Tai Hing Cotton Mill Ltd. v. Commissioner of Rating & Valuation

LDRA000031/1985

Rating - rateable value of owner occupied industrial complex comprising a cotton mill, ancillary staff quarters and other facilities - value derived by comparison with rents for industrial flatted factories and application of analysed unit rates to individual sections of the complex - when valuing the individual sections based on rents for flatted factories, ancillary and common areas must not be assessed separately as the value of these areas is already inherent in the unit rates applied to the individual sections - Two distinct stages in the valuation (1) Total of the assessed rents of the individual sections and (2) adjustment for the single occupation - a single hypothetical tenant merely has to outbid the total of the rents based on multiple letting after deducting for the costs the hypothetical landlord might save by letting to a single tenant - analysis for a deduction factor for a single letting preferred to any arbitrary allowance - adjustment for size and poor access should not be treated as an end allowance but should be included as factors to be considered when determining the value of each section - residential development in recent years in the Tuen Mun area might well result in the availability of staff quarters and dormitority accommodation becoming less attractive to a hypothetical tenant of such an industrial complex - sections 7, 7A and 8 Rating Ordinance, Cap. 116.

IN THE LANDS TRIBUNAL OF HONG KONG

(Appellate Jurisdiction)

Rating Appeal No. 31 of 1985

TRIBUNAL: His Honour Judge Leonard, Presiding Officer and M. W. Phillips, Esq., Member

Date of Judgment: 5th May 1986

_{____________}

DECISION

_________

1. This is an appeal against the assessment of the rateable value of an extensive industrial estate of about 560,000 square feet being a cotton mill together with ancillary staff quarters situated at Tuen Mun in the New Territories. The mill comprises a large number of factory and warehouse buildings together with office accommodation, and is separated from a staff quarters area by a road beneath which is a connecting pedestrian tunnel. The staff quarters comprise a number of buildings including dormitories for junior staff. There are also two canteens. The grounds have been Landscaped and include a basket ball court and a tennis court. The total built over area of the industrial complex is about 490,000 square feet, while that of the domestic quarters and canteens is about 32,000 square feet. Such industrial estates are unusual these days. Built about 20 years ago, it preceded the surrounding modern multistorey industrial buildings. These are part of the development of the Tuen Mun New Town which also includes the recently built Government Housing Estates nearby.

2. The Commissioner's assessment of the rateable value under sections 7 and 7A of the Rating Ordinance, Gap. 116 is $11,280,000. The appellant, Tai Hing Cotton Mill Ltd., which owns and occupies the property seeks a reduction in the assessment to $8,800,000. Earlier negotiations concerning the assessment led the Commissioner's valuer, Mr. WONG Fay-pangs, a Principal Rating and Valuation Surveyor in the Rating and Valuation Department to submit that the assessment should be $10,440,000. It is this figure he sought to support in his written submission under Rule 18 of the Lands Tribunal Rules and the oral evidence he gave in this case.

3. The appellant called Mr. Francis Choi, a chartered surveyor who is a partner in the firm of Jones Lang Wootton. He also produced a written submission under Rule 18 in support of his assessment of $8,800,000.

4. The new valuation list came into force on 1st April 1984. The relevant date of assessment as designated by the Governor under Section 11(1) of the Rating Ordinance is 1st July 1983. (GN 2412 of 1983)

5. Section 7A(4) provides that for any tenement in respect of which a proposal has been made -

6. The structures according to Mr. Wong may be grouped under three main headings, namely (a) reinforced concrete factories, (b) single storey structures and (c) dormitory and canteen facilities. He explained that there was no evidence of lettings of factory premises of a similar size and that direct comparison was not possible. Both he and Mr. Choi compared each building and sections of buildings individually with other similar premises, producing a total of the rents for such individual lettings. From each of these totals each valuer made a deduction to allow for the single occupation of the whole factory complex.

7. Although Mr. Choi and Mr. Wong approached the exercise as one relating to a group of individual lettings, their methods of assessment differed. Mr. Choi derived an individual rent for each section, by reference to his comparable rents, having regard not so much to the actual age of the premises as to the state of maintenance. He also adjusted for the presence or absence of air conditioning, as well as for ceiling height and for the size of each individual section. Mr. Wong's approach was much the same except that he chose not to make any allowance for size in assessing the individual rents. He did make an end allowance of 25% of which he said 5% accounted for difficulties of access, and 20% for the overall size of the letting. Otherwise he made allowances on the rates he applied to the individual areas for air conditioning, ceiling height, type of construction and state of repair.

