ASSESSOR OF AREA 06 COURTENAY CROWN ISLE DEVELOPMENT CORP. JOHN S. MURRAY. SUPREME COURT OF BRITISH COLUMBIA (S071437) 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 Property Assessment Appeal Board Decisions SC 514 AA06 v Crown Isle Development Corp et al Link to Property Assessment Appeal Board Decision ASSESSOR OF AREA 06 COURTENAY v. CROWN ISLE DEVELOPMENT CORP. JOHN S. MURRAY SUPREME COURT OF BRITISH COLUMBIA (S071437) Vancouver Registry Before the HONOURABLE MADAM JUSTICE BROWN Date and Place of Hearing: September 14, 2007, Vancouver, BC J.H. Shevchuk & E. Swartz for the Appellant B.T. Gibson, Q.C. for the Respondents Strata lots Fee Simple Interest "Stratified Resort" This was a Stated Case dealing with the strata lots comprising the Crown Isle Development at Courtenay, British Columbia. This appeal concerned the valuation of the strata lots. The Assessor asked the following two questions: 1. Did the Board err in law when it determined that fractional ownership interests in the subject properties encumbered the fee simple interest in land and improvements? 2. Did the Board err in law when it determined that the test of whether management fees and rental income are inextricably intertwined with the real estate is only relevant if it was using the income approach to value? Crown Isle asked the following question: 1. Did the Board err in law in failing to make downward adjustments to the value of the Glasgow units when the appraisal witnesses testified that such adjustments were necessary and the Board found that downward adjustments for location and quality should be made? HELD: The appeal on the questions posed by the Assessor was allowed; but on the question posed by Crown Isle was denied. The Court found to the extent that the Board determined that fractional ownership is an encumbrance that was an error, and a misapplication of Standard Life and Huculak and answered question 1, yes. The Court found that if rights are inextricably intertwined with the real estate and contribute value, then that value is part of the value of the land and improvements for assessment purposes. The right in question is the right to participate in the management/rental pool arrangement. Where that value is inextricably attached to the land, and contributes value, then that value is part of the value of the realty, not simply income to be considered on the income approach. Therefore, the Court answered the second question, yes In considering the question proposed by Crown Isle the Court found that the Board was not wrong to adjust the rate on the basis of the evidence before it, and answered this question, no. page 1

2 Reasons for Judgment January 25, 2008 [1] This is an assessment appeal Stated Case relating to the Crown Isle Development at Courtenay, British Columbia (Crown Isle Development Corp. v. Area 06, 2007 PAABBC ). Crown Isle is a planned resort community, with a golf course, a resort center, 48 furnished strata lots, and single and multi-family dwellings. This appeal concerns the assessment of the strata lots. [2] Crown Isle markets the resort as a high end resort destination. Each owner of a strata lot must enter a property management agreement. Crown Isle manages the strata units, with management costs shared by the owners. Each owner has the option of participating in a full service rental program run by Crown Isle, which rents out the strata units. The units are rented for short term stays, like a hotel. Renters have access to the golf course and clubhouse; although these are not part of the common property, they are on separate property owned by Crown Isle. For the rental service, Crown Isle retains 45% of the gross revenue from each unit. To date, all owners of one-quarter share interests in strata units have opted to participate in the rental program. [3] Strata lots may be purchased in one-quarter shares - four individuals each acquire a one-quarter interest in a particular unit as a tenant in common, although each holds a separate title. At Crown Isle, one-quarter shares sell for a premium. Those who purchase only a one-quarter share pay more per square foot than those who purchase a full unit. The central issue in this appeal is whether the actual value of a unit is the sum of the value of each one-quarter share, as the Assessor asserts, or is the value of the 100% interest, as the Board determined. [4] The second issue involves the rental income from the units. Crown Isle says that the units are subject to two premiums: the one-quarter share premium described above and a business premium, which is the rental premium - the owner's ability to participate in the rental pool. Crown Isle argues that this is a nonrealty premium that must be discounted. The Assessor argues that the premium is inextricably intertwined with the real estate because the income generated from the rental of the units is generated by the real estate. The Board concluded that the test of whether this premium is inextricably intertwined with the real estate would be relevant if the property was valued on the income method, but was not relevant here, where the property was valued on the direct comparison method. [5] The third issue concerns the value of the units in one of the buildings, the Glasgow, which both parties say is of lesser quality and location and should be discounted for that reason. The Board agreed, but said "the parties provided little or no evidence or analysis to support their adjustments, and, in the face of competing expert opinions, we cannot accept only appraisal judgement without supporting evidence as a basis for value." The Board applied the same rate to the Glasgow as to the other buildings. [6] The facts are stated in the Stated Case: 1. The appeal before the Board was from the decisions of the 2005 and 2006 Property Assessment Review Panel with respect to strata titled resort accommodation at the Crown Isle Resort and Golf Community ("Crown Isle") located on the outskirts of Courtenay, British Columbia. 