Assessment of Common Assets of Strata Corporations, Including Stratified Operational Facility Areas (SOFAs)

Assessment of Common Assets of Strata Corporations, Including Stratified Operational Facility Areas (SOFAs) Last Document Review Date: September 29, 2014 Last Legal Review Date: November 15, 2012 TABLE OF CONTENTS Executive Summary... 2 General... 2 Assessment and Taxation of Common Assets of a Strata Corporation... 2 Crown Land Leases... 4 Other Owners... 4 Resources... 5 Legislation... 5 Compliance Checklist... 6 Valuation... 7 General... 7 Coding... 8 Practices and Procedures... 8 Common Asset of Strata Corporation Used as Common Property... 9 Common Asset of the Strata Corporation That is Not a SOFA... 9 Appendix A: Frequently Asked Questions... 11 Appendix B: Case Studies... 13 Assessment Practices and Procedures SOFAs 1

EXECUTIVE SUMMARY General When a strata corporation owns either a strata lot or land that is not shown on a strata plan, the property is called a common asset(s) of a strata corporation (CASC). If the land is improved, the CASC will include the improvements on the land. 1 CASCs that are real property 2 and owned by the strata corporation 3 are assessed in the name of the strata corporation. The value of the CASC will depend on whether the CASC is part of the operational area of the stratified facility or whether it is leased to a third party commercial occupier. BC Assessment (BCA) refers to operational areas in a strata complex as stratified operational facility areas (SOFAs). If a CASC is a SOFA, it will have a nominal value (i.e., one dollar for the land and one dollar for the improvement, if the property is improved). If the CASC is not a SOFA, then it will be valued at market value. If a strata lot is owned by anyone other than a strata corporation, it must be assessed separately in the name of the owner and valued at full market value. Taxable CASCs in the name of the strata corporation are subject to the special assessment and tax rules in the Strata Property Act. If it is taxable to anyone else, then it is not subject to the special assessment and tax rules. Assessment and Taxation of Common Assets of a Strata Corporation Section 66 of the Strata Property Act provides that an owner of a strata unit is a tenant in common in relation to common property and CASCs. Common property is designated on a 1 The PAAB ordered that the Interpretation Act definition of land is applicable to CASCS, in Owners Strata Plan v. AA 08 2 CASCS can also be furniture and equipment. 3 Land may also be owned on behalf of the strata corporation; but because such land is assessable and taxable to its owner and not to the strata corporation, it is outside the scope of this document. Assessment Practices and Procedures SOFAs 2

strata plan with the initials CP. There is no special designation on a strata plan for a strata lot that is a CASC. There is also no special designation for land shown on a strata plan that is a CASC. The strata unit owner s share in the common property or CASC is equal to the unit entitlement of the owner s strata lot divided by the total unit entitlement of all the strata lots. Section 67 of the Strata Property Act provides that each strata lot, together with the owner s share in the common property or other taxable CASC, must be assessed separately as a separate parcel of land. The Assessment Act, section 19(1) requires that the actual value be based on the fee simple interest of the market value of the land and improvements. 4 For the purposes of this document, CASCs fall into two general categories: 1. CASCs that are used for the operation of the facility (if stratified, these would be called SOFAs) and 2. Those that are not used for the operation of the facility. If there is a lease of Crown land (e.g., a water lot), that will be addressed separately. SOFAs on some strata plans, areas that would otherwise be considered common property such as lobbies, meeting rooms, storage areas, lounges, parking, activity rooms, spas, gyms, or hallways, may be distinct strata lots or lots of land owned by the strata corporation, (i.e., registered in the name of the owners of the strata plan). Some strata corporations may own parcels of land (or land and improvements) that are not shown on the strata plan (e.g., an adjoining lot with a house on it). The assessed value of the CASC will depend on whether it is used for the operation of the facility or not. If the CASC is 4 See: Owners Strata Plan v. Area 08 (2009 PAABBC 20090017) that discusses application of sections 66 and 67 of the Strata Property Act in the assessment of common assets of a strata corporation. Assessment Practices and Procedures SOFAs 3

