CFS Managed Property Limited v Valuer-General

Planning evidence

1. Mr Sanders and Mr Staas, the town planning experts of the Applicant and the Valuer-General respectively, met and agreed a joint report dated 9 December 2014. There was no dispute about permissible development and floor space ratio (FSR) on the land.

Quantity surveying evidence

1. Mr Menzies and Mr Martin, the quantity surveying experts of the Applicant and the Valuer-General respectively, met and agreed a joint report dated 10 April 2015. The joint report identifies agreed costs of a number of options as at the three base dates, including constructing a new non-heritage building and the Moneybox building as new on the land.
2. It was unnecessary to hear oral evidence from the planners or quantity surveyors as there was no dispute between the parties about that evidence. To the extent the quantity surveyors' evidence was relied on by the valuers, it will be referred to in the valuers' evidence.

Valuers' evidence

1. Mr Jackson, Registered Valuer No 6614, prepared a report on the value of the land dated 1 June 2015 and gave expert evidence on behalf of the Applicant. Mr Hill, Registered Valuer No 3102, prepared a report on the value of the land dated 29 May 2015 and gave expert evidence on behalf of the Valuer-General.
2. Mr Jackson and Mr Hill also contributed to a joint report dated 14 August 2015. The valuers agreed that: 1. the existing building has a total floor space area (FSA) of 31,596 m2; 2. the existing building has a net lettable area (NLA) of 24,530 m2; 3. the existing FSR on the subject land is 9.44:1 because of the assumptions required by s 14G(1); 4. however, the potential development permitted on the land under the Sydney Local Environment Plan 2005 reflects a much greater FSR; 5. the existing building efficiency is (NLA/FSA%) 77.64%.
3. The valuers' respective valuations at the outset of the hearing may be summarised as follows: 1 July 2010 1 July 2011 1 July 2012 Mr Jackson 1 (sale of half land) $2,000,000 $2,000,000 $2,000,000 Mr Jackson 2 (hypothetical development) Nil Nil Nil Mr Hill 1 (net rental differential) $36,185,000 $37,285,000 $37,285,000 Mr Hill 2 (part heritage affected applying net rental differential, part non-heritage affected) $48,175,000 $49,540,000 $49,540,000

1. The valuers differed in their assessments of value, their approach to the valuation of the property and in the constituent elements of their valuation. During the proceedings the valuers were required to make their own respective calculations based on each other's approaches.

Mr Jackson's evidence

1. By the conclusion of evidence, Mr Jackson had submitted four approaches to the valuation which may be summarised as follows: Approach Land Value Jackson 1 Sale of half land $2,000,000 Jackson 2 Hypothetical development "no value" Jackson 3 Capital value differential (application of Hill 1) $22,690,000 Jackson 4 Density concession (variation of Oriental Bar) (exhibit B) $20,400,000

Mr Jackson's primary approach - sale of half land (Jackson 1)

1. Jackson 1 comprised an analysis of the sale of a 50% interest in the land, with the benefit of development consent, to Cbus in August 2011 for $36.50 million, with settlement in June 2012 and payment of a further $5.80 million as reimbursement for costs spent by the vendor in the redevelopment of the property. Mr Jackson analysed the sale of half land as follows: s 6A(1) assessment: Sale price 100% $73,000,000 Cash equivalent price for deferred settlement $69,908,346 Less added value of improvements $67,829 970 Plus cost of demolition $3,500,000 Land value (inclusive of improvements) $5,578,376 Rounded to: $5,580,000

s 14G(1) adjustment - increased permitted NLA: Land value $5,580,000 Permitted redevelopment NLA 33,860 m2 Land value per square metre NLA $165/m2 Existing building NLA 24,530 m2 Land value per square metre NLA $165/m2 Land value existing building $4,047,450

s 14G(1) adjustment - superior form of development permitted: Land value existing building $4,047,450 Less 50% $2,023,725 Rounded to: $2,000,000

1. Concerning the s 6A(1) assessment which requires the added value of improvements to be deducted Mr Jackson adopted a "cost less depreciation" approach. He depreciated at 50% the expert quantity surveyors' agreed cost of constructing the improvements (excluding those improvements to be demolished) of $135,659,940 as at 3 August 2011. This reflected Mr Jackson's assessment of "the level of obsolescence of the retained improvements in respect of their physical, functional and economic condition as at the date of sale".
2. Regarding functional obsolescence, Mr Jackson considered the retained improvements to be "functional and able to compete in the Sydney CBD commercial market". In oral evidence Mr Jackson referred to the Moneybox building as a "a rabbit warren building" concluding "functionally it wasn't terrific".
3. Mr Jackson considered economic obsolescence to be lessened by the requirement for retention of part of the structure with the retained improvements able to generate an ongoing economic return through incorporation in the redevelopment. Mr Jackson supported his assessment of a depreciation rate of 50% by noting that the substructure and superstructure of the existing building were required to be retained and preserved in the redevelopment of the property, with a consequential saving in preliminaries, such elements being estimated by Rawlinsons Australian Construction Handbook (29th ed, 2011) to comprise approximately 50.2% of office building construction costs.
4. Concerning the cost of demolition, Mr Jackson adopted $3.50 million for the cost to demolish those improvements excluded from his assessment of the added value of improvements (above at par 26), being an estimated amount advised to him by the owners of the land.
5. Mr Jackson stated that no allowance had been made for excavation costs of the two basement levels as these were included in the sale as improvements. The land value therefore analysed from the sale of half land includes the value, if any, of the "land improvements".
6. Concerning adjustments for the assumptions in s 14G, Mr Jackson considered no adjustment to be required for s 14G(1)(a), (b1) and (d).
7. Regarding subs 14G(1)(b) and (c), Mr Jackson considered that adjustments were required for two benefits of the development consent, being permission to redevelop in excess of the existing floor area of the land and the superior form of development permitted.
8. To adjust for the first benefit, being permission to redevelop in excess of the existing floor area of the land, Mr Jackson divided his assessment of land value by the permitted redevelopment NLA to derive a rate of $165/m2 NLA, which he then applied to the existing building NLA to derive a land value existing building of $4,047,450.
9. To adjust for the second benefit, the superior form of development permitted (based on criteria including "better quality building", "superior rental potential" and "superior offering to investment market", inter alia), Mr Jackson noted this to be essentially a matter of valuation judgment and adopted a 50% downwards adjustment to derive a land value existing building of $2,023,725 rounded to $2,000,000.
10. Accordingly, for Jackson 1 sale of half land approach, Mr Jackson determined a land value of $2 million.

Mr Hill's analysis of Jackson 1 (Hill 3)

1. Mr Hill's response to Mr Jackson's sale of half land approach (Jackson 1) was summarised in Hill 3, whereby Mr Hill analysed the sale of the land as follows: s 6A(1) assessment: Sale price 100% $73,000,000 Cash equivalent price for deferred settlement $69,908,346 Less added value of improvements $19,978,340 Plus cost of demolition $3,500,000 Land value (inclusive of improvements) $53,460,006 Rounded to: $55,000,000

s 14G(1) adjustment - increased permitted NLA: Land value $55,000,000 Permitted redevelopment NLA 33,860 m2 Land value per square metre NLA $1,624/m2 Existing building NLA 24,530 m2 Land value per square metre NLA $1,624/m2 Land value existing building $39,844,950

s 14G(1) adjustment - adjustment to subject: Land value existing building $39,844,950 Deduction for adjustment to subject (29%) $11,554,690 Analysed land value base date 2011 $28,290,260 Land value for the subject at 1 July 2011 $28,290,000

1. Concerning the s 6A(1) assessment and the added value of improvements, Mr Hill adopted Mr Jackson's allowance for deferred settlement and cost of demolition.
2. Regarding the added value of improvements, Mr Hill adopted the expert quantity surveyors' agreed cost of constructing a new, non-heritage retail-commercial building (excluding those improvements to be demolished) of $79,913,359 which he depreciated at 75% (reflecting a new building and retention of only the substructure and superstructure) to give a deduction of $19,978,340 resulting in a land value at base date 2011 rounded to $55,000,000.
3. Concerning land improvements, which are to be disregarded under s 6A(1) of the VL Act, Mr Hill made no allowance for the excavation costs of the basement levels. It is not clear whether Mr Hill specifically considered land improvements in this context.
4. Concerning adjustments for the assumptions in s 14G, Mr Hill adopted the same approach as Mr Jackson in making an adjustment for the benefit of the development consent being permission to redevelop in excess of the existing floor area of the land. Mr Hill divided his assessment of land value ($55 million) by the permitted redevelopment NLA to derive a rate of $1,624/m2 NLA, which he then applied to the existing building NLA to derive a land value of the existing building of $39,844,950.
5. To adjust for the difference between a 33,860 m2 office building comprising 19 levels and a 24,530 m2 office building comprising 12 levels (including the basement levels), Mr Hill then made a deduction of 29%, being for: Size 5% Location 0% Views -5% Height -5% Net rental differential (poor floor plate layout) -24%

1. This resulted in a land value at the 2011 base date of $28,290,260. Accordingly, for Hill 3 sale of half land approach, Mr Hill determined a land value of $28,290,000 at 1 July 2011.

Hypothetical development approach (Jackson 2)

1. Jackson 2 was a hypothetical development approach for the erection of a hypothetical building that exactly mirrors the improvements that existed at the relevant valuation dates, which are assumed to be in new condition due to the interplay of s 6A(1) and s 14G(1). Mr Jackson's hypothetical development approach may be summarised as follows: 1 July 2010 1 July 2011 1 July 2012 End value $165,680,667 $165,680,667 $165,680,667 Less selling costs $662,723 $662,723 $662,723 Add rental income $2,071,008 $2,071,008 $2,071,008 Sub total $167,088,952 $167,088,952 $167,088,952

Less Fees costs $26,338,000 $26,661,000 $27,306,000 Building works costs $188,132,000 $190,435,000 $195,042,000 Leasing expenses $1,866,053 $1,866,053 $1,866,053 Rates and taxes $2,069,535 $887,478 $1,373,408 Sub total $218,405,589 $219,849, 531 $225,587,461

Loss: $ $51,316,636 $52,760,579 $58,498,509 Loss: % 23.50% 24.00% 25.93%

1. Mr Jackson calculated the value of the completed redevelopment of the land at each of the base dates and deducted the cost of construction, following a conventional hypothetical development approach methodology. A viable hypothetical development would usually result in a positive balance which may then be attributed to the cost of the land plus the developer's profit and risk margin.
2. In this case Mr Jackson's calculations resulted in a negative balance, ranging from $51,316,636 to $58,498,509 at the respective base dates, with the effect that there was no amount to attribute to the cost of the land plus the developer's profit and risk margin. Accordingly, Mr Jackson concluded that such development was not commercially viable.

