Land and Environment Court of New South Wales CITATION : Rifon 2 Pty Ltd –v- Valuer General [2010] NSWLEC 1115 APPLICANT Rifon 2 Pty Ltd PARTIES : RESPONDENT Valuer General FILE NUMBER(S) : 30572 of 2009 and 30573 of 2009 CORAM: Parker AC KEY ISSUES: VALUATION OF LAND :- Land and Environment Court Act 1979 LEGISLATION CITED: Valuation of Land Act 1916 South Sydney Local Environmental Plan 1998 DATES OF HEARING: 6 May 2010 and 7 May 2010 DATE OF JUDGMENT: 21 May 2010 APPLICANT Mr D. Kingston (Agent) LEGAL REPRESENTATIVES: RESPONDENT Mr J Maston, Barrister Instructed by Ms J Donohue, Solicitor for Valuer General JUDGMENT: THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES Parker AC 21 May 2010 30572 of 2009 Rifon 2 Pty Ltd v Valuer General 30573 of 2009 JUDGMENT 1 This is an appeal by Rifon 2 Pty Ltd (the Applicant), under Section 37 of the Valuation of Land Act 1916 (the Act), against the Land Value assessed by the Valuer General (the Respondent) in respect of the property known as 23-31 Darlinghurst Road, Kings Cross (the subject property). Background 2 The Applicant was represented by Mr D Kingston, the Sole Director of Rifon 2 Pty Ltd. 3 The Respondent was represented by Mr J Maston, Barrister, instructed by Ms J Donohue, Solicitor for the Valuer General. 4 The Land Value of the subject property at 1st July 2007 (the 2007 Base Date) was assessed by the Applicant at $4,200,000 and by the Respondent at $5,600,000. 5 The Land Value of the subject property at 1st July 2008 (the 2008 Base Date) was assessed by the Applicant at $4,200,000 and by the Respondent at $5,770,000. 6 The matter was the subject of a conference under Section 34 of the Land and Environment Court Act 1979 but the parties were unable to reach agreement. 7 The matter was the subject of an on site inspection on 6th May 2010, followed by a hearing in Court on 6th and 7th May 2010. 8 Section 40(2) of the Act states: "On an appeal, the appellant has the onus of proving the appellant's case." The subject property 9 The subject property is located in the area generally known as Kings Cross, being approximately three kilometres east of the Sydney GPO within an area of dense retail, commercial and residential development. 10 Located on the eastern side of Springfield Avenue, the subject property is without the adult oriented uses precinct of Darlinghurst Road which predominates between the western side of Springfield Avenue and the junction with Bayswater Road. 11 The subject property comprises a four level building including ground level retail units with two upper levels of accommodation currently used as a backpacker hostel. 12 The principal frontage of the subject property is to Darlinghurst Road (14.95m) with significant return frontages to the pedestrianised Springfield Avenue (32.49m) and Llankelly Place (18.06m) offering considerable exposure. 13 With a site area of 537.5sqm, the subject property is a relatively level irregularly shaped block. 14 The subject property is zoned Mixed Use 10 under the South Sydney Local Environmental Plan 1998. 15 A building height of 18 metres is permitted on the site with a permissible floor space ratio of 3:1, giving a permissible floor space area (FSA) of 1,612.5sqm. 16 The subject property comprises Lot C DP33528. 17 I note that the Land Value of the subject property at 1st July 2006 was the subject of a prior dispute between the parties which was resolved separately to this matter. Accordingly, I do not have regard to the Land Value of the subject property at 1st July 2006 in my consideration of this matter. The issues 18 The parties agreed that the appropriate valuation method was the direct comparison approach using comparable sales evidence assessed on a rate per square metre FSA basis. 19 The parties disagreed on the highest and best use of the subject property, the impact of exposure and frontage, the impact of the adult oriented uses precinct of Darlinghurst Road between Springfield Avenue and Bayswater Road and extended trading hours therein, which comparable sales were relevant and the appropriate adjustment of comparable sales. 20 Concerning highest and best use, the Applicant contended that the current use comprised the highest and best use being ground floor retail with either upper floor budget residential or budget office accommodation, further contending that Council trading hour limitations for hospitality uses reduced the scope of uses for the ground floor retail accommodation. 21 The Respondent contended that the current use was not the highest and best use which comprised ground floor retail with upper floor good quality office accommodation accessed from Springfield Avenue and/or Llankelly Place, further contending that Council trading hour limitations for hospitality uses did not reduce the scope of uses for the ground floor retail accommodation. 