Rongotai Investments Ltd v Land Valuation Tribunal

[2022] NZHC 1664

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2020-485-217

[2022] NZHC 1664

IN THE MATTER OF

The 2018 Appeal against the decisions of the Land Valuation Tribunal at Wellington

BETWEEN

RONGOTAI INVESTMENTS LTD and RONGOTAI ESTATES LTD

Appellant

AND

WELLINGTON CITY COUNCIL

First Respondent

AND

2468 LTD, NZ CASH FLOW CONTROL LTD, WELLINGTON INTERNATONAL AIRPORT, ROGER BLAYLOCK AND YVONNE KEREKES, WILD BAY PROPERTIES LTD AND BUNNINGS LTD

(as joined parties) Second Respondents

Hearing:

20–23 September 2021

Appearances:

C Stevens QC, T Mijatov and M Robertson for Rongotai Parties N Whittington for Wellington City Council

L McEntegart and S K Lennon for Bunnings Limited K Sullivan for Other Lessees

Judgment:

19 July 2022

JUDGMENT OF CULL J and MEMBER VM WINIATA

[The mathematical calculation issue]

A        The appeal is dismissed.

RONGOTAI INVESTMENTS LTD and RONGOTAI ESTATES LTD v WELLINGTON CITY COUNCIL and

ORS [2022] NZHC 1664 [19 July 2022] [Mathematical calculation issue]

Table of Contents

Para No.

Background  [3]

The Tribunal’s ruling[5]

The appeal[8]

The “mathematical error”[13]
What was “the error”?[14]

Issues for determination  [26]

Was the valuation methodology valid?[28]

Sales comparison approach[29]

Adjustments[32]

Conclusion[40]

Have the valuers made “mathematical errors” in their methodology?            [41]

The textbook examples[43]

Analysis[50]

Conclusion[62]

Observation[66]

Result  [71]

Costs[72]

[1]    This judgment concerns the discrete issue of whether there was an arithmetical error in the calculations of adjustments made by valuers and the Land Valuation Tribunal (the Tribunal) in its revaluation decisions for the years 2012, 2015 and 2018.

[2]    This issue has arisen from the Tribunal’s ruling during the 2018 hearing, declining leave to the Rongotai parties’ valuer-experts to correct their evidence.1 They considered they had made a mathematical error in their adjustments for the properties under consideration. They contend that the Tribunal erred by accepting flawed valuation evidence containing miscalculated adjustments in the adopted modal site valuation and thereby understated the roll values of the subject properties.

1      Rongotai Investments Ltd v Wellington City Council [2020] NZLVT 008.

Background

[3]    This judgment, dealing with the mathematical calculation only, is issued as part of a suite of six judgments on appeals against the Tribunals’ decisions in 2007, 2012, 2015 and 2018 and a judicial review of the 2012 hearing.2 This issue arose during the consolidated appeal and cross-appeal hearing concerning the objections against the Quotable Value New Zealand Ltd (QV) valuations for each of those rating years and was the subject of a further hearing.

[4]    The agreed background facts, with the details of the Rongotai properties and the description of the assessment of rates with the applicable principles on rating valuations, have been fully described and set out in the 2007 appeal judgment, which was issued at the same time as this judgment.3 With all four appeals against the Tribunal’s decisions being heard together, this decision should be read alongside all four decisions as it concerns the same freehold interests, the same location in Wellington, and largely the same lessee’s interests.

The Tribunal’s ruling

[5]    On 24 March 2020, the Tribunal issued a ruling during the hearing on the 2018 rating objections, declining leave for the Rongotai parties’ experts, Mr Horsley and Mr Butchers, to correct their filed affidavit evidence. They sought to correct their mathematical calculation in their valuation adjustments in their evidence. The application arose on the second day of hearing during the cross-examination of the QV witness, Ms Watson. The questions focussed on the difference in mathematical calculations of making percentage adjustments to comparable sales, as part of the sales comparison valuation methodology. The Rongotai experts claimed that making the percentage adjustments by addition or subtraction, which was the agreed course adopted by all experts including them, was a mathematical error. Instead, they suggested the correct approach was to make the adjustments by division and

2      Rongotai Investments Ltd v Land Valuation Tribunal [2007 Rating Valuation Appeal]; Rongotai Investments Ltd v Wellington City Council [2012 Rating Valuation Appeal]; Rongotai Investments Ltd v Wellington City Council [2015 Rating Valuation Appeal]; Rongotai Investments Ltd v Wellington City Council [2018 Rating Valuation Appeal]; and Rongotai Investments Ltd v Land Valuation Tribunal [Judicial Review].

3      2007 Rating Valuation Appeal, above n 2, at [3]–[9].

multiplication, to “back out” the percentage correctly. The Tribunal ruled these were not the same calculation and refused to allow the two experts to amend their evidence.

[6]The Tribunal’s reasons for refusing the amendment of evidence were:

(1)It is the universal practice of all valuers to adjust comparator sales to modal sites. QV have a computer programme which allows for the adjustments to be entered and it generates the outcome.

