METHODOLOGY GUIDE- VALUING SHOPPING CENTRES IN …

METHODOLOGYGUIDEVALUINGSHOPPINGCENTRESINONTARIO

ValuationDate:January1,2016

AUGUST2016

August22,2016

TheMunicipalPropertyAssessmentCorporation(MPAC)isresponsibleforaccuratelyassessingandclassifyingpropertyinOntarioforthepurposesofmunicipalandeducationtaxes.

InOntario’sassessmentsystem,MPACassessesyourpropertyvalueeveryfouryears.Thisyear,MPACisupdatingthevalueofeverypropertyintheprovincetoreflectthelegislatedvaluationdateofJanuary1,2016.

MPACiscommittedtoprovideOntariopropertyowners,municipalitiesandallitsstakeholderswiththebestpossibleservicethroughtransparency,predictabilityandaccuracyinvalues.Aspartofthiscommitment,MPAChasdefinedthreelevelsofdisclosureofinformationinsupportofitsdeliveryofthisyear’sassessmentupdate.ThisMethodologyGuideisthefirstlevelofinformationdisclosure.

ThisguideprovidesanoverviewofthevaluationmethodologyundertakenbyMPACwhenassessingshoppingcentresforthisyear’supdateensuringthemethodologyforvaluingthesepropertiesiswelldocumentedandinalignmentwithindustrystandards.

Propertyownerscanaccessadditionalinformationabouttheirownpropertiesthroughaboutmyproperty.ca.Logininformationforaboutmyproperty.caisprovidedoneachPropertyAssessmentNoticemailedthisyear.AdditionalinformationaboutMPACcanbeaccessedatmpac.ca.

AntoniWisniowski

PresidentandChiefAdministrativeOfficer

RoseMcLean,M.I.M.A.

ChiefOperatingOfficer

TableofContents

1.0INTRODUCTION................................................................................................................41.1PROPERTIESCOVEREDBYTHISMETHODOLOGYGUIDE......................................................................41.2LEGISLATION.............................................................................................................................5

1.3CLASSIFICATION.........................................................................................................................5

1.4THEUSEOFTHISMETHODOLOGYGUIDE.......................................................................................7

1.5CONSULTATIONANDDISCLOSURE.................................................................................................7

2.0THEVALUATIONPROCESS.................................................................................................9

2.1OUTLINE..................................................................................................................................9

2.2APPROACH.............................................................................................................................10

2.3DATACOLLECTION...................................................................................................................10

2.4DATAANALYSIS.......................................................................................................................12

3.0THEVALUATION..............................................................................................................13

3.1DETERMININGPOTENTIALGROSSINCOME(PGI)...........................................................................13

3.2ESTABLISHINGEFFECTIVEGROSSINCOME(EGI).............................................................................14

3.3ESTABLISHINGNETOPERATINGINCOME(NOI).............................................................................15

3.4CAPITALIZINGNOIINTOVALUE..................................................................................................17

3.5CURRENTVALUEASSESSMENT...................................................................................................17

3.6POSTVALUATIONREVIEW.........................................................................................................18

3.7CONCLUSION..........................................................................................................................18

©MunicipalPropertyAssessmentCorporation2016Allrightsreserved 4

1.0Introduction

TheMunicipalPropertyAssessmentCorporation(MPAC)–mpac.ca–isresponsibleforaccuratelyassessingandclassifyingpropertyinOntarioforthepurposesofmunicipalandeducationtaxation.

InOntario,propertyassessmentsareupdatedonthebasisofafour-yearassessmentcycle.In2016,MPACwillupdatetheassessmentsofOntario’snearlyfivemillionpropertiestoreflectthelegislatedvaluationdateofJanuary1,2016.Assessmentsupdatedforthe2016baseyearareineffectforthe2017–2020propertytaxyears.

ThelastAssessmentUpdatewasbasedonaJanuary1,2012valuationdate.Increasesarephasedinoverafour-yearperiod.Anydecreasesinassessmentareappliedimmediately.

Itisimportanttoensurethatthevaluationmethodologyappliediscapableofprovidingarealisticestimateofcurrentvalueattherelevantvaluationdate,which,inturn,enablesallstakeholderstounderstandthevaluationprocessandhaveconfidenceinthefairnessandconsistencyofitsoutcome.

ThisMethodologyGuidehasbeenpreparedforthebenefitofMPACassessors,propertyownersandtheirrepresentatives,municipalitiesandtheirrepresentatives,AssessmentReviewBoardmembers,provincialofficials,andthegeneralpublic.

