Metropolitan News-Enterprise


Wednesday, May 8, 2013


Page 1


Court Rules for State Teachers’ Retirement System in Property Tax Dispute With Los Angeles County


By a MetNews Staff Writer


A statute enabling counties to collect taxes on leasehold interests in real estate owned by the State Teachers’ Retirement System is unconstitutional, the Court of Appeal for this district ruled yesterday.

Government Code Sec. 7510(b)(1), which establishes a formula for taxing those interests, violates two provisions of the state Constitution by allocating to the taxed lessee a share of the full cash value of the property, including the value of STRS’ fee interest, Presiding Justice Joan Dempsey Klein wrote for Div. Three.

This violates the constitutional bans on assessing property taxes on publicly owned real property, as well as the prohibition on assessing property in excess of its fair market value, the presiding justice wrote.

The decision overturns Los Angeles Superior Court Judge Richard Rico’s ruling in favor of the county in what the parties described as a “test case” of the validity of the assessments on various STRS properties in the county.

The test case concerned an office building at 924 Westwood Boulevard owned by STRS.

In January 1998, Dong Il Kim and Chang Nim Kim entered into a five-year lease with STRS for a retail space consisting of 1,280 square feet on the ground floor of the building. In a 2003 amendment, the parties extended the lease for an additional five’ years such that the lease terminated in February 2008.

The lease obligated the lessee to pay all property taxes imposed in connection with the leasehold.

In valuing the leasehold interest, the county assessor applied the relevant provisions of Sec. 7510(b)(1), which applies only to taxation of leasehold interests in STRS property, and provides that the assessed value of a leasehold in a portion of such property includes “the lessee’s allocable share of the full cash value of the property that would have been enrolled if the property had been subject to property tax upon acquisition by the state.”

The assessor multiplied the full value of all rentable retail space in the building by 3.3 percent, representing the Kims’ share of that space, arriving at a value of $418,000 for their leasehold, and sent them a bill for nearly $5,000 in taxes for fiscal year 2006-2007. STRS paid the taxes and sought a refund in order to test the constitutionality of the statute.

Klein, writing for the Court of Appeal, explained that the statute was enacted, despite doubts expressed by lawyers and legislators as to its constitutionality, after an earlier law requiring payments by STRS to counties “in lieu of” property taxes was struck down. That law was part of the 1982 legislation allowing STRS to invest in real estate.

Sec. 7510(b) is similarly defective, however, the presiding justice said, because the assessed value of leasehold includes the value of STRS reversionary interest after conclusion of the lease term.

The presiding justice elaborated:

“California Constitution article XIII, section 3(a), exempts “[p]roperty owned by the State,” rather than the State itself….The reversionary interest in the subject real property is State-owned property and therefore is exempt from taxation.  Section 7510, subdivision (b)(1) does not become constitutional simply because it shifts the tax on the reversionary interest to the lessees of STRS.”

Klein went on to say that the county may tax leasehold interests such as the Kims’ only at fair market value, not under the standard set forth in the statute, which imposes an assessment above fair market value by allocating a portion of the fee interest to the tenant.

The case is California State Teachers’ Retirement System v. County of Los Angeles, 13 S.O.S. 2363.


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