3. On 16 December 2009 ("the relevant date") the DA was approved. The approval contained a restriction that the Subject Properties could not be used for a hospital or for the retailing of bulky goods. It also contained a requirement that, if a change of use charge were payable, it was to be paid within 28 days of the notification of the decision. A change of use charge is calculated according to the formula set out in section 277 of the Planning and Development Act 2007 ("the Act").

4. Following substantial discussions between the parties concerning valuation issues, the Respondent issued a Change of Use Charge ("CUC") notice on 15 December 2010. The DA (No 200915418) of 4 September 2009 seeking consolidation and lease variation was followed, on 26 May 2010, by DA 201017863, which sought development approval for the demolition of the existing buildings on the consolidated lease and erection of a 10 to 12 storey office block. This DA was approved subject to conditions on

14 December 2010, consequently Disallowable Instrument No. 2009-137 was applied, which reduced the CUC to 50 % of any value added to the new lease by the variation.

1. On 21 December 2010 the Applicant lodged an application with the ACT Civil and Administrative Tribunal ("the Tribunal") for a review of the Respondent's decision. The Applicant's right to seek review of the Respondent's decision under section 277 of the Act was contained in

Schedule 1 (item 26) of the Act as it then was. The application for review was lodged in the name of the parent company, Stockland (Australia) Pty Ltd, but set out the registered Crown Lessees as Trust Company Ltd (Block 1) and Trust Company of Australia Ltd (Blocks 3, 19 and 20). The parties agreed that the correct applicant was the Trust Company Ltd and the application was corrected accordingly by the Tribunal.

1. Division 9.6.3 of the Act deals with Variation of Nominal Lease Rentals and includes the method for calculating the CUC. Sections 276 - 279 (as the Act was prior to 1 July 2011) [1] read:

276 Variation of nominal rent lease - change of use charge

(1) The planning and land authority must not execute a variation of a nominal rent lease unless the lessee has paid the Territory any change of use charge worked out by the authority, less any remission under section 278, plus any increase under section 279.

Note The change of use charge is worked out under s 277.

(2) A variation of a lease has no effect if the change of use charge payable under subsection (1) for the variation is not paid.

_(3) This section does not apply to a variation of a nominal rent lease if - _

(a) the only effect of the variation would be to alter a

common boundary between 2 or more adjoining leases;

(b) the land comprised in each adjoining lease is leased for

(c) none of the adjoining leases is a rural lease.

(1) The planning and land authority works out the change of use charge for a variation of a lease as follows:

CUC means the change of use charge payable for the variation of the lease.

(a) for a variation other than a consolidation or

subdivision, means the capital sum that the lease might

(iii) the rent payable throughout the term of the lease

or, for a variation that involves the surrender of

(b) for a variation that is a consolidation or subdivision,

means the capital sum that the new lease or leases to be

granted under the consolidation or subdivision might be

(i) the consolidation or subdivision were to take

(ii) the new lease or leases were genuinely offered

(iii) the rent payable throughout the term of the new

(a) for a variation other than a consolidation or

subdivision, means the capital sum that the lease might

(i) the lease were not varied during the remainder

(iii) the rent payable throughout the term of the

(b) for a variation that is a consolidation or subdivision,

means the capital sum that the lease or leases to be

surrendered under the consolidation or subdivision

(ii) the lease or leases were genuinely offered for

(iii) the rent payable throughout the term of the lease

(3) If the capital value assessed as V1 is equal to or less than the capital value assessed as V2, no change of use charge is payable.

278 When authority must remit change of use charge

(1) The planning and land authority must remit all or part of a

change of use charge for a variation of a lease under section

(2) A regulation may prescribe the amount to be remitted under

279 When authority must increase change of use charge

(1) The planning and land authority must increase a change of use

charge for a variation of a lease under section 276 as

(2) A regulation may prescribe the amount of the increase under

1. For the purpose of the hearing of the review, the Tribunal directed that each party file and serve a statement of facts and contentions and the evidence on which they intended to rely in advance of the hearing. The Tribunal had before it the documents on which the Respondent had based its decision ("the T Documents") and the Exhibits tendered in evidence. The Tribunal also directed that the expert valuers on whose evidence the parties proposed to rely confer prior to the hearing and lodge with the Tribunal a statement identifying the issues on which they agreed and the matters in respect of which they disagreed. That statement is Exhibit 11. The Tribunal subsequently had available to it the Transcript of the hearings ("TR"). The Tribunal also took a view of the Subject Properties and other relevant properties in the presence of the parties' representatives.

2. At the hearing of the review the Applicant was represented by Mr P Walker of counsel and the Respondent by Dr D Jarvis of counsel. Evidence was given by two witnesses expert in the valuation of commercial office buildings:

Mr S Flannery on behalf of the Applicant and Mr M Shadbolt on behalf of the Respondent. Ms S Messer, the Technical Coordinator of the Development Assessment Leasing Team with the Respondent, also gave evidence. She had made the determination of the CUC for this DA.

3. Mr Flannery is a Fellow of the Australian Property Institute and a certified practising valuer. He is a senior director of CB Richard Ellis ("CBRE") with expertise in commercial and office valuations. He has held senior positions with the ACT Division of the Property Council of Australia ("PCA").

Mr Shadbolt is a regional manager employed by the Australian Valuation Office. He is an Associate of the Australian Property Institute (since 1991), a certified practising valuer and is registered as a valuer in New South Wales and Queensland. He has extensive experience in the ACT, NSW and Queensland and is an expert in commercial valuations. He is active in the Australian Property Institute and has been a National Board Member.

4. In late June 2011, after conclusion of the hearings, Stockland announced the conditional sale of the Subject Properties in a press release. The sale was not a simple transaction but involved interconnected sales among three separate entities. At a Directions Hearing on 5 September 2011, both parties submitted that the transaction could not be relied upon to assist in the assessment of the value of the Subject Properties on 16 December 2009. The Tribunal agreed and has disregarded this sale.

1. Section 277 of the Act contains separate provisions for the calculation of before and after capital sums for the sale of leases, depending upon whether the lease variation is a consolidation or another type of lease variation. This DA is an approval for both a consolidation and another type of lease variation. However, as the separate provisions are in all material respects the same, the Tribunal has not distinguished between the two in its decision.

2. The practice of the Respondent and Applicant is to use the phrase "Before Value" for V2 and "After Value" for V1 and the Tribunal will adopt these phrases in its decision. The Before Value is to be calculated immediately before the variation of a lease and the After Value immediately after the variation. The intent of the Act is to ensure that any change in value results solely from the variation because there will be no time for intervening events to affect the value of the lease.

3. Section 277 does not use the word "value" but rather the expression "the capital sum the lease might be expected to realise if ... the lease were genuinely offered for sale ... on reasonable terms and conditions that a genuine seller would require". Both expert valuers have treated section 277 as requiring the assessment of market value. The Tribunal accepts that approach.
4. The Tribunal notes that section 277(3) of the Act contemplates that a situation could arise where the After Value might not exceed the Before Value.

The Subject Properties and other agreed matters

1. The Applicant and the Respondent agreed that the Subject Properties, described below, are located on or close to one of Canberra' busiest intersections. They contain five buildings ("the Subject Buildings") with a total net lettable area ("NLA") of 24,393m2 on a total site area of 6,265m2.

