LR22-39

Landlord appeal · rent increase. Outcome: partial. The appeal is allowed in part and monthly rent is increased to $1,246.77 for each of the eight (8) units affected by this Order. The Issue The Commission must decide whether the requested rent increases are justified.

Linked prior order: LD22-015

Order text

Docket LR22007 – Greenway Realty Inc. v. Tenants of 55-67 and 71 Balcom Drive, Summerside Wednesday, July 20, 2022 Docket: LR22007
Order: LR22-39
BEFORE THE COMMISSION ON Wednesday, July 20, 2022.
Panel Chair - Erin T. Mitchell, Commissioner
M. Douglas Clow, Vice-Chair
Hearing Date: Thursday, April 28, 2022
ORDER
IN THE MATTER of an appeal, under section 25 of the Rental of Residential Property Act (the “Act”), filed by Greenway Realty Inc. against
Order LD22-015 issued by the Director of
Residential Rental Property and dated January 24, 2022.
Compared and Certified a True Copy
(Sgd.) Susan Jefferson Commission Administrator Corporate Services and Appeals

Orders of The Island Regulatory and Appeals Commission Order LR22-39 - Page 2 Docket LR22007 – Greenway Realty Inc. v. Tenants of 55-67 and 71 Balcom Drive, Summerside Wednesday, July 20, 2022 This appeal asks the question of whether the Director of Residential Rental Property (the “Director”) erred in the calculation of greater than allowable rent increase for eight (8) of nine (9) units in a three-unit and six-unit building. One unit, 69 Balcom Drive, is excluded.
BACKGROUND
A landlord, Greenway Realty Inc. (the “Landlord”), rents units located at 55, 57, 59, 61, 63, 65, 67 and 71 Balcom Drive, Summerside, PE (the “Units”), to each of Judy Green, Eric and Paula Arsenault, Donnie and Georgina MacDonald, Ada Kilbride, Clair White, Mary Drummond, Karen Oatway and Barbara Poirier (collectively the “Tenants”). Rent for the Units in question ranges from $1,147 to $1,222 per month.
On October 22, 2021, the Landlord gave formal notice to the Tenants that it intends to raise their rent to an amount that was set out in each notice. On the same date, the Landlord filed with the Director an application to increase the rent above the percentage allowed by regulation. On December 1, 2021, the Landlord filed with the Director a Statement of Income and Expenses.
In Order LD22-015 dated January 24, 2022, the Director ordered that:
a) the maximum allowable monthly rent for the Units shall be as follows:
Unit Rent Effective Date 55 $1,158.47 February 1, 2022 57 $1,158.47 February 1, 2022 59 $1,158.47 February 1, 2022 61 $1,216.04 March 1, 2022 63 $1,158.47 February 1, 2022 65 $1,158.47 February 1, 2022 67 $1,234.22 March 1, 2022 71 $1,158.47 February 1, 2022 The Landlord appealed.
The Commission heard the appeal on April 28, 2022. The hearing was conducted by way of telephone conference call. Matthew Bowness and Kevin Green represented the Landlord and were assisted by legal counsel, Andrew MacDonald. The following Tenants participated: Judy Green, Paula Arsenault, Eric Arsenault, Donald MacDonald (“Mr.
MacDonald”), Georgina MacDonald, Ada Kilbride, Clair White, Mary Drummond (“Ms.
Drummond”), Karen Oatway, and Barbara Poirier. Mr. MacDonald served as the Tenants’ representative and spoke at the hearing. Ms. Drummond also spoke at the hearing.

Orders of The Island Regulatory and Appeals Commission Order LR22-39 - Page 3 Docket LR22007 – Greenway Realty Inc. v. Tenants of 55-67 and 71 Balcom Drive, Summerside Wednesday, July 20, 2022
Disposition
The appeal is allowed in part and monthly rent is increased to $1,246.77 for each of the eight (8) units affected by this Order.
The Issue The Commission must decide whether the requested rent increases are justified.
Analysis
Part IV of the Act governs rent increases, and sets out the factors the Director shall consider in determining whether a rent increase beyond the annual allowable amount is justified. Subsection 23(8) reads:
Factors considered At the hearing both parties are entitled to appear and be heard and the Director shall consider the following factors:
(a) whether the increase in rent is necessary in order to prevent the lessor sustaining a financial loss in the operation of the building in which the premises are situate;
(b) increased operating costs or capital expenditures as advised by the lessor;
(c) the expectation of the lessor to have a reasonable return on his capital investment;
(d) such other matters as may be prescribed by the regulations.
One additional matter is set out in the Rental of Residential Property Act Regulations (the “Regulations”):
20. Additional factors
The following additional matter is to be considered under subsection 23(8) of the Act: The date and amount of the last rental increase. (EC10/89) The Landlord presented evidence on expenses and submitted that their proposal would phase in their requested increases over time for existing tenants only. The Landlord’s representatives referenced an eight-page written submission where they submitted that the Director had erred in Order LD22-015 and that the Commission had erred in recent previous appeal Orders. In particular, they opposed the 4% return on investment referenced in recent Commission Orders, submitting that the Commission in Order LR14-02 found that a reasonable return on equity, after taxes, would be between 8% and 9%.
The Landlord submitted that, in the present appeal, an increase of monthly rent to $1,500 as originally proposed would amount to a return on investment of approximately 5.9%.

