Talgai Investments Pty Ltd v Director-General, Department of Main Roads
[1998] QLC 72
•30 June 1998
|
BRISBANE
30 JUNE 1998
Re: A97-30 -
Determination of Compensation -
Resumption for Road Purposes -
Acquisition of Land Act 1967.
Talgai Investments Pty Ltd
v.
Director-General, Department of Main Roads
J U D G M E N T
By proclamation published in the Government Gazette on 15 September 1995, the Chief Executive, Department of Transport (as he then was) took from that date for road purposes, part of land described as Lots 44 and 45 on RP 4777, County of Ward, Parish of Nerang, contained in Title Reference 17145177.
Lots 44 and 45 contained areas, before resumption, of 582 m² and 569 m² respectively, totalling 1,151 m². The amalgamated parcel was of rhomboid shape with frontage of about 30.4 metres to Queen Street and about 35 metres to High Street, Southport. Lot 44 was situated at the north-eastern corner of Queen and High Streets, with Lot 45 adjoining to the east fronting Queen Street.
The land taken comprised 114 m² of Lot 44, being a strip along the Queen Street frontage truncating along its western boundary, then 537 m² from Lot 45, leaving a small triangular shaped area remaining in the extreme north-eastern corner. The balance areas total 500 m², being 468 m² in Lot 44 and 32 m² in Lot 45. The amalgamated balance area is of irregular shape with an angular frontage of about 38 metres to High Street and about 9.4 metres to Queen Street. It has depth of about 16.8 metres on the northern boundary off High Street and about 41.2 metres as the eastern boundary off Queen Street.
The scheme behind the resumption allowed the widening and upgrading of High Street and the intersection with Queen Street. The road widening and upgrading continued southerly across Queen Street into Ferry Road as the continuation of High Street.
The registered proprietor of the land as at the date of resumption was Talgai Investments Pty Ltd.
At the date of resumption there was erected over both surveyed parcels in an inverted L-shape, a cavity brick and concrete block showroom and factory/workshop building with concrete flooring at two main levels and steel framed metal deck roof. For the purposes of this determination, it will be accepted that the building contained a total floor area of 625 m², of which about 185 m² constituted a modernised showroom with aluminium framed shopfront glazing. The building, although structurally sound, was in need of some maintenance and repairs. The painted exterior, although in distinctive colours as chosen by the lessee, was generally considered to be unattractive by modern standards.
Vehicular access to the prominent, elevated site was restricted to left-in and left-out eastbound traffic on Queen Street, to a driveway easterly of the corner showroom, leading to car-parking areas and the rear factory area.
The whole of the property was leased, the purpose of use being "Manufacturer, wholesaler and retailer of sheepskin products and everything reasonably incidental thereto".
The resumption necessitated the demolition of the building. The premises were not vacated by the tenant until the end of February 1996 and rental was received by the owner until that time.
Claim for Compensation
A claim for compensation was first filed in the Land Court Registry on 2 April 1997, made up as follows:
Loss of Benefit of Leases $585,000
Valuation expenses $5,000
Legal expenses $4,000
Total $594,000
When the matter came on for hearing, counsel for the claimant company, Mr B. Cronin, made application for the claim to be amended as follows:
Compensation for resumption $528,000
Valuation expenses $3,792
Legal expenses $3,763
Surveying fees for amalgamation $400
Gold Coast City Council amalgamation fees $434
Titles Office fees for amalgamation $250
KPMG Accountants' advice $1,400
Total $538,039
Counsel for the respondent constructing authority, Mr R.S. Jones, did not object to the amendment although the respondent wished to reserve its rights to argue the implications of the amendment, if the question of the costs of the hearing became an issue.
Leave was granted for the claim to be amended accordingly.
Constructing Authority's Valuation
The final valuation put in evidence by the constructing authority was in the amount of $370,000.
Prior to the conclusion of the hearing the constructing authority agreed to payment of the claim for valuation fees in the amount of $3,792.
Expert Evidence
Exchange of experts' reports had been effected prior to the hearing.
Town Planning
Town planning reports by Mr B. Dredge of Dredge & Bell Planning Pty Ltd for the claimant and Mr E. McLynskey of City and Regional Planners Pty Ltd for the respondent, were admitted as exhibits. While there were some areas of conflict in the opinions expressed in those reports, facts which were relevant to the assessment of compensation were agreed by the parties, without the need for verbal evidence to be heard.
The agreed facts are as follows:
Zoning:The land was zoned at the relevant date "Residential Multi Unit" and was included in the relevant Strategic Plan in the "Multi-unit Development" designation.
Use as existed at date of resumption: Lawful Non-Conforming.
Highest potential use as separate entity after resumption: Residential - duplex.
Valuation Evidence
Mr. G. R. Love, a registered valuer in private practice on the Gold Coast, had prepared the valuation report upon which the claimant relied, although the final valuation figure was lesser in amount than the claim, as amended.
Mr Love's assessment of compensation was in the amount of $519,000, summarised as follows:
Value - before resumption $564,000
Value - after resumption $45,000
Compensation (excluding disturbance items) $519,000
The respondent's valuation was conducted by Mr L.G. Goggins, a registered valuer also in private practice on the Gold Coast.
