Smithies Holdings Inc. v. RCV Holdings Ltd.

2016 BCSC 477 Smithies Holdings Inc. v. RCV Holdings Ltd.

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Smithies Holdings Inc. v. RCV Holdings Ltd., 2016 BCSC 477 Date: 20160318 Docket: S125995 Registry: Vancouver Between: Smithies Holdings Inc. E.M. Smithies Investments Inc. 0704824 B.C. Ltd. Plaintiffs And RCV Holdings Ltd. Defendant - and - Docket: S123328 Registry: Vancouver Between: Smithies Holdings Inc. E.M. Smithies Investments Inc. 0704824 B.C. Ltd. Plaintiffs And RCV Holdings Ltd. Linnell Taylor Lipman & Associates Ltd. Ian Pritchard Defendants And Smithies Holdings Inc. E.M. Smithies Investments Inc. 0704824 B.C. Ltd. Spearpoint Holdings Ltd. Defendants by Counterclaim Before: The Honourable Mr. Justice Butler Reasons for Judgment Counsel for the Plaintiffs and Defendants by Counterclaim: Ronald Josephson David Adams, A/S Counsel for the Defendant RCV Holdings Ltd.: Francis Lamer Place and Date of Trial/Hearing: Vancouver, B.C. July 6-10, 2015 Place and Date of Judgment: Vancouver, B.C. March 18, 2016 Table of Contents Paragraph Range

INTRODUCTION [1] - [8]

POSITION OF THE PLAINTIFFS [9] - [13]

POSITION OF RCV [14] - [18]

ISSUES [19] - [86] Issue 1: What appraisal method should be used to value the Lands, given the circumstances of this case and the comparable sales data relied on by the appraisers? [23] - [74] The Property [24] - [63] a) Property Size [50] - [53] b) Level of Planning Approval [54] - [56] c) Location [57] - [57] d) Chestermere Properties [58] - [61] e) Land Use [62] - [63] Use of the SDM approach to appraisal of the Lands [64] - [73] Conclusions on proper appraisal approach to value the Lands [74] - [74] Issue 2: What is the value of the Lands as of the two dates? [75] - [86] June 1, 2012 [75] - [83] January 15, 2015 [84] - [86] Conclusion [87] - [88]

INTRODUCTION [1] These two actions arose out of a dispute between three parties who established a joint venture to acquire lands (the "Lands") near Calgary, Alberta. After acquiring the Lands and working together for several years, serious differences arose between the parties about the extent to which they should pursue development. The defendant, RCV Holdings Ltd. ("RCV") gave notice to the other joint venturers of its intention to withdraw from the joint venture. The parties invoked the provisions of the joint venture agreement (the "JV Agreement") to appraise the Lands in order to value RCV's 20% interest. Ian Pritchard, an appraiser, was appointed to conduct an appraisal. During the course of the appraisal, the remaining joint venturers (0704824 B.C. Ltd., Smithies Holdings Inc., and E.M. Smithies Investments Inc., collectively the "plaintiffs") received a letter of intent delivered by Greenfield Development Ltd. (the "LOI") expressing an interest in purchasing the Lands. The LOI was not provided to RCV. Other information was also withheld from RCV. As a result of these developments, the appraisal process came to a halt and litigation was commenced. [2] The plaintiffs commenced two actions to specifically enforce the provisions of the JV Agreement so that the Lands could be valued and they could acquire RCV's interest in the joint venture. RCV opposed this and sought an

order for sale of the Lands. In Smithies Holdings Inc. v. RCV Holdings Ltd., 2014 BCSC 1688 (the "Reasons"), following a three-week trial, I found that the plaintiffs breached fiduciary duties owed to RCV and were in breach of the JV Agreement. I dismissed the plaintiffs' claims for specific performance of the JV Agreement and did not order the sale of the Lands. Instead, pursuant to s. 39 of the Law and Equity Act, R.S.B.C. 1996, c. 253, I made a detailed order, which is described at para. 127 of the Reasons, establishing a procedure for appraising the Lands for the purpose of valuing RCV's interest in the joint venture in place of the process set out in the JV Agreement (the "Order"). [3] Each party appointed an appraiser to value the Lands pursuant to the terms of the Order. The plaintiffs appointed Chris Griffin and RCV appointed Pat Cooper. The Order provided that the appraisers would value the Lands as of June 1, 2012 and as of the date of the letter of instruction to the two appraisers. It took some time for the parties to agree on the terms of the letter of instruction, but the letter of instruction directed to the appraisers was dated January 15, 2015. [4] The Order for two appraisal dates was based on the findings made at trial. I concluded that RCV established, through credible evidence, the existence of circumstances which were sufficient to support a claim for loss

of opportunity. I found that Greenfield was a bona fide potential purchaser that wanted to acquire the property and had the means to do so. My conclusions regarding the evidence given by Mr. Chouhan, the principle of Greenfield, are set out at para. 33 of the Reasons: [33] I have no hesitation in accepting Mr. Chouhan's evidence regarding his intentions with respect to the attempted purchase of the Lands. Greenfield was anxious to purchase the Lands and was prepared to pay an amount in the range of $40 million to do so in the spring of 2012. Further, it had the financial wherewithal to make such a purchase. I also conclude that Greenfield's serious and legitimate interest in pursuing a purchase of the Lands was evident to Mr. Kuz. It is not possible to reach any other conclusion based on the content of the written communication between Mr. Kuz and Mr. Chouhan, and Mr. Chouhan's evidence regarding their discussions. [5] The Court was not asked at trial to value the Lands or the RCV interest in the joint venture. Accordingly, it was not possible to value the loss of opportunity claim. The question I have been asked to determine at the continuation of these proceedings is: what is the value of the Lands as of the two valuation dates. The issue as to the value of the loss of opportunity claim is not yet before the Court. Determination of the market value of the Lands as of June 1,

