Calgary (City) v Heritage Plaza Ltd, 2016 ABQB 383

Court of Queen’s Bench of Alberta Citation: Calgary (City) v Heritage Plaza Ltd, 2016 ABQB 383 Date: 20160711 Docket: 1501 10106 Registry: Calgary Between: The City of Calgary Applicant - and - Heritage Plaza Ltd. (As Represented by MNP LLP) and the Assessment Review Board for the City of Calgary Respondents _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice R.J.

Hall _______________________________________________________ [ 1 ] The Applicant City of Calgary seeks leave to appeal a decision of the Calgary Assessment Review Board, involving the assessment of land at 8330 and 8312 MacLeod Trail, which is owned by the City, but is leased to the Respondent Heritage Plaza Ltd. [ 2 ] In order to obtain the Court’s permission to appeal, the City must satisfy the 3 requisites of s.470(5) of the Municipal Government Act (MGA) : It must establish:

a) the appeal involves a question of law or jurisdiction;

b) the question of law or jurisdiction is of sufficient importance to merit an appeal; and

c) the appeal has a reasonable chance of success. [ 3 ] The facts are set out in the Applicant’s Brief and I repeat them here. Facts A. Description and history of the Property [ 4 ] The Property consists of two retail buildings situated on a 4.46 acre parcel of land ( Parcel A ), along with an adjacent 2.07 acre parcel used for parking ( Parcel B ). Although both parcels are owned by the City, Parcel A is leased to Heritage Plaza Ltd. ( HPL ) under a 40-year leased (the Lease ), while Parcel B is occupied by HPL under a License of Occupation. As will be discussed below, HPL is deemed to be the Assessed Person for the Property (pursuant to section 304(1)(

c) of the MGA ) and is therefore liable to pay property tax (pursuant to section 331(1)(a). None of these facts are in dispute. [ 5 ] The Lease sets out various terms and conditions agreed to by the parties, including a right of first refusal clause for HPL to purchase the Property, as well as a lease renewal clause. At the expiry of the Lease (which commenced in 1985 and currently runs through to 2025), the Lease further provides that the lessee (HPL) must remove the retail buildings and restore the site to its original vacant condition.

This is set out at clause 9.12 of the Lease (the Restoration Clause ). [ 6 ] Historically, the assessment of the Property has been reduced by the CARB because of the Lease and specifically the Restoration Clause. This was the case most recently in 2014 and again in 2015. B. How the subject assessment was prepared [ 7 ] In order to determine the market value of the Property, the City prepared separate assessments for Parcel A and B. Generally speaking, it is the assessment of Parcel A that forms the basis for this appeal. [ 8 ] Parcel A was assessed using the income approach to value.

This requires the assessor to determine the net operating income (NOI) of the property along with the applicable capitalization rate in order to arrive at an estimated market value [1] . In this case, the NOI of Parcel A was $1,409,855, which was capitalized at a rate of 5.25%, resulting in an assessed value of $26,850,000. C. The Complaint, Hearing and Decision [ 9 ] A complaint was filed by HPL with respect to the 2015 assessment of the Property; during the subsequent hearing before the CARB, HPL raised two issues:

a) Whether the “base” capitalization rate used by the City to assess Parcel A (under the income approach to value) was too low;

b) Whether the capitalization rate should be further increased to recognize the “short life” remaining under the Lease. [ 10 ] Regarding the first issue – base capitalization rate – the CARB reviewed the sales evidence and determined that a rate of 6.75% should apply to the subject Property.

This finding was based on common evidence and argument submitted for multiple properties and is not being appealed. [ 11 ] Instead, it is the second issue – whether a further adjustment is necessary given the Restoration Clause – where the City alleges that the CARB erred in law. [ 12 ] During the hearing, the City argued that it is bound by legislation to assess the fee simple interest of the Property.