22 Concerning the impact of exposure and frontage, both parties agreed that the extensive frontages enjoyed high levels of passing pedestrian traffic which would benefit retail trading levels. The Respondent contended that the property had good exposure with three street frontages providing an unusually high profile and the adjacent pedestrianised areas providing the potential for outdoor seating. The Applicant accepted that the property had good exposure but considered the proximity of the adjacent adult oriented uses precinct undermined the potential benefits of such exposure by diminishing the scope for ground floor retail uses and the quality of upper floor uses. 23 Concerning the impact of the adult oriented uses precinct of Darlinghurst Road between Springfield Avenue and Bayswater Road and extended trading hours therein, both parties accepted the principle that extended trading hours may contribute to higher land values but concurred that the analysis of sales evidence did not appear to indicate this. 24 Having regard to the contentions of the parties, I consider that the subject property suffers from many of the disadvantages associated with a Darlinghurst Road location but without necessarily fully benefiting from the advantages attributed thereto. I consider that the extensive frontage to Darlinghurst Road and three frontages of the subject property provide the potential for significant ground floor retail uses but accept that the utility of the upper floors is diminished by the proximity of the adult oriented uses precinct. 25 I note the contention of the Applicant that, for the subject property, the value of the ground level may be proportionately greater than the value of the upper levels when compared to certain comparable sales but also note that evidence was not tendered on this basis for consideration. The comparable sales evidence 6. 7. 26 Mr Wotton, Registered Valuer, tendered as evidence a valuation of the subject property at both Base Dates dated 12th April 2010 and gave expert evidence on behalf of the Applicant. He concluded the land value of the subject property to be $4,200,000 at both Base Dates. 27 Mr Hill, Registered Valuer, tendered as evidence a valuation of the subject property at both Base Dates dated 15th April 2010 and gave expert evidence on behalf of the Respondent. He concluded the land value of the subject property to be $6,450,000 at both Base Dates. 28 I note that Mr Hill's valuations are in excess of the amounts assessed and claimed by the Respondent of $5,600,000 at the 2007 Base Date and $5,770,000 at the 2008 Base Date. 29 The parties submitted ten comparable sales, comprising four common comparable sales with the Applicant submitting two further comparable sales and the Respondent submitting four further comparable sales. 30 The parties submitted common comparable sales at 24-30 Springfield Avenue, 33-35 Darlinghurst Road, 66-66A Darlinghurst Road and 70A Darlinghurst Road, Kings Cross which were inspected externally. 31 The Applicant further submitted two comparable sales at Corner Campbell and Crown Streets, Surry Hills and 16-32 McLachlan Avenue, Rushcutters Bay which were inspected externally. 32 The Respondent further submitted four comparable sales at 5-9A Roslyn Street, 72-80 Darlinghurst Road and 49-55 Darlinghurst Road, Kings Cross and at 441-449 Elizabeth Street, Surry Hills which were inspected externally. Consideration of the comparable sales evidence 33 Having regard to location, sales as land or as an improved property, site area, date of sale, exposure and frontage and nature of use, the ten comparable sales may be compared with the subject property as follows. 34 24-30 Springfield Avenue, Kings Cross, submitted by both parties, is adjacent to the subject property, was a sale of lightly improved land, is significantly larger than the subject property, sold some time before the Base Dates and is not within the adult oriented uses precinct. However, the property lacks exposure and frontage. Having regard to the considerable comparability of this sale to the subject property, I consider this sale to be a directly relevant comparable sale. 35 33-35 Darlinghurst Road, Kings Cross, submitted by both parties, is adjacent to the subject property across the pedestrianised area, is smaller than the subject property, sold some time before the Base Dates and benefits from corner exposure and frontage. However, the property was an improved sale and is within the adult oriented uses precinct. Having regard to the