Mr Goggins' assessment is summarised as follows:
Value - before resumption $450,000
Value - after resumption $80,000
Compensation (excluding disturbance items) $370,000
The Issues
Both valuers adopted as their primary approach to the before resumption valuation, the methodology of capitalisation of net rental return.
The differences in opinions as they affected the before resumption valuation , related to first, whether the actual rental being paid at the date of resumption was a fair market rental for the premises unaffected by the scheme, and second, the yield which would be expected for an investment property of the nature of the subject, having a lawful non-conforming use.
Mr Goggins was of the opinion that the rental paid by the lessee at the date of resumption, represented fair market rental of the premises in the condition as presented. He adopted a capitalisation rate of 10.75%.
Mr Love held the opinion that the actual rental as paid by the lessee was below fair market rent. He assessed a significantly higher rental value as at the date of resumption. He took the view that had it not been for the threat of resumption, a prudent lessor would have, at relatively small cost, carried out the maintenance necessary to present the property to its full potential. He assessed the rental on the basis that the property was fully maintained and adopted a capitalisation rate of 10.5%. The cost of the necessary maintenance was deducted from the resultant capital value.
In the after-resumption situation, as vacant land, Mr Goggins was of the opinion that, as a separate entity, the highest and best use of the land was for development of a two-storeyed residential duplex, and valued it accordingly.
Mr Love held the opinion that although a duplex building may have been legally and physically possible, the disabilities of the site were so great as to limit the economic development potential to that of a single dwelling.
Resolution of Issues
Fair Market Rental
Mr Clyde Veivers, a director of the claimant company, provided a written statement and gave verbal evidence as to several matters relevant to the determination. Part of that evidence was that a road widening proposal had been in existence for many years, prior to the actual date of resumption, although the extent of land eventually taken was much greater than had earlier been proposed. A lease of the property had been executed in 1988 for the use which existed at the date of resumption. In 1988, inquiries made through the respondent Department had indicated that the road widening proposal as it would affect the subject property, was at that time, not programmed to occur within five years. That had been a fairly standard response over the years. On that advice the lessees had been prepared to sign a lease for five years with a five-year option. The base rental at the commencement of the lease in 1988 was negotiated at $40,000 per annum plus outgoings. Base rental increases in accordance with variation in the Consumer Price Index (CPI) or a minimum 10% per annum were payable under the lease. The minimum 10% had been applied in the second and third year of the lease, the annual rental reaching $48,398 for the third year. In the fourth and fifth years relatively nominal increases had been applied, the rental in the fifth year having become $50,470. Mr Veivers' evidence was that it had not been the policy of the lessor to strictly enforce rental increases when the circumstances of the lessees warranted a more conservative approach.
Mr Veivers said that when the first period of the lease was due to expire further inquiries of the respondent Department, by both the lessor and the lessees, indicated that, for the first time, the roadworks program estimate had reduced from five years to about three years. The option period under the lease was for five years and while it was taken up by the lessees, the base rental for the second period was negotiated down to $43,200 per annum (from the previous year's rental of $50,470). Mr Veivers' statement included the following comment -
"The rent was reduced in the 1993 year in order to keep the tenant due to the pending resumption by Queensland Transport."
Mr Veivers proved to be a forthright witness. He agreed that the pending resumption was not the only concern of the lessee when the lower rental had been negotiated, the emerging poor state of the economy at the time being another concern. He saw nothing unusual in a lessee endeavouring to negotiate a rental as favourable as possible. Mr Veivers had involvement with other commercial/industrial investment properties in the locality, but had not found the necessity or had not been convinced by other lessees in those premises to reduce rentals at that period. However, with regard to the subject property, there was a fear that if the sitting tenant was not prepared to take up the option, the uncertainty of the future of the premises because of the roadworks scheme would have seriously affected the chances of obtaining a replacement tenant. The claimant did not wish to have the premises vacant pending clarification of the timing and extent of the resumption proposal.
In the second year of the option period the lessee sold the business and the lease was assigned to the new owner. There was similar provision for a minimum 10% increase in base rental per annum during the option period of the lease. Clearly that increase had not been fully applied. The parties agreed that the base rental at the date of resumption was $48,300 per annum. Total outgoings, were agreed as being $6,900 per annum making the gross rent payable by the lessee $55,200 per annum or $88.32 per m² over all.
In accordance with a previous Council approval, Mr Love had adopted a gross floor area of 600 m² for the building which he apportioned as comprising showroom (163 m²), office areas (155 m²) and the balance area of workshop, storage and amenity areas (282 m²). It was his opinion that fair market rental values on a fully maintained basis, including outgoings, should have been $145 per m², $115 per m² and $100 per m² for those respective areas. He provided a comprehensive schedule of market rentals which he believed supported those assessments. The total fair gross rental on his assessment became $69,660 per annum, an overall average of $116.10 per m². The premises would have required refurbishment works to "include the cleaning and painting of the building as well as the repairs and carpeting of the office areas and carpeting of the showroom areas. The toilets and kitchen would also require some minor refurbishment. Once these works were carried out the premises would present extremely well." He broadly estimated the cost of refurbishment work to achieve the standard envisaged as being $25,000. Mr Love saw the location of the property as particularly important as it provided a local landmark with excellent exposure to heavy density traffic at a signalised intersection.
