Opinion ID: 2585327
Heading Depth: 3
Heading Rank: 3

Heading: The Reversionary Method Is an Appropriate Valuation Method.

Text: We have twice upheld the application of the reversionary method of valuation used in this case. [34] In North Star Alaska Housing, we reviewed an assessment of property in which the federal government leased land at no cost to a housing developer. [35] The developer then built houses on the land and leased them back to the federal government. [36] When Fairbanks assessed the property, the developer challenged the assessment. [37] We affirmed the assessment and the valuation method. [38] The valuation method approved in North Star Alaska Housing was the same one employed in the instant case. [39] As in this case, the developer argued that the leasehold should be assessed according to the value the leaseholder would receive if it sold its interest on the open market, and the value of the interest would be zero. [40] But we rejected that argument and concluded that it was appropriate to value the leasehold based on the land's market value, as if it were owned by [the leaseholder], minus an adjustment based on the fact that [the leaseholder's] interest in land is only for a [fixed] term.... [41] We again approved of this valuation method in our decision in Cool Homes, Inc. v. Fairbanks North Star Borough. [42] Golden Heart, however, believes that the decisions in North Star Alaska Housing and Cool Homes are distinguishable from the instant case. In those cases, the lessees either paid no rent or nominal rent for their leases. [43] Under those circumstances both the reversionary method and the rent savings method would yield approximately equal valuations. According to the rent savings method, one would assess the lease at the market value of the lease, which is the market value of the possessory interest, less the rent actually paid. [44] If the lessee pays no rent, the market value of the lease contract is the same as the assessed value of the possessory interest. The reversionary method starts with the fee simple value, discounted by a factor representing the fact that the property will revert to the owner in the future, [45] a figure approximately equal to the market value of the possessory interest in the property. But when the lessee pays rent, the value assessed by the rent savings method goes down, and the value assessed by the reversionary method stays the same. [46] Golden Heart argues that this result is untenable because there can only be one measure of market value. But this argument begs the question. The issue is which interest the assessor is valuing. We have already concluded that Fairbanks may assess the possessory interest. Therefore, it is not anomalous that the market value of the lease is different from the market value of the possessory interest; the valuations are measures of two completely different interests. [47] Moreover, many states have adopted the rule that when governments tax a lessee's possessory interest in otherwise exempt property, they should value the interest without regard for the amount of contract rent. [48] Many of these courts distinguish between the lessee's equity in the lease and the value of the lessee's right to use the property. [49] Although the valuation methods vary, [50] these states seek to ascertain the value of the right to possess the property for the contract term, without regard for the contract price, [51] just as the assessor has done here. The California Supreme Court has explained why the assessment of leases of tax-exempt property requires valuation methods different from the assessment of private property that is subject to a lease. In De Luz Homes v. County of San Diego , Justice Traynor explained that in a normal lease, no distinction is made between the possessor and the individual holding the reversionary interest when values are assessed. [52] Instead, the reversioner and possessor sort out the tax liability in a private arrangement. [53] Inquiring into the value of the possessory and reversionary interest is important, however, when the reversionary interest is tax exempt. [54] Because the reversion is not taxed, some method of valuing the tenant's possessory interest must be employed to account for the value of the reversion. [55] Golden Heart argues that the extra-jurisdictional authority is not persuasive. Instead, Golden Heart directs us to Great Northern Railway Co. v. Weeks. [56] Golden Heart asserts that Weeks stands for the proposition that the assessor must use the same valuation standard for tax and condemnation cases, quoting the following language: The principles governing the ascertainment of value for the purposes of taxation are the same as those that control in condemnation cases, confiscation cases, and generally in controversies involving the ascertainment of just compensation. [57] But other courts have distinguished Weeks and held that different valuation methods for condemnation and taxation purposes may be employed. [58] And the Supreme Court has expressly limited the precedential value of Weeks, confining its holding to the specific facts. [59] Contrary to Golden Heart's contention, there are good reasons for employing different methods of valuation for condemnation and taxation purposes. In a condemnation, the interest holder loses its possessory interest. As Justice Traynor explained: In eminent domain the full value of the interest must be paid for, but since the taking discharges the obligation to pay future rent, the value of that obligation to the lessor must be awarded to him. Although the lessee is awarded damages equal only to the value of his equity, he receives the full value of his possessory interest, for his obligation to pay rent is discharged. [60] In a taxation case, the assessor is attempting to ascertain the value of the possessory interest without regard for the obligation to pay rent because the assessment does not extinguish the lessee's obligation to pay that rent. Accordingly, the value of the reversionary interest is deducted from the fee simple value of the property less the decrease in value caused by the lease restrictions. We conclude that the reversionary method is a valid method for valuation of a possessory interest in tax-exempt property. Both the assessor and Golden Heart agree that the rate of $20,000 per year is fair market rent. And neither the assessor's use of the eight percent capitalization rate to value the fee interest at $250,000 [61] nor the assessor's estimate that the use restrictions deplete the market value of the lease by ten percent has been challenged. Golden Heart does, however, point to an error in the assessor's valuation. Golden Heart argues that when calculating the reversionary interest, the assessor improperly calculated the value of the reversion using the $225,000 value, reached by deducting ten percent of the fee simple value of $250,000 from the fee value to account for the use restrictions. Golden Heart contends that this deduction is inappropriate because when the property reverts to Fairbanks it will not contain the lease's restrictions. We agree. Once the lease term expires, the utilidor will revert back to Fairbanks, but because Fair-banks is the fee owner, it will not be subject to use restrictions. Factoring the use restrictions into the valuation of Fairbanks's reversion is therefore inappropriate. Assessor's Reversion Estimate = (fee value-(.1) fee value) × (present value factor) The present value factor for a lease expiring in fifty years, assuming 10% annual compound interest, is .008519. Assessor's Reversion Estimate = (250,000-25,000) x (.008519) = $1,917 Recalculated Reversion Estimate = (250,000-0) (.008519) = $2,130 Accordingly, the new assessed value should be the fee value ($250,000) less the amount accounting for the use restrictions ($25,000) less the recalculated value of the reversionary interest ($2,130), [62] equalling $222,870.