The HERTZ CORPORATION, Plaintiff, Respondent and Cross–Appellant, v. COUNTY OF SAN DIEGO, Defendant, Appellant and Cross–Respondent.
NATIONAL CAR RENTAL SYSTEM, Plaintiff, Respondent and Cross–Appellant, v. COUNTY OF SAN DIEGO, Defendant, Appellant and Cross–Respondent.
The Hertz Corporation and National Car Rental System, Inc. operate car rental businesses at San Diego's airport at Lindbergh Field under agreements with the San Diego Port District. This dispute with the County of San Diego involves the scope of the taxable possessory interests 1 created by those agreements. Hertz and National say the possessory interests are limited to the counter space they occupy in the airport terminals. The San Diego County Assessor taxed Hertz and National on their purported possessory interests in the “airport as a whole.” The Assessment Appeals Board agreed with the assessor's determination. The superior court overruled the Board's decision. The County appeals that judgment. Hertz and National cross-appeal asserting the Board's calculations failed to consider depreciation in value caused by the decreasing term of their respective leases. (§ 51(b).)
We agree with the trial court's determination that Hertz's and National's possessory interests are limited to the counter space they occupy at Lindberg Field, also concluding the court properly decided the section 51(b) claim. We therefore affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
The parties stipulated to the facts submitted to the Assessment Appeals Board. In summary they are as follows.
In 1982 Hertz and National successfully bid to operate their car rental businesses on site at Lindbergh Field. Under separate five-year agreements with the Port District, Hertz and National acquired (1) non-exclusive rights to operate car rental businesses at the airport in return for concession fees and (2) rights to occupy and use counter space in the terminal buildings on a per square foot rental basis.2
Hertz and National paid annual concession fees equal to 10 percent of gross income as defined in the agreements, subject to a minimum annual guarantee. Generally speaking, “gross income” included income from customers renting the company's vehicles at the airport. Included were revenues resulting from (1) prearranged rental contracts or advance telephone reservations; (2) exchanges of automobiles not originally rented at the airport; (3) rentals originating at other locations which were returned at the airport; and (4) five cents per gallon of gasoline sold. Their annual concession fees were as follows:
With respect to counter space, during the 1983, 1985 and 1986 tax years in question Hertz leased and occupied a total of 590 square feet. This included 280 square feet in the airport's West Terminal and 310 square feet in the airport's East Terminal. National leased and occupied a total of 321 square feet, consisting of 166 square feet in the West Terminal and 155 square feet in the East terminal. Annual rent for counter space in the West Terminal was $12.78 per square foot. Rent for counter space in the East Terminal was $15.05 per square foot per year.
Execution of the 1982 agreements triggered tax reassessments in 1983. The 1983 reassessments became the base year assessments for lien dates 1984, 1985, 1986 and 1987.
The parties agreed that the income approach was the proper method of valuing the possessory interests created by the Hertz and National agreements with the Port District. The parties disagreed on the specific income to be capitalized. Hertz and National argued the assessor should capitalize only the fair market rent for the counter space they occupied. The assessor, however, capitalized the total income each paid to the Port District. In effect, the parties' fundamental disagreement centered on the treatment of concession fees as rent.
To establish the assessment for the 1983 base year, the assessor made the following computations. He first attributed all income paid by Hertz and National to their possessory interest in the real property being assessed. He then reduced this number by 35 percent reflecting the expenses of the airport as a whole as determined by the Port District. The remainder was capitalized at a 13 percent rate to establish the fee value of Hertz's and National's rights in the real property they possessed. The assessor then allocated 20 percent of the resulting figure to land and 80 percent to improvements and determined the present value of the reversionary interest in both land and improvements. Based on these calculations, the assessor valued Hertz's possessory interest at $5,080,000 and National's at $2,099,600.
To determine the assessments for 1984, 1985 and 1986, the assessor adjusted the 1983 base year assessments by the Proposition 13 inflation factor of 2 percent. The following assessments resulted:
In making these calculations for 1984, 1985 and 1986 the assessor did not consider that the remaining terms of the lease agreements were, in each consecutive year, reduced by one year. Nor did the assessor consider the increase in capitalized value based on each year's increase in income to the Port District.
Hertz's and National's expert appraiser valued the possessory interests in the counter space by excluding the concession fees from the computation and imputing a fair market rent of $30 per square foot.