• (a) Block 1, Section 26 - 72 Northbourne Avenue & 17 Mort Street ("Block 1")

The area of this site is 2,085 m2. There are two buildings on it. The one known as 72 Northbourne Avenue was developed in the late 1970s and is on the corner of that Avenue and Cooyong Street. It comprises a six storey building with basement parking, with an energy rating of 2.5 stars. The balance of the site on the corner of Cooyong Street and Mort Street was developed in the early 1990s as a stand-alone five storey office building with basement parking, known as 17 Mort Street. It has an energy rating of 3 stars. The combined NLA of the two buildings is 7,067m2 and there are 37 car bays. The weighted average lease expiry ("WALE") [2] is 2.88 years for both buildings.

(b) Block 3 Section 26 - 68 Northbourne Avenue ("Block 3")

The area of this site is 2,090m2. There is a six storey building on it with an NLA of 9,786m2 and 108 basement car bays. Its entrance is to Veterans' Park with side boundaries to Northbourne Avenue and Mort Street. It was built in the late 1970s but some refurbishment work was carried out in recent years. The energy rating is 1.5 stars. The WALE is 1.39 years.

(c) Block 19, Section 26 - 15 Mort Street ("Block 19")

The area of this site is 1,161m2. There is a six storey building on it with an NLA of 3,717m2 and 32 basement car bays. Its frontage is to Mort Street. It was built in the late 1970s but was refurbished recently. Its energy rating is 4 stars. The WALE is 0.64 years.

(d) Block 20, Section 26 - 70 Northbourne Avenue ("Block 20")

The area of this site is 929m2. There is a six storey building on it with an NLA of 3,822m2 and 26 basement car bays. Its frontage is to Northbourne Avenue. It was built in the late 1970s and has an energy rating of 3.5 stars. The WALE is 0.64 years.

1. The Applicant and Respondent agreed that the Subject Properties, if retained, would need to be refurbished to the standard necessary to be leased to the Commonwealth Government. This consists of a 4.5 stars energy rating and an "A" grade building standard as assessed by the PCA using a mix of technical and general criteria. They also reached common ground on the state of the Canberra office market on the relevant date.

2. The market was at its strongest in 2006 and 2007 but vacancy rates began increasing through 2008 and continued increasing to the second half of 2009. The January 2010 Office Market Report of the PCA showed that for "A" grade office accommodation the vacancy rate was zero in July 2007. It. increased to 10 % in July 2009 but fell to 8.9 % in January 2010.

3. Both valuers agreed that on 16 December 2009 the potential for long-term pre-commitment by tenants was low and unless a pre-commitment was obtained, the consolidated site would be "unviable for redevelopment as at

16 December 2009" and that any such redevelopment would need to be deferred well into the future.

1. Mr Flannery said that the highest and best use of the Subject Properties before the variation of the leases was their continued use as commercial office buildings. His view is that the primary valuation method to establish the Before Value is the capitalisation of net rental income after allowing for refurbishment and later re-letting. Mr Flannery adopted the direct comparison approach as a check method of valuation. The details of the rentals and sales relied upon by Mr Flannery are considered later.

2. For the purposes of assessing the After Value Mr Flannery used, as the primary valuation method, the direct comparison approach by comparing the Subject Properties with other vacant land sales identified for commercial office development. From these sales he obtained a GFA rate (in $/sqm of GFA) to apply to the Subject Properties at the relevant date and adjusted the value of the Subject Properties to account for five years of rent, holding costs and demolition costs. As a check method of valuation Mr Flannery carried out a feasibility analysis of fully developing the vacant consolidated site in five years, but taking into account the value of the rental stream for those five years.

3. The Applicant said that in calculating the After Value there was no added value for the lease variation and consolidation on the relevant date and that any added value would only be achieved in the future when the market improved. Such added value was not present on 16 December 2009.

1. As set out earlier, the Respondent and the Applicant agreed on the highest and best use of the Subject Properties for the Before Value and the methodologies to establish the Before Value. The details of the rentals and sales of comparable properties relied upon by the Respondent to establish the Before Value are set out and analysed later.

2. For the purpose of assessing the After Value, Mr Shadbolt adopted as a primary method of valuation the capitalisation of net income. He "strengthened" (i.e. reduced) the capitalisation rate because of the added value of the consolidation, the common lease purpose and the increased GFA. He assumed the ongoing use of the Subject Properties as refurbished office accommodation in the foreseeable future.

3. As a check method for the After Value Mr Shadbolt used the direct comparison of sales which was the same as that adopted by Mr Flannery as his primary valuation method.

1. Mr Flannery's primary valuation method was the capitalisation of the net rental income of the Subject Properties for the period of the Crown Leases. This method involved, firstly, establishing the capitalisation rate that was relevant. He then determined the gross market rent that was appropriate to the Subject Properties and the outgoings that were to be deducted from that gross market rent. The gross market rent assumed that the Subject Properties were fully let and that they were refurbished to a 4.5 star energy rating. The capital costs of refurbishment were deducted from the capitalised value to achieve the market value of the Subject Properties on the relevant date. Mr Flannery's methodology is set out in the following simple summary:

1. Mr Flannery said that the capitalisation rate is the long term return on investment in the Subject Properties, taking into account all the risks and uncertainties that were present on the relevant date. These would include the age of the buildings, the WALEs, the market situation, the cost of funds, the need to refurbish and the condition of the buildings (TR 29/3/11, pp 32-33). In order to calculate the capitalisation rate, Mr Flannery selected sales of eight commercial properties which he considered had similar characteristics to the Subject Properties (see Table 1). His analysis of these sales produced the yield or capitalisation rate which was then adjusted to take into account the risks and uncertainties mentioned above. The first five sales he considered his key sales and relied principally on them.

1. Mr Flannery said the net market income which is capitalised is the gross market rental on the relevant date less outgoings, but the rental and outgoings are adjusted so that they represent sustainable long term figures. Thus a higher rent will be adjusted down to the market rent and a lower rent adjusted up to the market. Outgoings will be similarly adjusted. Where refurbishments are required then any reduction in outgoings e.g. from the use of more efficient air-conditioning, will be taken into account in the net market income figure as well as the cost of refurbishment.

1. The low net yield of 7.34% for the newly refurbished Edmund Barton Building, leased to the Australian Federal Police for 15 years, represents the low risk nature of this property. The highest net yield of 9.86% is for 4 Marcus Clarke Street. It is leased with a WALE of 2.86, it has little development potential and is on the outskirts of the CBD which increases the risk to the investor and shows a higher yield or capitalisation rate.

2. Based on the yields set out in the preceding table, Mr Flannery applied the capitalisation rates described below to the Subject Properties. The lower rate of 9.25% took into account that Block 1 had longer leases than the other properties. Block 20, by contrast, is a lesser building needing more repair work and with earlier lease expiry dates. It would be seen in the market as higher risk and accordingly a higher capitalisation rate of 9.75% was applied to reflect this.

