



COURT OF APPEAL
        FOR BRITISH COLUMBIA




Citation:



Assessor
                of Area #09  Vancouver v. The Cadillac Fairview Corporation
                Ltd.,









2004 BCCA
            35




Date: 20040123




Docket: CA029200

Between:

Assessor
      of Area #09 - Vancouver

Appellant

(
Appellant
)

And

The Cadillac
      Fairview Corporation Ltd. and
The Four Seasons Hotel

Respondents

(
Respondents
)











Before:



The Honourable
            Madam Justice Southin





The Honourable
            Madam Justice Saunders





The Honourable
            Mr. Justice Thackray









P.W. Klassen
            and J.D. Houston



Counsel for the Appellant





B.T. Gibson,
            Q.C.



Counsel for the Respondent

The Cadillac Fairview Corporation





W.G Allen



Counsel for the Respondent
The Four Seasons Hotel





Place and
            Date of Hearing:



Vancouver, British Columbia





May 26, 2003





Place and
            Date of Judgment:



Vancouver, British Columbia





January 23, 2004









Written
              Reasons by
:





The Honourable
            Madam Justice Saunders





Concurred
              in by:





The Honourable
            Madam Justice Southin
The Honourable Mr. Justice Thackray





Reasons for Judgment of the Honourable Madam Justice
        Saunders:

[1]

This
      appeal concerns the assessment for property tax purposes, by the appellant
      Assessor, of four office buildings in downtown Vancouver, British Columbia,
      that form part of Pacific Centre.  The respondent Cadillac Fairview Corporation
      Ltd. is the manager and a part owner of Pacific Centre.

[2]

The
      order appealed dismissed a stated case without answering the questions
      posed.  The learned chambers judge held that the questions posed were questions
      of fact, not law, and thus not appropriate for answer by the Supreme Court
      of British Columbia under s. 65 of the
Assessment Act
, R.S.B.C.
      1996, c. 20.

[3]

The
      decision of the Assessment Appeal Board challenged in the stated case included
      valuation of tenant improvements in the four office towers.  Extensive
      tenant improvements transform the shell space into usable office quarters.  One
      of the questions in the proceedings before the Assessment Appeal Board
      was whether those tenant improvements should be included in the value of
      the property, and if so, on what basis.  The Assessment Appeal Board held
      that only relatively new tenant improvements add market value to the building,
      and captured the market value of tenant improvements by including the valuation
      of the amortized value of tenant improvement allowances in an analysis
      of a particular lease transaction to determine net effective rent for that
      transaction.  Also in reaching its decision on the actual value of the
      properties, it applied a capitalization rate different from the rates used
      by the experts put forward by the Assessor and Cadillac Fairview, using
      instead the rate employed by the former area assessor whose work was appended
      to the Assessors expert report as supplementary data (the Jones Report).

[4]

On
      this appeal the appellant Assessor raises three issues:

1.    whether
      the chambers judge erred in declining to answer the questions on the basis
      they were questions of fact; and

2.    if the
      answer to question 1 is in the affirmative, whether the Assessment Appeal
      Board erred in failing to attribute a value to all tenant improvements;
      and

3.    whether the Assessment Appeal Board erred in the
      capitalization rate it used to attribute value to the property.

[5]

An
      appeal from a stated case may be brought to this Court on a question of
      law only with leave (s. 65(9) of the
Assessment Act
).  On
      4 April 2002 Mr. Justice Thackray gave leave to appeal on these grounds:

[i]   that the
      chambers judge erred when he found that Questions 1-6 of the Stated Case
      were questions of fact and not questions of law;

[ii]  that the chambers judge erred when he failed to
      answer each of the Questions 1-6 of the Stated Case in the affirmative.

The three issues come within the grounds recited in
      the order granting leave to appeal.

[6]

The
      first issue is whether the chambers judge erred in declining to answer
      any of the six questions posed on the stated case and referred to in the
      order granting leave to appeal.  (Two other questions of the stated case,
      Nos. 7 and 8, are not at issue in this Court).

[7]

The
      six questions still in issue are:

1.    Did the
      Board err in law by failing to include in the actual value of the respondents
      office buildings the value of the tenants interest as well as the landlords
      interest in the subject building?

2.    Did the
      Board err in law when it held, that although tenant improvements have value
      for the tenant so long as the tenant occupies the space, that such value
      is value to the owner, and is therefore not assessable?

