Rather than just redevelop existing structures to fit their requirements, the build-to-suit model calls for the advancement and construction of brand-new buildings that match the trade dress of other shops in a nationwide chain. Think CVS drug store, Walgreens and so forth ...

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

The build-to-suit transaction is a modern-day phenomenon, birthed by nationwide merchants unconcerned with the resale worth of their residential or commercial properties. Instead of merely redevelop existing structures to fit their requirements, the build-to-suit model requires the advancement and construction of new structures that match the trade dress of other shops in a national chain. Think CVS pharmacy, Walgreens and the like. National retailers want to pay a premium above market worth to establish shops at the precise locations they target.

In a typical build-to-suit, a designer assembles land to obtain the desired site, destroys existing structures and constructs a building that conforms to the national model store style of the supreme lessee, such as a CVS. In exchange, the lessee indications a long-lasting lease with a rental rate structured to reimburse the designer for his land and construction expenses, plus an earnings.

In these cases, the long-term lease is like a mortgage. The designer resembles a lender whose danger is based upon the merchant's ability to satisfy its lease commitments. Such cookie-cutter transactions are the favored funding plan in the nationwide retail market.

So, how exactly does an assessor value a nationwide build-to-suit residential or commercial property for tax functions? Is a specific lease deal based upon a niche of nationwide merchants' equivalent proof of value? Should such nationwide information be disregarded in favor of comparable evidence drawn from regional retail residential or commercial properties in closer proximity?

How should a sale be dealt with? The long-term leases in place heavily affect build-to-suit sales. Investors essentially buy the lease for the expected future money flow, purchasing at a premium in exchange for guaranteed rent. Are these sales indicators of residential or commercial property value, or should the assessor neglect the leased fee for tax functions, instead concentrating on the cost simple?

The basic response is that the objective of all parties involved must always be to identify fair market price.

Establishing Market Value

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

Wrong. The premium paid in lots of situations can be anywhere from 25 percent to half more than the free market would generally bear.

Realty is to be taxed at its market price - no more, no less. That refers to the cost a ready purchaser and seller under no obsession to offer would accept on the free market. It is an easy meaning, but for purposes of tax, market worth is a fluid concept and difficult to determine.

The most dependable technique of figuring out value 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 necessary to pop the hood on each offer, nevertheless, to see just what is driving the cost and what can be explained away if a sale is abnormal.

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

For residential or commercial property tax functions, only the property, the charge simple interest, is to be valued and all other intangible personal residential or commercial property overlooked. A leasehold interest in the property is thought about "chattel genuine," or personal residential or commercial property, and is not subject to tax. Existing mortgage financing or partnership arrangements are also neglected because the factors behind the terms and amount of the loan may doubt or unrelated to the residential or commercial property's value.

Build-to-suit deals are basically building and construction funding transactions. As such, the private arrangement among the parties involved should not be seized upon as a charge versus the residential or commercial property's tax direct exposure.

Don't Trust Transaction Data

In a current build-to-suit assessment appeal, the data on sales of nationwide chain shops was rejected for the functions of a sales contrast technique. The leases in place at the time of sale at the various residential or commercial properties were the driving consider figuring out the cost paid.

The leases were all well above market rates, with rent that was pre-determined based upon a formula that amortizes building expenses, consisting of land acquisition, demolition and designer profit.

For comparable factors, the earnings information of many build-to-suit residential or commercial properties is skewed by the rented cost interest, which is linked with the charge interest. Costs of purchases, assemblage, demolition, building and construction and profit to the developer are packed into, and financed by, the long-lasting lease to the national merchant.

By consequence, rents are inflated to show recovery of these costs. Rents are not derived from free market conditions, but normally are computed on a percentage basis of job expenses.

To put it simply, investors are prepared to accept a lower return at a greater buy-in cost in exchange for the security of a long-term lease with a quality nationwide tenant like CVS.

This is illustrated by the significantly reduced sales and leas for second-generation owners and tenants of national chains' retail structures. Generally, nationwide retailers are subleased at a fraction of their original contract rent, reflecting prices that falls in line with open market standards.

A residential or commercial property that is net leased to a nationwide retailer on a long-lasting basis is a valuable security for which investors are ready to pay a premium. However, for tax purposes the assessment must differentiate between the real residential or commercial property and the non-taxable leasehold interest that influences the nationwide market.

The appropriate 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 local market. Using that technique will allow the assessor to identify fair market value.

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