Escalating property values in certain pockets of Vancouver and nearby urban centres are causing unfair tax burdens for tenants of commercial properties, say advocates of commercial tax reform.
In the last five years, for example, Vancouver has reduced the share of revenues that come from commercial property taxes to 48 per cent from 53 per cent. And in nearby Richmond, the city council received special permission from the provincial government to offer tax relief of up to 20 per cent for certain properties in its city centre where real estate values have shot up sharply in recent years.
Four unrelated phenomena are receiving most of the blame for the rising commercial taxes. According to Vancouver real estate consultant Peter Austin, principal of Austin Real Consultants, those phenomena can be summed up as follows:
• the proportion of municipal revenues that come from commercial properties;
• the rate at which commercial properties are taxed in comparison with residential rates;
• that properties are assessed on their highest and best use rather than their actual use; and
• that rising property values, including rising residential values, are causing assessments of commercial properties to spike much higher in certain areas of B.C.’s lower mainland.
The first two phenomena come under municipal control. Assessments, meanwhile, are determined by a provincial government crown corporation, BC Assessment.
In the first case, noted Austin in voicing a common sentiment, “Councillors don’t want to increase the amount of residential tax because that’s the people who vote.” In the second case, assessments only interpret market values and don’t take into account “the actual user who’s paying the tax,” he said.
“Many properties that have commercial use have high values because of the residential permitted on the site,” Austin added. “They are valued as residential values for a three to 10 storey building but taxed at a commercial rate. All that tax is paid by a single storey retail tenant, for example.”
Even after a reduction, commercial taxes are ‘the same problem just not as big’
The City of Vancouver has chipped away at the share of the tax pie that comes from commercial properties. Vancouver also reduced the ratio of the commercial tax rate to the residential rate to 4.333 times in 2009 from 4.690 in 2011, according to an October 2011 report from Altus Group Limited.
Despite that, property taxes at Ed des Roches’s 1,700 square foot Plum Clothing store at West Fourth Avenue and Vine Street rose to $29,344 a year in 2012 from $24,536 in 2010. The latter was a break from the $27,176 he paid for that location in 2009. At his Granville Street store, the 2012 taxes were $51,842 for 2,600 square feet, about the size of typical modern single-family house.
“All my stores pay property tax but the two stores in Vancouver are ridiculous,” sad des Roches, who has several stores on the lower mainland.
He traces the problem back to 1983 when the provincial government gave municipalities the power to determine how to divide the commercial/residential tax pie. In Vancouver at the time, commercial properties accounted for 56 per cent, which became the rate by default, he said. At the time, Vancouver had much more commercial activity than today. Since then, residential units have increased in the city, as evidenced by the new condo towers lining False Creek. But the residential/commercial ratio stayed the same until the mid 1990s when, in response to retailers’ complaints, the city reduced the commercial share to 52 per cent.
Then in 2007, city council under then mayor Sam Sullivan agreed to drop the rate by another one per cent a year to bring it down to 48 per cent by 2012. The current administration under mayor Gregor Robertson, of the left-leaning Vision Vancouver party, agreed to continue program but cap it this year.
“So that’s where we’re at today,” des Roches said. “We have the same problem but it’s just not as big.”
Even so, according to Vancouver’s 2012 Budget Basics document, the city redistributed $52 million in taxes from non-residential to residential properties between 1994 and 2011.
Coun. Richard Louie, who chairs the city’s finance committee, has been the point person for council on this issue. Unfortunately, he was on vacation and unavailable for comment. Calls to the city’s media enquiries line were not returned by deadline.
As journalist Francis Bula noted in her blog in March, City Hall was stung in March when the fair tax coalition took out ads calling on the city to freeze property taxes. Bula added that Louie called upon businesses to stop relying on the city to solve their tax woes. “Part of the issue locally is that landlords and tenants have unquestioningly conformed to a system where tenants pay the property-tax increase, even though it’s the landlords who cash in if and when they sell their land later on for some crazy price,” Bula wrote.
