Highest and Best Use: Ticking Time Bombs

In Realty Tax by Ricardo McRae

PROBLEM: Highest and Best Use: Ticking Time Bombs – Tenants Property Tax Nightmare

The wording of leases is insufficient to deal with the massive property tax spikes that are occurring in Toronto. Current wording has tenants on the hook for paying for the increased density value of the entire property, rather just the value of their unit.

SCENARIO: The following graph shows the impact of MPAC valuing an income property, a strip retail plaza on Yonge Street, near the Rosedale Subway Station in Toronto.

Its reputed Highest and Best Uses at $16,000,000, shown by the middle bar, was outrageously high in relation to what it was actually worth, which is shown by the bar on the right.

The impact of the application of Highest and Best Use value had a devastating effect on the tenants.See the Toronto Star article titled “Massive property tax hike forces Yonge St. mom-and-pop store out” as a prime example of the impact.

Fair Apportionment of Taxes: The tenants lease was written in the standard proportionate share wording. Consequently, the tenants had to pay for their proportionate share of the additional $10 Million in density value, as well as, the value of their own units.

The assessor arbitrarily valued the site as if it had a density of eight times, for the reassessment year. The value spiked by 530%. We checked with a developer and an urban planner who confirmed the density would maybe get to three times the site area at best. Providing this evidence to MPAC who were very attentive and professional and who acted in a speedy manner, resulted in a rapid reduction down to its Market Value. See the follow up Toronto Star article titled “Mom-and-pop store saved by property tax reduction”.

CONCLUSION: Leasing lawyers and tenant reps should be aware of the apportionment clauses in leases in order to ensure the tenant pays their proportionate share of their store, not the owners’ value of the additional density rights.

Leasing representatives and leasing lawyers should be addressing this in their lease negotiations.

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