CITY HILL PTY LTD & ACT PLANNING and LAND AUTHORITY (Administrative Review)
[2011] ACAT 87
•16 December 2011
ACT CIVIL & ADMINISTRATIVE TRIBUNAL
CITY HILL PTY LTD v ACT PLANNING AND LAND AUTHORITY (Administrative Review) [2011] ACAT 87
AT11/11
Catchwords: ADMINISTRATIVE REVIEW – Land and Planning - Change of Use Charge – ss 276 and 277 of Planning and Development Act 2007 - Crown Lease variation -adding “residential use” to the permissible uses – formula for working out CUC - valuation methods used to determine – direct comparable sales method – capitalisation of net income method - hypothetical feasibility studies method – costs of demolition and asbestos removal – whether site affected by contamination of underground water or soil – whether allowance should be made for cost of decontamination in calculating After Value.
Legislation: Planning and Development Act 2007 (ACT) ss 276, 277.
List of Regulations: Braddon Commercial Area Planning Study Final Report, April 2008
Code of Practice for the Safe Removal of Asbestos (ACT)
Territory Plan 2008
Territory Plan 2003
List of Cases: Caltex Oil (Australia) Pty Ltd v Chief Executive, Department of Lands (1995) 15 QLCR 206)
Closer Settlement Ltd v The Minister (1942) 17 LGR 62
English Exporters (London) Ltd v Eldonwall Ltd, and Same v Same [1971] E. No 2606
ISPT Pty Ltd v City of Melbourne [2007] VCAT 652
Karenlee Nominees Pty Ltd v Gollin & Co Ltd [1983] 1 VR 657Spencer v The Commonwealth of Australia [1907] 5 CLR 318
List of Texts:Alan Hyam, The Law Affecting Land Valuation in Australia, (4th ed, 2009)
Ian Freckelton and Hugh Selby, Expert Evidence: Law, Practice, Procedure and Advocacy (2nd ed, 2002)
Tribunal: Dr Don McMichael Presiding Member
Mr Graeme Trickett Member
Date of Orders: 16 December 2011
Date of Reasons for Decision: 16 December 2011AUSTRALIAN CAPITAL TERRITORY )
CIVIL & ADMINISTRATIVE TRIBUNAL ) AT11/11
BETWEEN: CITY HILL PTY LTD
Applicant
AND:
ACT PLANNING AND
LAND AUTHORITY
Respondent
TRIBUNAL: Dr Don McMichael Presiding Member
Mr Graeme Trickett Member
DATE: 16 December 2011
ORDER
1. The decision under review is varied by amending the After Value (V1)) to $ 4,730,000, the Before Value (V2) to $3,900,000, the Added Value to $830,000 and the 75% of Added Value to $622,300 and the CUC Payable to $622,300.
………………………………..
Dr D McMichaelFor and on behalf of the Tribunal
\
REASONS FOR DECISION
Background
1.City Hill Pty Ltd (“the applicant”) has sought review of a decision of the ACT Planning and Land Authority (“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 24 December 2010. Although the Planning Act was amended in July 2011 to vary the method of charging for lease variations, a transitional provision (section 486) means that the amendments do not apply to the present application and the Act as it stood in June 2011 continues to apply.
2.The decision giving rise to the CUC was made in relation to Development Application (“DA”) 200913948 which sought to vary the Crown Lease of Block 19, Section 29, Braddon (16 Lonsdale Street) to add “residential use” to the purpose clause. The existing uses were:
·industry (other than a noxious trade) and for any purpose ancillary thereto such as a residence or a shop;
·bulky good retailing;
·office;
·personal services;
·public agency;
·restaurant;
·shop PROVIDED ALWAYS THAT the combined maximum gross floor area used for supermarket or other shop selling food shall not exceed 200 square metres.
3.The decision to approve the lease variation was made on 20 August 2009, and was accompanied by a Draft Lease which contained the following uses in its purpose Clause:
·freight transport facility;
·industrial trades LIMITED to motor vehicle tyre fitting and ancillary motor vehicle repairs and servicing;
·light industry;
·non retail commercial use LIMITED to office and public agency;
·plant and equipment hire establishment;
·residential use PROVIDED THAT residential use shall not be permitted at ground floor level or at first floor level;
·restaurant;
·shop PROVIDED ALWAYS THAT the combined maximum gross floor area for supermarket or other shop selling food shall not exceed 200 square metres;
·transport depot;
·vehicles sales; and
·warehouse.
4.Although the purposes allowable under the proposed new lease are more diverse than those under the old lease, no party addressed any of the changes (save the addition of upper floor residential use) as a consideration in determining the CUC and the Tribunal will do likewise.
5.The property in question (“the subject property”) is at present developed as a tyre repair and mechanical workshop premises with a showroom of 95 m2, a workshop of 248 m2, store room and amenities of 212 m2, and a high-clearance metal-clad canopy to the front of the workshop and a concrete sealed parking area of about 208 m2. These measurements were accepted by both valuers. Sections of the building’s roof and internal wall linings contain asbestos cement sheeting. The building has recently been vacated but a lease over it remains in place and rent continues to be paid. The lease extends to September 2013 and provides for two yearly rental reviews, the most recent of which was on
1 September 2010 when the rent increased to $165,667 per annum.
The Hearing
6.The matter was heard on 17, 18, 19 and 20 October 2011. The Tribunal had
before it the documents on which the respondent had based its decision (“the T Documents”) together with Statements of Facts and Contentions of the parties and material tendered in evidence (“Exhibits”). Neither the Tribunal nor the parties considered it necessary to view the site. The applicant was represented by Mr Richard Arthur of Counsel, while the respondent was represented by
Mr Wayne Sharwood of Counsel.7.Evidence for the applicant was given by Mr S Flannery, a Senior Director of CB Richard Ellis (“CBRE”), who is a Certified Practising Valuer and a Fellow of the Australian Property Institute, with extensive experience in commercial property valuation in Canberra; Mr Ian Gregson, a Principal Environmental Consultant with GHD Pty Ltd, who is a Chartered Professional Engineer and Environmental Auditor (Contaminated Sites) with extensive experience in investigation and remediation of former service station sites; Mr Warwick Dunstone, the Director of Dezignteam Pty Ltd and a qualified Architectural Draftsman with many years’ experience in commercial design and documentation, who is also currently involved in six site redevelopments in Braddon; Mr Mark Chappé, a Director of Rider Levett Bucknall ACT Pty Ltd, who is a qualified and experienced Quantity Surveyor and a past President of the ACT Chapter of the Australian Institute of Quantity Surveyors; and Mr Anthony Adams, a Director and Senior Town Planner with CBRE, who is a Fellow of the Planning Institute of Australia with 30 years’ experience in urban and regional planning and property development, mainly in the ACT.
Mr Arthur also tendered the Final Report of the Braddon Commercial Area Planning Study.8.Evidence for the respondent was given by Mr Geoffrey McInerney, a Certified Practising Valuer with the Australian Valuation Office (“AVO”) who has many years experience in valuation of commercial, industrial, rural and specialised properties in NSW and the ACT; and Mr Todd Svanberg, also a Certified Practising Valuer with the AVO in Melbourne, who had extensive knowledge of the use of Development Feasibility computer software developed by Estate Master and held Estate Master Development Feasibility Certification.
A Witness Statement prepared by Mr Benjamin Green, Acting Technical Coordinator of the Development Assessment Leasing Team with the respondent was tendered in evidence but Mr Green was not called to testify.
Relevant Law
9.Section 276 of the Planning Act 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:
(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)for a variation other than a consolidation or subdivision, means the capital sum that the lease might be expected to realize if –
(i)the lease were varied as proposed; and
(ii) the lease were genuinely offered for sale immediately after the variation on the reasonable terms and conditions that a genuine seller would require; and
(iii)the rent payable throughout the term of the lease or, for a variation that involves surrender of a lease and issue of a new lease, the new lease, were a nominal rent….
V2 –
(a)for a variation other than a consolidation or subdivision, means the capital sum that the lease might be expected to realize if –
(i) the lease were not varied during the remainder of its term; and
(ii) the lease were genuinely offered for sale immediately before the variation on the reasonable terms that a genuine seller would require; and
(iii)the rent payable throughout the term of the lease, or lease 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.
10.The subject property lies within the CZ3 Services Zone of the Commercial Zones section of the Territory Plan 2008 (“the Plan”) and is subject to the Objectives, and other provisions applying to that Zone, as well as the Rules and Criteria set out in the City Centre Development Code (”the CCD Code”), in particular, Part A3 of that Code. Any future residential multi-unit development would also be required to comply with Part C(5) of the Residential Zones - Multi Unit Housing Development Code (“the MUHD Code”).
The Issues for Consideration
11.It is customary to refer to the V1 capital sum, as the After Value, and the V2 capital sum as the Before Value. They are to be calculated at the date on which the variation to the lease was approved, that is on 20 August 2009 (“the relevant date”). In this case, there was a significant difference between the expert valuers relied on by the applicant and the respondent as to the amount of the After Value, although their Before Values were not far apart.
12.The decision of the respondent was that the Before Value was $4,265,000 and the After Value $5,665,000, the added value therefore being $1,400,00 and the CUC payable being 75% of that figure, viz $1,050,000. The applicants contended that the Before Value should have been $4,050,000 whereas the After Value as calculated by them was $3,040,000, but adopted $4,050,000 as the After Value and submitted that no CUC was payable in accordance with section 277(3) of the Planning Act. During the course of the hearing, some variations to these figures were made by both parties as a result of evidence given and these will be dealt with below.
13.The Tribunal’s task is to determine, in the light of the evidence presented to it, the preferable Before and After Values and work out whether any CUC is payable and if so, how much. We will deal first with the Before Value.