Property Applied Capitalisation Rate Value/sqm NLA

1. Mr Flannery used three key properties in establishing gross market rents. These are set out in Table 2

These properties were considered by Mr Flannery to be comparable with the Subject Properties after refurbishment. He adopted $380/sqm as the gross market rent for all of the Subject Properties.

1. Mr Flannery was provided with the detailed budgeted outgoings of the Subject Properties by the Applicants. He adjusted these to achieve the anticipated outgoings taking into account, for example, the reduction of energy cost following refurbishment and setting management fees to reflect market levels (Exhibit 3, pp 27-28). The summary below sets out his adopted outgoings for each property.

Before adopting these figures Mr Flannery compared his adjusted outgoings with the benchmark provided by the PCA for "A" grade buildings in the Canberra Business District. In 2009, the adopted benchmark was $75.93/sqm with an upper rate of $79.82sqm and a lower rate of $70.06/sqm (Exhibit 3,

1. Table 3 below sets out the refurbishment rates for the Subject Properties adopted by Mr Flannery having regard to the current energy rating of the buildings at the relevant date, advice provided by the Applicant, and CBRE's market knowledge of refurbishment costs of other similar buildings within the ACT office market.

The refurbishments were programmed to be carried out as major leases expired between 2010 and 2014 and were adjusted to present value.

1. Numerous other items of future capital such as rental adjustments, letting up allowances, commissions, incentives and make good allowances were also deducted (Exhibit 3, pp 46-50). All future expenditure was adjusted back to the present value at the valuation date as set out in Table 4 below.

1. Mr Flannery applied his various adopted figures to establish the market values of the Subject Properties. Table 4 sets out those calculations and his final conclusions.

Mr Flannery adopted the sum of $54,650,000 as the combined Before Value of the Subject Properties using this method.

Comparative sales approach - Before Value check

1. As a check valuation Mr Flannery considered the sales in Table 1 which set out the sale rates achieved in dollars per square metre of NLA. These varied depending on the market view of the best investment, so that the Edmund Barton building, fully refurbished and with a 15 year lease to the AFP, sold in December 2008 for $4,515/sqm of NLA. The ACTEW Building, with a similar lease profile and age to the Subject Properties and with some refurbishment but requiring more, sold in September 2008 for $2,285/sqm of NLA. 10 Rudd Street, a more modern building with longer leases than the Subject Properties, sold in July 2009 for $3,948/sqm of NLA. 62 Northbourne Avenue, built in 1986, refurbished and with a long term lease to the Commonwealth, was sold in October 2008 for $3,719/sqm of NLA.

2. Based on these sales and the other sales in Table 1 Mr Flannery adopted the following value per square metre of NLA, having regard to the quality of the buildings and the other factors previously identified:

Mr Flannery broadly averaged these rates and set a rate of $2,250/sqm of NLA for the Subject Properties. As the NLA of the Subject Properties is 24,143 square metres, his check method resulted in a value of $54,321,750, which confirmed the valuation achieved by the primary valuation method.

Mr Flannery then adopted $54,650,000 as his Before Valuation.

1. Mr Flannery's primary valuation method was the direct comparison of sales to establish a rate per square metre that the market was prepared to pay for GFA potential. He analysed a number of sales, both of buildings and of vacant land, and adopted a rate of $600/sqm of GFA. This figure was agreed to by the Respondent. The GFA potential of the Subject Properties is 59,000 sqm.

2. The value of the site today on this basis is $35,400,000 (59,000sqm @ $600/sqm). It assumes that the site is vacant and available for redevelopment immediately, however that would ignore the existing leases. Deferral of redevelopment until the expiry of the last of the existing leases in 2014 was therefore considered necessary. The value was therefore reduced by

Mr Flannery to $24,092,645 to account for five years holding costs at eight per cent. He also deducted one million dollars for the present value of demolition cost in five years. Finally he added the present value of the lease income from the Subject Properties over the next five years until 2014, which included income from short term leases from a reletting of parts of the Subject Properties as their leases expired. No refurbishment was allowed for. These calculations are set out below:

(+) 5 years' rental income (present value) $18,541,353

This was rounded to an adopted value of $41,650,000

Hypothetical development approach - After Value check

1. Mr Flannery used a hypothetical development computer model to assess the residual land value of the vacant site in the market on 16 December 2009 as a check on his direct comparison approach. The assessment had the following parameters:
   • GFA potential 59,000sqm;
   • Deferred development until 2014 when all leases expire;
   • Provision of minimum car parking;
   • New office market rentals of $440/sqm;
   • End sale value for new developments of 7.5% yield;
   • Long term lease incentives of 6.66%;
   • Current construction costs of $185,968,550 including demolition;
   • Interest rate of 7.5%;
   • Commercial profit and risk margin of 25%;
   • Development period 36 months.

2. The assessment shows a land value at the relevant date of $22,350,000 or $379/sqm of GFA potential (Exhibit 10). Because the development would take place in five years, Mr Flannery added the present value of the rental stream to the land value of $22,350,000. Using this method, the After Value was $40,891,353, rounded to $40,900,000.

3. In discussing the After Value in his second valuation report (Exhibit 3),

Mr Flannery said that immediate redevelopment was not viable. He said that any additional development rights would not trigger redevelopment as the existing buildings were substantial and had not reached the end of their economic life. He said the highest and best use of the Subject Properties was refurbishment and reletting rather than redevelopment. Mr Flannery said in evidence that where the After Value (valued assuming the use of the development rights granted by the lease variation) is less than the Before Value then the Before Value should be adopted for the After Value (29/3 TR p.83). Mr Swinbourne also endorsed this approach (T121).

1. Before Value (capitalisation of net market income): $54,650,000

After Value (direct comparison approach): $41,650,000

1. Mr Shadbolt's primary valuation method was the same as Mr Flannery's, that is, the capitalisation of the net market income of the Subject Properties. The various adjustments that were made by Mr Shadbolt were similar to those made by Mr Flannery. The differences between the components of their respective valuations are discussed later.

2. Mr Shadbolt selected sales of eight key commercial properties to calculate the capitalisation rate he considered most relevant. These are set out in Table 5.

1. In comparison with the Subject Properties, Mr Shadbolt considered

62 Northbourne Avenue to be a far superior building, 19-25 Moore Street to be overall superior and 10 Rudd Street to be superior in most respects. ActewAGL was superior because of the time of its sale. 38 Akuna Street was considered inferior to the Subject Properties; it was essentially vacant without a yield but was included by Mr Shadbolt to show the sale rate per square metre of a property with a high risk profile. He applied the following capitalisation rates and sale values per square metre to the Subject Properties:

Property Applied Capitalisation Rate Value/sq m NLA

1. Mr Shadbolt selected six properties to establish gross market rents. These are set out in Table 6.

5 Constitution

2 Constitution

1. Mr Shadbolt adopted an average market rental of $360/sqm/annum in the light of the competition from better buildings in a difficult market. He considered the rental would need to be competitive to attract tenants. In

Mr Shadbolt's view, although the Subject Properties would be refurbished to a 4.5 star energy rating, this would not be sufficient to bring them up to a full A grade building rating. He considered they would be "A minus to B plus" which is not a recognised category by the PCA but reflects his own assessment that they would be in the lower part of the A rating and in the upper part of the B rating.

