Instead of merely redevelop existing buildings to match their requirements, the build-to-suit model requires the advancement and building of brand-new buildings that match the trade dress of other stores 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 deal is a modern-day phenomenon, birthed by nationwide retailers unconcerned with the resale value of their residential or commercial properties. Instead of just redevelop existing structures to match their requirements, the build-to-suit model requires the advancement and building and construction of brand-new structures that match the trade gown of other stores in a . Think CVS pharmacy, Walgreens and so on. National sellers want to pay a premium above market value to establish shops at the precise places they target.

In a typical build-to-suit, a developer puts together land to obtain the preferred website, destroys existing structures and constructs a building that complies with the national model shop style of the ultimate lessee, such as a CVS. In exchange, the lessee signs a long-term lease with a rental rate structured to reimburse the developer for his land and building costs, plus a profit.

In these cases, the long-term lease is like a mortgage. The designer is like a loan provider whose threat is based upon the seller's ability to meet its lease responsibilities. Such cookie-cutter deals are the preferred 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 customized lease deal based upon a specific niche of nationwide retailers' equivalent evidence of worth? Should such nationwide data be neglected in favor of equivalent proof drawn from regional retail residential or commercial properties in closer distance?

How should a sale be treated? The long-term leases in place greatly influence build-to-suit sales. Investors essentially buy the lease for the anticipated future capital, purchasing at a premium in exchange for guaranteed lease. Are these sales signs of residential or commercial property worth, or should the assessor overlook the leased cost for tax purposes, instead concentrating on the charge simple?

The simple answer is that the objective of all parties involved need to constantly be to identify reasonable market value.

Establishing Market Value

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

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

Realty is to be taxed at its market price - no more, no less. That refers to the cost a prepared buyer and seller under no compulsion to offer would concur to on the free market. It is a basic meaning, however for purposes of taxation, market price is a fluid principle and difficult to select.

The most dependable method 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 required to pop the hood on each offer, nevertheless, to see just what is driving the price and what can be described away if a sale is unusual.

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

For residential or commercial property tax functions, only the real estate, the cost simple interest, is to be valued and all other intangible personal residential or commercial property disregarded. A leasehold interest in the genuine estate is thought about "goods genuine," or personal residential or commercial property, and is not subject to tax. Existing mortgage financing or partnership agreements are likewise neglected due to the fact that the reasons behind the terms and quantity of the loan might doubt or unassociated to the residential or commercial property's worth.

Build-to-suit transactions are basically construction financing transactions. As such, the personal plan among the parties involved should not be seized upon as a charge versus 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 national chain stores was declined for the purposes of a sales comparison technique. The leases in location at the time of sale at the numerous residential or commercial properties were the driving factors in 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 and construction costs, consisting of land acquisition, demolition and developer profit.

For comparable factors, the income data of the majority of build-to-suit residential or commercial properties is altered by the rented fee interest, which is intertwined with the fee interest. Costs of purchases, assemblage, demolition, building and construction and earnings to the designer are loaded into, and funded by, the long-lasting lease to the national seller.

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

Simply put, investors are prepared to accept a lower return at a greater buy-in cost in exchange for the security of a long-lasting lease with a quality national renter like CVS.

This is shown by the markedly decreased sales and rents for second-generation owners and renters of nationwide chains' retail structures. Generally, nationwide stores are subleased at a portion of their original contract lease, reflecting rates that falls in line with free market standards.

A residential or commercial property that is net rented to a nationwide seller on a long-term basis is an important security for which financiers are prepared to pay a premium. However, for tax functions the assessment must separate in between the real residential or commercial property and the non-taxable leasehold interest that influences the national market.

The appropriate 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 technique will allow the assessor to identify reasonable market worth.

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.