Thisguideoutlinesthevaluationprocesstobefollowedbyanassessor,includingstepsthatrequireappraisaljudgment.Itisincumbentupontheassessortomakeinformeddecisionsthroughoutthevaluationprocesswhenarrivingatestimatesincurrentvalue.

1.1PropertiesCoveredbyThisMethodologyGuide

ThisMethodologyGuideappliestoshoppingcentresinOntario.ThefollowingMPACpropertycodesareusedtocategorizethevarioustypesofshoppingcentresinOntario:

• 425Neighbourhoodshoppingcentre–aminimumoftwostores(underoneownership)withoneanchor,generallylessthan150,000squarefeet

• 426Smallboxshoppingcentre–aminimumofthreeboxstoresusuallywithoneanchor,generallylessthan100,000squarefeet

• 427Bigboxshopping/powercentre–twoormoremainanchors(suchasdiscountorgrocerystores)andacollectionofboxorstripstoresinacommercialconcentrationconcept,generallygreaterthan100,000squarefeet


• 428Regionalshoppingcentre–atleastonedepartmentstoreoranchorofatleast100,000squarefeet,alargepopulationbase,generallygreaterthan300,000squarefeet

• 429Communityshoppingcentre–clustersofattachedretailunits(open-airand/orenclosed)withsignificantoff-streetpavedparkingsurroundingthebuilding(s)andwithaccessfromtwoormoresides.Theytypicallyofferproductsandservicesfocusedondailyshoppingneedsbutalsoofferawiderrangeofsoftgoodsandservicesthansmallerneighbourhoodcentres.Thesecentresaregenerallybetween100,000and400,000squarefeet.

• 430Neighbourhoodshoppingcentre–aminimumofthreestoresattached,underoneownershipandwithoutananchor,generallylessthan150,000squarefeet

• 438Neighbourhoodshoppingcentreswithofficesabove

Pleasenotethatthesearegeneralguidelinesthatvarydependingonthespecificcircumstancesofaparticularproperty.

AnassessormayalsomakereferencetoadditionalMethodologyGuidesforpropertiesthatdonotfallpreciselywithinthedescriptionofoneofthepropertycodeslistedabove.

1.2Legislation

ThemainlegislationgoverningtheassessmentofpropertiesinOntarioforpropertytaxpurposesiscontainedintheAssessmentAct.1

TheActcontainsimportantdefinitionsandstatesthatallpropertyinOntarioisliabletoassessmentandtaxation,subjecttosomeexemptions.Section19(1)oftheActrequiresthatlandbeassessedatcurrentvalue,whichisdefinedtomean,inrelationtoland,“theamountofmoneythefeesimple,ifunencumbered,wouldrealizeifsoldatarm'slengthbyawillingsellertoawillingbuyer.”

Inaddition,legislationgovernstheclassificationofshoppingcentresforpropertytaxpurposes.

TheMinisterofFinancefiledOntarioRegulation430/15onDecember18,2015,whichaddedadditionalrulesaffectingthevaluationandclassificationofpropertiesonwhichathird-partysign(billboard)islocated.Tocomplywiththeregulation,theincomeattributabletoathird-partysignwillnotbeincludedinthevaluationofanypropertyforassessmentpurposes.

1AssessmentAct,R.S.O1990,cA.31:https://www.ontario.ca/laws/statute/90a31.


1.3Classification

MPAC’sroleistoaccuratelyassessandclassifyallpropertiesinOntarioinaccordancewiththeAssessmentActanditsassociatedregulationsestablishedbytheGovernmentofOntario.Theclassificationofapropertywilldeterminewhichtaxratewillbeappliedbythemunicipalityortaxingauthority.Allpropertiesareclassifiedaccordingtotheiruse,andOntarioRegulation282/98oftheAssessmentActsetsouthowvariouspropertyusesareclassified.

