Docket: 2000-1755(GST)G

BETWEEN:

VILLA BELIVEAU INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on common evidence with the appeals of S.A.M. (Colorado) Inc. (2001-2725(GST)G), Southpark Estates Inc. (2001-2726(GST)G) and Virden Kin Place Inc. (2001-2856(GST)G), on May 5, 6, 7, 8, 9, 10 and 11, 2003,

at Winnipeg, Manitoba

By: The Honourable Justice A. A. Sarchuk
Appearances:
Counsel for the Appellant:	Jonathan Kroft and Barbara M. Shields
Counsel for the Respondent:	Lyle Bouvier and Angela Evans

____________________________________________________________________

JUDGMENT

          The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated April 12, 1999, and bears number 09CR0006181 is dismissed, with costs.

Signed at Ottawa, Canada, this 1st day of November, 2004.

"A.A. Sarchuk"

Sarchuk J.

Docket: 2001-2725(GST)G

BETWEEN:

S.A.M. (COLORADO) INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on common evidence with the appeals of Villa Beliveau Inc.

(2000-1755(GST)G), Southpark Estates Inc. (2001-2726(GST)G) and Virden Kin Place Inc. (2001-2856(GST)G), on May 5, 6, 7, 8, 9, 10 and 11, 2003,

at Winnipeg, Manitoba

By: The Honourable Justice A. A. Sarchuk
Appearances:
Counsel for the Appellant:	Jonathan Kroft and Barbara M. Shields
Counsel for the Respondent:	Lyle Bouvier and Angela Evans

____________________________________________________________________

JUDGMENT

          The appeal from the assessment of goods and services tax made under the Excise Tax Ac, notice of which is dated February 13, 2001, and bears number 09CR0006874 is dismissed, with costs.

Signed at Ottawa, Canada, this 1st day of November, 2004.

"A.A. Sarchuk"

Sarchuk J.

Docket: 2001-2726(GST)G

BETWEEN:

SOUTHPARK ESTATES INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on common evidence with the appeals of Villa Beliveau Inc.

(2000-1755(GST)G), S.A.M. (Colorado) Inc. (2001-2725(GST)G), and Virden Kin Place Inc. (2001-2856(GST)G), on May 5, 6, 7, 8, 9, 10 and 11, 2003,

at Winnipeg, Manitoba

By: The Honourable Justice A. A. Sarchuk
Appearances:
Counsel for the Appellant:	Jonathan Kroft and Barbara M. Shields
Counsel for the Respondent:	Lyle Bouvier and Angela Evans

____________________________________________________________________

JUDGMENT

          The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated April 5, 2000, and bears number 09CR0030090 is dismissed, with costs.

Signed at Ottawa, Canada, this 1st day of November, 2004.

"A.A. Sarchuk"

Sarchuk J.

Docket: 2001-2856(GST)G

BETWEEN:

VIRDEN KIN PLACE INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on common evidence with the appeals of Villa Beliveau Inc.

(2000-1755(GST)G), S.A.M. (Colorado) Inc. (2001-2725(GST)G), and Southpark Estates Inc. (2001-2726(GST)G), on May 5, 6, 7, 8, 9, 10 and 11, 2003,

at Winnipeg, Manitoba

By: The Honourable Justice A. A. Sarchuk
Appearances:
Counsel for the Appellant:	Jonathan Kroft and Barbara M. Shields
Counsel for the Respondent:	Lyle Bouvier and Angela Evans

____________________________________________________________________

JUDGMENT

          The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated January 30, 2001, and bears number 09CR0006860 is dismissed, with costs.

Signed at Ottawa, Canada, this 1st day of November, 2004.

"A.A. Sarchuk"

Sarchuk J.

Citation: 2004TCC701

Date: 20041101

Docket: 2000-1755(GST)G 2001-2725(GST)G 2001-2726(GST)G 2001-2856(GST)G

BETWEEN:

VILLA BELIVEAU INC., S.A.M. (COLORADO) INC., SOUTHPARK ESTATES INC. and VIRDEN KIN PLACE INC.,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Sarchuk J.

[1]      On consent of all parties these appeals were heard together. The issue in each relates to the proper method of assessing market value of non-profit life-lease senior citizen multiple residence complexes for the purpose of subsection 191(3) of the Excise Tax Act (the Act). It is not disputed that each of the Appellants was a non-profit corporation duly incorporated under the laws of the province of Manitoba.

The Assessments

[2]      S.A.M. (Colorado) Inc. (Colorado) - This Appellant completed construction of a 45-unit senior's life lease residential complex at 140 Ferry Road, in the City of Winnipeg in 1997. It self-assessed with respect to the complex on the basis that the fair market value of it was $2,740,000 and that the GST payable was $191,800. On February 13, 2001, the Minister assessed the Appellant on the basis that the fair market value was not less than $5,215,000 and assessed net tax of $365,050.

[3]      Villa Beliveau Inc. (Villa Beliveau) acquired vacant land located at 500 Beaverhill Blvd., Winnipeg upon which it arranged for the construction of a 33-unit residential complex which units were leased under "life leases". Construction was completed in August 1998 and in September, Villa Beliveau self-assessed with respect to the complex on the basis that the fair market value was $2,400,000 and that the GST payable was $168,000. In April 1999, the Minister assessed Villa Beliveau on the basis that the fair market value of the building was not less than $3,995,327.10 and that it had failed to account for tax in the amount of $111,672.90.

[4]      Virden Kin Place Inc. (Virden) completed construction of a three-storey, 22-unit senior's life lease apartment complex at 489 Frame Streetin Virden, Manitoba in April 1998. Virden self-assessed with respect to the building in accordance with subsection 191(3) of the Act on the basis that the fair market value of the complex at the relevant time was $1,261,000 and that the goods and services (GST) payable was $88,270. On July 15, 2001, the Minister of National Revenue (the "Minister") issued a Notice of Decision which revised the assessment of GST payable to $142,282.90 on the basis that the fair market value of the complex was at least $2,032,612.89.

[5]      Southpark Estates Inc. (Southpark) acquired land at 132 Marrington Road in Winnipeg and arranged for the construction of a three-storey, 58-unit senior's apartment complex. Construction was completed in 1997 and the apartments were granted to tenants subject to life leases. Southpark self-assessed with respect to the complex on the basis that the fair market value at the relevant time was $4,100,000 and that the GST payable was $287,000. On April 5, 2000, the Minister reassessed the Appellant on the basis that the fair market value was not less than $6,630,000 and thus the GST payable by the Appellant was $464,100.

[6]      Subsections 123(1) and 191(3) of the Act provide:

123(1) In section 121, this Part and Schedules V to X,

"fair market value" of property or a service supplied to a person means the fair market value of the property or service without reference to any tax excluded by section 154 from the consideration for the supply.

191(3) For the purposes of this Part, where

(a)         the construction or substantial renovation of a multiple unit residential complex is substantially completed,

(b)         the builder of the complex

(i)          gives, to a particular person who is not a purchaser under an agreement of purchase and sale of the complex, possession of any residential unit in the complex under a lease, licence or similar arrangement entered into for the purpose of the occupancy of the unit by an individual as a place of residence,

(i.1)       gives possession of any residential unit in the complex to a particular person under an agreement for

(A)        the supply by way of sale of the building or part thereof forming part of the complex, and

(B)        the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment, or

(ii)         where the builder is an individual, occupies any residential unit in the complex as a place of residence, and

(c)         the builder, the particular person or an individual who is a tenant or licensee of the particular person is the first individual to occupy a residential unit in the complex as a place of residence after substantial completion of the construction or renovation,

the builder shall be deemed

(d)         to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession of the unit is so given to the particular person or the unit is so occupied by the builder, a taxable supply by way of sale of the complex, and

(e)         to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times.

Appellant's Evidence

[7]      A representative of each of the four Appellants testified with respect to the circumstances leading to the organization and construction of the respective properties.

[8]      Colorado:     S.A.M. Management (S.A.M.) is a non-profit corporation which was created in 1973 when the United Church of Canada was attempting to replace a building which had been destroyed by fire. In so doing, it constructed St. Andrew's Place which was a mixture of commercial space and senior citizen's low-cost housing. John Lyons was the general manager of S.A.M. from May 1975 to March 2001. As such, he was involved in the Colorado and other projects with the responsibility for contracts with the developers, overseeing leasing staff, and the overall coordination of the projects.

[9]      In the early part of 1995, the Y.M.C.A. approached three individuals, Bill Coady, Joe Bova and Jim Weslake, to undertake a development of the St. James Y.M.C.A. site which consisted of a building that was no longer serviceable. They initially approached a Lions group to see whether it would be the sponsor of a proposed life lease project but were not successful. As a result, Coady approached Lyons and asked whether S.A.M. would sponsor the project on that site. According to Lyons:

... we essentially came to an agreement sometime between May and June of 1995 that the group, which would include the Manshield Construction and Smith Carter Architects and RFC Development, would financially support the marketing of the life lease project, and S.A.M. Management would provide leasing and marketing staff to see whether or not we could put together sufficient numbers to go ahead with the project and purchase the building from the Y. ...