3.    Did the
      Board err in law and act upon a view of the facts that could not be reasonably
      entertained when it held that the best way to capture the value of tenant
      improvements, to the extent they do have market value, is to include the
      amortized value of tenant improvement allowances in an analysis of a particular
      lease transaction to determine net effective rent for that transaction?

4.    Did the
      Board err in law and act upon a view of the facts which could not reasonably
      be entertained when it held that only relatively new tenant improvements
      add market value (and therefore actual value) to the building?

5.    Did the
      Board err in law when it held it was establishing equity by using only
      the capitalization rate applied by the Assessor to the income streams for
      similar office buildings in the years in question, when those income streams
      had been determined using a different set of assumptions than those that
      were used in determining the income stream of the subject buildings.

6.    Did the Board err in law when in determining the
      actual value of the subject buildings it adopted a capitalization rate
      determined by using one set of assumptions as to market rents and applied
      that capitalization rate to a market rent determined by using a different
      set of assumptions?

[8]

The
      stated case came before the chambers judge pursuant to s. 65(1) of the
Assessment
      Act
:

65.
(1)  Subject
      to subsection (2), a person affected by a decision of the board on appeal,
      including a local government, the government, the commissioner or an assessor
      acting with the consent of the commissioner, may require the board to refer
      the decision to the Supreme Court for appeal on a question of law alone
      in the form of a stated case.

[9]

It
      is well settled that the words of s. 65(1) mean that the only jurisdiction
      of the Supreme Court of British Columbia on a stated case is on questions
      of law alone:
Crown Forest Industries Ltd. v. Assessor of Area 6
       Courtenay
(1985), Stated Cases, Case 210, [1985] B.C.J. No. 163
      (S.C.).

[10]

The
      Assessor contends before this Court, as before the Supreme Court of British
      Columbia, that the six questions ask questions of law as that notion is
      discussed in jurisprudence.

[11]

The
      Assessor relies upon the reasons for judgment of Madam Justice Southin
      in
Crown Forest Industries Ltd.
, at p. 1191:

Under the British
      Columbia statute, this Court has no power to substitute its opinion on
      questions of fact for those of the Board.

So long as the
      Assessment Appeal Board which must, in deciding appeals to it, apply the
      Act does not:

1.    misinterpret or misapply the section . . .;

2.    misapply any applicable principle of general law . . ., or

3.    act without any evidence or upon a view of the facts which could
      not reasonably be entertained

this Court has no
      power to intervene.

On the third
      proposition, which is fundamental to the appellants case, see: . . .
Edwards
      v. Bairstow
[1956] A.C. 14 (H.L.) at 29:

For it is universally
      conceded that, though it is a pure finding of fact, it may be set aside
      on grounds which have been stated in various ways but are, I think, fairly
      summarized by saying that the court should take the course if it appears
      that the commissioners
have acted without any evidence or upon a view
      of the facts which could not reasonably be entertained
.  [underlining
in
      Crown Forest Industries Ltd
.]

[12]

An
      example of an error in the findings of fact of the assessment appeal tribunal
      is found in
Westcoast Transmission Limited v. Assessor of Area 9
       Vancouver
(1987), Stated Cases, Case 235, [1987] B.C.J. No. 1273
      (S.C.).  There Mr. Justice Cumming adopted the passage above from
Crown
      Forest Industries Ltd.
, and in its application said at p. 1352:

I stated above
      that the concepts used, in developing capitalization rates for application
      to the subject, should be used consistently.  Thus it makes no sense to
      develop a capitalization rate on one set of assumptions about long-term
      vacancy rates, long-term rents, and long-term expenses, and then apply
      that rate to the income of the subject property that is not derived in
      the same way.

The choice of a vacancy rate goes directly into the calculation
      of gross income, from which the appraiser then deducts expenses to arrive
      at an estimate of net income.  All of these factors, for consistency, should
      be used in the same manner as they were used in the study of comparables
      which resulted in the development of the capitalization rate.  To do otherwise
      is to offend appraisal theory, and is likely to produce a mistaken result.