Crown Land Leases Other Owners used for the operation of the facility (i.e., it is a SOFA) then it will be valued at a nominal value (i.e., one dollar for the land and one dollar for the improvement if the property is improved). If the CASC is not used for the operation of the facility, such as when a CASC is leased to a third party (e.g., a commercial retail unit or a restaurant with retail, office, warehouse, ICI leasable strata units), then the value of the CASC will be market value. To avoid double counting, the value of the other strata lots should be adjusted downward to account for the market value of the CASC. If the strata corporation has a lease of Crown land (typically a water lot), then the ordinary rules for assessing occupiers of Crown land will apply, including the rules regarding paramount occupiers. The fact that the fee simple interest owner is the Crown and the strata corporation is the leaseholder will not displace the Assessment Act s rules regarding assessment of Crown land under section 26. Section 73 of the Assessment Act states that where there is a conflict between the Assessment Act and another Act (in this case, the Strata Property Act), the Assessment Act prevails. Examples of scenarios with Crown land leases are provided in the case studies. The special rules that apply to CASCs under section 67 of the Strata Property Act do not apply if the strata corporation does not own the property. While a third party may own land on behalf of a strata corporation, and the land is a CASC, the rules under section 67 of the Strata Property Act do not apply because section 67 refers to assessment and taxation of taxable common assets of a strata corporation (i.e., not all CASC are taxable to it). If the land is not owned on behalf of the strata corporation (e.g., a unit under private ownership, such as an individual or a developer), it must be assessed in the name of the owner of the property and valued at market value. A developer may Assessment Practices and Procedures SOFAs 4

RESOURCES Legislation retain ownership of strata units in a development for strategic or commercial or economic reasons. Strata Property Act SBC 1998. c. 43 Assessment Practices and Procedures SOFAs 5

COMPLIANCE CHECKLIST The following is a list of items that must be completed in order to be considered compliant with this document: 1. All strata lots must be assessed on the roll. 2. Strata lots owned by anyone other than the strata corporation, even if they are used as part of the operational areas of the strata complex (SOFA's) must be assessed separately to those owners at market value. 3. Strata lots owned by the strata corporation that are not part of the operational area of the strata complex are assessed to the strata corporation at full market value. 4. Common assets of strata corporations (CASCs) (i.e., land, whether on or not on the strata plan) which are part of the operational area of the strata complex (are a stratified operational facility area, or SOFA) are assessed to the strata corporation but valued at a nominal value (one dollar for the land and one dollar for the improvements) because the market value of such property is included in the market value of the individually owned strata units in the complex. 5. If the CASC is not a SOFA (e.g., it is leased to an unrelated or commercial third party), a corresponding downward adjustment must be made to the remaining strata units (i.e., the upstairs units ) to account for the fact that the value of this lot is not included in the assessed value of the upstairs units; this adjustment must be made to avoid double counting. Assessment Practices and Procedures SOFAs 6

VALUATION General Assessment of conventional strata units must be based on the fee simple interest of the strata lots. All strata lots are to be assessed on the assessment roll. Any strata lot not owned by the strata corporation, (even a SOFA) must be valued at full market value based on the market value of the fee simple interest in the property. Accordingly, the only time an appraiser would consider whether to put a nominal value on a property is when the property is owned by the strata corporation. SOFAs and land not shown on the strata plan that are also CASCs have a nominal value (i.e., one dollar for the land and one dollar for the improvements) to ensure that the strata lot appears on the assessment roll, and to acknowledge the fact that the Strata Property Act directs that such strata lots be treated as if they are common property. However, if a strata corporation owns a strata lot that is leased to a third party commercial entity (e.g., a restaurant), and the operation has no relationship with the operation of the facility, then even though the strata lot is technically a CASC, it must be valued based on the market value of the fee simple interest in acknowledgement that the strata lot is not a SOFA. Make a corresponding downward adjustment to the value of the rest of the strata lots (i.e., the upstairs units ) to reflect the fact that the assessed value of the leased out CASC is not captured in the value of the upstairs units; this must be done to avoid double counting. When a strata lot or land not shown on the strata plan is used for operational purposes (i.e., a lobby), and is owned by the owners of the strata corporation (registered at LTSA), purchasers of the remaining strata units in the building acquire an interest in this unit or land (similar to common property). A nominal assessed value of one dollar for land and one dollar for improvements applies to the strata lot or other land owned by the strata corporation that is used operationally. Assessing the SOFA at a nominal value Assessment Practices and Procedures SOFAs 7

Question 1 Answer Question 2 Answer Coding recognises that the value of the SOFA is included in the assessments of the remaining strata units. The following questions and answers will provide a framework of reference for determining the appropriate valuation of these units: Does the strata corporation own the strata lot or land (registered at Land Titles in the name of the strata corporation, e.g., Owners of LMS 1246 )? o If yes, then the strata lot or land is a CASC. Proceed to question 2. o If no, value the strata lot at market value to that strata lot s owner (such as a developer). Is the strata lot or land used operationally to support the dayto-day operational requirements of the complex/building (i.e., if it is a strata unit, it may be a SOFA)? o If yes, value the strata lot or land on a nominal basis (one dollar for the land and one dollar for the improvements). o If no, value the strata lot or land at its market value. Apply actual use code 300 stratified operational facility areas to SOFAs/land owned by a strata corporation, that is used operationally for consistent valuation, queries and future identification. For CASC that are not SOFA units, apply an actual use code that reflects the use of the unit, irrespective of ownership. Practices and Procedures 1. Determine ownership of the subject property, which may be a strata lot in the strata plan, or a parcel of land that is not shown on the strata plan. Assessment Practices and Procedures SOFAs 8

