S PELLE PTY LTD AND THE COMMISSIONER FOR ACT REVENUE (ADMINISTRATIVE REVIEW)

[2010] ACAT 83

ACT CIVIL & ADMINISTRATIVE TRIBUNAL

S PELLE PTY LTD AND THE COMMISSIONER FOR ACT REVENUE (ADMINISTRATIVE REVIEW) [2010] ACAT 83

AT 106 of 2009 & AT 95 of 2009

Catchwords:             Rates and land tax – determination of unimproved value of commercial land in Gungahlin – comparable sales evidence – adjustments for sub-lessee, difference in size, location, date of sale & lease purpose clause – effect of global financial crisis.

List of Legislation:    Taxation Administration Act 1999 s 104.

Rates Act 2004 ss 3, 6, 10

List of Cases:            Commonwealth v Arklay [1952] 87 CLR 159

Brewarrana Pty Ltd v Commissioner of Highways (No.2) [1973] 6 SASR 541

Spencer v The Commonwealth [1907] 5 CLR 418

Chief Minister of the ACT v Macrae & Rumble
[1993] FCA 359

Tribunal:                  Mr A. O’Neil, Senior Member
  Mr H. Hird, Member

Date of Orders:  19 November 2010
Date of Reasons for Decision:         19 November 2010

AUSTRALIAN CAPITAL TERRITORY            )
CIVIL & ADMINISTRATIVE TRIBUNAL)                   AT 106 of 2009
  AT 95 of 2009

BETWEEN:

S. PELLE PTY LTD

Applicant

AND:

COMMISSIONER FOR ACT REVENUE

Respondent

TRIBUNAL:            Mr A. O’Neil, Senior Member
  Mr H. Hird, Member

DATE:  19 November 2010

ORDERS

1. The decision under review is set aside and substituted with a decision that the unimproved value of Block 2, Section 3, Gungahlin as at 1 January 2009  is $889,200.

2. The decision under review is set aside and substituted with a decision that the unimproved value of Block 3, Section 3, Gungahlin as at 1 January 2009  is $889,200.

………………………………..

Mr A O’Neil

Senior Member

REASONS FOR DECISION

1. S Pelle Pty Ltd (“the Applicant”) applied to the ACT Civil and Administrative Tribunal (“the Tribunal”) on 23 November 2009 for review of two decisions made on 26 October 2009 by The Commissioner for ACT Revenue (“the Respondent”) under section 104 of the Taxation Administration Act 1999.  The decisions were to affirm the valuations dated 15 July 2009 determining that the unimproved value (“UV”) of each of two parcels of land at adjoining Blocks 2 and 3, Section 3, Gungahlin (“the Subject Land”) was $1,513,000.  For the purposes of these reviews there is no significant difference between the two matters and the parties agreed that they should be considered together by the Tribunal.  Matter No. AT 09/95 relates to the review of Block 2

   
   

   Section 3 Gungahlin and Matter No. AT 09/106 relates to the review of Block 3 Section 3 Gungahlin.

THE LEGISLATION

1. Section 6 of the Rates Act 2004 (“Rates Act”) sets out the meaning of unimproved value:

   (1) The unimproved value of a parcel of land held under a lease from the Commonwealth is the capital amount that might be expected to have been offered on the relevant date for the lease of the parcel, assuming that—

   (a) the only improvements on or to the parcel were the improvements (if any) by way of clearing, filling, grading, draining, leveling or excavating—

   (i) if the Territory or Commonwealth had, before the parcel became rateable as a separate parcel, granted a development lease of land that included the parcel—made by the lessee under that lease or by the Territory or Commonwealth, or the cost of which was met by that lessee or by the Territory or Commonwealth; or

   (ii) in any other case—made by the Territory or Commonwealth or the cost of which was met by the Territory or Commonwealth; and

   (b) the circumstances that existed on the prescribed date also existed on the relevant date; and

   (c) on the relevant date, the lease had an unexpired term of 99 years; and

   (d) a nominal rent was payable under the lease for the 99 year term.

   (2) The unimproved value of a parcel of land held in fee simple is the capital amount that might be expected to have been offered for the parcel at a genuine sale on the relevant date on the reasonable terms and conditions that a genuine seller would require, assuming that no improvements had been made on or to the parcel.

   (3) In this section:

   prescribed date, for a parcel of land, means—

   (a) for a determination of the unimproved value of the parcel—the date the parcel became rateable; or

   (b) for an annual redetermination of the unimproved value of the parcel—the date the redetermination applies; or

   (c) for a redetermination of the unimproved value of the parcel under section 11 (Redetermination—error) or section 11A (Redetermination—change of circumstances)—the date the redetermination begins to apply to the parcel.
   
   

2. Section 10 of the Rates Act requires annual redeterminations:
   
   

   (1)  As soon as practicable after each 1 January, the commissioner must redetermine the unimproved value, as at that date, of each parcel of land rateable on that date.

