Opinion ID: 2823829
Heading Depth: 1
Heading Rank: 4

Heading: Valuation of Concessionairesâ Possessory Interests

Text: Â¶57Â Â Â Â Â Â Concessionaires also contend that the trial court erred in approving the Cityâs valuation of their possessory interests. Specifically, Concessionaires dispute the determination of their âreasonably estimated future annual rents,â and they also argue that portions of their future rent should have been excluded from the valuation. Â¶58Â Â Â Â Â Â As relevant here, section 39-1-103(17), C.R.S. (2014), 12 sets forth a two-step method for the valuation of taxable possessory interests in tax-exempt properties. 13 First, to calculate the actual value of the possessory interest, the assessor must calculate the âpresent value of the reasonably estimated future annual rents or fees required to be paid by the holder of the possessory interest to the owner of the underlying real or personal property.â Â§ 39-1-103(17)(a)(II)(A). The ârents or feesâ under this provisionÂ shall be the âactual contract rents or fees reasonably expected to be paid . . . unless it is shown that the actual contract rents or fees to be paid . . . are not representative of the market rents or fees paid for that type of real or personal property.â Id. Second, the assessor shall exclude rent and fees required to be paid for all rights other than the exclusive right to use and possess the property. Â§ 39-1-103(17)(a)(II)(B). Relevant here, the statute indicates that the following are examples of such payments that shall be excluded: (1) â[n]onexclusive rights to use and possess . . . common areasâ; (2) ârights to conduct a businessâ; and (3) âreimbursement . . . of the reasonable costs of operating, maintaining, and repairing the land, improvements, or personal property to which the possessory interest pertains, regardless of whether such costs are separately stated, provided that the types of such costs can be identified with reasonable certainty from the documents granting the possessory interest.â Id. Â¶59Â Â Â Â Â Â At trial, a representative of the Cityâs assessor, qualified as an expert in valuation, testified that he used the minimum monthly guarantee as the basis to determine the âreasonably estimated future annual rents.â Under the concession agreements, Concessionaires pay the greater of either: (1) a defined percentage of their monthly gross revenues, which may fluctuate monthly or seasonally; or (2) a minimum monthly guarantee, which is calculated by applying a fixed price per square foot to the total square footage of the space exclusively possessed by the Concessionaire. The representative testified that he used the minimum monthly guarantee instead of the percentage of monthly gross revenues because, regardless of circumstances, Concessionaires would pay at least the minimum monthly guarantee in the future. TheÂ representative also determined that the only qualifying deduction or exclusion required under section 39-1-103(17)(a)(II)(B) was the value of Concessionairesâ non-exclusive occupancy of the common areas, like food court spaces. It was undisputed that the assessor excluded all rent that would be paid for common areas. The trial court ultimately adopted the representativeâs valuations of Concessionairesâ possessory interests.
Â¶60Â Â Â Â Â Â Concessionaires contend that the use of the minimum monthly guarantee was not an appropriate basis for determining the âreasonably estimated future annual rents or feesâ under section 39-1-103(17). Section 39-1-103(17)(a)(II)(A) provides that the âreasonably estimated future annual rents or feesâ are the âactual contract rents or fees reasonably expected to be paidâ unless it is âshownâ that they âare not representative of the market rents or fees paid for that type of real or personal property.â Concessionaires argue that the minimum monthly guarantee was neither the âactual contract rent . . . expected to be paidâ nor was it ârepresentative of market rents.â Â¶61Â Â Â Â Â Â First, Concessionaires argue that the minimum monthly guarantee was not representative of the âactual contract rents or fees reasonably expected to be paidâ because most Concessionaires historically paid the percentage of monthly gross revenues instead of minimum monthly guarantee. However, the representativeâs use of the minimum monthly guarantee, approved by the trial court, was a reasonable estimate of future rent because Concessionaires are obligated under their concession agreements to pay at least that amount. Though it also may have been reasonable for an assessor to estimate future rent based on historical payments of a percentage of monthly gross revenues, Concessionaires have not met their burden to prove that the use of the minimum monthly guarantee was an unreasonable estimate of future rent under their concession agreements. See Bd. of Assessment Appeals v. Sampson, 105 P.3d 198, 204 (Colo. 2005) (the taxpayer has the burden to show by a preponderance of the evidence that the valuations are incorrect). Â¶62Â Â Â Â Â Â Regardless, Concessionaires contend that the trial court erred in adopting the representativeâs valuation because the representative did not consider whether minimum monthly guarantee was ârepresentative of the market rentsâ for similar property. However, the trial court found, and the record supports, that the representative did inquire into the market rateâbut determined that the only comparable market consisted of the concessions at DIA. Â¶63Â Â Â Â Â Â Thus, the trial courtâs adoption of the representativeâs use of the minimum monthly guarantee as a basis for determining the âreasonably estimated future annual rents or feesâ is consistent with section 39-1-103(17) and is supported by the record.