The Before Value
14.While there is a range of methods available for valuing commercial property, in this case the respondent’s valuer, Mr McInerney of the AVO, used what is known as the Direct Comparable Sales method, while the applicant’s valuer, Mr Flannery of CBRE, used the Capitalisation of Net Income method. Both methods are considered to be acceptable approaches.
Mr McInerney’s Before Value
15.Mr McInerney referred to a number of sales of not dissimilar properties that had taken place at or about the relevant date, but in particular relied on two sales in Braddon for his Before Value. The first of these (Sale 1) was that of Block 14, Section 20, Braddon which is 27 Lonsdale Street, about one street block further from the CBD than the subject property. Its lease purposes are not dissimilar to those of the subject property as they were before it was varied. Its site area is 1,252 m2 and at the relevant date by virtue of the 2:1 site coverage limitation for non-residential development imposed by the Rule 46 of the CCD Code, the maximum gross floor area (“GFA”) that could be built on it was 2,504m2.
16.It was sold in August 2008 for $4,300,000 and according to Mr McInerney, the purchaser when interviewed said he had bought it for redevelopment purposes and had given no consideration to the net yield from the existing tenancy.
Mr McInerney’s evidence was that after allowing for a reduction of 5% for what is known as “adjoining owner influence” [1] and an increase of $150,000 for demolition costs and contingencies, the “deduced land value” was reduced to $4,235,000. He concluded that this sale therefore showed a value of $1,691/m2 GFA.[1] Mr McInerney said that the purchaser also owned Blocks 13 and 15 of Section 20 and was seeking changes to the purpose clauses of all three blocks, implying that a higher than market price may have been paid for Block 14; see Hyam at pp 135-136.
17.Mr McInerney contended that 27 Lonsdale Street had an inferior purpose clause and an inferior location compared to the subject property, but he described it as “the best comparable sale”. However, in commenting on Mr Flannery’s capitalization approach for 27 Lonsdale Street, he seemed to accept
Mr Flannery’s view that it was a superior property because of the superior rental return. He agreed with Mr Flannery that the sale represented a “Before Value” situation which, in his view, readily supported the value of $1,700/m2 GFA for the subject property that he had adopted.18.Mr McInerney’s second sale (Sale 2) on which he relied for his Before Value was that of Block 5, Section 28, Braddon (28 Mort Street) which sold on
1 July 2010 for $5,000,000. It has a site area of 1,517m2 and because of the 2:1 limit on plot ratio for non-residential development in this zone, had a GFA limit of 3,034m2 at the relevant date. Its lease purpose clause was identical to that of Sale 1 and Mr McInerney described it as having an inferior purpose clause and being in an inferior location compared to the subject property.19.He contended that the sale showed a sale price of $1,681/m2 GFA. However, the undiscounted price of $5 million for 3,034m2 GFA works out at $1,648/m2. While the market in July 2010 was undoubtedly firmer than in August 2009,
Mr McInerney apparently made no allowance for this.20.Mr McInerney contended that this sale should be regarded as a Before Value situation and in his opinion, readily supported his value of $1,700/m2 GFA for the subject property. Mr Flannery did not use this sale in his valuation.
21.The other sales referred to by Mr McInerney included three which, he said, did not involve proposed residential development at the time of sale. They were of Block 1, Section 12, Bonner (Sale 3) which showed a price of $1,445/m2 GFA for supermarket and other commercial uses; Block 1, Section 435, Turner
(Sale 5) which showed $1,362/m2 GFA for office uses; and Block 14, Section 25, Griffith (Sale 6) which showed $1,348/m2 GFA primarily for office use. All of these rates are considerably below those attained for the Braddon sites, but Mr McInerney considered them to have either inferior purpose clauses, or to be in inferior locations, compared to the subject property and he did not rely on them in arriving at his Before Value.22.Under cross examination, Mr McInerney denied that the existing lease on
Block 14, Section 20, Braddon (Sale 1) would be an impediment to its redevelopment including for residential purposes. He said that the purchaser’s representative had said that they were aware that the lease might prevent redevelopment for some time, but they hoped to get around that because in similar situations, the leases had been broken. Also, they were aware that they would have to pay any CUC that was determined if the lease was varied and Mr McInerney said that in fact it had turned out to be in excess of $1million for the three adjacent properties. He said he had not attempted to quantify the costs of paying the CUC, demolishing the existing building and building a new building, nor had he asked the purchaser’s representative about these.23.In relation to Block 5, Section 28 (Sale 2) Mr McInerney said that he had treated it as a Before Value situation. In fact, he said, the lease had subsequently been bought out, the building had been demolished, and subsequently the lease had been varied and the determined CUC paid. His colleague, Mr Dennis Dominguez, had advised him that he had spoken to the purchaser who had said that it had been bought for redevelopment. He acknowledged that Mr Anthony Adams’ evidence was that certain elements of this redevelopment were contrary to the provisions of the Plan, but observed that nevertheless the DA had been approved.
Mr Flannery’s Before Value
24.Mr Flannery preferred to use the Capitalisation of Net Income method to establish the Before Value. This method takes the net income from an existing lease as the starting point, and capitalizes that sum in order to establish what a purchaser would pay for that income stream. Mr Flannery described the method as follows:
The approach involves the application of a market yield, known as the capitalisation rate, to the net annual rental from the property when fully let, after allowing for the deduction of appropriate operating expenditure such as statutory charges, insurance, repairs and maintenance, management etc. The assessment makes no allowance for depreciation or interest on capital. The yield is the return sought by the investment market, shown by sales of similar properties, for the type of property in question.
He added that in preparing their assessment, they had had regard to the following:
·Age and specification of the buildings;
·Current income and expenditure levels;
·Unexpired lease terms; and
·Rental levels and yields applicable in today’s market
25.Mr Flannery relied on the rentals being attained from six properties in Lonsdale Street, Braddon and one in Northbourne Avenue, Braddon, to establish appropriate rental rates for premises with similar characteristics to those of the subject property. He summarized these as follows:
·Showroom and office accommodation - range from $300 to $500/m2 per annum;
·Workshop premises - range from $150 to $300/m2 per annum;
·On-grade car parking - range from $1,500 to $2,800/bay per annum.
He noted that 27 Lonsdale Street, Braddon, being a purpose-built tyre outlet is currently leased at an annual rental of $212/m2 net, but observed that this property is situated in an inferior commercial location and occupies the whole of the land, compared with the subject property.
26.In preparing his Before Value for the subject property, he adopted the following rates:
·Showroom $500/m2 per annum
·Workshop $275/m2 per annum
·Storage/amenities $220/m2 per annum
·Canopy $165/m2 per annum
·Carparking $2,750/bay per annum
and based on the agreed areas of the subject property set out in paragraph 5 above, he calculated the potential income as equating to $235,160 per annum which, after allowing $70,000 for outgoings, yielded $165,160 per annum net (or 216/m2 overall). He further noted that the subject property lease had a net rental of $154,829 per annum at the relevant date which was to increase to $165,667 per annum at 1 September 2010. He therefore adopted a net passing income of $165,667 as the basis for his capitalisation calculations.
27.Mr Flannery next calculated the appropriate capitalisation rate by analyzing the yield on sales of three comparable properties in Torrens Street and Lonsdale Street, Braddon. The details are set out in Table 1 below.
Table 1
Address Sale Price Contract Date Net Yield % Area Sale Rate
$/m243 Torrens Street $1,800,000 3/2010 1.67 180m2 $10,000 45 Torrens Street $3,200,000 3/2010 4.65 460m2 $6,957 27 Lonsdale Street $4,300,000 8/2008 5.58 1,090m2 $3,945 28.Mr Flannery observed that 27 Lonsdale Street was considered the most directly comparable sale, but said that it was sold in a softer market (the implication being that in a firmer market, it would have fetched a higher price and thus given a lower yield) and was considered to be in an inferior commercial location. He considered the recent sales of the two Torrens Street properties as indicative of strong demand for redevelopment sites within the Braddon Service Trades area and because the purchasers were yet to pay any CUC, the prices were considered to reflect the Before Values.
29.He further observed (in his Valuation Report of August 2010) that CBRE was aware that 28 Mort Street, Braddon had reportedly exchanged in July 2010 for $5,000,000 but was yet to settle. He considered this sale showed a net market yield of between 4% and 5% before any allowance for agents and legal fees and letting up period. However, he added that as at the date of sale only a portion of the property was occupied and the sale showed an initial yield of only 1.3% (based on their understanding of the lease details at the date of the sale).
30.He considered the subject property has a broader purpose clause than the sales evidenced above. In addition, it had no GFA limitation within the Crown Lease, and was considered to be in a superior location within the precinct. He had therefore adopted a net yield of 4.0% when assessing the Before Value for the subject property and used 4.0% as his capitalisation rate.
31.The result of his adoption of this net passing income figure of $165,667 and the 4.0% capitalisation rate is that he estimated the Before Value at $4,051,389 after allowing $5,000 for the cost of extending the Crown Lease. He rounded this figure to $4,050,000 which equates to $1,614/m2 GFA overall.
32.Mr McInerney drew attention to Mr Flannery’s Before Value calculation, where he has derived a figure of $165,667 per annum as the passing income, but pointed out that the rental for the subject property was increased by fixed amounts in the lease and at the relevant date, would have been $154,829 per annum.
33.Mr McInerney also drew attention to the fact that in an earlier valuation of the subject property (T245-T264) which accompanied the DA for the lease variation, Mr Flannery had adopted a capitalization rate for the subject property of 5% which, when applied to the then estimated passing rent of $152,310 gave a Before Value of $3,021,877, which he rounded to $3,020,000. Mr McInerney observed that the change from 5% to 4% in the capitalisation rate made a difference of $1,030,000 in the estimated Before Value. He contended that the capitalised Before Value should at least have remained at $3,020,000, although the AVO considered the more appropriate capitalisation rate was 6% (which would have reduced the value even further).
