RAMAGE and VALUER GENERAL
[2014] WASAT 80
•2 JULY 2014
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL
STREAM: DEVELOPMENT & RESOURCES
ACT: VALUATION OF LAND ACT 1978 (WA)
CITATION: RAMAGE and VALUER GENERAL [2014] WASAT 80
MEMBER: MS C WALLACE (MEMBER)
MR D MOORE (SENIOR SESSIONAL MEMBER)
HEARD: 17 JUNE 2014
DELIVERED : 2 JULY 2014
FILE NO/S: DR 254 of 2013
BETWEEN: ROBERT RAMAGE
Applicant
AND
VALUER GENERAL
Respondent
Catchwords:
Valuation of gross rental value Hotel in Geraldton Appropriate valuation methodology Nominated percentage of turnover Standard valuation ratio approach
Legislation:
State Administrative Tribunal Act 2004 (WA), s 27(2)
Valuation of Land Act 1978 (WA), s 4, s 18, s 33
Result:
Application dismissed
Decision of respondent affirmed
Summary of Tribunal's decision:
The owners of a hotel in Geraldton sought review of the Valuer General's determination of gross rental value as at 1 August 2011. The Valuer General determined the gross rental value of the subject property at $865,800 as at the valuation date. The owners contended that the gross rental value of the hotel was $728,000 as at the valuation date.
The Tribunal found that the appropriate primary valuation methodology to determine gross rental value was the standard valuation ratio approach. The Tribunal found that the Valuer General's expert more properly calculated the gross rental value using that methodology than the owners' valuation expert. The Valuer General's determination of gross rental value of $865,800 as at 1 August 2011 was affirmed and the application seeking review was dismissed.
Category: B
Representation:
Counsel:
Applicant: In person
Respondent: Mr M Palandri (Public Sector Employee)
Solicitors:
Applicant: N/A
Respondent: N/A
Case(s) referred to in decision(s):
Nil
REASONS FOR DECISION OF THE TRIBUNAL:
Introduction
Mr Robert Ramage and Mrs Mary Ramage are the owners as joint tenants of Lot 20 on Diagram 82305 known as No 144 Marine Terrace, Geraldton, on which is situated a hotel, being the Ocean Centre Hotel, a bank, two commercial offices and a restaurant. The property is located in the Western Australian mid-west coastal City of Geraldton, being approximately 424 kilometres from the State's capital, Perth.
The Ocean Centre Hotel is situated a short distance from the foreshore and ocean and hence a number of the hotel rooms enjoy an ocean view, as well as also being centrally located, being within Geraldton's central business district. The property has an area of 2,938m2 and is essentially rectangular in shape with three road frontages, 46.47 metres to Marine Terrace, 58.20 metres to Cathedral Avenue and 30.14 metres to Foreshore Drive.
Pursuant to s 33 of the Valuation of Land Act 1978 (WA) (VL Act), Mr Ramage gave notice to the Valuer General requiring the Valuer General to refer the valuation of gross rental value (GRV) of $1,183,000, the hotel component being $865,800 as at 1 August 2011, to the Tribunal for review. It is only that portion of the GRV related to the hotel to which objection is taken by Mr and Mrs Ramage in these proceedings.
The Valuer General had initially assessed the GRV as at 1 August 2011 as $1,216,800. The global GRV for the property reduced as a result of the Valuer General lowering the components in respect of the offices in the complex, but the objection in relation to the hotel component was disallowed. Mr and Mrs Ramage accepted the GRV in relation to the bank, offices and restaurant portions of the GRV, but pressed their objection to the hotel component.
Section 18 of the VL Act requires the Valuer General to determine or cause to be determined the 'Gross Rental Value' with respect to rateable land. Section 4 of the VL Act defines GRV as:
… [T]he gross annual rental that the land might reasonably be expected to realize if let on a tenancy from year to year upon condition that the landlord were liable for all rates, taxes and other charges thereon and the insurance and other outgoings necessary to maintain the value of the land[.]
The issue in contention at the hearing was what valuation methodology was more appropriate to be applied in order to determine GRV for the subject hotel. Upon identifying the appropriate methodology the second issue to be addressed by the Tribunal was which of the independent valuation experts more accurately applied that methodology in their calculation in deriving the GRV component for the hotel.
The applicant contended that the GRV component for the hotel ought to be $728,000, although we note that in Exhibit 2, being the experts' joint statement in paragraph 10, it was accepted by the applicant's expert that a valuation of $759,000 would be appropriate. The Valuer General maintained that a GRV assessment of $865,800 was appropriate.
