PT Limited v Department of Natural Resources and Mines
[2006] QLC 68
•20 October 2006
LAND COURT OF QUEENSLAND
CITATION: PT Limited v Department of Natural Resources and Mines [2006] QLC 68 PARTIES: PT Limited
(appellant)v. Chief Executive, Department of Natural Resources and Mines
(respondent)FILE NO: AV2003/0803 DIVISION: Land Court of Queensland PROCEEDING: Appeal against annual valuation under the Valuation of Land Act 1944 DELIVERED ON: 20 October 2006 DELIVERED AT: Brisbane HEARD AT: Brisbane MEMBER: Mr RP Scott ORDER: The appeal is allowed and the unimproved value of Lot 10 on Survey Plan 128115 in the Parish of Kedron, County of Stanley being title reference 50358209 is determined at One Hundred and Twelve Million Dollars ($112,000,000). CATCHWORDS: 1. Valuation – unimproved value – regional shopping centre – alternative valuation approaches – primary method (based on sales) – subtraction method (based on improved value) – possible different conclusions – Valuation of Land Act ss.3(1)(b), 3(2).
2. Valuation – unimproved value – Valuation of Land Act s.3(2) – no assumption about highest and best use of land nor attributes.
3. Statutory Construction – Valuation of Land Act s.3.(1)(b) – history of provision – meaning of "improvements did not exist", not "never have been made" – temporal aspect – no ambiguity – use of Hansard to confirm meaning – notional removal of improvements but not their effect on value.
4. Valuation – unimproved value – meaning of "improvements" – 2003 Amendments to Valuation of Land Act – s.35A – "intangibles now improvements" – requirement to provide details of 'intangibles' – 20% cap.
5. Valuation – unimproved value – improvements – value can exceed costs – value of physical improvements based on cost – benefits of physical improvements not valued – intangible improvements different – benefits of non-physical improvements valued.
6. Valuation – unimproved value – Valuation of Land Act – intangible improvements – nature of – all of "benefit" of non-physical improvements – new class of improvement – outcome focussed – contrast with physical improvements
7. Valuation – unimproved value – use of sales – interstate sales – National Market for shopping centres – use of other valuation evidence – offers, hypothetical development exercise – whether allowance for Development Approval needed under s.3(1)(b).
8. Valuation – profit and risk – differences between subdivision and shopping centre development.
9. Valuation – unimproved value – regional shopping centre – highest and best use – proved by history – not speculative – Nathan formulation – Agreements for lease (AFLs) in place confirm highest and best use.
10. Valuation – unimproved value – use of improved or lightly improved sales – issue of evidence – not a statement of law.
11. Valuation – highest and best use – general discussion.
12. Valuation – sales comparison – sale for possible extension of higher use – not comparable – lease on sale property – considerations.
13. Valuation – sales comparison – single sale – suitable basis in sophisticated market – preferable to mathematical methods.
14. Valuation – unimproved value – s.3(1)(b) of Valuation of Land Act – intangible improvements not required to be notionally removed.
15. Valuation – unimproved value – methods of valuation – calibration method – allocation method – limitations – over-reliance on mathematical methods criticised – methods from American Appraisal Institute considered.
16. Valuation – unimproved value – sales analyses – use of applied statutory figures – presumption of correctness (s.33) – purpose of presumption - limits to its use.
17. Evidence – hearsay – when appropriate to admit in valuation cases – rationale for valuers to use such – weight – limitations.
18. Evidence – expert opinion – admissibility need to be based on knowledge of expert giving opinion evidence.
19. Valuation – unimproved value – sales analyses – allowance for contingencies in site improvements - no allowance if project completed – contingencies then known – best evidence.
20. Valuation – unimproved value – highest and best use of subject property – approach if property contains extensive structures – whether such structures to be treated as improvements – appropriate test (QNI case) – whether structures add value – two step procedure.
21. Valuation – unimproved value – application of s.3(2) proviso – mandatory to apply if higher than s.3(1)(b) figure – not merely an alternative – steps in application of proviso – first necessary to establish if property is improved.
22. Principles of valuation – Executor Trustee principle – resolving doubts in owner's favour in rating and taxing cases – only counts in final determination, not with intermediate steps (e.g. capitalisation rate).
23. Valuation – improved value – capitalisation method - capitalisation of net rents – choosing a rate – relationship to expected capital gain.
24. Valuation – improved value – improvements – "intangibles" – meaning – benefits of non-physical improvements – how to assess – must enhance land value – goodwill – how to determine.
25. Valuation – unimproved value – approach to subtraction method under s.3(2) – whether allowance for Development Approval to be separately assessed and deducted – time in obtaining same – different for s.3(1)(b) valuation.
26. Valuation – value of improvements – difficulties – magnified with highly improved properties – problems with invisible improvements, cost of effecting, depreciation – summation method rarely accepted.
27. Valuation – unimproved value – value of improvements – s5(1) Valuation of Land Act concerned with valuation – s5(2) concerned with an "amount" – not limited to direct cost – prospective view – interest at borrowing rate.
28. Valuation – unimproved value – value of improvements – higher value in time of cost increase – use of escalation method – may be relevant to depreciation.
29. Valuation – unimproved value – value of intangible improvements – s5(2) Valuation of Land Act – profit and risk relevant to value of intangible improvements – use of CAPM.
30. Valuation – unimproved value – alternative statutory approaches s.3(1)(b) and s.3(2) – acceptable evidence to support s.3(1)(b) valuation – still necessary, on evidence, to do s.3(2) valuation – rational approach – lesser figure than s.3(1)(b) revealed – precise s.3(2) figure not necessary.
31. Valuation – unimproved value – desire for relativity – concern if different approaches to valuation reveal markedly different values for similar properties.
APPEARANCES: Mr J E Gallagher QC, Mr D R Gore QC, Mr S L Doyle SC, Mr R N Traves SC Mr L Kelly SC, Mr T Trotter,
Mr J Horton - for the appellant.
Mr D B Fraser QC, Mr T W Quinn, Mr B Codd – for the respondent.SOLICITORS: Mr R Bowie and Mrs A McDonnell – Minter Ellison Lawyers for the appellant.
Mr J O'Rourke and Mrs L Hawkings-Guy Legal Services Department of Natural Resources, Mines and Water – for the respondent.
The appellant has appealed under s.45(1) of the Valuation of Land Act 1944 (Qld) (the Act) against a decision on objection made by the Chief Executive, respondent. The appellant owns land upon which the Chermside Shopping Centre (Chermside) has been constructed. That is the subject land for the purpose of these proceedings. The statutory valuation was carried out as at 1 October 2002 which is the relevant date for the purpose of the appeal. Before me the respondent contended for a final valuation figure for the subject land of either $151,000,000 or $142,500,000 depending upon the disposal of a question of law. In contrast with these figures the 2003 valuation has been issued at $54,000,000. The appellant in its Notice of Appeal provided an estimate of the valuation of the subject land at $21,500,000.
The valuation of the subject land issued in the amount of $120,000,000; a substantial increase over that of $25,500,000 which applied as at 1 October 2001. Following objection the valuation was reduced to $54,000,000 for reasons stated as, "the valuation requires calculation by a different methodology". That methodology was purported to rely on s.3(2) of the Act and paying regard to amendments which took effect on 2 June 2003 but which had retrospective effect with regard to the 2002 valuation. The appellant sought and received a statement of reasons pursuant to Judicial Review Act (1991) (Qld): a document that could at best be described as inadequate and at worst as misleading. Evidence was then led before me to a valuation of $116,000,000 or $125,000,000, then to $144,000,000 or $154,000,000 and finally to the amounts mentioned above.