34.Mr McInerney further observed that in relation to the August 2008 sale of
27 Lonsdale Street, which he regarded as the most comparable to the subject property, Mr Flannery had valued it and had concluded that that sale showed a capitalization rate of 5.75%. Given the similarities between 27 Lonsdale Street and the subject property (leased to the same tenant for about the same period for similar purposes) it would be assumed that they had the same capitalization rate yet Mr Flannery had adopted 4% for the subject property, even though it had a lesser rental return. He suggested that a prospective purchaser may consider that 27 Lonsdale Street, which generates 33% higher rental, would be of superior value, but by adopting the lower capitalisation rate for the subject property Mr Flannery assumedly considers it to have the superior income capability.35.When cross examined, Mr Flannery said that he had checked the rental income for the subject property and needed to correct the passing income to $154,829 which, he said, when capitalised at 4.0% gives a Before Value of $4,043,975 which was not significantly different from his determined value.
36.The Tribunal has difficulty in understanding how Mr Flannery arrived at his Before Values. Capitalisation of $165,667 at 4.0% gives $4,141,675 (equivalent to $1,651/m2 GFA overall), while capitalisation of $154,829 at 4.0% gives $3,870,725 (or $1,543/m2 GFA overall) each of which differs from the Before Values calculated by Mr Flannery.
Submissions about Before Value
37.Mr Arthur noted that the difference in the Before Values of the parties’ valuers was about 5% in circumstances where, he submitted, neither has an interest in showing the other to be wrong. He therefore suggested that the Tribunal should find that the value is between $4,050,000 and $4,265,000 and that if it was necessary to establish a particular value, it should be at the middle of the range. Alternatively, he said that this being a statutory determination, it would be appropriate to adopt the respondent’s figure.
38.Mr Sharwood agreed that the two Before Values were not far apart, and
although Mr Flannery’s use of the capitalisation of net income approach yielded a lower Before Value than that contended by the respondent, he nevertheless submitted that Mr Flannery’s approach was incorrect and that the direct sales comparison approach was to be preferred. He also rejected
Mr Flannery’s adoption of 4% as the capitalisation rate to be used, because in his submission, it was not supported by the evidence. In his view, 6% would have been the appropriate rate based on market comparison evidence.
The Tribunal’s consideration of the Before Value
39.It is no surprise that the applicant would be happy to see the Before Value increased, nor is it any surprise that the respondent would be happy to see it decreased. However, we cannot simply adopt a median value. The Tribunal is required to determine a Before Value based on the evidence before it.
40.There can be no “correct “decision on these matters, only a preferable decision. As the Full Court of the Victorian Supreme Court said in Karenlee Nominees Pty Ltd v Gollin & Co Ltd [1983] 1 VR 657 at 669:
The valuation of land and building involves a matter of judgment. Opinions notoriously vary on this subject matter – it would be surprising to find two valuers who agree on the valuation to be given to land and buildings of the nature of the subject premises. There is no scientific exactitude in the valuations of land and buildings. They are as hypothetical as the hypothetical purchaser whom they assume.
41.It seems to be generally agreed that the comparative sales method is preferable to other methods if there is evidence of any comparable sales. In The Law Affecting Land Valuation in Australia, Hyam at p. 126 says
Therefore, in the absence of directly comparable sales evidence, a valuer. or a court, should look to those sales of lesser comparability, analyse them and make the necessary adjustments in applying them for the purpose of assessing the task at hand. Failing any sales of remotely comparable properties, other methods of valuation should be utilized. (Emphasis added).
42.In this case, there are a number of sales, some of which are directly comparable and others that are of lesser comparability but which can assist in determining the Before Value of the subject property. Consequently, the Tribunal will rely mainly on the comparable sales approach, but have regard to the capitalisation of income approach as a check. We place particular importance on the sale of 27 Lonsdale Street which seems to us to be very comparable to the subject property.
43.It has an almost identical site area and hence a similar GFA in the before situation, its lease term commenced at about the same time and runs for a similar period to the subject property, and it is leased by the same lessee for the same type of business that was carried out in the subject property. The purpose clause of the Crown Lease for 27 Lonsdale Street does not have as wide a range of permissible uses as does the subject property before the lease variation, but at present it apparently yields a 33% higher rent.
44.We accept that the sale price of 27 Lonsdale Street ($4,300,000) should be adjusted downwards by 5% for owner influence, but we consider that a further reduction of 5% should be made because the purchaser was seeking to acquire the property in the hope of gaining the additional rights that would accrue if the lease were to be varied. This would make the adjusted sale price $3,870,000. We accept that the purchaser intended to redevelop the property and therefore would have made an allowance for demolition and other contingencies in his price, which would have decreased the price he was willing to pay and consider that the $150,000 adopted by Mr McInerney is a reasonable estimate of these costs, having regard to the figures used by Mr Flannery in his After Value calculations for the subject property.
45.Thus, the market price for that property as a going concern at the relevant date can be estimated at $4,020,000, which equates to $1,605/m2 GFA rather than the $1,691/m2 determined by Mr McInerney.
46.The second sale used by Mr McInerney - that of 28 Mort Street - is also very comparable to the subject property. It is slightly larger at 1,517m2 site area and 3,034 m2 GFA, with a lease purpose clause identical to that of 27 Lonsdale Street. Mr McInerney described it as being in an inferior location, even though it is slightly closer to the CBD in Mort Street. It was sold in July 2010 for $5,000,000 and, if discounted by 5% for the purchaser’s desire to acquire the potential residential rights and the stronger market in July 2010, its deduced land value is $4,750,000 or $1,566/m2 GFA, without allowing anything for the cost of demolition and other contingencies.
47.The other of Mr McInerney’s sales which Mr Flannery agreed was comparable for Before Value purposes, was that of Blocks 1 and 2, Section 21, Braddon (Sale 4) which is 43-45 Torrens Street. The combined block has a site area of 2,293m2 and has a 2:1 plot ratio but because it is in a CZ2 Zone, a different zone to the subject property, it does not get the extra plot ratio benefit from residential use, so its maximum GFA will remain at 4,586 m2.
48.According to Mr McInerney, a 2010 DA for it was approved allowing
50 residential units and 405m2 office space, which he analysed as equating to $1,482/m2 GFA for the office component (after adjusting the sale price to $5,100,000 to allow for demolition costs and by allowing $4,500,000 as the price paid for the future residential units at $90,000 per unit and dividing the $600,000 balance by 405). Because this sale is not as comparable to the subject property as the other two and because it assumes a value for the residential units which may not be justifiable, the Tribunal is inclined to give it less weight in arriving at the Before Value.49.As to Mr Flannery’s principal sale, that of 27 Torrens Street, we are inclined to agree with Mr McInerney that a 4% capitalization rate is too low, given its net yield of nearly 6% in August 2008. While the market was somewhat firmer at the relevant date, we think a rate of 4.5% would have been more appropriate to apply to the subject property with its lower yield. This would mean that the capitalised value, on a passing rent of $154,829 per annum would be $3,440,644, which equates to $1,374m2 GFA. However, we consider this outcome to be less reliable than that based on the comparable sales dealt with above.
50.As a result of these considerations the Tribunal concludes that Mr McInerney’s overall figure of $1,700/m2 GFA is too high and that $1,550/m2 GFA would be more appropriate. This results in an overall value of $3,887,400 for the subject property and we will therefore adopt $3,900,000 as the rounded Before Value.
The After Value
51.The applicant’s and the respondent’s valuers adopted similar approaches in their primary method of calculating the After Value, that is, using direct sales comparison. However, the ways in which they utilized the evidence from the comparative sales was somewhat different. They each also undertook (or had associates undertake) hypothetical development feasibility valuations, and these will be discussed separately below.
52.The two valuers agreed that in accordance with Rule R46 of the CCD Code, the lease variation, in adding “residential” to the permissible uses, potentially increased the plot ratio from 2:1 to 3:1, where at least 1:1 was to be used for residential use. The effect of this would be to increase the GFA allowable from 2,508m2 to 3,762m2.
53.Mr McInerney’s method was to assume that the commercial component of the After Value was the same as the Before Value he had calculated and that all he needed to do was to work out a value for the added residential rights and add it to the Before Value. He did this by analyzing a number of sales of comparable properties to extract estimates of what buyers were paying for residential development rights on a per unit basis, and after adopting the number of units proposed by Mr Dunstone, derived an added value to represent this development potential. He did not allow for any demolition, asbestos removal, or decontamination.
54.Mr Flannery also added a residential value derived in a similar manner, but he obtained his estimate of the value of the commercial component by analysing comparable sales and attributing different values to ground floor uses as compared with first and second floor uses. In addition, he allowed for the demolition of the existing buildings, the removal of asbestos and the decontamination of the site.
55.
Mr McInerney valued the additional residential use at $1,400,000 for an additional 14 residential units (at $100,000 each). Mr Flannery valued the additional residential use at $1,260,000 for an additional 14 residential units (at $90,000 each). The only difference between the two valuers in this element was the value per unit that they derived. The Tribunal will consider their analyses below. The main difference in their After Values arises from their valuations of the commercial components. The Tribunal will first consider the residential component values.
Residential Component Value
56.In
determining the value of adding residential to the purpose clause, Mr Flannery relied on a sketch design for a mixed-use development prepared by Mr Dunstone, which assumed that the ground floor would remain commercial shopfront, and the first and second floors would be used for offices, while the third and fourth floors would be used for residential units. His design took into account the relevant provisions of the CCD Code and the MUHD Code and provided for three levels of basement car parking and access thereto and he also allowed for lifts and for circulation space. This resulted in the third floor being 765m2 and the fourth floor 489m2, equalling the additional 1,254 m2 GFA allowable as a result of residential use. He hypothesised a layout comprising14 units (12 one-bedroom and 2 two-bedroom) ranging from 63m2 to 108m2 in floor area.
