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Court of Appeal, Second District, Division 4, California.

PACIFIC SOUTHWEST REALTY COMPANY, Plaintiff and Respondent, v. COUNTY OF LOS ANGELES, and City of Los Angeles, Defendants and Appellants.

No. B044028.

Decided: April 18, 1991

De Witt W. Clinton, County Counsel, Halvor Melom, Principal Deputy County Counsel, and Albert Ramseyer, Sr. Associate County Counsel, for defendants and appellants. O'Melveny & Myers, Frederick A. Richman, Gregg A. Oppenheimer and Marcy Jo Mandel, Los Angeles, for plaintiff and respondent.

The City and County of Los Angeles (hereinafter jointly referred to as the County) appeal from the judgment which found that no change of ownership had occurred when certain real property was sold and leased back by respondent Pacific Southwest Realty, a subsidiary of Security Pacific National Bank (respondent), and which ordered the County to refund ad valorem property taxes which respondent had paid under protest.   For the reasons discussed below, we affirm.


The parties entered into a joint stipulation of facts which related the following.   Pursuant to a purchase agreement, dated September 28, 1984, respondent transferred title to Security Pacific Plaza (the Plaza) to Metropolitan Life Insurance Company (Metropolitan) for a purchase price of $310,000,000.   The related grant deed was recorded on September 28, 1984.   After describing the real property being transferred, the grant deed, in pertinent part, provided:  “EXCEPTING AND RESERVING TO GRANTOR an estate for years subject to conditions subsequent, upon and subject to all of the terms, covenants, conditions and provisions contained in that certain unrecorded Security Pacific Plaza Office Building Lease of even date herewith.”

The purchase agreement set forth the terms and conditions of the transfer.   One of the conditions precedent to the transfer was the execution of the above-mentioned lease between respondent and Metropolitan.   The lease covered two areas of the Plaza, Tower Block A and Tower Block B, which amounted to approximately 73 percent of the Plaza's total square footage.   Respondent's term of occupancy for Tower Block A was 60 years, including ten consecutive renewal options of five years each.   Respondent's term of occupancy for Tower Block B was 21 months, including a renewal option.   The initial rent for the Tower Block A space was $11,695,879 per year, and the initial rent for the Tower Block B space was $10,088,735 per year.   The initial rent payments were subject to increases in accordance with the Consumer Price Index.

In addition to office and storage space, the lease provided respondent with the exclusive use of the name of the building, the exclusive use of the exterior of the building for identification signs, the exclusive use of the building cafeteria and the helipad on top of the building, control over security for the entire building, extensive parking space and private elevators, and the use of other appurtenances to the building.

The lease also required respondent to pay its share of property taxes, computed in accordance with the lease.

For state and federal income tax purposes, respondent treated the transfer of title to Metropolitan as a sale of the Plaza and deducted the rental payments as payments of rent.   For state and federal income tax purposes, Metropolitan treated the acquisition of title to the Plaza as a purchase, entitling Metropolitan to a tax basis in the property equal to the purchase price paid to respondent.   Metropolitan thereafter claimed depreciation deductions based upon this tax basis, excluding the portion of the purchase price attributable to the land.

By letter, dated February 4, 1985, the Los Angeles County Assessor (the Assessor) sought advice from the State Board of Equalization (the Board) with respect to the assessment of the Plaza as a result of the transfer of its title to Metropolitan.   On February 14, 1985, the Board responded and advised the Assessor who thereafter, for property tax purposes, treated the transfer of the Plaza title to Metropolitan as a “change in ownership” of only the 27 percent of the Plaza which was not covered by the office building lease.   Accordingly, on May 31, 1985, a supplemental tax bill for 1984–1985 was issued to Metropolitan;  it reflected an increase in the assessed value for the building from $122,730,744 to $169,514,243.

The Assessor used the same 27 percent formula in 1985–1986.

On September 27, 1985, the Assessor again corresponded with the Board with respect to the transfer at issue.   On December 4, 1985, the Board responded and, in a change of position, concluded that the transfer to Metropolitan represented a “change in ownership” of the entire property, including the 73 percent covered by the lease.

Consequently, on January 28, 1986, a new supplemental tax bill for 1984–85 was issued;  it showed an increase in the assessed value for the Plaza to $323,000,000.   On March 7, 1986, a new tax bill for 1985–86 was issued;  it showed an assessed value for the Plaza of $323,000,000.