This appeal was, with the consent of the parties, heard together with an appeal under the Act with respect to land developed as the Pacific Fair Shopping Centre (Pacific Fair) a super regional shopping centre developed in the Gold Coast City Council Local Government area. Evidence in each matter is evidence in the other. Whilst these reasons are concerned only with the Chermside matter I include such consideration of evidence associated with Pacific Fair to the extent needed to dispose of the Chermside appeal. For convenience only I refer in these reasons to the owner of the Pacific Fair land as an appellant or to both landowners as appellants.
To some extent the grounds of appeal and the particulars provided by the appellant have been superseded by the nature of the case the respondent conducted. In that respect the respondent did not rely on or advance the presumed correctness of the valuation appealed against, that presumption arising from s.33 of the Act:
"Any and every valuation, or alteration of the valuation, of any land made, or purporting to be made, under this Act by the chief executive shall be deemed to be correct until proved otherwise upon objection or appeal or until altered or further altered."
It was held in AMP Life & Ors v Department of Natural Resources and Mines[1] that the Chief Executive cannot unilaterally waive the deemed correctness accorded by s.33 once the court is properly seized of the matter. Clearly, the court in the present appeal is seized of the relevant matter. It was also concluded on that occasion that the Chief Executive could, subject to any question of admissibility, lead evidence at trial of a different valuation figure from that which gained the protection of s.33.[2]
[1] [2002] 23 QLCR 300 at [26].
[2] See [46] to [48] and [73], [74].
The jurisdiction of the court in an appeal of this nature is to either affirm the valuation appealed against or reduce or increase the amount of the valuation to determine it correctly and in accordance with the Act.[3] It follows that whilst a valuation which is statutorily deemed correct under s.33 subsists as such until proven to be incorrect, the real contest in circumstances where the Chief Executive elects to lead evidence to a different figure from that embraced by s.33, will be between the valuations to which evidence is addressed by the parties. It is the outcome of that contest which will displace the deemed correct valuation or theoretically lead to its affirmation.[4] Nevertheless, the appellant remains confined to the grounds of appeal.[5]
[3] s.66.
[4]See Perpetual Trustee Co Ltd v Department of Natural Resources, Mines and Water [2006] QLC0017 at [24] and Van Amstel v Chief Executive Department of Lands (1997) 17 QLRC 27 at 41–46.
[5] s.45(3) and (4).
The grounds of appeal were expressed comprehensively and were further explained by particulars. No point was taken by the respondent that evidence led and submissions made by the appellant went beyond the grounds of appeal. I therefore see no need to record the detailed grounds of appeal in these reasons.
The Subject Land
The Chermside land is Lot 10 on Survey Plan 128115 in the Parish of Kedron, County of Stanley, being Title Reference 50358209. It is located at 395 Hamilton Road, Chermside. The land is burdened by various easements but none of them, it is agreed between the parties, has any material effect on the value of the land. There is an unregistered licence over part of the land for the purpose of a bus interchange operated by the Brisbane City Council.
The land has an area of 13.78 ha and lies within the Brisbane City Council local government area. It is owned by the appellant as trustee for the Westfield Trust. Westfield Management Limited is the responsible entity.
There was, at the relevant date, a shopping centre on the land having the characteristics of what is generally known as a "major regional shopping centre". The centre was developed in stages with the first commencing in 1957. It was the first regional shopping centre constructed in Australia. The centre was extended in 1986, 1991, 1998 and 2000. The appellant acquired the subject land by contract dated 23 December 1996, at which time the centre had a retail floor space of 39,065 m².
As at 1 October 2002 the shopping centre had a gross lettable area of 78,471 m² or 77,117 m² excluding a car-cleaning area and storerooms. It had parking for 3,533 cars with 1,697 of those on the roof and 418 in the open air. The centre had as its tenants: Myer who conducted a department store on the site; two discount department stores (Kmart and Target); two supermarkets (Coles and Bi-Lo); a 16 screen cinema; seven mini majors so-called, together with 191 specialty shops; 14 automatic teller machines; five restaurants; seven first-floor tenancies and a carwash tenant as well as storage rooms.
The centre is fully air-conditioned and has the appearance and attributes expected of a modern large shopping centre, namely, paved roadways, lighting, landscaping, concrete kerbs, fencing, centre identification signs and security lighting.
The subject land is to be found 10 km north of the Brisbane General Post Office by road. It lies at the north-eastern junction of Gympie and Hamilton Roads in the suburb of Chermside. The land has frontages to both of those roads. It also fronts Banfield Street, a cul de sac to the north–west. The land is adjacent to an older residential area comprising predominantly single-unit residential dwellings interspersed with some multi-unit residential developments. Gympie Road is a major arterial road forming part of the Bruce Highway which proceeds to the north and which connects the northern Brisbane suburbs with the Brisbane City Centre. It carries a high volume of traffic.
The southern part of the land lies below the levels of Gympie and Hamilton Roads. Land to the west and south of these roads drain through the property. The natural ground level falls from the north-west corner at the intersection of Banfield Street and Gympie Road to the eastern boundary along which there is a subterranean culvert. In its natural state the subject land was cut by a major gully lying north/south adjacent to its eastern boundary. This gully is now contained by culverts and drains flowing to Downfall Creek to the north. In extreme conditions the car-parking areas to the south-east of the site may experience some inundation. Parts of the subject property lie below the one in 100 year flood level and are unable to be developed for that reason.
The subject land falls under the Brisbane City Council Plan 2000. It is designated as being within the MP2-Major Centre classification. The relevant parts of the plan are:
·The Strategic Plan which identifies the land as a "major centre" within a category of "multi-purpose centre". Major centres are to be the major concentration for "centre activities" being relevantly shops and cinemas, along with display and sale activities. The desired environmental outcomes for multi-purpose centres include providing significant locations for shop and entertainment outside the Brisbane City centre.
·The Local Area Plan (LAP) which designates the site to be within a "core centre" precinct. That plan makes it clear that it is intended the centre is to be developed as an integrated shopping facility supported by various factors including service and information centres and restaurants and fast-food outlets. It is also intended to integrate the centre with the nearby Chermside parklands and with the major centre of which the shopping centre will form part. The LAP foreshadows some intensification of the use of the subject land including the incorporation of a major busway and interchange.
·The level of assessment required for development and/or use of the site for "centre activities" is "code assessable" for the purposes of the Integrated Planning Act 1997 (Qld) (the IPA). Whilst there is no necessary opportunity for third party objection as part of the assessment process, there are various requirements to be satisfied including satisfying various codes, referral and assessments by certain State agencies and other statutory approvals.
For present purposes it is sufficient to note that the use of the subject land as a major regional shopping centre is consistent with the planning regime just discussed.
Westfield
Prior to a recent merger which resulted in the creation of the Westfield Group, the three entities which merged to form that group existed separately. That is Westfield Holdings, Westfield Trust and Westfield America Trust were at the relevant date independently owned and dealt with each other on a commercial arms length basis. Westfield Holdings conducted three major business activities: property development and construction, property and funds management and property investment. I note that there was no evidence of any Westfield Trust owned shopping centre being managed by other than Westfield. Except where precision is called for I will refer to Westfield, generically.
Evidence and Witnesses
With the consent of the parties I inspected both the subject property and Pacific Fair, and the various sales properties referred to in the valuation evidence. These inspections assisted my understanding of the evidence.
