City and County of Denver v. Board of Assessment Appeals of State of Colo., 91SC775

• Decision Date: 08 March 1993
• Docket Number: No. 91SC775,91SC775
• Citation: 848 P.2d 355
• Parties: CITY AND COUNTY OF DENVER, State of Colorado; Board of Equalization of the City and County of Denver; and Patricia Beer, Manager of Revenue, in her official capacity as ex-officio Assessor of the City and County of Denver, Petitioners, v. BOARD OF ASSESSMENT APPEALS OF the STATE OF COLORADO; and Regis Jesuit Holding, Inc., Respondents.
• Court: Colorado Supreme Court

Page 355

848 P.2d 355

CITY AND COUNTY OF DENVER, State of Colorado; Board of Equalization of the City and County of Denver; and Patricia Beer, Manager of Revenue, in her official capacity as ex-officio Assessor of the City and County of Denver, Petitioners, v. BOARD OF ASSESSMENT APPEALS OF the STATE OF COLORADO; and Regis Jesuit Holding, Inc., Respondents.

No. 91SC775.

Supreme Court of Colorado En Banc.

March 8, 1993.

Rehearing Denied March 29, 1993.

Daniel E. Muse, City Atty., Donald E. Wilson, Karen A. Aviles, Asst. City Attys., Denver, for petitioners.

Gale A. Norton, Atty. Gen., Raymond T. Slaughter, Chief Deputy Atty. Gen., Timothy M. Tymkovich, Sol. Gen., Larry A. Williams, First Asst. Atty. Gen., Denver, for respondent Bd. of Assessment Appeals.

Jon Slaughter Pelegrin, Lakewood, for respondent Regis Jesuit Holding, Inc.

Chief Justice ROVIRA delivered the Opinion of the Court.

We granted certiorari to review the court of appeals decision in Board of Assessment Appeals v. City & County of Denver, 829 P.2d 1319 (Colo.App.1991), affirming a de novo valuation by the Board of Assessment Appeals (BOAA) of respondent Regis Jesuit Holding, Inc.'s (Regis) property. The court of appeals held that the BOAA properly considered both actual and market rent in valuing Regis' property. Because the consideration of actual rent in determining the value, for ad valorem tax purposes, of real property subject to an existing long-term below-market lease is appropriate, we affirm.

I

The facts in this case are not in dispute. This action involves the 1989 ad valorem tax valuation of property located in Denver, Colorado, owned by Regis, and 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 for 20 years, and the lessee has the option to renew until the year 2001. The lease payments are $1.50 a square foot plus an override. As a result, the lease payments during the years 1987-88 ¹ were approximately $2.00 a square foot. It is undisputed that this rate is below the prevailing market rental rates for leases of comparable properties that were entered into in 1987 and 1988. It is also not disputed that at the time this lease was entered into it was the result of arm's length negotiation. Although the 1965 market rent was $1.38 a square foot, the actual payments that year were $1.75 a square foot.

The Denver assessor valued the property, as of January 1, 1989, at $3,731,000. ² This value was affirmed by the Denver Board of Equalization (DBOE). Regis appealed to the BOAA which held a hearing de novo.

At the BOAA hearing, the assessor's evidence was that he examined real estate data from January 1, 1987 through June 30, 1988, the relevant statutory base period. In evaluating this data, he found no comparable properties which sold free from a long-term lease, and thus, he rejected the market approach. ³ He valued the property using a cost approach ⁴ at $3,997,400 and at $3,731,000 using the income approach. ⁵ The assessor's income approach used three allegedly comparable properties for which leases were negotiated during the base period: a K-Mart leased in 1988, a Burlington Coat Factory leased in 1987, and a Service Merchandise Mart leased in 1987. This analysis indicated that $4.00 per square foot for the department store and $7.25 per square foot for the service garage was the appropriate fair market rental for the property. Based on the cost and income approaches the assessor established a value of $3,731,000 for the property. The actual lease rental was not considered in establishing a value for the subject property by the assessor.

Regis' expert witness also considered the market, cost, and income approaches for valuing the property. In support of his market approach to valuation, he presented three sales of comparable properties which were encumbered by long-term below-market leases. His income approach derived from a capitalization of an average actual rent from the subject store as well as three other K-Mart stores of similar age in the Denver Metropolitan Area. The subject property's actual income and expenses were used as an "indicator" to "simply establish a parameter" for value. Evidence was also presented by Regis' witness on the cost approach to valuation, but was not relied upon by him in valuing the property because, in his opinion, replacement costs are higher than the market value of the property.

