was awarded interest based on its borrowing rate. The corporate Claimant, for the balance of the interest period, and the individual Claimants were awarded interest based on their investment practices. The Claimants again appealed to the Court of Appeal.

This time the Court again reviewed the procedures to date and prior jurisprudence and, in a split decision, dismissed the appeal.17 The Claimants argued that, for the corporate Claimant, the interest rate for the early period for which interest was payable, the rate should have been based its borrowing rate. The court found the decision of the Board to be reasonable and dismissed this ground of appeal. The individual client argued that the Board had not applied the proper principles for determining the investment.

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The Court of Appeal had to wrestle with the issue of whether the interest rate

should be based on the

cost of borrowing or

an investment

rate.

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In a previous Court of Appeal decision,18 the Court had stated that:

“…an owner should be compensated for such income as he would have received had he followed usual and prudent investment

practices, or if it is illustrated, for the cost of usual and prudent borrowings.”19

The Claimants in Gimbel argued that the Board had misinterpreted the phrase “usual and prudent” and had failed to properly define investment. This led the Court into a lengthy discussion of the meaning of “usual and prudent investment practices”. In the end result, the majority concluded that the decision of the Board was reasonable and dismissed the appeal.

O’Ferrall, J.A., in dissent, took a somewhat different view and an approach which was somewhat contradictory to previous decisions of the court. He took what might seem to an eminently sensible approach by considering the issue of interest in two contexts. First, he considered interest as a claim for disturbance damages. Where the owner may have been forced to incur debt as a result of the expropriation and pay interest on borrowings th is could result in the disturbance damage claim.20 In the judge’s view, in such a claim the compensation would be based on a borrowing rate. However, the second form of interest, being that payable

on compensat ion, “compensates the landowner for the fact that the expropriating authority has had the use of funds to which the landowner was entitled and for the fact that the landowner is deprived of the use of those funds.”21

With this conclusion, O’Ferrall, J.A. was of the view that the interest rate should be “one that is generally available to landowners regardless of their means, their particular investment practices or returns, or their borrowing.”22 Unfortunately, with this approach, a further hearing of the Board would have been required!

CONCLUSION After three trips to the Alberta Land Compensation Board and the Court of Appeal, the issues of compensation and interest thereon had been concluded. As the expropriation had taken place in 1995 and the compensation as ordered by the Board was not paid until 2006, the issue of interest was a significant issue for all parties. While the Alberta legislation would appear to give the Board some discretion in the setting of a just interest rate, the tortuous route that the parties in the case had to follow in order to arrive at a conclusion, would seem to give much credence to the comment of Robinson in 1974 that a fixed rate is more desirable than a flexible rate.

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INTRODUCTION One of the most common questions brought up during the course of expropriation proceedings is what are the tax consequences? The answer to this question is rarely simple and normally requires knowledge of the specific details of each case to ensure that the proper tax treatments are considered. Despite these intricacies, due to the involuntary nature of an expropriation, the Income Tax Act (Canada) (the “ITA”) includes special rules with the underlying intention of mitigating certain immediate tax consequences that might otherwise arise.

The challenge in writing an article that discusses anything tax related is how not to put the reader to sleep before they make it through the first paragraph. Accordingly, we have developed a simple case study that discusses the tax implications related to an expropriation from a high level, with a focus on common elements that are involved in an expropriation. It should be recognized that certain conditions and criteria not discussed in the following case may be applicable to real expropriation cases, such as meeting election criteria or timing issues.

CASE STUDY – WOBBLY TRAVELER BREWING COMPANY BACKGROUND Wobbly Traveler Brewing Company (“Wobbly”) is a Canadian private company that has operated a brewery in the City of Expropria over the past 25 years. Wobbly has a high traffic and exposure location near a world class museum and other local attractions. Wobbly generates 80% of its revenue through the sale of beer to retail establishments across Canada and generates the remaining 20% through its

brewery tours to tourists who would rather drink beer than visit the museum. Wobbly owns the land, building and equipment used in its operations.

On June 30, 20X1 the City of Expropria announced its intention to expropriate the lands owned by Wobbly to expand an existing highway. From the date of the announcement of the intention to expropriate to the date of possession of the Subject Property, Wobbly did not incur any significant business losses.

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CASE STUDY: THE TAX IMPLICATIONS OF AN EXPROPRIATION !!

TIMOTHY ZIMMERMAN EDITORS: KEN GRIFFIN, GORDON KING, JOHN SEIGEL


During the period leading up to the date of possession, Wobbly found a comparable property in which to operate the business; however, it has been estimated that its brewery tours business will decrease by 50% at the new location and will never return to the same levels as at its previous location.

Through negotiations with the City of Expropria, Wobbly’s counsel confirmed that they would receive the following compensation in exchange for a full and final release on any future damages.

Compensation Details: $

Fair Market Value of Land (Subject Property) 10,000,000

Fair Market Value of Building and Equipment 5,000,000

Moving and Relocation Costs 1,000,000

Permanent Loss of Business (decreased brewery tours) 3,000,000

Total Compensation 19,000,000

In addition to the compensation details, relevant financial information related to Wobbly is as follows:

$

Original Cost to Purchase Land 5,000,000

Cost of Replacement Land 9,000,000

Original Cost to Purchase Building & Equipment 4,000,000

2,000,000

Cost of Replacement Building and Equipment 6,000,000

ANALYSIS

General Typically when a taxpayer sells or disposes of Capital Property1 such as land, equipment or a building for an amount greater than its tax cost, a number of possible tax results arise including recapture (income equal to any capital cost allowance (“CCA”) previously claimed up to the lesser of the sale price and the original cost of the Capital Property, or simply the difference between the UCC and that lesser amount) or a capital gain (sale proceeds in excess of the original cost of the Capital Property).

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An expropriation is not a typical disposition of Capital Property, though, because it is involuntary. The ITA contains specific rules relating to involuntary dispositions of Depreciable Property (subsection 13(4)), Eligible Capital Property (subsection 14(6)) and Capital Property (section 44). The application of these rules to the above case study is discussed in the sections that follow.

Land Wobbly originally purchased the expropriated land for $5,000,000 and it received $10,000,000 for the property. Normally, this transaction would require Wobbly to pay tax on a capital gain of $5,000,000 (the amount received above the original cost or the difference between $10,000,000 and $5,000,000). However, since this transaction was involuntary, and assuming Wobbly meets the replacement property rules criteria2 including acquiring a replacement property within the designated time period, some or all of the capital gain that would have been recognized on the disposition of the property can be deferred along with the payment of income tax on the capital gain. This deferral is achieved by decreasing the cost base of the replacement property by the amount of the capital gain deferred. We have illustrated this below:

$ Original cost of land taken 5,000,000 A Proceeds received for land taken 10,000,000 B Capital gain otherwise determined 5,000,000 C = B - A Proceeds received for land taken 10,000,000 B Cost of replacement land 9,000,000 D Proceeds not reinvested in replacement land 1,000,000 E = B – D Capital gain to be recognized 1,000,000 F = Min(C,E) Capital gain to be deferred 4,000,000 G = C – F Cost of replacement land 9,000,000 D Capital gain to be deferred 4,000,000 G Cost base of replacement land 5,000,000 D – G

Ultimately, when Wobbly sells the land at a future point in time the deferred capital gain will be recognized as follows (assuming Sale Price of $11,000,000):

$ Sale price of land 11,000,000 A Cost base of replacement land 5,000,000 B Capital gain 6,000,000 C = A – B Taxable capital gain (50% of capital gain) 3,000,000 D = C x 50%

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The taxable capital gain of $3,000,000 includes both the gain on the replacement property (50% of $11,000,000 minus $9,000,000) and the deferred capital gain on the expropriated property (50% of $4,000,000).

Building & Equipment

Wobbly originally purchased the building and equipment for $4,000,000 and received $5,000,000 for the building and equipment. In addition, Wobbly claimed CCA on the original cost of the building and equipment of $2,000,000 which resulted in a remaining UCC of $2,000,000. For purposes of this illustration, we have treated the building and equipment as if it was a single asset. In reality, the following analysis would be done separately for the building and the equipment.

