Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) Definitions. For the purposes of this
regulation:
(1) "Real property" is defined in
rule 20(c)(1).
(2) "Possession" is
defined in rule 20(c)(2).
(3) A
"right" to the possession of real property includes a "claim to a right" to the
possession of real property within the meaning of rule 20(c)(3).
(4) "Possessor" is defined in rule
20(c)(4).
(5) The "term of
possession" of a taxable possessory interest means the term of possession for
valuation purposes.
(6) The "stated
term of possession" for a taxable possessory interest as of a specific date is
the remaining period of possession as of that date as specified in the lease,
agreement, deed, conveyance, permit, or other authorization or instrument that
created, extended, or renewed the taxable possessory interest, including any
option or options to renew or extend the specified period of possession if it
is reasonable to assume that the option or options will be exercised.
(7) "Contract rent" means any compensation or
payments, in cash or its equivalent, that are required to be paid or provided
by a possessor under an authorization or instrument that creates a taxable
possessory interest for the rights in real property provided by the taxable
possessory interest.
(8) "Economic
rent" means the estimated amount that would be paid by the possessor, on the
valuation date in cash or its equivalent, for the rights in real property
provided by the taxable possessory interest if (i) the rights to possession
were offered in an open and competitive market and (ii) the public owner's
interest in the property were not exempt or immune from taxation. Economic rent
does not include payments by the possessor to the public owner that are not
paid as consideration for rights in real property, such as payments for the
rental of personal property, for the provision of security services, and for
advertising and promotional services.
(9) "Creation" means the creation of a
taxable possessory interest. Creation includes (i) an initial grant or other
conveyance of a taxable possessory interest; (ii) a subsequent grant or other
conveyance of additional land or improvements to a preexisting taxable
possessory interest; or (iii) a subsequent grant or other conveyance of
additional valuable property rights or uses to a preexisting taxable possessory
interest.
(10) "Extension or
renewal" means the lengthening of the period of possession of a taxable
possessory interest, such as by the exercise of an option to extend or to renew
a lease or permit.
(b)
Rights to be Valued. Except as provided in subsection (f) or specifically
provided otherwise by law, the rights to be valued in a taxable possessory
interest are all rights in real property held by the possessor.
(1) The fair market value of a taxable
possessory interest is not diminished by any obligation of the possessor to pay
rent or to retire debt secured by the taxable possessory interest. In other
words, the fair market value of a taxable possessory interest is the fair
market value of the fee simple absolute interest reduced only by the value of
the property rights, if any, granted by the public owner to other persons and
by the value of the property rights retained by the public owner (excluding the
public owner's right to receive rent).
(2) Examples of rights in real property that
may be granted or retained by the public owner include the following:
(i) the right to take possession of the
property upon the termination of the taxable possessory interest due to the
occurrence of an event such as the expiration of the contract term, a breach of
agreement, or the happening of a condition that terminates the possessor's
right to possession;
(ii) the right
to put the property to a higher and better use or otherwise restrict the
possessor's use of the property;
(iii) the right to terminate possession upon
notice;
(iv) the right to approve a
sublessee or assignee;
(v) the right
to approve a loan secured by the taxable possessory interest; and
(vi) the right to allow other possessors to
use the property.
(c) Standard of Value. Assessors shall value
a taxable possessory interest consistent with the requirements of subsections
(a), (d), (e), and (f) of section
110
of the Revenue and Taxation Code. A taxable possessory interest subject to
article XIII A of the California Constitution shall also be valued consistent
with the requirements of section
110.1
of the Revenue and Taxation Code.
(d) Term of Possession for Valuation Purposes
(1) The term of possession for valuation
purposes shall be the reasonably anticipated term of possession. The stated
term of possession shall be deemed the reasonably anticipated term of
possession unless it is demonstrated by clear and convincing evidence that the
public owner and the private possessor have reached a mutual understanding or
agreement, whether or not in writing, such that the reasonably anticipated term
of possession is shorter or longer than the stated term of possession. If so
demonstrated, the term of possession shall be the stated term of possession as
modified by the terms of the mutual understanding or agreement.
(2) If there is no stated term of possession,
the reasonably anticipated term of possession shall be demonstrated by the
intent of the public owner and the private possessor, and by the intent of
similarly situated parties, using criteria such as the following:
(A) The sale price of the subject taxable
possessory interest and sales prices of comparable taxable possessory
interests.
(B) The rules, policies,
and customs of the public owner and of similarly situated public
owners.
(C) The customs and
practices of the private possessor and of similarly situated private
possessors.