Mr Hill's analysis of Jackson 2

1. Mr Hill criticised the hypothetical development approach because of the large number of subjective inputs required which may deliver a wide variance in resultant land values. A land value of approximately minus $50 million given that income of $12 million a year is achieved for the land is an absurd result.
2. I am inclined to agree with this criticism. This valuation approach was rejected by Talbot J who accepted similar criticism by Mr Hill in Moneybox 1 at [27]-[28]. As a valuation method, the hypothetical development approach is dependent upon the assessment of numerous interactive variables in the derivation of land value. Minor changes in such variables as rent or capitalisation/discount rate may lead to a significant change in the value of the developed property, with minor changes in construction cost rates per square metre potentially leading to a significant change in the cost of construction. The interaction of such changes, together with potential changes in the required level of profit and risk, may result in magnified changes in the residual amount.
3. The hypothetical development approach has long been recognised as involving a higher risk of reaching unrealistic results than the direct comparison approach (Graham Trilby Pty Ltd v Valuer-General [2008] NSWLEC 217 at [32]) and being relevant only in "the absence of directly comparable sales" (Graham Trilby Pty Ltd v Valuer General [2009] NSWLEC 1087 at [41]) or the very limited availability of relevant comparable sales evidence (Gwynvill Properties Pty Ltd v Commissioner for Main Roads (1983) 50 LGRA 322). Accordingly I do not propose to consider the hypothetical development approach as adopted by Mr Jackson. No basis is established for its application in this case.

Variation of Oriental Bar approach (Jackson 4)

1. Jackson 4 (exhibit B) was a density concession approach, whereby Mr Jackson: 1. assessed the highest and best use of the land without heritage restriction to be office development at a floor space ratio of 13.75:1, giving a floor space area of 46,021 m2; 2. assessed a 90% efficiency for the new office development giving a NLA of 41,419 m2; 3. multiplied the NLA of 41,419m2 by a land value rate of $1,650/m2 to give a land value of $68,341,556 for the notional land value without heritage restrictions; 4. calculated that the actual NLA of the existing heritage land of 24,530 m2 was 40.78% less than that of 41,419 m2 for a new office development, which Mr Jackson described as a "loss of site density"; 5. applied the "loss of site density" of 40.78% to the notional value of $68,341,556 to derive a land value of $40,474,500; 6. applied a further discount of 5%, which reflected the loss of higher rental upper floors in the new office development, to derive a land value of $38,450,775; 7. applied the 55% capital value differential from Jackson 3 to derive a land value of $17,302,849; and 8. added Mr Hill's assessment of land improvements of $3,095,975 at 1 July 2010 to derive $20,398,824.
2. Accordingly, for the Jackson 4 density concession approach, Mr Jackson determined the land value to be $20,400,000.

Mr Hill's analysis of Jackson 4 (Hill 4)

1. Mr Hill's response to Mr Jackson's density concession approach (Jackson 4) was summarised in Hill 4 (exhibit 9), whereby Mr Hill: 1. adopted the highest and best use of the land without heritage restriction to be office development at a floor space ratio of 13.75:1, giving a floor space area of 46,021 m2; 2. adopted the 90% efficiency assessment for the new office development giving a NLA of 41,419 m2; 3. multiplied the NLA of 41,419 m2 by a land value rate of $1,952/m2 (exhibit 8 at 2010 base date and following my ruling) to give a land value of $80,850,132 for the notional land value of the land without heritage restrictions; 4. adopted the assessment of 40.78% for "loss of site density"; 5. applied the "loss of site density" of 40.78% to the notional value of $80,850,132 to derive a land value of $47,879,448; 6. applied no further discount to reflect the loss of higher rental upper floors in the new office development; 7. adopted the 55% capital value differential to derive a land value of $21,545,752; and 8. added land improvements of $3,095,975 to derive $21,641,727.
2. Accordingly, for the Hill 4 density concession approach, Mr Hill determined the land value to be $24,650,000.

Mr Hill's evidence

1. By the conclusion of evidence, Mr Hill had submitted four approaches to the valuation which may be summarised as follows: Approach Land Value Net rental differential $36,185,000 Hill 1 at 1 July 2010 $37,285,000 at 1 July 2011 and 1 July 2012 Part heritage affected applying net rental differential, part non-heritage affected $48,175,000 Hill 2 at 1 July 2010 $49,540,000 at 1 July 2011 and 1 July 2012 Hill 3 Sale of the land (Jackson 1) identified above at par 36-42 at 1 July 2011 $28,290,000 Hill 4 Density concession (Jackson 4) identified above at par 49-50 at 1 July 2010 (exhibit 9) $24,650,000

Mr Hill's primary approach - rental differential approach (Hill 1)

1. Hill 1 comprised a two-step process, the first step was an assessment of the land value for the purposes of s 6A(1) with regard to a first set of comparable sales. The second step was the adjustment for the purposes of s 14G(1) of a net rental differential using a second set of comparable properties for rental purposes applied to the existing building NLA of 24,530 m2 with an allowance then made for land improvements.
2. In step 1 (s 6A(1)), Mr Hill accumulated, analysed, adjusted and applied five (ultimately four at the hearing) comparable sales of vacant land, described as development sites and lightly improved sales within the Sydney CBD to derive a rate of $1,775/m2 NLA for 1 July 2010 and $1,825/m2 NLA for 1 July 2011 and 1 July 2012 for the land.
3. In step 2 (s 14G), Mr Hill adopted the net effective rental differential as a percentage difference as he had done in Moneybox 2 which approach was accepted by Biscoe J. The net effective rental evidence for a new modern commercial retail/office use building of similar size is compared to that of the same subject heritage building, in new condition, with the net rental differential expressed as a percentage then deducted from the s 6A(1) land value previously assessed.
4. Mr Hill accumulated and analysed seven comparable rentals for modern buildings and eight comparable rentals for heritage buildings, arriving at a net effective rental rate of $734/m2 per annum for a modern building at the 2010 base date. Mr Hill particularly focussed on adjusting comparable rental evidence from 33-39 Hunter Street, Sydney to derive a net effective rental rate of $558/m2 per annum for a heritage building in new condition. Mr Hill calculated the net rental differential to be 24%.
5. Mr Hill's step 1 assessment of s 6A(1) land value at a rate of $1,775/m2 NLA for 1 July 2010 and $1,825/m2 NLA for 1 July 2011 and 1 July 2012 was then adjusted by 24% for the purposes of s 14G(1) to $1,349/m2 NLA for 1 July 2010 and $1,387/m2 NLA for 1 July 2011 and 1 July 2012. When multiplied by the NLA of the existing building of 24,530.30 m2 a s 14G(1) adjusted land value of $33,091,375 and $34,023,526 respectively was derived.
6. Concerning an allowance for land improvements, Mr Hill considered the excavation of two basement levels to be a land improvement creating added value reflecting the cost and time saving of excavation to a hypothetical purchaser. Having regard to Rawlinsons Australian Construction Handbook (28th ed 2010, 29th ed 2011, 30th ed 2012), Mr Hill calculated the "value of excavation" to be $3,095,975 at 1 July 2010 and $3,263,325 at 1 July 2011 and 1 July 2012. Adding the value of excavation for land improvements to his s 14G(1) adjusted land value, Mr Hill derived $36,185,000 at 1 July 2010 and $37,286,851 at 1 July 2011 and 1 July 2012 which he then rounded.
7. Accordingly, for the Hill 1 net rental differential approach, Mr Hill determined a land value of $36,185,000 at 1 July 2010 and $37,285,000 at 1 July 2011 and 1 July 2012.

Mr Jackson's analysis and variation of Hill 1 (Jackson 3)

1. Mr Jackson contended that regard should be given to the capital value differential, rather than to the net rental differential approach of Mr Hill, being effectively a new valuation method. Jackson 3 comprised a capital value differential approach, being a variation of the Hill 1 net rental differential approach, whereby Mr Jackson: 1. assessed the capital value of a new modern building with an NLA of 24,530 m2 on the land at $369.06 million ($15,045/m2 NLA); 2. assessed the capital value of a new heritage building with an NLA of 24,530 m2 on the land at $165.10 million ($6,730/m2 NLA); 3. calculated the capital value differential to be 55%; 4. adopted Mr Hill's assessment of the land value of the land for the purposes of s 6A(1) of $1,775/m2 NLA for 1 July 2010; 5. applied the 55% capital value differential to Mr Hill's land value of $1,775/m2 NLA for 1 July 2010 to derive $798.75/m2 NLA; 6. multiplied the rate of $798.75/m2 NLA by the building NLA of 24,530.30 m2 to derive $19,593,577; and 7. added Mr Hill's assessment of land improvements of $3,095,975 at 1 July 2010 to derive $22,689,552
2. Accordingly, for the Jackson 3 capital value differential approach, Mr Jackson determined the land value to be $22,690,000.

Part Heritage Constrained/Part Developable Approach (Hill 2)

1. Hill 2 comprised of Hill 1 but with regard to s 14G(1) for only that part of the land to be retained (i.e. not to be demolished, approximating 13,133 m2 NLA) in the proposed redevelopment with the balance of the area to be demolished to be valued without regard to s 14G(1) (being a land area approximating 1,406 m2). The two parts were then added.
2. For an assessment of the land value of the retained portion for the purposes of s 6A(1), Mr Hill derived a rate of $1,875/m2 NLA for 1 July 2010 and $1,925/m2 NLA for 1 July 2011 and 1 July 2012 for the land. For adjustment for the purposes of s 14G(1) for the retained portion, Mr Hill maintained the net rental differential of 24%.
3. The rate per square metre NLA was then adjusted by 24% for the purposes of s 14G(1) to $1,425/m2 NLA for 1 July 2010 and $1,463/m2 NLA for 1 July 2011 and 1 July 2012. When multiplied by the NLA of the retained portion of the existing building of 13,133 m2, the s 14G(1) adjusted land value was $18,714,525 and $19,213,579 respectively.
4. For the land value of the portion of the land to be demolished (approximating 1,406 m2) for the purposes of s 6A(1), Mr Hill accumulated, analysed, adjusted and applied five comparable sales of vacant land and development sites within the Sydney CBD to derive a rate of $1,875/m2 gross floor area (GFA) for 1 July 2010 and $1,925/m2 GFA for 1 July 2011 and 1 July 2012.
5. For the portion of the land to be demolished of 14,060 m2, when multiplied by the rates of $1,875/m2 GFA for 1 July 2010 and $1,925/m2 GFA for 1 July 2011 and 1 July 2012, land value for the purposes of s 6A(1) was $26,362,500 and $27,065,500, respectively.
6. Mr Hill maintained a value of land improvements of $3,095,975 at 1 July 2010 and $3,263,325 at 1 July 2011 and 1 July 2012.
7. Mr Hill then added the components as follows: 1 July 2010 1 July 2011 1 July 2012 s 6A(1) and s 14G(1) adjusted value retained part $18,714,525 $19,213,579 s 6A(1) value demolished part $26,362,500 $27,065,500 Land Improvements $3,095,975 $3,263,325 Total $48,173,000 $49,542,404

1. Accordingly, for the Hill 2 part heritage constrained and part developable approach Mr Hill determined the land value to be $48,175,000 at 1 July 2010 and $49,540,000 at 1 July 2011 and 1 July 2012.
2. The Applicant submits that this approach is not legally available to the Valuer-General or its valuer as the Valuer-General has determined that it would be reasonable to make the assumptions referred to in s 14G(1) for the whole of the land as provided for in s 14G(2). I agree. I will not consider the Hill 2 approach further for that reason.