   (2)       An annual redetermination of the unimproved value of a parcel of land applies to the parcel for the period—

   (a)     beginning on 1 July in the calendar year in which the relevant date when the redetermination is made falls; and

   (b)     ending on 30 June in the next calendar year.

3. “Relevant date” is defined in the Dictionary to the RatesAct as follows:

   relevant date, for a parcel of land, means a date when a determination of the unimproved value of the parcel is or is to be made.

4. In the present case the relevant date is 1 January 2009 and the prescribed date is 1 July 2009. The effect of section 6(1)(b) of the Rates Act is that, although the valuation must be as at 1 January 2009, it must assume that the circumstances existing on 1 July 2009 also existed on 1 January 2009.

THE HEARING

1. The Applicant was represented by Mr D Robens of Dibbs Barker and the Respondent by Mr. R Bayliss of the ACT Government Solicitor’s Office.

1. Written and oral evidence was presented by Mr. Greg Cummins of CB Richard Ellis for the Applicant and by Mr. Geoff McInerney of the Australian Valuation Office for the Respondent.  Mr. Cummins is a registered valuer in NSW and Queensland and is Director, Valuation and Advisory Services at CB Richard Ellis.  He has been a qualified valuer for seven years.  Mr. McInerney is a senior valuer with the Australian Valuation Office, an Associate Member of the Australian Property Institute, a Certified Practising Valuer and a registered valuer (without limitation).   He has been a valuer for 33 years. 

THE APPROACH TO VALUATION

1. The task of the Tribunal in determining the UV of land in accordance with section 6 of the Rates Act is to act in accordance with the views of the High Court in Commonwealth v Arklay [1952] 87 CLR 159 where the Court said:

… an estimate of the price which would have been agreed upon in a voluntary bargain between a vendor and purchaser each willing to trade but neither of whom was so anxious to do so that he would overlook any ordinary business considerations"… It is simply an analysis of what in all the relevant circumstances would be the price that a willing purchaser would have to pay a vendor willing but not anxious to sell in order to obtain the land. Where land has no special suitability for some business or activity carried on by the owner and has no added potential value if put to some better use, the value on a free market is usually its market value. The best evidence of this value is that of comparable sales of other land either before or after the date of acquisition but this evidence is often not available.

1. Both valuers agreed that the appropriate valuation methodology in these matters is the comparable sales method.  It is the role of the valuer to assess what sales are sufficiently comparable to the Subject Land to be of use and also to make any necessary adjustments to take account of differences between the comparable sale and the Subject Land that affect value.

1. In Brewarrana Pty Ltd v Commissioner of Highways (No.2) (“Brewarrana”) [1973] 6 SASR 541 at 550-551 Wells J said:

Before using any allegedly comparable sale, therefore, the valuer must consider whether, having regard to the circumstances (using that word in its broadest sense) appertaining to the parcel of land in question, and to the transaction of sale, there are sufficient similarities to the circumstances appertaining to the subject land and to the notional sale presupposed by the test formulated in Spencer v. The Commonwealth of Australia and in later cases to warrant a court's reasoning from the sale price paid under the allegedly comparable sale, with or without other evidence, to a value for the subject land.

… It is, in my view, all a matter of degree: some adjustment is always necessary; too much adjustment will render it unsafe to use a sale, subject to such a degree of adjustment, for the purpose of the reasoning process in the comparable sales method. Just where the line is to be drawn is, it seems to me, the very sort of question that is fit for the expert valuer to determine; the assessment of the risks of adjustment is peculiarly within his sphere of skill.

1. The witnesses agreed that in any valuation the land must be valued on the basis of its highest and best use.  This principle was expressed by the High Court in Spencer v The Commonwealth [1907] 5 CLR 418 at 441 per Isaacs J as “the most advantageous purpose for which [the land being considered] was adapted”.

1. On 27 July 2009 Mr. Cummins submitted (T4) to the Respondent that the UV of the Subject Land should be no greater than $600,000, which gave a GFA rate of $607/m².  On 14 September 2009 Mr Cummins submitted (T10) that the UV of the Subject Land should be no greater than $500,000, giving a GFA rate of $506/m². 

1. Neither the parties nor their valuers explained this discrepancy.  Mr. Cummins in his evidence maintained that a UV of $500,000 for the Subject Land was correct. Both the Applicant and the Respondent accepted this value as the Applicant’s position in their submissions. 

