Impact of Long-Term Leasehold Interest on County Property Tax Assessment
Based on the 1978 voter initiative commonly referred to as “Proposition 13,” the government can reassess the value of real property for taxation purposes after a “change in ownership” of the property. The meaning of “change in ownership” has been the subject of subsequent statutes created by the state legislature. In a recent case entitled Equinix LLC v. County of Los Angeles, the Court explored the nuances of those statutes, focusing in particular on the impacts of long-term leasehold interests on the characterization of various transactions as a “change in ownership.”
Over objections from the appellants the Court confirmed and upheld the “plain language” of the statute characterizing any transfer of a lessor’s interest in taxable real property as a “change in ownership” if the remaining term of the lease was less than 35 years.
Facts of Equinix LLC v. County of Los Angeles
In 2015, GPT Maple Avenue Owner, LP (“GPT”) purchased a large building, more than 100,000 square feet in size, in El Segundo. At the time of GPT’s purchase, the property was subject to a lease to Equinix, LLC, with 26 years remaining on the lease term. Under the lease, Equinix was responsible for payment of property taxes due during the lease.
The Assessor determined that the 2015 purchase by GPT was a “change in ownership” and reassessed the value of the property, which resulted in significantly higher property taxes. Equinix appealed the Assessor’s 2015 change in ownership determination to the Los Angeles County Assessment Appeals Board. The appeals board found in favor of the county, concluding GPT’s purchase of the property resulted in a change in ownership under sections 60-62 of the California Revenue and Tax Code.
Next, Equinix and GPT took their challenge to the courts and filed an action against the County of Los Angeles challenging the “change in ownership” determination. The trial court also concluded that, under the “express language” of Sections 61 and 62, GPT’s purchase of the property in 2015 resulted in a change in ownership because, at the time of sale, the remaining term of Equinix’s lease was less than 35 years. Equinix and GPT appealed.
Court of Appeal: Purchase was a “Change in Ownership” Under Plain Language of Revenue & Tax Code
On appeal, the appellate court affirmed the Assessor, Assessment Appeal’s Board, and trial court’s decisions. Turning first to the plain language of the statutes created by the state legislature to define “change in ownership,” the Court started with section 60 of the Revenue & Tax Code. Section 60 sets forth a general test: “A ‘change in ownership’ means a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest.”
While Section 60 was designed to provide an overarching definition and rule to determine which transactions qualify as a change in ownership, the Court explained that Sections 61 and 62 sought to give examples of specific types of common transactions which would qualify as a change in ownership (Section 61) and those which would not qualify (Section 62).
As relevant here, under Section 61, “[a]ny transfer of a lessor’s interest in taxable real property subject to a lease with a remaining term … of less than 35 years” is a “change in ownership[.]” Conversely, under Section 62, “[a]ny transfer of a lessor’s interest in taxable real property subject to a lease with a remaining term … of 35 years or more” is not a “change in ownership.”
GPT and Equinix raised various policy concerns to try and persuade the Court to ignore the plan language of Sections 61 and 62, without success. Ultimately, the Court recognized that the plain language of Sections 61 and 62 controlled and fit the circumstances of GPT’s purchase. GPT had purchased a property with a leasehold interest of less than 35 years (26 years in this case); therefore, the purchase qualified as a change in ownership warranting reassessment of the value of the property for tax purposes.
Lessons
Changes in ownership under Proposition 13 can result in significantly higher property taxes. As in the case of Equinix LLC v. County of Los Angeles, many commercial leases require the tenants to pay property taxes during the life of the lease. Whether it is the owner of a property or a tenant who is obligated to pay property taxes pursuant to a lease, it is important to understand the types of transactions that can result in tax reassessments. In this case, Equinix was the tenant and not even a party to the transaction that resulted in a tax reassessment and higher property taxes, but Equinix was the party immediately impacted with a higher tax burden.