Common Property – all cost, little real value

In this week’s guest post from our friend Francesco Andreone of GoStrata, he’s going to make you think about assumptions we’ve all made about common property in our strata buildings – that it has value like other real estate. Or not. Maybe it’s actually valueless!

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 subdivision, 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.

1.      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.

2.     Secondly, there’s the market value of land or property on land.

The international definition of market value is simply the price of the land likely to be agreed between a seller and buyer in a marketplace.

But, in Australia the principles for degerming market value were set out by the High Court in an old case, Spencer v Commonwealth (1907) 5 CLR 418.

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.

3.     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:

1.     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,

2.     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

3.     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.

A.    Common property has value like all other real estate [the conventional position].

B.     Common property has no monetary value.

C.     Common property only has value as part [proportionately] of the strata lot values.

But, common property is not like other real estate. 

Here are a few of the things that make it different that I’ll explore in more detail in future articles.

1.     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.

2.     The group of strata owners who own common property is not fixed and changes without reference to other owners.

3.     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.

4.     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].

5.     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].

6.     Common property can’t be sold without most or all of the strata owners’ approve [although that varies from state to state].

7.     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,

8.     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.

9.     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.

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