(2)The Tribunal and previous Valuation Tribunals have seen the additions/subtraction practice as the preferable methodology for valuation.

(3)The Tribunal approved the valuers’ approach through the previous three hearings before the Tribunal on these rating objection appeals and on two occasions, the experts were required to caucus and produced schedules showing their adjustments for each site. It was too late to suggest that this was an incorrect approach.

(4)The Tribunal did not accept that some “unexplained arithmetical error” in relation to the adjustment for the comparator sales had occurred, when the same valuation approach had been followed throughout.

[7]    In summary, the Tribunal concluded that all the parties had agreed on the same valuation methodology and the Tribunal was not entertaining any change to the evidence on valuation adjustments for the 2018 hearing.

The appeal

[8]    The Rongotai parties appeal the Tribunal’s ruling on the “arithmetical error” in the valuers’ calculation of adjustments, alleging that the Tribunal erred by miscalculating the values, averages, market movement, and ultimate roll values in its adjustments from its respective adopted modal sites. The Rongotai parties contend that in turn, the Tribunal’s calculations have been distorted by a mathematical error,

which is material, as it understates the roll values of the subject properties and should be corrected.

[9]    Before the hearing of the four rating objection appeals to this Court, Counsel for Rongotai filed an application for leave to adduce further evidence to be heard on the appeals, in order to correct the evidence which the Rongotai parties were not permitted to correct before the Tribunal.

[10]   The Rongotai parties sought to adduce an affidavit of an independent expert valuer, Mr Washington, as well as the revised briefs of experts Messrs Horsley and Robertson from the 2018 Tribunal hearing to address the mathematical calculations of the valuers and the Tribunal. The respondents objected to the Rongotai parties’ application to adduce further evidence, as the fresh evidence had not been tested by cross-examination. They also strongly objected to such evidence being applied to any of the previous objection years in the respective appeals of the Tribunal’s 2012 and 2015 decisions.

[11]   On 21 May 2021, leave was granted to the Rongotai parties to adduce the evidence of Mr Washington, Mr Horsley and the accompanying material attached to Mr Robertson’s affidavit. A timetable was agreed, with an opportunity for all parties to file further evidence as required, and to allow for cross-examination of that evidence at a further hearing.

[12]   Because the substantive hearing had been scheduled for two weeks in June 2021, the parties experienced difficulty in completing the relevant reply evidence in time for the June hearing. At the end of the two-week hearing in June, a further four- day fixture was scheduled for the hearing of this issue, commencing in September 2021.

The “mathematical error”

[13]   Mr Washington reviewed the 2012, 2015 and 2018 Tribunal decisions to determine whether the Tribunal had made an arithmetical error when determining the modal value (that is, the most common site value) for the Rongotai properties. He concluded that the valuers and the Tribunal had erred in calculating the various

percentage adjustments made to comparator properties to derive a modal site value at Rongotai. In his view, the error resulted in skewed valuation outcomes. To understand the parties’ positions it is necessary to understand the nature of the alleged error.

What was “the error”?

[14]   The essence of the Rongotai claim is that the error is simple and commonly made. When a valuer makes percentage adjustments to comparable sale prices, they are using addition and subtraction of the percentage amounts from the comparable sale price. Rongotai says the appropriate mathematical methods should be multiplication and division.

[15]   This example can be illustrated by calculating a GST exclusive and inclusive price. For example, where a known price is GST exclusive, the addition of 15% to the known price will give the GST inclusive price. Thus, a price of $100 becomes $115 once GST is added.

[16]   The converse, however, is not the same. If a GST inclusive price has 15% subtracted from that price, (15% of $115 being $17.25), it gives the result of $97.75, not $100, the starting price. To reach the figure of $100, the correct adjustment is to divide $115 by 1.15. That is, the mathematical inverse of multiplying $100 by 1.15 to derive the GST-inclusive price of $115. The percentage deduction, then, to reach the GST exclusive price of $100 is a lesser amount than 15% (15 ÷ 115 = 13%) from the GST inclusive sum.

[17]   Applying that methodology to the property valuations, Mr Washington’s thesis is that deriving a value of a subject property from an actual sale price of another property can induce the same error as that arising with GST calculations, because valuation adjustments are similarly expressed as percentages. The example given by the Rongotai parties is a comparable property, which sells for $1,000,000 and is assessed as 50% superior to the subject property. That means it is worth half the value again of the subject property. Calculating that differential by subtracting 50% of the comparator sale price will produce an inflated subtraction figure and a lower value, namely a subject value of $500,000. To achieve the correct value, the Rongotai parties say, the amount to be subtracted should be only $333,333 ($166,000 less than

$500,000) because $1,000,000 is 50% greater than $666,666. This figure can be calculated through use of division (not subtraction): $1,000,000 ÷ 1.5 = $666,666.

