Villa Beliveau Inc. v. The Queen

Villa Beliveau Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2004-11-01
Neutral citation
2004 TCC 701
File numbers
2000-1755(GST)G
Judges and Taxing Officers
Alexander A. Sarchuk
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2000-1755(GST)G
BETWEEN:
VILLA BELIVEAU INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of S.A.M. (Colorado) Inc. (2001-2725(GST)G), Southpark Estates Inc. (2001-2726(GST)G) and Virden Kin Place Inc. (2001-2856(GST)G), on May 5, 6, 7, 8, 9, 10 and 11, 2003,
at Winnipeg, Manitoba
By: The Honourable Justice A. A. Sarchuk
Appearances:
Counsel for the Appellant:
Jonathan Kroft and Barbara M. Shields
Counsel for the Respondent:
Lyle Bouvier and Angela Evans
____________________________________________________________________
JUDGMENT
The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated April 12, 1999, and bears number 09CR0006181 is dismissed, with costs.
Signed at Ottawa, Canada, this 1st day of November, 2004.
"A.A. Sarchuk"
Sarchuk J.
Docket: 2001-2725(GST)G
BETWEEN:
S.A.M. (COLORADO) INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of Villa Beliveau Inc.
(2000-1755(GST)G), Southpark Estates Inc. (2001-2726(GST)G) and Virden Kin Place Inc. (2001-2856(GST)G), on May 5, 6, 7, 8, 9, 10 and 11, 2003,
at Winnipeg, Manitoba
By: The Honourable Justice A. A. Sarchuk
Appearances:
Counsel for the Appellant:
Jonathan Kroft and Barbara M. Shields
Counsel for the Respondent:
Lyle Bouvier and Angela Evans
____________________________________________________________________
JUDGMENT
The appeal from the assessment of goods and services tax made under the Excise Tax Ac, notice of which is dated February 13, 2001, and bears number 09CR0006874 is dismissed, with costs.
Signed at Ottawa, Canada, this 1st day of November, 2004.
"A.A. Sarchuk"
Sarchuk J.
Docket: 2001-2726(GST)G
BETWEEN:
SOUTHPARK ESTATES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of Villa Beliveau Inc.
(2000-1755(GST)G), S.A.M. (Colorado) Inc. (2001-2725(GST)G), and Virden Kin Place Inc. (2001-2856(GST)G), on May 5, 6, 7, 8, 9, 10 and 11, 2003,
at Winnipeg, Manitoba
By: The Honourable Justice A. A. Sarchuk
Appearances:
Counsel for the Appellant:
Jonathan Kroft and Barbara M. Shields
Counsel for the Respondent:
Lyle Bouvier and Angela Evans
____________________________________________________________________
JUDGMENT
The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated April 5, 2000, and bears number 09CR0030090 is dismissed, with costs.
Signed at Ottawa, Canada, this 1st day of November, 2004.
"A.A. Sarchuk"
Sarchuk J.
Docket: 2001-2856(GST)G
BETWEEN:
VIRDEN KIN PLACE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of Villa Beliveau Inc.
(2000-1755(GST)G), S.A.M. (Colorado) Inc. (2001-2725(GST)G), and Southpark Estates Inc. (2001-2726(GST)G), on May 5, 6, 7, 8, 9, 10 and 11, 2003,
at Winnipeg, Manitoba
By: The Honourable Justice A. A. Sarchuk
Appearances:
Counsel for the Appellant:
Jonathan Kroft and Barbara M. Shields
Counsel for the Respondent:
Lyle Bouvier and Angela Evans
____________________________________________________________________
JUDGMENT
The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated January 30, 2001, and bears number 09CR0006860 is dismissed, with costs.
Signed at Ottawa, Canada, this 1st day of November, 2004.
"A.A. Sarchuk"
Sarchuk J.