1. Mr Shadbolt adopted a market standard for all outgoings on buildings of the grade of the refurbished Subject Properties of around $95/sqm of NLA.

Mr Swinbourne also useD this figure (T113-117). He did not have available budgeted outgoings. However some small adjustments were made in

Mr Shadbolt's actual calculations (at T 56-58). Block 1's outgoings rate was $94.89/sqm, Block 2's was $95.28/sqm, Block 19's was $95.51/sqm and Block 20's was $85.02/sqm. These rates were applied to the Subject Properties based on the buildings being upgraded to a 4.5 star energy rating.

2. In order to refurbish the buildings to a 4.5 star energy rating Mr Shadbolt considered that $1,000/sqm of NLA would need to be expended. He based this on his knowledge of the costs of similar refurbishments. The total cost, based on an NLA of 24,392.9sqm would be $24,392,900. He then discounted the cost at a rate of between 10.25% and 10.50% to achieve a present value of $21,250,000. This discounting took into account the expiry of leases between 2010 and 2014.

3. Mr Shadbolt also made capital adjustments for rental reversions, letting up allowances, agents' fees and tenants' incentives. Future expenditure was adjusted back to the present value as set out in Table 7 below. Mr Shadbolt applied his various adopted figures to establish the market values of the Subject Properties, as summarised in Table 7 (Extracted from T56-58).

1. Mr Shadbolt therefore adopted the sum of $43,000,000 as the Before Value for the Subject Properties.

Comparative sales approach - Before Value check

1. As a check valuation Mr Shadbolt considered the sales in Table 5 which set out the rates achieved in dollars per square metre of building area (T47, last paragraph). These varied from a high of $3,948/sqm for 10 Rudd Street down to $1,374/sqm for 38 Akuna Street which was vacant at the sale date. [3] As between the Subject Properties, Mr Shadbolt allocated a rate per square metre of NLA of $2,221 to Block 1, $1,699 to Block 3, $1,533 to Block 19 and $1,413 to Block 20.

2. Although Mr Shadbolt did not include the calculation arising from these conclusions in his report, using the NLA figures provided by Mr Flannery (Exhibit 3 pp 25-26) the values resulting are - for Block 1, $15,696,695; for Block 3, $16,626,414; for Block 19, $5,698.161; and for Block 20 $5,401,192.50, giving a total of $43,422,462.90 for the Subject Properties**.**

1. Mr Shadbolt's primary valuation method to establish the After Value was the same as his primary method for the Before Value; the capitalisation of net income. He adopted the same figures as those used in the Before Value for income, outgoings, capital adjustments and the like, but combined these to achieve a consolidated result. Mr Shadbolt strengthened his capitalisation rate from between 10.25% and 10.50% to an overall rate of 9.5% in recognition of his view that the Subject Property possessed added value as a result of consolidation, a common and expanded lease purpose clause and increased GFA.

2. Mr Shadbolt said that yields had generally softened (that is, increased) by 1.5% to 2% from the high point of the market in 2006-2007 and the relevant date. In support of his view he quoted the sale of 10 Binara Street for $151M in November 2006 and its resale in May 2009 for $123M with an increase in yield of 2.02%. Another property, 255 London Circuit, was sold for $60.7M in July 2007 and resold in December 2010 for $55.2M, showing an increase in yield of 1.55%. These sales also appear in Mr Flannery's second valuation (Exhibit 3, p 42), where he also said (at p 32) that during 2008 and 2009 yields had softened by 150-200 basis points for prime assets and up to 200 basis points for secondary assets.

3. Mr Shadbolt relied on the sale of the first three properties listed below to show that the market placed added value on development rights. The fourth and fifth properties did not have development rights and, he said, showed no added value.

9/2008 - GFA height limit removed from lease and residential use added

1. Mr Shadbolt capitalised the net market income of the Subject Properties using the figure $7,095,064 (T60) at 9.5% to achieve a capitalised value of $74,675,511. He said he then made the same capital adjustments as in his Before Value calculation of $27,105,393 to obtain an After Value of $47,570,118 which he rounded to a market value of $47,600,000.[4]

2. As a primary check method Mr Shadbolt calculated the After Value of the Subject Properties taking into account the deferral of existing leases for a period of five years and the present value of the site deferred for five years.

3. The agreed value of the site today was $35,400,000 (59,000sqm @ $600/sqm). It was reduced by Mr Shadbolt to $22,500,000 to account for five years holding costs at 9.5%. He added the present value of the lease income from the Subject Properties over the next five years until 2014, which included income from short term leases from a reletting of parts of the Subject Properties as their leases expired and attained a value of $47,100,000

4. Mr Shadbolt in his valuation (T25-T62) used the figure of $24,600,000 for the present value of rental income based on earlier figures supplied by Mr Flannery (T226). He revised this at the hearing to $18,541,353 following receipt of updated figures supplied by Mr Flannery in Exhibit 3. At hearing, Mr Shadbolt agreed that he had not included demolition costs, estimated at $1,000,000. His revised calculations, not taking into account demolition costs, are set out below:

(+) 5 years' rental income (present value) $18,541,353

1. Having regard to the check method result based on the first rental income figure, Mr Shadbolt adopted the following values as at 16 December 2009:

Mr Walker, for the Applicant submitted that the CUC must be based on evidence, not intuition. The Tribunal, he said, is not asked to determine an abstract concept of value and it is not relevant that the lessee is owned by a large real estate investment trust. The Tribunal must be satisfied on the evidence before it that a CUC is payable; that is, that the After Value exceeds the Before Value. He submitted that the Tribunal cannot assume that an increase in value has occurred as a result of the consolidation, the increase in GFA and the application of a uniform lease purpose to all of the subject properties. In determining the After Value, the evidence must show what the market would have been prepared to pay for the lease immediately after consolidation and variation.

He contended that Mr Shadbolt had taken the view that extra development rights must have a value for potential and this would be reflected in the market price, but he submitted that it does not follow that people will pay for additional rights which they cannot see themselves using into the foreseeable future. In his submission, the Tribunal should have grave reservations about Mr Shadbolt's opinion where it was not clearly supported by unambiguous, objective evidence,

Mr Walker questioned many of the assumptions made by Mr Shadbolt in both his Before and After Value calculations and concluded that there must be considerable doubt about his Before Value of $47,500,000 while his After Value, if the Applicant's contentions were to be accepted, should be between $30,100,000 and $40,100,000.

Dr Jarvis, for the Respondent started with the proposition that an increase in the income-earning capacity of an asset must tend to increase its value. He contended that the increase in the GFA is such an increase in earning capacity and that it will tend to result in a higher After Value. The added value or potential will be in the mind of the hypothetical purchaser even though it is not reflected in the present use of the Subject Properties.

He said that it was common ground that continuing the current uses as office buildings was the highest and best use of the subject buildings for the "foreseeable future" or "for many years to come" and therefore submitted that the critical difference in the After Value arrived at by the two valuers was the assessment of the added development rights, added uses and consolidation. Dr Jarvis contended that in estimating this After Value, Mr Flannery had not produced a value of the highest and best use of the property, but had instead attempted to model a proposed re-development of the Subject Properties based on a range of assumptions including that re-development would occur in 2014, an assumption that both valuers accepted was not realistic.

