Vancouver Commercial Real Estate Podcast

Providing real-time insight into today's commercial real estate industry.

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May 4, 2023
VCREP #95: How Do Property Taxes Work? with Paul Sullivan

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This week, Cory and Melisa invite Paul Sullivan from Ryan ULC, a property tax expert with a background as a real estate appraiser, to unpack some useful and potentially business saving insight as he guides us through the labyrinth of commercial property tax.

What are commercial tax classes? Which areas are taxed the most and how do they work it out? What can happen when you appeal your property tax assessment? And find out what happens when you don’t return those phone calls to BC Assessment.

All of this and more, this is another episode you certainly don’t want to miss out on. Take notes!

Property tax expert Paul Sullivan of Ryan ULC breaks down everything you need to know about BC commercial property taxes. Where are taxes the highest? Who sets the tax rate? And how and when should you appeal your assessment to reduce your tax burden? 

What is Ryan and what do you do there?

Our firm is a group of real estate appraisers with expertise in property tax. A combination of property value and tax class determines tax burdens. We audit people’s assessed values and make recommendations on whether to appeal or not. If we file appeals, we advocate on behalf of our clients to reduce tax burdens to a fair and equitable level.

Your taxes are based upon the value of your property. You can’t appeal your taxes but you can appeal the value of your property to reduce your taxes.

In British Columbia we have nine different classes of property. Each class has a different tax rate. We have to make sure you’re in the correct class so the correct rate is applied.

What are the different property tax classes in BC?

The nine property tax classes in BC are:

  • Class 1 is residential
  • Class 2 is utilities, such as infrastructure, and has a high tax rate
  • Class 3, 4 and 5 are related to industrial uses
  • Class 6 is a catch-all category for retail and office
  • Class 7 is forest
  • Class 8 is exempt for non-profit and recreational use, such as healthcare
  • Class 9 is for farm properties and has a lower tax rate

The use of your property determines what class you fall into. Your value is predicated on market value as of July 1st each year. What class you are in has no impact on the value of your property.

Do you pay property taxes based on highest and best use of the land?

This is an extremely common occurrence. About 40% of our clients are in a situation where the underlying land value is higher than the existing use. Everyone understands that no property is worth less than what the land is valued. When we rezone, there will be future value.

Our community retailers have suffered from this for years – paying a commercial tax rate based on a future residential density value that doesn’t exist yet. We’ve been dealing with this in small business in Vancouver for over two decades.

Can tenants appeal a tax assessment? 

It depends on the landlord/tenant relationship and the negotiations around your lease. You want to be savvy about that.

The province recently introduced Bill 28 which provides tax relief for occupied small business properties in situations where the land value is higher than the existing use. There are 1700 properties in Vancouver that qualified this year of the 15,000 commercial properties. It’s a pilot project so we’re seeing how it works.

If you qualify under Bill 28, you get up to $5 million of the air space free from municipal property tax. Municipal property taxes are about half of your tax bill. This allows municipalities to help taxpayers where they deem necessary. 

Does the province set the property tax rate or does the city?

Let’s break down BC commercial property taxes! Half of your taxes go to the province as general revenue. The province has never done anything about their tax burden on community retail, so let’s park that.

The other half of your commercial property taxes are your municipal share. Your municipal council decides two things:

  1. What the increase in the municipal budget will be
  2. What percent of the total tax burden will be paid by residential properties VS commercial properties 

In 2016, a coalition formed to create a tax rate ratio of 6:1. For every $1 of tax paid by a resident, a business would pay $6. We are now down to 3.7:1, so it has come a long way, but is still an on-going issue.

Business properties still pay more for services than they consume. They pay 45% of the total tax burden and only consume 23% of the services provided.

Is the municipal tax rate an issue in every municipality? 

Yes, we see these issues across the province. Back in 1984, the provincial government passed the power of tax distribution to municipal councils. As councils’ budgets grew, they decided to load up on the commercial class rather than the residential class.

I joined the Business Tax Alliance last year. We advocate for the return of the commercial vote in municipal elections. There’s no accountability to the commercial taxpayer. It’s easy to abuse someone on taxation if they have no vote and there’s no risk. Without accountability, we will have this problem.

If residents had to pay for all the services they consumed, their tax bills would double. There would be more heat on city councils, which is why they prefer to put the tax burden on businesses.

What are the most extremely taxed areas in BC?

There are two reasons why commercial properties are over-taxed. The first is in an area where there are very few commercial properties. Municipalities are spreading the tax load over a small number of properties, which drives up the cost per property. We see that in areas like Victoria or Kelowna where there might be more retirement communities.

The other area reason we see unfair taxation is where there’s scarcity of land. We see that primarily in Vancouver but also in Burnaby. Land values are going up in Burnaby because there’s very little land to develop; it’s the most land-constrained region which wreaks havoc on taxes because they are based on market value.