In his calculations, Mr Love had allowed outgoings of $7,821 to include annual maintenance and management. His calculation of net rental was then as follows:
Gross Rental - $69,660
Less Outgoings - $7,821
Net Rental - $61,839
Mr Goggins on the other hand in adopting the net rental figure of $48,300 at the date of resumption had allowed outgoings in the amount of $6,934, the total rental commitment of the lessees being $55,234 per annum or $88.37 per m² overall based on a lettable area of 625 m². Mr Goggins apportioned the gross rent for comparison purposes as:
Showroom - 185 m² @ $130/m² per annum $24,050
Factory/Storage - 440 m² @ say $72/m² per annum $31,184
Adopt $55,234
In all, the Court heard evidence relating to the rentals of 23 premises, predominantly in the Ferry Road area. It is fair to say that none of those premises could have been described as directly comparable to the subject property overall. Of all the "comparison" rental premises, only one was common to both valuers. Even then there was dispute between them as to the accuracy of the information provided. Mr Love had quoted premises at 42 Ferry Road containing 409.3 m² as having a base rent of $36,374 plus outgoings payable by the lessee of $7,377, totalling $43,751 per annum or $106.89 gross, with rent reviews to market. Mr Goggins quoted the same premises as having a net rental of $26,000 per annum or $63.56/m², plus outgoings, with annual reviews based on movement in the CPI, then to a market rental at the commencement of the option period. The lease on those particular premises commenced in August 1992, had an initial term of three years with two option periods each of three years.
Also included in Mr Goggins' rental comparison schedule was the second unit of 358 m², at No. 42 Ferry Road which was leased for two years from April 1992 with a two year option. The rental was quoted at $25,000 per annum net with outgoings payable by the lessees. Rental reviews were annually to CPI or a minimum 7% and to market rental at commencement of the option period.
Mr Love, as it happened, had provided details of the sale - in January 1996 - of No. 42 Ferry Road, as part of his valuation basis. The net rental was quoted as $67,000 per annum. No details were given as to the total outgoings.
It is observed that if the 7% minimum increase had been applied to the rental of the second unit, both to the annual reviews and to the commencement of the option period, the rental as at January 1996 would have increased from $25,000 per annum to $30,626 which, added to Mr Love's quoted $36,374 for the first unit, would be the $67,000 net per annum - the rental used in his analysis of the sale.
While I accept that Mr Love's quoted net rental was probably correct, as at the date relevant to this matter, the evidence indicates to me that the outgoings quoted by him were more likely the total for both units. That would have had the effect of reducing Mr Love's analysis of the rental of Unit 1 from $106.89 per m² gross to about $98.50 per m² gross as at January 1996, the rental period having commenced in August 1995. More relevant is that net rentals for Units 1 and 2 at No. 42 Ferry Road would have been approximately $89 and $85.50 per m² respectively as opposed to the rentals of $63.56 and $69.83 respectively which Mr Goggins said "supported the subject rate as a maximum". It would seem to follow that, if Mr Goggins was referring in that comment to the rental under the lease of the subject property at the date of resumption - as I understood he was, ie $77.28 net or $88.32 gross per m² - then the higher actual rental for the No. 42 Ferry Road units at the relevant date would also have supported a fairly significant increase in the comparative fair market rental of the subject premises at that date.
I have concentrated on that one comparison rental property because it was common to both valuers. Taken by itself it would indicate that Mr Love had adopted a gross rental which was too high, while Mr Goggins had made his comparison on base rentals which were not relevant to the date of resumption and which had increased significantly through annual reviews.
It seems to me that enough difficulty existed with making comparisons with the various rental evidence in the Ferry Road area without the introduction of rental evidence from premises in localities such as Bundall Road, Bundall and Scarborough Road, Southport, such evidence forming part of Mr Goggins' basis. Each valuer believed that some of the evidence relied on by the other actually supported his own opinion. The veracity of some of the evidence was questioned, but in the end result I have formed the opinion that Mr Goggins was somewhat selective in considering only the evidence which tended to support his opinion that the rental under the lease was fair. Even so, some of that evidence, particularly that from No. 42 Ferry Road, is not accepted as supporting his stated opinion. Other of his rental evidence (examples No. 4 and No. 5) was more relevant to rental rates at the commencement of leases in 1993 than at the date of resumption. Three examples were given of rentals of premises at 5-7 Ferry Road. That property had been acquired by the respondent in this matter. The rentals had been negotiated almost precisely at the relevant date. However, it was difficult to see consistency between the rentals of one unit of 254 m² let at $101.70/m² gross, another of 106 m² let at $102.94/m² gross and another of 293 m² let at $70/m² gross (with provision for increase to $85/m² for the second year). That type of evidence tends to support the opinion of Mr Love that the imminent adjoining roadworks could have had some effect on the rental negotiations conducted by the Department with regard to those particular premises.
Mr Love suggested that he had provided a "cocktail" of rental evidence because it was representative of the range of rentals achieved for premises of various quality and with varying traffic exposure. However, after hearing Mr Goggins' opinions on each example given, I lean to the view that the totality of rental evidence suggests that, even with refurbishment as proposed by Mr Love, his overall rental assessment for the subject premises was too high. This seems to have resulted from the level of rent he had applied to the areas other than the showroom.
