June 16, 2003, E.C.B. No. 11/98/238

REASONS FOR DECISION

INTRODUCTION

[1]  The case concerns the acquisition by the City of Richmond ("Richmond") of a single lot of 0.202 ha (0.50 ac) property owned by Benny Kwun Construction Ltd. ("the claimant"), legally described as:

PID 003-698-009
Lot 34, Section 5 Block 4 North Range 6
New Westminster District
Plan 32827

The site was improved with a two storey commercial building with the civic address of 5671 No. 3 Road, Richmond, British Columbia ("the Property").

[2]  The parties entered into an agreement under s. 3(1) of the Expropriation Act, R.S.B.C. 1996, c. 125 ("the Act"), on April 9, 1997 whereby Richmond acquired the entire parcel for the purposes of the Lansdowne Street Extension project. The agreement provided for an advance payment of $1,656,000. The payment was made May 29, 1997 and was subject to normal closing adjustments. The Agreement stipulated that compensation would be determined by the Expropriation Compensation Board ("the board"). Richmond's acquisition is referred to as the "expropriation" or the "taking".

[3]  On March 31, 1998 the claimant filed an Application for Determination of Compensation ("Form A") with the board. Initially, the claimant sought compensation of $2,080,694.75 for the market value of the Property and disturbance damages. Prior to the compensation hearing, the Form A was amended to claim compensation of $2,007,070.15, an amount $351,070.15 in excess of the advance payment. The issues which this board must decide are the market value of the land acquired by Richmond and the amount of disturbance damages, if any. The parties have agreed that the valuation date for determining compensation is May 31, 1997.

[4]  The compensation hearing proceeded over three consecutive days in Vancouver, B.C. The first witness to present evidence for the claimant was Willie Kwun, sole shareholder of Silver Yen Property Management Ltd. ("Silver Yen") which managed the Property. Willie Kwun was also a minority shareholder in Benny Kwun Construction Ltd., the claimant. Willie Kwun testified mainly with respect to the claim for disturbance damages. The only other witness for the claimant was John Rack who testified with respect to his appraisal report prepared August 31, 2001. The sole witness for Richmond was Geoffrey L. Johnston of Johnston, Ross & Cheng, a real estate appraiser, whose report was prepared March 21, 2001.

2.  BACKGROUND

[5]  The Property was a 2,020 m² (0.50 acre) parcel of land on the west side of No. 3 Road opposite the Lansdowne Shopping Centre, in a central commercial section of the city of Richmond. The site was improved with a two storey building demised into five leasable areas: the ground floor, which was fully leased, comprised approximately 9,356 square feet and the partial second floor had about 2,550 square feet. Siegel's Bagels Ltd., a bagel bakery and restaurant, took up the front section of the ground floor facing No. 3 Road. The rear of the building, accessed by a lane, was occupied by Diamond Car Care, a car wash and detailing shop. Siegel's Bagels was the tenant pursuant to a five year lease that expired in February 1999. Diamond Car Care had a lease that commenced in October 1996 and had been renewed until September 2001. The second floor was demised into three offices, one of which was vacant at the date of the taking.

[6]  The building occupied 43% of the site. The total building area of 12,985 square feet, excluding mezzanine, gave a floor area ratio of 0.60. The actual use was deemed to be "legally non-conforming" as to the existing zoning bylaws.

[7]  The Property was bordered on the east by a frontage road and on the rear by a service lane. The north side of the building abutted the adjacent commercial building. The south side was bordered by the Lansdowne Canal, a covered watercourse leased by the claimant from the City of Richmond. This was used for access from the front to the rear of the building and for parking.

3.  COMPENSATION CLAIM

[8]  As summarized in the Amended Form A, filed with the board on September 25, 2001, the claim is as follows:

Market value (s.31)	$ 1,915,000.00
Disturbance damages (s.34)	92,070.15
Total Claim	2,007,070.15
Less Advance Payment	1,656,000.00
Net Claim	$   351,070.15

plus costs and interest pursuant to ss. 45 and 46 of the Act.

[9]  The claim for disturbance damages under s. 34 of the Act is broken down as follows:

Conveyancing, mortgage commitment, environmental assessment, and survey for replacement property No.1	$  6,464.70
Conveyancing, environmental assessment for replacement property No. 2	14,123.11
Conveyancing and mortgage commitment for replacement property No. 3	19,912.10
Property Transfer Tax (based on a market value of $1,915,000)	36,300.00
Extraordinary property management expenses	15,270.24
Total disturbance damages	$92,070.15

4.  ISSUES

[10]  The parties have agreed that the highest and best use of the Property is its continued use as a multi-tenanted commercial property. They have also agreed that the most appropriate method of appraisal is the Income Approach. They do not agree, however, on the appropriate application of this approach and the final estimate of value.

[11]  The parties have agreed that the claimant is entitled to the direct transaction costs for the purchase of replacement property Nos. 1 and 2 in the amount of $20,587.81. In dispute are the costs associated with replacement property No. 3 since the combined cost of the three properties purchased by the claimant is greatly in excess of Richmond's opinion of the value of the Property.

[12]  Richmond concedes that the claimant is entitled to be compensated for Property Transfer Tax. The parties are agreed that this is to be based on the market value of the Property as determined by the board.

[13]  Richmond disputes the claim for extraordinary property management expenses advanced by the claimant with respect to invoices submitted by Silver Yen. The claimant has provided detailed invoices, included in the Statement of Agreed Facts, which specify the time spent and disbursements incurred, in connection with the expropriation. There are four such invoices dated March 31, 1997, May 31, 1997, December 31, 1997, and April 20, 1998. The board notes that only the last invoice, dated April 20, 1998, includes the fees and disbursement relating to replacement property No. 3.

