Krisgay Pty Limited v The Valuer-General

Krisgay Pty Limited v The Valuer-General - [2007] NSWLEC 600 - NSWLEC 2007 case summary — Zoe

[19]

(a) that that land may be used only for the purpose, if any, for which it was used at the relevant date, (b) that all improvements on that land as at the relevant date may be continued and maintained in order that the use of that land as referred to in paragraph (a) may be continued, and (c) that no improvements, other than those referred to in paragraph (b), may be made to or on that land. … 10 Mr Roberts was instructed by the applicant to prepare a heritage valuation on three different scenarios. Scenario 1 was described by him as "existing pub versus hypothetical hotel". It proceeds in five steps: · Step 1. Assess the "land value" under s 6A of the V of L Act on the basis of its highest and best use of medium density residential development. That step is legally uncontroversial. However, there is a strong factual contest between the valuers as to the resultant valuation assessment. That contest largely turns on the appropriateness of, and conclusions to be drawn from, comparable sales and yields of residential units. By reference to comparable sales and yields, the land value was assessed by Mr Roberts at $880,000 and by Mr Wall at $1,300,000; · Step 2. Assess the market value of the existing going concern hotel. Mr Roberts assessed it at $1,430,000 based upon a net profitability of $210,741 and a market capitalisation rate of 14.75 percent; · Step 3. Assess the market value of a hypothetical brand new going concern hotel on the land (unrestricted by the heritage assumptions in s 123 of the Heritage Act). Mr Roberts assumed that the hypothetical brand new improvements would be limited to the scope of the existing building areas. He considered that an increase in net profitability of 49 percent could be achievable which would result in an annual net profit of $314,035 equating to a value of $2,100,000. He added that a brand new going concern hotel on this site would not be feasible because the cost of construction, licensing and fit-out would exceed the going concern value of the hotel on completion; · Step 4. The difference between the values in steps 2 and 3 equates to 47 percent of the step 2 value. · Step 5. The 47 percent equates to a sum of $413,600, which is then deducted from the land value in step 1 ($880,000) to yield a heritage valuation of $466,400. 11 Mr Wall did not carry out the assessments required by steps 2 to 5 of scenario 1 because they involved the valuation of a business which he considered was irrelevant to a heritage valuation under the Heritage Act. He did dispute some limited aspects of Mr Roberts' financial analysis. Mr Roberts' heritage valuation assessment of $466,400 appears inconsistent with Mr Wall's assessment of land value alone of $1,300,000 (step 1 above). 12 Scenario 2 by Mr Roberts was described by him as "existing hotel versus highest and best use" . It also involves five steps, of which steps 1 and 2 are identical with steps 1 and 2 in scenario 1. Steps 3 to 5 are as follow: · Step 3. Assess the market value of the land developed to its highest and best use (i.e. medium density residential). Mr Roberts assessed this at $4,320,000 by adopting an average value per unit on completion of $360,000 and 12 unit redevelopment; · Step 4. The difference between steps 2 and 3 is $2,890,000 or 202 percent. · Step 5. The discount allowance of 202 percent equates to a sum of $1,777,600 which when deducted from the land value in step 1 ($880,000) yields a large negative heritage valuation of - $897,600. 13 Mr Roberts considered that scenario 2 was inappropriate for four reasons. First, it does not take into consideration the cost that would need to be incurred in order to derive the gross realisation of $4,320,000. Second, the methodology does not truly reflect the opportunity cost to the owner for operating a hotel as opposed to an alternate use. Third, it does not take into consideration the value of the realisable assets of the going concern hotel (i.e. poker machine entitlements, plant, furniture, fixtures and fittings) which have a value in addition to the land value and any perceived value of the improvements. Fourth, it does not address what a prudent purchaser would pay for the vacant land on the basis of constructing an hotel on the site. These criticisms have weight, and in the absence of any expert support for scenario 2, I propose to reject it.