8. The approach to be adopted for valuations of owner occupied premises was considered by the Tribunal in The Hong Kong Canton Export Co. Ltd. v. Commissioner of Rating and Valuation Rating Appeal No. 222 of 1984. This case dealt with the assessment of the rateable value of a go-down building in single occupation and ownership. No comparables of similar premises were available so comparison was made with the rents of individual floors in similar buildings. The Tribunal drew attention to the two distinct steps which should be adopted in such an exercise. The first step is to value each of the individual units taking care to see that the premises are treated as being the subject of multiple lettings of the same mode and character as that of the comparables. Ancillary areas, the value of which would be inherent in the rent obtained for the individual units must not be assessed in addition. Thus caretakers' quarters, plant rooms or loading and unloading areas would not be given a separate assessment if the premises were to be regarded as being let unit by unit. The second step is to adjust the assessment to the value for single occupation having regard to the benefits a hypothetical landlord and a single hypothetical tenant might obtain due to such a letting. The single tenant has merely to pitch his bid marginally above that of the total rent for a multiple letting after having taken account of what the hypothetical landlord would save by not having to bear such costs as those associated with rent collection and administration, and, perhaps more importantly, the losses associated with periodic vacancies which would be eliminated by the single letting.

9. As individual sections of the complex are first to be assessed by reference to similar lettings, we cannot accept that adjustment for size may be ignored at this stage. We therefore favour Mr. Choi's approach in making such an allowance with reference to the comparables. We also agree with Mr. Choi that plant rooms and other ancillary areas usually forming common areas in premises subject to multiple letting must be omitted from the assessment when dealing with the initial stage of determining the total rent obtainable on a multiple letting basis. Any value associated with such common areas must be inherent in the value of the individual sections.

10. If we consider in the light of the above principles, the detailed figures submitted by both expert witnesses, we might summarise the main areas of difference as follows:

11. If we omit from Mr. Wong' s figures those which relate to what we think should not have been included, and make adjustments to the unit rates in order to reflect poor access, and the size of the individual sections, the effect is to reduce his total figure of the industrial part of the premises before end allowance from $1,090,983 per month to $967,580 per month.

12. If we adjust this amount by Mr. Wong's end allowance of 20% to reflect a bulk letting, the result is a figure of about $774,000 per month.

13. Mr. Choy' s total figure for the industrial section was $897,713 per month from which his allowance of 25% for the bulk letting gave a figure of about $673,300. The difference is $100,700. If we were to apply Mr. Wong's 20% instead to Mr. Choi's figure the result would be about $718,000 or a difference of only $56,000 per month or less than 8% of each assessment.

14. We would add in relation to the valuation of the staff accommodation area that we do net necessarily agree with the approach of the experts who looked at domestic comparables in the Tuen Mun area. The dormitories and other staff facilities seem to us to be of a character different from that of private domestic accommodation which is not truly comparable. With the growth of domestic accommodation in the Tuen Mun area of recent years we think that the availability of dormitories and other quarters for staff would be less and less attractive to a hypothetical tenant of such an industrial complex and it may be that, to such a hypothetical tenant at the relevant date, such accommodation would not appreciably have enhanced the rent which he would have been prepared to pay for the factory site as a whole. We must, of course, in accordance with section 7(A), approach the question on the basis that the mode and character of use of the dormitory accommodation and other facilities would have continued. However, the parties adopted a common approach to the valuation of the staff accommodation and associated facilities. As the respondent's assessment before end allowance of $70,863 per month is lower for this area than that of the appellant, we are not disposed to interfere.

15. The amount to be allowed in respect of the single bulk letting has not been analysed by either Mr. Choi or Mr. Wong. Mr. Wong seemed to relate his allowance to that of the size of the complex while Mr. Choi regarded it merely as a discount for the letting of the whole. As we have said we prefer Mr. Choi's approach but would have welcomed some analysis in support of the allowance to be made.   If some figures were obtained regarding expected vacancies for similar premises at or about the relevant date as well as costs of overheads which might be avoided in letting the whole of an industrial complex to a single tenant rather than letting it out as individual units, perhaps some appropriate reduction factor could be calculated. Obviously such an exercise would be preferable to the arbitrary percentages which have been suggested by Mr. Wong and Mr. Choi.

16. In the absence of any evidence to support the amount which should be deducted, we nevertheless agree that there are advantages in letting to a single tenant and propose to adopt a discounting rate of 20%.

17. The Tribunal has noted little difference in the unit rates applied by each of the valuers and by adjusting Mr. Wong's figures for these factors in relation to which we consider that he has erred, we have concluded that the factory area before end allowance should result in a total monthly rent of $967,580, a figure which is not very far removed from that of $897,713 which was Mr. Choi's total for the individual rents.

18. To this sum of $967,580 must be added the value the staff accommodation and other facilities for which we have adopted Mr. Wong's figure of $70,863. This gives a total monthly figure of $1,038,443 to which we apply a discount of 20% to arrive at an assessed monthly rent of $830,754. Rounded down to $830,000 this rent equates to $9,960,000 per annum at which figure we determine the rateable value.

19. The appeal is upheld and the Collector of Rates is directed to amend the Valuation List to record a rateable value of $9,960,000 effective from 1st April 1984. The Collector of Rates is further ordered to make any refund of rates which may be necessary in consequence of this decision. Liberty to apply is reserved to both parties.

20. Dated this 5th day of May 1986.

Representation:

Mr. H. Tsoi of P.C. Woo & Co. for the appellant

Mr. S. Y. Chan, Senior Crown Counsel for the respondent