July 21, 2024

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Taste the Home & Environment

Vancouver real estate: ‘Mystery’ case of old buildings’ value soaring

Vancouver real estate: ‘Mystery’ case of old buildings’ value soaring

While the land under Kerrisdale Cameras has decreased in value in recent years, the value of its 96-year-old building has just seen a 539 per cent year-over-year increase

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Usually land gets more valuable over time, while the buildings on it get less valuable.

In at least one Vancouver neighbourhood, the opposite seems to be happening, and Linda Hudson is perplexed.

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Hudson is the third generation of her family to run Kerrisdale Cameras. The building, which her family owns, has been a fixture on West 41st Avenue in Kerrisdale Village since 1961.

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Most people would be happy if they owned an asset whose value soared by 500 per cent year-over-year. Unfortunately for Hudson, this is not a hot stock or valuable work of art or something she can easily sell.

The only tangible thing she will gain from her asset’s suddenly skyrocketing value is a higher property tax bill.

B.C. Assessment listings show her property’s building — a little 1½-storey 96-year-old building with a street-level storefront and an office upstairs — was appraised at $155,000 last year and $991,000 this year. That’s a 539 per cent increase.

Hudson has appealed the assessment with the help of Paul Sullivan, a principal and regional leader at Ryan, a tax services and software provider.

In Vancouver, where a hot property market and soaring property taxes are often blamed for killing businesses, a “land assessment averaging” program has been in place since 2015, providing temporary tax relief for “hot” properties when land values sharply increase.

But the land-averaging program will provide no relief to Kerrisdale Cameras, Sullivan said, because it’s the building value that’s increased, not the land. There is no “building assessment averaging” program.

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The property’s land value fell about 35 per cent over five years — to $3.5 million this year from $5.3 million in 2019 — but the building value skyrocketed by 14,000 per cent over the same time, jumping to to $991,000 from $6,800.

The appeal will hear arguments around complicated concepts, Sullivan said. Basically he will argue that B.C. Assessment made errors in their calculation of the market rent for the Kerrisdale Cameras property and its capitalization rate. The capitalization rate, or cap rate, is used to estimate an investor’s potential rate of return on real estate. Generally, the higher the cap rate, the greater the risk and return.

“They’re saying the economic contribution of the building has dramatically increased because of their opinion of rents and cap rates. To which, I say, they’re wrong,” Sullivan said.

Sullivan, who has spent 32 years handling property assessment appeals, said he has occasionally seen year-over-year increases in building value assessments over his career, but, “We usually see things move uniformly.”

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Kerrisdale Cameras on W. 41st in Vancouver, BC, February 1, 2024. Photo by Arlen Redekop /PNG

Some other shops in Kerrisdale Village have also had the assessed value of their little old buildings soar this year. B.C. Assessment records show the butcher shop across the street had its building value more than double in a year, while the land value fell. It also happened with the building down the block housing a small shoe store — one of the neighbourhood’s oldest businesses — as well as a dessert shop and luggage seller.

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Sullivan’s firm is handling thousands of appeals this year — a 50 per cent increase over last year — and they are seeing unusual spikes in some industrial property assessments in places like Burnaby, Langley, Surrey, and Richmond, he said.

But he is not aware of other commercial districts where properties like the ones in Kerrisdale are facing huge hikes in assessed building value. He’s not hearing about that phenomenon on Vancouver’s west or east side, or along shopping streets in other cities.

“It’s unusual to see small pockets outside of the normal change in value, which upsets tax distribution among the commercial taxpayers,” Sullivan said. “It’s a mystery as to why they think the commercial environment is so much stronger than everywhere else. It’s absolutely a mystery.”

Assessing properties is complex, but officials say the process is applied the same way throughout B.C.

One key thing that affects tax bills is how a property’s assessment changes relative to others in the same category in its jurisdiction. If your residential property’s value increases by 50 per cent, and every other residential property in your city increases by 75 per cent, then your property taxes should go down. If your commercial property’s value is stable while others in the same category sink, then your taxes could go up.

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The property tax hikes facing some of these Kerrisdale business owners could be connected to the struggling market for downtown office space, said Bryan Murao, a B.C. Assessment assessor.

Softened demand for office space has dragged down the whole commercial property category, Murao said, leading to the 7.4 per cent overall decrease in Vancouver’s commercial property values this year.

“To see a minus 7.4 per cent like that, it is a little bit unique, and I think a lot of that has to do with particular market segments in Vancouver,” Murao said.

Office towers and small neighbourhood retailers in old buildings like Kerrisdale Cameras fall into the same property category, Class 6 commercial properties. That means that if the office market is declining at the same time the market shows those little shops are holding their value, that puts upward pressure on the retailers’ property taxes.

“You’ve got a lot of office buildings in Vancouver, and we know the office market has not been good, that drags down your Class 6 commercial average. And the retail market is doing OK still, despite recent challenges in the brick-and-mortar market. You see that natural tax burden shift, that’s just the nature of having all those property types together in Class 6.”

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Murao said that based on 2023 market activity in and around Kerrisdale, B.C. Assessment determined: “There’s more economic life to those buildings than we necessarily thought there was.”

However, Murao acknowledged: “It’s not really a benefit necessarily to the property owner.”

Sullivan estimates that if the assessment stands, Hudson’s property tax bill could increase by more than $13,000 — from an annual bill of around $36,000 to more than $49,000. Depending on the camera shop’s profit margins, Sullivan estimates itp might need to do hundreds of thousands of dollars of new revenue just to cover the increased property tax bill, before seeing a penny of profit.

Derek Holloway, who worked at B.C. Assessment for 28 years before retiring as a senior appraiser in 2016, still handles some assessment appeals, but has no involvement in the Kerrisdale Cameras matter.

Based on his initial review of the file, though, Holloway said: “All I can do is laugh — yes, there’s holding income until redevelopment from the existing building, but it does not reflect close to a million dollars of building value. Probably a small fraction of that is appropriate.”

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“The land value is likely the vast majority of the total value, so the clumsy building value increase was ill-advised,” Holloway said. “This is just very poor assessing, in my opinion. And you can quote me on that.”

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