Cal-American Income Property Fund II v. County of Los Angeles

• Citation: 208 Cal.App.3d 109,256 Cal.Rptr. 21
• Decision Date: 31 January 1989
• Docket Number: No. B031439,CAL-AMERICAN,B031439
• Court: California Court of Appeals
• Parties: INCOME PROPERTY FUND II, a California limited partnership, Plaintiff and Appellant, v. COUNTY OF LOS ANGELES and City of Los Angeles, bodies corporate and politic, Defendants and Respondents.

Page 21

256 Cal.Rptr. 21

208 Cal.App.3d 109

CAL-AMERICAN INCOME PROPERTY FUND II, a California limited partnership, Plaintiff and Appellant, v. COUNTY OF LOS ANGELES and City of Los Angeles, bodies corporate and politic, Defendants and Respondents.

No. B031439.

Court of Appeal, Second District, Division 2, California.

Jan. 31, 1989.

Review Denied April 19, 1989.

Baker & Ancel, Stephens, Berg, Lasater, Schulman & Rogers, Mark C. Ancel, Larry S. Dushkes, Los Angeles, for plaintiff and appellant

De Witt W. Clinton, County Counsel, Albert Ramseyer, Special Services Atty., Orry P. Korb, Deputy County Counsel, Los Angeles, for defendants and respondents.

ROTH, Presiding Justice.

I STATEMENT OF THE CASE

Cal-American Income Property Fund II appeals from a decision by the superior court denying its request for a refund of property taxes. The issue raised is whether there was a change of ownership in the real property, within the meaning of Proposition 13, so as to permit a reassessment of its value and the attendant increase in property taxes.

II FACTUAL BACKGROUND

The subject realty is a 137-unit apartment building which Cal-American, a limited partnership, purchased in 1974.

In May 1980, Cal-American agreed to sell the property to Convair Properties Corporation, conveying title in fee simple. The sales price was $7 million with Convair giving a down payment of $750,000. The remainder of the purchase price was covered in an all-inclusive trust deed carried by Cal-American which included the debts it owed on the existing first and second trust deeds.

The promissory note provided that from the close of escrow (July 18, 1980) until April 1, 1981, interest only would be paid monthly "... in an amount equal to the lesser of seven percent (7%) per annum of the unpaid principal or the 'net spendable cash' generated from the Property...." Net spendable cash was defined as the profits generated by leasing the apartment units less expenses. After April 1, 1981 and continuing until July 18, 1985 or to when 80% of the cooperative units had been sold, whichever occurred first, the note was "payable, interest only, equal to seven per cent (7%) per annum on the unpaid balance plus the 'net spendable cash' of the Property, all of which payments shall be accrued and due and payable together with the entire principal balance of [the Promissory Note] upon the earlier of five (5) years from July 18, 1980 or until eighty percent (80%) of the individual stock cooperative units within the Property are sold."

The agreement had the typical indicia of a traditional sales transaction. For instances, all outstanding leases and rental agreements were transferred to Convair; Cal-American was required to convey "marketable and fee simple title" with title insurance; and $50,000 was set as liquidated damages in favor of Cal-American in the event of breach by Convair.

The purpose of sale was to permit Convair to convert the apartment building into a Stock Cooperative Housing Project. In a cooperative, title to the entire project is held by the cooperative corporation so that an individual purchases a unit therein by buying stock in the corporation.

An additional term of the purchase agreement provided Convair would retain Cal-American Management, Inc., an affiliate Escrow on the sale was opened in May 1980. On July 18, 1980, Cal-American first conveyed title to the realty to its attorney, Sidney A. Hamburg, as "Trustee under Declaration of Trust dated July 8, 1980" who in turn conveyed title to Convair by a recorded grant deed. The same day, Convair, by 11 grant deeds, transferred title to fractional interests in the property to individual investors. Aggregated, those conveyances constituted 92.5% of Convair's interest. Each transferee executed a trust deed and assignment of rents in favor of Convair to secure the debt occasioned by the purchase ². In 1981, one of the transferees conveyed her interest to another party. The Internal Revenue Service permitted the investors to claim depreciation for the realty and to deduct the management fees paid to Cal-American management, Inc. on their federal income tax returns.

of Cal-American ¹, to manage the building. The management agreement referred, in several places, to Convair as the fee title owner of the building. A rider to the contract recited that all of Convair's obligations to pay management fees, costs, loan payments, and expenses were assumed by Cal-American.

Cal-American recorded the 1980 transaction with Convair as a sale on its accounting records and no longer claimed depreciation on the building. ³

The Assessor for the County of Los Angeles determined the 1980 transactions constituted a change in ownership of the property and therefore reassessed its value from approximately $1.9 million to $6.3 million.

In July 1985, the accrued interest and principal became due on the promissory note executed by Convair. However, as the effort to convert the apartment building into a cooperative had not materialized, Convair was unable to make the payment. Cal-American initiated foreclosure proceedings. Ultimately, Cal-American paid money to the investors to whom Convair had sold fractional interests to settle the litigation; in turn, those investors quitclaimed title back to Cal-American so that Cal-American was once again the record owner of the realty.

III PROCEDURAL HISTORY

Cal-American filed an application with the Assessment Appeals Board for the County of Los Angeles contesting the reassessment in property taxes. It contended that in the 1980 there had been no change of ownership of the apartment building because Cal-American had merely granted Convair an option to purchase the realty, an option which was never exercised, and that was the only interest transferred by Convair to its grantees.

The Assessment Appeals Board, after hearing testimony and examining documentary evidence, rejected Cal-American's claim and found there had been a change of ownership in 1980. It based its conclusion on the specific findings that "... since each Having exhausted its administrative remedies, Cal-American brought suit in the superior court. It explicitly abandoned its earlier theory that Convair had been granted only an option to purchase the realty. Instead, it urged there had been no transfer of ownership as only "bare legal title" had been conveyed to Convair and its grantees because the right to the beneficial use of the property remained in Cal-American.

of the investors [to whom Convair had transferred fractional interests] could sell, encumber, or will their interest, and stood to gain any profit derived should the project [to convert the building into a cooperative] have been completed, [each] did in fact own a beneficial interest. [p] Further nowhere in any of the agreements ... was the word 'option' or 'option to purchase' indicated."

The trial court examined the record of the administrative proceedings and...