Rare Air Ltd. v. Prop , 2019 COA 134 ( 2019 )

The summaries of the Colorado Court of Appeals published opinions
constitute no part of the opinion of the division but have been prepared by
the division for the convenience of the reader. The summaries may not be
cited or relied upon as they are not the official language of the division.
Any discrepancy between the language in the summary and in the opinion
should be resolved in favor of the language in the opinion.
SUMMARY
August 29, 2019
2019COA134
No. 18CA0535, Rare Air Ltd. v. Prop. Tax Adm’r — Taxation —
Property Tax — Improvements
A division of the court of appeals considers whether an
improvement located on tax exempt land is subject to property tax
when the underlying land is government-owned land that is leased
from a private party that holds a possessory interest in the land.
The division concludes that tax assessments on improvements are
properly made even against mere lessees when the lessee is, for all
practical purposes, the owner of the improvements. This is so
where a lessee’s possessory interest in the land includes rights such
as exclusive use, the right to encumber, and the retention of all
income generated, because such an interest constitutes the
substantial equivalent of complete ownership for property tax
purposes.
The division therefore concludes that the Board of Assessment
Appeals (BAA) correctly determined that Rare Air Limited, LLC (Rare
Air), possesses a taxable ownership interest in the hangar facility.
And, absent a lawful exemption, such an interest is properly
assessed taxes on that interest. In so concluding, the division
rejects Rare Air’s contention that because its interest in the
improvement should be assessed as a possessory interest, such
assessment is barred by section 39-1-103(17), C.R.S. 2018. The
division further concludes that, in the absence of multiple
taxpayers with interests in a single property, the unit rule
established by section 39-1-106, C.R.S. 2018, has no application.
Accordingly, the division affirms the BAA’s order upholding the
2015 tax assessment on Rare Air’s property.
COLORADO COURT OF APPEALS 2019COA134
Court of Appeals No. 18CA0535
Board of Assessment Appeals Case No. 69880
Rare Air Limited, LLC,
Petitioner-Appellant,
v.
Property Tax Administrator,
Respondent-Appellee,
and
Board of Assessment Appeals,
Appellee.
ORDER AFFIRMED
Division II
Opinion by JUDGE TERRY
Pawar and Márquez*, JJ., concur
Prior Opinion Announced July 18, 2019, WITHDRAWN
OPINION PREVIOUSLY ANNOUNCED AS “NOT PUBLISHED PURSUANT TO
C.A.R. 35(e)” ON JULY 18, 2019, IS NOW DESIGNATED FOR PUBLICATION
Announced August 29, 2019
Kutak Rock LLP, Kenneth K. Skogg, Dana B. Baggs, Denver, Colorado, for
Petitioner-Appellant
Philip J. Weiser, Attorney General, Robert H. Dodd, First Assistant Attorney
General, Allison Robinette, Assistant Attorney General, Denver, Colorado, for
Respondent-Appellee
Philip J. Weiser, Attorney General, Evan P. Brennan, Assistant Attorney
General, Denver, Colorado, for Appellee
Kristin M. Bronson, City Attorney, Charles Solomon, Assistant City Attorney,
Noah Cecil, Assistant City Attorney, Denver, Colorado, for Amicus Curiae City
and County of Denver
*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.
VI, § 5(3), and § 24-51-1105, C.R.S. 2018.
¶1 In this property tax case, taxpayer, Rare Air Limited, LLC
(Rare Air), appeals the order of the Board of Assessment Appeals
(BAA) upholding the 2015 tax assessment on its property. We
affirm.
I. Background
¶2 This appeal arises out of a dispute over a property tax
assessment made on an aircraft hangar facility located at
Centennial Airport.
¶3 Centennial Airport, located in Arapahoe and Douglas
Counties, Colorado, is owned by the Arapahoe County Airport
Authority (Authority), which is tax-exempt as a political subdivision
of the State of Colorado. The Authority holds title to land in
Arapahoe and Douglas Counties.
¶4 In 2006, the Authority leased approximately seventy acres of
airport land in Douglas County, at a rate of five cents per square
foot, to Denver jetCenter (DJC) pursuant to a Master Lease. The
initial term of the Master Lease is forty years with optional
extensions of another fifty years.
¶5 Under the terms of the Master Lease, DJC is required to
construct, or contract for the construction of, certain improvements
1
on the leased land. Those improvements include an aircraft hangar
facility to provide specified aviation-related services. The Master
Lease further provides that DJC may enter into a sublease, with the
Authority’s approval, to provide some of the required improvements
and services.
¶6 DJC entered into a sublease (Ground Lease) in 2011 with Rare
Air to satisfy its obligation to construct the hangar facility. The
Ground Lease covers about three acres out of the seventy acres
DJC leases from the Authority under the Master Lease. The
Ground Lease includes only land, requires rent payments of
thirty-five cents per square foot, and has a base term of twenty-five
years with an option to extend for an additional five years. If the
lease is extended the rent will be adjusted to include the land and
any improvements.
