pa supreme court decision in tech one: practically speaking

PA Supreme Court Decision in Tech One: Practically Speaking

May 24, 2012 PBI Webinar

Anthony C. Barna, MAI, SRA Sharon F. DiPaolo, Esquire

“In conducting this valuation [of the market value of the real estate as a whole], the impact of the lease on the market value of the real estate owned as the leased fee and, also, on the market value of the real estate owned as a leasehold interest must be considered.”

Tech One Associates v. Board of Property Assessment, Appeals and Review of Allegheny County, West Mifflin Borough and West Mifflin Area School District, 32 WAP 2010 (Pa. Supreme Court, April 25, 2012), at page 32.

Tech One

Leased fee + Leasehold = Value for Taxation

Tech One Associates v. Board of Property Assessment Review of Allegheny County

• PA Supreme Court, No. 32 WAP 2010 • April 25, 2012• Unanimous decision

Leased fee + Leasehold = Value for Taxation

Tech One

What does it mean?

Tech One

Leased fee + Leasehold = Value for Taxation

Tech One

Where do we start?

Uniformity• Pennsylvania Constitution Article 8, Section 1: “All taxes shall

be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.”

Leased fee + Leasehold = Value for Taxation

Objects of Taxation

• General County Assessment Law, 72 P.S. Sec. 5020-201 “Subjects of Taxation Enumerated”

• “The following subjects and property shall . . . be valued and assessed, and subject to taxation...[a]ll real estate. . . “

Leased fee + Leasehold = Value for Taxation

“Real Estate” and “Real Property”

Leased fee + Leasehold = Value for Taxation

Real Property

The interests, benefits, and rights inherent in the ownership of real estate.

Leased fee + Leasehold = Value for Taxation

Actual Value• General County Assessment Law 72, P.S. Sec 5020-402

“Valuation of Property”:

All “objects of taxation” are to be valued “according to the actual value thereof, and at such rates and prices for which the same would separately bona fide sell.”

Leased fee + Leasehold = Value for Taxation

Actual Value“Actual value” defined by PA Supreme Court:

“[P]rice which a purchaser willing but not obliged to buy, would pay an owner, willing but not obliged to sell, taking into consideration all uses to which the property is adapted and might in reason be applied.”

Dietch, 209 A.2d 397, 400 (Pa. 1965).

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II

What were the facts?

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II

• Shopping center

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II

• Shopping center • Built in 1964, approximately 200,000 sf

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II

• Shopping center • Built in 1964, approximately 200,000 sf• 1968 lease for land and building

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II

• Shopping center • Built in 1964, approximately 200,000 sf• 1968 lease for land and building• 25 years (expires 1994) with option for additional 50

years (expires 2044)

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II

• Shopping center • Built in 1964, approximately 200,000 sf• 1968 lease for land and building• 25 years (expires 1994) with option for additional 50

years (expires 2044)• $1.47 square foot rent, remains constant throughout

term

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II

• Shopping center • Built in 1964, approximately 200,000 sf• 1968 lease for land and building• 25 years (expires 1994) with option for additional 50

years (expires 2044)• $1.47 square foot rent, remains constant throughout

term• Late 1970s Klein’s goes out of business

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II• 1987 Marple XYZ Associates acquires the Klein’s lease

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II• 1987 Marple XYZ Associates acquires the Klein’s lease• Later Kleins (Marple XYZ) subleases to others at $3.04

square foot

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II• 1987 Marple XYZ Associates acquires the Klein’s lease• Later Kleins (Marple XYZ) subleases to others at $3.04

square foot• 1990 New Circuit City built, 35,000 sf, on land subject

to Klein’s lease. Marple XYZ subleases to Circuit City. Circuit City paid for and financed the building.

Leased fee + Leasehold = Value for Taxation

Marple I and Marple II• 1987 Marple XYZ Associates acquires the Klein’s lease• Later Kleins (Marple XYZ) subleases to others at $3.04

square foot• 1990 New Circuit City built, 35,000 sf, on land subject

to Klein’s lease. Marple XYZ subleases to Circuit City. Circuit City paid for and financed the building.

