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Why Build-to-Suits are Over Assessed

Rather than simply redevelop existing structures to match their requirements, the build-to-suit design requires the advancement and construction of new buildings that match the trade gown of other shops in a nationwide chain. Think CVS drug store, Walgreens and so forth …

By Michael P. Guerriero, Esq., as released by Rebusinessonline.com, March 2012

The build-to-suit deal is a modern phenomenon, birthed by national merchants unconcerned with the resale value of their residential or commercial properties. Rather than merely redevelop existing structures to match their requirements, the build-to-suit design requires the advancement and construction of brand-new structures that match the trade dress of other stores in a national chain. Think CVS pharmacy, Walgreens and so on. National retailers are willing to pay a premium above market price to establish shops at the accurate areas they target.

In a normal build-to-suit, a developer assembles land to acquire the desired website, demolishes existing structures and constructs a building that complies with the nationwide prototype shop style of the supreme lessee, such as a CVS. In exchange, the lessee signs a long-term lease with a rental rate structured to reimburse the designer for his land and building costs, plus a .

In these cases, the long-term lease resembles a mortgage. The developer resembles a lender whose risk is based upon the seller’s ability to fulfill its lease obligations. Such cookie-cutter deals are the favored financing arrangement in the national retail market.

So, how precisely does an assessor value a national build-to-suit residential or commercial property for tax functions? Is a specialized lease transaction based upon a specific niche of national retailers’ equivalent proof of worth? Should such nationwide information be overlooked in favor of equivalent proof drawn from regional retail residential or commercial properties in closer distance?

How should a sale be treated? The long-term leases in place greatly influence build-to-suit sales. Investors basically acquire the lease for the awaited future money flow, purchasing a premium in exchange for ensured lease. Are these sales signs of residential or commercial property value, or should the assessor disregard the rented fee for tax purposes, instead concentrating on the charge simple?

The basic answer is that the objective of all parties involved need to constantly be to identify fair market value.

Establishing Market Value

Assessors’ eyes light up when they see a list price of a build-to-suit residential or commercial property. What much better evidence of worth than a sale, right?

Wrong. The premium paid in lots of situations can be anywhere from 25 percent to 50 percent more than the open market would typically bear.

Property is to be taxed at its market price — no more, no less. That refers to the rate a ready purchaser and seller under no obsession to offer would consent to on the open market. It is a simple meaning, however for functions of taxation, market price is a fluid idea and hard to select.

The most trustworthy method of figuring out worth is comparing the residential or commercial property to recent arm’s length sales, or to a sale of the residential or commercial property itself. It is needed to pop the hood on each deal, nevertheless, to see what precisely is driving the cost and what can be discussed away if a sale is abnormal.

Alternatively, the earnings method can be utilized to capitalize an estimated income stream. That income stream is constructed upon leas and data from comparable residential or commercial properties that exist in the open market.

For residential or commercial property tax functions, just the property, the cost easy interest, is to be valued and all other intangible personal residential or commercial property neglected. A leasehold interest in the property is thought about «belongings real,» or individual residential or commercial property, and is not subject to taxation. Existing mortgage financing or collaboration agreements are likewise neglected because the factors behind the terms and quantity of the loan might be unpredictable or unassociated to the residential or commercial property’s value.

Build-to-suit deals are basically construction financing transactions. As such, the personal plan among the celebrations included should not be seized upon as a penalty versus the residential or commercial property’s tax exposure.

Don’t Trust Transaction Data

In a current build-to-suit evaluation appeal, the data on sales of national chain stores was turned down for the functions of a sales comparison approach. The leases in place at the time of sale at the different residential or commercial properties were the driving elements in identifying the rate paid.

The leases were all well above market rates, with lease that was pre-determined based upon a formula that amortizes construction costs, including land acquisition, demolition and developer revenue.

For comparable factors, the income data of a lot of build-to-suit residential or commercial properties is altered by the leased cost interest, which is intertwined with the cost interest. Costs of purchases, assemblage, demolition, building and construction and profit to the developer are loaded into, and funded by, the long-lasting lease to the nationwide retailer.

By consequence, rents are inflated to show healing of these costs. Rents are not originated from open market conditions, however generally are computed on a portion basis of project costs.

To put it simply, investors want to accept a lesser return at a higher buy-in cost in exchange for the security of a long-lasting lease with a quality nationwide renter like CVS.

This is shown by the noticeably decreased sales and leas for second-generation owners and tenants of nationwide chains’ retail buildings. Generally, nationwide retailers are subleased at a portion of their original contract lease, reflecting prices that falls in line with free market requirements.

A residential or commercial property that is net rented to a national retailer on a long-term basis is a valuable security for which investors are willing to pay a premium. However, for tax functions the evaluation should distinguish between the real residential or commercial property and the non-taxable leasehold interest that affects the nationwide market.

The suitable way to worth these residential or commercial properties is by turning to the sales and leases of comparable retail residential or commercial properties in the regional market. Using that technique will enable the assessor to determine fair market worth.

Michael Guerriero is an associate at law office Koeppel Martone & Leistman LLP in Mineola, N.Y., the New York state member of the American Residential Or Commercial Property Tax Counsel. Contact him at mguerriero@taxcert.com.