Residential Tax Phase-In - 3 Nassau Street (Downtown)

The Strategic Policies and Priorities Committee recommends the adoption of the Recommendation of the Assessment and Tax Policy Task Force, embodied in the following communication (May 3, 1999) from the City Clerk:

Recommendation:

The Assessment and Tax Policy Task Force recommends that By-law No. 966-1998 be amended to include any change in classification between 1997 and 1998, such that the property is reflected as residential/farm for 1998.

Background:

The Assessment and Tax Policy Task Force, on May 3, 1999, had before it a report (April 22, 1999) from the Chief Financial Officer and Treasurer, recommending that Council not approve the request to grant an exemption from the residential phase-in program for 3 Nassau Street as there has been no change in classification of this property between the 1997 and 1998 tax years.

The Task Force also had before it communications (March 18, 1999) from Mr. Alex Spiegel, Context Development Inc., and (March 29, 1999) from Mr. James Julien, Kensington Market Working Group.

The Task Force's recommendations are noted above.

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(Report dated April 22, 1999, addressed to the

Assessment and Tax Policy Task Force from the

Chief Financial Officer and Treasurer, entitled

"Request for Exemption from Phase-in - 3 Nassau Street")

Purpose:

This report provides additional information regarding the request of the owners of 3 Nassau Street that the property be excluded from the provisions of the City's 1998 residential phase-in program.

Financial Implications:

Exclusion of 3 Nassau Street from the residential phase-in will result in an estimated $267,125.00 in taxes foregone in 1998 and $200,342.00 in 1999. The total amount of taxes foregone over the five year phase-in will be $667,806.00.

Recommendation:

It is recommended that Council not approve the request to grant an exemption from the residential phase-in program for 3 Nassau Street as there has been no change in classification of this property between the 1997 and 1998 tax years.

Comments:

At its meeting on April 1, 1999, the Assessment and Tax Policy Task Force had before it communications from McCarthy Tetrault, solicitors for the developers of 3 Nassau Street and Context Development Ltd, the manager of this condominium conversion project. The property owners, citing similarity to the request pertaining to 188 Eglinton Avenue East, are requesting that Council exclude this property from the residential phase-in program as adopted by City Council in July 1998. Copies of the communications are attached for information.

The property in question was purchased from George Brown College in April 1997. Prior to this transfer, the property, being owned by a college, was exempted from property taxes in accordance to paragraph 4 of subsection 3 (1) of the Assessment Act.

The Regional Assessment Office (now the Ontario Property Assessment Corporation or "OPAC") issued a supplemental assessment notice to the new owner changing the exempt tax status to a taxable status effective April 8, 1997. The former City of Toronto, upon receiving this supplemental notification, issued a supplemental tax bill on June 10, 1997, for the amount of $365,298.22 which is the pro-rated amount based on a realty assessment of $1,051,000.00 times the 1997 residential public mill rate of 473.37.

When the supplementary assessment was issued, changing the status of the property from exempt to rateable, the 1997 assessed value became eligible for appeal. As noted in the communication from the property owners' solicitors, the 1997 supplementary assessment reflected the historic assessment returned against the College, which had never been tested because the property was exempt from taxation. As a result, the supplementary assessment (based on 1940 market values) issued against the new owners was extremely high in comparison to the actual purchase price.

The solicitors for the property owner have also stated that, during discussions with OPAC to resolve the appeal, they compromised significantly with respect to the 1997 value because the proposed 1998 value was reasonable. They were also advised by OPAC staff that it was their expectation (without guarantees) that the property would not be subject to phase-in. In 1998, a settlement on the 1997 and 1998 values for the property was reached, and on May 11, 1998, the Assessment Review Board reduced the 1997 realty assessment from $1,051,00.00 to $802,400.00 effective April 8, 1997.

The property at 3 Nassau Street is a condominium conversion project, which will consist of 138 residential units and 8 commercial units. OPAC staff have advised that the property was visited by an assessor on December 22, 1997. At that time, the model suites were completed and marketing of the project was well underway. Construction on the other condominium suites commenced early in 1998. A partial CVA assessment of $3.708 million was placed on the 1998 assessment roll. In December 1998, an amended assessment notice was issued, increasing the assessment of the property to $16.60 million, which represents 75 percent of the full CVA value when the project is complete. It is anticipated that a further increase in assessment will occur during 1999, for taxation in 2000, bringing the total estimated assessment of the property to $22.13 million.