Mr Walker submitted that the additional development rights will only be triggered when market conditions are assessed by the owners to make the development feasible, not at an arbitrary date such as 2014. The evidence pointed to the fact that there were a number of cases where purchasers had appeared to pay a premium for properties with development potential in the form of unused development rights and then decided to "land bank" those rights for the time being and to continue to operate buildings that had not reached the end of their income-earning life.

Dr Jarvis said that if the Tribunal accepts the proposition that the variations tend to add value to the lease, the difficult task nevertheless remains of quantifying that value. He defended the assumptions made by Mr Shadbolt and said that in calculating his After Value, Mr Shadbolt had adopted the conventional and accepted method of approach, that is, the capitalisation of net income. In his submission, that was the correct and preferable primary valuation approach. In order to reflect the added potential, Mr Shadbolt had adopted a firmer yield of 0.75%-1.0% as compared with the sales evidence of 1.0-2.0% which was consistent with the well-accepted distinction between the present value of a potential and what may in the future be actually realised from it (citing Raja Vyricherla Narayama Gajapatiraju v Revenue

[1939] AC 302, at 313 as authority).

The Tribunal has carefully considered these submissions and accepts that its decision as to the appropriate Before and After Value must be based on the evidence before it. Nevertheless, it also accepts the general proposition that added development rights generally have value, but recognises that that value might not be realisable for many years. Thus, at the relevant date in the property market in the ACT, a purchaser may not have been willing to pay any greater price than would be paid in the absence of those rights because of the risks and uncertainties involved. Consequently, The Tribunal has adopted the course of carefully analysing the evidence and adopting values for a number of the variables that it believes are appropriate and then applying them to arrive at its own estimates of the Before and After Values,

1. In Brewarrana Pty Ltd v Commissioner of Highways (No.2) [1973] 6 SASR 541 at 543, Wells J commented on the "extraordinary differences" in opinions of "experienced professional men in respect of identical subject matter". His Honour also said where evidence is presented that is '"defective, incomplete, or irreconcilable" it is the task of the Court or Tribunal to "correct, complete or reconcile" that material. The evidence in this case highlights the wide divergence of opinion among experienced valuers. Table 8 below illustrates this divergence of views:

The Tribunal has disregarded the valuations by Mr Powderly and Mr Dominguez because they were not supported by any detailed analysis or evidence. While Mr Swinbourne's valuation was fully detailed and was in the T Documents, no evidence was given about it and the Tribunal has referred to it as appropriate but not relied upon it, considering instead mainly the evidence of Mr Flannery and Mr Shadbolt. The principal areas of disagreement between Mr Flannery and Mr Shadbolt are discussed in the following paragraphs.

1. There were significant differences between Messrs Flannery and Shadbolt in their adopted costs of Outgoings/Expenses after Refurbishment in $/sqm of NLA, as set out in the Table 9 below, together with the Trust Company's budgeted figures, The PCA 2009 Benchmarks were $76 within the range $80-$70 for "A" Buildings and $90 within the range $99-$67 for "B" and "C" Buildings.

73. The Trust Company budget figures (Exhibit 3, pp 27-28) relate to the Subject Properties in an un-refurbished state. The figures from the three valuers relate to the refurbished properties. The Trust Company's budget itemised all the components of the outgoings and Mr Flannery adjusted each item to his view of what was an ongoing market rate. Messrs Shadbolt and Swinbourne selected $96 as a general market rate. Mr Shadbolt said he doubted that the Subject Properties could be refurbished to a full "A" rating but that they would remain at "A-" or "B+". The Tribunal accepts that this is an accurate assessment of the refurbished buildings.

Bearing in mind that the buildings will be around the bottom of the A or the top of the B rating, the PCA benchmarks for outgoings give support for Mr Flannery's rates, rather than the blanket $96 rate used by Mr Shadbolt. The Tribunal prefers Mr Flannery's outgoings' rates for the Subject Properties because they are based on a researched analysis of the likely outgoing of the actual buildings and will adopt them.

Mr Flannery's analysis of his capital adjustments is more detailed than that of Mr Shadbolt and contains more adjusted items, although the major items are dealt with in both valuations. The single largest item is the expenditure on refurbishment to achieve a 4.5 star energy rating and as close as possible to a general "A" grade building rating. Mr Shadbolt used a uniform $1,000/sqm of NLA to establish the refurbishment cost for all buildings. Mr Flannery was more selective. Block 3 required upgrading from a low 1.5 stars and he calculated refurbishment costs at $1,200/sqm of NLA for it whereas Block 19, already at 4.0 stars, required expenditure of $900/sqm of NLA. Because of this greater attention to detail the Tribunal prefers Mr Flannery's capital adjustments to those of Mr Shadbolt.

76. Mr Flannery adopted an average gross market rental of $380/sqm for office space, while Mr Shadbolt adopted $360/sqm. Mr Flannery's three comparison properties require rental adjustments because they are outside the CBD: 496 Northbourne Avenue ($370/sqm); 17 Moore Street ($380/sqm); and a superior building, 33 Allara Street ($390/sqm). All three were rented in a weak market between July 2008 and September 2008. Mr Shadbolt's two comparison properties at 14 Mort Street ($380/sqm) and at the corner of Bunda and Mort Streets ($377/sqm) support his rate of $360/sqm, as both are superior buildings with rentals established in a stronger market. A similar argument applies to rentals for 2 Constitution Avenue ($380/sqm and $395/sqm) and 5 Constitution Avenue ($380/sqm and $375/sqm).

The Tribunal is mindful of the fact that given the depressed market circumstances and substantial vacancies on the relevant date, rental would need to be competitive to attract tenants. The Tribunal considers that Mr Flannery was overly optimistic while Mr Shadbolt was overly pessimistic. The Tribunal feels that a gross office rent rate of $370/sqm more accurately represents the rate that the Subject Properties would have achieved following refurbishment.

The basement car bay market rates of $3,500/bay/annum adopted by Mr Flannery (Exhibit 3, p.36) for the Subject Properties do not seem to be supported by the evidence. The only parking at this rate is at 2 Constitution Avenue (T51). The only other basement car parking above $3,000/bay/annum is at 5 Constitution Avenue at $3,350/ bay/annum (T51). The rate at 33 Allara Street is $2,800/bay/annum, while at 17 Moore Street it is $3,000 bay/annum, as it is at the corner of Mort and Bunda Streets. The Tribunal prefers Mr Shadbolt's parking rate of $3,200/bay/annum.

Various figures were given in Exhibit 3 by Mr Flannery for the area of storage - 250 sqm in Block 3 and none in the others (p 26); 106.3sqm in Block 1 and none in the others (p 36); and 370 sqm in total (p38) which he valued at $160/sqm. Mr Shadbolt adopted 356.3 sqm as the correct total. We adopt 106 sqm (Block 1) and 250 sqm (Block 2) at a rental rate of $160/sqm.

