In the case of Tech One Associates v. Board of Property Assessment Appeals and Review of Allegheny County, et al. No. 32 WAP 2010, argued April 13, 2011 and decided April 25, 2012, the Supreme Court of Pennsylvania ruled on an appeal concerning the validity of a single unified assessment of land and the buildings of a shopping center, movie theater and restaurant located on the land, where the land is owned by one business entity and the buildings and surrounding improvements were constructed by a second business entity under a long term lease.
The Appellant purchased the land in the 1980s. In 1989, Appellant entered into a 50-year lease with lessee who constructed the buildings in the early 1990s.
Lessee pays $665,000 in rent per year plus all real estate taxes. The Board of Assessment assessed total values of land, buildings and improvements at $30,984,000 in 2001 and $32,477,300 for years 2002 through 2005. The Appellant appealed these valuations.
Initially, a Board of Viewers reduced the assessment to a valuation based solely upon the capitalization of rent received under the lease or a leased fee interest in the land and only that interest.
The Allegheny County Court of Common Pleas set aside that report and entered an order assessing market value of the entire parcel comprising both land and buildings.
Appellant appealed to the Commonwealth Court, which affirmed the lower court opinion in a divided en banc decision. There, the court addressed the central contention “that the leasehold improvements were not taxable real estate under The General County Assessment Law.” The court looked at Section 402(a) of the General County Assessment Law, which obligates assessors to value “all objects of taxation.” The court explained that “objects of taxation” are defined by Section 201(a) of the General County Assessment Law as “all real estate which includes buildings, lands…and all other real estate not exempt by law from taxation.” The court also upheld the lower court finding that excluding real property from taxation that was built and owned by a lessee pursuant to a long term lease, and not by the owner of the underlying land, would violate the Uniformity Clause of the Pennsylvania Constitution. Thus, the court determined that because the land and buildings are objects of taxation, there is an insufficient basis to tax them differently just because different parties own them. To adopt a different class of buildings (those that are leased) and that are exempt from taxation, would violate Article 8, Section 2 of the Pennsylvania Constitution, said the court.
Judge McGinley dissented on the basis of In Re: Appeal of Marple Springfield Center, Inc. 530 Pa. 122, 607 A.2d 708 (1992) (Marple Springfield I) stating that “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.” In Judge McGinley’s view, the economic reality of a long-term lease meant that a prospective buyer would be limited by its terms to receiving as income from the property only the fixed rent, so any valuation of the property must reflect that limitation.
The Supreme Court granted allowance of appeal to determine whether for real estate tax purposes the “economic reality test” announced in Marple Springfield I applies to establish the fair market value of an improved property encumbered with a long term lease that grants the lessee ownership of buildings and other improvements on the land. Further, the court considered whether the Uniformity Clause of the Pennsylvania Constitution requires an improved property encumbered with a long-term lease that grants the lessee ownership of buildings and other improvements on the land, to be taxed in the same manner as a similar, but unencumbered property.
The court determined that the mere fact that the shopping center buildings and other improvements to the land in the instant matter as owned by lessee as leasehold interests does not alter the fact that they are particular types of real estate enumerated in Section 201(a) of the General County Assessment Law and thus are proper subjects of taxation.
The court then considered whether the market value of the real estate including the buildings and improvements was property determined by the lower courts. The court noted that the property assessment procedure is to value the property as a whole. The term actual value as used in Section 402 means “market value.” Market value is a “price which a purchaser, willing but not obligated to buy, would pay an owner willing, but not obligated to sell, taking into consideration all uses for which the property is adapted and might in reason be applied.” The court reasoned that the property as a whole in this case included the real estate comprising the tax parcel at issue along with the buildings and improvements which Allegheny County was required to ascertain for assessment purposes. Noting that in Marple Springfield I, the court did not suggest that in valuing taxable real property as a whole, the value of any portion that is owned as a leasehold interest could be disregarded. The court held that all of the real estate owned, including the leased fee and the leasehold interests, must be valued for tax assessment purposes; and in valuing the leased fee, an expert appraiser must consider the impact of the ownership division and rent restrictions created by the lease on the Appellant’s ability to sell the land and in capitalizing the value of the income stream that an owner of the land could expect to receive. The court did not address the second issue on the Uniformity Clause since the court concluded that neither Section 201(a) nor 402 of the General County Assessment Law nor the previous decision in Marple Springfield I permits real estate to be classified differently for purposes of taxation based on the matter for which it is owned.