Sales and Ors v Transport for NSW

Applicants' position

1. The applicants refer to the judgment at [144], where I found that the construction cost of the hypothetical subdivision included a 5m high masonry wall ('5m wall') which would be determined "adopting the characteristics of the wall described by Mr Connelly". The applicants submit that the "characteristics" are those referred in Ex D (the supplementary report of the town planners provided 14 October 2020) at (47)-(52) and in particular the Revised Plan 5.4 "Revised Traffic Wall after approach" ('Revised Plan 5.4') subject to an adjustment reflecting other findings in the judgment. For convenience, a copy of that plan is annexed to this judgment and marked "A".
2. The applicants submit that the "characteristics" of the 5m wall to which I referred at [144] necessarily involve a "return" to the wall of 70m on the southern boundary of the hypothetical subdivision and a return of 50m on the northern boundary (each projecting westward of the boundary between the Residue Land and the Acquired Land ("Lot 5") to the east) (collectively, the 'returns'). The applicants submit that although Mr Connelly's Revised Plan 5.4 depicts the 5m wall at the northern extremity of the Northern Land in the after scenario, given the Court's finding that the Northern Land (being zoned RU1 and being subject to the "WSEA SEPP") would not have transacted (in the notional sale) on the basis of its potential for residential subdivision (and it was agreed to be valued at $125/m² on the basis of its potential land banking), the determination of the sale price (in the notional sale) of the Southern Land would take into account the likely requirement for the 5m wall along the eastern boundary and this would include a return of 70m at the southern end and a return of 50m at the northern end of the Southern Land in the hypothetical subdivision.
3. In the circumstances, the applicants submit that the Court would accept that the market value for the Acquired Land would be determined on the assumption that a 5m wall measuring 348.145m in length (that is including the returns to the wall of 50m and 70m respectively) would be required.

Transport's position

1. Transport notes that Mr Connelly's evidence, which was served on the third day of the earlier hearing, prior to the preparation of Ex D (the supplementary report of the town planners provided 14 October 2020), indicated that the 5m wall would be confined to the eastern boundary of the Residue Land however, it was only in Ex D that Mr Connelly amended his earlier proposal by extending the 5m wall with the returns.
2. Transport submits that Mr Connelly's amendment to include the returns was based upon observations at the site view that an earthen mound had been constructed on the Acquired Land along the eastern boundary, which he considered was not of a sufficient height to provide amenity protection. Transport submits that the proposed 5m wall is frequently and consistently referred to in the judgment as being adjacent to the "eastern boundary" of the Residue Land.
3. Transport submits that although the judgment referred to "characteristics" of the 5m wall described by Mr Connelly (at judgment [144]), the Court recorded that "little weight" would be given to "changes in the opinions" of the experts which arose as a result of the presence of the earthen mound on the Acquired Land (at judgment [138]) and that this should include Mr Connelly's "change" of opinion in Ex D to include the returns. As such, Transport submits that the 5m wall should be confined to the eastern boundary of the Residue Land with no returns.

Consideration

1. At the earlier hearing, one of the town planning issues concerned whether a 5m high masonry wall or a 1.8m high timber boundary fence would be the appropriate treatment "on the eastern boundary of the Residue Land" (at judgment [34]). The likely required treatment along the eastern boundary was, as noted by Transport, referred to in the judgment on a number of occasions, and it is clear that the nature and extent of the "physical treatment" was a matter of concern and debate. Having concluded that a 5m wall would be required, the precise length of the wall (and whether it included the returns), was not discretely determined.
2. At the earlier hearing, the town planners gave conflicting evidence about the physical treatment "on the eastern boundary" that may be required by Council to attenuate the impact of the road. I summarised the opinions of the town planners, Mr Connelly and Mr Rowan (at judgment [128]-[131]), and the submissions of the parties (at judgment [132]-[137]). Having considered that it was more likely that a 5m wall would be Council's preferred physical treatment, I concluded, as noted above, that the final construction cost of a 5m wall would need to be calculated on the basis of my findings that such treatment along the eastern boundary of the Residue Land would be required (confined to the Southern Land) and, as noted by each of the parties, "adopting the characteristics of the wall described by Mr Connelly".
3. Transport submits that given my comment that I would give "little weight" to changes in opinions of the planning experts which arose as a result of the presence of the earthen mound (at judgment [138]), this would necessarily have included Mr Connelly's "change of opinion" in Ex D.
4. I do not find Transport's position persuasive and it does not reflect that which I intended to convey in my findings, even if somewhat infelicitously expressed. Having decided that a 5m wall was likely to be required, I would find it difficult to discount Mr Connelly's opinion as to its precise characteristics, even if I had some concerns in that regard, in the absence of persuasive evidence to the contrary in relation to the returns. In any event, given the different opinions of the town planners, I found that a 5m wall would be required and "the characteristics" of the wall were shown (albeit in a nominal manner) by Mr Connelly on Revised Plan 5.4. Although the return to the wall on the northern boundary (as therein depicted) related to the Northern Land as opposed to the northern section of the Southern Land (which would reflect my finding as to the development potential upon which the hypothetical parties would transact), this does not change my view. Further, I do not consider that Mr Connelly's evidence is properly or fairly excluded as a result of my comments regarding the earthen mound. His concern for the likely amenity impacts were addressed by his inclusion of the 5m wall and the returns.
5. As such, I do not accept that the 5m wall should be confined to the eastern boundary of the Residue Land. The agreed cost of a masonry 5m wall 348.145m in length (including the returns) as agreed at $1,129,730, is to be adopted in the valuation determination in the after scenario.

