PA Supreme Court Decision in Tech One: Practically Speaking May 24, 2012 PBI Webinar Anthony C. Barna, MAI, SRA Sharon F. DiPaolo, Esquire

“In conducting this valuation [of the market value of the real estate as a whole], the impact of the lease on the market value of the real estate owned as the leased fee and, also, on the market value of the real estate owned as a leasehold interest must be considered.” Tech One Associates v. Board of Property Assessment, Appeals and Review of Allegheny County, West Mifflin Borough and West Mifflin Area School District, 32 WAP 2010 (Pa. Supreme Court, April 25, 2012), at page 32. Tech One Leased fee + Leasehold = Value for Taxation

Tech One Associates v. Board of Property Assessment Review of Allegheny County PA Supreme Court, No. 32 WAP 2010 April 25, 2012 Unanimous decision Leased fee + Leasehold = Value for Taxation

Tech One What does it mean?

Tech One Leased fee + Leasehold = Value for Taxation

Tech One Where do we start?

Uniformity Pennsylvania Constitution Article 8, Section 1: “All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.” Leased fee + Leasehold = Value for Taxation

Objects of Taxation General County Assessment Law, 72 P.S. Sec “Subjects of Taxation Enumerated” “The following subjects and property shall... be valued and assessed, and subject to taxation...[a]ll real estate... “ Leased fee + Leasehold = Value for Taxation

“Real Estate” and “Real Property” Leased fee + Leasehold = Value for Taxation

Real Property The interests, benefits, and rights inherent in the ownership of real estate. Leased fee + Leasehold = Value for Taxation

Actual Value General County Assessment Law 72, P.S. Sec “Valuation of Property”: All “objects of taxation” are to be valued “according to the actual value thereof, and at such rates and prices for which the same would separately bona fide sell.” Leased fee + Leasehold = Value for Taxation

Actual Value “Actual value” defined by PA Supreme Court: “[P]rice which a purchaser willing but not obliged to buy, would pay an owner, willing but not obliged to sell, taking into consideration all uses to which the property is adapted and might in reason be applied.” Dietch, 209 A.2d 397, 400 (Pa. 1965). Leased fee + Leasehold = Value for Taxation

Marple I and Marple II What were the facts? Leased fee + Leasehold = Value for Taxation

Marple I and Marple II Shopping center Leased fee + Leasehold = Value for Taxation

Marple I and Marple II Shopping center Built in 1964, approximately 200,000 sf Leased fee + Leasehold = Value for Taxation

Marple I and Marple II Shopping center Built in 1964, approximately 200,000 sf 1968 lease for land and building Leased fee + Leasehold = Value for Taxation

Marple I and Marple II Shopping center Built in 1964, approximately 200,000 sf 1968 lease for land and building 25 years (expires 1994) with option for additional 50 years (expires 2044) Leased fee + Leasehold = Value for Taxation

Marple I and Marple II Shopping center Built in 1964, approximately 200,000 sf 1968 lease for land and building 25 years (expires 1994) with option for additional 50 years (expires 2044) $1.47 square foot rent, remains constant throughout term Leased fee + Leasehold = Value for Taxation

Marple I and Marple II Shopping center Built in 1964, approximately 200,000 sf 1968 lease for land and building 25 years (expires 1994) with option for additional 50 years (expires 2044) $1.47 square foot rent, remains constant throughout term Late 1970s Klein’s goes out of business Leased fee + Leasehold = Value for Taxation

Marple I and Marple II 1987 Marple XYZ Associates acquires the Klein’s lease Leased fee + Leasehold = Value for Taxation

Marple I and Marple II 1987 Marple XYZ Associates acquires the Klein’s lease Later Kleins (Marple XYZ) subleases to others at $3.04 square foot Leased fee + Leasehold = Value for Taxation

Marple I and Marple II 1987 Marple XYZ Associates acquires the Klein’s lease Later Kleins (Marple XYZ) subleases to others at $3.04 square foot 1990 New Circuit City built, 35,000 sf, on land subject to Klein’s lease. Marple XYZ subleases to Circuit City. Circuit City paid for and financed the building. Leased fee + Leasehold = Value for Taxation

Marple I and Marple II 1987 Marple XYZ Associates acquires the Klein’s lease Later Kleins (Marple XYZ) subleases to others at $3.04 square foot 1990 New Circuit City built, 35,000 sf, on land subject to Klein’s lease. Marple XYZ subleases to Circuit City. Circuit City paid for and financed the building New small shops built adding 18,000 sf, on land NOT subject to Klein’s lease. Leased fee + Leasehold = Value for Taxation

Marple I Case tried for 1988 and 1989 tax years BEFORE new construction Issue: whether to use Klein’s rent or market rent in valuation Case went to PA Supreme Court “Economic reality” test Leased fee + Leasehold = Value for Taxation

Marple II Case tried for tax years 1990, 1991, 1992 AFTER construction of new Circuit City and construction of new small shops Issue: whether Circuit City (subtenant to Klein’s lease) should be valued separately or as part of Klein’s lease Commonwealth Court ruled Circuit City should be valued as part of Klein’s lease Supreme Court refused to take case Leased fee + Leasehold = Value for Taxation

Tech One What were the facts? Leased fee + Leasehold = Value for Taxation

Tech One Century Square Shopping Center Leased fee + Leasehold = Value for Taxation

Tech One Century Square Shopping Center 50 acres of land Leased fee + Leasehold = Value for Taxation

Tech One Century Square Shopping Center 50 acres of land Lease signed in 1989 Leased fee + Leasehold = Value for Taxation

Tech One Century Square Shopping Center 50 acres of land Lease signed in years Leased fee + Leasehold = Value for Taxation

