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By Sean Keegan, Vice President, Property Tax | April 9, 2021

An agreement between a private party and non-taxable entity can lead to the taxation of a previously exempt property

A taxable possessory interest is created when a private party is granted the use which is exclusive of other’s rights in the same property which provides a private benefit to the lessee in the real property which is owned by a non-taxable entity (for instance, taxable improvements on tax exempt land). A key element that must exist to have a taxable possessory interest are the possession or right-to-possession by a taxable entity of real property owned by a non-taxable entity.

The possession must be:

  • independent
  • durable
  • exclusive of the rights held by others
  • provide a private benefit to the possessor above that which is granted to the general public

Taxable possessory interests can be created in many ways through the use of government or publicly owned real property. Most often, it is a land lease in which the private party has a leasehold interest for a period of time in the land and or the land with its improvements. Some examples would be campgrounds, government employee housing, forest cabins, golf courses, ski resorts, airplane hangars and terminals, port operations and anchorages, restaurants, grazing rights, stores, homes, apartments, cable television rights-of-way, easements and boat slips.

California Property Tax Law covering possessory interests can be found in California’s Revenue and Taxation Code (RTC) Sections 61, 107 – 107.9, 480.6, and California Property Tax Rules 20-22 and 27-28.

 

Discovery of Taxable Possessory Interests

The California County Assessors (Assessor), by law, must search out and value all taxable property in the county as of the lien date, January 1, each year. This includes all taxable possessory interests. Annually, pursuant to RTC Section 480.6, Assessor’s staff request every governmental agency in the county to provide various items of information such as leases and other agreements that are related to the real property they own. This information includes the name, mailing address, situs, etc., for each property. The Assessor analyzes this information when making the possessory interest assessments.

It is important that the lessee keeps this information current with their government landlords and that the agencies cooperate fully with the Assessor so that accurate assessments and billing can be made by the county.

Valuing Taxable Possessory Interests

Base year values are established for taxable possessory interests upon a change in ownership or completion of new construction under the guidelines of Proposition 13.  The requirements for a change in ownership of a taxable possessory interest are found in RTC Section 61.   A change in ownership occurs when a possessory interest is created, assigned, or upon expiration of the reasonably anticipated term of possession used by the Assessor.

When valuing a taxable possessory interest, there are a few key factors that differentiate the value from the typical real property valuation or the fee interest value:

  • The Assessor must value only the legally permitted use under the agreement, which may not be the highest and best use of the property.
  • The Assessor must only value the actual rights held by the possessor or lessee.
  • The Assessor must not include the value of the lessor’s rights which are retained or that revert back to the owner at the end of the lease term.

“The value of the possessory interest is typically best seen as the fair market value of the rights held by the possessor.”  In many cases, “the value of the leased fee generally is not relevant to possessory interest valuation.”  (Assessor’s Handbook 510, P. 17-18)

Possessory interest assessments are generally less in value enrolled than the assessments of similar property which are privately owned.  The identification of the correct appraisal unit and the proper valuation methods are needed when reviewing possessory interest assessments.

The last step in the valuation of taxable possessory interests is the reconciliation of the valuation by the appropriate methods to ensure that a proper and a fair value has been enrolled.  We recommend reviewing California possessory interest assessments on an annual basis to ensure that the correct rights are being assessed.

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