Skycity Adelaide Pty Ltd v Valuer-General
[2009] SASC 289
•15 September 2009
SUPREME COURT OF SOUTH AUSTRALIA
(Land and Valuation Division)
SKYCITY ADELAIDE PTY LTD v VALUER-GENERAL & ANOR
[2009] SASC 289
Judgment of The Honourable Justice Bleby
15 September 2009
REAL PROPERTY - VALUATION OF LAND - ANNUAL VALUE
REAL PROPERTY - VALUATION OF LAND - PARTICULAR PROPERTIES AND INTERESTS - LICENSED PREMISES
Appellant operated a casino within the second respondent's council area - second respondent issued a valuation and rate notice for the casino premises - rates based on 'annual value' of the casino premises - annual value calculated by council valuer arrived at by reference to percentage of profit of the casino - whether error of law or of valuation principle - relevance of casino licence - whether licence ran with the premises - whether calculation of rent per square metre appropriate - consideration of appropriate percentage of earnings before interest, taxation, depreciation, amortisation and rent to assess gross rental value - appeal dismissed.
Casino Act 1997 (SA) s 3, s 5, s 5(3), s 6, s 6(2), s 7, s 8, s 9, s 10(1), s 11, s 12, s 13, s 16, s 18, s 21, Pt 4, Pt 4 Div 4, Pt 4 Div 4A, Pt 4 Div 5; Casino Act 1983 (SA); Independent Gambling Authority Act 1995 (SA); Liquor Licensing Act 1997 (SA) s 72(1); Local Government Act 1999 (SA) s 169, s 169(1)(b), s 169(2), s 169(15); Local Government Act 1934 (SA) s 173(14); Valuation of Land Act 1971 (SA) s 5(1), s 22(4), s 25C, referred to.
Fenton Nominees Pty Ltd v Valuer General (1981) 27 SASR 258; Ardoch Pty Ltd v Valuer General (No 2) (2006) 148 LGERA 408; Tooth & Co Ltd v Valuer-General (1953) 19 LGR (NSW) 172; Players Pty Ltd v Corporation of the City of Adelaide [2001] SASC 369, applied.
Mersey Docks and Harbour Board v The Assessment Committee of the Birkenhead Union [1901] AC 175; Mersey Docks and Harbour Board v The Overseers of the Poor of the Parish of Liverpool (1873) 9 LRQB 84; Cooper v City of Perth [1961] WAR 112, distinguished.
WORDS AND PHRASES CONSIDERED/DEFINED
"annual value" of land, "gross annual rental"
SKYCITY ADELAIDE PTY LTD v VALUER-GENERAL & ANOR
[2009] SASC 289Land and Valuation Division
BLEBY J.
Introduction
The appellant, Skycity Adelaide Pty Ltd (Skycity) is the licensed operator of the Skycity Adelaide Casino (the casino) which operates from premises on North Terrace, Adelaide (the casino premises).
On 2 August 2006 the second respondent, the Adelaide City Council (the Council) issued a valuation and rate notice for the casino premises in respect of the financial year ending 30 June 2007. The rates were based on the annual value of the casino premises, which was assessed at $5,998,500. Skycity, by notice dated 27 September 2006, objected to the valuation in accordance with ss 169(1)(a) and 169(3) of the Local Government Act 1999 (SA). In accordance with the requirements of s 169(5) of the Local Government Act the Council referred the objection to the city valuer, Mr Kevin Brogan, for reconsideration. Mr Brogan reconsidered his valuation. He also obtained a valuation from Mr Brian Dudakov, an independent valuer based in Melbourne. On 30 May 2007 the Council gave notice pursuant to s 169(7) of the Local Government Act that the valuation would not be altered.
Pursuant to ss 169(8) and 169(9) Skycity requested that the valuation be referred to the Valuer-General for further review. It was then referred to a review valuer, Ms Janet Hawkes, pursuant to s 169(10) of the Local Government Act. By letter dated 21 November 2007 the parties were informed that the review valuer had confirmed the original valuation. Skycity now appeals to this Court against that valuation.
The appeal purports to be pursuant to s 25C of the Valuation of Land Act 1971 (SA). That section provides for a right of appeal against a valuation of the Valuer-General, not a valuation of the Council. However, even if the Valuer-General has adopted the Council valuation, it would appear that any right of appeal conferred by s 25C of the Act would be removed by s 22(4), which applies where another Act allows a right of appeal in respect of the valuation. Section 169(15) of the Local Government Act confers such a right of appeal. I therefore treat the appeal as being brought pursuant to that section.
On 2 July 2007, the Council issued a further valuation in respect of the casino premises of an identical amount in respect of the financial year ending 30 June 2008. Skycity has also included in its appeal an appeal against that valuation without having gone through the objection and review process described above. Section 169(1)(b) of the Local Government Act confers a right of appeal to this Court against a council valuation. Section 169(2) prevents the objection and review course from being followed if the objection involves a question of law. This may render the process described above in respect of the 2006/2007 valuation invalid if the objection involves a question of law.[1] However, as I understand it, the parties are agreed that the outcome of this appeal will be applied to the valuations in respect of both financial years.
[1] See s 169(2).
Nature of the appeal
Whether an appeal comes to this Court via s 169(1)(b) or after objection and review via s 169(15) of the Local Government Act, each subsection provides that the person appealing may “appeal against the valuation” to this Court. In the case of an appeal under s 169(1)(b) it will be against the valuation of the valuer employed or engaged by the Council. In the case of an appeal under s 169(15) it will be against the valuation “after the further review” conducted in accordance with the earlier provisions of s 169. That will necessarily involve a consideration not only of the original valuation but of the valuer’s reconsideration under sub-ss (5) and (6) and the panel valuer’s review under sub-ss (11) and (12).
It was common ground that the appeal is a hearing de novo in which the Court is to make its own determination after hearing the evidence.[2] However, in order to succeed on an appeal it is insufficient merely to lead evidence of a different value without being able to point so some error in the valuation the subject of the appeal. In Ardoch Pty Ltd v Valuer-General (No 2)[3] Debelle J, having considered a number of authorities in this and other jurisdictions, concluded: [4]
In my view, the court will not interfere with a valuation unless the appellant demonstrates that the valuer whose assessment is subject to appeal has made some error of law; has acted on a wrong principle of valuation; has misapprehended, misused or excluded relevant material, in other words, has failed to have had regard to relevant factors or has had regard to irrelevant factors; has misapplied principle or has in some other way erred in discharging the task of a valuer. The court will also interfere where the valuation is manifestly excessive or manifestly low. To adapt the observations of Jacobs J in Fenton (No 2) at 356,[5] as a matter of practical reality the court will not be likely to interfere unless it is shown that the valuation is either erroneous in principle, or tainted by significant error of fact, or so obviously excessive or so obviously low that some such taint or error must be inferred. The court will have little difficulty where the valuer has made an error of principle or misapplied principles. An incorrect analysis of comparable sales or a failure to mention relevant comparable sales are instances of a misuse or exclusion [of] relevant material. To put the matter shortly, the court will not interfere if the difference between the Valuer‑General’s valuation and that of the appellant is essentially a difference of opinion. It will interfere only if the appellant demonstrates error of the kind just mentioned.