At this point of time,

... Smith Carter had put together a preliminary set of drawings. The brochure had been developed. The pricing essentially was in place. The rent structure was established. The entrance fees were worked out. We had to massage that as we went along, but essentially the first draft was there and in a doable manner. In other words, it looked like it could be marketed reasonably well.

The first mailout in July 1995 was directed at the "total community" which initially was St. James and subsequently, Charleswood. This was followed by town hall meetings, "a little show and tell sort of thing". Sales personnel were engaged to find contacts and to follow up with phone calls, etc. The Winnipeg Free Press was used for advertising and marketing, more specifically with respect to information such as town hall meetings and S.A.M.'s office telephone number, etc. Financing with Royal Trust was arranged in May 1996. According to Lyons, the bank insisted that the property be registered as a condominium and there had to be a certain number of leases before it would commit, in this case 38 out of 45 proposed. Contracts were signed with the architects in July 1996, a stipulated price contract was entered into with Manshield Construction on July 29, and construction commenced that month and was completed in June 1997. The tenants immediately moved in, the building filled up very quickly and by the time construction was finished, Lyons noted "one or two units might have been left".

[10]     Southpark: Vincent Reilly is a marketing director in the life insurance business. At the relevant time, he was resident in Richmond West and was a member of the Knights of Columbus (the Knights) and of the Mary Mother of the Church Parish. The former was the sponsoring body of Southpark. The Knights knew that other organizations were involved in life lease projects and an earlier effort to do the same failed because suitable land could not be obtained. They were also aware of vacant land which had been reserved for a possible school, approached the authorities, and ultimately reached an agreement to acquire this land by way of an option to purchase conditional on their obtaining the required financing, and undertaking that the project would be a senior's complex. Southpark was incorporated on July 10, 1995 at which point the organizational aspects were in their fourth or fifth month. A general announcement directed at potential tenants was made in the Church as well as by way of a release in the newspaper and other forms of promotion. A Southpark brochure distributed at this time indicated that one of the unique features of Southpark was that residents would be permitted to sell their interest in the life lease to another party and that this "allows residents the opportunity for capital appreciation as demand for retirement housing increased in the future".[1] Riley noted that although the project originally contemplated 90 units, commitments slowed up and stalled at around 50 and a decision was taken to reduce the plan to 60 units. Fifty-one were "sold" and in order to commence the project, the architect and general contractor committed to taking the remaining nine units. He noted that about 40% of the capital cost of $7,200,000 was put up by the tenants by way of their entrance fees. The options to purchase the land was exercised on April 14, 1996, financing was arranged and on October 16, 1996, the Knights entered into a stipulated price contract with a general contractor. Construction commenced that same month and the units began to be occupied in October 1997.

[11]     Virden:         Doyle Frederick Piwniuk, an accountant, owns an insurance agency with a "financial planning and insurance brokerage aspect". He is a member of the Virden Kinsmen's Club and the Virden Chamber of Commerce and is vice-president of the Economic Development Board in Virden. Virden is a community of approximately 3,500 located in the southwest area of Manitoba. It has two main industries, agriculture and oil, and is a transportation hub located on the Trans-Canada Highway midway between Winnipeg and Regina. A major concern to the community and to the Kinsmen was the limited available housing in Virden as a result of which both the younger generation and seniors were moving to Brandon. There also was a demand for housing by younger people who lived in nearby small towns but who wished to live closer to Virden so that their children could attend its schools. As a result a fairly viable market existed for seniors who wished to sell their homes and move into something smaller. This led the Kinsmen to decide that a life lease project for seniors housing was appropriate.

[12]     The first steps were taken in February 1996 when an architect was approached and discussions began with the administrator of the local Health District with respect to the acquisition of a piece of land owned by the hospital. The property chosen was well located in a residential area and across the street from the hospital and clinic. Shortly thereafter, the Kinsmen obtained an option on the property. The initial project contemplated 34 units and advertisements were placed in March 1996. Public meetings were held and although initial interest was substantial, it became apparent that 34 units would not be sold and the project was reduced to 21 units. Funding arrangements were made with Virden Credit Union in June 1997. The delay was, according to Piwniuk, the result of a Credit Union requirement that there be 16 units sold before it would provide financing. Although a substantial number of potential tenants had indicated interest, the actual signatories amounted to "about 14 or 15". Ultimately, this hurdle was overcome and a management contract was entered into on June 30, 1997. Piwniuk indicated that construction had commenced just before that date and was completed in March 1998 with the first tenants moving in on April 1st.

[13]     Villa Beliveau:         Douglas Alexander Leeies is a consultant with Acorn Development (Acorn), a company which works with charities, non-profit organizations and other groups who wish to provide housing as a service to certain constituents. Acorn had previously been engaged by the Knights on different projects such as non-profit co-ops and non-profit rental properties. The Knights from the parish of St. Martyr's located in Southvale, a suburban neighbourhood in southeastern Winnipeg, had tried to develop a project independently through a provincial government program designed for a modest income household. They had also spoken to other consultants with the intention of "doing a federally funded project", specifically a senior's co-op, but it never came to fruition.[2] According to Leeies, both the provincial and federal governments had stopped becoming involved in such projects and:

... the only vehicle that was available to develop non-profit housing in Manitoba was, in fact, the Manitoba Housing Life Lease program, and we sat and discussed this with them over a period and recanvassed the community. They felt that it was a good match and that we should go ahead as a team and try and develop that project with them.

In or about April 1992, the Knights formalized an arrangement for a property owned by the Church and entered into a consulting agreement with Acorn. Leeies testified that prior to Acorn being engaged, the sponsors had initially:

... hoped to do 50 or 60 units and that was way back, prior to engaging us, and finally when we were engaged and went out with the life lease notion about a year after that, we came to the conclusion that we could not develop anything significantly more than 30 odd units. So the project was downsized and a project, I think it was 33 units was designed at that point in time.

Villa Beliveau was incorporated on November 23, 1994 and on February 4, 1995, a contingent arrangement for a plan was reached with Prefontaine Architects. On April 3, 1996, Concorde Projects was brought into the picture to provide construction estimates. The project was not intended to provide luxury or high-end units, but was directed at the low to middle-income group. A design was developed and drawings were completed by April 1996. As well during that period, the sponsors were in the community developing interest in the project since a condition of financing was that a specific number of suites were to be leased. Leeies noted that during this period approximately 14 of the units had not been leased but this situation did not appear to have caused any particular concern since there were sufficient people expressing interest in the units. Construction commenced in 1996 and was completed in August 1998.

[14]     Estimates of the market value of the four properties in issue were provided for the Appellants by O. William Steele.[3] Steele defined highest and best use as:

... the most profitable legal use to which a property can be put. Opinion of such use is based on the highest and most profitable continuous legal use to which a Property is capable of being used, or likely in demand, in the near future.

To analyze and estimate the highest and best use, Steele considered the following factors: zoning classification and land uses permitted, existing land use, age, design, materials, workmanship and physical condition of the building, feasibility and/or viability of alternative legal land uses for the property. In his opinion, although the two potential highest and best land uses as at the dates of appraisal were as residential condominiums or multiple family residential complexes for seniors, he concluded, for a number of reasons, that their highest and best use would not be as a residential condominium for seniors. He noted that as at the date of appraisal the properties were not residential condominiums for seniors and accordingly, it would be necessary to estimate the collective market value for the residential units as condominiums and then deduct all costs which would be incurred in converting the property from a non-profit residential complex for seniors to a residential condominium for seniors.[4] In addition to the foregoing, other costs which would have to be deducted were the amounts required to buy out the leasehold rights of those tenants who had been committed to a long-term lease in the subject property as well as the profit to the owner. On that basis, Steele concluded that the market value of the subject properties as condominiums, less conversion costs, buyout costs and profit to the owner, was substantially less than their market value as non-profit multiple family residential complexes for seniors. Therefore, in his opinion, the highest and best use of the subject properties was for non-profit multiple family residential complexes for seniors[5] and more specifically "for rental purposes".

[15]     Steele testified that where real property being appraised includes land and building, the most satisfactory procedure is to include the three most widely accepted valuation processes, namely, the Cost Approach, the Income Approach and the Comparison Approach. He further indicated that based on the fact that there was an insufficient number of conventional multiple family residential complex sales to estimate market value by the Comparison Approach, the Cost Approach and the Income Approach were the most precise methods to estimate market value of the subject properties. Steele specifically noted that:

In estimating market value by the Cost Approach, the estimates used are replacement cost estimates based on market conditionsas at the date of appraisal rather than actual development and construction costs for the subject property,

since in his view, those costs did not represent development and construction costs based on market conditions. He noted that the cost approach is no different than any of the other approaches, and more specifically said:

the end result has to be what the market would pay for the property, and if the cost approach, let's say it did cost more than supposed market value, there has to be a - there is depreciation that has to be accounted for. In other words, there is now depreciation inherent in the property.

