City of Desert Hot Springs v. County of Riverside

Decision Date02 April 1979
Citation91 Cal.App.3d 441,154 Cal.Rptr. 297
CourtCalifornia Court of Appeals
PartiesCITY OF DESERT HOT SPRINGS, Plaintiff and Respondent, v. COUNTY OF RIVERSIDE, Defendant and Appellant. Civ. 19681.
OPINION

MORRIS, Associate Justice.

This case involves the taxability of the possessory interest of a private contractor-builder under a lease of property owned by the City of Desert Hot Springs, leased to the builder for the purpose of construction by him of certain buildings, and leased back to the City under a lease with option to purchase the buildings at the expiration of the five-year and ten-year anniversary dates of the sublease.

The taxes in issue were assessed not on the fee interest in the property owned by the City, which is exempt, but rather on the possessory interest of the contractor as owner of the leasehold estate. The City, having obligated itself under the sublease to pay all taxes levied upon the contractor's interest in the property, paid under protest the taxes levied for the tax years 1973-1974, 1974-1975, and 1975-1976, and brought this action against the County of Riverside to recover the sums paid. 1 The trial court entered judgment in favor of the taxpayer, and the County appeals.

THE FACTS

Prior to the year 1970, the City of Desert Hot Springs city offices were located in rented facilities. In that year a four and one-half acre parcel of land was donated to the City to be used for the construction of a civic center complex. In order to finance the construction but at the same time avoid violating the one-year debt limitation provision of the California Constitution, 2 the City entered into the lease-leaseback" agreement with Herbert Goldhammer which provided for the construction by him of a city hall and a public library structure to be used by the County. 3

The agreement entitled "Lease and Sublease" provided essentially as follows. The City leased the property to Goldhammer for an effective term of 50 years for the consideration of $1.00, possession to be delivered upon completion of construction. Goldhammer subleased to the City for a term of 15 years commencing upon completion and availability of the facilities, for an annual rental of $16,617.60 payable in monthly installments of $1,384.80. The rental was based on a maximum construction cost of $142,500, and the City was given the option to purchase at the end of the fifth year by paying $115,170, or at the end of the tenth year by paying $68,170. The City also assumed payment of all taxes, insurance and expenses caused by any default of the City.

The agreement expressly authorized the use by Goldhammer of the "Lease and Sublease" as collateral security to obtain construction financing in the amount of $142,500, and authorized the execution of instruments providing for the City to pay all rental payments directly to a trustee for the lending institution. The pay-off period on the bank's loan was to coincide with the term of the 15-year sublease.

Title to the real property was retained in the City subject to the lease and sublease and title to all structures was to remain in Goldhammer during the term of the lease and sublease and to vest in the City at the end of the 50-year term.

Goldhammer retained the right of access to the premises for inspection and purposes connected with his rights and obligations under the lease. In event of default by the City which the City failed to remedy after notice, Goldhammer had the right to terminate the sublease without terminating the ground lease and to re-enter the premises, or without terminating the sublease to re-enter and relet the premises for the account of the City, the City to pay any deficiency.

Finally, the lease is to terminate upon the first to occur of the following: (1) 35 years after the term of the sublease to the City, (2) exercise by the City of its option to purchase, or (3) repayment by the City of all encumbrances.

The buildings were completed and the City went into possession under the sublease.

Commencing with the tax year 1973-1974, the county assessor levied a tax on the possessory interest of Goldhammer under the lease. 4 The City paid pursuant to the agreement contained in the lease, and sued to recover unsecured property taxes paid under protest, and for declaratory and injunctive relief.

The trial court found that "While (the agreement) was entitled 'Lease and Sublease', it was the intention of all parties . . . that it would serve as the most economical method of arranging financing for, and construction of, the subject City Hall and library structures for the CITY." The court also found that "At no time . . . has it been expected . . . that any of the events would occur which, under the AGREEMENT, would give anyone but the CITY the right to possession . . . ." Finally, the court found that "At all times since completion of construction and commencement of occupancy, all essential indicia of ownership of the real property, including the subject land and improvements thereon, have been in Plaintiff CITY."