[18]   Mr Washington says that the arithmetical error has implications in this case, where percentage adjustments are required on account of (i) the superiority of a comparator property over a subject property or (ii) the superiority of a modal property over a comparable property. The example he gives is a valuer comparing two properties X and Y. Property X has just sold for $1,000/m2 and the valuer considers that property Y is 25% superior to property X. Mr Washington explains that if there was a percentage function on the valuer’s calculator, they could simply add 25% to the sale of property X, to derive the value of property Y, which would be $1,250/m2. Alternatively,  the  valuer  could  multiply the  $1,000/m2  sale price  by  0.25  to give

$250/m2  and then add that to the $1,000/m2 to derive the same value of property Y at

$1,250/m2.

[19]   On his evidence however, most valuers know there was a much simpler and more direct equation. They can multiply the $1,000/m2 by 1.25 to give the value of

$1,250/m2, which is 25% higher or superior to $1,000/m2. Thus, to value the superior property Y, the valuer multiplies the sale price of property X by 1.25.

[20]   However, the problem arises, he says, when a deduction is to be made for an inferior property. If property Y is assessed as 25% superior to property X, the valuer using the percentage function on his calculator or alternatively multiplying $1,250/m2 by .75, obtains the result of $937.50/m2. Mr Washington says this result is incorrect as $1,250/m2 is 33.33% greater than $937.50/m2. When valuing property X therefore, he says, the valuer should divide the value of property Y ($1,250/m2) by 1.25 to get

$1,000/m2. Mr Washington calls this reverse process “backing-out”. To back-out the 25% superior factor, that is, to deduct 25% from the superior comparative property, the valuer must do the exact opposite of the multiplication process detailed above.

[21]   Rongotai submits that the above example constitutes an error because the valuers and the Tribunal failed to undertake the method of “backing-out.” Mr Washington puts it this way:

If one uses mathematics to get from point A to point B, then the only way to get back to point A, is to use the reverse calculation. If the mathematics employed does not get back to point A, then it is simply incorrect.

[22]   Mr Wigmore, an independent valuer and director, also gave evidence for Rongotai. He described the practice of adding and subtracting the percentage amount as a simple analysis of the market evidence. Although this practice is widely accepted in valuation practice, in his view it is not a necessarily accurate basis of adjustment. He says that in mathematical terms this method cannot be “backed-out” or “back- solved” to the original start position.

[23]   The Tribunal named the “backing-out” calculation using multiplication and division an alternative analysis. The alternative analysis, Mr Wigmore says, ensures that the calculation “back-solves” to the original start position, thereby confirming there is no mathematical “creep” in the adjustments.

[24]   In summary, the submission for the Rongotai parties is that although a valuation is an opinion, application of the mathematics to the adjustment is a calculation which must be correct and the alternative analysis, not the simple analysis, should have been adopted. Error has resulted as a consequence.

[25]   The respondents dispute that there was error in the use of percentage adjustments by the simple analysis. They say this is an analysis tool, not designed for mathematical purity. The expert valuers called by the respondents do not accept that any mathematical error has occurred in the valuers’ or the Tribunal’s method of calculation.

Issues for determination

[26]The parties agreed on the following issues for determination. They are:

(a)Was the methodology the valuers used valid and/or agreed to by all parties?

(b)Have the valuers made "mathematical errors" in their chosen methodology to determine the rating valuation in the subject years?

(c)If so:

(i)Do such “mathematical errors” constitute valuation methodological errors?

(ii)If the answer to (c)(i) above is yes, have the errors impacted on the valuations contended for by the valuers in the subject years?

(iii)If the answer to (c)(ii) above is yes, can such impact be quantified by a mathematical recalculation?

(d)In light of the answers to the above, what is the impact on the rating valuations reached for each of the subject years?

[27]   We now deal with each of the issues, adopting the terms “simple” and “alternative” method to describe the difference in valuation methodology.

Was the valuation methodology valid?

[28]   It is important in the context of this appeal to first understand the nature of the valuation approach adopted in this case, being the sales comparison approach. The following description and analysis is taken from the New Zealand Institute of Valuers’ publication Urban Valuation in New Zealand by Rodney L Jefferies, to which we were referred during the hearing and is the authoritative text on valuation in New Zealand.4

Sales comparison approach

[29]   The sales comparison approach is one of four basic valuation approaches.5 Jefferies describes it in the following way:6

In this approach the valuer either by direct judgment or employing various techniques and levels of sophistication, interprets the evidence of past and

4      Rodney L Jefferies Urban Valuation in New Zealand – Vol 1 (2nd ed, The New Zealand Institute of Valuers, Wellington, 1991).

5      The other three are the replacement approach, the investment approach and the development project approach. This valuation approach is described in more detail in the 2007 Rating Valuation Appeal, above n 2, at [36]–[42].

6      Jefferies, above n 4, at 6-2.

current market sales transactions of comparable properties in terms of the characteristics of the subject property being valued, to derive an indicated market value at the effective date.

[30]Jefferies details the approach as consisting of five basic steps:7

1.    Sales evidence and other data –such as the physical attributes of the properties sold, are collected and verified as to accuracy and their bona fides.

2.    The most comparable sales are selected – of sufficient quantity to form a distinguishable market pattern.

3.    The sales are analysed by some means – using units of comparison (such as per square metre or per hectare) or other advanced statistical techniques.