Both valuers assessed the retail rental rate for the 20 square metres on

Block 19 at their office rate. The Tribunal has already decided upon an office rate of $370/sqm/annum and adopts this rate for this 20 square metres of retail space. Block 1 has 66.2 square metres of retail space which Mr Flannery assessed at $400/sqm. Mr Shadbolt did not make a rental assessment for this space. The Tribunal adopts Mr Flannery's assessment.[5]

This is the most significant factor in determining the Before Value. Both valuers used the yields on sales to determine the capitalisation rate to be applied to the net income. Mr Flannery's capitalisation rates ranged from 9.25% to 9.75% (paragraph 30 above) while Mr Shadbolt's rates ranged from 10.25% to 10.50% (paragraph 46 above). The sales of the large properties at 10 Binara Street and 255 London Circuit, discussed earlier, showed softening yields between the high and low points of the market. Mr Flannery considered that any softening in yields should apply only to the large consolidated site after redevelopment. He would not apply the softer yields to the four leases comprising the individual Subject Properties. Without being too exact about the yields, the Tribunal considers that some guidance can be gained from this yield differential where sales were made in a strong market compared with a weak one regardless of whether the properties were under or over $25M.

An examination of the initial yield from 4 Marcus Clarke Street of 9.86 % on an October 2009 sale supports Mr Flannery's capitalisation rates for the Subject Properties. 4 Marcus Clarke Street is a C grade property whereas the Subject Properties will be A minus or B plus when the refurbishments are complete. It is some distance from the CBD with neighbouring buildings of a residential character. Its lease expiry position is similar to that of Block 1.

ActewAGL (221 London Circuit) was a key sale for both valuers and they agreed that 9.5 % was the correct yield for this sale in September 2008. Based on the vacancy rates, at the time of this sale and the relevant date, as set out in PCA's Office Market Report of January 2010 (Exhibit 7), the Tribunal considers that the market was similar at both times. ActewAGL and the Subject Properties have substantial similarities and its yield is a reliable guide to the capitalisation rate for the Subject Properties. This yield also offers support for Mr Flannery's capitalisation rate.

Another key sale for both valuers was 19-25 Moore Street. It showed yields of 10 % (Mr Shadbolt) and 9.79 % (Mr Flannery) from a sale in July 2009 when the market was weak. The difference between the two quoted yields seems to have resulted from the use of different income figures (Exhibit 14). The Tribunal prefers Mr Flannery's figures as CBRE were joint selling agents in that sale. Mr Shadbolt judged 19-25 Moore Street to be overall superior to the Subject Properties. Mr Flannery said it was a B grade building with a WALE of 3.9 years built in 1989 and refurbished in 1999. The building has basement car parking, two levels of office accommodation, the crown lease had no height or GFA limits and the site is close to, but outside, the CBD. The Tribunal does not agree with Mr Shadbolt that 19-25 Moore Street shows an overall superiority. At best, it is marginally superior, which suggests a capitalisation rate for the Subject Properties of slightly above 9.79 % which falls between the rates adopted by the two valuers.

Both valuers agreed that the yield on the key sale of 91 Northbourne Avenue was 8.70 % from a sale towards the middle of 2009 in a weak market. The building is a three level B grade office building built in 1988. The lease has no GFA or height restrictions. Although not in the CBD, it has an excellent corner location on Northbourne Avenue. It has an average lease expiry of three years, that is, similar to Block 1. In the Tribunal's view this property is only slightly superior to the Subject Properties. This yield supports the stronger capitalisation rate adopted by Mr Flannery.

The fourth key sale used by both valuers was that of 217 Northbourne Avenue in late 2007. It showed a yield of 8.09 % in a strong market. This property, although on Northbourne Avenue, is some distance from the CBD. It was built in the early 1970's and fully refurbished in 2005. It has a WALE of 2.0 years and comprises four levels of office accommodation. The lease does not limit GFA. The Tribunal considers this property to be slightly inferior to the Subject Properties except with respect to the time of sale. If an adjustment is made for this of 1.5 to 2.0 %, the adjusted yield of 9.59 to 10.09 % lies slightly closer to Mr Flannery's range of 9.25 to 9.75 % for the Subject properties than Mr Shadbolt's range of 10.25 to 10.50 %. Any adjustment for the slight superiority of the Subject Properties moves the capitalisation rate closer to Mr Flannery's figures.

Mr Shadbolt also relied on several other key sales, including 40 Allara Street which sold in early 2006 when the market was strong. Mr Flannery showed the yield as 9.76 %. The Tribunal accepts this yield figure of Mr Flannery's because he provided the net rental to calculate the yield. Mr Shadbolt did not provide any rental details, but expressed the yield as "approx.10%"

(Exhibit 16). The yield should be adjusted by between 1.5 % and 2.0 % for a weak market on the relevant date.

Mr Shadbolt described 40 Allara Street as a standard commercial property without development prospects and with the expectation that the leases would not be renewed. He said the vendor had decided to sell while the market was good. Mr Flannery thought the sale too distant from the relevant date. The Tribunal believes the sale relevant but is cautious about the weight to be given to it. Mr Flannery also said that the property required refurbishment and this would have added to the risk for the purchaser and required a higher yield to compensate. An adjusted yield for a sale in a strong market would result in figures of between 11.26% and 11.76%. They support Mr Shadbolt's capitalisation rate for the Subject Properties.

Another key sale on which Mr Shadbolt relied was 62 Northbourne Avenue. The property was sold for $38M in October 2008 for a yield of 8.61%. The Tribunal accepts Mr Flannery's yield figure because he disclosed in Exhibit 4 the basis of his calculations. CBRE was the sales agent. The property has a WALE of 8.66, is leased to the Commonwealth, was built in 1987 and was refurbished in 2008. Mr Shadbolt considered this property far superior to the Subject Properties "in respect of timing and lease term". This is so in respect of lease term but at the sale date the vacancy rate for A grade buildings moved from 8.3% (July 2008) to 9.9% (January 2009). The Tribunal believes that the evidence shows that the market was weak on the sale date (see also Exhibit 3, page 32). Additionally, Mr Shadbolt said that the vendor was "keen to quit the asset" which suggests that the sale price might have been lower than would be expected, thus increasing the yield. The Tribunal considers that this sale

supports the capitalisation rate for the Subject Properties proposed by

1. The final key sale on which Mr Shadbolt relied was 10 Rudd Street. It was sold in October 2009 in a weak market for $18.7M and a yield of 9.98% (Mr Shadbolt) or 9.63% (Mr Flannery). The different yields result from a difference in the net income of $66,531 but the evidence did not resolve the matter. The Tribunal accepts that either yield could be correct. Mr Shadbolt considered 10 Rudd Street superior to the Subject Properties in most respects. It is a modern, six storey building, built in 1985 with an average lease expiry of three years. In the Tribunal's view this sale on either yield supports

Mr Shadbolt's capitalisation rate for the Subject Properties.

2. Although the yields on the various sales offer some conflicting results, most support Mr Flannery while a few support Mr Shadbolt. The Tribunal believes that the capitalisation rates supported by the evidence are closest to those adopted by Mr Flannery for the four Subject Properties, but should be adjusted slightly to reflect the pessimistic outlook for them. The Tribunal therefore adopts capitalisation rates of 9.25% for Block 1; 9.50% for Block 3; 9.75% for Block 19; and 10% for Block 20.

• (v) Capitalisation of net market rent - calculation of Before Value

3. Based on its previous findings the Tribunal has calculated the Before Value of the Subject Properties as set out in Table 10 below.