[2] Fenton Nominees Pty Ltd v Valuer-General (1981) 27 SASR 258, 260; Players Pty Ltd v Corporation of the City of Adelaide [2001] SASC 369, [19]; Ardoch Pty Ltd v Valuer-General (No 2) [2006] SASC 217, [24], (2006) 148 LGERA 408, 412.
[3] [2006] SASC 217, (2006) 148 LGERA 408.
[4] Ibid [33], 418-419.
[5] Fenton Nominees Pty Ltd v Valuer-General (1982) 29 SASR 348, 356.
These remarks were made in the context of an appeal pursuant to s 25C of the Valuation of Land Act. However, there is no material difference in the language used in the two sections. It was not suggested that this was other than the correct approach to adopt in respect of these appeals.[6]
[6] A similar approach was taken by Debelle J in Players Pty Ltd v Corporation of the City of Adelaide [2001] SASC 369, [21] in relation to an appeal under s 173(14) of the Local Government Act 1934 (SA), the predecessor to the present s 169(15).
Skycity submits that those conditions are met in this case for a number of reasons:
1It is alleged that the Council valuer made an error of law, in that the valuation method employed in arriving at the valuation is not permitted under the relevant provisions of the Valuation of Land Act 1971 (SA).
2In the alternative it is alleged that the valuer applied an incorrect principle of valuation, in that the method of valuation used was inappropriate or inapplicable to the valuation of the casino premises.
3In the further alternative it is alleged that the valuer misapplied a correct principle of valuation by applying a flawed methodology and incorrect values.
4By way of further alternative it is argued that the valuation is so excessive that it is explicable only on the ground that the valuer committed an error.
The casino legislation
Skycity is the holder of the only casino licence permitted in South Australia. The licence was issued pursuant to the provisions of the Casino Act 1997 (SA) (the Casino Act). That Act repealed the Casino Act 1983 (SA).
Section 5 of the Casino Act provides:
5—Grant of licence
(1) The Governor may grant a casino licence.
(2)In the case of the first grant of a casino licence under this section, the grant is to be made to Adelaide Casino Pty Ltd (ACN 082 362 061).
(3)Any later grant of a casino licence under this section is to be made, on the recommendation of the Authority, to an applicant for the licence.
The Authority referred to is the Independent Gambling Authority established under the Independent Gambling Authority Act 1995 (SA).
The expression “casino licence” is defined in s 3 as meaning “the licence (under this Act or the former Act) to operate the casino”. “Casino” is defined as meaning “the premises defined in the casino licence as the premises to which the licence relates”. It is therefore evident that a licence is issued to a licensee in respect of premises. This is confirmed by s 6:
6—Casino premises
(1)In the case of the first grant of a casino licence after the commencement of this Act, the licence may only be granted for premises in respect of which a casino licence is, or was last, in force.
(2)After the first grant of a casino licence under this Act, a casino licence may be granted for different premises (to take effect on or after the surrender or termination of an earlier licence) if the Authority, after conducting a public inquiry into the appropriateness of the new site, recommends the grant of the licence for those premises.
(3)The Governor may, on the recommendation of the Authority (made without public inquiry), redefine the boundaries of the casino premises, if the new boundaries consist only of an extension or contraction of the previous boundaries.
Section 7 provides that not more than one casino licence can be in force under the Casino Act at any one time.
Section 8 enables the licensee to operate the casino in accordance with the conditions of the licence. They are the conditions fixed by the Act and the conditions fixed by or in accordance with the approved licensing agreement. The approved licensing agreement is the agreement entered into between the licensee and the Minister pursuant to s 16.[7] Subject to the approved licensing agreement, the terms in the agreement may be varied by the Governor on the recommendation of the Authority.
[7] Casino Act s 10(1). See para [17] below.
The term of licence is fixed under the approved licensing agreement. Before the end of the term the approved licensing agreement can be renegotiated, and if approved by the Authority, the Governor may renew the licence for a term fixed under the renegotiated agreement.[8]
[8] Ibid s 9.
The Governor may only approve the transfer of the licence on the recommendation of the Authority.[9] The licensee cannot mortgage, charge or encumber the casino licence or any business assets associated with the operation of the casino without the approval of the Authority,[10] and the licensee is unable to dispose of or grant an interest in the business conducted under the licence to someone else without the approval of the Authority.[11]
[9] Ibid s 11.
[10] Ibid s 12.
[11] Ibid s 13.
Section 16 provides for the content of the approved licensing agreement. It is to be an agreement about the operation of the casino, the term of the licence, the conditions of the licence and the performance of the licensee’s responsibilities under the licence or under the Casino Act. Any variation must be approved by the Authority. The agreement and any variation must be laid before both houses of Parliament within twelve sitting days of the approval of the Authority.[12]
[12] Ibid s 18.
The grant, renewal and transfer of the casino licence can only be made by the Governor on the recommendation of the Authority. Section 21 of the Casino Act provides for a number of matters to which the Authority must have regard in making any such recommendation. Those matters include “the nature and standard of the casino”, i.e. the premises,[13] and the facilities to be provided in or in conjunction with it, together with “the likely impact of the casino on tourism, employment and economic development in the region in which the casino is (or is to be) located”. The decision to renew or transfer the licence will therefore depend to a significant extent on the premises to be used by the licensee.
[13] Ibid s 3, definition of “casino”.
Part 4 of the Casino Act contains provisions for regulating the trading hours of the casino and a statutory process for the approval of employees who work in what are described as “sensitive positions” in the casino. Under Part 4, Div 4 the Liquor and Gambling Commissioner must authorise the games to be played in the casino, and the Division contains other provisions providing for minimum return to players on gaming machines, for the approval by the Commissioner of various management systems and a requirement for the approval of the installation or use of a variety of equipment for gambling, surveillance or security and other purposes.
Divisions 4A and 5 provide further restrictions on the manner in which the casino may be operated, including the provision of codes of practice for advertising and responsible gambling, and the prohibition of certain gambling practices.
There are many other regulatory provisions contained in the Act. I have said enough, however, to indicate that the nature and suitability of the licensed premises and the manner in which the business under the licence may be conducted are highly regulated in many ways, including ways which will have an effect on profits which may be generated by the licensee.
The relevant facts
There is no dispute as to the relevant facts underlying the valuations in dispute. The casino premises occupy the major portion of a heritage-listed building formerly part of the Adelaide Railway Station. The building is on Crown land abutting North Terrace and a private road known as Station Place. The casino has operated from the same premises since a licence was first granted under the Casino Act 1983.
The current licence was granted to Skycity, then known as Adelaide Casino Pty Ltd, on 25 November 1999. All of the shares in Skycity were purchased by Skycity Australia Pty Ltd on 30 June 2000 for $182.553 million, including a cash component of $4.621 million. There were additional capitalised costs of the transaction, including stamp duty, reflecting a total consideration of $185.851 million. In its financial statements for the year ended 30 June 2000 Skycity Australia Pty Ltd attributed a value of $174.312 million to the casino licence. Following the adoption of those financial statements the directors of Skycity reassessed the fair values of the licence and property, plant and equipment and increased the carrying value of the licence to $178.058 million, with a corresponding decrease in property, plant and equipment carrying values. Skycity has stated in its accounts that the benefits of the licence are expected to be realised over 85 years. Value is amortised accordingly each year.