The cases were exhaustively presented. The trial time occupied 50 days of evidence and five days of oral submissions in addition to 1,439 pages of written submissions. A total of 279 exhibits were tendered, many of which extended to hundreds of pages. There were 27 witnesses called to give evidence, some of whom provided evidence in both matters. A transcript in excess of 5,000 pages was generated. Witnesses called by the appellant were:
Stewart John Alexander White Asset General Manager for Queensland and Northern New South Wales for Westfield Limited
Andrew David Robertson Senior Development Manager for Westfield Limited Shane Stacey Thompson Development Executive, Development and Asset Management for Westfield Limited.
John Colin Hill Director Resources Co-ordination Partnership Pty Ltd Construction Programmer
Robert Hubbard Partner in Price Waterhouse Cooper's Advisory Services Certified Practicing Accountant
Kenneth Robert McGowan Director or WT, Partnership Quantity Surveyors and Construction Cost Consultants
Simon Vickers Rumbold Director of Urbis JHD Pty Ltd– Retail Economist
Michael Joseph Slater Registered Valuer Doctor James Roger De Lisle PH.D. – Runstad Professor of Real Estate, University of Washington, Director Runstad Centre for Real Estate Studies.
Christopher Gerrard Buckley Director Buckley Vann Town Planning Consultants.
Ronald Albert Higham Partner, Valuations and Strategy Price Waterhouse Coopers (PWC) Adjunct Professor of Finance & Valuation, School of Business, University of Queensland Chartered Accountant Eamonn Martin Cunningham Vice President Global Risk Management for Westfield Limited James Gerard Long Manager – project Planning at AMP Capital Investors Limited.
Michael Edward Gilligan Associate Ryder Hunt, Quantity Surveyor
Rodney Louis Brett Registered Valuer Graeme Wakefield Centre Manager of Westfield Chermside Shopping Centre from 24-12-96 to late July 2001.
Richard Kenneth Godfrey Director and Consulting Engineer MPN Consulting Pty Ltd
Andrew Robert Pryor Financial Controller Management Finance Operations Westfield Limited
Russell Reid Bowie Partner Minter Ellison Lawyers
Witnesses called by the respondent were:
Professor Kerry Dean Vandell Ph.D; Tiefenthaler Chair in Real Estate and Urban Land Economics Director, Centre for Urban land Economics Research University of Wisconsin – Madison
William Owen Managing Director Core Economics
Member – Planning Institute of Australia, Retail EconomistBrett Andrew Plant Director Strategic Financial Services
PKF Chartered Accountants and Business AdvisersRichard Berry Rowles Construction Programmer, Project Planner Managing Director Rowles Time Management
Shane Raymond Stirling Montgomery Registered Valuer
Malcolm Davidson Gold Coast Manager The Rawlinsons Group Pty Ltd, Quantity Surveyor
Mark Everett William Denman Registered Valuer John Brian O'Rourke Principal Legal Officer Legal Services
Department of Natural Resources, Mines and Water
I have not included witnesses whose evidence was exclusive to the Pacific Fair appeal.
Some Relevant Statutory Provisions
The role of the respondent in valuing the subject land and of the court on appeal is to determine the "unimproved value" of each parcel of land. The meaning of that term is dealt with in s.3(1) and (2) of the Act:
"3Meaning of "unimproved value"
(1)For the purposes of this Act -
unimproved value of land means -
(a) in relation to unimproved land - 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; and
(b) in relation to improved land -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, at the time as at which the value is required to be ascertained for the purposes of this Act, the improvements did not exist.
(2) However, the unimproved value shall in no case be less than the sum that would be obtained by deducting the value of improvements from the improved value at the time as at which the value is required to be ascertained for the purposes of this Act."
A definition of the term "value of improvements" is provided by s.5.
"(1) The 'value of improvements' means, in relation to land, the added value which the improvements give to the land at the time as at which the value is required to be ascertained for the purposes of this Act, irrespective of the cost of the improvements, including in such added value the value of any hotel licence the value of which has been included in the improved value.
(2) However, the added value shall in no case exceed the amount that should reasonably be involved in effecting, at the time as at which the value is required to be ascertained for the purposes of this Act, improvements of a nature and efficiency equivalent to the existing improvements."
The phrase "value of improvements" is found in s.3(2) but not in s.3(1)(b).
These provisions remained unchanged by amendments made to the Act by the Valuation of Land Amendment Act 2003 (Act No. 35 of 2003), though are to some extent affected by those amendments. I discuss this below. The provision in s.3(1) for unimproved value to be based on a "fee simple of the land" is subject to any beneficial or burdening easement associated with the land (s.14(4)). Apart from that provision, the "fee simple" must be taken as "a hypothetical unencumbered fee simple without regard to any restrictions on title or user other than those imposed by the general law".[6] Thus any leases which encumber the relevant title are to be disregarded.
[6]Brisbane City Council v The Valuer-General (1978) 140 CLR 41 at 48. See also Stephen v Federal Commissioner of Land Tax (1930) 45 CLR 122 at 144-145. Royal Sydney Golf Club v Federal Commissioner of Taxation (1954-55) 91 CLR 610; Harry v The Valuer-General (1975) 36 LGRA 319; and Gollan v Randwick Municipal Council [1961] AC 82.
The parties agree that for the purpose of striking the unimproved value of the subject land it should be treated as "improved land" and that, therefore, s.3(1)(a) has no application.
The statutory methods provided in s.3(1)(b) and s.3(2) are therefore relevant, though I should say that each is not a valuation method as such. I will refer in the current discussion to the s.3(1)(b) method as the "primary" method. I will refer to the s.3(2) as the proviso method or as the "subtraction" method, a description that reflects what is involved and which acknowledges the fact that the method was utilised even though it was not, in terms, provided for in relevant legislation before 1930.
No definition of "improved land" is provided in the Act, however the definition in s.4 of "improved value", following the inclusion of the 2003 amendments, read together with the definition of "improvements" in s.6, provide some indication of what is intended by the phrase:
"4Meaning of "improved value"
(1)For the purposes of this Act -
improved value means, in relation to land, the capital sum which the fee simple of the land, including improvements, might be expected to realise if offered for sale on such reasonable terms and conditions as a bona fide seller would require." (the words underlined by me were added by amendment in 2003)
I discuss the issue of what constitutes improvements in some detail later in these reasons. I should point now to the view that I have formed that whether the land is unimproved or improved land can depend on detailed analysis.[7]
[7] See [114] and following.
In the 2003 amendments two amendments were made to s.6 which provides the meaning of the term "improvements". First, in s.6(1) the word "intangible" was added so that the definition now reads:
"6Meaning of "improvements"
(1) Improvements means, in relation to land, improvements thereon or appertaining thereto, whether visible, invisible or intangible, and made or acquired by the owner or the owners' predecessor in title, and includes …" (my underlining)
I see no need to set out s.6(1) in full. Section 6 was also amended by the inclusion of a new subsection (5) expressly referring to the word "intangible" which had been inserted in s.6(1):
"(5) In this section -
intangible improvements, in relation to land, include the benefit of -
(a)the following non-physical improvements to the land -
(i)a lease, licence or other right;
(ii)the goodwill associated with the purpose for which the land is being used; and
(b) other non-physical improvements prescribed under a regulation."
Changes to the Valuation of Land Regulations 1993 were made at or about the same time as were the amendments to the Act. Regulation 2AA as enacted was later repealed, then repeated in identical terms as regulation 3 in the Valuation of Land Regulations 2003 (the Regulations). That regulation has the effect of deeming things which it describes, to be non-physical improvements for the purpose of s.6(5) of the Act:
"3 Non-physical improvements that are intangible
improvements -Act, s 6(5)
For section 6(5) of the Act, definition "intangible improvements", paragraph (b), the following non-physical improvements are prescribed -
(a)risk management procedures in place for a development on the land, including, for example, procedures dealing with the following -
(i) capturing and retaining a share of the market;
(ii) turnover of tenants;
(iii) establishing a stable and quality mix of tenants;
(b)market advantages resulting from the business skills of the owner or manager of a development on the land;
(c)market advantages of a brand name used for a development on the land."