[14]  Accordingly, the issues to be determined by the board are:

• The appropriate application of the Income Approach and the market value of the Property for compensation.
• The disturbance damages to which the claimant is entitled, in particular:
  • Whether the claim for transaction costs for replacement property No. 3 is compensable.
  • Whether the claim for extraordinary property management expenses is compensable.

5.  COMPENSATION FOR MARKET VALUE

5.1  Appraisal Methodology

[15]  The appraisers retained by the parties each valued the Property as of the date of the transfer of title, May 29, 1997. Rack, presenting evidence on behalf of the claimant, and Johnston, for Richmond, were of like mind as to both the highest and best use of the Property and the appropriate approach to its valuation.

[16]  Rack and Johnston were both of the opinion that the highest and best use was its continued actual use as an improved commercial property. Further, Johnston supported this conclusion with an analysis of the probable market value of the land as if it were vacant. Based on his analysis of sales of vacant land, he found the value as improved to be higher than a hypothetical value of a vacant site, absent the buildings.

[17]  Based on its existing use as a multi-tenanted property, Rack and Johnston each considered the Income Approach as the proper method of valuation. This approach is a method of converting the projected net income of a property into a capitalized value. The process of applying the Income Approach involves deriving market rents for the property to determine the potential gross income. An allowance for losses through vacancies and costs of collection is applied to derive an Effective Gross Income ("EGI"). Net income is estimated by deducting an applicable expense allowance from the EGI. The indicated value of the property is derived by dividing the net income by a capitalization rate obtained by analysis of transactions of comparable commercial properties.

5.2  Agreed Rents

[18]  The first step presented by the appraisers in applying the Income Approach is to determine the appropriate rents from which to derive a gross income potential.

[19]  In the Statement of Agreed Facts presented at the hearing, the parties have agreed that, at the date of determination of compensation, the rents in effect were:

* including CAM

5.3  The Claimant's Case

[20]  For the most part, Rack used these actual rents in his appraisal analysis. He attributed a market rent of $5,625 per annum to the vacant space, or $7.50 per square foot, giving a total annual gross income potential of $190,526. The rents were found to be on a mixed net / gross basis. The ground floor tenants paid a base triple net rent plus set common area maintenance ("CAM") charges on a per square foot basis with a cap or upper limit placed on these charges. For Siegel's Bagels this was $3.50 per square foot. For Diamond Auto Care the CAM was on a graduated basis set at $940.86 per month at the date of expropriation, in effect a rate of $1.98 per square foot. The second floor office leases were on a gross rent basis which included CAM charges and GST. For comparison purposes, Rack added back CAM charges to the ground floor leases to render them equivalent to gross leases, reflected in the above table.

[21]  To derive an allowance for vacancy, Rack looked primarily at the actual occupancy in the building at the time of preparing the appraisal report. The unoccupied space represented 2.95% of the total potential rents so he applied a vacancy rate of 3% to the gross income. This produced an EGI of $184,810.

[22]  Expenses deducted by Rack from this amount were:

1996 taxes	$ 24,322
Insurance	$  2,825
Maintenance	$   3,696	2% EGI
Management	$   5,544	3% gross income
Total	$36,387

Deducting this total from the EGI, Rack estimated the net income, for capitalization purposes, to be $148,423.

[23]  The process of capitalizing net income requires a rate of capitalization to be derived from the real estate market. Rack used five comparable sales, with reported capitalization rates that ranged from 3.8% to 8.35%. Rack limited his sales to those of commercial properties since it was his opinion that sales of properties zoned for industrial use would not provide appropriate comparisons. Rack conceded that he did not have access to detailed financial information on his comparables. As such, he accepted the reported capitalization rates on each comparable provided by the real estate agent at the time of listing. The comparable transactions on which Rack placed the most reliance were:

Comp.	Address	Sale Price	Zoning	Reported  Net Income	Cap. Rate  at List Price
1	9020 Capstan Way	$2,950,000	C2	$214,333	6.70%
2	7771 Westminster Hwy.	$3,200,000	C7	$201,000	6.00%
3	9471 No. 2 Road	$2,000,000	C2	$123,000	6.00%
4	12031 1st Avenue	$600,000	C5	$53,357	8.35%

Comparable Nos. 1, 3, and 4 were transactions common to both the Rack and Johnston reports.

[24]  Relying on these comparables, Rack selected a capitalization rate of 7.75%. The net income of $148,423 divided by this rate gave a value to the total property of $1,915,142 which he rounded to $1,915,000. It was Rack's opinion that this amount represented the compensation due to the claimant for the market value of the property acquired by Richmond.

5.4  Richmond's Case

[25]  The appraisal prepared for Richmond by Johnston also applied the Income Approach to value the property. His analysis differed from Rack's in two fundamental areas: Johnston converted gross rents to triple net for comparison purposes and he based his capitalization rate on the ratio between the net income from the comparables and their sale price.

