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Rather than simply redevelop existing structures to match their needs, the build-to-suit design calls for the development and building and construction of brand-new buildings that match the trade gown of other stores in a national chain. Think CVS drug store, Walgreens and so on ...

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

The build-to-suit transaction is a modern-day phenomenon, birthed by nationwide retailers unconcerned with the resale worth of their residential or commercial properties. Rather than merely redevelop existing structures to match their needs, the build-to-suit design calls for the development and building of new structures that match the trade gown of other stores in a nationwide chain. Think CVS pharmacy, Walgreens and so on. National merchants want to pay a above market value to establish stores at the precise places they target.

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

In these cases, the long-term lease resembles a mortgage. The designer resembles a loan provider whose danger is based upon the retailer's ability to satisfy its lease commitments. Such cookie-cutter deals are the favored funding arrangement in the nationwide retail market.

So, how precisely does an assessor worth a national build-to-suit residential or commercial property for tax functions? Is a specific lease transaction based upon a niche of national sellers' similar evidence of value? Should such national data be overlooked in favor of comparable evidence drawn from local retail residential or commercial properties in closer distance?

How should a sale be dealt with? The long-lasting leases in place heavily affect build-to-suit sales. Investors basically buy the lease for the awaited future cash flow, purchasing at a premium in exchange for guaranteed rent. Are these sales signs of residential or commercial property value, or should the assessor disregard the rented cost for tax purposes, rather focusing on the cost simple?

The easy response is that the objective of all celebrations involved ought to always be to determine reasonable market price.

Establishing Market Price

Assessors' eyes illuminate when they see a price of a build-to-suit residential or commercial property. What better evidence of value than a sale, right?

Wrong. The premium paid in numerous situations can be anywhere from 25 percent to half more than the open market would usually bear.

Property is to be taxed at its market worth - no more, no less. That refers to the cost a willing purchaser and seller under no obsession to offer would concur to on the open market. It is a basic definition, however for functions of taxation, market price is a fluid principle and challenging to determine.

The most trustworthy method of identifying 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, however, to see what precisely is driving the price and what can be rationalized if a sale is abnormal.

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

For residential or commercial property tax purposes, only the genuine estate, the fee basic interest, is to be valued and all other intangible individual residential or commercial property overlooked. A leasehold interest in the realty is thought about "chattel genuine," or personal residential or commercial property, and is not subject to taxation. Existing mortgage financing or collaboration agreements are also overlooked due to the fact that the factors behind the terms and quantity of the loan may be unpredictable or unassociated to the residential or commercial property's value.

Build-to-suit deals are basically building and construction financing deals. As such, the personal plan among the parties included ought to not be taken upon as a charge against the residential or commercial property's tax exposure.

Don't Trust Transaction Data

In a current build-to-suit evaluation appeal, the information on sales of nationwide chain stores was declined for the functions of a sales contrast method. The leases in location at the time of sale at the various residential or commercial properties were the driving elements in figuring out the price paid.

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

For similar reasons, the income data of most build-to-suit residential or commercial properties is skewed by the leased fee interest, which is intertwined with the fee interest. Costs of purchases, assemblage, demolition, building and construction and revenue to the developer are packed into, and financed by, the long-term lease to the national merchant.

By repercussion, rents are inflated to reflect healing of these expenses. Rents are not obtained from open market conditions, but generally are determined on a percentage basis of job costs.

Simply put, investors are willing to accept a lesser return at a greater buy-in price in exchange for the security of a long-lasting lease with a quality nationwide tenant like CVS.

This is highlighted by the considerably minimized sales and rents for second-generation owners and tenants of national chains' retail structures. Generally, national stores are subleased at a fraction of their initial agreement lease, showing prices that falls in line with open market standards.

A residential or commercial property that is net leased to a nationwide merchant on a long-lasting basis is an important security for which financiers want to pay a premium. However, for tax functions the assessment should distinguish between the real residential or commercial property and the non-taxable leasehold interest that influences the national market.

The suitable method to worth these residential or commercial properties is by turning to the sales and leases of similar retail residential or commercial properties in the regional market. Using that approach will make it possible for the assessor to figure out fair market value.

Michael Guerriero is a partner at law company 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.