[13]

Likewise
      in
Pacific Logging Company Limited v. The Assessor for the Province
      of British Columbia
(1976), Stated Cases, Case 99, 16 N.R. 515
      (B.C.C.A.) in reasons approved by the Supreme Court of Canada and subsequently
      applied by this Court in
Kelfor Holdings Limited v. Assessment Area
      of Prince George (26)
(1979), Stated Cases, Case 130, [1979] B.C.J.
      No. 880 (C.A.), Mr. Justice McIntyre concluded that certain findings of
      fact were arbitrary and therefore an error in law, saying as to the word
      arbitrary at 492:

When
      I use the word arbitrary I mean  and from the context in which the word
      is used in the case I conclude the assessor meant  a decision made at
      discretion in the absence of specific evidence and based upon opinion or
      preference (see Shorter Oxford English Dictionary).  The resulting assessment
      is then made without regard for the statutory provisions and uncontrolled
      by them.

The authorities
      are clear that an assessment must be made in conformance with the statute
      that provides for it. . . .

They all enunciate the proposition that an assessment made in a
      manner not justified in law cannot stand.  In my view that is what has
      occurred here.  The assessor has assessed upon a basis not authorized in
      the statute, and in the selection of another method which has no legal
      warrant, has acted in an arbitrary manner and created an arbitrary assessment.

[14]

The
      first issue, then, is whether the six questions raise questions which fit
      within the limited scope of court review.

[15]

The
      chambers judge concluded all six questions raised questions beyond his
      review.  The first four questions relate to the valuation of the tenant
      improvements.  The core of the Assessment Appeal Boards decision on the
      tenant improvements issue, reproduced in the reasons for judgment of the
      chambers judge, is:

The Board finds that
      the buildings should be valued on the basis that tenancies have improvements
      in place, but that not all tenant improvements have market value.  Office
      space cannot be occupied without tenant improvements.  Tenant improvements
      clearly have value when they are first constructed, and continue to have
      value to the tenant for whom they were constructed so long as the tenant
      occupies the space.  When office buildings sell, they have tenant
      improvements in place.  The tenant pays for tenant improvements either
      directly or through the rent paid where the landlord provides a tenant
      improvement allowance and amortizes the expense over the term of the lease.  Where
      a tenant allowance is amortized into the rent, that rent becomes part of
      the income stream purchased on the sale of the property.  The evidence
      suggests, however, that tenant improvements have no value in the market
      generally and that a landlord will not receive more rent for already improve
      space.  The Board finds that only relatively new tenant improvements
      add market value to a building.  While they may have value to the
      particular tenant occupying the space, the tenant's interest is more in
      the nature of "value to owner" and has no market value.

At any give time,
      except when a building is brand new or not yet occupied, an office building
      will have office space with new improvements that have market value and
      older improvements which no longer have any market value.  In a perfect
      situation, a lease sample will include new leases where the landlord provides
      an allowance for tenant improvements, and renewals where tenant improvements
      are already in place and no value for them is reflected in the rent.  Market
      rent, therefore, will include a combination of both types of rent.

The Assessor cannot possibly inspect every tenancy every year to determine
      the level of tenant improvements and whether they, in fact, add value in
      each case.  The Board finds that the best way to capture the value
      of tenant improvements, to the extent they do have market value, is to
      include the amortized value of tenant improvement allowances in an analysis
      of a particular lease transaction to determine net effective rent for that
      transaction.  The net effective rent of leases including value for
      tenant improvements and the net effective rent of lease where there is
      no market value to the tenant improvements will, together, lead to a conclusion
      of market rent generally, and will reflect both the landlord's and the
      tenant's interest in the building.

[16]

On
      questions 1-4 the chambers judge held:

[8]   This holding
      is attacked both by the Assessor and Cadillac Fairview, each saying that
      it amounts to an inconsistency which offends the principle articulated
      by Cumming J. in
Westcoast
.  If the improvements have
      a value in the first term, the Assessor says, they must have a value afterwards.  If
      tenant improvements add no value, Cadillac Fairview says, how can they
      add value in the first term?

[9]   I conclude that the Board drew an inference of fact from the evidence
      as to tenant improvements, turnkey leases, shell rents, and so forth, in
      arriving at its conclusion on this issue.  It distinguished between
      situations, rather than treated the data inconsistently. Thus, the questions
      which relate to this issue are not within my appeal jurisdiction.

[17]

On
      questions 5 and 6 the chambers judge held:

[10]  The Board heard
      evidence from the Assessor and from Cadillac Fairview as to capitalization
      rates.  It declined to accept the evidence of the experts put forward
      and instead employed the "Jones Valuation Summary", which was
      in evidence before it.

[11]  The Assessor
      contends that the rates set out in the Jones Valuation Summary are based
      on realities different from those of the respondents.