Section 35A was inserted into the Act in 2003, permitting a landowner to apply to the Chief Executive to have taken into account the value of intangible improvements in the making of a valuation under the Act. Section 35A provides:
"35A Valuing intangible improvements
(1)An owner of land may apply to the Chief Executive to have the value of intangible improvements to the land taken into consideration by the Chief Executive in making a valuation of the land.
(2)The application must -
(a) be in the approved form; and
(b)state, for the land including improvements, the market value mentioned in the owner’s financial records; and
(c) state the type of intangible improvements; and
(d) include -(i)an assessment by the owner of the value of each of the intangible improvements; and
(ii) the information used by the owner to make the assessment including supporting documents; and
(e)be given to the Chief Executive by 30 June in the year before the year in which the valuation is to have effect.
(3)The Chief Executive may require the person to provide further information or documents to enable the Chief Executive to make the valuation.
(4)The Chief Executive is required to take the value of intangible improvements into consideration in making a valuation only if -
(a)an application has been made under this section; and
(b)the Chief Executive has received any information requested under subsection (3).
(5)The Chief Executive must not value intangible improvements at more than the percentage prescribed under a regulation of the improved value of the land.
(6)Subsection (7) applies if -
(a)the Chief Executive has valued intangible improvements under this section; and
(b)the owner of the land to which the intangible improvements relate has not made a further application under this section.
(7)The Chief Executive, in making a valuation of the land, may take the value of the intangible improvements, decided under this section, into consideration for up to 3 years after the application is made."
For the purposes of s.35A(5) the Regulations (s.5) prescribe a figure of 20%. The parties referred to this as the "cap".
The appellant lodged an application on 29 August 2003 pursuant to s.35A alleging that the value of intangible improvements in the case of the Chermside land was $75,500,000. By virtue of s.101 inserted by the amending Act, the lodgement of the application by 31 August 2003 means that the amended provisions apply to the valuation under appeal. The respondent accepted the application as being consistent with the Act and relied upon the materials which accompanied the application in its reconsideration of the valuation.
Shopping Centres
The evidence was that a major regional shopping centre is one which typically has a department store as one of its tenants together with one or more full line discount department stores and supermarkets and around 150 speciality shops. Chermside falls into that category. A super regional shopping centre is one usually with two department store tenants, a similar number of discount department stores and supermarkets to that of a major regional centre and around 250 speciality shops. Pacific Fair is so classified. In Australia, there are two department store chains only, that is Myer and David Jones. Where a shopping centre has secured a department store as a tenant it is said to be an "anchor" tenant. A department store is also described as a "major", a term which also applies to discount department stores, such as Target and Kmart and supermarkets such as Coles, Bi–Lo and Woolworths.
At the next level come the mini–majors which are national chain speciality shops such as Harvey Norman, Toys "R" Us, Lincraft, Just Jeans, Mathers and Witchery. Evidence from Mr Long was that some majors such as Harvey Norman are often referred to as "category killers" because of their market dominance in particular categories of merchandise.
"Stabilisation" is a stage, as Mr White described it, that a newly developed regional shopping centre reaches when the owner no longer has to support tenants. That is, a reasonably expected level of income for the centre has been achieved without rental support needing to be ongoing and without a level of marketing beyond that of stable expenditure. It is when tenancies are not frequently and or irregularly vacated, requiring re-leasing - when tenant "churn" has dropped to a consistent level - and when releasing to current tenants can generally be anticipated as leases expire. Following stabilisation a shopping centre is said to have reached "maturity". After maturity, when it cannot accommodate any increase in customer traffic and where sales have plateaued or fallen the indicated option is redevelopment. Stabilisation will be reached some few years after development, occupation and opening. A shopping centre owner will need to invest substantial sums in order that the shopping centre may reach the point of stabilisation. Expenditure alone would not achieve the outcome, there being a need for sufficient time to elapse in order that the response of the market catchment to the offer can occur. There is therefore an element of risk associated with establishing a stabilised major regional shopping centre.
The Valuations
The respondent and the appellants provided valuations under s.3(1)(b) and s.3(2) of the Act for both properties. For Chermside Mr Slater prepared the valuation for the appellant under s.3(1)(b) whilst Mr Denman wrote the valuation relied on by the respondent. For the appellant in Pacific Fair, Mr Brett provided the valuation under that provision whilst Mr Montgomery prepared the corresponding valuation for the respondent. Each of the four valuers employed the comparison with sales method. That method is usually associated with s.3(1)(b), however the provision does admit the use of any method consistent with its terms.[8]
[8] See for example Russell v Federal Commissioner of Taxation (1934) 50 CLR 182.
Mr Slater and Mr Brett estimated improved values for Chermside and Pacific Fair respectively. Mr Higham carried out two exercises which, having regard to evidence of construction cost estimates provided by Mr McGowan for Chermside and Mr Gilligan for Pacific Fair, reduced those improved values to unimproved figures in a manner said by the appellants to be consistent with s.3(2). He employed what was referred to in evidence as the PWC model. Mr Higham also supplied an alternative method in which he directly valued improvements. The overall s.3(2) exercises for the respondent were prepared by Mr Denman for Chermside and Mr Montgomery for Pacific Fair, taking into account construction cost estimates provided by Mr Davidson.
Prior to trial there were exchanges of valuation reports. Response reports were generated and rejoinders followed. As a result, the figures which appeared in the original valuations were in some cases adjusted, some on a number of occasions. I will not record those adjustments in detail but will simply refer to the final figures in each case.
In the case of the Chermside land the parties appeared on first blush to have held a common view as to the highest and best use of the land to be valued. In his valuation report Mr Denman said that the highest and best use of the land: "… is considered to be its current use, being a large shopping centre …". Mr Slater, unusually, did not set out a description of the highest and best use of the land in his primary valuation report, however it is clear that he proceeded on the basis of the highest and best use described in the appellant's submissions, "… for a regional shopping centre …".
The respondent's valuations under s.3(1)(b) proceeded on the basis that it was "improvements" only that had to be notionally removed from the land, leaving whatever value remained in the land for the fact that the highest and best use of the land had, by the valuation date, reached fruition by the development, tenanting and operation of the shopping centre. That position relied, in particular, on a suggested meaning of the words "… assuming that, at the time as at which the value is required to be ascertained for the purposes of this Act, the improvements did not exist" in s.3(1)(b). Particular emphasis was placed on the words "did not exist".
The appellant's position was, however, that that same phrase required an assumption that, subject to one exception, no shopping centre had ever been developed and occupied on the land. In short, a hypothetical purchaser of the land treated as unimproved would need to make appropriate allowance for profit and risk associated with the need to secure anchor tenants for the shopping centre to be developed. That one exception was that the improvements on the land could be taken into account in determining the highest and best use of the land, as could the fact that a shopping centre had successfully operated on the land.
I deal with that major point of difference between the parties below in [59] and following. Before I come to that however, there is a topic I should address.
Highest and Best Use (Ripeness)
The legal concept of value is usually referable to the oft-cited case of Spencer v The Commonwealth[9] and in particular to the judgment of Griffith CJ at 432:
"In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained on a given day, i.e. whether there was in fact on that day a willing buyer, but by inquiring 'what would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.";
and to that of Isaacs J at 441:
"To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property."