How does the BC commercial property tax appeal process work?

Properties are assessed using a market value system. Your assessment is published January 1st and you have until January 31st  to file an appeal. You must look at two things to file an appeal: your market value as of July 1st and equity.

For market value you want to ask, “What are properties like mine selling at?” If the comparables support a lower price than what you were assessed at, you want to file an appeal.

For equity you want to ask, “Am I being assessed fairly relative to comparable properties?” If I’m being assessed at $500/square foot but the people across the street are at $400/square foot for no discernable reason, you can file an appeal based on equity. You have the right to the lesser of market value or comparable equity.

Once you file your appeal by January 31st, the review process happens from February 1st to March 15th. During this time, you will make a presentation to a review panel. BC Assessment will bring evidence and defend their assessment. If they made a mistake, you may enter into a negotiation.

On April 1st, decision notices are delivered from the review hearings. If you’re not satisfied with the decision, you have until April 30th to file an appeal to level two, the Property Assessment Appeal Board.

Individuals can represent themselves or hire a property tax agent. I act as a property tax agent and look after major properties. It becomes a sophisticated valuation argument as properties become more complex. But individual homeowners could run their own appeal.

How do you decide which appeals to take on? Why would someone want to engage a property tax agent?

We do an audit report and make recommendations to appeal or not appeal. If you appeal on a property that is in the wrong class or under-valued, you run the risk of BC Assessment increasing your value. So you shouldn’t blindly appeal. That’s where we come in to offer our expertise.

We also take liability for the decision. If you don’t appeal a $300 million property centre and your tenants are asking why their taxes have gone up, you want to have a professional opinion that defends your decision. 

Most tenants pay the property taxes because they are on triple net leases. So as a landlord, you must exercise care and audit your assessments thoroughly.

Can you share some success stories from past appeals?

One of the most interesting scenarios is when a property sells because it mixes together market value and equity. Let’s say a property was assessed for $10 million the year prior but sold for $15 million in the current year. BC Assessment will look at that $15 million and use that as the new assessment. But then that would raise all similar properties to $15 million, not just the one that sold.

We’ve seen several cases like this where we appealed properties that sold, once negotiating $3 million below what a property sold for. BC Assessment can either move the value down on that one property or move everyone up. Moving everyone up isn’t very popular as it causes a big tax change. This is an on-going situation in our marketplace.

A case we’re working through right now is the Musqueam Capital Corp. case out at UBC. They introduced a new tax, the Additional School Tax (AST), that is being applied to development land. That drives up the price of housing.

In this case, we had those taxes entirely removed at the Property Assessment Appeal Board level. The assessor and the Attorney General appealed to the Supreme Court and it was overturned. Just last week, we filed an appeal to the Court of Appeals.

You can’t just roll out billions of dollars in new taxes on real estate and not be challenged. So we have a busy time ahead of us!

If I was a speculator and bought land in downtown Surrey for $9 million anticipating the LRT coming in, but then it changed to a skytrain in a different location and my land value dropped to $6 million, could I appeal my assessment? 

Speculation is not a tangible asset one can assess. Case law says there needs to be a greater than 51% probability of achieving the speculated use. As soon as the land use policies changed and proved the previous use was speculative, you’d go back to your lower value. But you’ll be in a one-year argument for the year when you were speculating but were wrong.

The line in the sand on probability and speculation has gotten blurry because there are so many opportunities for the public and council to stymie projects. It’s very tricky.

If you buy a property and get a call from BC Assessment, do you have to provide them with information? 

You are compelled to answer and provide information under provincial legislation. But many people don’t provide that information and just don’t answer the call. In those cases, BC Assessment will just put your assessment up. And they’ll put it up to the point where you don’t like it and will need to start answering some questions.

But you do want to be careful about what you say to BC Assessment. And as a vendor, you don’t want to say anything at all. BC Assessment likes to go to vendors and purchasers but I think it’s risky when vendors start talking about other businesses. 

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Vancouver Commercial Real Estate Podcast

For all the curious minds interested in commercial real estate investing, grab a coffee and pull up a chair because we have exclusive stories and tips from commercial real estate brokers, investors, developers, economists, urban planners, and everyone in-between. From the successes and failures to the motivations and lessons learned, the Vancouver Commercial Real Estate Podcast is your insight into commercial real estate in Vancouver, Victoria, Kelowna, and beyond.

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This communication is not intended to cause or induce breach of an existing agency agreement. E&OE: All information contained herein is from sources deemed reliable, and have no reason to doubt its accuracy; however, no guarantee or responsibility is assumed thereof, and it shall not form any part of future contracts. Properties are submitted subject to errors and omissions and all information should be carefully verified. All measurements quoted herein are approximate.