4.    Evidence from the comparable sales is compared to the subject property – by means of an appropriate unit of comparison or other comparison technique.

5.    The value of the subject property is then estimated – by the application of the appropriate comparison technique, to which the valuer then applies his or her professional experience and judgment in assessing whether this makes good sense and gives an adequate interpretation of the available market evidence.

[31]   The comparable sales method of valuation has been the subject of comment in a number of Australian authorities. Noting that the use of comparable sales evidence was the most widely accepted method of determining the market value of land8 and “the conventional valuation technique,”9 the Australian Courts have articulated a similar stepped approach which mirrors Jefferies’ steps above. They were summarised as accumulation, analysis, adjustment, and application:10

First, accumulation of a pool of potentially comparable sales. Secondly, analysis to convert them to a common basis of measurement such as a unitary rate (for example, per square metre) improved or unimproved (through allowance for existence or absence of improvement). Thirdly, adjustment to reflect identified differences between them and he subject property (eg size, location, use and date). Too much adjustment may make it unsafe to use [as] a sale. Fourthly, application of the adjusted unitary rates of the potentially comparable sales to the subject property in order to determine its value. This may involve attributing differing weight to the different comparables sales according to their degree of comparability …

7      At 6-2.

8      Redeem Pty Ltd v South Australian Land Commission (1927) 40 CGRA 151 at 156.

9      Riverbank Pty Ltd v Commonwealth (1974) 48 ALJR 483 at 484.

10     Chircopy v Transport for NSW (2014) NSWLEC 63 at [35]. See also Alan Hyam The Law Affecting Valuation of Land in Australia (6th ed, The Federation Press, Sydney, 2020) at 237.

Adjustments

[32]   Adjustments were made at three discrete stages by the valuers and the Tribunal in these proceedings.

[33]   First, the actual sales prices of the comparable sales were adjusted to isolate the land value of the property (by making deductions for the value of improvements or adding in estimated costs of demolition) and to strip out the effects on price of matters other than the property itself (such as impacts of deferred settlement).

[34]   The comparative sales were then adjusted to derive a modal property value, called the “modal rate,” within the Rongotai area. As noted, the term “modal site or property” represents in this context the most common type of property likely to be found amongst the subject properties being valued in the Rongotai area. For example, within the relevant area, the modal site was considered to be an inside lot of rectangular shape, with a land area of around 2000m2 on Kingsford Smith Street.11 This modal property was either a notional vacant lot in the Rongotai area possessing agreed characteristics (the 2012 objections hearing) or one of the subject Rongotai properties (the 2015 and 2018 objections hearings).12

[35]   In this way, each comparator sale generated its own modal figure, so that a range of modal figures were generated across the set of comparators. These were expressed in dollar terms per square metre ($/m2). Subsequent adjustment was then made to account for time between the date of sale and the relevant rating valuation date. This range of rates then informed the valuers’ and, ultimately, the Tribunal’s assessment of a single modal price (per square metre).

[36]   Adjustments were made to the comparable sales as percentage adjustments across a range of characteristics such as corner location, frontage, size and shape of site and timing. For a ‘superior’ comparative, the adjustment was deducted from the

11 Rongotai Investments Ltd v Wellington City Council [2019] NZLVT 108 at [25]; Rongotai Investments Ltd v Wellington City Council [2020] NZLVT 001 [the 2015 decision] at [34]; and Rongotai Investments Ltd v Wellington City Council [2020] NZLVT 009 [the 2018 decision] at [12].

12 In both 2015 and 2018, the modal site adopted was 29 Kingsford Smith Street: see the 2015 decision, above n 11, at [59]; and the 2018 decision, above n 11, at [12].

comparable sale price. Conversely for an inferior comparative, the adjustment was added onto the comparable sale price.

[37]   Where the modal property was equivalent to one of the subject properties being valued, the per square metre price of the modal property became the price for that particular property. Any subject properties being valued which differed from the modal property were adjusted accordingly. In either case, values were further adjusted to account for improvements or any other matters particular to the subject sites.

[38]   The methodology used at both stages of the comparative adjustment was to simply sum the adjustments on account of property characteristics – netting off the positive and negative adjustments – to reach a net percentage adjustment figure. That percentage adjustment was then made. To account for the effects of time (inflation or deflation) for the 2018 hearing, the valuers agreed on a flat (non-compounding) percentage rate of 1.2% per month.13 That meant, that sales occurring prior to the valuation date were increased at that rate and sales occurring after that date were decreased at that rate.