Tech One Century Square Shopping Center 50 acres of land Lease signed in years Annual rent $665,000 for entire term Leased fee + Leasehold = Value for Taxation

Tech One Century Square Shopping Center 50 acres of land Lease signed in years Annual rent $665,000 for entire term 415,000 square feet shopping center, movie theater restaurant Leased fee + Leasehold = Value for Taxation

Tech One Case tried for tax years 2001 to 2005 Appraisers agreed on leased fee value ($9.5 Million or $9.3 Million) Issue: whether leasehold must be valued? Leased fee + Leasehold = Value for Taxation

Tech One Special Master: Leased fee. $9.5 Million Trial Court: Leased fee plus leasehold. $22 Million to $35 Million Commonwealth Court: Leased fee plus leasehold. Leased fee + Leasehold = Value for Taxation

Tech One Leased fee + leasehold Leased fee + Leasehold = Value for Taxation

Tech One “Where … ownership of taxable real estate which comprises one tax parcel is divided into leased fee and leasehold interests, Section 402) still requires that the market value of the real estate as a whole be determined.” page 31 Leased fee + Leasehold = Value for Taxation

Tech One Assess the entire property Does not matter who owns Leased fee + leasehold Leased fee + Leasehold = Value for Taxation

The Valuation of All Objects of Taxation Tech One is the evolution of Marple that reflects the genuine “economic reality” Practical result is UNIFORMITY Every lease creates leased fee property rights (property owner) leasehold property rights (tenant) Leased fee + Leasehold = Value for Taxation

Tech One Decision Leased fee property rights (V lf ) + Leasehold property rights (V lh ) = Actual Value (V a ) = Value for Taxation Leased fee + Leasehold = Value for Taxation

Tech One Decision Value of Leased fee property rights (V lf ) + Value of Leasehold property rights (V lh ) = Actual Value (V a ) = Value for Taxation At market rate: $18 V lf + V lh = V a Owner receives + (Tenant receives-Owner Receives) $18 + ($18-$18) = V a = Value for Taxation Leased fee + Leasehold = Value for Taxation

Tech One Decision Leased fee rights (V lf ) + Leasehold rights (V lh ) = Actual Value (V a ) At market rate: $18 V lf + V lh = V a $18 + ($18-$18) = V a $18 + $0 = V a $18 = V a Leased fee + Leasehold = Value for Taxation

Above Market Rate Market rate: $18 Above market rate: $30 Leased fee + Leasehold = Value for Taxation

Above Market Rate Market rate: $18 Above market rate: $30 V lf + V lh = V a Leased fee + Leasehold = Value for Taxation

Above Market Rate Market rate: $18 Above market rate: $30 V lf + V lh = V a Owner receives + (Tenant receives-Owner Receives) $30 + ($18-$30) = V a Leased fee + Leasehold = Value for Taxation

Above Market Rate Market rate: $18 Above market rate: $30 V lf + V lh = V a $30 + ($18-$30) = V a $30 - $12 = V a Leased fee + Leasehold = Value for Taxation

Above Market Rate Market rate: $18 Above market rate: $30 V lf + V lh = V a $30 + ($18-$30) = V a $30 - $12 = V a $18 = V a = Value for Taxation Important: this illustration is an over-simplification, because it does not take into account differing capitalization rates for the leased fee and leasehold positions, but it reflects the economic reality. Leased fee + Leasehold = Value for Taxation

Below Market Rate Market rate: $18 Below market rate: $5 Leased fee + Leasehold = Value for Taxation

Below Market Rate Market rate: $18 Below market rate: $5 V lf + V lh = V a Leased fee + Leasehold = Value for Taxation

Below Market Rate Market rate: $18 Below market rate: $5 V lf + V lh = V a Owner receives + (Tenant receives-Owner Receives) $5 + ($18-$5) = V a $5 + $13 = V a $18 = V a Leased fee + Leasehold = Value for Taxation

Below Market Rate Market rate: $18 Below market rate: $5 V lf + V lh = V a $5 + ($18-$5) = V a $5 + $13 = V a $18 = V a Again, this illustration does not take into account differing capitalization rates for the leased fee and leasehold positions, but it reflects the economic reality. Leased fee + Leasehold = Value for Taxation

V lf + V lh = V a = Value for Taxation The components of the Value for Taxation are a balance between Leased Fee and Leasehold that reflect the true economic reality of the property and result in UNIFORMITY

V lf + V lh = V a = Value for Taxation Above market rate Below market rate V lf is greater V lh is greater Landlord gets benefitTenant gets benefit Leased fee + Leasehold = Value for Taxation

V lf + V lh = V a = Value for Taxation When there is a below market rent, the lease hold value is greater and carries more weight

V lf + V lh = V a = Value for Taxation When there is an above market rent, the leased fee value is greater and carries more weight

V lf + V lh = V a = Value for Taxation Regardless of which property rights have more value, the scale stands upright and the practical result is a balance to UNIFORMITY

Tech One Questions?

So, What Does it Mean? It means it does not matter if a property has a below market lease Leased fee + Leasehold = Value for Taxation

So, What Does it Mean? It means it does not matter if a property has a below market lease It means it does not matter if a property has an above market lease Leased fee + Leasehold = Value for Taxation

So, What Does it Mean? It means it does not matter if a property has a below market lease It means it does not matter if a property has an above market lease It means it does not matter if a property is leased or owned… Leased fee + Leasehold = Value for Taxation

So, What Does it Mean? No matter what… the whole of the real property is valued. Leased fee + Leasehold = Value for Taxation

Anthony C. Barna, MAI, SRASharon F. DiPaolo, Esquire Kelly|Rielly|Nell|Barna Siegel Jennings Co, LPA