[21]

· Step 1. Assess the market value of the existing hotel as a going concern. Mr Roberts assessed this at $1,430,000 based upon a net profitability of $210,741 per annum and a capitalisation rate of 14.75 percent. This is the same as step 2 of scenario 1. · Step 2. Assess the value of the hotel licence (which would need to be purchased to operate a hotel on the site), the value of poker machine licences and entitlements (which would need to be obtained to generate the current income), the depreciated value of improvements other than the shell of the building (ie "operational" improvements required to turn the bricks and mortar of the building into an operational hotel) including plant, furniture, fixtures, fittings and finishes, and the value of the goodwill of the going concern hotel. · Step 3. The difference between steps 1 and 2 is the heritage valuation of $235,243. It was said by Mr Roberts to reflect what the land value and the shell of the building would sell for in the market. 15 Mr Wall did not carry out the valuation assessments in scenario 3 because he considered that a heritage valuation was not concerned with the valuation of an existing going concern business. A heritage allowance, he thought, should be determined on a hypothetical basis with the only restrictions being the existing use and existing improvements. He considered that it was not reliable to deduce land value by apportionment of the value of an improved hotel into the land component and improvement component because the primary determinant of a going concern hotel was the hotel's financial trading position which depended upon factors such as the quality of management. 16 Mr Wall's methodology was to follow the literal text of s 123 in three steps: · Step 1. Assess the land value under s 6A of the V of L Act. He assessed this at $1,300,000 having regard to permissible density and comparable sales; · Step 2. Determine the heritage allowance as a consequence of making the assumptions referred to in s 123 of the Heritage Act (i.e. that the land may be used only for the purpose of a hotel and that only the existing hotel as at the base date may be continued and maintained). He determined the allowance at 30 percent. His explanation in his written report as to how he arrived at this percentage was as follows: In relation to the heritage allowance for heritage hotels generally I note the following · The layout of a structure built in the 19th Century, even with subsequent modifications and additions, is unlikely to be as efficient as a newer structure which is better adapted to current market conditions/requirements · The layout of an historic hotel can lead to inefficiencies in terms of staff movement/access within the hotel, modern keg room requirements and supervision/servicing of all customer areas · The provision of small bedroom accommodation rooms with (for example) common bathrooms may not meet contemporary market requirements · The size of some heritage hotels limits activities such as entertainment, however this does not appear to be the case in relation to the subject hotel. The above factors must be weighed against the market advantages that can be available to a hotel due to heritage character and appeal. In many cases the presence of historic features on a site is a significant asset and may command a premium price. The sales of heritage listed hotels in the annexed schedule do not appear to have suffered from any discounting in relation to the overall hotel market. Accordingly, whilst it could be reasonably suggested that no deduction for heritage matters be made I consider that a fair and reasonable allowance for the heritage nature of the subject property, having regard to all factors, is in the order of 30 % of the land value as zoned and as with existing use rights for hotel use. · Step 3. Deduct the heritage allowance (step 2) from the land value (step 1) to yield a heritage valuation of $910,000. SUBMISSIONS 17 In summary, the applicant submitted as follows:

[36]

(1) Where land is subject to a listing on the State Heritage Register, a rating or taxing authority which would, but for this Act, make and levy a rate or levy a tax on a valuation for rating or taxing purposes of that land shall make and levy that rate or levy that tax on the heritage valuation of that land derived from that valuation for rating or taxing purposes. (2) Where a heritage valuation is made with respect to land pursuant to a request made by the Minister under section 124 (1), the amount of any rates or taxes payable in respect of that land shall be redetermined on the basis of that heritage valuation as from the date determined in accordance with section 124 (1) (a) or (b), as the case may be, of that heritage valuation and any amount paid in excess shall be refunded and any amount short-paid shall be recoverable as arrears. (3) Where land ceases to be subject to a listing on the State Heritage Register, the amount of any rates or taxes levied in respect of that land shall, as from the date on which that land ceases to be subject to that listing on the State Heritage Register, be redetermined on the basis of the valuation for rating or taxing purposes of that land and any amount paid in excess shall be refunded and any amount short-paid shall be recoverable as arrears. VALUATION OF LAND ACT 1916 20 The "valuation for rating or taxing purposes" defined in s 123 of the Heritage Act is the "land value" referred to in s 6A of the V of L Act, which provides: 6A (1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner's predecessor in title had not been made. (2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that: (a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and (b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used,