2. Crown Isle is a 831 acre, master planned resort community which includes a top rated golf course, a resort centre called the "Clubhouse", 48 furnished strata lots, designed and used as resort accommodations (the "Villas"), single family lots and residential homes, multi-family condominiums, and lands for future development. Crown Isle Development Corporation, the Respondent in these proceedings and the Appellant before the Board, appealed the 2005 and 2006 property assessments of the Villas and development lands. As of 2005, there were 44 strata lots comprising the Villas, and, for the 2005 assessment roll, 40 of these 44 lots were appealed. For the 2006 assessment roll, all 48 of the 48 strata lots comprising the Villas were appealed. The parties resolved the appeals respecting the development lands. page 2

3 3. The issue before the Board was the determination of actual value of the strata lots within the Villas as of July 1, 2004 and July 1, 2005 specifically whether the sum of the value of each 1/4 interest equals actual value of the fee simple interest as required by the Assessment Act. 4. Some of the strata lots are sold and owned in 1/4 fractional shares, while some are not. Crown Isle owns half of the units. Historically, the 1/4 share interests sell at a higher value proportionally than a full ownership unit due to the fractionalization of the interest, i.e. there is a higher price per square foot paid for a fractional interest than for a full interest. The sum of the value of the shares of the 1/4 interest is higher than the market value of the full ownership unit. 5. The Villas are resort accommodations that Crown Isle operates as a resort hotel. There are eight buildings: the Aberdeen, Folkstone, Edinburgh, Dorchester, Glasgow, Canterbury, Balmoral, and Inverness. These eight buildings are located on acres of land composed of seven different strata plans, and near or bordering the first fairway of the golf course. 6. Out of the 48 strata lots in the Villas, Crown Isle Development Corporation (the developer) continues to own 24 strata lots. The remaining 24 strata lots are owned by different individuals, primarily on a 1/4 share basis (three 1/4 shares remain unsold). The Aberdeen, the first building constructed, sold six of its 14 strata lots as full ownership, although the developer has since purchased two of the strata lots back. The developer retained all the strata lots in the Glasgow. The Glasgow is the only Villa complex not fronting the golf course. The remaining strata lots in the other buildings were offered for sale and sold on a 1/4 share basis, although the developer chose to sell only two of the three strata lots in the Balmoral, and two of the six strata lots in the Canterbury. Crown Isle Management manages all 48 units and organizes their rental as part of a property management agreement that all owners sign. Crown Isle rents the units for short-term stays, similar to a hotel. 7. The strata lots range in size from a one- unit of 717 square feet to a three- unit of 2,311 square feet. However, all of the Villas that were sold or were available for sale as 1/4 share ownership are two- units between 1,411 and 1,485 square feet. Some of the two and three- units can be divided into two or three distinct rooms for rental purposes, so that a total of 92 rentable rooms can be available in the Villas. The wood-frame buildings have high quality construction and units are fully furnished. The furnishings are consistent between units (excepting the Glasgow which is slightly inferior) and cannot be customized by individual owners. The parties agreed on a value of $36,000 per unit for the furnishings, fixtures and equipment (FF&E). 8. The chart below summarizes the units in each building as well as the unit types and ownership nature. page 3

4 Building Date Built No. of Strata Units No. of Rentable Rooms CIDC Units (100% Interest) Units Sold as ¼ shares Unit Type Aberdeen (#100) (100% owned) No ¼ shares Edinburgh (#500) Folkstone (#600) Dorchester (#400) Glasgow (#700) Balmoral (#200) All All All bed + loft (sold) 2 3- (CIDC) Canterbury (sold) 4 3- (CIDC) Inverness (#900) All 2- Totals: Many of the strata units at the Villas are sold based on fractional 1/4 shares (with the exception of Aberdeen units which were sold on 100% interest), with separate titles given to each purchaser. The four purchasers of one strata unit each own an undivided 1/4 fee simple interest as joint tenants [the parties agree that it is as tenants in common]. Under the 1/4 share ownership, owners have the right to 13 non-consecutive weeks each year (excepting every fourth year when 12 weeks are available with one used for annual maintenance). As the individual titles are separate, owners can sell or finance their 1/4 interest at their discretion. 10. Purchasers of the 1/4 interests are required to enter into a property management agreement. Under the agreement, Crown Isle Development Corp. is responsible for managing the units with all management costs shared amongst the owners. page 4