1. Mr. Cummins relied on eight sales of unimproved land in Gungahlin:

   Block 1, Section 88, Gungahlin (75 Gozzard Street), sold June 2008,
   Block 2, Section 88, Gungahlin (77 Gozzard Street), sold June 2008,
   Block 3, Section 88, Gungahlin (79 Gozzard Street), sold June 2008
   Block 4, Section 88, Gungahlin (81 Gozzard Street), sold June 2008
   Block 5, Section 88, Gungahlin (cnr. Gozzard & Heazlett Streets),
   sold June 2009,
   Block 5, Section 3, Gungahlin, sold June 2009, (“the motel”),
   Block 2, Section 224, Gungahlin (Gundaroo Drive), sold June 2009, and
   Block 1, Section 224, Gungahlin (cnr. Gundaroo Drive & Gozzard Street).

2. Mr. Cummins said that he had selected his comparable sales based on vacant land sales in Gungahlin, which he believed was preferable to using comparable sales of improved land and especially improved land elsewhere than Gungahlin. 

3. Mr. McInerney selected nine sales as comparable to uphold his valuation of the Subject Land at $1,513,000:

   Unit 1, Blocks 2, Section 8, Gungahlin (“KFC”), sold February 2009,
   Unit 2, Blocks 2, Section 8, Gungahlin (“IPG”), sold March 2009,
   Block 1, Section 8, Gungahlin (75 Gozzard Street), sold June 2008,
   Block 13 Section 103, Lyneham (“Tea Club”), sold November 2008,
   Block 64, Section 32, Fyshwick, (“Fyshwick”), sold March 2008,
   Block 79, Section 65, Belconnen (“Red Rooster”), sold February 2009,
   Block 14, Section 25, Griffith, “(Griffith”), sold May 2008,
   Block 25 Section 40 Holder (“Holder”), sold April 2009 and
   Block 1, Section 12, Bonner (“Bonner”), sold March 2010.

4. 75 Gozzard Street is the only comparable sale that both valuers included although both Block 5 Section 88 Gungahlin and the Bonner site were eventually accepted as comparable.  All of these sales were of vacant land.  Mr. McInerney’s other seven sales were of land and buildings.

1. Wells J was in Brewarrana faced with considerable expert evidence that displayed “extraordinary differences” in opinions of “experienced professional men in respect of identical subject matter”.  He commented  (at 543) that the

   process of valuing land … has something of the character not only of a science but also an art, in which knowledge, experience and judgment of people, commerce and fashion play integral parts”. 

   Both valuers agreed that there was considerable “art” in the opinions they offered the Tribunal.

1. The Tribunal must act on the evidence presented to it and if it is “defective, incomplete or irreconcible” then the Tribunal must “correct, complete or reconcile” that material (Brewarrana at 543).

GENERAL ISSUES

1. There are two general issues of importance that require discussion.  The first is the effect of the global financial crisis (“GFC”) on land values.  The second is the question whether a sale price is enhanced by the presence of a tenant on the property.

1. With regard to the GFC, Mr Cummins said that land values in Gungahlin had declined from 2003 to the relevant date and that the GFC was a factor in the decline.  Mr McInerney said that the population of Gungahlin had increased and its business district had developed in that time.  He did not consider that land values had declined. It is a matter of public knowledge that all classes of assets fells substantially in value during the GFC and the Tribunal accepts Mr Cummins’ opinion that the GFC affected land values in Gungahlin, as elsewhere. 

1. The focus for the Tribunal is the UV of the Subject Land on the relevant date, that is, 1 January 2009.  The GFC commenced in September 2008.  It was described by Trevor Sykes, a noted Australian financial commentator, as the largest and most severe the world has seen since the Great Depression (Six Months of Panic, Allen & Unwin, Sydney, 2010).  He noted that the size of the Australian Government’s stimulus package increased for $10.4 billion in October 2008 to $42.0 billion in February 2009.

1. The following discussion deals with sales in June 2008 and June 2009 to consider what inferences may be drawn about the effect of the GFC on land values in Gungahlin.  It is based on sales evidence provided by Mr McInerney and Mr Cummins.  These sales will be analysed and compared with the Subject Land later.

1. Blocks 1-4, Section 88 Gungahlin, located at 75-81 Gozzard Street, (“the four Gozzard Street blocks”), are for practical purposed identical and sold in June 2008 at an average GFA rate of $672/m².  That was prior to the GFC.

1. Block 5, Section 88, Gungahlin, which adjoins 81 Gozzard Street at the corner of Gozzard & Heazlett Streets, sold one year later at a GFA rate of $321/m².  When this sale took place the world was still in the grip of the GFC and asset prices were depressed.  This block was accepted by both valuers as having a lease purpose clause superior to those of the four Gozzard Street blocks.  A superior lease purpose clause would usually result in a better sale price and a higher GFA rate.  Block 5, Section 88, Gungahlin is twice as large each of the four Gozzard Street blocks and this would normally be expected to result in a reduced GFA rate.  Its lease requires the lessee to construct a building with a GFA of 1,400 m², which Mr. McInerney said may have reduced the sale price.  Mr. Cummins did not agree.  In terms of locality there is little difference between all five blocks, with 75 Gozzard Street being very slightly superior as it is closer to the business centre of Gungahlin. 