57.As already noted, both valuers adopted this 14 unit design as the basis for their valuation (although it is not the only option that might have been considered as discussed below). This shows an average GFA of 89.5m2 per unit (GFA includes circulation space as opposed to Gross Lettable Area which excludes circulation). This GFA per unit is, in the Tribunal’s view, comparable to the average GFA of one and two bedroom units in recent inner north Canberra developments.
Mr McInerney’s Estimate of the Residential Component Value
58.
In determining the value of the residential component, Mr McInerney initially relied on a number of sales [identified in his Valuation Report (T18 - T35) and his first witness statement (Exhibit 16) as Sales 4, 7, 9, 10, 11 and 12] which were analysed as follows.
59.Sale 4 was of Blocks 1 & 2, Section 21, Braddon which are adjoining blocks on the corner of Torrens and Girrawheen Streets, with a combined area of 2,293 m2. The purpose clauses of these blocks were at the time limited to offices only (Block1) or office and professional suites only (Block 2) with a 2:1 plot ratio, but DA 201017831 has been approved allowing 50 residential units on the combined site together with 405m2 of non-retail commercial use. Because these blocks are in a CZ2 Business Zone, they remain subject to a 2:1 plot ratio, hence the allowable GFA is 4,586 m2. Mr McInerney considered the property inferior to the subject property in its present situation because it was further from the CBD and was limited to office use. The block was sold in March 2010 for $5,000,000. Mr McInerney allowed $100,000 for demolition of the existing buildings, adjusting the sale price to $5,100,000, and after allowing $1,482/m2 GFA for the 405m2 commercial space ($600,210) he divided the balance ($4,499,790) by the 50 units to come up with a value of $90,000 per unit. He contended that this sale readily supported the $100,000 he had adopted in the residential component of the After Value of the subject property, noting that the latter had a significantly smaller number of residential units. However, he did not explain how he had arrived at the figure of $1,482/m2 for the commercial space.
60.Sale 7 was of Blocks 4/6, Section 45, Lyneham, which is 13 Oliver Street, one street back from Northbourne Avenue. It has a site area of 2,395m2 and is zoned for residential uses with a 2:1 plot ratio. It sold for $2,562,000 in April 2009 and has a DA approved for 21 residential units above basement car parking, which equates to $122,000 per unit. Mr McInerney considered this property to be inferior to the subject property in its location and that the sale readily supported his choice of $100,000 per unit for the subject property.
61.Sale 8 was of Blocks 13/14 Section 3, Dickson (10-12 Randell Street, Dickson) with a combined site area of 1,629 m2, a purpose clause allowing residential use, and a DA approved for 16 residential units above basement car parking. This sale was in May 2009 for $2,000,000, which showed $125,000 per unit and in his opinion, being in an inferior location, also supported his rate of $100,000 per unit for the subject property.
62.Sale 9 was of Block 5, Section 18, Griffith, on the corner of Canberra Avenue and Giles Street, close to Manuka Circle. This had a site area of 2,902 m2 and a DA had been submitted seeking approval to a development of 11,161m2, including 1,285m2 commercial retail and related uses, as well as 90 serviced residential apartments occupying 9,876m2. A complication in this case was that the Crown Lease required the lessee to provide 60 public parking spaces on the land and plans submitted showed that these would be basement parking. The property was sold in November 2009 for $7,650,000 and after adding $2,700,000 as the cost of providing the 60 basement parking spaces (based on $45,000 per space, an average of Rawlinson’s range) Mr McInerney arrived at a derived figure of $10,350,000 as the overall cost to the purchaser. After subtracting the value of the commercial space (for which he allowed $2,000/m2 for the 1,285m2 of commercial GFA - a total of $2,570,000) he concluded that the sale equated to a value of $86,444 per serviced residential unit. Again, no explanation was given for the $2,000/m2 placed on the commercial space.
63.Sale 10 was of Block 1, Section 14, Kingston which was sold in December 2010 for $5,625,000 as a redevelopment site and for which a lease variation to allow 68 units has been sought. Mr McInerney considered it to be in an inferior location, opposite the Canberra Railway Station. After allowing for a change-of-use charge and some demolition costs, he concluded that this sale showed $85,000 per unit with an average size of 69.8m2.
64.Sale 11 was of Blocks 7/8 Section 49 Lyneham, which sold for $1,780,000 in July 2011. The combined block is 1,610 m2 and has a maximum GFA of 1,046 m2. Development approval has been sought for 12 residential units which Mr McInerney considered equated to $148,333 per unit with an average size of 87m2.
65.Sale 12 was of Blocks 5/7, Section 79, O’Connor, which sold for $2,675,000 in August 2010. The combined site area was 2,718m2 with a maximum GFA of 1766.7m2. Development approval has been sought for 20 units which showed a price of $133,750 per unit with an average size of 88m2.
66.In oral evidence, Mr McInerney explained that he had tried to concentrate on similar developments and considered that Sale 4 gave good support to his adopted value of $100,000 per unit, as it was also in Braddon and showed $90,000 per unit in an inferior location. Even though most of the properties analysed were purely residential developments, he saw little difference in value between purely residential and mixed-use development units and considered that people would pay more for proximity to the CBD. He agreed that the evidence suggested that larger units fetched a higher price than smaller ones, but noted that Mr Dunstone’s scheme allowed for a range of unit sizes from 63m2 to 108 m2 and therefore an average price of $100,000 was appropriate.
67.Mr McInerney also drew attention to the resale, on 21 February, 2011, of the properties comprising Sale 4, according to him for $6,450,000, after receiving development approval to vary the Crown Lease to include “residential” as a permissible use, which he contended showed that adding “residential” as a use did increase the value of a property.
Mr Flannery’s Estimate of the Residential Component Value
68.Mr Flannery relied on a completely different set of sales to establish his values for the residential component. His sales and the details relating to them are set out in Table 2.
Block and Section
or Street AddressSale Price Contract
DateSite Area Max
UnitsSale Rate
Per DwellingBlock 3, Section 60 Kingston $9,800,000 Nov 09 3681m2 100 $98,000 Canberra Avenue
Griffith$7,669,000 Nov 09 2908m2 85 $79,635 3 Forbes Street
Turner$1,000,000 Aug 09 987m2 9 $111,111 1 McGowan Place
Dickson$1,420,000 Oct 09 1451m2 14 $101,429 16 DeBurgh Street
Lyneham$635,000 June 09 682m2 12 $52,917 Table 2
69.Mr Flannery gave few details about these properties in his Valuation Report, other than to observe that they indicate sale rates per unit between $75,000 and $100,000 for larger units. Under cross examination, he stated that although the lease of Block 3, Section 60, Kingston allowed for up to 100 units, the property was on The Island and the developers have sought approval for only 44 or 45 much larger units which would have the effect of increasing the price per unit.
70.He contended that the sales at 1 McGowan Place, Dickson, and at 3 Forbes Street, Turner, were relevant, as the sales took place close to the relevant date and they were for small developments, but noted that they were purely residential and suggested that sale rates over $100,000 per unit are achievable for smaller boutique style, residential-only developments (up to 15 units). He also agreed that he had not relied on the sale of 16 DeBurgh Street, Lyneham, as it may not have been a strictly arms-length transaction.
71.Apart from these, Mr Flannery considered the sale of Blocks 8 and 11, Section 29, Braddon (5-7 Torrens Street) to provide the best evidence of After Value, as the purpose clause permitted both residential and commercial office uses. This property sold in June 2009 for $4,100,000. Based on a purely residential development of 56 units, he said that this site showed $75,000 per unit. However in his witness statement (Exhibit 1) he subsequently advised that his analysis of this sale was incorrect as he had not taken into account the maximum GFA of 1,195m2 in the Crown Lease. Such a limit would restrict the number of units achievable depending on size and would increase the value per unit accordingly.
72.Based on the sales in Table 2, Mr Flannery adopted a rate of $90,000 per unit for the subject property. Under cross examination, he denied that the sales evidence indicated a higher value per unit for the subject property, as he pointed out that it was located opposite a car-wash.
Commercial Component Value
73.Both valuers used a similar approach to determining the values of the commercial component, that is, by assigning them a value per m2 of commercial GFA, determined by an analysis of comparable sales. Each assumed a building comprising three floors (ground, first and second) of commercial use, and two floors (third and fourth) of residential use based on Mr Dunstone’s hypothetical building. They differed however in that Mr McInerney assigned a single rate per m2 to all three floors of the commercial component, whereas Mr Flannery assigned a higher rate to the ground floor uses than he did to the two upper floor commercial uses. In the paragraphs that follow, we set out each valuer’s sales analyses and their conclusions.
Mr McInerney’s estimate of the Commercial Component Value
74.
MrMcInerney relied on six sales (his Sales 1, 2, 3, 5, 6 and 9) for the commercial element of the After Value. His Sale 1 (Block 14 Section 20 Braddon) has already been discussed in relation to the Before Value at paragraphs 15-17 and paragraphs 42-45 above, where we concluded that the sale showed a rate of $1,605/m2 GFA for commercial uses, compared with Mr McInerney’s figure of $1,691/m2. Mr Flannery did not consider Sale 1 as being an After Value sale, because “the purpose clause allows only industry and industrial – no residential or commercial” (Exhibit1, paragraph 13). Mr McInerney nevertheless contended that the purchaser had bought it for redevelopment and believed there would be no difficulty in adding “residential” to the permissible uses.
75.
Mr McInerney’s Sale 2 was of Block 5 Section 28 Braddon for $5,000,000, which we have discussed above in paragraphs 18-20 and 46. This site has the same planning and development controls as the subject property and is located slightly closer to the CBD. The sale was about a year after the relevant date. Mr Flannery considered that it had an inferior purpose clause compared to the subject property. The 1,517m2 site had a 2:1 plot ratio. As discussed in paragraphs 20 and 46 above, we consider that after adjustment for the weaker market at the relevant date, the sale shows a commercial rate of $1607/m2 GFA. As with Sale 1, Mr Flannery noted that “the purpose clause allows only industry and industrial –no residential or commercial” and considered it too was not an After Value sale.