Appropriate valuation method?

1. As already identified, an important change of circumstance since earlier Moneybox appeals is that half the interest in the land was sold in 2011. In addition, a development consent has now been granted for the site which increases the NLA to 33,860 m2. The Valuer-General submits that as the approach accepted by the Court and the Court of Appeal in Moneybox 1/1A and Moneybox 2/2A was the same rental differential methodology as Mr Hill applied in this case that is the appropriate method to apply. There are at least three reasons why that litigation history is not conclusive of the appropriate valuation methodology in this case.
2. Firstly, there is no specific guidance in terms of valuation principle in the VL Act for how the required set of assumptions in s 14G(1) interact with the assumption in s 6A(1) that the land is vacant unimproved land. Consequently no single valuation methodology is required as a matter of law. Section 14G(1) specifies numerous assumptions of which the hypothetical parties to the sale of the land in its notional physical state under s 6A(1) are taken to be aware per Valuer General v In Adam [2012] NSWCA 20; (2012) 211 LGERA 75 at [23]. Provided the necessary assumptions required by s 6A(1) and s 14G(1) are made within a particular valuation method, the Court can have before it several methods which may meet the statutory requirements, as has happened in this case. As the Valuer-General submitted, all the valuation methodologies here are consistent with the assumption required by s 6A(1) of land valued as if the improvements had not been made, which the assumptions in s 14G(1) must operate in conjunction with.
3. Secondly, and related to the first point, as Biscoe J identified in Moneybox 2 at [7], in merit appeals against valuations of heritage restricted land the valuations by the Court in preceding years do not attract the principle of res judicata, citing Broken Hill Proprietary Company Limited v Municipal Council of Broken Hill (1925) 37 CLR 284 at 289. The decisions in Moneybox 1 and Moneybox 2 reflected the evidence in those cases. In Moneybox 1 the Court rejected the then owner's valuer's method based on a capitalisation of rent and accepted (as the valuation method that remained) Mr Hill's rental differential approach. A broadly similar approach was taken by both valuers in Moneybox 2, the dispute was how the s 14G(1) assumptions applied within that method. Moneybox 2A was determined on a narrow issue of whether a reduction in land value to reflect the existing building in actual condition ought be applied in the rental differential method. There was no fundamental review of Mr Hill's approach in Moneybox 2. The results in Moneybox 1 and Moneybox 2 do not preclude Mr Jackson on behalf of the Applicant putting before the Court other valuation methods provided these satisfy the requirements of s 6A(1) and s 14G(1) of the VL Act. Ultimately I must determine what is the most reliable valuation method to apply in this case on the evidence before me.
4. Thirdly, criticism has been made in this case about Mr Hill's rental differential approach (Hill 1) which was not identified and considered in the earlier Moneybox appeals. The reliability of that approach is in issue. The Applicant's position is that s 14G(1)(c) requires the hypothetical vendor and purchaser of the land (in its notionally vacant state) to be aware of the circumstance that it may only be developed by means of a building that is of exactly the same physical character as the actual building located on the land on the relevant base dates. The physical character of the existing building not only encompasses its overall size and shape but also includes its internal design and the materials of which it is constructed. In other words, the hypothetical sale transaction is consummated on the common understanding that the potential of the land is limited to a scenario where the only building that may be erected on the vacant land is an exact physical replica of the existing building. I agree that approach reflects the drafting in subs (1)(c).
5. Hill 1 is criticised by the Applicant as failing to make the assumptions required by s 14G(1)(b) and (c). It is agreed here, as in the earlier Moneybox appeals, that the use of the land for retail/commercial office space is its highest and best use in a planning sense for the assumption required in s 14G(1)(a). Subsection (1)(b) requires the assumption that all improvements on land may be continued in order that the use (as assumed in subs (1)(a)) may be continued. Subsection (1)(c) requires an assumption that no improvements other than those referred to in subs (1)(b) may be made on the land. The Applicant criticises Mr Hill's approach in step 1 on the basis that he does not take the actual building physically existing on the land into account as a physical structure but contends it is only its use that informs the selection of comparable sales based on that use being applied to a new structure of the same size. His comparison of comparable sales in the first step of his rental differential method is therefore criticised because he compares the selected sales with a hypothetical new modern commercial building on the land, not the actual building physically existing upon the land. Mr Hill derives a land value on the assumption that the land as vacant land can be developed with a building other than and more valuable than the existing building, namely a modern building of the same envelope as the existing building. The Applicant therefore submitted that the first step of the rental differential method was inconsistent with the assumption required in s 14G(1)(c).
6. Whether this is a valid criticism can be debated as in the second step of the net differential method a comparison of the rental evidence for a new modern retail/commercial office use building of a similar size and/or height to that of the very same subject heritage building in new condition is made by Mr Hill. That step arguably does takes into account the s 14G(1)(c) assumption, which the Applicant accepted to some extent. According to the Applicant that comparison is only of the inferior design and efficiency of the existing building compared to a modern building of the same size. This differential fails to take into account the cost of constructing the existing heritage building which would be a substantial consideration for the hypothetical purchaser of the land in light of its limited development potential (Applicant's closing submissions at par 35).
7. Further criticism is provided by Mr Jackson when asked to apply Mr Hill's net rental differential model. He considered the approach incorrect and varied it by applying an approach he called the capital value differential approach, summarised above in par 61-62.
8. Regardless of this criticism, which appears well founded in part, Mr Hill's approach requires a large number of adjustments of two different sets of properties, the first set of comparable sales being used to derive a land value and the second set of rental properties being used to derive a percentage reflecting a net rent differential. Accepted valuation principle suggests that where available the directly comparable sales method is the traditional and usually unexceptional method, as identified by the High Court in Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2003) 212 CLR 111 at [16] albeit in the context of compensation for compulsory acquisition of land in New South Wales. Here the sale of the land is the best evidence provided the test in Spencer v The Commonwealth of Australia (1907) 5 CLR 418 is satisfied because it shows that the market paid for the property. This is a rare occurrence in s 6A(1) cases. At a general level therefore Mr Jackson's reliance on the sale of half the interest in the land could be the most reliable valuation method, subject to determining the fundamental legal criticism of this approach in the context of the VL Act. The application of a single sale as the most comparable sale was approved in AMP Henderson Global Investors v Valuer General [2004] NSWCA 264; (2004) 134 LGERA 426 at [67]-[68].
9. I do not need to finally resolve the criticism of Mr Hill's net rental differential approach. In the absence of a relevant sale of the land in the future that approach may well be once again a preferable method of valuation, which may require adjustment in light of the arguments heard in this case.

Jackson 1 legally permissible valuation method?

1. Turning to the legal question of whether Mr Jackson's first approach is legally permissible, at issue is whether Mr Jackson can apply the sale of half land and in applying the sale of half land whether Mr Jackson can deduct the value of the improvements to arrive at a value for the vacant land as required by s 6A(1) of the VL Act. The Applicant submits there is no legal bar to the Court adopting this method. The Valuer-General submits that approach is contrary to Toohey's Limited v Valuer-General (1928) AC 439; (1924) 25 SR (NSW) 75.
2. The Applicant argued that Toohey's does not render impermissible the methodology used by Mr Jackson in these proceedings. That method is indistinguishable from the approach endorsed by the High Court in Maurici. As the Applicant identified, s 6A(1) and/or s 14G(1) do not state explicitly or implicitly that a sale of the land is not a permissible valuation method. As a result of Valuer-General of New South Wales v Fivex Pty Ltd [2015] NSWCA 33; (2015) 206 LGERA 45 and the insertion of s 14G(1)(b1) and (d) in the VL Act since the earlier Moneybox appeals, Moneybox 1A and Toohey's should no longer be regarded as prohibiting the use of a methodology that derives the land value for a property by deducting the value of the improvements on that property from an assessment of the improved market value of that property.
3. The Valuer-General submitted that the sale of half interest in land approach was contrary to s 6A(1), relying on Toohey's and the later cases Moneybox 1A, per Tobias JA at [93] and Valuer General v Fenton Nominees Proprietary Limited [1982] HCA 46; (1982) 150 CLR 160 at 165-166. A similar approach by Mr Jackson in Moneybox 1 was rejected by Talbot J, affirmed by the Court of Appeal in Moneybox 1A. In Moneybox 1 Mr Jackson sought to rely upon a valuation of the land based on the capitalisation of rents and discounted cash flow analysis and here the sale of a half interest in the improved property. Both approaches assess a value for the improved land. The value of the improvements was then subtracted, an impermissible approach according to Toohey's.