Citation: 2004TCC701
Date: 20041101
Docket: 2000-1755(GST)G
2001-2725(GST)G
2001-2726(GST)G
2001-2856(GST)G
BETWEEN:
VILLA BELIVEAU INC.,
S.A.M. (COLORADO) INC.,
SOUTHPARK ESTATES INC. and
VIRDEN KIN PLACE INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sarchuk J.
[1] On consent of all parties these appeals were heard together. The issue in each relates to the proper method of assessing market value of non-profit life-lease senior citizen multiple residence complexes for the purpose of subsection 191(3) of the Excise Tax Act (the Act). It is not disputed that each of the Appellants was a non-profit corporation duly incorporated under the laws of the province of Manitoba.
The Assessments
[2] S.A.M. (Colorado) Inc. (Colorado) - This Appellant completed construction of a 45-unit senior's life lease residential complex at 140 Ferry Road, in the City of Winnipeg in 1997. It self-assessed with respect to the complex on the basis that the fair market value of it was $2,740,000 and that the GST payable was $191,800. On February 13, 2001, the Minister assessed the Appellant on the basis that the fair market value was not less than $5,215,000 and assessed net tax of $365,050.
[3] Villa Beliveau Inc. (Villa Beliveau) acquired vacant land located at 500 Beaverhill Blvd., Winnipeg upon which it arranged for the construction of a 33-unit residential complex which units were leased under "life leases". Construction was completed in August 1998 and in September, Villa Beliveau self-assessed with respect to the complex on the basis that the fair market value was $2,400,000 and that the GST payable was $168,000. In April 1999, the Minister assessed Villa Beliveau on the basis that the fair market value of the building was not less than $3,995,327.10 and that it had failed to account for tax in the amount of $111,672.90.
[4] Virden Kin Place Inc. (Virden) completed construction of a three-storey, 22-unit senior's life lease apartment complex at 489 Frame Streetin Virden, Manitoba in April 1998. Virden self-assessed with respect to the building in accordance with subsection 191(3) of the Act on the basis that the fair market value of the complex at the relevant time was $1,261,000 and that the goods and services (GST) payable was $88,270. On July 15, 2001, the Minister of National Revenue (the "Minister") issued a Notice of Decision which revised the assessment of GST payable to $142,282.90 on the basis that the fair market value of the complex was at least $2,032,612.89.
[5] Southpark Estates Inc. (Southpark) acquired land at 132 Marrington Road in Winnipeg and arranged for the construction of a three-storey, 58-unit senior's apartment complex. Construction was completed in 1997 and the apartments were granted to tenants subject to life leases. Southpark self-assessed with respect to the complex on the basis that the fair market value at the relevant time was $4,100,000 and that the GST payable was $287,000. On April 5, 2000, the Minister reassessed the Appellant on the basis that the fair market value was not less than $6,630,000 and thus the GST payable by the Appellant was $464,100.
[6] Subsections 123(1) and 191(3) of the Act provide:
123(1) In section 121, this Part and Schedules V to X,
"fair market value" of property or a service supplied to a person means the fair market value of the property or service without reference to any tax excluded by section 154 from the consideration for the supply.
191(3) For the purposes of this Part, where
(a) the construction or substantial renovation of a multiple unit residential complex is substantially completed,
(b) the builder of the complex
(i) gives, to a particular person who is not a purchaser under an agreement of purchase and sale of the complex, possession of any residential unit in the complex under a lease, licence or similar arrangement entered into for the purpose of the occupancy of the unit by an individual as a place of residence,
(i.1) gives possession of any residential unit in the complex to a particular person under an agreement for
(A) the supply by way of sale of the building or part thereof forming part of the complex, and
(B) the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment, or
(ii) where the builder is an individual, occupies any residential unit in the complex as a place of residence, and
(c) the builder, the particular person or an individual who is a tenant or licensee of the particular person is the first individual to occupy a residential unit in the complex as a place of residence after substantial completion of the construction or renovation,
the builder shall be deemed
(d) to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession of the unit is so given to the particular person or the unit is so occupied by the builder, a taxable supply by way of sale of the complex, and
(e) to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times.
