Babcock and Brown Properties Pty Ltd v Valuer-General

[2005] NSWLEC 526

Land and Environment Court

of New South Wales

CITATION:

Babcock & Brown Properties Pty Ltd v Valuer-General [2005] NSWLEC 526

PARTIES:

APPLICANT
Babcock & Brown Properties Pty Ltd

RESPONDENT
Valuer-General

FILE NUMBER(S):

31435 of 2004

CORAM:

Nott C

KEY ISSUES:

Valuation of Land :- land value of 25 ha site leased by IBM at Pennant Hills - use of comparable sales - adjustments to contract prices of the comparables - movement in the market between date of contract and base date - adjustments for deferred settlement
agreeement to lease or special conditions of contract - adjustments for the value of any development consent affecting the comparables - value of the existing development consent for the subject land to be included in the land value - adjustments for different features of the comparables compared with the subject land - weighting the comparables for reliability to indicate a value for the subject land - land value altered to $19950000

LEGISLATION CITED:

Valuation of Land Act 1916, s 6A

CASES CITED:

Flack v Valuer-General (1952) 18 LGR (NSW) 157 at 158;
Illawarra Meat (Developments) Pty Ltd v Valuer-General (Land and Valuation Court, Rath J, 10 March 1978, unreported);
Maurici v Chief Commissioner of State Revenue [2005] NSWLEC 20;
Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610

DATES OF HEARING:

8 & 9 June, 4 & 5 July and 25, 26 & 30 August 2005

 
DATE OF JUDGMENT: 

10/04/2005

LEGAL REPRESENTATIVES:

APPLICANT
Mr Craig Miller, valuer and authorised agent

RESPONDENT
Mr M McGrowdie, barrister
SOLICITOR
I V Knight, Crown Solicitor

JUDGMENT:

IN THE LAND AND
ENVIRONMENT COURT
OF NEW SOUTH WALES

Nott C

4 October 2005

31435 of 2004: Babcock & Brown Properties Pty Ltd v Valuer-General [2005] NSWLEC 526

JUDGMENT

1. Introduction

1. Commissioner Nott: This is an appeal under the Valuation of Land Act 1916 in respect of the land value of lot 61 in DP 737386 at Coonara Avenue, West Pennant Hills having an area of 25.87 ha and occupied since 1984 by IBM Australia Ltd (“IBM”).

2. In September 1993, the subject site was purchased by the applicant, Babcock & Brown Properties Pty Ltd (“Babcock”) from Zerlina Pty Ltd. Concurrently with the Babcock’s purchase of the site, Babcock leased the site to IBM, and a variation to the lease provided for specified increasing amounts of rent payable until June 2018. Having regard to the terms of the deed of lease and a power of attorney, IBM has lodged and conducted this appeal with Babcock’s authority and in Babcock’s name. IBM is liable for land tax under the lease, and the rent payable to Babcock is not affected by changes to the land value.

3. The Valuer-General determined the land value of the subject site as at 1 July 2003 to be $25,000,000. At the hearing, senior valuer Mr M O’Leary gave evidence in support of the Valuer-General’s determination. The applicant (in reality, IBM) objected to that land value and at the commencement of the hearing contended that the land value should be $15,500,000, based on the evidence of consultant valuer Mr J Juniper of Craig Miller Pty Ltd. In considering all evidence and submissions, I have been aided by a view of the subject land and the comparable properties. For the reasons given below, I have determined the land value to be $19,950,000.

4. Briefly, the method of valuation used by both valuers was to deduce a land value for the subject site by a direct comparison with comparable sales. A key element in the method was to express the analysed land value of each comparable sale as a price per sq m of developable gross floor area (GFA) and, after making adjustments for the different features of the comparable property and of the subject site, to deduce a price per sq m of developable GFA for the subject site. In so doing, the valuers made adjustments for the value of any new development consent relating to the comparable sale, as well as for the value of the depreciated development consent relating to the subject land (par 25 ff below).

