The opinion of the court was delivered by: Judge Pellegrini
BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge, HONORABLE BERNARD L. McGINLEY, Judge, HONORABLE DAN PELLEGRINI, Judge HONORABLE RENÉE COHN JUBELIRER, Judge, HONORABLE ROBERT SIMPSON, Judge, HONORABLE MARY HANNAH LEAVITT, Judge, HONORABLE JOHNNY J. BUTLER, Judge
Tech One Associates (Landowner) appeals an order of the Court of Common Pleas of Allegheny County (trial court) assessing the value of its property for tax years 2001 through 2005. The issue on appeal is whether buildings and other improvements on the property made and owned on land leased property must be included in the assessed value of the property. The trial court determined that those improvements were to be included, and finding no fault with the trial court's determination, we affirm.
Landowner owned 47.5 acres of undeveloped land in West Mifflin Borough, Allegheny County, Pennsylvania. In 1989, it entered into a 50-year lease agreement with Terra Associates (Lessee) covering this land with an annual rent of $665,000. Landowner gave Lessee the right to improve the land, own what it built, and assign its interests at any time. Under the lease agreement, Lessee pays all real estate taxes and other related taxes for the entire property.
On the land in the early 1990s, Lessee constructed a one-story shopping center now known as Century Square, that has 415,613 square feet of rentable area with 29 tenant spaces. Lessee, or others pursuant to agreements with Lessee, have also built a multi-screen movie theater building and a restaurant building on the land.
In 2001, the Allegheny County Board of Property Assessment, Appeals and Review (Board) assessed the fair market value of Landowner's property for 2001 at $30,984,700. It included the land (based on Landowner's leased fee, i.e., the rent it received) and the buildings and improvements in its assessment. Landowner appealed, and a hearing was held before the Board of Viewers.*fn1
At that hearing, Anthony Barna (Barna), a licensed real estate appraiser, testified for Landowner stating that in making his appraisal of the property for the tax years in question, he recognized the "economic reality" of the impact of the long-term land lease between Landowner and Lessee in using the capitalization-of-income approach to value the property.*fn2 He stated that the income capitalization method established a capitalization rate by assessing the property and surrounding area as well as comparable properties, and any reversion interest in the property with the annual income of the property divided by the capitalization rate to obtain the value of the land. He established a capitalization rate of seven percent, and based on the annual rent Landowner received, the value of Landowner's lease fee interest in the land was $9,500,000 for each of the four tax years, 2001 through 2005.*fn3 He placed no value on the buildings because the economic reality of the long-term land lease held by Landowner, the party being assessed, was that it received no economic benefit from the buildings constructed on the land.
The taxing bodies, Borough of West Mifflin and the School District of West Mifflin, presented the expert testimony of Mark Ackerman (Ackerman) who used the income approach in arriving at his values. His appraisal value included the lease fee interest held by Landowner and the value of the improvements which it did not own. He testified that the values of the combined interest ranged from $36,130,000 in 2001 to $22,600,000 in 2004. He stated that he used a highest and best use evaluation and appraisal for a retail shopping center; however, his capitalization of income analysis of the leased fee concluded a value similar to that of Landowner's expert and was just $200,000 less.*fn4
The Board of Viewers concluded that Marple Springfield I controlled the outcome of this matter and, therefore, accepted Barna's fair market value of $9,500,000 for the property owned in leased fee by Landowner. No value was assigned to the buildings. The taxing bodies filed objections with the trial court and oral arguments were heard. The trial court then issued an opinion and order rejecting the Board of Viewers' recommendation and rejecting the application of the Marple Springfield I and Marple Springfield II decisions. The trial court found that Landowner's approach to value violated the Uniformity Clause of the Pennsylvania Constitution and the prohibition against creating exemptions not provided for in the Pennsylvania Constitution, an issue not discussed in either Marple Springfield I or Marple Springfield II. Instead, it accepted the value of the property for each of the tax years offered by the taxing bodies' expert who included the value of the improvements in his opinion of fair market value. This appeal by Landowner followed.*fn5
On appeal, Landowner contends that trial court erred (1) because it was at variance with our Supreme Court's decision in Marple Springfield I where it holds that a long-term lease value is not subject to being assessed; (2) inholding that buildings built on the land lease are subject to taxation because no statutory authority exists for imposing a real estate tax assessment on a lessee's leasehold interest; and (3) in findingthat the methodology used by Landowner's expert resulted in a constitutional violation of the Uniformity Clause of the Pennsylvania Constitution because our Supreme Court was aware of that clause at the time its decision came down and saw fit not to include it in its decision.
In Marple Springfield I, the taxpayer was the owner of land on which a shopping center was built in 1964. In 1968, the taxpayer's predecessor in title entered a long-term lease for the entire property which, with renewals, expired in 2044, and had values that were well below market rates which would not change during the term of the lease. There was no mention that the lessee was responsible for real estate taxes. The property was assessed based on the market rent that lessee received from its subtenants, not the contract amount the lessee paid to the taxpayer/landowner.*fn6 The taxpayer challenged its real estate tax assessments contending that property should be valued based on the rent that it received, not the fair market rent. Our Supreme Court agreed, holding that "the economic realities of commercial real estate transactions" had to be taken into consideration when valuing property and stating:
The capitalization-of-income approach to tax appraisals is the most appropriate if not the only valid means of establishing fair market value of real estate when the rental income is below what would otherwise be the current market level but for a long-term commercial lease, because such long-term leases are an accepted aspect of commercial real estate transactions and their effects have a decisive impact on the price a buyer would pay for the affected property. To interpret the tax assessment statute as requiring valuation of property ...