[26]  Johnston had completed a previous report for Richmond in December 1995 as the basis for advance payments. In his report for the current hearing, prepared in March 2001, Johnston carried forward the narrative description of tenants and leases in the building, incorrectly assuming these to be unchanged. He was of the opinion, however, that the rental rates he used in the second report were at market levels as of the valuation date of May 29, 1997. In his 2001 report Johnston reconstructed the gross rents he used in his previous report. He deducted an allowance for expenses to bring the rents in line with triple net office leases in the area. These reconstructed rents showed an overall lease rate of $13.26 per square foot for Diamond Auto Care and $19.00 per square foot for Siegel's Bagels. Johnston incorrectly used a leasable area of the second floor of 2,150 square foot. He used $8.50 and $5.17 per square foot for the occupied second floor and applied a market rent of $6.00 per square foot for the vacant space. Johnston's overall rent for the second floor was $13,150, or $6.12 per square foot on a triple net basis. His projected gross income for the Property was $158,100 before vacancy.

[27]  Johnston reviewed the overall local commercial market as well as the actual vacancy in the property based on square footage and income loss. He suggested that the vacancy rate represents a long term factor amortizing losses from vacancies and collections over the life of the building and does not necessarily correspond to actual vacancies at any given point in time. On this basis, Johnston used a rate for vacancy and collection loss of 5% of the gross income potential. This resulted in an EGI of $150,195 by his calculations.

[28]  Since Johnston used triple net rents, whereby operating expenses are charged back to the tenant, his estimate of expenses for the landlord were much lower than those used by Rack. Johnston reduced the gross income by 5% of the EGI to account for structural maintenance and irrecoverable costs. This produced a net income of $142,685, almost $6,000 lower than Rack's estimate.

[29]  Johnston undertook an analysis of six transactions to determine the relationship between the net income and sale price of each. These showed capitalization rates ranging from 3.2% to 9.7%. Like Rack, he disregarded the lowest sales which he stated had sold for land value only, relying on the following transactions:

Comp.	Address	Sale Price	Net Income	Cap. Rate
11	9471 No. 2 Road	$2,000,000	$161,047	8.0%
12	9020 Capstan Way	$2,950,000	$214,333	7.3%
13	11030 Horseshoe Way	$1,300,000	$106,115	8.2%
14	2351 Vauxhall Place	$857,000	$83,474	9.7%

[30]  Comparable Nos. 11 and 12 were commercial properties, Comparable Nos. 13 and 14 were described by Johnston as being commercial and industrial in land use. Based on these comparables Johnston weighed the quality of each property and its tenancies, concluding a capitalization rate for the Property of 9.0%. Applied to his net income of $142,685, Johnston derived a market value of $1,585,389, rounded to $1,600,000.

5.5  Analysis and Conclusions

5.5.1  Potential Gross Income

[31]  The appraisal reports for both parties were prepared with a valuation date of May 29, 1997. As previously noted, the s.3 Agreement provides that the date for determination of compensation is May 31, 1997. The board is satisfied that this minor discrepancy in date does not affect its decision as to compensation due for the market value of the Property.

[32]  While Rack and Johnston agreed that valuing the Property by the Income Approach was the most appropriate method of valuation, they disagreed on the method of determining market rents. The first step in applying the Income Approach is to determine rents as of the date of appraisal. At the time of acquisition, the ground floor rents were on a triple net basis with a cap on triple net expenses to the tenant. The second floor tenants were on a gross rent basis with the landlord paying a portion of the expenses.

[33]  In order to reach a common basis of comparison, Rack converted the ground floor rents, in effect on a triple net basis, to gross rents, by adding CAM charges back to the lessees. He added this potential gross income to the actual gross rent rates for the second floor offices. In contrast, Johnston did the reverse by treating all rents on a triple net basis. We note the data contained in the Johnston report showed dated rental data for the second floor space.

[34]  Johnston's rental analysis was detailed, providing ten comparable leases to substantiate the rents used in his report. Rack presented us with no analysis to determine whether the current rents were in line with the local market. The board agrees with Johnston that the appropriate approach in this instance is to convert the second floor rents to triple net to compare them with the market norm in Richmond. This is supported by the ground floor rents being on a triple net basis, representing about 90% of the income to the Property.

[35]  The rents in effect for the ground floor, after deductions for the CAM charges, at the date of expropriation were Siegel's Bagels: $69,350 and Diamond Auto Care: $75,600 per annum. The actual rents on the second floor averaged $8.83 per square foot including expenses, for the occupied space. The board accepts Johnston's reconstruction of the second floor rents to triple net at an average $6.12 per square foot. The board accepts the actual ground floor rents as appropriate and concludes an overall potential rent for the 2,550 square foot of leasable area on the second floor to be $15,606.

[36]  The board notes that Johnston's report contained inconsistencies in the demised leasable area and available plans, resulting in a difference between Johnston and Rack of 400 square feet on the second floor. The board accepts Rack's larger size which is supported by documentation provided by Willie Kwun as the basis of leasing negotiations and was agreed upon by both parties at the hearing.

[37]  Bringing the total leasable space to a triple net equivalent, the board has reconstructed the potential gross income as follows:

Siegel's Bagels	$  69,350
Diamond Auto Care	$  75,600
Second Floor Offices	$  15,606
	$160,556

Based on the leasable area of the building at 11,906 square feet, this amounts to an average rent of $13.49 per square foot.

5.5.2  Vacancy and Collection Allowance

[38]  The board finds Johnston's analysis of vacancy and collection loss well supported by a range of data. He used an overall rate of 5% of gross income. Rack calculated the actual vacancy rate in the building at the date of acquisition as 3%, cross-checking this with a Colliers' report on commercial vacancy rates in Richmond. Using the actual vacancy situation at a set point in time may not fully compensate for a turnover of tenants and the resulting collection losses. The Property had experienced a relatively high turnover of tenants for the second floor in the two years prior to the expropriation, incurring a rent-up fee each time. Johnston recognized this and considered a wider range of factors than Rack when deriving his vacancy rate. Johnston's rate is accepted as more realistic. Applying a 5% rate to the potential gross income, the board concludes an EGI of $152,528.