The BOAA valued the property at $2,500,000, a value below that urged by the assessor ($3,731,000), and greater than that urged by Regis ($1,316,000). Thus, according to the BOAA, the value of the fee is approximately $20.00 a square foot. In reaching this conclusion the BOAA noted that it reviewed all of the sales presented by both parties but paid "particular attention to sales of similar properties that sold with long-term leases in place." It also opined that the comparable sales presented by Regis "included all interests in property, and reflected the long-term leases as an encumbrance at the time of sale." Denver appealed pursuant to section 39-8-108(2), 16B C.R.S. (1989 Supp.). The court of appeals affirmed the BOAA's valuation, holding that BOAA "properly considered actual rent as well as economic rent." The court of appeals concluded that

the actual rent generated from a lease is a valid factor to consider because it affects the property's selling price and fulfills the statutory goal which is to assess property based on its actual value. Thus, the BOAA properly considered actual rent as well as economic rent. Because the BOAA's assessment is a figure between [Regis'] and [Denver's] proposals, we may conclude that actual and economic rent were considered by it.

Board of Assessment Appeals, 829 P.2d at 1323.

This case requires us to decide whether any consideration can be given to actual rent which results from a long-term below-market lease encumbering commercial property when determining the actual value of that property for ad valorem tax purposes.

II

The substance of Denver's argument is that actual rental income from the property is extraneous to a determination of the actual value of the property, and thus, the BOAA erred in considering the rental income of the property. Denver urges that although the general rule is that actual rent is a factor in determining value, an exception exists where such rent is wholly misleading. Denver asserts that here such rent is misleading because it does not reflect the value of all interests in the subject property; in particular the "leasehold bonus value" ⁶ in the below-market lease. Denver claims that this conclusion necessarily follows from the "unit assessment rule."

The unit assessment rule is a rule of property taxation which requires that all estates in a unit of real property be assessed together, and the real estate as an entirety be assessed to the owner of the fee "free of the ownerships of lesser estates such as leasehold interests...." Alliance Towers v. Stark City Bd. of Rev., 37 Ohio St.3d 16, 523 N.E.2d 826, 832 (1988). See Merrick Holding Corp. v. Board of Assessors, 45 N.Y.2d 538, 410 N.Y.S.2d 565, 568, 382 N.E.2d 1341, 1344 (1978); Folsom v. County of Spokane, 111 Wash.2d 256, 759 P.2d 1196, 1202 (1988) (Folsom II ). See also 84 C.J.S. Taxation § 404(a), at 770 (1954). It prohibits multiple assessments on multiple taxpayers holding disparate interests in a single piece of property. Folsom II, 759 P.2d at 1203. In other words, both the lessor's interest and the lessee's interest are assessed simultaneously, and the property taxed as though it was an unencumbered fee.

Both parties treat the rule as applying; however, it is a question of first impression in Colorado. The court of appeals held that section 39-1-106, 16B C.R.S. (1982), establishes "a unit rule for the assessment of property; rather than requiring assessment of the various interests in the property ... the property is assessed to the owner only, and it 'makes no difference' that his ownership or possession is qualified or limited." Board of Assessment Appeals, 829 P.2d at 1323. Section 39-1-106 provides:

Partial interests subject to tax. For purposes of property taxation, it shall make no difference that the use, possession, or ownership of any taxable property is qualified, limited, not the subject of alienation, or the subject of levy or distraint separately from the particular tax derivable therefrom.

§ 39-1-106, 16B C.R.S. (1982).

We agree with the court of appeals conclusion that section 39-1-106 establishes a unit assessment rule. The language of section -106 renders an encumbrance irrelevant for purposes of property taxation; thus, avoiding the distortion of property values caused by fragmenting the leasehold interest from the fee. See Folsom v. County of Spokane, 106 Wash.2d 760, 725 P.2d 987, 993 (1986) (Folsom I ). Other considerations weigh in favor of such a construction. The unit assessment rule taxes all interests in property, no matter how they are divided. See § 39-1-102(16), 16B C.R.S. (1982) ("taxable property" defined as all property, real and personal); § 39-1-102(14)(a), 16B C.R.S. (1982) ("real property" defined as "all interests in land"); Colo. Const. art. X, § 3(1)(a) (property tax levy shall be upon all real and personal property). See also J. Youngman, Defining and Valuing the Base of the Property Tax, 58 Wash.L.Rev. 713, 725 (1983) (most important and persuasive of the rationales supporting the "unit assessment rule" interprets the tax as a levy against all interests in a given parcel of real property). Additionally, the rule achieves the constitutional mandate of uniformity by assuring horizontal equity between comparable parcels of property. ⁷ See Martin v. Liberty County Bd. of Tax Assessors, 152 Ga.App. 340, 262 S.E.2d 609, 612 (1979) (where lessor chose to receive disproportionate share of rental income in first four years of long term...