I was not informed of the current term of licence provided for in the approved licensing agreement. However, from the amortisation rate and the length of the lease available to Skycity, I infer that it is of the order of 85 years. In accordance with s 6 of the Casino Act the licence granted is in respect of the North Terrace premises. On surrender or termination of the current licence, a casino licence may be granted for different premises.[14]
[14] Casino Act s 6(2).
Skycity leases the casino premises from the Department of Transport, Energy and Infrastructure, formerly TransAdelaide, pursuant to a lease dated 30 June 1998. The initial term expires in March 2025 and is subject thereafter to three rights of renewal of 20 years each. The initial annual rent payable under the lease was $1,457,454. As at 1 July 2006 it was $1,843,781.28 excluding GST. The rent is subject to annual review under cl 5.10 of the lease. Pursuant to that clause, the rent is to be mutually agreed between the lessor and the lessee, but failing agreement is to be adjusted in accordance with increases in the Consumer Price Index (All Groups) for Adelaide. This applies throughout the whole of the term of the lease, including renewals. There is no right to any “market review” based on market rentals for equivalent premises. This would suggest a probable significant long-term advantage to the lessee.
Clause 3.4 of the lease provides that the lessee will not assign, transfer, sub-let, license or create a trust in respect of the lease or otherwise part with possession of the premises without the consent of the lessor, but the lessor may not withhold consent to a transfer to a person approved by the Authority. Clause 3.5 provides that, while the lessee uses the premises as a casino in accordance with the Casino Act, it will not use the premises for any use or purpose other than as a casino, restaurant, bar, cabaret, night club and offices and such other uses as the Authority may first approve. It is only if the premises cease to be used as a casino in accordance with the Casino Act that they may be used for some other lawful purpose.
The casino premises comprise the following areas:
Ground Floor
Gaming and restaurants 3,190m2
Marble Hall 925 m2Platform
Storage 1,096 m2
Plant 569 m2Platform Mezzanine
Storage 232 m2
Ground Mezzanine
Storage 181 m2
Office 354 m2First Floor
Gaming 5,761 m2
Second Floor
Pullman, Grille and Kitchen 1,025 m2
BOH Offices & Storage 4,044 m2Third Floor
Storage 1,426 m2
Offices/Workshops 534 m2Skycity is licensed to operate up to 995 gaming machines and 90 gaming tables. The average number of gaming machines in operation at the Casino was as follows:
2003/2004 – 850
2004/2005 – 821
2005/2006 – 934
2006/2007 – 989
In order to understand the valuations and the valuation processes adopted, it is also necessary to record extracts from the accounting records of Skycity relating to earnings before interest, taxation, depreciation, amortisation and rent (EBITDAR), earnings before interest, taxation, depreciation and amortisation (EBITDA) and earnings before interest and taxation (EBIT). For the financial years ended 30 June 2000 and 2001 Skycity’s earnings before interest and taxation (EBIT) were $16.372 million and $8.503 million respectively. Skycity’s trading and profit figures for the financial years ended 30 June 2004, 2005, 2006 and 2007 were as follows:
AUD millions 2003/2004 2004/2005 2005/2006 2006/2007
Total revenues 110.160 109.151 132.635 135.871
Cost of goods sold (59.216) (60.037) (73.932) (78.505)
Gross profit 50.944 49.114 58.703 57.366
Operating expenses
(excluding rent)(27.341) (30.989) (29.968) (29.886)
EBITDAR 23.603 18.124 28.735 27.480
Rent (1.713) (1.745) (1.788) (1.844)
EBITDA 21.890 16.379 26.947 25.636
EBIT 12.700 8.590 17.977 16.671
It was agreed that existing fit out and infrastructure components within the casino premises, namely escalators, lifts and air-conditioning, are nearing the end of their economic life. Skycity had plans to replace the existing fit out of the casino premises at an estimated cost of $20-30 million, and had plans to undertake car parking works at an estimated cost of $30 million. The replacement of the existing fit out has since taken place.
The Valuation of Land Act
What is at issue is the annual value of the casino premises to be determined in accordance with the provisions of the Valuation of Land Act 1971 (SA). So far as is relevant, “annual value” of land is defined in s 5(1) of the Act:
5—Interpretation
(1) In this Act, unless the contrary intention appears—
annual value of land, means a value computed as three-quarters of the gross annual rental that the land might reasonably be expected to realise if leased upon condition that the landlord were liable for all rates, taxes and other imposts on the land and the insurance and other outgoings necessary to maintain the value of the land, or as five per cent of the capital value of the land, but this definition is subject to the following qualifications—
…
(c) if the value of the land is enhanced by the existence on the land of any fixtures, consisting of prescribed machinery, plant or equipment the annual value of the land must (where the annual value is computed on the basis of gross annual rental, but not otherwise) be reduced by an amount representing depreciation on that machinery, plant or equipment; and
…
The determination of annual value on the basis of the capital value is not in issue in this case. What is in issue is the gross annual rental that the land might reasonably be expected to realise upon the conditions specified in the definition.
That is not necessarily what the owner actually receives. It is “what a hypothetical tenant would be prepared to pay”.[15] When speaking of a similar provision in the relevant NSW Act Sugerman J said:[16]
The ultimate object of the inquiry is the same in all cases. It is expressed in Dunedin City Corporation v. Young[17] as “the gross annual amount which a hypothetical tenant would be prepared to pay for the right to occupy the property on the basis of his being a tenant from year to year” assessed on the assumption that, “in respect of his occupation of the premises, the tenant will not have to pay to any one anything other than this rent—that he will not have to pay anything for rates or taxes that may be levied upon the property, or for insurance premiums, or on any other account.”
[15] Tooth & Co Ltd v Valuer-General (1953) 19 LGR (NSW) 172, 178 Sugerman J.
[16] Ibid 178-179.
[17] [1941] NZLR 959, 969.
The matters in issue
As I have already pointed out, and as was accepted by both parties, the appellant must demonstrate some error of law or error of valuation principle or a valuation so obviously excessive that error must be inferred. The valuation to be reviewed for that purpose is the valuation adopted by the Council and, where appropriate, as reviewed by the review valuer.
The parties refined the issues to be determined in the following way:
1Whether the definition of “annual value” in s 5(1) of the Valuation of Land Act permits the gross annual rental that the land might reasonably be expected to realise in accordance with s 5(1) of the Act to be determined by reference to the profit or gross revenue of the occupant of the land;
2Whether the Council and review valuer appointed by the Valuer-General used the correct method in determining the annual value of the casino premises for the 2006/2007 financial year for the purposes of s 5(1) of the Valuation of Land Act and, in particular, whether the annual value of the casino premises should have been determined;
(a)by reference to the fact that Skycity holds a casino licence pursuant to s 5 of the Casino Act; or
(b)by reference to comparable rents and without reference to the fact that Skycity holds the licence;
3If the answer to question 1 is “Yes”, and if the annual value of the casino premises was correctly determined by the Council by reference to the fact that Skycity holds the licence, whether it is also appropriate to:
(a)calculate the annual value by reference to other licensed and gaming premises;
(b)consider past trading performance and, if so, for what period or periods;
(c)consider the information provided to the Council by Skycity of Skycity’s EBITDAR as part of determining the casino premises’ gross rental.
