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When Can Actual Rents be Used for Assessed Value?
The value of income producing properties is generally calculated by capitalizing the average annual net income a buyer could expect from the building. That requires that the rental income be determined, any other income from the building be determined, the average expenses be calculated, and an appropriate capitalization rate be determined.
Determining the rental income often turns on whether the actual rents achieved should be used or if a market average is more appropriate. The Municipal Property Assessment Corporation (“MPAC”) uses an average, which they refer to as Fair Market Rents. In many cases those rents will be close to the actual rents achieved. But there are cases where the actual rents achieved at a property are significantly lower than MPAC’s Fair Market Rents. A lower rental income will indicate a lower value for the building. When can actual rents be used to calculate a property assessment?
The Ontario Court of Appeal weighed in on this issue in 1984 in Re Cardinal Plaza Ltd. et al. and Regional Assessment Commissioner, Region No. 19 et al., 1984 CanLII 1841 (ON CA).The Court held that “an equitable assessment of multi- residential properties based on the income approach must necessarily use economic rents rather than actual rents.” The Court also noted that the question to be determined on rents is “what the typical tenant would be willing to pay for the occupancy of a particular property for a specified period of time.” In doing so, the “assessor must give consideration to but is not bound to use actual rents in the assessment of multi-residential property under the income approach.”
The statement in Cardinal Plaza on the necessity of using market rents is not the final word. The Court’s other comments regarding actual rents are far more relevant. NextGenLaw does not believe that Cardinal Plaza automatically prohibits the use of actual rents in determining current value.
While market rents are usually relied on, the Assessment Review Board has used actual rents in some cases. In Grewal v Municipal Property Assessment Corporation Region 15, 2015 CanLII 78968 (ON ARB), the Board averaged the actual rents with some rents from other properties in determining a market rent. In Kilmanagh Developments Ltd v Municipal Property Assessment Corporation, Region 15, 2016 CanLII 24418 (ON ARB), the Board used actual rents because there was nothing else before it.
In Jay Patry Enterprises Inc. v Municipal Property Assessment Corporation, Region 05, 2018 CanLII 70338 (ON ARB), the Board considered whether actual rents that were higher than market rents could be used. The Board cited Cardinal Plaza and explained that there are situations “where other buildings in the market may not provide a fair estimate of the potential rents in a particular building. This can be the case when there are special aspects to the building that are likely to result in rents that are either above or below market.” The Board found that actual rents could be used in that case because the evidence supported a finding that the subject property would likely command higher than market value rents.
In Braebury Development Corporation v Municipal Property Assessment Corporation, Region 05, 2018 CanLII 70337 (ON ARB), the Board held that it “prefers FMR to actual rent, especially when there is a reasonable explanation as to why the property is not achieving market rents.” The Board rejected the actual rents in that case because the tenants had invested significant capital in the property to make the space usable. The Board found that fact explained why the rent achieved at that property was lower than the market average.
What is implied in Braebury is that if there is no reasonable explanation as to why the actual rents at a property are lower than market rents, it may be appropriate to use the actual rents in determining the current value. This fits with the Court of Appeal’s direction in Cardinal Plaza that actual rents must be considered.
Only using actuals when it is not obvious why actuals are below market also fits with valuation theory. The value of an income producing property is determined by the income that a purchaser can reasonably expect to achieve from the property. If rents are below market and there is a way to get them to market, it is likely that a purchaser will consider the income to be market rents. If it seems that there is something about the building driving rents down, something that cannot obviously be changed, then the actual rents achieved could determine value.
So there is a place for actual rents in an assessment appeal. Contact NextGenLaw LLP to see if there could be tax savings on your property.