ShoppingCentresareincludedinthecommercialpropertyclassinaccordancewithSection5(1)1ofOntarioRegulation282/98as“landandvacantlandthatisnotincludedinanyotherpropertyclass.”2TheclassificationofshoppingcentresiscoveredinSection12(1)ofOntarioRegulation282/98.Theshoppingcentrepropertyclassonlyappliesifthecouncilofamunicipalitypassesabylawoptingtohavetheoptionalclassapply.Section12(1)ofOntarioRegulation282/98requiresthecouncilofamunicipalitytopassabylawestablishingthetaxratiosfortheshoppingcentrepropertyclasspursuanttoSection308oftheMunicipalAct,2001.3

Theshoppingcentrepropertyclassonlyappliestotheportionofthepropertythatexceedsthe25,000squarefeetthreshold.Asaresult,theeligiblepropertywillalwaysbeapportionedbetweencommercialandshoppingcentreasfollows:thecommercialclassificationisappliedtothefirst25,000squarefeetandtheshoppingcentreclassificationisappliedtotheportionofthepropertythatisinexcessof25,000squarefeet.Dependingonthepercentageincreaseoftheimprovementandthebuildingpermitissuancedate,ashoppingcentremayalsobeincludedintheNewCommercialPropertyClassunderOntarioRegulation400/98.

Irrespectiveofwhetherthemunicipalityhasadoptedtheoptionalshoppingcentrepropertyclass,MPACwillstillapplytheoptionalclasstotheportionsofthepropertythatmeetthelegislativerequirements.

Whendeterminingtheclassificationofashoppingcentre,theassessorwillalsobemindfulofexcesslandandofficepropertyclasses,taxexemptportionsofthepropertyaswellasanyotherappropriatetaxclass.

Ifaportionofthepropertyisusedforotherpurposes,itmaybenecessarytovaluethosecomponentsseparatelyandsumthecomponentvaluestoachievethecorrecttotalcurrentvalue.Itmayalsobenecessarytoapportionthetotalvalueofthepropertybetweenthevarioususestoensurethattheappropriatetaxrateisappliedtotherelevantpartsoftheproperty.2OntarioRegulation282/98,GENERAL:https://www.ontario.ca/laws/regulation/980282.3MunicipalAct,2001,S.O.2001,c.25:https://www.ontario.ca/laws/statute/01m25.


1.4TheUseofThisMethodologyGuide

ThisMethodologyGuideisintendedto:

• EnsureMPAC’sassessedvaluesforthesepropertiesarefair,accurate,predictableandtransparent.

• Providedirectiontoassessorsandclearexplanationstomunicipalities,taxpayersandAssessmentReviewBoardmembers.

• EnsurethatMPAC’smethodologyforvaluingthesepropertiesiswelldocumentedandalignswithindustrystandards.

• Explainthethoughtprocess/decision-makingprocessthatanassessorshouldundertaketoapplythevaluationmethodology.

• Ensureaconsistentapproachtovaluingthesepropertytypes.

• SupportMPACassessorsinconductingtheirduediligencein:

Ø applyingOntario’slegislationandregulationsØ adheringtoindustrystandardsformarketvaluationinamassappraisal

environment

ItshouldbenotedthatthisMethodologyGuideisnotintendedtobeasubstituteforanassessor’sjudgmentinarrivingatamarketvalue–basedassessment(i.e.,currentvalue)foraparticularproperty.However,giventhattheMethodologyGuideexplainsindustrystandardsforpropertyassessment,conformstovaluationindustrynorms,andadherestoprovinciallegislationandregulation,MPACassessorsareexpectedtofollowtheproceduresintheMethodologyGuideandbeabletoclearlyandsatisfactorilyjustifyanydeviationsfromit.

1.5ConsultationandDisclosure

MPACiscommittedtoprovidingmunicipalities,taxpayersandallitsstakeholderswiththebestpossibleservicethroughtransparency,predictabilityandaccuracy.Insupportofthiscommitment,MPAChasdefinedthreelevelsofdisclosureaspartofitsdeliveryofthe2016province-wideAssessmentUpdate.

• Level1–MethodologyGuidesexplaininghowMPACapproachedthevaluationofparticulartypesofproperty


• Level2–MarketValuationReportsexplaininghowthemethodologyoutlinedinLevel1hasbeenappliedatthesectorlevelforthepurposesofeachassessment

• Level3–PropertySpecificValuationInformationavailabletopropertytaxpayers,theirrepresentativesandmunicipalities


2.0TheValuationProcess

Thevaluationprocessalwaysbeginswithadeterminationofthehighestandbestuseofthesubjectproperty.

Anyrelianceuponthisguideismadeonlyaftertheassessorhasdeterminedthatthehighestandbestuseofthesubjectpropertyisthatofashoppingcentre.