Normally, Wobbly would be required to pay tax on the recapture3 of the CCA claimed previously of $2,000,000 and on the capital gain of $1,000,000 (the amount received above the original cost). However, since this transaction was involuntary, and assuming Wobbly meets the replacement property rules criteria including acquiring a replacement property within the designated time period4, some or all of the capital gain and recapture that would otherwise be recognized on the disposition of the property can be deferred and any recapture or capital gain deferred would decreases the cost base of the replacement building and equipment. We have illustrated this below:

$ Original cost of Building and Equipment 4,000,000 A UCC of Building and Equipment 2,000,000 B Proceeds received for Building and Equipment 5,000,000 C Recapture otherwise determined (if no deferral) 2,000,000 D = A - B Capital gain otherwise determined (if no deferral) 1,000,000 E = C - A Proceeds received for Building and Equipment 5,000,000 C Cost of replacement Building and Equipment 6,000,000 F Proceeds not reinvested in replacement property Nil G = C – F Capital gain to be recognized Nil H = Min(E,G) Capital gain to be deferred 1,000,000 I = E - H Cost of replacement Building and Equipment 6,000,000 F Capital gain to be deferred 1,000,000 I Cost base of replacement Building and Equipment 5,000,000 J = F – I Recapture to be deferred 2,000,000 K = Min(D,F) Cost base of replacement Building and Equipment 5,000,000 J Recapture to be deferred 2,000,000 K UCC of replacement Building and Equipment 3,000,000 L = J – K

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Ultimately, when Wobbly sells the building and equipment at a future point in time the deferred recapture and capital gain will be recognized as follows (assuming a sale price of $8,000,000 and that no capital cost allowance is taken on the replacement building and equipment):

$ Sale price of building and equipment 8,000,000 A Cost base of replacement building and equipment 5,000,000 B UCC of replacement Building and Equipment 3,000,000 C Recapture 2,000,000 D = B - C Capital gain 3,000,000 E = A - B Recapture (fully taxable as business income) 2,000,000 D Taxable capital gain (50% of capital gain) 1,500,000 H = E x 50%

Moving & Relocation Costs

Wobbly received $1,000,000 from the City of Expropria for relocation and moving costs. Typically the tax treatment related to these expenses is to recognize the $1,000,000 as revenue to the business and to record the actual expenses when they are incurred. In theory the amount received of $1,000,000 should offset the actual costs incurred with any difference either increasing or decreasing income in the current year. One important element to bear in mind is that the $1,000,000 would be recognized in income as it is received. Accordingly, if the City of Expropria gives Wobbly interim payments for expenses incurred, those interim payments would be included in income as received.

This differs from the treatment of the proceeds for the land and building and equipment, where the tax results of the expropriation are generally recognized only when Wobbly has agreed to the full compensation for the properties taken (or when a court or tribunal has made a final determination of such compensation). Accordingly, if the City of Expropria gives Wobbly interim payments on account of the final settlement, the tax implications of the disposition would not be recognized until Wobbly agrees to the amount of the final settlement.

Permanent Loss of Business (From decreased brewery tours)

Due to the expropriation, Wobbly had to relocate from its location near the museum and other local attractions that generated significant brewery tour income for the company. In its new location, Wobbly expects its revenues from brewery tours to drop by 50%. The City of Expropria has agreed to compensate Wobbly $3,000,000 for this drop in revenue.

For purposes of this illustration, we have assumed that this payment represents compensation for the damage to the company’s profit-making structure and should be considered an eligible capital amount. In reality, this determination will depend largely on the particular facts of any given situation and the intended purpose and effect of the compensation payment.

On this basis, and assuming that Wobbly did not have any balance in its cumulative eligible capital account, the amount of $3,000,000 received by Wobbly would have a similar tax treatment as a capital gain. Upon determination of full and final compensation, Wobbly would be required to pay income tax on 50% of the amount received, or $1,500,000, as regular business income. We have illustrated this below:

!15


$ Proceeds received for permanent loss of business 3,000,000 A Eligible capital property inclusion rate 50% B Taxable eligible capital amount 1,500,000 C = A x B

CONCLUSION As illustrated in the Wobbly case, the tax implications of an expropriation can be quite complicated and professional advice should be sought to avoid common pitfalls and to ensure that you or your client are meeting the proper criteria to make the correct election under the replacement property rules. Further, it’s recommended that your tax advisor carefully review the wording of any offer or settlement agreement to ensure that you can take advantage of these rules. The main three criteria to make an election under the replacement property rules include:

a) ensuring that any replacement property is acquired within the specified time period and is a direct replacement of the former property;

b) ensuring that the election is made within the specified time period; and

c) that the disposal of the property was involuntary.

In addition, under certain instances, including negotiation of a settlement with the Authority, costs incurred for consulting on taxation issues related to the settlement may be eligible to be claimed as part of the expropriation settlement.

Should you have any questions or require assistance, please contact the author, Timothy Zimmerman.

OEA 2014 SPRING CONFERENCE !

THURSDAY, MAY 22ND The Rosewater Room 19 Toronto Street, Toronto REGISTER ONLINE www.oea.on.ca/springevent

Guest Speaker Professor Martin Horak specializes in Canadian and comparative urban politicos, with an emphasis

on the dynamics of urban policy-making, multi-level governance problems of large cities.

6 PM Cocktails

6 PM Cocktails

7 PM Dinner

8 PM Guest Speaker

!16

http://www.oea.on.ca/springevent

http://www.oea.on.ca/springevent


PARTIAL TAKING EXPROPRIATION: THE REMAINDER

TONY SEVELKA ABSTRACT This article is intended to inform appraisers and real estate-related professionals about the challenges involved in appraising expropriated property and the procedures necessary to support opinions of value associated with a partial taking. An expropriated property owner is entitled to the market value of the land taken, plus any diminution in value sustained by land not taken. Depending on the nature and extent of a taking, including the public works, the land not taken can have its value impacted. The extent of the impact on value is a function of whether the land not taken is a viable or non-viable remainder. After a partial taking, the remainder constitutes an entirely new property, which requires preparation of a separate stand-alone appraisal, independent of the appraisal of the original property.

Public works frequently result in property expropriations. Appraisals are required to assist in ascertaining the amount of compensation to which an affected property owner is entitled. In a property expropriation, a partial taking always leaves behind un-expropriated property. The land not taken can possess varying degrees of utility, depending on the nature and characteristics of the land, the presence and type of any improvements, and the spatial relationship of the land to abutting property, including the part taken. The land not taken in an expropriation of a property is known as the remainder. A partial taking that causes a natural severance will always have more than one remainder.

Every remainder should be viewed as a new property requiring an appraisal, prepared independently of the before-taking appraisal. The valuation principles employed in the initial appraisal should also be applied to the appraisal of the remainder, including identifying the larger parcel as part of highest and best use analysis of the remainder. Both appraisals, however, must comply with the relevant provisions of the applicable expropriation act, ignoring the scheme when it is appropriate to do so.

The valuation principles employed

in the initial appraisal should also be applied to

the appraisal of the remainder, including

identifying the larger parcel as

part of highest and best use analysis …

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A remainder is defined as “that portion of a larger parcel remaining in the ownership of the property owner after a partial taking.” Another closely related term is remnant, which is defined as “a remainder that has negligible economic utility or value due to its size, shape, [location] or other detrimental characteristics; also called uneconomic remainder or uneconomic remnant.”

There are two types of remainders in a property expropriation. In this article, t hey a re r e fe renced a s v i ab l e remainders and non-viable remainders. A viable remainder is one that is marketable as a standalone entity. A non-viable remainder is essentially the equivalent of a remnant or uneconomic remainder or uneconomic remnant, terms that are in common usage in jurisdictions throughout the United States.

For a remainder to have value, it must have four economic factors: (1) demand (it must be desired; fewer buyers create less demand); (2) utility (it must have

use to buyers); (3) scarcity (it must be relatively scarce, as too much supply will depress the price); and (4) purchasing power (there must be a financial capability to buy; fewer buyers depress price).

Appraisers are called upon by expropriating authorities and by impacted property owners to prepare appraisals within a statutory framework. The role of the appraiser is to conduct a broad enquiry into relevant economic factors and develop well-supported opinions of value within that framework. This necessitates an understanding of valuation procedures unique to expropriation.

Market value Market value is the principal focus of most appraisal assignments, and both economic and legal definitions have been developed. The economic definition of market value is defined by the Appraisal Institute as: “The most probable price that the specified property interest should sell for in a competitive market after a reasonable exposure time, as of a specified date, in cash, or in terms equivalent to cash, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, for self-interest, and assuming that neither is under duress.” An appraisal prepared for expropriation requires a legal definition of market value sourced from the appropriate expropriation act.

“The most probable price

that the specified property

interest should sell for in a competitive

market after a reasonable

exposure time, as of a

specified date…”


For example, in Ontario, Section 14(1) of the Expropriations Act defines market value as: “the amount that the land might be expected to realize if sold in the open market by a willing seller to a willing buyer.”

An opinion of market value of a property must be predicated on a highest and best use. Highest and best use is a fundamental question of fact that must be answered before an appraiser can offer an opinion as to market value. All relevant aspects of highest and best use analysis applicable to the expropriated property must be explored and sufficiently documented to support the opinion of market value.

