Land and Environment Court of New South Wales CITATION : Commonwealth Custodial Services Ltd v Valuer-General of New South Wales [2006] NSWLEC 775 APPLICANT Commonwealth Custodial Services Ltd PARTIES : RESPONDENT Valuer-General of New South Wales FILE NUMBER(S) : 30098 of 2004; 31271 of 2004; 31079 of 2005 CORAM: Talbot J KEY ISSUES: Valuation of Land :- heritage restricted land - s 14G Valuation of Land Act LEGISLATION CITED: Valuation of Land Act 1916 Australian Postal Commission v Melbourne City Council [2005] VSCA 295; James v Valuer-General (1942) 7 The Valuer 132; CASES CITED: Maurici v Chief Commissioner of State Revenue (2002) 212 CLR 111; Nap Nap Station Pty Ltd v Valuer-General (1989) 72 LGERA 275; Toohey's Ltd v Valuer-General [1925] AC 439; Valuer-General v Fenton Nominees Pty Ltd (1982) 150 CLR 160 DATES OF HEARING: 16/10/2006, 17/10/2006, 18/10/2006 DATE OF JUDGMENT: 12/08/2006 APPLICANT Mr M G Craig QC with Mr A Galasso SC SOLICITORS Mallesons Stephen Jacques LEGAL REPRESENTATIVES: RESPONDENT Mr J A Ayling SC with Mr J B Maston (barrister) SOLICITORS Crown Solicitors Office JUDGMENT: THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES Talbot J 8 December 2006 30098 of 2004 Commonwealth Custodial Services Ltd v Valuer-General 31271 of 2004 Commonwealth Custodial Services Ltd v Valuer-General 31079 of 2005 Commonwealth Custodial Services Ltd v Valuer-General JUDGMENT 1 Talbot J: These three appeals against the Valuer-General's assessment of unimproved land value relate to the same property at the relevant base dates of 1 July 2002, 1 July 2003 and 1 July 2004. The property concerned is Lot 120 in DP 882436 within the City of Sydney, Parish of St James, generally known as 120 Pitt Street, Sydney, also known as the Commonwealth Bank building, or more colloquially the "Moneybox" building, at the corner of Martin Place and Pitt Street. With respect to all three of the base dates, the Valuer-General's determination of unimproved land value was $40,000,000. 2 At each relevant base date the property was zoned City Centre under the Central Sydney Local Environmental Plan 1996 and listed in Schedule 1 to the Central Sydney Heritage Local Environmental Plan 2000. 3 The respondent's expert valuer, Mr Hill, determines a value of $37,525,000 for each of the respective base dates. The applicant says that as a consequence of this evidence, the Valuer-General's assessment of $40,000,000 cannot be supported. In those circumstances, it is said that the applicant has discharged the onus prescribed in s 40(2) of the Valuation of Land Act 1916 ("the Act") and the appeals should be upheld. The respondent's view is that Mr Hill's figure is "within the normally recognised range of valuation judgment applicable to the figure fixed by the Valuer General as the land value". 4 Section 6A of the Act relevantly provides as follows: 6A Land value (1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner's predecessor in title had not been made. (2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that: (a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and (b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used, but nothing in this subsection prevents regard being had, in determining that value, to any other purpose for which the land may be used on the assumption that the improvements, if any, other than land improvements, referred to in subsection (1) had not been made. 5 Section 14G relevantly provides as follows: 14G Valuation subject to heritage restrictions under EPI (1) Land that is heritage restricted on the date by reference to which its land value is to be determined is to have its land value determined on the basis of the following assumptions: (a) that the land may be used only for the purpose, if any, for which it was used when the value is determined, (b) that all improvements on that land when the value is determined may be continued and maintained in order that the use of that land as referred to in paragraph (a) may be continued, (c) that no improvements, other than those referred to in paragraph (b), may be made to or on that land. (2) Land is heritage restricted as at a particular date if the Valuer-General has determined that it would be reasonable to make the assumptions referred to in subsection (1) in respect of the land as at that date because of any provision of a planning instrument concerned with the heritage significance or heritage value of the land or any building, work or other thing on or in the land. 6 There is no dispute that the land is relevantly heritage restricted. There is an issue as to the construction of the above provisions and consequently as to the appropriate valuation method to be applied. The retained valuers and the parties adopt divergent approaches to the valuation. Approach to Valuation 7 Mr Jackson, valuer retained by the applicant, assesses the improved value of the land by capitalising the rent and then deducts the added value of the improvements to derive a "heritage land value" as follows: · $12,430,000 for the 1 July 2002 base date; · $5,170,000 for the 1 July 2003 base date; · $6,270,000 for the 1 July 2004 base date. 8 Mr Craig QC submits on behalf of the applicant that s 14G requires consideration not only of the existence of the improvements on the land but also the assumption that only those improvements may be made to the land. This is said to be the antithesis of the assumption in s 6A, where the valuer is required to assume that the improvements had not been made. As a consequence of this reversal of the assumption, the improvements and the use of them directs the determination of land value. Accordingly, a valuation based on the improvements is the only available method of valuation. That process must therefore