5. The “land value” has to be determined in accordance with s 6A of the Valuation of Land Act 1916, which reads:

6A Land value
(1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner ’ s predecessor in title had not been made.

(2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that:
(a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and
(b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used,
but nothing in this subsection prevents regard being had, in determining that value, to any other purpose for which the land may be used on the assumption that the improvements, if any, other than land improvements, referred to in subsection (1) had not been made.

6. The appellant has the onus of proving the appellant’s case (s 40(2) of the Act). That is, the applicant has the burden of establishing that the land value objected to is too high: cf. Flack v Valuer-General (1952) 18 LGR (NSW) 157 at 158 per Sugerman J.

2. The subject land in more detail

7. As I mentioned, the subject site has an area of 25.87 ha. The site is irregularly shaped and is located on the south-eastern side of Coonara Avenue, West Pennant Hills, immediately to the south of the intersection with Castle Hill Road. The land falls mainly from north to south, with a creek or drainage line affecting part of the site. A substantial proportion of the site is covered by established native forest, similar to the vegetation at the adjoining Cumberland State Forest to the east. The site is approximately 3.5 km to the east of the Castle Hill shopping centre. The nearest railway station is Pennant Hills. The locality of the subject site is predominantly residential.

8. Access to the M2 motorway is available by travelling east along Castle Hill Road that flows directly through an underpass to Pennant Hills Road; the motorway is a little further south from the underpass.

9. The site is occupied by IBM as its Australian corporate headquarters. There are seven interconnected office buildings of 3-4 levels, a multi-deck carpark located near the eastern boundary, and there are extensive open carparking areas interspersed with trees. The buildings have a total GFA of 40,094 sq m.

10. As at 1 July 2003 the layout of the buildings and carparking areas is as shown on the Building Layout Plan at p 13 of the Cumberland Forest Business Centre Technical Report 1992 (ex J). There is also another carpark in the south-eastern corner of the site (not shown on the plan). Further particulars of the site and locality are contained in the original reports of the valuers.

11. The large, levelled areas or earth platforms that were created for these buildings and carparking areas are “land improvements”, the value of which is part of the land value of site.

12. At the relevant date, the subject land was zoned Special Business 3(b) under the Baulkham Hills Local Environmental Plan 1991. In this zone, the LEP would ordinarily permit a floor space ratio (FSR) of 1:1. However, no doubt because of the constraints of the site, Development Control Plan No. 8 identifies the subject land as possessing a maximum of 0.2:1.

13. Both valuers agreed that it was most appropriate to value the subject land to the maximum FSR of 0.2:1 as stated in DCP 8. Therefore, multiplying 0.2 by the site area of 25.87 hectares gives a developable gross floor area of 51,740 sq m.

3. The comparable sales in general

14. After the hearing commenced, I expressed certain tentative opinions on the evidence that had been presented, and I adjourned the proceedings to enable the valuers to confer again with a view to reducing the differences between them. Progressively, the valuers narrowed the areas of disagreement. I will therefore not refer to their earlier schedules and tables that have been superseded.

15. Set out on the next page of this judgment is Table 1—Valuers’ Adjusted Sales, which is a composite table containing each valuer’s final figures relating to the adjustments to the comparable sales. Following that table is Table 2—Court’s Determination of Adjustments and Land Value. (For convenient reading, I recommend that each of these tables be enlarged by photocopying from A4 size to A3.)

16. In respect of Table 1, the valuers ultimately agreed upon the particulars for all the sales in columns A to H inclusive. The valuers also agreed on the figures in columns I and J but only in respect of sales R1, R2 and R4. (However, the applicant submitted that sale R4 should not be used as that property was developed for residential purposes.) In respect of the remaining particulars in columns I to Q of Table 1, where there are two sets of figures for any particular comparable sale, Mr Juniper’s particulars are listed first, and Mr O’Leary’s particulars are given in italics below Mr Juniper’s; and where the valuers’ figures differ, I have shown Mr O’Leary’s in bold italics. For instance, taking column J of sale A4 in Table 1, the first figure of 328 is Mr Juniper’s and the figure below it in bold italics of 372 is Mr O’Leary’s. The valuers are to be congratulated on the extent to which they were able to reduce their differences.