Assessorsdeterminethevalueofapropertyusingoneofthreedifferentapproachestovalue:

• thedirect(sales)comparisonapproach

• theincomeapproach

• thecostapproach

2.1Outline

Inthedirect(sales)comparisonapproach,valueisindicatedbyrecentsalesofcomparablepropertiesinthemarket.Inconsideringanysalesevidence,itiscriticaltoensurethatthepropertysoldhasasimilaroridenticalhighestandbestuseasthepropertytobevalued.

Intheincomeapproach(or,moreaccurately,theincomecapitalizationapproach),valueisindicatedbyaproperty’srevenue-earningpower,basedonthecapitalizationofincome.Thismethodrequiresadetailedanalysisofbothincomeandexpenditure,bothforthepropertybeingvaluedandothersimilarpropertiesthatmayhavebeensold,inordertoascertaintheanticipatedrevenueandexpenses,alongwiththerelevantcapitalizationrate.

Inthecostapproach,valueisestimatedasthecurrentcostofreproducingorreplacingimprovementsoftheland(includingbuildings,structuresandothertaxablecomponents),lessanylossinvalueresultingfromdepreciation.Themarketvalueofthelandisthenadded.

MPACprimarilyusestheincomeapproachtovalueshoppingcentres.Thevalueofanincomepropertysuchasashoppingcentreisbasedonthepresentworthofanticipatedfutureincome.

MPACusesthedirectcapitalizationmethodtoestablishcurrentvalueassessmentsinamassappraisalcontext.

Thismethodestimatestheannualfairmarketrentalincomeandotherpotentialincomethatcanbegeneratedbyashoppingcentre,deductsoperatingexpensesandthenappliesacapitalizationratetothenetincometoarriveatanestimateofcurrentvaluefortheproperty.


Thedirectcapitalizationapproachinvolvesthefollowingsteps:

1. Determinethepotentialgrossincome(PGI)usingmarketrents.

2. Adjustfortypicalvacancyexpenseallowanceaccordingtothetypeandqualityofshoppingcentretodeterminetheeffectivegrossincome(EGI).

3. Deducttypicalnon-recoverableexpensestodeterminethenetoperatingincome(NOI).

4. Establishthecapitalizationratefromsalesdata.

5. CapitalizetheNOIintoanestimateofcurrentvalue.

2.2Approach

TherearefourmainphasesintheprocessusedbyMPAC:

• datacollection

• analysisofthedatacollected

• valuation

• propertyvaluereview

2.3DataCollection

Thedatarequiredforshoppingcentrevaluationscomefromanumberofsources:

• MPACconductsperiodicinspectionsofshoppingcentres.

• PropertyownersarerequiredtoprovideMPACwithdetailsincludingtheactualincomeandexpensesthroughthePropertyIncomeandExpenseReturn(PIER)forms.

• MPACalsocollectsinformationaboutsalesandtransfers.

MPACgenerallycollectsthefollowingtypesofdataforshoppingcentres:

• generaldata(tenantlist,occupancy,leasetypes,etc.)

• financialdata(rent,vacancy,expenses,retailsales,etc.)

• propertydescription(siteplans,floorplans,etc.)


• salesdata(whereapplicable)

• grossleasablearea(GLA)

• Furthertotheabove,MPACwillreviewthirdpartyreportsfromvariousreputablesourcessuchasCoStarandAltusInsite.

Confidentiality

Asoutlinedabove,itisimportanttobeawarethat,inordertoenableMPACtoproduceanaccuratevaluationofthepropertyconcerned,informationneedstobeobtainedfromavarietyofsources.

ThiswillincludeinformationfromMPAC’srecords,fromtheowneroroperatoroftheproperty,fromthemunicipalityinwhichthepropertyislocated,fromtheassessor’svisittotheproperty,andfromothersources.

AllstakeholdersinthepropertyassessmentsystemhaveaninterestinensuringthatthecurrentvalueprovidedbyMPACiscorrect;inordertoachievethis,itisnecessaryforallpartiestocooperateintheprovisionofinformation.

Itisappreciatedthatsomeoftheinformationoutlinedabovemaybeofacommerciallysensitivenature.MPACrecognizestheneedtoensurethatanyinformationprovidedtoitisproperlysafeguardedandonlyusedforthepurposeforwhichitissupplied.Assessorsmustappreciatethenatureofthisundertakingandensuredataistreatedaccordingly.