5.5.3  Operating Expenses

[39]  Rack calculated his potential income on a gross lease basis attributing expenses to the owner of $36,387. A particular difficulty in estimating projected expenses to the Property is the fact that CAM charges have an upper limit and therefore extraordinary expenses must be borne by the owner. The board heard evidence that the assessed value of the Property for taxation purposes was $1,144,000 in 1995 and had increased to $1,656,000 by 1997, an increase of 45%. This resulted in a large increase in property taxes which jumped from $24,321 in 1996 to $34,521 in 1997. Given the cap on CAM rates, this increase in expenses could not have been passed on to the ground floor tenants until the expiration of the current term of their leases. Since assessment notices are sent out in January, Johnston assumed that a prudent purchaser, at the date of expropriation, could reasonably have expected that the increase in assessment would mean higher property taxes. Rack did not consider that a purchaser would have known of this increase and used the lower figure in his expense analysis. With a cap on those expenses that could be passed onto the tenants, this increase in taxes would negatively impact the cash flow of the property and, if known to a potential purchaser as Richmond contends, could have a downward influence on value. Richmond also pointed out that Rack's expense schedule omitted $400 per year paid for rental of the covered Lansdowne Canal allowance.

[40]  As stated, the board accepts Johnston's method of bringing all leases to a triple net basis whereby most costs are passed onto the tenants. The board agrees with his expense allowance of a nominal 5% of EGI which covers non-recoverable expenses to the owner including a reserve for structural maintenance. For the purposes of capitalization, the board finds the net income to be $144,900, calculated by deducting the operating expenses of $7,628 from the EGI of $152,528.

5.5.4  Capitalization Rate

[41]  The board heard extensive evidence from both parties as to the appropriate rate by which the net income should be converted to market value. The board has described the sales, the methods, and the criteria used by each appraiser.

[42]  It appears to the board that Rack's capitalization rate analysis is in error. As stated, Rack based his capitalization rate on those provided in the MLS® description at the time of listing. He was not aware, nor did he investigate, whether this capitalization rate was based on gross or net income or whether a vacancy allowance had been attributed to each comparable. Rather than deriving a rate from independent analysis, Rack accepted a calculation made by the listing agent for each comparable, based on a list price rather than the actual sale price.

[43]  At the hearing, Rack produced a table of calculations in which he re-worked the capitalization rate, this time basing it on the sale price of each comparable and adjusted for assumed expenses. Rack's resulting reconstruction of the sales data produced surprisingly similar rates to those based on the list price. The board cannot rely on these adjustments, however, since Rack admitted that he was not aware whether any consideration had been given to expenses in the published capitalization rate by the listing agent. In contrast, Johnston derived his market capitalization rate by dividing the net income by the sale price of each comparable. He researched sales data from MLS® and private sources. In each case he verified his data with parties to the sales or from his own company files.

[44]  The board does not find Rack's capitalization rates to be of any assistance since it is not possible to verify the accuracy of his assumptions. He admitted that he did not have access to lease documents; did not talk to realtors, purchasers, or vendors involved in the comparable transactions; nor did he make inquiries into the financial details on the properties. The board does not find it can place any reliance on Rack's conclusions in selecting a capitalization rate.

[45]  At the outset of Rack's appearance before the board, Richmond challenged his qualification to be an expert witness giving evidence in real estate appraisal. They raised the objection based on Rack's experience and lack of a formal appraisal designation. The claimant took the position there is no legal requirement for an expert to have a designation and countered with a summary of Rack's experience, notably in the area of commercial real estate sales. The board noted that Rack had been accepted as an expert witness before the board in previous hearings and ruled that deficiencies, if any, in his evidence would be reflected in the weight given to his report.

[46]  The board considers Johnston's presentation of market data on which he based his capitalization rate analysis to be thorough. He used a wider range of data than Rack going beyond MLS® sales transactions. He verified his data with parties to the transactions in most cases and has extensive local knowledge having worked as an appraiser in the Richmond area for 30 years. Since the value of the Property is derived by applying the market capitalization rate to the net income, for consistency the board considers it reasonable that Johnston derived a capitalization rate from sales in the same manner, that is by dividing the net income of the comparables by their actual sales prices.

[47]  Johnston was criticized by the claimant for including properties with an industrial land use in his comparable sales when the claimant contends that the Property has a strictly commercial use. Johnston placed most emphasis on four sales for his capitalization rate. Comparable Nos. 11 and 12 were neighbourhood shopping centres producing capitalization rates of 8.0% and 7.3%. Comparable Nos. 13 and 14 were described by Johnston as typical industrial properties. Comparable No. 13, an automotive shop, showed a capitalization rate of 8.2%. The highest capitalization rate of 9.7% came from Comparable No. 14, a conventional industrial warehouse. After weighing the comparability of these properties, Johnston chose 9% as the appropriate capitalization rate reflecting the actual use of the Property as a combination commercial and service-commercial property which contained a bakery and restaurant, automobile detailing shop and car wash, and offices.