The parties have agreed that if the annual value of the casino premises should have been determined by reference to comparable rents and without reference to the fact that Skycity holds a casino licence, then the annual value for the 2006/2007 year should be $4,376,500.
The parties have also agreed that if the annual value is to be assessed on the basis of a percentage of profits of Skycity and taking into account the casino licence, the assessment is to be made in accordance with the following calculation:
1 EBITDAR.
2Less $1,625,000, the cost of ownership and depreciation for gaming machines.
3 Application of a percentage of EBITDAR for rent.
4Less 25%, the statutory adjustment.[18]
5Less a further adjustment for plant and equipment allowance, in this case, an agreed reduction of 14%.[19]
[18] Valuation of Land Act 1971, s 5(1) definition of “annual value”.
[19] Ibid para (c).
The actual figure of EBITDAR for Skycity was in dispute, but in evidence the appellant’s valuer, Mr Smithson, accepted the figure adopted by Mr Brogan and Mr Dudakov. The application of the appropriate percentage of EBITDAR for rent remained in dispute.
Mr Dudakov undertook a check valuation based on a percentage of gross income. There was a dispute between Mr Smithson and Mr Dudakov as to the appropriate percentage of gross income to be applied for that calculation.
In order to understand the differences in issue it is necessary to describe the approach taken by each of the relevant valuers.
The approach of the valuers
Mr Brogan
Mr Brogan, the city valuer of the Council, was not called to give evidence. His affidavit describing his valuation process was, however, admitted. He considered that there were no directly comparable properties in Adelaide or in South Australia to that of the casino premises. The premises had been renovated and modified so that the most likely use to which they would immediately be put upon sale of the leasehold would be that of a casino. The most likely purchaser, given the legislative and regulatory structure establishing the casino, would be another casino operator. A hypothetical lessee for the purpose of valuation would therefore also be a casino operator.
In those circumstances he considered it appropriate to value the premises as what is known as a “specialised trading property” (STP). STPs include hotels, various restaurants, business premises and leisure premises. They are individual properties that usually change hands in the market place while remaining operational. Because of the lack of suitable comparables and the relevance of trading value in determining the market value of the property, they fall into a type of property where analysis of receipts, expenditure and profits is the appropriate method for valuation. The concept of an STP is one that takes account of the most likely use of the land in all of the circumstances current at the time of valuation.
The valuation methodology adopted by Mr Brogan for valuing an STP was based on the International Valuation Standards Committee’s International Valuation Guidance Note 12, endorsed by the Australian Property Institute and the Property Institute of New Zealand. It is a method which has some international recognition.
It is appropriate to set out some of the relevant paragraphs of Guidance Note 12:
5.3STPs are considered as individual trading concerns and typically are valued on the basis of their potential Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA), as adjusted to reflect the trading of a reasonably efficient operator and often on the basis of either DCF methodology or by use of a capitalisation rate applied to the EBITDA.
5.4Valuations of STPs are usually based on assumptions that there will be a continuation of trading by a Reasonably Efficient Operator, with the benefit of existing licences, trade inventory, fixtures, fittings and equipment and with adequate working capital. The value of the property including transferable goodwill is derived from an estimated maintainable level of trade. If the valuation is required on any other assumption, the Valuer should make such assumption explicit through disclosure. While the actual trading performance may be the starting point for the assessment of the fair maintainable level of trade, adjustments should be made for atypical revenues or costs so as to reflect the trade of a reasonably efficient operator.
5.5Profit generated in excess of market expectations that may be attributed to the manager is not included. The manager’s particular tax position, depreciation policy, borrowing costs and capital invested in the business are not considered for the purpose of establishing a common basis to compare different properties under different managers.
5.6Although the concepts and techniques are similar to those often used in the valuation of a large-scale business, to the extent that the valuation of an STP does not usually consider tax, depreciation, borrowing costs and capital invested in the business, the valuation is based on different inputs from those of a valuation of a sizable business.
5.7The valuation conclusion may need to be broken down between the different asset components for the purposes of financial reporting, for property taxation or, when required for property lending purposes.
5.7.1The components of STP entity value are typically:
5.7.1.1land;
5.7.1.2building(s);
5.7.1.3fixtures and fittings (furniture, fixtures and equipment), including software;
5.7.1.4inventory, which may or may not be included (this should be disclosed);
5.7.1.5intangible assets, including transferable goodwill; and
5.7.1.6any licences and permits required to trade.
5.7.2Items such as working capital and debt are considered in valuing equity for businesses, but equity is not valued for STPs. STPs may, however, comprise part of a business.
5.7.3An estimation of the individual values of the components can only represent an apportionment unless direct market evidence is available for one or more of these components to isolate component value from the overall STP value.
5.8STPs are by their nature, specialist assets that are usually designed for a specific use. Changes in market circumstances, whether structural to the industry or due to the local competition or another reason can have a material impact on value.
5.9It is necessary to distinguish between the asset value of a Specialised Trading Property and the ownership value of the business. In order to undertake a valuation of an STP, a Valuer will require sufficient knowledge of the specific market sector so as to be able to judge the trading potential achievable by a Reasonably Efficient Operator, as well as knowledge of the value of the individual component elements.
Mr Brogan took the EBITDAR of Skycity and added the costs of occupation. The resultant figure had to be adjusted, where necessary, to reflect “fair maintainable trade” and to take into account any factors that may affect the result such as an impending smoking ban that was due to take effect in October 2007. He calculated the resultant figure, the “divisible balance”, to be $26.6 million. That was then multiplied by 35% to produce what is the landlord’s share, or gross rent, of the financial return on the property for the purposes of the valuation exercise. He rounded that figure to $9.3 million. He then deducted the statutory allowance of 25%. He deducted 14% from the resultant figure for the plant allowance referred to in paragraph (c) of the definition of “annual value” for this type of building. That percentage figure was determined in accordance with the 1971 Convention agreed to by the Australian Institute of Valuers and Land Economists (now the Australian Property Institute), the Real Estate Institute of South Australia, the Valuer-General and the Adelaide City Council. As mentioned above, that figure was not in dispute.
The figure of 35% gross rental was based on actual figures applicable to hotels that Mr Brogan considered were engaged in a similar line of business. He had conducted an analysis of rent actually paid by hotels as a percentage of EBITDAR. He considered that hotels were serving an industry similar to that of the casino, particularly in respect of gaming components. While the casino was not directly comparable, it could be said that at least a portion of its business was in competition with other hotels in Adelaide. He took into account that the licence had been acquired for approximately $185 million, the $20 million refurbishment which was due to take place and which has since taken place and the planned car park investment for the property. A divisible balance of 35% to the landlord and 65% to the tenant seemed to him to be appropriate because the casino was an operator of premises in the leisure sector of STPs and exposed to similar risk factors.
Mr Brogan arrived at his annual value for the casino premises of $5,998,500 by application of that method.
Mr Brogan conceded that if the property ceased to be used as a casino, then the annual value would need to be reviewed. He also considered that relocation of the casino would not change the methodology for the determination of annual value within the city of Adelaide. The same method of valuation would be used at whatever location the casino was conducted. He considered that any volatility attributed to the manner in which the business is conducted would be overcome by the proper application of the STP valuation process and by virtue of the fact that the valuation method itself seeks to establish sustainable earnings over a typical period of three years. The process was appropriate, in his opinion, where there was no market evidence for a general rental of casinos operating in other States of Australia.
