Borrowdale House Pty Ltd v Environment and Sustainable Development Directorate (Administrative Review)

[2012] ACAT 28

ACT CIVIL & ADMINISTRATIVE TRIBUNAL

BORROWDALE HOUSE PTY LTD v  ENVIRONMENT AND SUSTAINABLE DEVELOPMENT DIRECTORATE (Administrative Review) [2012] ACAT 28

AT 11/93

Catchwords:             ADMINISTRATIVE REVIEW – Working out Change of Use Charge (CUC) following consolidation of two Crown leases and variation to purpose clause – formula for working out CUC - valuation methods used to determine V₁ (After Value) and V₂ (Before Value) – comparable sales method – capitalisation of net income method – capitalisation rate to be applied and whether renovation required in Before Value calculation - costs of demolition – costs of off-site works - whether allowance should be made for costs of off-site works in calculating After Value.

List of Legislation: Planning and Development Act 2007

(ACT) ss 276, 277, 278

     

and 471.

List of Regulations: Planning and Development Regulation 2008, s 177.

Planning and Development (Reduction of Change of Use Charge) Policy Direction 2009 (No 1) - DI 2009-137.
Building (General) (Cost of Building Work) Determination 2009 (No 1) - Notifiable Instrument NI 2009-257.
Territory Plan 2008
Town Centres Development Code, Rule R96

List of Cases:            ISPT Pty Ltd v City of Melbourne [2007] VCAT 652

Kelly v Western Australian Planning Commission [2006] WASC 208
Waalt Homes Pty Ltd v Road Construction Authority (1987)
64 LGRA 346
Wyola Pty Ltd and ACT Planning & Land Authority [2005] ACTAAT 32

List of Texts             Alan A Hyam, The Law Affecting Valuation of Land in Australia (4^th ed, 2009)

Rawlinsons Australian Construction Handbook Edition 29 2011

Tribunal:                  Dr Don McMichael     Senior Member, Presiding

Mr Graeme Trickett     Senior Member

Date of Orders:  30 April 2012

Date of Reasons for Decision:         30 April 2012 

AUSTRALIAN CAPITAL TERRITORY            )
CIVIL & ADMINISTRATIVE TRIBUNAL       )           AT11/93

BETWEEN:  BORROWDALE HOUSE PTY LTD

Applicant

AND:ENVIRONMENT AND SUSTAINABLE DEVELOPMENT DIRECTORATE

Respondent

TRIBUNAL:            Dr Don McMichael     Presiding Member

Mr Graeme Trickett     Senior Member

DATE:                      30 April 2012

ORDER

The decision under review is varied by substituting the following sentence in place of the third sentence in the second paragraph:

Therefore, the CUC has been determined in accordance with the formula
           CUC = (V₁ – V₂) x 50% as follows:

After Value (V1)        :  $8,340,000
  Before Value (V2)     :  $4,902,000
  Added Value              :  $3,438,000
  50% of Added Value  :  $1,719,000

CUC PAYABLE    :                     $1,719,000

……………………………….
  Ms L. Crebbin for   
  Dr D. McMichael, Presiding Member

REASONS FOR DECISION

1.

Borrowdale House Pty Ltd (“the applicant”) has sought review of a decision of the ACT Planning and Land Authority (now within the Environment and Sustainable Development Directorate) (“the respondent”) to determine a Change of Use Charge (“CUC”) under sections 276 and 277 of the Planning and Development Act 2007 (“the Planning Act”) and notified to the applicant on 26 September 2011. Although the Planning Act was amended in July 2011 to change the method of charging for lease variations, a transitional provision (section 471) means that the amendments do not apply because the application to vary the lease was made on 28 May 2010 (as part of a broader development application) and as at 1 July 2011 the respondent had still not completed working out the CUC. Consequently the Act as it stood at 30 June 2011 continues to apply. [1] 

[1]

2.

The lease variation decision giving rise to the CUC was made on 15 December 2010 in relation to Development Application (“DA”) 201017864 which sought to consolidate Blocks 54 and 84, Section 8, Phillip and to vary the Crown lease to increase the total permissible Gross Floor Area (“GFA”) to 35,091 m² and to permit the uses of residential use, restaurant, commercial accommodation use limited to serviced apartments, hotel and motel, and community use excluding childcare. The permissible GFA in the draft Crown lease was amended on 29 August 2011 at applicant’s request to 29,000m².

3.Block 54 is the block on which Borrowdale House currently stands.  Block 84 is an L-shaped parcel of land wrapping around Block 54 to the south and west with its western arm adjacent to Furzer Street.  The lease for Block 84 was granted only in 2009 and its purpose clause was “to use the premises only for the purposes permitted by the Crown lease for Block 54, Section 8, Phillip”.

4.

The uses permitted by the existing Crown lease for Block 54 (Exhibit 28) were:

offices;
public agency;
business agency;
shop
but the combined gross floor area used for public agency, business agency and shop shall not exceed a total of 600 square metres

while the maximum permissible GFA was 2,779 m².

5.The decision to approve the lease variation was accompanied by a draft lease which contained the following uses in its purpose clause:

Commercial accommodation use LIMITED to hotel, motel and serviced apartments;
Community use EXCLUDING childcare
Non retail commercial use LIMITED to business agency, office and public agency;
Restaurant;
Residential use;
Shop

The draft lease also limited the GFA of all buildings erected on the land to 29,000m².

6.Borrowdale House was developed in about 1970 as a three-storey office building, with Woden Square to its south-east and vehicular access from Furzer Street to the west.  A 344m² portion of the ground floor is occupied by the Woden Post Office which has a ten-year lease commencing on
1 November 2006.  The remaining 1,572m² of the office space in the building is currently vacant, having previously been occupied by the Department of Health and Ageing, while a 277m² industrial-style area at the rear of the Post Office was previously utilized as a mail sorting centre and subsequently for storage purposes by the Department of Health and Ageing, but is also currently vacant.

7.The interiors of the building show some evidence of water damage to carpet, said to have arisen as a result of vandalism, and there is some minor wall cracking, but otherwise it is in relatively fair condition.  Apart from the Post Office, the floors are carpeted but un-partitioned. The washrooms and toilets appear to be in near original condition and typical of their date of construction.

8.The approved DA included a proposal for demolition of the existing building and its replacement with a high-rise development comprising three towers of residential apartments in a U shape above a three-level podium of part parking, part residential; a ground floor with commercial spaces and service functions; two levels of basement car parking; and associated landscape and off-site works.  A total of 208 residential units and 444m² of commercial space was proposed.

The Hearing

9.The matter was heard on 8, 9, and 21 February and again on 30 March 2012.  The Tribunal had before it the documents on which the respondent had based its revised decision of 26 September 2011 (“the T Documents”) and the documents on which it had based its original decision of 28 June 2011 (“the ST Documents”) together with Statements of Facts and Contentions of the parties and documents tendered in evidence.  The Tribunal visited the site in the presence of the parties and their representatives on 8 February.  The applicant was represented by Mr R Arthur of Counsel, while the respondent was represented by Dr D Jarvis of Counsel. 

10.

Evidence for the applicant was given by Mr Chris Young-Wright, a qualified architect who was Project Manager for the proposed development;

Mr R Azzopardi, a qualified quantity surveyor with Rider Levett Bucknall ACT Pty Ltd; Mr Douglas Barton, a Director of Borrowdale House Pty Ltd; and Mr Gregory Cummins, a Director of Knight Frank Valuations Canberra who is a Registered Valuer with extensive experience in commercial property valuation in Canberra.

11.Evidence for the respondent was given by Mr Haydn Rudat, a Certified Practising Valuer with the Australian Valuation Office (“AVO”) whose experience is mainly in valuation of residential and rural properties in the ACT and since joining the AVO in valuing commercial properties and assessing CUC proposals; by Ms Ada Park, Senior Development Assessment Officer with the Development Services Branch of the respondent; and by Ms Sue Messer, manager of the DA Leasing team in the Lease Administration section of the respondent.

Relevant Law

12.

Section 276 of the Planning Act (as it was prior to 1 July 2011) provides that any CUC worked out by the respondent must be paid before a variation to a nominal rental lease will be made, while section 277 sets out the method for working out the CUC. The relevant parts of that section read as follows:

       277 Working Out Change of Use Charge

(1)   The planning and land authority works out the change of use charge  for a variation of a lease as follows:

CUC = (V₁ – V₂) x 75%

(2)   In this section:

CUC means the change of use charge payable for the variation of the

lease.

V₁ –

(a)…

(b) for a variation that is a consolidation or subdivision, means the
     capital sum that the new lease or leases might be expected to
     realize if –

(i) the consolidation or subdivision  were to take place as
     proposed; and

(ii)  the new lease or leases were genuinely offered for sale
      immediately after the variation on the reasonable terms
      and conditions that a genuine seller would require; and

the rent payable throughout the term of the new lease or leases were a nominal rent….

V₂ –

(a)….

(b) for a variation other that is a consolidation or subdivision, means
     the capital sum that the lease or leases to be surrendered under the  
     consolidation or subdivision  might be expected to realize if –

(i) no consolidation or subdivision were to take place during
                the remainder of the term or the surrendered lease or
                leases; and

(ii) the lease or leases were genuinely offered for sale
                 immediately before the consolidation or subdivision on the
                 reasonable terms that a genuine seller would require; and

(iii) the rent payable throughout the term of the lease or leases
                  to be surrendered, were a nominal lease….

