Caterer Says Commercial Property Cap Rates Are Like A Dish Served Cold
By Robert Thomas
Please Note the story has EXPLAINERS that provide more detail into the issue.
A perceived shift in the commercial property tax burden - from large businesses to small businesses - had a local caterer serving up some delectable pictorial morsels to illustrate what he saw as commercial property inequity favouring the big guys to Council.
It was also a night of cold soup being poured on the way the Saskatchewan Assessment Management Agency (SAMA), the City’s contracted assessment agency, has chosen to assess the values of business and commercial properties in Moose Jaw.
“As a small business it is a hopeless situation almost and once you start losing small businesses they are gone,” Bernie Dombowsky co-owner of Charlotte’s Catering told Council.
Bernie Dombowsky addresses Council on Monday afternoon - MJ Independent photo
Dombowsky was speaking to Council about the 2021 reassessment and how SAMA had decided to move from one Cap Rate (Capitalization Rate) in previous assessments to 17 Cap Rates when determining the value of commercial properties in Moose Jaw.
The Capitalization Rate (or Cap Rate) is the Rate of Return a commercial property returns and is used by investors to help determine the value of a property. (For a more detailed explanation see the EXPLAINER below).
Story continues after Explainer
EXPLAINER - So What Is Cap Rate????
Simply put Cap Rate is an abbreviation for the term Capitalization Rate.
Capitalization Rate is used to determine the Rate Of Return on a commercial/business property.
Rate of Return is the net gain or loss that an investment earns over a specified period of time based as a percentage figure.
When it comes to business or commercial properties, the percentage rate (usually in the number of years) is expressed in how long a business/commercial property will take to repay the initial investment.
The Rate Of Return is based upon the Gross Income minus the Gross Expenses (all expenses) to equal Net Income the property will generate.
Gross Income - Gross Expenses = Net Income
(Net Income / Property Cost) x 100 = Rate Of Return (Capitalization Rate)
For example if an investor buys a building for $1,000,000 with an annual net income of $100,000 the property would have a Cap Rate of ten (10) percent. It would take ten years for the $1,000,000 investment to be paid back.
(100,000 / 1,000,000) x 100 = 10
The higher the Rate Of Return the more valuable the building is for investors in business/commercial properties.
Investors use the Cap Rate to make decisions on whether or not they are willing to purchase a property.
The Cap Rate is used by assessment agencies like SAMA in a formula with other factors to help determine a commercial property’s assessed value for property tax reasons. It is not used to determine the assessed value for residential properties.
Dombowsky told Council he saw it as unfair how SAMA had in the 2021 reassessment instituted a different model using 17 commercial property classifications and corresponding Cap Rates instead of the single Cap Rate for all commercial properties used in the previous reassessment. The new model used by SAMA to determine commercial property taxes was unfair to a variety of businesses he said.
Regina has only one Cap Rate in its commercial property assessment process that is 6.9 percent.
“In the previous four year cycle there was one Cap Rate for all (commercial) properties for the city of 6.61 percent. For this cycle that we are in right now has a different Cap Rate and model which resulted in a multiple stratification,” he said, adding “there are 17 classifications in this new model and you’ll see small businesses of every type have lower Cap Rates than larger businesses. The lower the Cap (Rate) the higher your assessment will be.”
Lower Cap Rates in SAMA’s model mean a higher commercial property assessment and from that number higher property taxes.
He pointed out the category that included banks, funeral homes, high rise offices and medical offices have a Cap Rate of 9.3 percent meaning the multiplier on his business is 3.09 because it is in the general retail category is more than three times that of businesses in the other category.
Dombowsky pointed out two businesses on High Street West - the Chow and McLeod Law Office at 48 High Street West and a vacant retail space at 39 High Street West - whose assessments because of the Cap Rate classifications have almost identical assessments.
The 50 foot wide law office (the former Bank of Montreal building) has seen its property taxes go down by $7,000 from $17,354 in 2020 (under the previous assessment) to $10,354 in 2021 (under the new reassessment). Whereas the presently vacant 27 foot retail space has seen its property taxes go up by $3,701 from $7,357 in 2020 (under the previous assessment) to $11,058 in 2021 (under the new reassessment). See Graphic Below.
Two High Street West properties are compared as part of Bernie Dombowsky’s Presentation to Council - source Bernie Dombowsky
“When property taxes are raised the rent has to be raised and you lose tenants. And when you lose tenants on a block the traffic flow to other businesses diminishes and eventually you get a ghost block,” Dombowsky said.