considerable comparability of this sale to the subject property, I consider this sale to be a directly relevant comparable sale. 36 66-66A Darlinghurst Road, Kings Cross, submitted by both parties, is located close to the subject property, is significantly smaller than the subject property and sold within the Base Date period. However, the property was an improved sale, has street frontage but lacks exposure and is within the adult oriented uses precinct. Having regard to the comparability of this sale to the subject property, I consider this sale to be an indirectly relevant comparable sale. 37 70A Darlinghurst Road, Kings Cross, submitted by both parties, is located close to the subject property and sold within the Base Date period. However, the property was an improved sale, is very significantly smaller than the subject property, has street frontage but lacks exposure and is within the adult oriented uses precinct. Having regard to the limited comparability of this sale to the subject property, I consider this sale to be of limited relevance. 38 Corner Campbell and Crown Streets, Surry Hills, submitted by the Applicant, was a sale of land within the Base Date period, benefits from corner exposure and frontage and is not within an adult oriented uses precinct. However, the property is located in a different suburb to the subject property and is very significantly larger than the subject property. Having regard to the limited comparability of this sale to the subject property, I consider this sale to be of limited relevance. 39 16-32 McLachlan Avenue, Rushcutters Bay, submitted by the Applicant, sold within the Base Date period, benefits from corner exposure and frontage and is not within an adult oriented uses precinct. However, the property is located in a different suburb to the subject property, was an improved sale and is very significantly larger than the subject property. Having regard to the limited comparability of this sale to the subject property, I consider this sale to be of limited relevance. 40 5-9A Roslyn Street, Kings Cross, submitted by the Respondent, is located close to the subject property and is not within the adult oriented uses precinct. However, the property was an improved sale, is very significantly smaller than the subject property, sold some considerable time before the Base Dates and lacks exposure and frontage. Having regard to the limited comparability of this sale to the subject property, I consider this sale to be of limited relevance. 41 72-80 Darlinghurst Road, Kings Cross, submitted by the Respondent, is located close to the subject property, is larger than the subject property and benefits from corner exposure and frontage. However, the property was an improved sale, sold some time before the Base Dates and is within the adult oriented uses precinct. Having regard to the comparability of this sale to the subject property, I consider this sale to be an indirectly relevant comparable sale. 42 49-55 Darlinghurst Road, Kings Cross, submitted by the Respondent, is located close to the subject property. However, the property was an improved sale, is very significantly smaller than the subject property, sold some considerable time after the Base Dates, has street frontage but lacks exposure and is within the adult oriented uses precinct. Having regard to the comparability of this sale to the subject property, I consider this sale to be an indirectly relevant comparable sale. 43 441-449 Elizabeth Street, Surry Hills, submitted by the Respondent, was a sale of land, is significantly smaller than the subject property, sold close to the Base Date period and benefits from corner exposure and frontage. However, the property is located in a different suburb to the subject property and has proximity to an adult oriented uses precinct. Having regard to the comparability of this sale to the subject property, I consider this sale to be an indirectly relevant comparable sale. 44 I consider the comparable sales at 24-30 Springfield Avenue and 33-35 Darlinghurst Road, Kings Cross to be directly relevant comparable sales. 45 I consider the comparable sales at 66-66A Darlinghurst Road, 72-80 Darlinghurst Road and 49-55 Darlinghurst Road, Kings Cross and 441-449 Elizabeth Street, Surry Hills to be indirectly relevant comparable sales. 46 I consider the comparable sales at 70A Darlinghurst Road, Kings Cross, Corner Campbell and Crown Streets, Surry Hills, 16-32 McLachlan Avenue, Rushcutters Bay and 5-9A Roslyn Street, Kings Cross to be of limited relevance. 47 Concerning 33-35 Darlinghurst Road, Kings Cross, I note the Applicants contention that the purchaser, as the holder of a hotel license which is a relatively rare commodity, may be considered a special purchaser who may have paid a premium to secure the property for use as a hotel. 