5 11. Each owner has the option of participating in a full service rental program (individual not pooled rental program). The program is run by Crown Isle, which rents out all the strata units (those owned by Crown Isle and those that have been sold), as there is demand. People renting units have access to the golf facilities and all facilities at the clubhouse. In return for this rental service, Crown Isle earns 45% of the gross revenue from that 1/4 share of the unit. There is no guaranteed income for the various owners, nor is there a requirement for Crown Isle to rent the sold units prior to renting their own units. To date, all owners have opted to participate in this rental program. The average use of the units by the owners themselves is approximately eight days. As per the current management agreement, owners are not permitted to rent their units outside of this rental program. 12. Purchasers of 1/4 shares received a two-year golf benefit, consisting of either unlimited golf privileges for one owner, or 20 golf passes per year to be used by the owner or a guest; both benefits are for the time the owner is occupying the strata lot. The estimated benefit of this golf membership/passes is $2,400 (20 passes of $60 each x 2 years); the benefit is not transferable upon resale. 13. The Assessor originally assessed the strata units based on 100% ownership and classified them as residential use. For the 2005 tax year, the Assessor valued the units based on 1/4 share sales activity and assessments increased 78%. The Assessor also moved the units from residential to business class. These changes increased the property taxes to 4.37 times the amount paid in According to Crown Isle, this changed the economics of the investment to such an extent that the units were not able to achieve similar price points and Crown Isle postponed further development. It also resulted in an appeal of the units for the 2005 and 2006 tax years. 14. The total Crown Isle development was approved to comprise 2,700 living units. To date, approximately 700 are built with a mix of single family and multi-family units. The rate of development during the last few years has been approximately 60 single-family homes and 40 multi-family homes per year. During the early years of the development, the rate of building was lower due to a weaker market and fewer amenities completed on site. Crown Isle completed the golf course as the first phase of the overall development. During the 1990s, the developer built some single-family homes and duplexes. 15. The Clubhouse comprises the front desk facilities for the Villas, a golf shop, meeting rooms, state-of-the-art fitness centre, restaurant, lounge, and a classic car museum. The Clubhouse is not part of the Villa properties in the form of common property. It is a separate parcel owned by Crown Isle. 16. Crown Isle had planned a Lodge that was to provide 52 typical hotel rooms with more consistency between room sizes (in the Villa units the main is superior to the second with lock-off capability) and finishings (main master suite is superior to second and bathroom), and more rental accommodation for the golf course. The Lodge was to include the front desk (moved from the clubhouse), spa, fitness centre (relocated from clubhouse), indoor swimming pool, and a breakfast area. Crown Isle indicated that they cancelled the Lodge due to the increases in property taxes. This was despite the fact that the development had been pre-sold based on 1/4 share ownership. 17. The Board found the highest and best use of the Villas is for overnight accommodation as a stratified resort, with units available for rent or sale. 18. The Board found the direct sales comparison approach was the applicable valuation method. 19. The Board found that the Assessor's method of valuing the fee simple interests by using the sales or values of the partial interests results in a value that is not the value of the unencumbered fee simple interest, even though the result is a higher aggregate market value. page 5

6 20. The Board found the premium at which 1/4 interests sell at does not reflect the market value of the fee simple interest on an unencumbered basis. 21. The Board found that sales of 1/4 interest should not be used in determining the market value for assessment purposes of the Villa strata units. The Board found the sale of strata unit No. 11 in Aberdeen is the best indicator of market value for the Villa units. 22. The Board found the premium or additional value that fractional interests generate is not part of the unencumbered fee simple interest. The Board found the test of whether management fees and rental income are inextricably intertwined with the real estate is only relevant when using the income approach to value. 23. The Board found that there should not be a separate discount for any premium for participation in the Crown Isle business and the rental income potential, and the "hassle free" nature of ownership in the resort. 24. The Board ordered the Assessor to amend the actual total values for the 2005 and 2006 assessment rolls in accordance with a Schedule attached to the Board's decision. The Board ordered the parties provide the Board their agreement on the split between land and improvements and retained jurisdiction to determine that issue in the event the parties are unable to agree. 25. Attached as Schedule "A" to this Stated Case is a copy of the Board's decision dated January 23, Attached to this Stated Case as Schedule "B" is a copy of the Board's order splitting actual value between land and improvements for each folio. Attached to this Stated Case as Schedule "C" is a copy of the Board's hearing Results Form/Exhibit Sheet. Filed with this Stated Case are Exhibits 1 through 38 filed with the Board. [7] The questions that the Board has stated for the court on behalf of the Assessor are: 1. Did the Board err in law when it determined that fractional ownership interests in the subject properties encumbered the fee simple interest in land and improvements? In this regard, did the Board misinterpret and misapply Standard Life Assurance Company v. Assessor of Area 01 - Capital (1997) Stated Case 381 (B.C.C.A.) and Assessor of Area #08 v. Huculak, (1998) Stated Case 408 (B.C.S.C.) and thereby erred in law? 2. Did the Board err in law when it determined that the test of whether management fees and rental income are inextricably intertwined with the real estate is only relevant if it was using the income approach to value? In reaching its determination, did the Board misinterpret ABKA Limited Partnership v. Board of Review 231 Wis. 2d 328 (1999)? [8] The questions that the Board has stated for the opinion of the court on behalf of Crown Isle are: 1. Did the Board err in law in determining that the highest and best use of the property was as a "stratified resort" when the property was not marketable as high-end resort accommodation without the front desk, restaurant, and fitness amenities, which were not part of the lands and improvements? 