17. In Table 2, I have adopted without change the agreed particulars of the valuers for all sales in columns A to H. I have also accepted the valuers’ agreed figures for sales R1, R2 and R3 in columns I and J. In respect of all other particulars in Table 2, I have determined appropriate figures in the light of the often-conflicting evidence and submissions, as discussed in more detail below.

18. In their original reports, both valuers relied on certain comparable sales that have since been abandoned. In particular, sales of land having an area of less than 2 ha have been excluded, because of the unreliability of comparing such small sales with the subject land. As can be seen in Table 1 or 2, there are only nine sales that are now relied upon by the valuers. In column A, the respondent’s sales are prefixed with “R” and the applicant’s with “A”.

19. In respect of sale R4, I accept the applicant’s submission that the sale should be given no weight (see par 69 below).

4. Zoning of the comparables and their potential GFA

20. In respect of each comparable property in Tables 1 and 2, column C gives the land area in hectares, column D the zoning, and column E the potential or developable gross floor area under the applicable planning instruments. Apart from sale R4, the valuers accepted that, like the subject land, each of the comparable properties could be developed for commercial purposes or other business use. (The 4(d) zone at Macquarie Park is not limited to industrial uses.)

5. GST to be excluded from the contract prices

21. Originally, the contract prices for the applicant’s sales included an additional 10% for the goods and services tax (GST). Having regard to the definition of “land value”, I ruled that any GST payable on the purchase of a comparable property (where the property is used in a direct-comparison method of valuation) should not be included in the land value for that property. Both parties accepted the ruling. Accordingly, the contract prices in Column G of Tables 1 and 2 are exclusive of GST.

6. Other adjustments to the contract prices—column H

22. Special conditions and other factors affecting the contract price. After the commencement of the hearing, the initial evidence before the Court indicated that some of the contracts for the sale of land were likely to have special conditions, such as deferred settlements, agreements to lease, or settlement conditional upon a development consent having been granted. In addition, it appeared that some of the properties might have been sold with the benefit of a development consent for redevelopment. It was apparent that the contract prices would have to be adjusted for such special conditions and for any such development consent, in order to derive a land value for the comparable property before inferring a land value for the subject land. The proceedings were therefore adjourned in order to enable the parties to obtain relevant option agreements, contracts or deeds of agreement for all the comparable sales. After the contractual documents had been produced on subpoenas, the valuers conferred at length to determine what adjustments should be made to the contract prices. (I consider in more detail at pars 25 ff the adjustment for the value of any development consent relating to a comparable property and the adjustment for the value of the development consents relating to the subject land.)

23. While there were originally differences between the parties, the valuers arrived at the agreed figures to be inserted in column H of Table 1. As mentioned earlier, I have adopted those figures in column H of Table 2.

24. Cost of demolition. Where buildings on the comparable property had to be demolished after the date of the contract of sale in order to permit the intended development, the cost of demolition was added to the adjusted contract price for that sale in column H. (And the value of any buildings that were going to be kept would be deducted from the contract price, since the purpose of the exercise is to first arrive at a land value for the comparable property.)

7. Adjustment for the value of any development consent

25. Where a parcel of vacant land is sold with a development consent for a suitable form of redevelopment of the land, the land will usually have a higher land value than if there were no such consent. The value of any such development consent is to be taken into account as part of the land value.