[39]

(1) Land that is heritage restricted on the date by reference to which its land value is to be determined is to have its land value determined on the basis of the following assumptions: (a) that the land may be used only for the purpose, if any, for which it was used when the value is determined, (b) 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, (c) that no improvements, other than those referred to in paragraph (b), may be made to or on that land. (2) Land is heritage restricted as at a particular date if the Valuer-General has determined that it would be reasonable to make the assumptions referred to in subsection (1) in respect of the land as at that date because of any provision of a planning instrument concerned with the heritage significance or heritage value of the land or any building, work or other thing on or in the land. (3) The Valuer-General may, and on the application of the owner of land must, make a determination as to whether a particular parcel of land is heritage restricted. (4) An application under subsection (3) is to be in the form required by the Valuer-General and accompanied by such supporting information as the Valuer-General may request. (5) The Valuer-General is not to determine that land is heritage restricted as at a particular date if the land is the subject of a listing on the State Heritage Register under the Heritage Act 1977 as at that date. CONSTRUCTION OF Section 6A VALUATION of land ACT 1916: LAND VALUE 23 Section 6A(1) of the V of L Act requires improvements (other than "land improvements" as defined) to be ignored when determining land value: Toohey's Ltd v Valuer-General [1925] AC 439 (PC). Toohey's was concerned with the original s 6 of the V of L Act which was virtually identical with the present s 6A(1) except that it referred to "unimproved value" rather than "land value" and made no allowance for "land improvements". In delivering the judgment of the Privy Council, Lord Dunedin said at 443: Now, what [the valuer] has to consider is what the land would fetch as at the date of the valuation if the improvements made had not been made. Words could scarcely be clearer to show that the improvements were to be left entirely out of view. They are to be taken, not only as non-existent, but as if they never had existed. It is, therefore, to approach the question from a completely wrong point of view 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. What the Act requires is really quite simple. Here is a plot of land; assume that there is nothing on it in the way of improvement; what would it fetch in the market? It will be observed that the value is not what has been sometimes designated by the expression prairie value. The land must be taken as it exists at the date of the valuation. 24 Toohey's was approved by the High Court in a joint judgment in Valuer-General v Fenton Nominees Pty Ltd (1982) 150 CLR 160 at 165: It is well settled that in establishing what that capital amount might be it is necessary to inquire what the hypothetical purchaser would pay for the land in a notional condition shorn of its improvements and that it is not permissible to arrive at the figure by identifying the value of the site in its improved state and then subtracting the value of the improvements ( Toohey's Ltd. v. The Valuer-General [1025] A.C. 439, at p. 443).

[42]

Improved sales are used daily for the purposes of statutory valuations under provisions similar to s 6A(1) of the Valuation of Land Act , by subtracting the added value of the improvements to them from their sale prices to derive unimproved values. It may be that in such a desirable area as Hunters Hill where there are apparently many mansions, their presence and the presence of lesser houses may add little, or much less than replacement value to the sale prices of the land on which they stand. But that does not mean that the respondent is entitled to ignore reasonably contemporaneous sales of comparable improved land. Such sales, particularly in the case of a scarcity of vacant land cannot be disregarded. The contrary approach is required by the Act. 27 The High Court in Maurici did not refer to Toohey's nor to their earlier decision in Fenton in which they approved Toohey's. Of course, both Fenton and Maurici bind lower courts. So the common technique, when determining the unimproved value of a comparable sale of improved land, of making a deduction of the value of improvements from the improved value (the sale price), is not permitted when applied to the subject land itself. Is that anomalous? Jacobs J thought so in Myer (SA) Stores Ltd v Valuer-General (1986) 60 LGRA 158 at 163: It is to my mind something of an anomaly that, if this technique of arriving at the site value by analysis of comparable sales of improved land is permissible, the same technique cannot be applied to the subject land itself, consistently with the decision of the Privy Council in Tooheys Limited v Valuer- General [1925] AC 439 where it was held that it is not permissible to arrive at the unimproved value by identifying the value of the site in its improved state and then subtracting the value of the improvements . That case is too well-established to be questioned, and it was recently cited with approval in Valuer-General v Fenton Nominees (1982) 150 CLR 160 at 56 ALJR 778 at 780; 47 LGRA 95 at 98; 42 ALR 371 at 374… 28 His Honour referred to similar misgivings expressed by Roper J in James v Valuer-General (1942) 15 LGR (NSW) 110 at 112. James was decided before Toohey's was approved by the High Court in Fenton. Roper J felt able to distinguish Toohey's and thereby to permit the unimproved value of the subject land to be assessed by the technique which Toohey's prohibits. With respect, in my view Toohey's was indistinguishable in James and is indistinguishable in the current context of s 6A(1), as was recently affirmed by the Court of Appeal in Trust Company (above). 29 In Commissioner for ACT Revenue v Rosnet Pty Ltd (1994) 83 LGERA 440 at 447 Higgins J said that the dictum in Toohey's, quoted above, was "…not a statement which forbids the deduction of the value of improvements from the improved value to find the unimproved value of a parcel of land. If it were, it would be impossible to value land where there are no comparable sales of unimproved land". Although perhaps unclear, I assume that his Honour was intending to only refer to the method (subsequently approved in Maurici) of ascertaining the unimproved value of sales of comparable improved land.