begin with the improved value of the land. 9 The use of sales of improved land for comparative purposes was approved in Maurici v Chief Commissioner of State Revenue (2002) 212 CLR 111 to determine land value. However, in Toohey's Ltd v Valuer-General [1925] AC 439 a valuation of land that takes in the improvements and then proceeds by way of subtraction of a sum representing the value of the improvements for the purpose of deducing an unimproved land value was rejected. Mr Craig argues that Toohey's can be distinguished on the basis that it represents the law in the s 6A sense, where the relevant assumptions do not require confinement of use and the continuance of improvements in existence at the date of the valuation as prescribed by s 14G. 10 In Nap Nap Station Pty Ltd v Valuer-General (1989) 72 LGERA 275 at 280 Stein J said: I accept that it is permissible to deduct the estimated value of improvements from the actual sale price of a comparable improved property to establish a deduced land value… In my opinion what is not permissible, whether by reason of Toohey's case or plain commonsense, is the deduction of the estimated value of improvements from a hypothetical valuation of the improved property on a carrying capacity basis. 11 Mr Craig distinguishes these observations by Stein J as a purely s 6A exercise. In my view, setting aside the prospect that he was making observations confined to the nature of the valuation made on a carrying capacity basis, they do no more than make the distinction made in Maurici namely that it can be appropriate to make adjustments to a sale by subtracting the value of the improvements but consistent with Toohey's not deduct the value of improvements to deduce the unimproved value of the subject. 12 Mr Craig refers to the following passage from the judgment of Roper J in James v Valuer-General (1942) 7 The Valuer 132 at 132-3: Further, it frequently happens, as it has in this case, where the site is unique, that there are no sales of really comparable land whether improved or unimproved. In those circumstances, the purpose for which the land would normally be acquired and the return which the purchaser would expect from his purchase must be looked to to furnish a guide to values generally… If it appears that land is being devoted to its proper use from the point of view of exploiting its value, and that the improvements upon it are necessary and proper for that use, and that there is no element of value involved in the improved value other than the intrinsic value of the land and of the improvements, then there is, in my view, no error involved in a valuer forming his opinion of the unimproved value of the land by deducting the value of the improvements from the improved value. 13 Mr Craig submits that it is appropriate to apply this passage in the circumstances of s 14G. The Moneybox site is unique. Relying on the evidence of Mr Jackson he says there are no comparable sales and there can be none. The site is devoted to its proper use from the point of view of exploiting its value and the improvements are necessary and proper for the use. In Toohey's, the subject property also had an element of value in addition to the intrinsic value of the land and of the improvements, i.e. the hotelier's licence. I agree with Mr Ayling that there is no reason to distinguish Toohey's. James v Valuer-General was decided before Toohey's was adopted in Australia (in Valuer-General v Fenton Nominees Pty Ltd (1982) 150 CLR 160 at 165). 14 In final submissions Mr Craig asserted that no reference needs to be made to s 6A of the Act because s 14G as a special provision overrides s 6A as a provision of general application (generalia specialibus non derogant). He says that the term "land value" in s 14G is not a reference to land value as defined in s 6A, but is to be generally understood in the context of the Act. Therefore "land improvements" should be ignored. Alternatively if s 6A is to be applied, land improvements should be ignored as s 14G does not refer to land improvements. The two provisions are inconsistent. 15 Mr Hill, valuer retained by the respondent, refers to comparable sales of improved and unimproved sites and makes adjustments for the heritage restrictions to derive a "heritage land value" of $37,525,000 for each of the three years in question. 16 Mr Ayling SC submits for the respondent that the phrase "land value" in s 14G is an unambiguous reference to the definition of land value in s 6A of the Act. He sees no inconsistency between the two sections. On the one hand s 6A tells the Valuer-General what to value, i.e. the land without the improvements except land improvements. On the other hand, s 14G describes how to value the land without its improvements. The two sections apply and are to be given full effect except to the extent that the methodology is to be modified to superimpose the assumptions in s 14G. He says the assumptions to be made for the purpose of valuation under ss 6A and 14G are as follows: (a) In accordance with section 6A(1) of the Act, the land is to be considered to be, at the moment at which its valuation is determined, in the notional condition of being devoid of improvements (other than land improvements). (b) Sales of the subject land must be assumed to have occurred on the base dates between willing but not anxious parties. (c) The "purpose for which the land was used" on the respective dates must be identified. (d) Identification of the purpose for which the land was used on those dates is to be determined at a suitable level of generality. (e) The purpose for which the land was used on the relevant dates in the present case was that of a commercial office building with retail banking at ground floor level, storage and car parking in basement levels. (f) Section 14G requires there to be assumed no legal or other impediment to the continuation and maintenance of the improvement actually on the land at the base dates. However, these issues only attain relevance insofar as they bear upon the capacity of the improvements to continue to be used for their purpose. (g) Any potential for adding to, replacing or altering the improvements on the land at the base dates must be disregarded under section 14G. 17 Generally speaking I find that the assumptions relied upon by Mr Ayling arise from the application of the two sections and that the provisions are not inconsistent. 