Rather than merely redevelop existing buildings to fit their requirements, the build-to-suit model calls for the development and building of new buildings that match the trade gown 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 national retailers unconcerned with the resale worth of their residential or commercial properties. Rather than merely redevelop existing buildings to fit their requirements, the build-to-suit design calls for the development and construction of brand-new structures that match the trade dress of other stores in a nationwide chain. Think CVS drug store, Walgreens and so forth. National sellers want to pay a premium above market worth to establish stores at the exact locations they target.

In a common build-to-suit, a developer puts together land to get the preferred website, demolishes existing structures and constructs a structure that conforms to the national prototype shop design of the ultimate lessee, such as a CVS. In exchange, the lessee signs a long-term lease with a rental rate structured to repay the developer for his land and construction expenses, plus a revenue.

In these cases, the long-lasting lease resembles a mortgage. The developer resembles a loan provider whose danger is based upon the merchant's capability to satisfy its lease obligations. Such cookie-cutter deals are the favored funding arrangement in the nationwide retail market.

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

How should a sale be treated? The long-term leases in location heavily influence build-to-suit sales. Investors essentially purchase the lease for the expected future capital, purchasing a premium in exchange for ensured lease. Are these sales indicators of residential or commercial property worth, or should the assessor ignore the leased charge for tax purposes, instead concentrating on the fee simple?

The basic response is that the goal of all parties included need to always be to identify fair market worth.

Establishing Market Price

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

Wrong. The premium paid in numerous scenarios can be anywhere from 25 percent to half more than the free market would typically bear.

Real estate is to be taxed at its market price - no more, no less. That describes the rate a prepared buyer and seller under no obsession to offer would agree to on the open market. It is a basic definition, however for purposes of tax, market price is a fluid idea and tough to pin down.

The most trustworthy technique of figuring out worth is comparing the residential or commercial property to current arm's length sales, or to a sale of the residential or commercial property itself. It is required to pop the hood on each offer, however, to see exactly what is driving the rate and what can be rationalized if a sale is irregular.

Alternatively, the earnings method can be utilized to capitalize an estimated income stream. That earnings stream is constructed upon rents and data from comparable residential or commercial properties that exist in the open market.

For residential or commercial property tax purposes, only the realty, the fee basic interest, is to be valued and all other intangible personal residential or commercial property disregarded. A leasehold interest in the realty is considered "effects genuine," or personal residential or commercial property, and is not subject to tax. Existing mortgage financing or collaboration contracts are likewise overlooked due to the fact that the reasons behind the terms and quantity of the loan may be unpredictable or unassociated to the residential or commercial property's worth.

Build-to-suit transactions are basically building and construction funding transactions. As such, the personal plan among the parties involved ought to not be seized upon as a charge against 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 store was declined for the functions of a sales comparison technique. The leases in location at the time of sale at the numerous residential or commercial properties were the driving aspects in determining the rate paid.

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

For comparable reasons, the income data of a lot of build-to-suit residential or commercial properties is skewed by the leased cost interest, which is linked with the charge interest. Costs of purchases, assemblage, demolition, construction and profit to the designer are packed into, and financed by, the long-term lease to the nationwide seller.

By effect, leas are pumped up to reflect healing of these expenses. Rents are not stemmed from open market conditions, however typically are computed on a percentage basis of project expenses.

Simply put, investors are ready to accept a lower return at a greater buy-in rate in exchange for the security of a long-term lease with a quality nationwide tenant like CVS.

This is highlighted by the markedly minimized sales and leas for second-generation owners and occupants of national chains' retail buildings. Generally, national stores are subleased at a fraction of their original agreement rent, reflecting rates that falls in line with free market standards.

A residential or commercial property that is net leased to a national retailer on a long-lasting basis is an important security for which financiers want to pay a premium. However, for tax purposes the assessment must separate in between the genuine residential or commercial property and the non-taxable leasehold interest that affects the nationwide market.

The proper way to value these residential or commercial properties is by turning to the sales and leases of comparable retail residential or commercial properties in the regional market. Using that approach will make it possible for the assessor to determine fair market price.

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.