Rona v Transport Infrastructure Development Corporation

[2004] NSWLEC 215

Land and Environment Court

of New South Wales

CITATION:	Rona v Transport Infrastructure Development Corporation [2004] NSWLEC 215
PARTIES:	APPLICANT: Rona RESPONDENT: Transport Infrastructure Development Corporation
FILE NUMBER(S):	30761 of 2003
CORAM:	Bignold J
KEY ISSUES:	Compulsory Acquisition of Land :- compensation-capitalisation of net annual rental method of valuation-appropriate capitalisation rate
LEGISLATION CITED:	Land Acquisition (Just Terms Compensation) Act 1991
CASES CITED:	Bowmont Pty Ltd v Transport Infrastructure Development Corporation (2004) NSWLEC 118; Croghan v Hawkesbury City Council (1998) 99 LGERA 375; Marcus Clark and Co Ltd v The Commissioner for Railways (1949) 29 LVR 98; Vazenios v Transport Infrastructure Development Corporation (2004) NSWLEC 187
DATES OF HEARING:	10, 11, 18/02/2004
DATE OF JUDGMENT:	05/27/2004
LEGAL REPRESENTATIVES:	APPLICANT: Mr J Webster SC SOLICITORS William Boxsell Georgas RESPONDENT: Mr R Lancaster, Barrister SOLICITORS Clayton Utz

JUDGMENT:

IN THE LAND AND Matter No:

30761 of 2003

ENVIRONMENT COURT Coram

: Bignold J

OF NEW SOUTH WALES

27 May 2004

IMAN HUSEYIN RONA

Applicant

v

TRANSPORT INFRASTRUCTURE DEVELOPMENT CORPORATION

Respondent

JUDGMENT

A. INTRODUCTION

1. This is an objection pursuant to the Land Acquisition (Just Terms Compensation) Act 1991, against the amount of compensation offered to the Applicant in respect of the Respondent’s compulsory acquisition of his property known as Nos 150-152 Church Street, Parramatta by compulsory Acquisition Notice published in Government Gazette No 77 of 24 April 2003.

2. That Compulsory Acquisition Notice notified the acquisition by compulsory process of a number of properties situate in Parramatta immediately south of, and adjacent to, the Railway Station, including the Applicant’s property for the purposes of the Parramatta Rail Link (including the augmentation of the existing Parramatta Rail Station and the provision of an integrated transitway interchange).

3. At the date of compulsory acquisition, the Applicant owned the property, having purchased it in December 2000 from TAB Ltd on a sale and leaseback arrangement. The property comprised shop premises fitted out as a typical TAB Agency having been refurbished for that purpose in 1996.

4. The lease arrangement was for an initial five year term commencing on 21 December 2000 with two successive options to renew each for a further five year term.

5. Following the compulsory acquisition, the Applicant received a compensation notice whereby the Valuer General had determined compensation for market value in the sum of $1,852,500.

6. This offer was not accepted and on the hearing of the Applicant’s objection, the Applicant, in reliance upon the valuation evidence of Mr Large (Exhibit 4) has contended for market value compensation in the sum of $2,465,000 and the Respondent in reliance upon the valuation evidence of Mr Humphries (Exhibit A) has contended for market value compensation in the sum of $1,640,000.

7. The parties have asked the Court to determine the amount of compensation payable in respect of the market value of the property formerly owned by the Applicant and to reserve the question of the amount of compensation payable in respect of disturbance in anticipation of that amount being agreed between the parties following the Court’s determination of the market value.

8. Although the parties’ valuers conferred in an attempt to resolve the matters in dispute, their Joint Report (Exhibit 1) although agreeing on a number of matters concerning the property in its leased state at the date of compulsory acquisition disclosed significant areas of disagreement concerning the market value of the property at the date of compulsory acquisition. Although that Joint Report records a difference in valuation methodology employed by Mr Large and Mr Humphries—the former adopting the capitalisation or investment method and the latter adopting the re-development method—ultimately at the end of the hearing, the parties mutually formulated the required adjudicative task as that of determining the appropriate capitalisation rate to be applied to the agreed amount of net annual market rent yielded by the lease of the property. The competing capitalisation rates were 4.5 per cent (Mr Large) and 5.95 per cent (Mr Humphries). Those competing rates yield competing valuations of $2,283,300 and $1,726,890.
B. DESCRIPTION OF THE COMPULSORILY ACQUIRED PROPERTY

9. The subject property comprises two adjoining lots (lots 1 and 2 Deposited Plan 229310), having a combined area of 322 m2 with a combined frontage of 10.13 metres to Church Street to a frontage of 3.1 m to Fitzwilliam Street. The configuration of the combined lots is irregular with the rear portion comprising an access corridor (3 m wide) to Fitzwilliam Street. A copy of Deposited Plan 229310 is annexed hereto and marked “A”.