An appraiser’s primary objective is to develop fact-based opinions of market value, but market value does not apply in a bilateral market. A bilateral market is one in which a single seller is confronted by a single buyer. In this situation, the value of a non-viable remainder is affected by the interdependence of the non-viable remainder and an adjoining property under different ownership, combined to form a single larger parcel. Conveyance of a property under this condition does not meet the test of market value,

which assumes an active market of many buyers and sellers, and a choice of available properties.

Market value does not apply to a non-viable remainder, as it has no independent highest and best use. Instead, the value of a non-viable remainder is tied to the market value of a larger parcel by way of "value in c o n t r i b u t i o n . " Contributory value is measured in terms of the amount the non-viable remainder adds to the value of the larger parcel or as the amount that its absence detracts from the value of the larger parcel.

Injurious affection Injurious affection represents the loss in value sustained by a remainder in a property expropriation, sometimes referred to as remainder damages. Section 1 of the Ontario Expropriations Act states that injurious affection is:

(a) where a statutory authority acquires part of the land of an owner,

(i) the reduction in market value thereby caused to the remaining land of the owner by the acquisition or by the construction of the works thereon or by the use of the works thereon or any combination of them, and

(ii) such personal and business damages, resulting from the construction or use, or both, of the works as the statutory

!19


For a property owner to sustain a claim for injurious affection arising out of a property expropriation, it must be demonstrated that the partial taking caused the remainder’s value to change. Generally, the following criteria must be satisfied for a valid injurious affection: (1) the remainder must be “held with” the expropriated land; (2) the potential loss in value of the remainder must be occasioned by the use or construction of the anticipated public works of the expropriating authority upon the expropriated land; (3) the potential loss in value of the remainder must not be too remote; and (4) the potential loss in value of the remainder must be permanent rather than temporary. As long as the expropriated land (the part taken) is part of one holding and is so inextricably linked to the remainder as to diminish the existing or potential use or marketability thereof, the property owner is entitled to compensation for the consequential injury to the part not taken.

An after-taking market value that is less than the before-taking market value, minus the contributory value of the part expropriated, suggests that the remainder has been injuriously affected (i.e., sustained a disproportionate loss in value). However, injurious affection must be proven through independent, mutually exclusive, and objective valuation exercises without being tainted by a presumption of damages. As noted by the Board in Ammouri,in rejecting the position taken by one of the appraisers: “His approach in this case assumes de facto injurious affection, to which he then applied the findings of his ongoing study to arrive at a quantification thereof. Injurious affection is not axiomatic as a consequence of a taking….[His] analysis in this case implies that it is. He has put the

cart before the horse, and the Board finds that in so doing he has not made out a case to demonstrate the presence of injurious affection in these circumstances.”

Countless legal, physical and economic factors have the potential to affect the market value of a remainder. The factors and their importance differ depending on the type of property, its use or potential use, and the presence of improvements. Factors affecting rural properties often differ from those that affect urban properties. Some of the potential factors that can impact the value of a remainder include title restrictions, easements, exposure, accessibility, lot conf igurat ion, d imens ions and s ize, topography, drainage, crop production,

diminished utility of existing improvements, increased fixed costs, non-compliance with zoning provisions, and change in highest and best use.

The timing and nature of the public works for which a property expropriation is undertaken can also influence the value of the remainder, due to the time value of money and whether the public works restrict or enhance the

!20


Viable vs. non-viable remainders A viable remainder is a stand-alone larger parcel with an independent market value and highest and best use. However, if the part taken has a greater value as part of the “whole” property in its highest and best use prior to expropriation, the property-owner is entitled to the contributory value of the part taken and there is no injurious affection.

A non-viable remainder has no independent highest and best use, and has limited marketability. Unless it can be tied to an adjoining property as part of a larger parcel, for which a highest and best use can be established, a non-viable remainder will have nominal or no market value. Only land from an adjoining property that is not part of any other land expropriated can be considered in defining the larger parcel.

In all jurisdictions in Canada, no expropriating authority can compel a property owner to relinquish more land than is necessary to achieve the public purpose underlying an expropriation. Therefore, when a partial taking results in a non-viable remainder, a separate and independent estimate of value (i.e., value in contribution) is required of the non-viable remainder.

Cost-to-cure remedy In some instances, it might be possible to initiate a “cost-to-cure” that will transform a non-viable remainder into a viable remainder. For example, if legal access can be re-established for a remainder that is landlocked, it may prove cost-effective to remedy the deficiency. This remedy is only beneficial if the cost-to-cure as a measure of injurious affection (damages) does not exceed the diminution in market value sustained by the remainder without curing the deficiency (i.e., lack of legal access). In addition to the estimated cost of curing the deficiency, determining if a cost-to-cure is appropriate should consider whether (1) a purchaser of the remainder could obtain all approvals necessary to implement the cure; (2) the cure can be implemented for a fixed price; (3) a purchaser would expect to be compensated for risk and entrepreneurial incentive in undertaking the cure; and (4) the cure can be achieved within a reasonable time frame (i.e., not remote). The overriding consideration is to ensure that the contemplated cure is both practical and warranted.

!21

Only land from an

adjoining property that is not part of

any other land

expropriated can be

considered in defining the

larger parcel.


Applying the concept of the larger parcel to a non-viable remainder As an example, there m i g h t b e t h r e e properties abutting an interior non-viable remainder, one on each side and another at the rear. Depending on the size and utility ( u s e ) o f e a c h adjoining property, and whether any of these properties are part of the same expropriation as the subject property, the analyses involved in identifying a larger p a r c e l c a n b e overwhelming, and lead to a finding of more than one larger parcel or none at all. In this example, some of the possible permutations are as follows:

• All three abutting properties taken as a “whole” for the same expropriation – no larger parcel identified.

• Two abutting properties taken as a “whole” for the same expropriation, leaving one adjoining property and the non-viable remainder to be potentially combined as one larger parcel.

• One abutting property taken as a “whole” leaving two adjoining properties and the non-viable remainder to be potentially combined as two larger parcels.

• Only part of each abutting property taken for the same expropriation, with the three remainders to be potentially combined with the non-viable remainder to create one larger parcel.

• Only part of two abutting properties taken for the same expropriation, with the two remainders to be potentially combined with the non-viable remainder to create one larger parcel.

• Only part of one abutting property taken for the same expropriation, with the one remainder to be potentially combined with the non-viable remainder to create one larger parcel.

These permutations are by no means exhaustive, especially if there is more than one non-viable remainder, but the challenge of identifying the larger parcel is a prerequisite in assessing the prospects of a non-viable remainder, and estimating its contributory value. The contributory value on a non-viable remainder will also be influenced by the size of the larger parcel to the extent that the unit rate attributable to the “size” variable will decrease as parcel size increases, and vice versa, all other elements of value remaining constant. !22


Highest and best use in concert with a larger parcel

In the US, “[a]ppraisers must bear in mind that the determination of the larger parcel is required in every appraisal assignment; irrespective of whether the agency has designated an acquisition on a total acquisition or a partial acquisition. This is so because, from a practical standpoint, whether an acquisition is a total or partial acquisition cannot be determined until such time as the appraiser has made a determination of the highest and best use, and the larger parcel.”

In Canada, there is no corresponding appraisal instruction at either the federal or provincial level to identify the larger parcel. Instead, most expropriation statutes make indirect references to the larger parcel. For example, Public Works and Government Services Canada’s March 2007 Valuation Guidelines on Expropriation under Section 2.12 in respect of “a limited interest or a partial taking,” the value assigned to the security interest must be “in the same proportion that the value of the land taken bears to the whole of the land.” Further, Section 26(3) states that the part taken “if not marketable on its own, then it is valued at the greater of, the value it contributes to the whole property, or the value of equivalent land,” f a c t o r s t h a t a r e considered in defining the larger parcel.

T h e u n d e r l y i n g foundational requirements established by the courts in defining the larger p a r c e l a r e u n i t y o f o w n e r s h i p , u n i t y o f contiguity, and unity of use (highest and best use). The courts have ruled that the unities of ownership, contiguity, and use (highest and best use) need not be simultaneously present as of the date of valuation, as would be likely when dealing with a non-viable remainder.

!

The underlying

foundational requirements

established by the courts

in defining the larger parcel are

unity of ownership,

unity of contiguity,

and unity of use (highest

and best use).

!23


Some key considerations of highest and best use analysis include:

• Title restrictions: Legal use precluded by restrictive covenant or use limited to a specific legal use.

• Legal permissibility: Use must be legal or capable of being achieved (i.e., rezoning and/or Official/Master Plan amendment) within a reasonable time frame.

• Physical adaptability: Site and/or improvements, including off-site infrastructure, must be capable of supporting the use.

• Externalities: Impact on use by external forces that effect property values.

• Probability of use: Must have a greater than 50% chance of being achieved.