2. Did the Board err in fact and in law in failing to take into account the business/rental premium mentioned at Paragraph 51 of its decision? 3. Did the Board err in law in failing to make downward adjustments to the value of the Glasgow units when the appraisal witnesses testified that such adjustments were necessary and the Board found that downward adjustments for location and quality should be made? [9] Crown Isle did not wish to pursue the first and second issues. JURISDICTION OF THE COURT page 6

7 [10] I must first determine if the issues in this Stated Case fall within the jurisdiction of this Court. Section 65(1) of the Assessment Act, R.S.B.C. 1996, c. 20 (the "Act") provides: Subject to subsection (2), a person affected by a decision of the board on appeal, including a local government, the government or the assessment authority, may require the board to refer the decision to the Supreme Court for appeal on a question of law alone in the form of a stated case. [11] Section 65 limits the jurisdiction of the court to questions of law. Questions of mixed fact and law are outside of the court's jurisdiction: Gemex Developments Corp. v. Coquitlam Assessor, Area No. 12 (1998), 62 B.C.L.R. (3d) 354 at 358, 112 B.C.A.C. 176 (C.A.) ("Gemex"). [12] For the purposes of the Act, a question of law has been defined as: (1) a misinterpretation or misapplication by the Board of a section of the Act; (2) a misapplication by the Board of an applicable principle of general law; (3) where the Board acts without any evidence; (4) where the Board acts on a view of the facts that could not reasonably be entertained; or (5) where the method of assessment adopted by the Board is wrong in principle: Gemex, at p [13] Mr. Justice Smith cautioned at para. 27 in Burlington Resources Canada Ltd. v. Peace River (Assessor of Area #27), 2005 BCCA 72, 37 B.C.L.R. (4th) 151, that questions alleging the misapplication of legal principle will not always be questions of law. Such questions must be examined carefully to determine whether they are actually questions of law or whether they are truly questions of mixed fact and law. [14] I have concluded that the questions in this Stated Case are questions of law. [15] The standard of review is correctness: Burlington, paras ISSUES Fractional Ownership (i) Did the Board err in law when it determined that fractional ownership interests in the subject properties encumbered the fee simple interest in the land and improvements? In this regard, did the Board misinterpret and misapply Standard Life Assurance Co. v. British Columbia (Assessor of Area #01 - Capital), (1997) 146 D.L.R. (4th) 247, 34 B.C.L.R. (3d) 346 (C.A.) ("Standard Life" cited to D.L.R.) and Assessor of Area 08 North Shore/Squamish Valley v. Mir Huculak (28 April 1998), Vancouver, No. A (B.C.S.C.) ("Huculak") and thereby err in law? [16] The Assessor argues that s. 19 of the Act requires the Assessor to determine the actual value of the land, which is the market value of the fee simple interest in land and improvements. The Assessor may consider, among other things, other circumstances affecting value. [17] The Assessor says that the Board erred when it determined that fractional ownership encumbered the land. The Assessor says that fractional ownership is not an encumbrance; rather it is the manner in which the title is held. Those who have a one-quarter interest hold the interest as tenants in common. Tenancy in common is a manner of holding the fee simple; it is not an encumbrance on land. [18] Secondly, the Assessor says that it is not, in any event, required to ignore encumbrances registered against the land. The Assessor says that the Board has misinterpreted the Standard Life and Huculak decisions. The Assessor says that in Standard Life, the encumbrances were below market leases and in Huculak, they were long term leases, which reduced the value of the property below what it would have been worth without those particular charges. The Assessor says that it is not correct in law to say that the Assessor must always ignore encumbrances. Rather, the Assessor must determine when it is appropriate to consider encumbrances based on appropriate appraisal and assessment practices. The Assessor says that one determines when to consider encumbrances by looking at highest and best use of the property. page 7

8 The Assessor states that in some cases, tenancy in common may constitute the highest and best use, referring to the Huculak reconsideration by the Board. The Assessor says that in this case, both parties recognize that when the property is sold as a one-quarter interest tenants in common, it has a higher value than when it is sold as a 100% interest. By contrast, in Huculak, the time-share arrangement reduced the value, and therefore it was not the highest and best use and it was appropriate to ignore the encumbrance when assessing the property. [19] Crown Isle says that the one-quarter shares are an encumbrance here as they were in Huculak and, as in Huculak, they should be ignored. Crown Isle asserts that the Board was correct in looking to sales of 100% interests. Crown Isle says that Standard Life stands for the general proposition that the statute requires the determination of the fee simple