Â¶64Â Â Â Â Â Â Concessionaires also contend that the valuation does not exclude portions of future rent that are for payments not associated with their exclusive use and occupancy of their concession spaces. Specifically, Concessionaires contend that a portion of their future rent should be excluded under section 39-1-103(17)(a)(II)(B) as payments for the right to conduct a business and as âreimbursementsâ to the City for the costs of operating and maintaining the airport. We disagree.Â Â¶65Â Â Â Â Â Â The concession agreements state that the âcompensationâ due under the agreements is âfor the rights and privileges herein granted by the City.â The rights granted under the agreements are âthe right to occupy, improve, and use the Concession Space.â Together, these provisions indicate that the rent (or compensation) due under the agreements is for the right to occupy, improve, and use the concession spacesânot for the right to conduct a business or for reimbursements for operating expenses. Â¶66Â Â Â Â Â Â Still, Concessionaires contend that a portion of their future rent should be excluded as a payment for the right to conduct a business. Section 39-1-103(17)(a)(II)(B) clarifies that excludable rent for the right to conduct a business should be determined in accordance with guidelines published by the administratorâwhich are contained in the Assessorâs Reference Library (âARLâ). In providing guidance on calculating exclusions from future rent, the ARL recognizes that possessory interest agreements are usually structured in such a way that the rent due under the agreement already âreflect[s] amounts after expenses and income exclusions are taken into account,â and, thus, no exclusion under section 39-1-103(17)(a)(II)(B) is usually necessary. 3 Assessorâs Reference Library 7.78 (rev. Mar. 2014) (emphasis in original). However, exclusions may be necessary when the rent due under the agreement is based on a percentage of revenue, i.e. percentage rent. Id. When percentage rent is used as the basis to calculate future rent, the ARL instructs assessors to compare the percentage rent to market rent to determine the amount attributable to business value. Id. at 7.79. Where percentage rentÂ is higher than market rent, the difference should be excluded as rent for the right to conduct a business. Id. Â¶67Â Â Â Â Â Â In this case, the representative used the minimum monthly guaranteeânot a percentage of monthly gross revenuesâas the basis to value Concessionairesâ possessory interests. Consistent with the ARL guidelines, the representative testified that by using the minimum annual guarantee, he was certain that he had not captured any value for the right to conduct a business. Moreover, the representative also testified that the minimum monthly guarantee was representative of market rent. Thus, evidence presented at trial supports his assertion that no portion of that rent was attributable to payments for the right to conduct a business because the minimum monthly guarantee and market rent are essentially the same. We therefore conclude that the trial court did not err in adopting the representativeâs valuation that did not exclude any portion of future rent as a payment for the right to conduct a business. Â¶68Â Â Â Â Â Â Finally, Concessionaires argue that a portion of future rent is for âreimbursementsâ to the City for the costs of operating and maintaining the airport. Section 39-1-103(17)(a)(II)(B) requires an appraiser to exclude from valuation any fees that will be paid as âreimbursement to the owner of the underlying real or personal property of the reasonable costs of operating, maintaining, and repairing the land, improvements, or personal property to which the possessory interest pertains.â Such deductions, however, apply only where âthe types of such costs can be identified with reasonable certainty from the documents granting the possessory interest.â Id. Â¶69Â Â Â Â Â Â As Concessionaires conceded at trial, nothing in the concession agreements specifically identifies any reimbursement to the City for the costs of âoperating, maintaining, or repairingâ the airport. In fact, the concession agreements provide that the City shall maintain the terminal and concourses at its expense. Â¶70Â Â Â Â Â Â Nonetheless, Concessionaires argue that because the City can reestablish the minimum monthly guarantee under the concession agreements in reasonable relation to the cost of providing, operating, and maintaining the airport, such increases are reimbursementsâ for operating expenses. In support of this argument, Concessionaires rely on several letters from the City notifying them of such increases. The letters indicate that increases in facility costs contributed to these increases. However, the trial court found that the âpercentage increases of facility costs bear no obvious relation to the percentage increases in the minimum guaranteed amounts.â More importantly, nowhere do the concession agreements indicate that any portion of payment, including that attributed to a payment increase, constitutes a reimbursement to the City. Any City use of payments from Concessionaires to operate, maintain, and repair the airport does not transform such paymentâwhich the concession agreements state is for the âright to occupy, improve and use the Concession Spaceââinto a reimbursement for operating and maintaining the airport. Â¶71Â Â Â Â Â Â Therefore, we reject Concessionairesâ contention that some of their payment is excludable either as payment for the right to conduct a business or reimbursement to the City for operating expenses. The trial courtâs adoption of the Cityâs valuation isÂ consistent with section 39-1-103(17)(a)(II)(B) and the administratorâs guidance in the ARL and is supported by the record.