2012 should allow the parties to either negotiate the value of that loss or, if they are unable to do so, argue the issue at a further hearing before this Court. [6] The object of determining the value of the Lands as of January 15, 2015 was to establish a current value. The final three terms of the Order provided as follows (Reasons, at para. 127): h) Upon receipt of the appraisals the parties may agree on the value of the Lands. If they agree as to the current value of the Lands (i.e. as of the date of the letter of reference), the provisions of Article 13.1 (b)(iv) apply to determine the Equity Value of the Lands and the value of the RCV interest; i) The provisions of Article 12.3 apply for the purpose of the Buy/Sell option with respect to the interest of RCV. If the plaintiffs do not exercise the option the Lands shall be listed for sale in accordance with Article 12.3(e); j) In the event the parties do not agree as to the value of the Lands and the RCV interest, the value shall be determined by reference to this court. I will be seized of any continuation of the proceedings to determine that issue. [7] The parties were not able to agree on the value of the Lands. In part, this was because the two appraisers arrived at dramatically different values for both valuation dates. At the hearing, I permitted counsel for each of the parties to cross-examine both appraisers. Other

evidence of limited relevance was presented. In addition to the evidence presented at the most recent hearing, some of the evidence from the first trial is relevant to the issue of the value of the Lands in 2012. [8] The plaintiffs urge the Court to accept the lower appraised values put forward by Ms. Cooper. RCV submits that the higher valuations of Mr. Griffin should be accepted. I will set out their positions on the valuation issues.

POSITION OF THE PLAINTIFFS [9] The plaintiffs submit that the Court should accept the valuations of the Lands set out in Ms. Cooper's reports. She opined that the value of the Lands in 2012 was $20,500,000 and in 2015 was $17,800,000. The plaintiffs say that the January 2015 valuation of $17,800,000 should be used as the amount for the Buy/Sell option and, if necessary, as the list price in accordance with Article 12.3. [10] Ms. Cooper utilized the Direct Comparison Method ("DCM") when preparing her valuation of the Lands. She did this because the market value must be based on the marketability and desirability of the Lands as a development property with medium to long-term potential. The plaintiffs say the DCM is appropriate given the status of the land use approvals and the likely time frame for the development. In addition, the plaintiffs say that the comparable sales used by Ms. Cooper were highly relevant and fully support the valuations. [11] The plaintiffs are critical of Mr. Griffin's appraisals and say that the Subdivision Development Method ("SDM") he utilized is inappropriate for a number of reasons. It is unreliable because it requires the appraiser to estimate or subjectively assess a number of factors including the discount rate, the anticipated future selling price, the appropriate absorption period, as well as the projected hard and soft costs. The plaintiffs

criticize the approach Mr. Griffin took on all of these factors. In addition, to the extent that he used comparables to test the value he arrived at through the SDM, he used sales which had little relevance to the Lands; most were within the Calgary area, as opposed to an undeveloped rural area such as Conrich. [12] The plaintiffs also say courts have been reluctant to endorse the use of the SDM as a valid valuation technique. Courts have applied it only where development is imminent and there is adequate evidence to support the assumptions made by the appraiser. That is not the situation here and, accordingly, the plaintiffs say the Court should accept Ms. Cooper's appraisal based on the DCM. [13] With regard to the LOI, the plaintiffs say Ms. Cooper properly gave no weight to Greenfield's expression of interest in the Lands. She did that in part because the LOI was unsigned and subject to numerous conditions. However, she also spoke with Mr. Chouhan in preparation of her report and decided that the amount Greenfield was prepared to pay was very high in relation to the appropriate comparables. The fact that one buyer is prepared to pay a very high amount does not make that offer the most probable price. Accordingly, the plaintiffs say I should disregard the LOI when determining the market value of the Lands as of June 1, 2012.

POSITION OF RCV [14] RCV says the Court should generally accept the opinion of Mr. Griffin regarding the valuation of the Lands in preference to Ms. Cooper's. He opined that the value of the Lands in 2012 was $30,190,000 and in 2015 was $36,125,000. RCV says that the January 2015 valuation should be used as the amount for the Buy/Sell option and as the list price in accordance with Article 12.3. [15] RCV says that Ms. Cooper's opinion should be rejected for two reasons. First, she utilized an inappropriate valuation methodology. RCV says the DCM approach should not be used where there are insufficient relevant comparable properties on which to base the valuation. RCV says that is the situation here. Further, the fact that the properties used by Ms. Cooper as comparables are inappropriate renders her appraisal of little value to the Court. In other words, Ms. Cooper's application of the DCM was also incorrect. [16] RCV is also critical of the adjustment Ms. Cooper applies in her DCM analysis for large properties and of the fact that she seems to ignore the level of planning approval as being a significant driver of value. RCV says that Ms. Cooper's use of the data was fundamentally flawed: she adjusted the data based on preconceived impressions rather than drawing conclusions from the data itself. [17] RCV also rejects the argument that the SDM is inapplicable to the

circumstances presented in this case. RCV says the authorities establish that SDM can be used in two circumstances: where the land to be valued has the potential for subdivision development; and where there is insufficient comparable land sales data for application of the DCM. RCV says that both of these circumstances apply here. Accordingly, the SDM is the best methodology to use to value both the Phase 1 lands and the lands slated for later development (the "Remainder Lands"). In addition, the fact that the SDM mimics the very exercise a developer will invariably engage in before deciding to purchase a property adds credence to this approach. The Lands could only be purchased by a large property developer. Any such developer would undertake an analysis similar to the SDM. This suggests that the SDM is the better method to use for development properties like the Lands. [18] With regard to the LOI, RCV says I should reject the views of both Mr. Griffin and Ms. Cooper. Neither of them gave any weight to the LOI. RCV says I should take the $40 million offer into account when determining the market value of the Lands at June 1, 2012 based on my findings at trial that Greenfield wanted to purchase the Lands and had the ability to do so.

ISSUES [19] Based on the positions of the parties, I must consider two issues: 1) What appraisal method should be used to value the Lands, given the circumstances of this case and the comparable sales data relied on by the appraisers?