As a result, an adjustment to the capitalization rate was not appropriate because the fee simple interest takes into account the complete and absolute ownership of the property, unencumbered by any other interest or estate (including the Lease). [ 13 ] Meanwhile, the agent for HPL (the Complainant ) argued that the CARB must apply the “Direct Capitalization Straight Line Overall Investment Recovery Analysis” in determining the applicable capitalization rate, due to the Lease.

This was based on MGB Board Order 105/06 [2] . – a previous decision of the Municipal Government Board. [ 14 ] MGB 105/06 was an appeal concerning the 2005 property assessment for the subject Property. In that decision, the MGB held that the Respondent “cannot hide behind the veil of fee simple assessment” and must account for the Restoration Clause in the Lease by adjusting the capitalization rate. MGB 105/06 has been cited and followed in subsequent MGB and CARB decisions concerning the subject Property, including the Decision issued in 2015. [ 15 ] In the Decision, the CARB’s

summary of the evidence and argument regarding the Restoration Clause is found at paragraphs 29 to 58 of the Decision; however, its reasons for decision are limited to paragraphs 59 to 63. Specifically, the CARB states at paragraphs 59 and 60: The CARB finds that because the life expectancy of the subject buildings is shorter than typical, a higher capitalization rate is required to allow for a greater recapture pace in amortizing an investment in the subject property over a shorter period. There are only 11 years remaining in the lease term.

Because the Complainant’s interest in the subject property is not perpetual, value cannot be calculated on income, rights or improvements lasting in perpetuity. The Direct Capitalization method used in the assessment is erroneously based on the assumption that the rights, income and buildings will remain in perpetuity. The finite life of the improvements imposed by the lease

decreases the market value of the property. The CARB finds that the conditions and circumstances have not changed since 2006, other than the remaining lease term is now 11years and the buildings have only 11 years life remaining until they must be demolished. As such, all of the added risks outlined in MGB105/06 are still relevant and pertinent. It is therefore appropriate to adopt the same methodology for determining the effect of those riskson the value of the subject property.

That methodology is the Direct Capitalization Straight Line Overall Investment Recovery Analysiswhich results in an overall capitalization rate of 14.17% to be applied in the assessment. [16] The City seeks leave to appeal the ruling above. [17] The City says it is a question of law whether the existence of the limitation placed on the interest is to be considered in theassessment process. I agree. See, for example T.

Eaton Co v Alberta (Assessment Appeal Board (1995) 174 A.R.99 (Alta CA)(hereinafter “T.Eaton Alberta”) at para 4, where the Alberta Court of Appeal characterizes a decision of the Board, that developmentlimitations respecting the subject land did not adversely affect the assessment, as being an error of law. [18] Therefore the first of the three requirement of s.470(5) is met herein. [19] Turning to the second requirement, that the question of law be of sufficient importance to merit an appeal: The issue here isnot of significance to very many municipal taxpayers.

It is only of importance to those taxpayers who have leased land from the City, andin that lease the City has restricted the use to which the land can be put, or restricted the term of the lease to less than the life expectancyof buildings erected thereon by the lessee. The City, in its argument referred to this as a “unique situation”. [20] The City says the bar is not high to satisfy this pre requisite to leave being granted. That may be, but there is still a bar. Thelegislative intent is that the courts only become involved in assessment matters of broad importance and applicability.

I am not persuadedthat this requisite is met in the instant case. [21] Most of the argument before me was in relation to the third requisite of s.470(5) of the MGA; that the appeal has a reasonablechance of success. [22] The argument as to whether the Board should consider limitations imposed on the use of property in reaching its assessmenthas long been decided.

In the 1950 British Columbia Court of Appeal Decision of CNR et al v Vancouver (1950) (BCCA), BCJ No 101 the court held that lands that were restricted to railway terminal purposes through an agreement between CNR and theCity of Vancouver could not be valued on the same basis as lands that were not similarly restricted. That case has been repeatedlyfollowed as being good law today.

