Reassessment Update - Apartments

By Henri Dupont, KPMG LLP

The City of Winnipeg Property Assessment Department’s parameters were released recently, providing details and some insight into their chosen methodology for the 2006 reassessment.

The Assessment Department has again applied an Income Approach using direct capitalization, however, they have made a marked departure from past practices. For the 2006 reassessment, the Assessment Department developed a mass appraisal valuation model using multiple regression analysis.

It is our conclusion from this that the Assessment Department has abandoned site-specific stabilization for the 2006 reassessment (2003 reference year).

The Property Assessment Department’s model encompasses several sub-models which they have used to “predict” rents, vacancy loss, parking and laundry income, operating expenses, net operating incomes and capitalization rates.

The categories, or groupings, into which a building will fall have been expanded from the three used in the 2002 reassessment (number of storeys, year built, and neighbourhood) to five for the 2006 reassessment, which include:

Independent Variables
Age (5 categories changed from the previously used 4)
Units (or number of suites, not previously used and has 4 categories)
Storeys (4 categories changed from the previously used 2)
Tenant appeal (a new category that has 5 categories)
Regions (10 categories changed from the previously used 16 neighbourhoods)

Rents
 

Vacancy
North End, West End, West Broadway, Spence: 4.0-5.5%. All others 2%.

Parking and Laundry
 

Operating Expenses (% of effective gross income)
Base Rate 61.66%
Adjustments (3 groups) 14.73 to 8.02%
High / Low 46.93 to 69.68%

Capitalization Rates
Based on 151 sales adjusted to July 1, 2003 and using their models (not site specific Cap Rate):
Base Rate 9.0%
Age +2.5% for apartments built before 1946
Region +1% for North End, West End, West Broadway and Spence.
Range 9.0%-12.5%
Model Evaluation
Mean 0.918
Weighted Mean 0.893
Median 0.890

The above is an Assessment to Sale Ratio (ASR) where the model produces an assessment which is 10% lower than the 151 sales, demonstrating that the model assessed at 90% of value.

Example of Model Application
The assessor’s model has highly subjective input data point with the category of tenant appeal. In that category, they can decrease their estimate of market rents by 20% or increase it by 20%. Assuming parameters closest to the base, the variation of rent for tenant appeal can cause a swing in value as follows:
 

This is a major manipulative tool.
These subjective adjustments were made by the assessor to obtain their Cap Rates and to arrive at an Assessment to Sale Ratio of 90%.

Our Commentary on the 2006 Reassessment:

We are pleased that the Property Assessment Department has recognized proper premiums in Capitalization Rates for inferior locations and older apartments. Extractions of Capitalization Rates are subjective, complex, and time consuming. The Capitalization Rates used by the assessor are not completely unreasonable. The Cap Rates for most apartments built after 1945 will decrease from 9.5% to 9.0% since the last reassessment. However, since we were successful in many challenges to the Cap Rate, the decrease is 0.5% to 1% for that age group.

However, we are disappointed that multi-residential properties are not assessed for 2006 based on their site-specific revenues and expenses.

Some preliminary checks have shown revenue for assessment to be 25% higher than actual, laundry and parking triple the actual, and some higher than actual expenses which tend to offset the higher revenues.
In the past, appeal boards have used, and in fact preferred, site-specific versus market parameters. For this reason, every assessment should be compared to properly stabilized site-specific operations.

Of significant concern is whether the Assessment Department will assess multi-residential properties on the basis of “suppressed” values (at approximately 90% of value) but seek to have Boards apply full “value” on appeal. Such tactics have the potential to result in appealed properties being valued for assessment purposes at 100% on appeal, versus 90% for other apartments not appealed.

For example, if an assessment is 5% higher than a property’s real “value”, it is in actuality over-assessed by 15% because of the assessment suppression in relation to “value”. To maintain equity among multi-residential buildings, every apartment on appeal should then also be assessed at 90% of its “value”.
The Property Assessment Department has provided us with assessment-to-sales ratios (ASR) for houses which shows median ASR’s of 0.9917 to 1.0045, depending on the Region, or virtually at 100% - that is, the assessments tend to fully reflect “value”. Therefore, there appears to be an inequity as between apartments and houses and their respective levels of assessment. The ASR’s for other property types have not yet been made available.

The suppression in multi-residential properties could potentially be in the capitalization rate, the expense ratios, or revenue averages. An undisputed capitalization rate would normally be accepted by both appeal boards, however, in many cases, the assessor has used lower capitalization rates than proscribed by their parameters when proceeding to appeals before the Municipal Board.

Typically, an appeal board would want to analyze both the income and expenses on a site-specific basis, because an error in revenue could be offset by an error in expense. However, it may be possible to argue a case solely on the basis of a single factor (for example, rents) by stating that the suppression is built into the undisputed factors, such as expenses or capitalization rates.
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Any advice herein is based on the facts provided to KPMG at the time of writing and on current assessment law including judicial and administrative interpretation.
Assessment law is subject to continual change, at times on a retroactive basis.
Should the facts provided to KPMG be incorrect or incomplete or should the law or its interpretation change, their advice may be inappropriate.
Neither party (PPMA nor KPMG) is responsible for updating the advice herein or changes in law or interpretation after the date hereof.

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