interest which represents the total of all interests in the lands and improvements. [20] Crown Isle says that if the Assessor is correct, then the Assessor would have to look at the fair market value of each owner's part interest and add those together to get the market value of the fee simple, which is contrary to the reasons of this court in Legends Owners Association v. Assessor of Area #08, 2006 BCSC 177, 18 M.P.L.R. (4th) 243 ("Legends"). Discussion [21] The Assessor is required to determine the actual value of the land and improvements and to enter that value in the assessment roll (Act, s. 19(2)). Actual value is defined as the market value of the fee simple interest in land and improvements. [22] The Board described the issue before it as "whether the sum of the value of each one-quarter interest equals the actual value of the fee simple interest as required by the Assessment Act?" The Board concluded that it did not, saying at paras : This was confirmed in the decision of Assessor of Area #08 v. Huculak (B.C.S.C.) S.C. 408, where the Court stated that the general principle stated in Standard Life Assurance, supra. by the Court of Appeal is a principle of general application, namely that an assessment must be made on an unencumbered basis. The Huculak, supra, case involved the assessments of strata units which contained 1/12 interest in the fee simple of each unit, which were then rented out as part of a timeshare arrangement. However, there, the market value of an undivided 1/12 interest was much lower than market value of a full ownership unit due to the time-share arrangement. The Court found that valuing the aggregate market value of the partial interests did not result in the value of the unencumbered fee simple interest and that units should be valued without the reference to the timeshare arrangement. In applying the same principles to the facts here, we find that the Assessor's method of valuing the fee simple interests by using the sales or values of the partial interests results in a value that is not the value of the unencumbered fee simple interest, even though the result is a higher aggregate market value. This value includes, not an impairment as was in Huculak, supra., but additional value because, rather than the fractionalization and rental program impairing the value, it has added to the value. Applying the reasoning of the Court in Huculak, supra, this may reflect the market value, but does not reflect the market value of the fee simple interest on an unencumbered basis, which here is the fractionalization and rental program. [23] I accept the argument of the Assessor that the manner of holding title, one-quarter interests as tenants in common, is not an encumbrance. An encumbrance is defined in s. 1 of the Land Title Act, R.S.B.C. 1996, c. 250, as including "a judgment, mortgage, lien, Crown debt or other claim to or on land...", and in Black's Law Dictionary, 6th ed. as "Any right to, or interest in, land which may subsist in another to diminution of its value, but consistent with the passing of the fee by conveyance. A claim, lien, charge, or liability attached to and binding real property: e.g. a mortgage; judgment lien; mechanics' lien; lease; security interest; easement or right of way; accrued and unpaid taxes." That one may acquire title page 8

9 to a one-quarter interest as a tenant in common is not an encumbrance, it is simply the manner in which title is held. [24] There are two common types of co-ownership of land, joint tenancy and tenancy in common. The parties agree that the owners of one-quarter shares hold as tenants in common (they agree that the Board misspoke when it referred to the owners as joint tenants). Tenancy in common is described by the Law Reform Commission of British Columbia in its Working Paper on Co-ownership of Land (Vancouver: Ministry of Attorney General, 1987) at 6-7: With respect to possession, in describing tenancy in common, the Law Reform Commission of British Columbia (the "Commission") wrote in its Working Paper on Co-ownership of Land (1987) the following: The second form of co-ownership of land in British Columbia is the tenancy in common. It depends solely on the co-owners having equal rights of possession. Unlike joint tenants, tenants in common may possess different interests in the property. For example, one co-owner may have a 3/4 interest and the other a 1/4 interest. Nevertheless, neither has a greater right than the other to possession of the property: Unlike joint tenants, tenants in common hold in undivided shares: each tenant in common has a distinct share in property which has not yet been divided among the co-tenants. Thus tenants in common have quite separate interests; the only fact which brings them into co-ownership is that they both have shares in a single property which has not yet been divided among them. While tenancy in common lasts, no one can say which of them owns any particular parcel of land. [25] The decisions to which the Board refers, Huculak and Standard Life, did not find fractional ownership to be an encumbrance. [26] In Huculak, the court found that the property was encumbered by a time-share/lease agreement, which reduced the market value of the property. The court said that the Board was required to determine the market value of the unencumbered fee simple interest, without the encumbrance of the timeshare/lease agreement. Although the owners in Huculak each held a one-twelfth undivided fee simple interest in the property, the court did not find this manner of holding title to be an encumbrance. It was the time-share/lease agreement and not the fractional interest that was germane to the decision. [27] In Standard Life, the property was encumbered by a long term, below market value lease, which reduced the property's selling value. The Board