MPAC

MPAC Presentation to BIA 2007 National Conference: 

MPAC Presentation to BIA 2007 National Conference April 3, 2007 Presentation by Bill Bradley, B.A., AACI,P.App. Account Manager, Business Relations Municipal Property Assessment Corporation

Presentation Topics: 

Presentation Topics MPAC Roles, Responsibilities and Relationships 2007 Ontario Budget Update Approaches to Value Storefront Retail Valuation: Approaches to Value Overview of CAMA for Storefront Retail Valuation Process: Office and Shopping Centre Capping and Clawback Example Questions & Answers

Slide3: 

MPAC Roles, Responsibilities and Relationships

Slide4: 

MPAC Roles, Responsibilities and Relationships Municipalities & Province Adjudicate Administer Legislate Tax

MPAC: Roles and Responsibilities cont’d: 

MPAC: Roles and Responsibilities cont’d Assign a Current Value Estimate (CVA) & property tax class to 4.5 million properties on an annual basis Annual Assessment Rolls to all 445 municipalities Prepare provincial jury lists, school support lists and municipal voters’ lists

MPAC: Roles and Responsibilities: 

MPAC: Roles and Responsibilities MPAC assigns CVA as well as property tax class in accordance with O. Reg 292/98 Classification of property based on use Seven major property classes Residential, multi-residential, commercial, industrial, pipeline, farm, managed forests Property tax class also determines Municipal tax rate to apply Province of Ontario sets the education tax rates

Ontario Budget 2007: Assessment Related Changes: 

Ontario Budget 2007: Assessment Related Changes Assessment Cycle changes to four years Four year cycle commences for taxation commencing Jan. 1 2009 based on Jan. 1 2008 assessed value Next assessment update will be based on Jan.1 2012 valuation date for taxation beginning Jan. 1 2013

Ontario Budget 2007: Assessment Related Changes (cont’d): 

Ontario Budget 2007: Assessment Related Changes (cont’d) MPAC will phase in assessment increases for residential, farm and managed forest properties over four year cycle: Example: Assume property increased in value by 20% from Jan 1 2005 to Jan 1 2008 Means 5% increase in assessment over the next 4 years (2009,2010, 2011, 2012)

Ontario Budget 2007: Assessment Related Changes (cont’d): 

Ontario Budget 2007: Assessment Related Changes (cont’d) Assessment decreases are immediate Province will consult with stakeholders to determine if phase in will be expanded to other property classes (commercial, industrial, multi-residential)

Ontario Budget 2007: Assessment Related Changes (cont’d): 

Ontario Budget 2007: Assessment Related Changes (cont’d) Request for Reconsideration (RfR) is mandatory first step of an assessment appeal Assessment Review Board (ARB) deadline to coincide with completion of RfR process Standard information disclosure requirements for RfR and appeal stages These changes targeted for 2008 assessed values for 2009 taxation

Ontario Budget 2007: Assessment Related Changes (cont’d): 

Ontario Budget 2007: Assessment Related Changes (cont’d) Business education taxes will be reduced by $540 million over the next seven years Target rate for commercial and industrial properties will be 1.60 ( currently Toronto education tax rate is 1.97 commercial)

Assessment Update Information: 

Assessment Update Information All properties in Ontario are currently valued on a January 1, 2005 valuation date Next province-wide reassessment will be based on a January 1, 2008 valuation date Commercial, Industrial and Multi-Residential properties are “capped” classes of property

What is to be valued?: 

What is to be valued? According to the Assessment Act all real property in Ontario is to be assessed at its current value (CVA) What is the definition of CVA: “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.”