By checks dated April 3, 1986, and June 19, 1986, respondent paid the County the sums of $1,404,985 and $1,152,439.   Pursuant to Revenue and Taxation Code section 1603,1 on March 7, 1986, respondent filed an “Application for Reduction of 1985 Assessment,” which it subsequently amended to constitute a claim for refund pursuant to section 5097, subdivision (b).

On June 27, 1986, after a hearing, the Board denied respondent's claim without prejudice on the ground that the issue presented by its applications was a legal one for the courts to decide.   Respondent has received no refund.


On December 22, 1986, respondent filed its first amended complaint, the operative one on appeal, for refund of ad valorem property taxes and attorney fees.   Respondent's position was that section 62, subdivision (e), together with 18 California Code of Regulations 462, subdivision (k)(4),2 excluded from a “change of ownership” a sale of real property coupled with a leaseback which is reserved to the transferor by the terms of the sale instrument.   It alleged that this is exactly what had occurred in the transfer of the Plaza from respondent to Metropolitan, and consequently, the Assessor illegally and erroneously reassessed that portion of the Plaza which had been excepted and reserved in the grant deed.   As to Tower Block A, respondent further asserted that section 62, subdivision (g), provided a specific exemption as it stated that a “change in ownership” did not include “[a]ny transfer of a lessor's interest in taxable real property subject to a lease with a remaining term (including renewal options) of 35 years or more.”

The County countered that any transfer of real property which met the three-pronged test of section 60 3 is subject to reassessment, unless specifically exempted.   The County asserted that the exception codified in section 62, subdivision (e), referred to a change in ownership which transferred a future interest in real property and was not applicable to a sale-leaseback situation.   The County argued that the transaction had occurred in two stages—(1) the initial sale from respondent to Metropolitan and (2) the subsequent lease-back from Metropolitan to respondent;  and that the first transaction was a change of ownership which created a taxable event.

After a court trial, the court ruled in respondent's favor.   It found that the plain meaning of section 62, subdivision (e), and 18 California Code of Regulations 462, subdivision (k)(4), mandated the conclusion that respondent was entitled to a tax refund.   The court, however, rejected respondent's assertion that section 62, subdivision (g), was applicable to the case.

Judgment was entered on July 3, 1989.   Therein, the court ordered the County to pay to respondent a refund of the ad valorem property taxes it had paid, plus interest.   The County filed a timely appeal.


The parties reiterate the positions they articulated below.   Additionally, the County asserts that the court erred when it ordered the refund because the court was without jurisdiction and should have remanded the matter to the Assessment Appeals Board for the property's ultimate equalization.

 The Nature of the Sale–Leaseback.   As noted in footnote 2, supra, section 62, subdivision (e), provides that a change in ownership does not include “[a]ny transfer by an instrument whose terms reserve to the transferor an estate for years.”   A leasehold is an estate for years.  (4 Witkin, Summary of Cal.Law (9th ed. 1987) Real Property, § 510, p. 687, and cites therein.)   Here, the grant deed, which transferred the Plaza, specifically reserved an estate for years subject to the terms of the lease.   It follows, therefore, that, pursuant to section 62, subdivision (e), this particular sale and leaseback is not a “change in ownership” which would trigger a reassessment of the Plaza.

The County strenuously objects, relying primarily on the recently decided case of Industrial Indemnity Co. v. City and County of San Francisco (1990) 218 Cal.App.3d 999, 267 Cal.Rptr. 445.   The Industrial Indemnity court held that a sale-leaseback of real property, which is not a financing transaction, constitutes a change in ownership, triggering a reassessment of the property.   (Id., at p. 1002, 267 Cal.Rptr. 445.)   We do not consider that case controlling in the case at bench.

In Industrial Indemnity, the court reached its conclusion after discussing the nature of a sale-leaseback and the definition of “change of ownership” as codified in section 60.  (See fn. 3, supra.)   We need not engage in such an exercise because a pivotal fact exists in this case which was missing from Industrial Indemnity.   In Industrial Indemnity, the transferring documents were noticeably silent regarding any reservation of an estate for years.  (218 Cal.App.3d at p. 1006, 267 Cal.Rptr. 445.)   By contrast, here the grant deed contains express language reserving an estate for years.

We are aware Industrial Indemnity also concluded that in order for it to be consistent with its earlier determination that a sale-leaseback was a change of ownership as defined by section 60, it also should consider whether a sale-leaseback was an estate for years excluded by section 62, subdivision (e).  (Industrial Indemnity Co. v. City and County of San Francisco, supra, 218 Cal.App.3d at p. 1006, 267 Cal.Rptr. 445.)   We note, however, that the Industrial Indemnity court framed the issue, but found it unnecessary to resolve it, observing that “Even if the applicable statutes permitted [it] to treat leases as the equivalent of estates for years in this context, Industrial Indemnity did not satisfy the administrative requirement that it reserve to itself an estate for years․  Industrial Indemnity did not reserve an estate for years to itself in any instrument.”  (Ibid., emphasis in original.)   Here, as stated, the transferring instrument did reserve an estate for years.