2) What is the value of the Lands as of the two dates? [20] My consideration of these two issues follows. For the reasons outlined, I conclude that the proper approach to appraisal of the Lands is by means of the Subdivision Development Method. I have concluded that the value of the Lands as of the two dates is: June 1, 2012 - $36,000,000 January 15, 2015 - $31,000,000 [21] In the section of these reasons dealing with the first issue, I will explain my conclusion that the SDM is preferred for the circumstances of this case and provide my critique of the reports of Ms. Cooper and Mr. Griffin. As I will explain, I reject the DCM approach chosen by Ms. Cooper and her application of that method to the data available. I accept Mr. Griffin's rationale for the use of the SDM for the Lands. I have used his opinions of value as a starting position. [22] Finally, I will indicate my reasons for arriving at the values for the Lands as of June 1, 2012 and January 15, 2015. My findings at trial regarding Greenfield's attempt to purchase the Lands in 2012 are an important factor in the determination of the fair market value of the Lands at that time. Unlike the appraisers, I cannot ignore those findings of fact. For the 2015 valuation, I have discounted Mr. Griffin's opinion given my view that he failed to recognize that the absorption period was likely to be significantly longer in 2015 than

he assumed. Issue 1: What appraisal method should be used to value the Lands, given the circumstances of this case and the comparable sales data relied on by the appraisers? [23] I will start the analysis by setting out some of the background. I do not intend to do this in any detail as the circumstances regarding the Lands and the state of the land use planning as of June 2012 are not controversial. I will also comment on the evident difficulty in valuing the Lands. The Property [24] The Lands are comprised of 433 acres of land a short distance east of Calgary and just north of the Trans-Canada Highway in Rocky View County between the towns of Conrich and Chestermere, Alberta. They were acquired by the joint venture in 2004 for approximately $3.23 million. The close proximity to Calgary made the Lands attractive for residential and commercial development. The intent of the joint venturers as expressed in the JV Agreement was to rezone the Lands for residential and commercial development and then to sell it. [25] As described in the Reasons, the parties took active steps to rezone the Lands and move the project towards development. When the joint venture began its work, the Lands were in an Agricultural Transitional zone. A significant step towards changing the land use designation took place in July 2006 when Rocky View County adopted the Buffalo Hills Comprehensive

Development Conceptual Scheme (the "Conceptual Scheme"). The Conceptual Scheme set out the residential densities for the proposed development and designated part of it for commercial development. The impact of that step and its importance in Alberta land development planning is described in paras. 50 and 51 of the Reasons: [50] With the Conceptual Scheme in place the land use could be re-designated through amendment of the land use by-law or adoption of a "direct control" by-law. However, in order to actually develop property a developer is required to obtain a development permit for subdivision approval or, alternatively, must enter into a Development Agreement with the municipality for the subdivision development. Here, Phase 1 of the development was to proceed by way of a Development Agreement between the developer and Rocky View. Until the Development Agreement was entered into and the fee paid to Rocky View, the development could not proceed. [51] Once the Conceptual Scheme was adopted in 2006, it was very likely the development set out in that document would be the one that Rocky View would allow to proceed. As of that time the Lands were, in concept, no longer designated for ranch and farm use but for residential and commercial development. However, without actual re-designation of land use and the issuance of a development permit or a development agreement, it would not

be possible to proceed with such a development. [26] The likely future land use was thus established in 2006, but the Lands remained some way from actual development. The parties needed to secure water which did not happen until 2011. The parties anticipated that the Lands would be developed in phases and continued work to ready the first phase ("Phase 1") for development. This was comprised of approximately 87 acres. Phase 1 was ready to move to actual development by mid-2011. The balance of the 433 acres was still covered by the Conceptual Scheme and so its final use was secured, but development would take additional time. [27] The difficulty in appraising a large parcel of development land in close proximity to Calgary was evident from the evidence presented at trial. I described the appraisals and expressions of interest to purchase the Lands in the Reasons. As noted at paras. 96-98 of the Reasons, the range in the appraised values and offers to purchase or sell the Lands was extremely large: [96] Another issue I must consider when deciding whether or not to grant the equitable relief sought by plaintiffs is the surprising variation in appraisal values obtained for the lands. Cushman and Wakefield performed four appraisals of the Lands for the purpose of obtaining bank financing. In each case, the appraised value was between $62 million and $66 million. The Pritchard

appraisal arrived at a value of $22,550,000. Mr. Tighe, an appraiser with Colliers International, prepared an appraisal as of January 31, 2013 and opined that the Lands had a value of $34,100,000. [97] In addition to the surprising variation in appraisal values, the evidence revealed a considerable variation in the value of offers to buy or sell the Lands. The Joint Venturers have received one other offer to purchase the Lands. On August 17, 2006 Universal Marketing & Consultants Ltd. offered to purchase the Lands for $80 million which would be paid over time as the Lands reached stages of development. Mr. Smithies responded by telling the prospective purchaser the Joint Venturers were of the view the wholesale value of the Lands was $160,000,000. I note parenthetically that the plaintiffs did not produce Mr. Smithies' letter with that response until a week before trial. [98] The wide variation in appraised values is of particular concern. Geoffery Burgess provided expert evidence regarding land appraisal. He indicated that two appraisals performed under the same terms of reference within six months of one another without a change in market conditions should arrive at values within a range of 10 to 15%. It is difficult to reconcile the Pritchard appraisal with the other appraisals and the two offers, even accepting the change in market conditions after the Universal Marketing

offer. [Emphasis added.] [28] The procedure set out in the Order was designed to produce two independent appraisals for the two valuation dates. It was expected that the procedure would produce appraisals which would arrive at values within a reasonable range. That did not happen. Indeed, Mr. Griffin's values were 50% and 100% greater than Ms. Cooper's values for the 2012 and 2015 valuation dates respectively. This is far outside of the expected margin of variation. As the parties have noted, this could occur because one or both of the appraisers used the wrong appraisal method, applied the method incorrectly to the available data, or utilized the wrong data when applying the method. It is against this background that I have considered the evidence of the two appraisers. [29] Ms. Cooper and Mr. Griffin are both accredited appraisers and members of the Appraisal Institute of Canada. The purpose of their reports was to estimate the market value of the Lands. Both utilize the approved definition of market value which reads in part: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. [30] Of course, the determination of market value is based upon an assessment as to the highest and