If,afteranappealhasbeenfiled,MPACreceivesarequestforthereleaseofactualincomeandexpenseinformation,orothersensitivecommercialproprietaryinformation,theusualpracticeistorequirethepersonseekingtheinformationtobringamotionbeforetheAssessmentReviewBoard(ARB),withnoticetothethirdparties,requestingthattheARBorderproductionoftherequestedinformation.ThereleaseofsuchinformationisatthediscretionoftheARBandcommonlyaccompaniedbyarequirementforconfidentiality.

TheAssessmentActoutlinesinSection53(2)thatdisclosedinformationmaybereleasedinlimitedcircumstances“(a)totheassessmentcorporationoranyauthorizedemployeeofthecorporation;or(b)byanypersonbeingexaminedasawitnessinanassessmentappealorinaproceedingincourtinvolvinganassessmentmatter.”


2.4DataAnalysis

ForMPACtogainfullvaluefromthedatacollected,thedatahastobeorganizedinsuchawaythatmeaningfulcomparisonscanbemadeandconclusionsdrawnthroughstatisticalanalysis.

Theanalysisprocessinvolvesseveralsteps.Thefirsttaskistovetthedata(i.e.,checkforaccuracy)beforeitisusedtohelpestablishthefairmarketrentsandfactorsthatwillbeusedtovaluetheproperties.ThesecondstepistoenterthedataintoMPAC’sdatabase.Next,MPACclassifiesthedatasothatitcanbesortedintoappropriatemarketareas,whichreflectconditionswheredatacomparisonscanbemadeandconclusionsdrawn.Finally,MPACdevelopscertainvaluationparametersthroughthemodelprocessthatcanbeusedinthevaluationofshoppingcentres.Aftercollectingfairmarketrentdatafrompropertyowners,thenextstepsinclude:

1) Classifyandconfirmthetypesoftenantsbymarketarea,propertycodeandoccupancycode.

2) Analyzedatatoreachconclusionsforallowances.

3) Establishrentsbytenanttypeforeachclassofshoppingcentrethroughmultipleregressionanalysis.

4) Establishtypicalmarketvacancyratesforeachclassofproperty.

5) Establishtypicalnon-recoveredoperatingexpenseallowances.

6) Establishthecapitalizationrates.


3.0TheValuation

3.1DeterminingPotentialGrossIncome(PGI)

Indeterminingthepotentialgrossincome(PGI)forashoppingcentre,MPACreviewsopenmarketrentstakenfromcurrentrentrollinformationforthepropertyprovidedbythepropertyowner.InestablishingthePGI,itisassumedthereistypicalandcompetentmanagementandleaseswereestablishedbyawillinglessorandlesseewhowerebothknowledgeableandfreefromduress.Thisdataisthenanalyzedtoarriveatanestimateoffairmarketrent(FMR).

ItisimportanttonotethatwhentheanalystisdevelopingFMRsfromactualrentalinformation,athoroughreviewoftherentrollsisconductedtoensuretheyarereflectiveofcurrentmarketconditions.

Itemstoconsiderandreview:

• overalleconomiccircumstancesofgeographicalareaandpropertytype

• whetherrentsreflectexistingmarketconditions

• thelengthandtimeoftheleasetransactions

• rentspaidforothersimilar-sizedrentalspaces

• fullfloorrentstothatofpartialfloorrents

AspertheAssessmentAct,whenvaluingshoppingcentrepropertiesasunencumbered,itisimperativethattheanalystestimateFMR,reflectiveofthemarketplaceasoftheeffectivevaluationdateandinclusiveofallinterestsintherealproperty.TheFMRsareappliedtotheshoppingcentregrossleaseableareas(GLA)toarriveatanoverallPGIfortheproperty.

ThenationallyrecognizedstandardandapproachtomeasuringshoppingcentrebuildingFMRsanddeterminingGLAhasbeenestablishedbytheBuildingOwnersandManagersAssociation(BOMA).

AdditionalincomegeneratedfromthepropertyforsuchitemsasparkingorstoragefeesshouldalsobeaddedtothePGI.Thisadditionalincomeshouldreflectthesamemarketconsiderationsastheshoppingcentregeneratedrevenue(i.e.,shouldbedeterminedfromopenmarketrates).

InestimatingthepropertiesPGI,thepropertyshouldbeconsideredasthoughfullyleasedandoccupiedandoperatingatitsmaximumpotential.