(3) If the capital value assessed as V₁ is equal to or less than the capital value assessed as V₂ no change of use charge is payable.

13.

Section 278(1) provides that the planning and land authority must remit all or part of a CUC for a variation under section 276 as prescribed by regulation, while section 278(2) provides that a regulation may prescribe the amount to be remitted. The Planning and Development Regulation 2008, section 177(1), provides that the Minister may make a policy direction in relation to a CUC “in a circumstance, or for a period, stated in the policy direction”. In this case, such a policy direction was made in Disallowable Instrument 2009-137 (Planning and Development (Reduction of Change of Use Charge) Policy Direction 2009 (No 1) - DI 2009-137) which reduced the CUC to 50 % of any value added to the new lease by the variation, for DAs for qualifying lease variations lodged between 1 June 2009 and 1 June 2010.  The DA seeking the leased variation was lodged on 28 May 2010 and was presumably deemed to be a qualifying application by the respondent. Consequently, the CUC is to be calculated at 50% of any Added Value.

The Issues

14.

The V₁ is commonly known as the After Value while V₂ is known as the Before Value and we will adopt that terminology.  It was agreed by the parties that the date for valuation purposes was 15 December 2010 (“the relevant date”). In this case the respondent determined the Before Value as $3,975,000, the After Value as $8,895,000, the Added Value as $4,920,000 and the CUC as $2,460,000. By contrast, in its application for review, the applicant contended that the correct Before Value was not less than $6,070,000, the After Value not more than $7,730,000 and that the determined CUC was too high.  More precise figures were given at the hearing. The applicant also contended that the cost of certain off-site works should be deducted from the After Value because they were a requirement of the Territory.

15.

Mr Arthur submitted that the Tribunal should not itself attempt to assume the role of a valuer but should rely on the expert opinions provided by the qualified valuers who had given evidence, citing as authority Hyam’s The Law Affecting Valuation of Land in Australia, where pp 554-557 deal with these matters under the headings Judge not third valuer and Disparity between valuers.  While the case law in relation to these matters is extensive, it seems clear to this Tribunal that while the Tribunal should not attempt to arrive at some sort of average value as between two competing valuations, it is nevertheless entitled to “make appropriate adjustments in the application of proper principles to the evidence…” (Simmonds J in Kelly v Western Australian Planning Commission [2006] WASC 208 at [350] cited by Hyam at 559).

16.

Further, Hyam (at 573) notes that the role of a Review Tribunal is somewhat different from that of  a Court, and cites the remarks of Justice Stuart Morris , President of the Victorian Civil and Administrative Tribunal in ISPT Pty Ltd v City of Melbourne [2007] VCAT 652, where he said that in vesting power in the tribunal to review a valuation

the Parliament should be taken to understand the structure and nature of the tribunal.  In particular, it should be taken to understand that the tribunal is an expert tribunal…where the practice is to assign cases to lists where the members hearing cases have knowledge or experience likely to arise in the list.  Further, the Parliament should be taken to have contemplated that the review of a matter would involve a complete re-assessment, and the exercise of a judgement, in respect of the matter and not just the acceptance of one side or the other…

17.

We do not accept the submission that the Tribunal should only interfere with a valuation if it is somehow unsound.  In considering a review of a valuation it is the Tribunal’s role to seek to arrive at a valuation which it believes is the correct valuation noting that the role of an administrative tribunal is to make the “correct or preferable” decision in the circumstances.

18.

In this case, neither of the Tribunal members claims to be an expert in valuation but each of us has had some experience in hearing and deciding valuation matters and, as in the past, we will adopt the approach advocated by Morris J.

19.

Despite the disparities in their Before and After Values, the differences between the approaches of the two expert valuers were not great.  Both adopted the capitalisation of net income as their approach to the Before Value, and each relied on comparative sales as the basis for arriving at their After Values. The differences in the amounts of their Before Values arise mainly from differences in the capitalisation rates adopted and whether the property would need to be renovated before it could be re-leased, while the differences in the After Values arose mainly from issues relating to the deduction of certain costs.  We will now turn to a consideration of each of these Values.

The Before Value

20.

Borrowdale House is, at present, substantially vacant.  Mr Barton’s evidence was that the owners have not sought to re-lease the vacant space so as to facilitate demolition and redevelopment of the site.  There is therefore no direct evidence of the rental that might be obtained, save for that presently  being paid by the Post Office which in any case is considered by both valuers to be above present market rate and requires an adjustment to the Before Value.  There is however, a very comparable building on the other side of Woden Square, known as the Woden Churches Centre (“the WCC building”) which both valuers considered sufficiently similar to Borrowdale House to provide a basis for estimating the potential income that could be obtained from it, and hence a basis for capitalising that income to provide the Before Value.

Applicant’s case

21.

The applicant’s valuer, Mr Cummins, defined Market Value as the estimated amount for which an asset should exchange on the date of the valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing, wherein the parties had each acted knowingly, prudently and without compulsion. The capitalisation method involves the application of a market yield (the capitalisation rate) to the net annual rental derived from the property when fully let, after allowing for the deduction of appropriate operating expenditure such a statutory charges, insurance, repairs and maintenance, management etc. It measures the rent potential and market return on the asset to calculate the present capital value of the property.  In oral evidence Mr Cummins explained that the initial or passing yield represented the return to the purchaser on the sale price of the building from the passing (or actual) rent after allowing for outgoings, whereas the analysed or market yield represented the return to the investor when the building was fully refurbished and occupied, that is, after allowing for the costs of refurbishment and taking into account the rentals that could then be attained. 

22.

In his valuation prepared on 5 August 2011 when working with CB Richard Ellis (V) Pty Ltd and submitted to the respondent before the CUC was determined (T29-54) Mr Cummins relied on a number of properties in the City, Griffith. Kingston and Barton for his sales evidence.  From these he derived net yields varying from 8.09% to 10.79% and adopted a capitalisation rate of 9.0% to calculate his Before Value.  Using an estimated net income of $603,130 for Borrowdale House this gave a capitalised value of $6,700,123 and after deducting $625,391 for refurbishment and letting up costs he derived a rounded Before Value of $6,070,000 (T48).  However at that time he did not consider the WCC building.

23.In his later valuation (undated, but prepared in December 2011 when working for Knight Frank Valuations Canberra) Mr Cummins brought the WCC building into his calculations, replacing the Barton property used in his earlier analysis. He noted that the WCC building had been sold in July 2010 for $4,250,000 and observed that this showed an initial or passing yield of 9.9% and an analysed or market yield of 13.3%.  (Mr Rudat, however, listed it as being sold for this price on 15 June 2011 and we believe the latter date to be correct.) 

24.

At hearing Mr Cummins adjusted his estimate of the passing and market yields for the WCC building to 9.9% and 12.75% respectively after receiving an updated set of rentals for the WCC building from the property manager (Exhibit 10) as at 1 July 2011, which showed passing rentals totalling $585,753 (Exhibit 9). He noted that the upper floor of 595.3 m² was presently vacant and being refurbished.  This rental figure was later adjusted by correcting the rental for one lease and allowing $178,000 rental for the vacant floor when refurbished, giving a market rental of $740,097 (Exhibit 9A). The budgeted outgoings for the WCC building for the period 1 July 2011 – 30 June 2012 were also supplied to Mr Cummins by the property manager and totalled $164,663 (Exhibit 11) which he rounded to $165,000.

25.

Mr Cummins calculated the passing and market yields using these adjusted figures in the following way:

Income   $
Passing Rental  585,753
Market Rental  740,097
Less Outgoings  165,000
Net Passing Annual Income  420,753
Net Market Annual Income  575,097


Expenses
Sale Price  4,250,000

Add (for Market)
 Leasing up costs                   23,217

Advertising            0
Incentive 6 months                89,295
Loss of income 6 months       89,295
Capital works program           60,000

Total:  261,807   261,807

Total Cost to purchaser for Market  4,511,807

Passing Yield ($420,753 from $4,250,000)  9.9%
Market Yield ($575,097 from $4,511,807)   12.75%

26.

Mr Cummins then addressed the Before Value of Borrowdale House, which he regarded as superior to the WCC building for a number of reasons.  While he accepted that the WCC building was immediately adjacent to the entrance to the Woden Plaza and that the first floor tenancies adjacent to that entrance would attract higher rents, he drew attention to what he considered to be the buildings deficiencies including its ground floor being adjacent to the Woden bus interchange; its third floor having highlight east facing windows with the view partially blocked by external pre-cast concrete slabs; a low ceiling height on the second floor; and the fact that the third floor was currently vacant  and being refurbished. He also noted that it had poor vehicular access, and had less GFA, and considered that the greater number of tenancies devalued it because there was a greater risk of vacancies. 

27.

Although he had used a capitalisation rate of 9% for Borrowdale House in his initial valuation report, at hearing Mr Cummins revised this figure to 10.25%.  He estimated the rentals that might be attained from Borrowdale House on the following basis:

·Australia Post’s continued occupancy of 344m² at a market rent of $450/m² (rather than the $552/m² they are presently paying under a lease running to 30 October 2015);

·$450/m² for the balance of the ground floor office space (418m²);

·$150/m² for the ground floor storage area (227m²); and

·$340/m² for the two upper floors (each of 577m²).