10. The location of the subject property is on the eastern side of Church Street between Argyle and Fitzwilliam Streets, directly opposite the Westfield Shoppingtown complex (situate on the western side of Church Street). Church Street is the optimal retail and commercial location in Parramatta.

11. The railway station is 100 m distant from the subject property to the east along Argyle Street and the railway line and bridge overpass is some 80 m distant and north from the subject property.

12. The property is included in the “Retail Core” Zone under the provisions of the Sydney Regional Environmental Plan No 28—Parramatta which came into force on 20 August 1999, the express objects of which Zone being:

(a) to maintain and enhance the Parramatta city centre as a primary retail centre in the greater metropolitan region,

(b) to create and consolidate an identifiable central retail spine within the city at Parramatta,

(c) to ensure retail uses interact with primary pedestrian routes and provide active frontages to streets,

(d) to protect and encourage accessible city blocks by providing active frontages to streets, and a network of pedestrian — friendly streets, lanes and arcades.

13. The Retail Core Zone permits a maximum floor space ratio of 6:1 and a maximum building height of 24 metres.

14. At the date of compulsory acquisition, the existing development within immediate environs of the subject property was described in Mr Humphries’ Report (Exhibit A) in the following terms:

3.8 SURROUNDING DEVELOPMENT

The Westfield Shopping Centre opposite on the western side of Church Street was developed in the 1970’s and subsequently extended and dominates the Parramatta Retail market.

To the north is the Parramatta Railway Station whilst further south along Church Street redevelopment into commercial and residential units is taking place to take advantage of the zoning.

Surrounding development is single storey and two storey shops and offices generally dating from the 1900’s to 1940’s. However some high rise office blocks have been erected in recent years.

15. At the time of hearing, the properties that have been acquired (either by compulsory process or by negotiation) by the Respondent in the block bounded by Church, Argyle and Fitzwilliam Streets for the aforesaid public purpose had been cleared of the existing developments (principally consisting of retail shop premises of one or two storeys construction).

16. As earlier mentioned, at the date of compulsory acquisition, the subject property was the subject of a leaseback to TAB Ltd for an initial term of five years commencing on 21 December 2000 with options to renew the term for two further terms each of five years. The compulsory acquisition accordingly terminated the lease some 2 1/2 years into its initial term of five years (with the prospect of that term being renewed pursuant to the options).

17. The lease provided a net lettable space of 180 m2 and provided for an annual rental of $105,437 gross with 3 per cent fixed annual rental increases and with market value reviews every five years. Outgoings were payable by the lessor.
C. THE COMPETING VALUATION EVIDENCE

18. As earlier noted, at the end of the hearing, the Court was asked to determine only one issue concerning the market value of the subject land which remained in dispute between the parties, namely the appropriate capitalisation rate or factor to be applied to what the valuers in the Joint Statement (Exhibit 1) agreed to be the net annual rental of $102,750.

19. In my opinion, the capitalisation of net rental is obviously the most appropriate valuation method to adopt in the present case. Both Mr Large and Mr Humphries in their Reports in chief had employed this method, but because the result of Mr Humphries employing this method had yielded a lesser amount ($1,380,000) compared with the result yielded by his valuation based upon the comparable sales evidence of redevelopment sites ($1,640,000), Mr Humphries properly opted for the latter valuation as that which reflected the highest and best use of the subject property.

20. However, since his valuation employing the capitalisation of net rental had been based upon a net annual rent of $82,189 (capitalised at 5.95 percent), the agreement expressed in the Valuer’s Joint Statement (Exhibit 1) of a net annual rental of $102,750 necessarily means that Mr Humphries’ valuation based upon the capitalisation of net rental would be automatically amended from $1,380,000 to $1,726,890 by substituting the agreed amount of net annual rental for the lesser amount originally adopted by Mr Humphries (which had reflected the rent actually received at the date of compulsory acquisition). Moreover, this result means that that amended valuation based upon the capitalisation of net annual rental would yield a higher value than that yielded by Mr Humphries’ valuation employing the redevelopment method. No doubt, this fact substantially explains how the parties came to submit that the required adjudication to determine the market value of the subject land was confined to the determination of the proper capitalisation rate or factor.

