Docket: LT92007
Order: LT94-2

IN THE MATTER of the Real Property Assessment Act, R.S.P.E.I. 1988 Cap. R-4;

and

IN THE MATTER of an appeal to The Island Regulatory and Appeals Commission (the Commission), under Section 22 of the Real Property Assessment Act (Act), by Alti-Lien Holders Inc. (the Appellant) of Charlottetown, Prince Edward Island, against a decision of the Minister of Finance (the Minister) with respect to the 1991 assessment of property (Provincial Property Number 778563-000) located in Victoria, P.E.I.

DATED the 11th day of March, 1994.

Linda Webber, Chairman
John L. Blakney, Vice Chairman
Michael Ryan, Commissioner

Order

Appearances

1. For the Appellant
Richard Farmer President, Alti-Lien Holders Inc.,
The Appellant

2. For the Minister
Jim Ramsay Director, Real Property
Assessment Division
Bill Found Manager, Commercial and
Special Purpose Properties

Reasons for Order

I. BACKGROUND

The property in question is located just outside the municipal boundary of Victoria, Prince Edward Island and includes 16.5 acres of land comprised of a 1.0 acre lot, 9.5 acres of land general, and 6.0 acres of low wet land. The property is serviced by three wells (2 fresh water and 1 salt water) and two sewage lagoons.

Three structures are located on the property. Building Number 1 is a three-storey precast concrete industrial engineering and research building. Construction of this building began in 1986, however it was never completed or occupied. Building Number 2 is a single storey Sprung structure and consists of a poured concrete foundation, aluminum frame, and a vinyl/rubber fabric exterior wall/roof cover. Construction of this building began in 1986 and has never been completed. The third building is a single storey steel-frame structure which was started in 1986 but was not completed at the time of appeal The foundation is poured concrete and the roof has a metal cover. There are no exterior or interior walls.

Building areas for the three structures include 25,260 square feet for building Number 1, building Number 2 has 27,604 square feet and building Number 3 has 2,014 square feet.

The Prince Edward Island Development Agency acquired the property on March 31, 1987. In 1990, Alti-Lien Holders Inc. took possession of the property and since that time has been trying to sell the property.

The assessment history of the property is as follows:

YEAR

TOTAL
31/03/87 $1,114,700
1988 $1,169,000
1989 $1,248,900
1990 $1,309,700
14/12/90 $1,306,200
1991 $1,608,700
1991 Revised $969,300
1991 Revised $683,500

By Notice of Appeal dated June 10, 1992, Richard Farmer appealed the 1991 real property assessment for Provincial Property No. 778563-000. The reasons for the appeal are as follows:

"Value of property is groosly [sic] overrated. (a) property is of no or little commercial value (b) property damaged -structural and u/g pipes to be checked (c) Max. value should be based on sale of interest by one shareholder to another, i.e. free market value."

The Commission heard the appeal on May 4, 1993, in Charlottetown.

On September 22, 1993, the Commission issued Interim Order LT93-3, and found:

... the Commission finds that at the time of appraisal and due to circumstances beyond the control of the owner, the utility of the Sprung structure was significantly decreased and a cure of the loss in value is not economically feasible. Therefore, in this case the Commission does not accept the Department's general application of 25 per cent for the special purpose category.

The Commission therefore orders the Department to determine a new rate, such a rate to more appropriately reflect a loss in value that is considered by the Commission to be incurable and to submit a suggested revised assessment to the Commission by October 20, 1993, with reasons explaining the basis for the determined value.

The Department responded on October 20, 1993 and recommended that the -25% allowance (for functional) on the Sprung structure be varied to -50%. The Department stated: "This recommended adjustment represents a 50% allowance based on an opinion that this amount is sufficient to compensate for modifications that may have to be made to the building to enable another use."

II. EVIDENCE AND ARGUMENTS

The arguments for both the Appellant and the Minister have been summarized in Interim Order LT93-3.

III. DECISION

The Appellant indicated that he accepts the assessment on building No. 1 and building No. 3 and the lot and the Commission affirms those assessments. Therefore, the Commission must decide to dismiss or allow the appeal or vary the assessment on building No. 2, herein referred to as the Sprung structure.

In Interim Order LT93-3, the Commission determined that the "economic obsolescence" of the Sprung structure is significant. After fully reviewing the Department's submission of October 20, 1993, the Commission is not satisfied that the recommendation of the Department is adequate enough to reflect the economic obsolescence of the Sprung structure.

