ASSESSOR OF AREA 05 - PORT ALBERNI MCDONALD S RESTAURANTS OF CANADA LTD. SUPREME COURT OF BRITISH COLUMBIA ( ) Victoria 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 Property Assessment Appeal Board Decisions SC 462 AA05 v. McDonald s Restaurants of Canada Ltd. Link to Property Assessment Appeal Board Decision ASSESSOR OF AREA 05 - PORT ALBERNI v. MCDONALD S RESTAURANTS OF CANADA LTD. SUPREME COURT OF BRITISH COLUMBIA ( ) Victoria Registry Before the HONOURABLE MR. JUSTICE BROOKE Date and Place of Hearing: August 19, 2002, Victoria, BC J. David Houston for the Appellant James D. Fraser for the Respondent Fast Food Restaurant - Functional Obsolescence The property is a fast food restaurant, which includes a drive-thru and play area and fronts onto the Island Highway. The Board found that one-half of the kitchen area and part of the storage area was obsolete and treated the restaurant as having 4,000 square feet for restaurant purposes. The Board found that the highest and best use of the property was its existing use as a fast food restaurant and that the market rent was $19 per square foot. HELD: Appeal Dismissed. There was some evidence before the Appeal Board of the trend to down-sizing in the fast food or quick-service restaurant industry. The sufficiency, weight and credibility of the evidence are questions of fact, and this Court has no power to substitute its opinion on questions of fact for that of the Board. The Court finds the Board did not err in law in accepting that part of the restaurant was functionally obsolete and of no value, and in valuing the remainder at its full market value. The Court finds the Board acted with some evidence and upon a view of the evidence that could reasonably be entertained. Reasons for Judgment October 11, 2002 [1] The Assessment Appeal Board of British Columbia ( the Board ) has stated a case pursuant to s. 64(1) of the Assessment Act, R.S.B.C. 1996, c. 20 setting out the following questions for the opinion of the court: i) Did the Board err in law by valuing the subject property with reference to its particular owner rather than to the market in general and thereby find value to owner rather than actual or market value as required by the Assessment Act? ii) Did the Board err in law and act without evidence or upon a view of the facts which could not reasonably be entertained when it held certain portions of the subject property were functionally obsolete? page 1

2 iii) Did the Board err in law by finding that those areas which it found functionally obsolete had no value whatsoever when such a finding was made without evidence or upon a view of the facts which could not reasonably be entertained? The Facts: [2] The appeals before the Board were from the decisions of the 2000 and 2001 Property Assessment Review Panel with respect to commercial property located in the City of Parksville. The property is improved with a fast food restaurant, which includes a drive-thru and play area and fronts onto the Island Highway. Until 1996, this was the main highway to the north and west of Vancouver Island from Nanaimo through Parksville. In 1996, the highway was redeveloped bypassing Parksville. [3] The site area is a little more than 54,000 square feet and the restaurant occupies a little more than 6,000 square feet, with the remainder devoted to access and parking. [4] The issue before the Board was the determination of the actual value of the property as of July 1, 1999 and July 1, 2000, and specifically whether the building or part of it was functionally obsolete, thus affecting its value. The Board found that one-half of the kitchen area and part of the storage area to be obsolete and treated the restaurant as having 4,000 square feet for restaurant purposes. In estimating the functional obsolescence of the property, the Board used the replacement cost model in calculating value. The Board found that the highest and best use of the property was its existing use as a fast food restaurant and that the market rent was $19 per square foot. The Law: [5] The appeal is taken under s. 64(1) of the Assessment Act which provides: 64. (1) At any stage of a proceeding before it, the board, on its own initiative or at the request of one or more of the persons affected by the appeal, may refer a question of law arising in the proceeding, in the form of a stated case, to the Supreme Court. [6] As Madam Justice Southin (as she then was) said in Crown Forest Industries Limited v. Assessor of Area 6 - Courtenay, [1985] B.C. Stated Cases No. 210 at 1191 (B.C.S.C.): Under the British Columbia statute, this Court has no power to substitute its opinion on questions of fact for those of the Board. So long as the Assessment Appeal Board which must, in deciding appeals to it, apply the Act does not: 1. misinterpret or misapply the section - see Pacific Logging Co. Ltd. v. The Assessor [1977] 2 S.C.R. 623 adopting the dissenting judgment of McIntyre, J.A. in the Court of Appeal 12 th November, 1976 (unreported); 2. misapply any applicable principle of general law (a concept relevant only to one of the questions in the stated case), or 3. act without any evidence or upon a view of the facts which could not reasonably be entertained this Court has no power to intervene. [7] Madam Justice Southin elaborated upon the third issue of law saying this: page 2