2. If the subject property is owned by a strata corporation, then determine how it is used (i.e., determine if it is a SOFA/is otherwise used operationally, or if it is leased to an unrelated or commercial third party). 3. Assess and value the property in accordance with the information obtained at either nominal or market value. Common Asset of Strata Corporation Used as Common Property If the CASC is used as common property, then it is a SOFA and the value of the SOFA is already included in the value of the other strata lots in the development because the SOFA is considered to be part of the amenities of the strata complex that the purchaser of a strata lot buys when they purchase a unit. The value of the SOFA will be inextricably intertwined with the value of the individual strata lots, in the same way that the value of common property is a part of the value of the individual strata lots. To recognize that the value of the SOFA is included in the value of the individual strata lots, a nominal value should be assigned to avoid double assessment. A nominal value of one dollar should be assigned to improvements if they exist and to land if it exists, which means if both are present the total assigned value should be two dollars. If only land exists, then the value assigned would be one dollar; similarly, if only improvements exist, then the value assigned would be one dollar. The nominal one dollar values must be entered as override values in the Property viewer/value Selection tab/override field. Common Asset of the Strata Corporation That is Not a SOFA If the common asset of the strata corporation is not a SOFA (e.g., it is leased to an unrelated or commercial third party), it should be valued at full market value and assessed in the name of the owner (strata corporation). Make a corresponding downward adjustment to the remaining strata units (i.e., the upstairs units ) to ensure that the value of this lot is not included in the assessed value of the upstairs Assessment Practices and Procedures SOFAs 9

units; this adjustment must be made to avoid double counting. Assessment Practices and Procedures SOFAs 10

APPENDIX A: FREQUENTLY ASKED QUESTIONS Question There is a stratified hotel or carehome and the operational areas are stratified (i.e., lobby/front desk, meeting rooms, halls, kitchen, resident dining room, etc.). These SOFA strata lots are not owned by the owners of the strata corporation but are owned by an individual, company or developer. Are they to be assessed at a nominal value? 1. Answer Question No, these operational SOFA units are not CASCs because they are not owned by the strata corporation even if under bulk ownership. They should be assessed at full market value. Value these units at what the market would pay for operational space. The owners of the SOFA units in FAQ #1 above say that these SOFA units are of no value as they are needed for the entire property to operate and therefore the market value is in the other non-sofa units in the building. Is this correct? 2. Answer Question No, the value of these SOFA units is not captured in the sale of the non-sofa units in the building. Although these units are needed to operate and as such are of value to the operator, they can, and have, traded independently on the market for much more than nominal values. There are situations where these units may be owned by one party, the hotel units are owned by individuals and a third party manages/operates the hotel. The owner of the SOFA space collects rental payment for use of the facility. As a further rendition of FAQ #2, some hotel or carehome operators will argue that their management or operating agreement requires the SOFA strata lots such as the lobby strata lot to be provided to the benefit of the hotel strata units at no charge or minimal charge and therefore is of no market value even though the unit is not owned by the strata corporation. Will the unit therefore have a nominal value? Assessment Practices and Procedures SOFAs 11

3. Answer Question 4. Answer No, the minimal or non-compensation situation is likely part of the entire management agreement and compensation is occurring within the agreement. Irrespective, the agreement is a private agreement that is not considered for the purpose of valuation (i.e., to result in lower values and taxes), in the same way that the assessor would not consider below market rents in a commercial lease. How do I estimate the market value of a lobby/front/office desk and meeting room space? Use the direct comparison approach. Determine what the area sells for per square foot and compare the date of sale, age, quality, location to the subject and adjust to reflect the subject, as would be the case in any strata property appraisal. Question 5. Answer Sales of these types of units are scarce. It may be necessary to go back a couple of years to find sales. Compare the relationship of these SOFA sales to similar age and quality retail strata unit sales in the community where they sold and use the same ratio for the subject. For example if a sale in another office sold at 75 percent of the retail strata unit selling rates then it is possible that the subject strata SOFA unit may be worth 75 percent of the market rate of retail stratas in that community. With a bulk-held strata development in which every strata unit within the stratified building is registered at the land titles office in the name of the strata plan (i.e., VR1246), what value is appropriate for these strata units? The units should be valued at market value. This is a rare situation. The value of one unit is not captured in the sale of another should the owner sell a unit. These units are no different than any other bulk held units and should be valued at full market value. Assessment Practices and Procedures SOFAs 12