76.
McInerney’s Sale 3 was of Block 1, Section 12, Bonner, for $3,210,000 in March 2010. The allowable GFA was 2,222m2, which showed a value of $1,445/m2 GFA. Mr McInerney asserted that the purchaser had a pre-commitment to use this site for a supermarket. We note that this site is located in a CZ4 Local Centre Zone. In the Local Centres Development Code, the CZ4 Overview states that this zone provides for development “of local shops, non-retail commercial and community uses, service stations, and restaurants to service a local community. Residential uses may also be permitted”. The site is in an inferior location to the subject property, being in a residential suburb rather than directly next to the CBD. Although the sale was only some six months after the relevant date and it is a mixed use site, because of the different circumstances we do not believe that the Bonner sale price can be adequately adjusted without there being too great a margin of error.
77.
Mr McInerney’s Sale 5 was of Block 1, Section 45, Turner (corner of Watson Street and McKay Gardens) for $3,000,000 in February 2008, approximately six months prior to the relevant date. Mr McInerney stated that it has an inferior purpose clause and is in an inferior location compared to the subject property. The 2,225m2 site had a 1:1 plot ratio. Mr McInerney adjusted the sale upwards by $30,000 for demolition to $3,030,000, which he contended showed $1,362/m2 GFA for office use only. He does not appear to have adjusted it for time, nor for the lease difference and location. We note that this site is located to the north-west of the CBD proper, in a CZ2 Business Zone. The CZ2 Overview states that it provides for “more fringe commercial activities, primarily non-retail commercial uses, commercial accommodation, and some restaurants and indoor entertainment and recreation facilities. Residential and community uses are also permissible, subject to design and siting, provided they are not incompatible with primary uses”. We consider this site to be reasonably comparable with the subject property in terms of commercial use values, but inferior to the subject property in location.
78.
Mr McInerney’s Sale 6 was of Block 14, Section 25, Griffith, for $3,300,000 in May 2008, approximately three months prior to the relevant date. This site is located well away from the CBD, on Canberra Avenue near Hume Place, in a CZ2 Business Zone, (similar to Sale 5). Mr McInerney stated that it has an inferior permitted use compared to the subject site. The 1,689/m2 site has a GFA of 2,512m2. Although Mr McInerney stated that this showed $1,348/m2 GFA there is no indication that the sale price was adjusted for time, nor for the lease difference and location. Absent any such adjustment, the sale shows $1,314/m2 GFA.
79.
Mr McInerney’s Sale 9 was of Block 5, Section 18, Griffith, for $7,650,000 in November 2009. The 2,902m2 site has had a DA submitted seeking a GFA of 11,161m2. The sale price was adjusted up by Mr McInerney for the lease requirement to provide 60 public parking spaces, estimated to cost $2,700,000, which resulted in a sale price of $10,350,000 (as discussed in
paragraph 62 above). This was then extrapolated to show a rate of $2,000/m2 GFA for commercial space and 90 residential units at $86,444 each, but no basis for adopting the $2,000/m2 figure was given. The sale price does not appear to have been adjusted for location. The site is located well away from the CBD, but is close to Manuka and on Canberra Avenue in a CZ2 Business Zone, like Sales 5 and 6.
80.
In oral evidence, Mr McInerney said that sales 5 and 6 reinforced his valuation of the office use element of the commercial component at in excess of $1,300/m2 GFA and he had adopted $1,700/m2 GFA because of the wider range of uses permissible on the subject property.
81.He also drew attention (Exhibit 17) to the properties constituting Sale 4 (see paragraph 59 above) which had been resold in February 2011 for $6,450,000 following approval, in October 2010, of a DA seeking to vary the Crown Lease to include “residential” uses. As they were purchased in March 2010 for $5,000,000, Mr McInerney contended that the additional value could be attributed to them now having residential use, albeit without any increase in allowable GFA (4,586m2). He had been advised that the vendor, who retained a 30% share in the property, had sought investors with a proposal to redevelop the site incorporating 50 residential units and office units at ground level. This equated to an overall price of $1,406/m2 GFA for a mixed use site, and was comparable with the overall After Value of $1,506/m2 GFA that he had adopted for the subject property ($5,665,000 for 3,762m2 GFA in total) with a superior location and commercial component including shop and restaurant use.
Mr Flannery’s estimate of the Commercial Component Value
82.
Mr Flannery relied on four commercial development site sales in determining the commercial component of the After Value, which are set out in Table 3 below. Only one of his sales was also used by Mr McInerney (that in Canberra Avenue, Griffith, Sale 9 - see paragraphs 62 and 79 above). Mr Flannery noted the range of values which, he said, reflected the size and location of the sites, their development potential and their purpose clauses. For the subject property, he initially adopted a rate of $1,200/m2 for 750m2 of GFA for the ground floor space and $700/m2 for 1,500m2 of GFA for office space on the first and second floors, giving he said an overall rate of $900/m2 GFA for the commercial component. This, he noted, was well above the rates listed, save for 5-7 Torrens Street, Braddon. However, he subsequently adjusted the latter rate upwards (see paragraph 85 below).
Street Address Sale Price Sale Date Maximum
GFA in m2Sale Rate per
m2 GFA5-7 Torrens St, Braddon $4,100,000 June 2009 5,780* $878* Canberra Ave, Griffith $7,650,000 Nov 2009 9,000 $500 (commercial
component of mixed use development29 National Cct, Forrest $12,475,909 June 2009 24,000 $520 Macquarie Street, Barton $16,500,000 May 2010 27,000 $611 (overall rate for
mixed use site)
Table 3
· Later corrected by Mr Flannery to 1,195m2 maximum GFA and a Sale Rate of $1,000/m2 GFA after allowing for existing buildings and basement car parking
83.Mr Flannery’s first sale was that of Blocks 8 and 11, Section 29, Braddon, (5-7 Torrens Street), for $4,100,000. In his Valuation Report he stated that, of all the sales in his analysis, 5 Torrens Street (clarified in evidence to be 5 and 7 Torrens Street) is considered “most directly comparable to the subject site” and “to provide the best evidence of After Value”. The sale was approximately two months prior to the relevant date. The two blocks are opposite a park and are closer to the CBD than the subject property by half a street block.
84.We note that these two adjacent blocks are located in what was known in the 2003 Territory Plan as Precinct B4 – Braddon, Torrens Street Office Area in the Civic Centre Land Use Policies (Part B2A of that Plan). They are now in a CZ2 Business Zone which provides for “more fringe commercial activities, primarily non-retail commercial uses, commercial accommodation, and some restaurants and indoor entertainment and recreation facilities. Residential and community uses are also permissible, subject to design and siting, provided they are not incompatible with primary uses”. The plot ratio in this Section is 2:1; there are 6m setbacks required to front and rear boundaries and there is a building height limit of 16m.
85.
Mr Flannery stated that this sale showed a rate of $878/m2 GFA. The Tribunal notes the sale price was $4,100,000 with a GFA stated as being 4,780sqm, which shows a rate of $858/m2. However, Mr McInerney observed (Exhibit 16) that the GFA was limited in the Crown Lease to 1,195m2 (having a plot ratio of 0.5:1 as prescribed in the 2003 Territory Plan) and that in other reports by CBRE submitted to the AVO it had been more correctly analysed as showing a deduced value of $1,317/m2 GFA. In his witness statement (Exhibit 1) Mr Flannery accepted that his Report analysis was incorrect and that the correct GFA limit was 1,195m2.
86.
When giving oral evidence, Mr Flannery provided a document entitled TOPS – Commercial Sales Analysis of 5 Torrens Street Braddon Block 11 Section 29 prepared by CBRE valuer Andrew Menegazzo in July 2009 (Exhibit 14) which showed a sale price of $4,100,000 at 30 June 2009; that the site area was 1,195.6m2; and that the “building area” was 1,037m2. The Tribunal asked Mr Flannery whether this document referred to 5 Torrens Street only or if it included 7 Torrens Street as well and he confirmed it included both blocks. We are of the opinion that there is an error in the document. The approximate site area for the blocks is given in Appendix A to the Braddon Commercial Area Planning Study, each being shown as 1,196m2. The area quoted in Exhibit 14 is for Block 11 only while the Tribunal was informed that the sale price was for both blocks. We believe that the actual site area of the combined blocks is 2,391.2m2, but the allowable GFA is only 1,195m2 as prescribed in the Crown Lease.
87.After making adjustments of $2,900,000 for the value of the existing building and two levels of parking (Exhibit 13) Mr Flannery derived a “vacant land” value of $1,200,000 which showed a value of about $1,000/m2 GFA for the commercial rights. While acknowledging that this was not a “vacant land” sale, he nevertheless considered $1,000/m2 a fair value. The Tribunal notes, from Exhibit 13, that Mr Flannery’s calculations of the value of the buildings were based on the GFA of 1195m2 as opposed to the building area of 1037m2 and he also adopted a high value for the parking spaces. These had the effect of increasing the value of the existing building and parking and reducing the “vacant land” value. Had he used more appropriate figures the vacant land value might have been $1,200/m2.
88.
Mr Flannery placed less reliance on his three other sales, of which two have not been adjusted; Macquarie Street, Barton ($16,500,000 for 27,000m2 equates to $611/m2 GFA) and 29 National Circuit, Forrest ($12,475,909 for 24,000m2 equates to $520/m2 GFA - a vacant land sale). The Canberra Avenue, Griffith sale ($7,650,000 for 9,000m2 equates to $850/m2 GFA (a vacant land sale) but has been adjusted to $500/m2 GFA for the “commercial component of mixed used (sic) development” (see Table 3). However, there does not appear to be any analysis showing the reasoning for this considerable adjustment down of over 40% (see T62).