Jackson 1 legally permissible

1. The approach in Jackson 1 can be distinguished from the method applied by Mr Jackson in Moneybox 1. I accept that a sale is factual evidence of an agreement of a vendor and purchaser effecting commercial reality. A valuation is the opinion of an individual based on that individual's judgement. The Jackson 1 approach is fundamentally different from reliance on a valuation applying the capitalisation of rent and discounted cash flows arising from the use of the building as a commercial office building. That approach adopted by Mr Jackson in Moneybox 1 was rejected. That same finding does not apply to the part sale of land approach here.
2. Turning to the case law referred to by the parties, I largely agree with the Applicant's analysis of the relevant authorities resulting in the conclusion that reliance on the sale of half land is a legally permissible valuation approach under s 6A(1) of the VL Act. In Toohey's the Privy Council said that it is an erroneous approach to begin with a valuation which takes in the improvements and then proceed by means of subtraction of a sum arrived at by an independent valuation in order to find the required figure, at 443. The approach was adopted in Fenton Nominees by the High Court. There are three matters to consider in Toohey's. Firstly the property to be valued in that case as vacant included premises which had the benefit of a liquor licence was held to attach to the building not the land. No such issue arises in this case. Secondly the Privy Council criticised the application of a valuation distinguishing it from a sale. The limitation on using a valuation to do a valuation is not in issue here. Toohey's rejected reliance on a valuation of the subject property. This matter can be distinguished as reliance here is placed on the sale of half land. Thirdly the Privy Council criticised the deduction of improvement costs from improved land to arrive at an unimproved value in the context of a comparable sale valuation.
3. In Moneybox 1A Tobias JA stated at [130]-[132]: 130 It follows from the foregoing in my view that the current text of the Act logically stands in the way of valuing the relevant land in its improved state in the manner adopted by Mr Jackson as his primary method of valuation and then deducing its unimproved value by deducting from its improved value the added value of the improvements. In my opinion this is contrary to what I still regard, notwithstanding the additions of ss 6A(2) and 14G(1), as the clear requirements of s 6A(1). 131 Although such a result may be regarded as artificial or lacking in reality or even as rendering impermissible a method of valuation which is said to be rational (though in my view inherently unreliable), nevertheless that is what the statute requires. The fact that a similar method is used in deducing an unimproved land value from the sales of improved land is beside the point. However, as Biscoe J points out in Krisgay in the passage recorded by me in [106] above, the use of such sales is far more reliable than directly valuing the relevant land as improved land and this is so for two reasons. 132 The first is that with sales, the improved value of the sale land has actually been determined by the market. Only one exercise is then required: the deduction of the added value of the improvements to arrive at the bare land component of the sale price. The second is that Mr Jackson's method requires the additional and primary exercise of determining the improved land value without reference to the market generally or to market sales of comparable land in particular. The weakness of this method is that this primary exercise of determining the improved value of the relevant land has not been tested in, let alone determined by, the market and for that reason alone is more likely to give rise to greater problems of unreliability.
4. In Krisgay Biscoe J stated the following in relation to Maurici and Toohey's at [30]: 30 Can Fenton/Toohey's and Maurici be rationalised? Suppose there are two identical buildings on adjoining lots A and B. Lot A is to be valued for its "land value" as at a certain base date under s 6A of the V of L Act. Lot B was sold shortly before the base date and is a comparable sale to which regard should be had when determining the land value of Lot A. Under Fenton/Toohey's the land value of Lot A cannot be determined by taking the improved value of Lot A and deducting the improvements. However, under Maurici the unimproved value of Lot B can be determined by that method for the purpose of utilising it as a comparable sale. If this is capable of being rationalised, it may be on two bases. First, as a matter of construction, the V of L Act simply mandates that improvements (other than "land improvements" as defined) must be kept entirely out of view. It is only then that the notional sale occurs. Second, there has been no actual sale of Lot A whereas Lot B has actually been sold. Where there is a sale, the sale price is a reliable indicator of value; and the value of improvements is in view, even if not expressly identified and segregated in the sale contract from the unimproved value. Where there has been no sale, the value of improvements is not in view, at least not in the same way.
5. As identified in the passage in Krisgay cited immediately above the market sale of a property is a markedly different transaction from the assessment of improved value by other means. This passage was cited with approval by Tobias JA in Moneybox 1A. I agree with the Applicant's submission that the conclusions in Moneybox 1A of Tobias JA are defined by the particular methodology in issue in those proceedings. Moneybox 1A and Toohey's does not render impermissible the sale of half land approach of Jackson 1. Fivex supports the Applicant's approach.
6. In Fivex the Court of Appeal was considering s 6A(2) rather than s 14G(1). The similarities between the two provisions in s 14G(1)(a) and (b) and s 6A(2)(a) and (b) were recognised by Leeming JA (Basten and Gleeson JJA agreeing) at [12]-[14] and [30]. The application of s 6A(2) and whether it required actual improvements on the land to be taken into account in the valuation exercise was in issue. Leeming JA relevantly stated: 10 The "land value" required to be determined initially by the Valuer-General, and by the Land and Environment Court on appeal, is defined by s 6A(1) of the Act. Speaking generally, it is the unimproved value of the "fee-simple", subject to certain assumptions. Improvements "were to be left entirely out of view": Toohey's Ltd v Valuer General [1925] AC 439 at 443. The absoluteness of that statement is, however, now qualified by s 6A(2). … 13 Section 14G(1) does not apply to the land owned by Fivex, but it will be seen that paragraphs (a) and (b) resemble s 6A(2)(a) and (b); I return to this below. Handley JA, with whom Allsop P and Tobias AJA agreed, said in Valuer-General of New South Wales v In Adam Pty Ltd [2012] NSWCA 20 at [24]: "Most of the assumptions in s 14G(1) modify the basic, but artificial, assumption in s 6A(1), that the improvements, other than land improvements, have not been made. Those assumptions introduce facts from the real world." … 46 Thirdly, and to my mind critically, there is paragraph (b) of s 6A(2). Paragraph (b) goes beyond the use of the land, and speaks in terms of the improvements on the land. The paragraph refers at least in part to improvements in the real world, as appears from the verb "continued", a point noted by Handley JA in Maurici v Chief Commissioner of State Revenue [2001] NSWCA 78 at [26]. If the operation of s 6A(2) were exhausted by ensuring that an existing use is one to which the valuation exercise may have regard, then it is difficult to see why paragraph (b) is needed at all. Conversely, the presence of s 6A(2)(b) requires, in particular, an assumption to be made that the improvements as they exist in the real world "may be continued". … 48 None of this is to deny that what is to be determined is the unimproved value of the "fee-simple", stripped of those improvements. Necessarily, the task required by the statute is a highly artificial one. However, the statute refers in terms not merely to the purpose of the existing use, but also to the actual improvements in the real world that enable that existing use to continue. … 50 Fifthly, my conclusion is also consistent with what was held in Valuer-General v Commonwealth Custodial Services Ltd [2009] NSWCA 143; 74 NSWLR 700, where the Court unanimously held that heritage restricted land should be valued by reference to the improvements on the land in their actual condition, rather than in their pristine condition. That was a decision upon a determination of land value making the assumptions in s 14G(1), but it is clear that those assumptions are closely related to the approach required by s 6A(2). The operative words in s 14G(1)(b) which led to this construction were "that all improvements on that land when the value is determined may be continued and maintained in order that the use of that land as referred to in paragraph (a) may be continued". There is not merely a close textual resemblance with s 6A(2)(b), but also a clear structural resemblance. In s 6A(2), there is a requirement to assume a particular use for a purpose, and then a further requirement to assume that improvements may continue in order to enable the continuation of the use. In s 14G(1) there is a requirement to assume that a particular use for a purpose is the only permitted use, and a further requirement, materially identical to that in s 6A(2)(b), that improvements may continue in order to enable the continuation of the use. The simple point is that if s 14G has been held to require attention to the actual condition of the building, why should not the same be true of s 6A(2), a provision in the same Act, and with much the same text and structure?
7. As the Applicant submitted Leeming JA in Fivex states at [10] that the principle in Toohey's that improvements must not be considered was qualified by s 6A(2). The Court of Appeal in Fivex distinguished the analysis of Tobias JA in Moneybox 1A at [125]-[130] where his Honour concluded that the enactment of s 6A(2) had no impact on the principle in Toohey's, see Fivex at [50]-[51]. There is no reason to distinguish the reasoning of Leeming JA in Fivex as extracted above to apply in this case to support the approach in Jackson 1.
8. I do not accept the Valuer-General's submissions that Fivex should be distinguished because it refers to s 6A(2) rather than 14G(1). There is considerable overlay between par (a) and (b) in both subsections, as recognised in Fivex at [12]-[14] and [50].The reasoning in Fivex including the express qualification of Toohey's support the Applicant's submissions on this matter.
9. The addition of s 14G(1)(b1), (d) and (1A) all suggest an emphasis on improvements in the statutory scheme which supports use of a sale of the property in its improved state where the value of the improvements can be identified, as in this case.
10. As the Applicant submitted, the criticism of Jackson 1 for using an improved sale to derive an unimproved land value would also seem to apply in part to Mr Hill's set of comparable sales in step 1 of the net rental differential method (Hill 1). While he described such sales as lightly improved or development sites, Mr Hill deducted large amounts for improvements in relation to sale H1 of 20 Martin Place (site opposite the land), sale H2 of 153-159 Clarence Street and sale H3 of 379-385 George Street as can be seen in the table in par 14. Only sale H5, 8-12 Chifley Square, was vacant land.
11. I conclude that the Jackson 1 approach is a permissible valuation method for the purposes of the VL Act.

Operation of s 14G(1)(d) no bar to Jackson 1

1. The Valuer-General contends that s 14G(1)(d) is also a bar to Mr Jackson's first approach. I will repeat the subsection here for ease of comprehension: …that the cost of construction of improvements on that land has no effect on its land value, with the result that there is to be no reduction in land value because of any difference between the cost of construction of the improvements referred to in paragraph (b) as new improvements and the cost of construction of other improvements used as a basis for comparison in the determination of land value.
2. Firstly, the Valuer-General submitted that the paragraph contains two assumptions both of which must be made. The first assumption is that the costs of construction of improvements on land has no effect on land values. The second assumption is that this assumption has the result that there is no reduction in land values because of any difference between the cost of construction of the improvements referred to in par (b) as new improvements and the cost of construction of other improvements used as a basis for comparisons in the determination of land value. Land that is heritage restricted is to have its land value determined on the basis of the assumption that the cost of construction of improvements on that land has no effect on its land value. The sale of the land offends the first assumption as Mr Jackson derived the value of the improvements by using the cost of construction of the improvements of the Moneybox building as identified by the quantity surveyors. The improvement value is a function of the construction cost, which has an effect on the land value. This approach is precluded as a matter of law.
3. The Applicant submitted that the Valuer-General's construction of s 14G(1)(d) was incorrect. The paragraph should be read as a whole as containing one assumption, namely that the cost of construction of the existing improvements has no effect on land value. To do otherwise ignores all the words after the comma. The Applicant's construction is in conformity with the statutory context as the chapeau of the section refers to the valuation of land "on the basis of the following assumptions". Furthermore, "the" result follows the opening words of par (d) not "a" as the Valuer-General's approach would require.
4. Secondly, the two assumptions approach is inconsistent with the explanatory materials at the time of its introduction and therefore its provenance and purpose. The provision was enacted by the Valuation of Land Amendment Bill 2011 (NSW). The second reading speech of that Bill states that the provision was intended to reverse the effect of the decision of this Court in In Adam Pty Ltd v Valuer-General [2011] NSWLEC 55 "which involved a deduction from land value of a "heritage cost penalty" calculated as the increased cost of construction of improvements in heritage restricted land" (New South Wales Legislative Council, Parliamentary Debates (Hansard), 22 November 2011 at 7523).
5. The "heritage cost penalty" reduction approved in In Adam involved a variation of the rental differential method. As seen above, the second step of that method involves the assessment of a rental differential comparing the rent for the existing heritage building (considered in new condition due to s 14G(1)(b1)) and the rent for a new modern building of the same size in terms of NLA. The heritage cost penalty operated to further reduce the land value derived from the application of the differential by an amount reflecting the increased cost of construction of the new modern building compared to the heritage building, see In Adam at [25]-[29]. The mischief to which s 14G(1)(d) is directed is a valuation method that reduces land value by a comparison between the construction cost of the existing improvements on the subject land and the construction cost of other improvements.
6. Thirdly the Valuer-General's first assumption would cancel out and render redundant the effect on land value of the assumption required to be made by s 14G(1)(c), that no improvements other than those referred to in par (b) may be made to or on that land. The cost of construction of those improvements will necessarily be a factor in the mind of the hypothetical purchaser of the land in that state in considering its value.
7. For the reasons advanced by the Applicant Mr Jackson's sales approach is not precluded by s 14G(1)(d). I accept that s 14G(1)(d) is ambiguous and obscure, such that the secondary reading speech (see above at par 98) may be used to assist with the meaning of that provision, per s 34 of the Interpretation Act 1987 (NSW). While I note the words of Spigelman CJ in Moneybox 1A at [16] that the words of a statute must be applied as written so that their effect may apply beyond the mischief originally addressed, statutory construction principles require that a statute and its parts must be read as a whole. The whole of s 14G(1) must be read, which includes the chapeau, and each paragraph including par (c) must be given work to do if at all possible. The Applicant's approach accords with such an approach to statutory construction and is to be preferred to the Valuer-General's approach.
8. Section 14(1)(d) does not preclude the Jackson 1 approach.