• 1992 New small shops built adding 18,000 sf , on land NOT subject to Klein’s lease.

Leased fee + Leasehold = Value for Taxation

Marple I

• Case tried for 1988 and 1989 tax years• BEFORE new construction• Issue: whether to use Klein’s rent or market

rent in valuation• Case went to PA Supreme Court• “Economic reality” test

Leased fee + Leasehold = Value for Taxation

Marple II

• Case tried for tax years 1990, 1991, 1992• AFTER construction of new Circuit City and

construction of new small shops• Issue: whether Circuit City (subtenant to Klein’s

lease) should be valued separately or as part of Klein’s lease

• Commonwealth Court ruled Circuit City should be valued as part of Klein’s lease

• Supreme Court refused to take case

Leased fee + Leasehold = Value for Taxation

Tech One

What were the facts?

Leased fee + Leasehold = Value for Taxation

Tech One

• Century Square Shopping Center

Leased fee + Leasehold = Value for Taxation

Tech One

• Century Square Shopping Center• 50 acres of land

Leased fee + Leasehold = Value for Taxation

Tech One

• Century Square Shopping Center• 50 acres of land• Lease signed in 1989

Leased fee + Leasehold = Value for Taxation

Tech One

• Century Square Shopping Center• 50 acres of land• Lease signed in 1989• 50 years

Leased fee + Leasehold = Value for Taxation

Tech One

• Century Square Shopping Center• 50 acres of land• Lease signed in 1989• 50 years• Annual rent $665,000 for entire term

Leased fee + Leasehold = Value for Taxation

Tech One

• Century Square Shopping Center• 50 acres of land• Lease signed in 1989• 50 years• Annual rent $665,000 for entire term• 415,000 square feet shopping center, movie

theater restaurant

Leased fee + Leasehold = Value for Taxation

Century Square Shopping Center

Leased fee + Leasehold = Value for Taxation

Tech One

• Case tried for tax years 2001 to 2005• Appraisers agreed on leased fee value ($9.5

Million or $9.3 Million)• Issue: whether leasehold must be valued?

Leased fee + Leasehold = Value for Taxation

Tech One

• Special Master: Leased fee. $9.5 Million• Trial Court: Leased fee plus leasehold. $22

Million to $35 Million• Commonwealth Court: Leased fee plus

leasehold.

Leased fee + Leasehold = Value for Taxation

Tech One

Leased fee + leasehold

Leased fee + Leasehold = Value for Taxation

Tech One

“Where … ownership of taxable real estate which comprises one tax parcel is divided into leased fee and leasehold interests, Section 402) still requires that the market value of the real estate as a whole be determined.”page 31

Leased fee + Leasehold = Value for Taxation

Tech One

• Assess the entire property• Does not matter who owns• Leased fee + leasehold

Leased fee + Leasehold = Value for Taxation

The Valuation of All Objects of Taxation

• Tech One is the evolution of Marple that reflects the genuine “economic reality”

• Practical result is UNIFORMITY• Every lease creates

leased fee property rights (property owner)

leasehold property rights (tenant)

Leased fee + Leasehold = Value for Taxation

Tech One Decision

Leased fee property rights (Vlf) + Leasehold property rights (Vlh) = Actual Value (Va) = Value for Taxation

Leased fee + Leasehold = Value for Taxation

Tech One Decision

Value of Leased fee property rights (Vlf) + Value of Leasehold property rights (Vlh) = Actual Value (Va) = Value for Taxation

At market rate: $18• Vlf + Vlh = Va

• Owner receives + (Tenant receives-Owner Receives)

• $18 + ($18-$18) = Va = Value for Taxation

Leased fee + Leasehold = Value for Taxation

Tech One DecisionLeased fee rights (Vlf) + Leasehold rights (Vlh) = Actual Value (Va)