21. In these circumstances, it is not necessary for me to consider the competing valuation exercises undertaken by Mr Humphries and Mr Large (as a check valuation in response to Mr Humphries’ valuation) based upon the redevelopment approach. In so concluding, it is not intended to deny or ignore the substantial redevelopment potential of the subject property, given its obvious locational advantages and Zoning under the Regional Environmental Plan. Rather, it is to recognise the intrinsic difficulty of valuing the subject property upon the redevelopment basis in circumstances when at the date of valuation, the property was subject to a lease with the potential to continue for the next 12 1/2 years. This scenario resulted in Mr Humphries, in his redevelopment valuation, deferring for 12 1/2 years his estimate of the present day freehold value of the subject property or alternatively allowing some $700,000 premium payment to TAB Ltd to buy out the leasehold interest and thereby place the purchaser in the position to realise the redevelopment value. This prompted Mr Large’s valuation exercise (undertaken as a check valuation in response to Mr Humphries) yielding a much higher value which allowed for an amount of $483,000 to buy out the lessee’s interest.

22. However, there are inherent difficulties with these valuation exercises principally caused by the fact of the unexpired term of the lease held by TAB Ltd at the date of compulsory acquisition.

23. An additional unresolved problem with this valuation approach concerns the fact that by virtue of its constrained size and irregular configuration, the whole of the subject property was not likely to be capable of redevelopment to its maximum potential without being amalgamated with other sites (such as had recently occurred with other properties in Church Street a short distance to the south).

24. However, there is no need for me to further consider the question of the redevelopment approach to valuing the subject property since ultimately the parties and their valuers properly recognised the obvious preference and appropriateness of the valuation method of capitalising the net annual rental (agreed to be $102,750).

25. The capitalisation of net annual rental method of valuation (also known as the “Investment method”) is succinctly described in the following extract from pp 82/83 of A F Millington’s “An Introduction to Property Valuation” (3rd Edition)

This is based on the principle that annual values and capital values are related to each other and that, given the income a property produces, or its annual value, the capital value can be found. The method is widely used by valuers when properties which produce an income-flow are sold to purchasers who are buying them for investment purposes.

Many properties are let to tenants and the income they produce is known. In other cases, although a property may not be let, it is possible to predict what its rental value is by comparing it with similar properties which have been let. If this is the case, or if a rent actually passes on a property, the only problem the valuer faces is determining the relationship of annual value to capital value. The way in which the conversion is made is by the use of a multiplier which is commonly known as Years’ Purchase, or, in abbreviated form, the Y.P. As will be seen later, in valuation terms, this multiplier is more appropriately described as the Present Value of £1 Per annum.

The Years’ Purchase or multiplier is derived from the rate of interest which an investor decides he will require from a property, that is, the yield which he wishes to obtain. This yield reflects the quality of the investment in comparison with other property investments, and other investments generally. Consideration has been given to factors which may influence the investor in his choice of yield, and the valuer will obviously need to be conversant with these when using the investment method. Here again an element of comparison arises, as the valuer will be comparing both other investments and properties.

26. This method of valuation is helpfully considered and illustrated by the decision of Sugerman J sitting as the Land and Valuation Court in Marcus Clark and Co Ltd v The Commissioner for Railways (1949) 29 LVR 98.

27. As I have mentioned earlier, the capitalisation rate adopted by the valuers ranged from 4.5 percent (Mr Large) to 5.95 percent (Mr Humphries). Their respective and competing opinions are principally derived from their respective analyses of a number of sales of properties in close vicinity to the subject property, namely (i) 114-116 Church Street; (ii) 179 Church Street; (iii) 151-155 Church Street; and (iv) 129 Church Street.

28. Additionally, Mr Large relies upon sales (with leaseback) of various St George Bank premises situate in various suburbs in Sydney and Mr Humphries relies upon a sale to the Respondent’s predecessor of the property No 148 Church Street (immediately adjoining the subject property) and a sale at 86 Station Street, Wentworthville.

29. The respective analyses undertaken by Mr Large and Mr Humphries of some of the same sales evidence to derive a capitalisation rate for each sale produced discrepant results as is reflected in the following Table:

Analysed Capitalisation Rate

Property	Mr Large’s Analysis	Mr Humphries’Analysis
(i) 114-116 Church Street	4.3 to 5.1 percent	5.67 percent
(ii) 151-153 Church Street	4.7 percent	5.95 to 6.5 percent 30. There was no discrepancy in the Valuers’ analysed capitalisation rate for the following sale properties—

(iii) 179 Church Street	6.5 percent
(iv) 129 George Street	5.25 percent
(v) 148 Church Street	5.96 percent

31. Mr Large regarded the sale of 148 Church Street as unreliable because it was purchased by the Respondent’s predecessor, and considered the Wentworthville sale as being irrelevant to the market for Parramatta CBD properties such as the subject property.

