Thursday, March 4, 2010

Duke's Revisited

A few years ago, a fire on Queen St. West (near Bathurst) destroyed a number of buildings. Among them was was the property 623-625 Queen St. West, owned by the Duke family. The building housed there own store, Dukes Cycle, and above there were some rental apartments. The old building was paying property tax of (commercial portion) $8,671 per year, based on a 2008 CVA assessment of $654,975. This amount was only 32.6% of the full tax rate, as it was protected by a cap. Unprotected the tax would climb to $ 26,598 per year. The cap was set to diminish over the years until 2016 when all properties in Toronto would be taxes at the full CVA rate. Now, with the building destroyed, any new building will face paying taxes at the full CVA rate. As such the viability of the commercial space is in question.

Councillor Adam Vaughan has been working diligently to help address the difficulties in the redevelopment of these properties. This is what he found….

” Through the process of working with the six property owners of these buildings in the aftermath of the fire, I have discovered that any new buildings constructed on the fire site would pay property taxes at the full CVA rate, and would be ineligible for capping protection. The reality of the significant tax increases facing these property owners threatens the viability of redeveloping these properties with street-related commercial uses. The longer the fire site remains vacant, the more severe the social and economic impacts facing Queen West and the broader neighbourhood become. This is why it is in the City’s interest to facilitate a timely and appropriate replacement of the lost fabric of this street. ”

Think about this. It is not viable to rebuild commercial space on Queen West, on land that is already owned. If the redevelopment of these properties had included the need to purchase the land also, it would have only compounded the problem and made it even more un-viable. The added cherry on top is that the calculation of the new tax burden were based on the 2008 MPAC assessments. In the case of Dukes cycle (623-625 Queen St. West) it was woefully under-assessed. The 2008 assessment has these properties valued at $ 654,975.00. As someone who is very familiar with the area, this assessment does not reflect the market. The Cameron house, a much smaller building of similar age is currently listed for more than 2 million. In light of this it is fair to say that being un-viable at a full CVA tax rate of $ 26,598 per year, think about what might happen with a more realistic assessment. If the commercial portion of the assessment was updated to a more realistic 1.5 million, the taxes would rise to more than $60,000 per year.

How sad. It is barley viable to rebuild commercial space on Queen West, one of the most vibrant retail streets in Toronto, on land that is already owned. With a undervalued assessment and a million dollars in insurance money. If the redevelopment of these properties had included the need to purchase the land, had a realistic assessment, and a greater need for financing, the notion to rebuild would be dead in the water.

If your wondering about how a property that is un-viable retain it value, there is a answer to this. MPAC!. MPAC will heavily rely on comparable sales, instead of income, for valuing small properties. On the one hand, this makes sense. Market value is reflected by recent purchases. What MPAC does not do is account for two extremely important issues. Firstly, there is the speculative value of such properties. Properties such as these sell at a premium to their value if one was to rely solely on projected income (Cap values). The reason for this is their value is not captured in there present form, but once they can be converted to residential condos. Secondly MPAC is oblivious to the fact that the rate of tax itself has an effect on value. Even though this is a well covered area in academia and reality….