Business Property Owners Continue To Question Fairness In Assessment Process
By Robert Thomas
It May Not Be In The Public Eye But The Fight Continues To Boil
“For me it is a question of fairness. It is the principle of the thing,” Bernie Dombowsky co-owner of Charlotte’s Catering told MJ Independent when asked the main motivation why he has fought so hard to have the present commercial property tax assessment system changed.
It is a system that he along with fellow local business property owner Kristy Van Slyck see as not only unfair but also “lacking common sense” in how the commercial property assessment changed in the last reassessment year 2021.
But for the Saskatchewan Assessment Management Agency (SAMA), who the City contracts to perform assessment services, the model is not broken and their review of the concerns prove otherwise.
For SAMA it is just a lone business property owner who is raising the concerns and others in the community are satisfied with the present system.
Dombowsky and Van Slyck sat down last week with MJ Independent and explained the reasons why they have been tirelessly lobbying and trying to effect change to the commercial property tax assessment system (model) SAMA has adopted.
Dombowsky addressed the issue publicly at the September 12th regular Council meeting.
Van Slyck for her part spoke to a Chamber of Commerce meeting where Mayor Clive Tolley let slip changes discussed in-camera by Council were coming with the replacement of the Board of Revision. At the May 24th post Council press scrum due to ‘technical difficulties’ the questions over the apparent breach by MJ Independent did not appear on the City’s video of the presser
Their story is not about a tax revolt with Dombowsky stating he had paid up his property taxes early in order to receive a modest discount. But rather the pair want to see what they call a more fair and equitable commercial property tax regime.
“You have to pay up what they assess you otherwise you are charged penalties and interest. That’s not the issue and the money is not the issue. The issue is the injustice of it,” he said.
In order to understand what the pair call a lack of common sense and fairness in the 2021 reassessment there needs to be a look at the former model and the model SAMA used since 2021, Dombowsky said.
“For my (commercial property tax) category in general. So my category is general retail and you know as well as I do the cap (capitalization) rate use to be 6.61 percent across the board. Every (commercial) property was 6.61 percent,” Dombowsky explained, adding “With this new model general retail has a cap (rate) of 3.09 and the banks, lawyers offices and funeral homes that is a 9.3 (percent cap rate).”
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. The Cap Rate indicates how long it takes a commercial property owner to recoup their investment.
In the 2021 reassessment SAMA went from a single Cap Rate for commercial properties to a multi-category and sub-category model of 17 commercial property classifications each with its own Cap Rate.
Bernie Dombowsky addresses the September 12th Council meeting where he graphically displayed what he believed to be the lack of fairness and inequities in the classifications and assessments of Business/Commercial properties - MJ Independent file photo
- Story Continues After Explainer Below -
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.
For Dombowsky what he sees as a major lack of common sense in SAMA’s model lies in how they have defined the class and sub-class his business property is in.
It, the general retail class, is further divided into two subclasses something Van Slyck says is based upon square footage.
The 2,800 Square Foot Cutoff
Dombowsky points to the division of the general retail class at the 2,800 square foot plateau with buildings under 2,800 square feet having a Cap Rate of 3.09 percent and those over 2,800 square feet having a Cap Rate of 6.2 percent as something that does not make sense and is not equitable.
By expanding his Home Street West shop to just over 2,800 from the present 1,900 square feet and making the building as well as the business more valuable or turning the basement into a suite - also bringing in more money - he said he would save majorly on property taxes.
“There are two categories in general retail. Anything under 2,800 square feet has a cap rate of 3.09. Anything above 2,800 square feet has a cap rate (just over) 6 percent so if I added 900 square feet to my building my property tax would be cut in half. That just tells you just unjust how my evaluation is,” Dombowsky said.
“So if I added a suite into the basement of my kitchen I would be classed as multi-use and my property tax would also be cut in half…that is what I have got to do before December 31st is have an occupiable suite in the basement of my kitchen and then my property tax would be cut substantially.”
Dombowsky said the reduction brought on by his adding a habitable basement suite in his commercial property would put him into a different business property assessment classifications - there are 17 for commercial properties starting in the 2021 reassessment year.
