AJR ENTERPRISES LTD. ASSESSOR OF AREA 09 - VANCOUVER. Supreme Court of British Columbia (A963495) Vancouver Registry

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1 The following version is for informational purposes only, for the official version see: for Stated Cases see also: for PAAB Decisions SC 401 AJR Enterprises Ltd. v. AA09 AJR ENTERPRISES LTD. v. ASSESSOR OF AREA 09 - VANCOUVER Supreme Court of British Columbia (A963495) Vancouver Registry Before the HONOURABLE MR. JUSTICE CATLIFF M.R. Hoogbruin for the Appellant John H. Shevchuk for the Respondent Vancouver, October 6 & 7, 1997 Hotels - Business v. Lease Income - Actual v. Industry Rates - Goodwill The Appellant argued that the Assessment Appeal Board erred in law when it determined the actual value of the subject hotel by relying upon a combination of the actual revenue and expenses for the sleeping rooms and the market rental rates for other components of the hotel. HELD: The Board had not erred in law. There was evidence to support the Board's findings. Further, appraising such parts of a hotel as lounges and cabarets based on market rental rates avoids valuing the "goodwill". Assessing a hotel on the basis of actual business income may or may not be appropriate depending on the hotel in question. Reasons for Judgment November 6, 1997 The owner of the Nelson Hotel in Vancouver appeals by way of Stated Case the order of the Assessment Appeal Board which confirmed the assessment for 1992 made by the Court of Revision. DESCRIPTION OF PROPERTY The Nelson Hotel, located at 1002 Granville Street, Vancouver was built in about 1910 and covers the entire site of 50 feet by 120 feet. Following a fire in 1971 the hotel was substantially rebuilt and is in fair to good condition. The hotel comprises five upper floors each with 20 guest rooms, a mezzanine floor with office and storage area, a main floor with lobby and front desk area, a restaurant (120 seats) and cocktail lounge (84 seats). In the basement there is a pub with 220 seats.

2 The Board noted that the parties agreed that the immediate neighbourhood had been in decline since the 1960's as a result of Granville Street becoming a pedestrian mall attracting transients and "street people" to the area. DECISION OF THE BOARD Following a six-day hearing the Board gave written reasons and found that the actual value of the lands and improvements totalled $2,116, The Board then noted the Assessor's request that the value on the roll be confirmed rather than increased. Accordingly it confirmed the value determined by the 1993 Court of Revision of $1,765, on the assumption that "confirming the roll will ensure consistency in the assessments of similar hotels in the neighbourhood. STATED CASE The questions which the Board was required to ask by the Appellant are as follows: (Question 6 was withdrawn by the Appellant.) 1. Did the Assessment Appeal Board err in law by adopting an unreasonable view of the evidence in connection with the stabilized room rates and occupancy figures to be used to derive Actual Value for the subject property? 2. Did the Assessment Appeal Board err in law by not applying generally accepted appraisal principles in the determination of the Actual Value for the subject property? 3. Did the Assessment Appeal Board err in law when it adopted a combination of income and expense figures and percentages taken from both the actual experience of the subject property and hotel industry averages to derive stabilized income to be applied to determine the Actual Value of the subject property? 4. Did the Assessment Appeal Board err in law in acting without evidence or upon a view of the evidence which could not be reasonably entertained, when it failed to take into account the cost of replacing and updating the furniture, fittings and equipment? 5. Did the Assessment Appeal Board err in law by giving weight or undue weight to the Respondent's use of the Real Estate Lease Value Approach to Actual Value when there was no evidence that buyers or sellers use this approach where valuing properties similar to the type under appeal? 7. Did the Assessment Appeal Board err in law in accepting as appropriate the Respondent's submissions to the effect that an average of several previous years earnings were the best indicator of maintainable future profits given that the Respondent's submissions: a) included periods prior to the introduction of the 7% GST and failed to adjust for the effect on sales; b) failed to consider that the Appellant hotel's operating results were trending down dramatically at the July 1, 1992 Valuation Date; and c) failed to consider that in the absence of evidence to the contrary the most recent results are the best indicators of future results. To ask if the Board erred in law by "adopting an unreasonable view of the evidence" or by "not applying generally accepted appraisal principles" or by "acting without evidence", should sensibly

