Opinion ID: 2585327
Heading Depth: 3
Heading Rank: 2

Heading: Governments May Tax the Value of the Possessory Interest in the Leased Property.

Text: Golden Heart argues that because it pays market rent on the utilidor property, if it were to assign its interest to an informed buyer the assignee would not be willing to pay anything for the interest because the lease terms reflect the market price. Accordingly, Golden Heart believes that the assessed value should be zero. The assessor, however, does not argue that the reversionary method accurately values the utilidor lease contract. Instead, the assessor argues that the assessment reflects the value that Golden Heart derives from its ability to use the utilidor property in its operationsits possessory interest. Even if Golden Heart cannot sell its lease contract for any significant sum, the assessor seeks to tax the benefit Golden Heart derives from its right to use the utilidor. [24] This use of the property must have some value, or Golden Heart would not agree that $20,000 in annual rent is fair market value. It was appropriate for the assessor to assess Golden Heart's possessory interest. Although our approval of the taxing of a possessory interest in tax-exempt property is not explicit in our decisions in North Star Alaska Housing [25] and Cool Homes, [26] we implicitly approved of the practice. First, we approved the use of the reversionary method, which begins with the fee value of a property in an attempt to discern the market value of a lease. [27] Second, we concluded that the assessments in those cases were valid because the interests to be taxed shared attributes of a fee interest in that the leases were long term. [28] Even though Golden Heart pays rent, the longevity of the agreement makes Golden Heart's interest analogous to a fee interest. Moreover, the reversionary method accounts for the differences between a leasehold interest and a fee interest in the utilidor by deducting value to reflect the restrictions on the lease and the fact that the property will eventually revert back to the City. In several other states, local governments are permitted to tax a private party's possessory interest in tax-exempt property. [29] We agree with the assessor and conclude that [t]he value to be taxed is the value of the right to use the property over the period of the lease. [30] We join these other states in allowing municipal governments to assess the possessory interest in tax-exempt property. [W]hat is being taxed is the value of the leasehold, in the sense of the price for which it can be sold, not the value of the leasehold to the tenant, in the sense of the profit that the tenant can make upon a sale of the lease. [31] Golden Heart argues that the Alaska Constitution specifically requires the assessor to assess the market value of its lease contract rather than the value of its possessory interest. Article IX, section 5 of the Alaska Constitution states that [p]rivate leaseholds, contracts, or interests in [tax-exempt] land or property ... shall be taxable to the extent of the interests. (Emphasis added.) Golden Heart argues that because the constitution specifically refers to a leasehold, the assessor cannot tax its possessory interest. But the term leasehold is not exclusive of the term possessory interest. A leasehold is a tenant's possessory estate in land or premises. [32] Golden Heart provides no additional legal authority for its proposed distinction. Moreover, the constitution appears to contemplate the taxation of more than leaseholds in tax-exempt property. The constitutional provision includes the more inclusive term interests in enumerating what a municipality may assess. [33] We therefore reject Golden Heart's argument that by allowing a leasehold to be taxed, the Alaska Constitution excluded the possibility that a municipality could tax a possessory interest in a lease.