(D) The history of the
relationship of the public owner and the private possessor and the histories of
the relationships of similarly situated public owners and private
possessors.
(E) The actions of the
parties to the subject taxable possessory interest, including any amounts
invested in improvements by the public owner or the private
possessor.
(3) For the
purposes of this regulation, a taxable possessory interest that runs from month
to month, a taxable possessory interest without fixed term, or a taxable
possessory interest of otherwise unspecified duration shall be deemed to be a
taxable possessory interest with no stated term of
possession.
(e) Valuation
of Post-De Luz Taxable Possessory Interests. Except as specifically provided
otherwise by law, and excluding a taxable possessory interest involving the
production of gas, petroleum, or other hydrocarbons, the value of a taxable
possessory interest created, extended, or renewed after December 24, 1955
(i.e., a "Post-De Luz" taxable possessory interest) may be estimated using one
or more of the following methods, as appropriate for the taxable possessory
interest being valued.
(1) Comparative Sales
Approach to Value. In the comparative sales approach, a taxable possessory
interest is valued using the sale price of the subject taxable possessory
interest or sales prices of comparable taxable possessory interests, provided
such interests shall have sold under the conditions of fair market value
described in subsection (a) of section 110. A taxable possessory interest may
be valued by the direct comparison method or the indirect comparison method.
(A) Direct Comparison Method
In the direct comparison method, the appraiser shall add the
following to the sale price of the subject taxable possessory interest, or to
the sale price of a comparable taxable possessory interest, to derive an
indicator of the fair market value of the subject taxable possessory
interest:
(i) the present value on the
sale date of any unpaid future contract rent for the term of
possession;
(ii) the fair market
value on the sale date of any debt assumed by the buyer of the taxable
possessory interest; and
(iii) the
present value on the sale date of any future costs that the buyer is
contractually obligated to pay for the right of possession (e.g., the cost of
site restoration at the end of the term of possession) less the present value
on the sale date of any future benefits in addition to the right of possession
or use that the buyer is contractually entitled to receive (e.g., the salvage
value of, or reimbursement value for, improvements existing at the end of the
term of possession). The unpaid future contract rent in (i) above shall be
reduced by any expense necessary to maintain the income from the taxable
possessory interest, including any element of "gross outgo" as defined in
subsection (c) of rule 8.
When valuing a taxable possessory interest by comparison with
the sales of other taxable possessory interests, the other taxable possessory
interests shall be located sufficiently near the subject taxable possessory
interest and shall be sufficiently alike in respect to character, size,
situation, usability, zoning or other enforceable government restrictions on
use (unless rebutted pursuant to subdivision (c) of section
402.1
of the Revenue and Taxation Code), and restrictions on possession or use
contained in the legal authorization or instrument that created, extended or
renewed the taxable possessory interest to make it clear that the comparable
taxable possessory interests and the subject taxable possessory interest are
comparable in value and that the cash equivalent price realized for the
comparable taxable possessory interests may fairly be considered as shedding
light on the value of the subject taxable possessory interest. The comparable
sales also shall be sufficiently near in time to the valuation date of the
subject taxable possessory interest. "Near in time to the valuation date" does
not include any sale more than 90 days after the valuation
date.
(B) Indirect
Comparison Method. In the indirect comparison method, a taxable possessory
interest is valued by (i) estimating the fair market value on the valuation
date of the possessor's rights in real property in the taxable possessory
interest as if owned in perpetuity (i.e., the value of the fee simple absolute
interest in such rights) using sales of fee simple absolute interests in
properties that are comparable to the subject property as prescribed in section
402.5
of the Revenue and Taxation Code and whose highest and best use corresponds to,
or is comparable with, the permitted use of the subject taxable possessory
interest; and (ii) reducing this value by both the present value of those
property rights for the period subsequent to the term of possession (i.e., the
value of the fee simple absolute interest in such rights at the end of the term
of possession) and the present value of all other rights of fee simple absolute
ownership, if any, that are not provided to the possessor.
(2) Cost Approach to Value. In the cost
approach, a taxable possessory interest is valued by (i) adding the estimated
replacement cost new less depreciation of improvements that meet the
requirements of the possessor's permitted use to the estimated value of the
taxable possessory interest in land; and (ii) reducing this amount by the
estimated present value of the improvements that shall revert to or be retained
by the public owner at the end of the term of possession.