These estimates assumed that the presently unleased office space on the ground, first and second floors was refurbished at a cost of $300/m² to enable the rentals proposed to be obtained.

28.

On this basis, a passing rent of $769,310 would be obtained, and after allowing $105,000 for outgoings, he arrived at an Estimated Net Annual Income of $664,310 which when capitalised at 10.25% gave him a capitalised value of $6,480,000. To this figure he added what he called the “Capitalised Profit Rent” or “Capitalised Super Rent”, being the capitalised value of the excess over-market rent that Australia Post would pay for the remainder of its lease term. At hearing he admitted that he had calculated it incorrectly and adjusted the figure to $35,042 per annum for 5.2 years at 7.5% interest, a total of $146,449.  He then subtracted the costs of agents and legal fees ($73,741), Incentives ($614,510) and Refurbishment works ($471,600), giving a total of $1,013,402 reduction in the capitalised value, bringing it to $5,467,258. This figure he rounded to $5,470,000 as his estimated of the Before Value.

29.Mr Cummins amended calculations of the Before Value (as in Exhibit `12) may be summarised as follows:

Annual Income                  Area and rate   Market rental        

Australia Post             344m² at $450/m²  $154,800

Ground (Office)         418m² at $450/m²  $188,100
        Ground (Storage)       227m² at $150/m²   $34,050
        Level 1  577m² at $340/m²  $196,180
        Level 2  577m² a5t $340/m²  $196,180


Total Rental  2,143m²  $769,310
Less Outgoings

(say)  ($105,000)

Estimated Net Annual Income  $664,310

Capitalised at 10.25%  $6,480,660 [2]

[2]     The actual capitalised value of $664,310 at 10.25% is $6,481,073 but the error makes little difference.

Add Capitalised Profit (Super) Rent 
Australia Post - $35,042 per annum for 5.2 years at 7.5%             $146,449
           $6,627,109
Less Letting Up Costs

Agents and legal fees (12%)  $73,741
        Incentive 12 months letting up period            $614,510
        Refurbishment works (1,572m² at $300/m²)   $471,600

Total Letting Up Costs  ($1,159,851)

Total; Capitalised Value  $5,467,258

For practical purposes adopt  $5,470,000       

30.

Mr Cummins said that this showed an analysed market yield of 12.14% (annual income of $664,310 from a capital investment of $5,470,000) which, he contended, demonstrated that it was a slightly better building for an investor than the WCC building at 12.75%.

31.

When questioned Mr Cummins explained that he considered the building’s vacant office spaces could not be let in their present state and would need refurbishing to attract tenants. He understood that the WCC building owners had tried to market their vacant top floor space at $285/m² without success. In his opinion, Borrowdale House, if refurbished, could achieve $340/m² rental. He noted that the nearby Corinna Chambers had been let in February 2011 for $380/m² (Exhibit 13) but was unable to say whether it had been refurbished. 

32.

Mr Cummins explained that he had capitalised the Australia Post profit (super) rent at 7.5% (rather than a higher rate) because Australia Post had indicated its desire to continue at that site, so it was virtually risk free income, guaranteed over five years.

33.

When questioned about the amount he had allowed for refurbishment ($300/m²), Mr Cummins said that he considered that would be an ample allowance.  When shown the figures for minor refit of a three storey Sydney office building in Rawlinsons Australian Construction Handbook Edition 29 2011 at p 709 ($395/m² - $465/m²) and the indicative elemental costs that supported these estimates (Exhibit 14), Mr Cummins said that he used Rawlinsons as a guide only as there were no figures specifically for the ACT and he did not think all of the things identified in the indicative elements would be required, for example, $53- $63 for preliminaries (builders site establishment, administration, plant, scaffolding, protection, insurance, fees, etc) while the allowance for new carpet seemed excessive.

34.

In relation to the allowance he had made for outgoings ($105,000), Dr Jarvis observed that this worked out at $49/m² whereas the actual outgoing for the WCC buildings ($165,000) worked out at over $80/m² and asked

Mr Cummins why a similar rate should not have been used.  Mr Cummins commented that he had not had access to the actual outgoings for the WCC building at the time he made the Before Valuation and while he felt the WCC figures might be a bit high in some elements, for example, repairs and maintenance, he agreed that the figure for Borrowdale House could be increased.

35.In relation to the capitalisation rate he had used (10.25%), Mr Cummins said that the market would always pay a little more for a fully (or nearly) tenanted property. The sale of the WCC building in July 2011showed a passing yield of 9.9% and as he considered Borrowdale House to be a slightly superior property, he had added a quarter of a percent to that figure on the assumption that it would be fully tenanted after refurbishment. 

36.In relation to the “incentive 12 month letting up period” allowance of $614,510, he observed that this was based on the loss of 12 months’ rent for the presently unlet spaces, arising from six months spent in refurbishing and a further six months rent-free incentive to a new tenant for taking a five year lease.

Respondent’s case

37.

The respondent’s valuer, Mr Rudat, had prepared his valuation for Borrowdale House (Exhibit 15) after having considered Mr Cummins’ earlier valuations of 19 May 2010 and 5 August 2010 (while working for CB Richard Ellis) and that dated 5 December 2010 (while working for Knight Frank) (Exhibit 8).  He initially accepted some of the elements of

Mr Cummins last valuation, including the proposed ground floor rentals and the cost of outgoings, but differed from him in the rental for the top upper floors, the present value of the profit (super) rent, the letting up costs and the capitalisation rate adopted.  Moreover, he made no allowance for refurbishment. 

38.

Mr Rudat had analysed a number of sales in Belconnen, Bruce and Barton, as well as that of the WCC Building in arriving at his capitalisation rate (Exhibit 24). These showed equivalent yields of 9.01% and 10.38% for properties in Barton and Bruce which he considered to be superior to Borrowdale House, while the sales of two properties in Oatley Court, Phillip, in his opinion showed that the market was willing to pay a higher price for a fully tenanted building. However, the sale of the WCC building showed, in his analysis, an equivalent yield of 12.51% (Exhibit 16). Hence he had adopted 12.5% for Borrowdale House.

39.

Mr Rudat’s Before Value calculations may be summarised as follows:

Annual Income   Area and rate   Market rental      

Australia Post             344m² at $450/m²  $154,800

Ground (Office)         418m² at $450/m²  $188,100

Ground (Storage)       227m² at $150/m²   $34,050

Level 1  577m² at $280/m²  $161,560

Level 2  577m² at $280/m²  $161,560

Total Rental  2,143m²  $700,070

Less Outgoings (say)  

($105,000)

Estimated Net Annual Income  $595,070

Capitalised at 12.5%  $4,760,519

Add Capitalised Profit (Super) Rent 

Australia Post - $35,042 per annum for 5.2 years at 12.5%           $127,853

$4,888,372
Less Letting Up Costs

Agents and legal fees (12%)  $65,432

Letting up period for ground floor retail (6 months)           $94,050
Letting up period for office (12 months)  $323,120
Incentive Retail (5 months rent free)   $78,375

Incentive Office (5 months rent free)  $134,633

Total Letting Up Costs                          ($695,611)

Total Capitalised Value  $4,192,761

For practical purposes adopt  $4,190,000

40.

Mr Rudat said that he had capitalised the Australia Post profit (super) rent at 12.5% rather than the 7.5% used by Mr Cummins, to give a present value of $127,853. He said that he had used a higher capitalisation rate because Australia Post might vacate the premises to seek a lesser rental, hence the risk was higher.

41.

In relation to the rentals for the upper two floors, Mr Rudat said that he had adopted $280/m² on the assumption that they could be let at that price without refurbishment. He based his assessment on a number of rentals in Phillip (Exhibit 16, p 15) ranging from $300/m² to $360/m² but did not elaborate on how he had arrived at the $280 figure other than to compare it with the WCC building which he regarded as a superior building, noting that it was almost fully tenanted. He agreed, however, that the fact that Borrowdale House was presently largely empty was likely to be because the owners had not sought tenants.  In his opinion, having a large number of tenants (such as in the WCC building) did not pose a greater risk, because if one tenant did vacate, you would still be receiving rent from the remaining tenants. Only a Government Department as a single tenant was advantageous.

42.

He agreed that in some aspects Borrowdale House was better than the WCC buildings (such as not being partitioned, having floor to ceiling glass rather than small windows, with a better outlook) but Mr Rudat still believed that the WCC building was a slightly superior building.  He conceded that Borrowdale House might be equal to it, if refurbished.

43.

He had prepared a revised estimate of the Before Value using Mr Cummins’ original figures and rates, but including refurbishment using the lowest Rawlinsons rate for a minor refurbishment of a three storey Sydney office building ($395/m²) which had the effect of reducing Mr Cummins’ Before Value to $5,171,469 (Exhibit 17, page 1). However, in his opinion, you would need to spend more than that to achieve the rental rate proposed by

Mr Cummins.  If a medium refurbishment was required, using the lowest Rawlinsons rate ($790/m²) the Before Value fell to $4,696,978 (Exhibit 17, page 2).

44.