[12]  That, I conclude, is not a question of law.  It has to do
      with the pertinence of evidence, its weight and applicability.  The
      Board had a range of evidence before it, and chose what it was among that
      evidence on which it should act.  This was not a matter of using inconsistent
      data when there were consistent
and credible
data to hand, it was
      a matter of using the best available evidence.  The determination
      of which evidence is most persuasive is within the prerogative of the Board
      and is a decision of fact.  It does not involve a question of law.  [emphasis
      in original]

[18]

On
      appeal to this Court the Assessor contends that all six questions are questions
      of law in that they ask whether the Boards review of the evidence was
      reasonable, and whether there was evidence before the Board to support
      its conclusions.  And as to the first question concerning tenant improvements,
      the Assessor contends that the Assessment Appeal Board erred in law by
      failing to value all interests in the subject property, including the interests
      of the tenants in their own improvements.  Questions 5 and 6 are said to
      challenge inconsistent premises used in the component parts of the valuation,
      which is an error of law on the authority of
Westcoast Transmission
,
supra
,
Assessor
      of Area 09  Vancouver v. James Lau
(1999), Stated Cases, Case
      423 (B.C.S.C.) and
Lornex Mining Ltd. v. British Columbia (Assessor
      of Area No. 23  Kamloops)
, [1987] B.C.J. No. 2555 (S.C.).

[19]

The
      respondents answer that all six questions challenge findings of fact that
      had a basis of support in the evidence, and that the chambers judge was
      therefore correct.

[20]

It
      appears to me that there has been, in the reasons for judgment of the chambers
      judge, a compression of the jurisdiction issue and the answers to the questions
      posed.  This may originate from the form of question.  For example, as
      to question 1, neither a no nor a yes adequately provides an answer:
      no suggests that the Board failed to include all the interests in its
      valuation (which would be an error of law) and yes affirms that the described
      failure was an error of law.   It is rather like the old question have
      you stopped beating people? It is not unknown that questions framed in
      a stated case may require interpretation because they do not admit of a
      straight yes or no, see for example, the reasons for judgment of Mr.
      Justice Esson in this Courts appeal decision in
Crown Forest Indust.
      Ltd.
(1987), Stated Cases, Case 210, 10 B.C.L.R. (2d) 145.  Nonetheless,
      to the extent the questions pose questions of law, some answer must be
      given.

[21]

On
      those questions that challenge the findings of fact on the basis there
      was no evidence which reasonably could support the conclusion, the questions
      are questions of law as explained by Madam Justice Ryan in
British
      Columbia (Assessor Area 26  Prince George) v. Cal Investments Ltd.
,

[1993]
      B.C.J. No. 93 (S.C.), and an answer must be given.  That is not to say
      that the answer will be in the affirmative, but an answer to the question
      of law must be provided.  Further, those questions which ask outright whether
      there is error of law in the decision (questions 1, 2, 5 and 6) ask a question
      within the Courts jurisdiction and an answer must be given.  And it is
      clear from the authorities cited that a failure to determine the entire
      value of the property, or a decision based on inconsistent premises, to
      which those questions are directed, may amount to an error of law.

[22]

There
      is one other matter.  Question 1 is said to be inconsistent with question
      4.  Those questions ask, again:

1.    Did the
      Board err in law by failing to include in the "actual value" of
      the Respondent's office buildings the value of the tenant's interest as
      well as the landlord's interest in the subject building?

.  .  .  .  .

4.    Did the Board err in law and act upon a view of
      the facts which could not reasonably be entertained when it held that only "relatively
      new tenant improvements" "add market value (and therefore "actual
      value") to the building"?

[23]

I
      would interpret questions 1 and 4 as asking the same question, whether
      there was an evidentiary basis on which the Board could conclude that only
      some, but not all, of the tenant improvements added value to the property
      for the purpose of assessment.  If the answer is yes, there is no error
      of law.  If the answer is no, there is an error of law in the sense described
      by question 4.  If the evidence indisputably established that all tenant
      improvements added value to the building, there is an error as described
      by question 1.

[24]

It
      follows that I consider that all six questions, in some fashion, pose questions
      of law to which answers must be provided.

[25]

I
      turn now to the questions themselves and the scheme of the statute.  The
      task of an assessor under s. 19(2) of the
Assessment Act
is
      to determine the actual value of land and improvements.  Actual value
      is defined in s. 19(1) as the market value of the fee simple interest
      in land and improvements.

