Don Cayo
Sun
Vancouver City Council may limit its 2010 property tax increases to two per cent, but it looks as if a lot of tax bills will shoot up higher than that.
Much, much higher for some. This is the gloomy analysis of Paul Sullivan of real estate consulting firm Burgess Cawley Sullivan. He co-chairs Vancouver Fair Tax Coalition’s technical committee, and he’s the savviest property tax guru I know.
The culprit, he says, is the policy of “averaging” the last three years on assessed values of land (but not buildings).
This policy is meant to soften the impact of big jumps in land value, which can lead to huge increases in tax bills. And, until now, it generally helped a lot more people than it hurt.
What has changed is the trend in land prices, and with it the whole impact of averaging. In yesteryear’s world, when land values only ever went up, averaging lowered the amount on which tax bills were based. Now, with a lot of land valued at less than last year or the year before, averaging is more apt to drive up the amount on which your bill will be based.
Sullivan has studied a cross-section of the early notices that have just gone out to selected taxpayers who would otherwise be caught off guard by dramatic and unforeseen changes when their official property assessment arrives next month.
What he sees makes him wince. A lot of property owners face tax increases that add up to much more than the change in the assessed value of their land multiplied by whatever tax increase city council adopts.
Among the most vulnerable, Sullivan says, are those whose land is worth a lot more than the buildings on it — the occupants of shabby business blocks in areas that are becoming trendy, or owners of modest old homes on streets where land values have gone through the roof.
All it takes for properties like these to be stung is a downward blip in assessed value.
The shoulder area just west of downtown is one part of Vancouver where assessed land values of business properties haven’t just dropped, they’ve nose-dived. This because, until now, the land value was determined by figuring out what the land would be worth if it were used for a residential tower. That would be much more than if the land is used for business. This year, it’s the actual use–for business–that determines the land value.
I looked closely as actual numbers, taken from pre-assessment notices, for some typical properties in this area. The land values have plummeted by 30 to 40 per cent, yet the value of the buildings on the land has risen sharply. Thus the total value is up four to five per cent.
But the looming tax bill? It will soar 20 to 40 per cent. To grasp why, look at some rounded-off figures that are very close to the numbers for a typical site.
Last year and the year before, land for a typical property was valued at $32 million and the building at $5 million, for a total of $37 million. Now, the land value is $20 million and the building is $19 million, for a total of $39 million.
That’s a $2-million difference, or 5.4 per cent.
But the figure on which the tax bill be based will be much higher. The land will be pegged at the three-year average value, which is $28 million, or 40 per cent more than the real figure. Now add on the new $19-million value of the building, and the figure the tax bill will be based on becomes $47 million, even though the property is worth only $39 million.
Even in the big downtown towers, more than 80 per cent of tenants are small businesses. So both big and small in this area will be clobbered.
The problem is worsened by the way property is valued. The total amount is the market value, but the land-building split is artificial. The land is assessed as if it were vacant, then a value is assigned to the building to bring the total up to the market price. This explains why the value of the building in my example — and many others — will change so sharply this year.
Few homeowners will be hit as hard. But, Sullivan reckons, many will see tax increases significantly in excess of the change in their assessment. This could drop by several percentage points, while their tax bill goes up by several percentage points.
Council could make the whole thing go away by simply voting against the continuation of averaging when the policy comes up for renewal in March. Unfortunately, homeowners won’t see the impact on their bills until July, and assessment numbers that don’t look too bad may well lead to complacency. So there may not be much pressure on councillors to fix the problem before it does real harm.
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