If It s Property Tax Exempt, Tax It Anyway! How Local Jurisdictions Tax Publicly Owned Properties Cutchin Powell Principal Ryan, LLC Washington, DC cutchin.powell@ryan.com Colin Fraser Associate Greenberg Traurig, LLP Irvine, CA frasercw@gtlaw.com
Topics to be Covered Nature of Possessory Interest Taxation (PIT) Jurisdictions where PIT is Levied Recent Legal and / or Administrative Changes Properties and Industries Subject to PIT Calculating PIT Remedies to Correct Improper Assessments Open Discussion / Q&A 2
What Is Possessory Interest Tax? 3
What is a Possessory Interest? Possessory Interest Defined: The right to the use and the occupancy of real estate, as distinguished from any interest in title. Possessory interests are created from contracts such as leases, permits, or licenses. For example, a leasehold estate is a possessory interest. - Appraisal Institute, The Dictionary of Real Estate Appraisal, Fifth Edition 4
Leasehold vs. Leased Fee Interests Leasehold Interest Defined: The tenant s possessory interest created by a lease. Leased Fee Interest Defined: A freehold (ownership interest) where the possessory interest has been granted to another party by creation of a contractual landlord-tenant relationship (i.e., a lease). - Appraisal Institute, The Dictionary of Real Estate Appraisal, Fifth Edition 5
No. Same as a Fee Simple Estate? Fee Simple Estate Defined: Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. - Appraisal Institute, The Dictionary of Real Estate Appraisal, Fifth Edition 6
General Application of PIT In General: May apply to land, improvements, or both Always applies to private, beneficial use of publicly-owned, non-taxable real property For example, where private entities lease or use government-owned property 7
General Application of PIT Basic Limitations: Personal property is typically exempt. Easements, covenants, licenses, and profits are typically exempt. 8
Impacted Industries / Property Uses 9
Properties Potentially Subject to PIT Offshore mineral / oil rights Cable television right-of-way easements Marinas, piers, & container operations at harbors Airport terminals, cargo space, & car rental facilities Ski resorts or lodging on public lands Cattle grazing rights on public lands Concessions spaces at public convention centers Private companies leasing public land or buildings 10
Where Is PIT Levied? 11
Where is PIT Levied? Applicable Jurisdictions: PIT may be levied where real estate tax (RET) is levied Typically at the county or city level States with jurisdictions that may have PIT: CA CO CT DC FL GA HI ID IL IO KY LA MD MA MI MN MS MT NE NV NH NJ NY NC ND OH OR RI SC TN TX VT WA WV WI 12
States with Potential PIT 13
Recent Law & Decisions 14
Is PIT Law Changing? United States Supreme Court: City of Detroit v. Murray Corp. of America, U.S. Supreme Court, March 3, 1958. A state or local jurisdiction may levy PIT if they enact corresponding local law. California: Seibold v. County of Los Angeles, Court of Appeals, September 22, 2015. Hangars leased for private use at a public airport may be subjected to PIT. 15
Where is PIT Law Changing? California Continued California State Teachers Retirement System (CalSTRS) v. County of Los Angeles, Court of Appeals, May 7, 2013. Reversionary value of possessory interest shall be exempt from PIT. Vanguard Car Rental USA, Inc. v. County of San Mateo, Court of Appeals, February 8, 2010. Space leased by auto rental merchants at public airports may be subjected to PIT even if there are multiple lessors. 16
Where is PIT Law Changing? California Continued DFS Group, L.P. v. County of San Mateo, Superior Court, Decision Pending. Issue: Valuation of the exclusive nature of concessions at SFO Airport. Exclusivity is a non-taxable intangible asset pursuant to Rev. & Tax Code 110(d)(3). While the fair market value of using publicly owned realty is assessable, any premium stemming from operation of an exclusive concession on such lands is exempt from assessment. 17
Case Studies 18
Case Study No. 1: California The legal basis for taxing possessory interests is found in the general mandate of the California Constitution that all property is taxable unless otherwise provided by law. 1-1 Cal. Const., Art. XIII, 1 19
Case Study No. 1: California Case Study 1, continued For a PI to be taxable it must be: Exclusive: Holder can exclude others from the property. Independent: Holder has autonomy from the public owner. Durable: Possession is for a determinable period of time. A Private Benefit: Use does not simply benefit the public owner. 20