According to Steele, economic obsolescence is a form of depreciation resulting in a loss in value:

caused by extrinsic conditions inherent to the subject property such as deficient location, excessive taxes, special assessments, government regulations, legislation or encroachment of inharmonious land uses.

and in his opinion:

there is substantial economic obsolescence negatively impacting market value of the subject property.

Since in his view their highest and best use was as multiple family residential rental complexes for seniors, he specifically referred to rent controls as having that effect on their market value. This loss he considered to be a form of economic obsolescence which is measured as the capitalized value of the annual net income loss due to the deficiency. He noted in his report that:

An indicator of Annual Rent Loss caused by Rent Controls is the difference between the Net Income which would be required to produce a Reasonable Market Return on Investment in the Capital Cost of the Subject Building and the Estimated Market Net Income from the Subject Building, only, based on its use as at the Date of Appraisal.

The objective in calculating such difference is to Estimate the Loss in Market Value between the Normal Market Expectation for a Return on Capital Invested in a Multiple Family Residential Complex and the Market Value resulting after the effect of Rent Controls.

Utilizing this method, Steele estimated the market value of these properties by the cost approach for Colorado as at June 1, 1997 as follows:

ESTIMATE OF REPLACEMENT COST
Building: 45 Rental Units X $105,000 Per Unit	$4,725,000
Yard Work: 41,122 SF X $3.50 PSF                Say,	$150,000
Estimate Replacement Cost	$4,875,000
LESS ESTIMATE OF DEPRECIATION
Economic Obsolescence: $230,607 ÷ .10(%) = $2,306,070        Say, ($2,300,000)
Estimate of Depreciation	($2,300,000)
ESTIMATE OF DEPRECIATED VALUE OF SUBJECT IMPROVEMENTS	$2,575,000
ADD ESTIMATE OF MARKET VALUE OF LAND AS IF VACANT    62,500 SF x $6.00 PSF	$375,000
ESTIMATE OF MARKET VALUE BY THE COST APPROACH	$2,950,000
Say,	$3,000,000

Utilizing the same method, Steele reached the following estimates of market value by the cost approach for the other three properties, Virden - $1,150,000, Villa Beliveau - $2,200,000 and Southpark - $3,800,000.

[16]     Steele also estimated the market value of the properties by the income approach, an appraisal technique in which anticipated net income applicable to the subject properties is capitalized into an indication of market value. He defined market rental value as the rental income that a property would most probably command in the open market, and indicated that the rates used in his report are in excess of those rates generally paid for "comparable conventional, non-senior multiple family residential complex rental units". That was so because the non-profit residential complexes for seniors were generally newer buildings, included attributes which make them amenable to seniors housing and thus, command somewhat higher market rentals. Steele specifically noted that rental values for such properties are restricted in Manitoba by the Residential Tenancies Act and this is further complicated by the fact that rents are property-specific, i.e. annual rental increases are based on annual rent for the respective property in the previous year and not on the general market. In his view, rent controls applied to the overall multiple family complex market had a serious negative impact on the rental value of newly-constructed multiple family residential complexes. Accordingly, he concluded that:

In a broad spectrum of both 1 and 2 Bedroom Multiple Family Residential Complex Rental Units in 1997 and 1998, Market Rental Values of higher quality Conventional Multiple Family Residential Complexes in good locations were, generally, from $0.70 to $0.80 per square foot per month, say, $0.75.

Steele then went on to pose the question:

As a result of its new construction in a Market of older stock of conventional multiple family residential complexes, would market rental value of the subject property rental units as at the date of appraisal be substantially higher than $0.75 per square foot per month?

and concluded that the market rental values for the subject properties would be only slightly higher than their value as a conventional multiple family residential complex.

[17]     The basis of the Income Approach, according to Steele, is that components of value including Rental Value, Vacancy Allowance, Operating Expenses and Overall Capitalization Rate are based on market conditions for comparable properties and not, necessarily, based on current or historic experience of the subject property. In this process, the first step is to estimate the gross income based on Market Rental Value at 100% occupancy under market terms and conditions; deduct an estimate of vacancy and rent loss as well as an estimate of annual operating expenses based on the physical status of the subject improvements and conclude by capitalizing the resulting estimate of annual net income into an indication of market value. He concluded that while it was difficult to estimate absolutely, there was sufficient Market Data to make a "reasonably accurate and reliable Estimate of Market Value". His ultimate conclusion with respect to the market value by this approach for Colorado was $3,350,000, Southpark $4,000,000, Virden $1,200,000, and Villa Beliveau $2,150,000.

[18]     For the purposes of his final estimate, Steele considered the results produced by both the cost approach and the income approach and concluded, with respect to each property, that their market value was as follows: Colorado -$3,300,000,Virden - $1,200,000, Villa Beliveau - $2,150,000, and Southpark -$4,000,000.

[19]     Jeffrey Rabb[6] has been involved in the real estate business since at least 1986 and currently manages Dorchester Developments Ltd., a company specializing in the acquisition and redevelopment of multi-family properties. More specifically he noted that the renovation of such properties allows them a rent control holiday for up to five years and enables Dorchester to bring them up to their maximum market rents and thus "we create the highest rates of return on multi-family property by generating the highest rents in the industry". For the purposes of his testimony, counsel for the Appellants provided Rabb with the Kellough, Pestl, Sing Associates and the Sterling Realty Advisors reports and specifically requested his opinion "as an active participant in the Winnipeg multi-family residential market as to which set of values is more commercially reasonable and accurate". Since Rabb does possess special knowledge and experience in what he described as the multi-family real estate business, the Appellants were permitted to call him to testify as to his perception of the market value of the four properties in issue as rental properties. However, he was not acceptable as an appraisal expert and accordingly, was not permitted to testify with respect to the appropriateness or correctness of either the methodology or conclusions reached by Stirling Realty Advisors or Kellough, Pestl, Sing Associates.

[20]     In Rabb's view, the properties were not appropriate for condominium conversion because as a result of their cost it would not be possible to generate enough revenue to cover the costs based on the value per square foot of what condominiums sell for in the Winnipeg market. He further testified that if he were to buy the properties in issue it would only be for use as a multi-family residential apartment building. Rabb reached this conclusion by considering the properties' location, suite size, and amenities to determine rent and actual operating costs and thus determining their expenses. He then capitalized the net income based on what he perceived to be the market price given the conditions in Winnipeg at the relevant time. Based on the foregoing, his view was that the market values for Villa Beliveau, Southpark and Colorado were $2,100,000, $3,678,980 and $3,028,449, respectively.

Respondent's Evidence

[21]     Evidence was adduced on behalf of the Respondent from H.E. Pestl.[7] The purpose of his engagement was to appraise and to provide an opinion as to the market value of each of the four properties. The effective date of the value estimates in each case is the date of first occupancy of each of the subject properties in accordance with the requirements of subsection 191(3) of the Act. These dates are as follows: Colorado - June 1, 1997; Southpark - October 1, 1997; Virden - April 1, 1998; and Villa Beliveau - August 5, 1998. Pestl testified that he analysed relevant information pertaining to the subject properties including acquisition particulars as well as recent offerings and listings. In respect of the latter, he learned that there had not been any. Each of the subject properties and their surrounding neighbourhoods were inspected and economic market data was assembled. Consideration was given to land use controls including the municipal zoning and official plan documents which affect the subject properties. This was followed by an analysis and consideration of the highest and best use concept and the various methods of appraisal. He indicated which methods were most appropriate to the subject properties and then undertook an analysis on the basis of those methods.

[22]     Pestl stated there are three methods, which are acceptable and normally used in appraising or estimating the market value of real property. Each of these methods has advantages but all are dependent on specific information which must be available in order for that particular method to succeed. He described them as follows:

(i)          The Cost Approach is a method of estimating value by appraising the land upon which the buildings stand, as vacant. This appraisal of vacant land is done primarily by market comparisons. The cost of reproducing the buildings when new is estimated and the value is established by adding the market value of the land to the depreciated value of the buildings and site improvements. This approach presupposes sufficient land sales and close proximity to the subject on or about the date of value to establish the market value of the land by comparison.

(ii)         The Direct Sales Comparison Approach involves the gathering, analyzing and comparing of data on similar properties that have been sold or on which offers have been made. These similar properties must be logically comparable to the subject in size, location and time of sale. Assuming that a sufficient number of properties can be found which can be compared to the subject as a unit; that is land, buildings and amenities, the direct sales comparison approach is a good and acceptable test of value.

(iii)        The Income Approach or Capitalization Method of valuation, is a method whereby the estimated annual income produced by a property is capitalized at an appropriate rate into an indication of the capital value of that property. The term capital value is considered to be synonymous with market value: that is, the estimated price an investor would pay for a property having regard to the net income flow and the rate of return expected on the capital invested. In this approach, an appropriate factor is applied in order to discount the future income strain to a present cash worth.