Appellant's Evidence
[7] A representative of each of the four Appellants testified with respect to the circumstances leading to the organization and construction of the respective properties.
[8] Colorado: S.A.M. Management (S.A.M.) is a non-profit corporation which was created in 1973 when the United Church of Canada was attempting to replace a building which had been destroyed by fire. In so doing, it constructed St. Andrew's Place which was a mixture of commercial space and senior citizen's low-cost housing. John Lyons was the general manager of S.A.M. from May 1975 to March 2001. As such, he was involved in the Colorado and other projects with the responsibility for contracts with the developers, overseeing leasing staff, and the overall coordination of the projects.
[9] In the early part of 1995, the Y.M.C.A. approached three individuals, Bill Coady, Joe Bova and Jim Weslake, to undertake a development of the St. James Y.M.C.A. site which consisted of a building that was no longer serviceable. They initially approached a Lions group to see whether it would be the sponsor of a proposed life lease project but were not successful. As a result, Coady approached Lyons and asked whether S.A.M. would sponsor the project on that site. According to Lyons:
... we essentially came to an agreement sometime between May and June of 1995 that the group, which would include the Manshield Construction and Smith Carter Architects and RFC Development, would financially support the marketing of the life lease project, and S.A.M. Management would provide leasing and marketing staff to see whether or not we could put together sufficient numbers to go ahead with the project and purchase the building from the Y. ...
At this point of time,
... Smith Carter had put together a preliminary set of drawings. The brochure had been developed. The pricing essentially was in place. The rent structure was established. The entrance fees were worked out. We had to massage that as we went along, but essentially the first draft was there and in a doable manner. In other words, it looked like it could be marketed reasonably well.
The first mailout in July 1995 was directed at the "total community" which initially was St. James and subsequently, Charleswood. This was followed by town hall meetings, "a little show and tell sort of thing". Sales personnel were engaged to find contacts and to follow up with phone calls, etc. The Winnipeg Free Press was used for advertising and marketing, more specifically with respect to information such as town hall meetings and S.A.M.'s office telephone number, etc. Financing with Royal Trust was arranged in May 1996. According to Lyons, the bank insisted that the property be registered as a condominium and there had to be a certain number of leases before it would commit, in this case 38 out of 45 proposed. Contracts were signed with the architects in July 1996, a stipulated price contract was entered into with Manshield Construction on July 29, and construction commenced that month and was completed in June 1997. The tenants immediately moved in, the building filled up very quickly and by the time construction was finished, Lyons noted "one or two units might have been left".
[10] Southpark: Vincent Reilly is a marketing director in the life insurance business. At the relevant time, he was resident in Richmond West and was a member of the Knights of Columbus (the Knights) and of the Mary Mother of the Church Parish. The former was the sponsoring body of Southpark. The Knights knew that other organizations were involved in life lease projects and an earlier effort to do the same failed because suitable land could not be obtained. They were also aware of vacant land which had been reserved for a possible school, approached the authorities, and ultimately reached an agreement to acquire this land by way of an option to purchase conditional on their obtaining the required financing, and undertaking that the project would be a senior's complex. Southpark was incorporated on July 10, 1995 at which point the organizational aspects were in their fourth or fifth month. A general announcement directed at potential tenants was made in the Church as well as by way of a release in the newspaper and other forms of promotion. A Southpark brochure distributed at this time indicated that one of the unique features of Southpark was that residents would be permitted to sell their interest in the life lease to another party and that this "allows residents the opportunity for capital appreciation as demand for retirement housing increased in the future".[1] Riley noted that although the project originally contemplated 90 units, commitments slowed up and stalled at around 50 and a decision was taken to reduce the plan to 60 units. Fifty-one were "sold" and in order to commence the project, the architect and general contractor committed to taking the remaining nine units. He noted that about 40% of the capital cost of $7,200,000 was put up by the tenants by way of their entrance fees. The options to purchase the land was exercised on April 14, 1996, financing was arranged and on October 16, 1996, the Knights entered into a stipulated price contract with a general contractor. Construction commenced that same month and the units began to be occupied in October 1997.