Orders of The Island Regulatory and Appeals Commission Order LR22-39 - Page 4 Docket LR22007 – Greenway Realty Inc. v. Tenants of 55-67 and 71 Balcom Drive, Summerside Wednesday, July 20, 2022 Mr. MacDonald for the Tenants expressed concern about the extent of the requested increase and stated that the requested increase was based in part on high fuel prices and yet there is no method available to decrease rents when fuel prices go back down. He noted issues with maintenance – specifically snow removal, grass cutting, lower siding, and painting. He noted that decks, washers, driers and dishwashers belong to the Tenants.
Ms. Drummond stated that the increases for water, sewer, and IWMC charges were minimal. She noted that their units were the oldest, did not have block wall between them and thus should be valued less than other units owned by the Landlord. She stated that the Landlord wants the Tenants to pay market-value rent, but the Landlord is not paying market-value property tax.
As the Landlord has critiqued the Commission’s recent use of a 4% return on investment as a guideline, stating that the dividend yield of blue chip stocks, such as Canadian bank stocks, would give a roughly equal rate while not requiring active management, the Commission offers the following:
 Blue chip stocks offer a dividend that varies but is relatively reliable. Blue chip stocks may also offer share value accretion that is generally quite favourable over time, but are subject to day-to-day fluctuations in the market, and are also subject to general economic downturns and recessions.
 Residential real estate rentals may offer an annual profit, but also offer the possibility of appreciation in the value of the real property asset.
 A recent check of annual dividend yields for the “Big 5” Canadian banks indicates a range of from 4.08% to 5.23%, which is an increase over recent past yields.
 Real property values on Prince Edward Island are generally increasing at a significant rate and, in recent years, at a very significant rate. While this current rate will likely level off to more modest growth, such growth is favourable over time.
 Unlike stocks, including blue chip stocks, residential real estate is moderately isolated from negative market conditions, especially when demand for housing is high and vacancy rates are low.
 While the Commission’s current 4% return on investment guideline is calculated before taxes, dividend yields are also before taxes. In addition, dividends may be subject to fees.
 Dividend yields do not include the costs of financing the acquisition of shares. The Commission’s current 4% return on investment guideline is calculated after including any financing e.g., mortgage costs required to purchase the rental real estate asset.
Accordingly, the Commission, in the absence of a professional analysis filed by the Appellant setting out an appropriate rate of return on investment for residential rental

Orders of The Island Regulatory and Appeals Commission Order LR22-39 - Page 5 Docket LR22007 – Greenway Realty Inc. v. Tenants of 55-67 and 71 Balcom Drive, Summerside Wednesday, July 20, 2022 properties, concludes that a rate of 4% is appropriate in an environment where the real estate market value is increasing at a significant rate and that increase is taken into account when determining equity and return on investment. A leveling off of real estate market values or continued rising interest rates could potentially warrant a raising of the 4% rate.
The Commission has recently allowed the averaging of the tax assessed value of a residential rental property with an appraisal of said property when calculating a landlord’s return on investment. Such an appraisal must be based on the then current value of the property using current income conditions.
The Landlord submitted a detailed professional appraisal report dated May 11, 2021. This appraisal report considered the valuation of 55 townhouse style residential rental suites, including the 8 out of 9 Balcom Drive units which are the subject of this present appeal.
The appraisal report was prepared “… for the purpose of providing an estimate of the market value for the subject property denoted herein.” The appraisal report also states:
The market value opinion found within this report assumes the value “As If Rents Have Been Adjusted to Market Rent” as is fully utilized as a multifamily residential townhouse/garden home development.
[Note: quotation marks and capitalization of words are as contained in the appraisal report] The above quote was stated in both the extraordinary assumptions and limiting conditions section of the report, as well as the hypothetical conditions section of the report.
The appraisal report goes on to calculate monthly and annual rental income using projected rent:
The provided schedule outlines the current rent roll for the subject property legally identified as PID #941286. All of the (9) residential suites are leased inclusive of heat and hot water. Residential tenants are responsible for payment of their own electrical usage. The projected base rent of $1,375 is suggested plus the cost of heat and hot water which averages $131.00 per month for each unit. Therefore, the projected overall rent is suggested to be $1,500.00. The current total monthly rental income for the subject property is an estimated $10,326.00 per month, which equates to an annual rental income of $123,912.00. The projected monthly rent is estimated at $13,500.00 per month, which equates to an annual rental income of $162,000.00.
… The purpose of this report is to calculate the market value based on market rents for the property. It is the appraisers understanding the property owner will use this report to apply to (IRAC) for a rental increase.
As noted at the beginning of this Order, the request for a rental increase only concerns eight (8) out of the nine (9) units. However, the income and expenses data provided by the Landlord was based on nine (9) units.