At hearing, Mr Rudat said that in the light of the new information about the actual outgoings of the WCC building, he would adjust the outgoings figure of $105,000 (or 49/m²) upwards and in a revised estimate of the Before Value he had used $80/m² which, when applied to Mr Cummins’ figures and rates reduced the Before Value to $4,996,264 (Exhibit 18).  If, in turn, this was combined with medium refurbishment at $780/m², the Before Value fell to $4,225,984 (Exhibit 19) and if, in addition, his preferred capitalisation rate of 12.5% was applied, the Before Value became $3,144,575 (Exhibit 20).

45.

When asked which of these estimates he thought the Tribunal should adopt, he said that he stood by his earlier Before Value of $4,190,000, observing that the Exhibits 17 to 20 only indicate the significant effects on Before Values of changing variables. However, he did concede that the outgoings item in his estimate should be increased.

46.

Mr Arthur cross-examined Mr Rudat at length about the capitalisation rate (12.5%) that he had adopted.  He first sought Mr Rudat’s opinion on the valuation of the WCC building that he had prepared (Exhibit 16). In that analysis, Mr Rudat had arrived at a valuation of $4,506,138, which showed a market yield of 12.51%. His estimates differed from those of Mr Cummins, mainly because he had adopted rental of $280/m² for the vacant space (compared with Mr Cummins’ $300/m²) and made no provision for a capital works program (compared with Mr Cummins $60,000).  Nevertheless, his market yield was only 0.24% different from that calculated by Mr Cummins (12.75%), while his passing yield was 9.34% compared with Mr Cummins 9.90% (Exhibit 9A). 

47.

When asked whether his estimated market yield of 12.51% for the WCC building, a property which he regarded as superior to Borrowdale House, would lead him to increase the capitalisation rate used for the latter, he said yes, he would increase it to 12.75% and that would lower the value of the property.

48.

Mr Rudat agreed that the main difference between their Before Values was that Mr Cummins had adopted the initial or passing yield as his capitalisation rate, whereas he had adopted the equivalent or market yield, but contended that most investors would look at the equivalent yield which would tell them what the market would pay for it in its current state. Mr Arthur suggested that by adopting the equivalent yield rate, he had included the letting up costs twice, once in his valuation at page 9 of Exhibit 15 as a deduction from the capitalised value, but also in the 12.5% capitalisation rate he had used, which included an allowance for these costs. Consequently, Mr Arthur suggested he had seriously undervalued the Before Value of the property.  Mr Rudat disagreed and contended that his method and approach were correct.

Submissions on before Value

49.

Mr Arthur, for the applicant, submitted that the Tribunal should place more weight on Mr Cummins’ opinions and valuation because of his 25 years experience in the commercial property industry, including sales, management and valuation.  By comparison, Mr Rudat was relatively inexperienced and his work in commercial property had mainly involved critiquing the work of other valuers.

50.

Mr Arthur submitted that Mr Rudat’s use of the equivalent yield as the capitalisation rate was wrong.  He contended that the equivalent yield provides market evidence of the return being sought by the market after spending what is needed to get the property fully let, and its use as the capitalisation rate builds in the assumption that what is required to bring the property to the fully let state has already been expended.  Instead, Mr Rudat had deducted the estimated cost of letting up again, resulting in a false value.  By contrast, Mr Cummins, by working from initial or passing yields, had not introduced the cost of letting up at the start of the process.  He submitted that the rate selected by Mr Cummins captured the return being sought by the market and only after capitalising the passing income stream had he brought the cost of achieving a fully let property to account. This, he submitted, accurately reflected what a person contemplating the purchase of Borrowdale House would do to work out what sum to pay.

51.

He further submitted that Mr Cummins’ estimate that a market rent of $340/m² for the upper floors of Borrowdale House could be achieved after refurbishment was supported by the evidence that $380/m² had recently been obtained for Corinna Chambers whereas the owners of the WCC building had been unable to obtain a tenant at $280/m² for the un-refurbished floor. 

Mr Rudat had adopted the latter figure for Borrowdale House without refurbishment and had allowed for a lengthy letting up period, but Mr Cummins’ experience in property management indicated that his approach should be preferred.

52.

As to the outgoings, while both had initially adopted a total of $105,000 (or about $49/m²) for the 1968m² WCC Building Net Lettable Area (“NLA”) and applied a similar figure to the 2143m² Borrowdale House (NLA), later information about the actual outgoings for the WCC building ($164,663 or $84/m²) caused both valuers to revise their opinions.  Mr Cummins had suggested that for Borrowdale House, they would be less than those of the WCC building actuals but did not nominate a figure.  Mr Rugat had indicated (in Exhibit 18) that $80/m² should be allowed, but Mr Arthur suggested 70/m² would be more appropriate.

53.

Dr Jarvis, for the respondent, submitted that the Tribunal should prefer

Mr Rudat’s evidence, because Mr Cummins had been somewhat evasive in his evidence and in relation to a number of key variables, had adopted figures favourable to his client, including refurbishment costs which departed significantly from those recommended by Rawlinsons.

54.

He noted the difference in the outgoings initially used for the WCC Building by Mr Cummins and those which emerged during the hearing, and submitted that as the two buildings were very similar in style, age and location, the Tribunal should adopt $80/m² for Borrowdale House.

55.

As to the capitalisation rate, Dr Jarvis contended that there was no error in

Mr Rudat’s approach, in that he had analysed the market data and considered other factors such as location and condition of the buildings and then applied his professional judgment to arrive at his capitalisation rate which, after revaluing the WCC building using up-to-date figures, he would now increase to 12.75%. 

56.

Dr Jarvis drew attention to evidence from one of the present owners of Borrowdale House, that it had sold in 2005 for $4,100,000, and submitted that Mr Cummins’ valuation at the relevant date (December 2010) of $5,520,000 suggested an increase in value of about 34% since 2005, which was inconsistent with market movements in the period (which included the global financial crisis during which there had been a 10-15% drop in commercial property values). By contrast, Mr Rudat’s valuation of $4,190,000 was consistent with the market having recovered to its pre-GFC level.

57.

Dr Jarvis also noted that Mr Rudat had agreed that the approach taken by

Mr Cummins to rental of the vacant spaces in Borrowdale House (refurbishment prior to rental at a higher price) was valid, but that he had questioned the level of the refurbishment costs ($300/m²) adopted by Mr Cummins.  Rawlinsons’ Sydney costs were substantially higher ($395-465/m² for a minor refurbishment and $790-910/m² for a medium refurbishment) of a 3 storey office building with standard finishes and facilities and air-conditioning. In the absence of any evidence of actual refurbishment costs (such as from a quantity surveyor) and given the poor condition of the vacant space in Borrowdale House, Dr Jarvis submitted that a reasonable estimate would be about $400/m², which was close to the lower range of the Rawlinsons’ Sydney minor refurbishment figure.

 Consideration of the Before Value issues

58.

The Tribunal has carefully considered the evidence and the submissions of the parties in relation to the Before Value.  It has reached the following conclusions.

59.We do not consider that there is any great difference between the WCC Building and Borrowdale House in terms of relative merit.  While Borrowdale House is slightly larger, its location is slightly less advantageous than that of the WCC building but we consider that, when renovated, it will be at least as attractive to potential commercial tenants as the WCC Building, given the on-going presence of the Woden Post Office, its proximity to Woden Plaza and the passing pedestrian traffic. We accept Mr Cummins’ view that a purchaser would put a slightly higher value on a fully or near-fully tenanted building and that based on the  passing yield for the WCC Building  (9.9%),  this would support a slightly higher capitalisation rate (10.25%) for Borrowdale House. 

60.

We accept Mr Arthur’s contention that Mr Rudat has erred in adopting a 12.5% capitalisation rate and then subtracting the costs of refurbishment.  We consider that a 12.5% capitalisation rate can only apply to the building after it has been refurbished. We will therefore adopt Mr Cummins’ capitalisation rate of 10.25% but will make some adjustment to his costs of refurbishment (see below).

61.

We consider that the outgoings rate for a newly renovated Borrowdale House should be somewhat less than that currently experienced at the WCC building and will adopt the figure recommended by Mr Arthur, $70/m², or $150,010 for the 2,143m² NLA.

62.We see no reason to apply Mr Rudat’s capitalisation rate for the building (12.5%) to the Australia Post Profit (Super) Rent, preferring Mr Cummins’ rate of 7.5% and, therefore, will adopt Mr Cummins’ revised figure of $146,449 for its capitalised value.

63.

We accept Mr Cummins’ view that in order to find tenants for the vacant spaces in Borrowdale House it will need to be renovated and that, if this is done, a rental of $340/m² should be attainable after appropriate marketing.  However, we disagree with his estimate of the costs of renovation to the standard required by the current market.  Mr Cummins did not give any satisfactory explanation of why he had chosen a figure of $300/m² for renovation, nor the extent of renovation that would be required, and while we recognise that Rawlinsons Australian Construction Handbook does not provide rates specific to Canberra, we accept that the Sydney rates are the most relevant.  We consider that a rate of $380/m², the lower end of the range for minor refurbishment of a three story Sydney office building, should be adopted.

64.

We will adopt Mr Cummins’ rates for agents and legal fees and incentives, applying them to the adjusted estimated net annual income.