Van Slyck said the way SAMA has broken down the income earning properties into so many classes left SAMA “with not enough (sales) data to clarify” exactly how many of the subclasses assessments were derived.
Asked why SAMA had so many classifications for commercial properties - especially smaller retail properties - she replied “I have no idea.”
Asked further if the higher prices might be due to activity from immigrant investors who are buying large numbers of smaller commercial properties in order to take advantage of the Saskatchewan Immigrant Nominee Program (SINP) they said it wasn’t the case as the sales figures for the 2021 reassessment only used 2015 - 2019 sales figures.
The greater majority of the SINP sales - where investing $250,000 into a Moose Jaw business gets the investor a fast track to a permanent resident visa - happened after the cutoff for the 2021 assessment, they said.
“I think there is only one or two (in that period),” Van Slyck said, adding there was not a lot of properties changing hands “for immigration reasons” but sales during that time period were stable.
“So the numbers shouldn’t be skewed because of that reason,” she said.
For further clarification MJ Independent asked Dombowsky if he were to expand Charlotte’s Catering to more than 2800 square feet and thereby perhaps do more business and make the building more valuable he would in fact pay less property taxes.
“I would only be half. I would only be paying about half of what I am paying right now,” he replied.
“It is based on square footage,” Van Slyck agreed shaking her head at the 2,800 square foot cutoff.
“It is just totally unfair. It’s the feeling that keeps me up at night knowing that I have no hope of having this corrected. It is just a feeling of helplessness and a feeling of being bullied because my property is smaller than the big guys,” Dombowsky said.
The pair said the problem is not just at Dombowsky’s commercial property but throughout Moose Jaw small business properties are experiencing the same impact.
They told how through research they had found one small Main Street retail building that pays 96 percent of the market rent as property taxes.
What that means is for example if the monthly portion of the rent for the small Main Street shop was $1,000 - to pay the landlord for wear and tear, upkeep, mortgage and perhaps a small profit - the monthly tax bill would be $960 on top of the $1,000 making the rent $1,960 a month.
Dumbowsky compared the small Main Street retailer were it takes 96 per cent of the market rent to pay the property taxes whereas the Sun Life Financial building’s property takes only take 16 percent.
“So basically what they are doing is they are hitting the little guy...when you look at the very end results the people that were harmed the most in the COVID lockdown are the people who were targeted for higher assessments.”
Dombowsky pointed out what he saw as some of the inequities in the commercial property assessment process where smaller commercial properties have higher assessments and a lesser ability than other commercial properties to generate income but suffered massively due to the COVID - 19 pandemic restrictions.
“M and M Hair Salon is assessed higher than Aspen Dental Clinic. There is a retailer on Main Street she is assessed much. much higher than the Sun Life Financial building over on Ominica (Street West). So Sun Life’s property taxes was cut in half (with the 2021 reassessment) Rings and Things was doubled.”
Strip Mall Dilemna
While free standing smaller under 2800 square feet retailers are being hit hard with their assessments the same does not hold true when it comes to strip malls if they are over the 2,800 square foot threshold.
“They have a different cap rate,” Van Slyck said. A cap rate which means property taxes are lower than smaller - under 2,800 square feet - retail properties on a square footage basis.
“They could hold a whole variety of retailers in it and because their square footage is over 2,800 square feet the business’s property taxes are lower (than a standalone shop under 2,800 square feet),” Dombowsky said, adding “property tax wise they are in a better place.”
Selling and moving into a strip mall might seem like a logical solution but at the same time finding a buyer is not easy, he said because of the property tax issue.
“The problem with having a small property is it has a death wish on it because when a person is considering buying it, the building, they look at the property taxes and if the property taxes are so sky high it makes it not a viable building to buy,” Dombowsky said.
Subdivide And Upgrade With No Corresponding Large Tax Increase
The same holds true for Van Slyck and one of the commercial properties she owns that once subdivided and part of the property sold - the sold side was upgraded at the cost of millions - the resulting new tax bill is for her hard to understand.
She pointed to the former Thunder Creek School Division office on Thatcher Drive East her company purchased in 2017 and what happened afterwards when it came to property taxes and how for her it does not make sense.