[39]   In the 2018 Adjustment Tables, 36 Tacy St was used as a comparator by all valuers. The sale price, date of sale (agreement and settlement) and land area were constant with all valuers producing an unadjusted sale price rate of $1,190/m2. Adjustments were then made for deferred settlement and demolition costs to obtain the “adjusted sale price”. Further adjustments were then made by each valuer for location, shape/frontage, size, views/aspect, and time, which altered the unadjusted rate. We set out Ms Watson’s analysis as an example:

Sale Price	$3,550,000
Area	2983 m2
Unadjusted $/m2 rate	$1,190/m2
Deferred Settlement	-$ 130,000
Demolition Costs	+ $ 245,000
Adjusted $/m2 rate	$1,229 / m2

13 The 2018 decision, above n 11, at [32].

Location	-10%
Shape / Frontage	-7.5%
Size	+ 5%
Views / Aspect	-2.5%
Total % Adjustment	-15%
Adjusted $/m2 rate	$1,044 / m2
Time Adjustment	+ 32.40%
Adjusted $/m2 rate	$1,383 / m2

Conclusion

[40]   The parties all agree that the sales comparison approach was appropriate. The sales comparison approach is a standard and accepted valuation practice, in which subject properties are valued by reference to the sale prices of comparable properties. We find therefore that it was both an agreed and valid valuation approach.

Have the valuers made “mathematical errors” in their methodology?

[41]   The critical issue in this appeal concerns the assessment calculation, which the valuers used in applying the sales comparison approach. Did the valuers make mathematical errors in using the simple analysis instead of the alternative analysis in their percentage adjustments to comparable property sales?

[42]   To illustrate the effect of the mathematical error, which Rongotai allege have been made by the valuers and the Tribunal, their expert Mr Washington, referred to the sale of 13 Kingsford Smith Street, which was used by some valuers both as a comparator and a subject property to be valued. The QV valuer, Ms Watson, considered that the property had an awkward shape and increased it as a comparator by 5% to make it more comparable to the modal site (the modal site being superior in this regard). However,  when  working  from  a  final  modal  site  value  to  assess 13 Kingsford Smith Street as a subject property, she concluded it was 5% inferior than the modal and deducted 5% from the modal rate. Mr Washington said that because the valuer used the simple analysis, the value of the subject property was lower than

the starting point, which was the known sale price, despite the identical adjustments. He described this as an example of a failure to “back-out.”

The textbook examples

[43]   During the course of the hearing, counsel for the Rongotai parties, Mr Stevens QC, drew the Court’s attention to Jefferies’ text and the difference between the first edition and second edition, where the application of the simple and alternative method to the adjustment percentages produced different results. In the first edition, Jefferies had provided an example where allowance (in the form of a 15% deduction) was made for profit and risk using the residual land value method for a development project. The first edition example is set out below, concerning valuation of land for a block of 10 home units on a develop-sell type of development:

First edition example 1978

RESIDUAL LAND VALUE METHOD

Example — Land for Block of 10 Home Units (Develop-Sell Type)

Est. Sales:          10 units @ $30,000                =  $300,000

Less           Selling Commission:

5% x $ 10,000  =           500

2½% x $290,000  =          7,250

Legal Fees:

10 x $200  =          2,000

––––

9,750

–––––

Est. Net Sales:  $290,250

Less           Allowance for Profit and Risk:

15% Net Sales:  43,538

–––––

Est. Total Outlay:  $246,712

Less           Construction and other Costs:

Units:     800m2   @  $180  =  144,000

Garages:  250m2  @  $ 50  =  12,500

Other Improvements:               =  3,000

––––

$159,500

Fees:  8¼%  =  13,956
––––

$173,456

Holding Costs: 6%

10,407

––––

$183,863

Legal Cost of Unit Titles and Purchase:

2,000

Rates during development:

250

Insurance during development:

200

––––

Total Construction and other Costs	$186,313	say	$186,312 ––––––
RESIDUAL LAND VALUE:	$60,400
÷ 10 = $6,000 per unit site.	say	$60,000 ======

[44]   This example was produced by the Rongotai parties to show the simple method of calculation adjustment.

[45]   In the second edition, the author changed the net sales calculation, with the allowance for profit and risk, to show a 20% allowance on outlay. In making the calculation, Jefferies used the alternative analysis by dividing by one-sixth or 20% over 120% to arrive at the profit and loss allowance. The change in use of the alternative analysis is shown below:14

Example 8.12

RESIDUAL LAND VALUE METHOD

(Adopting a develop/sell type of development project approach)

Land for Block of 10 Home Units

(Incl. GST – if any)

Estimated Sales:     10 units @ $180,000               =  $1,800,000

Less           Selling Commission:

Basic:     (5% 1st $100,000 each sale) x 10	=	$ 50,000
Balance: 3% x $800,000 =	=	$ 24,000
Legal costs of sales: 10 x $2,000 =	$ 20,000
$     94,000
Est. Net Sales:	$1,706,000
Less:     Allowance for Profit and Risk: 20%% on outlay
20% x Net sales = 1/6th x $1,706,000 =
120%	$ 284,333
Est. total outlay:	$1,421,667

Less: Construction and other costs:

Units:    (10 units @ 80m2) 800m2  @ $900/m2   =  $ 720,000 Garages: (10 units @ 25m2) 250m2  @ $300/m2   =  $  75,000

Other Improvements:  =  $  15,000

$810,000

Fees:          Say 10% =  $  81,000

Building cost:  $891,000
Holding Costs:

Interest on outlay @ 15% for 18 mths. x ½ =  $159,937

Survey fees and legal costs of unit titles:  $  10,000

Rates during development:  $    2,000

Insurance during development:  $     1,000

14     Jefferies, above n 4, at 8-21.

Total Construction and other Cost:	$1,063,937
$ 357,730
Less: Costs of purchase	$ 7,000
$ 350,730
RESIDUAL LAND VALUE:	Say	$350,000

÷ 10 Units = $35,000 per unit.