65.These decisions may be summarised as follows:

Annual Income   Area and rate   Market rental      

Australia Post                     344m² at $450/m²  $154,800
Ground (Office)                 418m² at $450/m²  $188,100
Ground (Storage)                227m² at $150/m²   $34,050
Level 1  577m² at $340/m²  $196,180
Level 2  577m² a5t $340/m²  $196,180

Total Rental  2,143m²  $769,310

Less Outgoings (2,143m² at $70/m²)  ($150,010)

Estimated Net Annual Income   $619,300

Capitalised at 10.25%  $6,041,951

Add Capitalised Profit (Super) Rent
 

Australia Post - $35,042 per annum for 5.2 years at 7.5%             $146,449

$6,188,440

Less Letting Up Costs

Agents and legal fees (12% of $619,300)     $74,316
Incentive 12 months letting up period           $614,510
Refurbishment works (1,572m² at $380/m²)   $597,360

Total Letting Up Costs  ($1,286,186)

Total; Capitalised Value  $4,902,254

For practical purposes adopt  $4,902,000       

66.

We therefore adopt $4,902,000 as the Before Value of Borrowdale House on the relevant date.

The After Value

67.

The basis for the After Value calculation is that a building of 29,000m² would be erected on the site after demolition of the existing building, and that there would be associated off-site works involving three areas immediately adjacent to the new building - in Woden Square to the south, in a pedestrian area to the north, and in Furzer Street to the west. The building would include 6,554m² of podium parking, leaving 22,446m² of GFA for commercial and residential purposes.

68.

While the two valuers adopted a similar approach to calculating the After Value, in that they worked out what a purchaser would pay for the commercial and residential rights based on an analysis of comparable sales and then deducted costs associated with the development, they differed in a number of ways, particularly as to whether or not the costs of the off-site works should be allowed as deductible from the After Value.

The Applicant’s Case

69.

In arriving at an After Value, Mr Cummins assumed that the redevelopment of the non-parking component of a redeveloped Borrowdale House (22,446m² of GFA) would yield 208 units.  He considered the sales of a number of sites in various parts of Canberra that had taken place close to the relevant date which had rights to multi-dwelling development ranging in GFA from 11,725m² at Wright to 27,096m² at Bruce. Of these, he selected sites at Anketell Street, Greenway (19,840m²) and Benjamin Way, Belconnen (21,400m²) as the most comparable because of their closeness to Town Centres and their allowed mix of commercial and residential development.

70.

The Belconnen property sold for $7,000,000 in June 2011 which equated to $327/m² GFA.  He estimated that a building of the permissible size would yield 240 units and the price paid equated to $29,266 per unit.  The Greenway property had sold for $5,000,000 in March 2009, which equated to $252/m² GFA.  He estimated that it would yield 227 units, which equated to $22,026 per unit.

71.

Nevertheless, Mr Cummins adopted significantly higher figures for Borrowdale House - $400/m² and $43,165 per unit - without offering any adequate explanation other than that the Belconnen sale provided good market evidence.  For his After Value, he chose to rely on his adopted value of $400/m² for the GFA of 22,446m², giving an overall value of $8,978,400 before any deductions.  He made no distinction between the residential uses and the commercial uses in the development.

72.

He then deducted the estimated cost of demolition of the existing building ($513,000) and the full costs of off-site works ($731,000), making a total deduction of $1,244,000, which reduced the After Value to $7,734,400.  He rounded this figure to $7,730,000 for practical purposes.

73.Mr Cummins’ After Value calculations may be summarised  as follows:

Gross Floor Area              Price/m²  Market Value
   22,446m²     $400             $8,978,400

Less

Demolition                 ($513,000)
Off-Site Works          ($731,000)

Total:           $1,244,000   $1,244,000

After Value:      $7,734,400
For practical purpose adopt               $7,730.000.

74.

The estimated cost of demolition of Borrowdale House had been prepared by Mr Azzopardi.  He had worked from a set of 1970 drawings of the building which gave him a general idea of its construction and the areas involved.  To these he had applied overall rates per square metre and had not done a detailed analysis element by element.  Factors affecting the rate were market conditions at the relevant time; quotes on demolition that they had from about the same time; the difficulty of access to the site for demolition purposes; and the problem of maintaining pedestrian access to surrounding areas.

75.

Mr Azzopardi had included amounts for preliminaries, escalation over

12 months, consultant and management fees and 10.1% contingency in his estimate, totalling $183,000, but Mr Arthur observed that Mr Cummins had not taken these into account. Nevertheless, Mr Azzopardi said that they would have to be allowed for by any purchaser.

76.

The rates for demolition adopted by Mr Azzopardi were $150/m² for what he described as the “462m² single storey building” and $159/m² for the “2,800m² three-storey building”, making a total of $513,300 for demolition of 3,262m² of existing building.  In a more detailed analysis, he broke the three storey component into three elements: Basement (311m² at $200/m²), Ground Floor (830m² at $180/m²) and Upper 2 floors (1,659m² at $140/m²).  [The areas used by Mr Azzopardi differ from those used in calculating the Before Value because they include substantial areas of verandah around the upper two floors which do not constitute NLA. Also, no one else had mentioned a basement.] 

77.

When cross examined, Mr Azzopardi explained that demolition of the verandahs would not result in any significant reduction in the cost per square metre.  When his attention was drawn to the rates/m² demolition of Sydney 2 storey and 6 storey office buildings in Rawlinsons ($97.30 and $106.50 respectively) and the fact that his overall rate was some 50% higher, Mr Azzopardi agreed that the Sydney figures could be used as a reference but observed that the Rawlinsons figures were qualified by assuming there were no site access problems, but that was not the case here.

78.

The cost of the off-site works were also estimated by Mr Azzopardi (Exhibit 3). They amounted to $731,000 and in this case were based on a detailed analysis, but with margins and adjustments the cost rose to $1,144,000. These marginal and adjustment costs had also not been taken into account by Mr Cummins. We will consider these offsite work costs and whether or not they should be deducted later in these Reasons.

The Respondent’s Case

79.

Mr Rudat chose not to work on a value per square metre of GFA, but on a value per unit basis. He too assumed that the development would yield 208 units and valued them at $45,000 each, giving a total for the residential component of the development of $9,360,000.  However, he also allowed for 444m² of commercial space which he valued at $425/m² giving a total for the commercial component of $188,700 and an overall total of $9,548,700.  He noted that this equated to $425/m² of actual GFA excluding podium car-parking.

80.

He then deducted the costs of demolition, calculated as 2,143m² at $125/m², giving a total demolition cost of $267,875, yielding a final After Value of $9,280,825, which he rounded to $9,280,000.  Mr Rudat based his demolition costs on evidence of actual demolition costs of two buildings in Woden (75/m² GFA) and one in Canberra City $145/m² GFA) and had had  regard to the Rawlinsons figures for demolition of office buildings in  Sydney ($97.3 - $106.5/m²).

81.

Mr Rudat made no deduction for the cost of off-site works, contending that these primarily benefitted the proposed development and that at best only a  negligible amount should be allowable.  He commented that the amount deducted by Mr Cummins ($731,000) was not supported by any documents but at that stage, he was unaware of the valuation of these works by Mr Azzopardi.

82.Mr Rudat’s After Value calculations may be summarised as follows:

Number of Units  Price/Unit                  Market Value

208           $45,000   $9,360,000

Add

444m² commercial space             $425/m²   $188,700

$9,548,700
Less
Demolition             (2,143m² at $125/m²)  $267,875

After Value:   $9,280,825

For practical purpose adopt   $9,280.000.

83.

Mr Rudat explained that his estimate of the value of the units was based on sales evidence of six properties in Bruce, Griffith, Belconnen, Harrison, Wright and Franklin, which showed that the prices paid per attainable unit were $51,289, $103,500, $29,167, $34,409; $58,400 and $28,636 respectively. He also agreed that the sale of the Benjamin Way Belconnen site (also used by Mr Cummins) was the most comparable sale and that showed $29,122 per unit in Mr Cummins’ analysis. However, he did not explain clearly why he had settled on a value of $45,000 per unit for the proposed Borrowdale House redevelopment.

84.

Mr Rudat agreed that his figure of $425m² GFA for the proposed building (excluding podium parking) was not greatly different from Mr Cummins figure of $400/m². When asked why he had selected $425/m² GFA when the sale of the most comparable building (Block 1, Section 199 Belconnen) showed $327/m² GFA, Mr Rudat said that he regarded the Belconnen site as inferior and that there was a greater risk in purchasing at Belconnen, because in his opinion the 240 units shown in the concept plan might not be attained.  Even if they were attainable, his figure of $425/m² was not based solely on comparison with the Belconnen site

85.

In support of his estimate of demolition costs, Mr Rudat referred to a valuation prepared by Colliers International for the respondent’s leasing section for a property in Akuna Street, City, to which Mr Paul Powderly, an experienced valuer, had attached formal quotes from two demolition firms for the demolition of a city building in Canberra (Exhibit 22).  The lower of these quotes equated to $145/m² GFA for a 14,000m² building and has been accepted by the developer.

86.

When questioned about the off-site works, Mr Rudat suggested that an allowance of 5-10% of the value of the works might be deductible, reiterating that the bulk of these works benefitted the development.  Because the issue of the deduction of the cost of the offsite works became a crucial issue, we propose to deal with other elements of the After Value first and consider the off-site works later.