The court concluded that each tax levy based on the assessments of the possessory interest was void and the City was entitled to a refund.

Judgment was entered granting the refund, declaring that no possessory interest exists under the lease agreement, and enjoining the County from further assessment of the interest.

DISCUSSION

Appellant County contends that the Lease-Sublease agreement created a valid leasehold in the property, and that as a matter of law such leasehold constitutes a possessory interest which is fully taxable under California law. As subsidiary issues the County complains that (1) the trial court committed reversible error by failing to determine whether the agreement constituted a valid lease agreement or a 15-year installment purchase contract, (2) the trial court's finding that all indicia of ownership of the property including the improvements is in the City is not supported by substantial evidence, and (3) the City's contractual obligation to pay the property taxes does not defeat the validity of the lease.

Since respondent City does not contend that its agreement to pay the taxes affects the validity of the lease, that argument does not merit discussion. Moreover, the law is well settled that such agreements do not create a tax exemption. (Cane v. City and County of San Francisco (1978) 78 Cal.App.3d 654, 657-658, 144 Cal.Rptr. 316; see De Luz Homes, Inc. v. County of San Diego (1955) 45 Cal.2d 546, 563, 290 P.2d 544.) Therefore, if the interest is otherwise taxable, the payment of the tax is a matter of private arrangement.

The County seeks to impose upon the court the alternative of finding either that the agreement created a valid taxable leasehold interest in the property or that it created a 15-year installment purchase in violation of the constitutional debt limitation. The court quite properly refused to consider the debt limitation issue. That issue is not involved. There has been no contention that the agreement creates any indebtedness or liability which will exceed in any year the income or revenue provided for such year. Moreover, it is apparent from reading the agreement that such result was carefully avoided. There is no contractual right on the part of Goldhammer to accelerate liability for the remaining payments in the event of the City's default. (See Dean v. Kuchel (1950) 35 Cal.2d 444, 446-448, 218 P.2d 521; County of Los Angeles v. Nesvig (1965) 231 Cal.App.2d 603, 611, 41 Cal.Rptr. 918.) The sole issue, as the court recognized, is whether the agreement created a possessory interest which is taxable under California law.

Neither is the issue presented in this appeal a question of whether there is substantial evidence to support a factual determination on conflicting evidence. There is no factual conflict. "The interpretation of a written instrument, even though it involves what might properly be called questions of fact (citation), is essentially a judicial function to be exercised according to the generally accepted canons of interpretation so that the purposes of the instrument may be given effect. (Citations.) Extrinsic evidence is 'admissible to interpret the instrument, but not to give it a meaning to which it is not reasonably susceptible' (citations), and it is the instrument itself that must be given effect. (Citations.) It is therefore solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence. Accordingly, 'An appellate court is not bound by a construction of the contract based solely upon the terms of the written instrument . . . where there is no conflict in the evidence . . . .' " (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865, 44 Cal.Rptr. 767, 770, 402 P.2d 839, 842, second quotation quoting Estate of Platt (1942) 21 Cal.2d 343, 352, 131 P.2d 825.)

Examining the factual findings the County complains of, it is clear that there was no conflict in the evidence on these issues. It was admittedly the intention of the parties that the lease-leaseback was to serve as a method of financing the construction of the city hall and library complex, and it was certainly never anticipated that the City would default on any payment under the lease back. Not only was this the undisputed evidence of the intention of the parties and purpose of the agreement, but this intention...

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  • Davis v. Fresno Unified Sch. Dist.
    • United States
    • California Court of Appeals
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    ...the use of a lease-leaseback arrangement for a public construction project is set forth in (City of Desert Hot Springs v. County of Riverside (1979) 91 Cal.App.3d 441, 447–449, 154 Cal.Rptr. 297.) There, the city leased land to a contractor for 50 years and the contractor subleased the comp......
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