Is the sale of half land reliable (is Spencer test satisfied)?

1. The Valuer-General criticised reliance on the part sale of the land on the basis that it was not reliable. The contract between CFS Managed Property and Cbus Property 5 Martin Place Pty Ltd (Cbus) dated 2011 for the 50% sale of the land (exhibit 4) relevantly provided: Vendor CFS Managed Property Limited (ACN 006 464 428) as trustee for the 120 Pitt Street Trust. Level 7, 52 Martin Place, Sydney NSW 2000 … Property (this definition overrides clause 1) 50% share as tenant in common with the vendor of the Building known as the Sir Denison Miller Building situated at 5 Martin Place, Sydney and comprising the land, the improvements, all fixtures and the included items, but not the exclusions. … Purchaser Cbus Property 5 Martin Place Pty Ltd (ACN 152 430 898) as Trustee of the 5 Martin Place Trust … Price $36,500,000.00 subject to clauses 31 and 32 …

30 Interpretation Co-Owners' Agreement means the Co-Owners Agreement to be entered into between the purchaser and the vendor in substantially the same form as attached to this document as schedule 1. … 31 Reimbursement Amount (a) The purchaser must in addition to the Price pay the vendor the Reimbursement Amount. (b) The purchaser acknowledges that the purchaser will be liable to pay stamp duty on the Combined Price (being both the Price and the Reimbursement Amount) and that the Reimbursement Amount has been calculated having regard to the purchaser's stamp duty liability. 32 Sale Adjustment Amount (a) If the vendor or the parties enter into a Pre-Commitment on or before 1 December 2013, then the purchaser agrees to pay the vendor in addition to the Price the Sale Adjustment Amount within 14 days of the date of practical completion (or if there is more than one date of practical completion, the last date of practical completion) under the Building Contract. (b) The purchaser acknowledges that if the Sale Adjustment Amount is payable the purchaser will be liable to pay stamp duty on both the Combined Price and the Sale Adjustment Amount and that the Sale Adjustment Amount has been calculated having regard to the purchaser's stamp duty liability. ... Schedule 1 - Co-Owners' Agreement … 3 Co-Ownership structure and Interests … 5 Building and property management … 7 Co-owners Committee … 9 Dealings with Interests 9.1 Restriction on Dealings A Co-Owner must not Deal with its Interest except by way of: (a) a Permitted Transfer in accordance with clause 10; or (b) a Dealing pursuant to clause 11; or (c) a Default Buyout in accordance with clause 13. 9.2 Further restrictions on Dealings In addition to the restrictions in clause 9.1, a Co-Owner may not Deal with its Interest: (a) in a way which would result in there being more than two Co-Owners; or (b) unless the Interest to be Dealt with is the whole of the Co-Owner's Interest. … 10 Permitted Dealings 10.1 Dealing with Co-Owners' Group Subject to clauses 9.1 to 9.4 inclusive, a Co-Owner: (a) may Deal with the whole of its Interest where the other party to the Dealing is a member of that Co-Owner's Group; and (b) need not comply with clause 11 in connection with that Dealing. The Co-Owner Dealing with its Interest must promptly notify the other Co-Owners in writing of the Dealing. … 11 Pre-emptive rights 11.1 Offer If a Co-Owner wants to Deal with its Interest other than by way of Permitted Transfer, it must give the other Co-Owner a notice in writing offering to sell that Interest. … 12 Mortgage of an Interest 12.1 Mortgage of part of an interest A Co-Owner must not, and must not agree, attempt or take any step to create or allow to exist a Mortgage over part of its Interest. 12.2 Mortgage of Interests A Co-Owner must not, and must not agree, attempt or take any step to, create or allow to exist a Mortgage over the whole of its Interest or the Property without the consent of the other Co-Owner. 12.3 When a Mortgage is permitted The non-mortgaging Co-Owner must give that consent if the prospective Mortgagee enters into a deed with the non-mortgaging Owner, in such form as it may reasonably require (having regard to the market practice at the time), under which the prospective Mortgagee agrees and acknowledges that: (a) it has read and understood this agreement and all other Relevant Agreements and the mortgaging Co-Owner's Obligations under them; and …

1. The CFS Managed Property's press release dated 4 August 2011 (exhibit 2) relevantly provided: COMMONWEALTH PROPERTY OFFICE FUND (CPA) Sale of a 50 percent interest in 5 Martin Place, Sydney asset Colonial First State Property Limited, the Manager of the Commonwealth Property Office Fund (CPA or the 'Fund'), today announced the sale of a 50% interest in its 5 Martin Place, Sydney asset, to Cbus Property, a subsidiary of Cbus, the industry superannuation fund for the construction, building, infrastructure and allied industries. The transaction, which will be immediately accretive to earnings and distributions on settlement, will result in the following: Cbus Property acquiring a 50% interest in 5 Martin Place, Sydney for a total of $36.5 million plus the reimbursement of 50% of the costs expended to date totalling $5.8 million; Cbus Property assuming full development and leasing risk for their 50% interest in the asset as part of the joint ownership arrangements put in place for the redevelopment of this asset; The joint partnership targeting a 30% tenant pre-commitment prior to the commencement of construction; CPA being granted a call option to acquire a 50% interest in 8 Exhibition Street, Melbourne with the option being exercisable between 1 July 2012 and 30 June 2013 at the then market value; and Proceeds from the sale of the 50% interest in 5 Martin Place, Sydney, being initially used to retire debt and then drawn upon, once the development commences. Charles Moore, CPA Fund Manager said: "We are pleased to welcome Cbus Property as our partner in the joint ownership of 5 Martin Place, Sydney. We view Cbus Property as a compatible, like minded, long-term investor with a proven track record in developing Australian commercial assets. This transaction is in line with CPA's strategy of prudently managing development risk and making investment decisions that are focused on improving returns to unitholders." "The additional benefit of CPA being granted a call option to acquire a 50% interest in 8 Exhibition Street, located in the premium east end of Melbourne will, if exercised, provide an opportunity for the Fund to further diversify its holdings and enhance the underlying characteristics of the portfolio, whilst providing sustainable income return to unitholders," said Mr Moore. … Property details As previously announced, 5 Martin Place, Sydney has received Development Application (DA) approval, permitting the asset to be transformed into a 33,000 sqm premium-grade office building offering large, efficient floor plates in the centre of Sydney's central business district, whilst preserving the unique heritage features of the site. It will target a 5-star Green Star and 5-star NABERS Energy ratings. …
2. Mr Jackson characterised the sale as being the sale of a partial development site, as the land was sold with a development consent in place and on the basis that the development was to proceed. As the development included substantial existing improvements, Mr Jackson described it as a "redevelopment opportunity".
3. In examination in chief Mr Jackson gave evidence that he considered that the sale of the land itself might be good evidence of value, notwithstanding that that sale was an improved sale. This approach means there are less subjective adjustments required than using comparable sales evidence of different properties. Valuers often adopt an approach of analysing the added value of improvements to derive an underlying land value. In this case where there were no other heritage restricted buildings to consider, the sale of the land was the most directly comparable piece of evidence.

Parties' submissions (reliability of half sale)

1. The Applicant submits that the partial sale is reliable in accordance with general valuation practice that the sale of a land is the best evidence of its market value. This was conceded by Mr Hill in cross-examination. The application of such a sale is a commonly used valuation method endorsed by the High Court in Maurici at [19]. It is also the best evidence being the sale of the land, not requiring adjustment as other comparable sales generally do.
2. The Valuer-General submitted that the Court would have concerns in relation to the circumstances surrounding the particular transaction. The following differentiating aspects of this transaction make it an unreliable transaction to rely on: i. This is a sale of a partial interest. Although Mr Jackson says that sales of partial interests are "relatively" common, particularly "where many assets these days are owned and developed in joint ownerships", this partial transaction raises concerns where Mr Jackson describes it as a sale of "half an entity in regard to a piece of property as a redevelopment site"). ii. It is unknown whether the vendor or purchaser obtained "discrete valuations in the sense of anything formal". Mr Jackson notes "to the best of my knowledge, they didn't get valuations done" and "they are adequately resourced to formulate their own views…". Mr Jackson made enquiries and assumed (or acted upon the fact) that neither the vendor nor purchaser obtained a valuation. iii. The sale was not "exposed to the market" in the usual way, although Mr Jackson maintained that it was - as a "private sale". iv. The CPOF sold a half interest in "a new Sydney office project" (exhibit 1) (that is, a "project" which it was "transforming into a $450m tower" and "part of the deal" was a call option regarding a Melbourne "landmark tower"). The press release issued by CFS Managed Property (exhibit 2) and the property/financial press (exhibit 1), made it clear that the "transaction" will result in, inter alia, an option able to be exercised in 2013 over a development in Melbourne estimated to be $280-$300 million. v. It was associated with, or part of a "joint venture". It was a joint venture "to develop this site". In this regard, Mr Jackson stated that "it became a joint venture when the parties concluded their agreement to transact". However, he had never seen the joint venture agreement, and did not know when it was signed or dated. He understood that there was a partnership or a joint venture "…created as a result of this transaction" that was "part of a larger arrangement between the parties". vi. Mr Jackson agreed that "part of this arrangement between this partial sale or the transfer or partial interest involved a collateral agreement of the granting of a call option over the purchase of a 50% interest of the property [8 Exhibition Street] in Melbourne" and that the Moneybox building was bought as a "redevelopment site", and "for the development that's occurred…". vii. Part of the transaction, being referred to in the press release (exhibit 2) indicates that although there was an acquisition of 50% (for a total of $36 million) it also involved the reimbursement of 50% of certain costs expended to date, totalling $5.8 million. Mr Jackson was aware of this and made enquiries that this "didn't…infect the sale price of the real estate". viii. The circumstances included a "partnership" (in oral evidence Mr Jackson said that "if you are joint owners, you are in partnership"). Mr Jackson's evidence was that there was an option offered in writing in relation to the Melbourne property, but it "never proceeded". He agreed that, in relation to the partial sale, "part of the consideration" included, first, a joint venture and, as a separate matter, it also involved the granting of an option over the purchase of a large property (worth millions of dollars) in Melbourne. ix. The contract for sale dated 3 August 2011 (exhibit 4) contained a "co-owners' agreement". Mr Jackson had not seen the "co-owners' agreement". The co-owners' agreement is a 53 page document being schedule 1 to the "additional clauses to contract for sale of land" dated 3 August 2011 and defined on p 10 of the special conditions). x. The co-owners' agreement (as put to Mr Jackson) dealt with matters including "certain permitted dealings in relation to the interests that each party would have consequent upon the purchase…". There were, in fact (as put to Mr Jackson) "significant restrictions upon mortgaging or in any way otherwise encumbering their discrete interests". He was asked whether he knew that to be the case. He answered "If you tell me as a matter of fact, I'll accept that". xi. As put to Mr Jackson, the co-owners' agreement involved pre-emptive rights between the parties. xii. The co-owners' agreement also dealt with matters such as the co-ownership structure (cl 3), building and property management (cl 5), co-owners' committee (cl 7), dealings with interests (cl 9 - which included reference to restrictions on dealings (cll 9.1 and 9.2)), entry into an "accession deed" and other clauses such as cl 10, dealing with specific "permitted" dealings, and, importantly, cl 11, dealing with pre-emptive rights, and, as noted above, restrictions on mortgaging the interest were provided for in cl 12. Although Mr Jackson had not considered these matters regarding restrictions on mortgaging or otherwise encumbering the discrete interests, in relation to pre-emptive rights in dealing with the interest or half interest, he was of the view that such clauses would be "standard in a contract like that". xiii. Nevertheless, Mr Jackson's evidence (summarised above) in relation to his analysis of the contract is indicative that he did not closely consider the contract and, it is submitted, the circumstances surrounding the sale. For example, he says that he was provided with a contract for sale, but he was not provided with the co-owners' agreement. The co-owners' agreement was part of, and attached to, the contract. It was more than "a document associated with the contract", as suggested by Mr Jackson. Mr Hill had his concerns and raised them at the objection stage.

