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Instead of just redevelop existing buildings to fit their requirements, the build-to-suit model requires the development and construction of brand-new buildings that match the trade gown of other shops in a nationwide chain. Think CVS pharmacy, Walgreens and the like ...

By Michael P. Guerriero, Esq., as released by Rebusinessonline.com, March 2012
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The build-to-suit deal is a modern phenomenon, birthed by nationwide sellers unconcerned with the resale value of their residential or commercial properties. Rather than just redevelop existing buildings to fit their requirements, the build-to-suit model requires the advancement and building and construction of new buildings that match the trade gown of other stores in a nationwide chain. Think CVS pharmacy, Walgreens and the like. National retailers want to pay a premium above market worth to establish shops at the exact locations they target.

In a typical build-to-suit, a designer puts together land to get the desired site, destroys existing structures and constructs a structure that adheres to the national prototype shop design of the ultimate lessee, such as a CVS. In exchange, the lessee indications a long-lasting lease with a rental rate structured to reimburse the designer for his land and building costs, plus a profit.

In these cases, the long-term lease is like a mortgage. The developer resembles a loan provider whose danger is based upon the merchant's ability to meet its lease commitments. Such cookie-cutter transactions are the favored financing arrangement in the nationwide retail market.

So, how exactly does an assessor value a nationwide build-to-suit residential or commercial property for tax functions? Is a customized lease transaction based upon a specific niche of nationwide retailers' similar evidence of value? Should such nationwide information be neglected in favor of similar evidence drawn from regional retail residential or commercial properties in closer distance?

How should a sale be treated? The long-lasting leases in place heavily influence build-to-suit sales. Investors essentially acquire the lease for the anticipated future money circulation, buying at a premium in exchange for ensured rent. Are these sales signs of residential or commercial property value, or should the assessor overlook the leased charge for tax functions, rather concentrating on the charge simple?

The simple answer is that the objective of all parties included should constantly be to identify fair market worth.

Establishing Market Price

Assessors' eyes light up when they see a 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 usually bear.

Real estate is to be taxed at its market price - no more, no less. That describes the price a willing purchaser and seller under no obsession to offer would consent to on the free market. It is a simple definition, but for purposes of taxation, market value is a fluid principle and challenging to select.

The most reputable technique 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 essential to pop the hood on each deal, however, to see what exactly is driving the price and what can be explained away if a sale is abnormal.

Alternatively, the income approach can be used to capitalize a projected income stream. That earnings stream is constructed upon rents and data from similar residential or commercial properties that exist outdoors market.

For residential or commercial property tax purposes, just the genuine estate, the cost easy interest, is to be valued and all other intangible individual residential or commercial property neglected. A leasehold interest in the realty is thought about "chattel real," or individual residential or commercial property, and is not subject to tax. Existing mortgage financing or partnership arrangements are also overlooked because the reasons behind the terms and amount of the loan may doubt or unassociated to the residential or commercial property's worth.

Build-to-suit deals are basically construction financing deals. As such, the private arrangement among the parties involved need to not be taken upon as a penalty against the residential or commercial property's tax direct exposure.

Don't Trust Transaction Data

In a current build-to-suit assessment appeal, the information on sales of nationwide chain stores was rejected for the purposes of a sales contrast approach. The leases in at the time of sale at the various residential or commercial properties were the driving consider determining the rate paid.

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

For similar reasons, the income data of many build-to-suit residential or commercial properties is altered by the rented cost interest, which is intertwined with the fee interest. Costs of purchases, assemblage, demolition, construction and profit to the developer are packed into, and financed by, the long-term lease to the nationwide merchant.

By effect, leas are pumped up to show recovery of these costs. Rents are not originated from open market conditions, however normally are calculated on a percentage basis of project costs.

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

This is shown by the markedly reduced sales and leas for second-generation owners and renters of national chains' retail buildings. Generally, national stores are subleased at a portion of their original contract lease, reflecting pricing that falls in line with open market standards.

A residential or commercial property that is net rented to a national seller on a long-lasting basis is an important security for which investors are ready to pay a premium. However, for taxation functions the assessment should separate between the real residential or commercial property and the non-taxable leasehold interest that affects the nationwide market.

The appropriate 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 method will allow the assessor to figure out reasonable market price.

Michael Guerriero is an associate at law firm 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.