A blockbuster year for commercial and industrial transactions means that many property owners could see significant increases in assessments when January rolls around.
Assessments of many of the retail properties at the heart of Vancouver’s neighbourhoods rose between 30% and 40% last year; similar increases are expected this year, while industrial properties in East Vancouver are on track for assessments to rise upwards of 65%.
While the gains lift portfolio values for landlords, they also stand to boost holding costs and tenant rents – an even greater issue following Vancouver council’s approval of changes to land-averaging practices last year as suggested in the Property Tax Policy Review Commission report of 2014.
Land averaging is a practice designed to mitigate the effect of high land values in the Vancouver market by basing assessments on the three-year average of land values. Current practice now limits the practice to properties experiencing assessment increases 10 percentage points above the annual average for their class.
In the case of residential properties, land averaging kicks in where assessments increase 18.8% or more; for light industrial and business class properties, on increases of 24.2% or more.
“It created a scenario where the increases were on average so high that the threshold level didn’t kick in for very many people,” said Paul Sullivan, a property tax specialist and principal of the appraisal firm Burgess, Cawley, Sullivan & Associates Ltd. “We will see again a dramatic increase in the values of properties [in 2016], and therefore the average increase will be at a very high level … [making] the averaging bylaw apply to very few properties.”
On the plus side, targeted land averaging boosts the aggregate value of the assessment roll, because properties are assessed on their current (and generally higher) value, allowing for business-class tax rates that are closer to residential property tax rates – a long-standing issue for the Vancouver Fair Tax Coalition, of which Sullivan is a board member.
However, it made market forces a greater factor in the effect of tax rates – something land averaging sought to mitigate when it was adopted in 1993, following the run-up in values in the early 1990s.
With land values once again logging substantial gains, the policy change is backfiring.
“We’re in uncharted territory on market value,” Sullivan said. “The sales are occurring at levels we’ve never seen before, and BC Assessment’s goal is to get to sales price.”
This means owners need to pay close attention to the valuation of their properties to ensure assessments reflect the class, not the market.
“You must be sure that your increase is not in excess of the average,” he said. “That’s the name of the game.”
Sullivan explained that it comes down to preventing a single transaction from determining values for an entire block, or an entire class of properties.
“Landlords need to be more conscious than ever that their assessments, particularly if they’ve had a sale of their property, or the neighbouring property, or within the block, … that their assessments are not getting jacked up because of that one transaction.”
Keeping an eye on the value of their properties has long-term ramifications for owners.
While targeted land averaging lessens the immediate effect of a significant shift in assessed value, property owners will eventually face a hefty tax bill when land averaging doesn’t kick in.
“[Small and mid-sized businesses] have been saved a little bit if they were part of the City of Vancouver’s targeted averaging program,” said Phil Gertsman, executive vice-president, Western Canada, with the property tax division of Altus Group Ltd. “But those are short term – as soon as their assessment doesn’t qualify for averaging, they’re just going to get killed.” •