ROYAL BANK REALTY INC. ASSESSOR OF AREA BURNABY-NEW WESTMINSTER. Supreme Court of British Columbia (A902670) Vancouver Registry

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1 The following version is for informational purposes only, for the official version see: for Stated Cases see also: for PAAB Decisions SC 309 Royal Bank Realty Inc. v. AA10 Quick Link to Stated Case #309 (BCCA - Leave to Appeal) ROYAL BANK REALTY INC. v. ASSESSOR OF AREA BURNABY-NEW WESTMINSTER Supreme Court of British Columbia (A902670) Vancouver Registry Before the HONOURABLE MR. JUSTICE ANDERSON (in chambers) John R. Lakes for the Appellant John E. D. Savage for the Respondent Vancouver, November 6, 1990 Valuation - Owner-Occupied Buildings - Considerations - Shell Rents - Tenants Improvements - Escalators The Assessment Appeal board in valuing the property placed a value based on "shell rents" for an owner-occupied building and added an allowance for what it called "tenant's improvements" which included an escalator, ceiling and floor finishes. The owner argued that the so called "tenant's improvements" were not properly tenant's improvements, and in any event, there was no evidence to support any additional value for such property. HELD: 1. The escalator, ceiling and floor finishing could not be removed from the premises by the tenant, they became part of the realty from the date they were installed and therefore the appropriate consideration should have been given in the initial calculation of the economic rent if any value was to be ascribed to them; 2. In any event, there is no evidence in this case to suggest any additional value should be placed on the building as a result of the improvements mentioned; 3. The Assessment Appeal Board need not accept all of the opinion evidence presented to it and they may call upon their own knowledge or expertise in assessing the facts. They must, however, base their decisions on facts in evidence and in this case, there were no facts in evidence upon which the Board could justify the decision it reached. Reasons for Judgment December 7, 1990

2 This is an appeal by way of Stated Case at the instance of Royal Bank Realty Inc. seeking the opinion of the Supreme Court on the following questions: 1. Did the Assessment Appeal Board err in law by adding on the Assessor's calculated costs of the escalator, floor and ceiling as in the nature of "tenant's improvements" when there was no evidence that there would be an additional value to the building by such addition? 2. Did the Assessment Appeal Board err in law by adding on the Assessor's calculated costs of the escalator, floor and ceiling notwithstanding an admission that was made by the Assessor's witness that there would not be any additional value placed on them in the event the property was either sold or leased? 3. Did the Assessment Appeal Board err in law by misinterpreting the Income Approach to value as is set out in Westcoast Transmission Company Limited v. Assessor of Area 9 -- Vancouver (Stated Case 235) as it should have been applied to the subject property by applying shell rental rates without making adjustments to determine the economic net income with reference to the comparables relied on by the Assessor? The material facts set out in the Stated Case are as follows: 1. There are two folios involved in this matter: (a) The land on Folio No is a vacant lot adjacent to Folio No (b) The improvements on Folio No consist of a three-storey bank building entirely occupied by the Royal Bank as a regional banking centre. 2. The Bank was constructed in 1980 and contains 31,691 square feet. 3. The appeals in this matter were from the 1987 and 1989 Assessment Rolls as follows: 1987 Roll Folio No Land $ 85,900 Folio No Land $ 391,550 Improvements $3,542,550 Total $3,934, Roll Folio No Land $ 85,900 Improvements $3,947,200 Total $4,360,100

