Hewitt v Valuer General
[2004] NSWLEC 728
•12/24/2004
Land and Environment Court
of New South Wales
CITATION: Hewitt v Valuer General [2004] NSWLEC 728 PARTIES: APPLICANT
Robert James Hewitt
RESPONDENT
Valuer-GeneralFILE NUMBER(S): 31042 of 2004 CORAM: Pain J KEY ISSUES: Valuation of Land :- Appropriate valuation methodology - whether market slow at base date LEGISLATION CITED: Hurstville Local Environmental Plan 1994
State Environmental Planning Policy No 5 - Housing for Older People or People with a Disability
Valuation of Land Act 1916 s 6A, s 40CASES CITED: DATES OF HEARING: 16/12/2004 DATE OF JUDGMENT: 12/24/2004 LEGAL REPRESENTATIVES:
APPLICANT
Mr R J Hewitt (in person)
RESPONDENT
Mr A Pickles instructed by the Crown Solicitor's Office
JUDGMENT:
THE LAND AND
ENVIRONMENT COURT
OF NEW SOUTH WALESPain J
24 December 2004
JUDGMENT31042 of 2004 Hewitt v Valuer General
1 Her Honour: The Applicant, Mr Hewitt, has commenced Class 3 proceedings challenging the Valuer General’s assessment of the value of Lot 1 Folio Identifier 1048900 being 43-47 Clarke St, Peakhurst (“the land”) pursuant to s 37(1) of the Valuation of Land Act 1916 (“the Act”). The relevant base date for the present valuation appeal is 1 July 2003 at which date the Valuer General valued the unimproved value of the land at $1.72 million. This valuation was used by the Office of State Revenue to calculate the land tax payable by the Applicant for the 2004 tax year.
2 Mr Hewitt represented himself at the hearing and relied on the evidence of Mr Tseris, a valuer, who contends that the unimproved value of the land as at the base date was $1.38 million. The Valuer General was represented by his barrister, Mr Pickles. Mr Edmondson, a valuer, gave evidence on behalf of the Valuer General that the unimproved value of the land as at the base date was $1.92 million. If I accept Mr Edmondson’s figure then the amount of $1,72 million determined by the Valuer General would remain as the unimproved value of the land as at 1 July 2003 and the land tax payable by the Applicant for the 2004 tax year will be assessed on the basis of this figure.
The Land
3 The land has a frontage to Clarke St of 45.25m, a rear boundary of 45.52m and side boundaries of 61.01m and 73.05m. The land has a total area of 3041m2.
4 As at the base date the land was zoned “Zone No. 2 – Residential Zone” under the Hurstville Local Environmental Plan 1994 (“the LEP”). The development control table located at cl 8 of the LEP indicates that the following uses are permissible with consent within this zone:
- dwelling houses … housing for aged or disabled persons; multiple dwellings; … residential flat buildings; …
5 The land is located within the foreshore scenic protection area and cl 19B of the LEP imposes additional restraints on development located within this zone.
6 As at the base date the land had the benefit of a development consent, granted by this Court pursuant to State Environmental Planning Policy No 5 – Housing for Older People or People with a Disability (“SEPP 5”) which was then being built. This development consent granted consent to the erection of a 12 unit residential development consisting of six three-bedroom units and six two bedroom units, basement car parking and extensive common entertaining areas extending over 3 levels. This development is now complete and the relevant strata plan was registered in March 2004.
7 The parties agreed that if the development the subject of the development consent was not built it would have been open to the Applicant to seek development consent under the LEP for six town houses or villas.
8 Section 6A Act states:
- (1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner’s predecessor in title had not been made.
(2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that:
- (a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and
(b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used,
9 Section 40 of the Act provides that:
- (1) On an appeal, the Land and Environment Court may do any one or more of the following:
- (a) confirm or revoke the decision to which the appeal relates,
(b) make a decision in place of the decision to which the appeal relates,
(c) remit the matter to the Valuer-General for determination in accordance with the Court’s finding or decision.
10 The parties prepared an agreed Statement of Issues in the matter as follows:
11 Issue 4 in the agreed Statement of Issues refers to the statement of issues filed by Mr Hewitt in which he stated as follows:
As at valuation date of July 2003 the Valuer General’s valued amount of $1.7m is at a level such that no intending developer would consider purchasing the property for the purpose of a SEPP 5 development comprising 12 units. More so, I am advised that no intending financier would approve the funding of the development for such a proposal.
This is because the resultant outcome (using the UV of $1.7m) after taking Purchase+Construction+Holding Costs from the realised sales (12 SEPP 5 villas) would result in a 6% profit based on a two year project period.
