IF I BUY REAL ESTATE ENCUMBERED BY A SUB-MARKET LEASE, CAN THIS BE A BASIS FOR SEEKING A PROPERTY TAX REDUCTION?
The most accurate answer to this question is “yes and no.” As a practical matter, the answer is “yes” in the respect that in an administrative tax appeal, the appraiser who is sitting as the decision-maker will pay a lot of attention to the actual income and actual expenses of the property. This is particularly true where you back-up the actual experience of the property with copies of the lease, operating statements and applicable portions of federal income tax returns.
The practical answer set forth above is based on our experience in representing clients in and observing thousands of value adjustment board hearings throughout the State of Florida. As distinguished from the practical answer above, the answer to the question from a purely legal and theoretical standpoint is an emphatic “NO!”
This is a good example why experience counts in these matters. Experience dictates one answer, while the law dictates another. One must heed the quotation invoked recently by Judge John G. Fletcher of the Third District Court of Appeal of Florida: “An ounce of logic is worth a pond of law.” As a practicing attorney before being elevated to the bench, Judge Fletcher litigated plenty of property tax cases—some against the author of this blog.
What follows is the rule and the legal support for ignoring a sub-market leased when assessing real estate for tax purposes in the State of Florida.
RULE: THE PROPERTY APPRAISER IS REQUIRED TO VALUE ALL RIGHTS IN PROPERTY TOGETHER.
Any time property is subject to a lease, the tenant has a leasehold interest and the landlord has a leased fee. The leased fee is the right to receive the contracted-for rent over the term of the lease, plus the right to physical possession of the realty at termination of the lease. When the owner of a shopping center talks about the value of “my property,” he or she is talking about a leased fee. Whether the tenant’s leasehold interest has value depends on whether there is a spread between market rent (what the space should rent for) and contract rent (the actual lease.) A simple example: A shopping center owner leased a 20,000 square foot space some years ago at $1.00 per square foot per year. Market rent today is $7.00 per square foot. The tenant thus enjoys a rent advantage of $6.00 per square foot, times 20,000 square feet, or $120,000 per year. The value of the tenant’s leasehold estate depends on the length of the lease plus options. Conversely, if a lease in a downtown area were made at $10.00 per square foot to a “AAA” tenant, and market rent is now $5.00 per square foot, the tenant should pay the landlord the capitalized value of the lease to cancel it.
Florida is a “market rent state,” as opposed to a “contract rent state.” Valencia Center, Inc. v. Bystrom, 543 So.2d 214 (Fla. 1989), established the principle that when a shopping center is encumbered with a long-term lease that is no longer economic, the Property Appraiser is required to ignore the lease and value all of the interests in the property together. Accord Century Village v. Walker, 449 So.2d 378 (Fla. 4th DCA 1984). In a “contract rent state” such as Wisconsin or Oregon, the shopping center would be appraised by capitalizing only the contract rent. As a result, the tenants’ leasehold interests are not taxed.
The last word on the subject of using market or contract rent from the Florida Supreme Court is Schultz v. TM-Florida/Ohio Ltd., 577 So.2d 573 (Fla. 1991). The Supreme Court made it abundantly clear that the Property Appraiser is required to value property using market, not contract rent.
To contact a property tax attorney who represented the taxing authorities in the trial court, the district court of appeal and Supreme Court of Florida in the Valencia Center case cited above, click here.
The practical answer set forth above is based on our experience in representing clients in and observing thousands of value adjustment board hearings throughout the State of Florida. As distinguished from the practical answer above, the answer to the question from a purely legal and theoretical standpoint is an emphatic “NO!”
This is a good example why experience counts in these matters. Experience dictates one answer, while the law dictates another. One must heed the quotation invoked recently by Judge John G. Fletcher of the Third District Court of Appeal of Florida: “An ounce of logic is worth a pond of law.” As a practicing attorney before being elevated to the bench, Judge Fletcher litigated plenty of property tax cases—some against the author of this blog.
What follows is the rule and the legal support for ignoring a sub-market leased when assessing real estate for tax purposes in the State of Florida.
RULE: THE PROPERTY APPRAISER IS REQUIRED TO VALUE ALL RIGHTS IN PROPERTY TOGETHER.
Any time property is subject to a lease, the tenant has a leasehold interest and the landlord has a leased fee. The leased fee is the right to receive the contracted-for rent over the term of the lease, plus the right to physical possession of the realty at termination of the lease. When the owner of a shopping center talks about the value of “my property,” he or she is talking about a leased fee. Whether the tenant’s leasehold interest has value depends on whether there is a spread between market rent (what the space should rent for) and contract rent (the actual lease.) A simple example: A shopping center owner leased a 20,000 square foot space some years ago at $1.00 per square foot per year. Market rent today is $7.00 per square foot. The tenant thus enjoys a rent advantage of $6.00 per square foot, times 20,000 square feet, or $120,000 per year. The value of the tenant’s leasehold estate depends on the length of the lease plus options. Conversely, if a lease in a downtown area were made at $10.00 per square foot to a “AAA” tenant, and market rent is now $5.00 per square foot, the tenant should pay the landlord the capitalized value of the lease to cancel it.
Florida is a “market rent state,” as opposed to a “contract rent state.” Valencia Center, Inc. v. Bystrom, 543 So.2d 214 (Fla. 1989), established the principle that when a shopping center is encumbered with a long-term lease that is no longer economic, the Property Appraiser is required to ignore the lease and value all of the interests in the property together. Accord Century Village v. Walker, 449 So.2d 378 (Fla. 4th DCA 1984). In a “contract rent state” such as Wisconsin or Oregon, the shopping center would be appraised by capitalizing only the contract rent. As a result, the tenants’ leasehold interests are not taxed.
The last word on the subject of using market or contract rent from the Florida Supreme Court is Schultz v. TM-Florida/Ohio Ltd., 577 So.2d 573 (Fla. 1991). The Supreme Court made it abundantly clear that the Property Appraiser is required to value property using market, not contract rent.
To contact a property tax attorney who represented the taxing authorities in the trial court, the district court of appeal and Supreme Court of Florida in the Valencia Center case cited above, click here.
posted by Daniel A. Weiss at
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