18 The language in s 14G is inelegant. The section identifies what improvements may be made on the land and to what use they may be put for the purposes of valuation under the Act by reference to "all improvements on the land when the value is determined". Upon a cursory reading, the reference to existing improvements appears to be contrary to the assumption that the land is vacant. However, the reference to existing improvements does not require the valuer of the land to consider the improvements to physically exist except for the purpose of defining the extent and impact of heritage restrictions on the land value within the meaning of s 6A. The improvements and their use are simply a means of identifying an assumption for the purpose of s 6A. 19 The additional assumptions required by s 14G impose an implied restriction or constraint on the use of the land and strictly limit the identity of improvements that can be placed on it. Section 14G says nothing about the reality of the state of the land except by reference to what is there for the purpose of identifying the terms of the restricted use that impacts upon value. Valuation Evidence 20 Mr Jackson says that the comparable sales method is the best approach to valuation. However in his opinion, as a matter of logic, there are no (and nor can there be any) heritage restricted vacant land sales. If sales were available of heritage restricted improved sites, he would depreciate the existing improvements to derive a heritage land value. Mr Jackson could not identify a sale of an improved heritage site that would be sufficiently comparable. He says that comparison with an unencumbered non-heritage site cannot be made; it is in no way a like for like comparison with a heritage property. Because there are no comparable sales upon which Mr Jackson can rely, he proceeds by determining the improved value of the land with its existing heritage improvements. He then deducts the added value of the heritage improvements. 21 Mr Jackson adopts as his starting point valuations of the subject property undertaken on behalf of the owner by independent valuers. The valuations were for the following dates and values: · 31 December 2002 - $123,500,000 · 31 December 2003 - $120,000,000 · 31 December 2004 - $125,000,000 22 The valuations were determined on the basis of capitalisation of rent and discounted cash flow analysis. Mr Jackson reviewed the valuations and satisfied himself that the basis of valuation, rental and sales evidence relied upon and the analysis was in accordance with proper valuation practice and reflected the true market value at the relevant time. Although the valuations are for dates six months from the relevant base dates, Mr Jackson does not adjust for that period of time. 23 The next step in Mr Jackson's valuation is to deduct the lease/investment component to isolate the land and improvements component of value from the value of the lease to the Commonwealth Bank. This is said to reflect the value of the time and risk associated with placing a tenant. A period of 12 months is adopted with a discount rate of 8%. He then allows a further 5% for profit and risk. 24 Mr Jackson further deducts the added value of the existing heritage improvements by reference to a replacement cost assessment by a quantity surveyor engaged by the owner. The replacement cost is depreciated at the rate of 25% taking account of the age of the improvements, the fact that they must be maintained and continued in accordance with the Act, the recent refurbishments, the architectural and heritage significance and the significant costs of ongoing maintenance. Mr Jackson also allows for interest during the development period, savings on holding costs and loss of interest during the development period. 25 Mr Hill's fundamental criticism of this method is that it relies on the mistaken assumption that replacement cost does not equate to the added value of improvements. Mr Hill says that the investment value, derived from actual rental returns, already takes into account the heritage nature of the building, including its condition, shape and efficiency. Actual returns are lower than would be expected from a building with similar lettable area not subject to heritage constraints. 26 As I have said, Toohey's cannot be distinguished from the present case. Mr Jackson's approach to valuation is to subtract the value of the improvements from the improved value of the site, a method not available to me since Toohey's was adopted in Fenton. Even if Toohey's could be distinguished, and James v Valuer-General accepted, it would not permit me to value the land in the manner proposed by Mr Jackson. Mr Jackson subtracts a factor in addition to the value of the improvements, which he refers to as the investment value of the lease, from the improved value of the land. This is an additional element of the improved value of the property other than the intrinsic value of the land and the improvements. Consequently, I cannot rely on Mr Jackson's primary valuation approach. 