best use of a property. Ms. Cooper defined this as "the most reasonable and probable use for which a property can be utilized and is the most likely possible use for a property within the foreseeable future." Mr. Griffin was of the opinion that the "Highest and Best Use for the subject lands would be to develop same into a mixed use residential/ commercial subdivision." Ms. Cooper's determination is similar; she is of the view that "the subject holding represents an opportunity for a comprehensively planned development." [31] There are three appraisal methodologies recognized by Canadian Uniform Standards of Professional Appraisal Practice: the Cost, Income and Direct Comparison Approaches. The SDM is a form of the Cost Approach while the DCM is the application of the Direct Comparison Approach. [32] Before turning to the evidence of the two appraisers, I must comment on the legal position taken by the plaintiffs. They submit that courts and tribunals in this country have been reluctant to approve the use of the SDM. That is not an accurate statement of the law. It is more correct to say that the DCM is much more widely used because it is the appropriate methodology for most residential and commercial appraisals. [33] Ms. Cooper agreed with the reasoning noted in Appraisal Institute of Canada, The Appraisal of Real Estate, Third Canadian Edition (Vancouver: Real Estate

Division, Sauder School of Business, 2010) at 13.4.: The direct comparison approach is applicable to all types of real property interests when there are sufficient recent, reliable transactions to indicate value patterns or trends in the market. For property types that are bought and sold regularly, the direct comparison approach often provides a supportable indication of market value. When data is available, this is the most straightforward and simple way to explain and support an opinion of market value. [34] The SDM is utilized less frequently and only in particular circumstances. The cases referred to by the plaintiffs are support for the proposition that some caution must be used in considering the SDM. However, it is an appropriate methodology when there is a lack of recent reliable transactions involving comparable properties and where the property in question is being sold for future development. Large development properties are not "bought and sold regularly" and so the SDM is often used to value such properties. [35] The plaintiffs rely on the decision in Canadian Pacific Ltd. v. City of Montreal, [1978] 2 S.C.R. 719, for the proposition that the "developer's method" of appraisal should only be used in exceptional cases where it is impossible to fix the value by use of the "usual methods". In fact, the case supports the use of a method akin to the SDM where it is

appropriate in the circumstances. In City of Montreal, the question before the Court was the appropriate method to use in assessing land held by Canadian Pacific. In the circumstances of that case, the Court approved of a method which treated the property as "bulk land" which could be used for future land development even though development was not on the immediate horizon. [36] The plaintiffs also rely on Shindle v. City of Yorkton (1979), [1982] 18 Sask. R. 56 (D.C.). The SDM was rejected in an expropriation proceeding, but the circumstances were quite different from those before this Court. In Shindle, the development was not imminent and there was "ample evidence of reasonably like sales within a reasonable date of the expropriation": at 72. The land use status of the property as described by the court at 71 is clearly distinguishable from the situation here: In the present case, at the time of the expropriation, the subject land was located outside the city limits and was used for agriculture. The claimants made no attempt to have it zoned for residential development. They had no plan of their own for establishing the subdivision. Although they used the city's plan (Ex. P8) for estimating market value, that plan, which embraced and tied in the surrounding areas, was originally meant for and used in the development of Heritage Heights and was subject to change. They

prepared no plan of their own. According to the evidence the claimants did not take the most elementary steps towards developing the subdivision. [37] The need for caution when using the SDM was highlighted in Yin Wan Enterprises Ltd. v. City of Richmond, 2008 BCSC 146. The court referred, at para. 36, to a decision of the Expropriation Compensation Board (Double Alpha Holdings Corp. v. Pacific Coast Energy Corp. (1998), 65 L.C.R. 99 (B.C. Exp. Comp. B.)), which highlighted the fact that "[most] of the case law on the appropriateness of the subdivision development approach deals with the issue of the remoteness in time of the development, as well as the availability of reliable data with which to perform a direct comparison valuation." At para. 39, the court ultimately rejected an appraisal using the SDM which was: [39] not based on an actual development proposal for the Properties, only on a possible project. It is completely hypothetical and speculative. While such an approach might be appropriate absent sufficient comparable sales, in this case both appraisers were able to complete their reports using the Direct Comparison Approach. [38] In spite of some criticism about the SDM in Double Alpha, the Expropriation Compensation Board ultimately accepted that appraisal method. While it was not the preferred method, in the absence of adequate comparable data to support a direct

comparison method, the Board accepted the expert reports which used the SDM. The Board did so in spite of considerable frailties in the evidence, including lack of zoning, and uncertainty over the number of lots and development costs. [39] I need not refer to all of the cases relied on by RCV where assessment boards have used the SDM to arrive at land values. However, it is noteworthy that this method has been used to appraise property where the development of the land was not shovel ready and was anticipated to take place over a long period of time. This occurred in a dispute involving the Concord Pacific lands which were to be developed over a period of 7 to 15 years. In its decision, Vancouver Assessor, Area No. 09 v. Concord Pacific Developments Ltd., 1998 Carswell BC 3401(Prop. Ass. App. B.), the assessment appeal board rejected the DCM stating: [93] At the outset the Board will reiterate that only the Subdivision Development Method will be accepted for the purpose of determining the probable value for this property. The Market Comparable Approach used by Mr. Mendel is too fraught with uncertainties relating to lack of objective evidence, assumptions and subjective opinions to have any meaningful value. [40] Mr. Griffin's criticism of the DCM in the circumstances of this case echoes the problems highlighted in Concord Pacific: Under normal circumstances the Direct