APPENDIX B: CASE STUDIES 1. Scenario: Strata lots that are owned by the strata corporation but are not a SOFA or are not used operationally. An example is a strata lot owned by the strata corporation that is leased to a third party for independent commercial use (e.g., retail space or a restaurant) o Strata lots that are owned by a strata corporation may be leased to third parties for independent commercial or other use. o They are not SOFAs or otherwise used operationally. o Since the property is a separate strata unit or separate parcel of land, it must be separately assessed. o Tenants who pay rent are typically required to bear the tax burden, so it is not appropriate to value such strata lots at a nominal value. These lots should be separately assessed to the strata corporation and valued at market value. Make a corresponding downward adjustment to the remaining strata units (i.e., the upstairs units ) to account for the fact that the value of this lot is not included in the assessed value of the upstairs units; this adjustment must be made to avoid double counting. 2. Scenario: Strata lots or parcels of land that are owned by the strata corporation which are SOFAs or are used operationally Example A: Visitor parking spaces: strata lots (parking spaces) owned by a strata corporation but used for visitors parking This example assumes that the parking spaces in the parking lot are individual strata lots (i.e., the parking spaces have been stratified) and that the spaces are owned by the strata corporation and used for visitors parking (they are SOFAs). o While not designated as common property on a strata plan, this property is owned by the strata corporation and used by the strata lot owners as if it were common property. This type of strata unit is not typically leased out (i.e., visitors do not lease the parking while they visit). Assessment Practices and Procedures SOFAs 13

o Since the parking spaces are separate strata lots, they must be separately assessed. o Since the parking spaces are used as common property (visitor parking, which is available for use to guests of all strata unit holders) the value of the property is already included in the sales prices of the units as it is assumed to be one of the amenities that the purchaser of a strata unit pays for when purchasing the unit. The SOFA parking spaces should be assessed, but valued at a nominal (one dollar) value. A nominal value of one dollar should be assigned to improvements and one dollar to land the total assessed value should be two dollars. If land only exists then the value assigned would be one dollar. Example B: Strata lot owned by a strata corporation and used as a lobby, hallway, stairway, or access area, etc. The underlying assumption for a purchaser of a strata lot in a strata accommodation property or a residential strata property is that there will be free access to the strata lot. In a commercial or retail strata property, there is an underlying assumption that the individual strata units will be accessible by the public. In many cases, the strata corporation s ownership of strata lots that provide access (e.g., hallway, lobby, stairwell, etc.) may simply be a means by which the strata corporation holds those areas to maximize flexibility. These properties (SOFAs) would normally be regarded as common property on a strata plan (e.g., lobbies, parking areas, access areas, etc.). The value of these properties is ordinarily already included in the value of the other strata lots because they are part of the amenities of the strata complex that the purchaser of the strata lot buys when they purchase a unit. Put another way, the value of separate strata lots that are used as lobbies or hallways or for accessing individual strata lots in the complex should be treated as included in the value of the individual strata lots in the same way that common property would be. The value of the lobby or hallway is inextricably intertwined with the value of the individual units and so the lobby or hallway should be valued at a nominal value. Assessment Practices and Procedures SOFAs 14

A nominal value of one dollar should be assigned to improvements and one dollar to land so that the total assessed value should be two dollars. If land only exists, then the value assigned would be one dollar. Example C: Strata lot owned by the strata corporation and used as a guest suite Typically, any of the strata lot owners could use the guest suite for their guests. The value of the guest suite is therefore inextricably intertwined with the value of the individual strata lots, so the assessed value should be nominal. A nominal value of one dollar should be assigned to improvements and one dollar to land, which means if both are present, the total assigned value should be two dollars. Example D: Strata lot owned by the strata corporation and used by a resident manager as a private residence o These properties are conventional residential strata lots occupied by a resident caretaker. o They are SOFAs because they are strata lots that support the day-to-day operational requirements of the complex/building. o Since the property is a separate strata unit, it must be separately assessed. These private residential strata lots should be separately assessed to the strata corporation, and valued at a nominal value, one dollar land and one dollar improvements. 3. Scenario: Land owned by a strata corporation that is not included in a strata plan, which is used operationally Example A: Strata corporations can acquire land outside of the strata plan. Such land may be used for parking, a buffer or storage of RVs, etc., used as common property o The property is a common asset of the strata corporation and used as such, despite not being included in the strata plan. Assessment Practices and Procedures SOFAs 15