26. The reason for this is that a valuation for the purpose of 6A(1) of the Valuation of Land Act 1916 must take into account the presence or absence of restrictions imposed by or under town-planning law: cf. Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610. The granting of a development consent is the relaxation of a prohibition that development should not take place without such a consent. Accordingly, the value accruing to the land by reason of the removal (by the development consent) of this prohibition must be taken into account under s 6A(1): cf. Illawarra Meat (Developments) Pty Ltd v Valuer-General (Land and Valuation Court, Rath J, 10 March 1978, unreported)—relevant extracts from that case are reproduced as appendix 1 in Maurici v Chief Commissioner of State Revenue [2005] NSWLEC 20.

27. Once a development has actually been carried out, the statutory assumption in s 6A(2) needs to be considered. The highest and best use of redeveloped land will often be for the continuation of the current development, in which case the land value of the property would usually be greater than if there were no approved development.

28. As explained by Rath J in the Illawarra Meat case, the former s 6(2) (now s 6A(2)) applied not only to non-conforming existing uses but also to conforming uses permissible with consent in the zone (the abattoir in that case was a conforming use).

29. In the present case, some of the comparable properties were sold with the benefit of a development consent (which was rightfully regarded by the valuers as enhancing the land value of the particular comparable property), and for other comparable properties there was no development consent to be taken into account. Obviously, if a land value was being inferred for the subject land from a comparable property that had the benefit of a consent, the inferred value would be higher than the value inferred from another comparable property in respect of which there was no development consent (all other things being equal). To put all the comparable properties on an equal footing (at least in relation to the value of any development consent), where a comparable property had the benefit of a consent the valuers deducted the estimated value of that consent from the contract price. As a result of conferences between the valuers, they were able to agree as to the values of the development consents.

30. So the figures given for each comparable sale in column H of Table 1 (and which I have adopted in Table 2) show the contract price less the agreed value of any development consent. (As described above, other adjustments were also made to the contract price, for example, for any special conditions of contract.)

31. The next step in the valuation method used by both valuers was to take into account any movement in the market (columns I and J) and then to make adjustments (to the price per sq m of GFA of the comparable) for the different features of the land in each sale compared with the subject land (columns K-O)—in order to infer a land value for the subject land (columns P and Q).

32. Since the adjusted contract price for each sale in column H is exclusive of the value of any development consent, likewise the inferred value for the subject land is also exclusive of any development consent relating to the subject land. That is, the inferred values in column Q assume that the buildings and other improvements (other than “land improvements”) on the subject land had not been constructed and that the subject land does not have the benefit of any development consent.

33. The valuers agreed that the highest and best use of the subject land is for the continuation of the use of existing buildings (having a GFA of 40,094 sq m) and for the development of a further 11,646 sq m of GFA. The valuers took the view that existing development consent (for the use of the existing buildings and carparks on the subject land) gave the subject land an enhanced land value (over and above the land value that the site would have if there were no such consent). Alternatively, there was an enhanced land value by reason of part of the total potential GFA of the subject land being actually realised by the continued use of the existing buildings in accordance with s 6A(2). They agreed that the amount by which the land value was enhanced was $1,500,000—which should be added to the raw land value in column Q.

34. How did the valuers arrive at this amount of $1,500,000? Mr Juniper set out in exhibit R his estimates for the costs of obtaining a new development consent for all the buildings on the subject land for a total gross floor area of 40,094 sq m. These costs were for survey and design, the preparation of the statement of environmental effects, holding charges for the 12-month period of the development-application process, and interest; to which was added an allowance for profit and risk. The total of all these amounts was $2,500,000, which Mr Juniper regarded as the value of a new development consent. However, because the existing buildings on the subject land are not new, he depreciated the value of the consent by 40%, giving a depreciated value of $1,500,000. The respondent’s valuer accepted this figure.

35. Therefore, $1,500,000 should be added to the indicative land value (which does not include the value of a consent) derived from each comparable sale appearing in column Q.