There is no doubt that when the option period commencement rental was under consideration the lessor had the opportunity to seek, under the terms of the lease, a much higher rental than was eventually negotiated. It also seems, and I am assisted here by some of the rental evidence provided by Mr Goggins, that even though full rental increase potential under the terms of the lease had not been applied, the rental even for the fifth year of the lease, could not have been maintained, if the existing tenant was to be retained. It is logical that the lessor would have been faced with a most difficult task in letting the premises in the condition as presented, or even in refurbished condition, to another tenant when the resumption was imminent. I am able to accept the evidence of Mr Veivers that, while it wasn't the only matter of concern to the existing lessee, the imminent resumption would have placed the lessor in a weakened position to negotiate fair market rental at the commencement of the option period in 1993 or at any review leading up to the date of resumption.
I am of the opinion that had there been no threat of resumption in 1993 a prudent lessor would have been keen to retain the existing tenant in the building as it then presented (due in no small part to the occupation by that tenant) for at least the option period but at a rental related to market rather than as an extension of the previously existing rental. One of Mr Love's rental examples had been the Scotty's Trading Post at No. 41 Ferry Road, showing on his analysis, a gross rent of $118.76 for an enclosed building area of 479.2 m². Mr Goggins' opinion was that this rental analysis was inflated because a covered (but not enclosed) verandah area of about 130 m² was used by the lessee for display purposes and the leased area also included exclusive use of a lawned area. Bearing in mind the size, nature and condition of the subject premises, and also its excellent exposure together with the fact that the lessee enjoyed exclusive use of the whole of the property, it seems to me that a base rental in the range of $75 per m² plus outgoings could have been argued as fair, on the evidence available for the commencement of the option period in 1993. It was not disputed that a difficult economy was in existence leading up to the date of resumption. With that in mind the full 10% annual increase which could have been applied under the terms of the lease would have been difficult to achieve just as it had been in the latter part of the first term of the lease. I have decided to adopt a fair market base rental of $87.50 net per m² overall per annum as at the date of resumption. That is on the assumption that there had been no threat of resumption at the time the option to the sitting tenant was due to be exercised.
Doing the best that is possible with the nature of the evidence presented to the Court, I see as reasonable a rental apportionment of around $135 per m² for the showroom and around $67.50 per m² for the balance of the building, as a base rental before outgoings, for the premises as they existed as at the date of resumption.
Adoption of $87.50 per m² net of outgoings would have provided a net income to the lessor of $54,687.50 per annum.
Capitalisation Rate
Mr Love agreed that in comparison with rental producing investment properties developed as of right under a relevant zoning, the subject property had a market disability through its lawful, but non-conforming use status, within the "Residential - Multi-unit" zone. Mr Love held the opinion that as the past history of the site had also included a change of the original use, there would be little risk in a suitable "commercial industry" type use being substituted for that which existed at the date of resumption. Nevertheless, it was necessary to obtain consent by application to the Gold Coast City Council for the re-establishment of a use where that use had been discontinued (whether through the destruction of a building or structure or otherwise) within 12 months from the day when the use was discontinued. He held the opinion that in comparison with a similar investment property but with use "as of right", the market would react to the lawful non-conforming status of the subject property by requiring a yield or capitalisation rate in the range of 0.5% to 1% higher. He adopted a capitalisation rate of 10.5% on the rental which he had assessed.
In support of that capitalisation rate, Mr Love provided the sales of six properties, brief details of which are as follows:
(1)11 Ferry Road, sold 27/9/96 for $520,000, 887 m² site zoned "Commercial Industry", 3 tenancies including a car sales yard, an advertising sign and a workshop, net rental $56,725, yield of 10.91%, "considered to be a slightly inferior investment to the subject property. It is a slightly smaller property with inferior improvements ...".
(2)42 Ferry Road, sold 29/1/96 for $645,000, 1,653 m² site zoned "Commercial Industry", 2 tenancies - 747.46 m² net lettable, net rental $67,000, yield of 10.4% - "slightly larger than the subject property, however improvements on this property are inferior ... and accordingly the rental per annum is inferior ... . Overall a comparable type investment property."
(See comments on this property under heading "Fair Market Rental").
(3)130 Scarborough Street (Cnr Windmill Street), sold 25/10/94 for $1,380,000, 2,572 m² site zoned "Comprehensive Development", five tenancy areas, net rental $145,619, yield 10.55%, "slightly superior condition, however comparable quality of construction, located in an inferior situation and includes 5 tenants. Overall, considered comparable as an investment property."
(4)179 Nerang-Southport Road, retail showroom building, sold 8/11/94 for $1,100,000, 2,492 m² site zoned "Special Facilities", 2 tenancies, 1,136 m² building, net rental $111,287 ($97.96 net/m² overall), yield 10%, considered a slightly superior investment due to quality of tenants and long-term nature of leases. The location is however considered slightly inferior."
Mr Love saw "good growth potential in the income. In his verbal evidence he attempted to draw an analogy between the lawful non-conforming use status of the subject and the 'Special Facilities' zoning of the sale property.
(5)Cnr Ashmore Road and Racecourse Drive, Bundall, showrooms, sold 8/7/94 for $1,490,000, 3,036 m² "Commercial Industry" zoned site, 2 separate buildings in 9 individual showrooms, total lettable area 1,198 m², net rental $161,275, initial net yield 10.9% - "overall slightly inferior location and reasonably tenanted. Considered to be an inferior investment to the subject."