Valuation - hurdle rates

1. The Court made orders by consent on 25 November 2021 requiring the valuers to serve on the parties a short joint report addressing the following: "(a) Market value of the 'R2 zoned southern land' when adopting a Profit and Risk Margin (P+R Margin) of 25% (b) Market value of the 'R2 zoned southern land' when adopting a target Internal Rate of Return (IRR) of 16.5% (c) Market value of the 'R2 zoned southern land' having consideration to both P+R Margin of 25% and IRR of 16.5% (d) Each of the above scenarios with a wall measuring 228.145m (no return) and with a return of 120m (total length 348.145m)"
2. The valuation experts prepared a final supplementary joint report dated 3 December 2021 (Ex N) responding to the Court's directions which included a table of agreed market values of the R2 zoned Southern Land for each relevant scenario derived using the respective target rates:
3. I note that the table in Ex N contained a further column dealing with "No Wall Returns" in the after scenario which, as a result of my finding above in relation to the first issue, is no longer relevant.
4. In light of my finding above that the 5m wall including the returns would be required (and noting that the market value of the northern RU1 zoned portion of the Acquired Land was agreed at $1,619,125), as the applicants submit, the effective difference between the valuers when utilising a P+R Margin of 25% and an IRR of 16.5% in relation to the market value of the Acquired Land is $974,000 with Mr Dale determining the market value in the sum of $6,337,125 ($4,718,000 plus $1,619,125) and Mr Hollinshead determining the market value in the sum of $5,363,125 ($3,744,000 plus $1,619,125).
5. In Ex N, each expert provided further short commentary. Mr Hollinshead stated that, despite his understanding of one of the directions, there was to be consideration of the target P+R Margin of 25% and the IRR of 16.5% "including placing some weight on each of the 'Valuation Methods'", the use of the target P+R Margin and the IRR are two different approaches to valuation and each results in a different residual land value. He notes his view that the fully informed vendor/purchaser would consider the Estate Master program "User Manual" ('Manual') when forming an opinion as to the appropriate weight to be placed on each valuation approach. In his further opinion (which was generally in accordance with that summarised in the judgment), he maintains that the P+R Margin is the "traditional" approach (used before the "widespread use of computers") which he considers a flawed method when a project exceeds 24 months as it does not take into account the time value of money; whereas the IRR takes this into account by considering the timing of all costs and all incomes and he maintains his view that the IRR approach is more effective for projects of more than two years.
6. On Mr Hollinshead's understanding that the experts were "required" to give consideration to both valuation methods, he considers that a sound approach is to adopt a consistent IRR (in relation to both the before scenario and the after scenario) while maintaining a "reasonable level of P+R", and he provided a range of IRRs and P+R Margins including IRRs of 16.5%, 18.75% and 20% and noting corresponding P+R Margins of 16.42%, 19.86% and 21.74% respectively and provided a "Summary of Various Alternate Scenarios" being alternative compensation assessments "should a different target hurdle rate be preferred".
7. Mr Hollinshead opines that adopting an IRR of 16.5% or 18.75% results in a P+R Margin which is too low compared to the target P+R Margin of 25% and that this does not reflect the level of risk in the project; whereas adopting an IRR of 20% (being 3.5% higher than the target IRR of 16.5%) results in P+R Margins of 27.08% in the before scenario, and 21.74% in the after scenario. Mr Hollinshead states that the resultant P+Rs are "relatively close to the target of 25% being also less than 3.5% from the target P[+]R" Margin.
8. Mr Hollinshead notes that, although for different reasons, he and Mr Dale agreed that it would be unsound merely to adopt a midpoint between either valuation method (that is, adopting the P+R Margin of 25% and/or the IRR of 16.5%).
9. Mr Dale states that in setting the performance targets at an IRR of 16.5% (a return of 16.5% per annum on money invested) and a P+R Margin of 25% (to account for the risk to capital being employed), a purchaser would consider what land price would facilitate the "hurdling" of these rates, and would be mindful of a variety of factors including the return on capital per annum, the IRR available from alternative investment opportunities, and what Mr Dale considers to be the "unusual risk profile" of this (notional) development where there is no external sewerage infrastructure located nearby that the project could connect to, and where an external rising main has to be constructed over 6.3km such that the external sewer work represents 37-40% of the total construction costs, which he considers represents an "extraordinary cost that substantially shapes the risk profile".
10. Mr Dale opines that the market value of the subject land (in both the before scenario and the after scenario) "lies at a price point" that generates a P+R Margin of 25%, an IRR at that price point at or in excess of 16.5% per annum, and where the risk profile does not vary between the before scenario and the after scenario, noting that the before project life is 36 months and the after project life is 30 months. He opines that a land price that generates an IRR at or in excess of 16.5% per annum would be given positive consideration by a purchaser, as would a land price that generated a P+R Margin at or in excess of 25% per annum. He states that a land price that did not facilitate both performance targets being hurdled would be given negative consideration by a purchaser. He opines that with performance hurdles of 25% for the P+R Margin and 16.5% for the IRR, that the market value is $6,337,125.