The Assessment Appeals Board accepted the assessor's method of valuation, rejecting only his contention that the term should be extended to ten years. The Board valued the possessory interests as follows:
Hertz's and National's separate actions in the superior court seeking a refund and for declaratory relief were consolidated. Based on the court's consideration of the stipulated record and lengthy argument by counsel, it ruled “the proper method of valuation is that urged by plaintiffs, and ․ the highest imputed fair market rent for rent-a-car counter space in the terminals ․ is $30 per square foot per year for the tax years in question.” Using Hertz's and National's calculations, the court deducted 5 percent for administration, $4.50 per square foot for maintenance and service charges, and capitalized the remainder at 10 percent to establish the full cash values on the lien dates in question:
The court denied Hertz's and National's claim that depreciation should be considered because of the declining lease term.
IThe Scope of the Possessory Interests
The pivotal issue in this appeal is whether Hertz and National have a possessory interest in the entire airport, as the County contends, or only in their respective counter locations in the airport terminals. What constitutes a possessory interest under California law is a legal issue which we may review de novo. (Pacific Grove—Asilomar Operating Corp. v. County of Monterey (1974) 43 Cal.App.3d 675, 681–682, 117 Cal.Rptr. 874.)
“The concept of a taxable possessory interest originated for sound public policy reasons. With much of California land either federal or state owned and therefore not subject to direct taxation, a method for taxing persons who used that land for their own benefit was created to generate necessary revenue.” (Freeman v. City of Fresno (1981) 126 Cal.App.3d 459, 462–463, 178 Cal.Rptr. 764.) The purpose of section 107 3 is to protect the public domain from private profit without tax liability. (Stadium Concessions, Inc. v. City of Los Angeles (1976) 60 Cal.App.3d 215, 225, 131 Cal.Rptr. 442.)
The State Board of Equalization Property Tax Rules elaborate on the definition of possessory interest found in section 107. Rule 21(a) defines a possessory interest as:
“․ an interest in real property which exists as a result of possession, exclusive use, or a right to possession or exclusive use of land and/or improvements unaccompanied by the ownership of a fee simple or life estate in the property. Such an interest may exist as a result of:
“(1) A grant of a leasehold estate, an easement, a profit a prendre, or any other legal or equitable interest of less than freehold, regardless of how the interest is identified in the document by which it was created, provided the grant confers a right of possession or exclusive use which is independent, durable, and exclusive of rights held by others in the property.” (18 Cal.Code Reg., ch. 1, Rule 21(a); emphasis added.)
“Possession” is defined as “[a]ctual possession, constituting the occupation of land or improvements with the intent of excluding any occupation by others that interferes with the possessor's rights ․” (Id. at Rule 21(c); emphasis added.) The rules define “exclusive use” as “the enjoyment of a beneficial use of land or improvements, together with the ability to exclude from occupancy by means of legal process others who interfere with that enjoyment.” (Id. at Rule 21(e); emphasis added.) Examples of taxable possessory interests include:
“[P]ossession of public property at harbors, factories, airports, golf courses, marinas, recreation areas, parks and stadiums. Possessory interests may include land subject to the ultimate grant of a United States patent, commercial and industrial sites, and water rights.” (18 Cal.Code Regs., ch. 1, Rule 28(e); emphasis added.)
The Board of Equalization Rules carefully distinguish between a license, which is not a possessory interest, and the right to the exclusive possession or use of a fixed location on publicly owned land, which is.
The California courts have determined that a possessory interest exists only where the use and possession of real property and/or improvements (1) is conferred for a reasonably certain determinable period, (2) is exclusive against all the world, including the rightful owner, and (3) generates a valuable private profit. (Kaiser Co. v. Reid (1947) 30 Cal.2d 610, 619, 184 P.2d 879; Cox Cable San Diego, Inc. v. County of San Diego (1986) 185 Cal.App.3d 368, 381–383, 229 Cal.Rptr. 839; Freeman v. County of Fresno (1981) 126 Cal.App.3d 459, 463, 178 Cal.Rptr. 764.)
The County suggests the sole test for determining the existence and scope of a possessory interest is whether the taxpayer derives a private benefit or profit from the public property arguing “[t]he cases construing taxable possessory interests make it clear that it is the right to conduct business on publicly owned and tax exempt land that is the possessory interest.” We believe the County's argument incorrectly ignores the exclusivity requirement.