Case Study No. 1: California Case Study 1, continued In De Luz Homes, Inc. v. County of San Diego (1955) 45 Cal.2d 546, the California Supreme Court established the method of valuing possessory interests: Value is equal to the present value of the future market rents under the leasehold, reduced by any allowed expenses of the public owner paid from the market rent. 21
Case Study No. 2: District of Colombia DC enacted PIT in 2000 to close a present loophole in the District s tax laws. For PI to be taxable it must be: 1. A lease of government-owned real property 2. Leased by an entity or individual who is not tax exempt, and 3. A lease that will not be used for an exempt or immune purpose 1-1 D.C. Code 47 1005.01(b). 22
Case Study No. 2: District of Colombia Case Study 2, continued PIT may not be imposed if it would cause DC to breach a pre-existing agreement or other legal obligation. 2 Recently, Donald Trump acquired the rights to redevelop the Old Post Office Pavilion in DC into a luxury hotel, but his bid proposal did not take into account PIT. Trump requested a special exemption from the tax but was denied. Annual PIT reportedly will exceed the $3 million estimated base rent on the property. - 2 D.C. Code 47 1005.01(c)(2). 23
Case Study No. 3: Texas Texas has no state income tax so property tax is the largest source of funding for local services. The Texas Constitution provides that all real and tangible personal in property in the state is taxable unless a federal or state law provides an exemption for it. 1-1 Tex. Const., Art. VIII, 1. 24
Case Study No. 3: Texas Case Study 3, continued For a PI to be taxable it must be: 1. An interest in tax-exempt land 2 2. Held by a non-exempt entity or person 3. For a non-exempt use 4. Last at least 1 year in duration (including potential extensions) 3 The PI is appraised at the market value of the leasehold or other PI. - 2 Tex. Tax Code Ann., 23.13. - 3 Tex. Tax Code Ann., 25.07(a). 25
Are PIT And RET Values The Same? 26
Possessory Interest vs. Real Estate NO. PIT & RET valuation are different in two ways: 1. For PIT, only rights held by the private user are valued. 2. PIT excludes property rights that revert to lessor at end of lease (aka - reversionary interest ). PI assessments are frequently less than comparable RE assessments of similar privately-owned properties 27
How Is PIT Calculated? 28
Valuation Methodology Generally Accepted Methodology: Unlike with RE, a PI includes only a partial interest, not the full fee simple interest. Acceptable means of valuing PIT varies by jurisdiction. Sample methods include: 1. Sales Comparison 2. Income Capitalization 3. Cost 29
Valuation Methodology Sales Comparison - Direct: 1. Begin With: Sale Price of Subject Adjust for Cash Equivalency, for Market Conditions, & Comparability 2. Add Present Value of Contract Rent Less Required Expenses of Exempt Owner 3. Less Present Value of Lessee s Expenses 4. Less Present Value of Lessee s Entitlements 30
Valuation Methodology Sales Comparison - Indirect: 1. Begin With: Sale Price of Comparable 2. Less Present Value of Reversionary Value 31
Valuation Methodology Income Capitalization - Direct: 1. Begin With: Contracted Rent Adjusted to Present Value 2. Add All Remaining Payments Over Contract Term 3. Less Present Reversionary Value 32
Valuation Methodology Income Capitalization - Indirect: 1. Begin With: Estimated Market Value Utilize Estimated Market Net Operating Income and Capitalization Rate in Direct or Yield Capitalization 2. Less Present Reversionary Value 33
Valuation Methodology Cost: 1. Begin With: Estimated Replacement Costs or Actual Original Costs of Improvements Less Accumulated Depreciation & Obsolescence 2. Estimate Land Value via Sale Comparison Adjust for Cash Equivalency, Market Conditions, & Comparability 3. Add RCNLD of Improvements & Land Value 4. Less Present Reversionary Value 34
How Do You Prevent Over-taxation? 35
Avoiding Improper Original Assessments Proactive Planning: Record correct value upon change in ownership, inception of lease, or allocation between multiple leases Lessee interest only Acquisition Price Allocation Negotiating leases to consider: PIT or RET implications Payment structure Present value 36
Correcting Improper Assessments Retroactive Recourse: Administrative appeals: Typically pay to play - file assessment appeal & claim for refund May have limited timeframe to appeal May have tolling statute of limitations May include multiple venues / levels of appeal 37
Correcting Improper Assessments Retroactive Recourse continued Judicial appeals (i.e. - court level): May replace other avenues of appeal May have limitations, such as CA s matter of law requirement May be de novo or limited to prior administrative submissions 38
Open Discussion Q&A 39
Thank you. Cutchin Powell 202.470.3100 cutchin.powell@ryan.com Colin Fraser 949.732.6663 frasercw@gtlaw.com 40