refused to base the assessed value on the uneconomic rental rates, and used market value rents to arrive at the assessed value. The British Columbia Court of Appeal agreed, saying at p. 252: I think the real issue in this case is what is meant by the phrase "the fee simple interest in land and improvements" in s. 26 of the Act. My conclusion is that the Assessor is correct in submitting that the fee simple interest includes all the interests in the land and buildings and not just the owner's interest. In my opinion, the Assessor here had to consider not just the owner's interest, [...] but also the tenant's interest. That, for practical purposes, leads to the conclusion that the totality of the interests properly considered should, generally speaking, be the equivalent of the owner's unencumbered interest. [28] Standard Life does not require the Board to ignore value based on fractional interests, rather that the totality of the interests should generally be the equivalent of the owner's unencumbered interest. [29] If four people purchase a property as tenants in common, each holding an equal one-quarter share, the purchase price is its market value. Tenancy in common is not an encumbrance, it is a method of holding title. If those purchasing a one-quarter interest will pay $100 per square foot, then, all else being equal, the market value is $100 per square foot. [30] However, that is not the end of the matter in this instance. The Board said at para. 52: page 9

10 Crown Isle also argues that fractional ownership is feasible at the Villas, only because of the management agreement and rental program. It is their contention that without these, the market for the units on a 1/4 share basis would be very limited if a market existed at all. While these agreements are private agreements and thus not applicable for assessment valuation purposes, the strata nature of the development suggests that no matter what the ownership form (fractional vs. 100%), a management company of some sort would be highly likely. However, the rental program is separate from this. Given the low actual use by owners of the fractional shares, it is clear that the primary purpose for purchasing the units is not for personal use, but rather as an investment. We find that without the ability to rent the units and generate income on the investment to cover the majority of expenses over time, there would be no market for the fractional shares. This was essentially undisputed by both parties' experts. Fractional ownership makes rentals to outside parties whilst protecting all owners' interests extremely difficult and unmanageable. [emphasis added] (para. 52) [...] [By contrast at para. 55] A single owner of a full strata unit does not need an outside party to coordinate rentals thus has the ability to generate income even without a rental program. [31] It is apparent that the Board considered not just the manner of holding title (fractional vs. whole interests), but the effect of the management agreement and rental program. The Board found as a fact that without the ability to rent the units there would be no market for fractional shares and for this reason fixed value based on the sale of a whole interest. It is "the fractionalization and the rental program... [that have] added to the value" [emphasis added], and which the Board treated as an encumbrance. [32] I cannot interfere with (and no one takes issue with) the Board's factual finding that without the rental agreement, there would be no market for fractional interests. The parties have not raised as an issue the Board's conclusion of law that the agreements are not applicable for assessment purposes. The Board says that the management and rental agreements "are private agreements and thus not applicable for assessment purposes". The parties have not specifically raised this conclusion as an issue on this appeal. Therefore, to the extent that the Board determined that fractional ownership is an encumbrance, in my view that is an error, and a misapplication of Standard Life and Huculak. However, I do not understand that alone to be the basis for the Board's decision. To this limited extent, the answer to question 1 is yes. [33] I do not accept Crown Isle's argument that the court must ignore fractional interests because some American jurisdictions have concluded that sales of fractional interests can only be taken into account by an Assessor where it is explicitly authorized by legislation to do so. In London Bridge Resort, Inc. v. Mohave County, 200 Ariz. 462 (2001), 2001 Ariz. App. Lexis 105 ("London Bridge"), the Court of Appeals of Arizona rejected the reasoning in the cases relied upon by the Respondent. London Bridge is an example that, contrary to the proposition put forth by the Respondent, specific statutory authority is not necessarily required before the value of fractional interests can be cumulatively assessed to determine the value of the fee simple interest. [34] In London Bridge, each owner did not own a fraction of a specific unit, but rather a fraction of the whole development. Under Arizona law the Assessor was required to determine the "full cash value" of the condominium units. Such value was "synonymous with market value which means the estimate of value that is derived annually by using standard appraisal methods and techniques". This wording is similar to the requirements imposed upon the Assessor under s. 19(1) of the Act. [35] In British Columbia, the Act requires the Assessor to determine the actual value of the land and improvements, defined as the market value of the fee simple interest. If Crown Isle were correct, when determining the market value of a unit in a complex where all units were sold as one-quarter shares, the Assessor would have to ignore all of those sales and look instead to other complexes to find comparables page 10