Appendix 1 shows the impact on the taxes for 3 Nassau Street for 1998 through 2003, with phase-in and without phase-in. The total 1998 assessment-related tax decrease that is being phased-in over 5 years is $333,905.00, with an annual tax decrease due to the phase-in of $66,780.00. However, because the property has only been partially assessed, the tax decreases due to the phase-in will be offset by non-phaseable tax increases due to increases in the CVA assessment as the property gradually becomes fully assessed. As noted above, it anticipated this will occur for taxation in the year 2000. At that point, the average taxes per unit with the phase-in will be $2,825.00, compared to $1,910.00 if the property is excluded from the phase-in program.

The similarity between the 3 Nassau Street property and 188 Eglinton Avenue East property is that, in both cases, the conversion of the properties from non-residential to residential uses started in late 1997. However, the major difference in the circumstances for these two property is that the 188 Eglinton property was assessed and taxed as a commercial office building in 1997. The 1997 taxes for 188 Eglinton included commercial realty taxes and business taxes. For 1998, the 188 Eglinton property was classified as residential (after the OPAC correction), resulting in a change in classification between 1997 and 1998. Conversely, the 3 Nassau Street property was assessed and taxed as residential in 1997.

The main issue with respect to 3 Nassau Street is the high 1997 assessment and resulting high tax level from which the CVA decrease is being phased-in. In this regard, it is unfortunate that, when the new owners of the property had the opportunity to appeal the 1997 assessment appeal, a lower 1997 assessment was not negotiated that more accurately reflected a 1940's based market value.

It should be noted that when this project is registered as a condominium (likely in late 1999 or early 2000), OPAC will apportion the CVA assessment among the individual condominium units for taxation in the following year. When the apportionment of assessment occurs, and the condominium units are assessed as separate portions, the phase-in will no longer apply. As a result, it is expected that the owners of the condominiums will have their taxes reduced to the lower CVA level prior to the end of the phase-in program and as early as 2000.

Conclusion:

The use and classification of the property at 3 Nassau Street was changed from that of a college (exempt from taxation) to residential in 1997. The property was also reflected on the returned assessment roll for 1998 taxation as residential. With the property being classified and taxed correctly in the residential class for both 1997 and 1998, it is inappropriate to exclude this property from the phase-in program.

When the project is registered as a condominium and OPAC assesses each of the condominium units separately, the phase-in will no longer apply and the individual condominium owners will benefit from the lower CVA taxes. This could occur as early as 2000. However, due to the phase-in program, the developer will not benefit from the full CVA decrease.

Contact Names:

Lynne Ashton, 397-4203

Bill Wong, 392-9248

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Appendix 1

Impact of Phase-in - 3 Nassau Street

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(Communication dated March 18, 1999, addressed to

Councillor John Adams, Chair, Assessment and Tax

Policy Tax Force from Mr. A. Speigel, Context Development Inc.)

Context Development Ltd. Is the manager of a residential conversion development project in Kensington Market. Our building was previously in non-residential use as George Brown College Kensington Campus. When it became surplus to the college's needs, we acquired it for conversion to residential use. We received community and City support for this project in accordance with the Kensington Market Action Plan.

For assessment purposes, the property became taxable for the first time in 1997, and paid taxes at the commercial rate in that year. Assessment staff re-classified it as residential in 1998. Our tax bills indicate that the resulting tax decrease is being phased in over five years.

Almost identical circumstances arose previously in the case of a property at 188 Eglinton Avenue East. Late last year, Council excluded that property from the phase-in program. The only apparent difference between the two properties is that our property was correctly classified as residential on the assessment roll for taxation in 1998, whereas the Eglinton property was initially (and incorrectly) classified as commercial on that roll (later corrected to residential).

The City Treasurer's report on the Eglinton property (a copy of which is appended for reference) persuasively outlines the key issues, making it clear that the intent of the phase-in program was phasing in of assessment-related tax changes, not tax changes due to reclassification. Section 372 (6) of the Municipal Act provides authority to exclude properties from phase-in in circumstances such as re-classification of property under the Assessment Act. Council relied on this provision in excluding the Eglinton property from phase-in.