3 On the third proposition, which is fundamental to the appellant s case, see: (a) Edwards v. Bairstow [1956] A.C. 14 (H.L.) at 29: For it is universally conceded that, though it is a pure finding of fact, it may be set aside on grounds which have been stated in various ways but are, I think, fairly summarized by saying that the court should take the course if it appears that the commissioners have acted without any evidence or upon a view of the facts which could not reasonably be entertained. [8] Mr. Justice Cumming (as he then was) in Westcoast Transmission Company Limited v. Assessor of Area 9 - Vancouver [1987] B.C. Stated Cases No. 235 at 1350 (B.C.S.C.) said this: In conducting the hearing of an assessment appeal it is my opinion that the Board functions in a judicial capacity; The Assessment Act, s. 57(2); and Peterkin v. Hydro-Electric Power Commission of Ontario, 12 D.L.R. (2d) 791. It is required to hear and determine the case on the evidence adduced. No doubt the members of the Board do have a certain degree of expertise in assessment matters which assists in understanding, assessing and weighing evidence. In deciding assessment appeals, if the Board were permitted to act on its own expertise in complex matters and substitute its unsupported opinions for those expressed in evidence, then the exercise ceases to be judicial in character. [9] At p. 1350, Mr. Justice Cumming referred to the judgment of Craig J. in Marathon Realty Company Limited v. The Regional Assessment Commissioner Region Number 7 and The Corporation of the City of Peterborough and others:... it is my opinion that the Board erred in law in failing to determine the issue in the case on the expert evidence adduced; and also in adopting the finding of the ARC, which finding was unsupported by evidence. [10] The distinction to be drawn between whether there is no evidence or whether the Board s view of the evidence as to the facts is unreasonable was elaborated upon by Drossos J. in Yuel L. Huie v. Assessor of Area 10 - Burnaby/New Westminster, [1993] B.C. Stated Cases No. 349 at 2092 (B.C.S.C.): It is evident from the authorities that issues of the sufficiency and weight and credibility of evidence are questions of fact whereas issues of no evidence, or whether the view or the interpretation of the evidence as to the facts is unreasonable are matters of law. [11] The Assessor and the Board are required to find for assessment purposes the actual value of the land and improvements being assessed. Section 19 of the Assessment Act provides: 19. (1) In this section: actual value means the market value of the fee simple interest in land and improvements;... (3) In determining actual value, the assessor may, except where this Act has a different requirement, give consideration to the following: (a) present use; (b) location; (c) original cost; page 3

4 (d) replacement cost; (e) revenue or rental value; (f) selling price of the land and improvements and comparable land and improvements; (g) economic and functional obsolescence; (h) any other circumstances affecting the value of the land and improvements. Discussion: (My emphasis) [12] The Respondent called one witness before the Board, Mr. David Lane, who was qualified as an expert capable of giving opinion evidence in respect of the appraisal of real property. He testified that he had many years of experience in the quick service industry and that the recent trend in that industry had been toward smaller sized restaurants. In his evidence, he referred to certain guidelines which had been provided to all area assessors by the British Columbia Assessment Authority, as a result of certain initiatives taken by the Respondent. These guidelines were issued to assist appraisers in determining the highest and best use of freestanding commercial buildings in the quick-service industry. Those guidelines referred to a new model of 3,500 square feet. The introduction to these guidelines which were issued November 18, 1998, says this: The following guidelines have been prepared in response to McDonald s position that their large outlets greater than 4,000 square feet plus/minus are becoming functionally obsolete as a result of an overall move in the express food service industry to smaller outlets. In the fast food industry, it is now typical to expect newly constructed outlets configured in three general categories: 1. 1,200 square feet plus/minus in retail outlet (eg. Express) 2. 2,500 square feet plus/minus (Mid-range) 3. 3,500 square feet plus/minus larger outlets (generally free-standing net of play areas) McDonald s has informed us that there is an increase in the drive-thru business and technological changes have resulted in increased efficiencies and the need for smaller stores. The following guidelines should not be restricted to the valuation of McDonald s restaurants but should be applied to the valuation of all free-standing commercial buildings whether they be retail/restaurant or similar. The existing use may no longer represent the highest and best use of the site. The following guidelines provide assistance to the appraiser in determining highest and best use of a given site... (My emphasis) Thus neither the guidelines, nor by implication, the Board focused on the value to McDonald s but correctly focused upon market value. [13] The Appellant called two witnesses, one of whom was Ms. Quigley, the Deputy Assessor of Assessment Area No. 12, who testified that the Guidelines were for the assistance of appraisers if there was a finding of super-adequacy in existing quick-service restaurants and not to define a maximum of 3,500 square feet for quick-service restaurants. [14] The evidence of Mr. Lane, which the Board relied upon, included this at p. 17 of the transcript of the proceedings before the Board: page 4