1. In the Tribunal’s view the various adjustments between the Gozzard Street blocks and Block 5 Section 88 Gungahlin largely balance out and so cannot explain the explain the substantial price differential.  The decisive difference is the date of the sales relative to the GFC.  The GFA rate for the sale in June 2009 was 52 percent lower than the average GFA rate for the four sales in June 2008.  This is a relevant factor to be taken into account when considering the comparable sales evidence.

1. With regard to the question whether a tenant has a positive influence on sale price, Mr. Cummin’s position is that it does while Mr. McInerney said that it does not.  Mr. Cummins argued that where a property is sold with an existing tenant the sale price should be adjusted down.  Mr. McInerney said that in 33 years as a valuer he had never done so.  Neither valuer quoted authority for his position. 

1. The Tribunal consulted a standard text on valuation published by the Australian Institute of Valuers and Land Economists (Valuation Principles and Practice, 1997, Deakin, ACT) on this question. Chapter 5 (pp 88-103) stresses the importance of a reliable long term tenant in underpinning the income stream an investor is purchasing. This authority supports Mr. Cummins’ position which is essentially that a prudent purchaser will pay more for a property with a good tenant. If a comparison is to be made with an untenanted property then an adjustment is necessary. The words of sections 6 and 10 of the Rates Act 2004 suggest that the determination of the UV of the Subject Land on the relevant date is the determination of the unimproved untenanted land on the relevant date.

1. The Tribunal also had before it a valuation by CB Richard Ellis (“CBRE”) dated 13 January 2009 of the Kentucky Fried Chicken site in Ernest Cavanagh Street almost opposite the Subject Land.  Both valuers accepted that it was a proper valuation prepared for mortgage purposes at the request of a large commercial lender.  The value was reduced by 22 per cent if the property was vacant.

1. In light of the above, the Tribunal considers that the presence of a tenant has the effect of increasing the purchase price of a property compared with an untenanted property and an adjustment to take this factor into account may need to be made when undertaking a valuation using the comparative sales method.The reduction may be nil for a bad tenant, or up to 22 per cent in the case of a tenant similar in character to a franchisee of the Kentucky Fried Chicken chain of businesses.

THE APPLICANT’S COMPARABLE SALES

A.  Blocks 1-4, Section 88, Gungahlin (“75-81 Gozzard Street”)

1. 75 – 81 Gozzard Street were all sold in June 2008 and all have GFA’s of 710m2.  75 Gozzard Street sold for $525,000, giving a GFA rate of $739/m².  77 Gozzard Street sold for $455,000, giving a GFA rate of $641/m².  
   79 Gozzard Street also sold for $445,000, giving a GFA rate of $641/m², while 81 Gozzard Street was sold for $475,000, giving a GFA rate of $669/m².   

1. Both valuers agreed that the sale of 75 Gozzard Street was comparable.  Mr. Cummins considered 77, 79 and 81 to be comparable.  Mr. McInerney seemed to accept that they were comparable in his evidence, but were less so than 75 Gozzard Street. 

1. Mr. Cummins discussed the property at 75 Gozzard Street in detail.  He indicated that that his remarks also applied to the properties at 77, 79 and 81 Gozzard Street as all four properties  had identical lease purpose clauses and were sold on the same day (11 June 2008) and were identical in area.

1. In his view, the location of the four Gozzard Street blocks was marginally inferior to the Subject Land.  He said that the lease purpose clause was inferior and that the highest and best use was for a health facility and offices.  Mr. Cummins did not consider the easements on two sides of the block reduced their value by much, if at all.  He conceded that there was no likelihood of a commercial return on these blocks in the near future, which explained their low prices. 

1. Mr. McInerney had a different view of the four Gozzard Street blocks.  He said that the presence of residential accommodation opposite and of the police and fire services building between them and the developed area around Ernest Cavanagh Street, plus the distance from the main commercial activity meant their location was “significantly inferior” to the Subject Land.  On the subject of the relative lease purpose provisions he said that the Subject Land had a significantly superior lease purpose clause to that of the four Gozzard Street blocks.  He said that the easement would reduce their value to some extent.  He agreed with Mr Cummins that the highest and best use for these blocks is offices.   Mr. McInerney gave evidence that he had spoken with the purchaser of 75 Gozzard Street who said that the purchase was speculative and at a low price. 