[26]

There
      are several approaches to valuation that may be used, each aimed at divining
      the market value of the property.  One method is the income approach.  The
      income approach is based upon the proposition that the market value of
      an income generating property may be determined by finding the income that
      can reasonably be expected to be generated on a continuing basis, and translating
      that income to a capital value by utilizing a capitalization rate.  It
      is one way of asking how much money a person would spend to secure a particular
      level of income.

[27]

In
      general terms, the income divided by the capitalization rate will generate
      the market value.  The market value derived this way will increase with
      either an increase in income or a decrease in the capitalization rate.

[28]

The
      stated case presented by the Assessor challenged two aspects of the valuation
      by the Assessment Appeal Board, the income attributable to the property,
      which the Assessor said was too low, and the capitalization rate, which
      the Assessor said was too high.  Either or both of these points, if successful,
      would generate a higher assessed value and, the Assessor contends, a value
      more equitable to other property owners who share the burden of property
      taxes.

[29]

The
      first four questions are directed at the income level used by the Board.  For
      convenience I repeat them:

1.    Did the
      Board err in law by failing to include in the actual value of the respondents
      office buildings the value of the tenants interest as well as the landlords
      interest in the subject building?

2.    Did the
      Board err in law when it held, that although tenant improvements have value
      for the tenant so long as the tenant occupies the space, that such value
      is value to the owner, and is therefore not assessable?

3.    Did the
      Board err in law and act upon a view of the facts that could not be reasonably
      entertained when it held that the best way to capture the value of tenant
      improvements, to the extent they do have market value, is to include the
      amortized value of tenant improvement allowances in an analysis of a particular
      lease transaction to determine net effective rent for that transaction?

4.    Did the Board err in law and act upon a view of
      the facts which could not reasonably be entertained when it held that only
      relatively new tenant improvements add market value (and therefore actual
      value) to the building?

[30]

One
      of the factors in determining the income level for the property was the
      rent that should be attributed to the tenant improvements, other factors
      being the vacancy rate and the expense allowances.  The imperative to consider
      tenant improvements in determining rent follows from the myriad ways in
      which landlords and tenants arrange their leases.  At one end is a lease
      of fully finished space with a relatively high rent reflecting the landlords
      greater investment.  On the other end is the lease of bare space with a
      low rental rate and a tenant obligation to install tenant improvements
      at tenant expense.  In between are variations.  As noted by the Assessment
      Appeal Board in the passage quoted at para. 15 of these reasons, [t]he
      tenant pays for tenant improvements either directly or through the rent
      paid where the landlord provides a tenant improvement allowance and amortizes
      the expense over the term of the lease.

[31]

The
      Board here found:

.
      . . The Board finds that the best way to capture the value of tenant improvements
      to the extent they do have market value, is to include the amortized value
      of tenant improvement allowances in an analysis of a particular lease transaction
      to determine net effective rent for that transaction.  The net effective
      rent of leases including value for tenant improvements and the net effective
      rent of leases where there is no market value to the tenant improvements
      will, together, lead to a conclusion of market rent generally, and will
      reflect both the landlords and the tenants interest in the building.

[32]

On
      behalf of the Assessor it is said that this passage, in declining to put
      a rental value on tenant improvements that have been fully amortized and
      in making no provision for tenant improvements paid by the tenant, demonstrates
      a failure to value all of the tenant improvements.  It is said this result
      is contrary to the statutory requirements that all improvements be included
      in the actual value assessed and is inconsistent with the Assessment Appeal
      Boards own conclusion that only relatively new tenant improvements add
      market value to a building.

[33]

The
      suggestion is that on an income approach the entire cost of tenant improvements
      is value to the property.  This equation is not absolute in my view.  The
      sole question is the market value of the property, meaning what a purchaser,
      including the present owner, would pay for this property. Here all parties
      adopted an income approach to valuation and the Assessment Appeal Board
      chose to use that approach.  In furtherance of that approach the Board
      was required to determine an amount that could be said to fairly reflect
      the income that the owner could derive from the property, considering a
      wide variety of lease arrangements, vacancy rates and expense allowances.  There
      was no evidence that the hypothesis put by the Assessor, a tenant self-funding
      its tenant improvements, had occurred in these buildings; even the Assessors
      expert report contained no such information.  On the other hand there was
      evidence the landlord had provided tenant improvement allowances and amortized
      the expense over the term of the lease, and some evidence that pre-existing
      tenant improvements were a negative influence on rental income when property
      was re-let, that new tenants had required removal of even relatively new
      improvements.  It was in that evidentiary mix that the Board made its decision.