[46]   These examples were put to the lessees’ experts, Mr Stanley and Mr Veale, to show that the “foundation valuation textbook” as described by Mr Stanley was wrong, as Jefferies had used the simple method in the first edition but corrected it in the second edition. Mr Stanley in cross-examination accepted that Jefferies had corrected his use of the simple method in the first edition of his text. He also agreed that he himself used the alternative, not simple method, for profit and risk allowances in his previous valuation reports.

[47]   For the lessees, Mr Sullivan pointed to the various reports of valuers for the Rongotai parties and the lessees, where they respectively used the simple method and the alternative method, depending on the circumstances. He submits that the alternative method may be appropriate where valuers are seeking to determine the specific value that a certain premium or benefit would add to a subject site. This analysis was undertaken by the lessees’ expert Mr Blucher when he determined the value of the waterfront premium specifically for the corner site of Kingsford Smith Street overlooking Lyall Bay. Similarly, Mr Washington had used the alternative method in a valuation report, where he backed-out a 5% adjustment to identify the value of a “benefit of an island site” but used the simple method to calculate an allowance for corner influence of 12.5%.

[48]   Mr Blucher also identified that one of the key difficulties with the alternative method is that the same percentage adjustments result in different quantum adjustments. For example, a 10% increase for corner influence on a $1,000/m2 property results in a $100 increase. Yet a negative 10% adjustment for zoning reduces the $1,000 only by $91. The alternative approach achieves different outcomes if the adjustments are done on either a line-by-line basis or by adjusting the cumulative net percentage. Mr Washington acknowledged in his evidence that netting off between adjustments to get to a cumulative figure is a simple method approach. The lessees argue that only after netting off the adjustments using the simple method does Mr

Washington then apply the alternative method, if there is a negative cumulative adjustment, by backing it out.

[49]   Mr Wigmore, an expert for Rongotai deposed that in using the simple method, the error “exponentially widens” when the scale of adjustments increases and produced a graph to demonstrate his proposition.

Analysis

[50]   We consider that the starting point in our consideration is the techniques used in the basic valuation approaches and their methodology.

[51]   As noted, Jefferies describes the four basic valuation approaches for the assessment of value of parcels of real estate, being the sale comparison approach, the replacement approach, investment (or productive) approach and the development project approach. While the replacement and investment approach share similarities to the sales comparison approach, the development project approach differs. It involves the use of a hypothetical sub-divisional budget to derive a price that a developer would prudently pay for the property as it currently exists, with a view to developing it to exploit its potential for profit or capital gain.15 Encompassing as it does three types of property to which the technique can be applied, namely buy/sell, develop/sell or develop/own, this approach has a distinctly different land valuation method and that is the residual land value method (“residual method”).16

[52]   Jefferies describes the residual method as being “based upon the principle that land value is a residual derived from the capitalised investment value of a hypothetical development using land to its highest and best use.”17 The author also records that:18

…the residual method is not generally appropriate for owner-occupier housing land, industrial land, or where other forms of owner/occupier use would be the highest and best use for the property.

15     Jefferies, above n 4, at 6-11.

16     At 6-13–6-15

17     At 8-19.

18     At 8-19.

[53]   We refer specifically to the residual method as this was the methodology employed in both the first and second edition examples adduced by the Rongotai parties to demonstrate the correctness of the alternative analysis. However, as clarified above, the residual methodology is used in the development project approach to derive a profit and loss figure. This is not the methodology utilised within the sales comparison approach.

[54]   Although much was made of the correction by Jefferies to his first edition calculation of the profit and risk allowance in the residual method example, it was the simple method which he used for the sales comparison approach, demonstrated by example 6.1 in his texts. Jefferies illustrates each of the steps in the sales comparison approach by using an example of a block of rental flats for valuation. At step four, the evidence of the comparable properties is adjusted for differences. Those adjustments are percentage adjustments, added or subtracted, and illustrate the application of the simple analysis. The example is set out as follows:19

Example 6.1

SALES COMPARISON APPROACH

PROPERTY: A single storied block of rental flats consisting of 6 two-bedroomed brick and tile roofed flats, which are rented at $150 per week each this being considered to be a fair rental.

Step 1:Information about recent sales of flats in the area is collected and verified. (See Chapter 7 for sources).

Step 2:               The most comparable sales are selected:

Sale 1:A single storey block of 3 flats sold for $243,750 ten months ago. The rentals were $165 per week for slightly better quality two-bedroomed units.