With respect to the income approach, Pestl made the following specific comments as they related to the properties in issue:

In the subject instance the lands have only recently been improved with a modern seniors residential complex. Because of the nature of the Life Lease structure the existing income stream generated by the project is not market rent. The rents paid by occupants are reflective of the entrance fee payments, and any additional payments made by the purchasers of the life leases interest. Further, market rents have not justified the construction of new residential projects for many years as such projects are not economically viable. For this reason the Income Approach to value is not considered appropriate for the purposes of valuing the subject complex. It is also noted that an analysis of market rental values for typical rental apartments is not appropriate in this instance as such rentals are not based on similar entrance fee and additional payments, as made by life lease occupants.

An Income Approach analysis would not indicate the total market value of the subject property, unless the entrance fee and additional amounts paid by the occupants is taken into account. The owner of the subject complex receives both a monthly rental stream (as in a typical rental property) and also receives the entrance fee and additional payments made by the purchasers of the life lease interests. These two forms of capital recovery by the owner combine to form the market value of the property. Unlike a typical rental property however there is no incentive to escalate rents to their maximum potential due to the not-for-profit nature of the project.

[23]     Pestl noted that the four properties in issue were newly constructed and in each case, the development costs were available. He also observed that a number of similar projects had recently been constructed and it was evident that a market for such complexes existed. None of the properties were either publicly assisted nor otherwise funded. All were totally financed by the entrance fees and the mortgage companies. There was no subsidy granted to any of the projects either publicly or privately, nor were they funded through "fund raisers" or similar mechanisms. Thus for the purposes of his analysis, he utilized the cost and direct sales comparison approaches to value.

[24]     In the cost approach analysis with respect to each of the four properties, in order to estimate the replacement cost new of the subject improvements, Pestl took into account the actual construction costs of the complex, the cost of similar complexes, and undertook an independent costing using the Marshall Valuation Computer Costing System. With respect to Colorado, he described this process as follows:

According to the Financial Statements, the total construction cost of the subject complex is stated to be $5,552,771. This amount includes the land cost, shown as $388,501. It also includes GST paid, an amount of $191,800. Accordingly, net of land and GST the development cost is about $4,972,470, or for 45 units, $110,499 per unit.

The complex comprises a total net unit area of 48,407 square feet and the development cost is about $102.72 per square foot net of land, and $110.75 inclusive of land, both exclusive of GST. Based on these reported costs for the subject property the project cost, exclusive of GST but inclusive of land is $5,360,971.

Included as Appendix #16 hereto is a summary of the development costs of eleven (11) Life Lease Projects, inclusive of the subject. One property (No. 9) is an addition to an existing project and has been adjusted to reflect that circumstance. That project is also based on a 99-year lease term with renewal option. As may be seen these projects indicate a development cost range, excluding land and GST, of from $90.17 per square foot of net unit area, to $116.88 per square foot, with an average cost of $103.72 per square foot, ($102.72 for the subject). The cost range inclusive of the land cost is from $95.71 per square foot to $121.03 per square foot with an average of $108.95 per square foot, ($110.75 for the subject).

While the subject complex enjoys particularly extensive and good quality common area facilities, it is, at the same time, of frame construction. These characteristics are considered to offset one another. The average indicated values based on the comparable sales support the actual costs of construction for the subject complex.

We have also undertaken a cost analysis employing the Marshall Valuation Computer Costing System, (see Appendix #18). The building costs exclusive of land, site improvements such as landscaping, exterior lighting, surface parking, driveways, signage, fixtures and equipment etc. but inclusive of GST is $4,710,985, as at current date. The adjustment factor for July 1, 1997 is 1.081 and the adjusted cost is therefore $4,357,988. Adjusted for GST this is reduced to $4,072,886.

An allowance of from 10% to 15% for site improvement, fixtures and equipment, and incidental costs results in a cost range of from $4,480,173 to $4,683,819. This compares with an actual cost, exclusive of land and GST of $4,972,470. The indicated cost range by the Marshall & Swift costing method is some 6% to 10% lower than the actual cost of development. As has previously been indicated, the common areas are extensive and finished to a much superior standard than is typical in similar complexes. These superior characteristics are not reflected in the cost estimates which are based on average quality frame construction. For this reason, the actual development costs of the project are concluded to be the most appropriate indicator.

We have estimated the market value of the subject land in the amount of $382,500. We have further confirmed the actual development cost of the project in the amount of $4,972,470 is reflective of the likely replacement cost of the subject. Accordingly the indicated market value for the subject property by the Cost Approach to value, as at July 1, 1997, exclusive of GST is $5,354,970 which amount may be rounded to $5,355,000.

[25]     Pestl also used the direct sales comparison approach to provide a further indication as to the market value of the subject properties. In his report, he observed that in order to select appropriate comparable sales, he considered the nature of the subject properties as life lease complexes. More specifically he stated:

The definition of Market Value requires the assumption of a willing seller and a willing buyer, neither of which are acting under compulsion. In other words, a hypothetical transaction in an open market and normal market circumstances is to be assumed. In this regard, there are two prospective scenarios in which the subject property might be sold.

In the first scenario another not-for-profit group may wish to provide its members with a similar housing opportunity, and the present owner and occupant of the subject property are assumed to be willing sellers.

The purchaser group has available the opportunity to either acquire a suitable site and construct a complex, or assuming the subject were available for sale, acquiring it.

In both instances a group would have members prepared to put up sufficient entrance fees to complete the transaction.

In the second scenario, the owner and occupants of the subject property could proceed with the sales of the individual units as condominium units, should they be in agreement to do so.

In most instances the life leases of such projects are structured so that the individual occupants, or their estates, received the initial entrance fees, and any additional capital contributions for each unit, at the termination of the lease term. That is the actual acquisition costs are refunded and the unit is resold in the form of a new life lease to a subsequent purchaser. The market for life lease units is comparatively new and few resales have in fact occurred in the subject project. However, in some similar projects occupants are permitted to arrange their own sales and achieve market appreciation.

The life lease form of occupancy is, in most respects, similar to condominium ownership. Both are a form of unit occupancy, with shared common elements. Because life leases are anticipated to be resold not subject to the life term of the vendor, but the life term of the purchaser, the rights of ownership are significantly enhanced as compared with a typical leasehold interest.

The life lease concept provides additional benefit by catering to the mature (55+) market. Not only are the common area facilities typically more extensive than in comparable condominium projects, the concept also allows for regulation of the complex with respect of prospective occupants. It creates an attractive senior's environment.

The principal financial difference between a life lease tenure (operated on a not-for-profit basis) as compared with a condominium ownership is the opportunity to realize the capital gain on any potential value appreciation of the unit on its ultimate sale or disposition. This impact however is relatively modest.

For example, assuming a $110,000 unit value, held for say 20 years at an annual appreciation of 1% per year, compounded, would have a future worth of $134,220.90 at the end of that time frame. This is a capital appreciation of $24,220.90. However, the present worth of that capital gain at say an annual interest rate of even only 5% is $9,128.59 (f = .376889). At 10% (f = .148644) the present worth is only $3,600.29. Based on this consideration the life lease tenure would appear to carry a financial cost of from 3% to 8%.

However, this modest financial expense appears to be more than offset by other benefits of the life lease tenure. Not only is the life lease complex, a more structured environment particularly attractive to the seniors market, the projects typically also feature more extensive common and recreational facilities than typical condominium projects, and often include monitoring equipment for emergency assistance etc.

While it is not uncommon for life lease complexes to be registered as condominium units, and some projects are in the process of such registration, others are not. We are aware of only one complex, Assiniboine Links on Roblin Boulevard which had been a not-for-profit life lease project and was subsequently sold as condominium units.

In that instance, the project was however a sale under distress conditions. The members of the original life lease occupants contributed additional funds to buy their units under condominium tender, however, the additional funds were to meet the financial obligations of the corporation and to preserve their original investments.

The decision as to whether or not the life lease occupant may resell the unit at market value is typically governed by the terms of the life lease agreement. However, whether or not the owner corporation decides to benefit from such appreciation by resale at market value, or permits the occupant to benefit thereby is not material to the actual market value of the property. Some projects permit the resale of the units by the occupants at their market value.

Pestl considered a number of condominium unit sales in a variety of projects throughout Winnipeg and surrounding area and used approximately ten as comparable sales. His conclusion that the market value of Colorado by the direct sales comparison approach was $5,422,000.[8]

[26]     Based on his view that the most probable purchaser of the subject property would be another not-for-profit operator and considering the benefit of a significant timesaving through the acquisition of an existing project, Pestl concluded that more weight should be given to the cost approach considerations and accordingly, appraised the value of Colorado as at July 1, 1997 in the amount of $5,355,000. Utilizing the same methods, Pestl put forward the following estimated values with respect to:

(a)       Villa Beliveau: cost approach - $4,345,000, the direct sales comparison approach - $4,332,000. Thus, Pestl's estimate of the market value as at August 1998 was $4,345,000.

(b)      Southpark: the approaches utilized indicate values of $6,457,000 and $6,541,000, respectively, and the estimated market value property as at October 1998 was $6,460,000.

