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….



John Duncan said...

Would a rebuild of Duke's be viable if Toronto's commercial tax rate was more comparable to the 905? The numbers you've put up make even that seem unlikely.

What do you think might solve the MPAC problems you've identified?

Backing away from market-value assessment would address them but raise other issues too. i.e. last sale price leaves neighbours paying vastly different amounts based on when they bought in.

A less amendable OP combined with secondary plans could reduce speculation and its effect on property values, but would require more city planning staff and a more predictable OMB. Both of those seem unlikely any time soon.

Glen M said...

If the tax rate was the same (both city and education) as Mississauga's then it would most likely be viable.

As far as MPAC is concerned, what it should do is value commercial properties on an income approach (current). This would remove the speculative influences from assessment amounts. Using comparative sales data is distorting. Most sales of smaller properties are for redevelopment into residential. Large office towers do not have this problem. They are assessed on an income approach. When drafting the city wide C.I.P. plan, staff noted this dynamic...

"The redevelopment of existing industrial properties, in particular, is economically
challenging. A key reason is that for the land component of a project there is often
substantial price hurdle because of the upward pressure on values attributable to the
speculative potential of alternative more valuable uses such as retail and residential."


As you can see though, that in this case (Dukes) even retail development faces a large tax hurdle.

Anonymous said...

3.59 is the rate in Toronto.
VS say 2.4 in Mississauga (the rates are similar throughout the 905).

So we're talking about 1.2% difference per year - so per million that amounts to about $12,000. Which may not seem significant in that light but the actual amount paid in the 905 is 24,000 vs 36,000.

The interesting part is the opposite can be seen in residential tax rates but this doesn't really say much - people don't make decisions regarding where to live based on this as much, a lot of people even think Toronto has higher residential tax rates for that matter.