pa supreme court decision in tech one: practically speaking
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PA Supreme Court Decision in Tech One: Practically Speaking. May 24, 2012 PBI Webinar. Anthony C. Barna , MAI, SRA. Sharon F. DiPaolo, Esquire. Tech One. - PowerPoint PPT PresentationTRANSCRIPT
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|[email protected]
Siegel Jennings Co, [email protected]