On appeals before the Commission, the Minister is responsible pursuant to the provisions of Section 28.(1) of the Act to demonstrate that the assessment is uniform in relation to other assessments.

In a previous decision, the Commission concluded that the concept of "uniformity" is the most important feature of real property assessment, a view which has wide support.l In fact, in the case of Irving Oil Ltd. v. City of Halifax, before the Appeal Division of the Nova Scotia, Supreme Court, the decision of County Court Judge Anderson "... that uniformity was a basic principle of assessment..."2 was upheld.

In determining whether the Minister has satisfied the test of uniformity in assessing the Sprung structure, the Commission is guided by Section 3.(1) and 3.(2) of the Act.

3.(1)

All real property in the province including real property owned by the Crown shall be assessed, and such assessment shall be made by the Minister.[emphasis added]

3.(2)

All real property owned by the Crown or any person shall be assessed at its market value, either... [emphasis added]

Furthermore, Section 1. (c) defines "assess":

... to value a property for tax purposes, whether by an appraisal or by use of an adjustment multiplier; [emphasis added]

Section 1.(a) defines "appraise" as:

... to enter into and inspect a property and determine its market value; [emphasis added]

Section 1.(f) defines "market value" as:

... the most probable sale price indicated by consideration of the cost of reproduction, the sale price of comparable properties and the value indicated by rentals or anticipated net income:

Therefore, the Minister must assess all real property at its market value and the assessment shall be uniform in relation to other assessments.

In previous cases before the Commission the Department has referred to several sources of information, including material prepared by the Appraisal Institute of Canada. From the Institute's Course 101 material, the concept of "market value" is described as: "By far the most important value concept in real estate appraising...". The Institute defines "market value" as: "The probable sale price at which property would sell for at the date of appraisal allowing a reasonable time to find a purchaser".3

In its submission, the Department stated that the assessment under appeal was arrived at on the basis of an appraisal which was completed on August 17, 1992. The effective date was January 1, 1991.

In determining market value of property, Section 1.(f) requires the Department to consider three approaches: cost of reproduction, sales comparables, and rent or anticipated net income.

To determine the market value for this property, the Department stated that the Direct Sales Comparison Approach was not applied because they could not find any sales of properties which could be considered comparable to the subject property. For similar reasons, the Income Approach was not applied.(Exhibit 1, p.7)

The Department considers the Sprung structure to be a "special purpose building", and chose to base its market value on the cost of reproduction. In so doing, it relied on the Marshall Valuation Service manual as a guide to determine the cost of reproduction. (Exhibit 1, p. 7)

The Commission has reviewed the Marshall Valuation Service manual, and notes with interest that: "This publication has been recognized as an authority in the appraisal field for more than fifty five years." The Marshall Valuation Service states that, "The costs contained in the manual have a high validity, but as with any collection of cost data, they are presented as a guide to cost analysis and cannot be used blindly."4

The Commission understands that the Department applied the 1989 base cost per square foot to the areas of the buildings to determine the assessment. These values were then adjusted for the various forms of depreciation so that such items as Physical Deterioration, Functional Obsolescence, and Locational Obsolescence are reflected in the assessed value. These values were adjusted by a market factor and a time adjustment multiplier to arrive at a determination of the Building's 1991 assessed value. (Exhibit 1 at Addenda exhibit "E")

From the information submitted by the Department, the Commission observes that the Department has already made a number of adjustments to the overall assessment of the property and in particular to the assessment of the Sprung structure. The Sprung structure was originally assessed in 1991 at $884,700. Upon receipt of the Reference of Assessment, the Department reviewed the property and determined the assessed value of the Sprung Structure to be $330,750, then reassessed it at $305,146. In response to Interim Order LT93-3 it was further reduced to $206,296.

While this latest value is a substantial reduction from the initial assessment, the issue before us is whether or not even at this level the assessment reflects market value.

The evidence before us indicates the building has been rendered virtually worthless as a result of external economic forces.

The issue therefore becomes: what should the assessment be if the building has practically no use at the time of appraisal?