Approaches to Value: 

Approaches to Value To estimate Current Value the appraiser can use any one or more of the three approaches to value: Direct Comparison Approach (Comparative Sales) Cost Approach Income Approach

Approaches to Value (cont’d): 

Approaches to Value (cont’d) Direct Comparison Approach Models the behavior of buyers and sellers in the real estate market Compares property to be valued with recently sold properties Works best when there are sufficient comparable sales Sales Comparison approached used to value s.f.d., all condominiums, res. waterfront, vacant land, retail strip stores in some areas

Approaches to Value (cont’d): 

Approaches to Value (cont’d) Cost Approach Seeks to determine the replacement cost of the improvement less depreciation plus the land value Primary approach on properties that do not regularly trade in marketplace Land estimate from vacant land sales and land residual methods Market modified cost approach Assessment to sale used as a test

Income Approach to Value: 

Income Approach to Value Based on the principle that the value of an investment property is reflected in the income it is anticipated to generate over its life Such properties are generally purchased for the right to receive the future income flow Present worth of the income stream plus the present worth of the reversion

Property Types Valued by the Income Approach: 

Property Types Valued by the Income Approach Office Buildings, Shopping Centres Multi residential – Rows & Apartment Buildings Hotels, motels Nursing homes, Retirement homes Golf courses Multi-use properties Specialty properties I.e. Air Canada Center, Corel Center, CN Tower, Rogers Center.

Storefront Retail: Approaches to Value: 

Storefront Retail: Approaches to Value If sufficient sales MPAC employs the Sales Comparison Approach Retail Storefront in Toronto, Ottawa If insufficient sales MPAC employs a Market Adjusted Cost Approach Retail Storefront in Eastern and Northern Ontario Fast Food chains, retail gas stations (vacant land sales) Built-on sales are scarce MPAC utilizes Handscombe cost data base as well as cost questionnaires collected from owners

CAMA for Retail Strip: Toronto and Ottawa: 

CAMA for Retail Strip: Toronto and Ottawa MPAC uses MRA (Multiple Regression Analysis) as a tool to assist in the determination of the initial values (before fine tuning) for the Toronto and Ottawa Retail Strip stores Reasonable sample of arms length sales in each economic neighborhood Physical and locational variables collected on all strip properties MPAC builds a computer model based on all the open market sales and associated physical and locational data for the strip store properties

Overview of Computer Assisted Mass Appraisal for Storefront Retail: 

Overview of Computer Assisted Mass Appraisal for Storefront Retail

Single Property Versus Mass Appraisal: 

Single Property Versus Mass Appraisal Single property appraisal is the appraisal of one property at a time Mass appraisal is the process of valuing a group of properties as of a given date, using standardized methods and allowing for statistical testing Multiple Regression Analysis (MRA) is an appraisal application of the sales comparison approach

Single Regression: Building Area and Sale Price: 

Single Regression: Building Area and Sale Price

Sample MRA Value Calculation: Storefront Retail: 

Sample MRA Value Calculation: Storefront Retail Sample subject property has the following attributes: Located in the area referred to the “ Danforth East “ Lot frontage 20 feet; lot depth 120 feet 2 story strip store with full basement built in 1965 Ground floor 2,000 s.f.; 2nd floor 1,000 s.f. Finished basement area of 500 square feet metered street parking 1-2 bedroom apartment on 2nd floor Property located on a corner

What makes up the value? : 

What makes up the value? Base Value = $30,000 $200,000

Structure: 

Main Floor 2000 s.f. @ $60/sq.f. =$120,000 2nd Floor 1000 s.f. @ $45/sq.ft. =$45,000 2 Bsmt 2000 s.f. @ $10/sq.ft. = $20,000 D Structure

Slide27: 

$ 431,000

Storefront Retail: Data Collection: 

Storefront Retail: Data Collection

Parking Code: 

Parking Code This variable indicates the existence of parking on the property or in the immediate vicinity of the property F = Free On Site P = Meter On Site S = Free On Street M = Meter On Street N = No Parking

Corner: 

Corner This is a variable designed to record whether the property is on a corner lot i.e.. Exposure on two streets 0 = Not on a Corner 1 = On a Corner

Boulevard: 

Boulevard This is a variable to record the existence of a boulevard in front of the property. It identifies properties that have a divided traffic flow 0 = No 1 = Yes

One-Way Street: 

One-Way Street This variable identifies if the property is on a one way street 0 = No 1 = Yes

Street Exposure: 