In instances where current rent roll information has not been supplied, is not complete or is not available for a shopping centre, typical market rents can be established by analyzing the rent roll returns from similar properties in the vicinity. The analyst may stratify properties by location, age, classification, etc. in the vicinity. The resulting stratified FMRs are then applied to similar or comparable properties to determine the PGI for those properties.

Figure 3.1 – Example of PGI

Unit Type of Space GLA FMR Income

1 Anchor 100,000 $16.00 $1,600,000

2 Retail 5,000 $25.00 $125,000

3 Retail 1,000 $32.00 $32,000

4 Storage 700 $10.00 $7,000

5 Retail 1,180 $30.00 $35,400

6 Retail 500 $35.00 $17,500

Total PGI $1,816,900

It should be noted that rates and other information shown are for illustrative purposes only.

3.2 Establishing Effective Gross Income (EGI)

Once the PGI from a property has been established, the next step is to determine an effective gross income (EGI). EGI is the amount of income the owner expects to receive over the long term; this is the EGI reduced as a result of expected vacancy and bad debt. Effective Gross In-come = Potential Gross Income – Vacancy and Collection Loss

Market Vacancy

Market vacancy reflects the amount of space that is typically vacant in a particular type of shop-ping centre. Three issues arise when considering vacancies:

• A vacancy estimate is intended to reflect the likely average for a property type over a typical holding period and recognizes that, because of economic cycles, there will be periods when demand is good and periods when demand softens.

• Vacancy rates at individual shopping centres may differ from the norm.

• The vacancy and collection loss is an allowance for reductions in PGI attributable to vacancies, tenant turnover and non-payment of rent.

© Municipal Property Assessment Corporation 2016 All rights reserved 14


EstablishingtheTypicalMarketVacancyRate

MPACassessorsapproachthevacancyrateusingthepercentageoflossofincometypicallylostduetovacanttenancies.Whencalculatingvacancybasedonlostincome,theassessorwillcalculatethelossofincomeasapercentageofthetotalpotentialrentalincomethatwasreportedonaproperty’sincomeandexpensereturn.

OncelostrevenuehasbeenconvertedintoapercentageofthePGI,thepropertiesarethenstratifiedbylocation,ageandqualitytoproducerangesofvacancypercentages.Themeanvacancyrateisthenselectedandappliedtotheentireinventoryofsimilarproperties.

Baddebtrepresentsrentalandotherpaymentsthatthelandlordcannotcollectfromthetenants.Itistypicaltoincludevacancyandbaddebtasasingleblendedrate.

DeterminingEGI

TodeterminetheEGI,theassessorstartswiththePGIanddeductsvacancyandcollectionlossallowance.TheresultistheEGI.

Figure3.2–ExampleofEGICalculation

TotalPGI $1,599,100Vacancy -7.0% -$111,937TotalEffectiveGrossIncome $1,487,163

Notethatunlessthereareextenuatingcircumstances,whichwillbenotedbytheassessor,marketvacancyratesshouldbeusedasopposedtoactualvacancyratesinordertoderivetheappropriatedeductionforvacancy.

Itshouldalsobenotedthatratesandotherinformationshownaboveareforillustrativepurposesonly.

3.3EstablishingNetOperatingIncome(NOI)

Theobjectiveoftheincomeapproachistodetermineaproperty’snetoperatingincome(NOI).TheprocessbeginsbyestablishingtheexpectedPGI,thendeterminingtheeffectiveincomebymakingadeductionfortypicalvacancy.Thefinalstepistoadjusttheincomeforexpensesthatcannotberecoveredfromthetenants.

NetOperatingIncome=EffectiveGrossIncome–Non-recoverableOperatingExpenses


Non-recoverableoperatingexpenseisthedifferencebetweenthetotaloperatingexpensesandthetotalincomerecoveredfromtenants.

Non-recoverableOperatingExpenses

Non-recoverableoperatingexpensesareexpensestothepropertyownerthatarenotrecoveredfromtenantsinordertomaintainandgenerateanincomestream.Inatypicalshoppingcentre,tenantsareonnetleasesandtheoperatingcosts,suchasrealpropertytaxes,heating,airconditioning,andcleaning,arecollectedfromthetenant,independentoftherentpaidfortheoccupiedspace.

Therearetypicallytwoareaswherethepropertyownerhastocoverexpenses:

• non-recoverableoperatingexpenses,whicharenotpassedontothetenants,suchaslegalandauditfees,advertisingandpromotionalfees;and

• expensesassociatedwithoperatinganyvacantspace.