Sale 2: A block of two-bedroomed flats sold eight months ago for $445,000 consisting of 7 flats rented at $140 per week. Construction was slightly inferior and single storied.

Sale 3: A two storied block of 8 flats of very similar construction and quality sold for $478,000, three months ago The flats were one-bedroomed though and rented at $125 per week.

19     At 6-3.

Step 3:The sales are analysed and compared to the subject property, the units of comparison being price per flat.

Sale 1	Sale 2	Sale 3	Subject
Price	$243,750	$445,000	$478,000
Age of sale	10 mths.	8 mths.	3 mths.	0
Stories	1	1	2	1
No. flats	3	7	8	6
No bedrooms per flat	2	2	1	2
Rental per week per flat	$165	$140	$125	$150
Gross rents per annum	$25,740	$50,960	$52,000	$46,800
Price per flat	$81,250	$63,571	$59,750	$?
Quality compared to subject	better	inferior	similar

Step 4:The evidence is related to the subject property with adjustments for differences:

Adjusted sale price per flat:	Sale 1	Sale 2	Sale 3
Sale price per flat	$81,250	$63,571	$59,750
Time adjustment	+10.0%	+8.0%	+3.0%
Quality adjustment	–10.0%	+2.5%	nil
Rental level adjustment	–10.0%	+7.5%	+20.0%
Adjustment for no. in block   –2.5%           nil                nil
Net adjustment factor	–12.5%	+18.0%	+23.0%
Adjusted sale price per flat.	$71,094	$75,014	$73,492

Step 5:The value of the subject property is estimated by application of the comparison technique above.

Price per unit: take $72,500 per flat

Indicated current market value: = 6 flats @ $72,500 =                $435,000

[55]   There is an important distinction to be drawn between the sales comparison approach and the development project approach. The value of the subject property in the sales comparison approach is an estimation which occurs by the “application of the appropriate comparison technique”. Jefferies describes this process as the valuer “[applying] his or her professional experience and judgment in assessing whether this makes good sense and is an adequate interpretation of the available market evidence.”20

[56]   The emphasis on the need for judgment in the sales comparison approach (also referred to as the market approach) is reinforced in the International Valuation Standards at 20.6, where it states:21

20.6     The market approach often uses market multiples derived from a set of comparables, each with different multiples. The selection of the

20     At 6-2.

21     International Valuation Standards Council International Valuation Standards 2017 (31 January 2020) [International Valuation Standards].

appropriate multiple within the range requires judgement, considering qualitative and quantitative factors.

[57]   The development project approach, however, involves an estimate of net sales with a specific allowance for profit and risk. The percentage adjustment is “backed out” and used to identify the likely allowance for the developer’s profit and risk over expenditure. It is a specific benefit or result which is quantified, to assess the total cost of construction and purchase, arrived at by the alternative method.

[58]   We conclude therefore, that the sales comparison approach is an application of the valuer’s professional experience and judgment in assessing the comparable sales data to arrive at an estimation of market value. It differs from the sums specifically required for a developer to make allowance for his profit and risk in developing a sub- division, through the residual calculation method. Accordingly, we consider that there has been no mathematical error in the application of the sales comparison approach and the simple analysis, adopted for all four years of the rating objections from 2007 to 2018 by both the valuers and the Tribunal.

[59]   There is also an element of common sense and logic in the sales comparison approach. Taking the example of the $1,000,000 comparable sale at [17] and [18] above, if the subject property is 50% inferior, it is logical to deduct the sum of

$500,000 to arrive at half the value of the comparator. The adjustment is half the value of $1,000,000. It is, as Jefferies puts it, a result which makes “good sense.” The calculation by the alternative method of $633,000 does not provide a logical result when assessing a half value of the $1,000,000 comparable sale.

[60]   The differing results in the 13 Kingsford Smith Street example, referred to at [42], can also be explained. The first percentage adjustment (+5%) is made to the known sale price of the location to establish a modal value. When the reverse percentage adjustment (-5%) is then applied to the modal value, the percentage adjustment is higher, as the modal value is greater than the sale price from which the first percentage adjustment was taken. Secondly, the modal value is a weighted value from a basket of comparatives, not just one sale comparative. It reinforces the point that the simple method requires a valuer’s judgment about the qualitative nature of the selected sales and their comparison with the subject property. It is acceptable and

possible that the downwards percentage sum, being deducted in the 13 Kingsford- Smith Street example, does not equal the percentage sum adjustment upwards. That is not the focus of the simple method, which is an estimate of value, based on qualitative and quantitative judgment, not an approach to identify a sum certain.

[61]   For completeness, we deal with Mr Wigmore’s proposition on the exponential effect of the error on the increase of adjustments. In light of our reasoning above, the effect of “exponential” error begs the question of which valuation approach is being used and for what purpose. We note that where significant adjustments to comparable sales are required, the comparison to the subject property becomes less relevant, necessitating a judgment from the valuer as to whether the sale or sales should be discarded. We take this matter no further.