3 4. The Royal Bank seeking a reduction in actual value for the improvements, for both the 1987 and 1989 Roll years relied on the Income Approach. The Assessor also relied on the Income Approach and supported his value determination by a Cost Approach. 5. The Royal Bank provided evidence of rentals taken from other buildings in the area since the appealed building is owner occupied and based his final lease rate determination as that of a turn-key operation which included all basic tenant improvements together with the escalator. 6. The Appraiser for the Respondent Assessor determined rents by referring to shell rents being charged for other banks in the New Westminster area. 7. With respect to the vacancy rate the Board determined that neither of the vacancy surveys proposed by the parties was reliable and determined that the best evidence of vacancy was that of other banks on Columbia Street where the subject property was located and employed a 10% vacancy rate as being, in their interpretation of the Bramalea Case (Bramalea Limited (Trizec Equities Limited) v. Assessor of Area Vancouver) the only reasonable and equitable vacancy rate in this case. 8. The Board accepted the shell rental rates advanced by the Appraiser for the Respondent Assessor as being the best supported and deserving the most weight. The Board found that it is not the normal practice of tenants to lease such buildings by turn key rates. The Appraiser for the Assessor supplied good evidence of rates as reported by several banks in New Westminster which stood the test of cross-examination. The Board accepts that since the Appraiser for the Assessor employed shell rates, a rate which would be paid by a potential tenant for unfinished space, then it was reasonable to add an amount for tenants' improvements. 9. In the result the Board found the following values with respect to the following folios: Land $ 391,550 Improvements $3,360,550 Total $3,752, Land $ 412,900 Improvements $3,744,000 Total $4,156,900 Folio No the value of $85,900 confirmed for both the 1987 and 1989 Rolls. For the purposes of this appeal paragraph 8 above is particularly significant. The property presently under consideration is a three storey concrete building located at 613 Columbia Street in New Westminster and lies between Columbia Street and Clarkson Street. The

4 main floor is on Columbia Street and comprises an attractive public banking area. The second storey opens out onto Clarkson Street at the rear of the building. Part of the second floor is finished in a manner commensurate with the main floor and to which there is access to the bank's customers from Clarkson Street and the balance of this floor is used for washrooms, an employees' lunch room and storage. An escalator, under a skylight connects these two floors. The top floor houses the mechanical and electric equipment as well as additional storage facilities. It is the obligation of the Assessor to determine the "actual value of the land and improvements". A number of approaches or methods of determining the actual value may be employed depending on the particular circumstances. In the present matter, both the appraiser for the Assessor and the appraiser for the Royal Bank used what is described as the "Income Approach". Cumming, J. (when he was a member of this court) described the Income Approach in Westcoast Transmission Company Limited v. Assessor of Area 9 -- Vancouver (1987) Case 235, 1345 at In this matter, the Assessment Appeal Board accepted the valuation of the property on the Income Approach by capitalizing the shell rents and then adding an allowance for what it described as "tenant's improvements". The Board's decision in this regard is set out on pp. 6 and 7 of the Stated Case: As to lease rates, the Board finds that the shell rates advanced by Mr. Bandringa were the best supported, and deserve the most weight. The Board does not accept that it is the normal practice of tenants to lease such buildings by turn-key rates. Mr. Bandringa supplied good evidence of rates reported by several banks in New Westminster, and they stood the test of crossexamination. As to the "add-on" value for tenant's improvements, the Board accepts it as reasonable. Mr. Bandringa employed shell rents i.e. a rate which he estimated would be paid by a potential tenant for unfinished space, and then added an amount as reported by the Appellant for the existence of finished walls, ceilings, lighting, escalators, etc. (See Re A. Merkur & Sons Ltd. and Regional Assessment Commissioner, Region No. 14 et al (1977) 17 O.R. (2d) 339). An appeal from a decision of the Board must be on a question of law alone, the determination of facts being solely a matter for the Board. As Southin, J. (as she then was) decided in Crown Forest Industries Limited v. Assessor of Area Courtenay, (1985) B.C. Stated Cases at p that so long as the Board does not (among other things) act without evidence, the court has no power to intervene. She cites from the speech of Lord Radcliffe in the House of Lords reported in Edwards v. Bairstow (1956) A.C. 14: "I do not think that it much matters whether this state of affairs is described as one in which there is no evidence to support the determination or as one in which the evidence is inconsistent with and contradictory of the determination, or as one in which the true and only reasonable conclusion contradicts the determination. Rightly understood, each phrase propounds the same test." Bearing these observations in mind, I turn to the first question stated. The starting point in the calculations of the actual value must be the determination of the rent which could be reasonably obtained for the land and improvements as a vacant and unoccupied building as it stood at the appropriate times for assessment -- the "shell rent".