Comparison Approach requires an adjustment process to compare the relative merits of the subject to the merits of the properties presented as being comparable. When it comes to large development parcels such as the subject the adjustment process becomes extremely difficult to apply within reasonable degrees of accuracy as there are numerous important factors such as potential yield, availability of utilities, status of the approval process, etc. that are very difficult to accurately account for. [41] I conclude from my review of the authorities that the SDM is a valid and accepted appraisal methodology. This is not surprising; it is certainly accepted by the Appraisal Institute of Canada. The real question in every case is whether there are appropriate comparable properties available to do a reasonable assessment using the DCM. If there are no appropriate comparable properties, and the highest and best use of the subject property is for development purposes, the SDM may be the preferred valuation method. [42] I turn now to consideration of the availability of reliable data to perform a DCM appraisal of the Lands. Ms. Cooper was cross-examined at some length on her choice of comparable properties and the adjustments she applied to compare those properties with the Lands. I find that much of the criticism levied against Ms. Cooper by counsel for RCV is merited. The choice of

comparable properties and the way in which Ms. Cooper purported to adjust the sales data to make a comparison with the Lands does not stand up to a reasoned analysis. I would paraphrase the comment made by the assessment appeal board in Concord Pacific: the DCM used by Ms. Cooper is fraught with uncertainties relating to lack of objective evidence, assumptions and subjective opinions such that it does not have meaningful value. [43] Ms. Cooper considered the Phase 1 portion of the Lands separately from the balance of the property. However, she used all of the same comparable sales for the two phases. Further, she used the same data for the 2015 appraisal that she used for the 2012 appraisal, although she did supplement the later appraisal with sales that took place after June 1, 2012. In total, she utilized 20 comparable sales for the 2015 appraisal. This meant that for the 2015 appraisal, the sales covered a period of more than five years. [44] Ms. Cooper agreed that the number of comparable sales used was not ideal; she would have preferred to use fewer sales, but had difficulty finding reasonably comparable sales. Mr. Griffin was of the view that there were no good comparable property sales. Ms. Cooper agreed that the data she used was less than ideal and that some of the comparables were quite poor. Nevertheless, she stood by her use of that data. [45] As expected with

large properties, both experts approached the appraisal by determining a price per acre for the Lands. I will set out my criticism of the way Ms. Cooper adjusted the sales data below. However, it is worthwhile noting that even after she made her qualitative adjustments to the price per acre for the comparable sales, the variation in the comparable sales is exceedingly large. After making what she determined to be appropriate adjustments, the comparable sales indicated a price range from $30,000 to $130,000 per acre for the Phase 1 property; a range of 433%. For the Remainder Lands, the sales indicated a price range of $20,000 to $90,000 per acre; a range of 450%. Ms. Cooper describes the ranges as "extremely broad". [46] Ms. Cooper agreed in cross-examination that normally after the adjustments have been applied to the data, there should be a relatively narrow range of values. Indeed, that is why the DCM approach is supposed to be useful; the comparable sales should indicate a likely value for the subject property. However, that did not occur here. Looking at the comparables, it is not possible to deduce a likely value. I can only conclude from the extremely broad range of values that the comparable properties are not, in fact, comparable to each other and some or all of them are not reasonably comparable to the Lands. Where the comparable sales data after adjustment produces a

range of values of over 400%, the exercise has little meaning. [47] Ms. Cooper agreed in cross-examination that it is preferable to do a quantitative analysis in order to make adjustments to the comparable sales. In order to do that, sufficient data is required to perform a paired sales analysis in order to isolate the effect of a particular adjustment factor. The data here did not allow any such analysis, and so the adjustment factors applied were qualitative; in other words, they were all purely subjective. This weakens the DCM analysis. In simple terms, this means that Ms. Cooper estimated percentage adjustments for a variety of factors (including lot size, location, land use and timing) and that her adjustments were not based on an analysis of relevant sales data. [48] Ms. Cooper recognized the difficulty in using the DCM given the data available from comparable sales. She stated at p. 105 of her report: The adjustment process assumes a causal relationship among the various factors for which adjustments are made and, by its very nature, is somewhat subjective. Where there is as little good data as is available for this appraisal, the adjustment process is even more difficult. [Emphasis added.] [49] I accept the criticism advanced by RCV about the adjustments applied by Ms. Cooper to the numerous comparable sales. I do not intend to analyze all of the comparables and all of

the problems with her adjustments as they are numerous. I will highlight a few of the difficulties with her opinion. a) Property Size [50] Ms. Cooper applied a 20 to 30% adjustment factor to the Remainder Lands in relation to all sales where the parcel size was less than 250 acres. This is a significant subjective adjustment made without adequate evidence. As Ms. Cooper stated after attempting to analyze the data: "Because of the variety of land uses and locations, the data is not clear." As Ms. Cooper notes, there is a basis for some adjustment because of size: smaller properties have reduced capital requirements and a shorter time frame to build out. However, for a large developer, there are also benefits to having the security of supply that a larger property provides. [51] In addition, it is illogical for Ms. Cooper to make no size adjustment for the Phase 1 property but to do so for the Remainder Lands when the property is being appraised as a single parcel. As noted by RCV, the Remainder Lands are comprised of three parcels which could be sold separately. In other words, if there is no size reduction for the Phase 1 lands, there should not be for the Remainder Lands as they could be sold separately in similar size parcels as well. The distinction between the two parts of the Lands is really the readiness for development, not the size of the lots. [52] The lack of logic to