[27]     With respect to Virden, the indicated values were $2,246,500 and $2,065,000, respectively. In this instance, Pestl favoured the lower indicated value range, that of the direct comparison approach primarily:

because of its rural location and presumably a smaller market for that kind of property in that location as compared to properties located here and therefore concluded that the value would be at the lower end of the range indicated by the two approaches.

Thus, the estimate of the market value as at April 1, 1998 was $2,100,000.

[28]     Pestl further testified that the market value is not complete without an estimate of exposure time linked to the value estimate. Exposure time, he said, is the estimated period the property being appraised would have been offered on the market prior to the hypothetical sale at market value on the effective date. Exposure time is always presumed to precede the effective date of the value estimate and is based upon an analysis of past market events and trends as they apply to the type of real property under consideration. Based on his research and analysis it was concluded that a reasonable exposure time-period would be in the range of three to six months.

Appellants' Submissions

[29]     At the outset of his submission, counsel for the Appellants set out several points of agreement between the parties. First, there is no dispute regarding the definition of fair market value. Second, the process does not relate to the life leases but rather relates to valuing multiple unit residential complexes. Third, it is not disputed that no one would buy these complexes for their cost to operate as conventional apartment buildings since market rents have not justified the construction of new residential projects for a number of years as they are not economically viable. Counsel further noted that the replacement costs were not seriously in dispute, conceded that Pestl's estimates of those costs were in each instance consistent with the actual cost of construction, and noted that with the exception of Villa Beliveau were very similar to those reached by Steele. On the other hand, counsel argued, there was a very substantial difference between the two appraisers as to the manner in which each considered and applied the concept of economic obsolescence to the cost approach values. Counsel noted that Pestl agreed that the depression of value due to rent controls would create economic obsolescence for conventional apartment buildings and that if one were dealing with such a building, in the cost approach an appraiser would be required to consider that economic obsolescence. Furthermore, it was not disputed that an acceptable method to measure economic obsolescence would be to capitalize the rent loss attributable to rent controls. This, counsel said, was what the Appellants' appraiser did but the Respondent's failed to do. Instead, Pestl assumed that another not-for-profit life lease project would purchase the properties in issue for cost with the result that they would not be considered or treated as conventional apartments and, therefore, there would be no economic obsolescence. This assumption raises the question whether there was a separate market that would be willing and able to buy the properties in issue for their cost for the purpose of developing new life lease projects or whether these properties would end up on the normal market. Counsel argued that there was no evidentiary basis for the Respondent's position, whereas on the other hand, the testimony of the four witnesses representing the non-profit groups involved in the development of the properties in issue established that there was "no realistic possibility that another life lease project would be in a position to acquire an existing building" since non-profit groups undertaking projects such as this do not have immediate funds available to make an offer for an existing property. By way of example, counsel referred to the testimony of Leeies to the effect that there would not be a circumstance where a life lease could acquire another building unless there was a philanthropic lender, as he put it, or government funding, both of which would take it out of the definition of market value. Other factors which precluded the acquisition of an existing property by a life lease group was that the physical location of the development was of substantial importance, i.e. proximity to the parish Church, such as was the case with Villa Beliveau. Particular reliance was placed on the testimony of Leeies to the effect there are "fairly rigid geographic limitations as to the suitability of building locations".

[30]     The Appellants' second point of disagreement with respect to Pestl's cost approach conclusion is that even if there was an acquisition of the hypothetical property by a not-for-profit life lease group, it would not be a market transaction within the definition of "market value" since the parties to such a transaction are not motivated by market place objectives. The sponsors who own the buildings are motivated by social and community needs and according to counsel:

When we are talking about a market, we're talking about entrepreneurs; we are not talking about social projects. Typically motivated people in the market do not do things for free; they expect a benefit. But the owners of each of the subject properties here are not typical. They are providing social services. They are not doing business.

The Appellants further contend that since life lease transactions cannot take place without creative financing schemes and concessions from persons associated with the projects, "one can't seriously argue that the life lease model is typical or normal financing for the construction of a multiple family residential building".

[31]     The Appellants also challenge Pestl's conclusion that a reasonable timeframe for the disposition of such properties would be three to six months. This is so even if complexes such as the ones in issue were available on the market, it would be virtually impossible for an interested sponsor to organize a tenant group in the short period of time suggested by the Respondent. Counsel noted that the periods for the properties in issue once the location was identified and plans were available to show to potential tenants range from 14 months to 2½ years. Thus the fundamental assumption underlying Pestl's exclusion of economic depreciation i.e. that there is a pool of non-profit buyers for these complexes is unsupported by any acceptable evidence. The Appellants also contend that even if there were such buyers, those purchases would not meet the definition of market value and that the cost approach, if properly applied, accounting for the obsolescence which Pestl admitted existed in the market generally, does not support the values put forward by the Respondent.

[32]     With respect to the direct comparison approach utilized by the Respondent's appraiser Pestl, the Appellants submit that to properly evaluate a property in the case of the sale of a condominium complex, the process must include provision for the cost of the conversion of the complex to a condominium, having regard to the costs of any physical modifications, legal and professional fees, marketing and operating costs during a reasonable marketing period, as well as provision for the profit that a developer expects to obtain on the sale of the individual units. This method was used by Steele and it was wrong for Pestl to support his direct comparison condominium approach by estimating the aggregate retail value of the units as condominiums and using that total to establish what the complexes were worth. He also failed to estimate the amount and timing of capital outlays or marketing costs nor did he provide any analysis of the timing of potential sales. In substance, Pestl's condominium approach valued the individual units in the respective properties but did not value the complexes. This was incorrect according to both the appraisal format and the Excise Tax Act. The result was that Pestl accounted for the revenues of selling the units but failed to take into account the costs and made no provision for a normal market return.

[33]     With respect to the income approach utilized by Steele, the Appellants contend that it was used customarily when the property to be valued is an income-producing property. First, Steele's estimate was made of the market rental values of the units rather than the contract rental values and, thus, the rentals used were unaffected by the life lease arrangements. Steele then deducted the costs associated with operating the complexes and capitalized the net income stream based on a market capitalization rate. Counsel observed that the Respondent's appraiser did not contest Steele's testimony as to what market rent values or operating costs were nor did he contest the capitalization rate utilized. Specific reference was made to the following comment by Pestl in rejecting this approach:

An analysis of market rental values for typical rental apartments is not appropriate in this instance as such rentals are not based on similar entrance fee and additional payments as made by life lease occupants.

Counsel argued the fact that they were originally financed through life leases was not relevant to their current value because it is necessary to assume the "non-existence" of the life lease for the purpose of marketing the full fee simple. Furthermore, the entrance fees and additional payments are, according to counsel, "red herrings" and do nothing more than explain how the building was built in a market that had depressed rental values. For these reasons, the Appellants contend that hypothetical buyers in this market would establish value based on the income approach and that reflects the appropriate current valuation of the properties in issue as determined by the Appellants' appraiser Steele.

Respondent's Submissions

[34]     The basic issue before the Court is whether the assessments made pursuant to subsection 191(3) of the Act which requires the Appellants to perform a self-assessment of the fair market value of the four life lease complexes should be upheld. Subsection 123(1) of the Act provides that fair market value of a property or service supplied to a person means the fair market value of the property or service without reference to any tax excluded by section 154 from the consideration for the supply. There is, as was conceded by the Appellants, no disagreement as to the definition of fair market value as put forward by the Respondent's expert Pestl.

[35]     Counsel noted that albeit the issue before the Court is the fair market value of the properties and appraisal evidence was introduced, a representative of each of the four Appellants testified regarding the inception and development of their respective projects. This testimony made it clear that life lease properties are anything but conventional rental properties and also established that they are substantially different from a typical tenancy arrangement. In the first place, the properties have physical amenities that are conducive to the lifestyle of life lease tenants. Furthermore, the entrance fees typically finance up to half of the cost of construction and are tied to the rental payments made by the tenants. The tenants have an interest in their units that is evidenced by the life leases and in some cases, the entrance fees are considered in the relevant documentation to be an investment secured by second mortgage in favour of the tenants. In the Respondent's view, the testimony of these four witnesses clearly established the existence of a demonstrated market and need for life lease complexes.

[36]     The Respondent contends that the Appellants' reliance on the Steele appraisals was misplaced in that the content and quality of his reports fell below the required standard of expert evidence and should not be accepted by the Court. In particular, Steele failed to take appropriate steps to ensure that the information and analysis provided are sufficient for users to understand the rationale for any opinion given. More specifically, there was a failure on his part to provide anything more than minimal identification of information or data to support his assumptions and conclusions which in many instances reflected nothing more then his reliance on personal experience. A number of specific items were raised by counsel. First, Steele utilized an income approach with respect to the properties and appears to have valued them as conventional apartment buildings. In so doing, no consideration was given to the entrance fees even though he admitted that they formed part of the financing of the complexes and that the Appellants could never have charged the existing rents absent those fees. Thus, Steele's income approach was flawed because it failed to take into account the tenants' substantial equity injections into these properties. Furthermore, with respect to the capitalization of the estimated net income of these properties in his income approach, Steele's method for calculating the capitalization rate by the band of investment theory was overly simplistic and inaccurate in light of the more technical and detailed method set out in the requirements of the Appraisal Institute.