A possessory interest does not exist in the absence of the exclusive use or possession of real property. (See, e.g., Scott–Free River Expeditions, Inc. v. County of El Dorado (1988) 203 Cal.App.3d 896, 904, 250 Cal.Rptr. 504 (usufructuary right to use waterway); Cox Cable San Diego, Inc. v. County of San Diego, supra, 185 Cal.App.3d at 382, 229 Cal.Rptr. 839 (cable space in public right-of-way); Stadium Concessions, Inc. v. City of Los Angeles, supra, 60 Cal.App.3d at p. 225, 131 Cal.Rptr. 442 (permanent concession stands); Freeman v. County of Fresno, supra, 126 Cal.App.3d at p. 464, 178 Cal.Rptr. 764 (amusement machines at airport terminal).) Where a taxpayer has no right of possession or use other than those shared by the general public, the requirement of exclusive use is lacking and no possessory interest exists. (Cox Cable San Diego, Inc. v. County of San Diego, supra, 185 Cal.App.3d at p. 383, 229 Cal.Rptr. 839; Freeman v. County of Fresno, supra, 126 Cal.App.3d at pp. 463–464, 178 Cal.Rptr. 764 (“the requirement that the use must be exclusive means that it must not be one shared by the general public”); Pacific Grove—Asilomar Operating Corp. v. County of Monterey, supra, 43 Cal.App.3d at p. 693, 117 Cal.Rptr. 874 (Asilomar's use of state property was “not exclusive but specifically open to the public”).)
Here the undisputed facts show that Hertz and National did not have exclusive use and/or possession of the airport as a whole. Their possessory interests were limited to the leased counter space in the baggage claim areas of the East and West Terminals.
It appears to us that pursuant to the agreements with the Port District, Hertz and National acquired two distinguishable rights. They obtained the (1) “non-exclusive right to operate a car rental business at the Airport in return for concession fees and  the [exclusive] right to occupy and use certain counter space in the terminal buildings in return for rent on a per square foot basis.” (Emphasis added.) Although the contract designations of interests conveyed are not controlling (Sea–Land Service, Inc. v. County of Alameda (1974) 36 Cal.App.3d 837, 842, 112 Cal.Rptr. 113), in this instance the agreement reflects the true scope of Hertz's and National's possessory interests.
The County stipulated “[t]he rent-a-car companies neither occupy nor have the exclusive use or possession of any portion of the Airport under the Agreements except for the counters. The only other Airport property the companies use in connection with their operations is the public road used by everyone commuting to and from the terminal buildings. The companies' use of the public road is limited to transporting their customers by trams between the terminal building curbsides and the return/service areas. The off-Airport rent-a-car companies, taxis, limousine operators and hotel trams similarly use the public road. The car rental companies do not have any special rights to use or have access to the Airport roads.”
These facts are confirmed by the assessor's testimony before the Board:
“Q. The only improvements that either Hertz or National have exclusive possession of are the counters; is that correct?
“A. That's correct.
“Q. What land other than the land right under the counters do Hertz and National have exclusive use or possession of?
“A. None. Only under the counter space. Nonexclusive use of the rest of the airport.”
The assessor acknowledged he attributed most of the value of Hertz's and National's possessory interests to their concession rights to operate a business at the airport, rights he ultimately conceded did not create possessory interests.4
Neither Hertz nor National has a possessory interest in the “airport as a whole” because, as the assessor openly conceded, neither company has exclusive use or possession of any airport property other than its counters. Accordingly, based upon the stipulated facts and the specific contractual terms negotiated by the parties the court properly limited the scope of the taxable possessory interests.5
Having rejected the County's theory that Hertz and National each held possessory interests in the “airport as a whole”, we also conclude the County improperly included the concession fees as “percentage rents” in valuing the possessory interests. Based on uncontradicted evidence, the court correctly valued the possessory interests held by Hertz and National. No remand is required. (Ehrman & Flavin, Taxing California Property (3d ed. 1988), § 30.11, p. 34.)
Given our conclusions, we need not consider whether the Board's capitalization of the concession fees improperly included business enterprise value or resulted in discriminatory assessments.
Reasonably Anticipated Term of Possession
In their cross-appeal Hertz and National point out that their agreements with the Port District were for fixed five-year terms. Thus, on each lien date following the 1983 base year lien date, the term of possession remaining under the agreements had decreased by one year. They contend section 51(b) 6 requires the court to take into account the depreciation in value caused by the decreasing contract term of possession.
Board of Equalization Rule 23 permits the assessor to consider factors apart from the express terms of a lease agreement.