In her report, the City Treasurer describes the by-law subsequently enacted by Council in these terms:

"The attached draft by-law, if enacted, would exclude (from phase-in) all properties which were re-classified as residential/farm for the 1998 taxation year. This approach would preclude the need for additional by-laws to further preclude (sic) any property which fits the above-mentioned criteria."

(From the context, it is clear that the second use of "preclude" is a typo, with "exclude" having been intended.) As has been noted, our property was re-classified as residential/farm for the 1998 taxation year and thus clearly falls within Council's intended criteria for exclusion form phase-in. Why, then, is it necessary for us to make a site-specific application for exclusion?

Unfortunately, the staff objective as cited above was frustrated by incorporation into the by- law of a requirement that the 1998 classification had to be initially in error. No reason is provided for this requirement in the report, or in the "whereas" recitations of the by-law. The requirement appears to be immaterial.

This 'initial-in-error" requirement makes the enacted by law more site-specific that general - so far as is known, only the Eglinton property complies. As has been emphasized, it is the reclassification from commercial (in 1997) to residential (in 1998) that is material, not whether it was done correctly in the first instance. The Eglinton property's need for a by-law to exclude it from phase-in would have been just as evident (and justified) had the classification error never occurred.

We are requesting the Task Force to provide the same relief that was provided to 188 Eglinton Avenue East. This would be best effected by amending the by-law (enacted by Council at its December 16-17 meeting) to give effect to Council's evident intent, namely to exclude from the phase-in program all properties which were re-classified as residential/farm for the 1998 taxation year, such exclusion to begin with that year (as was done with the Eglinton property) and that the necessary staff reports be made available for consideration at the next scheduled Strategic Policies and Priorities Committee.

If our property is not excluded from phase-in, a gross inequity will arise between our residents (indeed all residents in conversion properties) and those of the Eglinton property. The residents of 188 Eglinton E. will be paying taxes at the 1.26 percent residential tax rate from day one, while the residents Of 3 Nassau Street will pay a phase-in adjustment on top of that rate - initially as much as $3,000.00 per unit annually in additional taxes, and not phasing out completely until the year 2003.

The majority of purchasers at Kensington Market Lofts are first time buyers, dependent on C.M.H.C. Mortgage Insurance. They require and deserve equitable tax treatment in order to fulfill their mortgage responsibilities. Furthermore, placing this additional tax burden on the residents of a conversion project is contrary to the City's publicly stated policy of encouraging the conversion of buildings to residential uses.

We attach for your reference a copy of the City Treasurer's report on the Eglinton property and a letter to the Finance Department by our solicitor, which gives additional background information regarding our situation.

Thank you and your colleagues for consideration of this matter.

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(Communication dated December 11, 1998, addressed to

Mr. R. Ripley, Finance Department from

Mr. P. Sandford, McCarthy Tétrault.)

We are the solicitors for the developers of a condominium conversion project known as Kensington Market Lofts which Is located at 3 Nassau Street. The project is currently under construction. Due to extraordinary circumstances which we believe may be unique, we are making application on behalf of our client to Council for the removal of the property from phase-in created by By-law No. 472-1998 which was enacted by Council pursuant to the powers conferred on it by Bill 16. You will see from the information which follows that the phase-in provisions produce a 1998 tax which is a breathtaking seven-fold increase in what would otherwise be the tax in 1998. As you will appreciate, that unexpected increase imposes a significant and entirely unanticipated burden on the present and future owners of the project.

Our client took title to the property in April, 1997. Previously, the property had been owned by George Brown College. By the time our client acquired the property it had been vacant for a number of years. Shortly thereafter, our client received a Notice of Assessment. Representatives of our client were shocked to learn that the assessed value of the property, which then reflected 1940 market values, was $1,051,000.00 whereas the 1997 purchase price had been $1,500,000.00. The assessment reflected the historic assessment returned against the College which of course had never been tested because the property was exempt and no payments were made in lieu of taxes. We think the history which follows receipt of the Notice of Assessment is important. We will review that his history in some detail.