(A) The replacement cost new less
depreciation of the improvements may be estimated as prescribed in subsections
(d) and (e) of rule 6. The estimated value of the taxable possessory interest
in land may be estimated using the comparative sales approach (direct or
indirect method) or the income approach (direct or indirect method), as
prescribed in subsections (e)(1) and (e)(3).
(B) If a possessor's property use is limited
to specified time periods (e.g., certain hours of the day or certain days of
the week) or is shared with other possessors, the value determined by the cost
approach shall be reasonably allocated to each possessor in a manner that
reflects each possessor's proportionate value of the right to
possession.
(3) Income
Approach to Value. In the income approach, a taxable possessory interest is
valued by discounting the future net income that the interest in real property
is capable of producing. A taxable possessory interest may be valued using the
direct income method or the indirect income method.
(A) Direct Income Method. In the direct
income method, a taxable possessory interest is valued by capitalizing the
future net income that the taxable possessory interest is capable of producing
under typical, prudent management for the term of possession.
(B) Indirect Income Method. In the indirect
income method, a taxable possessory interest is valued by (i) estimating the
fair market value of the possessor's rights on the valuation date as if owned
in perpetuity (i.e., the value of the fee simple absolute interest in such
rights) using the income approach to value as prescribed in rule 8; and (ii)
reducing this value by the present value of the those rights for the period
subsequent to the term of possession (i.e., the present value of the value of
the fee simple interest in such rights at the end of the term of
possession).
(C) Income to be
Capitalized. The income to be capitalized in the valuation of a taxable
possessory interest is the "net return" (as defined in subsection (c) of rule
8) attributable to the taxable possessory interest. The income to be
capitalized may be based on either (i) the estimated economic rent for the
subject taxable possessory interest or (ii) if the estimated economic rent is
unreliable or unavailable, the estimated net operating income of a typical,
prudent operator of the property subject to the taxable possessory interest.
Rental income is preferable to operating income (i.e., income from operating a
business) because operating income may be influenced by managerial skills and
may derive, in part, from nontaxable property. The income to be capitalized
must be attributable to the rights in real property in the subject taxable
possessory interest and must reflect the restrictions on use inherent in the
subject taxable possessory interest.
Economic rent
a. The
economic rent of the subject taxable possessory interest may be estimated by
reference to (i) the contract rent for the subject taxable possessory interest;
(ii) contract rents for comparable taxable possessory interests; (iii) contract
rents for comparable fee simple absolute interests in real property; or (iv)
contract rents for other comparable interests in real property. All such
contract rents shall have been negotiated in an open and competitive market
involving real property reasonably comparable to the subject taxable possessory
interest in terms of physical attributes, location, legally enforceable
restrictions on the property's use, term of possession, and risk of
cancellation of the taxable possessory interest by public owner. In addition,
the contract rents shall have been negotiated sufficiently near in time to the
valuation date as to shed light on the economic rent of the subject taxable
possessory interest.
b. When using
the contract rent of a taxable possessory interest as an indicator of the
economic rent, the assessor shall add to the contract rent (i) an estimate of
the amount, if any, by which the contract rent has been reduced because
improvements have been constructed at the possessor's expense that will revert
to the public owner at the end of the term of possession; and (ii) an estimate
of the amount, if any, by which the contract rent has been reduced because the
possessor will bear the cost of restoring the real property to its original
condition on reversion to the public owner, including the cost of removing
improvements (less any estimated salvage value of, or reimbursement value for,
the improvements), or the cost of any similar obligation.
c. To arrive at the income to be capitalized,
any expense necessary to maintain the income from the subject taxable
possessory interest, including any element of "gross outgo" as defined in
subsection (c) of rule 8, whether paid by the public owner or the possessor,
must be deducted from the estimated economic rent if the expense will be paid
out of the estimated economic rent.
Net Operating Income
a. Net operating income is gross operating
income less allowed expenses. Gross operating income, allowed expenses, and net
operating income are defined herein consistent with "gross return," "gross
outgo," and "net return," respectively, in subsection (c) of rule 8.
b. When valuing a taxable possessory interest
using operating income, allowed expenses include the following: cost of goods
sold (if applicable), typical operating expenses, typical management expense,
an allowance for a return on working capital, and an allowance for a return on
the value of any nontaxable property that contributes to the gross operating
income. Typical operating expenses may include expenses for the rental of
personal property, for the provision of security services, and for advertising
and promotional services, provided such expenses are necessary for the
production of the gross income. Typical operating expenses and typical
management expense include expenses that an owner/operator typically would bear
to maintain the property and to continue the production of income from the
property but are borne by the public owner in the case of the subject taxable
possessory interest.
c. Allowed
expenses do not include the following: amortization, depreciation, depletion
charges, debt retirement, interest on funds invested in the taxable possessory
interest, the contract rent for the taxable possessory interest, property taxes
on the taxable possessory interest, income taxes, or state franchise taxes
measured by income.