her size adjustment is demonstrated by the four comparable sales she used which were part of a Canadian National Railway ("CN") land assembly. CN purchased four adjacent lots in 2011. The sizes of the lots were: 335, 330, 143 and 165 acres. The 330-acre lot and the 165-acre lot were purchased for almost the same price per acre value. There was a 42% difference in price per acre for the two larger lots and a 48% difference in the price per acre for the two smaller lots. The only conclusion to be drawn from these sales is that the size of the parcels was not a significant factor. [53] I conclude that there is no support in the data for the magnitude of size adjustment applied by Ms. Cooper. b) Level of Planning Approval [54] As noted in The Appraisal of Real Estate, the most significant driver of value for development land is the level of planning approval. That is not surprising. Ms. Cooper acknowledges the value added by properties which are included in an Area Structure Plan ("ASP") or covered by a Conceptual Scheme. She also recognized that the Lands had both levels of approval. However, when making adjustments from her chosen comparables, she appears to give little or no credit to the level of planning approval, especially with regard to the Remainder Lands. [55] A dramatic example of the benefit of land use approval was evident in her data. Three properties within Langdon

were sold between 2010 and 2012. The one property with an ASP sold for $91,211 per acre, while the two without approval sold for values between $48,000 and $55,000 per acre. This suggests that the land use approval has a very significant effect on value. However, the adjustments she applied to the Remainder Lands do not reflect this. In relation to the Langdon properties without land use approval, she gave a small upward adjustment to the Remainder Lands based on land use, although it was offset by the negative size adjustment. In relation to the Langdon property with ASP approval, she applied a negative adjustment to the Remainder Lands even though they had the benefit of both an ASP and a Conceptual Scheme. [56] Ms. Cooper included five properties in her comparables which had no level of planning approval. Not surprisingly, these properties sold at prices per acre which were quite low compared with the majority of the properties with some level of planning approval. The small adjustments she made fail to give adequate recognition to the importance of this factor. I conclude that the choice of comparable sales and the adjustments Ms. Cooper applied did not properly take into account the contribution to land value attributable to more advanced levels of planning approval. c) Location [57] Ms. Cooper included a 105-acre property located in Strathmore as one of the comparables.

There is no logic in doing so. Strathmore is almost 50 kilometres east of the Lands. The Lands are just outside of the city limits of Calgary. The development potential of the Lands is based on the proximity to Calgary. In spite of this, Ms. Cooper concluded that the Strathmore property was superior for location, primarily because it was within "an urban setting". In fact, Strathmore is a smaller community far from Calgary. The inclusion of the sale as a comparable is illogical and the adjustment applied is indefensible. The inclusion of property sales for lands which are not reasonably comparable to the Lands is one of the reasons the range of property values Ms. Cooper arrived at after applying adjustments is more than 400%. d) Chestermere Properties [58] Ms. Cooper used as comparables, two transactions of 70-acre parcels in Chestermere, just south of the Lands. The sales took place in December 2014 for approximately $130,000 per acre. She applied a 55% downward qualitative adjustment when comparing these to the Remainder Lands. She did this for two reasons; she assumed the Chestermere properties could be developed within a year or two and that the densities would be much greater than for the Remainder Lands. [59] In cross-examination, it was evident that she failed to verify her assumptions. She failed to examine either the Chestermere ASP or the Conceptual Scheme covering

the Lands. The Chestermere ASP covers 2400 acres to be developed over 30 years. The parcels are in a section of that ASP which is "subject to growth management analysis" following the initial phases of the development. This suggests the development of those parcels could be years away. Based on the Conceptual Scheme, the Phase 1 lands appear to be closer to development than the Chestermere lands, and the Remainder Lands may also be closer to development as they are also subject to the Conceptual Scheme. Quite simply, the level of land use approval based on the planning documents is superior for the Lands when compared to the Chestermere parcels. [60] Ms. Cooper relied on information she received from a realtor, not from the planning documents. Further, she did not confirm the planned densities for either the Lands or the comparables. Her assumption that the Chestermere densities would be much greater is without justification. In fact, based on the planning documents, the densities for the Remainder Lands and the Chestermere lands are quite similar; 4.22 and 5.0 units per acre respectively. [61] The drastic subjective adjustment in relation to the Chestermere comparables significantly impacted Ms. Cooper's opinion. Those properties had the highest per acre sale price, the same land use, a slightly inferior level of planning and are in very close proximity to the Lands. e) Land

Use [62] Ms. Cooper used sales of lands zoned for industrial purposes as comparables. The use of a property type with a different highest and best use makes little sense. Lands zoned for industrial use will sell at different per acre values than residential/ commercial property. Those properties are clearly not reasonable comparables and the adjustments applied by Ms. Cooper do not adequately reflect the difference in land use. [63] In summary, the use of the DCM as a valid approach to appraisal is dependent upon the availability of reasonable comparable sales. It is the approach used most often because of the ready availability of recent sales data for comparable properties with the same use and similar attributes to the property under consideration within a specified area. The data relied upon by Ms. Cooper to perform the direct comparison is simply not useful for that purpose. This is evident from the "exceedingly broad" range of values arrived at even after Ms. Cooper applied her subjective adjustments. When I examine the application of those adjustments, they do not stand up to scrutiny. Adjustments were applied inconsistently and without any coherent or understandable rationale. I conclude that the DCM approach was inappropriate for appraisal of the Lands. As Ms. Cooper's methodology was seriously flawed, I can give no weight to her opinion to the extent that it was based

on that approach. Use of the SDM approach to appraisal of the Lands [64] The two conditions which should be met before application of the SDM to an appraisal are present here: the highest and best use of the Lands is for subdivision development; and there are insufficient recent transactions which are reasonably comparable to allow the use of the DCM. [65] Ms. Cooper did not use the SDM because of her concern about the timing of the development. She was of the view that it should not be applied because the Buffalo Hills development would be built out in the medium to long range. However, I was not referred to any texts or authorities which restrict the application of the SDM to near-term development. Indeed, it has been applied to long-term developments in the authorities referred to above. [66] One of the rationales given by Mr. Griffin for using the SDM is compelling. There are a limited number of potential purchasers for large development parcels. Only developers who have access to sufficient financing to allow them to hold land for an extended time and undertake the substantial development costs are interested in acquiring large parcels of land. The approach taken by any such potential purchaser will necessarily mimic the approach taken by an appraiser applying the SDM. As confirmed by the evidence of Mr. Chouhan at trial, and by Mr. Griffin, developers engage in a

