If your MPAC assessment doesn’t have you seeing red, maybe it should.

You may recall a few posts back I coined the phrase “red building.” This label applies to any building that, due to its age, operational inefficiency or lack of amenities common to newer real estate, just doesn’t have the market appeal it once did, and is going to be out bid in the marketplace by new green construction.

These negatives can push a property into the domain of C-class space. There likely is no return from this abyss without substantial reinvestment, provided the cost of that reinvestment doesn’t exceed the potential return.

Now consider this concept, and any red buildings in your portfolio, in the context of the commercial property assessment notices that will be hitting mailboxes on Oct. 18.

I wrote last time about the need to take a close look at that notice when it arrives to ensure the assessment of your property is accurate and fair versus comparable properties in your market.

But what if you have a property that is, for one reason or another, losing or has lost market appeal? Does the assessment adequately reflect that?

Assessments should be based on true market value

A building you can’t lease, or can only lease by cutting your rates below that of your competition, represents a loss of revenue and market value. The property may just be less valuable than it once was, or less than the newer competition. Your assessment should reflect that, but you may have to stand up and take action to get noticed by the assessor.

Take, for example, one property I’ve been involved with that’s had trouble leasing vacant space since a key tenant left. The reason? It’s too far from public transit for most prospective tenants.

These days, people want to commute without their car and employers want or demand space that’s within reasonable walking distance of a transit stop. “Reasonable” is typically five to seven minutes, tops.

On this basis alone, I would argue the owner of this building has grounds to appeal if a commercial property assessment doesn’t take this negative point into account.

The jury is still out on that building, but on another file, appealing an assessment due to red building factors had a huge impact.

A $40M property really only worth half that

How huge? We got this property’s assessed value cut in half, by $20 million. This drastically cut the property’s tax burden with the local municipality. The owner got a retroactive reduction in his property taxes – a $1.7 million refund cheque.

What are this building’s red factors? Yesterday’s innovation became today’s albatross. The chief culprit is the “state-of-the-art” ductless heat pump system installed when the building was constructed 40 years ago. The building is still operational and usable, but the growing age and inefficiency of this equipment impacted its cost of operation and market value. The building was designed in such a way that replacing this system would require quite costly renovation. On this basis we were able to successfully appeal the original assessment.

But this silver lining does tarnish

Appealing the assessment of a red building can result in a silver lining in an otherwise grey cloud for the property owner. But it bears noting that a growing stock of red buildings in Canada’s commercial real estate market is bad news for municipal coffers. Lost value and lower assessments adds instability to the municipal tax base. City hall has to recoup this lost revenue in some way, and the key source of municipal revenue is the remaining taxpayers.

Which means the ultimate solution for a red building is its redevelopment as a higher-value green property, rather than settling for a downward spiral of diminishing returns. Maybe this is a good place to invest a refund cheque should you achieve a successful assessment appeal.

To discuss this or any other valuation topic in the context of your property, please contact me at jclark@regionalgroup.com. I am also interested in your feedback and suggestions for future articles.