[34]

The
      Assessor contends that the Boards finding that only relatively new tenant
      improvements add market value to a building and its earlier statement
      that [t]enant improvements . . . continue to have value to the tenant
      for whom they were constructed so long as the tenant occupies the space
      are inconsistent with an attribution of value for only those improvements
      that are evident in the owners amortization schedule.  While those two
      findings clearly would be consistent with the conclusion that all new improvements
      must be included in the assessed value, the question is whether they are
      inconsistent with the result reached by the Board in this case.  I conclude
      they are not.

[35]

The
      two statements referred to by the Assessor are part of a larger paragraph
      that says [t]he evidence suggests . . . that tenant improvements have
      no value in the market generally and that a landlord will not receive more
      rent for already improved space.  In context, it is clear that the Board
      was concerned with the valuation for assessment purposes of all the improvements
      and was alive to the evidence before it that the market value of the property
      in the marketplace would not reflect tenant improvements, in general, although
      the tenant improvements had value to the tenants themselves.  The Board
      considered the market value of those tenant improvements that it found
      had market value, being the relatively new ones, and attributed value through
      the device of amortization.  As there was no evidence that tenant improvements
      had been self-funded, and there was evidence that older tenant improvements
      did not add value to the property, the Boards decision on this point,
      in my view, was soundly based upon the evidence before it.

[36]

The
      Assessor contends that the Board, in declining to attribute value to all
      the tenant improvements, committed the error found in
Re A. Merkur & Sons
      Ltd. and Regional Assessment Commissioner, Region No. 14 et al.
(1997),
      17 O.R. (2d) 339 at 343 (H.C.J.) (Reversed on other grounds: 21 O.R. (2d)
      797 (C.A.):

I
      am of the opinion that where there are two or more interests in land it
      is the land itself that must be assessed and not merely the owners interest
      in the land.  As in the present case, the owner often does not have the
      exclusive occupation of premises because it is held by the tenants.  Even
      if the rent charged by the owner is in line with general market rents,
      there is still an interest to a tenant.  Therefore, it is not just the
      market rent less the expenses of the owner that must be used in calculating
      the market value of the land, but also whatever the interest of the tenant
      is.  In many cases the tenants interest may be subject to certain variable
      adjustments.  It is quite obvious that if only the rent that is received
      by the owner is to be used as the basis of assessment, two buildings identical
      in construction and finishing could be assessed at different valuations.
      I use as an example an office building that is built as a shell and then
      rented by the owner to individual tenants with an obligation upon the tenant
      to finish the interior thereof.  Obviously, the rent received by the owner
      would be less than that of a similar office building which the owner constructs,
      finishes the interior and thereafter rents.  If only rents were considered
      in the two cases, although the buildings are identical, the assessment
      of one would be lower than the assessment of the other, even though in
      both cases a fair market rent was charged to the respective tenant.  Under
      a rental agreement, by merely casting the burden of cost of the repairs
      and finishing and decorating of a building in different directions, the
      assessment would differ although if the properties were being sold as complete
      units, including tenants interest, they should sell at identically the
      same price.  This is the nub of the difference in the arguments raised
      by the assessment commissioner and the owner of the property in the present
      case.  I am of the opinion that it is the total property and not its parts
      that form the basis of assessment.

[37]

This
      passage was applied in this province by Mr. Justice Murray in
Assessor
      of Area 23  Kamloops v. Trelco Enterprises Ltd.
(1991), Stated
      Cases, Case 308 (B.C.S.C.).  In
Trelco
Mr. Justice Murray
      held that the Board erred in failing to consider any value for the property
      over and above the shell rental of the building.

[38]

The
      Assessor also relies upon
Assessment Office v. Office Specialty
,
      [1975] 1 S.C.R. 677, a case of assessment of an industrial building for
      which no purchasers for the building in its existing use could be found,
      but which was suitable for the existing owner.  The Court held that the
      assessor was required to regard the owner as a possible purchaser and to
      consider what he would expend on a building to replace the one being valued.