[11] Virden: Doyle Frederick Piwniuk, an accountant, owns an insurance agency with a "financial planning and insurance brokerage aspect". He is a member of the Virden Kinsmen's Club and the Virden Chamber of Commerce and is vice-president of the Economic Development Board in Virden. Virden is a community of approximately 3,500 located in the southwest area of Manitoba. It has two main industries, agriculture and oil, and is a transportation hub located on the Trans-Canada Highway midway between Winnipeg and Regina. A major concern to the community and to the Kinsmen was the limited available housing in Virden as a result of which both the younger generation and seniors were moving to Brandon. There also was a demand for housing by younger people who lived in nearby small towns but who wished to live closer to Virden so that their children could attend its schools. As a result a fairly viable market existed for seniors who wished to sell their homes and move into something smaller. This led the Kinsmen to decide that a life lease project for seniors housing was appropriate.
[12] The first steps were taken in February 1996 when an architect was approached and discussions began with the administrator of the local Health District with respect to the acquisition of a piece of land owned by the hospital. The property chosen was well located in a residential area and across the street from the hospital and clinic. Shortly thereafter, the Kinsmen obtained an option on the property. The initial project contemplated 34 units and advertisements were placed in March 1996. Public meetings were held and although initial interest was substantial, it became apparent that 34 units would not be sold and the project was reduced to 21 units. Funding arrangements were made with Virden Credit Union in June 1997. The delay was, according to Piwniuk, the result of a Credit Union requirement that there be 16 units sold before it would provide financing. Although a substantial number of potential tenants had indicated interest, the actual signatories amounted to "about 14 or 15". Ultimately, this hurdle was overcome and a management contract was entered into on June 30, 1997. Piwniuk indicated that construction had commenced just before that date and was completed in March 1998 with the first tenants moving in on April 1st.
[13] Villa Beliveau: Douglas Alexander Leeies is a consultant with Acorn Development (Acorn), a company which works with charities, non-profit organizations and other groups who wish to provide housing as a service to certain constituents. Acorn had previously been engaged by the Knights on different projects such as non-profit co-ops and non-profit rental properties. The Knights from the parish of St. Martyr's located in Southvale, a suburban neighbourhood in southeastern Winnipeg, had tried to develop a project independently through a provincial government program designed for a modest income household. They had also spoken to other consultants with the intention of "doing a federally funded project", specifically a senior's co-op, but it never came to fruition.[2] According to Leeies, both the provincial and federal governments had stopped becoming involved in such projects and:
... the only vehicle that was available to develop non-profit housing in Manitoba was, in fact, the Manitoba Housing Life Lease program, and we sat and discussed this with them over a period and recanvassed the community. They felt that it was a good match and that we should go ahead as a team and try and develop that project with them.
In or about April 1992, the Knights formalized an arrangement for a property owned by the Church and entered into a consulting agreement with Acorn. Leeies testified that prior to Acorn being engaged, the sponsors had initially:
... hoped to do 50 or 60 units and that was way back, prior to engaging us, and finally when we were engaged and went out with the life lease notion about a year after that, we came to the conclusion that we could not develop anything significantly more than 30 odd units. So the project was downsized and a project, I think it was 33 units was designed at that point in time.
Villa Beliveau was incorporated on November 23, 1994 and on February 4, 1995, a contingent arrangement for a plan was reached with Prefontaine Architects. On April 3, 1996, Concorde Projects was brought into the picture to provide construction estimates. The project was not intended to provide luxury or high-end units, but was directed at the low to middle-income group. A design was developed and drawings were completed by April 1996. As well during that period, the sponsors were in the community developing interest in the project since a condition of financing was that a specific number of suites were to be leased. Leeies noted that during this period approximately 14 of the units had not been leased but this situation did not appear to have caused any particular concern since there were sufficient people expressing interest in the units. Construction commenced in 1996 and was completed in August 1998.