(6)2 Kamholtz Court, Ashmore, sold 10/94 for $655,000, 1,945 m² site zoned "Commercial Industry", 2 tenancy areas totalling 682 m², net rental $68,500 ($100.44 per m²), yield 10.5% - "10 year old high clearance, clear span metal clad and fibrous cement sheeted industrial building ... prominently located, having excellent exposure to the Nerang/Southport Road and is of an inferior standard to the subject ... is of similar age and is located in an industrial location which is considered to be inferior to the subject. However the building has quality tenancies and recent leases in place. Considered to be a comparable investment proposition."
Mr Goggins provided the evidence of 10 sales of commercial properties which he had utilised in his valuation exercise. Those from which he had analysed investment yields were as follows and as numbered in his schedule:
(2)20-22 Export Court, Ashmore, sold 28/2/95 for $750,000, 2,728 m² site zoned "Commercial Industry" improved by a modern 6 year old full glass front retail showroom development comprising 7 units (3 with mezzanine floors) net rental $85,110, yield 11.3%, building area 1,260 m² (46% site coverage - $67.50/m² net rental - $594 m² of building area) "larger site, larger more modern building, less exposure, strata title potential."
(3)4-8 Ferry Road, sold 8/4/94 for $530,000, 1,276 m² zoned "Commercial Industry", improved by 2 concrete block showroom warehouse buildings of 820 m² (64% site coverage), let to long-term tenant at $63,392 gross per annum ($77/m²) net rental $57,148 ($70/m²) yield 10.8% - building area rate of $646/m² - "larger building, better presentation, slightly less exposure, potential for multiple tenancies."
The rental on these premises was part of Mr Goggins' basic rental evidence for the subject property.
(4)1-3 Bailey Crescent, Cnr Nerang/Southport Road, sold 27/1/95 for $1,900,000, 5,661 m² site zoned "Commercial Industry", developed with service station, snack bar and 5 brick and steel factory units, building area of 2,135 m² (38% site coverage), net maintainable rental calculated at $206,500, yield 10.9%, building area rate of $890/m² "but large site area and only 38% developed".
(5)5-7 Ferry Road, sold 24/6/94 for $515,000, 1,265 m² site zoned "Commercial Industry", improved by a single level concrete masonry block steel roofed showroom building of 733 m² (58% site coverage), divided into 5 sections, leased in 3 tenancies. "Adjusted fair market rental return estimated for negotiation purposes at $54,242 ($74/m² per annum overall)." 10.5% yield - building area $704/m² - "slightly less exposure, larger and better presented building, potential for 5 tenancies. Rental rate overall less than subject."
The actual rentals on these premises as negotiated in September-November 1995, amounted to $57,252 gross ($78/m²) and formed part of Mr Goggins' rental evidence.
(8)88-90 Bundall Road, Bundall, sold 5/3/93 for $935,000, 3,834 m² site zoned "Commercial", older style, split masonry and concrete block showroom building with 5 tenancies, rear concrete block warehouse building of 2 tenancies plus restaurant, building area total 1,569 m² (41% site coverage), net rental return $109,173 ($69.58/m² per annum net overall) "considered a little under market levels.", yield 11.75%, $596/m² building area, "Buildings of similar vintage to subject, better presentation, larger land area and price range. Somewhat similar exposure in Bundall retail showroom area."
(9)130 Scarborough Street (Cnr Windmill Street) - see Mr Love's Sale 3.
On Mr Goggins' analysis this sale showed a net yield of 10.65% and a building area rate of $657/m² (comprising 82% site coverage in 3 tenancy areas on the upper level fronting Scarborough Street and 2 tenancies at lower ground level off Windmill Street) - "Superior zoning and retail location. Buildings of similar vintage to subject but have better presentation. Better flexibility of 5 tenancy areas."
(10)Cnr 17 Case Street and Harvest Court, sold 1/2/95 for $940,000, 4,119 m² site zoned "Commercial Industry", modern 10 year old metal showroom/warehouse building of 1,815 m² (44% site coverage) divided into six tenancy areas, includes air-conditioned 1st floor offices and an air-conditioned showroom, net rental $100,060 per annum with potential for increase, yield 10.7%, building area $518/m² - large site, less exposure, more modern better presented building, flexibility of 6 tenancy areas.
Again, of all the investment property sales evidence provided, there was but one common sale - the property at Scarborough Street, Cnr Windmill Street, Southport. Mr Love (his Sale 3) thought that on an overall comparison including zonings of the sale and the subject, they were comparable investment properties. His analysis showed a yield of 10.55% with precise rental details. Mr Goggins analysed the sale on a "reported" net return finding a yield of 10.65%. Whilst his comments indicated that, apart from exposure, the sale property was overall superior, his adopted yield for the subject was only marginally higher.
There was a difference of opinion between the valuers as to whether a single tenant investment property attracted, in the marketplace, a higher, lower or equivalent yield compared to a multiple tenancied property. It was Mr Love's strong opinion that a single tenancy investment property afforded less net rental risk return than a multiple tenancied investment property with increased management requirements and greater potential for vacancies. Mr Goggins believed that the market showed preference for the multiple tenancied properties where the risk of vacancy is spread over a number of tenancies as opposed to the risk of total loss of income which could be caused by the failure of a single tenant.