At market rate: $18

• Vlf + Vlh = Va

• $18 + ($18-$18) = Va

• $18 + $0 = Va

• $18 = Va

Leased fee + Leasehold = Value for Taxation

Above Market Rate

Market rate: $18

Above market rate: $30

Leased fee + Leasehold = Value for Taxation

Above Market Rate

Market rate: $18

Above market rate: $30

• Vlf + Vlh = Va

Leased fee + Leasehold = Value for Taxation

Above Market Rate

Market rate: $18

Above market rate: $30

• Vlf + Vlh = Va

• Owner receives + (Tenant receives-Owner Receives)

• $30 + ($18-$30) = Va

Leased fee + Leasehold = Value for Taxation

Above Market Rate

Market rate: $18

Above market rate: $30

• Vlf + Vlh = Va

• $30 + ($18-$30) = Va

• $30 - $12 = Va

Leased fee + Leasehold = Value for Taxation

Above Market Rate

Market rate: $18Above market rate: $30• Vlf + Vlh = Va

• $30 + ($18-$30) = Va

• $30 - $12 = Va

• $18 = Va = Value for Taxation• Important: this illustration is an over-simplification, because it does not take into account

differing capitalization rates for the leased fee and leasehold positions, but it reflects the

economic reality.

Leased fee + Leasehold = Value for Taxation

Below Market Rate

Market rate: $18

Below market rate: $5

Leased fee + Leasehold = Value for Taxation

Below Market Rate

Market rate: $18

Below market rate: $5

• Vlf + Vlh = Va

Leased fee + Leasehold = Value for Taxation

Below Market RateMarket rate: $18

Below market rate: $5

• Vlf + Vlh = Va

• Owner receives + (Tenant receives-Owner Receives)

• $5 + ($18-$5) = Va

• $5 + $13 = Va

• $18 = Va

Leased fee + Leasehold = Value for Taxation

Below Market Rate

Market rate: $18Below market rate: $5• Vlf + Vlh = Va

• $5 + ($18-$5) = Va

• $5 + $13 = Va

• $18 = Va

• Again, this illustration does not take into account differing capitalization rates for

the leased fee and leasehold positions, but it reflects the economic reality.

Leased fee + Leasehold = Value for Taxation

Leased fee + Leasehold = Value for Taxation

Vlf + Vlh = Va = Value for Taxation

• The components of the Value for Taxation are a balance between Leased Fee and Leasehold that reflect the true economic reality of the property and result in UNIFORMITY

Vlf + Vlh = Va = Value for Taxation

Above market rate Below market rate

Vlf is greater Vlh is greater

Landlord gets benefit Tenant gets benefit

Leased fee + Leasehold = Value for Taxation

Vlf + Vlh = Va = Value for Taxation

• When there is a below market rent, the lease hold value is greater and carries more weight

Vlf + Vlh = Va = Value for Taxation

• When there is an above market rent, the leased fee value is greater and carries more weight

Vlf + Vlh = Va = Value for Taxation

• Regardless of which property rights have more value, the scale stands upright and the practical result is a balance to UNIFORMITY

Tech One

Questions?

So, What Does it Mean?

• It means it does not matter if a property has a below market lease

Leased fee + Leasehold = Value for Taxation

So, What Does it Mean?

• It means it does not matter if a property has a below market lease

• It means it does not matter if a property has an above market lease

Leased fee + Leasehold = Value for Taxation

So, What Does it Mean?

• It means it does not matter if a property has a below market lease

• It means it does not matter if a property has an above market lease

• It means it does not matter if a property is leased or owned…

Leased fee + Leasehold = Value for Taxation

So, What Does it Mean?

No matter what…

the whole of the real property is valued.

Leased fee + Leasehold = Value for Taxation

Anthony C. Barna, MAI, SRA Sharon F. DiPaolo, Esquire

Kelly|Rielly|Nell|Barnatony@krnbvaluation.com412-683-2212

Siegel Jennings Co, LPAsdipaolo@siegeltax.com412-486-2848