Finally he noted, correctly, that the rent payable under the current lease was not market evidence for the premises as currently demised. It may represent evidence of the rental value of the original building, but it does not take into account any of the improvements to the building that had been carried out by the tenant. They needed to be reflected in the assessment of annual value for rating purposes.
Mr Dudakov
Mr Dudakov has extensive experience in valuation of commercial properties. Of more immediate relevance, he has undertaken valuation work for Crown Casino in Melbourne in relation to rating assessments made by the City of Melbourne. He has advised Crown Casino in relation to site value assessments and what are known in Victoria as net annual value assessments. He has also undertaken the valuation of the Burswood Casino in Perth and Star City Casino in Sydney. He has also valued Crown Casino for tax consolidation purposes.
He considered that there was limited evidence available in relation to rentals or lease payments made for real estate used for casino operations anywhere in Australia. The information that is available is difficult to analyse in many cases due to the operating structures adopted or to the fact that rental expense need not be disclosed in statutory accounts. Operators have differing operating structures depending on the property and the requirements and development objectives of the various State Governments involved. He also noted that locating source documents is very difficult, given the time that has elapsed since casino licences were initially issued.
He concluded that there was no benchmark, methodology or rule of thumb adopted within the casino industry to assist with the analysis of rental or lease payments made by casino operators. Nor were there any arms-length market transactions from which any meaningful data could be analysed and compared with the Skycity operation.
On Mr Dudakov’s understanding of the provisions of the Casino Act, he considered it significant that the casino licence “runs with the land”, and that accordingly any goodwill which attached to the casino’s locational attributes was to form part of the assessment. He emphasised that such interpretation assumed that the rent that a hypothetical tenant would be prepared to pay would be for the casino operated under a “fair average management” regime. As such, any premium for goodwill attributable to the particular expertise of the current operator was to be ignored.
Mr Dudakov therefore based his calculation on what a hypothetical tenant could afford to pay as rent, given the likely trading which could be achieved at the premises. He therefore took as his starting point Skycity’s actual EBITDAR, to which some adjustments were made, and applied a percentage of that figure to calculate gross rental value. He had researched rentals paid by hotel and club venue operators with electronic gaming machines in South Australia and Victoria. He considered that the use of trading performance of a hotel in assessing gross annual rent was appropriate because the nature of the businesses was very similar – the provision of gaming machines, food and drink. He therefore considered that it was appropriate to apply similar figures to the casino. He noted one key difference, namely that Skycity is both an operator and owner of gaming machines, whereas in the case of hotels the operators leased the machines. He therefore made an adjustment in the case of the casino for the annual cost of capital necessary to own and operate the gaming machines.
For the purpose of the 2006/2007 valuation Mr Dudakov resolved to adopt the actual revenue, expenses and resultant EBITDAR figures for the financial year ended 30 June 2006. He noted that the following year’s forecast was for substantial growth, but he considered that that would be short-lived following the introduction of smoking bans, which would be likely to reduce the forecast to 2006 levels. In his experience the returns derived were in line with fair average management.
As the valuation for the casino includes revenue from table games, gaming machines, VIP gaming, casino restaurants, staff dining, casino snack bars and casino bars, all direct costs associated with those areas were deducted from revenue other than the imputed rent expense.
In his final calculation Mr Dudakov had available to him the actual trading figures for the financial years ending 30 June 2006 and 30 June 2007. He was therefore able to act with a degree of hindsight, and on the basis that expected future trading as at 30 June 2006 did not live up to expectations. The averaging process resulted in an assessed EBITDAR of $28,950,000. He then adjusted that figure downwards to reflect the annual cost of owning the gaming machines and calculated gross rent at 35% of the resultant figure. He then applied the statutory reduction of 25% to that figure, and made a further deduction of 14% relating to plant and equipment fixtures. His assessment was therefore as follows:
Rent as % of EBITDAR
Adopted EBITDAR $28,950,000
Less: Costs of owing gaming machines $1,625,000
27,325,000
Rent @35% of EBITDAR $9,563,750
Adjust @ 75% for deduction under statutory formula $7,172,810
Less: 14% Plant and Equipment Convention $1,004,190
Annual Value $6,168,620
Mr Dudakov then undertook a check valuation by determining a percentage of gross revenue. He conceded that he did not have market evidence to support this figure, but he was aware, having acted for the Crown Casino, of the negotiated settlement between the Melbourne City Council and Crown Casino in respect of the net annual value, being the equivalent under the Victorian legislation, to be applied. The agreed figure was 6.25% of gross revenue. However, the Victorian formula was required to produce a net rent rather than a gross annual rent. Accordingly, he increased the percentage for this calculation to 6.75%. On that basis the calculation was as follows:
Rent as % of Gross Revenue
Gross Revenue $131,200,000
Rent @ 6.75% $8,856,000
Less @ 25% for reduction under statutory formula $2,214,000
$6,642,000
Less: 14% Plant and Equipment Convention $929,880
$5,712,120
In the light of both calculations he considered it reasonable to adopt a figure of $5,900,000 as the annual value of the casino premises at 29 June 2006.
Leaving aside Mr Dudakov’s check valuation, it can be seen that his approach was similar to that of Mr Brogan, although Mr Dudakov did not refer specifically to the convention of valuing an STP. In his oral evidence he firmly expressed the view that his methodology was commonly used for valuing hotels and like premises, and that calculations based on EBITDAR were extensively used in the hospitality and like industries for calculating, and hence valuing, the purchase price of such licensed premises.
Ms Hawkes
Ms Hawkes was the review valuer appointed by the Valuer-General. She considered the process adopted by Mr Brogan and Mr Dudakov as being “an appropriate method for this type of property” and she accepted their analysis and reasoning with one minor qualification in respect of Mr Dudakov who later corrected his calculation to deal with that point. That correction is reflected in Mr Dudakov’s figures quoted above. She considered the grounds of objection then made by Skycity and dismissed them. She considered the annual value assessed by Mr Brogan to be correct and confirmed the assessment. She was not called to give evidence at the hearing.
Mr Smithson
Mr Smithson is an experienced South Australian based valuer. He has substantial experience in valuing hotels, motels and other specialised properties. However, he has very limited experience in valuing a casino. He was aware of Mr Brogan’s method of valuing STPs and had used it himself for such properties.
The assumptions on which Mr Smithson proceeded included the fact that the casino premises are not the only premises within South Australia from which Skycity could conduct its operations and that there is no legal impediment to Skycity relocating its operations to a new location in South Australia. He noted a number of apparent limitations of the casino premises on their efficient operation as a casino, and that it was a less than ideal building and site for the location of such an enterprise. He regarded it as being “within a very old and dated structure that is limited in its potential by layout and heritage listing”.