There is seen to be merit in both arguments although it is no doubt part of the task of the valuer to make a considered judgment as to the quality of the tenant/s and nature of the lease/s, when arriving at an assessment of maintainable rental for any particular property. It would seem that it is the stature of the tenant/s and rental history of a property which would impact significantly on the market's perception of the risk involved in maintaining rental under the relevant lease/s.
The sales evidence provides a broad range of yields for properties none of which have a single tenant.
If, as Mr Love suggested, the inferior zoning status of the subject property would be expected to increase the yield required by an investor by between 0.5% and 1%, it would need to be shown that commercially zoned single tenant investment properties of a comparable nature were capable of sale to show yields in the range of 9.5% to 10% for his adopted yield to be supported. That would seem overly optimistic on the evidence presented to the Court, for a property generally of the nature of the subject.
It is also observed that in his original assessment of net rental, Mr Love was prepared to allow, in addition to the outgoings estimates supplied to him, amounts for maintenance and management. As I understood the agreement between the parties, the outgoings allowance of $6,900 generally as estimated by Mr Goggins includes a relatively minor amount for maintenance but excludes any allowance for management. There is no detailed evidence to indicate the extent of allowances made in those sales analyses where outgoings needed to be considered in establishing net rental.
Reference was made by Mr Goggins to the fact that the resumption survey showed that the northern wall of the subject building encroached (slightly) over the northern boundary. Apparently the encroachment was unknown to any of the parties until negotiations concerning compensation had become well advanced. Nevertheless, an encroachment must be seen as a disability, the effect of which a prudent investor would be expected to consider in acquisition negotiations.
Mr Goggins agreed that the status of the zoning of the subject property would have a deleterious impact on investment yield in comparison with investment properties with as of right use. His inquiries had indicated to him that at least some financiers would be more conservative in their loan exposure guidelines if the use of a property was not as of right within the relevant zoning.
Mr Goggins' adopted yield of 10.75% was assessed on the basis of his opinion that the rental under lease was representative of fair market rental for the premises. The overall evidence indicates to me that a capitalisation rate of 10.75% would be appropriate for the subject property with an established tenant, under lease conditions which provided a fair market base rental and realistic rental growth potential.
On the basis that the actual rent is adjusted to a fair market rent level, a capitalisation rate of 10.75% will therefore be adopted.
Check valuation methodologies - before resumption
Mr Love adopted a summation approach to check his valuation arrived at through the capitalisation method. He analysed the sales of five sites which he described as development sites showing values for land in the "Commercial Industry" zone of $302/m², $254/m², $345/m² and $423/m². A "Special Facility" zoned site which had been purchased by the tenant of the subject premises immediately prior to their resumption, for the purposes of reinstating the business, showed a land value of $341/m².
After making comparison with each sale and particularly due to the exposure superiority and size of the subject site, Mr Love adopted a land value of $375/m² as zoned or $431,625. The improvements were valued in the amount of $133,555, the improved valuation totalling $565,180. This supported his capitalised rental valuation of $564,000.
There was criticism of his analysis of the first sale which showed him $302/m², as that particular site had accommodated a fairly substantial building which had been utilised by the purchaser. Mr Goggins had assessed the added value of the improvements on the site as being $120,000, leaving a land value content of only $144/m².
I have not been persuaded that this was an appropriate case for the summation methodology to be used as a check against the improved valuation. There is no dispute that the zoning status in some way deleteriously affected the improved capital value of the property. It follows that either the land value, or the added value of the improvements, or both, have a discounted value because of the zoning status. The necessary discount could be proved only by reference to the improved value. Yet it is that amount which the methodology was intended to check.
Although Mr Goggins did not attempt a summation approach, he included in his overall evidence (Sale 7) a sale of a 1,706 m² site zoned "Comprehensive Development" used as a car sales yard, but with minor structural improvements, the sale price equating a value of $390/m² as improved. It is not clear just how he used that sale but it was "quoted as an example for price paid per square metre for superior 'comprehensive development' zoned sites."
Mr Goggins' nine sales of improved properties included the one referred to earlier, at 23 Ferry Road (showing an analysed land value of $244/m² for a larger site with "slightly" less exposure). Each were compared by him directly with the subject property. Mr Goggins' comparison process was assisted, where it was seen to be possible, by his consideration of the "rate/m² of building area" shown by the improved sales. This involved the simple process of dividing the sale price of the property by the floor area of the building. Mr Love did not see that procedure and comparison process as objectionable but only as a broad check and mainly then to identify any major variance which might require explanation (eg site coverage, structural condition of improvements etc).
The rate paid per m² of building area in Mr Goggins' sales ranged between $518 and $890/m² (the latter site not being fully developed). His valuation of $450,000 for the subject property equated $720/m² which, in his opinion, was reasonable "considering the age and condition of the improvements and making allowance for the non-conforming zoning".
I am unable to gain any specific assistance from this check methodology. It is observed that had Mr Love's improved sales been fed into that comparison process, a significantly higher rate could have been argued. For example, Mr Love's Sale No. 2 (42 Ferry Road) which seems to me to be a sale which offers some assistance, indicated a rate of $863/m² (45% site coverage - subject 51%) and an overall net rental of about $90/m² per annum. His Sale 4 (179 Nerang-Southport Road) indicated $978/m² (site coverage 45%, overall net rental $98/m² per annum); Sale 5 (Ashmore Road and Racecourse Drive) indicated $1,244/m² (39.5% site coverage, overall net rental pf $135/m² per annum); Sale 6 (2 Kamholtz Court) indicated $960/m² (35% site coverage, overall net rental of $100/m² per annum).