The Department argued during the hearing that it is not reasonable to further depreciate the Sprung structure simply because a use cannot be found for the building: this factor is common to all special purpose buildings and doesn't necessarily mean that the building has no value - "conceivably someone could come up with a use for the building and pay the price".5 The Department's position is that the Sprung structure is intended to be a part of the entire complex consisting of three buildings and a buyer must accept the fact that one building may have limited or no use. The Department used as an example special purpose buildings for mixed farming which may no longer have a use based on current farm practices. When a person purchases such property he has to accept that some buildings may have no use or they may have to be converted at a cost. In this case the Department believes the Sprung structure has an "integrated value" with the total property - "you cannot remove the Sprung structure and say it has no value".6

While these comments may be generally true, this case appears unique because not only is the Sprung structure a special purpose building as defined by the Department, but it is also a single purpose building. The Commission heard no evidence from either party on practical alternative uses for the building. The evidence indicated the opposite - all attempts to find alternative uses have failed because of the special nature of the building.

In the Avalon Aviation Inc. case (referred to in Interim Order LT93-3), the Commission notes that the Honorable P.H. Howden of the Ontario Municipal Board, responded to similar concerns expressed by the Regional Assessment Commissioner. "This is a case where a specific change in market demand has been demonstrated with effects on one specific building's economic or market value. This loss in value is in no way imaginary, merely anticipated, or of wide application to other circumstances."7 The Commission believes that such are the circumstances in this case.

From its reading of some commonly used references for assessment of real property, the Commission found that there are various definitions of economic obsolescence.

The Marshall Valuation Service defines external or economic obsolescence as the loss in value due to causes outside the property and independent of it.8

In McMichael's Appraising Manual, "Obsolescence" is defined as "functional and economic and denotes loss in value due to any change, lower productivity, inadequate architectural style, shifting of business, aging of residential district, absence of new and efficient building appliances, change in use, adverse business condition, unfavorable tendencies, improper management and other factors".9

The Real Property Assessment 1993/94 Course Manual from the University of British Columbia, defines Economic Obsolescence, as the loss in value of a property that stems from factors external to the property. As an example, a buggy-whip factory, to the extent that it could not be used economically for anything else, suffered substantial economic obsolescence when automobiles replaced horse-drawn buggies.10

From The Appraisal of Real Estate external depreciation is defined as the diminished utility of a structure due to negative influences emanating from outside the building. External depreciation can be caused by a variety of factors, e.g. neighborhood decline; the property's location in a community, region or province; or local market conditions.11

It is apparent to the Commission that the authorities in their definition of economic obsolescence have blended the factors that may be associated or may be applicable to both location and the economy. The definitions express two dimensions of economic obsolescence; one - the location factors which may include such aspects as incompatible surrounding land uses; the other - a much wider interpretation - one which can include external economic forces such as a significant shift in demand for the use of a building.

It appears that the decisions of other tribunals of similar jurisdiction have further refined the definition.

The Ontario Municipal Board decision in Avalon Aviation Inc.12

"...finds that the assessment based on the cost approach has no relation to the market value of a single-purpose building, the ongoing purpose of which is lost ..."

In that case the building at issue was an airplane hangar designed specifically for very large planes used as water bombers for fighting fires. Changes in technology had resulted in the planes effectively becoming obsolete. The hangars were no longer useful for their intended purpose, perhaps only useful as storerooms if converted. Overall, the case confirms the validity of taking economic obsolescence into consideration.

The case Dominion Bridge Co. Ltd. and Town of Mississauga (1974), 45 D.L.R. (3d) 38, 3 O.R. (2d) 205 (C.A.), remains an authority for the general proposition that "obsolescence or loss in economic value due to internal or external changes of circumstances is a relevant matter to consider in assessing on a cost basis and that, whether it is functional (internal) or economic (external), it relates to buildings and not to land."

In Montreal v. Sun Life Assurance Co. of Canada13 at p.95-96.

[Their Lordships] cannot accept the statement in the second heading of the Memorandum that 'it would seem that properties which are wholly occupied by their owners whether constructed for that purpose or acquired with that object in view are always worth to their owners the current cost of replacement less depreciation' ... The fact is that no such proposition is universally true.

...

The ultimate object being to find the amount which a willing buyer and seller agree upon it by no means follows that the owner, even if regarded as a potential buyer, would pay the price originally expended or, to take another line of approach, that if he had to re-erect the building at the time of the assessment, he would erect one of the same form or incur the same expenditure.

All these matters and among them any change of circumstances must be taken into consideration.

In the case of Jack Pearse Ltd v. The Regional Assessment Commissioner, Region No 17 (1986), O.M.B.R. 376 at p.386. the Ontario Municipal Board agreed with a critique of the cost approach (of assessment) as defined by Mr. Alexander Fitzsimmons, an experienced and qualified appraiser, which incorporated elements of economic obsolescence. He defined economic obsolescence as - "Impairment of desirability or useful life arising from economic forces such as changes in optimum land use, legislative enactments which restrict or impair property rates, and changes in supply-demand relationships.'