11 to determine the market value, even if all of the one-quarter shares had sold at the same time. This is an absurd result, and not consistent with the Act. [36] Nor do I accept the argument of Crown Isle that to add together the values of the four one-quarter interests is contrary to the decision in Legends. Legends was a case pertaining to the classification of property according to its usage pursuant to s. 19(14) of the Act. In that case it was held that classification is determined by use of the property, not by ownership structure. The issue in Legends was not the valuation of the property. I agree with the Assessor that valuation and classification are distinct concepts under the Act. Therefore, the statement in Legends that "each strata lot is one title" applied to the usage and classification of the property, not the value of the property. The logic of Legends does not extend as far as to support Crown Isle's proposition that a strata unit should not be valued by reference to the sum of the values of the partial interests. Management Fees and Rental Income "Inextricably intertwined with real estate" (ii) Did the Board err in law when it determined that the test of whether management fees and rental income are inextricably intertwined with the real estate is only relevant if it was using the income approach to value? In reaching its determination, did the Board misinterpret ABKA Limited Partnership v. Board of Review, 231 Wis. 2d 328 (1999) ("ABKA")? [37] Before the Board, the Assessor argued that income generated from management fees or rental of the units is generated by the real estate, and therefore the premium or additional value of the fractional interest must be valued as part of the fee simple interest. The Board rejected this argument: As for the argument the management fees and rental income are inextricably intertwined with the real estate, this test would be relevant if we were using the income approach to value the property and a decision had to be made as to what income should be included in the analysis. [...] However, in this case, neither appraiser used an income approach to value, and, as such, we are not concerned with whether certain revenue or income should be used in such an analysis. Rather the question is whether the sales of fractional interests are appropriate comparables in a direct sales comparison analysis. [38] Crown Isle argued that all sales included a premium for participation in the established Crown Isle business and the rental income potential, should be discounted in arriving at the assessed value. The Board concluded that, regardless of whether such a premium existed, Crown Isle had not provided sufficient evidence to quantify the premium. [39] Here, the Assessor argues that the Board has improperly interpreted ABKA, that while a stream of income is explicitly considered when employing the income approach to value, the test of whether this income is "inextricably linked to the real estate", and thus to be included in the assessed value, is not limited to the income approach. [40] Crown Isle argues that it markets the units as a luxury resort, which the Board found would not be possible without the golf course and the clubhouse. The golf course and the clubhouse are not part of the lands and improvements being assessed, so the income is not inextricably linked to the lands being assessed. Crown Isle acknowledges that an owner might generate some income through private rental, but that would be considerably lower. Crown Isle agrees that the Board erred in concluding that the rental pool premium should be considered only if the Board is valuing the property using the income approach. Crown Isle says that if rental income generated by the contract with Crown Isle results in a premium, that premium must be considered, regardless of which approach is taken to value the property. Crown Isle says that unless the income from the rental pool is inextricably linked to the strata unit being assessed, the value must be adjusted downward. Discussion [41] The Board makes the broad statement that whether "management fees and rental income are inextricably intertwined with the real estate [...] would be relevant if we were using the income approach to page 11

12 value the property" and concludes that the analysis is not necessary because it is not using the income approach to value. Both parties say that this is an error, that income inextricably linked to the real estate is relevant regardless of the approach to value. [42] Delaware North v. Areas 15 & 16 (2005 PAABBC ), concerned the assessment of the Harrison Hot Springs Resort and Spa. The issue was the resort's license from the province to use water from crown land. There, the Board said at para. 14: The issue is, to the extent the water licence, that is the right to use the water from Harrison Hot Springs in the hotel and spa operation, contributes to the value of the going concern, can or should its value be extracted from the value of the going concern? To the extent either tangible or intangible personal property is distinct from the real estate and can be separately valued, as for example furniture, fixtures and equipment as an example of tangible personal property, or brand or goodwill (where it exists) as an example of intangible personal property, the value of those assets must be extracted from the value of the going concern to determine the value of the land and improvements for assessment purposes. If on the other hand, the water licence contributes value to the going concern that is inextricably intertwined with the real estate, then that value is part of the value of the land and improvements for assessment purposes. [43] The Board concluded at paras : The scheme of the Water Act is clear that the property in and rights to use