When valuing a privately-owned improvement, such as a house or cabin located on public land for purposes of property taxation, is it proper to include in the valuation the value for the leasehold interest (land value) component?
A leasehold interest is created when public land is leased. In some cases, the land is being leased at below market rent. Since leasehold excise tax is due on land rent, the leasehold excise tax being paid when rent is less than market rent is less than it should be otherwise.
Should the tax on this missed full rent be picked up by adjusting the rent to a market rent or should it be picked up in the assessment of the improvement?
The rent should be adjusted and only the value of the improvement may be assessed a property tax. If the land rent is below market rent, the improvement value may not be increased to make up the difference, nor may a land leasehold value be assigned and assessed a property tax. If, for example, a privately-owned cabin on public land sells, the sale price may include the value of the cabin as well as some value for the leasehold interest in the land. The leasehold interest is created by the under-market land lease and may not be assessed as part of the property tax assessment.
A privately-owned improvement on leased public land is subject to property taxation as personal property. See Washington Mutual Savings Bank v. Dept. of Revenue, 77 Wn. App. 669 (1995). The leasehold interest in the real property on which the improvement sits is exempt from property taxation under RCW 84.36.451 and is instead subject to leasehold excise tax under chapter 82.29A RCW.
Because only the improvement is subject to property taxation and the leasehold interest is exempt, only the value of the improvement itself is relevant for purposes of property taxation. Any component of value based on the leasehold interest is not relevant. See Moyer v. Martin, BTA Docket No. 54968 (2000).
With respect to cabins (improvements) on leased public land, we know that the land is exempt from property taxation and is instead subject to leasehold excise tax (RCW 82.29A.020). Improvements to publicly owned leased land are subject to property tax and classed as personal property (RCW 84.04.080).
If the value of the cabin on leased government land reflects more than just the value of the cabin, then only one conclusion can be reached; the leasehold interest includes value associated with the exempt land.
How should the value of the leasehold interest in the cabin and other improvements to the land be determined if sales prices include some value in the exempt land and how do we test for this?
In order to extract value of exempt land, appraisers should analyze sales data to determine the value of the fee simple interest (land plus improvements). After the fee simple interest is determined the appraiser should subtract out the exempt land value. Exempt land value can be determined by capitalizing the annual market net lease amount at a safe rate. Don’t assume that the contract rent is at market level. Be careful to use market rent for the leased land and not the contract rent. This can be tested if there are any similar properties selling that are not subject to a land lease.
Another way to determine the value of the improvement is through a sales analysis of comparable improvements on leased land and adjust for lot differences. Once the improvement value is determined it can be broken down into units of comparison such as dollars per square foot and used to value other improvements in the area.
A final way to isolate the value of the improvements is to use the Cost Approach to Value. Balancing this against the Sales Approach provides a stronger basis for valuing other property.
Based on the above analysis, appraisal judgment is used to arrive at a final conclusion of value for the improvements. The effects on value of the lease amounts and differing land and improvement characteristics may be determined. The other benefit is that appraisals are not limited to just a Cost Approach to arrive at the improvement value but are balanced by the use of multiple approaches to value.
Remember, this same analysis applies to any improvements on leased public land including commercial and industrial improvements.