At 440-441 Issacs J said:
"The facts existing on 1st January 1905 are the only relevant facts, and the all important fact on that day is the opinion regarding the fair price of the land, which a hypothetical prudent purchaser would entertain, if he desired to purchase it for the most advantageous purpose for which it was adapted."
[9] (1907) 5 CLR 418.
What was said by the High Court is often referred to as the Spencer test of value. Spencer involved the subject of compensation for the resumption of land, however the test of value enunciated there by the High Court has been held to apply equally to statutory valuations. See, for example, Stubberfield v The Valuer-General[10] and Martin v Commissioner of Land Tax.[11] Stubberfield involved an appeal under the Valuation of Land Act. The Spencer test is reflected in the language of s.3(1)(b) and in the term "improved value" in s.3(2) which is defined by s.4 and which also includes language similar to s.3(1)(b) in that each refers to "the capital sum which the fee simple of the land… might be expected to realise". Below, I consider that similarity to be of relevance.
[10](1989) 12 QLCR 328 at 330.
[11] (1965) 12 LGRA 142 at 146.
In Stubberfield Carter J said at 331:
"It is also a well recognised principle that land be valued for its highest and best use. What it can best be used for will be reflected in its true market value which takes account of any detriment the land possesses relevant to its use as well as any potential it has for its present or other use. Again the relationship between value and land use is immediately apparent."
I am not aware of the source of the term "highest and best use", however it appears to reflect a combination of "the fair price" and "most advantageous purpose" which appear in the Spencer judgment of Isaacs J at 440-441 quoted above.
The cases emphasise that highest and best use is to be ascertained as at the date for valuation, but is to take into all "relevant factors affecting its present and future potential".[12] It is an important aspect of a valuation that the value be struck based on the highest and best use at the relevant point in time - in the present case 1 October 2002. As much was observed, for example, in The Minister v Matford Nominees Pty Ltd[13].
[12]per Jacobs J in Adelaide Clinic Holdings Pty Ltd v Minister for Water Resources (1988) 65 LGRA 410 at 415.
[13][1973] 2 NSWLR 58 per Else Mitchell J at 59-60.
In Boland v Yates Property Corporation Pty Ltd[14]the High Court was concerned with land having a highest and best use as a retail market place to be operated through licensed stall holders. The landowner had proceeded to gain local authority planning and building approval and to attract licensees. He secured written agreements from 40 individuals who agreed to take a stall if the market was constructed. Buildings on the site were demolished to make way for the planned construction. An amount of $2,700,000 had been spent to reach that stage.
[14](1999) 74 ALJR 209.
The actions the landowner had taken were described by Callinan J as being "no more than an element of the highest and best use of the land and a factor to be taken into account in assessing its value on that basis." [15]
[15] at [274].
In that same paragraph his Honour made reference to what Isaacs J said in Spencer (at 441) concerning a purchaser being assumed to be "perfectly acquainted with the subject", then said:
"It follows that the more work, the more proving up that is done by the vendor before the sale, the more uncertainty as to the realisation of the potential will be reduced, and the higher the price will be."
In other words, land may be suitably described as having a particular highest and best use, however its value will depend, amongst other things, on the extent to which the land has progressed towards the fulfilment of that potential. Boland was a case arising from a resumption of land, however the reasoning to which I have referred can be found in statutory valuation cases. For example, in Stubberfield Moynihan J said:
" … if facts are established which could affect the price a hypothetical prudent purchaser was prepared to pay for a particular piece of land by comparison to other lands of 'similar zonings, uses or categories' not so affected then, in the absence of some statutory provision compelling exclusion of the consideration, the valuation of the particular piece of land should reflect the considerations peculiar to it. There is no such statutory provision applicable in this case."[16]
[16] at 347 - see also Carter J at 339 – 340.
A parcel of land may be presently unused or used for a low value purpose, but be perceived to have some potential for a higher use. Whether the suggested potential has value would be dependent upon whether its achievement was speculative or probable. If the probability is high approaching certainty, the land might be said to be "ripe" for development for its application to that highest and best use. In a case where the achievement of the potential is dependent on the uncertain occurrence of an event such as the release of a restriction or the grant of a right, then the value of the land would be dictated by some lower use than the hoped for potential use.[17] In effect, the need for that event to occur acts as a barrier that must be overcome for the land to be said to have the greater highest and best use.
[17] Royal Sydney Golf Club v Federal Commissioner of Taxation (1957) 97 CLR 379 at 391.
Acceptance of land as having a highest and best use as a regional shopping centre is dependent upon a number of characteristics being satisfied to an adequate degree. I refer for example to size, location, access, land configuration and topography, surrounding population and local authority land use designation. There was no dispute between the parties that such characteristics were suitably present in the matter before me. Yet even with these features a parcel of land may not yet be ripe for development as a regional shopping centre because the assemblage and securing of suitable tenants has not yet occurred and may be uncertain.
Evidence from Mr Long and Mr White was that in a proposed regional shopping centre development, it is essential to secure the commitment of majors to tenancies at the outset including, in the case of a major regional shopping centre, a department store as the anchor tenant. Those commitments usually in the form of agreements for lease (AFL's), provide stability for the centre, secure income, facilitate financing and attract speciality tenants to the proposed centre. The identity of the major tenants will influence the specialities, especially the mini–majors, who prefer to associate with certain majors. Design and planning cannot take place until the major tenants and their needs are known.
These gentlemen said that without the major tenants being secured the regional shopping centre development would not proceed. That view is confirmed by other witnesses including Mr Rumbold and Mr Hill.
This point was taken up by Mr Slater who said that without suitable AFL's for majors in place a proposed shopping centre site would not sell, although that viewpoint is conflicted by the Helensvale sale discussed below. Mr White was less emphatic that a sale would not take place, however emphasised that it would be at a price which reflected the absence of major tenants. There would be the risk that such tenants would not be secured or that the costs and delays in obtaining AFL's would be substantial. He was quite clear that development would not take place until major tenants had been secured.
The relevance of this evidence to the highest and best use of a parcel of land was I think best explained by Mr Denman. His evidence was to the effect that it is not a question of a site with a highest and best use as a regional shopping centre selling at a higher price if majors are secured – the land could not be said to have a highest and best use as a regional shopping centre without the major tenants. The assemblage of the major tenants bestows on the land the essential characteristic which gives it its highest and best use. As the appellant put it, it is the "yeast that makes it grow". Without such tenants the land must simply be seen as being suitable for development as a regional shopping centre, but unproven. The securing of the major tenants is a barrier that must be overcome. Once overcome, the land may be said to be ripe for development as a regional shopping centre; that, is to have that highest and best use. The evidence is clear that a prudent developer such as Westfield would be comfortable in committing to development once the major tenants are secured. Whilst it may be correct to say that the development from that point could not be described as being absolutely risk free, it seems that it would largely be treated as such by the Westfield's of this world. To paraphrase the language of Demack J in Blocksidge v State of Queensland,[18] the shopping centre developer would treat the probability of a successful development as a reality. Many identifiable risks which remain with the development would, to the extent possible, be effectively contracted out in the form, for example, of the building contract and would be costed accordingly. An example of such "de-risking" can be found in the Coonan Street sale.[19]Whilst such identifiable risks may be open to management and the successful completion of the development assumed, that is not to say that a developer would prudently treat the expected profit from his development efforts as being secured. Any development of the order of a regional shopping centre will involve uncertainties such as the quality of non-major tenants that will be secured and the costs and time in securing them; design variations; the time, cost and strength of stabilisation; uninsured delays and others.