Itispossibletoexpressallnon-recoverableoperatingexpensesasapercentagereductionfromtheEGI.AstudyofthetypicaldifferencebetweenoperatingrecoveriesandoperatingexpensesproducestheexpecteddifferencebetweenEGIandNOI.Ifthisdifferenceisfairlyuniformandconsistent,thenitisappliedasaone-timededuction,muchlikethevacancydeduction.

ExcludedExpenses

Thereareseveralexpenseitemsthataretypicallyexcludedfromanyoperatingexpensestudy,astheydonotformpartoftheday-to-dayoperationorongoingmaintenanceofaproperty.Theseitemsinclude:

• incometaxandtaxesassociatedtothebusiness

• mortgageordebtservice

• depreciationonthebookvalueofthebuilding

Notethatstructuralrepairsandcapitalcostitems(notregularbuildingmaintenance)aretypicallyexcludedfromleasearrangementsmadewithtenants.

ThedeterminationofNOIshouldnotbeundulydistortedbylarge,one-timeorinfrequentexpenseitems,suchasmajorstructuralrepairsorcapitalcosts.However,ifadeductionisdeterminedappropriateforsuchexpenses,theassessormayproratetheexpenseamountoverthelifeexpectancyoftheitem.


Figure3.3–ExampleofNOICalculation

Totaleffectivegrossincome $1,487,163

Totalnon-recoverableexpenses –5% $74,358

Netoperatingincome $1,412,805

Itshouldbenotedthatratesandotherinformationshownareforillustrativepurposesonly.

3.4CapitalizingNOIintoValue

OncetheNOIhasbeenestablished,thefinalstepfortheassessoristoapplytheappropriatecapitalizationratetoconverttheincomeintoapresentvalue.Theassessorwillestablishthecapitalizationratebystudyingsalesofpropertiesthatpresentsimilarinvestmentopportunitiesandthereforesimilarincomeprofiles.Anincomeprofileisthedegreeofrisk,aswellasthepotentialforgrowth,associatedwiththeincomestream.

SelectinganAppropriateCapitalizationRate

Selectionofanappropriatecapitalizationrateisessentialtotheproductionofanequitableandfairvalueforaproperty.Selectinganappropriaterateconsiderssuchfactorsasage,stateofrepairandlocationoftheproperty,incomparisontotheaverageortypicalproperty.

Figure3.4–CapitalizationofNetIncomeintoValue(V=I/R)

NetOperatingIncome(I) $1,373,083

CapitalizationRate(R) 8.0%

IncomeValuation(V) $17,164,000(Rounded)

Itshouldbenotedthatratesandotherinformationshownareforillustrativepurposesonly.

3.5CurrentValueAssessment

Thefinalstepintheprocessistoconsolidateacurrentvalueassessmentfortheproperty.Oncethedeterminationofincomevaluehasbeencompleted,theassessorwillconsiderwhetherthereisanyothervalueintherealestatethathasnotbeencapturedbytheanalysisofincome.


ExcessLand

Excesslandisundevelopedlandthatissurplustocurrentneeds.Thislandisnotcapturedbytheincomeapproach,astherentsandotherpaymentsmadegotosupportalltherealestateelementsneededtooperatetheshoppingcentre.Landthatisnotrequiredtooperatetheshoppingcentreissurplusorexcesstocurrentneeds.Thevalueofexcesslanddependsonitslocationwithinthesiteandhowwellitsuitsfuturedevelopmentsorexpansion.

3.6PostValuationReview

Havingarrivedatthevalueoftheshoppingcentrethroughtheaboveprocess,MPACassessorswillconductadetailedreviewofthevaluationandaddressanyanomaliesthroughaprocesscalledpostvaluationreview.Throughthisprocess,theassessorwillreviewthepropertyspecificdatatoensureaccuracy,compareresultstosimilarpropertiesandensurethevalueisreflectiveoflocalmarketconditions.

3.7Conclusion

ThisguidesetsouthowMPACassessorsapproachthevaluationofshoppingcentresforpropertyassessmentpurposes.

Althoughitoutlinesthegeneralapproachadopted,itdoesnotreplacetheassessor’sjudgmentandtheremaybesomecaseswheretheassessoradoptsadifferentapproachforjustifiablereasons.

ForfurtherinformationaboutMPAC’srole,pleasevisitmpac.ca.

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METHODOLOGY GUIDE- VALUING SHOPPING CENTRES IN …