• Timing of use: Must be achieved within a reasonable time frame.

• Demand: There must be an active market for the use.

• Financial feasibility: Prices and/or rents must be sufficient to support the use.

• Sustainability: The use must be maximally productive over a long time frame.

• Purchaser/user: The most likely purchaser or user must be identified.

Every partial taking differs in its impact on highest and best use analysis. If there is some doubt or uncertainty as to the physical or legal viability of a remainder for any economic use,

independent advice from a qualified third party should be sought. Of course, as the appraiser is ultimately responsible for the opinion of highest and best use and the corresponding market value estimate, the appraiser must be satisfied that the conclusions of any third party are reasonable and appropriate before relying on them.

When confronted with a non-viable remainder, it may be possible to mitigate damages (injurious affection). This outcome can sometimes be achieved by estimating its contributory

value to an adjoining property by combining the two to create a larger parcel, akin to an assembly involving separate rights of ownership. In this case, the larger parcel does not necessarily have, or require, unity of ownership.

Key Considerations of highest and

best use analysis

!24


For every potential larger parcel, highest and best use requires an analysis of the abutting property, with and without the non-viable remainder, accompanied by an estimate of market value of the abutting property (if it has its own highest and best use) and an estimate of market value of the larger parcel. The difference between the two estimates of market value represents the maximum contributory value of the non-viable remainder to the market value of the larger parcel. Every larger parcel that incorporates a non-viable remainder, with only one prospective purchaser, is characterized as a bilateral market, which can significantly impact the contributory value of the non-viable remainder. Where there is potential for more than one larger parcel, the contributory value of the non-viable remainder is

enhanced by the prospect of more than one buyer.

A larger parcel that combines an abutting non-viable property (often the result of a p a r t i a l t a k i n g i n v o l v i n g t h e s a m e expropriation) and a non-viable remainder of the subject property only requires an estimate of the market value of the larger parcel. In this scenario, both property owners are likely to enjoy equal bargaining power. Prorating the market value of the larger parcel, in its highest and best use, on the basis of an overall unit rate and applying the unit rate to the area of land in each ownership may be an appropriate method of determining the contributory value of each property, provided no improvements are involved.

SKETCH ONE

!25


The concept of the larger parcel is an integral part of highest and best use analysis. This analysis must reflect the most probable and financially feasible economic use. It establishes the basis for estimating both the market value of the larger parcel and the contributory value of the non-viable remainder. The maximum contributory value of a non-viable remainder as part of a larger p a r c e l , b e f o r e c o n s i d e r i n g t h e appropriateness of a potential discount associated with a bilateral market, can be estimated by deducting all anticipated costs, including an allowance for entrepreneurial incentive, associated with consolidating title to both properties and achieving the highest and best use of the larger parcel.

In effect, the maximum contributory value of a non-viable remainder, pursuant to any adjustment for trading in a bilateral market, as part of a larger parcel represents the after-taking value of the remainder for inclusion in the before- and after-taking test applied in the appraisal of a partial taking. Depending on the interrelationship of the larger parcel and the non-viable remainder, it is possible to have a highest and best use for the larger parcel that differs from the highest and best use of the abutting property.

A hypothetical example of the before and after test invo lv ing two non-v iab le remainders, including the presence of a bilateral market, is illustrated as Sketch 1 (see page 25), and summarized as follows:

!26


!27

Before and After Test, Two Non-viable Remainders Value before the taking (larger parcel) ignoring the scheme - 2.00 acres $180,000 Less: Contributory value of part taken (as part of the whole) 0.77 acres $69,300 Remainder value before taking (as part of the whole@ $90,000 per ac) 1.23 acres $110,700 Less: - Contributory value Remainder A (1.08 ac) as part of larger parcel (2.163 ac) $90,000 - Contributory value Remainder B after 50% discount for bilateral market ($7,500 x 0.5) $3,750 - Sub-total $93,750 Equals: Injurious Affection (Betterment) $16,950

As long as an adjoining property owner can benefit financially from acquiring a non-viable remainder, it is assumed that the adjoining property owner is a “willing buyer.” Typically, an adjoining property owner will pay s ome th i n g l e s s t h an t he max imum contributory value for a non-viable remainder to achieve a financial benefit.

The discount associated with conveyance of a non-viable remainder in a bilateral market depends largely on the extent the non-viable remainder enhances the value of the adjoining property. Where a non-viable remainder only marginally enhances the utility of an adjoining property, the value in contribution may be virtually non-existent relative to the maximum contributory value to the larger parcel. Conversely, if an addition of a non-viable remainder changes the highest and best use of an abutting property from residential to commercial as part of the larger parcel, it is likely that no discount to the m a x i m u m c o n t r i b u t o r y v a l u e o n a proportionate basis would be warranted.

The following text from a September 2000 report of the City of Ottawa describes a non-viable parcel (analogous to a non-viable remainder from a previous expropriation) and its disposition. Reportedly, the contributory value of the non-viable parcel was based on an appraisal, but there is no indication as to how the appraiser arrived at the value conclusion, and whether there was any discount associated with the conveyance of the non-viable parcel in a bilateral market.

In 1998 the Region bought the property…for the reconstruction of

Hawthorne Road….The settlement [price of $226,550] was for land and buildings and inc luded compensat ion for e n t i t l e m e n t s p u r s u a n t t o t h e Expropriations Act. The buildings were demolished, road works were completed and a legal survey was undertaken to define any surplus land [remainder]….

The surplus property is a rectangular site consisting of 3,295 m2 [35,467 sf]…fronting onto Hawthorne Road between Stevenage Road and Hunt Club Road in the Cities of Gloucester and Ottawa. The property is zoned M4(1.0) & I-Hf(1.0) – Industrial. The parcel does not meet the minimum requirements for the zone, and cannot be developed on its' own. It is therefore considered a non-viable parcel, of use only to the abutting owner.

The adjacent owners…contacted the Region and a purchase price of $80,000 was negotiated.

In some jurisdictions, the policy pertaining to the disposition of a remnant parcel is specifically tied to the enhancement of highest and best use of an adjoining property: “[A] county governing authority is authorized to sell and convey parcels of small or narrow strips of land, so shaped or so small as to be incapable of being used independently as zoned or under applicable subdivision or other development ordinances or land use plans, or as streets, whether owned in fee or used by easement, to abutting property owners where such sales and conveyances facilitate the enjoyment of the highest and best use of the


abutting owner's property.” This policy of maximizing the value of a remnant parcel on disposition is consistent with the objective of reducing injurious affection when dealing with a non-viable remainder.

While the ultimate objective is to mitigate damages, reduce injurious affection sustained by a non-viable remainder, the process by which that objective is achieved is through enhancement of the market value of an adjoining property, when considered as part of a larger parcel. When estimating the contributory value of a non-viable remainder to an adjoining property, value in contribution is based on the highest and best use of the larger parcel, as suggested by the Ontario Ministry of Transportation: “If it is concluded that the remainder is not viable, the impact of adding the Ministry lands to each adjoining property must be investigated and analysed. The value of the remainder will be its value in contribution to the adjoining property (or properties) as part of a larger parcel. The objective of the appraisal will be to estimate the increase in market value to that adjoining owner's holding if they were to acquire the Ministry lands.” Any financial benefit resulting from a reduction of injurious affection can only be applied to the remainder.

Deviating from recognized valuation parameters Moller dealt with an expropriation of three non-viable linear strip

takings of 1.94 acres, 0.79 acres, and 0.37 acres from lands zoned as Agricultural (AG) District, for the purpose of widening an abutting highway. All parties agreed that none of these small non-viable parcels were marketable on their own. However, one appraiser prepared a “Valuation Report for a Three-acre Hypothetical Rural Residential Acreage Parcel as per Client Request.” He believed his report “followed general sound appraisal practices.” The Board quoted directly from the appraiser’s report. “The land is at the corner of

highways 2, 59, & 674, one mile north of the Town of Sexmith in the County of Grande Prairie #1, Alberta. The basis is the property having good aesthetics for future rural development. The property is zoned for Country Residential development. The property will have good road access and good overall aesthetics. It is known that each parcel has specific attributes that affect value, but the purpose of the report is for a generalization for specific

!28

“The objective of the appraisal

will be to estimate the increase in

market value to that adjoining

owner's holding if they

were to acquire the Ministry

lands.”


!29

compensation purposes. This report is not tailored to the expropriation act, but to the clients’ terms of reference and follows general sound appraisal practices.”

The appraiser conceded that: “My valuation has no relevance to three small parcels or the size or strip. I was asked to appraise a three-acre – basically I didn’t appraise it as a three-acre long, skinny strip that only had one use, I appraised it as a three-acre site that could be marketed and sold.”