o As a common asset of the strata corporation, every owner in the strata corporation is a tenant in common of the asset and is entitled to a proportionate ownership share in the asset. o When a person purchases a strata lot they acquire a proportionate share in the CASC; therefore, the price they pay includes a proportionate share in the common asset. The value of the common asset is inextricably intertwined with the value of the individual units and so the common asset should be valued at a nominal value. A nominal value of one dollar should be assigned to improvements and one dollar to land and the total assessed value should be two dollars. If only land exists then the value assigned would be one dollar. 4. Scenario: Strata Lot owned by a third party (not the strata corporation), and used partially as common property and partially as third party commercial space o Strata lot is located within a stratified hotel tower. o Strata lot is 100,000 square feet over three floors. o Uses include lobby, escalator, front desk, associated offices, washrooms, meeting rooms, lounge and commercially leased space. o Ownership is a third party, not the strata corporation. The property cannot be a CASC because it is not owned by a strata corporation, so the special rules under sections 66 and 67 of the Strata Property Act do not apply. o Since it is a separate strata lot, it must be separately assessed. o Since it is separately owned, the assumption is that the value of such facilities is not included in the sales prices of the units; none of the strata unit owners are tenants in common in relation to this strata lot. The strata lot should be separately assessed at full market value as the sales prices of the other units in the building do not include the value of this strata lot because the owners of those strata units are not tenants in common in respect of this strata lot. There is no need to make a downward adjustment to the value of the upstairs units since none of Assessment Practices and Procedures SOFAs 16

those owners are a tenant in common owner of this strata lot (given that it is not owned by the strata corporation). 5. Scenario: Strata lot in stratified hotel, owned by the strata corporation and used as common property/sofa o Strata lot located within stratified hotel tower. o Strata lot is 10,000 square feet. o Uses include lobby, escalator, front desk, associated office, washrooms, convention/meeting rooms and housekeeping rooms. o May be operated by the strata corporation or a hotel management company. These areas in other circumstances might be designated as the common property of hotel. o Since the owners of the strata corporation own this strata lot and it is equivalent to common property in nature, it is assessed at a nominal value, as the value of these parts of the property would be included in the sales prices of the actual hotel units within the building. o Since this is a strata lot, it must be separately assessed. o Because these units are equivalent to common area and owned by the owners of the strata corporation they are valued at a nominal value. It does not matter in this case if this space is used and operated by someone other than the strata corporation (e.g., Hilton or Ramada), it is still a SOFA and nominal in assessed value. The property should be valued at nominal value (one dollar for land and one dollar for improvements). 6. Scenario: Waterlot leased by strata corporation Example A: Waterlot lease from the Crown by a strata corporation, leased to a third party independent commercial operator and operated as a commercial marina o The regular rules regarding assessment of Crown land apply, including assessment of a paramount occupier. Assessment Practices and Procedures SOFAs 17

o A water lot that is owned (i.e., leased) by a strata corporation may be subleased to a third party for independent commercial use. o It is not treated as common property by the strata corporation or by the owners of the particular strata lots in the complex. o Since the property is a separate lot it must be separately assessed. o The marina operator (commercial tenant) is the paramount occupier and so will bear the tax burden. The water lot should be separately assessed to the paramount occupier (i.e., marina operator and valued at market value). Example B: Waterlot lease from the Crown by a strata corporation and used by the strata corporation as a SOFA o The water lot is treated as a SOFA by the strata corporation or by the owners of the particular strata lots in the complex. o Since the property is a separate lot, it must be separately assessed. The assumption is that there is no paramount occupier. The property should be assessed in the name of the strata corporation and given a nominal value (one dollar for land and one dollar for improvements). If there were a paramount occupier of portions of the water lot (i.e., an individual strata unit owner had exclusive rights to a certain area for moorage), then the property is treated as limited common property and that strata unit owner is the paramount occupier of that area. As the paramount occupier, the strata unit owner should be assessed for the area occupied, valued at market value. 7. Scenario: Bulk strata all strata units in the building are owned by one owner who is not the strata corporation o All strata lots located within stratified building are owned by the same individual or company. o This is common in some hotels and in some carehomes that are stratified as well as stratified parking garages. Assessment Practices and Procedures SOFAs 18

There is no ownership by the owners of the strata corporation. Each strata lot should be separately assessed at full market value in the name of the strata lot s owner. Assessment Practices and Procedures SOFAs 19