Applicants' position

1. The applicants submit that the fundamental difference between the valuers is the weight each accords to the P+R Margin and the IRR and that Mr Dale has adopted a "balancing exercise" in which each is accorded significant weight; whereas Mr Hollinshead's exercise is "infected by significant weighting towards the IRR" and that Mr Hollinshead has continued, as he did in the earlier hearing, to agitate for the IRR over the P+R Margin, referring to the P+R approach as flawed and this is indicated by his adherence to a consistent IRR of 20%, which results in the varying P+R Margins of 27.08% in the before scenario and 21.74% in the after scenario.
2. The applicants submit that the Court would accept Mr Dale's opinion that the risk profile would not vary significantly between the before scenario and the after scenario and it is unlikely that a developer would recast the target P+R Margin to a level below 25% in the after scenario. And, the Court would accept Mr Dale's opinion that the market value of the land lies at a price point that generates a P+R Margin of 25% providing the IRR at that price point is at, or in excess of, 16.5% per annum, and this is the case in both the before scenario and the after scenario. That is, Mr Dale has applied the two target rates and worked between them to obtain the acceptable market position. In these circumstances the Court would accept Mr Dale's market value of the Acquired Land of $6,337,125.

Transport's position

1. Transport submits that in accordance with Mr Hollinshead's opinion that fully informed transacting parties would take into account the Manual in determining the weight to place on each hurdle rate in the before scenario and the after scenario, the sound approach is to adopt a consistent IRR while maintaining a reasonable level P+R Margin. In taking this approach, the Court would accept that Mr Hollinshead has had regard to a range of IRRs and P+R Margins and has selected the appropriate rate from this range by reference to the degree to which the rate differs from the target rates prescribed in the judgment. That is, Mr Hollinshead has concluded that an IRR of 20% is appropriate because it is only 3.5% higher than the target IRR of 16.5%, resulting in a P+R Margin of 27.08% (in the before scenario) and 22.06% (in the after scenario), which are both close to the target P+R Margin of 25%.
2. Transport submits that Mr Dale's approach, of adopting a valuation derived from the target P+R Margin of 25% for both the before scenario and the after scenario providing the resulting IRR is at, or in excess of, 16.5%, would not be preferred in circumstances where Mr Hollinshead's approach is consistent with the finding in the judgment that both kinds of hurdle rates are to be considered and as such, Mr Hollinshead has given consideration to both the target IRR and the P+R Margin hurdle rates in determining the resulting market value; whereas, Mr Dale effectively fixes the valuation by reference only to the P+R Margin and does not give "any real consideration or weight" to the IRR.
3. Transport further submits that under Mr Dale's approach, the market value for both the before scenario and the after scenario is simply the amount derived from adopting the P+R Margin of 25% which is at the "extreme end of the relevant range"; whereas Mr Hollinshead derives a market value which is within each relevant range, reflecting his "more blended approach", consistent with the judgment.