He said the system was not fair if you looked at what the buildings rented for.
“To show the inequity here the total market rent at 39 High Street West is $16,800 the market rent for the law office across the street has a $62,100 market rent. That is almost four times the market rent for the law office than the market rent for that small retailer across the street.”
The reason for the property tax disparity was the fact the law office has a 9.3 percent Cap Rate and the small retailer having a 3.09 Cap Rate.
“High property tax results in higher rents which makes it unsustainable (for tenants and landlords),” he said.
Story continues after Explainer
EXPLAINER - How Does SAMA Determine The Value And Property Taxes Of Commercial Properties???
Briefly put the Saskatchewan Assessment Management Agency or SAMA uses the Cap Rate as part of a formula to determine the value of business/commercial properties.
It is caIled the Income Approach to assessing a business/commercial property’s value for property taxation purposes.
Under the Income Approach the Net Operating Income multiplied by the Cap Rate equals the property’s value.
The formula includes an analysis of commercial property sales in a four year period. Under provincial legislation SAMA must conduct a statistical analysis of commercial property sales figure using actual sales figures.
The 2021 Reassessment used commercial property sales data from 2014 - 2019 in constructing the property tax model.
Other factors which come into play when deciding how much to assess a business/commercial property are the properties age, what is the median value of business/commercial property legitimately sold in the assessment period, the condition of the property and also what the property is going to be used for.
There are other factors that can come into play when making the final determination of a commercial properties assessed value such as rental data and income from hotel rooms rented amongst others.
In Moose Jaw’s case SAMA, who the City has contracted to conduct assessments, has decided to set Cap Rates at varying percentages based upon classes or what the business/commercial property is used for.
In Regina there is just one Cap Rate (where the City of Regina has an internal assessment department) whereas in Moose Jaw there are multiple Cap Rates depending on the business/commercial property’s use and size if it is a larger building.
Due to the fact that the Cap Rates differ in Moose Jaw based upon industry and use a business/commercial property with an assessment of $500,000 in one class can have a different property tax than a business/commercial property with the same assessment but be in a different use class.
The use of multiple Cap Rates is allowed under the applicable Act and the Saskatchewan Court of Appeal has stated the decision to have one or multiple building classes is at the discretion of the Assessment Agency and must be respected by the Board Of Revision.
Dombowsky pointed out another property showing what he saw as a disparity between a Main Street retailer and a 9th Avenue NW dental office.
“Just note the market rent of both. A $13,000 market rent for Main Street retailer and over $50,000 for the other property (dental office). Yet the little retailer is paying more tax than the dental clinic.”
Graphic used to show a Downtown retailer’s tax increase under the 2021 versus the tax decrease for a 9th Avenue NW dental office - Bernie Dombowsky graphic
Dombowsky compared his property, Charlotte’s Catering, to Sun Life Financial (a newer and more modern building) to show what he saw as the inequity of the commercial property tax model used by SAMA to determine commercial property taxes.
“Their taxes were cut in half but yet my taxes increased by 61 percent,” he said. “I am paying just less, 80 bucks or something, than a head office, you know a beautiful mansion on Stadacona Street (West), (the Sun Life Financial office in Moose Jaw),” he said.
“It just shows you the injustice that has been created by SAMA’s new model that stratifies the Cap Rate. Basically what happens is the small retailer, the small restaurants, small anything is now subsidizing the property tax of the banks, the law offices, the medical clinics, the funeral homes, the veterinary clinic ”
Dombowsky said he is at the present time looking at selling his commercial property in Moose Jaw but not his business. He told Council he was keeping the business but now concentrating on a commercial kitchen based in Regina to run his business out of.
“A lot of people have been asking what is going on? Are you going out of business? No we are not going out of business. No we are not selling the business. We are just looking to sell the building…it is just the rise in property tax is just completely wrong…you will see on the next few pages a kitchen that is available to us in Regina,” he said.
The handout to Council included the statement “Now our primary focus is to build our business in Regina.”
Dombowsky said he had successfully appealed his taxes to the local Board Of Revision (BOR) only to have SAMA appeal the decision in his favour to Saskatchewan Municipal Board saying the BOR had errored in their decision in his favour.