Mr Smithson accepted that there was no evidence in Australia of casinos leasing fully fitted-out space or of evidence of what such businesses would pay to occupy the space. He considered that there were limitations involved in the use of EBITDAR and comparisons with hotels because of the differing characteristics of casinos, and that unlike hotels it was difficult to ascertain what portion of a casino’s EBITDAR is a result of good management. Furthermore, he considered that the casino competes against other entertainment venues by providing a different entertainment experience to that of hotels and clubs and, in a broader sense, also competes against casinos in other parts of Australia. He concluded:
Therefore the fundamental premise that the net income generated from the SKYCITY business is entirely resultant from the particular building and its physical and location attributes is in my opinion erroneous. If the property was vacant and available for lease, assuming a casino operator was in the market to lease such premises, it is reasonable to assume that the operator would be a logical potential tenant for the property, which has purpose designed fitout for a casino. Such an operator if “footloose” would, in my opinion, if prudent, also consider alternate premises.
…
Should alternate premises be available at a lower rent or one which is more suitable for use as a casino than the subject property at a rent that is more attractive than that being asked by the owners of the subject property, it is reasonable to assume the casino operator would choose to lease the alternate premises rather than the subject property.
Mr Smithson then considered the evidence of rents achieved in Adelaide and its environs for different categories of property, namely the office buildings, suburban hotels and restaurants and cafes. He then assigned notional comparable rentals for the various components of the casino premises comprising storage, office, workshops, gaming and restaurant areas, for each of which different rents were notionally assigned. That produced a gross rental assessment of $6,785,000 per annum. In arriving at those figures he took into account the quality of accommodation and age of fit-out in comparison to other properties that are leased out for commercial purposes. The figures he applied were what he considered to be maximum gross rents attributable to the casino premises on the basis of a rate per square metre, and rents that were well above what could be reasonably expected for any form of alternate use, particularly having regard to the large size of the tenancies and their limited accessibility for potential subdivision.
He then took into account the statutory allowance of 25% and the plant and equipment allowance of 14% to arrive at his annual value figure of $4,138,850. He later adjusted that figure to $4,376,500 for reasons which are not presently material.
The valuation method
The first question for determination is not whether Mr Smithson’s method is preferable to that of Mr Brogan and Mr Dudakov, but whether the method adopted by Messrs Brogan and Dudakov discloses error or is shown to be erroneous in principle.
The assessment of the rental value of some types of commercial premises by reference to a percentage of the operator’s EBITDAR is by no means an unusual or unprincipled process. I accept the evidence of Mr Dudakov that it is a method in common use by the operators of commercial premises themselves for assessing value of certain types of premises for a variety of purposes. This is so particularly in the hotel industry which, in this State and in Victoria, have a number of similar features, notably liquor and gaming licences and gaming, restaurant and bar facilities.
Even Mr Smithson, in his written opinion in which he assessed comparable rentals for the various components of the casino premises, when examining comparable rents of hotels, acknowledged that hotel rentals were not normally equated to a rate per square metre, due in part to the greatly differing characteristics of facilities and uses of such facilities. In that context he accepted that analysis of hotel trading figures showed that rents generally fell into a band of 30% or more of EBITDAR. This confirmed Mr Dudakov’s method as being an acceptable method for valuing the rental value of hotels. Indeed, Mr Smithson considered Mr Brogan’s analogous method of valuing an STP to be acceptable.
Mr Smithson accepted that his method of valuation was based on the premise, which he was specifically instructed to assume, that there was no legal impediment to Skycity relocating to alternate premises if it wished. He did not consider the casino premises to contribute to the income produced by the casino. However, in his oral evidence he conceded that if the casino licence ran with the land in the same sense that hotel licences were considered to run with the land, Mr Brogan’s approach would not be erroneous. In fact he would agree that Mr Brogan’s approach was correct. He was not asked to explain why the casino was not an STP. He also agreed that, on that basis, Mr Dudakov’s approach would be a reasonable approach. By way of illustration as to why hotel licences run with the land Mr Smithson noted that under most leases the hotel licence could not be removed without the consent of the landlord, and that s 72(1) of the Liquor Licensing Act 1997 (SA) provides that in respect of leased premises the licensing authority must not grant an application for removal of a licence or for transfer of a licence unless the lessor has consented to the application. It followed that in a practical sense a liquor licence attaches to premises.
The real difference in method was therefore based on the assumption on Mr Smithson’s part that the casino licence did not run with the land, and on Mr Dudakov’s assumption that it did.
While the situation of the casino is not identical to that of a hotel, it is sufficiently regulated for me to be able to find, with some confidence, that, in practical terms, the casino licence runs with the premises. There are a number of legal and practical impediments to the removal and transfer of the casino licence.
The Casino Act requires that the sole casino licence be issued in respect of particular premises. While it is only the Governor who may grant the casino licence, the grant of any future licence is to be made on the recommendation of the Authority.[20]
[20] Casino Act s 5(3).
If a licence is to be granted in respect of different premises, the present licence must first be surrendered or terminated.[21] It cannot be transferred to other premises. There is a practical impediment to such surrender in a situation in which Skycity, in July 2000, attributed to what is clearly a long-term licence a value of $178 million. That is not to say that the surrender cannot be achieved without loss to Skycity by agreement with the Governor. However, the Executive Government, through the relevant Minister, is also the lessor of the casino premises.
[21] Ibid s 6(2).
Not only must there be a surrender of the current licence, but a licence cannot be granted for different premises without the recommendation of the Authority, and then only after the Authority has conducted a public enquiry into the appropriateness of the new site[22] and has also taken into account the requirements of s 21 of the Casino Act.
[22] Ibid.
The lease itself also provides a strong disincentive to removal of the licence. Its minimum term is to 2025, with three rights of renewal of 20 years each. While there is no prohibition in the lease on removal of the licence, cl 3.4.1 of the lease requires that any transfer of effective ownership of the lease cannot take place without the prior consent of the lessor. Clause 3.5 provides that while the premises are used as a casino, they cannot be used for any other purpose without the consent of the lessor and the Authority.
It follows that there are substantial restrictions on the ability to obtain a casino licence for different premises. In practical terms the casino licence is indispensable to the occupier of the premises being able to conduct the business in which it is engaged. In those circumstances it is necessary to take into account the value of the premises due to the existing licence.[23] While the situation of the casino is not identical with that of a hotel, it is sufficiently regulated to be able to find, with some confidence, that, in reality, the casino licence runs with the premises. The casino premises are not like shop premises or office premises which can be located anywhere and in respect of which there are ready comparators of rental rates per square metre.
[23] Players Pty Ltd v Corporation of the City of Adelaide [2001] SASC 369, [62].
The fact that the operation of and goodwill attaching to the casino licence is so intimately tied to the use of premises, coupled with the fact that there are no comparable casino operations from which any comparisons of reasonable gross rent can be drawn, must lead to the conclusion, with which all valuers agree, that an assessment of rent based on EBITDAR of the reasonably competent operator is an appropriate method of valuing the gross rent, from which the annual value can be derived by an agreed mathematical calculation.
That conclusion is further justified by the fact that gross earnings and relevant operating expenses will be affected by the nature and location of the premises. If, as Skycity contends, operating costs are increased or gross revenue is reduced by such factors as the heritage listing of the building, increased fit-out and infrastructure costs in respect of the building, inappropriate floor areas and the location or lack of car parking facilities, those factors will have a corresponding effect on the calculation of EBITDAR and hence gross rent and annual value.
I accept the evidence of Mr Brogan and Mr Dudakov that wherever the casino might be located, the appropriate method of valuation which they adopt will remain the same. It also follows that if the casino premises were fitted-out and used as offices they would command a different rental value which would be assessed by different and, for that type of use, more appropriate means.