89.
Mr McInerney addressed these three sales in his first witness statement (Exhibit 16, Annexure B) where he contended that upwards adjustments were necessary to the sales at Canberra Avenue and Macquarie Street because of the additional parking requirements imposed by the Crown Leases (provision of 60 public car parking spaces in the former and 470 spaces in the latter) and that the National Circuit sale was not a directly comparable sale. We also note the GFA for the National Circuit sale is 24,000m2 and the Macquarie Street sale is 27,000m2. The non-residential GFA for the subject site is 2,508m2. We do not believe that these three sale prices can be adequately adjusted without there being too great a margin of error.
90.
Mr Flannery chose to adopt different values for the ground floor uses (initially $1,200/m2, subsequently $1,485/m2) which he showed as 750m2 GFA and the first and second floor commercial uses (initially $700/m2, subsequently $850/m2) which he showed as 1,500m2 GFA - a total commercial component of 2,250m2. He adjusted the rates (Exhibit 12) after taking into account his changed assessment of the commercial value of 5-7 Torrens Street (see paragraphs 85-87 above).
91.
Mr McInerney allowed a total of 2,508m2 GFA for the three commercial floors (the allowable 2:1 plot ratio) which approximates the areas shown by
Mr Dunstone in Exhibit 6 - some 258 m2 more than Mr Flannery had allowed. Using Mr McInerney’s figure for GFA, Mr Flannery’s rates yield a commercial component totalling $2,388,750 and equate to an overall rate of $952/m2 GFA. This shows a substantial reduction for the non-residential part of the overall After Value from Mr Flannery’s Before Value of $1,614/m2 GFA.
92.
Mr Flannery did not explain why he had initially adopted rates of $1,200/m2 and $700/m2 for the different commercial floors, other than that they showed an average value of about $900/m2 commercial GFA, which was well above that of three of the sales relied on by him (apart from 5-7 Torrens Street). It was because of the Torrens Street sale that he adopted a rate per m2 “slightly above that indicated by this sale”.
93.
The adjusted rates adopted by Mr Flannery in Exhibit 12 had the effect of increasing the total commercial element After Value as calculated by him from $1,950,000 to $2,388,750. However, this value is still significantly less than that calculated by Mr McInerney ($4,263,600) based on an overall $1,700/m2 GFA commercial rate.
Other issues affecting After Value
94.
Mr Flannery’s After Value was also adjusted downwards through making allowance for the costs of demolishing the existing buildings, removing asbestos, and for possible decontamination of the site. Mr McInerney made no such allowances. One of these issues (decontamination) gave rise to some controversy.
(i) Asbestos and Demolition
95.An Asbestos Survey & Management Plan dated 15 May 2009 prepared by Robson Environmental Pty Ltd, unsigned, stated “friable ACM [Asbestos Containing Material] was not identified during the survey” while “bonded asbestos material was identified” (T119). In Canberra, it is to be expected that many buildings of this nature and age would have some bonded ACM cladding, roofing or lining. There is no doubt that, in order to redevelop the site to include residential use, the ACM would have to be removed in accordance with the ACT Code of Practice for the Safe Removal of Asbestos.
96.Mr Flannery allowed $50,000 as a deduction from his After Value to meet the costs of doing so and Mr McInerney, in his Valuation Report (T20), stated that a quote in the amount of $46,212 excluding GST dated 3 March 2010 for removal and disposal of the asbestos had been sent to the applicant by Classic Solutions.
97.
In addition to the cost of ACM removal, Mr Flannery allowed $69,375 for demolition based on $125/m2 for 555m2 GFA of the existing building.
Mr Chappé, a quantity surveyor, engaged by the applicants to estimate the costs of building a development in accordance with Mr Dunstone’s design concept, in his original estimate of construction costs (Exhibit 8 Attachment B) allowed $900,000 for demolition costs (excluding asbestos removal) but in his subsequent witness statement (Exhibit 8 paragraph 6) revised this down to $200,000 including asbestos removal. Under cross examination Mr Chappé defended his use of a rate of $270/m2 as compared with a rate of $78/m2 which was said to prevail in Sydney, based on his experience in the area.
98.Under cross examination Mr McInerney said that he regarded Mr Chappé’s cost figures as somewhat excessive and observed that Mr Chappé had agreed that they would need to be adjusted back to the relevant date, by allowing a reduction of about 6%. In addition, Mr McInerney considered there could be some double-dipping, for example for excavation and site preparation which might overlap with other costed items.
(ii)Decontamination
99.
Mr Flannery allowed an amount of $50,000 as a deduction from his After Value for decontamination of the site, noting that he had done so because it was situated adjacent to a former service station. Mr McInerney (at T20) said that the Environment Protection Authority (now the Environment Protection Unit or EPU) had advised the respondent’s Leasing Section by e-mail that the service station was abandoned and the fuel tanks removed in 1988; that they had no record of an environmental assessment having been carried out at the site; and that they no longer required such an assessment (T`179).
100.
However, a full reading of the text of that email shows that their statement that they no longer required an environmental assessment was “prior to the lease variation”. They went on to warn that there was a risk of hydrocarbon contamination of soil or groundwater from past fuel storage and that should any such impacts be encountered during excavation works at the site, all works must cease immediately and an EPU officer contacted.
101.
There was disagreement as to whether there was an aquifer below the subject property and whether there were any groundwater plumes containing hydrocarbons that might impact on the soil and water table below the subject property. Mr McInerney stated in his witness statement that “the respondent has received advice from ACT Territory and Municipal Services that there is no aquifer below the surface of the subject property” and did not resile from this position under cross examination, despite the evidence of Mr Gregson (see paragraph 103 below).
102.
Mr McInerney attached to his witness statement (Exhibit 16) a letter from
Mr M Heckenberg, Project Officer, Environment Protection and Water Regulation, dated 27 June 2011 which stated that
The latest recorded standing groundwater level in the area is approximately 10 to11 metres below ground level (August 2010). Groundwater is expected to be present at this level beneath all blocks within the area of Block 19 Section 29
and that
Petroleum hydrocarbon plumes have been identified under…Blocks 16 and 17 Section 29 Braddon associated with the former operation of a Burmah Service Station located at the site. Evidence of a chlorinated hydrocarbon groundwater plume is also evident at this site associated with the former operation of a dry cleaning facility. Records indicate that these plumes may be impacting groundwater in the south eastern corner of Block 18 Section 29 Braddon. Investigations to delineate the extent of these plumes are ongoing
and
The extent of groundwater plumes at these sites are yet to be fully determined, however, preliminary assessments at each site would indicate that the plumes are limited in extent due to the nature of the aquifers in the ACT with no evidence to suggest that they are impacting on Block 19 Section 29 Braddon.
and
The information detailed above only relates to records held by the EPA and may not represent the actual condition of the site
.
and
At present the EPA has no information on contamination of the above block(s) other than as detailed above. However, this does not absolutely rule out the possibility of contamination and should not be interpreted as a warranty that there is no contamination.
103.
Mr Ian Gregson, a Principal Environmental Consultant with GHD Pty Ltd, gave evidence on this matter for the applicant and in his initial Report (Exhibit 5, Attachment B) he confirmed that an underground aquifer is known to be present in the general area of the subject property, but that “no specific investigations have been undertaken to verify whether these conditions exist”. Moreover, the Limitations Statement attached to his Report stated that “The services undertaken by GHD in connection with preparing the report did not include any inspection of the site nor the collection of samples …as the basis of this report.”
104.
Having reviewed Mr Heckenberg’s letter, Mr Gregson further stated “there is no evidence one way or the other regarding impact of the groundwater plumes on Block 19 Section 29 Braddon” and that “On the basis of available information it would be conjecture to state whether contamination impact on the property is “likely”; however, on the balance of probabilities and based on my experience, I would think it more likely than not that there would be some impact…” and that “there is a greater level of uncertainty as to whether such impact would be of sufficient degree or extent to affect the suitability of the site for the proposed redevelopment.” He added that “The costs of site-specific contamination assessment, and potential remediation or management costs associated with contamination impacts, if present, should be considered as part of the costs and risks of redeveloping the site.” Under cross examination, he estimated the cost of assessment of the site at between $30,000 and $50,000.
General Considerations about Valuation
(i)Highest and Best Use
105.The Tribunal is required, as are the valuers in this case, to have regard to the “highest and best use” of the subject site when establishing the After Value. The concept of highest and best use as a principle of land valuation was established by the High Court in Spencer v The Commonwealth of Australia [1907] 5 CLR 318 and has received judicial approval in numerous subsequent cases. In ISPT Pty Ltd v City of Melbourne [2007] VCAT 652, the Tribunal President wrote
Highest and best use represents the most profitable potential use to which land can be put having regard to both planning and like controls and the circumstances of the land… When land is sold, the market values it at its highest and best use, as buyers will not be constrained to continue the existing use and the seller will seek to achieve the highest price for the land.
106.
Mr Flannery stated in his Valuation Report (paragraph 5.3.1) that the hypothetical development proposed by Mr Dunstone and adopted by him was the highest and best use but Mr McInerney took a different view. In his view, minimising commercial use and maximising residential use was the highest and best use of the maximum GFA available.
107.
Mr McInerney pointed out that while residential use is prohibited at the ground and first floor levels and that any redevelopment is limited to 22 metres maximum height, the Plan requires that in order to attain a 3:1 plot ratio, residential should occupy at least 1:1 plot ratio. He noted that in similar cases in the Braddon commercial area, developers were minimising the commercial component on the ground and first floors to less than the 1:1 plot ratio on each level. By way of example he cited Block 5, Section 28 (27 Lonsdale Street, his Sale 2) for which a proposed development had been publicly notified proposing 150m2 of commercial use at ground floor, 120m2 of offices at first floor, and the balance of the 4,751m2 maximum GFA (4,482m2 GFA or approximately 94%) to provide 59 residential units.