1. Mr. Cummins opined that the Subject Land should be valued at not more than $500,000, which equates to a GFA rate of $506/ m².  He insisted that the value of the Subject Land had dropped since its purchase in 2003.  His GFA rate of $506/ m² is lower than the GFA rate of $739m2 for 75 Gozzard Street even though he conceded the inferiority of 75 Gozzard Street.  The GFA rates for 77 and 79 Gozzard Street was $641/m² and for 81 Gozzard Street it was 669/ m².   Although Mr. Cummins argued that the sale of 75 Gozzard Street does not support Mr. McInerney’s GFA rate for the subject land of $1,531 m², it also stands as an obstacle to his claim that the correct GFA rate for the Subject Land is $506/ m².  Indeed all of the Gozzard Street sales present higher GFA rates for properties that are admitted by Mr. Cummins to be inferior to the Subject Land.  The Tribunal notes that all four Gozzard Strret blocks were sold prior to the advent of the GFC and adjustments down will be made for this factor.

B.  Block 5, Section 88, Gungahlin

1. Both valuers accepted that the property was comparable to the Subject Land.

1. Mr. Cummins’ evidence was that this block was sold in June 2009 during the GFC for $450,000 at a GFA rate of $321/ m².  It is further from the Subject Land than Blocks 75-81 Gozzard Street.  In Mr. Cummins’ view its location is marginally inferior.  In Mr. McInerney’s view its location is significantly inferior.  The Tribunal accepts that this property is inferior.  Neither valuer indicated what quantative adjustment for location they would make in comparing this block with the Subject Land.  The GFA of this block is twice that of the Subject Land.

1. Mr. Cummins said that its lease purpose was similar to that of the Subject Land but superior because a child care centre could be built.  He did not see any difficulty with a drink establishment operating on the same block of land as a child care centre.  He considered that the highest and best use was a shop and a restaurant.  The lease purpose clause limits a shop to 200m² which is one-seventh of the GFA of 1,400m², in contrast with the Subject Land that has no limitation on the area of a shop. 

1. Mr. McInerney initially indicated that the lease purpose clause was inferior but later in cross examination accepted that the lease purpose clause was similar.  The Tribunal accepts the valuers’ conclusion that no adjustment for lease purpose is necessary.

1. There was some evidence given by both valuers about the effect of the Crown lessee’s obligation that the gross floor area of all buildings must not be less than 1,400 m².  The building covenant in the Crown lease is set at $1,600,000.  Mr. Cummins’ opinion was that this requirement did not affect the sale price.  Mr. McInerney considered that this obligation would have resulted in reduced buyer interest and a lower sale price. 

1. The Tribunal had before it some estimates of depreciated building costs made by Mr. McInerney in respect of the KFC block (Exhibit R2) and the IPG block (Exhibit R2).  If these building cost rates are applied to a 1,400m² development, the cost of an office building would be in the order of $2.8 million and the cost of a take-away food shop, restaurant, or similar development would be in the order of $3.2 million.  These figures suggest that a prospective purchaser would need to expend much more than the $1.6 million building covenant.  For this reason the tribunal is inclined to accept Mr. McInerney’s opinion that the lease provision discouraged purchasers and resulted in a lower price.

1. The Tribunal concludes that an adjustment needs to be made for the location of this property which is inferior and for its greater size.  The Tribunal also concludes that an adjustment should be made to reflect the low selling price that resulted from the obligation to erect a building having a minimum GFA of 1,400 m².   The GFA rate of $321/m² will need to be adjusted upward to allow a proper comparison with the Subject Land. 

C.  The motel site

1. This property was sold in June 2009 during the GFC with a GFA rate of $300/ m².  Its required GFA is 3,000m² and its sale price was $900,000.  The motel has a common rear boundary with the Subject Land.  It was not sold at auction but passed in and sold to the highest bidder soon after.  It had a pre-existing development approval (per Mr. McInerney) in place for a motel.  A motel is being constructed on the land and is close to completion. The purchaser confirmed to Mr. McInerney that he had bought it for a motel and until the demand for a motel increased would let the rooms to permanent tenants.   In Mr. McInerney’s opinion this was a sale of a motel block with a restaurant as a secondary use.  He also considered that it was slightly inferior in location because it faced the emergency services centre on the opposite side of Anthony Rolfe Drive.  It has more than three times the GFA of the Subject Land.

1. The Tribunal does not accept that the motel site has sufficient commonality to enable it to be comparable with the Subject Land.

D.   Block 2, Section 224, Gungahlin and Block 1, Section 224, Gungahlin

1. Both of these blocks were sold in June 2009.  Gundaroo Drive had a sale price of $1,000,000, a GFA of 5,500m² and a GFA rate of $182/m².  The GozzardStreet/Gundaroo Drive block had a sale price of $1,020,000, a GFA of 3,500m² and a GFA rate of $291/m².  Mr Cummins did not in evidence press the comparability of these sales and the Applicant did not deal with them in his submissions.  In these circumstances the Tribunal cannot find that there is sufficient evidence of comparability.