The Commission concludes from its examination of the various authorities and manuals that more than just locational factor must be considered.

Based on the evidence the Commission concludes that considering the characteristics of the structure, and because of significant change in market conditions, i.e. the market of growing lobsters, it is logical and reasonable to give little value to the Sprung structure at this time. That is, the Sprung structure "is no longer useful for the purpose which it was designed, and it is difficult to perceive any real use for it."14

The most probable sale price of the Sprung structure is influenced by not only the physical, functional and locational factors but also external economic factors. Although the Department has followed its standard guidelines in determining the assessed value of the structure, these guidelines do not take into account the fact that the structure has practically no use as a result of external economic factors and its special design features. Upon review of the information filed by the Department, the Commission concludes that in this special case the Department's assessment of the Sprung structure does not accurately reflect the "market value" as defined by the Act, or the most probable sale price.

Again what should be emphasized is that neither the Appellant nor the Department presented evidence that a use for the structure existed at the time of appraisal or at any time during its ownership by the Appellant. In addition, the Department stated that there are no structures in the area or the province against which the Sprung structure can be compared.

Based on the foregoing, at this time the Commission believes it is reasonable to assess the Sprung structure as "scrap" with virtually no value. As such, the Commission finds that a fair market value for the building is $30,000. The Commission, in so deciding, acknowledges that the factor for economic obsolescence should only be applied until such time as a practical use is found for the structure.

The appeal is allowed and the assessment is varied for the reasons so stated.

IN THE MATTER of the Real Property Assessment Act, R.S.P.E.I. 1988 Cap. R-4;

and

IN THE MATTER of an appeal to The Island Regulatory and Appeals Commission (the Commission), under Section 22 of the Real Property Assessment Act (Act), by Alti-Lien Holders Inc. (the Appellant) of Charlottetown, Prince Edward Island, against a decision of the Minister of Finance (the Minister) with respect to the 1991 assessment of property (Provincial Property Number 778563-000) located in Victoria, P.E.I.

Order

WHEREAS Alti-Lien Holders Inc. (the Appellant) appealed to The Island Regulatory and Appeals Commission (the Commission), in written notice dated June 10, 1992, against a decision of the Minister of Finance;

AND WHEREAS the Commission heard the appeal at a public hearing conducted in Charlottetown, P.E.I. on May 4, 1993;

AND WHEREAS the Commission has made an decision in accordance with the stated reasons;

NOW THEREFORE, pursuant to the Real Property Assessment Act;

IT IS ORDERED THAT the Department apply an economic obsolescence factor to reduce the assessed value of the sprung structure to $30,000.

DATED at Charlottetown, Prince Edward Island this 11th day of March, 1994.

BY THE COMMISSION:

Linda Webber, Chairman

John L. Blakney, Vice Chairman

Michael Ryan, Commissioner

1 Mildred Jaynes v. The Department of Finance, Order LT93-2, I.R.A.C., August 12, 1993.

2 Irving Oil Co. Ltd. and City of Halifax, Nova Scotia, Supreme Court, Appeal Division, August 21, 1974, p. 601.

3 An Introduction to Real Estate Appraising - Course 101, Appraisal Institute of Canada, Fourth Edition, Sept. 1984, p.2-6.

4 Marshall Valuation Service Manual, Los Angeles, California, 1988.

5 Bill Found, statement provided during the hearing.

6 Jim Ramsay, statement provided during the hearing.

7 Regional Assessment Commissioner, Region No. 28 v. Avalon Aviation Inc. (1991), 27 O.M.B.R. 362 at p. 371.

8 Marshall Valuation Service Manual, Los Angeles, California, 1988, Section 97, p.1.

9 McMichael's Appraising Manual, New York, Prentiss Hall Inc. 1931 as cited in Dominion Bridge Co. Ltd. and Town of Mississauga, Dominion Law Reports, at p.41.

10 Real Property Assessment 1993/94 Course Manual - Urban Land Economics Diploma Programme, The University of British Columbia, glossary.

11 The Appraisal of Real Estate, Canadian Edition, Appraisal Institute of Canada, 1992.

12 Avalon Aviation Inc. supra, at p. 371.

13 Montreal v. Sun Life Assurance Co. Canada, November 5, 1951. Dominion Law Reports at p. 95.

14 Island Regulatory and Appeals Commission, Interim Order LT93-3, September 22, 1993.