Half sale of land is reliable

1. The following six concerns about the reliability of the 50% sale were identified as: 1. the sale was of a 50% interest (not a 100% interest) in the subject land (see above at par 126(i)); 2. the sale was part of a broader transaction involving reimbursement for development costs and the granting of an option to acquire a property in Melbourne (see above at par 126(iv), (vi) and (vii)); 3. there was no evidence of independent valuations being obtained by the parties to the sale (see above at par 126(ii)); 4. the transaction was a private sale not a public sale (such as by expression of interest or tender) and the opportunity to purchase the interest in the land was not formally advertised (see above at par 126(iii)); 5. the existence of a "partnership" and the 50% sale being associated with, or part of a "joint venture" (see above at par 126(v) and (viii)); and 6. terms of the co-owners' agreement (see above at par 126(ix)-(xiii)).
2. Firstly, in relation to the concern that the sale was of a 50% interest, the Valuer-General relied on an extract from RO Rost and GH Collins in Land Valuation and Compensation in Australia, (3rd ed, 1984) at 271 and 273 for the proposition that proportionate value of the fee-simple may not be directly determinative of the value of the proportionate fractional interest. Reliance was also placed on Souter v Valuer-General [2008] NSWLEC 20 at [20] and Ralph v Repatriation Commission [2006] AATA 258 at [27]. The above proposition and cases were not put to Mr Jackson. Rost and Collins is a general text published over 30 years ago and cannot be expected to address such a specialised and sophisticated market as this. Furthermore and as the Valuer-General agreed, the principle in Rost and Collins is not absolute. Each case needs to be considered on its merits, as the Applicant submitted. Souter and Ralph concerned suburban residential properties, a very different market to that of this case. Souter and Ralph are distinguishable on that basis. The criticisms of Mr Jackson in closing by the Valuer-General's counsel were not put to Mr Jackson in oral evidence. The USA material handed up by the Valuer-General in closing submissions concerning fractional sales (exhibit 11) was also not put to Mr Jackson. It could provide little assistance in this circumstance.
3. The nature of the market is important when considering a purchase of 50% interest in land. An email from the Court to the parties drawing on the expertise of Parker AC dated 9 December 2015 stated: The market for premium and/or Grade A office investment properties in the Sydney CBD is highly sophisticated with numerous buildings being held in joint ownership, including the MLC Centre, Australia Square, Grosvenor Place and 52 Martin Place. Joint ownership has been a common basis of ownership for premium and/or Grade A office investment properties in the Sydney CBD for several decades, with 52 Martin Place being held in joint ownership since the late 1980's. Among participants in the market for premium and/or Grade A office investment properties in the Sydney CBD, joint ownership is widely accepted with issues concerning control liquidity, pre-emptive rights and so forth being commonly understood and so reflected in the prices at which interests in such properties are transacted by such participants. Accordingly, it may be contended that the market in which the Moneybox building may be expected to transact is a market where joint ownership would not be considered unusual.
4. The passage directly above accords with Mr Jackson's understanding of the market. He gave evidence that such sales are relatively common, particularly in the Sydney CBD, and gave a number of examples (see above at par 107-108). Mr Hill disagreed that such proportional sales are a common place feature in the Sydney CBD. The sales he relied on were all 100% ownership (see above at par 123). Mr Jackson's evidence, which focussed on premium-grade properties, is more relevant to the Moneybox building and should be preferred. The redevelopment of the Moneybox building is described in the CFS Managed Property's press release dated 4 August 2011 (exhibit 2) and the AFR article dated 5 August 2011 (exhibit 1) as transforming that building into a premium-grade building.
5. That the sale was for a 50% interest in the Moneybox building does not alone make it unreliable. Mr Jackson gave evidence that the total value of a property is agreed and then the partial interest that is purchased is a percentage of the total (see above at par 107). The sale of 50% for $36.5 million represented half of $73 million. I disagree with the Valuer-General's contention above at par 126(i) that a partial transaction in this market raises concerns of the nature suggested by the Valuer-General.
6. Secondly, the sale was part of a broader transaction. The arrangement between CFS Managed Property and Cbus is identified above at par 103 (exhibit 2 extract). It included Cbus acquiring a 50% interest in the Moneybox building for $36.5 million plus the reimbursement of 50% of the costs expended to the date of the transaction totalling $5.8 million, Cbus assuming full development and leasing risk for that 50% interest, and CPOF being granted a call option to acquire a 50% interest in 8 Exhibition Street, Melbourne.
7. Concerning the reimbursement costs totalling $5.8 million, the contract relevantly makes the $36.5 million sale price subject to cl 31, which provides that Cbus must in addition to the $36.5 million pay CFS Managed Property the reimbursement amount. The sale price did not incorporate the reimbursement amount. Mr Jackson made inquiries as to whether the reimbursement amount may have affected how much Cbus paid for the 50% interest. From these inquiries, Mr Jackson understood the reimbursement payment to be a separate and discrete payment, which represented moneys spent by the CPOF in formulating and progressing the development to the stage it had got to when the transaction occurred. It did not in any way infect the sale price (see above at par 113).
8. Mr Jackson's evidence concerning the option in 8 Exhibition Street, Melbourne was that it was a discrete part to the arrangement (see above at par 112). The option was collateral to the partial sale. Mr Jackson disagreed that this affected how much was paid for the 50% interest.
9. The thrust of Mr Hill's evidence (above at par 116-124) was that he had not made any specific inquiries beyond his raising of the issues with Mr Jackson prior to the issued land values being considered, as the Applicant submitted. Mr Hill agreed that his investigations revealed no affirmative information or indication that the $36.5 million was paid for anything other than the 50% interest in the land. Mr Hill's reliance on the words "additional benefit" in the CFS Managed Property's press release (exhibit 2) does not support the Valuer-General's contention that the sale price was affected by the granting of the option. I accept Mr Jackson's evidence that the partial sale was discrete and separate from the reimbursement cost and call option. Accordingly, I do not have concerns with the matters raised by the Valuer-General at par 126(iv), (vi) and (vii).
10. Thirdly, the Valuer-General had concerns that there was no evidence of independent valuations. To the best of Mr Jackson's knowledge the parties did not get independent valuations. He was not concerned about this because he is familiar with the parties to the 50% sale and was of the opinion that they are adequately resourced to formulate their own views in respect of valuation (see above at par 108). Mr Hill gave evidence that fractional sales are usually accompanied by valuation evidence. It is important to know what is in the mind of the purchaser and vendor. He thought it strange that two funds would just come to agreement, but would assume that they would internally have valuation and development expertise (see above at par 120). I accept Mr Jackson's evidence, the substance of which Mr Hill did not contradict. As the Valuer-General submitted, in this respect it is important to note that Mr Hill agreed that the parties to the sale were sophisticated, unrelated companies who would have been duly informed about the nature of the land. He had no information to suggest that the transaction was not at arms' length (see above at par 122). That Mr Hill was not aware of the sale does not mean that it was not a market transaction. The nature of a private, off market transaction is that those not directly active in that market may be unaware. I do not have concerns with the matter raised by the Valuer-General at par 126(ii).
11. Fourthly, the Valuer-General had concerns that the sale was not exposed to the market in a public way. Mr Jackson's evidence from his inquiries was that CFS Managed Property had offered the sale privately to the market to parties with the ability to perform in relation to the redevelopment of the property. It was, therefore, a private sale, not a public sale such as by formal auction. In Mr Jackson's understanding, the sale did not involve a sole bidder (see above at par 110). While Mr Hill's evidence was that he had concerns whether the land was advertised to the world at large, he agreed that it would be enough if the sale became known to likely purchasers by some process or disclosure other than by public advertisement. He had no reason to doubt that the opportunity to buy the 50% interest became known to the relevant class of competitive purchasers. As Mr Hill's evidence does not contradict that of Mr Jackson I do not have concerns with the matter raised by the Valuer-General at par 126(iii).
12. Fifthly, the Valuer-General identified at par 126(v) and (viii) concerns relating to the existence of a "partnership" and the 50% sale being associated with, or part of a "joint venture". That Mr Jackson was not provided with and therefore did not see the co-owners' agreement did not detract from his evidence based on his inquiries that the reimbursement payment and option did not affect the 50% interest price of $36.5 million. His understanding was that there was a partnership or joint venture, but the sale of the 50% interest was separate and discrete. Mr Jackson's agreement that part of the consideration included a joint venture, and then separately the granting of an option is not inconsistent with his evidence as identified directly above.
13. Finally (sixthly), the Valuer-General's concerns at par 126(ix)-(xiii) relate to the contract itself, which includes in schedule 1 the co-owners' agreement. The co-owners' agreement included clauses dealing with pre-emptive rights (cl 11) and restrictions on mortgaging the 50% interest (cl 12), inter alia. Clause 11 requires a co-owner to give the first right to purchase to the other co-owner. Mr Jackson considered such a term to be standard in a contract like the one for the 50% sale. I agree with the Applicant's submission that cl 11 does not restrictively control the co-owner's right of disposition. Clause 11 does not require that disposition can only be done on certain terms or with the consent of the other co-owner.
14. Clause 12.1 provides that a co-owner must not create or allow a mortgage to exist over part of its interest. Clause 12.2 provides that a co-owner must not create or allow a mortgage over the whole of its interest without the consent of the other co-owner. Clause 12.3 provides that that consent must be given if the prospective mortgagee enters into a deed with the non-mortgaging co-owner agreeing and acknowledging the terms identified in that clause. When Mr Jackson was told that there were significant restrictions upon mortgaging or in any way otherwise encumbering their discrete interests and then asked whether he knew or assumed that to be the case, he answered "if you tell me that as a matter of fact, I'll accept that" (see above at par 111). The question whether a term dealing with mortgage interests affected the 50% interest sale price was not put to Mr Jackson. There is no conclusive evidence that constraints on mortgaging the property positively or negatively impacted on the sale price of this transaction.