THE RESPONDENT’S COMPARABLE SALES

A.  The KFC site

1. The Applicant’s contention is that this sale should not be considered as comparable because it was not at arm’s length.  Mr. Cummins’ evidence is that the vendor was in liquidation, the purchaser was the wife of a director of the vendor, the purchase price was discharged by way of payment of a debt and the purchaser had injected funds into the vendor and paid out the debts.

1. This site and Unit 2 - Block 2, Section 8, Gungahlin are the two properties that are most comparable with the Subject Land.  However, this sale should not be considered given the relationship between vendor and purchaser. 

B.  The IPG site

1. The Applicant contended that this sale should not be considered as comparable because it was sold with a lease in place at a higher rent than was commercially justified.  It was also sold without proper marketing.  Mr. Cummins gave evidence to this effect.  He said that the rent of $500 per week was between $50 and $100 higher than was justified.  He did not set out what adjustment should be made in the value of the property to take into account a commercially “correct” rent of between $400 and $450 per week, nor did he detail how much the sale price may have been depressed by the method of marketing.  It was not explained to the Tribunal why an informed vendor such a real estate business would seek to inflate the sale price by having a higher rent than was commercially justified but at the same time deflate the sale price by not properly marketing the property.  Additionally, the sub-lessee, another IPG company, would be prejudiced for five years by having to pay a high non-commercial rental.  In the absence of an explanation from Mr Cummins of these conundrums, the Tribunal is unable to accept his evidence as to these particular matters.

1. Mr Cummins also pointed out the smaller GFA of 175m² compared with that of the Subject Land which is 988 m².  He said that he would adjust the IPG site’s value down by between 30 and 40 per cent. 

1. Mr. McInerney’s evidence was that the rent of $500 per week was a fair rent, not out of line with the market.  Mr. McInerney said that he had reduced the IPA GFA rate to take account of the greater GFA of the Subject Land.  The lower GFA was $1,900m² (reduced from $2,830m²) which is between
   Mr Cummins adjusted GFA rates of $1,981/m² (with a 30 per cent reduction) and $1,698/m² (with a 40 per cent reduction).  The Tribunal adopts the reduced GFA rate of $1,900/ m² (32.8 per cent) to take account of the size variation. 

1. Both valuers accepted that the GFA rate of the IPG site should be higher that that of the Subject Land because of the wider and more valuable range of uses available under its lease purpose, but they did not quantify the amount. 

1. The valuation of KFC by CBRE reduced the valuation by 22 per cent in the absence of KFC as a tenant.  Mr. Cummins said that the presence of a national tenant such as KFC would increase the sale price of a property to a greater extent than would a local tenancy.  It follows that although IPG is a well established local business the adjustment would be less than 22 per cent.  The Tribunal considers that, in the absence of more specific information, it is reasonable to adopt the mid-point of 11 per cent for a good local tenant.  This results in a GFA rate of $1,589/m². 

1. The Tribunal has been given conflicting evidence whether the rental of $500 is a fair or inflated one.  In the circumstance it cannot be satisfied that the rate was is inflated.

1. This sale took place during the GFC.  The relevant date is also in the middle of the GFC.  No adjustment for this factor is necessary.

1. The Applicant argued that in a case where a sale of an improved property was comparable and the improvements were used to operate a business, a further adjustment is required.  His authority is Chief Minister of the ACT v Macrae & Rumble [1993] FCA 359 (“Macrae”).  In that case the valuation was not of the land but of the improvements on the land.  Both parties in that case accepted that the good will of the business was not to be the subject of compensation, but the Court said:

   … it will be for the decision-maker to determine, having regard to what is said by the expert valuers, whether or not the sale of the lease together with those improvements will produce a higher value than a sale based upon an assumption that no business had ever been carried on on the land utilising those improvements.

1. The IPG site is the only comparable property with improvements on it to which the approach in Macreae’s case can be applied, but Mr. Cummins did not offer an opinion on the crucial issue of the quantum of any adjustment to be made.   It would seem to the Tribunal that where improvements consist of an office building from which operates a real estate business it will be hard to say that a higher sale price will be achieved than if a real estate business had not operated from it.  The situation in Macrae’s case may be considered to be different in that the improvements were specialised, consisting of dog and cat boarding accommodation and associated facilities.  A higher sales price may well have resulted.  The Tribunal does not accept that any adjustment for the presence of a real estate agency is necessary in respect of the IPG site.

C.  Block 1, Section 88, Gungahlin (“75 Gozzard Street”)

1. This sale was discussed above, being also one of the Applicant’s comparable sales. 

   D.  The Tea Club site

1. The Tea Club site was sold on 12 November 2008 for $1,165,000.  Mr. Cummins’ evidence was that this sale could not be considered as comparable because of the presence of a long-standing tenant, The China Tea Club Restaurant, would cause the sale price to be inflated.  Mr. Cummins also gave evidence that the locality was inferior.  He said that the lease purpose was not inferior.  Additionally the site was too distant from the Subject Land and was in a fully established suburb.  In his view, the better comparable sales were the 8 sales of vacant land in Gungahlin.