[49]

36 The two steps under s 123 are: (i) a valuation under s 6A of the V of L Act less; (ii) an allowance determined as a consequence of assuming that the land may be used only for the purpose for which it was used at the relevant date and that only the improvements on the land as at that date (and no other improvements) may be continued and maintained in order that the use of that land may be continued. Section 14G of the V of L Act does not expressly spell out those two steps but simply provides that land value is to be determined on the basis of the same assumptions. No heritage hotel sale could capture all those assumptions because in the real world such a sale is not as restricted as the heritage assumptions require. That tends to suggest to that it is implicit in s 14G of the V of L Act that the same two steps are necessary. 37 The applicant submitted that Mr Roberts' scenarios 1 and 2 are consistent with the decision of Talbot J in Commonwealth Custodial Services Ltd v Valuer-General of New South Wales [2006] NSWLEC 775 at [41] and that the rejection in that case of a methodology equivalent to Mr Roberts' scenario 3 was erroneous. The respondent submitted that Mr Wall's heritage valuation was consistent with the dictum of Talbot J at [18]. That case concerned a valuation under s 14G of the V of L Act of a heritage restricted city office building. After holding that ss 6A and 14G are not inconsistent, Talbot J said at [18] - [19]: 18 The language in s 14G is inelegant. The section identifies what improvements may be made on the land and to what use they may be put for the purposes of valuation under the Act by reference to all improvements on the land when the value is determined . Upon a cursory reading, the reference to existing improvements appears to be contrary to the assumption that the land is vacant. However, the reference to existing improvements does not require the valuer of the land to consider the improvements to physically exist except for the purpose of defining the extent and impact of heritage restrictions on the land value within the meaning of s 6A. The improvements and their use are simply a means of identifying an assumption for the purpose of s 6A.

[51]

