Does Common Property Have Value
February 10, 2022
Since common property in strata buildings is real estate, it’s assumed it has value like every other piece of real estate. But, maybe that’s completely wrong and it’s valueless [at least in the conventional sense]. In this article, I start to explore alternative propositions about common property value.
Something has been bugging me for a long time in relation to strata title buildings: and, that’s how to value common property.
It’s an issue that comes up from time to time in situations like:
- when a strata owner wants to use it temporarily for parking or to put tables and chairs out when they run a café,
- when a strata owner wants to extend their apartment into common property to create a balcony, terrace, attic, or add a roof terrace or another floor,
- when a telecoms company wants to lease space for antennae, or
- when a developer of adjoining land wants to buy some common property on the boundary or to create a drainage easement.
In each case the issue of what that common property and/or rights over that common property are worth crops up and usually needs to be agreed or determined by a value or Court for the arrangements to be finalised.
There’s always been an assumption that strata common property has value just like any other piece of real property.
That’s because [in my view]:
- common property is real estate [after all there is a certificate of title] and it must, therefore, logically have value,
- people offering to use or buy use common property offer money for it,
- if it was not a strata subdivided it would have value,
- licensed valuers’ ascribe value to common property,
- Courts and Tribunal have made decisions ascribing value to common property, and
- no one wants to accept that something they own [like an appurtenant interest in common property] is worthless
But, all those things don’t necessarily make that right and I can think of many reasons why the opposite [or something fundamentally different] is true.
So, in this article, I’m starting to explore the problematic concept of whether or not common property has value, and if it does how is that determined.
Some basic land valuation concepts and principles
There are a few basic and long-standing concepts and principles to land valuation in Australia.
- Firstly, there’s the unimproved capital value of land.
That’s determined in each state by the Valuer-General or their equivalent.
It’s supposed to represent the underlying value of the earth [or dirt] in a parcel of land without any improvements like buildings, fences, productive vegetation or animals, etc. In some parts of Australia, it does include merged improvements such as drainage, leveling, and filling, for land within the metropolitan areas.
It’s largely used for applying and apportioning government and other statutory charges like rates, land tax, etc.
- Secondly, there’s the market value of land or property on land.
Market value is simply the price of the land likely to be agreed between a seller and buyer in a marketplace.
The International Valuation Standards Council defines Market Value as:
‘The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’
But, in Australia the principles for determining market value were set out by the High Court in an old case, Spencer v Commonwealth (1907) 5 CLR 418, which included the following guiding principles in its judgment:
at 41 Isaacs J said:
‘In the first place the ultimate question is, what was the value of the land on 1st January 1905? All circumstances subsequently arising are to be ignored. Whether the land becomes more valuable or less valuable afterwards is immaterial. Its value is fixed by Statute as on that day. Prosperity unexpected, or depression which no man would ever have anticipated, if happening after the date named, must be alike disregarded. The facts existing on 1st January 1905 are the only relevant facts, and the all important fact on that day is the opinion regarding the fair price of the land, which a hypothetical prudent purchaser would entertain, if he desired to purchase it for the most advantageous purpose for which it was adapted. The plaintiff is to be compensated; therefore he is to receive the money equivalent to the loss he sustained by deprivation of his land, and that loss, apart from special damage not here claimed, cannot exceed what such a prudent purchaser would be prepared to give him. To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.’
That’s all a bit heavy, but it is commonly summarised as:
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently, and without compulsion.
- Thirdly, there’s the value of land as an income-producing asset or a future developable asset.
That’s the value of land today taking into account the potential future use, income, or development of the land.
There’s a number of ways that is usually determined including approaches like the following that make predictions about future use and offset risk and uncertainties:
- The direct comparison method
- The summation method
- The income capitalisation method
- The discounted cash flow method
- The hypothetical development approach
And, depending on the location and type of land there are probably a few more ways to value it.
What happens in most strata buildings over common property value?
But, in practice, when common property needs to be valued the appropriate method is less than obvious and a hybrid approach is usually taken between the market value approach and the hypothetical [or actual] development approach. So that:
- the common property space is compared to apartment space in the strata building to determine its value as if it was part of an apartment,
- the future value of the common property space after its use is changed and/or works are done is determined less the cost of reaching that state plus some adjustment for risk to determine the next gain or profit, and
- a value is subjectively determined somewhere in between those amounts.
It’s all a bit vague and unsatisfactory leaving the people involved to ultimately negotiate a number if they can or Courts and Tribunals to pick the preferred or favourite valuer’s approach and simply adopt it when it’s disputed.
In my view, that’s because neither method is appropriate because common property can’t be valued like other stand-alone real estate.
So, everyone’s using the wrong tools to measure it.
My issues about common property having value [in the conventional sense]
There are a few options about common property value as follows.
- Common property has value like all other real estate [the conventional position].
- Common property has no monetary value.
- Common property only has value as part [proportionately] of the strata lot values.
But, common property is not like other real estate.
In fact, I’ve written before that common property is a unique form or real property that is unlike any other and that Courts have struggled to property define it and appurtenant rights [see my article ‘The Dilemma of One v. Many in Strata Buildings: Part 1: Why the essential nature of a strata title scheme remains enigmatic …’
Here are a few of the things that make it different that I’ll explore in more detail in future articles.
- Common property is not independently owned by anyone. So, whilst the strata corporation is the owner, it’s really owned by the entire group of strata owners.
- The group of strata owners who own common property is not fixed and changes without reference to other owners.
- All of the common property is part of each strata lot in legal and practical terms, so no one can claim ownership of any part of it at any time.
- Common property can’t be removed to the strata complex without most or all of the strata owners’ approval [although that varies from state to state].
- Common property can’t be used exclusively by anyone without most or all of the strata owners’ approval [although that varies from state to state].
- Common property can’t be sold without most or all of the strata owners’ approve [although that varies from state to state].
- Common property value has multiple components that go well beyond the physical space itself including things like structural integrity to buildings and other strata lots, space and separation between strata lots, and light, air, wind, views, etc.,
- The amenity and [to the extent amenity that affects value] the value of common property is different to different strata owners and strata residents based on who it relates to their strata lot. For instance, a garden outside your ground floor apartment is more valuable to you than to top floor strata owners and strata residents, and, a roof cavity space is more valuable to the strata owner of the strata lot below than to any other strata owner.
- The concept of lost rights in and benefits from the common property has not been considered much in valuations, by Courts and Tribunals, and in strata transactions.
So, questions like the following remain unanswered:
- who loses the value when common property changes occur,
- who gains value when common property changes occur,
- in what proportions do value changes affect strata owners,
- when do value changes affect strata owners [at the time of the change or when they sell], and
- does the strata corporation play any part in value questions [and if so, how].
In fact, when common property is used by only one or some strata owners there is an opportunity cost to all others strata owner who lose the use of that common property. That’s why that usually requires that most or all of the strata owners approve it: in other words, they must approve giving up those rights and benefits.
So, I don’t think common property be valued like other real property.
The value of the common property is really its value to each strata owner and not some independent value.
Perhaps the value of common property is really best measured in the opposite way: by how its exclusive use, sale, or transfer impacts on the value of all the strata lots and the strata owners’ property values.
Article contributed by Francesco Andreone, GoStrata