As noted by the court below, this conclusion is consistent with 18 California Code of Regulations 462, subdivision (k)(4) (quoted, supra, in fn. 2) which provides that a sale-leaseback, not reserved to the transferor in the sale instrument, is a change in ownership for the property.   We agree with the trial court's comment in its intended decision that “the plain meaning of [this rule] is that a sale of real property, coupled with a lease-back, that is reserved to the transferor by the terms of the sale instrument does not constitute a change in ownership.”  (Emphasis in original.)

The conclusion reached by the Industrial Indemnity court was that the language of 18 California Code of Regulations 462, subdivision (k)(4), was confusing and ambiguous, requiring judicial interpretation.  (218 Cal.App.3d at p. 1008, 267 Cal.Rptr. 445.)   The statement in Industrial Indemnity is dicta as it was not necessary to the resolution of that case and will not be followed here.4

We hold that the transfer of the Plaza, by documents containing a reservation of an estate for years, was not a change of ownership which requires reassessment.   To hold otherwise would render meaningless section 62, subdivision (e)—a result which we are charged to avoid.  (Title Ins. & Trust Co. v. County of Riverside (1989) 48 Cal.3d 84, 95, 255 Cal.Rptr. 670, 767 P.2d 1148.)

 The Refund Order.   The County urges that the court erred when it ordered a refund because in so doing it “undertook to establish in the judgment the new assessment for the Plaza in light of the perceived ‘reservation of ownership.’ ”   Instead, the County asserts, the court should have remanded the matter to the Assessment Appeals Board.

We are unconvinced by this argument.   This was not a situation where the valuation was at issue.  (Cf. Norby Lumber Co. v. County of Madera (1988) 202 Cal.App.3d 1352, 1366, 249 Cal.Rptr. 646.)   Tax bills had been issued in accordance with the Assessor's initial determination that the reserved portion of the Plaza had not changed ownership and that the assessed value of the Plaza was $169,514.243 for the 1984–1985 supplemental roll and $171,160,111 for the 1985–1986 roll.   When the Assessor subsequently reversed himself, new tax bills were issued.   By its complaint, respondent sought a refund of the taxes set forth on the new tax bills which it had paid and which related to the Assessor's contention that the reserved portion of the Plaza had changed ownership.   Respondent sought a determination that the Assessor's subsequent reassessment was invalid and contrary to the law, and that it was entitled to a refund of those taxes, paid under protest.   As the court found for respondent regarding the validity of the reassessment, it did not err when it ordered the County to refund the monies collected pursuant to the erroneous reassessment.


The judgment is affirmed.


1.   Subsequent statutory references are to the Revenue and Taxation Code unless otherwise indicated.

2.   In pertinent part, section 62 provides:  “Change in ownership shall not include:  [¶]․[¶] (e) Any transfer by an instrument whose terms reserve to the transferor an estate for years or an estate for life;  however, the termination of such an estate for years or estate for life shall constitute a change in ownership, except as provided in subdivision (d) and in Section 63.”18 California Code of Regulations 462, subdivision (k)(4), provides:  “Sale and leaseback.   A sale of real property, coupled with a leaseback which is not reserved to the transferor by the terms of the sale instrument, constitutes a change in ownership of such property;  provided however, a sale and leaseback transaction shall be rebuttably presumed to be a non-reappraisable financing transaction upon a proper written showing by the property owner, such as written opinion or ruling by the Franchise Tax Board and/or the Internal Revenue Service, to the effect that the transaction is considered to be a financing transaction for state and/or federal income tax purposes.”

3.   Section 60 provides:  “A ‘change in ownership’ means a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest.”

4.   The Industrial Indemnity court held that in order to be consistent with its earlier determination that the sale-leaseback at issue in that case was a change of ownership, as defined by section 60, the only reasonable conclusion it could reach was that Property Tax Rule 462, subdivision (k)(4), applied solely to sale-leasebacks which are financing transactions.  (218 Cal.App.3d at pp. 1008–1009, 267 Cal.Rptr. 445.)

ARLEIGH M. WOODS, Presiding Justice.

GEORGE and EPSTEIN, JJ., concur.