In rejecting the appraiser’s evidence, the reasons cited by the Board for doing so were:

• The admitted lack of relationship to the Expropriation Act as indicated in the quotation from his report.

• The failure to establish many of the assumptions such as the zoning of the property.

• The failure to consider that the property at issue is and always has been under agricultural production.

• The lack of similarity between the comparables and the land at issue….

• The admission that he was not appraising land of the shape or size of the land at issue.

• The admission that, in his hypothetical, he assumed that land was marketable whereas the land at issue was not.

The three non-viable linear strips had no independent highest and best use. They should have been appraised as part of a larger parcel in its highest and best use, in a manner reflective of a non-viable remainder, but without any potential discount, and in compliance with the relevant expropriation act. Offering evidence as an independent expert witness requires an appraiser to assist the trier of fact with objective, relevant, and well-founded opinions of value.

The market value of a remainder juxtaposed against the before-taking value reveals the clearest and most accurate measure of injurious affection (damages) and betterment (enhancement in value) occasioned by a partial taking. Provided provision is made to account for the contributory value of the part taken, the property owner is always assured of receiving at least the market value of the land taken.


CONCLUSION The value of a remainder, whether viable or not, is always established as an exercise independent of the before-taking valuation. This means that every remainder is treated as a newly created property and all of the investigations and analyses that are involved in the appraisal process must be undertaken anew, and in compliance with the relevant expropriation act. Accordingly, in addressing a remainder, the appraiser should:

• Identify the larger parcel(s) in the context of the remainder, while simultaneously conducting highest and best use analysis.

• Identify the property rights to be appraised.

• Identify relevant value-influencing property characteristics.

• Identify the most likely purchaser(s) of the remainder.

• Identify the appropriate method(s) of valuation.

• Ascertain the type of market data to be collected.

• Derive an estimate of value (i.e., market value or value in contribution).

When a remainder shows signs of betterment in the form of “special” benefits peculiar to it (i.e., benefits not enjoyed by the community at large), any injurious affection occasioned by the taking can be reduced by the amount of the betterment

attributed to special benefits. The amount of any betterment can only be set-off against any injurious affection

sustained by a remainder. Betterment cannot be applied to reduce a property-owner’s statutory right to always receive at least the market value of land taken.

A partial taking that results in two remainders, one whose value is disproportionately enhanced and the other whose value is disproportionately diminished, both relative to the before-taking

value, the net effect of weighing the value of one remainder against the value of the other, may give

rise to either injurious affection (damages) or betterment.

A partial taking appraisal prepared in compliance with the provisions of the relevant expropriation act and in compliance with recognized appraisal standards, with appropriately supported opinions of value presented in an unbiased, clear and convincing manner will assist the trier of fact in fixing the amount of compensation to which an affected property owner is entitled.

Betterment cannot be applied to reduce a

property-owner’s

statutory right to always

receive at least the

market value of land taken.

!30


OEA SKI DAY

4TH !ANNUALCRAIGLEITH !

SKI CLUB!COLLINGWOOD


The January decision of Justice Wilson in Moore v. Getahun has made its way into the inbox of every lawyer working with expert witnesses including, of course, the expropriation bar. So what does this decision mean for expropriation practitioners, whether experts themselves, or the counsel who call them?

While you’re likely familiar, by now, with this decision1 we’d like to quickly summarize what Justice Wilson appears to require from counsel who call experts as witnesses. She asks, with respect to amendments to a draft report made during a telephone call between counsel and the expert: “Is it appropriate under Rule 53.03 for counsel to review draft reports of experts and provide input to shape expert reports?”

[50] …the purpose of Rule 53.03 is to ensure the expert witness’ independence and integrity. The expert’s primary duty is to assist the court. In light of this change in the role of the expert witness, I conclude that counsel’s prior practice of reviewing draft reports should stop. Discussions or meetings between counsel and an expert to review and shape a draft expert report are no longer acceptable.

[51] If after submitting the final expert report, counsel believes that there is need for clarification or amplification, any input whatsoever from counsel should be in writing and should be disclosed to opposing counsel.

[52] I do not accept the suggestion… that discussions with counsel of a draft report go to merely weight. The practice of discussing draft reports with counsel is improper and undermines both the purpose of Rule 53.03 as well as the expert’s credibility and neutrality. 2

This decision is under appeal.3

Several months before Justice Wilson’s decision was issued, the Nova Scotia Court of Appeal considered whether an expert who herself faced potential liability in the very matter before the courts – a shareholder claim against an accounting firm for negligence – was adequately impartial to provide an expert opinion.4 Two out of the three judges of the panel held that the expert’s lack of independence should just “go to weight”. In other words, the court could consider the expert’s evidence, and her lack of independence would factor in when weighing her evidence

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MOORE v GETAHUN – THE ROLE OF DRAFT REPORTS IN EXPROPRIATION LAW

JULIA CROOME & MARK PENNEY


against the opposing party’s expert’s evidence. They reached this conclusion because, in their view, there is “…no binding or persuasive authority that sets such a standard for admission of expert evidence. It is not the law.”5 In other words, evidence of a lack of independence would never result in that expert’s evidence being entirely excluded.

The Chief Justice of the Court of Appeal, on the other hand, accepted the proposition that an expert’s independence or impartiality may appear to be so suspect that he or she should be prevented from testifying from the outset.

Leave to appeal to the Supreme Court of Canada from this decision has been granted, and the appeal will be heard October 7, 2014. It seems likely that the Supreme Court will take the opportunity to speak broadly to the standards that should apply to expert evidence; we are keeping a close eye out for that decision.

These appeals notwithstanding, Justice Wilson’s decision remains the most recent judicial finding on the “shaping” of draft expert reports. Counsel will have to determine how to handle the decision in the interim.

Very recently, the Holland Group, a group of leading practitioners involved in medical malpractice cases in Ontario, released a position paper regarding Morris. The group is currently led by Coulter Osborne, the author of the Civil Justice Reform Project: Summary of Findings and Recommendations that fueled the amendments to Rule 53.03 cited by Justice Wilson. The Holland Group stated:

To the extent that the conclusions discussed above in the Moore decision purport to rely on Justice Osborne’s report, it is Justice Osborne’s view, shared unanimously by the members of the Holland Group, that the Moore decision misconstrues the findings in the report and reaches conclusions that were not intended in the report. The changes to Rule 53.03 were intended to address concerns about bias in expert reports, but not stifle the important dialogue that occurs between counsel and experts.

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The Holland Group’s members, in fact, intend to continue to review draft expert reports and “to communicate with experts appropriately to ensure that expert reports filed in their cases are of high quality and ultimately of assistance to the parties and the Court.”

But what of the expropriation context? As we, a counsel and an expert, worked through the Moore findings, we found that we both shared Justice Wilson’s core concerns. A credible witness must of course be independent and neutral. The process used by counsel to instruct and assist experts to generate their reports is not always transparent, particularly where counsel provide oral commentary on a draft that leads to amendments. If the process is not transparent, it is difficult if not impossible for the court to determine whether the expert is independent and neutral and, accordingly, credible.

Our viewpoints started to diverge – just a little – when we discussed the role and use of draft reports, and

how the concerns raised by Justice Wilson could or should be addressed in the expropriation context. We think this difference in perspective illustrates the differences between the duties of counsel and those of experts. Rather than dilute our respective comments we’ve split the rest of this article into counsel’s view (which largely echoes the legal commentary on this decision across all the practice areas) and the expert’s view.

The counsel’s perspective: review of, and input on, draft reports is necessary Simply put, expropriation counsel must be permitted to comment on and question draft reports. The process is a proportional and necessary response to the statutory and evidential requirements of expropriations.

An expert’s evidence – the valuation of property, for example – must appropriately address the particularities of the Expropriations Act, the most obvious example being that the expert must ignore the scheme pursuant to section 14(4)(b). The valuator must make assumptions, but only the appropriate assumptions, and those assumptions must be clear to the non-expert. The facts that underpin the opinion must be accurate.

A review by counsel, and her clarifying questions, is necessary to ensure that end.

Simply put, expropriation

counsel must be permitted to comment on and question draft reports.

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!To do otherwise would be a failure of counsel’s responsibility to her client: she has been retained in part for her understanding of the legal framework that overlays the expert’s evidence. That framework cannot be fully explained to an expert, particularly a less experienced expert, through a retainer letter that is divorced from the facts. Only once the expert has produced a draft can counsel effectively convey the specific parameters of the Expropriations Act.

More broadly, legal counsel must ensure than an expert has had the opportunity to review and consider all of the relevant facts. She should also ensure that the expert does not inadvertently go beyond the parameters of his expertise, or purport to determine contested facts. Appreciating the case as a whole, and the distinction between the expert’s role and the court’s role, is up to counsel.