5 The building under consideration was equipped with an escalator connecting the first and second storeys. I do not see on what basis the value, if any, of the "tenant's improvements" can be considered separately as if it were not a part of the land and improvements -- as much as, for example, plate glass windows, a furnace or, more significantly, a stairway or an elevator. The escalator, the ceiling finish and the flooring could not be removed from the premises by the tenant. They became part of the realty from the day they were installed. Therefore, the appropriate consideration must have been given, or should have been given, in the initial calculation of the economic rent if any value was to be ascribed to them. The only inference which can reasonably be taken from the evidence of the Assessor's appraiser is that in his opinion there was no additional value to the building as a result of the improvements mentioned. I agree that the Board need not accept all the opinion evidence presented to it and they may call on their own knowledge or expertise in assessing the facts. But they must base their decisions on the facts in evidence. In Toronto-Dominion Bank v. Assessor Area Vancouver (1988) B.C. Stated Case No. 260, p. 1493, the Board did not accept the opinions of the expert witnesses but, on the basis of the facts established, made their own conclusion. In the present case, however, there are no facts in evidence or referred to in the conclusions of the Board which would justify the decision it reached. The question, therefore, must be answered in the affirmative. My conclusions in respect of the second question are essentially the same as above. The only evidence before the Board referring to this question is that the "improvements" would not result in a higher rent being paid by another tenant. The escalator, ceiling and floors cannot be regarded as tenants' improvements. They were all part of the building when it was constructed; they form part of the "shell". Whatever value or utility may be ascribed to them must already have been factored into the determination of the economic rent as they form part of the real estate. As before, there is no evidence to support a conclusion contrary to the opinion expressed by the Assessor's appraiser that there would be no additional value placed on these items in the event the building was to be leased by another tenant. The answer to this question is "yes". The decisions in Re A. Merkur & Sons Ltd. and Regional Assessment Commission (1977) O.R. (2d) 339 and London Life Insurance Co. v. Assessor of Area Vancouver have been cited to show the propriety of making adjustments to an economic rent. In my view, however, these cases are not analogous to the one presently before me. What we are concerned with here is not an office building or a shopping center. In the Mercur case, Steele, J. at p. 343 says: "I use as an example an office building that is built as a shell and then rented by the owner to individual tenants with an obligation upon the tenant to finish the interior thereof. Obviously, the rent received by the owner would be less than that of a similar office building which the owner constructs, finishes the interior and thereafter rents. If only rents were considered in the two cases, although the buildings are identical, the assessment of one would be lower than the assessment of the other, even though in both cases a fair market rent was charged to the respective tenant." Here the concern is with an owner occupied building. There is no tenant. No rent as such is received by the owner. In an office building or a shopping mall it may very well be necessary to make special and separate allowances to take into account such factors as tenant inducements or improvements made by an owner in the nature of fixtures expressly for a tenant as a means of rationalizing the economic rent in a multi-tenanted building. The Income Approach has been used by both appraisers. Neither, however, was able to lay a foundation for his appraisal or contract rent. Quite properly, comparisons were made with the shell rates of other banks in the close vicinity as were records of sales of similar buildings. But in considering shell rents, the appraisers must be taken to have considered the vacant building together with the fixtures in place, such as the doors, windows, escalators, floors and ceilings. As I remarked earlier, whatever values such fixtures may have, must (or should) have been