Spencer test satisfied

1. The evidence demonstrates that the sale of half land was at arm's length, between sophisticated parties that were well resourced and well advised, and after being offered to the market. The parties would have been informed about the nature of the land and what they were buying and selling respectively. That evidence supports the conclusion that the sale meets the Spencer test, namely that the parties "arrived at the value of the land by voluntary bargaining … willing to trade but neither of them so anxious to do so that they would overlook any ordinary business consideration", and both being "perfectly acquainted with the land, and cognizant of all circumstances which might affect its value", per Isaacs J in Spencer at 441.

Jackson 1 consistent with s 6A(1) and s 14G(1)

1. The detailed reasoning of Tobias JA in Moneybox 1A at [92]-[111] suggests that the assumptions in s 6A(1) and s 14G(1) can be made separately when determining the unimproved land value. The sale of half land as applied by Mr Jackson is consistent with s 6A(1) and s 14G(1)(b), (b1) and (c), as I discuss further below.
2. The sale date was 3 August 2011 and the figures identified in the judgment hereafter are directed to the 2011 base date. I have summarised Mr Jackson's sale of half land approach (Jackson 1) at par 25-35 and Mr Hill's analysis of Jackson 1 (Hill 3) at par 36-42. Jackson 1 and Hill 3 may be summarised as follows: Jackson 1 Hill 3 s 6A(1) assessment: Sale price 100% $73,000,000 $73,000,000 Less allowance for deferred settlement ($3,091,654) ($3,091,654) Cash equivalent price for deferred settlement $69,908,346 $69,908,346 Plus cost of demolition $3,500,000 $3,500,000 Sub-total $73,408,346 $73,408,346 Less added value of improvements ($67,829 970) ($19,978,340) Land value (inclusive of improvements) $5,578,376 $53,430,006 Land value base date 2011 rounded to: $5,580,000 $55,000, 000

s 14G(1) adjustment - increased permitted NLA: Land value base date 2011 rounded to: $5,580,000 $55,000, 000 Permitted redevelopment NLA 33,860m2 33,860m2 Land value per square metre NLA $165/m2 $1,624/m2

Existing building NLA 24,530m2 24,530m2 Land value per square metre NLA $165/m2 $1,624/m2 Land value existing building $4,047,450 $39,844,950

s 14G(1) adjustment - relativity to land: Land value existing building $4,047,450 $39,844,950 Deduction for superior form of development permitted - less 50% ($2,023,725) Deduction for adjustment to subject - less 29% ($11,554,690) Sub-total $2,023,725 $28,290,260 Land value land at 1 July 2011 $2,000,000 $28,290,000

1. Following the approach adopted by Mr Jackson, I will first consider the determination of land value for the purposes of s 6A(1) of the VL Act and then consider the impact of s 14G(1), endeavouring to avoid conflation of the two sections and the possibility of double counting.

Determination of unimproved land value for the purposes of s 6A(1)

1. I accept the following amounts on which the valuers agreed: 1. sale price; 2. allowance for deferred settlement terms; and 3. cost of demolition, 4. which results in an agreed amount of $73,408,346.
2. The valuers disagreed markedly about the added value of improvements and the percentage attributable to depreciation. Mr Jackson adopts $67,829,970 while Mr Hill adopts $19,978,340, the difference arising from a combination of the assumed nature of the improvements, the estimated cost of construction of those improvements and the adopted depreciation rate.

Actual improvements versus hypothetical improvements

1. Regarding the assumed nature of the improvements and the estimated cost of construction, Mr Jackson adopted the expert quantity surveyors' agreed cost of construction of the actual heritage building improvements (excluding those improvements to be demolished) of $135,659,940 at 3 August 2011. A half share reflecting the sale of $135,665,940 is about $67 million for the retained 21,582 m2 of heritage building. Mr Jackson adopted an estimated cost to construct the actual building physically existing on the site, replete with stone façade and marble columns.
2. Mr Hill adopted the Valuer-General's expert quantity surveyors' agreed cost of constructing of a new, non-heritage retail-commercial building (excluding those improvements to be demolished) of $79,913,359. Mr Hill therefore adopted an estimated cost to construct a hypothetical building not the actual building physically existing on the site, in a new form and without such heritage construction features as the stone façade and marble columns.
3. The Valuer-General criticised Mr Jackson's approach (par 47-52 of closing submissions) because it was said that Mr Jackson conflated the analysis of a comparable sale with the assumptions required in s 14G(1). Mr Jackson denied this in cross-examination and it is clear from his report that he expressly distinguished between s 6A(1) and s 14G(1).
4. The Valuer-General also submitted that the heritage reproduction costs were prohibitive and not commercially viable and should not therefore be the starting point. Mr Jackson's approach overcapitalises according to the Valuer-General. If the partial sale of the land were truly comparable according to the Valuer-General the valuer would assess the added value of the building improvements and in so doing would have regard to the value of the economic benefits encapsulated in the retained structure if any. I do not understand these last criticisms by the Valuer-General. As the Applicant submitted Mr Jackson has analysed the actual sale. I am not clear why the approach the Valuer-General contends for would be applied in such an analysis. That the improvements cost a lot reflects the actual circumstance that the building sold was a heritage restricted building.
5. I do not understand Mr Hill's approach to analysing the improvements in the context of a sale of half the land. The approach appears to be linked to his view that the use of the land is the key determinant of comparable sales selection. If a use can be fulfilled by a cheaper option that option is what is assessed, hence his adoption of the costing of a modern commercial building of the same size. That is not the assumption that the VL Act requires in s 6A(1) where an actual sale of land is being considered.
6. What Mr Jackson has done is analyse in an orthodox manner the sale of the actual building. Mr Jackson did not consider s 14G(1) in this part of his analysis. Reflecting the actual sale of half land, I consider that an allowance should be made for the actual improvements on the land and accept the estimated half share of the costs of construction of the improvements (excluding those improvements to be demolished) of $135,659,940 adopted by Mr Jackson.

Depreciation

1. Mr Jackson's reasoning for adopting a depreciation rate of 50% is identified above at par 26-28. Mr Jackson stated in his written report that he considered functional, economic and physical obsolescence of the land at the sale date. He derived a rate of 50.2% based on building construction costs, applying costs in Rawlinsons to the parts of the building retained being largely the walls (superstructure) and substructure. As foreshadowed in the Court email to the parties dated 12 October 2015 (exhibit D) the Court questioned the valuers on the different rates of depreciation that they adopted in relation to the cost of improvements. Mr Jackson considered a depreciation rate of 50% reflected the land having been completely stripped of any fit-out. Mr Jackson stated that the traditional way of looking at depreciation is to consider the functional, physical and economic obsolescence of a property. The land can never be physically obsolete because it has to be maintained forever. Functionally the land was not terrific but with the strip out it is being used as a new premium grade building. The land has economic potential as a new premium grade office building in the Sydney CBD but for the purposes of analysis of s 6A(1) it is an existing building in a deteriorating condition.
2. Mr Hill adopted a depreciation rate range of 75% to 80%. In oral evidence Mr Hill considered the functional, physical and economic utility of the retained structure to be low. Mr Hill's starting point was the cost as identified by the quantity surveyors for a new non-heritage building. Mr Hill considered that depreciation had to occur by comparison with a new building because a new building was not retained on the land, only the substructure and super-structure was retained. Mr Hill disagreed with the proposition that he had purported to depreciate a notional new building. He agreed with the general proposition that if there is a new building that is to be taken into account, no depreciation is appropriate.
3. In closing submissions, the Valuer-General's counsel advised that, on Mr Hill's analysis of the sale of the land with development consent, the appropriate depreciation rate should be 75% or 80% (par 55 of closing submissions). Mr Hill identified at p 8 of the valuers' joint report the reasons why he did not agree with Mr Jackson's 50% as the physical, functional and economic condition of the retained structure was low. The building was generally gutted, the heritage sections required conservation and the retained building was required to be amalgamated into the adjoining development. The depreciated rate of $3,143/m2 deduced from improvements worth $67,829,970 is fairly high given that the building was gutted. While the balance of the Valuer-General's criticism of Mr Jackson for his adoption of a new heritage building is misplaced, this criticism of the depreciation rate of 50% is relevant.
4. As the International Valuation Standards Council Technical Information Paper 2 "The Cost Approach for Tangible Assets" dated 2012 identifies, depreciation is normally considered in terms of physical obsolescence, functional obsolescence and economic obsolescence being generally measured by comparison between the land and the hypothetical new property upon which the cost estimate is based, at par 37-39. Physical building life may differ from economic building life. The physical life of a building represents the length of time a building could be used, appropriately maintained but disregarding refurbishment before it is worn out or beyond cost-effective repair, at par 44. The economic life of a building represents the length of time the building is anticipated to generate economic benefits in its current use, which will be influenced by a building's degree of functional or economic obsolescence, at par 45.
5. Both valuers referred to these factors. Both Mr Jackson and Mr Hill were seeking to determine the appropriate rate of depreciation to be adopted to reflect the difference in utility between a building originally constructed in 1913 and a building constructed in 2011, almost a century later. While Mr Jackson assumed the construction of a new Moneybox building (par 147) and Mr Hill assumed the construction of a new, non-heritage retail-commercial building (par 148), both valuers assumed the construction of a building that was new and therefore of generally similar utility. Therefore Mr Hill's adoption of a non-heritage new building is not material to his consideration of depreciation. Accordingly, the essential question to be determined by the Court is to what extent the physical, functional and economic utility of the land had become obsolete relative to a new building over the period of a century (allowing for extensions and refurbishments) and consequently what the remaining useful life of the land should be assumed to be.
6. By adopting a depreciation rate of 50%, Mr Jackson assumed that the building was half way through its useful life and therefore had a further century of useful life remaining, which analysis I do not consider credible given the age of the building and its location in the heart of the Sydney CBD. Mr Jackson's report refers to the physical, functional and economic obsolescence of the land without any detailed consideration, before focusing on the proportion of replacement cost relying on Rawlinsons as represented by the substructure and superstructure which he calculated as 50.20%. I consider that Mr Jackson's selection of a depreciation rate of 50% is inappropriately most guided by the cost of that which remains. Rather the value of the utility lost to date and that utility remaining is the key factor to consider. It is erroneous to focus on fit-out or the extent of demolition in such an analysis. The depreciation rate is not determined by the cost of retaining four walls but determined by an assessment of the utility of the four walls.
7. Mr Hill also considered the difference in utility between a building originally constructed in 1913 and a building constructed in 2011, albeit not the actual building but a new building. This difference is not material for the reasons already given in par 157. Mr Hill assumed a depreciation rate of 75% to 80%, indicating that the building was approximately three-quarters of the way through its useful life and therefore had a further thirty years or so of useful life remaining. This approach I consider more credible in the circumstances of the Moneybox building.
8. Having regard to the age of the building, its diminished utility relative to a new building and the parties to the sale of the land contemplating redevelopment and gutting of the heritage portion of the property such that only a shell would remain, I consider the level of physical, functional and economic obsolescence was likely to be high and adopt a depreciation rate of 75%, as adopted by Mr Hill. As identified in Mr Jackson's oral evidence, the selection of a depreciation rate is a matter of expert judgement and the evidence in this case identifies that experts can have widely differing opinions about matters that require a high level of subjective analysis.

