A reader wrote in recently for my thoughts on whether a revival of Ontario’s vanishing Vacancy Rebate Program would be a prudent measure to help landlords broadsided by COVID-19.
It’s a fair question.
Small to mid-sized businesses that are not deemed “essential” by government decision-makers are struggling to adapt and survive.
Recognizing that the Government of Canada is providing some extraordinary levels of financial support for business and individuals, the extended disruption or suspension of these business operations might very well mean their end.
That could leave landlords across the province (and the country) with a rash of vacancies.
As various government aid packages become available for individuals and employers alike, what can be done to help commercial real estate?
The current situation, in my view, highlights a fundamental issue with Ontario’s assessment system that has nothing to do with COVID-19. Situations like this current crisis merely bring this issue into sharper focus.
Simply put, Ontario’s assessment cycle is too long. It was too long at four years and it’s even more problematic now that MPAC has extended the current cycle by a year as part of the response by the Government of Ontario to the pandemic.
The issue with rebate programs
But, let’s back up for a moment to recap that Vacancy Rebate Program.
The program allowed landlords to apply for a rebate on their municipal taxes for units that were vacant or under renovation for future tenancy.
While this provided a break for landlords from paying property taxes on units while they were not generating revenue, it created financial volatility and unpredictability for municipalities.
Municipalities, which operate on a break-even basis, rely on a stable and predictable stream of property tax revenue to fund operations and service delivery. Vacancy rebates, which are seldom stable or predictable, can foul that up.
Over the past several years, Ontario municipalities, with the approval of the province, have been phasing out the rebates for this very reason.
This has been much to the chagrin of landlords, including my reader, who is already dealing with vacancies at an industrial property in Waterloo.
I understand his pain. Perhaps some short-term easement on property taxes is in order. However, I truly believe we need to consider an overhaul of the entire assessment model.
Long cycles create unfair tax burdens
In provinces like Ontario and Quebec that, normally, have three- and four-year assessment cycles, values based on a historical base date can be far out of sync with current markets well before their next assessment.
Calgary is a perfect example of how wildly shifts in the value of prime commercial space can occur, but in Alberta, this is mitigated by a provincial assessment cycle that is annual.
Remember it’s not the individual values that are key but the percentage of the total assessment by property class that is born by an individual property.
If you’re in a large class of property, say the commercial class in Ontario, and the majority of the class has seen a stable or rising market but one specific property has seen a downward market shift for some unanticipated reason, then the owner of that property is paying tax based on market circumstances from four or five years ago.
This may not be equitable.
As I always say, a taxpayer should be expected to pay no more and no less than their fair share.
Alberta isn’t the only province that has demonstrated a one-year assessment cycle is feasible. In B.C., new assessments come out every fall and property owners have only until the end of January to file an appeal if they find fault.
Cycle length isn’t the only issue
The length of the assessment cycle isn’t the sum total of the problem. Ontario also has the distinction of being the most challenging jurisdiction in Canada in which to appeal an assessment.
I once had a conversation with an assessor in New Brunswick about the efficiency of his system.
He replied, “We’re a poor province and can’t afford to be inefficient like Ontario.”
You can’t get an assessor in Ontario to take a second look at an assessment without filing a Request for Reassessment or a full appeal.
A property owner can file an appeal directly themselves, but unless they’re working through an agent or approved representative, they will have to retain a lawyer or paralegal.
Compare this to B.C. While this province also requires formal appeals, assessors are accessible and formal legal representation isn’t required to file an appeal. This helps to expedite the resolution of an issue in a reasonably quick and cost-effective manner.
A similar situation exists in Saskatchewan, where there are assessors who simply want you to call if you think there is a problem with your assessment.
I know from personal experience that problems can be fixed in that province in a day or two if the property owner has the problem clearly identified and calls the assessor for help.
Shorten the assessment cycle, give assessors enough rope to make decisions and make it easier to challenge an assessment.
These are the measures which Ontario’s commercial real estate landlords need to help them better adapt to market volatility and mitigate its impact on their business.
Stop counting the apples with the oranges
Another way that any province’s assessment system can be made more efficient is to stop treating properties that will never trade on the market as marketable properties.
I include in this category airports, legislative buildings, correctional facilities and even manufacturing sites, such as those operated by a tier one automaker, that are unlikely to ever be sold in their entirety for the same commercial purpose for competitive reasons.
Instead of trying to assign a market value to these properties as the basis for their municipality to calculate property taxes, develop some other simpler method of fair taxation.
This would free overworked assessors to focus more of their time on truly marketable properties.
I say this because in my work, I often deal with files where there is a dispute over how a non-market property has been assessed.
The assessment has been carried out using methods that are really only suitable for a marketable property where there will be market evidence to rely on for determination and support of the assessment.
Let’s fix the core problems
COVID-19 is undeniably creating true heartache for business owners and their landlords alike.
Short-term relief measures in the same vein as Ontario’s Vacancy Rebate Program may be in order. However, these would only be Band-Aid solutions.
The current crisis once again emphasizes the need for a fundamental reform in those parts of the country where the assessment cycle is longer than a year or two and property owners have difficulty challenging their assessments in a timely and easy/cost-effective manner.
To discuss this or any valuation topic in the context of your property, please contact me at [email protected]. I am always interested in your feedback and suggestions for future articles.