6 considered in that determination. In any event, there was no evidence before the Board to support any adjustment upwards by reason of these fixtures. In fact, the only evidence was to the contrary. The evidence before the Board established no range of options within which it could properly exercise a discretion. Question 3, therefore, will also be answered in the affirmative. The Appellant is entitled to its costs. SC 309cont Royal Bank Realty Inc. v. AA10 APPLICATION FOR LEAVE TO APPEAL ROYAL BANK REALTY INC. v. ASSESSOR OF AREA 10 - BURNABY-NEW WESTMINSTER BRITISH COLUMBIA COURT OF APPEAL (V01344) Victoria Registry Before the HONOURABLE MR. JUSTICE WALLACE (in chambers) J.E.D. Savage for the Appellant J.R. Lakes for the Respondent Vancouver, February 8, 1991 Valuation - Owner-Occupied Buildings - Considerations - Shell Rents Tenants Improvements - Escalators The Assessment Appeal Board approved a method of assessment which involved the addition of improvements on a Cost Approach to an income valuation based upon shell rental rates. Some of the included costs involved escalators which were found to be properly part of a building and not in the nature of tenant's improvements. HELD: Leave to Appeal denied. 1. The issue does not raise a question of law of general importance but reflects a method of assessment found unsupported by the evidence; 2. Based on the evidence adduced before the Board, the likelihood of the appeal succeeding on its merits is doubtful. Reasons for Judgment March 8, 1991 The Assessor applies for leave to appeal the decision of Anderson, J. pronounced December 7, The matter came before Anderson, J., for the opinion of the Court, by way of a Stated Case from the Assessment Appeal Board, at the insistence of Royal Bank Realty Inc. The relevant circumstances are set out in the following passages from the Reasons for Judgment of Anderson, J. The property presently under consideration is a three storey concrete building located at 613 Columbia Street in New Westminster and lies between Columbia Street and Clarkson Street. The

7 main floor is on Columbia Street and comprises an attractive public banking area. The second storey opens out onto Clarkson Street at the rear of the building. Part of the second floor is finished in a manner commensurate with the main floor and to which there is access to the bank's customers from Clarkson Street and the balance of this floor is used for washrooms, an employees' lunch room and storage. An escalator, under a skylight connects these two floors. The top floor houses the mechanical and electric equipment as well as additional storage facilities. It is the obligation of the Assessor to determine the "actual value of the land and improvements". A number of approaches or methods of determining the actual value may be employed depending on the particular circumstances. In the present matter, both the appraiser for the Assessor and the appraiser for the Royal Bank used what is described as the "Income Approach". In this matter, the Assessment Appeal Board accepted the valuation of the property on the Income Approach by capitalizing the shell rents and then adding an allowance for what it described as "tenant's improvements". The Board's decision in this regard is set out on pp. 6 and 7 of the Stated Case.: As to lease rates, the Board finds that the shell rates advanced by Mr. Bandringa were the best supported, and deserve the most weight. The Board does not accept that it is the normal practice of tenants to lease such buildings by turn-key rates. Mr. Bandringa supplied good evidence of rates reported by several banks in New Westminster, and they stood the test of crossexamination. As to the "add-on" value for tenant's improvements, the Board accepts it as reasonable. Mr. Bandringa employed shell rents i.e. a rate which he estimated would be paid by a potential tenant for unfinished space, and then added an amount as reported by the Appellant for the existence of finished walls, ceilings, lighting, escalators, etc. (See Re A. Merkur & Sons Ltd. and Regional Assessment Commissioner, Region No. 14 et al O.R. (2d) 339). The Questions on which the Board was required to ask for the opinion of the Supreme Court were: 1. Did the Assessment Appeal Board err in law by adding on the Assessor's calculated costs of the escalator, floor and ceiling as in the nature of "tenant's improvements" when there was no evidence that there would be an additional value to the building by such addition? 2. Did the Assessment Appeal Board err in law by adding on the Assessor's calculated costs of the escalator, floor and ceiling notwithstanding an admission that was made by the Assessor's witness that there would not be any additional value placed on them in the event the property was either sold or leased? 3. Did the Assessment Appeal Board err in law by misinterpreting the Income Approach to value as is set out in Westcoast Transmission Company Limited v. Assessor of Area 9 - Vancouver (Stated Case #235) as it should have been applied to the subject property by applying shell rental rates without making adjustments to determine the economic net income with reference to the comparables relied on by the Assessor? Anderson, J., upon hearing the Stated Case, decided all three questions in the affirmative. In respect to question #1 the learned Judge below, after referring to the Decision of the House of Lords Edwards v. Bairstow (1956), A.C. 14, stated as follows: "I do not see on what basis the value, if any, of the 'tenant's improvements' can be considered separately as if it were not a part of the land improvements - as much as, for example, plate glass