I also accept the evidence of Mr Dudakov that in respect of a licensed casino, as in the case of a licensed hotel, the hypothetical landlord “would know that it is being operated by a casino and the hypothetical landlord would know that the industry norm for these types of operations is to obtain a rent based on the business operation that goes to it”. As he subsequently agreed, the landlord would be “looking for a piece of the action”. The process therefore accords with the commercial reality of what happens. The process adopted by Mr Dudakov and Mr Brogan is, in the circumstances, the best indicator of what a reasonable hypothetical tenant would be prepared to pay for premises fitted out as a casino. The hypothetical tenant is therefore likely to be a casino operator, and a casino is the highest and best use of the premises as currently disposed.
Mr Hayes QC, counsel for the appellant, in support of his argument cited a passage from the judgment of Blackburn J, with whom Quain and Archibald JJ agreed, in Mersey Docks and Harbour Board v The Overseers of the Poor of the Parish of Liverpool:[24]
If the hereditaments are such as to afford peculiar facilities for carrying on any kind of business, that facility does, beyond all question, enhance the value of the occupation; but though the profits which may be reasonably expected to arise from such a business no doubt form an element in estimating the enhanced value of the occupation of the premises, the actual profits made do not form any element, except in so far as they afford evidence of what might be reasonably expected to be made from the occupation of premises affording facility for carrying on such a business. For instance, to explain our meaning, there can be no doubt that the annual rent of a shop in Cheapside is higher than the annual rent of a similar shop in a back street; and that the reason why tenants give a higher rent is because of the superior facility for carrying on business there. But the rent and the rateable value of the shop are quite independent of the amount of the shopkeeper’s actual gains. The rateable value is the same whether the tenant is a flourishing trader or is carrying on business at a loss. So, no doubt, in fixing the rent of chambers in one of the Inns of Court, the facility for carrying on the legal profession in them is an element, and an important one, but the actual income of the tenant is not. The chambers command no more rent when let to the Attorney General than they would do if let to a young barrister just called who does not as yet pay his expenses.
[Emphasis added].
[24] (1873) 9 LRQB 84, 97.
Leaving aside the exception referred to in bold, that approach is entirely correct in the case of a shop or barrister’s chambers where reasonable comparisons may be made with rentals charged for like premises. However, that cannot apply here. There are no like premises with which a comparison can be made. Even Skycity in support of its original objection described its business as “a business which is, by statutory mandate, entirely sui generis”. Furthermore, the method adopted by Messrs Brogan and Dudakov does no more than apply the exception emphasised in the passage above. Both valuers agreed that the actual trading figures of Skycity could not be taken without question. Both satisfied themselves that the figures represented fair average management of such a facility. Both in fact made some appropriate adjustments to the bare EBITDAR figures. Once the appropriate adjustments were made, the figures provided good evidence of what “might be reasonably expected to be made from the occupation of premises affording facility for carrying on such a business”.
Reference was also made to the judgment of the Earl of Halsbury LC in Mersey Docks and Harbour Board v The Assessment Committee of the Birkenhead Union.[25] That case was concerned with the assessment of net annual value under s 1 of the Parochial Assessment Act 1836. The Lord Chancellor said:[26]
Now, my Lords, the first part of the proposition is that you are to rate–what? Not the tenant's trade. … The trade is excluded from valuation by the terms of the statute. You are to rate the premises according to their value; therefore it would be very wrong indeed to rate the trade, or to treat it as you would if you were dealing with the question for the income tax. You are not rating the income–you are rating the premises; so that where you have premises of a similar character with equal facilities for carrying on trade you have a very facile mode of coming to the conclusion what sum would reasonably be given by any tenant from year to year for such premises.
It will be noted that the basis on which his Lordship proceeded was that there were premises of a similar character with equal facilities for carrying on trade. That is not the case here. The exception was recognised by his Lordship a little later on:[27]
Again, my Lords, I find that Collins L.J. says in the same way: "Hence the rule that in ordinary cases where the standard of rent is applicable evidence of actual profit made cannot be received. But it is equally true that where no such standard of comparison exists, it is legitimate to inquire into the profits actually earned." Again I am compelled to say that I cannot concur with the form in which that proposition is put. It is not a question of deciding what according to the law of evidence is receivable, but what is the natural and ordinary and usual mode by which you can answer the proposition put by the Legislature to the overseers.
The criticism of the form of the statement does not affect the validity of the qualification acceded to which has relevance to this case.
[25] [1901] AC 175.
[26] Ibid 180-181.
[27] Ibid 182.
Finally, the approach adopted by the respondent’s valuers gains endorsement from the decision of Jackson SPJ in Cooper v City of Perth.[28] That concerned the rating of a hotel in central Perth where the respondent had effectively applied Mr Dudakov’s alternative check method of valuation in determining the valuation of the hotel. The Court allowed the appeal, holding that the appropriate measure was the net profit of the hotel, not its gross takings.
[28] [1961] WAR 112.
Jackson SPJ described the appropriate process as follows;[29]
In the case of licensed premises I suppose, in the first place, a valuer would seek to base his valuation on actual rent paid or comparable rents in the locality if that information were available. Here it is agreed that the rent paid by the appellant and his wife as tenants to the appellant as owner is not a reliable index of annual value. Apparently comparable rentals also were unavailable. In those circumstances the next best method of arriving at a fair value is to examine the accounts of the hotel and to endeavour to ascertain from them what amount, by way of rental, a hypothetical tenant would be prepared to pay for a letting from year to year. …
[29] Ibid 115.
His Honour referred to a number of English and other authorities and concluded:[30]
In my opinion, the authorities to which I have referred justify the following passage from Halsbury, 2nd ed., vol. 27, p. 390: “Where the trade could be equally well carried on upon some other hereditament of the same class, there is no need to enquire into the profits actually made, but where the trade can only be carried on upon the particular hereditament, as in the cases of licensed property, railways, tramways, water-works … and other special kinds of property, the actual profits made upon the hereditament are among the matters which an intending tenant would take into consideration, and are, therefore, used as a basis upon which to calculate the rental value.” Further, at p. 426: “The simplest method of valuing a public house is by ascertaining the rents which are prevalent in the neighbourhood for ‘free’ houses; but ‘free’ houses are comparatively few and it is, therefore, rarely possible to apply this test. Evidence of the trade actually done, and of the profits made, by the actual occupier is admissible in order to ascertain the rental value. If evidence of the gross receipts is given, an occupier must be allowed to give evidence of the outgoings which have been found necessary to earn those receipts.” To this passage there is a footnote on which counsel for the appellant relied and with which I agree which reads: “The usual method of valuation when based on trade is to take the profit (actual or estimated and adjusted as for a free house) of the last year, or of an average of years, to subtract therefrom the remuneration which a hypothetical tenant would expect for himself, and to apportion the remainder between rent (i.e. gross value) and rates. The somewhat less accurate method of taking a round percentage of the gross receipts (actual or estimated and adjusted as for a free house) to represent the gross or the net annual value is also used.”
[30] Ibid 117-188.
It follows that there is no identified error of law or of principle in the valuation method adopted by the respondent’s valuers.