5 [Transcript October 29, 2001] [Lines p. 17]... the property s existing use as the site for a quick-service restaurant represents its highest and best use. However, this opinion is predicated on consideration of the sunk costs of the existing restaurant structure that is situated on the subject site. In my view, the existing restaurant represents an over improvement for the Parksville market and further, it s unlikely development of a new quick-service outlet at this subject location would be undertaken. In other words, the existing use in my opinion is the optimum use but only because of the sunk cost of the existing facility that is there. If you looked at this site as a vacant site, in my view it would have very limited appeal as the site for a quick-service restaurant. And even if a quickservice restaurant were to be developed on that site, which I think would be highly unlikely, the restaurant that would be developed would be of a significantly smaller size than what s there now. [15] In his report, which was accepted into evidence, Mr. Lane at p. 6 referring to p. 391 of a text; the appraisal of real estate 11 th edition and pp. 387 and 391, adopts this definition of functional obsolescence: Functional obsolescence is a loss in value that may be caused by a deficiency or a superadequacy. [16] And at p. 391, this description of an incurable functional obsolescence caused by a superadequacy: An item of incurable functional obsolescence caused by a superadequacy is a property component that exceeds market requirements. It represents a cost without any corresponding increment in value, or a cost that the increment in value does not meet. This form of functional obsolescence is considered incurable because it is not economically feasible to cure it. In most applications of the cost approach, the need to estimate the functional obsolescence attributable to an incurable super adequacy is eliminated by using replacement cost instead of reproduction cost; superadequacies are not replicated in a replacement cost estimate. Nevertheless, whether replacement or reproduction cost, is used, any extraordinary expense of ownership associated with the superadequacy must be quantified and deducted as penalty from the value of the property. [17] In order to quantify obsolescence, in his report Mr. Lane utilizes the replacement cost mode technique. No issue was taken with the use of this model and, in fact, it was seen to be appropriate by the appraiser called by the Appellant. [18] Before the Assessment Appeal Board, the parties agreed that the only issue was whether there exists functional obsolescence in the building on the subject property. It was submitted by the Assessor that McDonald s did not provide evidence that areas of the restaurant are under utilized or that business has diminished as a result of the highway change, nor did McDonald s provide any studies or analysis to support its submission that down-sizing was occurring in the fast food industry. The Board accepted Mr. Lane s evidence that the building on the subject property was functionally obsolete to the extent of one-half of the kitchen area and a part of the storage area. The Appeal Board accepted that Mr. Lane had the experience in the quick-service industry and direct knowledge of the trends and changes occurring in that industry. The Appeal Board rejected the expert opinion offered by the Assessor because she had no direct knowledge of the quick-service industry, and her opinion was largely based on newspaper articles or information from third parties. In doing so, the Board did not substitute its own expertise and its own unsupported opinions for the expert opinion before it. page 5

6 [19] In his report, Mr. Lane referred to significant change in the quick-service restaurant industry since the mid-1990s and his role in identifying and measuring functional obsolescence in large area free-standing restaurants. In the proceedings before the Appeal Board, Mr. Lane was accepted as qualified as an expert in the field of real estate appraisal and his report was admitted into evidence. His qualifications included personal involvement in the quick-service industry, as both a landlord and an owner of a quick-service restaurant and his acceptance as an expert by Assessment Appeal Boards in matters of functional obsolescence and economic obsolescence. [20] In my opinion, there was some evidence before the Appeal Board of the trend to down-sizing in the fast food or quick-service restaurant industry. The sufficiency and weight and credibility of the evidence are questions of fact, and this court has no power to substitute its opinion on questions of fact for those of the Board. The Appeal Board was entitled to find the subject property to be over-improved in the context of the recent trend in the quick-service industry to smaller sized restaurants. That recent trend is supported by the guidelines issued by the Assessment Authority. The Board was entitled to find on the evidence before it that the overimprovement was permanent, thereby distinguishing T. Eaton Company Limited v. Assessor of Area 09 - Vancouver, [1991] B.C. Stated Cases No. 317 at 1839 (B.C.S.C.) which held that evidence that the design of a building may not be optimum does not necessarily result in the functional obsolescence of the building. There, as was noted by the Board, the under-utilization was temporary whereas the Board in this case found that there had been a fundamental change in food delivery and cooking technique. [21] The Appellant also submits that the Board erred in law in finding that those parts of the improvements that were obsolete had no value whatsoever. This ground of appeal arises from the Board s finding that 2,249 square feet of the restaurant was obsolete or under-utilized and then applying the rental rate of $19 per square foot (which both parties before the Board agreed was appropriate) to that reduced square footage. I cannot find that the Board erred in law in doing so. It accepted that part of the restaurant was functionally obsolete and of no value, and valued the remainder at its full market value. [22] In the result, I am satisfied that the Board acted with some evidence and upon a view of the evidence that could reasonably be entertained. The answer to the three questions posed by the Board is in the negative and the appeal is dismissed with costs. page 6