Leasehold interest has no taxable value where interest is not freely assignable.
This case involved the value of a separate leasehold interest for property tax purposes. In 2013, West Virginia University (University) leased property to Taxpayer for the development of a student housing facility with a small retail/ commercial component. On the same day, Taxpayer subleased the student housing back to the University for purposes of offering it to students as on-campus student housing. Taxpayer was required to develop improvements on the land at its own expense, but title to those improvements immediately transferred to the University. The University collects rent from tenants and pays 100% to Taxpayer in consideration for the sublease. Taxpayer returns 50% of the net cash back to the University. As a result, the residential facilities are managed and operated by the University, while Taxpayer retained the ability to sublease the retail space. Pursuant to the long-term lease between the University and Taxpayer, Taxpayer's interest in the property is a leasehold interest.Because it is state property, the fee estate owned by the University is not taxable. However, the county assessor valued Taxpayer's leasehold interest in the property at $9 million. In West Virginia, leasehold interests can be taxable under certain circumstances; the state's statutes provide that a separate leasehold is taxable if it has a separate and independent value from the freehold. The question of whether Taxpayer's leasehold interest was taxable was resolved in an earlier appeal, but the question of how to value the Taxpayer's leasehold interest came before the West Virginia Supreme Court of Appeals.
In resolving the dispute, the court first cited an earlier case, in which the court concluded that an assessor could assess a leasehold interest if it has an independent value. There, the court held that a component of the analysis must address the marketability of the lease. The separate value of a leasehold, if any, is based on whether the leasehold is economically advantageous to the lessee (a so-called "bargain lease") and is freely assignable, so that the lessee may realize the benefit of such bargain in the marketplace.
The assessor argued that the earlier case was wrongly decided because the state's Leasehold Appraisal Policy referred only to marketability, not whether the lease was a bargain lease and freely assignable. The court, however, found no reason to depart from its earlier standard. The common thread of the earlier cases, as well as the Leasehold Appraisal Policy, was a focus on whether or not the leasehold is marketable. The earlier cases simply provided a framework for the definition of marketability.
Applying the two-prong marketability standard, the court concluded that, based on the evidence presented to the Board of Equalization and Review, Taxpayer proved that the assessment was erroneous. Although the Taxpayer may not have proved by clear and convincing evidence that the subject lease was neither a bargain lease nor freely assignable--the Taxpayer offered only limited testimony on that point--the assessor conceded that the lease between the University and Taxpayer was not freely assignable. Accordingly, the court affirmed that the correct value of the leasehold interest was $0.
Musick v. University Park at Evansdale, LLC
Supreme Court of Appeals of West Virginia
November 8, 2018
2018 WL 5913356
Benjamin A. Blair, JD, is an attorney in the Indianapolis office of Faegre Baker Daniels LLP, where his practice focuses on state and local tax litigation for clients across the United States. A frequent speaker and author on taxation and valuation issues, Blair holds a juris doctorate from the Indiana University Maurer School of Law, where he also serves as an adjunct professor. He thanks his colleague Julie Weiler for her contributions to this article. Contact: [email protected]
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| Title Annotation: | Recent Court Decisions on Real Estate and Valuation; Musick v. University Park at Evansdale, LLC |
|---|---|
| Author: | Blair, Benjamin A. |
| Publication: | Appraisal Journal |
| Geographic Code: | 1U5WV |
| Date: | Jan 1, 2019 |
| Words: | 607 |
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