water are vested in the Crown except to the extent private rights are established by licences or approvals granted under the Act. Licences must be appurtenant to land located in British Columbia and the rights and obligations granted under any licence pass with the transfer of the appurtenancy. The licence is not separately transferable apart from a transfer of the appurtenancy. The right to divert and use the water from Harrison Hot Springs is a right that attaches to the land comprising the Harrison Hot Springs Resort and Spa and would transfer with that land. To the extent the right to divert and use water for the purpose of hot pools forming part of the Harrison Hot Springs Resort and Spa contributes to the value of the going concern, that right and any value it may have is inextricably tied with the land and is part of the value of the realty. No deduction should be made from the going concern value to account for any value attributable to the water licence. [44] Both parties accept this as a correct statement of principle. If rights are inextricably intertwined with the real estate and contribute value, then that value is part of the value of the land and improvements for assessment purposes. To the extent that the current decision deviates from this principle, it is in error. Therefore, the answer to the second question is yes: the value of a right, inextricably intertwined with the real estate, is part of the value of the realty. The right in question is the right to participate in the management/rental pool arrangement. If it is inextricably attached to the land, and contributes value, then that value is part of the value of the realty, not simply income to be considered on the income approach. [45] I should note that I am not commenting on the underlying facts - that is, whether and to what extent the right attaches to the land and contributes value, or whether, as Crown Isle argued before the Board, the rental premium is not inextricably attached to the land and should be discounted from any valuation. Value of the Glasgow units (iii) Did the Board err in law in failing to make downward adjustments to the value of the Glasgow units when the appraisal witnesses testified that such adjustments were necessary and the Board found that downward adjustments for location and quality should be made? [46] Crown Isle argues that both experts agreed that the location and finishing of the Glasgow was inferior to the other buildings. Both recommended that the value be adjusted downward. The Board agreed that the building was less valuable, but said: page 12

13 However, the parties provided little or no evidence or analysis to support their adjustments, and, in the face of competing expert opinions, we cannot accept only appraisal judgement without supporting evidence as a basis for value. Thus, we have applied the same rate of $278 per sq. ft. to the Glasgow units. [47] Crown Isle says that the experts concurred that an adjustment needed to be made, and that Crown Isle did not take issue with the Assessor's expert's adjustments. Therefore, the best evidence that the Board had was that of the Assessor's expert. Crown Isle says that expert appraisal judgment is evidence that can and should be accepted, relying on the following principle of real estate appraisal: If no market can be demonstrated, or if data are not available, the appraiser cannot estimate market value, and should state so in his or her report. However, it is sometimes necessary to estimate market value in these situations for legal purposes. In these cases, the appraiser must comply with the legal requirement, relying on his or her judgment rather than direct market evidence. The Appraisal of Real Estate, 2d Can. ed. (Winnipeg, Man: Appraisal Institute of Canada, 1995), at [Emphasis Added.] [48] Crown Isle says that here there is no recent sale for this property, so the appraiser must look for sales of comparable properties, and make adjustments using his expert opinion to arrive at a value. [49] Crown Isle says that the Board had a statutory obligation to establish the fair market value of the Glasgow. Crown Isle's position is that the Board erred in law by failing to adjust for the differences between the Glasgow and the Aberdeen, accepting the evidence of the Assessor's expert, which was not challenged by the taxpayer, and assessing the Glasgow at the same rate as the Aberdeen. [50] The Assessor argues that because the Board decided to use the Aberdeen as the basis for determining value, there was no longer any evidence with respect to the adjustment for the Glasgow units. The Assessor's expert, Mr. Stewart, adjusted based on the quarter share sales in the Balmoral and Canterbury units. The Board specifically rejected using the sales of quarter shares in these buildings. To apply his percentage adjustments to the Aberdeen would be to apply them out of context. The Assessor says that the Board based its valuation on the Aberdeen, which neither appraiser did; neither appraiser attempted to adjust the Aberdeen sale relative to Glasgow. The Board did not have the necessary evidence to adjust values for the Glasgow. [51] I accept the Assessor's submissions on this issue. Mr. Stewart developed the adjustments for the Glasgow from the sales data for the Balmoral and Canterbury buildings, which sold as quarter shares, resulting in a base rate of $ The adjustments for location within the resort, location within the building, and quality are all from this presumed rate. [52] I cannot say that the same percentage adjustments would be appropriate to the lower rate of $ per square foot chosen by the Board. Therefore, I cannot say that the Board was wrong not to adjust the rate on the basis of the evidence before it. The answer to this question is no. The Honourable Madam Justice B.J. Brown page 13