The City of Richmond provides tax relief
That commercial tenants pay property taxes is standard in the triple-net leases that make up about 90 per cent of leases, said fair tax coalition director Sharon Townsend, who is also the executive director of the South Granville Business Improvement Association.
“I don’t know too many people who are willing to put leases out there that aren’t triple net,” she said.
When property owners are forced to pass on these costs to their tenants, they will try to be flexible, Townsend said. “But there comes a point where they don’t want to be in a loss position. So it’s making it very difficult for them to maintain a tenant,” she said.
In response to soaring property values in the Brighouse area, where some assessments had risen 300 per cent since 2005, Richmond city council took action last year. Richmond worked with the provincial government to provide tax relief of up to 20 per cent annually for properties meeting certain well-defined criteria in that area. For example, an eligible property had to have its assessment increase at least 100 per cent between 2005 and 2011, and its property tax bill increase by at least $30,000 in that period.
A property owner can receive the relief, which applies also to school taxes, for five years but must re-apply each year.
A “perfect storm” of factors contributed to those escalating property values, said Ted Townsend, senior manager of corporate communications for Richmond. Those factors included the recent arrival of Skytrain’s Canada Line to the area, changes to the Richmond City Centre Area Plan that encourage more high-density development, the sale of city lands next to the Richmond Olympic Oval, and a booming real estate market in Richmond.
“It’s specific to Richmond and the province was very adamant that this was a one-off case and that they weren’t looking to do this in other areas,” said Townsend, who is not related to Sharon Townsend. “It was felt that Richmond was a unique case.”
His namesake, however, begged to differ. She and other fair tax proponents noted that Vancouver’s Cambie and Broadway corridors, for example, are subject to the same forces that have caused taxes to skyrocket in Richmond.
No simple solution
Sharon Townsend isn’t a big fan of Richmond’s solution in any event. “There’s winners and losers in that scenario where you’ve got one business or property on one side of the boundary and one on the other,” she said.
She would prefer that B.C. Assessment move to what she calls a “split assessment,” where a distinction is made between what property use is currently in place versus its possible use. “And at least tax what we call the phantom density at a residential rate instead of a commercial rate, which would make a significant difference,” she said.
B.C. Assessment’s Kash Kang said that already happens to some degree when an assessor classifies the different uses in a mixed used development. “But when you say, “can you value it differently for the residential component?’ I’m not too sure how to apply that or how that would help anybody,” said Kang, who is the regional assessor for the North Fraser region.
As Kang and others noted, assessments are based on the highest and best use of a property. And that is determined largely by recent sales of nearby similar properties.
“Now, if we actually based it on what you do on the property in terms of business value, in some sense it would complicate matters,” Kang said. “So the way the legislation currently is we’re mandated to find the highest and best use of every property so that it’s done consistently.”
However, Norm Stickelmann, who chairs the Vancouver Fair Tax Coalition, pointed out that B.C.’s Assessment Act already empowers assessors to consider present use when determining actual value.
“We’ve made the argument that it should be taxed as a business of a going concern and not based on that higher potential,” Stickelmann said.
Kang said present use is taken into account, and offered the hypothetical example of a one-storey retail mall that is still earning good income even though that property is zoned for a five-storey office building. “Is it prudent to demolish or do you look at the present use and say there’s still some income coming from this property, and how does that come into the equation of the value of the property?”
No wonder Stickelmann said, “It can get very complex, very fast.”
One thing he advocates is tax topography analysis, which looks at the “before and after” of a development and highlights consumption patterns.
According to des Roches, a consumption analysis that was updated in 2003 found that commercial tenants paid over $2 for every $1 in services they received from the city, whereas residences pay on 50 cent on the dollar.
“But they don’t want to measure,” he said. “We’re business people. Measurement is everything.”
He proposes basing commercial assessments on the rents that tenants pay. “In my view, the value of the rent is what the value of the building is because we businesses compete with each other for the rent.”