Street Exposure This variable indicates the “Primary Exposure” of the front of the property (the direction the storefront faces) N = North S = South E = East W = West

Street Code: 

Street Code This variable indicates the “Traffic Pattern” E = Extremely Heavy (highways) H = Heavy (arterial) M = Medium (collector) L = Light (local)

Rear Access: 

Rear Access This variable indicates the availability of rear access to the property L = Laneway D = Driveway O = Other Street N = None

Storeys and Building Areas: 

Storeys and Building Areas Number of floor levels of the structure This variable is numeric 1, 2, 3…. Building areas are recorded by floor (ground, 2nd, 3rd, basement, finished basement etc.)

Renovated Commercial Unit: 

Renovated Commercial Unit This variable indicates if the property has been renovated in the last 5 years

Street Access to Basement: 

Street Access to Basement Basement accessible from street 1 = Yes 0 = No

Storefront Retail: Data Collection: 

Storefront Retail: Data Collection Site data: frontage, lot depth, lot area, rear access, parking availability, on-site parking, off-site parking, corner, orientation (N/S/E/W), one-way street, boulevard Structure data: building areas (ground, 2nd, 3rd , basement) Year built, renovations Type of construction Economic Homogeneous Neighbourhood

Storefront Retail: Analysis of Data: 

Storefront Retail: Analysis of Data

Storefront Retail: Data Analysis: 

Storefront Retail: Data Analysis

Sales Analysis: 

Sales Analysis MPAC will verify with properties owners the details surrounding the sale Is the sale open market, arms-length transaction? What were the particulars of the sale? MPAC valuation staff will conduct these sales interviews Inspect the sales properties to determine data at time of sale (additions, renovations demolitions etc.)

Market Adjusted Cost Approach Analysis: 

Market Adjusted Cost Approach Analysis Step 1: Establish Land Value Vacant land sales or land residuals Step 2: Estimate Replacement Cost New for Buildings MPAC uses current market cost data base (Handscombe) Building values adjusted by deducting depreciation from all sources

Market Adjusted Cost Approach Analysis (cont’d): 

Market Adjusted Cost Approach Analysis (cont’d) Step 3: Summation of Land and Building estimates Step 4: Test Value Estimates Using Sales Assessment to Sale Ratio Value adjusted to sales when necessary

Fine Tuning of Values: 

Fine Tuning of Values Once the initial values are generated (Sales or Cost approach) these values are fine tuned Local field staff review the values for accuracy and consistency (outliers investigated) Example: Property sold in base year for $500,000 , assessed value $490,000 ASR is 0.98 (acceptable) Assessment to Sale Ratio studies completed; final values placed on assessment roll

Office and Shopping Centre Valuation: 

Office and Shopping Centre Valuation

The Income Approach: 

The Income Approach Office and Shopping Centre Values determined using Direct Capitalization by applying an Overall Capitalization rate Net Operating income is discounted to a present worth (CVA estimate) The Overall Capitalization Rate (OAR) is derived from the Analysis sales of comparable properties.

Income Approach Steps: 

Income Approach Steps Estimate the annual gross potential income of the property less likely future vacancies and bad debts. 2. Estimate the total annual operating expense. 3. Calculate the net operating income. 4. Select an appropriate capitalization rate. 5. Convert the net income into an indication of the capital value of the property.

Valuation Calculation: Free Standing Office: 

Valuation Calculation: Free Standing Office Assume eight stories with no excess land (on site surface parking) Total leased area: 80,000 s.f. Market rent: $18.00 psf Gross Potential Income: $1,440,000 Less: Vacancy and Bad Debt at 6% or $86,400

Valuation Calculation: Free Standing Office (cont’d): 

Valuation Calculation: Free Standing Office (cont’d) Less: Non Recov Expense @ 5% or $67,680 Net Operating Income $ 1,286,000 Overall Cap Rate: 8.0% Value: $1,286,000 / .08 = $16,100,000 Income formula: Value = Net operating income / capitalization rate

Valuation Process: 