[48]  The board now turns to Johnston's data for deriving a capitalization rate from the market. Johnston provided the board with a chart showing his capitalization rate comparisons. This chart included a comment about the comparability of each sale to the Property, in terms of whether it was inferior, similar or superior. One measure of comparability was the overall lease rates found in the sales. In reference to the comparables on which Johnston placed most reliance, found in paragraph 29 of this decision, Comparable Nos. 11 and 12 had average rental rates of $17.95 per square foot and $19.30 per square foot respectively. Comparable No. 13 was an automotive complex with average rents of $7.62 per square foot. Johnston's Comparable No. 14 was a single tenant industrial building that was leased at $5.50 per square foot. The board was presented with evidence that a lower rental value would result in a higher capitalization rate. Johnston considered his Comparable Nos. 11, 12, and 13 to be superior to the Property when all factors were considered, including building age, exposure, floor area ratio, and average rents.

[49]  The Property is of a mixed use with a combination of commercial and service tenancies. It is located on a commercial street, somewhat superior in locational factors, including exposure, to Comparable No. 14. The front section of the ground floor is occupied by Siegel's Bagels which is a combination retail, restaurant, and bakery. The rear portion leased to Diamond Car Care is automotive in nature, most compatible with Comparable No. 13. The second floor is commercial office space. The board finds Johnston's analysis to be generally well-supported. The board is not entirely persuaded by the claimant's criticism of the use of industrial properties in the sales analysis and finds it reasonable to give some weight to these transactions, given the nature of the tenancies in the Property.

[50]  The board also notes that the capitalization rate selected by Johnston has accounted for the stability of the income stream and that an owner must bear any extraordinary expenses due to the cap on CAM charges for the current terms of the leases. The board finds it likely that a prudent purchaser would have researched the tax situation on the Property, therefore anticipating an increase in operating expenses. The board considers this would have exerted upward pressure on the selection of the capitalization rate.

[51]  The board finds Johnston's rent comparison to be a useful measure of comparability. The average rent for the Property is $13.49 per square foot which falls in the mid range of the rent levels in the comparable transactions. The board accepts Johnston's opinion that Comparable Nos. 13 and 14 are inferior in rent comparability at an average $7.62 and $5.10 per square foot. While the board accepts Johnston's opinion in this regard, it does not consider that his analysis fully reflects the differences between these sales and the rent levels in the Property thereby understating the relative superiority of the Property.

[52]  Weighing all the units of comparison used by Johnston, the board prefers to select a capitalization rate that gives more weight to Comparable Nos. 11 and 12 in regards to comparability with the Property. The board has rejected Rack's capitalization rate analysis and finds Johnston's analysis useful, if somewhat under-stated in not giving full consideration to the location, tenant mix, and rental income of the Property.

[53]  On the basis of the evidence presented, the board finds a capitalization rate of 8.5% to be most appropriate in this instance.

[54]  Based on the foregoing analysis, the board has reconstructed the capitalization process as follows:

Potential Gross Income	$   160,556
Vacancy & Collection Loss — 5%	8,028
Effective Gross Income	152,528
Expenses — 5% EGI	7,628
Net Income	$   144,900
Net Income Capitalized at 8.5%	$1,704,706
Indicated Market Value (rounded)	$1,700,000

The board concludes the compensation due for the market value of the Property to be $1,700,000.

6.  DISTURBANCE DAMAGES

[55]  The claims advanced for disturbance damages are for direct transaction costs incurred in acquiring replacement properties, Property Transfer Tax, and extraordinary property management expenses.

6.1  Replacement Properties

[56]  Disturbance damages sought by the claimant relate in large part to compensation for costs and expenses incurred in connection with the acquisition of three income-producing properties that the claimant submits are replacement properties for the expropriated property.

[57]  Richmond agrees that the first two properties constitute replacement properties, but submits that the third property does not, even in part, on the basis that the market value of the Property does not exceed the purchase price of the first two properties.

[58]  The board's conclusion as to the market value of the Property enables it to determine the issue of what constitutes replacement properties.

[59]  The Statement of Agreed Facts includes the following particulars of the properties:

Property	Address	Purchase Date	Purchase Price
No. 1	20234 Fraser Highway	June 2, 1997	$685,000
No. 2	20460 Fraser Highway	October 30, 1997	$1,015,000
No. 3	20740 Mufford Crescent	February 16, 1998	$3,275,000

The purchase price of property Nos. 1 and 2 total $1,700,000, which happens to be the same amount as the market value of the Property as determined by the board.

[60]  The board accordingly finds that only property Nos. 1 and 2 constitute replacement properties and the claimant is not entitled to advance any claims relating to property No. 3, even in part.

6.2  Direct Transaction Costs

[61]  The parties are in agreement that direct transaction costs consisting of conveyancing costs, mortgage commitment fees, survey, and environmental investigation expenses were reasonably incurred to purchase replacement property Nos. 1 and 2. The direct transaction costs for these two properties total $20,587.81 and Richmond has acknowledged the claimant's entitlement to compensation for this amount.

[62]  The board has determined that the third property purchased by the claimant is not a replacement property, and there is accordingly no entitlement for compensation in that regard.

6.3  Property Transfer Tax

[63]  As noted earlier, the parties have agreed that the claimant is entitled to be compensated for Property Transfer Tax, calculated on the market value of the Property as determined by the board, using the formula of 1% on the first $200,000 and 2% on the remaining value. Applying this agreed formula to the market value of $1,700,000 the claimant is entitled to compensation for Property Transfer Tax of $32,000.