discounted cash flow analysis in order to arrive at an estimate of value for the purpose of analyzing a potential investment in a long-term real estate development project. The purchaser attempts to assess the type and number of lots that will be developed, how long it will take to build out, and what the yield will be. This is the same kind of analysis undertaken by an appraiser using the SDM. If the analysis is done skillfully, the valuation should be similar to the price that potential purchasers would be prepared to pay. In the absence of recent similar land transactions, it will be the only method available to appraise such a parcel of land. [67] The plaintiffs' main criticism of the SDM is that it should not be applied when the entire development is not imminent. I accept Mr. Griffin's evidence in this regard. The technique is valid as long as the use of the land for development is known. It is better when some of the development is imminent, but is useful for developments which have a longer time line, even though there will be more uncertainty if that is the case. The SDM is the best way to assess the value added to the property by the land use approvals which have been obtained. Here, the Conceptual Scheme, which was approved in 2006, established the use of all of the Lands for residential, commercial and some institutional development. Further, the development of the

Phase 1 lands was approved in June 2009 and was imminent in 2012, even though it did not proceed. [68] The other criticisms leveled against Mr. Griffin's use of the SDM involved some of the assumptions he made. These included: his density estimate, the discount rate, the percentage figure used for soft costs, the lack of engineering estimates for the hard costs and the extrapolation of the 2012 budgeted costs for the 2015 appraisal. [69] I agree that it is important to critically examine Mr. Griffin's approach and the figures he used. However, in doing so, it is important to recognize that the assumptions made are intended to be estimates; they are not intended to be precise. For example, the fact that he could not use cost estimates developed by contractors or engineers for the hard costs is not fatal to the exercise. Mr. Griffin was qualified through extensive experience to perform the SDM analysis and is qualified to assess the reasonableness of such cost estimates. The hard cost estimate was based on a Buffalo Hills budget and he considered it to be within a reasonable range of costs for 2012. While such an approach does not produce as accurate a forecast as having an engineering cost estimate, it is sufficient for the kind of analysis performed. The fact that he had no updated budget for 2015 is a factor to take into account in assessing that appraised value. [70] Mr.

Griffin's estimate of the soft cost percentages differed from that which Ms. Cooper suggested, but it was evident that his figure was chosen based on the items he was including for both soft and hard costs. I accept his explanation for the estimates used. In addition, the density estimate figures he used were clearly conservative. Mr. Griffin also explained the figures he used for the selling price per lot or per acre for the different categories of property (residential single, residential multi-family, commercial and institutional). They were not challenged in cross-examination and I assume they are within a reasonable range. [71] The most challenging aspect of Mr. Griffin's SDM appraisal is the estimated absorption period and the applicable discount rate. Mr. Griffin used an 11-year estimated absorption period for the 2012 appraisal and an 8-year period for the 2015 appraisal. He used an 8% discount rate for both. I have a concern about the choice of absorption period for the 2015 appraisal. In his report for the 2015 appraisal, he made the following comments: Certainly with a total yield in the range of 1,337 residential units plus the other land uses constitutes a significant development and even with the formerly booming Alberta economy it would require several years for the development to be fully absorbed into the market place. Most of the forecast that we are familiar

with are of the opinion that this downturn in oil prices and the negative impact of same on the Alberta economy will last approximately two (2) years. Given the foregoing it would be prudent to delay commencing the development of the subject lands for the aforementioned two year period as lenders are likely, if history is to be a guide, to significantly reduce the availability of funding for such ventures . There is however a further factor that must be given consideration and that is the fact that the subject Buffalo Hills development has become somewhat stale in the market place as essentially, to the common observer, nothing has happened since the Buffalo Hills Comprehensive Development Conceptual Scheme was adopted by Rocky View County on July 11, 2006 and Phase 1 of the development was approved by Rocky View County on June 23, 2009. It is difficult for a developer to overcome the scepticism that is now associated with the development. In consideration of the current economic situation and the negative attitude that has developed about this development, we would suggest caution be exercised in terms of predicting a total absorption period; therefore, we shall incorporate a total absorption period of eight (8) years for the Buffalo Hills development. [72] I accept Mr. Griffin's cautionary notes about the situation in 2015. However, the difficulty with his 2015 appraisal is

that he uses a shorter absorption period when compared with the 2012 appraisal. The use of the shorter absorption period is significant because it means a faster build out of the development and a faster return on the investment. The greater return is also influenced, to some extent, by the higher estimated selling prices used in the 2015 appraisal, but the use of a shorter absorption period with the same discount rate results in a significantly higher appraised value. In other words, Mr. Griffin has highlighted market problems in 2015 which did not exist in 2012, and yet the assumptions he uses actually project that the Lands would be developed and sold more quickly as of January 15, 2015 than they would have based on the assumptions used for June 1, 2012 when Calgary was booming. This is illogical. [73] Before leaving my critique of Mr. Griffin's reports, I note that he chose a number of transactions as comparables (seven for each period) and used the DCM as a check on the appraised value he arrived at by the SDM. He did not perform any adjustment of the comparables, but found that they provided some support for the SDM analysis. The valuation he arrived at under that method fell into the bottom of the range of the comparable sales. He felt this was justified as development was more imminent for some of the comparable properties and a number of these were within the Calgary

city limits. I agree that the comparables chosen by Mr. Griffin are not ideal, but do provide some support for the SDM analysis he undertook. Conclusions on proper appraisal approach to value the Lands [74] In summary, I find that the SDM is the best approach to appraising the Lands. The DCM is not an acceptable method for valuing the Lands because of the lack of availability of recent sales data for comparable properties with the same use and similar attributes to the property under consideration. Ms. Cooper's attempted adjustment of the data she chose was unconvincing. The SDM is the preferred method in all of the circumstances. In general terms, I accept Mr. Griffin's application of that methodology. While the assumptions he makes are generally reasonable, the inconsistency between the two appraisals regarding the likely absorption period is illogical and has a significant impact on his opinion as to the value of the Lands as of January 15, 2015. Issue 2: What is the value of the Lands as of the two dates? June 1, 2012 [75] As I have already indicated, I am of the view that my findings regarding Greenfield's intention to acquire the Lands is a relevant consideration in determining the value of the lands as of June 1, 2012. Of course, at that time, Mr. Chouhan was in negotiations with Mr. Kuz in an attempt to purchase the Lands. Greenfield owned an adjacent property, had the