108.He noted that this proposal also incorporated car parking at the rear of the ground and first floors, which demonstrated that such a solution, if considered for the subject property, would considerably lessen the cost of providing additional basement level parking (because residential use generates less parking requirement than commercial use).
109.
The Tribunal also notes that the Braddon Commercial Area - Planning Study proposed that the private sector should be encouraged to investigate the provision of a parking structure if on-site parking is not feasible and that the GFA of publicly accessible carparks should not be used in calculating plot ratios - an incentive to provide public car parking. Such an option, if adopted in this case, could assist in reducing the amount of excavation on the subject property and help to avoid any contamination issues.
110.
Mr McInerney stated that the applicant had, on 23 June 2011, submitted D201120304 over the subject property with a proposal for 40 residential units in contrast to the 14 units considered in the Applicant’s After Value report. He contended that by adopting an approach similar to the lessee of Block 5 Section 28, and utilising only 270m2 for commercial uses on the ground and first floors, that would enable 3,493m2 (approximately 93% of allowable GFA) to be used for residential purposes and would yield the highest and best use of the land. However, no analysis was offered by Mr McInerney of how such a development might be designed, nor did he estimate what the consequences would be for the After Value.
111.
Mr Adams’ evidence was that the redevelopment proposal for Block 5 Section 28 was inconsistent with a number of mandatory rules in the CCD Code Part A3, CZ3- Services Zone – Braddon and should not have been allowed. When questioned about this, Mr McInerney agreed that a valuer should not advise a developer to contemplate a development that was contrary to the Code, but reiterated that this development had been approved and is currently proceeding.
112.
In any case, it does not follow that an alternative development for the subject property involving a greater amount of residential development could not be designed consistently with the requirements of the Code. A simple calculation suggests that up to 20 units could be provided in the two upper floors, albeit of a smaller size than proposed by Mr Dunstone, and more could be added if the second floor was also used for residential. But no such proposal was put before us for consideration.
113.
The only evidence about the cost of alternative development models available to the Tribunal was that contained in the hypothetical feasibility studies, to which we will now turn.
(ii)The Hypothetical Feasibility Studies
114.In May 2011, Mr Flannery arranged for CBRE to undertake hypothetical development feasibility studies using specialist software known as Estate Master for Excel as a check on the After Value, following receipt of information provided to them by GHD regarding contamination; from Rider Levett Bucknall regarding development costs inclusive and exclusive of decontamination; and from Dezignteam regarding various schemes for the redevelopment of the site. These were provided as attachments to the applicant’s statement of Fact and Contentions, but only the drawings of Dezignteam’s Scheme 2 were included. Four scenarios were studied, of which two “moved away” from Dezignteam’s Scheme 2 and were described by Mr Flannery in a file note as follows:
·Scenario 3 – limiting to 2 basement levels of car parks and assuming 40 residential units above ground floor retail and first floor commercial;
·
Scenario 4 - 2 levels of basement parking; same design as Scenario 3; costs based on builder/developer, ie reduced margin and costs; 17.5% profit and risk.
115.These studies essentially calculate all the costs associated with constructing a building of the nature established by the scenario and subtracting that from the anticipated revenue to be obtained from sale of the commercial and residential elements, to obtain a residual land value reduced to net present value (“NPV”). The results of the four feasibility studies were that scenarios 1, 2 and 3 yielded a negative NPV, while scenario 4 initially was found to show an NPV of $3,068,645, but this was later adjusted to $2,450,000 when recalculated in July 2011.
116.In response to these studies, Mr McInerney arranged for Mr Todd Svanberg, of the AVO’s Melbourne office to undertake a similar analysis as he was experienced in using the Estate Master software. Mr Svanberg’s first analysis yielded a residual land value of
$5,568,205, but after making some adjustments to his data entry to correct for errors, he subsequently reduced this to $2,958,159.
Submissions on behalf of the Parties
(i)For the Applicant
117.
Mr Arthur began by cautioning the Tribunal against placing too much reliance on hearsay evidence. He acknowledged that the Tribunal was not bound by the rules of evidence and that expert witnesses may rely on the general body of knowledge accumulated by them as experts in the field, but observed that hearsay is inherently unreliable and that to allow a witness to establish as a fact, that which they were told by someone else when it is not possible to test whether the other person was telling the truth, or the particular context in which they understood the conversation to be occurring, is to introduce an element of real uncertainty and thus unreliability.
118.He drew attention to the discussion of the hearsay rule in Freckelton and Selby’s Expert Evidence: Law, Practice, Procedure and Advocacy at pp 95-96, and to the words of Megarry J in English Exporters (London) Ltd v Eldonwall Ltd, and Same v Same [1971] E. No 2606 at 423, where he wrote:
A valuer giving expert evidence-in-chief (or in re-examination)…may not give hearsay evidence stating the details of any transaction not within his personal knowledge in order to establish them as matters of fact. To those propositions
I would add that for counsel to put in a list of comparables ought to amount to a warranty by him of his intention to tender admissible evidence of all that is shown on the list.
119.
Mr Arthur’s cautionary words were particularly directed at Mr McInerney’s evidence in relation to Sale 1 and his assertion that the purchaser had given no consideration to the net yield from the existing property but had purchased it for redevelopment. This evidence, Mr Arthur submitted, was hearsay and should be given no weight, as it was based on an interview Mr McInerney said he had had with the purchaser, but of which he had kept no notes, nor could he relate any part of the actual conversation or identify the context in which the discussion occurred. A similar criticism was levelled at his evidence regarding Sale 2, where Mr McInerney had relied on what a colleague had said about the purchaser’s intentions following a conversation with the purchaser.
120.
Mr Arthur also criticised Mr McInerney’ reliance on the recent re-sale of his Sale 4 (Blocks 1-2, Section 21, Braddon) because, as well as the addition of residential use, retail use had also been added, along with a sevenfold increase in permitted GFA (650m2 to 4,586m2). Furthermore, the CUC had been determined and paid, design and siting approval had been obtained and other significant development costs met. Hence, it was not surprising that there would be a significant increase in price, but what part of that was attributable to residential values was purely conjecture. Mr McInerney’s evidence about the profit and risk margin that the developer of Blocks 1-2 Section 21 Braddon was willing to accept, which he said he had seen on a piece of paper but which he was unable to identify precisely, was also regarded by Mr Arthur as indicating that Mr McInerney’s judgement should not be relied upon.
121.
Mr Arthur submitted that this was a case in which it was appropriate to rely on the feasibility studies, in particular, Mr Flannery’s scenario 4 and
Mr Svanberg’s revised study, because when both valuers adopted essentially the same input values, they attained outcomes that were relatively close and the figures they arrived at were confirmation of Mr Flannery’s comparable sales assessment of After Value as being more accurate that Mr McInerney’s. Mr Arthur submitted that while the feasibility studies taken together with Mr Flannery’s assessment do not enable the Tribunal to select a particular figure with confidence, it could be confident that the figure, whatever it is, is less than the Before Value.
122.
He noted that the CUC paid for the four Blocks 3-16 Section 21, Braddon, in the same street and approximately 100 metres from the subject property (one of which was a corner block which would seem to be more valuable) amounted collectively to $127,500 and submitted that no CUC in this case would be consistent with that outcome.
123.
Mr Arthur finally rejected Mr McInerney’s contention that the addition of another use must add value. Rather, he said, it remains a matter which must be demonstrated by appropriate evidence and the evidence in this case shows, that at the relevant date, there was no added value for this particular lease with all its attendant features and limitations, such as that it is a single block, inland, relatively small, affected by contamination and groundwater, which go to explain why residential use may not yet be valuable, when in other locations on other sites with different characteristics, residential use would seem to be valuable.
(ii) For the Respondent
124.
Mr Sharwood noted that while Mr McInerney and Mr Flannery had both adopted the direct sales comparison approach for their After Value assessment, they had used different sales. Mr McInerney had principally relied on Braddon sales, but had considered sales in other areas. He had comprehensively analysed each sale and this often involved interrogating the purchaser or other relevant person to understand variables and motivations. He had also referred to other valuations made by CBRE that were consistent with his assessment and to evidence (for example, Exhibit 10) that Mr Flannery had himself considered much higher values for the commercial component than he had ultimately adopted.
125.
There was a smaller, but not insignificant difference ($10,000 per unit) in the two valuers’ rates for the residential component, but Mr McInerney’s valuation was to be preferred.
126.
Mr Sharwood commented on the feasibility studies that had been undertaken, observing that they were an unreliable measure of value. The studies relied on the costings of Mr Chappé, but he had been obliged to adjust some of his estimates during the hearing and in any case, he had used 2011 costings which would need to be reduced by 5% - 6% to make them consistent with 2009 values. That could alter the cost by up to $1,063,200 on this point alone. Furthermore, he observed that both Mr Flannery and Mr Svanberg had cause to re-adjust their modelling during the course of the hearing and even after consultations between them, they could not get their versions of the software to get within $200,000 of each other although though the inputs were the same. How, he asked, could the Tribunal be confident of the correct answer?
127.Mr Sharwood submitted that at its highest, a feasibility study provides a poor “check” of the values of the subject land in this case and because it involves a process that can be manipulated to achieve an outcome, it does not assist the Tribunal in determining the true values and should not be used at all.
128.
In relation to demolition costs, Mr Sharwood took the view that Mr Chappé’s revised estimates for them ($200,000 including for asbestos removal) were too high observing that Mr Chappé was unable to explain how he had reached that figure. By contrast, Mr McInerney estimated that $50,000 was appropriate for asbestos removal, while $70,000 was more than sufficient for demolition of a single storey workshop. Mr Sharwood noted that adopting the mid-range of Rawlinson’s 2009 prices for demolition ($62.5 per m2) the cost of demolishing a building of 555m2 would be approximately $34,000.