“(a) When a written instrument creating a possessory interest specifies a period of occupancy which is to exist, the stated period shall be taken as the term of possession for purposes of valuation except as provided in this section․
“(b) Should a period thus determined be in conflict with the reasonably anticipated term of possession by the possessor and any successor to or assignee of the property interest, the reasonably anticipated term of possession, whether shorter or longer, shall be used instead of the stated period. In determining the reasonably anticipated term of possession, the assessor shall be guided by the intent of the public owner and the possessor, as indicated by such evidence as (1) sale prices of the subject or similar possessory interests, (2) the history of the property's use, (3) the policy of the public agency administering the lands, and (4) the actions of the possessor.” (18 Cal.Code Regs., ch. 1, Rule 23; emphasis added.)
Hertz has been located at the airport since the 1960's and National since the 1970's. Based on this history of property use, the court was entitled to assume Hertz's and National's presence would continue for a period of at least five years, notwithstanding the express terms of the agreements. Any other assumption ignores reality. The court therefore properly rejected Hertz's and National's contention.
Judgment affirmed. The parties to bear their respective costs.
1. Revenue and Taxation Code section 107 defines a “possessory interest” as:“(a) Possession of, claim to, or right to the possession of land or improvements, except when coupled with ownership of the land or improvements in the same person.“(b) Taxable improvements on tax-exempt land.”All statutory references are to the Revenue and Taxation Code unless otherwise specified. When referring to statutory subparts we will omit use of the word “subdivision.”
2. The counter space occupied by Hertz and National was located in the baggage claim areas of the two terminals. Hertz and National each had another agreement with the Port District for lease of airport property for their return/service operations. Those lease agreements were not before the Board or the superior court and are not involved in this appeal.
3. See fn. 1, supra.
4. The assessor's testimony before the Board included the following exchange:“Q. The rest of the value that you've come up with is a value that attaches to something other than the counters; is that right?“A. Yes. That is the concession fee plus the five cents a gallon on gasoline that's sold.“․“Q. ․ You have placed a value on Hertz's possessory interest for 1983 of 5,370,000 dollars, correct?“A. Yes.“Q. And a very small fraction of that is accounted for by the value of the counters themselves?“A. That would be correct, yes.“Q. And the remainder of the value, let's say something in excess of 5 million dollars that you've come up with, what property do you say has that five million dollar value?“A. I would say the nonexclusive use to the rights—for the rights to use all of the public areas at the airport for their clients.“Q. And you agree that those rights in the rest of the airport are rights that are nonexclusive?“A. I agree.“Q. And a possessory interest requires that the right to use be exclusive, correct?“A. That's what it states, yes.“Q. And you agree that's the correct definition?“A. Yes.Q. Do you contend that the rights that Hertz and National have, the nonexclusive rights to use the public areas of the airport, are a possessory interest?“A. You said the nonexclusive rights?“Q. Yes.“A. Okay. They have a possessory interest in the counter space only as stated in the lease and nonexclusive rights throughout the rest of the airport. That's the way I look at it.“Q. And those nonexclusive rights do not create a possessory interest; isn't that correct?“A. Only in the counter space, yes, that's right.”
5. Obviously judicial decision-making is made on the specific facts presented. Whether we would have reached the same result had the Port structured its deal differently, charging a greater rental for the counter space because of the benefits to a tenant from an on-site location is a question not before us, and accordingly one which we need not speculate. In addition, although counsel for the assessor at oral argument said the resolution of this hypothetical question was a matter of law we decline to treat it as such where the assessor has never sought to impose taxes on this theory. Where the assessor has made a tactical judgment to proceed on a virtually all or nothing basis on his interpretation of the law, we will not attempt to craft a compromise approach without the benefit of facts, briefing and argument.
6. Section 51 establishes the procedure for computing the taxable value of property as of any lien date. Under this provision “the taxable value ․ is the lesser of:“(a) Its base year value, compounded annually since the base year by an inflation factor, which shall be determined as follows:“(1) For any assessment year commencing prior to January 1, 1985, the inflation factor shall be the percentage change in the cost of living, as defined in Section 2212.“(2) For any assessment year commencing after January 1, 1985, the inflation factor shall be the percentage change from December of the prior fiscal year to December of the current fiscal year in the California Consumer Price Index for all items, as determined by the California Department of Industrial Relations; provided, that the percentage increase for any assessment year determined pursuant to paragraph (1) or (2) shall not exceed 2 percent of the prior year's value.“(b) Its full cash value ․ as of the lien date, taking into account reductions in value due to damage, destruction, depreciation, obsolescence, removal of property, or other factors causing a decline in value.” (Emphasis added.)
WIENER, Associate Justice.
KREMER, P.J., and WORK, J., concur.