Review of valuation
Appropriate valuation methodology
In determining what is the correct and preferable decision (s 27(2) of the State Administrative Tribunal Act 2004 (WA)), the Tribunal needs to firstly identify what is the appropriate valuation methodology to apply in determining the GRV hotel component in the circumstances of this case and secondly to assess whether the application of that methodology by each of the valuation experts is correct.
The parties filed evidence in support of their positions which we have had regard to as follows:
•Exhibit 1: expert report of Independent Valuers of Western Australia dated 16 June 2014;
•Exhibit 2: the summary of expert conferral dated 10 June 2014;
•Exhibit 3: expert report of Mr Scuderi of Landgate dated 27 February 2014;
•Exhibit 4: Landgate review papers dated 18 September 2013;
•Exhibit 5: additional information provided by Mr Scuderi dated 17 April 2014.
In addition, the parties' independent experts also attended the final hearing and gave oral evidence, being Mr Lambert of Independent Valuers of Western Australia on behalf of the applicant, and Mr Scuderi from Landgate on behalf of the Valuer General. We accepted that both experts were qualified and experienced valuers.
In oral evidence Mr Lambert informed us that the appropriate valuation methodology, and the one which he adopted as his primary method of valuation, is the application of a nominated percentage of turnover approach to assess the net rental; and to which outgoings and GST are added to assess the GRV. In support of his primary valuation methodology, Mr Lambert submitted to us that his methodology was more objective and less open to errors being made (because less calculations were required), and also that in his discussions with those in the industry, it was his view that this methodology had more support.
Mr Scuderi disagreed with Mr Lambert's position in this regard, and although he admitted that the turnover approach could be used as a check or validation of a primary method, it was not appropriate to use it as the primary valuation methodology: this is because that methodology requires bundling multiple valuation issues and variables into a single assessed percentage ratio.
By comparison, the primary approach of Mr Scuderi was to calculate, on a line by line basis, the trading profit or EBITDA ('Earnings before interest, taxes, depreciation and amortisation'). Mr Scuderi gave evidence that this methodology allowed greater accuracy and also allowed him to more conservatively assess the GRV through a rounding down approach taken to the multiple calculations. Mr Scuderi referred to the ratios he applied as having been derived from comparable evidence analysed and his extensive experience as a regional valuer in regional centres. Mr Lambert conceded in oral evidence that he did not have the same detailed trading evidence to analyse.
We accept the evidence of Mr Scuderi in relation to the more appropriate valuation methodology for the present case being the standard valuation ratio approach. We have difficulty accepting the evidence of Mr Lambert that the turnover approach is the methodology that is more widely accepted by experts and professionals within the industry. Although Mr Lambert made that submission in his oral evidence, it was made in vague terms, and those individuals to which he was referring were not identified. There is therefore no basis on which we could assess that assertion with any confidence.
In addition, we accept Mr Scuderi's contention that a methodology which allows a greater amount of evidence to be utilised, although leading to a number of calculations which need to be made in order to reach a final result, provides checks and balances in the methodology which is not achieved if one uses a simpler approach such as the one proffered by Mr Lambert.
On that basis, we find that a valuation calculation approach based on the application of a percentage of the analysed trading net profit derived from evidence provides the most reliable and fair valuation assessment because of the more detailed analysis undertaken. This indepth analysis enables the entire profit and loss accounts of the subject property to be taken into account, rather than only one or two variables, within the assessment methodology.
Given that we have found the appropriate primary valuation methodology which ought to be adopted to determine GRV, we will now proceed to consider the way in which that methodology has been adopted by each expert.
Valuation calculation
The calculations required for the valuation ratio methodology are set out usefully in the table in Exhibit 1 on page 28, although we note that the calculations for Landgate's column were corrected by Mr Scuderi in his oral evidence at the hearing. Rather than examine the calculations line by line, we will deal with what became clear at the hearing as the main difference in applying the methodology by the two experts, thereby explaining the difference in the GRV determined by this methodology Mr Lambert's being $758,245 and Mr Scuderi's being $865,800.
A significant difference between the experts in their calculations was in the assessment of 'add-backs'. Add-backs are expenses itemised in the profit and loss accounts as a cost to the business but effectively form part of the underlying business's profit. They are therefore added back to determine the total net profit for the business.
