Report to: General Committee Date
of Meeting: May 5, 2008
SUBJECT: Office Tower
Appeals in the City of Toronto
PREPARED BY: Paul Wealleans, Director, Taxation
RECOMMENDATIONS:
THAT the report
entitled “Office Tower Appeals in the City of Toronto” be received;
AND THAT the
Ontario Minister of Finance be requested to take steps to implement the
necessary statutory or regulatory amendment to ensure that the current
assessment practices in Ontario with respect to assessing land and all
improvements thereto continue, including the current methodology for the income
approach to value;
AND THAT staff be
authorized and directed to do all things necessary to give effect to this
resolution.
EXECUTIVE SUMMARY:
Not applicable
On February 22, 2008, the
Assessment Review Board (ARB) released an interim decision with respect to the
assessment appeal of 12 office towers in downtown Toronto. These properties represent the most
valuable commercial properties in Toronto
with a combined assessed value of $4.7 billion and approximately $250 million
in annual property taxes.
The hearings
commenced in 2005, concluded in February 2007 and related to the tax years 2001
and 2002.
The interim
decision would result in MPAC assessing commercial property without regard to
tenant and leasehold improvements, and would therefore significantly decrease
the assessed values, and resulting tax revenues, of commercial properties in Ontario municipalities.
Both the City of Toronto and MPAC have
appealed the ARB interim decision.
The appeal centered
on the definition of “current value assessment (CVA) in the Assessment Act that requires property in
Ontario be
assessed at its current value. CVA is defined as “the amount of money, fee
simple, if unencumbered, would realize if sold at arm’s length by a willing
seller to a willing buyer.”
The Municipal
Property Assessment Corporation (MPAC) assesses commercial properties using the
income approach to value. This approach includes utilizing actual rents, fair
market rents, tenants’ interests and leasehold improvements which would include
finishing upgrades. Essentially, all factors that add value to a property are
included in the assessment.
While all parties
and the ARB agreed that the income approach to value is the proper valuation
methodology to value commercial properties, the ARB concluded that tenant
improvements and leasing value should not be included and that the office towers
should be treated and valued as if they are vacant and available for rent. It
found:
·
That MPAC’s method of valuing
commercial properties is incorrect in law:
·
Only the owner’s interest is to
be assessed;
·
A tenant’s interest in land is
not assessable as an owner’s interest:
·
The bank towers must be valued
as if vacant and unfinished;
·
Extensive and valuable
leasehold improvements are not to be included in the determination of the
assessed value because they do not contribute to “value in exchange”;
·
A recent Court of Appeal
decision (Carson’s Camp Limited v MPAC et
al) dealing with the same questions, is not relevant for the bank tower
appeal.
The ARB did not
establish new values for the bank towers, however it did outline the assessment
approach to be used in determining the values for the towers and directed that
all parties undertake further analysis to determine them. The ARB reserved its
final decision until these values are established. This could take months.
Both the City of Toronto and MPAC have
appealed the ARB interim decision.
The Association of
Municipalities of Ontario (AMO) has written to the Ontario Minister of Finance
requesting provincial intervention in the case noting that if left to stand,
the decision “will have affected a dramatic change in assessment policy in
Ontario; a change that the AMO does not believe was intended by the Provincial
Legislature when it amended the Assessment Act in 1997” in which CVA was
defined. It is recommended that Council also write the Minister with a similar
request.
FINANCIAL CONSIDERATIONS:
This Assessment
Review Board decision, should it be upheld, will have significant Province-wide
implications. Values for commercial properties in Ontario would be reduced. It is difficult to
provide exact estimates but the reduction of such a change could be in the area of 25%.
In Markham, the 2007 tax
burden of all commercial properties was $120.7 M of which the Town share was
$15.3M. A 25% reduction reduces the total tax levy to $90.5 M and the
corresponding Town levy to $11.9 M. The loss to the Town would be $3.4 M.
ENVIRONMENTAL CONSIDERATIONS:
None
ACCESSIBILTY CONSIDERATIONS:
None
ENGAGE 21st CONSIDERATINS:
None
BUSINESS UNITS CONSULTED AND AFFECTED:
Legal Services
Department
RECOMMENDED
BY: ________________________ ________________________
Barb Cribbett, Treasurer Andy
Taylor, Commissioner
Corporate
Services