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A taxable possessory interest (PI) is created when real estate owned by a government agency is leased, rented, or used by a private individual or entity for their own exclusive use. The taxation of this interest is similar to the taxation of owners of privately owned property. A taxable possessory interest may be created or acquired through a contract, lease, concession agreement, license, permit, verbal agreement, or simply by possession or occupation without agreement. The use of the property may be concurrent or alternating with another use or user.

A base year value is established for taxable possessory interest upon its creation, a change in ownership, or completion of new construction under the guidelines of Proposition 13. This value, by law, will only increase by a maximum of 2% per year, until a new reassessable event (change of ownership or completion of new construction) occurs, or the property suffers a decline-in-value.  For an expanded definition see Revenue and Taxation (R&T) Code Section 61, 107-107.9, 480.6 and Property Tax Rules 20,21-22, and 27-28 available online at http://www.boe.ca.gov/proptaxes/proptax.htm. A change in ownership occurs when a possessory interest is created, assigned, or upon the expiration of the lease per Revenue & Taxation Code Section 61 available online at http://www.boe.ca.gov/proptaxes/proptax.htm

The valuation of possessory interests is different from other forms of property tax appraisal in two ways:

1)  Only the rights held by the private user are valued
2)  The assessor must not include the value of the lessor’s retained rights in the property or any rights that will revert back to the public owners (the “reversionary interest”) at the end of the lease. 

As a result, possessory interest assessments are frequently less than the assessments of similar privately-owned property.

When a new base year value is computed for a possessory interest property, the Assessor uses the income, comparative sales, or cost approach. The quality and quantity of the available market information, the type of interest being valued, and the estimated reasonable term of possession will determine which of the three valuation approaches is most appropriate to use.

Income Approach: This is the most commonly used method for valuing a possessory interest. Using this approach, the PI value is estimated by first determining the landlord’s net income over the entire contract term. The net income results from subtracting management expenses from the economic income. The net income is then multiplied by a present worth factor to arrive at the PI value. Using the economic net income for the term of possession allows the Assessor to value only the rights “possessed” by the tenant and exclude any non-taxable rights retained by the government landlord.

Comparative Sales Approach: In this approach to value, the sales price of the property and those of similar possessory interest properties are used to determine possessory interest value. Rent paid on the property and any other obligations assumed by the buyer are valued at present worth and added to the sales price.

Cost Approach: In the cost approach, the land and improvement values are determined separately. The land value is determined using the comparative sales approach or the income approach. Consideration is given for the reversionary value of the land at the end of the aniticpiated term of possession. The improvement value is estimated by estimating replacement cost new and subtracting the accrued depreciation. Consideration is given for the estimated value of the improvements at the end of the aniticpated term of possession. The total value of the PI is determined by adding the estimated land value to the estimated improvement value.

Examples of Possessory Interests:

·         A boat dock built on a public lake, bay or river;
·         Private companies leasing government buildings
·         The right to have food vending machines or ATMs located in a government building
·         Cable television right-of-way easements
·         Private companies leasing government buildings
·         Boat slips in public marinas.
·         Concert or air show on public land
·         All property  along the waterfront under Port of San Francisco jurisdiction

Publicly-owned property is tax exempt as it is held by the entity to provide a service or public enjoyment. Publicly-owned property providing beneficial use to a private person or entity is no longer available for public use and thus the “possession” becomes taxable to the individual or entity receiving the beneficial use. Similarly, landlords of privately-owned taxable property relinquish the beneficial use of their property to an individual or entity who in turn pays property taxes indirectly through rents paid for possession.

The 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 Revenue and Taxation Code Section 480.6, Assessor’s staff requests every government 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 tenant name, mailing address, situs, lease amendments, assignments, new construction, etc., for each property. The Assessor analyzes this information when making the possessory interest assessments. It is important that the lessees keep this information current with their government landlords and that the agencies cooperate fully with the Assessor so that accurate assessments can be made by the County.

Possessory interests are normally assessed on the Unsecured Tax Roll because the property rights being assessed are for the possession of and not the ownership of the real property and cannot provide security for the taxes owed. In other words, the property cannot be used to satisfy any delinquent property tax.  Therefore, PIs are assessed as real property on the Unsecured Roll, but still fall under the umbrella of Proposition 13. That is to say, that although they appear on the Unsecured Roll, they are still assessed according to the laws pertaining to secured real property.

The Assessor considers the actual permitted use under a lease or special use permit. Assessor will also consider that there is only a lease held by the occupant, not the fee ownership of the property. The Assessor will also consider the actual or anticipated term of possession. For example, property leased from the government for ten years, will revert back to the government at that time. It is the present value of the rights for ten years, which are held by the occupant, which are assessed. The rights that will revert back to the government after the ten-year occupancy are not assessed to the holder of the Possessory Interest.

If a tenant is in possession of property on January 1 of any tax year, they are responsible for the full tax bill issued in that fiscal year, without any proration.  If a tenant vacates during the year, they should provide their termination documents to the Assessor’s Office.  However, the Assessor cannot prorate the final bill.  The PI account will be closed once termination is confirmed.  This situation is addressed in BOE Letter to Assessors No. 86/12.