36. As dealt with later (par 62 ff), I have determined a weighted-average land value for the subject land (excluding the value of any development consent) using all the indicative land values in column Q of Table 2. The weighed-average land value of the subject land (excluding value of any development consent) is $18,455,000, to which I have added the $1,500,000 (being the agreed depreciated value of development consent), giving a land value for subject land as at 1 July 2003 of $19,955,000, rounded to $19,950,000.

8. Adjustment for any movement in the market

37. In respect of sales R1 and R2 at Macquarie Park, the valuers agreed that there was practically no movement in the market for office accommodation in the period embracing the base date between April 2002 and September 2004. Hence, the land value as at 1 July 2003 of each of the sales R1 and R2 (excluding the value of any consent) in column I of Tables 1 and 2 is the same figure as the adjusted contract price given in the preceding column H.

38. For the sales at Bella Vista, Mr O’Leary was of the opinion that the adjusted contract price (in column H) should be further adjusted for an upward movement in the market between the date of contract and the subsequent base date of 1 July 2003. He originally made an adjustment of 4% per annum or 0.33% per month.

39. However, in later documents tendered in the hearing, Mr O’Leary revised that adjustment having regard to the Valuer-General’s Blue Book, which he said indicated that from July 2001 to July 2003 values increased 30% at Blacktown and Wetherill Park, that is on average by 1.25% per month.

40. The applicant’s valuer Mr Juniper was of the opinion that the increases at Blacktown and Wetherill Park (where there were predominantly industrial uses) did not apply to the Norwest Business Park at Bella Vista (where there were mostly non-industrial businesses).

41. Mr Juniper referred to a graph of sales at Bella Vista that he had prepared (ex Y) in support of his view that there should be no adjustment to any of the sales at Bella Vista for movement in the market between the date of contract and the base date 1 July 2003, other than for sale A3. However, the graph does not take account of all factors affecting value, such as the shape and the location of the land. Some properties at Bella Vista are better located than other properties, for example, those on Norwest Boulevard. The fact that there was some land still at Bella Vista available for development does not necessarily mean that there was no increase in land values. It appears that the developer of the Norwest Business Park exercised a relatively high degree of control over the release of the land and was involved in approving beforehand any development application that was to be lodged with the council.

42. As mentioned earlier, Mr Juniper was prepared to make an adjustment for movement in the market in respect of sale A3, resulting in a figure in column I of $29,552,800. I note that the contract date for sale A3 is earlier than the contract dates for all the other sales at Bella Vista, and it is possible that there was a larger upward movement in about mid May 2001 than later on. In any event, I accept Mr Juniper’s figure in column I for sale A3.

43. In respect of all other sales at Bella Vista, it seems to me that the large percentage increases at Blacktown and Wetherill Park industrial estates should not be applied to the Norwest Business Park. But I am not satisfied that no adjustment for movement in the market should be made. In the absence of better evidence being available, I have adopted an increase of approximately 3.9% per annum, or on average 0.325% per month, for the movement in the market between the date of contract and 1 July 2003 for each of the sales at Bella Vista, this increase being slightly less than Mr O’Leary’s original figure (par 38 above).

44. The estimated land value (excluding the value of any consent) of each comparable sale as at 1 July 2003 is given in column I and is then divided by the potential gross floor area relating to the sale (column E), to give a land value for the sale expressed as a price per square metre of GFA, which is set out in column J of Table 2.

9. Comparative adjustments in general

45. In columns K to O of Table 1 the valuers adjusted the estimated land value of each comparable sale (column J) to take account of its various features compared with the subject land. I consider specifically below the more important factors of size (par 50 ff) and location (par 52 ff).

46. In respect of the factors in column M and N, I have had regard to the descriptive evidence of the valuers and to the figures that they gave in Table 1. In general, the subject land is generally slightly inferior, and I have reflected this by negative percentage adjustment in column M and N of Table 2. However, no overall adjustment is made in column M for sale R1, as the better topography of that property compared with the subject land is counterbalanced by the detriment of an easement crossing the property.