8 windows, a furnace, or more significantly, a stairway or an elevator. The escalator, the ceiling finish and the flooring could not be removed from the premises by the tenant. They became part of the realty from the day they were installed. Therefore, the appropriate consideration must have been given, or should of been given, in the initial calculation of the economic rent if any value ascribed to them" And in respect of question #2 the Court stated: "The escalator, ceiling and floors cannot be regarded as tenant's improvements. They were all part of the building when it was constructed; they form part of the "shell". Whatever value or utility may be ascribed to them must already have been factored into the determination of the economic rent as they form part of the real estate. As before, there is no evidence to support a conclusion contrary to the opinion expressed by the Assessor's appraiser that there would be no additional value placed on these items in the event the building was to be leased by another tenant". In respect of question #3 the Court held that, while comparisons were made with shell rates with banks in the close vicinity, in considering shell rents the appraisers "must be taken to have considered the vacant building together with the fixtures in place, such as the doors, windows, escalators, floors and ceilings". The Assessor raises the following grounds of appeal from the decision of Anderson, J. 1. That the learned Judge below erred in law in finding that the value of "tenant's improvements" cannot be considered separately in a valuation under the Assessment Act. 2. That the learned Judge below erred in law in finding that the valuation of an office building or shopping centre should be based on principles different than valuation of owner occupied buildings; 3. That the learned Judge below erred in law in making findings of fact contrary to the findings of the Assessment Appeal Board. OPINION Section 74 of the Assessment Act, 1979 R.S.B.C., Chap. 21 provides that an appeal on a question of law lies from a decision of the Supreme Court to the Court of Appeal with leave of a justice of the Court of Appeal. The Court of Appeal has held that leave in assessment appeals should only be granted where the question of law: (a) has not been previously addressed by the Court or there is a conflict of lower Court decision; (b) affects a substantial number of assessments, and therefore the taxable base is a question of general importance; (c) can be said to admit rationally of an answer different from that given below; and (d) there is some prospect of the appeal succeeding on its merits. The real issue raised by this appeal is the appropriateness of the particular assessment methodology used by the Assessor respecting the Bank's property--which methodology was approved by the Assessment Appeal Board and rejected by Anderson, J.

9 Is this an issue which meets the criteria established by this Court as prerequisite to the granting of leave to appeal? I have concluded, for the following reasons, that it is not. Firstly, I do not consider the issue raises a question of law of general importance but rather it reflects a method of assessment which the Supreme Court found, in the circumstances of this case, neither supported by the evidence nor justified in principle. Secondly, there is no evidence that this particular method of obtaining the valuation of the property which the Respondent categorizes as a "mis-application of the Income Approach" is a question of law of general importance affecting a substantial number of assessments on the taxation base. Thirdly, I consider, on the evidence adduced before the Board and referred to this Court, the likelihood of the appeal succeeding on its merits is, to put it at its best, doubtful. For all the above reasons I do not consider this case raises a legal issue which merits the attention of the Court of Appeal. I would dismiss the application for leave to appeal. The Respondent should have its costs of the application.