(D)
Capitalization Rate. Subsection (g) of rule 8 provides that a capitalization
rate may be developed by either comparing the anticipated net incomes of
recently sold comparable properties with their sales prices, or by deriving a
weighted average of the capitalization rates (rates of return) for debt and
equity capital appropriate to California money markets. In accordance with rule
8, the capitalization rate used in the valuation of a taxable possessory
interest may be developed by (i) comparing the anticipated net incomes from
comparable taxable possessory interests with their sales prices stated in cash
or its equivalent and adjusted as described in subsection (e)(1)(A); (ii)
comparing the anticipated net incomes of comparable fee simple absolute
interests in real property with their sales prices stated in cash or its
equivalent, provided the comparable fee properties are not expected to produce
significantly higher net incomes subsequent to the subject taxable possessory
interest's term of possession than during it; or (iii) by deriving a weighted
average of the capitalization rates for debt and equity capital appropriate for
the subject taxable possessory interest, weighting the separate rates of debt
and equity by the relative amounts of debt and equity capital expected to be
used by a typical purchaser of the subject taxable possessory interest.
Consistent with subsection (f) of rule 8, the capitalization rate shall contain
a component for property taxes where applicable
(f) Valuation of Pre-De Luz Taxable
Possessory Interests. Except as specifically provided otherwise by law, and
excluding a taxable possessory interest involving the production of gas,
petroleum, or other hydrocarbons, the value of a taxable possessory interest
created prior to December 24, 1955, and not since renewed or extended (i.e., a
"Pre-De Luz" taxable possessory interest) is the excess of the fair market
value on the valuation date of the taxable possessory interest over the present
value of unpaid future contract rent for the unexpired term of possession
(i.e., for the term of possession). This value may be estimated using one or
more of the following methods, as appropriate for the taxable possessory
interest being valued.
(1) Comparative Sales
Approach to Value. A Pre-De Luz taxable possessory interest may be valued by
the comparative sales approach using the direct comparison method or the
indirect comparison method, as described in subsection (e)(1), but with the
following modifications:
(A) Direct
Comparison Method. In the direct comparison method, the present value of the
unpaid future contract rent is not added to the sale price of the taxable
possessory interest.
(B) Indirect
Comparison Method. In the indirect comparison method, the value of the
possessor's rights as if owned in fee is reduced by the present value of the
unpaid future contract rent of the taxable possessory interest, as well as by
the value of those property rights for the period subsequent to the term of
possession.
(2) Cost
Approach to Value. A Pre-De Luz taxable possessory interest may be valued by
the cost approach as described in subsection (e)(2), but the present value of
any unpaid future contract rent of the taxable possessory interest in land for
the term of possession is also deducted.
(3) Income Approach to Value. A Pre-De Luz
taxable possessory interest may be valued by the income approach using the
direct income method or the indirect income method, as described in subsection
(e)(3), but with the following modifications:
(A) Direct Income Method. In the direct
income method, the net income to be capitalized is reduced by the unpaid future
contract rent for the term of possession, as well as by allowed
expenses.
(B) Indirect Income
Method. In the indirect income method, the present value of the unpaid future
contract rent for the term of possession is deducted from the value of the fee
interest, as well as the deduction of the present value of the property rights
for the period subsequent to the term of
possession.
1. New section
filed 1-19-71; effective thirtieth day thereafter (Register 71, No.
4).
2. Amendment of subsection (b) filed 12-26-75; effective
thirtieth day thereafter (Register 75, No. 52).
3. Amendment of NOTE
filed 10-26-77; effective thirtieth day thereafter (Register 77, No.
44).
4. Amendment of first paragraph, repealer of subsections
(a)-(e)(6), subsection relettering, and amendment of NOTE filed 4-6-98;
operative 5-6-98 (Register 98, No. 15).
5. Amendment of section
heading and repealer and new section filed 6-11-2002; operative 7-11-2002
(Register 2002, No. 24).
6. Change without regulatory effect
amending subsection (e)(1)(A) filed 1-14-2003 pursuant to section
100, title 1, California Code of
Regulations (Register 2003, No. 3).
Note: Authority cited: Section
15606,
Government Code. Reference: Sections
107
and
107.1,
Revenue and Taxation Code.