47. I have made slight changes to the valuers’ figures for shape, having regard to what is shown on the deposited plans and in the photographs of exhibits N and O. Because the percentage adjustments are made to the price per sq m of GFA and not to the price per sq m of land, the adjustments should be small. For example, the irregular shape of the northern apex of the subject land probably has little or no bearing on value, as there is ample room for buildings and carparking areas for the agreed GFA elsewhere on the site.

48. In this case, it has not been necessary to have an additional column for “Other” adjustments. The overall total of the comparative adjustments for each sale is given in column O.

49. I have then applied the total percentage adjustment in column O to the $/sq m of GFA in column J to produce the $/sq m of GFA for the subject land shown in column P of Table 2. And the figures in column P are then multiplied by the potential GFA of the subject site of 51,740 sq m, to give an indicative land value (not including the value of development consent) for the subject land in column Q, to which must be added the agreed depreciated value of development consent of $1,500,000.

10. Size of GFA

50. In column K the valuers considered what adjustment (if any) should be made to the comparable sale having regard to the difference in size of the developable gross floor area of the comparable property and of the subject site.

51. As a general rule, as the gross floor area becomes larger, the price payable per sq m decreases. Conversely, as the GFA becomes smaller, the price increases. Mr Juniper applied this rule when discussing in oral evidence sale A3 in comparison with another property at Bella Vista, but he made no size-adjustments in column K of Table 1 for any of the comparable sales. He agreed that it would not be unreasonable for another valuer to take the view that some adjustment should be made for size. Mr O’Leary considered that the general rule applied and made adjustments for most sales. I agree that adjustments should be made for the differing sizes of GFA, and it seems reasonable to make the adjustments set out in column K of Table 2.

11. Locational factors

52. As seen in column L of Table 2, the greatest differences of opinion between the valuers related to the adjustments to be made to the $/sq m GFA of each comparable sale for locational factors compared with the subject land.

53. The locations of all the comparable sales are shown on the map, exhibit M. A more detailed map showing the layout and size of the comparable sales at Bella Vista is exhibit L.

54. Both valuers agreed that there is a relativity between land value and rental value. But in the present proceedings there was a paucity of sufficiently reliable evidence to make a good comparison of the rental values between properties at Macquarie Park and the subject land and between properties at Bella Vista and the subject land.

55. Both valuers referred to a lengthy valuation report of LandMark White dated 7 November 2002, exhibit G, which was prepared for Westpac Banking Corporation. The authors of the report were not called to give evidence. The parties to the present appeal played no role in the preparation of exhibit G, and the Mr C Miller who appeared for the applicant was critical of certain findings in the report. Both valuers in the present appeal referred to the rental evidence that had been gathered by LandMark White at Epping and North Ryde as set out at pp 19-20 of the report, but they did not investigate that evidence themselves. No investigation is reported by LandMark White of rentals at Bella Vista.

56. At the subject site itself, the “passing rent”, that is the rent payable by IBM under the 1993 lease, is not a good indicator of the market rental for the subject land, because the lease was entered into at the time of the sale in 1993, and the rents were then fixed at increasing amounts until June 2018.

57. Both valuers were of the opinion that the location of each of the two sales R1 and R2 at Macquarie Park are superior to the location of the subject land, but there was a difference between the valuers as to the magnitude of the negative adjustments in column L of Table 1. I agree that these two comparable sales have a superior location to the subject land. But (in the absence of the investigation of rental evidence), I am not inclined to make negative adjustments as large as submitted by the applicant. I also note that the size of the GFA of the properties in the LandMark White report was generally quite small in comparison with the GFA of the subject land, for which adjustments should probably be made. In addition, the location of sale R2 is probably superior to sale R1, because it seems that there would be the opportunity to display a sign on the upper part of the building on R2 identifying the nature of the business to the passing traffic on the adjoining motorway.

