Instead of simply redevelop existing buildings to suit their needs, 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 drug store, Walgreens and the like ...

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

The build-to-suit deal is a contemporary phenomenon, birthed by national sellers unconcerned with the resale worth of their residential or commercial properties. Rather than just redevelop existing structures to suit their needs, the build-to-suit design calls for the advancement and construction of new structures that match the trade gown of other stores in a national chain. Think CVS drug store, Walgreens and so forth. National merchants are prepared to pay a premium above market price to develop shops at the exact places they target.

In a normal build-to-suit, a developer assembles land to obtain the preferred site, destroys existing structures and constructs a building that conforms to the nationwide prototype store design of the ultimate lessee, such as a CVS. In exchange, the lessee indications a long-lasting lease with a rental rate structured to compensate the developer for his land and building expenses, plus a profit.

In these cases, the long-term lease is like a mortgage. The developer is like a loan provider whose threat is based upon the merchant's capability to satisfy its lease commitments. Such cookie-cutter deals are the favored funding plan in the national retail market.

So, how exactly does an assessor worth a national build-to-suit residential or commercial property for tax purposes? Is a specific lease transaction based upon a niche of national merchants' comparable evidence of worth? Should such national data be overlooked in favor of equivalent proof drawn from local retail residential or commercial properties in closer proximity?

How should a sale be dealt with? The long-term leases in place heavily influence build-to-suit sales. Investors basically purchase the lease for the expected future capital, purchasing a premium in exchange for guaranteed rent. Are these sales signs of residential or commercial property value, or should the assessor ignore the rented charge for tax functions, rather focusing on the fee simple?

The simple response is that the goal of all parties included need to constantly be to determine fair market worth.

Establishing Market Value

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

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

Real estate is to be taxed at its market price - no more, no less. That refers to the rate a willing purchaser and seller under no obsession to sell would concur to on the open market. It is a simple meaning, however for functions of taxation, market value is a fluid concept and hard to pin down.

The most reputable method of identifying value 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 essential to pop the hood on each offer, nevertheless, to see exactly what is driving the price and what can be rationalized if a sale is unusual.

Alternatively, the earnings technique can be used to capitalize an approximated income stream. That income stream is constructed upon rents and information from similar residential or commercial properties that exist outdoors market.

For residential or commercial property tax functions, just the real estate, the charge basic interest, is to be valued and all other intangible individual residential or commercial property overlooked. A leasehold interest in the property is thought about "belongings genuine," or personal residential or commercial property, and is not subject to taxation. Existing mortgage financing or collaboration agreements are also overlooked because the factors behind the terms and amount of the loan might doubt or unassociated to the residential or commercial property's worth.

Build-to-suit deals are essentially building funding transactions. As such, the personal arrangement amongst the parties included ought to not be seized upon as a penalty versus the residential or commercial property's tax direct exposure.

Don't Trust Transaction Data

In a recent build-to-suit assessment appeal, the data on sales of nationwide chain shops was rejected for the functions of a sales contrast method. The leases in location at the time of sale at the different residential or commercial properties were the driving consider determining the rate paid.

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

For similar factors, the income information of a lot of build-to-suit residential or commercial properties is skewed by the leased charge interest, which is linked with the fee interest. Costs of purchases, assemblage, demolition, building and construction and revenue to the developer are packed into, and funded by, the long-lasting lease to the national retailer.

By effect, rents are pumped up to show healing of these costs. Rents are not stemmed from free market conditions, but normally are calculated on a portion basis of job expenses.

In other words, financiers want to accept a lesser return at a greater buy-in rate in exchange for the security of a long-term lease with a quality nationwide occupant like CVS.

This is highlighted by the significantly lowered sales and rents for second-generation owners and occupants of nationwide chains' retail buildings. Generally, nationwide stores are subleased at a fraction of their original agreement lease, showing prices that falls in line with open market standards.

A residential or commercial property that is net rented to a nationwide retailer on a long-term basis is an important security for which financiers are prepared to pay a premium. However, for taxation purposes the evaluation should distinguish in between the genuine residential or commercial property and the non-taxable leasehold interest that influences the nationwide market.

The proper method to value 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 price.

Michael Guerriero is an associate at law office 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.