38 In that case, because there were no comparable sales (nor could there be, given the s 14G assumptions), the applicant's valuer proceeded by determining the improved value of the land with its existing heritage improvements and then deducting the value of the improvements: at [20]. Talbot J held that this method was unavailable since Toohey's was adopted in Fenton. Alternatively, he said, even if Toohey's could be distinguished it would not be permissible to go beyond consideration of the intrinsic value of the land and improvements. His Honour adopted the methodology advanced by the respondent's valuer in that case which, as I understand it, involved the following steps: · Step 1. Assess the s 6A land value (unaffected by heritage restrictions and based on the same highest and best use in a modern office building). This was assessed at a rate of $1,900 per square metre of net lettable area based on comparable sales: at [30]; · Step 2. Discount the s 6A rate in step 1 to reflect the s 14G heritage assumption that the only improvements that may be made are those on the land. As I understand it, this was done as follows: (a) discount for those areas of the building that attracted lower rentals due to the heritage restrictions. Those areas commanded rentals that were 50 to 60 percent less than elsewhere in the building. This resulted in a reduction in the overall rate of $1,900 per square metre of net lettable area referred to in step 1 down to $1,749 per square metre: at [38]; (b) further discount the last-mentioned figure for the " design and efficiency of the heritage building ". This discount was assessed at 17 percent being the percentage differential between the rental rate actually achieved ($352.96 per square metre) and the rental rate for a hypothetical new building on the site ($425 per square metre). Apply this discount of 17 percent to the rate of $1,749 per square metre referred to in (a) above to produce a rate of $1,452 per square metre. Multiply the last-mentioned figure by the net lettable area of 24,530.3 square metres to produce a s 14G valuation of $35,617,995 before adding value attributable to " land improvements " (as defined in s 4): at [39] (c) after adding value for land improvements, arrive at a final s 14G valuation of $37,525,000: at [45]. 39 Talbot J expressed his conclusions as follows at [46] - [48]: 46 The task set for the Court is to determine the land value affected by the limitation on improvements to those actually in existence. The best indication of the effect heritage restrictions exactly corresponding to the improvements on the site is to look at the actual effect those very improvements have on the value of the property. This effect can be quantified by a comparison of the rental return actually achieved on the site with a hypothetical return that could be achieved if the site were not heritage restricted. Using this logic Mr Hill derives a discount of 17% to be applied to the s 6A land value of the subject land for the heritage restrictions to be taken into account under s 14G. I find this to be an reasonable approach and accordingly I adopt Mr Hill's methodology.

[56]

42 In my opinion, land value under s 6A of the V of L Act and a heritage valuation under the Heritage Act and s 14G of the V of L Act are a far cry from the assessment of the going concern value of businesses. Their main focus is unimproved value assuming, in the case of s 6A land value, the highest and best use and assuming, in the case of a heritage valuation, the existing use restricted by the existing improvements. It seems unlikely that the legislature would have intended to introduce into the notion of a heritage valuation or heritage allowance the going concern valuation of businesses where the primary determinant of value is the financial trading position influenced by the quality of management. 43 Accordingly, I do not accept Mr Roberts' scenario 1 and 2. In addition, I have rejected scenario 2 for other reasons referred to above at [13]. 44 Mr Roberts' scenario 3 values the existing hotel as a going concern and deducts the value of the hotel licence, poker machine licence and entitlements, operational entitlements and the value of the goodwill of the going concern hotel. The resultant figure is said to represent what the land value and the shell of the building would sell for in the market. In my opinion, that methodology is not available under s 123 of the Heritage Act. Section 123 is not concerned with the value of a going concern business, nor with the actual value of the shell of the existing building. The existing business and building are only relevant to the assumptions to which s 123 refers. The methodology of subtracting improvements from improved land value is impermissible to assess land value under s 6A of the V of L Act, where the implicit assumption is a sale for the highest and best use (Fenton/Toohey's). It logically follows that the methodology cannot be used to assess the heritage valuation under s 123 of the Heritage Act (or s 14G of the V of L Act) where the explicit assumption is the more limited existing use restricted by the existing improvements. That was also the conclusion reached by Talbot J in the context of s 14G of the V of L Act in Commonwealth Custodial at [26]. Accordingly, I do not accept Mr Roberts' scenario 3.

[60]