[18] (1991) 2 Qd R 1 at 9.
[19] See [275].
The first significant issue that I must address therefore, is that of the highest and best use of the subject land for the purpose of a valuation under s.3(1)(b) of the Act. That involves the question of whether under that provision the land should be treated as if the improvements on it had never been made, or whether they must simply be assumed not to exist at the date of valuation. In considering that question, I will need to also introduce some preliminary discussion on the s.3(2) method of ascertaining statutory value.
The Proviso or Subtraction Method
Section 3(2) operates as a proviso to s.3(1)(b) requiring that the "unimproved value" not be less than the figure derived in the manner described in that provision. Indeed, as originally expressed in the Act the proviso was not contained in a separate subsection but was included as part of the then s.12(2)(b). It was renumbered in 1993.
Land taxes were a feature of the revenue base for both the Commonwealth and the States early in the twentieth century. The Commonwealth land tax was imposed pursuant to the Land Tax Assessment Act 1910, whilst in Queensland the relevant Act was the Land Tax Act 1915.
The proviso was introduced into the Queensland Land Tax Act by an amending Act in 1930. The amending language was taken from a similar amendment made to the Commonwealth Act in the same year, these amendments being made for purposes I come to shortly.
Broadly speaking, the method of assessment described in the proviso had been employed in a relevant statutory context prior to the 1930 amendment as an alternative to the method based on the assumption that improvements on the land were to be notionally removed and the valuation to then proceed on that basis usually, but not exclusively, by a comparison with sales evidence. One example cited to me for the respondent and submitted as being particularly significant was the case of Commissioner of Land Tax v Nathan[20] - one suggested point of significance lying in the High Court's endorsement of the subtraction method in the application of a statutory definition of "unimproved value" (s.3) that did not, in terms, include the proviso:
"'Unimproved value' in relation to land, means the capital sum which the fee-simple of the land might be expected to realize 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 and made or acquired by the owner or his predecessor in title had not been made."
[20] (1913) 16 CLR 654.
Nathan involved an appeal to the High Court from a decision of the Supreme Court of Queensland. The dispute concerned a valuation of land pursuant to the provisions of the Land Tax Assessment Act (Commonwealth). The land comprising the Albion Park Racecourse had been improved as such and had been used without success as an unregistered club for a number of years. In due course, registration was granted by the Queensland Turf Club and trading success followed. The Commissioner had valued the land by use of the subtraction method on the basis that it had a highest and best use as a racecourse.
In response to the submissions for the landowner, Isaacs J who read the decision of the court said at 662:
"In the first place, the 'improved value' is arrived at by taking into account as evidential, but not as ultimate facts, all existing and all past circumstances affecting the land, and these include its past and present use, as well as its present improvements. Improvements existing at the given time, and which are 'thereon or appertaining thereto' - meaning actually upon the land itself or legally incident to its enjoyment - are to be assumed as not made. But past improvements, no matter how much their presence or use has enhanced the price, are not to be deemed never to have been made; their prior existence and the effect of them are not to be ignored. So when the 'improvements' as still existing are to be ignored, nothing is said as to erasing the effect they or their use have had in bringing the land up to its present value.
The definition of the phrase 'value of improvements' is couched in the present tense. It is added value which the improvements give to the land at the date of valuation - not the value which they gave from their creation up to that date, nor the value which past improvements have given."
I will, for the sake of brevity, refer to this quote as the "Nathan formulation" and to the second paragraph as the "temporal aspect".
Section 3 of the statute supplied this definition:
"'Value of improvements,' in relation to land, means the added value which the improvements give to the land at the date of valuation irrespective of the cost of the improvements."
It will be noticed that this definition does not include the proviso now included as s.5(2) of the Valuation of Land Act. It was not until 1912 that the Commonwealth Act was amended to include the provisio which was not applicable at the time of Nathan:
"Provided that the added value in no case exceed the amount that should reasonably be involved in bringing the unimproved value of the land to its improved value as at the date of assessment."
Nathan does not stand as an isolated example of the subtraction method being employed prior to 1930. There was "a catena of decisions" in which the method had been utilised.[21] Morrison & Ors v Federal Commissioner of Land Tax[22] was one such case in which the method was employed and in which Isaacs and Powers JJ, whilst concurring with the reasons expressed by Griffith CJ, said that their decision was consistent with Nathan. Others included Campbell v Deputy Federal Commissioner of Land Tax for New South Wales;[23] Fisher v Deputy Federal Commission of Land Tax (NSW);[24] and McDonald v Deputy Commissioner of Land Tax for NSW[25] all of which were concerned with the statutory definition of "value of improvements" which applied prior to the 1912 amendment by inclusion of the proviso to that definition. In Kiddle v Deputy Federal Commissioner of Land Tax[26] the proviso was in operation – a point I return to below.
[21] Drysdale Bros & Co v Federal Commissioner of Land Tax (1931) 46 CLR 308, at 325 per Evatt J.
[22] (1914) 17 CLR 498.
[23] (1915) 20 CLR 49.
[24] (1915) 20 CLR 242.
[25] (1915) 20 CLR 231.
[26] (1920) 27 CLR 316.
I now introduce a case which was central to the debate between the parties: Toohey's Limited v The Valuer-General.[27] The land in question had a hotel constructed on it and a licence granted under the Liquor Act 1912 (NSW) permitted the site to be used for the business of a licensed victualler. The matter came before the Privy Council on appeal from a decision of the Full Court of the Supreme Court of New South Wales in which the subtraction method of valuation had been endorsed. In applying that method the court at first instance had deducted the value of the physical hotel improvements from the value of the improved hotel property . That process effectively left the value of the licence in the unimproved value of the land - "land that possessed no special advantages or adaptabilities as a site for licensed premises by reason of its position or otherwise".[28] Their Lordships essentially relied on the construction they placed on s.6 of the Valuation of Land Act 1916 (NSW) which was expressed in similar language to the definition of "unimproved value" provided in the Land Tax Assessment Act (Commonwealth).
[27] (1925) AC 439.
[28] at 441.
At 443 the judgment of the Privy Council referred to s.6, then in reference to the valuer's task under that provision, said:
"Now, what he has to consider is what the land would fetch as at the date of the valuation if the improvements made had not been made. Words could scarcely be clearer to show that the improvements were to be left entirely out of view. They are to be taken, not only as non-existent, but as if they never had existed. It is, therefore, to approach the question from a completely wrong point of view to begin with a valuation which takes in the improvements and then proceed by means of subtraction of a sum arrived at by an independent valuation in order to find the required figure. What the Act requires is really quite simple. Here is a plot of land; assume that there is nothing on it in the way of improvement; what would it fetch in the market?"
Lord Dunedin, who read the judgment of the Judicial Committee, said that the valuation should be carried out as if the subject land was "bare land without any buildings upon it, and without any consideration of the value of the subject as including de facto licensed premises".[29]
[29] at 445.
That conclusion is, on my understanding, based on reasoning which appears at 444:
"… the result obtained is not only contrary to the method permitted by the Act, but is demonstrably fallacious. Proceedings are begun by the taking of a figure for the subject as it stands as licensed premises. It is obvious that this figure is composed of three ingredients; first, the bare land itself; second, the buildings themselves constructed for and appropriate for licensed premises; third, the enhanced value due to the fact that the land and buildings in question are not only suitable for licensed premises, but are in fact licensed premises.
When, however, the subtraction sum is entered upon it is only item 2 that is subtracted from the total figure; the result being that item 3 is all included in the unimproved value. From this follows the extraordinary result that the land is enhanced by the value of a licence which could only be granted in connection with buildings - for a licence such as this cannot be granted to sell liquor without premises - in a calculation in which you are told to assume that no building is there."