[64]  The board notes, however, that the actual amount of Property Transfer Tax paid by the claimant in connection with the acquisition of the two replacement properties is $30,000.00, calculated as follows:

Property	Purchase Price	Property Transfer Tax
No. 1	$685,000	1% of 200,000 + 2% of 485,000	$11,700
No. 2	$1,015,000	1% of 200,000 + 2% of 815,000	$18,300
Total			$30,000

[65]  Had this issue been left to the board to determine, the board would have followed its normal practice and limited the compensation for Property Transfer Tax to the amount actually incurred by the claimant in acquiring the replacement properties. In Hawk Investors Ltd. v. British Columbia (Ministry of Transportation and Highways) (1999), 66 L.C.R. 94 (B.C.E.C.B.), the claimant had argued for Property Transfer Tax based on the market value of the expropriated property as determined by the board. However, the board, referring to two of its earlier decisions, stated at p. 108:

In the circumstances of this case, we see no reason not to follow McKinnon and Ferancik and limit Hawk to the conveyancing costs incurred in the purchase of the replacement property to a maximum of the Property Transfer Tax on the market value of the expropriated property.

[66]  In the circumstances of the present case, where the amount of Property Transfer Tax paid by the claimant in connection with the acquisition of replacement properties has already been established, the board would likewise have limited the award under this head to the actual amount paid.

[67]  The board, however, does not see any jurisdictional or statutory reason to override the agreement between the parties and accordingly awards the sum of $32,000 to the claimant in respect of the Property Transfer Tax.

6.4  Extraordinary Property Management Expenses

6.4.1  Claimant's Position

[68]  The Property was managed by Silver Yen, a corporation of which Willie Kwun is the sole shareholder. Willie Kwun is also the son of the majority shareholder of the claimant, Benny Kwun Construction Ltd., and has a minority stake (10%) in the equity of the claimant.

[69]  Willie Kwun testified that he incorporated Silver Yen to oversee family properties and was paid a normal management fee by the claimant. He further testified that Silver Yen provided additional services to the claimant as a result of the expropriation. These included investigating the Langley real estate market for replacement properties, using his father's criteria for identifying such properties. Willie Kwun would present information on potential replacement properties to his father and follow up with a review of the site.

[70]  Silver Yen has submitted a number of invoices to the claimant with respect to details of these services. They include meetings on-site and off-site with various individuals, review of documentation, negotiations, conferences, and correspondence.

[71]  The claimant terms these invoices as "extraordinary management expenses" and includes these as part of the claim for disturbance damages.

[72]  The claimant cites Surrey Animal Hospital Ltd. v. British Columbia (Minister of Transportation and Highways) (1993), 51 L.C.R. 37 (B.C.E.C.B.) in support of its claim. Surrey Animal Hospital Ltd. discusses the entitlement to "executive time" as part of disturbance damages.

[73]  The claimant asserts that where such expenses have been disallowed, it is often because the management time spent was not properly accounted for; the claimant did not in fact incur a direct financial liability; or executive time was indirectly reflected elsewhere in the compensation award and a specific award for executive time would result in double recovery.

[74]  The claimant submits that these expenses should be pro-rated in accordance with the ratio of the market value of the Property to the total value of the replacement properties.

6.4.2  Richmond's Position

[75]  Richmond had previously taken the position that the claimant was not entitled to any of the costs of acquiring properties as it was not carrying on a business on the Property. This position was not asserted at the hearing, however and, as stated earlier, Richmond has conceded that the direct transaction costs related to two of the replacement properties are recoverable.

[76]  Richmond, however, asserts that the claimant is not entitled to any compensation for costs categorized as extraordinary property management expenses. It states that, while Silver Yen submitted the invoices to the claimant, the invoices had not yet been paid and referred to evidence at the hearing that the claimant will not pay the invoices pending the board's determination of its entitlement to compensation with respect to these invoices. Richmond refers to the claim for extraordinary property management expenses as a "disguised attempt" to claim executive time and submits that such claims have been typically denied by the board.

[77]  Richmond further submits that even if the extraordinary property management expenses are payable, it is only with respect to replacement properties based on the board's determination of market value of the Property.

6.4.3  Discussion

[78]  Section 34(1)(a) of the Act provides that:

[79]  The board notes that while both the claimant and Richmond refer to "executive time" in the context of the claim for reimbursement of extraordinary property management expenses, there is a distinction between this particular claim and the usual claim for "executive" or "principal's" time. While Willie Kwun is a principal of the claimant by virtue of his minority equity position, the invoices have been submitted by Silver Yen, a corporation owned by Willie Kwun that had provided management service to the claimant for some time prior to the expropriation of the Property. The claim refers to the claimant's liability to Silver Yen with respect to the invoices rather than a claim for the time spent by Willie Kwun in his capacity as a principal or executive of the claimant. However the claim is clearly analogous to a claim for "executive time". In fact, Richmond submits that it is a "disguised" attempt to claim executive time. It is therefore necessary to review the state of the law in British Columbia with respect to such claims.

[80]  E.C.E. Todd in the Law of Expropriation and Compensation in Canada 2nd. ed. (Carswell: Scarborough, Ont., 1992), at page 290, includes the following in the discussion of typical allowances for non-residential owners under the heading of disturbance damages:

The issue of executive time has been considered by the board in a number of decisions.

[81]  In Surrey Animal Hospital Ltd., the board considered a claim for $50,000 for lost executive time by one of its principals in attempts to relocate the business and in making arrangements for the move. The board found the claim for $50,000 in respect of time spent in the process to be unreasonable but did award $3,000 for viewing alternative premises and their acquisition. The board notes that no invoices were actually submitted to the claimant. Nevertheless the board inferred a loss to the claimant as the principal could have billed the claimant for time spent in undertaking this work.