“The burden of proof is on the property owner to prove that…as a small business it is a hopeless situation. Once you start losing small businesses they are gone. Once you start losing small retailers on Main Street..once you lost them they are gone and it is hard to get someone to replace and then you get a ghost street.”
COUNCIL’S REACTION
After his presentation Dombowsky received Council’s appreciation for making what he saw as problems with Moose Jaw’s present 2021 assessment scheme more explainable through his photographs and commercial property taxation comparisons.
Councillor Dawn Luhning said she had already spoken to Dombowsky as well as a couple of other commercial property owners. Councillor Luhning is the City’s rep on the local SAMA board as well as sits as the Saaskatchewan Urban Municipalities Association’s (SUMA) representative on SAMA’s board.
“I also had a conversation with SAMA last week because I as a board member of SAMA want to get a better understanding of the Cap Rate and how they are implemented in the manual. As a board member we don’t necessarily get into the nitty gritty of these Cap Rates,” Councillor Luhning said.
“Each community seems to be a little bit different so I am doing a little bit of homework so I can get back to Mr Dombowsky and also share with my colleagues on Council some of the things I can find out,” she said.
“We all know it is a complicated system but it looks like there are things that need to be fixed or adjusted.”
Story continues after Explainer
EXPLAINER - Business/Commercial Property Sales Values Where Do They Come From???
The business/commercial property sales values are accessible by SAMA whenever that type of property has been sold during a specified four year period.
Under provincial legislation SAMA must come up with a valuation using a statistical evaluation.
SAMA collects the sales data and then analyzes the figures removing any sale which may be abnormal such as a price that came as part of a family feud or a seller under severe duress.
The final data set and valuation comes from a median or middle value and not an average of the prices paid for business/commercial properties during the four year period.
The sales values collected over the four year period that is part of a property tax reassessment are never used twice but at each reassessment SAMA starts with a new data set.
The most recent reassessment was in 2021 where the data set used was business/commercial property sales for the years 2015 - 2019 inclusive.
With the data set being from four years prior to the COVID - 19 pandemic critics of the assessment point out they do not contain real world data about what is going on at the time property taxes are paid.
For example some industries did well pre-pandemic but during the COVID - 19 pandemic due to the health measures beyond their control suffered at a greater amount than other industries did and the actual value of their business/commercial property at the time taxes are due do not reflect the property’s real time value.
Industries such as catering suffered massively as events - both big and small - were cancelled due to the COVID - 19 restrictions as they could not operate and generate funds.
Some critics point out the system could be made “fairer” by splitting the reassessments by not throwing the data out every four years and starting from scratch but rather every two years do updates.
On the other side of the issue the argument is that over time the assessed values of properties and subsequently property taxes will average themselves out. The expected reduced property values will come into play at the next reassessment in 2025.
Councillor Heather Eby said the photos and the property taxation information attached to it made it much easier to better understand the Cap Rate implementation and its effect on commercial property taxation.
“I will be honest the Cap Rate is over my head. I don’t understand how they do all of that. We have had SAMA present to us and I still cannot understand it all. But when I can understand none of them make any sense to me,” Councillor Eby said.
She said the two businesses Dombowsky highlighted on High Street West just across from each other that the assessed values saying as a non-real estate person “none of that doesn’t even make sense to me.”
“I have known for awhile this system is broken. And I feel - I have heard SAMA’s presentation - I feel a part that is missing is common sense.
I don’t understand how they how they can put these assessed values out and it doesn’t make sense.”
Councillor Crystal Froese said she agreed that the visuals presented were “really, really tells the story on how Cap Rates are affecting our (business property owners) and it is a real shame that you as such a long standing business person here and well love business that supports so many organizations..the Cap Rates are controversial and it is a real shame small businesses cannot stand up under these drastic swings in assessment.”
She said businesses were closed during the COVID - 19 pandemic and came back to “an entirely different” system of Cap Rates.
“Something definitely has to be addressed here,” Councillor Froese said.
Mayor Clive Tolley, who served on the City’s Board Of Revision before being elected as mayor, said that the presentation demonstrated there were problems in how commercial properties are taxed.
“You have shown there clearly is some problems. And our Administration is taking the things you have shown to us we are taking it seriously. And looking at the information you provided and our meeting with SAMA and hopefully there will be some remedies in the future. There will be some corrections made and things improve,” Mayor Tolley said.
The Mayor said Dombowsky’s hard work and dedication had “done a great service to the citizens of Moose Jaw.”