[14] Estimates of the market value of the four properties in issue were provided for the Appellants by O. William Steele.[3] Steele defined highest and best use as:
... the most profitable legal use to which a property can be put. Opinion of such use is based on the highest and most profitable continuous legal use to which a Property is capable of being used, or likely in demand, in the near future.
To analyze and estimate the highest and best use, Steele considered the following factors: zoning classification and land uses permitted, existing land use, age, design, materials, workmanship and physical condition of the building, feasibility and/or viability of alternative legal land uses for the property. In his opinion, although the two potential highest and best land uses as at the dates of appraisal were as residential condominiums or multiple family residential complexes for seniors, he concluded, for a number of reasons, that their highest and best use would not be as a residential condominium for seniors. He noted that as at the date of appraisal the properties were not residential condominiums for seniors and accordingly, it would be necessary to estimate the collective market value for the residential units as condominiums and then deduct all costs which would be incurred in converting the property from a non-profit residential complex for seniors to a residential condominium for seniors.[4] In addition to the foregoing, other costs which would have to be deducted were the amounts required to buy out the leasehold rights of those tenants who had been committed to a long-term lease in the subject property as well as the profit to the owner. On that basis, Steele concluded that the market value of the subject properties as condominiums, less conversion costs, buyout costs and profit to the owner, was substantially less than their market value as non-profit multiple family residential complexes for seniors. Therefore, in his opinion, the highest and best use of the subject properties was for non-profit multiple family residential complexes for seniors[5] and more specifically "for rental purposes".
[15] Steele testified that where real property being appraised includes land and building, the most satisfactory procedure is to include the three most widely accepted valuation processes, namely, the Cost Approach, the Income Approach and the Comparison Approach. He further indicated that based on the fact that there was an insufficient number of conventional multiple family residential complex sales to estimate market value by the Comparison Approach, the Cost Approach and the Income Approach were the most precise methods to estimate market value of the subject properties. Steele specifically noted that:
In estimating market value by the Cost Approach, the estimates used are replacement cost estimates based on market conditionsas at the date of appraisal rather than actual development and construction costs for the subject property,
since in his view, those costs did not represent development and construction costs based on market conditions. He noted that the cost approach is no different than any of the other approaches, and more specifically said:
the end result has to be what the market would pay for the property, and if the cost approach, let's say it did cost more than supposed market value, there has to be a - there is depreciation that has to be accounted for. In other words, there is now depreciation inherent in the property.
According to Steele, economic obsolescence is a form of depreciation resulting in a loss in value:
caused by extrinsic conditions inherent to the subject property such as deficient location, excessive taxes, special assessments, government regulations, legislation or encroachment of inharmonious land uses.
and in his opinion:
there is substantial economic obsolescence negatively impacting market value of the subject property.
Since in his view their highest and best use was as multiple family residential rental complexes for seniors, he specifically referred to rent controls as having that effect on their market value. This loss he considered to be a form of economic obsolescence which is measured as the capitalized value of the annual net income loss due to the deficiency. He noted in his report that:
An indicator of Annual Rent Loss caused by Rent Controls is the difference between the Net Income which would be required to produce a Reasonable Market Return on Investment in the Capital Cost of the Subject Building and the Estimated Market Net Income from the Subject Building, only, based on its use as at the Date of Appraisal.
The objective in calculating such difference is to Estimate the Loss in Market Value between the Normal Market Expectation for a Return on Capital Invested in a Multiple Family Residential Complex and the Market Value resulting after the effect of Rent Controls.
