11 th Mass Appraisal Valuation Symposium Innovation, Transformation, Knowledge Enhancement and Improved Efficiencies in Mass Appraisal Niagara Falls, Canada May 17-18, 2016 LITIGATING IN A MASS APPRAISAL ENVIRONMENT Michael Bowman Osler, Hoskin & Harcourt LLP
Introduction/Themes What is litigating in the context of 2016? What is different about litigating in a mass appraisal environment? What are the best strategies and practical approaches to litigation in a mass appraisal environment?
Litigation Perspectives The Taxpayer: Reducing taxes of individual property or portfolio Concern about valuation principles or methodology? Cost/benefits of litigation
Litigation Perspectives The Municipality: Protection of Tax Base
Litigation Perspectives: The Assessment Authority: Protect and maintain returned assessments for entire jurisdiction Protect and maintain consistent assessment methodology Protect and maintain defensible approach Avoid negative precedents Satisfy all stakeholders?
Differences in Perspective Taxpayer focussed on individual property or portfolio wants expeditious and costeffective solution Municipality wants to protect tax base Assessor wants to maintain valuation consistency Impacts each party s approach to litigation
Mass Appraisal IAAO Definition Mass appraisal is the process of valuing a group of properties as of a given date using common data, standardized methods, and statistical testing. To determine a parcel s value, assessing officers must rely upon valuation equations, tables, and schedules developed through mathematical analysis of market data.
Mass Appraisal IAAO Definition (continued) Unless required by law, values for individual parcels should not be based solely on the sale price of property. Rather, valuation schedules and models should be consistently applied to property data that is correct, complete and up to date.
Mass Appraisal (IAAO Definition (continued) Properly administered, the development, construction and use of a computerassisted mass appraisal system results in a valuation system characterized by accuracy, uniformity, equity, reliability, and low per-parcel costs. Except for unique properties, individual analyses and appraisals of properties are not practical for ad valorem tax purposes.
Elements of Mass Appraisal Common Data/Standardized Methods Statistical Testing/Mathematical Analysis Valuation Models/Policies and Guidelines Consistent Application to Data Valuation Policies and Guidelines Sales price may not be determinative
Application: Cost Approach ACS Automated Cost System: Computerized cost system that automatically determines Replacement Cost New Less Depreciation Application of data-based component costs to physical structures Normalized costs representative of market prices, practices, standards
Application: Sales Approach Statistical analysis of sales prices of similar properties Computer assisted multiple regression and sales algorithm analysis Automated valuation models
Application: Income Approach Mass collection and processing of income and expense data Statistical and computer-generated models to determine: Typical gross incomes and multipliers Standard vacancy rates Capitalization Rates Expense Ratios
The Litigation Challenge Different perspectives of parties Different approaches to litigation Taxpayer narrow focus; seeking expeditious cost-effective result Assessment Authority broad focus; concern with big picture implications Municipality protect tax base
The Legislative Framework (Ontario) Assessment Act: The assessment of land shall be based on its current value (S. 19(1)) Current Value means, in relation to land, the amount of money the fee simple, if unencumbered, would realize if sold at arm s length by a willing seller to a willing buyer (S. 1)
The Legislative Framework (continued) Other than limited exceptions (e.g. electricity generating and transforming stations), there is no legislative direction regarding valuation methodology Legislation simply requires land to be assessed at current value (or in other jurisdictions market value )
The Legislative Framework (continued) Additional legislative provisions regarding: Equity of Assessment (s. 44(3)) Property tax class (s. 7 and O. Reg. 282/98) But no further legislative direction respecting how to value property
The Legislative Framework (continued) Therefore, the determination of current value (or market value ) is typically a question of fact, to be determined on the basis of expert appraisal evidence A taxpayer challenging an assessment is under no legal obligation to have the taxpayer s expert follow the authority s mass appraisal approach
The Strategic Litigation Issue Taxpayer appealing assessment has to consider whether: To ignore the mass appraisal approach and permit the expert to present a more traditionallydetermined appraised value?, or To accept the mass appraisal approach subject to valuation adjustments identified by the expert appraiser In other words to work within or outside the mass appraisal methodology