The sales evidence provided by both valuers indicated that there was a relatively wide range of evidence available and it seems fair to make the observation that the better picture of the real market is obtained through a melding of both sets of evidence.
Conclusion - Before Resumption Valuation
The capitalisation of estimated maintainable net income is the valuation methodology adopted.
Estimated Net Annual Rental - in the absence of resumption scheme - $54,687.50
Capitalised at 10.75% as zoned
Capital Value - $54,687.50 x 100 ¸10.75 = $508,720
In practical figures adopt $508,500
After Resumption Valuation
Land adjoining the subject to the east and north was held by interests associated with the wider Veivers family. There was however no common ownership of the contiguous parcels. The highest and best use of the adjoining lands was for redevelopment as zoned, "Residential - Multi Unit".
There seems little doubt that the highest and best use of the subject land would be not for development as a separate entity, but in amalgamation with adjoining lands for overall multi-unit redevelopment. By addition to the contiguous lands the additional area contained in the subject balance lands could result in the addition of up to five two-bedroom units to the redevelopment capacity of that adjoining land, as I interpret the town planning evidence.
As a separate entity however, the maximum development capacity of the subject land is for a duplex building. Because of site constraints, a duplex building would need to be of two-storeyed construction.
In such a location, exposed to high density traffic at close range, the residential amenity of such a structure would be poor. To obtain a reasonable standard of residential accommodation, at least the upper level of the structure would require traffic noise mitigation, ideally through double glazing of windows and either mechanical ventilation or air-conditioning.
The economic viability of any form of duplex construction was questioned by Mr Love. He suggested the best form of development would be for a single dwelling, albeit one still with poor residential amenity. I am unable to accept however, that the market would perceive the site potential to be so limited, provided the land value content in a duplex development recognised the specific disabilities of the site. Mr Love had based his assessment on sales of single unit residential sites with various disabilities. Although it cannot be assumed that amalgamation of the site with adjoining land will occur due to lack of commonality of ownership, that potentiality should not, in my opinion, be removed from consideration. Mr Goggins provided the only evidence as to the value of the land in this location for residential multi-unit development. He did that when proving that before the resumption the highest and best use of the land was as developed. He valued the land for multi-unit residential purposes at, say, $261 per m² before resumption. It seems to me then, that as part of an amalgamated site in the hands of a developer, the subject balance area has the potential to add up to about $130,000 to the redevelopment value of an adjoining lot. That, of course, is not the value of the site to its owner as a separate entity, but its potential value to an entrepreneur once an amalgamation had been effected, if indeed that was possible. Mr Goggins valued the land by reference to sales of vacant sites with potential for duplex development. The sales had been effected at prices of $105,000 for two adjoining 405 m² sites at Nos. 200 and 202 High Street Southport; $125,000 and $142,000 for sites of 519 m² and 405 m² at 71 and 31 Stevens Street, Southport respectively, all those sales being in 1993, and $125,000 for a site of 506 m² at 5 College Avenue, Southport (June, 1995).
Mr Goggins valued the subject balance area as zoned for individual development as a duplex in the amount of $80,000 having had regard to:
·location in close proximity to the Southport Central Retail District;
·elevated site with good building contour;
·irregular shape;
·adverse location on a busy intersection; and
·somewhat difficult access.
It is clear that the sale properties had been seen by Mr Goggins to have been significantly superior to the subject land. The degree of superiority is a matter of professional opinion, but, as far as duplex development is concerned Mr Goggins had provided the only basis of valuation capable of examination and consideration.
I am satisfied that not only is Mr Goggins' "after resumption" valuation soundly based, providing significant discount for the traffic noise and shape disabilities of the site for duplex development, but it finds a level of value which should attract entrepreneurial interest for amalgamation, being heavily discounted from the value it could be expected to add to an adjoining property for multi-unit redevelopment, regardless of the ownership of the adjoining land.
Conclusion - After Resumption Valuation
I will adopt Mr Goggins' after resumption valuation in the amount of $80,000.
Disturbance Items
(1) Valuation Fees.
As mentioned earlier the respondent constructing authority eventually did not dispute the claim for valuation fees in accordance with the memorandum of fees submitted by Mr Love's firm, in the amount of $3,792. That amount is awarded accordingly.
(2) Legal Fees.
The claim for legal fees was in the total amount of $3,763 comprising amounts of $616 paid to one firm of solicitors who had been initially engaged by the claimant and an amount of $3,147 paid to a second firm of solicitors who had been subsequently engaged.
It appears from Mr Veivers' evidence that the solicitors in the first instance gave preliminary advices and attended at least one conference "to try to negotiate a settlement", before it was decided to contest the matter of compensation. As I understood it, once the decision to contest the question of compensation had been made, the first firm of solicitors had no further involvement, the second firm being engaged to take over the matter and attend to the compilation and lodgment of the claim. The second larger account was itemised and involved the taking of instructions in October 1996 through to the lodgment of the claim in May 1997.