32. Conversely, Mr Humphries regarded the St George Banks sales with leasebacks as being irrelevant to the valuation of the subject property.

33. Both valuers accepted the locational superiority of the subject land to the sale property No 179 Church Street which is situated immediately north of the railway line, and in that sense physically isolated from the retail hub of Westfield Shoppingtown Complex and Chinatown in the southern section of Church Street.

34. In my judgment, the Church Street sale properties situate to the south of the railway line are the most comparable sales to the subject property. These sales are (i) 114-116 Church Street; (ii) 151-153 Church Street; (iii) 129 Church Street; and (iv) 148 Church Street.

35. Of these sales, it is clear that sales (i) and (ii) present significant difficulties for analysis in order to deduce the capitalisation rate. Sale of 129 Church Street which occurred six months after the date of compulsory acquisition presents no such difficulty of analysis and reveals a capitalisation rate of 5.25 percent. The sale of 148 Church Street also presents difficulty of a different kind because it was a sale to the Respondent’s predecessor (and obviously was not purchased for investment purposes but for the purposes of redevelopment).

36. I do not think it necessary to delve into the complexities of analysing the sales of (i) 114-116 Church Street; and (ii) 151-153 Church Street, because on the evidence, those complexities cannot be satisfactorily resolved.

37. However, it is, I think, both legitimate and sufficient to say that the capitalisation rate for the sale of 114-116 Church Street ranges between 5.1 and 5.67 percent (depending upon problematic factors) and the capitalisation rate for the sale of 151-153 Church Street ranges between 5.16 and 5.94 percent (depending upon problematic factors). The sales nonetheless are of comparable properties and the evidence they provide is important in the present case.

38. The discrepant capitalisation rates derived from these two sales is simply the product of the different manner in which the sale transactions were analysed. For example, Mr Humphries adjusted the sale prices downwards to reflect his view that the purchase prices included premiums (in the case of the sale of 114-116 Church Street, the premium was said to be based upon “an adjoining owner’s influence” and in the case of the sale of 151-153 Church Street, the premium was said to be founded upon the connection with the purchaser’s claim to compensation against the Respondent for disturbance on its acquisition of other premises in Church Street formerly owned or occupied by the purchaser). These matters are problematic, if not speculative, and simply are incapable of resolution in the present case on the available evidence. A further factor affecting the sale of 114-116 Church Street is that six months after the sale, a new lease was entered into yielding a much higher rental than that obtaining at the date of sale, and the deduced capitalisation rate would significantly differ depending upon which rental figure were adopted in the analysis of the sale.

39. These are the types of difficulties that can arise in valuation exercises that render analyses of sales transactions uncertain (in the absence of knowledge of all relevant circumstances pertaining to the sale transactions). In Marcus Clark, Sugerman J aptly described this phenomenon in the following passage at 121:

In a number of cases, different percentages were obtained by the experts for the same sale, according to the figures which were used as a basis. It may quite properly be said that where the actual sale price and the actual net return are known, there can be only one figure which is the actual percentage rate of capitalisation by which that sale price is obtained from that net return. Even in such cases, however, there remains more or less room for difference of opinion, according to the matter which is the subject of estimate.

40. His Honour had earlier made the following apt observation at 120:

The question of the appropriate rate of capitalisation is shown by the evidence to be largely one of expert opinion and it is not easy to check that opinion by reference, for example, to sales of other buildings. The experts have, of course, a large body of knowledge of other transactions to draw upon, accumulated by themselves or by their respective firms and available to them. That knowledge, it should be noted, is not always accurate, no doubt because of limitations on available sources of inquiry, and the conclusions drawn as to the rate of capitalisation in other transactions are therefore not always correct, as the investigation of some transactions in evidence in this action has shown. On a question of this sort, great experience may enable an expert to give a worthwhile opinion without being able to give precise references to all the transactions which have come under his notice which support that opinion. The value of the opinion may, as in other fields of expert knowledge depend upon the background of experience and knowledge which is behind it as well as upon those particular reasons for arriving at it which can be explicitly stated.

41. In the present case, I am considering the competing expert opinions concerning the appropriate capitalisation rate proffered by two very experienced valuers, each of whom was able to reasonably justify his opinion including under the process of rigorous cross-examination. Carefully weighing their evidence, I have been more impressed by Mr Large’s opinion in support of a lower capitalisation rate and his reasoned justification for it.