3 lead to only one answer. Two-thirds of the questions asked assume facts which constitute errors in law, but which are contested by the Respondent. I am aware that the law does not permit the Board to reframe the questions it is required to submit. That puts greater responsibility on an Appellant to frame sensible questions. Fortunately the appeal was able to proceed on the basis that there were real issues to decide and that the unhelpful wording of so many of the questions could be ignored. DID THE BOARD ERR IN LAW BY USING THE APPRAISAL METHOD IT DID? The task of the Board was to assess actual value, i.e. the market value of the fee simple interest in the land and improvements. Section 19(3) of the Act sets out a number of factors which may be considered in this regard including present use, location, and revenue or rental value. These last two factors -- value based on revenue or rent -- involve what appraisers call the income method of appraisal. This was the method used by the Board, i.e. the use of income information based on the hotel's actual experience and income from notional rent based on market experience. Mr. Shpak, the owner's appraiser, relied almost exclusively on the net income for the hotel for the 1992 and 1993 years. Mr. Cheung, the Assessor's appraiser, made reference to other appraisal approaches as useful comparisons, but relied also on the income approach, although in his case he used rental rates from the industry. The advantage of appraising the value of a hotel based on rental value is that it avoids the uncertainties in valuing the "goodwill" attached to the lounge/cabaret areas, i.e. the non-assessable value of the hotel's liquor license -- most often a valuable asset. In dealing with the appropriate appraisal method the Board said, The Board agrees with the parties that the applicable appraisal method is the Income method. At the same time it is advisable to value the land in order to determine whether or not the land value exceeds the value of the land and improvements package. Each appraiser has done this, and Mr. Shpak has concluded that this is indeed the case. Mr. Cheung does not agree and neither does the Board The Assessment Act directs the participants to value "land and improvements" which is interpreted to mean that chattels and goodwill, if any, are to be excluded from taxable value. In this aspect the Board prefers Mr. Cheung's approach over Mr. Shpak's, simply because it involves a more direct procedure in eliminating any non-taxable business value. It is crucial that the rental value adopted be consistent with market rentals in the area, and the Board finds Mr. Cheung's estimate to be well supported by the Commercial Space Rental Analysis. (pp. 8 and 9 Reasons) The Appellant submits the Board erred in law by applying the income method using rental values. Instead it is submitted the Board should have relied solely on actual income figures. It is of course an error in law for the Board to adopt a method of assessment that is wrong in principle. The selection of a particular technique will be an error in law if on generally accepted assessment principles it is wrong to employ it... It is an error in law if the selection of the method of assessment... was so unreasonable that no properly trained assessor would apply it in such a manner. Assessor of Area 26 - Prince George v. Cal Investments Ltd. 1992, B.C. Stated Case 335 p The income method of valuation adopted by the Board was clearly one which on generally accepted assessment principles it was entitled to select. Both parties relied on it. The Appellant submits, however, that the Board should have relied exclusively on actual income figures rather

4 than using rental evidence and that this constituted legal error. The Appellant relies on Assessor of Area 09 - Vancouver v. Bramalea Ltd. (Case 374: BCSC Dec. 1995: CA Mar. 1997). This appeal involved the 1992 assessment of the Hyatt Hotel in downtown Vancouver. Appraisers for both the hotel and the Assessor used a business valuation approach. This was the "income approach" used by the Board on the present appeal. As described in Bramalea it involves first capitalizing net business income and then deducting the value of non-assessable income producing operations of the hotel. The difference is the assessed value of lands and buildings. In Bramalea the Assessor's appraiser, Mr. Metcalfe, arrived at business income by using rates from four other downtown hotels. The hotel's appraiser, Mr. Geddes, used actual Hyatt hotel revenue. The Board preferred Mr. Geddes' method of finding room revenue. It assumed the Hyatt was competently managed, which eliminated any suggestion of lesser value based on poor management. Such a value would have been a value to owner rather than market value. The Court of Appeal confirmed that the Board did not err by choosing the figures based on the hotel's modified actual experience in preference to industry standards. Of significance in the case was the Board's finding that the Hyatt was not comparable to the four hotels with which it had been compared because of its greater number of rooms, location, type of clientele which depended heavily on the overseas tourist groups, the quality of its restaurants, its age and its diamond rating. There was also, as mentioned, no evidence of poor management. In my view Bramalea does not stand for the proposition that hotels may only be assessed on the basis of actual business income. That may or may not be an appropriate basis for assessment, depending on the hotel in question. In the present appeal the Board found The decline in the subject's operating results, which began in 1992, was due to the owner's disinclination to upgrade. For this reason it is necessary to look at the operating experience of other similar hotels in the area, employing the Real Estate Lease Value Approach. The Board considers that the desirability or otherwise of the hotel's location is accurately reflected by the economic rents indicated by the comparables and finds that no additional location adjustment is warranted. (p. 9 Reasons) The Board gave its reasons for looking outside the hotel's actual experience. The Board was acting within its legitimate discretion in doing so. I find the Board made no error in law in preferring a business income valuation which incorporated industry comparables as preferred by Mr. Cheung. It is to be noted that Mr. Shpak himself used industry rental value in his calculating the goodwill of the lounge/cabaret area. STABILIZED ROOM RATES AND OCCUPANCY FIGURES The Appellant submits the Board erred in law in accepting Mr. Cheung's estimates of net room income. Mr. Cheung gave a range of gross room revenue for comparable hotels of between $3,797 and $5,557 per room per year. His evidence was that the Nelson Hotel enjoyed stable occupancy and that each room had its own bathroom, unlike the comparable hotels. He therefore suggested an estimate of gross room revenue of $5,750. This was within the range of actual revenue for the Nelson Hotel for the operational years when the average gross revenue for the Nelson Hotel was $5, $15 more than Mr. Cheung's figures. Mr. Cheung applied an expense rate of 65% which appears generous to the Appellant whose actual room expense rates for the years in question were %; %; %; %. The Appellant's real complaint appears to be that the Board failed to confine itself to income figures for the years 1992 and 1993 in arriving at room revenue. The Board noted that the decline in the hotel's operating income which began in 1992 was due to the owner's disinclination to upgrade. The Board agreed with Mr. Cheung that it was necessary to look beyond those two years of operation to determine achievable operating results. The Board further noted that Mr. Cheung's estimate of gross and net income was "market derived and illustrative of the operating picture which would have been available to a purchaser at July 1, 1992".