27 As an alternative valuation approach, Mr Jackson conducts a hypothetical development exercise. For the purpose of this exercise, Mr Jackson assumes that the land is sold with a covenant on the title restricting development on the land to that which actually exists on the land. The fully leased, improved value, he says, is in the order of $125,000,000. The replacement cost of the improvements is $115,000,000. The hypothetical developer would incur additional costs such as interest, holding costs and selling and leasing cost. Ultimately, his valuation using the hypothetical development method results in a land value of nil or less. He supports this result by reference to the reasoning applied in Australian Postal Commission v Melbourne City Council [2005] VSCA 295. 28 This alternative valuation methodology was not considered by either party until the valuations experts conferred. Mr Hill does not undertake a valuation using this methodology. He sees the negative or nil land value deduced by Mr Jackson as evidence that the methodology is flawed in circumstances where over the three years in question the property generated an income of about $12,000,000. Mr Jackson's alternative valuation is not seriously considered, nor does it represent anything other than a "back of the envelope" calculation. The result is clearly not correct and would be rejected by any prudent hypothetical purchaser or vendor. 29 The Australian Postal Commission case involved Victorian legislation essentially similar to that under consideration in this case. The GPO building in the Melbourne CBD was determined in that case to have a land value of nil. However the Melbourne GPO had been subjected to a fire and the heritage improvements required substantial repair and refurbishment. That situation does not apply here. No work is required to restore the Commonwealth Bank building to the condition it was at the date of valuation. 30 Mr Hill's valuation proceeds on the assumption that on each of the base dates the primary use of the subject property was not materially different from typical modern office buildings in the Sydney CBD. He derives a s 6A land value (unaffected by heritage restrictions) of $1,900/m2 of net lettable area (NLA) based on comparable sales evidence. 31 Mr Jackson does not agree with Mr Hill's assumption that the subject is not materially different from modern office buildings in the Sydney CBD. He distinguishes the subject building on the basis of design, height, scale and nature. 32 It is obvious that the improvements on the subject land are different from typical modern office buildings in the Sydney CBD. However, for the purpose of determining the land value of the subject land unaffected by heritage restrictions, comparison with such developments is entirely appropriate. Section 6A requires the valuer to consider the highest and best use to which the land could be put at the base date and that is undoubtedly an office building. In Mr Hill's valuation, considerations under s 14G are considered as a separate step. 33 Mr Jackson is also critical of Mr Hill's selection and adjustment of comparable sales used to derive the $1,900/m2 of NLA land value. He identifies sales relied upon by Mr Hill as having occurred too far in the past to be of useful comparison. He says Mr Hill's 10% adjustment for development consent is "arbitrary" and "no more than a guess". 34 Mr Hill relies upon historical sales of development sites in the Sydney CBD for the reasons that there have been few such sales in the past decade and that there have not been significant movements in the market that would distort the site sale value. He considers that the hypothetical purchaser would take those sales into account. I accept these sales relied upon by Mr Hill as comparable for the purpose of the exercise he undertakes. 35 Mr Hill says that the usual approach to adjust for development consent is to defer the purchase price for 18 months at 10%. He adopts a simple increase of 10%, which he says results in a slightly more conservative adjustment. I accept this as a reasonable adjustment for the benefit of the development consent on the subject site. 36 A further criticism is that the calculation is on the basis of net lettable area (NLA). At the time of purchase, the NLA of a development site is not known, although the parties would be aware of the potential gross floor area. The error in adopting NLA is that it does not take into account the efficiency of the building, and this is particularly apposite in a heritage building. 37 The NLA is used by Mr Hill as it is the driving force in actual returns derived from a building. He says that a purchaser of a development site will consider the rental return from a project. The rental return is a product of the NLA and the rental return per m2 of NLA. The efficiency of the building is not taken into account when comparison is made on the basis of NLA. I accept this reasoning. The inefficiency of the subject building by comparison with modern office buildings is taken into account in the second part of Mr Hill's valuation where the restrictions of the heritage improvements are considered. 38 The second step in Mr Hill's valuation is to adjust the figure of $1,900/m2 of NLA to take into account the assumption that the only improvements that may be made to the subject land are those that are in fact present on the land, that is, the requirements of s 14G. He identifies areas of the subject building that would not attract the same commercial rentals as other parts of the building due to heritage restrictions. He applies a discount of 60% to those areas of the subject building that are basement/storage area and a 50% discount for level 9 (the Great Hall). This results in an average figure for NLA on the subject land of $1,749/m2. The applicant does not dispute the basis of this assumption. I consider this to be a logical deduction to take account of the greater area for which a lower rent can be achieved in the subject building than in modern office buildings. 