As a result the profit margin would diminish to as little as 6% by end of year no. 2, even if half of the units are sold at the end of year no. 1. As a profit and risk margin of between 20% and 25% on cost is required to make the project viable the Valuer General’s estimate as the Market Value is excessive in the extreme; therefore a SEPP 5 project would not be considered economically viable.The need for a two year project period reflects the time likely to be required to obtain approval for a SEPP 5 project and the extended selling period required to effect an end sale.
12 The evidence relied on by Mr Hewitt was:
- (a) the report of Mr Tseris, valuer, and an addendum to that report;
(b) a letter of objection dated 1 March 2004 by Mr Tseris writing on Mr Hewitt’s behalf to the Valuer General;
(c) a letter dated 24 November 2004 from Mr Tseris to Mr Hewitt further advising in relation to these proceedings; and
(d) letters dated 15 December 2004 from two real estate agents advising of the difficulties of selling the SEPP 5 units in Mr Hewitt’s property.
13 The Valuer General relied on the Statement of Evidence of Mr Edmondson, valuer.
14 The parties valuers also prepared a joint report dated 2 December 2004 and gave concurrent oral evidence in which they addressed the four issues outlined above.
The Parties’ Arguments
Issue 2 - The Appropriate Methodology
15 The joint report prepared by the valuers states that the experts agreed that the land was to be valued primarily on the basis of evidence as to comparable sales.
16 Mr Tseris also applied what he described as a hypothetical development approach to assess land value which he said was a check method used to support his conclusions on his comparable sales approach. Mr Edmondson did not agree that such an approach was appropriate at all given that the comparable sales approach is the appropriate method.
17 Mr Edmondson also did not agree with the calculations used in relation to the hypothetical development modelled by Mr Tseris. In particular he did not agree that the calculations should be net of land value and holding costs. There was also disagreement as to the methodology used by Mr Tseris in his cost and risk calculation. Mr Tseris applied a direct 20 per cent of total outlay as the appropriate calculation. Mr Edmondson argued that the profit and risk should be calculated on the nett realisation and should be divided at 120/100. There was also disagreement over the approach to be taken as regards GST adjustment. Mr Tseris argued that there should be an allowance of 4.5 per cent of the GST paid whereas Mr Edmondson argued that the developer would recoup close to the full 10 per cent for construction costs.
18 The Valuer General’s barrister submitted that, based on “Land Valuation and Compensation in Australia” by Rost & Collins (1993) 3rd ed, the exercise undertaken by Mr Tseris was not a hypothetical development model at all as it was based, in part, on the construction costs actually incurred by Mr Hewitt in carrying out the SEPP 5 development currently located on the land. Further, he argued that the 10% risk applied by Mr Tseris was inappropriate for small developments of this type and there was, in any event, no evidence as to how the amount of risk was calculated by Mr Tseris.
Issues 1 and 3: Highest and Best Use and The Adjusted Value of 12 SEPP 5 Villas Versus 6 Townhouses or Villas
19 The experts disagreed as to what was the highest and best use of the land as at the base date. Mr Tseris considered the highest and best use of the land to be six three-bedroom villas or townhouses whereas Mr Edmondson considered the highest and best use to be the existing development of 12 SEPP 5 units.
20 The two experts used the same comparable sales, in that Mr Tseris relied on four of the seven sales relied on by Mr Edmondson, to arrive at their respective figures for the land value per lot but compared these according to their different highest and best uses.
21 Mr Edmondson provided a table in schedule 1 to his report which set out a comparison of the seven comparable sales as assessed against the subject site. As only one of the seven sales was of a SEPP 5 unit, with the balance being for townhouse/villa developments, it was necessary for Mr Edmondson to adjust the sales for six of the sales by a 15 per cent reduction based on SEPP 5 limitations. Further adjustments shown in the table for each property were made for location, topography and site density. Based on this assessment Mr Edmondson arrived at the figure of $160,000 per unit which was multiplied by the total number of units on the land, being 12, to reach a total value of the land of $1.92 million.
22 In addition, Sch 2 to Mr Edmondson’s report consisted of a table of further sales he considered to determine if there was any difference between a typical medium density site sale compared to a SEPP 5 development. That analysis looked at six SEPP 5 unit sales (five being actual sales of the units located on the land) and nine medium density sales. He concluded, owing to the SEPP 5 constraints, there should be a 15 per cent reduction in the value per unit for SEPP 5 units as compared to typical medium density because of the effect of SEPP 5 constraints on sale price. As, however, the yield of SEPP 5 units is greater as 12 SEPP 5 units can be located on the land compared to only 6 typical medium density sales, Mr Edmondson maintains that this SEPP 5 development will achieve a greater return than a typical medium density development. Accordingly, Mr Edmondson maintains that this SEPP 5 development was the highest and best use of the land as at the base date.