4. The Tribunal's calculation results in a Before Value for the Subject Properties of $51,327,700 based on the capitalisation of net income, rounded to $51,328,000.

1. Both valuers used the direct comparison method to check their primary valuation approach. Mr Flannery's rates per square metre of NLA for his key sales are set out at Table 1 whilst Mr Shadbolt's appear at Table 5. Both of the valuers adopted values below most of the properties listed in their key sales to reflect their views that the Subject Properties, for one or more reasons, are less attractive than the properties listed.

2. Mr Flannery set out a range of values for each of the four properties and adopted a rate between them (Exhibit 3, pp 51-52). At his minimum rate, the value of the four properties is $51,750,000 while his maximum is $57,530,000. Mr Flannery then adopted a rounded midpoint overall figure, resulting in a value of $54,300,000.

3. Mr Shadbolt was consistently more pessimistic about the Subject Properties, in respect of both their quality and leasing prospects. His rates (T52) are generally lower than Mr Flannery's and result in a total value of $43,000,000.

On the basis of the evidence the Tribunal considers that Mr Shadbolt has been unduly pessimistic but that Mr Flannery may have adopted a slightly too positive view. The Tribunal considers that for Block 1 (7,067.4 sqm) the rate should be $2,200/sqm/NLA; for Blocks 3 (9,536 sqm) and 19 (3,717 sqm) it should be $2,100/sqm/NLA; and for Block 20 (3,822.5 sqm) it should be $1,800/sqm/NLA. These rates result in values of $15,548,280 for Block 1, $20,025,600 for Block 3, $7,805,700 for Block 19 and $6,880,500 for Block 20, giving a total of $50,260,080.

1. The Tribunal therefore adopts as the Before Value the sum of $51,000,000.

Mr Flannery contended that consolidation removed the flexibility to sell leases piecemeal if required. However, the evidence showed that the lessee had pursued acquisition of the Subject Properties over many years, and the fact that it sought consolidation of the leases suggests that it saw consolidation as a positive thing. The specific advantage is the ability to compete for large Commonwealth Government tenants in a new building (T.69) which was in the owner's mind on the relevant date. The Tribunal does not consider consolidation to be a negative.

The doubling of GFA was the major lease variation and the Respondent's contention was that an increase in the earning capacity of an asset will tend to increase its value (other factors affecting the value being equal). The difficulty in the present case is that there may not have been a market for the increased GFA at the relevant date, but in order to realise this extra GFA the asset producing the income will need to be demolished and a new building constructed. There was some speculation but no strong evidence before the Tribunal that the present buildings could be extended upwards or the courtyard space in-filled to utilise the additional GFA. It was also suggested that the additional GFA could be achieved without consolidation, by building across the lease boundaries as had occurred at the Canberra Centre. However, the Tribunal is not satisfied that either of these complicated possibilities is a realistic option.

Under the varied lease, all the Blocks acquired commercial accommodation use, including hotel and tourist resort. Blocks 1, 19 and 20 acquired tourist facility, drink establishment and commercial car park uses and Blocks 19 and 20 could include a restaurant. The streamlining of these uses also removed a design complication present with the four separate leases. Retail was increased to 2,500 square metres but importantly it was not fragmented into four smaller retail areas.

In the Tribunals' view these changes in the new lease conferred a benefit that was not reflected in the four earlier leases. However, the fundamental question remains. What would a purchaser, in the weak market of

16 December 2009 and with no possibility of utilising these advantages in the near term, pay for them? Mr Flannery would say "nothing" and Mr Shadbolt would say that they have a substantial value.

This method covered much agreed ground as set out earlier. It was Mr Flannery's primary valuation method and Mr Shadbolt's check method. Both valuers agreed that the value of the vacant site should be calculated at a rate of $600/sqm of GFA (59,000sqm) i.e. $35,400,000 and that the deferred period should be five years to coincide with the expiry of the existing leases.

Mr Flannery applied an interest rate of 8.0% to reduce the present value of the site to $24,092,645. Mr Shadbolt chose 9.5% to reduce the present value of the site to $22,500,000. Both valuers accepted that the net present value of lease rentals including opportunity rents was $18,541,353. Mr Flannery allowed $1.0M for demolition costs and although Mr Shadbolt did not initially allow for this, he accepted at the hearing that it was a necessary deduction. As a result Mr Flannery's After Value was $41,633,998 which he rounded to $41,650,000. Mr Shadbolt's After Value (after allowing for demolition) was $40,041,353. If rounded in a similar way to Mr Flannery, the figure would be $40,050,000. The chosen interest rates are the only difference between the After Values and are based on the valuers' subjective professional judgments.

• (iii) After Value - development feasibility

Mr Flannery used this valuation method to establish the After Value assuming the Subject Property was fully re-developed to 59,000sqm of GFA. The assumptions that he made are set out earlier together with his valuation, using this method, of $40,900,000 (paragraphs 40-41). He then concluded that the highest and best use of the Subject Property was its refurbishment and reuse.

Having reached that conclusion and also taken the view that the market was not paying for development rights then it would seem logical to the Tribunal that Mr Flannery's Before Value figure, based on refurbishment and reuse, would apply equally to his view of the After Value situation and that the valuations should be the same.

The Tribunal notes and agrees with the concerns expressed by other tribunals about the difficulty of relying on the development feasibility method of valuation, because of the number of estimates and assumptions involved: see Tuggeranong Town Centre Pty Ltd and Commissioner for ACT Revenue [2008] ACTAAT 22; Commonwealth Funds Management Ltd & Pty Limited and Commissioner for ACT Revenue [2005] ACTAAT 26; and Gwynvill Properties Pty Ltd v Commissioner for Main Roads (1983) 50 LGRA 322.

• (iv) After Value - capitalisation of net income

Mr Shadbolt's approach was to use the methodology that both he and Mr Flannery used to establish the Before Value of the Subject Properties. He would however place additional value on the new lease because of the consolidation, greater GFA and increased and extended lease uses. He would achieve this higher value by strengthening the yield to 9.50%. In his evidence, he initially indicated that 0.25% would be attributed to the benefits of consolidation, 0.25% to extended lease uses and 0.25% to the increase in GFA. Under cross-examination he retreated from these specific percentages and gave greater value to the increased GFA, but maintained that a strengthening yield between 0.75% and 1.00% was justified on the basis of the evidence.

Mr Shadbolt said that where properties had development rights, the weak markets from 2008 onwards did not affect them as much as properties without such rights. He selected four properties to support this view as set out below..

• (a) Mr Shadbolt contended that in the strong 2006 market, 91 Northbourne Avenue sold on an initial yield of 7.57%. He said it was generally agreed that between 2006 and 2009 yields softened between 1.55% and 2%. He considered that the 2009 re-sale of this property showed a yield of 8.7% when yields would be expected to be between 9.12% and 9.57% and concluded that the stronger 2009 yield was because, in 2008, the lease was varied to remove height and GFA limits. These matters are now limited only by planning requirements, which are more generous and thus increase development rights. The lease variation also added a number of new uses. Between 2006 and 2009, rents increased which would result in a higher yield but the higher price paid in 2009 would reduce the yield. This property is outside the CBD but on a prominent corner site with a three year lease expiry profile. The 2009 sale supports Mr Shadbolt's argument.