To be clear, counsel must of course not attempt to alter the expert’s opinion, and this draft, and any clarification that follows, should be considered disclosable once the expert’s final report is filed. If, however, counsel is not allowed the opportunity to review a draft report, less comprehensive and focused reports, which may even cloud the issues, will be the result. Counsel may also need to retain multiple experts to bring a case forward, increasing the cost of litigation.

In the view of most legal commentators, shared here, existing protections – the disclosure of drafts, the duties of counsel, the duties of experts, and the adversarial system – adequately address Justice Wilson’s concerns. It is interesting to note that, in the final paragraphs of her decision, she appears to agree that so long as counsel’s comments and any ensuing amendments to an expert’s report are disclosed there will be sufficient transparency to ensure the expert witness is neutral: [520] The purpose of Rule 53.03 of the Rules of Civil Procedure is to ensure the independence and integrity of the expert witness. The expert’s primary duty is to the court. In light of this change in the role of the expert witness under the new rule, I conclude that counsel’s practice of reviewing draft reports should stop. There should be disclosure in writing of any changes to an expert’s final report as a result of counsel’s corrections, suggestions, or clarifications, to ensure transparency in the process and to ensure that the expert witness is neutral.

Nonetheless, caution towards the use of draft reports is advisable until the Court of Appeal clarifies her findings.

The expert’s perspective: maintaining independence & integrity in the face of draft reports & counsel input Justice Wilson’s decision raises the following principal question: Does the expert compromise their independence and integrity through counsel’s review of the draft report, and by receiving/accepting input that may shape their final report?

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!The preceding question gives rise to a broader issue regarding the circulation of, and reliance upon, draft reports in expropriation proceedings. The circulation of draft reports to expropriating authorities and even the Board of Negotiation, particularly unsigned appraisal reports (essentially a “draft”), has become a troubling trend that severely compromises the independence and integrity of the expert. This practice also undermines the responsibility of the expropriating authority (having a fiduciary responsibility to taxpayers) and the role of the Board of Negotiation (BON). The circulation of draft reports to the expropriating authority and BON should be viewed as a tactic employed by the expert for the purpose of soliciting feedback and gathering intelligence during the negotiation phase of the proceedings so that subsequent revisions can be made to the final signed report – thereby strengthening the expert’s position and final report in preparation for an OMB hearing or mediation.

While some experts would argue that changes between a draft and final report do not compromise their independence or integrity given that the additional issues/perspectives adopted in the final report are addressed in a transparent and well supported manner, one must question the objectivity of the expert who clearly benefits from the feedback garnered through the issuance of a draft report to external parties, and who relies on the draft report as their core supporting evidence during preliminary negotiations with the authority and/or during BON hearings.

The mere absence of certain issues or perspectives raised and relied upon in the draft report (i.e. the issues/perspectives heavily criticized by the authority, BON or opposing expert), relative to those included in the final report, is another indicator that suggests the expert has compromised their credibility – especially if the conclusions

opined in the final report are consistent with those of the draft.

In the context of appraisal reports, some appraisers view the unsigned draft report as a report lacking ‘formal’ status (i.e. a work in progress) and, therefore, not fully susceptible to the ‘Standards’ of the Appraisal Institute of Canada.

Ultimately, the use of draft reports for external purposes will continue until representatives of expropriating authorities and members of the BON refuse to accept unsigned/draft reports.

Despite the preceding, draft reports certainly have a place in expropriation matters, particularly for internal purposes. For example, review of draft reports by legal counsel to ensure proper application of Sect ion 14.4 .b o f the Act and the appropriateness of various alternative heads of claim (i.e. equivalent reinstatement and special difficulties in relocating) may be viewed as an integral part of expropriation proceedings. In short, the requirements of the Act shape the expert’s report, and the expertise of legal counsel is required to ensure proper application of the Act.

The review of draft reports by legal counsel and the property owner (claimant) for factual accuracy and articulateness may also be deemed as acceptable practice. In fact, the narrative, data and illustrative exhibits included in a draft report are often useful for the purpose of generating final input from the property owner regarding the attributes and history of the subject property and surrounding area.

In conclusion, the use of draft reports can certainly shape an expert’s final report. Appropriate use of draft reports is paramount to maintaining independence and credibility.

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1 As defined in Section 54 of the ITA 2 Per Section 44, ITA 3 The principal difference between recapture and capital gains for tax purposes is that any recapture amount is included on account of income and fully taxable, whereas capital gains are on account of capital and only 50% of the total capital gain is taxable. 4 Per Section 44 and Section 13, ITA

1 Public Works defined as “structures, as roads, dams, or post offices, paid for by government funds for public use,” http://dictionary.reference.com/browse/public+works. 2. Unlike in the US, where the Fifth Amendment provides: “nor shall private property be taken for public use, without just compensation,” in Canada, no property owner of land expropriated by statute for public purposes is entitled to compensation. Therefore, in Canada, the federal government and each province and territory has passed a variety of expropriation acts that define the elements of compensation, and there is an assumption that there will be compensation for expropriated land, unless specifically precluded. 3. In Gardiner Burton Agencies Ltd. v. Nova Scotia Power Corp. (1986) NSCA, the court ruling emphasized that the “after” value must be independently estimated, with the result deducted from the “before” value in determining the amount of compensation due for injurious affection. 4. The scheme represents the intended public purpose underlying the necessity or justification for an expropriation. In valuing the property before the taking, the influence of the scheme is to be ignored. After the taking, the value of the remainder takes the influence of the scheme into account, and any special benefits flowing from the scheme. See Windsor (City) v. Paciorka Leaseholds Limited, 2012 ONCA 431 (CanLII). Leave to appeal denied by the Supreme Court of Canada. 5. Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Appraisal Institute, 2010, p. 166). 6. Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Appraisal Institute, 2010, 167). 7. Appraisal Institute, The Appraisal of Real Estate, 13th ed. (Appraisal Institute, 2008, 15). 8. “Appraisals for expropriation can incur hypothetical conditions, and may require the appraiser to invoke the Jurisdictional Exception protocol [see 3.6],” CUSPAP, effective January 1, 2012, Appraisal Standard 7.12.4.

CASE STUDY: THE TAX IMPLICATIONS OF AN EXPROPRIATION

PARTIAL TAKING EXPROPRIATION: THE REMAINDER

FOOTNOTE REFERENCES

1 B.A. (Hons.), LL. B, LL.M., of the firm of Barriston LLP. 2 Report of the Ontario Law Reform Commission on the Basis for Compensation on Expropriation, Department of the Attorney General, September 21, 1967, p. 51. 3 Ibid., at p. 52. 4 Robinson, QC, R.B., Report on the Expropriations Act, Ministry of the Attorney General, October 1974, p. 48. 5 Expropriation Act, R.S.A. 2000, c. E-13, s. 66(1). 6 [2013] ABCA 290. 7 (1997) 64 L.C.R. 73. 8 (1999) 66 L.C.R. 241. 9 (2006) 89 L.C.R. 276. 10 (2007) 93 L.C.R. 153 11 Ibid., at p. 165. 12 [2008] ABCA 262. 13 Ibid., at para. 17 14 Ibid., at paras. 20 and 21. 15 (2012) 107 L.C.R. 220. 16 Another issue in the case was whether the same interest rate should apply to each Claimant but that subject is beyond the scope of this article. 17 Supra, note v, at para. 59. 18 Mannix v. Alberta(1984), 31 L.C.R. 299. 19 Ibid, at p. 308. 20 For example see: Kincardine Construction Ltd. et al. v. Ontario Hydro (1985), 34 L.C.R. 328. 21 Note the similarity with the conclusion of the Ontario Law Reform Commission in 1967. 22 Supra, at note v, at para. 103.

