A new published California court of appeal decision may be important for private utility companies with respect to the valuation of their possessory interests in public rights-of-way for property tax assessment purposes. The case, Charter Communications Properties v. County of San Luis Obispo, provides that when assessing the fair market value of a utility's possessory interest, the County tax assessor will likely be able to disregard the utility's agreed-upon remaining term of possession and instead assume a much longer anticipated term of possession to match reality. This, in turn, means private utility companies should expect to see higher property tax assessments.
Some background: Under article 13, section 1 of the California Constitution, property is generally assessed as a percentage of its fair market value. Private possessory uses of public property may also be assessed for property tax purposes. With respect to private utilities in public rights-of-way, such possessory rights are typically valued by capitalizing the annual rent. The annual rent is based on the franchise fee paid in exchange for the utility's possessory interest for (1) the remaining term or (2) the anticipated term.
The term of possession therefore becomes very important for valuation purposes, as the longer the term of possession, the greater the present value. In the past, the assessor typically relied on the franchise agreement between the public entity and the private utility company in determining the remaining term. As terms came closer to expiration, private utility companies were taxed less and less.
The Charter Decision: In Charter, the private utility company had between four and eight years remaining on its franchise agreements with the County for the placement of its television cables in public rights-of-way. Instead of using this remaining term for valuation purposes, the County assessor instead valued the private utility's possessory interest by assuming a much longer anticipated term of possession (15 years).
Charter challenged the assessor's valuation methodology, as it resulted in over half-a-million dollars of increased assessment. Charter claimed there was no basis to deviate from the agreed-upon remaining term and assume a longer anticipated term of possession. The trial court held that the assessor appropriately relied on an extended anticipated term as opposed to the parties' stated remaining term, concluding that the evidence demonstrated that these types of franchise agreements are routinely renewed indefinitely, and in fact Charter expected its cables to remain in-place indefinitely.
The Court of Appeal affirmed, also concluding it was appropriate for the County assessor to assume a much longer anticipated term for valuation purposes. Despite the stated length remaining for its franchise term, there was no question that the utility provider would have its franchise renewed and the utilities would remain in place well into the future.
Private utility companies will now need to seriously analyze their property tax bills and determine the valuation methodology employed by the assessor. If the assessor deviated from the stated remaining franchise term, the utility provider will need to decide whether the deviation is supported.
Brad Kuhn, Chair of Nossaman's Eminent Domain & Valuation Group, guides private and public sector clients through complex real estate development and infrastructure projects – particularly with eminent domain/inverse ...
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