“We purchased it in 2017 for $550,000 and when I get my reassessment it is $990,000 and they justify it with time adjustments et cetera,” she said this after the property was subdivided and the office portion sold to be used as a medical clinic.
“Per square foot they are paying two-thirds of what I pay. Their assessment is at $1.2 million and I am almost at $1 million and I have 6,000 square feet and they have 12,000 square feet.”
The medical clinic additionally did major renovations with a building permit in the $2 million range for the office space while she owns the bus storage facilities.
“All of that took part in that time period so that is a very good example because they didn’t change.”
The medical office’s Cap Rate is 8.3 percent while the former bus barns is at 6.04 percent Cap Rate after an error was corrected and the Cap Rate changed from it previously being just over 5 percent.
“They (SAMA) are using numbers (in their assessments) that they shouldn’t be using.”
Where Is The Justice???
For Dombowsky there seems to be no equity when larger Downtown buildings - well over 2,800 square feet - are assessed lower than a building in much worse condition but less than 2,800 square feet.
He pointed to his building and how the assessment there was similar to the former Grayson Mansion in the eyes of the tax assessors.
“Basically my building is worth $300,000 if I’m really lucky. This building is probably worth $1.8 million or something like that. So the assessments are so far out of line and the City (of Moose Jaw) is losing so much money on lost revenue they were getting all along. The City was getting all of the revenue they were paying all of those years and all of a sudden they receive a 4o percent discount.”
It needs to be noted that traditionally the City has taken 20 percent of the property tax revenue from the commercial/business properties with the funds derived from the assessments in that class only. The amounts are based simply on the assessments assigned in the commercial property class.
Both agree what has happened in the 2021 reassessment is the property taxes collected have simply been redistributed in what they see in an inequitable manner to other commercial properties while many of the larger properties - worth more if sold - saw in many cases major property tax reductions.
“It was more fair when there was one cap rate just because Moose Jaw is pretty stable. There aren’t than many peaks and valleys in our economy like other places. And I would say the prices and the rents are fairly stable especially in a four year period,” Van Slyck said.
“So they didn’t need to break it down into so many classes. It shouldn’t be that many different ones. I don’t know why the cutoff should be 2,800 square feet (in retail) I would think it should be more like 5,000 or no cutoff. I don’t understand why they cut it off there,” she said.
Time For SAMA To Go
Dombowsky said the pair had spoken to a lawyer in Regina and there is nothing which can be done to force SAMA to change the model.
“Basically SAMA created a model and SAMA had the small retailers, the small restaurants - restaurants above 3,000 square feet pay less per square foot than restaurants less than 3,000 square feet per square foot - pay more,” he said.
He said SAMA created the model and the model had been approved by someone in the City meaning it is time City Hall or Council do their job and correct the problems.
“As long as they stick within the parameters of that model us small guys have no chance of winning an appeal or so very little because they always go back to the assessor’s professional discretion. And if they stay in what they have written up as a model we as small businesses have to pay that assessed amount even though at times it amounts to 96 percent of the market rent. And that is why it is so unfair,” Dombowsky said.
“We have no hope looking forward as there are two more years in this cycle and we don’t know what is beyond that two years. Are they going to hit us harder.”
Dombowsky said he has given up hope of SAMA changing the business property tax model to be more equitable to all business property owners without a major correction from the City and Council doing something more concrete to make the needed changes.
“I clearly prove the inequities of it but they win because they created a model that supposedly someone (in the City) approved of but the model is wrong. But they are using that model and they have the legal precedent to maintain that model without us ever receiving justification,” he said.
Both said that the only way things are going to change is for the City to do their job and makes the radical changes necessary.
“They (SAMA) have made errors that they won’t correct,” Van Slyck said, adding “I don’t know what motivates them but they put numbers (for property sales) that shouldn’t have been in.”
“The only hope we have is the City steps back into their role as the assessor as we are never going to receive justice. We are never going to receive fairness from SAMA. They crush us at the appeal. It is almost hopeless to be a small business in Moose Jaw. In Moose Jaw the Council and the Administration have to say to themselves do we want to maintain small businesses in Moose Jaw?” Dombowsky said.
“Or do we want an outsider, SAMA, to destroy our small business community?”