A CASE FOR A FIXED INTEREST RATE

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http://dictionary.reference.com/browse/public+works

http://dictionary.reference.com/browse/public+works


!5. Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Appraisal Institute, 2010, p. 166). 6. Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Appraisal Institute, 2010, 167). 7. Appraisal Institute, The Appraisal of Real Estate, 13th ed. (Appraisal Institute, 2008, 15). 8. “Appraisals for expropriation can incur hypothetical conditions, and may require the appraiser to invoke the Jurisdictional Exception protocol [see 3.6],” CUSPAP, effective January 1, 2012, Appraisal Standard 7.12.4. 9. Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Appraisal Institute, 2010, 122). 10. Creative Stretch Fabrics Ltd. v. Pitt Meadows (District) (1994), 54 L.C.R. 128, (B.C.E.C.B.). 11. Also applied in McIlwaine v. Saskatchewan, 2000 SKQB 326 (CanLII); Holdom v. British Columbia Transit (2005), 85 L.C.R. 198, 32 R.P.R. (4th) 58 at para. 93 (B.C.E.C.B.); Lulu Island Holdings Ltd. v. GVSDD, 2007 BCSC 938 (CanLII). 12. According to Eaton, in the US, “it is well settled, at least within the context of an action for just compensation under the Fifth Amendment, injuries to a landowner’s business are not compensable.” Real Estate Valuation in Litigation, 2nd ed. (Appraisal Institute, 2005, 58). 13. This is known as the ‘Edwards Rule,’ and stems from the English Court of Appeal ruling in Edwards v. Minister of Transportation (1964) 2 Q.B. 135. Not all jurisdictions in Canada follow the Edwards Rule. For example, Alberta’s expropriation act is not as restrictive as the Edwards Rule, and compensates for injurious affection if it results from the taking or from the construction or use of “the works for which the land is acquired.” See Landex Investments Ltd. v. Red Deer (City), 1991 ABCA 199 (CanLII). 14. Todd, The Law of Expropriation and Compensation in Canada, 2nd ed., 1992, Carswell Thomson Professional Publishing, p.335. 15. Claims for personal or business damages should be addressed separately and not as part of the value of the real property. 16. Ammouri v. Ministry of Transportation, 2008, OMB Decision LC060014. In Vaness v. Kamloops (City), 2002 BCSC 663 (CanLII), while acknowledging the difference in the before (without the dyke) and after (with the dyke) valuations is an appropriate measure of damages, the court rejected the appraiser’s evidence, which consisted of an analysis of unrelated waterfront lots province-wide as the basis for a 30% depreciation in value. The court awarded a nominal sum of $1,000. The appraiser was also criticized for exceeding his jurisdiction when he stated that “the primary function of his appraisal report was to assess the damage claim,” a role reserved for the court. 17. Kirk Corson, Rural Settings: Valuation of Partial Acquisitions and Damages, Right of Way (May/June 2008, 18-22). 18. In a 1994 study Determination and Evaluation of Remainder Characteristics Which Significantly Affect Right-of-Way Costs, prepared by Texas Transportation Institute, a survey of various groups, including appraisers and highway right-of-way government professionals, ranked in order of most importance as impacting the quantum of remainder damages: 1) change in highest and best use; 2) size of remainder; 3) location of access to abutting highway; 4) development capabilities; 5) shape of remainder; 6) width of remainder abutting highway; 7) grade level of abutting highway; and 8) length of remainder (depth from highway)/amount of access to abutting highway. http://d2dtl5nnlpfr0r.cloudfront.net/tti.tamu.edu/documents/1390-1.pdf. 19. Carol Lansing, and Mark Savin. Assessing and Mitigating the Zoning Impacts of a Partial Taking, Condemnation, Zoning and Land Use, 2009 Annual Review, American Bar Association. http://www.faegrebd.com/webfiles/lansing_reprint.pdf. 20. In the US, an uneconomic remainder generally cannot take into account land beyond the boundaries of the remainder as a means of mitigating damages. However, in Gilbert v. The State of New York, #2009-013-502, Claim No 107457, the judge concluded: “I find the subject property’s highest and best use after the taking to be for sale to adjoining owners, noting that that may include a multitude of purposes consistent with the zoning at the time of the taking which…allow[ed] commercial and residential development...” 21. Cost-to-cure also has application where a viable remainder sustains some diminution in value, the loss of which can be mitigated completely or partially at a cost that is less than the corresponding diminution in value without incurring the expenditure to undertake the cure. See Gene Reilly, Wu Sun, Louis J. Pignataro, and Nicholas J. Monahan, Jr., ‘Partial Acquisitions of Right of Way in New Jersey,’ The Appraisal Journal (Appraisal Institute, January 2000), 64-71, for an analysis of the cost-to-cure involving partial takings for a number of different types of properties. A copy of the actual study can be downloaded at http://ntl.bts.gov/lib/21000/21400/21467/PB99119513.pdf. 22. A remainder might not be expected to remain landlocked in perpetuity. For example, a landlocked remainder in a greenfield environment on the periphery of an urban boundary may be developable in the near future in conjunction with adjoining lands as part of a comprehensive “block” development plan. In Clarke v. City of Ottawa, Ontario Municipal Board Decision 1144, issued July 18, 2001, the Board refused to discount the value of a landlocked remainder (Parcel A), finding that “municipalities would likely require that owners of parcels of the size and shape of Parcel A (10 acres) and the [adjoining]…lands [23.5 acres] to plan any subdivision in comprehensive fashion.” 23. Michael Wolff, ‘Value Vs. Size in The Real Estate Market,’ Right of Way (July/August 2007), 36-31, applying linear regression analysis. http://www.irwaonline.org/eweb/upload/0707-5.pdf. 24. The Appraisal Institute, Uniform Appraisal Standards for Federal Land Acquisitions (Appraisal Institute, 2000, 18). 25. See Caldwell & Ross Limited v. New Brunswick (Transportation), 2009 NBQB 329 (CanLII) for a discussion of the larger parcel and how market value is impacted by parcel ‘size.’ http://www.canlii.org/en/nb/nbqb/doc/2009/2009nbqb329/2009nbqb329.pdf. 26. Copy available at http://www.tpsgc-pwgsc.gc.ca/biens-property/documents/pubs-re39-eng.pdf. 27. Tony Sevelka, ‘Expropriation and Condemnation: The Larger Parcel,’ The Appraisal Journal (January 2003, 75-93). 28 In Debra L. Miller, in her Capacity as the Secretary of Transportation for the State of Kansas, v. Lawrence Preisser and Tracy Chambers, 2012, the appeals court concluded that “the district court erred because unity of ownership is not required when a landowner presents the assemblage of two parcels of property solely for the purpose of establishing the highest and best use of the property; rather, it must merely be established that there is a reasonable probability of joinder of the properties…[and the district court] prohibited the landowners from presenting evidence regarding valuation based on use of their property as an integrated economic unit [larger parcel] with an adjacent property…” !

PARTIAL TAKING EXPROPRIATION: THE REMAINDER… CONT’D

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http://d2dtl5nnlpfr0r.cloudfront.net/tti.tamu.edu/documents/1390-1.pdf