[82]  In L'Abri B.C. Ltd v. School District No 34 (Abbotsford) (1994), 52 L.C.R. 161, the board denied a claim for executive time. The board was of the opinion that in order for such a claim to succeed there must be corresponding loss or expense to the claimant or one must reasonably be able to infer a consequential loss, as a result of the time expended by the individual. In L'Abri, the executive testified that there was no agreement between himself and the claimant for reimbursement for time expended in respect of an expropriation.

[83]  The issue of executive time was also considered by the board in Payless Gas Co (1972) Ltd. v. British Columbia (Minister of Transportation and Highways) (2001), 74 L.C.R. 81. In Payless, the board noted that in decisions subsequent to L'Abri, the board had consistently denied the claims, either because it found that there was no evidence of any financial loss to the claimant's business as a result of the time spent by one or more of its principals on matters arising out of the expropriation or because the claim for executive time was, in fact, already captured in the board's award for compensation for business loss.

[84]  The board in Payless was able to infer that the diversion of the executive's time to matters related to the expropriation was compensable as it represented a cost or expense to Payless even if it was not reflected as a loss in the company's financial statements. The board in Payless was troubled by what it termed the "rather impressionistic character" of the evidence. The board noted, for example, that the executive's evidence as to the varying percentage of time which he devoted to expropriation and relocation was not backed up by any more precise record of total hours spent. Nevertheless, the board determined that a reasonable amount to award as disturbance damages in respect of executive time was $20,000.

6.4.4  Conclusion on Claim for Extraordinary property management expenses

[85]  The board accepts the evidence of Willie Kwun and found him to be a credible witness. The claimant hired Kwun's company, Silver Yen, to provide services to assist with matters related to the expropriation and to find alternative replacement properties. Silver Yen was already providing normal management services for some time prior to the expropriation and it was reasonable and appropriate for the claimant to engage the services of Silver Yen for this additional service. These services related to additional work that would not have been necessary but for the expropriation. The invoices submitted by Silver Yen provide in detail the time spent and work done by Silver Yen with respect to the additional work. This is not a situation where the salary of an executive would be an expense item on the profit and loss statement, absent the expropriation. The claimant has a legal liability to pay these invoices. Richmond did not question Kwun about the reasonableness of the amounts invoiced, nor has it submitted that such amounts were not reasonable, even though it has objected to the claimant's entitlement to the claim in principle.

[86]  The board is of the view that the principles enunciated in the cases referred to above regarding entitlement to claims for executive time have been met by the claimant in this case. The claimant has established with credible evidence that the invoices for extraordinary property management expenses represent a legal liability of the claimant that would not have been incurred but for the expropriation; there is a precise accounting of the time spent and services rendered; the amount claimed is reasonable; and there is no element of double recovery for the claimant. The fact that the invoices have not been paid does not in any way bar a recovery. As has been pointed out in our discussion of Surrey Animal Hospital Ltd., even the fact that invoices have not been submitted is not necessarily a bar to recovery.

[87]  As has been noted earlier, the circumstances in this case are somewhat distinct from the usual situation relating to claims for executive time. The liability of the claimant is to Silver Yen, a separate legal entity that is not an executive or principal of the claimant, even though the sole shareholder of Silver Yen is also a minority shareholder of the claimant. The board is of the view that, if anything, these circumstances strengthen the claimant's entitlement to compensation for extraordinary property management expenses. The claimant and Silver Yen structured their arrangement well prior to the expropriation, presumably for business reasons, and not for the purpose of claiming executive time. The extraordinary property management expenses were not in fact submitted by Willie Kwun in his capacity as an executive or principal of the claimant but by the separate legal entity of Silver Yen. The board finds no support for Richmond's contention that this is a "disguised" attempt to claim executive time.

[88]  In view of the board's determination of market value, the board concludes that the claimant is entitled to be compensated for the extraordinary property management expenses with respect to replacement properties No. 1 and No. 2.

[89]  The board notes from the invoices that the total extraordinary property management expenses attributable to replacement property No. 3 are $6,516.30. This amount is therefore deducted from the total of all invoices for extraordinary property management expenses of $15,270.24. The board accordingly awards the sum of $8,753.94 as damages for extraordinary property management expenses directly attributable to the disturbance caused by the expropriation.

7.  SUMMARY OF COMPENSATION

[90]  The board has determined that the amount of compensation payable by Richmond to the claimant is as follows:

1.	Market Value of Property	$1,700,000.00
2.	Disturbance Damages
	- direct transaction costs	$     20,587.81
	- Property Transfer Tax	$     32,000.00
	- extraordinary property management expenses	$       8,753.94
Total Compensation Payable		$1,761,341.75

8.  INTEREST

[91]  The claimant is entitled to interest under s. 46(1) of Act.

[92]  Pursuant to s. 46(1)(a), the claimant is entitled to interest calculated annually on the market value portion of compensation of $1,700,000 less the advanced payment $1,656,000, from May 31, 1997, the date on which the claimant gave up possession.

[93]  Interest on the award of disturbance damages is governed by s. 46(1)(b) of the Act which provides that interest is to be calculated annually from the date the loss or damages were incurred or any other date the board considers reasonable.

[94]  There are three components of the award for disturbance damages:

i	direct transaction costs of $20,587.81
ii	Property Transfer Tax of $32,000.00
iii	extraordinary property management expenses of $8,753.94

The direct transaction costs and Property Transfer Tax, totaling $52,587.81 would have been incurred on, or very close to, the completion dates of the two replacement properties -- June 2, 1997 and October 30, 1997, respectively. The board considers September 10, 1997 to be a reasonable date on which to commence the calculation of interest on this amount. The selected date lies between the two completion dates and is closer to the completion date of the second replacement property, in connection with which over 60% of these costs were incurred.

