City & County of Denver v. Board of Assessment Appeals

Justice LOHR

concurring in part and dissenting in part:

I concur that provisions of article 1 of Colorado’s General Property Tax Act, §§ 39-1-101 to -121, 16B C.R.S. (1982 and 1992 Supp.), contemplate the application of a rule that taxes all the interests in taxable property no matter how they are divided. I further concur that the Board of Assessment Appeals (BOAA) may properly consider “actual” or “contract” rent payable under an existing lease when it determines the actual value of property for ad valo-rem tax purposes. I dissent, however, to the majority’s affirmance of the Colorado Court of Appeals’ judgment, because the BOAA order affirmed by that court suggests that the BOAA did not apply the proper standards in valuing the property for assessment.

When taxable property is divided into a lessor’s estate and a lessee’s estate, consistent application of a rule that taxes all the interests in taxable property no matter how they are divided requires that the actual value of both the lessor’s and the lessee’s estates be considered. The BOAA decision at issue in this case suggests that in determining the actual value for 1989 tax purposes of certain taxable real property the BOAA failed to take into account the value of the lessee’s estate. However, the BOAA’s findings and conclusions are too compactly stated for me to be certain this is so. I therefore would reverse and remand to the court of appeals with instructions that it direct the BOAA to set forth more fully the manner in which it considered the value of both the lessor’s and lessee’s estates if it considered the value of both, and if it did not, to conduct such further proceedings as may be necessary to value the property in accordance with this opinion.

I

The City and County of Denver (Denver) challenges a valuation for 1989 ad valorem *363tax purposes of certain real property located in Denver. The property is owned by Regis Jesuit Holding, Inc. (Regis) and has been leased since 1965 to the S.S. Kresge Company which operates a K-Mart department store and service garage on the premises. The base term of the lease is twenty years, but the lessee has the option to renew until the year 2001. The lease was the result of arms-length negotiations, but prevailing market rental rates for leases of comparable properties executed in 1987 and 19881 were significantly higher than the actual contract rent under the lease.

A Denver assessor initially valued the property at $3,731,000. This value was affirmed by the Denver Board of Equalization, and Regis sought a de novo review before the BOAA. In defending its value of $3,731,000, Denver relied in part on an income approach to valuation2 that ignored the actual contract rent under the lease in favor of prevailing, but higher, market rental rates for leases executed in 1987 and 1988. Regis, on the other hand, urged that the income approach to valuation should be based partly on the average, actual contract rent under the lease.

After a hearing, the BOAA issued findings of fact and concluded that the value of the property was $2,500,000, a figure less than that urged by Denver, but greater than that proposed by Regis. The court of appeals affirmed in Board of Assessment Appeals v. City and County of Denver, 829 P.2d 1319 (Colo.App.1991). Denver now argues that both the lessor’s and the lessee’s estate must be valued for property tax purposes, that relying on actual contract rent from a below-market lease to determine the value of the property does not value the lessee’s estate, and that the appropriate method for valuing property with a long-term below-market lease under the income approach is to use currently prevailing market (sometimes called “economic”) rent, rather than the actual contract rent. Regis, on the other hand, argues that even when property is subject to a long-term below-market lease it is appropriate for the BOAA to consider both actual contract rent and market rent.

II

Under Colorado’s General Property Tax Act, all interests in taxable property are taxed no matter how they are divided. Maj. op. at 359; see §§ 39-1-102(16) and -106, 16B C.R.S. (1982). However, this does not mean that there are to be multiple assessments on multiple taxpayers holding disparate interests in a single piece of land. Rather, the property ultimately must be assessed as a unit to a single taxpayer, and the manner of sharing the burden of the property tax among the holders of estates in the taxable property is a matter to be resolved by contract. Maj. op. at 359-60; see Oberstein v. Adair County Bd. of Review, 318 N.W.2d 817, 820-21 (Iowa App.1982); Folsom v. County of Spokane, 111 Wash.2d 256, 759 P.2d 1196, 1202-03 (1988). When, as in this case, taxable property is divided into a lessor’s and a lessee’s estate, it is necessary that the value of both estates be considered in arriving at the value, for ad valorem tax purposes, of all the interests in the taxable property. Valencia Center, Inc. v. Bystrom, 543 So.2d 214, 217 (Fla.1989); Oberstein, 318 N.W.2d at 820-21; Yadco, Inc. v. Yankton County, 89 S.D. 651, 237 N.W.2d 665, 668 (1975); Folsom, 759 P.2d at 1201-02.3

