This document contains the policy as revised July
1, 2001. It replaces the version dated November 15, 1993.
To earn revenue or gain other financial benefits
through the sale or other disposition of real property,
consistent with current market practice.
Note: For interpretation of
this policy in the Province of Quebec, "real property" means
"immovable" within the meaning of civil law of the Province of
Quebec and includes the rights of a lessee in respect of such an
immovable.
It is government policy that
- custodian departments seek opportunities to earn revenue from
the real property they administer for program purposes; and
- revenues received from the sale, transfer, leasing, or
licensing of government real property reflect its market value.
This policy applies to all departments within the
meaning of section 2 of the
Financial
Administration Actunless specific acts or regulations
override it.
Custodian departments must seek opportunities to
earn revenue through the wider use of the real property they
administer for their programs. In doing so, departments must make
certain that, in implementing such opportunities, they do not
cause a negative impact on their programs and that the wider use
is compatible with applicable land use controls.
All dispositions of federal real property must be
at market value. This principle applies to the following:
- sales, leases, and licences;
- transfers of administration from one department to another
that are not a custody transfer as defined in the Glossary;
- transfers of any interest in real property between the
federal government and federal Crown corporations; and
- transfers of administration and control of any interest of
the federal government.
Departments must take into
account terms and conditions imposed on the purchaser of a
designated heritage building when determining market
value.
Departments must develop
and consider a range of options from full protection to no
protection when disposing of recognized heritage buildings. As
well, they must determine the market value on the basis of the
option chosen.
Note:
Market value determination for various interests
in real property is discussed in the Appendix.
5.1 Sale or transfer of real property
Revenues from the sale or transfer of real
property must be credited to the Consolidated Revenue Fund. The
Treasury Board has authorized the sharing of 100 per cent of net
proceeds from the sale or transfer with custodian departments, on
the condition that
- the departments have a strategic investment framework (e.g.,
a Long-Term Capital Plan) approved by Treasury Board
- the proceeds are reinvested in real property, consistent with
the strategic investment framework; and
- the departments satisfy the reporting requirements to the
Directory of Federal Real Property (DFRP).
5.2 Granting leases, licences, and easements
Leases must
- be for specific terms, usually the shortest reasonable period
consistent with program objectives. The maximum term departments
should consider is the period considered normal for depreciating
investments using generally accepted accounting principles or the
time normally permitted by chartered banks in Canada to amortize
loans and mortgages made by a lessee for improvements to the real
property;
- provide for the regular review or appropriate adjustment of
the rent receivable, at least every five years, unless the
department determines that it is inappropriate to the
circumstances of the lease; and
- contain a clause that will address the issues of maintenance,
liability, and vesting of tenant improvements made during the
term of the lease. Where appropriate, leases must also contain a
provision that, at the option of the Crown, real property is to
be returned to its original condition at the end of the lease term.
Note:
Leases will also contain other clauses to address
the many related government policies, such as those on risk
management, accessibility, environment, and occupational safety
and health.
Licences:
- although not restricted to such uses, licences are the
preferred method for allowing for short-time uses of facilities
such as conference rooms, gymnasia, and other demands for the use
of federal real property in the community interest; and
- although generally at the pleasure of the government, must,
nevertheless, specify a maximum period of use based upon the
shortest reasonable period for the use involved and the
consideration paid.
Easements must:
- take into consideration their effect on the value and use,
both present and future, of any residual real property, or of any
adjacent federal real property held to meet program requirements;
- be made for a particular purpose and must describe, and limit
the right, to that purpose;
- be limited to the shorter of either the specified term or the
period of actual use; and
- provide for the return of the real property to its original
condition when the easement expires.
The Secretariat will determine how effective this
policy is, find out how it is applied in departments, and decide
whether it needs to be revised. It will do this through ongoing
contact with departments, consulting with the Treasury Board
Advisory Committee on Real Property, and noting audits and
reviews conducted by departments or the Auditor General of
Canada. The
Treasury Board Guide to Monitoring Real Property
Management provides information so that departments can
monitor and assess policy implementation.