23 In his letter dated 24 November 2004 Mr Tseris presented figures he said supported a value of $100,000 per SEPP 5 unit.
24 Mr Tseris’ report has a list of the comparable sales relied on by him. He concludes that the value of duplex units or villa sites, his preferred highest and best use, as at the date of assessment was in the range $225,000 - $275,000 per unit and that the subject land would fall in the lower to middle value of that range. He did not provide a specific figure for each unit in his report but, assuming his highest and best use of six villa/townhouses and the final figure of $1.38 million adopted by him, it is apparent that he must have adopted a value of $230,000 per unit. Mr Tseris’ report provides no analysis, however, of how he applied the sales relied on by him to arrive at these figures and it is therefore very difficult to assess Mr Tseris’ evidence. The addendum to Mr Tseris’ report which the Court asked him to provide at the hearing once again provides only general statements to the effect that the comparables were analysed having regard to factors including location, overall size, topography/building constraints. There is no analysis of these for each individual sale. Mr Tseris’ evidence on comparable sales was therefore of limited assistance.
25 The principal reason given by Mr Tseris in his report to support his argument that 6 villa or townhouse developments represents the highest and best use of the land appears to be that he is of the opinion that sales of SEPP 5 units are slow.
26 The two valuers were asked by the Court to undertake an analysis of the four sales which were common to both valuers on the basis that the highest and best use would be as a villa/townhouse development rather than as a SEPP 5 development as Mr Edmondson had originally calculated. The resulting tables became exhibit 4 in the proceedings. When the adjustment for SEPP 5 limitations was removed from the sales Mr Edmondson’s calculations showed values for the land in the range of $1,552,500 to $1,725,000 on. On Mr Tseris’ calculations the range was $1,456,00 to $1,620,000. However Mr Tseris stated to the Court that he was uncomfortable with using the table prepared by Mr Edmondson because there were a number of factors to take into account. A difficulty for the Court with these comments is that there is no alternative evidence from Mr Tseris suggesting how he conducted his own analysis of these sales.
27 Exhibit 4 was relied on by the Valuer General’s counsel to argue that Mr Edmondson’s conclusion that the SEPP 5 villa development currently on the site was the highest and best use was correct as, even on Mr Tseris’s figures, the value of the land for this use was greater than the value of the land for six villas or townhouses.
28 The principal argument relied on by Mr Hewitt as set out in the issue above at par 11 is that the SEPP 5 development currently on the land is uneconomic and so cannot represent the highest and best use of the land. This argument, although supported by Mr Tseris, is entirely separate to the valuation evidence produced by the parties’ valuers. Mr Tseris, who emphasised his qualifications as valuer, real estate agent and property developer in his own right, supported this approach by reiterating on more than one occasion to the Court that Mr Hewitt was likely to lose money because the SEPP 5 development on the land had become uneconomic in the market environment. Mr Hewitt was also clearly of the view that he was likely to lose money on the SEPP 5 development, given the construction and other costs itemised in Mr Tseris’ hypothetical development approach which used the actual costs and figures set out in the letter from Mr Tseris to Mr Hewitt dated 24 November 2004. This analysis purported to show that the return to Mr Hewitt if the unimproved land value was $1,720,000 was low.
29 A key part of this argument is that because of the poor market for SEPP 5 units the return needed to make a profit has not been achieved on sales. This is because there is less demand for units constrained by SEPP 5 constraints so that sales of these units are slow and prices have dropped. The evidence of Mr Tseris on the state of the market for SEPP 5 was very general. The principal paragraph in his report in this regard is as follows:
- We note that since completion this development, as in the case of a number of other developments, undertaken in accordance with the provisions of SEPP 5 for the aged undertaken contemporaneous to the subject in neighbouring surrounds including Blakehurst, Lugarno and Riverwood/Peakhurst have been very slow to sell and in many ways would be reasonably considered to be financial failures. This factor together with the difficulties and additional cost factors involved in the provision of additional facilities delays in obtaining relevant development approval, would we feel deter the undertaking of such projects on the basis that they would be considered economically unviable.
Finding
30 The valuers agreed that the comparable sales approach was the appropriate approach. Mr Edmondson’s approach to the comparable sales is clearly identified in Schedule 1 to his report. Other than exhibit 4, which assumes the highest and best use is as a SEPP 5 development, there is no equivalent evidence I can assess from Mr Tseris.
31 In relation to the highest and best use of the land, a significant factor which must be considered is that a development consent to use the land for 12 SEPP 5 units had been granted. Mr Edmondson’s sales evidence supports his view that 12 SEPP 5 units is the highest and best use of the land and his analysis of the same sales on the alternative basis of townhouse/villa development also suggests that his view is correct.