48 I note that Mr Wotton and Mr Hill analysed the directly relevant comparable sales as follows: Address 24-30 Springfield Ave 24-30 Springfield Ave 33-35 Darlinghurst Rd 33-35 Darlinghurst Rd Valuer Mr Wotton Mr Hill Mr Wotton Mr Hill Sale Price $10,200,000 $10,200,000 $7,500,000 $7,500,000 Site Area 1526sqm 1530sqm 333.5sqm 328.8sqm FSR 3.25:1 3.3:1 3.7:1 3.7:1 FSA 4959.5sqm 5049sqm 1234sqm 1216.6sqm Analysed Rate PSM FSA $2,057psm $2,020psm $6,078psm $6,164psm 49 While there are minor differences in the constituent variables, I note that the resulting analysed rates psm FSA for both properties are each within 2% of the other. 50 I note that both Mr Wotton and Mr Hill then sought to adjust the analysed rates psm FSA for application to the subject property with regard to relativity of the date of sale to the Base Dates, of the respective site areas and of the respective positions, together with allowance for the impact of development consent and existing improvements, as follows: Address 24-30 Springfield Ave 24-30 Springfield Ave 33-35 Darlinghurst Rd 33-35 Darlinghurst Rd Valuer Mr Wotton Mr Hill Mr Wotton Mr Hill Analysed Rate PSM FSA $2,057psm $2,020psm $6,078psm $6,164psm Adjust Time +7.5% +2.5% +7.5% +5% Adjust Size +12.5% 0% -5% 0% Adjust Position +10.0% 0% 0% 0% Adjust Dev Consent -$348psm -$101psm -$1,134psm -$616psm Adjust Improvements -$1,750psm -$952psm Adjust Demolition +$61psm +$19.80psm Rate PSM FSA For Application $2,387psm $1,985psm $3,345psm $4,808psm 51 Having regard to the directly relevant comparable sales rates psm FSA adjusted for application of $2,387 - $3,345 and to his analysis of other comparable sales evidence, Mr Wotton considered the appropriate range for application to the subject property to be $2,500 - $2,750 with $2,605 psm FSA the appropriate point estimate for both Base Dates. 52 Having regard to the directly relevant comparable sales rates psm FSA adjusted for application of $1,985 - $4,808 and to his analysis of other comparable sales evidence, Mr Hill considered the appropriate range for application to the subject property to be $3,983 - $5,595 with $4,000 psm FSA the appropriate point estimate for both Base Dates. 53 I note that the value as at the 2007 and 2008 Base Dates was assessed by the Applicant at $3,473 psm FSA and $3,578 psm FSA, respectively. Findings 54 Accepted valuation practice permits both explicit and implicit adjustment for differences, such as in location, area and time, to enable valuers to have evidentiary comparable values which, following adjustment, account for the various differences with the subject property. Such adjustment is generally based on a reasoning process drawing on the skill and experience of the valuer and undertaken to derive an opinion of value through a process of working forwards rather than a process of working backwards to justify an opinion of value previously formed. 55 Because properties are rarely identical, explicit and/or implicit adjustment for differences is obviously necessary but caution is required through making as few adjustments as possible, in a consistent manner, to ensure the reliability of the comparable sale when related to the subject property, with too much adjustment potentially rendering the comparable sale unsafe to use. Caution is, therefore, required where large explicit and/or implicit adjustments are required, with particular caution required for large implicit adjustments. 56 I note that under Section 40(2) of the Act, the Applicant has the onus of proof. 57 I consider that Mr Wotton provided a transparent valuation which clearly set out his approach and logic leading to his conclusion of value. 58 I consider that Mr Hill's approach to analysis and adjustment of comparable sales evidence for application, wherein analysis to determine land value is undertaken first followed by adjustment for application to the subject property, to be a logical approach. 59 I note that both Mr Wotton and Mr Hill based their adjustments to comparable sales evidence for the passage of time on their knowledge of the market and experience, rather than on analysis of repeat sales or other data sources. While both concurred on the broad direction of the market, they differed marginally in quantum and timing but I do not consider the differences to be significant. 60 I note that 24-30 Springfield Avenue, Kings Cross is significantly larger than the subject property, is not within the adult oriented uses precinct and lacks exposure and frontage. Accordingly, I consider the adjustment by Mr Wotton for size and position relative to the subject property to be insufficient. A larger adjustment for relative size and position would have the effect of increasing the rate psm FSA for application to the subject property. 