A Vancouver property assessment not worth the paper it’s printed on?.

Tuesday, December 18, 2012


Last week ushered in Vancouver’s first entry in the -50% below assessed value club.
And while it technically falls just short of the -50% mark (it’s currently listed at -47% below assessed value) you can be sure it will solidly join the club before long… with hundreds of other units quickly following suit.
Believe it or not, the property is located just to the west of the Olympic Village in False Creek.
Allow me to introduce you to #206-1477 Fountain Way:
This 2 bedroom, 2 bathroom condo which is 1,377 square feet in size is currently assessed at $463,000.
Current asking price? $250,000 or -47% below assessed value.
As with all our entries in the -50% club, this property has ‘issues’.
#206-1477 Fountain Way is a leasehold property.  
And the lease is owned by the City of Vancouver.
In the mid 1970s, housing was constructed along False Creek and leased for 60-year terms. The idea was to rehabilitate what was then contaminated industrial land by utilizing a combination of leased land and co-op housing programs to provide a mix of one-third social, one-third mid-market and one-third full market housing.
Thus was born the South West False Creek community plan. Cars were discouraged, transit was provided and Vancouver City Hall trumpeted how 5,000 residents built a strong, successful, sustainable community across from the downtown core.
By leasing the land, rather than selling it, the city boasted it had achieved affordable housing and retained the land value in the city’s Property Endowment Fund.
And by using densities that were considered high in their day — there isn’t a single family home in the entire area — the city-driven project sparked all the massive changes we now see around the Creek.

In return Condo residents on leased land paid monthly charges to the city that could be raised from time to time to market levels. Residents could also pre-pay a fixed amount for the outstanding term of the lease.

Fixed annual rents were set for the first 30 years of the leases, and increases were possible on the 30th, 40th, and 50th years of the leases. The increases were pre-determined by a formula outlined at the time the leases were signed.
But as the first 30 years came to a close in 2006, and it was time to re-examine the False Creek lease payments, land values in Vancouver increased far beyond what had been anticipated when the formulas were originally established. 
The City of Vancouver proposed raising lease fees to market levels.
But this was 2006, soon after Millennium had paid top dollar for the Olympic Village land nearby.  

Market levels’ were about to be massively distorted by the highest amount ever paid for land in the city to that time.
The 5,000 residents of the S.W. False Creek community plan – those who had  “built a strong, successful, sustainable community” – were about to suffered massive collateral damage from the Olympic Village land purchase.   In 2006 the newspaper, 24 hours, wrote:
“Richard Cooper woke yesterday to find his payments had jumped from $102 monthly to $785.
“I got up this morning and there was a bulletin,” Cooper told 24 hours.
Condo owner George Stratis was among the hardest hit. He wasn’t aware of the increase until he was contacted by 24 hours yesterday. “You’ve got to be kidding me! That’s absurd,” Stratis said, when told his payments had jumped by $1,400 a month. “That’s larger than a mortgage.”
Stratis could now owe the city about $20,000 a year. That’s on top of his regular property taxes.”
One owner has seen their payments raise from $121.50 to $2,000 – An incredible SIXTEEN HUNDRED PERCENT increase! The city claims that these lease rates have been stuck at a low value for thirty years and that todays increase reflects the current value of the land. Leasehold value has been a contentious issue between residents of False Creek and the city of Vancouver for years. Some residents claim this former industrial land is contaminated and overvalued by as much as 40-50 per cent.
“They’re simply boldly making the statement saying this land is worth top dollar and we should be getting as much rent for it as if it were clean,” said Renger, a senior city planner in another jurisdiction. “That’s not what market land value is about.”
As Director of Real Estate Services, Michael Flanigan, noted in a June 26, 2007 administrative report to city council, “Some leaseholders simply did not have the financial ability to prepay their leases on top of paying monthly mortgage debt, taxes, strata fees, ground rent, and special assessments.”
Ultimately the City agreed to go arbitration and to allow one more prepayment option. The end result were lease payments on a scale of $900 per month instead of an average increase of $1,200 per month.
And while the initial conflict over the lease increases has been resolved the damage has been done.