• (b) In 2005, 217 Northbourne Avenue showed an initial yield of 8.48% in a strong market. At some unspecified date Mr Shadbolt said that this property had its height restrictions removed and its GFA quadrupled. In 2007, when the market remained strong the property was resold for an initial yield of 8.09%, a strengthening of 0.39%. Mr Shadbolt attributed this improvement in yield to the unused development rights. However the property is 5,000sqm in area, the existing building is close to the Northbourne Avenue frontage and there is a large hard stand car park at the rear. Redevelopment would not necessarily involve demolition. In the case of the Subject Property, the Tribunal considers demolition is necessary to utilise the development rights. In addition, while the development rights of the Subject Property are doubled, those of 217 Northbourne Avenue increased by a factor of 4. This suggests that any premium paid might be higher for 217 Northbourne Avenue than for the Subject Property. Thus, while this 2007 sale supports Mr Shadbolt's position, when applied to the Subject Property a substantial adjustment should be made.

• (c) In 2006, 19-25 Moore Street was sold on an initial yield of either 8.56% (Mr Shadbolt) or 8.26% (Mr Flannery). In 2008, the lease was varied to remove height and GFA restrictions, leaving these matters to be governed by planning laws alone. In 2009, the property was resold on an initial yield of 9.79% (Mr Flannery) or 10% (Mr Shadbolt), being a softening of 1.44% (Mr Shabolt) or 1.53% (Mr Flannery). The Territory Plan limits this property to 3 storeys and it is fully developed to its maximum plot ratio. No redevelopment that utilizes these additional rights can occur unless there are changes in the Territory Plan, which may explain why the yields softened in line with the overall softer yields in the market. The present building may need to be demolished in order to utilise any development rights arising from a change in planning laws. This sale does not assist Mr Shadbolt's argument.

• (d) Another property, 7-9 Barry Drive, sold in 2006 with an initial yield of 8.5%. In 2008, the lease was varied to remove height and GFA restrictions. However, planning laws restrict the plot ratio to 1:1 and the number of storeys is limited to three. The property is currently developed to a 1:1 plot ratio. The existing building may need to be demolished to use any development rights. In 2009, the property sold on a initial yield of 8.77%. The yield change from a strong to a weak market is between 1.55% and 2.0%. This yield only softened by 0.27%. Dr Jarvis indicated in his submissions that the shape of the block restricts the use of added rights as does the Territory Plan, yet the yield has gone against the general market trend. These facts support Mr Shadbolt's view that development rights protect the softening of the yields in a weak market but they seem inconsistent with the preceding sales evidence for 19-25 Moore Street.

Three other properties did not have developments rights and were, in

Mr Shadbolt's view, less protected from the market downturn. The first of these properties, 10 Rudd Street, was sold in 2009 for an initial yield of 9.63%. It has no development potential. It was considered a superior building to the Subject Property and is in the CBD, compared with the four properties discussed in the preceding paragraph. The second of these properties,

40 Allara Street, was sold in early 2006 with an initial yield of 9.76%. It too has little development potential. Mr Flannery also pointed out that the sale was over three and a half years old at the relevant date. The third of these properties, 62 Northbourne Avenue, is close to the Subject Property in the CBD. In 2008 it was sold for an initial yield of 8.61%. This is Mr Flannery's figure which is to be preferred because of its transparency, as the rent is disclosed in Exhibit 14. The building was constructed in the mid-1980s and has recently been subject to a major refurbishment. It has long-term leases to the Commonwealth Government and is superior to the Subject Property although it has little or no development potential.

1. The Tribunal considers that the capitalisation of net income is the preferred method of establishing the After Value. It considers that the sales evidence supports Mr Shadbolt's position that development potential will be paid for even in a weak market. However the Tribunal considers his capitalisation rate of 9.5% requires some strengthening as the appropriate rate for the Subject Property in the After Value calculation, taking into account the sales evidence and the grant of additional benefits. Given that we have adopted capitalisation rates ranging from 9.25% to 10% for the before value, the Tribunal proposes to adopt an overall rate of 9.25% for the After Value and apply it to the net income calculation set out in Table 10.

2. The consolidated net income from Block 1 ($2,159,310), Block 3 ($3,248,840), Block 19 ($1,188,475) and Block 20 ($1,210,764) totals $7,807,469. When capitalised at a rate of 9.25%, a capitalised value of $84,405,070 is achieved. Total capital adjustments are the same as in the Before Value, that is, $30,512,488. When deducted from the capitalised value, the calculated After Value is $53,892,582. The Tribunal adopts this After Value, rounded to $53.9M.

1. The Tribunal adopts a Before Value of $51,000,000 and an after value of $53,900,000. As the After Value is greater than the Before Value a CUC is payable. Applying the formula and the rebate, the amount payable is 50% of $2,900,000, that is, $1,450,000.

The decision under review is varied by amending the After Value (V1) to $53,900,000, the Before Value (V2) to $51,000,000, the Added Value to $2,900,000 and the Change of Use Charge Payable to $1,450,000.

[1] The Act was amended in July 2011 to vary the arrangements for charging for lease variations, but transitional provisions (section 471) provide that where the planning authority has worked out the CUC for a lease variation before 1 July 2011, the amendments do not apply.

[2] Weighted Average Lease Expiry (WALE) means the average lease term remaining to expiry across the building, weighted by rental income.

[3] This was a key sale for Mr Shadbolt, not to establish a yield but to establish a sale rate in dollars per square metre of NLA for comparative sales purposes. Both valuers agreed on a sale price of $22M, but the sale was subject to a rent rebate of $4.735M. Mr Flannery said the rebate was paid to the purchaser, but Mr Shadbolt said it was paid to the vendor. This conflict between their evidence was not resolved. Depending on who received the rent rebate, the sale rate was either $1,753/sqm of NLA (Mr Flannery) or $1,374/sqm of NLA (Mr Shadbolt). Either way, it establishes a very low value per square metre for the property..

[4] The tribunal is uncertain how Mr Shadbolt arrived at the capital adjustment figure of $27,105,393 as neither that total, nor the individual adjustment items set out at T60, seem consistent with his earlier figures at T56-T57. The total of the capital adjustments at T56-T57 is $25,920,402 and if this adjustment is made, an After Value of $48,755,109 results, which might be rounded to $48,760.000. Furthermore, the net market income for the four properties shown in Table 7 totals $7,131,820 which when capitalised at 9.5% gives a capitalised value of $75,071,789. This, after deduction of $25,920,402, gives an After Value of $49,151,387 which might be rounded to $49,150,000.

[5] Mr Flannery listed the NLA of Block 1 as 7,067.4 square metres (Exhibit 3, pp. 25, 29 & 51) of which 66.2 square metres are retail while the remaining 7,001.2 square metres comprise office space. This was accepted by Mr Shadbolt. However Exhibit 3 also gives the combined office and retail NLA of Block 1 as 5,262.6 square metres (p.35) and 6,785.9 square metres (p.46). The Tribunal considers 7,067.4 square metres is the correct area of NLA of Block 1.