5 There was evidence before the Board from which it could reasonably reach its conclusion concerning stabilized room rates and occupancy figures. The Board did not err in law in estimating room revenue by declining to restrict itself to the income information suggested by Mr. Shpak. It is to be noted that a great deal of the Appellant's detailed submissions, on this and other points, was in effect a re-argument of the evidence before the Board, as if the appeal were a rehearing. FURNITURE, FIXTURES AND EQUIPMENT The Appellant complains that the Board failed to take into account the cost of replacing and updating the furniture, fixtures and equipment. It is submitted that the Board failed to take into account "the amortization of those costs that would necessarily be associated with the upgrading that would be required to obtain the improved room revenue or market lease rates for the nonroom areas as calculated by the Assessor." (p. 31 of the Appellant's argument) I was told by counsel that this objection was not raised before the Board and that there was no evidence before it concerning such costs or their amortization. The Respondent points out that as the rental rates for non-room areas were rates for triple-net-leases no such costs should have been taken into account in any event. The Respondent also says that the Board did make a deduction for the cost of furniture, fixtures and equipment in considering room rent. In its reasons the Board deducted a figure of $155,000 for "chattels" (see page 6). It is also to be noted that Mr. Cheung in his analysis of expenses made in calculating comparable room rents, included percentage amounts for maintenance and repair. (Exhibit 14; Sch. 6) The Appellant's submissions on this point are in effect a further objection to Mr. Cheung's appraisal which was not made to the Board and is not based on evidence before the Board. LEASE INCOME APPRAISAL METHOD - USE BY BUYERS AND SELLERS The Appellant submits that there was no evidence before the Board that buyers and sellers use this method when contemplating the sale/purchase of hotel properties. To this the Respondent replies that the Board's task was to assess the actual value of lands and assessable improvements and that the lease income approach is a recognized method of arriving at such value. I repeat that in my view it was not an error in law for the Board to assess value based on the income approach using industry rates. I point out that in calculating goodwill for the pub area the hotel's appraiser himself used such rental rates. It does not follow that the absence of evidence that buyers and sellers use the lease income approach means its adoption by the Board was an error in law. THE BOARD'S CHOICE OF INCOME INFORMATION The Appellant submits that the Board should have chosen to rely on the hotel's average net income for the years 1992 and 1993 as presented by Mr. Shpak. This is at the core of many of its submissions. I disagree. Mr. Shpak applied a capitalized rate of 12.65% to this average net income ($136,000) which produced a capital value of $1,075,000. From this Mr. Shpak deducted the value of chattels ($225,000) and goodwill ($300,000). This produced a value for land and assessable improvements of $550,000. As stated this was the result of using Mr. Shpak's figures for the 1992 and 1993 years. Mr. Shpak, however, did not present this as his final value for assessment purposes as he considered the land had a $720,000 value in transferable density based on comparable lease rental rates. This led Mr. Shpak to suggest that the hotel's bare site value of $720,000 was the actual value. In considering the expert evidence of each party the Board said:

6 The main difference between the two viewpoints lies in the years selected as typical of the attainable revenue. The Board concurs with the respondent's viewpoint that it is necessary to look beyond the two-year operating result to determine what is achievable. The Board further concurs with the respondent's estimate of gross and net income, noting that they are market derived and illustrative of the operating picture which would have been available to a purchaser at July 1, The valuation date the Board had to consider was 1 July The information that would have been available to prospective purchasers were the financial statements for the years 1992 and before. The Board noted that the decline in operating results was due to the owner's disinclination to upgrade. There was evidence before the Board from which it could reasonably make the choice it did of financial information to arrive at actual value. From a reading of their reasons it cannot be said the Board overlooked considering evidence. It is clearly not legal error for the Board to have preferred Mr. Cheung's evidence to that of Mr. Shpak. CONCLUSION The answers to questions 1, 2, 3, 4, 5 and 7 is "no". The Assessor is entitled to costs on Scale 3.