Submissions on After Value (excluding off-site works)

87.Mr Arthur submitted that Mr Cummins’ approach to valuing the rights acquired under the varied lease, that is, on a value/m² GFA basis rather than a value per potential unit basis, should be adopted because Mr Rudat had accepted Mr Cummins’ criticism that the disparity in unit sizes made the latter approach inappropriate.  He noted that, on a value/m² basis, Mr Rudat had arrived at $425/m² while Mr Cummins had adopted $400/m².  Mr Cummins had considered that even $400/m² might be a little high in comparison to his analysed figure of $327/m² for the Belconnen property, because he did not consider the advantage enjoyed by Borrowdale House (being in the middle of a Town Centre) conferred any great advantage. Moreover, Mr Cummins regarded Mr Rudat’s figure of $425/m² as being too close to the Kingston end of the market, when there was a clear difference between Kingston and Woden.

88.

Mr Arthur rejected the proposition that the 240 units proposed for the Belconnen property might not be attainable and that this would push up the rate/m² GFA.  He submitted that the only matters to be considered were those that a potential purchaser would have in mind and that such a purchaser would always seek to maximise the income from the investment and would assume that the 240 units were attainable. Mr Arthur submitted that the Tribunal should accept Mr Cummins’ view as being based on greater experience.

89.

In regard to the demolition costs, Mr Arthur submitted that Mr Cummins had relied on the advice of Mr Azzopardi, who had 30 years of experience in estimating such costs and who had taken into account the significant access difficulties that would be encountered in this case.  He contended that Rider Levett Bucknall were specialists in quantity surveying with extensive local knowledge, whereas Rawlinsons data are based on cities other than Canberra and are to be considered as no more than a general guide, taking no account of particular circumstances. 

90.He also rejected any suggestion that the rate allowable for demolition of commercial buildings ($100/m²) in the Building (General) (Cost of Building Work) Determination 2009 (No 1) - Notifiable Instrument NI 2009-257  

(Exhibit 25) was relevant.  The figures set out in that document were simply a scale of costs determined by the Construction Occupations Registrar as those to be applied for demolition when putting in a building application, for the purpose of assessing the charge to be imposed and had no relevance in this case.

91.

Mr Arthur also drew attention to the two quotes for demolition of a city building attached to the Collier’s letter (Exhibit 22), one being for $3,195,490 and the other for $2,029,045, both exclusive of GST.  He observed that these demonstrated that there could be significant differences between experienced demolition contractors in their estimates of likely costs, especially as in that case it comprised virtually a city block with street access of three sides.  In his submission, the Tribunal should accept the estimate of Mr Azzopardi for the costs of demolition.

92.

Dr Jarvis submitted that in relation to his adoption or $425/m²GFA as the After Value to be applied to Borrowdale House, Mr Rudat’s sales analysis of the Belconnen property was to be preferred to that of Mr Cummins in arriving at a rate of $327/m² GFA, because Mr Rudat has taken into account that the 240 units proposed for that development were considered to be unattainable. Because fewer units would be achieved, there would be less GFA and hence the rate/m²GFA would increase towards the $425/m² proposed by Mr Rudat.  Even if the 240 units were able to be attained, his estimate of $425/m² was not based solely on the Belconnen sale.

93.As to the demolition costs, Dr Jarvis acknowledged that the applicants had relied on the opinion of an expert witness in Mr Azzopardi, but said he could not reconcile the difference between the actual demolition costs incurred for an inner-city Canberra  six story building ($145/m²GFA) and the Rawlinsons figure of $106.50/m²GFA for a six storey office building in Sydney with the $157/m²GFA arrived at by Mr Azzopardi who had not explained in detail why the Canberra price should be so much higher.  He also observed that in the initial DA submitted by the applicant, the demolition costs were priced at $70/m²GFA, although he acknowledged that the evidence was that this figure had been supplied by the architects.

Consideration of After Value issues (excluding off site works)

94.

The Tribunal agrees with the view that valuation on a rate/unit basis is less reliable than is a rate/m² GFA basis, because of the uncertainties that apply to the number and size of units that a development such as that at Benjamin Way, Belconnen might yield.  What is certain is that from Mr Cummins’ uncontested evidence, the specimen lease for the Belconnen development set an upper limit of 21,400m² GFA including some commercial space (but just how much was not revealed).

95.On this basis, the sale at Benjamin Way, Belconnen, the most comparable property, showed $372/m² GFA overall.  The next most comparable (at Anketell Street, Greenway) showed $252/m² GFA overall. The other properties analysed by both valuers were, for one reason or another, not strictly comparable to Borrowdale House, being either much smaller, or located distant from a town centre, or being in up-market locations such as Kingston, or having special requirements such as the provision of 2,500m² of guest house/hotel/motel/serviced apartments (Bruce).

96.

While we agree with both valuers that the Borrowdale House site is superior to either the Belconnen or Greenway sites, we do not see it as being so superior to the extent of warranting a valuation rate of $425/m² GFA (almost $50/m² above Belconnen).  We prefer Mr Cummins’ rate of $400/m² GFA, as being sufficiently above the rate of the comparable properties to adequately reflect the superiority of the Borrowdale House site.  We do not see any necessity to strike a different rate for the commercial space in Borrowdale House when redeveloped as it is limited to 600m² by the draft Crown lease and no evidence was presented about this aspect (other than Mr Rudat’s adoption of $425/m² for 444m² of it).

97.

The two valuers’ estimated costs for demolition of the existing building are significantly different - $267,875 or $125/m² for Mr Rudat and $513,000 or $157/m² for Mr Cummins.  However, Mr Rudat’s estimate of the total costs is based on the lettable area of the building (2,143m²) and not the gross floor area, calculated from old plans by Mr Azzopardi at 3,262m².  If Mr Rudat had used that area, his overall cost of demolition would increase to $407,750.  Nevertheless, the demolition rate per unit GFA of the two valuers differs by $32/m². Furthermore, Mr Azzopardi’s estimate excludes preliminaries, margins, escalation and contingency adjustments which would increase the overall cost to $696,000 or $231/m²

98.We consider the disparity between Mr Azzopardi’s rate and those cited by Rawlinsons for comparable Sydney office buildings ($97.30 - $106.50/m²GFA) as substantial, even though we accept that Rawlinsons provides no specific rates for Canberra and is regarded as a guide only.  We are disinclined to place much weight on the quotes in Exhibit 22 for the demolition of the Canberra City building, because we had little information on the particularities of that task and note that the two quotes showed $145/m² GFA for the cheaper of the two (or $149.50/m² GFA if the cost of demolition hoardings and permits is included) and $228/m² GFA for the dearer one (assuming that 14,000m² is the correct GFA as cited by Dr Jarvis). 

99.

We consider that the demolition rates for former Blocks 46 and 48, Section 8, Phillip, cited by Mr Rudat in his Valuation Report as being $74/m² GFA could be relevant because they relate to buildings that were located in the Woden Town Centre to the north of Borrowdale House, but we were not provided with any details of the circumstances under which these demolitions occurred, nor documented evidence of the demolition costs and areas of GFA involved.

100.

Ultimately we must decide, from the limited evidence available, on what seems to be an appropriate rate and we will adopt Mr Cummins’ figure of $157/m² GFA, in recognition of the undoubted difficulties surrounding the demolition of this building, particularly, the limited access and the need to ensure safe pedestrian passage around the area, and in recognition of the fact that Mr Cummins’ rate was adopted following specific advice from an experienced quantity surveyor. We discount the additional costs for preliminaries, escalation, consultation and management fees and contingency identified by Mr Azzopardi as being absorbed in the overall costs of construction of the new development as (we presume) Mr Cummins has done.

101.At this point, our conclusions are that the After Value may be calculated on the following basis before considering the off-site works

GFA (excluding parking) 22,446m² at $400/m²  $8,978,400

Less Demolition Cost - 3,262m² at $157/m²   $512,134

Total  $8,466,266

The Off-site Works

102.We now turn to a consideration of the off-site works and the evidence about them.  

103.

In his witness statement (Exhibit 5) Mr Young-Wright stated that

Drawing No DA-A04 (at ST454) illustrated the extent of off-site works as “required by ACTPLA and its agencies” including

·the realignment of pedestrian footpaths, ramps and stairs to address the existing vehicle and pedestrian conflict;

·the rectification of existing poor paving and lighting to major pedestrian links from both the Furzer Street office precinct and the library/health centre; and

·landscaping to lessen the existing impact of wind tunnelling between Lovett House, the Library and Health Centre and the proposed development.

104.Mr Young-Wright further contended that the pedestrian movement along Furzer Street is required to cross over the street to access the stair adjacent to the Library building (see Exhibit 30); that the works will improve the amenity of the area and also the proposed development; and that the functionality of the proposed development is not affected by these works. He also contended that none of the works is necessary for the development, although they do benefit the development to an extent but that he would be happy to excise them from the application.

105.

In a second statement tendered in evidence (Exhibit 29) and in oral evidence he asserted that he had discussed the proposed development with Mr Rod Baxter, at that time an officer of the respondent, who had been supportive of the proposal and had suggested some of the off-site works to resolve problems in the area.  Mr Young-Wright said that Mr Baxter had indicated that the cost of these off site works would be deductible from the CUC because they were being undertaken on behalf of the Territory. 