42. Ultimately, I have concluded that the appropriate capitalisation rate in the present case is 5 percent in preference to Mr Large’s lower rate of 4.5 percent and Mr Humphries’ higher rate of 5.95 percent.

43. In so concluding, I have placed greater weight upon the less problematic evidence provided by the sale of 129 Church Street, the undisputed analysis of which reveals a capitalisation rate of 5.25 percent. That rate is entirely consistent with the lower range rates in the analyses of the more problematic evidence of the sales of 114-116 Church Street and of 151-153 Church Street. In respect of the former transaction, I note that McClellan CJ in Vazenios v Transport Infrastructure Development Corporation (2004) NSWLEC 187 held the capitalisation rate to be less than 5.13 percent (having earlier noted his understanding that the rate would be 4.8 percent if the net annual rental at the date of sale were adopted in the analysis).

44. Vazenios involved a claim for compensation against the Respondent for the compulsory acquisition of No 95 Argyle Street, Parramatta, situate a few properties removed from the corner of Church Street and Argyle Street. In that case, his Honour adopted a capitalisation rate of 5.5 percent in circumstances where the claimant’s valuer had adopted a capitalisation rate of 5.2 percent and the Respondent was contending for a rate of 6 percent.

45. In Vazenios, the competing valuers (each of whom had impressed the Chief Judge as an experienced valuer), had relied upon all of the George Street sales that have been referred to in the present case in support of their respective opinions on the appropriate capitalisation rate. In that case, the Chief Judge held that the Church Street properties (and in particular, the properties at 114-116 and at 129) were superior to the claimant’s property in Argyle Street, because of their closer proximity to Westfield Shoppingtown complex and Chinatown.

46. In concluding that 5 percent is the appropriate capitalisation rate to adopt in the present case, I rely principally upon the sale of 129 Church Street. Although that sale occurred six months after the compulsory acquisition date, it, in my opinion, provides the most reliable evidence of all of the relevant comparable sales in George Street which are situate to the south of the Railway line for deducing the relevant capitalisation rate for that sale and for deriving (by the process of direct comparison) the appropriate capitalisation rate for the subject property.

47. In applying that sale’s evidence to the subject property, I accept Mr Large’s opinion that the subject property is superior to the sale property—both location wise, building wise and in terms of the security of rental income via the long term lease held by TAB Ltd which Mr Large regarded as a “gilt edge” tenant comparable to a Bank tenant (hence his reliance upon the St George Bank sales). The superiority of the subject property over the sale property comfortably supports the conclusion that a lower capitalisation rate in the order of the 5 percent that I have adopted is justified in determining the market value of the subject property.

48. For the foregoing reasons, I determine the appropriate capitalisation rate in the present case is 5 percent.

49. Applying that rate to the agreed net annual rental value of $102,750, produces a capital value of $2,055,000 (from which amount the Applicant agrees there is to be deducted the amount of $42,400 as quantified by Mr Large being the present value of the difference in rent between the agreed market rent and the rent actually being paid at the date of compulsory acquisition). The result is a market value of $2,012,600.

50. Mr Large’s valuation had suggested an additional 10 percent said to be justified as “adjoining owner influence”, such as was allowed in my decision in Croghan v Hawkesbury City Council (1998) 99 LGERA 375. This additional amount was only faintly pressed by the Applicant at the end of the case, because it was obvious that the present case is factually different from Croghan’s case.

51. In my opinion, no such additional amount is justified in the present case for the reasons recently given by Cowdroy J in Bowmont Pty Ltd v Transport Infrastructure Development Corporation (2004) NSWLEC 118, involving a claim to compensation against the Respondent in respect of the property No 154-158 Church Street immediately adjoining the subject property and also fronting Argyle Street. (In that case the parties had otherwise agreed upon the market value of the relevant property where the valuer witnesses were Mr Large for the claimant and Mr Humphries for the Respondent).
D. CONCLUSIONS AND ORDERS

52. For all of the foregoing reasons, I make the following orders—

1. Determine compensation for market value under the Land Acquisition (Just Terms Compensation) Act 1991 of the compulsorily acquired property in the sum of $2,012,600.

2. Reserve the question of compensation payable for disturbance under the Just Terms Act.

3. Reserve the question of costs.

4. Exhibits be returned.

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I HEREBY CERTIFY THAT THE PRECEDING 52 PARAGRAPHS ARE A TRUE AND ACCURATE RECORD OF THE REASONS FOR JUDGMENT OF THE HONOURABLE JUSTICE N R BIGNOLD.

Associate