The City Responds
Despite the Commercial Property Assessment debate moving out of the public realm after it flared up publicly in mid September the issue has still been boiling behind the scenes.
Council has met in camera with both SAMA and Dombowsky and Van Slyck at separate Executive Committee meetings and the pair continue to ask questions and have spoken to Mayor Clive Tolley on several occasions about the issue.
Dombowsky said getting the problem fixed has been time consuming with it taking away from running his business as he fights for what he sees as justice day and night.
In a written response to an email requesting comment the City said they have been actively involved in addressing the concerns being raised.
MJ Independent relayed to the City the business owner’s calls to replace SAMA and take property assessments in house - as the City has done in the past.
If City were to replace SAMA it is something they could not likely do without paying some sort of penalties as there is a contract until the next assessment for property taxes slated for 2025.
“The City of Moose Jaw has a contract with SAMA through 2025 to handle assessment,” the City wrote in an emailed response.
The City also said they have been addressing the issue for some time.
“We’ve engaged with concerned property owners over the past year on this complex matter, and they’ve detailed to us what they feel are inconsistencies in the assessment of certain buildings,” the City responded.
The City further went on to state they have spoken to SAMA and had the issues raised reviewed.
“We have forwarded those concerns to SAMA and have facilitated dialogue with the property owners and SAMA in hopes of finding resolution. The City takes this matter very seriously and is committed to advocating for fair and consistent assessment on behalf of all property owners in Moose Jaw.”
The need for dialogue between the parties was stressed by Mayor Clive Tolley after Dombowsky made his concerns public at the September 12th Council meeting.
SAMA Says The System Is Fair
Likewise in an email SAMA responded to the criticisms raised about the assessment stating a review showed nothing was wrong with the assessment but if there are errors discovered they will correct them.
Although they do not publicly comment on Dombowsky’s case SAMA says they have reviewed the model when it comes to smaller retailers (under 2,800 square feet) concerns and the model is not flawed.
“SAMA is aware of the concerns of one individual regarding the model for small retail properties in the City of Moose Jaw. While we respect their opinion, this matter was reviewed through the assessment appeal process and the original assessment was determined to be correct,” the email stated.
“In Saskatchewan, assessments have a legislated process for review that begins with a local Board of Revision. If either party to an appeal believes the local board made an error in their decision, they can appeal to the provincial Assessment Appeals Committee,” SAMA wrote in their emailed response, adding “This was done regarding the small retail properties with the committee finding the existing model was accurate. It is important to note that both the local board and provincial board operate independently from SAMA.”
SAMA responded they follow the Province’s legislation when it comes to assessments for commercial properties and will fix any errors found - if it is discovered before a hearing it can be fixed without the sometimes lengthy and expensive appeals procedure.
“Since 2009, assessments for most commercial properties have a requirement to be determined using sales. The sales used are verified to ensure they reflect market value. We make every effort to verify information about the sales prior to developing the model.”
“Sometimes information comes to light through the appeal process, which includes discussions with the property owners prior to any formal hearing. If any information is discovered that might lead to an adjustment in the assessment, legislation allows for an adjustment to be made instead of going through with the formal hearing process,” they replied.
Appeals are reviewed to look for any errors in assessments.
“In addition, SAMA reviews the appeals each year to determine if there is any new information stemming from this process that would require changes to be made in the following year to the assessments,” the email stated.
“ However, we also recognize it is the choice of the City to contract the agency for assessment services or to provide them internally. Regardless of who does the valuations, they must be prepared following the same legislation”
Regarding the calls to replace SAMA with an in-house assessment department they replied it was within the City’s rights to do so but nevertheless who was in charge of Moose Jaw’s property assessments the provincial legislation still had to adhered to.
“The agency has been the contracted assessment service provider for the City of Moose Jaw since 2006. We value our relationship with the City of Moose Jaw. However, we also recognize it is the choice of the City to contract the agency for assessment services or to provide them internally. Regardless of who does the valuations, they must be prepared following the same legislation,” they wrote.
Next Step
At the present time the City of Moose Jaw is attempting to arrange a face to face meeting between the concerned business property owners and SAMA.
In all likelihood the meeting - despite being a major concern to the local smaller retail and restaurant business community - is likely to be held in camera behind closed doors to the public.