106.

Ms Ada Park, Senior Development Assessment Officer with the respondent gave evidence about the pre-application meetings in December 2009 and May 2010 in which she had participated and had prepared the Minutes (which were attached to her witness statement, Exhibit 27). She said that during discussions about the off-site works, it was not suggested at any time that the cost of the proposed off-site works would be offset against any CUC payable or that the off-site works were required by the Territory.  She said that had any such discussion occurred, it would have been recorded in the Minutes.  If it had, only the Lease Administration Section would have had authority to consider it.

107.

Ms Sue Messer, Manager of the DA Leasing Team, Lease Administration Section, gave evidence that it was a long standing practice of the respondent and DA Leasing that the cost of off-site works could only be offset against any CUC if they were required by the Territory and brought benefit to the Territory.  She said that the off-site works in this case related to the proposed development on the site, contrasting this with examples of off-site works that would benefit the Territory such as a requirement by the NCA for a developer to undertake a major upgrade to the verge surrounding the development but extending further than the development site; traffic lights required for access to a future suburb; and changes to streets around a school from two-way to one-way, traffic calming devices and bus lay-bys which did not benefit the development. However, she agreed that where the works partially benefitted the Territory an appropriate percentage of the cost of the works could be offset.

108.

When asked about Mr Baxter’s role, she said he was in charge of Woden Master Planning at the time and would have been involved in early discussions about the proposal, but had no role in development approval.  She endorsed Ms Park’s evidence that no one would have authority to speak on the charging of off-site works other than the Lease Administration Section and even then it would have to be cleared “up the line”.

109.Mr Arthur tendered a set of plans, documents, letters and emails, which covered the discussions about the off-site works from March 2006 onwards (Exhibit 33) including an email message of 17 March 2006 from Rod Baxter to Mr Young-Wright outlining matters that needed to be considered following discussions they had had that morning.  However, following a careful reading of these documents and plans, we find that they do not indicate that there was any written commitment to the cost of the off-site works being deductible from the CUC, nor do they show that the works were the result of specific Territory requirements (other than those which arose from the need to satisfy the requirements of the Town Centres Development Code of the Territory Plan 2008). At the most they indicate that at an early stage (January 2008) matters which would need to be addressed in relation to proposed development of the site were drawn to Mr Young-Wright’s attention by the Land Development Agency when considering the direct sale of Block 84.

110.

We accept the evidence of Ms Park and Ms Messer that, whatever Mr Young-Wright might have thought following his early discussions with Mr Baxter, there was no commitment made on behalf of the respondent that the full cost of the off-site works would be allowed as deductions from the CUC, but we also accept Ms Messer’s concession that, if some part of the works will be beneficial to the Territory allowance could be made for them.  We have therefore, in the following paragraphs, undertaken a careful analysis of the proposed off-site works to establish whether any public benefits arise from them or whether they are only of benefit to the development.

111.Mr Arthur submitted that the off-site works should be treated in the same manner as those considered in Wyola Pty Ltd and ACT Planning & Land Authority

[2005] ACTAAT 32 and for the same reasons. In Wyola, the AAT found that certain conditions of approval requiring the developer to undertake a noise study, to up-grade boundary fencing and to construct a public footpath at an estimated cost of $48,832, were particular requirements of that approval and should not be regarded as an ordinary incident of the kind of development approved and able to be absorbed into any contingency allowance.  It therefore decided that the cost of the works should be allowed as a deduction from the After Value.

112. Dr Jarvis submitted that no deduction or at best a 5-10% deduction should be allowed from the After Value (V1) because:

·unlike Wyola, the works are not the subject of an approval condition by ACTPLA, or any other formal requirement. They were volunteered by the proponent in the approval submission; and

·they are works that benefit the proposed development, or ameliorate its adverse wind effects, and are otherwise of minor public benefit.

113. Dr Jarvis further contended that:

·the areas where the off-site works are to occur include the forecourt/drop-off and service access area of the development. The drop-off area leads to two of the main entrances and therefore it is an area that visitors who arrive by vehicle must pass;

·the tree planting is necessary to mitigate the adverse wind effects of the development on public areas.  It is a requirement of the wind assessment report dated May 21 2010, ‘Pedestrian Wind Environment Study’ prepared by Windtech Consultants Pty Ltd, which was mandated by Rule R96 of the Town Centre Development Code; and

·there will be a loss of existing parking spaces, and that the contribution to general pedestrian movement will be minimal as the main north-south pedestrian route to the plaza is via Block 77 Section 8.

114. Mr Cummins’ view was that the off-site works in this case, valued at $731,000, should be deducted from the After Value.  The amount of $731,000 is the same as the Net Cost amount set out in Exhibit 3, which is an estimate for “vergeworks” prepared by Mr Azzopardi on behalf of Rider Levett Bucknall dated 19 May 2010. This was based on the following cost estimates:  

  $

Demolition/preparation  97,000

Soft Landscaping  21,500

Hard Landscaping – Pavements           329,000

Hard Landscaping – Walls, etc               69,000

Street Signs/furniture  90,000

Path/Street Lighting  66,000

In-ground services   58,500

Total$731,000

115. The area where off-site works are to be constructed is shown in Exhibit 32. It extends the full length of the southern and western sides of the site and just over half of the length to the north of the site. The Tribunal visited the site at the commencement of the hearing and took notice of the adjoining public spaces and neighbouring properties. The area to the west of the site has a lower ground level than do Woden Square and the pedestrian walkway south of the site.

116. To the west is the southern end of Furzer Street which appeared to have narrow footpaths paved in exposed aggregate, down both its eastern and western sides; approximately 9 metered vehicle parking spaces of which 3 appeared to be allocated for people with a disability, and an area for motor bike parking. The narrow eastern path appeared to extend around from the northern side of the site and had at least two vehicle cross-overs adjacent to the existing building. The western path appeared to extend from the north along Furzer Street beside the adjoining property, the Woden Library building, to a narrow stair up to the concourse south of Furzer Street. An access ramp from Furzer Street to the concourse was located next to the stair in the south-west corner.  There were trees and shrubs both to the north and to the south of this area. The drawing at ST528 shows the area to the west with the existing eastern and southern structures shown as dashed lines.

117. The Tribunal has considered carefully the plans, contentions and submissions. The Tribunal must consider what the purchaser would have taken into account as likely expenses in formulating the price to be offered. Unexpected or unknown expenses should not affect that price.  In addition, an adjustment should not be made for works which were properly part of the subsequent development (Waalt Homes Pty Ltd v Road Construction Authority (1987) 64 LGRA 346 at 352-353 - see Hyam at p192-193).

118. There are several things that a potential purchaser would know or reasonably be expected to know about this site. They would have known that there was somewhat restricted vehicle access to the site and that there would be a need for direct access by users of a proposed multi-storey building to car parking facilities and that these facilities would be a requirement of planning approval - whether for use as an office building, a residential building or a mixed use building. They would also have known that there would be a requirement for larger vehicles to access waste management facilities, including manoeuvring of the vehicle in reverse to depart the site. They would also have known that there would be a requirement for larger vehicles to access a loading dock if the development was to include commercial use, including manoeuvring of the vehicle to reverse.

119. A purchaser would have known that there would be a need to provide for an entry lobby, fire escape exits and substation requirements at ground level and that the planning authority would most likely require street front activity at ground level.

120. A purchaser would have known that there were existing public metered car parking spaces in Furzer Street including parking for people with a disability and that these might need to be retained or replaced and, if not, there would most probably be a requirement to compensate the Territory for their loss. 

121.A purchaser would have known that there were a small number of trees on the site and that these would have to be removed if the site were to be fully built on. They would have been aware of the mandatory Rule R96 in the Town Centre Development Code. With the potential removal of trees combined with the requirements of R96, the purchaser would have known that if their proposed development was to be of a height greater than 28m there would most likely be a requirement to provide tree planting and, if the whole of the site were to be built over, the trees would be required to be located off-site. 

122. The Tribunal will now consider the several elements of these off-site costs, as detailed by Mr Azzopardi in Exhibit 3, beginning with the trees. The General Arrangement Plan (ST528) shows that two large trees and four smaller trees will need to be removed on the northern side of the site and that one large tree will be removed from the southern side of the site as well as two smaller trees adjacent to the existing pedestrian ramp. The Site and Driveway Plan at Exhibit 30 shows four new trees proposed to the north of the site, two new trees to the west of the site, and four new trees and two existing trees to the south of the site.

123. The Windtech Report stated that the existing wind conditions to the south of the development currently exceeded the recommended criterion (ST298). It stated that with the inclusion of the development, the conditions are somewhat improved other than at the point to the west of the centre of the new development along the southern side.  The Report recommended that a minimum of eight 5m high evergreen trees were necessary as ameliorative treatment to the off-site surrounds of the site to the north and south. It determined that two trees to the north were necessary; no trees to the west were necessary as the development improved the situation; but that the south-west corner of the site was made worse by the development so that three new trees were necessary. It also stated that the existing two trees to the south west should be retained.

