Court of Appeal confirms VCAT decision in Southern Cross case
The courts have again confirmed the use of the direct comparison approach is often the most reliable method of valuing what a hypothetical and willing (but not anxious) vendor and purchaser would agree to. This traditional method has been preferred, even where there are no available sales evidence of a closely comparable property.
This was the case for various amended land tax assessments issued by the Commissioner of State Revenue (Vic) for part of the land located at, and known as, Southern Cross Station. Notably, the rail lines, retail areas, mezzanine carpark and undeveloped areas of the larger Southern Cross site, were not included in the valuation. The relevant assessments were based on site values in excess of $13 million, following substantial redevelopment of the site from 2012 to 2016. The applicants (the landowner and occupant) contended that the land had no value at all, as the station facilities were operating at a loss and could not be used for any other purpose.
Ultimately, the relevant assessments were reduced by the Victorian Civil and Administrative Tribunal by almost 50 per cent after adopting the direct comparison method and that decision was recently affirmed in by the Court of Appeal in September 2017.
The critical question for VCAT was how the site value of such land was to be determined in circumstances where:
- use and development of the Southern Cross site is strictly governed by the incorporated document, Spencer Street Station redevelopment, August 2007 (part of the Melbourne Planning Scheme), which limits use and development of the land to a major public facility
- there was no directly comparable sale to the Southern Cross site.
Relevant statutory provisions
Section 5A(3) of the Valuation of Land Act 1960 directs how the valuation of the site value of the land is to be undertaken. Without limiting the generality of the foregoing provisions of this section when determining such value, the following, where relevant, will be taken into account:
- the use to which such land is being put at the relevant time, the highest and best use to which the land might reasonably be expected to be put at the relevant time and to an potential use
- the effect of any Act, regulation, local law, planning scheme or other such instrument which affects or may affect the use or development of such land
- the shape, size, topography, soil quality, situation and aspect of the land
- the situation of the land in respect of natural resources, transport and other facilities and amenities
- the condition and suitability of any improvements on the land
- the actual or potential capacity of the land to yield a monetary return.
Sections 5A(3)(a), (b) and (f) were relevant considerations in this proceeding.
VCAT application of relevant statutory provisions
The current use of the site comprises open space, train platforms, office pods, ticketing windows, retail and car parking areas. For the purposes of s 5A(3)(a) of the Act, there was no dispute that the best use of the Southern Cross site was its existing use as an ‘inter-modal transport interchange facility’.
The Southern Cross site is part of a 30 year private-public partnership agreement, whereby the occupant was and is obliged to ‘design, construct, commission, lease, operate and maintain’ the transport facility in accordance with prescribed performance indicators. Performance of the occupant’s obligations must meet specified standards for the landowner to make certain payments toward construction costs and continued operation of the facility. A nominal rental of $10 per annum is payable under the agreement by the occupant. Coupled with the incorporated documents in the Melbourne Planning Scheme, this agreement between the applicant entities had the effect of restricting the use and development of the land for a specific public purpose (s 5A(3)(b)).
The applicants appeared to rely entirely upon s 5A(3)(f) in isolation. Their contentions were succinctly summarised by the Court of Appeal as follows:
“The applicants’ central contention was a simple one, namely, that the land could not be put to a commercially viable use and, hence, had a nil value. The steps in the argument were as follows:
- the effect of the planning controls, and of the contractual obligations on the applicants, was that the land could only be used as a transport interchange facility
- on the evidence, the facility had an operating loss of $5.5 million per annum
- no commercial entity would have any interest in purchasing the land on which it was constrained to conduct a loss-making enterprise
- accordingly, the site had no value at all.”
The applicants’ arguments were rejected for two main reasons:
- sub-paragraph (f) of s 5A(3) of the Act 'could not, alone, override all other relevant considerations'
- failing to consider the well-known Spencer and Raja principles, which required an assessment of what the State, as the most likely hypothetical purchaser, would pay to acquire the Southern Cross site, which was required for a critical public purpose, rather than not own it. It was considered absurd to suggest (as the applicants did) that a landowner would give the site away to the State for no value at all.
Ultimately, the case was decided upon the rationale that the 'the pivotal importance of the station site to the State and the people of Victoria, who use the station daily, is a very strong imperative for the State of Victoria to purchase the station site at the hypothetical Spencer auction' or otherwise, to compulsorily acquire it for a public purpose.
The applicants relied on two valuation methodologies: the hypothetical development approach and capitalisation of income. Both were presented at VCAT as appropriate in the circumstance where no directly comparable sale was available.
The hypothetical development approach presented the uneconomical cost to develop the land, which is strictly limited to the use and development for a public purpose. It was accepted that the site only had one likely, hypothetical purchaser, the State of Victoria. It was also argued that as no other buyer would seek to purchase the site to operate a public facility at a loss, there is no general market for the land and the Southern Cross site had no value.
This argument was rejected by the President of VCAT, His Honour Garde J, based on well-established principles set out by the Privy Council in Raja Vyricherla Narayana Gajapatiraju v Revenue Divisional Officers Vizagapatam, where it is wrong to assume:
- the land has no market value because it is uneconomical to develop, or
- the State would pay nothing for land required by it for a vital public use.
His Honour also felt the process of examining a hypothetical development required too many assumptions and estimates, which produced varying results and preferred the use of comparable sales.
The capitalisation of income from the operation of the Southern Cross site was suggested to result in a nominal valuation for the site. This argument was based on the commercial leveraging of the site by the State as landowner to the occupant as lessee, which produced a capital value of little significance. This approach was also criticised by His Honour, for ignoring what the State would be prepared to pay for the site and indeed did pay for the use and development of the site needed for a major public transport facility. Under the terms of the agreement between the applicant entities, the State has paid, and continues to pay, significant sums of money towards the construction costs and for the continued operation of the site as an important public facility. The amounts paid far exceed the what was suggested by the applicants to be the capital value of the Southern Cross site.
Ultimately, VCAT preferred and applied the direct comparison approach by having regard to both sales evidence of:
- land for development sites within the Melbourne CBD (considered an upper cap on rates that might be considered for the Southern Cross site)
- sites on the fringe of the Melbourne CBD (considered inferior to the Southern Cross site).
Using the sales evidence, appropriate adjustments were made to arrive at a value for the larger Southern Cross site. Estimated annual values for the subject site were then deduced as a proportion of the larger Southern Cross site to arrive at site values substantially less than what was set out in the amended assessments by the Commissioner of State Revenue.
When determining market value of a site used for public purposes, valuers must not look at the commercial viability of the facility operating on the land, otherwise it would likely produce an absurd result of little or no value.
The questions to ask are those set out in s 5A but also, more specifically:
- What is the potential of the site for use as a public facility worth, based upon available sales evidence?
- What would a hypothetical purchaser be prepared to pay for the site, rather than acquire an alternative site for the public facility?
Essentially, the value of land required for a public purpose is not in its commercial potential, but the potential of its use as an important public facility.
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