*364The manner of calculating the value of both the lessor’s and lessee’s estates in any-given case is not, however, a matter for this court to determine. In particular, although both actual contract rent and market rent may be relevant, the manner in which each is to be brought into play in determining the actual value of all interests in the property is a matter for experts in appraisal to decide applying accepted appraisal principles.4 Our role as a reviewing court includes making certain that the BOAA abides by the statutory scheme for calculating property tax assessments. Board of Assessment Appeals v. E.E. Sonnenberg & Sons, Inc., 797 P.2d 27, 34 (Colo.1990). Only if the BOAA took into account the value of both the lessor’s and the lessee’s estates in the present case did it abide by the statutory scheme.

My reading of the BOAA’s decision suggests that it did not take into account the value of the lessee’s interest, but its findings and conclusions are too compactly stated for me to be certain this is so. For example, the BOAA nowhere states that it took into account the value of the lessee’s interest. Moreover, Regis presented for the consideration of the BOAA “four comparable sales” to which the BOAA says it paid “particular attention,” but these sales appear from the record to have been sales of only lessors’ estates. I would therefore reverse and remand to the court of appeals with instructions that it direct the BOAA to set forth more fully the manner in which it considered the value of both the lessor’s and lessee’s estates if it considered the value of both, and if it did not, to conduct such further proceedings as may be necessary to value the property in accordance with this opinion. In so doing, I agree with the majority that the BOAA may consider both actual contract rent and market rent, maj. op. at 362, and reaffirm that the decision of the BOAA may not be set aside if it is supported by competent evidence. E.E. Sonnenberg & Sons, 797 P.2d at 34.

MULLARKEY, J., joins in this concurrence and dissent.

. As noted by the majority, the relevant base period for 1989 valuations is January 1, 1987, through June 30, 1988. See maj. op. at 357 n. 1, citing § 39-1-104(10.2), 16B C.R.S. (1989 Supp.).

. The actual value of property for ad valorem tax purposes must be determined "by appropriate consideration of the cost approach, the market approach, and the income approach to appraisal.” § 39-l-103(5)(a), 16B C.R.S. (1992 Supp.).

.In this connection, the Washington Supreme Court has observed that

"[a]n estimation of the value of property subject to a lease focuses upon two major interests: (1) the interest of the lessor who owns the fee, and (2) the interest of the lessee occupying the leasehold. Further analyzed, the lessor’s fee interest consists of (a) the right to receive contract rent, (b) the right of reversion, and (c) any right he might have to improvements at the end of the lease. The lessee’s leasehold interest consists of (a) the right to occupy the leasehold, (b) the right to the *364difference between contract rent and higher market rent, and (c) any interest he might have in any improvements to the leasehold.”

Folsom, 759 P.2d at 1202 (quoting Folsom v. County of Spokane, 106 Wash.2d 760, 725 P.2d 987, 989-90 (citing Solis-Cohen, Jr., Appraisal of Leaseholds, in Encyclopedia of Real Estate Appraising 465, 473, 476-77 (1959))).

. In general, a contract rent in excess of market rent tends to increase the value of the lessor’s estate and decrease the value of the lessee's estate while a contract rent below market rent tends to have the opposite effect. See American Institute of Real Estate Appraisers, The Appraisal of Real Estate 114-15 (9th ed. 1987).