The requirements of this policy should be read in
conjunction with the
Treasury Board's Cost Recovery and Charging Policy.
7.1 Authority
This policy is issued pursuant to the
Financial
Administration Act, subsections 7(1), 9(1.1), and 9(2),
and the
Federal Real
Property and Federal Immovables Act, subsection 16(4).
7.2. Treasury Board publications
Treasury Board Guide to Monitoring Real Property Management
Treasury Board Real Property Glossary
Please direct enquiries about this policy to:
Real Property and Materiel Policy
Treasury Board of Canada Secretariat
140 O'Connor Street
Ottawa ON K1A 0G5
Telephone: (613) 941-7173
Facsimile: (613) 957-2405
E-mail: rpmpd@tbs-sct.gc.ca
The determination of market value in a real
property transaction is a decision to be made by the department
or departments involved. However, departments regularly raise
certain common issues relating to this decision with the Treasury
Board of Canada Secretariat, through questions or submissions.
This appendix highlights several of these issues and illustrates
approaches that have been taken in the past to address them.
Note:
The evidence leading to the market value
conclusion must be clearly recorded for audit purposes in the
project file.
1. The use of an appraisal or estimate
The
Treasury Board Open and Fair Real Property Transactions
Policy requires departments to use current appraisals or
estimates to assist in determining market value. In essence,
appraisals are to be made for sales, exchanges, or transfers over
$250,000 or for sales to the Canada Lands
Company CLC Limited, and estimates are to be made for all
transfers of administration, leases, and licences, and for those
sales, exchanges, or transfers for
$250,000 or less.
Departments have asked whether the real property
manager needs to go beyond the appraisal or estimate in
determining market value. The answer in general appears to be
yes. There are many indicators of market value, and the manager
must use all available indicators to determine market value.
For example, when property is sold following a
public tender or auction, or when it is offered in the open
market for a reasonable period and has attracted sufficient
interest, the offers received will often determine its market
value most accurately. Real property appraisals or estimates have
their place in this process. But the market value is often more
accurately measured by the responses to the marketing effort.
In sales or transfers that may be completed
before the marketing effort, such as in priority sales to
provinces or municipalities under the Treasury Board Real
Property Revenue Policy, the appraisal or estimate has an
increased importance to managers in determining market value.
Managers should take into account not only the departmental
appraisal but also any appraisals or other evidence provided by
the province or municipality. Likewise, when the market value is
negotiated, managers should take into account the departmental
appraisal and any evidence provided by the purchaser in the
negotiation process.
Disposals of partial interests, such as the
granting or discharge of an easement, restrictive covenant or
right-of-way, rely heavily by their very nature on appraisals,
not only of the interest itself, but of the value, both before
and after, of the other affected real property interest(s).
When evidence accumulated by the manager leads to
a market value conclusion that varies significantly from the
appraised value, the manager should review the appraisal with the
appraiser and reconcile the differences between the two.
2. Leasing out federal real property
The
Treasury Board Open and Fair Real Property Transactions
Policy requires that all disposals of federal real
property by lease be supported by an estimate of the rental
market value of the real property. Rental market value would
normally be determined using one of the following methods:
- a survey of market rents for comparable real property (this
is an estimate by definition);
- the highest rents tendered in response to an advertisement;
- the rent contained in the best proposal rated against
predetermined selection criteria;
- the fixed rent plus the percentage of gross sales revenue
normal for the industry, as determined by survey;
- the appraised business value of the lease; or
- any other practice usual to the market for comparable lease
situations (see examples following).
Market rent can be affected by the conditions in
the lease, restrictions on the use of the real property, and the
impact of the tenancy on the rest of the real property. Thus,
managers must often develop a model and document the assumptions
they use and the conclusions they reach. Some specific lease
situations are discussed below.
Retail or commercial: A tenant's overall
impact on the rest of the real property can mean that market rent
can vary between, for example, anchor tenants, normal tenants,
and tenants sought out to provide a retail or service mix that is
expected to be an overall advantage to the whole. Thus, quite
distinct market rents for different tenants, occupying space at
the same location, can occur depending on the lessees'
contribution to the whole.