assessment of Land Value: section 6A Valuation Of Land Act 48 The valuers assessed land value under s 6A of the V of L Act on the basis of the subject land's agreed highest and best use of medium density residential development. There are three differences between the valuers: yield (i.e. number of residential units); value per residential unit; and the sales evidence to be relied upon. 49 Mr Roberts: (a) analysed the density of local sales to determine a density of 270 m2 per unit site for the subject property; (b) analysed two sales and a check sale to derive an average adjusted rate per unit of $73,333 for the subject site; (c) adopted a yield of 12 villa/townhouse sites for the subject land by dividing its area of 3,427 m2 by 270 m2; and (d) thereby concluded that the land value of the subject site was $880,000 ($73,333 x 12). 50 Mr Wall's initial approach was to analyse other sales for medium density development, general business and neighbourhood business, and industrial zoned parcels, which indicated an underlying value in the range of $350 to $400 per square metre which, when applied to the area of the subject site, produced a land value in the range of $1,199,450 to $1,370,800. He adopted $1,300,000. Later, in oral evidence, he also followed a method of adopting a yield of 14 villa/townhouse sites for the subject land based on analysing comparable sales to derive an average rate per unit of $92,857 for the subject site. Under this method he also concluded that the land value of the subject site was $1,300,000 (14 x $92,857). 51 The valuers' analyses may be summarised as follows: Table 1: Subject Property Base Date Land Area m2 Yield Rate/Unit Rate/m2 Density Land Value Heritage Valuation $466,400 Roberts Scenario 1 1-Jul-2003 3,427 12 $73,333 Roberts - 270m2 per unit Roberts $880,000 Roberts -$897,600 Roberts Roberts Scenario 2 $235,243 Roberts valuation Scenario 3 14 $92,857 $380/m2 Wall $1.3 million $1.3 million minus 30% = $910,000 Wall Wall Wall Wall $940,000 Valuer General $650,000 Valuer General

[82]

71 This sale was some two years after the base date. Mr Wall therefore thought it was irrelevant. A sale so long after the base date has to be used cautiously. If between the base date and the date of the subsequent sale, supervening events occur which alter the conditions previously existing, the subsequent sales would not, or may not, be comparable: McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1 at 16; Australian Mutual Provident Society v Overseas Telecommunications Commission Australia [1972] 2 NSWLR 806 (CA) at 823 - 824; AMP Henderson Global Investors v Valuer-General (2004) 134 LGERA 426 at 431. In the present case the evidence indicates that the market boom which existed as at the base date was over by August 2005. Mr Roberts accepted this and agreed that by August 2005 there was a subdued market and development was slower and that there was a different set of circumstances compared with the base date. In the circumstances, it seems to me that the sale of this property is of little assistance. 185 The Avenue, Figtree (Cnr Princes Highway) 72 This property was sold on 31 May 2004 for $950,000 without a development consent. It comprises a large corner site of 1,983.4 m2 which is approximately 58 percent of the area of the subject property. It is located approximately 12 km south of the subject site, opposite a Westfield Shoppingtown on a prominent corner of the Princes Highway. It was previously used as a Mobil service station but was decommissioned prior to sale (i.e. sold as a remediated vacant block of land). The underlying zoning is Residential 2(a) which allows a FSR of 0.3:1. This permits a lower density than the subject property's Residential 2(b) zoning which allows a floor space ratio of 0.5:1. Its area multiplied by the FSR of 0.3 yields approximately 594 m2 of potential development which, in turn, yields about five 120 m2 villas. 73 The sale price indicates a rate of $479 per square metre. Mr Wall estimated that five medium density dwellings could be approved on the land which represents $190,000 per unit. . The values assigned by Mr Wall to the subject land represent a 20 percent discount from the rate per metre for this property. 74 Mr Wall understood that this property was sold with a commercial purpose in mind and the purchaser was looking to rezone the property. Mr Roberts' understanding was similar. However, this has not occurred to date. The applicant submitted that this sale was irrelevant or of little assistance because the property was sold for a commercial purpose. I accept that its usefulness is limited for that reason. 481 Princes Highway, Woonona (corner of Gray Street) 75 This sale is the most similar to the subject property, ignoring heritage issues, in that it was just prior to the base date, its area is similar, it has two street frontages and it is located on the Princes Highway within two kilometres of the subject property. The respondent appeared to place a good deal of reliance upon it in submissions. 76 This property sold for $1,565,000 in April 2003. It has a land area of 2,957 m2. The sale value was $529 per square metre. It was sold as a medium density residential development site with dated industrial shedding. According to Mr Wall, it could accommodate up to 13 x three bedroom townhouses, which showed a value of approximately $120,000 per unit site based on apartment size of approximately 125 m2. This seems to be arithmetically incorrect because the area divided by the unit size (2,957 125 m2) multiplied by the FSR of 0.5 yields 11.8 units.

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