While some inroads against that principle were made where the taxpayer had voluntarily restricted theuse in an agreement with someone other than with the government, it has remained unassailed where the agreement is, as here, anagreement to which the municipality is a party. [23] The principle that restrictions arising through Bylaw, development permits, or agreements with a municipality can have aneffect on market value, has been accepted in Alberta. In T.

Eaton (Alberta) supra, O’Leary J.A. stated (para 23): The presence of development and use limitations contained in a Bylaw or in an agreement with the municipal authority may affect themarket value of land relative to comparable land not so restricted. (Underling Added) [24] O’Leary J.A. found that the Alberta Assessment Appeal Board had erred in not considering the impact the restrictions had onthe market value of the property. [25] Similarly, in 908118 Alberta Ltd v Calgary, 2015 ABQB 681, Kenny, J of this court cited T.

Eaton (Alberta), supra anddetermined that the Board was not justified in disregarding limitations on the use of the land when deciding upon the assessment ofproperty tax thereon. In that case, zoning and development restrictions imposed by the City affected the use to which the land could beput. Justice Kenny directed that such restrictions must be considered in assessing the value of the property for tax purposes. [26] Justice Shelley of this court more recently endorsed this approach in St. Albert Housing Society v St. Albert (City), 2016ABQB 203.

There under a Capital Grant Funding Agreement between the Province and the Developer, the Province provided funds tocover the cost of building affordable housing units on the Property. The Funding Agreement required the recipient to rent out thehousing units at or below provincially regulated rents. The City required a transfer agreement to be entered into and required theagreement to provide for the construction of Affordable Housing Units.

Such an agreement was entered into. [27] The taxpayer, party to these agreements, argued that its assessment should be lowered because of these restrictions on the useto which the land could be put and the rents that could be received. Justice Shelley held (para 58): The use restriction on the Property including the cap on rents established under the Funding Agreement and the Transfer Agreementconstitutes a legal restriction that the applicants have “little or no control over”.

The reality is that, if a property with such a restriction isto be sold to a willing purchaser, the limitation would have an impact on the market value of the property in the relevant assessment year. [28] The City argues here, that, because the limitation (as to life of the buildings and the obligation to destroy them at the end ofthe lease) is contained in the lease between the City and the Respondent, it does not run with the land.

A willing purchaser would nolonger be bound by the lease, as it could amend the lease to its satisfaction, once it purchased the fee simple from the City: thereforewhen we assess “market value” – the price at which a willing purchaser would buy from a willing vendor - we must recognize that, uponthat purchase occurring the limitation would no longer exist or could be removed by the purchaser. Therefore, the City agrees, applyingmarket value to the fee simple interest, the limitation should be disregarded. [29] This is incorrect.

When the Board considers a hypothetical purchase and sale between willing participants, it must stillconsider existing limitations. The hypothetical sale does not hypothetically remove the limitation. To analyze otherwise would be toignore the actual conditions and limitations faced by the taxpayer.

[ 30 ] It is, in my view, unassailable that the restrictions in the lease, imposed by the City of Calgary, have an impact upon the value of the property in question. The calculation of that impact was performed by the Board as is its mandate. [ 31 ] I therefore conclude: (

a) The matter before me is not of significant importance beyond its importance to these parties; and (

b) The intended appeal has no reasonable chance of success, the principle and legal question having long been decided and repeatedly followed. [ 32 ] The parties may speak to me regarding costs if they are unable to agree. Heard on the 28 th day of June, 2016. Dated at the City of Calgary, Alberta this 11 th day of July, 2016. R.J. Hall J.C.Q.B.A. Appearances: Henry Chan and Andrea Cole for the City of Calgary Brian Dell for Heritage Plaza Ltd Michael Janke For the Assessment Review Board for the City of Calgary [1] The calculation used to determine market value under the income approach to value is (net operating income)/(capitalization rate) = (estimated market value).