In Jowett v Federal Commissioner of Taxation[30] the court was constituted by Rich J and was concerned with the statutory valuation of three properties. In his reasons associated with the first two of these properties his Honour applied the subtraction method. Later in the judgment reference is made to Toohey's case and the opinion is expressed that Nathan, Morrison and McDonald are consistent with that case. What is said in this regard appears, however, to be concerned only with the question of whether the removal of prickly pear from a pastoral property constituted an improvement for the purposes of the Act. This same issue arose later before the full bench of the High Court in McGeoch v Federal Commissioner of Land Tax.[31]
[30] (1926) 38 CLR 325.
[31] (1929) 43 CLR 277.
It was not until McGeoch that the Full Bench of the High Court was to consider an appeal in which the decision in Toohey's case was to be applied. In McGeoch the High Court had before it the question of the value of a pastoral property. Rich J stated a case for the Full Bench in which two questions presently of relevance were asked:
"(1)Whether the keeping of the said lands clear of prickly pear as aforesaid is an improvement within the meaning of the Land Tax Assessment Acts 1910-1924 and 1910-1926;
(2) Whether, in estimating the unimproved value of the said lands by deducting from the improved value the value added thereto by the improvements, the enhancement in value of the said lands occasioned by the keeping of the same clear of prickly pear as hereinbefore mentioned should be deducted from the improved value of the said lands at the relevant dates;" (281)
It is with the above discussion in mind that I accept the submission for the appellant that the 10.5% WACC put forward by Mr Plant is too low being only 2.5% above the 8% real discounted cash flow of stabilised to mature shopping centres.
Mr Plant was critical of Mr Higham's estimating a WACC for each of the development, opening and maturing stages but then apparently putting them aside. What Mr Higham did, as I understand him, was to use those three WACC's as benchmarks for the 12.62% WACC over the entire development period in his PWC model. Now in his estimation under s.5(2) of the amount reasonably involved in effecting intangible improvements he did employ the 12.62% WACC but for the development period only, the other stages being based on the WACC's estimated for each of them. The effect of this is to adopt a lower WACC for the development period than would have applied had he estimated a WACC for that period separately.
Mr Denman provided a number of criticisms of Mr Higham's CAPM approach based on his appreciation of the Board Proposal for the Chermside purchase. That evidence is of no assistance in a s.3(2) exercise in my view as the sale property had a known history of use together with AFL's in place. I have held that the land in a s.3(2) exercise is not to be treated as having the benefit of such attributes. Mr Denman made various criticisms of Mr Higham's 12.62% WAAC suggesting that it was too high. He presented those criticisms in general terms but did not go to the source of Mr Higham's figures to suggest how it should have been recalculated.
I have earlier commented on the various references to the differences between the s.35A material and that led by witnesses. Such a criticism was levelled at Mr Higham with respect to the differences between the estimate of WACC's for the s.35A material and that presented before me. Mr Higham provided direct reference to the changes between the pre-trial period and the evidence presented in relation to the PWC model WACC and in oral evidence in relation to the effect that the development timing and the cash flow changes had on the WACC's proffered in evidence. He also explained how he adopted the final test of standing back and asking the question as to whether the result was reasonable. That is, he applied his expertise to consider its "commercial reasonableness" as Lonergan[360] puts it. And Mr Higham's expertise in the relevant subject is, I find on the evidence, greater than that of either Mr Denman or Mr Plant.
[360] p. 97.
Finally, I refer to the respondent's submission in reply in which it is argued that Mr Higham has made an arithmetic error in the calculation of the debt equity relationship relied on by him. Mr Higham operated on the basis of a 70% equity and 30% debt over the period of development to stabilisation. That was an average distribution, however as he assumed 100% debt for the development phase and 20% thereafter. The level of average debt to equity is a product of time and cash flow and there is a relationship between the level of debt and the WACC based on the risk profile.
What the respondent attempted to do in submissions was to demonstrate mathematically that Mr Higham's average debt to equity must be wrong and that, therefore, his development WACC is correspondingly wrong. I have two related difficulties with this material. First, it is clear that the relationship between time, debt, cash flow and development stage all relate to the beta hence to the WACC to be adopted. One cannot simply change the maths and assume that the mathematical consequences have independent validity. Second, this material was not put to Mr Higham in order that it might be tested and in order that any, if any, errors in his s.5(2) exercise might be identified and rendered capable of adjustment.
I acknowledge the criticism that have been made of such methods as that used by Mr Higham in s.5(2) exercise.[361] Nevertheless, the use of cost-based methods has been recognised, at least in simple form, by the High Court in Maurici[362] and employed in cases such as George Quaid Holdings Pty Ltd v The State.[363] The exercise required by s.5(2) of establishing the amount reasonably involved in effecting intangible improvements must, given the subject matter, be a method based on an hypothetical analysis. Such an exercise is not referrable to comparative market transactions. A method such as that provided by Mr Higham is the only type available as far as I am aware. Indeed, his was the only such exercise placed before me which attempted this difficult task. I notice that Mr Plant, though critical of some aspects of the calculation of WACC's by Mr Higham, was not critical of the methodology.
[361]Phillip Street Pty Ltd v Queensland (1999) 21 QLCR 24 at 48; Thirty-fourth Philgrim Pty Ltd v The Crown (1993) 14 QLCR 13 at 28; Heavey Lex No. 64 Pty Ltd v Chief Executive, Department of Transport (1999) 20 QLCR 296 at 336-7; Merivale Motel Investments Pty Ltd v the Brisbane Exposition and Southbank Redevelopment Authority (1984-1985) 10 QLCR 268 at 281; Cromlawn Pty Ltd v Chief Executive, Department of Lands (1996-1997) 16 QLCR 421 at 428.
[362] (2003) 212 CLR 111.
[363] (2001) 22 QLCR 311.
I refer to Mr Higham's exercise described in [830] which was provided in Exhibit 75. I have been presented with a document in the form of Exhibit 275 as a basis for modification of the Exhibit 75 document having regard to conclusions that I might draw on the evidence. There are a number of conclusions that would alter the detail of Mr Higham's exercise, however I will not carry out a complete adjustment. I will, for the purpose of the exercise, employ the respondent's suggested base construction cost including all professional fees and the escalation amount also submitted for the respondent. I do this simply to demonstrate that no issue arises under s.5(1) as to the added value of intangible improvements.