Monopoly situations: Cost recovery or
legislated formulae often form the basis for rents set in
government monopoly situations. Effectively, these calculated
rents become the market rent by their very application and
agreement by lessees. However, departments should periodically
examine the effect of such applied formulae against available
market data to ensure that great gaps do not develop.
Vested improvements: Tenant improvements
may have a positive, neutral, or negative effect on market value
or market rent:
- improvements that enhance the use of the property will
increase the property's value for sale or rent;
- improvements that are removed at the end of the lease,
restoring the property to its original condition, will have no
effect on the sale or rental value; and
- improvements that detract from the best use of the property
will decrease the property's sale or rental value.
At law, tenant improvements generally vest in the
landlord unless the landlord and tenant agree differently.
Therefore, when leasing out federal lands, a custodian department
should ensure that any improvements the tenant makes to the
property have, at worst, a neutral effect on the future sale or
rental market value of the lands. In addition, departments should
make sure that any improvements that may come under its
administration at the end of the lease do not represent a
liability that the department does not wish to assume and for
which it has not been funded.
The Treasury Board Real Property Revenue
Policy, which first came out in 1991, requires certain
clauses related to vesting to be inserted in leases of federal
lands to clarify the Crown's and the tenant's rights and
obligations regarding tenant improvements. However, a number of
previous leases still exist in which the intentions of the Crown
and the tenant in relation to vesting are unclear. These should
be examined on a case-by-case basis, preferably with the
assistance of legal counsel.
The following scenarios illustrate different
approaches that could be taken to resolve vesting issues:
An original lease contained a provision that
improvements are the property of the tenant and are to be removed
by the tenant when the lease terminates. Near the end of the
lease term, the custodian department advertises for a new lease
of the lands (on the basis that the improvement is removed) and
the former tenant's offer is selected. In this case, the
custodian department may determine that it is in the best
interests of the Crown to allow the tenant to keep the
improvements on the property. The new lease could again provide
for the removal of the improvement and could make it clear that
the Crown has no responsibility for the improvement. The market
rental value would be based on the rental value of the land alone
because the improvement remains the tenant's property.
Certain tenant improvements have become the
property of the Crown at the end of a lease, although the
department has neither a program requirement for the improvements
nor the financial ability to undertake normal landlord
responsibilities for them. In this case, the custodian department
should carefully examine whether the improvement increases or
decreases the market rental or sale value of the property. A new
lease could require the tenant to take complete responsibility
for the improvements and to remove them, at the Crown's option,
at the end of the lease. The market rental value would then be
based on the rental value of the land and improvements. (As in
all cases, the lease conditions would also affect the rental
value determination.)
In summary, clarity in the lease is crucial to
preventing vesting questions arising at the end of the lease. The
issues of ownership, construction, maintenance, and removal of
tenant improvements should all be addressed when negotiating
leases of federal lands. How these issues are resolved will
determine the effect any improvements will have on the market
value for a subsequent sale or rental of the property.
3. Granting options to purchase federal real property
Departments must determine the market value of a
property before granting any exclusive option to purchase the
property. The amount of consideration to be paid to the
government for granting an exclusive option to purchase should be
at least equal to the costs to the government related to the
entering into the agreement and the holding of the property for
the option period.
4. Granting licences
Departments must also determine market value when
granting licences. The intended period of use of the real
property will, in large measure, influence the choice of the
method used to determine the market value. In no case, however,
should the charge to the user be less than the full cost incurred
by the custodian department in respect of the licence.
5.Disposing of contaminated
federal real property
The Treasury Board Real Property
Environment Policy makes the custodian department
responsible for any necessary remediation of contaminated lands.
The department can ask the purchaser to carry out the
remediation. However, if the purchaser breaches its obligation to
conduct the remediation within a reasonable length of time, the
department should be prepared to conduct the remediation itself.
Where remediation of a contaminated property is
necessary, the market value should be determined on the
assumption that the remediation has been completed. If the
purchaser has agreed to remediate, the total consideration is the
amount of monies paid by the purchaser plus the estimated cost of
the remediation that the purchaser has agreed to undertake. This
total should be equal to the market value of the property.
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