61 In evidence, Mr Wotton explained that the adjustment for development consent reflected an assumed period of around 18 months in anticipation of extended negotiation and appeal together with holding costs throughout the period. Mr Hill gave evidence that the assumed period should be shorter which I accept with the effect that the adjustment for development consent should be smaller. A smaller adjustment for development consent would have the effect of increasing the rate psm FSA for application to the subject property. 62 Mr Wotton and Mr Hill differed in evidence on the appropriate rate to be allowed for demolition though I note that the amount of the difference is only around 2% of the respective analysed rates psm FSA and so do not consider this be significant. 63 Accordingly, therefore, I consider that a larger adjustment for relative size and position and a smaller adjustment for development consent would potentially have the cumulative effect of increasing the rate psm FSA proposed by Mr Wotton for application to more closely approximate the rates adopted by the Applicant at the respective Base Dates. 64 I note that 33-35 Darlinghurst Road, Kings Cross is smaller than the subject property being within the adult oriented uses precinct and has a corner exposure and frontage. Accordingly, I consider a downward adjustment for position would be appropriate which would have the effect of reducing the rate psm FSA proposed by Mr Wotton for application to the subject property. 65 Concerning adjustment for development consent, for the reasons given above, I consider that the adjustment proposed by Mr Wotton should be smaller. A smaller adjustment for development consent would have the effect of increasing the rate psm FSA for application to the subject property. 66 Concerning adjustment for the improvements at the property, Mr Wotton and Mr Hill gave evidence that the property comprised a vacated bank from which the majority of the floor and wall structure was retained on eventual redevelopment. However, Mr Wotton and Mr Hill approached the assessment of depreciated replacement cost of the building differently with Mr Wotton adopting an undepreciated "shell and core" replacement cost and Mr Hill adopting a depreciated replacement cost. Reflecting the age of the property and the potential utility of the floor and wall structure, I prefer Mr Hill's approach but do not consider the level of depreciation would necessarily be as great as Mr Hill adopted. Adopting an amount for depreciation would decrease the adjustment for improvements proposed by Mr Wotton which would have the effect of increasing the rate psm FSA for application to the subject property. 67 I note the Applicants contention that the purchaser of 33-35 Darlinghurst Road, Kings Cross may be considered a special purchaser who may have paid a premium to secure the property. 68 Accordingly, therefore, I consider that adopting an amount for depreciation of the replacement cost of improvements and a smaller adjustment for development consent would have the effect of increasing the rate psm FSA but that this would be offset by a downward adjustment for position which would have the effect of reducing the rate psm FSA proposed by Mr Wotton for application to the subject property, with the cumulative effect potentially resulting in a rate psm FSA for application that approximates the rates adopted by the Applicant at the respective Base Dates. 69 Having regard to the evidence tendered, the cross examination and the summation presented, I consider the valuations of the subject property at the respective Base Dates by the Respondent (which I note differ, but only by around 3%) to be supportable having regard to the differences between the comparable sales tendered as evidence and the subject property. 70 Having regard to the evidence tendered, I consider that the Applicant did not present an approach to the valuation of the subject property sufficient to prove the Applicant's case as required by section 40(2) of the Act. Orders 71 The orders of the Court: 1. The Appeal is dismissed. 2. The Land Values of $5,600,000 as at the base date of 1 st July 2007 and $5,770,000 as at the base date of 1 st July 2008 for the property known as 23-31 Darlinghurst Road, Kings Cross are confirmed. 3. No Order is made as to costs. 4. The exhibits are returned. ___________________ Dr David Parker Acting Commissioner of the Court 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.