[37]     With respect to the cost approach utilized by Steele, counsel noted that although he considered the actual cost to construct each property, he ultimately used a lower figure in his calculation of the estimated replacement cost without setting out the basis for so doing. Furthermore, although he asserted that he did not believe the actual costs were normal market costs he provided no definition of what constituted a normal market cost and no evidence of other costs or examples to back up his assumption. Regarding Steele's use of economic obsolescence to depreciate the improvements, his concept was, on the face of it, premised on the provisions in the Residential Tenancies Act that had the effect of reducing the potential for a return on investment in reduced profit for conventional apartments operated for commercial purposes. Counsel argued that in fact the rent control provisions of the Residential Tenancies Act do not apply in the present case and that Steele's analysis is irrelevant in the context of the not-for-profit life lease projects where the entrance fees compensate for the fact that the rents alone could not support the properties. Counsel also noted that both Steele's definition of economic obsolescence and the formula he utilized were based on his personal experience and was inconsistent with the approach recommended by the Appraisal Institute. Since his formula for calculating economic obsolescence required him to incorporate the net income derived in his income approach, any flaw in the latter would impact on his cost approach with the result that the conclusions reached in both are flawed and questionable. For these reasons, no reliance can be placed on Steele's estimate of value by either the income or cost approaches.

[38]     Counsel submitted that the evidence of the project representatives established that the arrangements are very different from a typical tenancy agreement. The properties in issue have physical amenities conducive to the life styles of this particular group of tenants. The entrance fees in most cases finance up to half the cost of construction and are tied to the rental payments made by the tenants. The entrance fees are considered to be an investment secured by a second mortgage in favour of the tenants. Thus, the tenants have a very special interest in their units that is evidenced by their life leases and the beneficial interest in those second mortgages. For financing purposes in almost all cases the banks treated these projects as condominium developments and require registration as such. There is obviously a demonstrated market and demand for these complexes as contrasted to conventional apartments and which, unlike conventional apartments, are supported in the market place by a combination of tenant equity and monthly payments.

[39]     The Respondent asserts that in determining the appropriate methods for valuing the properties in issue, Pestl reviewed the three approaches and noted that the income approach is ordinarily utilized to determine what an investor would pay for the property having regard to the net income flow and the rate of return expected on the capital investment. It is the Respondent's position that as the highest and best use of the property has been properly determined to be a continuation of its existing use, the income approach is not appropriate to valuing these properties. Given the life lease structure, the existing income stream generated by the project is not market rent. The rents paid by the occupants are reflective of the entrance fee payments and any additional payments made by the purchasers of the life lease interest. Market rents have not justified the construction of new residential projects for many years as such projects are not economically viable. Furthermore, an analysis of market rental value is not appropriate as there are no comparable rental units available and such rents are not in any event based on similar entrance fees and additional payments. An income approach analysis would not indicate the total market value of the subject property unless the entrance fees and additional amount paid by the occupants were taken into account as the owner receives both the monthly rent and the entrance fee.

[40]     In her conclusion, counsel made reference to several decisions supporting the proposition that the actual cost to construct is highly representative of value and fair market value for GST purposes. These comments reflected situations in which both non-profit and for-profit projects were being valued. The Respondent to that extent relies on these decision as being determinative.[9]

Analysis

[41]     The Manitoba Life Leases Act[10]defines a life lease as follows:

"life lease" means a written tenancy agreement under or in respect of which

(a)         an entrance fee has been paid or is payable in respect of a rental unit; and

(b)         the person first entitled to occupy the rental unit under the agreement is granted a right of occupancy for life or for a fixed term of not less than 50 years, if the agreement is entered into after the coming into force of this Act in respect of a rental unit in a residential complex in which no unit has been the subject of a life lease that was entered into before the coming into force of this Act,

and includes any separate agreement under which the entrance fee has been paid or is payable; ("bail viager").

[42]     A brief review of the life lease program in Manitoba is warranted. The imposition of rent controls in Manitoba in the 1980s resulted in a shortage of available rental accommodation because the market rents obtainable for new apartments were not sufficient to support their construction. This created a problem with respect to seniors' housing. The life lease program was initiated by the provincial government at a time when it and the federal government were backing out of new initiatives for social housing and deep subsidies. Leeies, at one time an employee of the department involved in these issues, testified that the provincial government of Manitoba decided to address the fact that there were a number of communications from user groups, particularly seniors, whose incomes were just high enough to disqualify them for the deeply subsidized rent geared to income program. A decision was taken to assist this particular user group which consisted of seniors in a home or rental property and the life lease program was developed to address their needs. Leeies observed that it was a program designed for:

... home owners, who were somewhat equity rich, income poor, is how they were came to be categorized, or they had a home free and clear, they had some equity tied up in it, but they had very low incomes, maybe only a Canada Pension. And those folks were somewhat trapped in that house, in many cases, was depreciating. They couldn't look after the house. It was no long really a suitable accommodation for them, but they were not eligible to move into the government-sponsored housing. So they could take the equity from the home and transfer it into this new form of shelter that accommodated their different lifestyle basically.

In an effort to deal with this problem, the Appellants (and others) became involved in programs whereby they acted as the sponsors of seniors' housing projects using the concept of life lease apartment rentals. It must be noted as well that as contrasted to non-profit housing which was subsidized by federal/provincial programs, life lease projects in Manitoba at the relevant time did not receive funding assistance from any level of government as a result of which all of the required capital was raised privately.

[43]     The issues in dispute relate to the fair market value of the four complexes at the time the Appellants were required to perform self-assessments. Counsel for the Appellants has indicated that with respect to the meaning of fair market value in appraisal theory and practice the following definition put forward by the Respondent's expert, Pestl, is acceptable:

For general purposes, market value may be defined as: - The probable price estimated in terms of money which the property would bring if exposed for sale in the open market by a willing seller allowing a reasonable time to find a willing buyer, neither buyer nor seller acting under compulsion, both having full knowledge of the uses and purposes to which the property is adapted and for which it is capable of being used, and both exercising reasonable judgement..

Implicit in this definition are the following: -

(i)          the parties to the transaction are typically motivated;

(ii)         both parties are well informed or well advised, and acting in what they consider their best interests;

(iii)        a reasonable time is allowed for exposure in the open market;

(iv)        payment is made in terms of cash, in Canadian dollars, or in terms of financial arrangements comparable thereto; and

(v)         the price represents the normal consideration for the property, unaffected by special or creative financing or concessions granted by anyone associated with the transaction.

A definition of market value is not complete without an indication as to the estimate of exposure time linked to the value estimate. Exposure time is the estimated period the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date. Exposure time is always presumed to precede the effective date of the value estimate, and is based upon an analysis of past market events and trends, as they apply to the type of real property under consideration.

[44]     There is substantial disagreement between the parties with respect to three issues. First, the Appellants maintain that the highest and best use of the properties was as multiple family residential rental complexes for seniors. On the other hand, the Respondent argues that the highest and best use was a continuation of the existing use, i.e. as a life lease complex. Second, the Appellants maintain that there was no separate market in which the life lease complexes in issue would be purchased at their cost price by a life lease group. Third, that even if such a sale, at cost, was to take place it would not constitute a fair market transaction. The first two are interrelated. If there is a separate market for life lease complexes then a basic premise upon which the Appellants' economic obsolescence theory is founded becomes questionable.

[45]     I turn first to the "separate market" issue which requires consideration from two aspects. First, is there a market for life lease projects in Manitoba and, second, would a sale of a complex to another not-for-profit life lease sponsor meet the definition of a fair market transaction? Given the Appellants' position, it is appropriate to consider the history of such projects in Manitoba. In his report, Pestl observed that the first such complex in Winnipeg, Kiwanis Chateau, a 122-unit building was constructed in 1988. After this initial project, this housing type became popular with seniors in the Winnipeg community and in 1998, there were 18 completed life lease projects in Winnipeg, with a total of 1,073 units and another six projects in the construction or planning stages. The CMHC Report also indicated that the sponsors of these projects included community organizations, church groups, property management firms and the like. The existence of a growing market is further established by the representatives' testimony that they wished to be active participants. For example, Lyons observed that in the past, S.A.M. had developed projects through CMHC's guaranteed mortgages and/or the provincial guaranteed subsidy programs, but these programs had ceased. He further indicated that the motivation which led to the involvement of S.A.M. in the Colorado project and others was, in part,the difficulty of maintaining a paid professional staff since "you need a certain level of projects to sustain yourself" and in this context, they saw "the future of senior housing in the life lease area within Winnipeg at the time and we wanted to be active in supplying it". As a result, S.A.M. currently manages six life lease projects, was the sponsor of one, Colorado, and was also involved in the development of Vasalund, another life lease project by providing staff for marketing and other duties. Acorn and its president, Leeies, provide professional consulting to various non-profit groups. He is also the president of Murdoch, a property management company. Leeies was the consultant in the Villa Beliveau project and Murdoch, in due course, was retained as property manager. Both are substantially involved in the life lease development area. In fact, the Murdoch website contains the following commentary:

Murdoch Management currently manages the homes of over 750 non-profit households valued in excess of sixty million ... current waiting list details are as follows - over 3,500 households for market life lease projects, over 600 households for subsidized seniors ...                                       (My emphasis)

I also note that Pestl conducted appraisals of nine life lease projects and "investigated, I think, 11 or 12 where we looked at all the documents and that sort of thing". He specifically asked each of the administrators in the projects involved whether there was a waiting list of prospective occupants for their building and was told that in many instances, there was an active list and that there had been very little turnover of the units in the time prior to his inspection of the building. Given these facts, it is reasonable to conclude that there was a substantial demand and a market for the life lease concept during the relevant period of time.