In a prophetic comment made earlier this summer Neil Hamilton, Senior Property Advisor with MacDonald Realty, identified the looming catastrophe which was clear to all to see:

“The thing you have to remember is, when you go into a lease, no matter how it’s set up, you have to know how long is left in it. Because once it gets under 10 years, and certainly under 5 years, the property is going to be much less saleable than one that has, say, 35 or 40 left on it. Because, at the end of that lease, nobody knows what’s going to happen to it. It’s like a game of musical chairs—or, in this case, musical buildings. When the music stops playing, you don’t want to be the person left holding the bag.”
Hamilton, however, was overly optimistic. In the summer he predicted residents would have to wait until the lease gets under 10 years (which is 15 years from now) before they are left holding the bag.

But with 25 years left in those leases, it’s already happening.

#206-1477 Fountain Way is assessed at $463,000. 
On November 05, 2010 it was listed for sale for $574,900. On March 28, 2011, after 143 days on the market, it was removed because no one wanted to touch it. It has been re-listed (and removed) four additional times since then – with a lower asking price on each successive listing.
On December 12, 2012 the property was listed for fifth time.  The asking price: $250,000… -47% below it’s so-called assessed value.
In our collapsing housing bubble, leaseholders are now clearly holding that proverbial bag. And it’s happening 15 years before local real estate agents predicted it would occur.
They’re finding out – a little earlier than everyone else – that their 2011/2012 government property assessments aren’t worth the paper their written on.

So there you have it.  2012 is topped off by ending with -50% below assessed value real estate listings  entering the City proper.

Who would have thunk it?

I had heard about this situation several years ago. That area of False Creek was turned into another “social engineering”  experiment. 
Now, don’t get me wrong…..properly structured Co-op housing can be a very good thing. At the end of the day, if a balance is struck with the income levels and subsequent rents, and ends up  revenue neutral overall…aka no NET subsidy…that is a workable solution to affordable housing.
I am not party to the exact details….but there is enough of a broader – based cautionary tale here.
I had read that the False Creek co-ops had been a joke from the start. Apparently, many parties manipulated their stated incomes so as to qualify for this cheap housing and pay a low lease/rent (aka well paid professionals like Doctors, Lawyers, Accountants etc.)
Now this project was built in the 1970’s and probably at a time when they NEVER would have anticipated the dramatic property value increases, hence the 30 + year leases were a guesstimate, but ultimately benefitted those that got in early. Now who is at fault for this ? Probably the Gov’t was well intentioned, and people if given an inch will take a mile. Perhaps we shouldn’t play the blame game, but let this serve as a lesson to learn from.
However, let’s try to keep things simple and in perspective….On a long term basis….. LeaseHold (aka you do NOT own the land the building is located on..it is usually a long term but finite lease) is NOT a good investment. It is usually presented as a cheaper option in a hot market.
It should also be noted that Stratas in BC came into  effect in the mid 1960’s.
Many places like UBC and SFU have multi – family condo units built as leasehold, as do many First Nations Reserves. This simply enriched their coffers, I don’t recall the money trickling down to the lower tuitions.  Again, many people do not think long term. In the False Creek scenario, these units are close to 40 years old, and the City exercised its right after 30 years  to review and charge a fair market rate, or conversely, it would not be fair to the other citizens to, in essence , subsidize, the False Creek leaseholds.
In our collapsing housing bubble, leaseholders are now clearly holding that proverbial bag. And it’s happening 15 years before local real estate agents predicted it would occur.
They’re finding out – a little earlier than everyone else – that their 2011/2012 government property assessments aren’t worth the paper their written on.
At the end of the day..someone is stuck with an asset with the clock ticking. We haven’t even discussed the strong probablity of maintenance, retrofits, restoration  and upkeep. A building 40 years old is quickly depreciating near “Lot value”
Thousands of leaseholds exist..old and new..but the savyy buyer will have lots of selection in the near future, and leasehold will inevitably be at the BOTTOM of the list.
Finally, as one of my overriding themes on this glutted overbuilt Real Estate market..if “leaseholds” as  class of  assessment comparable collapse…the slack will be picked up by other classes of comparables, ie freehold condos, SFH, etc.
Yes..the SHTF…and can hit everyone.
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