Utilizing this method, Steele estimated the market value of these properties by the cost approach for Colorado as at June 1, 1997 as follows:
ESTIMATE OF REPLACEMENT COST
Building: 45 Rental Units X $105,000 Per Unit
$4,725,000
Yard Work: 41,122 SF X $3.50 PSF Say,
$150,000
Estimate Replacement Cost
$4,875,000
LESS ESTIMATE OF DEPRECIATION
Economic Obsolescence:
$230,607 ÷ .10(%) = $2,306,070 Say, ($2,300,000)
Estimate of Depreciation
($2,300,000)
ESTIMATE OF DEPRECIATED VALUE
OF SUBJECT IMPROVEMENTS
$2,575,000
ADD ESTIMATE OF MARKET VALUE OF LAND AS IF VACANT 62,500 SF x $6.00 PSF
$375,000
ESTIMATE OF MARKET VALUE BY THE
COST APPROACH
$2,950,000
Say,
$3,000,000
Utilizing the same method, Steele reached the following estimates of market value by the cost approach for the other three properties, Virden - $1,150,000, Villa Beliveau - $2,200,000 and Southpark - $3,800,000.
[16] Steele also estimated the market value of the properties by the income approach, an appraisal technique in which anticipated net income applicable to the subject properties is capitalized into an indication of market value. He defined market rental value as the rental income that a property would most probably command in the open market, and indicated that the rates used in his report are in excess of those rates generally paid for "comparable conventional, non-senior multiple family residential complex rental units". That was so because the non-profit residential complexes for seniors were generally newer buildings, included attributes which make them amenable to seniors housing and thus, command somewhat higher market rentals. Steele specifically noted that rental values for such properties are restricted in Manitoba by the Residential Tenancies Act and this is further complicated by the fact that rents are property-specific, i.e. annual rental increases are based on annual rent for the respective property in the previous year and not on the general market. In his view, rent controls applied to the overall multiple family complex market had a serious negative impact on the rental value of newly-constructed multiple family residential complexes. Accordingly, he concluded that:
In a broad spectrum of both 1 and 2 Bedroom Multiple Family Residential Complex Rental Units in 1997 and 1998, Market Rental Values of higher quality Conventional Multiple Family Residential Complexes in good locations were, generally, from $0.70 to $0.80 per square foot per month, say, $0.75.
Steele then went on to pose the question:
As a result of its new construction in a Market of older stock of conventional multiple family residential complexes, would market rental value of the subject property rental units as at the date of appraisal be substantially higher than $0.75 per square foot per month?
and concluded that the market rental values for the subject properties would be only slightly higher than their value as a conventional multiple family residential complex.
[17] The basis of the Income Approach, according to Steele, is that components of value including Rental Value, Vacancy Allowance, Operating Expenses and Overall Capitalization Rate are based on market conditions for comparable properties and not, necessarily, based on current or historic experience of the subject property. In this process, the first step is to estimate the gross income based on Market Rental Value at 100% occupancy under market terms and conditions; deduct an estimate of vacancy and rent loss as well as an estimate of annual operating expenses based on the physical status of the subject improvements and conclude by capitalizing the resulting estimate of annual net income into an indication of market value. He concluded that while it was difficult to estimate absolutely, there was sufficient Market Data to make a "reasonably accurate and reliable Estimate of Market Value". His ultimate conclusion with respect to the market value by this approach for Colorado was $3,350,000, Southpark $4,000,000, Virden $1,200,000, and Villa Beliveau $2,150,000.
[18] For the purposes of his final estimate, Steele considered the results produced by both the cost approach and the income approach and concluded, with respect to each property, that their market value was as follows: Colorado -$3,300,000,Virden - $1,200,000, Villa Beliveau - $2,150,000, and Southpark -$4,000,000.