Conclusion

[62]   We conclude that there are no mathematical errors in the application of the sales comparison approach. The valuer’s simple percentage adjustment involved in the sales comparison approach relies on the valuer’s experience and judgment, considering qualitative and quantitative factors, in reaching an estimate of value on a subject property. It does not constitute mathematical error. It is distinctly different from the development project approach and the residual land value method, which involves a “backing out” calculation to provide a sum certain from known costs and outlay, of the likely profit and loss to a developer on a property or subdivision development.

Do the “mathematical errors” constitute valuation methodological errors?

[63]   In light of our conclusion above that there has been no mathematical error, it follows that there has been no valuation methodological error. The adjustments are judgments made on comparisons with the comparable sale prices and they are not precise calculations as the object of the sales comparison approach is an estimation of value.

Have the errors impacted on the valuations contended for by the valuers in the subject years?

[64]For the reasons above, the answer is no.

What is the impact on the rating valuations reached for each of the subject years?

[65]Similarly, for the reasons above, the answer is no.

Observation

[66]   We make the following observation on the separate hearing of the mathematical issue.

[67]   For the lessees, Mr Sullivan registered their objection to the belated error issues raised in this appeal. He submitted that where a party has consented to a particular process including the way in which evidence has been presented, that party should not and cannot lodge an appeal seeking to change it. He relied on Otago Station Estates Ltd v Parker as supporting his proposition.22 The lessees contend that the simple analysis adopted for the valuation approach in the 2007, 2012, 2015 and 2018 hearings was a deliberate decision and the evidence was presented by all parties and determined by the Tribunal on that basis. Given the extraordinary delay of the hearings, he says, valuer experts have been engaged for each of those hearings dating back to 2007 and he submits that it is now too late for two of the Rongotai parties’ valuation experts to belatedly challenge the basis upon which the evidence was prepared, including their own evidence and seek to amend their appeal notices for the three appeal hearings of 2007, 2012 and 2015.

[68]   We have taken the view that it was important to have the question determined as to whether there was a mathematical error in the valuation approach and the valuation analysis undertaken. The appellate courts must not shy away from error correction, if indeed error has been made. Parties can agree to an approach and be unaware that such an approach may be flawed. It is appropriate that that is aired and determined to ensure valuation evidence is appropriate and robust.

22     Otago Station Estates Ltd v Parker [2005] NZSC 16, [2005] 2 NZLR 734 at [10]–[13].

[69]   We note that the valuers have not resiled from the adoption of the sales comparison approach but rather have raised their concerns about the mathematical calculation and analysis in its application. This is distinguishable from the appellants in Parker, who attempted to raise on appeal a point which they conceded in the hearing below.23

[70]   While it is correct that the analysis affects a substantial number of hearings dating back to 2007, that fact alone should not prevent the Court from examining the issue of error, when it is raised. We have concluded that there has been no error, but the issue once raised, needed to be aired and determined.

Result

[71]The appeal is dismissed.

Costs

[72]   The parties seek clarification on the ability of the Tribunal to award costs under the Rating Valuations Act 1998 (RVA). The Tribunal reserved the matter of costs in each of the 2007, 2012, 2015 and 2018 objections, as well as the Tribunal’s mathematical calculation ruling.24 The Tribunal noted that the extent to which the Tribunal can award costs on rating valuation cases is unclear, and suggested this question should be referred to the High Court for consideration on the appeals, before being remitted back to the Tribunal for arguments as to quantum.

[73]   We have not heard full argument by Counsel on the cost jurisdiction in the Tribunal. We observe that the language of s 38(4) of the RVA is prescriptive and clear, providing a narrow ambit under which costs can be awarded. However, this is merely an observation. We consider that determination of this matter should await full argument.

23 At [11].

24 Rongotai Investments Ltd v Wellington City Council [2020] NZLVT 009 at [15]. In both 2007 and 2012, the Tribunal invited Counsel to submit applications for costs. However, in both the 2015 decision and the 2018 decision, the Tribunal recognised costs under the RVA as “problematic” and sought to defer the issue of a costs award to this Court.

[74]   We have discussed the issue of costs generally and in this jurisdiction more fully in our 2012 appeal judgment.25 Under s 37A of the Land Valuation Proceedings Act 1948 this Court may award costs on appeal. We indicated that this may be a case where costs lie where they fall. However, if any of the parties seek costs, Counsel are to file memoranda of no more than five pages as to whether they wish to be heard on the costs issue within 20 days of the date of this decision. Further directions will then follow.

…………………………………….

Cull J and Member VM Winiata

Solicitors:

Morrison Kent, Wellington, for Rongotai Estates Ltd and Rongotai Investments Ltd Simpson Grierson, Wellington, for Bunnings Ltd

Crown Law Office, Wellington, for Valuer-General Solicitors for Other Lessees:

Lane Neave, Christchurch, for Wellington International Airport Ltd and 2468 Ltd PCW Law, Auckland, for NZ Cash Flow Control Ltd

Hughes Robertson, Wellington for R Blaylock & Y Kerekes and Wild Bay Property Ltd

25     2012 Rating Valuation Appeal, above n 2, at [111]–[121].