58. It is necessary to make a discretionary judgment to resolve the conflicting views of the valuers concerning locational factors. I have reflected what I consider to be the degree of superiority of the locations of the Macquarie Park sales compared with the subject land by inserting minus 12% for sale R1 and minus 16% in column L of Table 2.

59. When comparing the subject site with properties at Bella Vista, again the starting point is somewhat uncertain if one is taking the rental of $265/sq m (inclusive of carparking) from exhibit G. In relation to properties at Bella Vista, the valuers referred to the rental of a large property on Norwest Boulevard and Brookhollow Ave occupied by IBM-GSA, where the rental was said to be $238/sq m; an adjustment would have to be made for the older buildings on the subject land and for any other material differences.

60. Apart from rentals, I have also taken into account the other evidence of the valuers concerning the advantages and disadvantages of the location of the subject site compared with the Bella Vista properties in the Norwest Business Park.

61. It seems to me that it would be reasonable to allow in column L of Table 2 between about +8% to +15% on top of the price per sq m of GFA of those comparable properties at Bella Vista to take account of the likely overall superior location of the subject land as at 1 July 2003. This range of percentage adjustments also reflects some different locational features of the properties at Bella Vista. For instance, sale A4 has a longer frontage to Norwest Boulevard than sale A3 as well as having an extensive exposure to Old Windsor Road along its western boundary. In addition, sale A4 is at the western gateway entrance to Norwest Boulevard.

12. Weight to be given to each comparable sale

62. As can be seen from column Q of Table 2, the comparable sales indicate different land values for the subject land (exclusive of the value of any consent). Not all indicative values are equally reliable. A further step in the valuation process is therefore required.

63. I adopt what is said in the American textbook, The Appraisal of Real Estate (12th edition 2001) published by the Appraisal Institute, which is the top professional association in America for real-estate valuers:

When many adjustments are applied by the appraiser and when their individual and collective amounts are substantial, the appraiser must ask, “ Is the comparable property really comparable? ” The greater the amount of collective adjustment, the more the appraiser may reduce the weight placed on a given comparable, or the appraiser may determine that it is not sufficiently comparable to be used at all. [pp 458-459]
…
Re-examining an appraisal helps ensure its accuracy, its consistency, and the logic of leading to the value indications. An appraiser relies more on professional experience and judgment in reconciliation than in any other part of the valuation process. The appraiser weighs the relative significance, applicability, and defensibility of each value indication and relies most heavily on the approach that is most appropriate to the nature of the appraisal problem. [p 600]

64. In exhibit W, the valuers gave a weight to each comparable sale according to its reliability. In general, Mr Juniper considered the applicant’s sales (prefixed “A” in column A of Table 2) to be more reliable than the sales (prefixed “R”) that Mr O’Leary used for the respondent; and Mr O’Leary considered his sales to be more reliable than Mr Juniper’s. Mr Juniper attributed the greatest weight or reliability to sale A8, and Mr O’Leary gave the greatest weight to sale R1. It is therefore necessary to resolve the conflicting views on this part of the valuation process.

65. In column R of Table 2, I have inserted a weight factor for each comparable sale according to what I consider on the available evidence to be the reliability of the comparable sale to indicate an accurate land value for the subject land. I have taken a weight factor of 10 as the theoretical maximum. A factor of 10 would mean that the comparable sale in all respects is perfectly reliable and produces a highly accurate inferred land value. A sale of the subject land itself on the day on which the value was to be determined could achieve the maximum score. At the other end of the scale, a zero weighting means that the sale should not to be used in the ultimate determination of land value of the subject land, because the sale is not comparable or because for some other reason it would be unsafe to rely on the sale.

66. In general, all of the comparable sales when compared with the subject land have certain deficiencies, and I have not given any of the sales a higher weight than 6.5.