financial ability to acquire the Lands, and was anxious to do so. Given the limited number of potential purchasers for development property as large as the Lands, the fact that one of those purchasers was able and anxious to acquire the property in June 2012 for $40 million cannot be ignored. [76] The Court's task at this time is to determine the value of the Lands as of the two dates in question. I am not constrained in the same way the appraisers were in relation to the Greenfield LOI and offer. This is perhaps best explained by examining Mr. Griffin's views on the Greenfield offer. As an appraiser, he was of the view that an unsigned offer was unworthy of any consideration. Without the signature, he regarded the offer as "simply a piece of paper". He did nothing further to assess the offer. In examination, he conceded that if the offer was serious, he ought to have taken it into account. [77] Ms. Cooper did speak with Mr. Chouhan and so had an opportunity to assess the offer. She recognized that he did have independent financing and that his interest in purchasing the Lands was genuine. Her reasons for giving no weight to the Greenfield offer are instructive. First, she says the mere fact that one individual is prepared to pay a particular price does not make that the market price. Second, she compared the Greenfield offer to her assessment of the value of the Lands based on

her DCM opinion. When she did that she concluded that the Greenfield assessment of value was so much higher than her opinion of value that it should be disregarded. This approach to consideration of the offer is, like her application of the DCM, highly subjective. She subjectively discounted the offer on the basis of her own opinion, which was already formed. Instead of considering relevant information in order to form her opinion, she rejected information which contradicted her preconceived views. [78] In any event, I can and must take the Greenfield offer into account in determining the value as of June 1, 2012. I have already found that the negotiations proceeded slowly and came to an end because of the actions of the plaintiffs. It was not because of any lack of interest or financing on the part of Greenfield. As I concluded at para. 29 of the Reasons: [29] The only conclusion to draw from the chronology of events is that Mr. Smithies deliberately attempted to drag out the discussions with Greenfield. He wanted to delay the plaintiffs' decision about what to do with the Greenfield offer and did not want to advise RCV of it prior to the buy-out of its interest. [79] I also concluded that Greenfield was ready and able to put up a significant non-refundable deposit, but never got to that point because of the steps taken by the plaintiffs. The only reason there was no signed

offer was because of the plaintiffs' manipulation of the process. In these circumstances, I find that Greenfield's willingness to offer $40 million to purchase the Lands is relevant and probative of the value at that time. [80] I must also take into account the evidence of Mr. Chouhan at trial regarding an appraisal he received on his adjacent property in July 2012. The appraisal (also by Mr. Tighe) opined that the value of his lands was $115,000 per acre. He thought Greenfield's land was worth 5 or 10% more than that and his offer to the plaintiffs for the Lands was based on his view as to the value of Greenfield's lands. He conceded that if Mr. Tighe's appraisal was correct, he may have offered 10% too much for the Lands. He also stated that this difference was within the range of error he would expect in appraisal values. In other words, it may not have been significant. Nevertheless, if the negotiations had continued, Mr. Chouhan may have received the Tighe appraisal of Greenfield's lands before conclusion of the negotiations to purchase the Lands. In other words, he may well have reduced his offer in light of that appraisal. [81] Taking all of the evidence into account, I conclude that Mr. Griffin's SDM valuation of the Lands is best regarded as a minimum value. It is to be regarded as a starting point because he arrived at that value by ignoring the best and most

probative evidence of value; a serious offer from a qualified purchaser. Accordingly, the appraisal at $30,190,000 is a minimum value or starting point. [82] RCV says the value in June 2012 should be $40,000,000, as Greenfield was a ready and willing purchaser at that price. However, that figure must be discounted. No agreement was reached. Further negotiations may have resulted in a lower offer. Further, I cannot ignore Mr. Chouhan's view that his offer may have been above the market value by 10%. [83] In all of the circumstances, I conclude that the value of the Lands as of June 1, 2012 was $36,000,000. January 15, 2015 [84] Again, I would use Mr. Griffin's value of $36,125,000 as a starting point. As I have indicated, his assumptions regarding the absorption period cannot be valid in light of the negative developments which have affected the Lands since 2012. In arriving at that conclusion, I have taken into account Ms. Cooper's evidence about the change in the market in the Calgary area since 2012. While I cannot accept the DCM approach used by Ms. Cooper, I do accept her views on market developments as of January 1, 2015: However, housing starts and sales have dropped dramatically in the Calgary region since Fall 2014. Our discussions with home sellers and land developers indicate that the number of sales have dropped by 25% in the last few months although they have not

yet discounted prices as deeply. We are also told that bankers have become very cautious. All of these factors support a downward adjustment for time since 2012. [85] Ms. Cooper was of the opinion that the Lands had reduced in value by about 15% between the two dates. The difficulties facing future development of the property were highlighted by Mr. Griffin: as of January 2015, financing would be more difficult to obtain, developers would be wary of a property which had sat idle for more than five years and the downturn in the oil industry would give any developer second thoughts about acquiring such a large development property. [86] In these circumstances, I would discount Mr. Griffin's valuation by an amount which is similar to the reduction applied by Ms. Cooper. In other words, I conclude that the value of the Lands as of January 15, 2015 was $31,000,000. That is the value to be used for the Buy/Sell option and, if necessary, as the list price in accordance with Article 12.3 of the JV Agreement. Conclusion [87] The value of the Lands as of the two relevant dates is: June 1, 2012 - $36,000,000 January 15, 2015 - $31,000,000 [88] RCV has been substantially successful and is entitled to costs at Scale B. "Butler J."