124. The Tribunal considers that a purchaser would most likely have been aware that off-site tree planting would be required for such a development and that the planting of the eight trees associated with measures to ameliorate wind conditions should be considered as off-site works that should not be deducted from the CUC. The additional planting of new trees to the north and west are not as a result of the recommendations of the report and would appear to have been proposed in the design to enhance the vehicle entry and drop-off points for the development and should also be seen as off-site works that primarily benefit the development and should not be deducted from the CUC.

125. We will next consider the new pedestrian ramp structure that replaces the existing ramp.  The Tribunal has determined from the drawings that the location of the new ramp is further to the south than the existing ramp by just over 2m. The drawings show that the western side of the proposed development includes vehicle entries, access to services facilities and a fire escape. It would appear that the pedestrian ramp has been relocated so that two parking spaces for people with a disability can be provided near the foot of the ramp and also to allow for the manoeuvring of a large vehicle within Furzer Street (see ST530).

126. We consider that a purchaser would have been aware of the existing public facilities adjacent to the site that include the health centre, library and government shopfront and that there were parking spaces for people with a disability in Furzer Street that it can be reasonably assumed provide amenity to these facilities. The Tribunal has determined that this relocation is a direct result of the proposed development and that the construction of the ramp is to replace the existing pedestrian ramp that will need to be demolished to enable the provision of the two parking spaces for people with a disability. As such, the new ramp should be seen as off-site works that should not be deducted from the CUC. The Notice of Decision at ST64 states that the parking could be located away from the site; however, it then notes that two spaces are provided adjacent to the site. The Tribunal considers that if all the parking for people with a disability was located away from the site, they would then need to use the covered pedestrian walkway to reach the ramp which would be disadvantageous to the proposed development.  We conclude that the applicant considers that the retention of these two spaces to be advantageous to their development, and that no deduction should be allowed for them.

127.We will next consider the paving of areas adjacent to the proposed development.  We believe a purchaser would have accepted that the off-site works associated with pavement to areas needing to be rectified after the planting of the required trees and paving of areas directly adjacent to the edge of the new building would be a cost to be borne by the purchaser.

128. By contrast, the Tribunal considers that a greater percentage of the off-site paving works in the area to the north of the site are works that enhance Territory land to a greater extent than the development and as such 70% of the cost of these should be seen as off-site works that should be deducted from the CUC.

129. Similarly, the Tribunal considers that a greater percentage of the off-site paving works in the area to the south of the new pedestrian ramp extending up to align with the government shopfront in the library building, are works that enhance Territory land to a greater extent than the development and as such 80% of their cost should be deducted from the CUC.

130. However, the Tribunal considers that the off-site paving works in the area to the south of the site where the entry lobbies, fire escape stairs and retail shopfronts are located are works that enhance Territory land to a lesser extent than the development and as such 30% of their cost should be deducted from the CUC.

131.A purchaser would consider that the off-site paving works to the west of the site would not include rectification similar to those set out above, but would consider that this area was potentially an important entry point to the development. A purchaser would therefore probably determine that the existing asphalt should be replaced with another material more appropriate to their development, as this area is intended to include a “forecourt/drop-off” site and that while able to be used by the general public, it is the only area that has the potential to provide such a facility to the new development.

132. We will now consider the other off-site works to the west of the site. A purchaser would consider that the existing eastern footpath of Furzer Street in this area would need to be replaced. The proposed design of the “drop-off” area has resulted in the ramp being relocated and, as a consequence, the stair presently on the western side of Furzer Street has been relocated to the eastern side (T110). The western foot path would lead to a blank wall and require pedestrians to walk across the vehicle area. An extension of this footpath to reach the foot of the ramp would result in the loss of a parking space for the disabled. The width of the proposed new eastern footpath is marginally greater than the combined widths of the two existing footpaths. The proposed path traverses two wide vehicle crossovers, an area in front of a fire escape exit, and a length of paving approximately 10m long associated with the “drop-off” area and parking for people with a disability. The new stairway up from this area is immediately next to the development site and further away from the government shopfront, library and medical centre area. This location is advantageous to the development as it directs the public closer to the retail shopfronts and provides a partially covered path of travel from the drop-off to the entries of the proposed development, but it is disadvantageous to users of the government facilities to the west.  

133.The Tribunal considers that none of these off-site works in the area to the west of the site are works that enhance Territory land as the extent of vehicle movement would most likely increase above what is there now and the conflict between existing pedestrian use, increased pedestrian usage due to the development and associated vehicles will be increased. The Tribunal considers that the paving enhances the development and therefore none of the costs of it should be deducted from the CUC.

134. We will now consider the street signs and furniture. A purchaser would consider that street signs would need to be provided in a development of this site and that some sundry street furniture may also need to be provided, associated with the entries to the building. Mr Azzopardi’s costing of bicycle racks at page 8 refers to six racks located to the west of the site, but the Notice of Decision at ST64 states that visitor bicycle parking should be provided near the entry or south of the site, and refers to the racks being shown on DA-A05, which is Exhibit 30 and shows 24 spaces. The Tribunal considers that the traffic signs and bicycle racks will enhance the development and, therefore, none of the cost of these works should be deducted from the CUC.

135.However, the Tribunal considers that while the bollards and bins enhance Territory land, they do so to a much lesser extent than they do the development and, therefore, only 10% of the cost of these works should be deducted from the CUC.

136. We will now consider the lighting. A purchaser would consider that external lighting would need to be provided in any development of the site. The down-lights would appear to be in the soffit of the proposed canopy or awning of the building which light the pathway from the west around to the building entries. The in-ground tree up-lights are not supported in the DA approval, refer ST62.  The Tribunal considers that the proposed pole lighting enhances the development to a greater extent than it does Territory land and therefore 20% of the cost of these should be deducted from the CUC. However, we consider that the remainder of the external electrical and power works only enhance the development and, therefore, none of their costs should be deducted from the CUC.

137. Finally, we will consider the cost of relocating in-ground services. It would appear that the allowance in Mr Azzopardi’s estimate is for pits and covers other than one item which refers to ‘water mains diversion’. No evidence was provided that explained these allowances and, as we have already determined that the paving to the west of the site is all to the advantage of the development, the Tribunal determines that none of the cost of these off-site works should be deducted from the CUC.

138.Our conclusions as the allowable costs may be summarised as follows

Assessment:

Area to north 300m²   

Area to south-west 200m²
Area to south 500m²

Allowance for Demolition/preparation: Demolish concrete bitumen
pavement 1,612m² at $25 and preparation at $5


North area 70% of 300m² at $30 equals   $  6,300
South-west area 80% of 200m² at $30 equals   $  4,800
South area 30% of 500m² at $30 equals   $  4,500

Allowance for pedestrian pavements 1,130m² at $185

North area 70% of 300m² at $185 equals   $38,850
South-west area 80% of 200m² at $185 equals   $29,600
South area 30% of 500m² at $185 equals   $27,750

Allowance for Street Signs and Furniture $83,000


10% of $83,000  $  8,300  
Allowance for Pole lighting of Paths and Street $23,000 and of BWIC.
  
20% of $24,000  $  4,800

Total  $124,900

Total to be deducted from the CUC for Off-site Works rounded:        $125,000

139. If this allowance is deducted from the provisional After Value of $8,466,266 set out in paragraph 101 above, the final After Value is $8,341,266, which for practical purposes we round to $8,340,000.

Conclusion

140. As set out in paragraphs 12 and 13 above, in this case the CUC is determined according to the formula CUC = V₁ – V₂ x 50%.    

After Value (V₁)  =           $8,340,000

Before Value (V₂)      =           $4,902,000

Added Value  =            $3,438,000

50% of Added Value             =            $1,719,000
           CUC Payable  =            $1,719,000

------------------------------------------
  Ms L. Crebbin for  

Dr D. McMichael, Presiding Member

Mr G. Trickett, Senior Member

PUBLICATION DETAILS

TO BE PUBLISHED

To be completed by Tribunal Staff

PART A  FILE NO:      AT 11/93

APPLICANT:                Borrowdale House Pty Ltd
RESPONDENT:            ACT Planning and Land Authority

COUNSEL APPEARING:       APPLICANT:          Mr R Arthur

RESPONDENT:      Dr D Jarvis

SOLICITORS:  APPLICANT:           Dickson Legal

RESPONDENT:ACT Government Solicitor

OTHER:  APPLICANT:          

RESPONDENT:      

TRIBUNAL MEMBER/S:        Dr D McMichael and Mr G Trickett

DATE/S OF HEARING:   PLACE: CANBERRA

DATE/S OF DECISION:  PLACE: CANBERRA

PART B

RECOMMENDATION:

FULL REPORT ( )        CASE NOTE ( )        UNREPORTED DECISION ( )

COMMENTS:

The history of this application is a little more complicated than would at first appear. An initial decision to approve the DA was made on 15 December 2010. However, that approval was formally corrected on 22 June 2011 and a CUC was determined and conveyed to the applicant on 28 June 2011. An application was then made on 16 August 2011 under section 197 of the Planning Act to amend the development approval, to reduce the permissible GFA from 35,091m² to 29,000m² and was approved by the respondent on 29 August 2011.  This resulted, on 26 September 2011, in the revised CUC which is the subject of this review.  It is considered that this amendment did not constitute a new application that would have brought it within the provisions of the July 2011 amendments. An appeal to the Tribunal against the CUC determination decision of 28 June 2011 was subsequently discontinued in favour of the present application.