39 The third step in Mr Hill's valuation is to make an allowance for the design and efficiency of the heritage building. He derives a figure of 17% for the differential between the rental actually achieved and the rental that could be achieved in a hypothetical new building on the site. He considered that a hypothetical new building on the site would achieve a rental of $425/m2 per annum, whereas the net rental actually paid in the subject building was $352.96/m2 per annum. He thereby derives a discount of 17% and uses it to obtain a land value of $1,452/m2 of NLA. Over 24,530.3m2 NLA on the subject site, this equates to a land value of $35,617,995 before any allowance for land improvements. 40 A further issue between the valuers is whether the additional operating costs associated with a heritage property ought to be taken into account when drawing a comparison with modern office buildings. Mr Jackson claims that heritage properties suffer a heavier maintenance burden than modern buildings. The issue arises out of the different interpretations of the legislative provisions. Mr Jackson interprets the word "maintained" in s 14G(1)(b) of the Act as a reference to upkeep of the improvements, whereas Mr Hill proceeds on the basis that it is a reference to retention of the use only. 41 The approach to valuation under s 14G that I have adopted requires consideration of the usual s 6A matters with the additional considerations imposed by s 14G. In a valuation under s6A one does not take into account the costs of maintenance of a development put forth as the highest and best use of land. The exercise under s 14G is essentially the same but confines the highest and best use to the actual use of the improvements existing at the time of valuation. Consequently, one does not take into consideration the costs of maintenance of the heritage building when valuing land under s 14G. 42 Mr Hill derives a value for the excavation of two basement levels on the subject site by reference to a comparable sale and to Rawlinson's Australian Construction Handbook (20th, 21st, and 22nd editions). A development site at 2-8 Dixon Street, Sydney sold with development approval for $3,200,000 and was resold after excavations for $4,500,000. After adjustments for the cost of demolition and time, he derived a figure for the added value of excavations of $130/m3. He then referred to Rawlinson's to obtain estimated costs of excavation of between $114/m3 and $124.50/m3. Finally he adopted a conservative value of $115/m3 for the added value of the land improvements. Over 16,735m3 excavated on the subject site this equates to an added value of $1,924,525. 43 While he agrees that s 4(d1) of the Act requires regard to be had to the excavations as a land improvement, Mr Jackson disagrees that in the present case the excavations have any effect on land value. Mr Jackson is not aware of any sale of vacant land in the Sydney CBD where an excavated site for commercial office development has attracted a premium over and above its unexcavated value. He also notes that the purchaser of an excavated site would be deprived of the value of excavated material that might otherwise have been sold as road base or clean fill. It would be erroneous in his view to form a judgement as to the value of any excavation based on its cost without market evidence to support the position. 44 I accept that the sales evidence presented by Mr Hill demonstrates that the excavation of the subject land adds to its land value. Given that he adopts, as he says, a conservative view of the added value attributable to the excavations, I adopt the added value of the land improvements in the amount he contends. 45 Mr Hill adopts a final valuation figure of $37,525,000 for each respective base date. He takes what he says is a conservative approach in regard to market movements across the three base dates and does not make any allowance for increases in the market. Conclusion 46 The task set for the Court is to determine the land value affected by the limitation on improvements to those actually in existence. The best indication of the effect heritage restrictions exactly corresponding to the improvements on the site is to look at the actual effect those very improvements have on the value of the property. This effect can be quantified by a comparison of the rental return actually achieved on the site with a hypothetical return that could be achieved if the site were not heritage restricted. Using this logic Mr Hill derives a discount of 17% to be applied to the s 6A land value of the subject land for the heritage restrictions to be taken into account under s 14G. I find this to be an reasonable approach and accordingly I adopt Mr Hill's methodology. 47 I reject the valuation put forward by the applicant through its valuer. I accept the respondent's case. While Mr Hill's valuation is a lower figure than that determined by the Valuer-General, it is within the accepted range of valuation judgement. Mr Hill's evidence supports the figure determined by the Valuer-General and demonstrates that the figure contended by the applicant is wrong. The applicant has not made out its case as required by s 40(2) of the Act. Nevertheless the statutory valuation should be adjusted to reflect the Court's determination in accordance with s 40(1)(b) of the Act. 48 The appeal is upheld and the land value of the subject property at base dates 1 July 2002, 1 July 2003 and 1 July 2004 is determined in the sum of $37,525,000. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.