Valuation Process Data Collection Data Analyses Initial Valuation Fine Tuning of Values Quality Testing Placement on Assessment Roll

Data Collection: 

Data Collection Property information is collected by MPAC from a number of sources Land transfer tax statements (sale prices, owner names) Building permits (from municipalities) On-site inspections Sales investigations Income and Expense Data from owners Realnet, Realtrack, Marsh reports Review of MLS listing information

Data Collection: 

Data Collection MPAC sends property owners of income producing properties an annual request for income and expense information For Office and Shopping Centre property MPAC requests: Current rent roll (listing of all tenants and lease details) Most recent Income and Expense Statement

Data Collection (cont’d): 

Data Collection (cont’d) When buildings are newly assessed the physical attributes of the property are collected For office and shopping centre property: GBA, GLA, rentable and useable areas, # of floors, year built, renovations, building class, construction details, parking spaces and type, storage areas etc.

Fair Market Rent Analysis: 

Fair Market Rent Analysis Contract Rent: Payment for the use of property as designated in a lease. Market Rent : The rental that a property would command on the open market if vacant and available and is reflective of current rentals paid for comparable space as of the chosen valuation date. MPAC estimates fair market rent for the various types of space (office, ground retail, concourse retail, parking, storage etc.) MPAC looks at recent open market contract rents to derive fair market rents

Overview of Shopping Centre Valuation: 

Overview of Shopping Centre Valuation

Fair Market Rent Analysis: Shopping Centres: 

Fair Market Rent Analysis: Shopping Centres Each center is unique in location, operation and competitive nature as established by tenant mix. Land and building components are captured in the fair market rent Shopping Centres are stratified based on Gross Leased area Super Regional, Regional, Community, Neighbourhood Shopping Centres

Shopping Centre Lease Analysis: 

Shopping Centre Lease Analysis Stratification of leases in large enclosed Malls Food court Allied Anchor tenant Bank or any special tenant Kiosk Location (corner, standard, low traffic, outside entrance, level) Leased area Best fit analysis

Slide59: 

Wal-mart Sears Supermarket Food Court Inferior location Kiosk Food Court

Allied Tenant Rental Analysis – Regional S.C. : 

Allied Tenant Rental Analysis – Regional S.C.

Rental Analysis: Malls versus Strip Plazas: 

Rental Analysis: Malls versus Strip Plazas Regional Malls: fair market rents tend to come from the FMR curve Strip plazas tend to have a flat rent situation with the exception of special tenants (Banks, coffee shops) in prime locations Rents in strip plazas are highly correlated to the income levels in the surrounding residential

Tax Capping / Clawback Overview: 

Tax Capping / Clawback Overview

Tax Capping in Ontario: 

Tax Capping in Ontario Starting in 1998 the province enacted tax capping for the commercial, multi-residential and industrial property tax classes Because Municipalities would lose revenue by the capping provisions, clawbacks were introduced Tax increases limited by capping Tax decreases limited by clawbacks

Backgrounder: Tax Capping: 

Backgrounder: Tax Capping Many commercial, industrial and multi-residential, especially in Toronto, would have experienced significant tax increases 37 % of non-residential properties in Toronto would have experienced tax increases in excess of 100% 54% were more than 50% above or below their full CVA level of taxation

Tax Capping in Ontario: 

Tax Capping in Ontario 1998, 1999, 2000: 10%, 5%, 5% (Toronto 2.5%) 2001, 2002, 2003, 2004: prior years annualized taxes plus 5% 2005, 2006, 2007: Municipalities given a range of options

Tax Capping in Ontario: 

Tax Capping in Ontario Municipalities’ range of options include: Increase the amount of the annual cap from 5% to 10% of previous years taxes; Adopt a minimum annual increase of up to 5% of CVA level taxes Move capped or clawed-back properties directly to their CVA taxes if they are within $250 of their CVA taxes

Slide67: 

Thank you ! Questions ? Bill Bradley 1-877-228-3447 ext 238 bradlebi@mpac.ca Jim Petrin, Senior Valuation Manager, 905-837-6967 petrinja@mpac.ca