http://www.faegrebd.com/webfiles/lansing_reprint.pdf

http://ntl.bts.gov/lib/21000/21400/21467/PB99119513.pdf

http://www.irwaonline.org/eweb/upload/0707-5.pdf

http://www.canlii.org/en/nb/nbqb/doc/2009/2009nbqb329/2009nbqb329.pdf

http://www.tpsgc-pwgsc.gc.ca/biens-property/documents/pubs-re39-eng.pdf

http://d2dtl5nnlpfr0r.cloudfront.net/tti.tamu.edu/documents/1390-1.pdf

http://www.faegrebd.com/webfiles/lansing_reprint.pdf

http://ntl.bts.gov/lib/21000/21400/21467/PB99119513.pdf

http://www.irwaonline.org/eweb/upload/0707-5.pdf

http://www.canlii.org/en/nb/nbqb/doc/2009/2009nbqb329/2009nbqb329.pdf

http://www.tpsgc-pwgsc.gc.ca/biens-property/documents/pubs-re39-eng.pdf


!PARTIAL TAKING EXPROPRIATION: THE REMAINDER… CONT’D 29. Burmont Holdings Ltd. v. Chilliwack (District), 1994 CanLII 3326 (BC SC). Use restriction negatively impacts market value. 30. Farlinger Developments Ltd. v. Borough of East York [1975] Ont. C.A. In considering the prospect of rezoning, the appeals court ruled that "highest and best use must be based on something more than a possibility of rezoning. There must be a probability or a reasonable expectation that rezoning will take place….[P]robability connotes something higher than a 50% possibility." This finding was contingent on achieving rezoning from single-family use to high density residential use in one year, recognizing that a reasonably probable use is time-sensitive (i.e., not remote). A contemplated use that does not have more than a 50% probability of satisfying all of the foundational requirements of highest and best use analysis is precluded from consideration, and cannot form the basis for an opinion of market value. Sperduti, Frank J. ‘Proving Market Value: Legal Issues For Appraisers,’ http://www.franksperduti.com/wordpress/wp-content/uploads/2012/09/Proving-Market-Value.pdf 31. Guido v. Ontario Ministry of Transportation (1977) Ont. H.C.J. The Divisional Court upheld the Board's rejection of motel use as the highest and best use of the legally permitted uses, as motel use was considered physically impossible, financially imprudent, and lacking tourist demand. Both parties agreed that none of the other permitted uses (hotel, tourist cabins, tavern, public house and eating establishment, or garage) were appropriate for the land. The Board considered the likelihood of commercial access from the highway "so remote as to be non-existent” and because of the ‘M’-shape of the parcel the effects of the setback requirements were "so severe as to render [the buildable area of the parcel] virtually useless…as a site for a motel."...[A]lso...extension of the Queensway westerly was responsible for "a drop and change in vehicular traffic passing the…land from commuter and tourist to mainly commuter," and...it was "exceedingly difficult to believe that a prospective and prudent purchaser...would risk an investment in the…land and construction of a motel thereon." 32. A nearby airport or crematorium would likely have a negative impact and preclude ‘residential’ development even it were a legally permissible use. 33. See footnote 29. 34. Rural and agricultural land on the urban fringe may not have an ascertainable time frame for achieving a higher and better use, but an expectation of urbanization as a higher and better use should be reflected in the prices of similarly located comparable land sales. Nonurban or agricultural land with market-recognized, long-term urban development potential may be characterized as a speculative landholding for anticipated urban development, with the existing use continuing into the foreseeable future. In Higgins and Tuddenham v. Province of N.B., 2005 NBQB 237, the court recognized that “while residential development was possible for the road frontage,…there was little, if any, demand for it at the time of this expropriation….[and] accept[ed the appraiser’s] conclusions as to highest and best use of the property, i.e. the continued use of the parent parcel as woodland.” 35. An economic use that fails to meet the initial tests of physical possibility and legal permissibility at a probability level greater than 50% is precluded from further consideration in the highest and best use analysis. 36. In Thoreson v. Alberta (Ministry of Environment), 2012 ABCA 170 (CanLII), the appeals court ruled that the property owner’s evidence was flawed and of limited assistance: “Despite acknowledging development of the subject lands depended on assessing both costs and demand, the…experts did neither. This…constitutes a fatal flaw in their analysis and I give their evidence little weight. Specifically the suggestion that but for the RDA/TUC [scheme] the subject lands would be fully developed and serviced as at March 31, 2004 is rejected. Therefore, the Plaintiffs’ appraisal of $400,000.00 per acre of the expropriated lands which assumed the full servicing and full development as of the effective date is of limited assistance to the…ultimate determination of value.” The lower court also cited the numerous steps necessary in the development process overlooked in bringing the raw land to a serviced state and fully developed as industrial lots. The court fixed the market value of the lands at $84,500 and $87,000 per acre. 37. A title search is required of each abutting property that has the potential to form part of the larger parcel, in concert with a non-viable remainder, to identify any legal constraints (title restrictions on use) and physical constraints (registered easements) relating to highest and best use analysis. 38. The terms non-viable property and non-viable parcel are used interchangeably, and have been variously defined as “a parcel of land, which, on its own, would not be eligible for a building permit” (Town of Milton); and “a parcel of land that is landlocked” (Infrastructure Ontario). The Ontario Ministry of Transportation defines “non-viable parcels are those that are not capable of independent development. They may be irregularly shaped, have limited or no access, or have other deficiencies preventing their independent use or development,” Real Property Appraisal Guidelines (February 2008, 26). 39. Gordon E. MacNair, ‘Value in Contribution & Landlocking,’ Right of Way (January/February, 12-17), describes a number of actual transactions of remnants trading at various discount rates in a bilateral market. 40. Cobb County, Georgia. 41. Ontario Ministry of Transportation, Real Property Appraisal Guidelines (December 2008, 26). 42. Moller v. Canada (Transportation), 2008 CanLII 88538 (AB LCB). See Alberta (Transport, Minister) v. Bonaventure Sales Ltd., 1980 ABCA 142 (CanLII), in which the appeals court mandated application of the concept of the larger parcel to value expropriated strips of land inappropriately assigned values as independently ‘saleable acreage’ by the Board. http://www.canlii.org/en/ab/abca/doc/1980/1980abca142/1980abca142.pdf. 43. In Falkirk Enterprises Ltd. v. Calgary (City), 2012, CanLII 60869 (AB LCB), the Board acknowledged one appraiser as presenting evidence “in a forthright and professional manner” while alluding to the other appraiser as one “whose experience is largely as a professional witness.” 44. Damages (injurious affection) arbitrarily computed as a percentage of the before-taking value or the residual value after estimating the contributory value of the part taken as part of the larger parcel fails to consider the value of the remainder in any meaningful way, and conceals the magnitude of the damages claimed without regard to the value of the remainder. 45. In F & F Realty Holdings Inc. v. Ontario (Ministry of Transportation), 1998 Carswell Ont 3046, 64 L.C.R. 52, the Board deemed the highway exit ramp constructed in connection with part of the land expropriated to have had both a positive (special benefit) and negative impact (injurious affection) on the 15.2-acre remainder, with the betterment attributed to 13.2 acres outweighing the injurious affection assigned to two acres, thereby, restricting compensation to the market value of the land taken (4.3 acres).

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http://www.franksperduti.com/wordpress/wp-content/uploads/2012/09/Proving-Market-Value.pdf

http://www.canlii.org/en/ab/abca/doc/1980/1980abca142/1980abca142.pdf

http://www.franksperduti.com/wordpress/wp-content/uploads/2012/09/Proving-Market-Value.pdf

http://www.canlii.org/en/ab/abca/doc/1980/1980abca142/1980abca142.pdf


46. In Kodila v. British Columbia (Ministry of Transportation), 2007, BCSC, while the “before and after method” indicated that the diminution in value occasioned by the partial taking was $2,074, the court awarded the property-owner $7,818 as the contributory value of the land taken as part of a larger parcel. 47. The onus to prove betterment lies solely with the expropriating authority. Lafleche v. Ministry of Transportation and Communications (1975), 8 L.C.R. 77 at 86 (Ont. Div. Ct.); and Thunderbird Entertainment Ltd. v. Greater Vancouver Transportation Authority, 2012 BCCA 294 (CanLII). 48. All provinces, except British Columbia, and the federal government restrict set-off of special benefits to injurious affection. British Columbia allows set-off of special benefits against the total claim for compensation. 49. See footnote 47.

PARTIAL TAKING EXPROPRIATION: THE REMAINDER… CONT’D

THE ROLE OF DRAFT REPORTS IN EXPROPRIATION LAW 1 Moore was a personal injury action. The defendant’s expert’s file contained notes referring to a telephone call between the expert and defence counsel, during which counsel reviewed the expert’s report and suggested changes, which the expert then made. Justice Wilson held, strongly, that the process undermined the expert’s credibility and neutrality.Type to enter text. 2 This decision has been cited only once since it was issued on January 14, 2014. Master Muir, in Thermapan Structural Insulated Panels Inc. v. Ottawa (City), [2014] OJ No 1790 (SCJ), considered the extent to which litigation privilege is waived by tendering an expert witness. The existing principle is that implied waiver should be narrowly construed and restricted to material relating to formulation of the expressed opinion. Counsel before Master Muir argued that Justice Wilson’s decision in Moore had taken the common law past the existing principle, and closer to the automatic production of the expert’s complete file. Master Muir disagreed, noting that the expert in Moore had admitted to reviewing his draft report with counsel and making “corrections” as a result. Only “foundational” information must be produced when an expert is tendered. 3 The Moore appeal will be heard with an appeal from the Divisional Court’s decision in Westerhof v. Gee (Estate), 2013 ONSC 2093 (Div Ct). 4 Abbott and Haliburton Company v. WBLI Chartered Accountants, 2013 NSCA 66. 5 Ibid at paras. 80-81.

www.OEA.on.ca


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CONTRIBUTORS

THANK YOU TO ALL OUR CONTRIBUTORS! Have an article or case study to contribute to our next issue?

Please contact our Editor for further details.

ROELAND AND PIKE DECISIONS KEITH ANDERSON AACI, SR/WA Appraiser Coordinator Real Estate Section, City of Hamilton [email protected] !A CASE FOR A FIXED INTEREST RATE ERIC FINN Senior Litigation Counsel Barrison Law [email protected] !THE TAX IMPLICATIONS OF AN EXPROPRIATION TIM ZIMMERMAN Bcomm CBV, CFE Manager, Valuations, Modelling and Disputes PriceWaterhouseCoppers LLP [email protected] !EDITORS: KEN GRIFFIN, GORDON KING, JOHN SEIGEL !PARTIAL TAKING EXPROPRIATION: THE REMAINDER TONY SEVELKA AACI, P. App

President of International Valuation Consultants Inc. [email protected] !THE ROLE OF DRAFT REPORTS IN EXPROPRIATION LAW JULIA CROOME MARK PENNEY AACI Associate, WeirFoulds LLP GSI Real Estate Advisors & Planning Inc. [email protected] [email protected] EDITOR IAN MATHANY Associate, Borden Ladner Gervais LLP [email protected]

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FALL CONFERENCE RD- TH CHECK OEA WEBSITE ... 2014...Value Appraisal Commission (LVAC) to base the amount of disturbance damages on the market value of the land (20% of market value