32 Mr Tseris claimed to undertake the hypothetical development approach as a check for his comparable sales approach. However, close analysis of his report and his oral evidence suggests that this was not his approach, rather Mr Tseris relied on his hypothetical development approach and used comparable sales to support this.
33 I have concerns about the methodology applied by Mr Tseris in using this approach. In his hypothetical development approach he included the actual development costs of the building of the 12 SEPP 5 units on the subject site as communicated to him by Mr Hewitt. On one view this could not be said to be an appropriate approach to a hypothetical development model. I have set out above other criticisms of this approach by Mr Edmondson and note that Mr Edmondson’s criticisms are supported by a consideration of the appropriate approach to a hypothetical development analysis as set out in “Land Valuation and Compensation in Australia” by Rost & Collins (1993) 3rd ed at p 151 – 159. Mr Tseris described the hypothetical development exercise he undertook as a “back of the envelope type approach” he has used successfully in working with banks to get finance for property projects.
34 There is simply no credible methodological approach advanced by Mr Tseris which is based on evidence which can be assessed by the Court and which I can accept as an alternative to that put forward by Mr Edmondson. I accept the evidence of the Valuer General that the highest and best use of the land as at the base date is that to which it is currently being put, namely a SEPP 5 development consisting of 12 units. The issue of the market value of each unit as at the base date then arises.
35 That raises the question of how I should regard the principal argument advanced by Mr Hewitt which is that the actual costs of developing this site for 12 SEPP 5 villas has resulted in a very low or uneconomic return. As pointed out by the Valuer General’s barrister this is not a recognised method of valuation used in this Court for the purposes of s 6A of the Act. Nevertheless I accept the position which Mr Hewitt currently finds himself in. The difficulty with taking this evidence, such as it is, into account is whether it can be said to be supported by the sales evidence which reflects the position of the market on 1 July 2003, the relevant date.
36 The evidence of sales of SEPP 5 units relied on in Mr Edmondson’s report included five sales of units in Mr Hewitt’s SEPP 5 development. Four of the contracts for these sales were exchanged in October and November 2003 and one further contract was exchanged in February 2004. The evidence of Mr Edmondson is that there were 6 sales of SEPP 5 units in the area in 2003 and early 2004 and five were in Mr Hewitt’s complex.
37 The paragraph in Mr Tseris’ report set out at par 29 above fails to specify any particular properties at all but refers generally to neighbouring suburbs. The Court understood from Mr Tseris’ oral evidence that the references to the neighbouring suburbs were references to three individual properties in Blakehurst, Lugarno and Riverwood/Peakhurst respectively which Mr Tseris had been involved in trying to sell through his real estate agency business. In the absence of further detail as to precisely what period this evidence applies to and in the absence of any details as to the properties themselves which would allow testing of this evidence it is difficult to give this any weight. I note that Mr Hewitt’s SEPP 5 units were completed early in 2004 and that the strata plan was registered in March 2004. The opening words of this paragraph suggest that the market being described by Mr Tseris is in 2004 and not at the relevant date. Accordingly, the documentary evidence relied on by Mr Hewitt as to the poor market in SEPP 5 developments relates to the market in 2004 not as at July 2003. The only evidence that the market was poor in 2003 is general oral evidence of Mr Tseris and statements by Mr Hewitt from the bar table.
38 I am the judicial valuer for the purposes of these proceedings meaning I am not bound to apply either parties’ figures but rather can reach my own view, based on the evidence before me, as to what the unimproved market value of the land as at the relevant date. The quality of the evidence relied on by Mr Hewitt is poor and his valuer has not presented his evidence to this Court using recognised methodologies I am able to adequately assess. The only concrete evidence in terms of sales of SEPP 5 units is that referred to by Mr Edmondson in his Sch 2. This table shows there were sales of SEPP 5 units being made by Mr Hewitt in the second half of 2003. Mr Hewitt stated however he had experienced difficulty with sales since commencing marketing in early 2003. Mr Tseris supported this view in his oral evidence, albeit with general statements only. From the evidence it appears that the market for SEPP 5 units has slowed considerably in 2004 and possibly 2003 but it is difficult for me to determine whether this was the case as at July 2003.
39 I am prepared to give Mr Hewitt the benefit of the doubt in taking into account that the market for SEPP 5 units was contracting from mid 2003, although I am unable on the evidence to determine by how much. I will adopt a value per unit of $140,000 an amount less than the $160,000 per unit applied by Mr Edmondson. This results in an unimproved value of the land of $1.68 million and I so find.
Orders
40 The Court makes the following order:
1. The Applicant’s appeal is upheld.
2. The unimproved land value of 43-47 Clarke Street, Peakhurst at 1 July 2003 is $1.68 million.
3. Costs are reserved.
4. Exhibits may be returned.
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