Our firm was retained to pursue an appeal with respect to the 1997 assessment. Extensive discussions were conducted with representatives of the Regional Assessment Commissioner and a settlement was reached in the spring of 1998. That settlement comprehensively dealt with both the 1997 assessment and the assessed value and classification of the property for 1998. Quite frankly, we compromised significantly in connection with the 1997 value because we thought the proposed 1998 value and classification were reasonable. During the discussions we specifically made inquiries with representatives of the Regional Assessment Commissioner with respect to the possible effect of phase-in By-laws. (At that time, the Minister had announced that legislation would be introduced but Bill 16 was not in fact introduced in the House until May 7, the day our settlement was implemented before the Assessment Review Board.) The provincial assessors quite properly advised our representatives that no guarantees could be given with respect to phase-ins given the fact that the legislation had not been introduced when the negotiations were being concluded and given the additional important fact that City Council had not considered the matter. Nevertheless, we were advised that it was the "expectation" of staff that a reclassified property in the unusual circumstances experienced by 3 Nassau Street would not be subject to a phase-in. We therefore advised our client to significantly compromise its 1997 position on the reasonable expectation that 1998 and future taxes would be determined based on the 1998 assessed value.

You will appreciate our client's consternation when we were advised by City staff that the phase-in By-law will have a significant impact on 3 Nassau Street. Staff advise us that, with out the phase-in, the 1998 taxes would have been $46,710.00 whereas the amount to be billed, once the City computer makes an appropriate adjustment for the agreed-to 1997 assessment reduction, will be $313,210.00 - an increase of 670 percent.

We are advised that the additional tax liability will have significant implications for the people who have purchased units. In 1998, for example, the additional taxes per unit will be substantially more than expected as a result of the application of the phase-in, effectively penalizing the future owners of the residential property because it was a conversion. (This is contrary to City's publicly stated policy of encouraging the conversion of building to residential uses.) We appreciate that the effects of the phase-in are progressively reduced over 5 years but cumulative additional taxes per unit are quite significant.

We note that in the By-law Council specifically addressed the possibility of exempting properties from the phase-in. We understand that a property may be excluded from a phase-in "if there has been a change in use or character of any real property in the residential property class or in its classification under the Assessment Act that makes a phase- in or a continuation of the phase-in in respect of such property inappropriate". We believe that precisely describes the situation faced by our client and by the purchasers of units at 3 Nassau street. After the property was assessed for 1997, and before the 1998 assessment was returned, there was a change in both the use and character of the property at 3 Nassau Street. We ask that Council consider our request that the building be exempt from the phase-in and that the 1998 taxes be based on the 1998 assessed value.

The Strategic Policies and Priorities Committee submits the following communication (April 1, 1999) from the City Clerk:

Recommendation:

The Task Force submits this matter to the Strategic Policies and Priorities Committee without recommendation:

The Task Force reports, for the information of the Strategic Policies and Priorities Committee, having requested the Chief Financial Officer and Treasurer to:

(1)(a)review the situation with respect to 3 Nassau Street and, if the matter can be easily resolved, report to the Strategic Policies and Priorities Committee or directly to Council as necessary, in order that the matter can be dealt with by City Council at its meeting to be held on April 14, 1999; or

(b)if she has concerns with respect to 3 Nassau Street, to forward those concerns to the Task Force at its meeting to be held on May 3, 1999; and

(2)report to the meeting of the Task Force to be held on May 3, 1999 on the general issues respecting the phase-in by-law raised by the situations experienced by the owners of 188 Eglinton Avenue East and 3 Nassau Street, and outlining proposed solutions.

Background:

The Assessment and Tax Policy Task Force, on April 1, 1999, had before it a communication (March18, 1999) from Mr. Alex Siegel requesting that 3 Nassau Street be exempted from the phase-in by-law.

The Task Force also had before it a communication (March 29, 1999) from Mr. James Julien, Kensington Market Working Group.

Mr. Peter Tomlinson, on behalf of the owner of 3 Nassau Street, appeared before the Assessment and Tax Policy Task Force in connection with the foregoing matter.

The Task Force's recommendations are noted above.

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(The Strategic Policies and Priorities Committee reports, for the information of Council, that a copy of the attachments to the communication (April 1, 1999) from the City Clerk, Assessment and Tax Policy Task Force was forwarded to all Members of Council with the May 4, 1999, agenda of the Strategic Policies and Priorities Committee and copies thereof are also on file in the office of the City Clerk.)