The respondent submitted that if I were to accept the appellant's submissions as to the application of nominal escalation to construction costs under s.5(2), the cost figure to adopt would be $223,849,826 which includes an escalation component of $38,096,979. These figures take into account that no allowance should be made for contingencies, a proposition that I have accepted. It is however based on a number of elements that I do not accept: that there is no requirement for a DA to be obtained; that Mr Rowle's program is adopted in preference to Mr Hill's; that the base cost of construction inclusive of professional fees is as submitted for the respondent; and that escalation indices are based on Mr Davidson's evidence. Nevertheless I will utilise the respondent's figure as its use demonstrates that the s.5(2) calculation reveals a figure not less than the minimum value of intangible improvements under s.5(1) revealed by the application of my rational method. For the other parts of the adjusted exercise I must employ Mr Higham's figures adjusted by my various conclusions as there was no equivalent exercise provided by the respondent. The adjusted exercise is as follows:
·Un-escalated base cost of construction $185,752,846
from respondent
·Escalation from respondent $38,096,979
·Holding costs $32,331,864
$55,445,855 * [(56/60=0.933)*
($185,752,846/$297,166,906) = $0.625)]
·Pre opening risk $25,956,020
$32,331,864* (5.62%/7% = 0.8028)
·Pre opening costs $4,900,000
Leasing costs $3,000,000
Launch costs $1,500,000
Other $400,000
·Total reproduction cost (TRC) $287,037,709
·Cost of achieving stabilisation
over five year period
· Marketing fund contribution $1,000,000
· Additional marketing costs $1,625,000
· Tenant stabilisation $10,262,500
$12,887,500
Gross cost of effecting intangible improvements $25,956,020
$4,900,000
$12,887,500
$43,743,520
The risk adjusted cost of carrying the investment after opening to stabilisation is calculated as follows:
Year 1 TRC $287,037,709 * [9.66% - ((9.66% - 8.15%) that is 1.51%) * 0/4)]
That is $287,037,709 * 9.66%= $27,727,842
Year 2 TRC $287,037,709 * [9.66% - ((1.51%) * ¼)]
That is $287,037,709 * 9.66% - 0.3775%
That is $287,037,709 * 9.2825% = $26,644,275
Year 3 TRC $287,037,709 * [9.66% - ((1.51%) * 2/4)]
That is $287,037,709 * 9.66% - 0.755%
That is $287,037,709 * 8.905% = $25,560,707
Year 4 TRC $287,037,709 * [9.66% - ((1.51%) * ¾)]
That is $287,037,709 * 9.66% - 1.1325%
That is $287,037,709 * 8.5275% = $24,477,140
Year 5 TRC $287,037,709 * [9.66% - ((1.51%) * 4/4)]
That is $287,037,709 * 9.66% - 1.51%
That is $287,037,709 * 8.15% = $23,393,573
Addition of years 1 to 5 = $127,803,537
Less income for 5 years $152,248,330
at $30,449,666 per year.
Negative $24,444,793
The net amount involved in effecting intangible improvements is therefore $43,743,520 less $24,444,793 = $19,298,727. That amount exceeds the minimum value of intangible improvements of $5,184,973 at [767].
All that I have been concerned with in this exercise is to establish whether the "amount…reasonably involved" under s.5(2) is greater than the minimum value of intangible improvements I have calculated under my rational method. The result is that the amount calculated under s.5(2) is greater than the amount I have calculated for the purpose of s.5(1).
The result is that the value of intangible improvements has not been shown to exceed 20% of the improved value nor has the nominal value of those improvements been shown to exceed the amount calculated under s.5(2). Accordingly, the value of $112,000,000 that I struck under s.3(1)(b) remains undisturbed.
Relativity
The appellant was provided by the respondent with a schedule depicting the unimproved values for a number of shopping centre properties along with other information. Mr Brett considered this material and rank ordered the revealed values reflecting both the site value per m² of lettable areas and the value per m² of land area. He said that he was unable to discern a pattern of relativity in the applied site values. My own understanding of this evidence leads me to the same conclusion. It seems that differences in relativity of one property to the other in the supplied material resulted from different levels of information being available to the Chief Executive and different valuation approaches being adopted.
I understand from Mr Montgomery that allowances for intangible improvements were made with respect to at least some properties on this schedule in amounts representing 8% to 18.7% of the improved values of the properties. Mr Montgomery said that a particular method employed was the adoption of one year's net rental income as representing the value of intangible improvements to be allowed. Had that approach been adopted for the subject properties the value of intangible improvements would have been many multiples of that allowed for by the Chief Executive in the appeals before me.
It appears that the adoption of one year's net rent as a standard was based on either advice or a submission from a shopping centre owner to the effect that this was an appropriate method. It would certainly be more simple than the methods advanced before me and would lead to more generous allowances. Whilst Mr Montgomery was not able to be clear about it, it may well be that the case that the use of one years net rent as a measure comprised a rule of thumb employed in the industry. If that were the case, however, I would have expected to hear about it from the appellants.
Nevertheless, I view it as a matter of concern if, as if apparent, the Chief Executive would apply different approaches between different shopping centre properties – one more generous method for those who settle their objections and another for those who proceed to appeal.
There are three important features, amongst others, that a taxation system should display: simplicity, efficiency and equity.[364] Simplicity in both the public understanding of the system and its method of application serve both the operation of the system and its acceptance by those affected. A plea for simplicity can be found in the judgment of this Court in Selbourne Chambers Pty Ltd v Valuer-General[365] with reference to the use of the capitalisation method in assessing unimproved value:
"The mind boggles at the enormity of the task (the Valuer General's) valuers would be required to undertake. Controversy would be compounded by differences of opinion not only as to the land value but also as to the value of improvements thereon".
[364]In the identification of these I am indebted in part to Henry George "Progress and Poverty" Doubleday Page & Co 1904.
[365] (1982) 10 QLCR 1 at 5.
It cannot be said that the use of the s.3(2) procedure exhibits simplicity, nor for that matter, that it leads to an unimproved land value as that concept is usually understood. The need to take intangible improvements into consideration imposes further complexity on an already complex method.
The feature of efficiency applies to the cost of application of the system and its economic effect. The level and length of litigation would be relevant to cost. Equity is a principle that is well understood – in the context of the valuation system it is represented by correct relativity in values. The above discussion raises the question as to whether that principle is presently satisfied.
It is for Parliament to consider the application of such elements to the valuation system. I would hope that this judgment would go someway to assist the policy makers in considering whether the three elements that I have identified – and any others thought relevant – are suitably exhibited by the system.
The task of this court in an appeal under the Valuation of Land Act is to determine each appeal by either affirming, reducing or increasing the Chief Executive's valuation.[366] The Act does not impose upon the court an obligation of ensuring proper relativity between the values of properties. Indeed, that would be an impossible task whilst appeals are lodged on an individual basis or even, as sometimes occurs, in isolated groups. Nevertheless the Land Appeal Court has recognised the practical desirability of maintaining relativities in values to the extent that this can be done. Importantly, however, the paramount task of the court consistent with its jurisdiction is to determine individual appeals, not manage a valuation system. That duty falls to the Chief Executive and his statutory officers.
[366] See s.66.
Support for what I have just said is found in Grahn v Valuer General:[367]
"(a) It is desirable that valuations made for the purposes of the Valuation of Land Act 1944 of comparable lands should bear proper relativity, one to the other, so long as the valuations are soundly based. It is, however, untenable to adopt a value for one parcel on relativity with another which has no sound basis. (R and MM Barnwell v The Valuer-General (1989) 13 QLCR 13, at p. 16 and cases cited in it).
(e) Whilst maintenance of correct relativity is of considerable importance for rating valuations, the use of the principle of relativity should not be preferred to the exclusion of relevant (even if not ideal) sales evidence (WM and TJ Fischer v The Valuer-General (1983) 9 QLCR 44, at p.46).
(f) If possible, the Valuer-General should obtain uniformity between different blocks in the same land category or type, but should do so (preferably by reference to sales of comparable land) by correcting inaccuracies rather than by making an inaccurate assessment in order to secure uniform error (R and MM Barnwell v The Valuer-General (1989) 13 QLCR 13, at pp. 16-17 and cases cited in it).
[367] (1992) 14 QLCR 327 at 328 – 9.
In the circumstances of these cases I am therefore left to the evidence placed before me. I can find no assistance in the relativity properties referred to.
Order:
The appeal is allowed and the unimproved value of Lot 10 on Survey Plan 128115 in the Parish of Kedron, County of Stanley being title reference 50358209 is determined at One Hundred and Twelve Million Dollars ($112,000,000).
RP SCOTT
MEMBER OF THE LAND COURT
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