The percentage of EBITDAR applied to rent
On the assumption that a percentage of net operating profit was a correct method of determining rental value, there remained differences between the respondent’s valuers and Mr Smithson as to some aspects of the calculation. Although there was a difference as to the appropriate figure of EBITDAR to be applied, Mr Smithson, in evidence, and in the light of actual historical information then available, agreed that the EBITDAR figure used by Mr Dudakov was appropriate.
The only item of dispute was then the percentage of EBITDAR to be applied to rent. Mr Dudakov and Mr Brogan applied a figure of 35%. Mr Smithson considered that 25% was the appropriate figure, having regard to the inherently high value of the lessee’s interest in the casino licence.
In order to arrive at this conclusion he compared the price paid for the leasehold interest of Skycity in the casino premises and licence and the price paid for leasehold interests in hotels, both as multiples of EBITDA/Net Operating Profit, otherwise known as “years’ purchase”. The figures showed, for the casino, a multiple of 9.31. Similar multiples for a range of hotel sales were generally between 3 and 4.5. This suggested that the casino licence was much more valuable than a hotel liquor and gaming licence. He considered that the analysis shows a much higher price paid in terms of multiple earnings for the casino licence, as compared to hotel licences. He believed that that demonstrated that a casino buyer does not equate the value of the casino licence and business in the same way as a hotel buyer equates hotel licences and businesses. He added that as the licensee is not required by the lease terms and conditions to keep the licence with the building, the casino owner has total control, and the building owner does not have any control over his licence. As such, the building owner is not entitled to a rent reflecting the value of the casino licence. He therefore considered that the percentage of EBITDAR should be much lower than the figure used by Mr Dudakov.
It is apparent from what I have already said that I do not accept that the casino owner has total control and that the building owner does not have any control over the licence. That is one of the false assumptions on which Mr Smithson proceeded. Nevertheless, the apparently different figures of years’ purchase need to be addressed.
Mr Smithson also admitted, however, in evidence, that his estimate of 25% of EBITDAR was speculative because he did not have available any casinos that were rented out on a turnkey basis from which to make any comparable calculations. He accepted that the difference between his figure and that of Mr Dudakov was a difference of opinion. He did not suggest that Mr Dudakov’s figure was erroneous in principle. Be that as it may, it does not meet the test required to disturb the respondent’s valuation. However, I am also satisfied that the figure adopted by Mr Dudakov is the appropriate and more accurate figure.
Mr Dudakov, in justifying his figure of 35%, considered that it was supported by a comparison of actual gross rental against EBITDAR of a number of hotel operators in Victoria and South Australia. The analysis of the Victorian figures showed a percentage of not less than 34%. The South Australian figures were less consistent, and only two out of 14 premises analysed showed a figure of above 35%. He gave greater weight to the Victorian figures because of the higher statutory limit on the number of gaming machines allowed in Victorian hotels (105) against the limit in South Australia of 35. No other gaming venue in South Australia is permitted to operate anything like the number of gaming machines that Skycity may operate. Overall, however, rental as a percentage of net operating profit for hotels was between 20% and 45%.
Mr Dudakov’s figure also gained support from the figure adopted by Mr Brogan.
Mr Smithson accepted that, in his experience, hotels with gaming machines generally fitted into the range of 20-45% of net operating profit. He did not dispute the figure of 35% as being an appropriate figure for hotels in South Australia. For reasons which I have summarised, he considered that that percentage was not appropriate for the casino.
Mr Dudakov’s explanation, which I accept, for the fact that the casino purchase showed a much higher years’ purchase figure than most hotels lay in a number of factors. The first is that the multiple for the casino was 8.59 if the cash reserves were ignored, as they should be. The second is that the casino had a lease of up to 85 years, whereas most hotel lessees only had security of tenure for 10-15 years. It had a much longer period to recoup the purchase price. The third factor was the extremely favourable (to the lessee) rent review provisions over the whole life of the lease. Those provisions included no market review of rent, whereas most hotel leases were subject to market reviews at least at each five year renewal. The fourth factor was that the price paid by Skycity Australia Pty Ltd in 2000 incorporated an element of profit rent, being the difference between gross market rent and the rent actually being paid. On his figures that profit rent capitalised at 9% represents a figure of $60 million. Even on Mr Simthson’s figures it represents a capitalised figure of $30 million. Fifth, the purchase price also included the purchase of casino equipment valued at about $7 million. Finally, Skycity and Mr Smithson considered that the previous management of the casino was “poor”. That resulted in an artificially low EBITDA for the purpose of calculating years’ purchase. Skycity no doubt based its purchase price on the basis of the higher future maintainable earnings which it considered it could achieve.
These factors provided the explanation for the substantial difference between average hotel multipliers of earnings and that applied to the casino. They did not effect any difference in the multiple of EBITDAR required to establish the annual gross rental payable by a hypothetical reasonable lessee. Furthermore, Mr Dudakov had already made adjustments to the actual EBITDAR of Skycity to allow for differences between the casino operation and that of a typical hotel.
In addition, Mr Smithson’s opinion as to the 25% figure was not supported by his ultimate opinion. His calculation of annual value by his preferred method of applying differing rates per square metre to various parts of the premises yielded an annual value of $4,376,500. His application of 25% to Mr Dudakov’s calculation resulted in a figure of $4,406,156, or roughly the same. His thesis in justifying 25% was that a casino licence was substantially more valuable to the lessee than a hotel licence. He argued that it would follow that the hypothetical rent, if the premises were fitted out for a casino, would be substantially more than for any alternative use. The alternative use is reflected in the composition of his preferred method of valuation. On that basis, the rent of the premises as a casino, and hence the percentage of EBITDAR, must be substantially higher than his estimate of 25% which he admitted was speculative.
For these reasons I accept the evidence of Mr Dudakov that in the calculation of gross rental for the casino premises, and hence annual value of the premises, the appropriate percentage to be applied is 35% of EBITDAR.
Rental value as a percentage of gross revenue
Mr Dudakov carried out a check valuation based on 6.75% of Skycity’s gross revenue. I have already described the method and its result and Mr Dudakov’s justification for the selection of 6.75%.
Mr Smithson considered this to be an appropriate method of ascertaining the rental value of hotels. He considered that it had the advantage of being less sensitive to management policy than the use of EBITDAR. He also agreed that 6.75% percent was an acceptable percentage for a hotel. However, he did not consider it appropriate for the casino for much the same reasons as those he expressed in relation to his disagreement with Mr Dudakov’s primary method. However, if it were to be applied, he considered that the percentage should be 5% for much the same reasons he relied upon in support of his conclusion that the multiplier of EBITDAR should be 25%. Both were unreasoned estimates not based on any comparisons of actual figures.
I prefer Mr Dudakov’s evidence as to the percentage he selected for the same reasons as those upon which I relied for preferring his evidence as to the percentage of EBITDAR. His figure for this aspect also has the support of an actual figure adopted by parties at arms-length in respect of the net annual rental attributable to the premises of Crown Casino.
Mr Dudakov’s check valuation by this method is within sufficiently close range also to justify the valuation under challenge.
Conclusion
For these reasons I consider that there has been demonstrated no error of law or principle of valuation in respect of the annual value adopted by the respondent, and the valuation has not been shown to be manifestly excessive. The appeals are therefore dismissed.
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