There is a useful table in Exhibit 1 at page 22 that sets out the addbacks used in the calculations by each of the experts. We note that the nonwage proportion of directors' fees was amended by Mr Lambert in his evidence from $40,000 to zero. Taking that correction into account, the total net profit determined by Mr Lambert was $1,828,249 and the total net profit determined by Mr Scuderi was $2,074,049. That significant difference largely explains the difference in GRV adopted by the two experts.
The addbacks in contention between the experts are directors' fees and superannuation to directors. The evidence before us was that the directors' fees of $160,000 was a wage paid to Mr and Mrs Ramage's two sons who work for the hotel, one on a part-time basis in relation to technology services and the other on a full-time basis in relation to marketing, and the superannuation of $114,400 was split between $14,400 for the two sons and $100,000 going to Mr and Mrs Ramage's superannuation fund in lieu of their wages in managing the hotel.
Mr Lambert's evidence was that $160,000 was a reasonable amount for wages for the two sons and should be treated as an acceptable expense to the business. His initial view was that only 25% of the superannuation was a 'nonwage' proportion and ought to be added back as profit. However, after clarification by Mr Ramage of this expense during the hearing, Mr Lambert's view changed in this regard and he gave evidence that the whole of the superannuation amount and director's fees should be added back.
Mr Scuderi's position was that Mr Lambert's approach was not appropriate and that the more acceptable approach to the directors' fees and superannuation was to add back the entirety of those amounts as part of the total net profit, and an adjustment could then be made to take into account that a proportion of those amounts are wages and therefore constitute a cost to the business. Mr Scuderi gave evidence that this could be adequately addressed by an overall assessment of expenses at a ratio of 60%. Mr Scuderi's evidence was that this is an appropriate adjustment in line with industry standards, giving a true net profit of 40%.
Mr Scuderi's evidence was that the ratios applied in his methodology have been derived from market research and evidence he had available to him. The evidence to which Mr Scuderi referred is set out in Exhibit 5 which identifies two comparable transactions. The first transaction records expenses reflecting a ratio of 60% of gross profit and the net profit reflecting 40% of gross profit. The second transaction records expenses at 63% of gross profit and the net profit reflecting 37% of gross profit. We also note that in Exhibit 2, Mr Lambert accepted that a 40% figure for net profit is not unreasonable. We also find this adjustment of percentage to be a reasonable approach and accept that the transactions set out in Exhibit 5 support this position.
We therefore find that Mr Scuderi's approach is a more valid approach to the treatment of the directors' fees and superannuation. We found Mr Lambert's evidence, in contrast, in relation to the use of the directors' fees unconvincing. Mr Lambert did not properly understand what that amount represented in the profit and loss statements for the business until the day of the hearing and therefore he had not fully investigated what those amounts were being paid for nor properly turned his mind to what, if any, adjustments ought to be made. The same can be said in relation to the superannuation to the directors which again only became clear during oral evidence.
Lastly, we note that Mr Lambert was critical of the respondent's GRV assessment of the Ocean Centre Hotel because in his view it had not been properly coordinated with comparable properties within Geraldton. Mr Scuderi rejected this assertion. In response, Mr Scuderi noted that all GRV assessments for hotels in the Geraldton area were properly coordinated. He gave oral evidence that the GRV for the subject property was appropriately higher, given that it was a superior rating hotel in a prime location (many rooms having ocean views) which reflected in a more favourable profit and loss activity for that business. Unlike Mr Lambert, Mr Scuderi had access to the profit and loss information for the other hotel/motel businesses in the area and therefore was able to conclude that he had achieved fair and reasonable coordinated GRV assessments in the region. We accept Mr Scuderi's position in this regard.
Therefore, we accept the evidence of Mr Scuderi, that the GRV value of $865,800 determined by the Valuer General in relation to the hotel premises at 144 Marine Terrace, Geraldton was fair and reasonable as at the date of valuation.
Conclusion
In conclusion, and based upon the above reasons, we find that the correct and preferable decision is to affirm the respondent's valuation of GRV for the Ocean Centre Hotel as $865,800 as at 1 August 2011 and to dismiss the application for review.
Orders
The Tribunal makes the following orders:
1.The application for review in relation to the determination by the respondent of the gross rental value as at 1 August 2011 of the hotel situated at Lot 20 on Diagram 82305 known as No 144 Marine Terrace, Geraldton at $865,800 is dismissed.
2.The determination of gross rental value as at 1 August 2011 of $865,800 in relation to the hotel situated at Lot 20 on Diagram 82305 known as No 144 Marine Terrace, Geraldton is confirmed.
I certify that this and the preceding [29] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
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MS C WALLACE, MEMBER
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