In 2018, the City of Vancouver had the highest commercial-to-residential property tax ratio of all major urban centres across Canada. In Vancouver, the ratio was 4.4 (meaning that a commercial property valued at $1 million dollars would incur property taxes 4.4 times higher than an equally valued residential property). For comparison, the national average ratio in 2018 was 2.9, and the BC average was 2.6. In Vancouver, this translated to properties occupied by “Business” users (non-industrial and non-residential users) paying 42% of the total property taxes received by the City, though their assessed values only made up 17% of the total taxable property value in the City.
The disproportionate tax burden carried by Vancouver businesses has been exacerbated by rapid increases to already record-high land values, coupled with the fact that land is assessed and taxed based on its “highest and best use” (as opposed to the existing use). The assessed values are determined annually by BC Assessment (a Crown corporation).
The planning department at the City of Vancouver often guides development in a given neighbourhood through the creation of a Neighbourhood Plan (ie. The West End Community Plan or The Mount Pleasant Community Plan). Neighbourhood Plans are typically long-term projects, often taking upwards of five years of consultation before they are released, and are typically created with the intention to guide the future development of an area for a period of up to 30 years. While most would agree that this process of area planning is generally positive, the current property taxation methods can cause the plans to have detrimental impacts to business owners within the subject areas.
Most commercial property leases in Vancouver are triple-net leases (whereby the tenant covers the cost of all property taxes and operating expenses, and bears the full burden of any increases thereto). When property values remain stable (or increase with inflation), this system typically works well. However, when an area plan is released that will add dramatic density to a neighbourhood, the effects can be catastrophic for commercial tenants of properties that are not currently built to their “highest and best use”. Imagine being the owner of a retail business in a single-storey building along Lower Robson, and waiting for your property assessment in the mail after the West End Plan has stipulated that your site can contain a 300′ tower. These are where the stories of property tax increases of 100% or more over the previous year come from.
While some members of the new Vancouver City Council seem aware of the issue at hand, their ability to make meaningful change fast enough to save some of our most at-risk retail nodes and small businesses is yet to be proven. In December 2018, Council voted to direct city staff to explore a property tax shift of 2% from commercial to non-commercial. Staff are due to report back to Council on their findings by April 2019 (hopefully leaving enough time for a policy change before the tax bills go out in July 2019). To maintain the viability of our local businesses and the vibrancy of our retail nodes, we must see some of the burden that commercial property users carry shifted to other revenue sources. In addition, City staff should explore alternative methods for the taxation of occupied commercial land, taking into account the “existing use” as opposed to strictly relying on “highest and best use”.
While the content of this blog post has focused on the City of Vancouver, many of the issues at play are also relevant across other Metro Vancouver municipalities. Given the current environment, it is critical that all parties to a potential real estate transaction understand the impact that taxation policies may have. The team at Form Real Estate Advisors have extensive experience in advising both tenants and landlords on the negotiation of triple-net leases. To discuss your property leasing or purchase needs, please contact me at 604-398-3819 or firstname.lastname@example.org.