[46]     Notwithstanding the existence of a life lease market, the Appellants reject the conclusion reached by the Respondent's appraiser that a typical willing buyer for the properties in issue would likely be another not-for-profit group wishing to provide similar residential accommodation to the community. The disagreement comes down to the question whether not-for-profit groups would be willing and able to purchase a complex for the purposes of developing life lease projects or whether these would end up on the "normal market". In support, several propositions were advanced by the Appellants: (a) there are fairly rigid geographic limitations as to the suitability of a building location; (b) there is no example of a not-for-profit group buying or attempting to buy an existing building; (c) delays associated with the promotion of these projects preclude a market purchase within a reasonable time of exposure; and (d) the method of financing is not conducive to acquiring an existing project since the non-profit groups involved do not have funds whereby they can obligate the group to purchase any property.

[47]     Location:      Counsel for the Appellants emphasized the importance of the "geographic location" to a "community" such as the church group involved in Villa Beliveau and that each community's particular requirements limited the size of the market.[11] While this may have been a factor in Villa Beliveau which was strongly connected to the local parish and was promoted and developed for a lower-income group, it was in my view, atypical. In direct contrast to Villa Beliveau is the Southpark project. It too was initially directed at a community affiliated to the local church. However, it quickly became apparent that such an approach would fail and the doors were opened to "anybody over age 55 who were of any denomination, any church, and had the ability to pay". Riley described the first occupants of the property in 1997 as:

... I would say that 40% of the people were from our own church community and then the rest of them, the other maybe 40% would be from the community, Fort Richmond, Richmond West. So there was lots of different denominations there as far as church-going people are concerned. And because of the advertising, we even attracted a lot of people, i.e. - I'm thinking of all the people that we went through here, but just about the tenants, there was some people moved in from Dauphin, I know of that are still there, that type of thing, from other areas in the City, but I would say that 80% of the people were from that community.

With respect to Colorado, Lyons testified that there was no parish or other specific group involvement in its development, and no particular group was being targeted. The initial advertising covered the whole area of St. James and since a new bridge was to be constructed across the Assiniboine River, the Charleswood community was also approached. In the case of Virden, there is no evidence that any specific group was targeted to the exclusion of others. Given these facts, I am not convinced that the location factor is as relevant as the Appellants contend. The particular inclination of any individual to reside in a specific sector of the City, either as a purchaser or tenant is not unusual and exists in the housing, condominium and rental markets.

[48]     Purchase of an existing non-profit building:    Leeies testified that Acorn has never undertaken the acquisition of a completed life lease project and did not believe it could occur. He also made specific reference to two life lease projects "that have gone under" and "couldn't really be sold for a long time, and ultimately, they were purchased at a very low cost and turned into rental, I believe". However, he was either unaware or did not mention that these projects collapsed because, as was noted by Lyons:

... the Doulton was a strange little building because it was more of a high-rise building. It was structured on a very small floor plate. That kind of building attracts or is attracted, or attracts the kind of tenants that are of an older nature, usually getting into the 75 or 80s. The high-rise, smaller units, you know, no walking up and down stairs, it's all elevator transport, that kind of stuff generally appeals to an older group.

The three-storey walk-up kind of townhouse style that we were trying with the Mager, the Villa Mager, was attracting the younger group. I think our biggest problem there was again the fact that St. Vital, on that strip, had some very low-cost condominiums and our rents were just a little too pushy.

The Islands was an attempt to develop bungalow-style residences and this:

... style has not worked with life lease. It doesn't have the amenity space. It doesn't have the congregant kind of community living that the seniors are looking for and it's a very hard sell.

As a result, Lyons said:

... essentially we couldn't make the numbers. In other words, through all of our marketing on both the Doulton, the Villa Mager and The Islands, we never got to the level of comfort that the bank was happy with.

Given their obvious unsuitability, it is not surprising that these projects failed. Furthermore, the absence of a sale does not lead to a conclusion that there was no circumstance where a life lease sponsor would acquire an existing building. Lyons testified that as far as he knew, S.A.M. had never been approached with respect to such a purchase nor had they ever contemplated doing so but, he noted "nobody came to us to say they wanted to get out of whatever they were currently owning, no". He conceded the possibility of such a purchase if S.A.M. had a waiting list of individuals interested in acquiring a life lease and if an appropriate building became available on the market, stating: "I guess there is a theoretical possibility, I would if I had all the tenants already in place, yes". It is reasonable to conclude that there was a demand for non-profit life lease projects and the fact that no sale of an existing non-profit building had occurred establishes nothing more than that an appropriate project had never been put on the market.

[49]     Delays - financing: Counsel for the Appellants made particular reference to Leeies' description of the steps involved in the development of a life lease project which included, inter alia, finding a suitable location, retaining a development consultant, creating a non-profit housing corporation, controlling the land preferably by way of an option and identifying interested potential life lease tenants. At this stage, preliminary capital cost estimates and first year operating costs were considered, preliminary marketing and advertising material was disseminated, and initial efforts were made to obtain tenant deposits (refundable) and commitment agreements with potential tenants to provide the equity to secure financing. When the sponsors had a sufficient number of commitments from tenants to proceed, the process entered stage two at which time the architect and engineers proceed to working drawings and contract documents, obtain firm construction costs and continue marketing. The Appellants contend that the length of time it took the sponsors to obtain commitment agreements and tenant deposits clearly indicated that there is no prospect that a life lease sponsor could put together a tenant group in the three-to-six month period of time suggested by the Respondent's appraiser as a timeframe for the hypothetical sale of one of these complexes.

[50]     Although I have reservations regarding Pestl's assessment that a three-to-six month period was reasonable for the hypothetical sale of one of the subject properties, the Appellants' contention that a period in excess of two years would be necessary is equally questionable. The project representatives made it clear that the substantial delays during the early stage of development when the property was being advertised and promoted occurred, in part, as counsel for the Appellants observed, because "you can't approach tenants without having a building, or at least a location and a plan in mind, that's not practical, and you can't simply tell a seller to wait for two to four years, with no guarantee that you could ever go through with the deal". That is understandable but as Leeies noted, the delays occurred because:

we find a very large number of people sit on the fence, the undecided people. There's a group of people who tell us, 'we've been with the project for two years. We like it, but we're not going to lease one until we see the bricks and mortar'. And some people have difficulty in reading the drawings and, you know, understandably, they want to walk around the building.

Furthermore, life lease projects provide the congregant social amenities this particular market demanded. By way of example, Colorado included a recreation area consisting of a sunroom, a library, a billiard room, an exercise room and a lounge which had "a kitchen and dishwasher and that kind of thing" and, Lyons said, that without these additional facilities "we would never be able to market the building". It is reasonable to conclude that the existence of a newly completed life lease residence would have a positive impact on potential lessees and would substantially reduce the length of time it would take to obtain the necessary commitments and thereby enable the sponsor/purchaser to secure the necessary bank financing.

[51]     I turn next to the second branch of the Appellants' argument, the economic obsolescence issue. There was no significant disagreement as to the replacement cost attributable to the properties. The principal issue between the parties is whether the properties were affected by the economic depreciation that affected other multiple residential rental complexes. More specifically, it relates to the application of economic obsolescence to this approach, by the Appellants' appraiser, Steele. This concept was based on his conclusion that the highest and best potential use of the properties would not be as a life lease project or a residential condominium complex for seniors but rather, as leased premises for seniors. The alleged obsolescence was based primarily on the fact that rent controls had a significant negative impact on the apartment rental market as a result of which no new apartments have been built since the rent structure was not sufficient to justify their construction. He concluded that as a result, there was substantial economic obsolescence negatively affecting the market value of the properties in issue. That approach was correct, the Appellants say, and that being the case, the Respondent's appraiser was wrong in excluding economic obsolescence from his appraisal and, more particularly, that it was rejected on the basis that there was a separate market for complexes to be purchased by non-profit groups looking to develop a life lease project.