1. Mr. McInerney agreed that the location in a local shopping centre was inferior as was, in his view, the lease purpose clause.  He would not adjust his calculations because of the existence of a tenant.  He agreed that the Tea Club site was some distance from the Subject Site, but noted that the sale was less than two months earlier than the date of his valuation.  He deducted for improvements on the Tea Club site to give a GFA of $1,750/m².  He then reduced this for the inferior locality and lease purpose clause to conclude that the sale supported his GFA rate of $1,531/ m² for the Subject Land.  

1. The Tribunal considers that the Tea Club site, being a considerable distance from the Subject Land and in a fully developed suburb is not truly comparable with the Subject Land.

E.  Fyshwick

1. This vacant site sold on 31 March 2008 for $1,081,000. It has a GFA of 1,000/m² and shows a GFA rate of $1,081/m².  It was described as a good comparable sale by Mr. McInerney but it was also used by him as a check and balance.  On the contrary, Mr. Cummins said that the sale was not comparable because of the industrial nature of Fyshwick, the inferior location of the land and its long distance from Gungahlin.  Both valuers agreed that its lease purpose clause was inferior.

1. The Tribunal does not accept that the Fyshwick site is comparable with the Subject Land.

F.  The Red Rooster site, Griffith and Holder

1. Despite being identified as comparable in the documents, at the hearing both valuers agreed, and the Tribunal accepts, that none of these three sites is comparable with the Subject Land.

G.  Bonner site

1. Mr. McInerney contended that this property has a “good comparability” whereas Mr. Cummins said that it is low on his comparability scale.  The following facts were agreed.  It is 5,635m² with an anticipated GFA of less than 2,000m², sold at auction on 19 March 2010 for $3,210,000, giving a GFA rate of $1,605/m².  There were four competing bidders who were aware of Woolworths’ interest in a lease of the site.  The suburb of Bonner is still in the early stages of development and the Bonner site is several kilometres from the Subject Land. 

1. Mr. McInerney thought that the Bonner site lease purpose provisions were broader but not better in that uses such as industrial are inferior.  Mr. Cummins considered its uses were superior to that of the Subject Land because it could be used as a supermarket and this was reflected in the competition among bidders and high sale price.  The Territory Plan places limits on supermarket development which may then often be reflected in the value of land on which supermarkets are permitted.  Although the sale was only 15 months from the relevant date it took place when the GFC in Australia had largely been overcome.

1. The Tribunal believes that the Bonner site is comparable with the subject land although adjustments need to be made for significant differences:  size, lease purpose, location, the prospective Woolworth’s lease and timing. 

1. The Bonner site GFA is slightly more than twice that of the subject land.  The Tribunal accepted 32.8 per cent as the appropriate adjustment for the IPG site, where the GFA of the Subject land was five times larger.  As the Bonner site has twice the GFA of the Subject Land, an adjustment of 6.5 per cent is appropriate, which increases the Bonner GFA rate to $1,709/m².

1. In terms of its lease purpose for a supermarket, and mindful of the suitability of its location for such a use, the Tribunal prefers the evidence of
   Mr. Cummins that this property has superior characteristics.  An appropriate adjustment needs to be made for this factor.  This means that a reduction in the GFA rate of the Bonner site compared with that of the Subject Land.

1. The most substantial adjustment must be made because the sale took place when the commercial property market had commenced its recovery from the effects of the GFC.  However no evidence was available as to the extent of the price recovery.  No comparable sales were available as they had been for Gozzard Street.  The GFA rate of Bonner must be reduced to make it comparable to the Subject Land on the relevant date which is in the middle of the GFC. 

1. Bonner was sold at auction in the high expectation that Woolworths would take up a lease of the premises, which expectation was realised.Although there was no sublease in place, the final price would have reflected that expectation.  We consider that Woolworths is a tenant of even higher calibre than KFC, given that unlike KFC it is not franchised.  It seems to the Tribunal that an appropriate downward adjustment of the GFA rate for Bonner should be made.  This would be not less than the KFC franchisee rate of 22 per cent.  A 22 per cent adjustment based on the sale GFA rate of $1,605/m² results in a GFA rate of $1,356/m² (including the size adjustment upwards). 

1. The Bonner location is inferior to that of the Subject Land, being several kilometres from the centre of Gungahlin so that an adjustment upwards of the GFA rate is required to make it comparable with the Subject Land.

THE SUBJECT LAND AND COMPARABLE SALES

1. The Subject Land was valued at $1,513,000 (GFA rate $1,531/m²) on 1 January 2008 (T3) and this valuation was not contested.  Mr. McInerney valued the Subject Land for the same amount on the relevant date.  This does not seem to take into account the GFC and the probable reduction of 52 per cent based on the evidence of the sales of the four Gozzard Street blocks in June 2008 and of the adjoining Block 5, Section 88, Gungahlin in June 2009.  If the 52 per cent reduction had been applied the GFA rate would have reduced to $735/m² and the UV to $726,180.