[19] Jeffrey Rabb[6] has been involved in the real estate business since at least 1986 and currently manages Dorchester Developments Ltd., a company specializing in the acquisition and redevelopment of multi-family properties. More specifically he noted that the renovation of such properties allows them a rent control holiday for up to five years and enables Dorchester to bring them up to their maximum market rents and thus "we create the highest rates of return on multi-family property by generating the highest rents in the industry". For the purposes of his testimony, counsel for the Appellants provided Rabb with the Kellough, Pestl, Sing Associates and the Sterling Realty Advisors reports and specifically requested his opinion "as an active participant in the Winnipeg multi-family residential market as to which set of values is more commercially reasonable and accurate". Since Rabb does possess special knowledge and experience in what he described as the multi-family real estate business, the Appellants were permitted to call him to testify as to his perception of the market value of the four properties in issue as rental properties. However, he was not acceptable as an appraisal expert and accordingly, was not permitted to testify with respect to the appropriateness or correctness of either the methodology or conclusions reached by Stirling Realty Advisors or Kellough, Pestl, Sing Associates.
[20] In Rabb's view, the properties were not appropriate for condominium conversion because as a result of their cost it would not be possible to generate enough revenue to cover the costs based on the value per square foot of what condominiums sell for in the Winnipeg market. He further testified that if he were to buy the properties in issue it would only be for use as a multi-family residential apartment building. Rabb reached this conclusion by considering the properties' location, suite size, and amenities to determine rent and actual operating costs and thus determining their expenses. He then capitalized the net income based on what he perceived to be the market price given the conditions in Winnipeg at the relevant time. Based on the foregoing, his view was that the market values for Villa Beliveau, Southpark and Colorado were $2,100,000, $3,678,980 and $3,028,449, respectively.
Respondent's Evidence
[21] Evidence was adduced on behalf of the Respondent from H.E. Pestl.[7] The purpose of his engagement was to appraise and to provide an opinion as to the market value of each of the four properties. The effective date of the value estimates in each case is the date of first occupancy of each of the subject properties in accordance with the requirements of subsection 191(3) of the Act. These dates are as follows: Colorado - June 1, 1997; Southpark - October 1, 1997; Virden - April 1, 1998; and Villa Beliveau - August 5, 1998. Pestl testified that he analysed relevant information pertaining to the subject properties including acquisition particulars as well as recent offerings and listings. In respect of the latter, he learned that there had not been any. Each of the subject properties and their surrounding neighbourhoods were inspected and economic market data was assembled. Consideration was given to land use controls including the municipal zoning and official plan documents which affect the subject properties. This was followed by an analysis and consideration of the highest and best use concept and the various methods of appraisal. He indicated which methods were most appropriate to the subject properties and then undertook an analysis on the basis of those methods.
[22] Pestl stated there are three methods, which are acceptable and normally used in appraising or estimating the market value of real property. Each of these methods has advantages but all are dependent on specific information which must be available in order for that particular method to succeed. He described them as follows:
(i) The Cost Approach is a method of estimating value by appraising the land upon which the buildings stand, as vacant. This appraisal of vacant land is done primarily by market comparisons. The cost of reproducing the buildings when new is estimated and the value is established by adding the market value of the land to the depreciated value of the buildings and site improvements. This approach presupposes sufficient land sales and close proximity to the subject on or about the date of value to establish the market value of the land by comparison.
(ii) The Direct Sales Comparison Approach involves the gathering, analyzing and comparing of data on similar properties that have been sold or on which offers have been made. These similar properties must be logically comparable to the subject in size, location and time of sale. Assuming that a sufficient number of properties can be found which can be compared to the subject as a unit; that is land, buildings and amenities, the direct sales comparison approach is a good and acceptable test of value.
(iii) The Income Approach or Capitalization Method of valuation, is a method whereby the estimated annual income produced by a property is capitalized at an appropriate rate into an indication of the capital value of that property. The term capital value is considered to be synonymous with market value: that is, the estimated price an investor would pay for a property having regard to the net income flow and the rate of return expected on the capital invested. In this approach, an appropriate factor is applied in order to discount the future income strain to a present cash worth.
With respect to the income approach, Pestl made the following specific comments as they related to the properties in issue:
In the subject instance the lands have only recently been improved with a modern seniors residential complex. Because of the nature of the Life Lease structure the existing income stream generated by the project is not market rent. The rents paid by occupants are reflective of the entrance fee payments, and any additional payments made by the purchasers of the life leases interest. Further, market rents have not justified the construction of new residential projects for many years as such projects are not economically viable. For this reason the Income Approach to value is not considered appropriate for the purposes of valuing the subject complex. It is also noted that an analysis of market rental values for typical rental apartments is not appropriate in this instance as such rentals are not based on similar entrance fee and additional payments, as made by life lease occupants.
An Income Approach analysis would not indicate the total market value of the subject property, unless the entrance fee and additional amounts paid by the occupants is taken into account. The owner of the subject complex receives both a monthly rental stream (as in a typical rental property) and also receives the entrance fee and additional payments made by the purchasers of the life lease interests. These two forms of capital recovery by the owner combine to form the market value of the property. Unlike a typical rental property however there is no incentive to escalate rents to their maximum potential due to the not-for-profit nature of the project.
[23] Pestl noted that the four properties in issue were newly constructed and in each case, the development costs were available. He also observed that a number of similar projects had recently been constructed and it was evident that a market for such complexes existed. None of the properties were either publicly assisted nor otherwise funded. All were totally financed by the entrance fees and the mortgage companies. There was no subsidy granted to any of the projects either publicly or privately, nor were they funded through "fund raisers" or similar mechanisms. Thus for the purposes of his analysis, he utilized the cost and direct sales comparison approaches to value.
[24] In the cost approach analysis with respect to each of the four properties, in order to estimate the replacement cost new of the subject improvements, Pestl took into account the actual construction costs of the complex, the cost of similar complexes, and undertook an independent costing using the Marshall Valuation Computer Costing System. With respect to Colorado, he described this process as follows:
According to the Financial Statements, the total construction cost of the subject complex is stated to be $5,552,771. This amount includes the land cost, shown as $388,501. It also includes GST paid, an amount of $191,800. Accordingly, net of land and GST the development cost is about $4,972,470, or for 45 units, $110,499 per unit.
The complex comprises a total net unit area of 48,407 square feet and the development cost is about $102.72 per square foot net of land, and $110.75 inclusive of land, both exclusive of GST. Based on these reported costs for the subject property the project cost, exclusive of GST but inclusive of land is $5,360,971.
Included as Appendix #16 hereto is a summary of the development costs of eleven (11) Life Lease Projects, inclusive of the subject. One property (No. 9) is an addition to an existing project and has been adjusted to reflect that circumstance. That project is also based on a 99-year lease term with renewal option. As may be seen these projects indicate a development cost range, excluding land and GST, of from $90.17 per square foot of net unit area, to $116.88 per square foot, with an average cost of $103.72 per square foot, ($102.72 for the subject). The cost range inclusive of the land cost is from $95.71 per square foot to $121.03 per square foot with an average of $108.95 per square foot, ($110.75 for the subject).
While the subject complex enjoys particularly extensive and good quality common area facilities, it is, at the same time, of frame construction. These characteristics are considered to offset one another. The average indicated values based on the comparable sales support the actual costs of construction for the subject complex.
We have also undertaken a cost analysis employing the Marshall Valuation Computer Costing System, (see Appendix #18). The building costs exclusive of land, site improvements such as landscaping, exterior lighting, surface parking, driveways, signage, fixtures and equipment etc. but inclusive of GST is $4,710,985, as at current date. The adjustment factor for July 1, 1997 is 1.081 and the adjusted cost is therefore $4,357,988. Adjusted for GST this is reduced to $4,072,886.
An allowance of from 10% to 15% for site improvement, fixtures and equipment, and incidental costs results in a cost range of from $4,480,173 to $4,683,819. This compares with an actual cost, exclusive of land and GST of $4,972,470. The indicated cost range by the Marshall & Swift costing method is some 6% to 10% lower than the actual cost of development. As has previously been indicated, the common areas are extensive and finished to a much superior standard than is typical in similar co