Conclusion on s 6A(1) land value

1. I therefore assess the added value of improvements as: Estimated cost of construction $135,659,940 Less depreciation at 75% Added value of improvements $33,914,985
2. Section 6A(1) requires, for the purposes of determining land value, that any improvements upon the land are assumed to have not been made other than land improvements. These are defined to include excavation associated with the erection of any building and therefore includes the two basement levels on the land. As identified above at par 30, Mr Jackson stated that the two basement levels are included within the added value of improvements, as these were included in the sale price for the land. These costs should be excluded for the purposes of s 6A(1). Arithmetically, as an amount for the two basement levels is included within the deduction from the sale price for improvements, an amount must be added back to reflect the requirements of s 6A(1) to exclude land improvements.
3. Mr Hill considered the two basement levels to be land improvements contributing to the value of the land when undertaking the net rental differential approach (see above at par 59). He attributed a value of $3,263,325 as at the 2011 base date which was not challenged and which I accept.
4. Therefore, the improved sale of $73,408,346 requires adjustment as follows: Less added value of improvements ($33,914,985) Plus land improvements $3,263,325
5. The s 6A(1) land value at the 2011 base date was $42,756,686.

Is the single sale price an indication of unimproved land value?

1. As identified above in par 79 it is acceptable to consider only one sale where there is one most comparable sale as in this case per AMP Henderson. The risk of such an approach is that the sale reflects a single price rather than the value of the land.
2. A land value for the land of $42,756,686 at the 2011 base date equates to $1,263/m2 NLA for the approved development (33,860 m2). I observe that, before adjustment for land improvements, the land value for the land maybe calculated as $46,020,011 at the 2011 base date which equates to $1,359/m2 NLA for the approved development (33,860 m2). This adjustment enables comparison with 20 Martin Place, Sydney. While not attempting a direct comparison, I observe that the rate of $1,359/m2 NLA for the approved development for the land is significantly below the rate of $2,298/m2 NLA, at the 2011 base date, derived by Mr Hill from his analysis and adjustment of his comparable sale H1, being 20 Martin Place, Sydney, directly opposite the land. 20 Martin Place, Sydney was sold in August 2011 for $95,550,000. At the date of sale it was a 23 storey commercial office building with an NLA of 17,748 m2. A development consent granted in 2012 permitted a total refurbishment of the then existing commercial building.
3. Oral exchanges during the hearing suggested that the difference in sale price between the land and 20 Martin Place, Sydney may be due to the significant impact of the heritage restriction on the land despite the significantly taller and larger premium office building permitted by the development consent for the land compared to 20 Martin Place, Sydney. This result is to be expected given this substantial difference between two buildings which otherwise share very similar locations and characteristics. This provides some confidence that my application of Jackson 1 reflects the unimproved land value as required by s 6A(1).

Adjustments required by s 14G(1)

1. It is necessary to consider if s 14G(1) mandates any adjustment to the s 6A(1) land value of $42,756,686 at the 2011 base date. As already observed immediately above, in the sale of half land used to determine the s 6A(1) land value the heritage restriction contributed to the much lower value per square metre NLA observed for the sale of half land compared to the sale of 20 Martin Place, Sydney, opposite the land. This matter is unusual in that the sale of half land affords direct evidence of the value of the improvements on the land as required by s14G(1), albeit also reflecting value arising out of the development consent for which adjustment is required. The sale of half land affords direct evidence of the impact of heritage restriction on land value as also required by s14G(1). Ordinarily, in the absence of comparable sales of heritage affected properties, compliance with s14G(1) would necessitate extensive adjustment of comparable sales evidence. Section 14G(1)(a) requires an assumption of the current use of the land. Mr Jackson contended that as the use of the land is unchanged, no adjustment is required for s 14G(1)(a). I agree.
2. Subsections (b), (b1) and (c) are interrelated and can be considered together in this case. Section 14G(1)(b) requires an assumption that all improvements on the land may be continued and maintained in order that the use of the land may be continued, and are new according to s 14G(1)(b1). Section 14G(1)(c) requires an assumption that no improvements other than those referred to in s 14G(1)(b) may be made to or on the land.
3. The sale of half land reflected the benefit of a development consent for the construction of an office and retail building of 33,680 m2 NLA of a modern design and layout, with modern technology, of a premium classification and to a height that would afford superior views to those provided by the land in its existing form as an office and retail building of 24,530 m2 NLA, albeit that such development was required to be constructed within the heritage built envelope at the lower levels. A purchaser of the land may be expected to pay more for the benefit of such development consent than would be paid if no such development consent existed. The effect of the development consent is that part of the building on the land will be demolished and part will be refurbished but, for the purposes of s 14G(1)(b), the original building is assumed to remain. Therefore, the assumption for the purposes of s 14G(1)(b) requires that the existing built envelope of 24,530 m2 NLA be continued and maintained. Mr Jackson contended, which I accept in principle, that the effect of s 14G(1)(b), (b1) and (c) is to require two adjustments - the first to reflect the agreed difference in NLA and the second to reflect the difference in building quality.
4. Concerning the first adjustment, which is a straightforward mathematical calculation concerning the agreed difference in NLA, applying the land's existing NLA of 24,530 m2 to the $1,269/m2 NLA, at the 2011 base date, of $42,756,686 divided by the 33,680 m2 NLA permitted by the development consent) gives an adjusted land value of $31,140,781 as at the 2011 base date.
5. Concerning the second adjustment to reflect the difference in building quality, Mr Jackson qualitatively outlined the differences in building quality such as better floor plate, superior energy efficiency and superior building entry which would contribute to potentially increased rental value and potentially increased capital value. While Mr Jackson did not explicitly quantify the impact of each difference in building quality on value, he contended that, while such adjustment could reduce the land value derived to zero, a 50% downwards adjustment should be adopted. I do not accept Mr Jackson's downward adjustment of 50% which appeared to simply be an assertion, lacking both transparency and a logical basis for assessment.
6. Mr Hill contended that the differences in building quality may be reflected by a downward adjustment of 29%, reflecting an upward adjustment of 5% for size, offset by downward adjustments of 5% for views, 5% for height and 24% for net rental differential, reflecting the poor floor layout of the existing building. Concerning Mr Hill's upward adjustment of 5% for size, the effect of the development consent for a larger building is manifest in the price at which half of the land sold and so is reflected in my determination of the s 6A(1) land value and is also addressed in the context of s14G(1) in my first adjustment for NLA. To make a second adjustment for size would appear to be double counting and not warranted. Concerning Mr Hill's downward adjustments of 5% for views and 5% for height, I accept that such adjustments reflect the difference in building quality. I consider they should be addressed together rather than separately as they are closely related.
7. Mr Hill also made a net rental differential adjustment of 24% which represents according to him the difference between the "net effective rental" of "Moneybox New Heritage" and "Hypothetical New Building" as at the 2010 base date, his approach in Moneybox 2. For reasons already identified above at par 73-79 I have not adopted the net rental differential approach in this case. The methodological rationale for making this adjustment in the context of the sale of half land is unclear. It appears to confuse two different and unrelated valuation approaches and should not be made.
8. I determine that the second adjustment to reflect the difference in building quality consistent with s14G(1)(b), (b1) and (c) should be a further downward adjustment of 10% (for views and height) to the previously adjusted land value of $31,140,781.
9. Mr Jackson contended that, as he had not reduced the land value on account of the cost of construction of improvements, no adjustment is required for s14G(1)(d). I accept that approach as consistent with Jackson 1 and s14G(1)(d). I have already found that s 14G(1)(d) does not preclude the application of the sale of half land above at par 95-102.
10. The calculations from par 161-176 above can be summarised as follows: Depreciation rate 75% Estimated cost of construction $135,659,940 Less depreciation at 75% Added value of improvements $33,914,985

Agreed amount $73,408,346 Less added value of improvements ($33,914,985) Plus Land Improvements $3,263,325 s 6A(1) land value at 2011 base date $42,756,686 s 14G(1) NLA adjustment (divide by 33,680, multiply by 24,530) $31,140,781 s 14G(1) building quality adjustment (less 10%) ($3,114,078) Finding on land value at 2011 base date $28,026,702

Conclusion

1. I find the unimproved land value for the land at the 2011 base date to be $28,026,702. As this amount is less than the Valuer-General's determination of approximately $32 million that appeal (matter number 30758 of 2013) should be upheld. The parties should further discuss what the appropriate land values at the two other base dates the subject of appeal should be. One issue that was not adequately addressed in the Applicant's case is how the sale of half land in August 2011 can apply to the earlier 1 July 2010 base date. While the expert quantity surveyors' joint report dated 10 April 2015 contained costing figures for 2010 there was no discussion of how the 2010 base date was to be approached given the primary approach contended for by the Applicant was a sale which took place after that date. This judgment considers figures relevant to 2011, on the assumption that the sale date of 3 August 2011 is so close to the base date of 1 July 2011 that the sale can apply. Application of the sale to the base date 1 July 2012 can be accommodated with appropriate adjustment for timing if necessary. The parties must discuss the issues identified in this paragraph in relation to the 2010 and 2012 base dates and further advise the Court in relation to the appropriate amounts of unimproved land values before final orders are made. A timetable for doing so will be discussed with the parties. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 February 2016