It seems to me that while the amounts as claimed were expended as a consequence of the resumption, there was some "doubling-up" involved through instructions being given to the two independent firms of solicitors. If the first account is compensable, as a direct and natural consequence of the resumption, then the whole of the second is not, the subsequent instructions being a consequence of the owner's decision. Alternatively, it would seem that the majority of the first fee had been thrown away, on the decision of the claimant, rather than as a direct consequence of the resumption. I have decided to award the total amount of $3,300 under the heading of "Legal Fees".
(3) Costs of Amalgamation by Survey of Balance Areas.
As it was explained, the rating policy of the Gold Coast City Council is such that certain minimum rating charges are payable by owners of each surveyed lot. Subsequent to the resumption, there was a balance area of only 32 m² in Lot 45, which remained, on the survey plan produced by the respondent's surveyor, as a separate lot although clearly unusable as such.
Rather than be liable for a separate minimum rating imposition for that lot, the amount of which was not revealed to the Court, it was seen by the claimant as necessary to amalgamate by survey, the balance area of both Lots 44 and 45. It was submitted that the cost of that amalgamation was a direct and natural consequence of the resumption, bearing in mind the rating policy of that particular local government. Apparently it had not been seen as a consideration before the resumption when both lots were of relatively standard size, jointly accommodating an income-producing building.
It may be arguable whether the expenditure involved in amalgamation of the balance areas was a direct and reasonable consequence of the resumption or a consequence of the rating policy of the local government. However, if the rating burden on the balance areas as a duplex site was abnormally high because of the situation created by the resumption, it would follow, in my opinion, that the duplex site would be less valuable than in its amalgamated state.
Such a consideration had not been relevant to Mr Goggins' valuation and it seems reasonable that this claim be accepted as an item of disturbance. Alternatively the amalgamated value of the two lots remaining after the resumption should be discounted accordingly.
I will award compensation under the headings as claimed which are as follows and as proved:
Survey fees for amalgamation $400
Gold Coast City Council amalgamation fees $434
Titles Office fees for amalgamation $250
Total $1,084
(4) Accountancy Fees.
The evidence from Mr Veivers is that there were no plans for disposal of this property and, as has already been stated, he proved to be a forthright witness whose evidence I accept.
It was explained that as a result of the resumption, advice was sought from a firm of accountants as to the Capital Gains Tax implications resulting from the forced disposal of the property (which had been acquired in 1987). There was need for the accountants to communicate with the Taxation Office to ensure that the claimant company complied with certain roll-over provisions, as they related to the Capital Gains Tax legislation.
It has been consistently held that any tax on capital gain resulting from the forced disposal of property through its resumption, is not a compensable item (see, for example, Theo and Ors v. Brisbane City Council (1990-91) 13 QLCR 160 at 165, 166 - Land Appeal Court).
This claim is not for any tax liability, as such, but for the professional advice sought by the claimant company to establish its position as a result of the resumption and to identify any action it needed to take to reinstate its position as it had existed prior to the resumption. That advice would not have been necessary had the property continued to be held by the claimant in its pre-resumption status. As I understood the evidence, the advice sought and received resulted in action being taken which reinstated the taxpayer's position pre-resumption.
In Harvey v. Crawley Development Corporation (1957) 1 AllER 504 (C.A.) Romer L.J. at p.507 said:
"The authorities to which our attention was drawn established that any loss sustained by a dispossessed owner (at all events one who occupies his house) which flows from a compulsory acquisition may properly be regarded as the subject of compensation for disturbance, provided, first, that it is not too remote and, secondly, that it is the natural and reasonable consequence of the dispossession of the owner."
It seems to me that the seeking of professional advice in this complex area of taxation is not an action too remote from the resumption but a natural and prudent response to the forced disposal of part of the claimant's assets. It is my opinion that the claimant should be compensated for this expenditure which was proved in the amount of $1,400.
Summary of Determination
Compensation is determined as follows:
Value of land and improvements - before resumption $508,500
- after resumption $ 80,000
Loss of land and improvements $428,500
Disturbance:
Valuation Fees $3,792
Legal Fees $3,300
Amalgamation by survey of balance areas $1,084
Accountancy Fees $1,400 $9,576
Total Compensation $438,076
Interest
The claimant received rental on the property until the end of February 1996. Advances were paid as follows:
29 May 1996 $50,000
28 June 1996 $199,999
24 July 1996 $171,773
It is ordered that interest at the rate of 7% per annum be paid by the respondent to the claimant as follows:
On the amount of $428,500 for the period commencing on and including 1 March 1996 ending on and including 28 May 1996.
On the amount of $378,500 for the period commencing on and including 29 May 1996 ending on and including 27 June 1996.
On the amount of $178,501 for the period commencing on and including 28 June 1996 ending on and including 23 July 1996.
On the amount of $6,728 for the period commencing on and including 24 July 1996 ending on and including the day immediately preceding the date on which the final payment of compensation is made.
Evidence before the Court shows that, of the legal fees claimed, an amount of $616 was paid on 26 April 1996. Of the survey and amalgamation expenditure, an amount of $217 was paid on 17 December 1997 and further amounts totalling $617 were paid on 13 February 1998. It is ordered that interest at the rate of 7% per annum be paid on the amounts identified above and for the periods commencing on and including the dates of those payments up to and including the day immediately preceding the date on which the final payment of compensation is made.
In the absence of proof of payment by the claimant of the balance of the compensation awarded under the heading of "Disturbance", no order is made as to payment of interest on that balance amount.
RE WENCK
MEMBER OF THE LAND COURT
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