[95]  The four invoices for extraordinary property management expenses are dated March 31, 1997, May 31, 1997, December 31, 1997 and April 20, 1998. However, as 75% of these expenses are attributable to the final invoice, the board considers March 1, 1998 to be a reasonable date for commencing the calculation of interest.

9.  COSTS

[96]  The total compensation awarded by the board in this case is $1,761,341.75, whereas the amount of advance payment is $1,656,000. The compensation award is 106.4% of the advance payment.

[97]  As the compensation awarded is less than 115% of the amount of the advance payment, pursuant to ss. 45(5) of the Act, the Board has the discretion to award the claimant all or part of its costs.

[98]  The claimant submits that if the board has discretion, it should be exercised in favour of the claimant. The claimant points out that the actual sum in dispute is substantial and even a recovery less than 115% of the advance payment of $1,656,000 could represent a significant degree of success. The claimant further points out that Richmond has presented its case on the basis of a market value of the Property of $1,600,000 and asks that the claimant's degree of success should be measured against that lower amount rather than the advance payment of $1,656,000.

[99]  Richmond submits that the claims have only valuation issues and no legal issues and therefore, if costs are awarded, they should be on Scale 1 under the Tariff of Costs Regulation, B.C. Reg. 189/99 (the "Tariff"). Richmond concedes that the claimant should have its costs until the date of delivery to the claimant of Johnston's report that was filed with the board on August 17, 2001. Richmond submits, however, that no costs should be awarded for Rack's appraisal report and evidence, which Richmond says was superficial and misleading.

[100]  The board notes that the compensation awarded is $105,341.75 in excess of the advance payment. The board agrees that this represents a significant degree of success for the claimant even though in percentage terms it is less than 115% of the advance payment. If measured against the market value of $1,600,000 asserted by Richmond at the hearing, the degree of success is even greater, though still below the 115% threshold.

[101]  The board is also of the view that it was not unreasonable for the claimant to proceed to a hearing to establish the market value in these circumstances, where the selection of a modestly lower capitalization rate could result in a significantly higher market value, which, in turn, would impact on the claim for disturbance damages. There was also a significant issue with respect to the claimant's entitlement to compensation for extraordinary property management expenses and the board has determined this in favour of the claimant.

[102]  The board is, however, also of the view that there is justification for Richmond's criticism of Rack's appraisal. The board has found significant deficiencies detailed in the earlier analysis in Rack's approach that prevented it from placing reliance on his conclusions; for example, his acceptance of calculations made by the listing agent for the comparables, based on a list price rather than the actual sales price in his selection of the capitalization rate.

[103]  The board is of the view that legal and appraisal issues were of ordinary difficulty or importance.

[104]  Taking into account the considerations set out above, the board has decided to exercise its discretion by awarding costs to the claimant as follows: the actual legal and other costs (excluding appraisal) and 75% of the appraisal costs incurred for the purposes of asserting its claim until June 28, 1999; after that date, the legal and 75% of the appraisal costs of the claimant under the Tariff, both at Scale 2.

THEREFORE IT IS ORDERED THAT:

[105]  Richmond shall pay to the claimant:

1.	Compensation for the market value of the property under s. 31 of the Act of $1,700,000.
2.	Compensation for disturbance damages under s. 34 of the Act of $61,341.75.
3.	Interest as follows:
	a.	Interest pursuant to s. 46(1)(a) of the Act on the compensation for the market value of the property of $1,700,000, less the advance payment, of $1,656,000, from May 31, 1997 until paid;
	b.	Interest pursuant to s. 46(1)(b) of the Act on the compensation for disturbance damages respecting Property Transfer Tax and direct transaction costs of $52,587.81 from September 10, 1997 until paid; and
	c.	Interest pursuant to s. 46(1) (b) of the Act on compensation for disturbance damages respecting extraordinary property management expenses of $8,753.94 from March 1, 1998 until paid.
	d.	Pursuant to s. 46(2) and (3) of the Act, interest shall be calculated annually at the following rates:
		1)	Four and three quarters per cent (4.75%) from May 31, 1997 to June 30, 1997;
		2)	Four and three-quarters per cent (4.75% from July 1, 1997 to December 31, 1997;
		3)	Six per cent (6.00%) from January 1, 1998 to June 30, 1998;
		4)	Six and one-half per cent (6.5%) from July 1, 1998 to December 31, 1998;
		5)	Six and three quarter per cent (6.75%) from January 1, 1999 to June 30, 1999;
		6)	Six and one-quarter per cent (6.25%) from July 1, 1999 to December 31, 1999;
		7)	Six and one-half per cent (6.5%) from January 1, 2000 to June 30, 2000;
		8)	Seven and one-half per cent (7.5%) from July 1, 2000 to December 31, 2000;
		9)	Seven and one-half per cent (7.5%) from January 1, 2001 to June 30, 2001;
		10)	Six and one-quarter per cent (6.25%) from July 1, 2001 to December 31, 2001;
		11)	Four per cent (4.0%) from January 1, 2002 to June 30, 2002;
		12)	Four and one-quarter per cent (4.25%) from July 1, 2002 to December 31, 2002;
		13)	Four and one-half per cent (4.5%) from January 1, 2003 to June 30, 2003.
4.	The claimant's actual legal and other costs (excluding appraisal) and 75% of the appraisal costs incurred for the purpose of asserting its claim prior to June 28, 1999, and after that date, the legal and 75% of the appraisal costs of the claimant under the Tariff, both at Scale 2.