67. As indicated earlier, there were quite divergent views as to the adjustments to be made to the comparable sales for size and for the location. So even after I have determined what adjustments are to be made for size, those sales that have the least adjustment are likely to be more reliable indicators of value (subject to considering other adjustments). Sale R2 is most comparable to the subject land in size, and so I would have given it a higher weighting than 6.5 but for the fact that this sale suffers from significant adjustments that have to be made in column H (the contract price is altered by $2,380,000). Likewise, the fact that a particular sale occurred close to the base date would be one indicator of reliability, suggesting a higher weighting, but other aspects of the same comparable sale (for example, in respect of some uncertainty as to an appropriate adjustment for size) might indicate that a lower weight factor should be adopted.

68. I have given less weight to sale A11 than the other sales at Bella Vista. This is because the indicative land value from sale A11 (given in column Q) is somewhat out of line with the indicative values from the other sales at Bella Vista and significantly different from the values inferred from the Macquarie Park sales, as seen in Table 2. Sale A3 is also out of line using the unaltered figures of Mr O’Leary or Mr Juniper in Table 1.

69. Mr Juniper was of the opinion that sale R4 should not be used at all, as the land was bought to be developed wholly for residential use. In the present case, both valuers agreed that the highest and best use of the subject land was for commercial purposes, for a use similar to that of IBM, even though the zoning of the subject land would permit a residential use. On the present evidence, insufficient analysis has been made of the potential of the subject land to be developed from a practical point of view for residential use as distinct from the current use. Without necessarily precluding further analysis for future years, I am of the opinion that sale R4 should not be used in the present case for the ultimate determination of the land value of the subject land. Accordingly, I have attributed zero weight to that sale in column R of Table 2.

70. Taking into account the more reliable as well as the less reliable aspects of each particular sale, I have made a discretionary judgment as to an overall weighting factor for each sale, as set out in column R of Table 2.

71. Using the weights in column R, I have determined the weighed-average land value (not including the value of any consent) of the subject land as follows.

In respect of each particular comparable sale, multiply the indicative value of the subject land (in column Q) by the weight attributed to that sale (in column R), to get a resultant value. Add up the resultant values from all the sales, to get the total of resultant values. Then divide the total of resultant values by the total of all the weights.

This can be done laboriously with a hand-calculator. Alternatively, the weighted average can be calculated automatically in a Microsoft Excel spreadsheet. The underlying Excel formula in cell Q11 of Table 2 that automatically calculates the weighted-average figure (rounded to the nearest thousand) is:

=ROUND(SUMPRODUCT(Q2:Q10, R2:R10)/SUM(R2:R10),-3)

72. It would not be appropriate, and indeed it would probably be an error of law, to merely adopt an arithmetic or simple average of the indicative land values in column Q, if an informed professional judgment can be made that some of the comparable sales are more reliable than others.

73. Likewise it would be an error of valuation principle to list the indicative values from all the comparable sales, commencing with the highest value and progressively decreasing to the lowest value, and then to adopt the middle or median value. A median value might be appropriate if (which is not the case here) all the sales were equally reliable or if a reasonable value-judgment could not be made as to the degree of reliability of any of the sales.

74. In this particular case, the simple average of all the inferred values in column Q of Table 2 happens to be $75,000 less than the weighted average. The difference between a simple average and a weighted average could be much higher or lower, depending on the range of possible inferred values and whether there is more variation in the weights to be given to the different sales.

75. Of course, the above procedure (of calculating a weighted average) is only one of the ways of weighing the evidence to come to an appropriate ultimate value, but it is a useful procedure where there are many sales involved.

13. Orders

76. Accordingly, the orders of the Court are:

1. The appeal is upheld.

2. The land value of lot 61 in DP 737386 at Coonara Avenue, West Pennant Hills as at 1 July 2003 is altered to $19,950,000.

3. The exhibits may be returned.
__________
A J Nott,
Commissioner of the Court