129.
In relation to the issue of decontamination, he observed that the applicant had not undertaken any investigative action such as test boring at the site which Mr Gregson said would have cost a mere $30,000 to $50,000 and conclusively determined the issue. In the absence of firm evidence, he submitted that no amount for decontamination should be deducted.
130.The effect of any aquifer in the area had not been conclusively determined and it would only become an issue if a third level of basement car parking was required. The applicant’s witnesses had not been able to specify the costs of this element, but if the Tribunal was to consider that de-watering of a third level of basement car parking was necessary, Mr Sharwood submitted that in the respondent’s view, it would not be a significant cost.
The Tribunal’s consideration of the After Value
(i) The Residential Component
131.
The Tribunal has carefully considered the evidence adduced by the parties as to the value of the residential component of the After Value but finds it to be less than persuasive in many cases. Most of the properties that have been chosen for analysis have little similarity to the subject property, either because of their scale or their location. It is notable that the two valuers chose totally different property sales to reach their conclusions. Furthermore, in Mr Flannery’s original valuation (T245–T264) which accompanied the DA to vary the lease, he used yet another set of properties, none of which he subsequently relied on. In that set, Mr Flannery obtained values ranging from $90,000 per unit to $143,750 per unit. Two of these were in Braddon (but some distance from the CBD) which showed values of around $90,000 per unit.
132.We are satisfied that the rate per unit lies somewhere between $80,000 and $120,000. We believe that the residential units in the subject property will be attractive to purchasers in that the site is close to the CBD, allowing residents to walk to work and is in a mixed use zone which has the potential to allow people to both work and live within the same area, something that is relatively uncommon in Canberra due to planning restrictions. We also note that with a maximum building height of 22m, the top floor level of the residential use (4th floor) has the potential to be well above the 16m maximum building height of any future development to the east, allowing the potential for views across towards the park opposite Torrens Street and beyond to Mount Ainslie. We also note that the second top floor of the residential use (3rd floor) has the potential for views across to Mount Ainslie. Given that we consider that the residential component of any development will have reasonable amenity and be adjacent to the CBD we have adopted a rate of $100,000/unit for the 14 residential units resulting in a value of $1,400,000 for the residential component of the After Value.
(ii) The Commercial Component
133.
The Tribunal has also carefully considered the evidence on commercial component values presented to it and again finds much of the evidence less than persuasive. The ideal comparable sale would be of a property of similar size, in the Braddon Services Area, which had been purchased at or about the relevant date with both commercial and residential uses in its purpose clause. The nearest of the comparable sales to this ideal are Mr McInerney’s Sales 1 and 2, neither of which, at the time they were sold, had “residential” as a permissible use.
134.
Mr McInerney’s oral evidence was that in each case he had been informed that the purchaser had in fact bought with the intent of residential redevelopment and had since varied the leased, paid the CUC, sought development approval and in one case commenced building. Mr McInerney contended that the two sales showed values of $1.691/m2 GFA and $1,681/m2 GFA respectively and Mr McInerney contended that both sales supported his adopted commercial value of $1,700/m2 GFA. Our calculations however, suggest that rates of $1,605/m2 and $1605/m2 are more appropriate. While conscious of Mr Arthur’s cautions about hearsay evidence, we are satisfied that both properties were bought with the intention of redeveloping them for commercial use as there is other evidence to confirm this fact.
135.Mr Flannery relied on the sale of Blocks 8 and 11 Section 29 Braddon ( 5-7 Torrens Street) for his commercial rates, but as noted above in paragraph 86, he had overlooked the GFA limit in the Crown Lease and had adjusted his value to about $1,000/m2 GFA. Mr McInerney observed that an earlier CBRE valuation of these same blocks had arrived at a figure of $1,317/m2 GFA. However, as we have said in paragraph 87, we think the correct figure is more likely to be around $1,200/m2 GFA.
136.Nor does Sale 4 (Blocks 1 and 2, Section 21, Braddon) fill us with any confidence as to an appropriate commercial rate. Mr McInerney adopted a figure of $1,482/m2 GFA for the office use, but that figure is derived simply by subtracting the total value of an assumed 50 units at $90,000 per unit from the adjusted sale price $5,100,000 and dividing the balance by the approved 405m2 of commercial space available.
137.
The subsequent resale of the property in 2011 following approval of lease variation to add “residential” to the permissible uses, detailed by Mr McInerney in Exhibit 17 and approval of DA 201017831, showed an overall sale rate of $1,406/m2 GFA for 4,586m2 maximum GFA in a mixed use site. This, Mr McInerney contended, was comparable with the overall sale rate of $1,506/m2 GFA in his assessed After Value for the subject property which, he contended, is better located.
138.The Tribunal considers that there is no merit in attempting to assign differing values to the ground floor and upper floor commercial spaces, as we were given no comparative evidence on the relevant rates that might apply (other than Mr McInerney’s mention, in Exhibit 16, of reported sale rates of $6,500/m2 GFA for ground floor retail and $5,570/m2 GFA for fist floor office space at the nearby “Mode 3” development, which are presumably end-user sales and were unsupported by any documentary evidence).
139.We therefore will rely on an overall rate for the commercial component, and consider that this would fall somewhere between $1,300 and $1,500/m2 GFA. We will adopt $1,400/m2. We see no inconsistency between this rate and our overall Before Value of $1,550/m2 GFA, because the Before Value rate does not involve any consideration of demolition costs, change of use charges and other contingencies, which will be taken into account by an informed purchaser. On the assumption that the total commercial space is twice the site area as adopted by Mr McInerney (2,508m2) and not the 2,250m2 adopted by Mr Flannery, this yields a total value for the commercial component of the After Value of $3,511,200, which we will round to $3,500,000.
Asbestos and Demolition
140.
There is no doubt that the building incorporates ACM extensively and as it must be removed. However, the rate for demolition should be reduced accordingly so that there is no duplication in the deductions. We consider that even Mr Chappé’s reduced rate for demolition including asbestos removal ($200,000) as excessive, having regard to Rawlinson’s rates. The Tribunal is of the view that a deduction for asbestos removal is justified but has decided not to change the amounts for demolition and for asbestos removal used by
Mr Flannery, which will remain at a total of $119,375 which we would round to $120,000.
Decontamination
141.
The Tribunal notes the reference to ‘Soil Contamination’ in the Braddon Commercial Area - Planning Study (Exhibit 22) at page 13 where it reiterates the advice of the EPU set out in paragraph 102 above, and states that
Prior to redevelopment of known or potentially contaminated sites, contaminated sites need to be audited, assessed and remediated to a suitable level required by the Environment Protection Authority. The type of development permitted would depend on the level of remediation and an assessment of the risk that the site may pose.
142.
The Tribunal is satisfied that it is highly likely that there is an aquifer under the subject property at a depth of 10m to 11m and that there is a risk of it being contaminated by hydrocarbons. It agrees that a hypothetical prudent purchaser would be aware that the land is possibly contaminated; that the contamination has not been substantiated; that the possible contamination does not prevent the land from being used for its current use prior to the proposed lease variation; and that the possible contamination may only come to the fore if the site were redeveloped to include residential use when remediation may be required because of the need to provide basement car parking.
143.The contaminated material, if it exists, will most probably need to be removed to allow residential development, and possibly also office development, and therefore should be treated as ‘structures or other useless material’ to be removed. As Hyam says (p168-169)
the principle is that the contaminated material, if it exists, should be seen in the same context as old structures or improvements to the land. If the use of the site is for a purpose which conflicts with any possible contamination effects, then the purchaser of the site would either have to have the decontamination undertaken by the vendor, or be prepared to decontaminate it himself
which implies that allowance should be made in the After Value for decontamination if redevelopment for residential use is envisaged.
144.An alternative view is that adjustments should not be made where the works are properly part of the subsequent development itself. The removal of the contaminated material is only required if it exists, and then if the site is to be redeveloped to include residential and commercial use. The provision of an underground car parking structure would require the removal of excavated material as part of the normal redevelopment works and as such, a percentage for the removal of any contaminated material would be expected to be included in the extent of the works.
145.The Tribunal is satisfied that an deduction from the After Value should be made for assessment and removal of any contaminated material that may be required, but in the absence of any other assessment we will adopt the amount proposed by Mr Flannery, ie $50,000.
146.The results of our calculations of the After Value components is therefore
Residential component $1,400,000, plus
Commercial Component $3,500,000, minus
Demolition &Asbestos removal $120,000, minus
Allowance for decontamination $50,000
yielding a total After Value of $4,730,000.
The Hypothetical Feasibility Studies
147.A great deal of evidence and much examination and cross examination was devoted to these studies and the inputs that had been used to undertake them, but the Tribunal considers them to be of little assistance in arriving at its conclusions. The hypothetical development feasibility method is said to be widely used by valuers, in particular, when developers are seeking finance from banks and other lending institutions, but it is normally used only when there are no comparable sales data available (Hyam, p 188).
148.
While its use in some cases has been endorsed, including by the High Court, it has been criticised by Courts and Tribunals because it applies an apparently scientific formula to a great number of subjectively established variables and small variations to these variables can have a very great impact on the result (Roper J, in Closer Settlement Ltd v The Minister (1942) 17 LGR 62 at 252). The changes that were made to Mr Svanberg’s analysis as a result of relatively small changes in various inputs are evidence of this.
149.We do not propose to give these studies any further consideration as we do have adequate, if not ideal, comparable sales to consider.
Conclusion
150.
The Tribunal concludes that theV2 (Before Value) of the subject property is $3,900,000 while the V1 (After Value) is $4,730,000. The difference is $830,000 and therefore the CUC payable is $622,500.
……………………………….
Dr D. McMichael
For and on behalf of the Tribunal
PUBLICATION DETAILS
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