[52]     In view of the Appellants' reliance on Steele's opinion that economic obsolescence existed, the basis for his conclusion must be carefully examined. I turn first to his qualifications. Steele stated that he was no longer a member of the Canadian Appraisal Institute and that he did not "live by the Appraisal Institute". He was not aware that the former U.S. Professional Appraisal Practice standards were no longer adopted by the Canadian Appraisal Institute since Canadian uniform standards were introduced in January 2001. He was aware of their existence but had not read them and had no intention of doing so but rather chose to apply his own methods and approaches to appraisal.[12] Thus, while he has a significant amount of experience, his failure to adequately document the information relied upon and to establish that the methods utilized by him were sound in principle creates concern as to the factual basis upon which his conclusions were drawn. This is so particularly with respect to his opinion that there was substantial economic obsolescence negatively affecting the market value of the properties. In his view, the actual development and construction costs for the properties did not accurately reflect costs and were, he said, in general higher than if the product had been developed in "normal market conditions". He attributed this increase as being stimulated by fees and profits for developers, consultants and contractors, as well as the lack of appropriate project management and maintains that in estimating the market value of the properties in issue, care must be exercised not to use these "excess development costs even if they are actual costs".[13] As was noted by the Respondent's appraiser, this resulted in his concluding that in the case of Colorado, the cost was 91.5% of the actual cost, Southpark was 89.7%, Villa Beliveau 77.2% and Virden 92.5%. As a result, the value of the new complexes was reduced by 42.5% to 51.8% of their estimated replacement cost new, an amount significantly less than their actual construction costs. It is difficult to accept these results given the fact that there was virtually no supporting data for his conclusion. With respect to Steele's replacement cost analysis, Pestl made the following comment:

As a result of the appraiser dismissing the actual development costs of the projects, substituting unsupported cost estimates and land values, and most significantly due to the application of the substantial estimated economic depreciation to the improvements, the indicated value by the cost approach is grossly understated.

I agree with this conclusion.

[53]     The second branch of Steele's analysis relates to his application of economic obsolescence to depreciate the value of the properties in issue. In this context, Pestl observed as follows:

With respect to the estimated economic depreciation applied by Sterling, we note that this is premised on the fundamental theory that the subject complexes are apartment rental units. That is the depreciation applied is reflective of the shortfall in net income which would normally be required on an investment of capital in the construction costs of the complex. This theory is not consistent with the facts, nor with the market. Fundamental to this theory is that the entrance fees, paid by each and every occupant in the complex, should be ignored for the purposes of valuation. We do not consider this a reasonable proposition. The Entrance Fees are in fact paid, and are initially used to finance the project construction. These fees are recoverable on the termination of the lease, and are paid by subsequent occupants of the units. The fees directly affect the amount payable as monthly rent during the term of the lease.

No interest is paid on the entrance fees and they benefit the owner of the complex by reducing the amount of the total financing required for the development of the complex. In most instances, the additional capital payments may be made by unit occupants, further reducing the monthly rental amounts specific to their unit.

There is an obvious relationship between the entrance fees paid by the tenants and the monthly rents, which Steele chose to ignore.[14] It was wrong to do so since as Pestl noted, the income approach would not indicate the total market value of the subject property unless the entrance fees and additional amounts paid by the occupants were taken into account.

[54]     A question was also raised regarding the manner in which Steele utilized the cost and income approaches in his analysis. Pestl observed that the three approaches:

... are standalone processes and they're designed to be standalone processes because you are hoping to develop at least one, but hopefully two, methodologies of valuing the property, independent of each other, in order to get an assurance that that is the value of the property. So you're getting more than one indicator of value by two independent methodologies. What Mr. Steele has done is he's combined the two, the cost approach with the income approach by extrapolating an economic depreciation on one approach and transposing it into the other to justify a reduction for economic obsolescence in the other approach. So if one approach is incorrect, it automatically renders the other result incorrect and if it's a transferred over adjustment, then it depresses both values.

I have concluded that Steele's appraisals must be rejected and in so doing, I adopt the following comments of Pestl with respect thereto:

... both the Cost Approach and the Income Approach to value as developed in the report are fundamentally flawed. The Income Approach is based upon an examination of rents paid by occupants of Conventional Multiple Family Residential Complexes, which are no longer being built in the rent controlled environment, and/or on Non-Profit Multiple Family Residential Complexes in which instance entrance fees are prepaid and not reflected in the income stream. As a result, the Income Approach to valuation results in a substantially understated indication of value. This understatement is then carried over into the Cost Approach to value analysis by the attribution of the significant economic depreciation applied to the cost estimates, which depreciation is directly based on the revenue shortfall resulting from the income analysis ignoring the entrance fee payments required in order to occupy units in the subject complex.

[55]     Life Lease Projects - Not Fair Market Transactions:          The Appellants further argue that since none of the life lease projects occur without concessions from the individuals involved and could not have occurred without special or creative financing, the transactions involving the development of non-profit life lease housing do not meet any element of the definition of fair market value. The basis for this proposition is a concept espoused by Steele and accepted by the Appellants that such transactions would not be reflective of "market value" because there was no financial return, i.e. there was no profit motive. As counsel put it "they're not seeking personal gain. They're not seeking a return on investment. These are social projects, not market transactions". As a result, the Appellants maintain that even if another charity were to buy one of these complexes to develop a life lease project and even if it did pay the replacement cost, it would not be a market value transaction because the vendor was not seeking a return on investment. I do not agree. This argument is premised on the assumption that an entrepreneurial profit is a necessary element which must be considered by the appraiser in his determination of market value. Counsel supported this proposition by reference to Moss v. The Queen.[15] In that case, the taxpayer was in the business of construction and sale of residential properties. He failed to include in his income amounts earned from the business as a result of which the Minister assessed to increase his income and assessed penalties. One of the issues was the taxpayer's credibility with respect to his construction costs and profit margins as well as his allegations of losses incurred on the sale of properties in issue. Both parties tendered appraisal evidence to establish construction costs but in each instance it was of dubious quality. Absence of acceptable evidence was of substantial concern to the Court since, as was observed in The Appraisal of Real Estate:

Because the extent of entrepreneurial profit varies with economic conditions, a typical relationship between it and other costs is difficult to establish; however, entrepreneurial profit should not be omitted from the cost approach. Entrepreneurial profit is a necessary element in the motivation to construct improvements ...

There is no dispute that entrepreneurial profit is a necessary element and should not be omitted or ignored when the cost of construction is being determined by an appraiser. But that is not in issue in these appeals and is not relevant to the issue before this Court. It is also a fact that both appraisers had access to the actual costs of construction and, in each case, made their own determination with respect to replacement costs. Furthermore, the Appellants conceded that there was virtually no dispute regarding replacement costs. The Appellants' position that the absence of profit motivation on the part of the sponsor/owner would convert a sale of the life lease property into something other than a market value transaction is simply not tenable and is inconsistent with the accepted definition of fair market value.

Conclusion

[56]     The ultimate aim of the appraisal process is to determine the probable price which the property would bring if exposed on the open market. The evidence before the Court leads to the following conclusions:

(i)                 the highest and best use of the properties in issue is a continuation of the existing use, i.e. a life lease senior citizen's multiple residence;

(ii)               there was a substantial market for life lease projects in Manitoba at the relevant time;

(iii)             the sale of a complex to another not-for-profit life lease sponsor would meet the definition of a fair market transaction; and

(iv)             the fair market values of the properties in issue are as determined by the Respondent's appraiser, Pestl.

It is also necessary to consider the Appellants' contention that no such sale could occur within a reasonable time. In this regard, it is common ground that with respect to the projects in issue, the time it took to secure sufficient commitments was 13 to 14 months for Colorado, 18 to 19 for Southpark, 19 for Virden and 2½ years for Villa Beliveau.[16] Given the advantage of having a completed building ready for occupancy, it would not be unreasonable to consider a range of 12 months to 18 months as an appropriate hypothetical timeframe for the sale of one of the properties in issue.[17]

[58]     For the foregoing reasons, the appeals are dismissed, with one set of costs to the Respondent.

Signed at Ottawa, Canada, this 1st day of November, 2004.

"A.A. Sarchuk"

Sarchuk J.

CITATION:

2004TCC701

COURT FILE NO.:

2000-1755(GST)G, 2001-2725(GST)G, 2001-2726 (GST)G, 2001-2856(GST)G

STYLE OF CAUSE:

Villa Beliveau Inc., S.A.M.(Colorado) Inc., Southpark Estates Inc. and Virden Kin Place Inc. and Her Majesty the Queen

PLACE OF HEARING:

Winnipeg, Manitoba

DATE OF HEARING:

May 5, 6, 7, 8, 9, 10 and 11, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice A.A. Sarchuk

DATE OF JUDGMENT:

November 1, 2004

APPEARANCES:

Counsel for the Appellants:

Jonathan Kroft and Barbara Shields

Counsel for the Respondent:

Lyle Bouvier and Angela Evans

COUNSEL OF RECORD:

For the Appellants:

Name:

Jonathan Kroft and Barbara Shields

Firm:

Aikins, MacAulay & Thorvaldson

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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