Trying to sharpen the very blunt tool that is the tax regime

AACI | Vice President, The Regional Group of Companies Inc.
  • Feb. 7, 2013

john clarkI was reading in my local paper last week about city hall’s finance committee taking aim at an Ontario tax rule which reduces property taxes on vacant or derelict commercial properties.

The issue I took with this article was the sentiment expressed by one city councillor that such a tax break is in fact a subsidy for property owners and a disincentive to rehabilitate a property and find tenants. A three-year limit on any such tax breaks was proposed, to ensure city coffers are not denied the revenue for too long.

I contend that city officials must take into consideration why the building is vacant or derelict in the first place.

City could take action against owner

If it has become unrentable due to poor upkeep, there may be recourse for the city to take action against the owner under its own property standards bylaws. This is a separate article all of its own. Suffice it to say that the onus is on the owner and the property probably should not be granted any tax break beyond that already reflected in an assessment that takes into account its sorry state and poor market appeal.

I want to focus on the circumstances around what I call involuntary destruction – the building is vacant, and very likely uninhabitable, due to circumstances beyond the owner’s control, such as a fire or a flood.

The municipal tax rate for a given property is based on its assessed value, as determined by the assessment authority (in Ontario that’s MPAC). MPAC makes its determination by calculating the property’s market value – what it would have sold for it if had been listed for sale, based on the average for that type and size of property in that area of the municipality.

Rules for involuntary destruction

In cases of involuntary destruction, it only makes sense then for the property taxes to be reduced, since the market value of the property has gone down, perhaps considerably, and even if only temporarily.

I would contend that a tax reduction should be considered immediately after an incident of involuntary destruction and the tax reduction be proportional to the drop in market value. Such a reduction would be determined by an independent, neutral assessor based on site observations.

It is unfair to say that even a 30 to 35 percent tax reduction is a disincentive for an owner to get a property operating and occupied again, as was suggested in that newspaper article.

Vacant properties cost their owners money, they don’t generate profit, even with a tax cut taken into account. It therefore behooves an owner to get that property back in the game as soon as possible.

Are there potential tenants?

If there is any disincentive for the owner to do this, it is most likely dictated to him or her by the vagaries of the local real estate market — are there potential tenants lining up for a lease? Depending on the location and the market, it may take an extended period to secure a good tenant, during which time the taxes on the property would remain depressed, reflecting negative market conditions. Imposing an arbitrary three-year limit is not the solution for a city’s revenue stream.

City officials and the assessor should instead consider these two variables: the average period for which a particular type of property sits vacant in a particular area of the city, and how long reconstruction of a damaged property should take. Applying these to develop a rule for the duration of an assessment reduction and tax rebate would be fair and equitable.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

About John Clark: With over 30 years of experience in the national real estate appraisal and valuation industry, John Clark (BA, AACI, P.App., FRICS, Chartered Valuation Surveyor) is a leading expert on real estate matters that impact the value of commercial, institutional, residential and other special use properties. He joined The Regional Group of Companies Inc. in 1988 and has served as Vice-President of Valuation and Consulting since 1990. He is a Fellow of the Appraisal Institute of Canada and served as its National President, 2001-2002.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more

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