Orders of The Island Regulatory and Appeals Commission Order LR22-39 - Page 6 Docket LR22007 – Greenway Realty Inc. v. Tenants of 55-67 and 71 Balcom Drive, Summerside Wednesday, July 20, 2022 The Commission wishes to emphasize again that market value is not a factor listed in subsection 23(8) of the Act or in section 20 of the Regulations.
The Commission finds that it cannot use the appraisal report for the calculation of return on investment as the appraisal report is based on market value and projected rent.
Accordingly, the Commission is left with the tax assessed value of the property and information establishing the actual purchase price.
In Director’s Order LD21-304, referenced in Commission Order LR21-51, the Director referred to a return on capital investment of 5.62% and then went on to state:
This rate of return is below what would be considered reasonable for residential rental premises (typically between 6.0 and 8.0%).
Given that the valuation is limited to the tax assessed value of the property and information establishing the actual purchase price, both of which are conservative valuations of the real estate rental property owned by the Appellant, the Commission will proceed to calculate equity and then determine the appropriate rents based on a 7% return on investment.
As the actual purchase price was higher than the tax assessed value of the property, the Commission calculates equity using the actual purchase price, weighted and adjusted for nine (9) units. Given the mortgage information provided to the Commission, also weighted and adjusted for nine (9) units, the equity is determined to be $370,694.70. A return on equity of 7% would thus be $25,948.63. The Commission has calculated revised annual expenses as $108,702. Adding the 7% return on equity, the required annual revenue would be $134,650.63.
Although this Order determines rent for only eight (8) of the nine (9) units, the data and all calculations are for nine (9) units. The Commission determines the appropriate maximum monthly rent to be $1,246.77 per month, based on the following:
$134,650.63 annual revenue divided by 12 months = $11,220.89 monthly revenue $11,220.89 monthly revenue divided by 9 units = $1,246.77 per month In Order LD22-015 the Director denied the Landlord’s application for a rent increase, but did allow an increase of the maximum allowable rate of 1%, which created three tiers of rent, namely $1,158.47 for each of six (6) units, $1,216.04 for another unit and $1,234.22 for the remaining unit. The Landlord had sought a uniform maximum rent of $1,500 for each of the eight (8) units. The Commission allows the appeal in part, awarding a maximum allowable monthly rent of $1,246.77 per unit.
As for the effective date of the rental increase, the Director used February 1, 2022 for six (6) of the units and March 1, 2022 for two (2) of the units. While the Director determined these dates on a rational basis, the Commission wishes to provide both uniformity going forward and avoid a pattern of retroactive rent payments, which would be quite significant for all eight (8) units. Accordingly, the effective date of the increase to $1,246.77 is determined by the Commission to be August 1, 2022, for all eight (8) affected units.

Orders of The Island Regulatory and Appeals Commission Order LR22-39 - Page 7 Docket LR22007 – Greenway Realty Inc. v. Tenants of 55-67 and 71 Balcom Drive, Summerside Wednesday, July 20, 2022 NOW THEREFORE, pursuant to the Island Regulatory and Appeals Commission Act and the Rental of Residential Property Act;
IT IS ORDERED THAT
1. The appeal is allowed in part.
2. The maximum monthly rent for the eight (8) units affected by this Order is $1,246.77, effective August 1, 2022.
DATED at Charlottetown, Prince Edward Island, Wednesday, July 20, 2022
BY THE COMMISSION:
(sgd. Erin T. Mitchell)

Panel Chair - Erin T. Mitchell, Commissioner
(sgd. M. Douglas Clow)

M. Douglas Clow, Vice-Chair
NOTICE
Subsections 26(2), 26(3), 26(4) and 26(5) of the Rental of Residential Property Act provides as follows:
26. (2) A lessor or lessee may, within fifteen days of the
decision of the Commission, appeal to the court on a question of law only.
(3) The rules of court governing appeals apply to an appeal under subsection (2).
(4) Where the Commission has confirmed, reversed, or varied an order of the Director and no appeal has been taken within the time specified in subsection (2), the lessor or lessee may file the order in the court.
(5) Where an order is filed pursuant to subsection (4), it may be enforced as if it were an order of the court.