Consideration

1. I do not repeat matters in the judgment in relation to my consideration of the evidence of each of the valuers and the manner in which each gave their evidence. For the reasons I have earlier given, I consider that both valuers have provided reasonable evidence in relation to their differing positions, and both have approached the matter doing the best that they can, to interpret and apply the findings in the judgment.
2. It is clear that the primary difference between the valuers is the weight each accords to the P+R Margin and the IRR. At judgment [237]-[238], I found Mr Dale's approach, that consideration should be given to both the P+R Margin and the IRR when undertaking valuations using the HDM, to be persuasive. I also found Mr Dale's evidence that, in his experience the approach of the market is to prioritise the P+R Margin, to be persuasive, and likely to reflect the actual behaviour of the parties to the hypothetical transactions (at judgment [237]).
3. I am unable, and it is inappropriate, to reason a result between the two experts, despite having now faced, again, two different approaches to the interpretation and application of the Estate Master program. Accepting as I do, that the adoption of the P+R Margin and/or the IRR are in effect discrete applications of the Estate Master program, and that while on occasions the "blended" approach (as noted by Transport) may be appropriate, having closely considered Ex N, I again prefer the evidence of Mr Dale for the reasons I noted at judgment [234]-[241]. I accept that Mr Hollinshead has again maintained his preference towards the IRR and that this continues to drive his opinion. I also consider the concern of Mr Dale in relation to the risk profile of the hypothetical development under consideration to be of importance. Overall, I accept the applicants' submissions noted at [26]-[27] above.
4. While I note Mr Hollinshead's concerns in relation to the manner in which Mr Dale has approached the matter, I prefer the approach using the target P+R Margin of 25% which, as noted by Mr Hollinshead and Mr Dale, when adopted reflects the market value of the land of $4,718,000 (being the difference between the before scenario in the sum of $14,791,000 less the after scenario in the sum of $10,073,000) which reflects the agreed figure in relation to the target P+R Margin of 25% (and also reflects Mr Dale's figure, in the table noted at [17] above, where he has considered both the P+R Margin and the IRR). I accept that Mr Dale has considered and applied the two target rates and, as submitted by the applicants, has worked between them to obtain an acceptable market position.
5. This is to be compared with Mr Hollinshead's position which, as the applicants submit and I accept, in fixing the IRR at 20% for both the before scenario and the after scenario, places significant weight on the IRR with the result being that the vendor may not accept a lower sale price based on a P+R Margin of 27.08% in the before scenario and a hypothetical purchaser may not adopt the sale price in the after scenario (with the returns) where a P+R Margin of 21.74% does not hurdle the target P+R Margin.

Conclusion

1. For the reasons above and those set out in the judgment, it is my view, subject to arithmetic clarification by the parties, that the applicants are entitled to compensation in the sum of $6,503,924.35 which is determined on a finding of market value of the Acquired Land in the sum of $6,337,125. This is calculated by adopting the before value in the sum of $19,129,125 (comprising the value of the R2 zoned land in the sum of $14,791,000 and the value of the RU1 zoned land in the sum of $4,338,125, being 34,705m² at the agreed rate of $125/m) and the after value in the sum of $12,792,000 (comprising the value of the R2 zoned land in the sum of $10,073,000 and the value of the RU1 zoned land in the sum of $2,719,000, being 21,752m² at the agreed rate of $125/m); to which the sum of $166,799.35 should be added for disturbance losses in accordance with the judgment at [276].
2. It is agreed between the parties that given the determination of compensation, the applicants are entitled to their costs of the proceedings.
3. In the circumstances, I direct the parties to confer and provide the Court with short minutes recording an agreed sum representing total compensation determined in accordance with the Court's findings.

Orders

1. The Court makes the following orders: 1. The parties are directed to confer and provide the Court with agreed orders reflecting the findings in the judgment of 1 September 2021 and the further short judgment of 11 March 2022 no later than 21 March 2022.

Annexure A (1908733, pdf) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 March 2022