[39]

The
      three cases,
Merkur
,
Trelco
and
Office
      Supply
, are quite different than that before this Court.
Office
      Supply
is a case discussing a property uniquely suited to the owners
      use.  In the
Trelco
case, it appears that the Assessment
      Appeal Board did not grapple with evidence of the market value of the tenant
      improvements, unlike the case at bar.  Likewise
Merkur
appears
      to be a case in which the Board simply did not address the value of tenant
      improvements.

[40]

In
      contrast to those three cases, the Board in the case at bar expressly considered
      evidence of value of the tenant improvements and reached its decision attributing
      value to some, but not all, on the basis of that evidence.  In many situations
      tenant improvements may enhance market value.  However, the evidence relied
      on by the Board was that, as a general proposition, tenant improvements
      to these buildings did not have this effect.  Based on evidence before
      it the Board made a finding of fact which, being based in evidence, is
      not one with which this Court may interfere.

[41]

It
      follows from this discussion that I do not consider that the Board failed
      to value the entire property as it was made known to it on the evidence.  As
      to question 1, I would answer that the Board did not commit the error of
      failing to value all the lands and improvements.

[42]

Question
      2 in my view does not accurately reflect the decision of the Assessment
      Appeal Board.  The Board said only, in discussing the general absence of
      market value for tenant improvements, the interest [to a particular tenant]
      is more in the nature of value to owner.  In the context of the evidence,
      this was a fair simile and a reasonable conclusion.  In my view the statement
      does not reflect an error of law.  As to question 2, I would answer that
      the Board did not err in law in comparing the tenants interest to value
      to owner.

[43]

Questions
      3 and 4 address the reasonableness of findings of fact.  I have concluded
      that there was an evidentiary foundation to support both the finding that
      only relatively new tenant improvements add market value to the building
      and that the best way to capture the value was to include the amortized
      value of tenant improvement allowances in an analysis of a particular lease
      transaction.  I would answer no to questions 3 and 4.

[44]

I
      turn now to questions 5 and 6.  They relate to the capitalization rate.  For
      convenience I repeat them:

5.    Did the
      Board err in law when it held it was establishing equity by using only
      the capitalization rate applied by the Assessor to the income streams for
      similar office buildings in the years in question, when those income streams
      had been determined using a different set of assumptions than those that
      were used in determining the income stream of the subject buildings.

6.    Did the Board err in law when in determining the
      actual value of the subject buildings it adopted a capitalization rate
      determined by using one set of assumptions as to market rents and applied
      that capitalization rate to a market rent determined by using a different
      set of assumptions?

[45]

The
      Assessment Appeal Board rejected the capitalization rate analyses put forward
      by both the appraiser for the Assessor and the appraiser for the respondents,
      and instead based its conclusion on the capitalization rate found in the
      Jones Report, modified slightly to adjust for the type of income generated
      by this property.  The Board held:

The
      Board has concluded that the capitalization rate analysis of both appraisers
      must be rejected in favour of a capitalization rate in line with those
      rates used by the Assessor for comparable buildings in each year to ensure
      equity.  Given the difficulties the Board has with the capitalization rate
      evidence of both appraisers, the Board finds it would not be fair or consistent
      to apply capitalization rates to the Pacific Centre Buildings that are
      lower than the rates applied to comparable downtown office buildings in
      each assessment year.

[46]

The
      Assessor contends that the capitalization rate determined by the Board
      was not based upon the same assumptions as were used in determining the
      market rent, and relies upon the reasons for judgment of Mr. Justice Cumming
      in
Westcoast Transmission Company Limited
,
supra
,
      at 1348:

I stated above that the
      concepts used, in developing capitalization rates for application to the
      subject, should be used consistently.  Thus it makes no sense to develop
      a capitalization rate on one set of assumptions about long-term vacancy
      rates, long-term rents, and long-term expenses, and then apply that rate
      to the income of the subject property that is not derived in the same way.

The
      choice of a vacancy rate goes directly into the calculation of gross income,
      from which the appraiser then deducts expenses to arrive at an estimate
      of net income.  All of these factors, for consistency, should be used in
      the same manner as they were used in the study of comparables which resulted
      in the development of the capitalization rate.  To do otherwise is to offend
      appraisal theory, and is likely to produce a mistaken result.