1. The IPG site is accepted by the Tribunal as comparable with the Subject Land.  The Tribunal earlier adjusted the GFA rate down to $1,900/m² to account for the difference in size.  The adjustment to take into account the tenancy of IPG was earlier accepted by the Tribunal to be 11 per cent, resulting in a GFA rate of $1,589/M².

2. A further adjustment down for the superior lease purpose of the IPG site is also required so that it is comparable with the Subject Land.  No quantitative evidence was given as to the amount of the adjustment. 

1. The GFA rate of the Bonner site, when adjusted for its greater size than that of the Subject Land, increases form $1,605/m² to $1,709/m².  The adjustment for the high probability of the Woolworths’ tenancy result in an adjustment down to $1,356/m².

1. Additional GFA rate adjustments of the Bonner site need to be made for its better lease purpose clause (downwards), its inferior position (upwards) and the timing of its sale in March 2008 when optimism was returning and asset values were improving (downwards).   No evidence as to the quantum of adjustments for these matters was received.

1. 75 Gozzard Street was sold in June 2008 with a GFA rate of $739/m².  Based on earlier comparisons between sales in June 2008 and the sale in June 2009, the GFA rates in the area fell by 52 per cent which would result in a GFA rate for 75 Gozzard Street on the relevant date of $355/m².  The lease purpose clause and the location of 75 Gozzard Street are inferior to the Subject Land and an upward adjustment of the GFA rate for 75 Gozzard Street is required to make the sale properly comparable.  However no figures for these adjustments are before the Tribunal.

1. Block 5 Section 88 Gungahlin sold in June 2009 for a GFA rate of $312/m².  A slight adjustment (based on the IPG size adjustment) must be made for the fact that this site is 50 per cent larger than the Subject Land.  This adjustment upward is small, in the region of 3 per cent, resulting in an adjusted GFA rate of $322/m².  No adjustment for timing is required as this sale took place close to the relevant date.  Both the lease purpose clause and the location of this site are inferior to those of the Subject Land so an upward adjustment of the GFA rate is required to achieve a valid comparison.  A further adjustment upwards is needed to offset the negative price influence of the requirement to build for a GFA of 1,400m². 

CONCLUSION

1. The Tribunal is conscious of the words of Wells J in Brewarrana quoted above that it must “complete, correct and reconcile”.

1. The GFA rates set out below for the four comparable blocks and the Subject Land have been adjusted where quantitative evidence is available.  No adjustments have been made for relative location, lease purpose clause differences, timing (in the case of Bonner) or the 1,400m² building obligation on one site, as no figures were available. 

   • IPG  $1,589/m²
   • Bonner  $1,356/m²
   • 75 Gozzard Street  $   355/m²
   • Block 5, Section 88, Gungahlin         $   322/m²
   • Subject Land  $   735/m²       

1. The strongest influence in setting a GFA rate is the uncontested valuation of the Subject Land on 1 January 2008, adjusted to account for the GFC.  The IPG site sale in March also strongly influences the Tribunal to place a higher GFA rate on the Subject Land, as does the sale of the Bonner site.  By contrast, the sales of 75 Gozzard Street and the nearby Block 5, Section 88, Gungahlin place downward pressure on the GFA rate.

1. Having regard to those matters, the Tribunal considers a GFA rate of $900/ m² for the Subject Land on the relevant date is appropriate.  This results in an unimproved value of the Subject Land of $889,200 on the relevant date.  The Tribunal finds that  the unimproved value of Blocks 2, Section 3, Gungahlin as at 1 January 2009 is $889,200 and that the unimproved value of Block 3, Section 3, Gungahlin as at 1 January 2009 is $889,200.  

………………………………..

Mr A. O’Neil

Senior Member

PUBLICATION DETAILS

TO BE PUBLISHED

To be completed by Tribunal Staff

PART A  FILE NO:      AT 09/106
  AT 09/95

APPLICANT:                S. PELLE PTY LTD
RESPONDENT:            COMMISSIONER FOR ACT REVENUE

COUNSEL APPEARING:       APPLICANT:          

RESPONDENT:      

SOLICITORS:  APPLICANT:          

RESPONDENT:      

OTHER:  APPLICANT:          

RESPONDENT:      

TRIBUNAL MEMBER/S:        

DATE/S OF HEARING:  PLACE: CANBERRA

DATE/S OF DECISION:  PLACE: CANBERRA

PART B

RECOMMENDATION:

FULL REPORT ( )        CASE NOTE ( )        UNREPORTED DECISION ( )

COMMENTS: