Appraisal Institute of Canada 2010 National Conference - Victoria

1. Appraisal Institute of Canada2010 National Conference - Victoria Federal Properties –Valuation Issues June 3rd, 2010 Carl Nilsen, AACI

2. Purpose and Intended Use • To identify issues that have arisen or which might arise in the valuation of military bases and other federal properties • No opinion is offered or intended regarding the appropriateness of methodologies referred to

3. Military Bases – Context • DND Provides Support to Canadian Forces • 21,000 Buildings • 5,500 km Roads • 3,000 km water, storm and sewer pipes • 2.25 million ha (5.4 million acres) of Land • DND Infrastructure Replacement or Refurbishment • 25% of holdings in 10 years • 50% of holdings in 20 years

4. Valuation Requirements • Disposition, redevelopment • Payment in Lieu of Taxes (PILT)

5. Disposition, Redevelopment • Hunters Point Naval Shipyard, San Francisco • Opened 1867, US Navy operations from 1941 • Closed 1974 • Development Concept 2000 • Grading operations and infrastructure 2007/8

6. Disposition, Redevelopment • 1,400 acres • 275 Buildings • Fully Serviced • Aerospace Industry • Rental housing • Commercial, Hospitality, Sports • Summerside Airport Slemon Park Summerside,PEI

7. Disposition, Redevelopment • CFB Chilliwack • Opened 1943, closed 1998, transferred to CLC 2004 • Demolition and Retention of Buildings • Renovation of former engineering School • Canada Education Park – UFV • Garrison Crossing – 153 acre, 1,500 unit housing project

8. Disposition, Redevelopment Valuation Issues • Highest and Best Use • Large scale needs to be reflected • Building conversion and renovation or demolition • Land Use Plan required • Contamination and UXO • First Nations Land Claims • De-commissioning and demolition costs • Development time frame prior to and after commencement

9. Disposition, Redevelopment Valuation Approach • Valuation Method • Direct Comparison • Subdivision Development (DCF) Analysis • Consideration of potential land uses taking into account physical characteristics • Analysis of Supply and Demand for potential uses • Requirement for sound planning advice • Engineering analysis and infrastructure costs • Value of end product • Analysis of absorption and discount period

10. Disposition, Redevelopment A well-insulated 20,000 square foot home complete with an airstrip and a Jacuzzi sounds really nice. This one is underground in an abandoned missile silo! It was once the home of an Atlas-F missile built for the Cold War, but it’s been converted into a luxury home.

11. PILT What is PILT? • Government of Canada exempt from local taxation [Sec 125 Constitution Act 1867] • Since 1950 Canada has shared municipal costs • Current legislation is Payments in Lieu of Taxes Act, 2000 • Payments under PILT Act roughly equivalent to taxes which might otherwise be payable • Payments reflect methods of valuation and taxation applicable in specific jurisdiction • Subject to Regulations under PILT Act (e.g. CCPR) • 26,500 Federal facilities; $460 million in payments (2007) • See: Montreal (City) v. Montreal Port Authority, 2010 SCC 14

12. PILT Act The purpose is “to provide for the fair and equitable administration of payments in lieu of taxes” [ Sec 2.1]

13. PILT Act • Defines “Federal Property” • Defines “Property Value” • “The value that, in the opinion of the Minister, would be attributable by an assessment authority to federal property…as the basis for computing the amount of any real property tax that would be applicable to that property if it were taxable property.” • Excludes mineral rights and “ornamental, decorative or non-functional features” • Sec 3 sets out specified exclusions • “Federal Property” does not include “any structure or work unless it is .. a building designed primarily for the shelter of people, living things, fixtures, personal property or moveable property.” • Excluded structures, works etc. in Schedule II

14. PILT Act • Payments not to exceed the product of: • The effective rate in the taxation year applicable • The property value in the taxation year of the federal property • Effective rate is: • “the rate of real property tax ..that, in the opinion of the Minister, would be applicable to any federal property if that property were taxable property.”

15. PILT Act – Schedule II • Schedule II describes structures, works, machinery or equipment not considered to be federal property • Includes, among others: • Docks, wharves, piers etc. • Drydocks • Fortifications • Pole lines, transmission lines, light standards • Reservoirs, storage tanks • Roads, sidewalks, aircraft runways, paving, railway tracks • Water mains, sewer mains

16. PILT Act – Schedule II

17. PILT Act – Schedule II

18. PILT – Dispute Advisory Panel (DAP) • Provides advice to minister of PWGSC on resolution of disputes • DAP is subject to Rules of Practice • Hearing Panel comprises from 1 to 3 members • One member to be from the province or territory of the dispute origin • Panel holds hearings and hears witnesses. Parties may be represented by counsel • Principles of natural justice followed • DAP provides advice, not a decision

19. Provincial Legislation • Provincial Acts guide how property is valued with respect to: • Base date • State and condition date • General market level • Specified valuation approaches/manuals • Uniformity • i.e. PILT Act respects local process

20. PILT Act/CCPR - The Montreal Cases • Montreal City v. Montreal Port Authority, 2010 SCC14 • Involved 3 federal agencies: CBC, Montreal Port Authority and PWGSC • Issues: Interpretation of PILT Act and Crown Corporation Payment Regulations (CCPR) • Discretionary powers regarding “corporation effective rate” • Whether certain improvements in the Port should be excluded under the PILT Act • Discretionary powers of Crown Corporations • Standard is “reasonableness” • Exercise of discretionary powers held unreasonable in this instance

21. Best Practices • Altus Group retained in 2003 by AIC to: • Identify and Address Differences in • Approach • Methodology • Policy • Propose solutions • Require discussion/review • Require testing in Case Study • Stakeholders involved in the process • Properties included Military Bases, Ports, Historic Sites, Penitentiaries and Wilderness Land in National Parks • Report remains in draft • Federation of Canadian Municipalities withdrew in February, 2006

22. Key Valuation Issues • Market Value where no or limited market • Special Purpose • Value in Use • Value in Exchange • Value to owner • Valuation methodology • Cost Approach • Income/Direct Comparison • Land Value • Impact of land use restrictions – local and federal • Treatment of “Excess” land • Size • Exemptions • Depreciation in Cost Approach

23. Limited Market – The Southam Case • Features are: • Specialized improvement with a limited market. • Utility for the current owner. • Limited market appeal for other users except at significant discount from replacement cost • Example: Pacific Press Building, Surrey, BC

24. Limited Market – The Southam Case • State of the art newspaper building specially designed and built • Replacement Cost in excess of $40,000,000, the value for assessment purposes. Owner would not sell for less • “Market Value” for an identified alternative use under Income Approach was $25,000,000 • Assessed value held on appeal to be $25,000,000.

25. Limited Market – The Southam Case • Identifies challenges of limited use properties • Value in Use or Market Value • Two appeals to BCCA (2004 and 2008) • Southam Inc. v. Assessor of Area #14 (2004 BCCA 245) • Pacific Newspaper Group v. Assessor of Area #14 (2008 BCCA 284) • Concept challenged in other jurisdictions

26. Restricted Use – Western Stevedoring • Lease from Vancouver Port Authority to bulk break terminal • Restricted uses in lease • No identified prospect for change of use • Restricted use affected value • Use of comparables not subject to restrictions not appropriate • Land rented at market • Land valued by capitalized rental income • Court (2006) largely upheld Board decision • Whether restricted use = HABU will depend on facts

27. DND Esquimalt

28. DND Esquimalt

29. DND Esquimalt

30. DND Esquimalt

31. DND Esquimalt • Building Inventory • Pre - WW I 44,977 m2 (484,144 sf) • 1915 -1945 28,386 m2 (305,554 sf) • 1950 -1990 65,368 m2 (703,638 sf) • 1990 -2010 32,133 m2(345,888 sf) • Total 170,864 m2 (1,839,224 sf)

32. General Principles - PILT • HABU – What should be assumed? • Existing Use • Alternate Use • Cost Approach – When applicable • Land Value • Federal Land not subject to Zoning • Subject to federal land use planning and regulation • Are federal use restrictions self-imposed – should they be ignored?

33. General Principles - Land • Land Use considerations • Principle of Consistent Use • Federal land use regulations reflect mandates and policy • “Excess Land” • Areas may appear under-used • Considerations are: • May reflect expansion plans • Required as buffer • Contamination • Environmentally sensitive • Land use regulations • Restricted use requires consideration of appropriate comparables

34. General Principles - Land • Land Value considerations • If current use assumed to be highest and best use, should land value reflect current use and density, even if appears under-utilized? • Should land value reflect value of entire parcel or the sum of the parts? • Challenges • Limited comparables for larger parcels • May consider smaller sales and adjust as appropriate • Land use needs to be reflected in comparable analysis • Potential for use of subdivision residual approach • Roads and services to be ignored • Value as if serviced to periphery only? • Value lands as serviced but with no additional value for services?

35. General Principles - Buildings

36. General Principles - Buildings

37. General Principles - Buildings • Improvement Cost • Replacement v. Reproduction Cost • Exclude decorative, ornamental and non-functional item • Treatment of GST/HST [See Executive Director of Assessment v. Food City, 2005 NBCA 65] • Method of calculating costs: • Costing manual • Quantity Survey • Recent Base construction cost experience • Use of Actual cost requires care • Inclusion of other costs (e.g. demolition, relocation, site clean-up) • Specialized features • Exclusions under PILT Act

38. General Principles - Buildings • Depreciation • Physical • Age/life tables • Observed condition • Functional • Special purpose facilities subject to changes in technology, equipment, mission and policy • Proper understanding of base dynamics required • Review of MRADP, Demolition Plan, Realty Rationalization Plan • Increased or excessive operational costs • Excessive size in relation to current needs • Inefficient design • External ( Economic,Locational) • Planned base closure

39. General Principles - Buildings • Use of Income Approach • Check on cost approach or stand alone • Assistance in estimating functional and/or external obsolescence • Most appropriate for standard uses • Consideration of alternative “market” uses • Income Approach – Issues • Recognize that income approach includes land • Need to adjust for size differentials • Use of market-derived inputs • Assume typical not specific tenant • Capital deficiencies reflected

40. Halifax Citadel - A Case Study “To say the Halifax Citadel is Priceless is obvious; to say what its value may be for taxes is less clear” [Phelan,J]

41. Halifax Citadel - A Case Study • Background • 48 acre site close to downtown Halifax • Built 1828-56 • Use restrictions imposed by Canada National Parks Act • Land zoned Regional Park by HRM • Highest and Best Use agreed to be National Historic Site • Value considered by PILT DAP in 2007; Judicial Review by Federal Court 2009. • Valuation Issues • Effect of restricted use on land value • Implication of land used as part of fortifications (the “glacis”) • Reproduction v. Replacement Cost for value of eligible improvements • Whether functional obsolescence applicable

42. Halifax Citadel - A Case Study • Land Value • Assessor’s Position • Value entire site (48 acres) by reference to alternative uses • Adjust comparables for large size (-84%) • No specific adjustment for density or use restrictions • Estimated Land Value $19,000,000 • Appellant’s Position • Took use restrictions into account • Nominal value ($10) for land being part of fortifications (“glacis”) • Value of land under “eligible” improvements – based on actual density • Estimated Land Value $286,010

43. Halifax Citadel - A Case Study Renovated Casemate

44. Halifax Citadel - A Case Study • Value of Eligible Improvements - Casemates • Assessor’s Position • Used QS estimate of Reproduction Cost • Adjust for physical depreciation based on remaining economic life • No adjustment for functional obsolescence based on current use as a “living history museum” • Appellant’s Position • Value based on Replacement Cost • Adjustment for physical depreciation • Adjustment for Functional and economic depreciation

45. Halifax Citadel - A Case Study • Recommendation to Minister by DAP • Land Value • Restricted use to be taken into account • Land value only relates to 60,542 sq. ft. or 3% of total site area • Eligible Improvements Value • Value based on Reproduction cost preferred in this instance because of specific use • Physical Depreciation at 40% • Casemates unused or partially used: 50% economic/functional depreciation

46. Halifax Citadel - A Case Study • Minister’s Decision • Acceptance of DAP Decision • Judicial Review by Federal Court [Halifax Regional Municipality and HMQ, as represented by PWGSC 2009 FC 670] • Review of Minister’s decision not DAP recommendation per se • National Historic Site restrictions to be taken into account • Market value to be determined (per NS Assessment Act) • Cannot equate Market value to subjective value • DAP land valuation deemed “unreasonable” • 50% discount for functional depreciation lacked rationale • Minister’s decision quashed

47. Halifax Citadel - A Case Study • Federal Court of Appeal • Federal Court decision appealed • Hearing held last week of May, 2010 • Decision yet to be handed down

48. Thank You