The Strategic Litigation Issue Assessment Authority: Will defend mass appraisal methodologies applied and resist any undermining of system Will commit legal and expert resources to defending valuation principles Municipality: Will determine degree of litigation support warranted
The Litigation Process Litigation is no longer simply about litigating in the traditional sense In my experience, clients are increasingly looking to alternative dispute-resolution Most assessment tribunals and courts encourage mediation and arbitration (and of course there is old-fashioned negotiation)
The Litigation Process The Good Old Days No procedural rules trial by ambush Effectiveness? trial de novo appeal rights Time and cost required to resolution
The Litigation Process The New and Improved Model? Procedural Rules and Requirements Pre-hearings (other than for simplified proceedings) Statements of Issues/Responses/Reply Production Oral Discovery Motions
The Litigation Process The New and Improved Model (continued) Hearing Encouragement of alternative dispute resolution primarily mediation Additional costs of mediation if no resolution Limited cost recovery provisions in appeal process
The Litigation Process The New and Improved Model can be: Longer More expensive and uncertain Limited cost recovery What is most effective litigation strategy in dealing with mass appraisal methodology and system?
The Litigation Process Full Disclosure Need for Taxpayer to obtain full disclosure from Assessment Authority of method of assessment But what does full disclosure mean? Need for transparency as to determination/calculation of assessment But how deep to probe (and challenge) underlying data and methodology?.
Role of the Appraisal Expert In Litigation Must be qualified appraiser or assessment valuator Must be independent - current case law has stressed the importance of expert not acting as advocate Must be able to independently arrive at valuation of property Must be able to defend position on cross
Role of Appraisal Expert (continued) As noted, there is no legislative requirement regarding valuation methodology Expert appraiser only needs to provide opinion on current value, as well as equity and classification if at issue Strategic Issue: what should appraiser s terms of reference be?
Strategic Considerations/Options In satisfying the legislative requirement of current value or market value Is it feasible for Taxpayer to attack the underlying valuation methodology?, or Is it more practical to accept the basic methodology and identify elements that can be modified Tilting Windmills vs. Picking Spots
Attacking Mass Appraisal Methodology Tilting Windmills? How practical for Taxpayer to analyze and attack: Common Data Bases Underlying costs of ACS or automated valuation models Computer assisted multiple regression Statistically generated models Need for other experts to give evidence
Picking Your Spots Strategy Onerous on Taxpayer to attack underlying mass appraisal methodology More practical approach is to identify subjective elements in mass appraisal valuation Pick your spots of attack to arrive at current value using mass appraisal methodology
Cost Approach Adjustments Depreciation and Obsolescence (Functional and Economic) More subjective element Based on sales of similar properties? Opportunities for specific property adjustments without undermining mass appraisal valuation models
Income Approach Adjustments Apply actual income and expense information for property under appeal, using mass appraisal pro forma valuation model Challenges to specific fair market rent, expense ratios?
Sales Approach Adjustments Difficult to attack statistical and computer generated models Actual sales should trump modelgenerated?
Litigating Mass Appraisals Mass appraisals present litigation challenges Transparency Difficulty in understanding valuation models Cost and complexity of attacking valuation models
Litigating Mass Appraisals There is no legislative requirement or authorization for mass appraisal Tilting At Windmills Approach Not practical or cost-effective for Taxpayer, given taxpayer perspective & objectives in litigation vs. Assessment Authority/Municipality perspective & objectives
Litigating Mass Appraisals Picking Your Spots Working within mass appraisal methodology Identify subjective elements or elements that can be applied on a property-specific basis Identify equity and property tax classification issues if relevant to issues
Conclusion: How Different Is it? Is this different from traditional valuation litigation? Or is mass appraisal methodology more common than we think? e.g. Expropriation valuation and litigation
Questions & Discussion