Court Opinion

ID: 9650036
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:21:08.139261+00
Date Added: 2024-06-11T18:12:17.433137
License: Public Domain

DISSENTING OPINION BY
Judge McGINLEY.
I must respectfully dissent.
It is well settled that in a long-term leased property scenario, the “income approach” to valuation must be considered and the implications of the long-term lease must be considered when an assessment of property is made. Marple Springfield. In the landmark case Marple Springfield, our Supreme Court held that fair market value is to be determined by the price a *1232buyer will pay in accordance with the “economic realities” of commercial real estate transactions. The Supreme Court explained: “To interpret the tax assessment statute as requiring valuation of property in hypothetical unencumbered form.... is to ignore the economic realities of commercial real estate transactions.” Marple Springfield, 530 Pa. at 126-127, 607 A.2d at 710.
In In re Assid, 842 A.2d 995 (Pa. Cmwlth.2004), this Court reversed a trial court when faced with a very similar fact pattern. There the trial court ignored the economic realty of a long-term commercial lease which encumbered the property.1
In Assid, Dr. and Mrs. Assid (Assids) owned a 339-acre tract of land in Armstrong County (county) which they leased on April 1, 1999, to Spring Church. The lease term was for an initial five years, with an option for four consecutive five-year renewals with a right of reversion to the taxpayers at the end of the lease. Pursuant to the lease, Spring Church constructed an 18-hole golf course and club house on approximately 100 acres of the property. The annual rent was $60,000 or 10% of the gross profits from all operations, whichever amount was greater.
The Assids received a notice of appraisal from the Armstrong County Board of Assessment setting the fair market value of the property at $1,346,390. Taxpayer appealed. At trial the county’s appraiser testified that he used the cost approach and did not consider the effect of the lease on the value of the property.
The Assids’ expert, on the other hand, valued the property as encumbered by the long-term lease. He used the income approach to value and capitalize the net operating income from the lease to arrive at a present market value. He then added that to the Assids’ reversionary value in the property and arrived at a fair market vale of $555,900. The trial court rejected this value and accepted the county’s valuation.
This Court reversed because the trial court was required to “determine the fair market value of [the Assids’] property ... by considering the impact of the [long-term commercial] Lease, and it failed to do so.” Assid, 842 at 1001.
In the present controversy, the trial court, like the trial court in Assid, ignored the impact of the long-term lease. However, this case is slightly different from As-sid. Here, the trial court accepted Mr. Ackerman’s use of the income approach. However, instead of considering the long-term lease and valuing only the Taxpayer’s lease fee interest, the trial court found that the Tenant’s leasehold interest must also be valued. I believe this was error.
Marple Springfield and Assid were based on the underlying principle that the proper inquiry in any valuation should focus on the market value of the property exposed for sale “as is.” See Assessment Law and Procedure in Pennsylvania, Bert M. Goodman, (2008 Ed.) at 199-200. Since a property is only worth what an investor-buyer could earn from it, a property encumbered by a long-term lease with a fixed rent must be valued based on the income it will yield to a purchaser. Id. As Professor Goodman explains, in the long-term lease situation, “[t]he owner ... should be taxed upon the current income from the property (rent) and the present *1233value of the reversion of the building at the end of the lease.” Id. at 200.
In the present scenario, a prospective buyer would be limited by what he could earn from the property for the duration of the lease because of the long-term lease encumbrance. The prospective buyer’s fee simple ownership interest, like Taxpayer’s, would be limited in that he is not free to sell the property unencumbered and is powerless to unilaterally void the encumbrance. Given the economic reality of the long-term fixed rent and the limitations on transferability, the valuation must take into consideration the encumbrance of the long-term lease in order to fairly value the property.
This is so, even if, under the trial court’s example, a tenant builds a replica of the “Taj Mahal or Empire State Building.” Trial Court Opinion at 3-4. If there is a long-term commercial lease in effect this negatively restricts the owner’s fee simple interest. That economic reality must be taken into account when valuing the property. A prospective buyer could, at most, earn the fixed annual rent of $665,000 until the expiration of the lease. Only after could the prospective purchaser sell the property outright, including the buildings and improvements. Thus, the trial court was required to take into consideration Taxpayer’s leased fee interest and the fact that the then-current economic benefit to Taxpayer was its receipt of a fixed annual rent for $665,000 per year for fifty years. So long as the lease was an arms-length transaction and entered into in good faith, the long-term lease and its implications must be considered when valuing the property.
Because an owner of property must be taxed solely upon the fair market value of the property as it presently exists, not upon the hypothetical unencumbered value, I believe that the trial court erred when it included the value of the buildings and improvements in the assessment. Marple Springfield. The trial court was required to value the Taxpayer’s interest in the property at the income value of its cash flow plus reversionary value of the realty which is precisely what Taxpayer’s expert, Mr. Barna, did.
Because the trial court erred when it failed to employ the method of valuation espoused in Marple Springfield and Assid, I would reverse.2
Judge LEAVITT joins in this dissent.

. An "encumbrance” is a claim or liability that is attached to property or some other right that may lessen its value, such as a lien or mortgage. Black's Law Dictionary 547 (7th Ed. 1999). Importantly, an encumbrance will not defeat the transfer of possession, but it remains after a property or right is transferred. So, in this case, if Taxpayer sold the property, the transfer of possession and title would be sold subject to the long term commercial lease.

. I must also disagree with the majority’s analysis of the Uniformity Clause because I do not agree that a property encumbered by a 50-year long term lease is similarly situated to or comparable to a property with no such restriction. The actual current market values of the two types of properties will be different. The market value of a property encumbered by a long-term lease (an encumbered fee) will be different than a similar property free and clear of all encumbrances. A potential purchase will be, in the first instance, purchasing an encumbered fee and will logically discount the property because of the encumbrance. Assessment Law and Procedure in Pennsylvania, Bert M. Goodman, (2008 Ed.) at 200.