[47]

In
      like vein are the reasons for judgment in
Lau
,
supra
,
      at 2675:

.
      . . It is my view, notwithstanding an extremely able argument by Mr. Lau,
      one which would have done most lawyers proud, that it is not consistent
      to apply a capitalization rate determined on one basis, to operating income
      determined on another.  I accept and concede that the capitalization rate
      to be used is a matter for decision by the Board, but it has been demonstrated
      to me, or at least to my satisfaction, that the use of the capitalization
      rate developed by the Assessor, the seven and a half percent rate, to a
      net operating income for the subject property determined in a manner entirely
      different than that used in respect of the comparables by the Assessor
      to develop that rate is an error in principle and therefore an error in
      law, and reviewable.

[48]

Rent,
      vacancy rates and expense allowances interplay with capitalization rates
      to generate the actual value of property.  Here the capitalization rates
      used came from a schedule of rates for other office buildings found in
      the Jones Report.  The Assessor contends that because the method of determining
      market rent did not derive from the parties but flowed from the Boards
      own conclusions, because no party provided evidence of the appropriate
      capitalization rate to apply to those values, and because the economic
      rent in the Jones Report was developed by a different analysis than was
      used here, the capitalization rate for the buildings referred to in that
      report therefore cannot be used here without creating an inequitable result.

[49]

The
      respondents reply that the Board used the only reliable evidence before
      it.  Having rejected the evidence of both appraisers for reasons that are
      not challenged in this Court, the evidence remaining was the Jones Report
      put in evidence as part of the Assessors case.  The respondents say that
      while consistency of determination of market rent, vacancy rate and expense
      allowance influence the selection of capitalization rate, there was no
      disagreement between the parties over either the vacancy rate or expense
      allowance.  The expense allowance they agreed upon was the same as that
      used in the Jones Report.  The vacancy rate they agreed upon, say the respondents,
      was lower than that used in the Jones Report, which would not be a basis
      on which to adjust the capitalization rate to create higher value.  In
      other words, they say the assumptions used in this case would only suggest
      an adjustment to the capitalization rate favourable to the respondents.  They
      contend that use of that rate, potentially unfavourable to them, cannot
      be a basis of complaint by the Assessor who contends for a higher, not
      lower, assessment.

[50]

The
      Assessor also contends that because it was not aware of the basis the Board
      would use for valuing the tenant improvements, the evidence on capitalization
      rates did not address the basis of valuation the Board selected and that
      the Board therefore erred in failing to call for further evidence.  With
      respect, the positions before the Board ranged from attribute no great
      value to tenant improvements as advanced by the respondents to attribute
      significant value as advanced by the Assessor.  It was for the parties
      then to address evidence of the appropriate capitalization rates for those
      possibilities and the possibilities in between.  In my view there was no
      obligation on the part of the Board to call for further evidence.

[51]

I
      repeat that the task of a Court is not to make fresh findings of fact.  The
      issue on these questions is only whether inconsistency is demonstrated
      such that one can say either that the evidence could not reasonably found
      the findings of fact or that an error of law is demonstrated.

[52]

The
      chambers judge said in his reasons for judgment:



[12]  That, I conclude, is not a question of law.  It has to do
      with the pertinence of evidence, its weight and applicability.  The
      Board had a range of evidence before it, and chose what it was among that
      evidence on which it should act.  This was not a matter of using inconsistent
      data when there were consistent
and credible
data to hand, it was
      a matter of using the best available evidence.  The determination
      of which evidence is most persuasive is within the prerogative of the Board
      and is a decision of fact.  It does not involve a question of law.  [emphasis
      in original]

[53]

In
      my view these comments are correct, the Board did not err in basing its
      conclusion on the evidence before it.  The parties presented their evidence
      on the issue of capitalization rate.  The Board found market rent between
      the extremes of the parties and on the evidence available determined the
      applicable capitalization rate.  In doing so it demonstrated an awareness
      of the correct considerations.

[54]

Further,
      it is not apparent to me that any inconsistency, if there be one, is other
      than to the prejudice of the respondents who do not complain of the result.  I
      would not accede to this basis of appeal.

[55]

It
      follows that I would answer no to questions 5 and 6.

Conclusion

[56]

In
      conclusion, I would allow the appeal and answer the questions on the stated
      case as follows:

as to question 1, I would answer
      that the Board did not commit the error of failing to value all the lands
      and improvements;

as to question 2, I would answer
      that the Board did not err in law in comparing the tenants interest to
      value to owner; and

as
      to questions 3, 4, 5 and 6, I would answer no.

The Honourable
      Madam Justice Saunders

I AGREE:

The
      Honourable Madam Justice Southin

I AGREE:

The Honourable Mr. Justice
      Thackray