¶7 The Ground Lease obligates Rare Air to construct
improvements consisting of a building containing an aircraft
hangar, storage, and office space with a minimum area of 25,000
square feet. The Ground Lease provides that Rare Air will be
deemed to own, and will hold title to, all improvements made by
Rare Air, until the expiration of the lease, at which time title will
2
vest in DJC. If the lease is extended, title to the improvements will
then vest in DJC.
¶8 Constructed in 2012 at a cost of approximately $2.4 million,
the hangar facility consists of 30,000 square feet of hangar space
and 9900 square feet of office and support space. The hangar can
accommodate five jet aircraft, and contains office space, meeting
rooms, a lounge, a kitchen, and interior automobile parking. The
hangar facility is located on tax-exempt land owned by the
Authority.
¶9 Rare Air has the exclusive right to possess, use, operate, and
receive revenues from the hangar facility and owns and holds title
to all improvements it constructs on the leased land, including the
hangar facility. Rare Air further has the rights to all depreciation
and tax advantages, to assign or transfer the improvements with
proper authorization, and to encumber the improvements. It also
has the duty to obtain insurance and maintain any improvements
at its own expense.
¶ 10 For tax year 2015, the Douglas County Assessor’s Office
issued a notice of valuation to Rare Air for the value of the hangar
facility of $2,871,708.00. The value of the hangar has not been
3
disputed by the parties. Claiming that the hangar facility should be
assessed to DJC’s leasehold interest in the seventy acres of land
under the Master Lease, Rare Air sought and obtained from
Douglas County an abatement for the tax assessment.
¶ 11 But due to the size of the abatement, review by the Property
Tax Administrator was required. The Tax Administrator overruled
the abatement, stating that “all property, real and personal, located
in the State of Colorado on the assessment date . . . is taxable
unless expressly exempted by the Constitution or state statutes.”
¶ 12 Rare Air appealed the Tax Administrator’s decision to the BAA,
which upheld the decision of the Tax Administrator, determining
that Rare Air had been correctly assessed for its interest in the
hangar.
II. Analysis
¶ 13 Rare Air contends that the BAA erred in upholding the tax
assessment on improvements — the hangar facility — because (1)
DJC — not Rare Air — holds a taxable interest in the hangar
facility; (2) the assessment violates the statute governing taxation of
possessory interests; and (3) the assessment violates the unit
assessment rule. We disagree with each of these contentions.
4
A. Standard of Review and Applicable Law
¶ 14 Review of the BAA’s decision presents a mixed question of law
and fact. Farny v. Bd. of Equalization, 985 P.2d 106, 109 (Colo.
App. 1999). It is the function of the BAA to weigh the evidence,
make credibility determinations, and resolve any factual conflicts.
Bd. of Assessment Appeals v. Sampson, 105 P.3d 198, 208 (Colo.
2005). We therefore defer to the BAA’s factual findings and will not
disturb them unless they are clearly erroneous, meaning they are
unsupported by the record. Id.
¶ 15 Questions of law, including the meaning and scope of property
tax statutes, are reviewed de novo. Boulder Cty. Bd. of Comm’rs v.
HealthSouth Corp., 246 P.3d 948, 951 (Colo. 2011). Whether the
BAA’s decision comports with the statutory scheme is a legal
question that we review de novo. Lobato v. Indus. Claim Appeals
Office, 105 P.3d 220, 223-24 (Colo. 2005).
¶ 16 Judicial deference to an agency’s interpretation of a statute “is
appropriate when the statute before the court is subject to different
reasonable interpretations and the issue comes within the
administrative agency’s special expertise.” Huddleston v. Grand
Cty. Bd. of Equalization, 913 P.2d 15, 17 (Colo. 1996). Even so, we
5
are not bound by an agency decision that misapplies or
misconstrues the law. El Paso Cty. Bd. of Equalization v. Craddock,
850 P.2d 702, 704-05 (Colo. 1993).
B. Discussion
1. Property Taxation of Improvements
¶ 17 Rare Air contends that it does not have a taxable interest in
the hangar facility. We disagree.
¶ 18 “The Colorado Constitution directs that all real and personal
property, as defined by the legislature, must be taxed unless it is
exempted in accordance with law.” Bd. of Cty. Comm’rs v. Vail
Assocs., Inc., 19 P.3d 1263, 1275 (Colo. 2001) (relying on Colo.
Const. art. X, § 3(1)(a)). As a result, no affirmative tax provision
needs to be enacted for real and personal property to be taxed. But
exemptions from taxation must be expressly enacted into law. See
§ 39-1-102(16), C.R.S. 2018 (defining “[t]axable property” as “all
property, real and personal, not expressly exempted from taxation
by law”). “Real property” is defined to specifically include
“[i]mprovements.” § 39-1-102(14)(c).
¶ 19 Improvements are statutorily defined as “all structures,
buildings, fixtures, fences, and water rights erected upon or affixed
6
to land, whether or not title to such land has been acquired.” § 39-
1-102(6.3). Accordingly, buildings and structures are
improvements subject to taxation as real property unless exempted.
¶ 20 Rare Air constructed the hangar facility at its own expense.
The Ground Lease vests in Rare Air significant benefits of
ownership in the hangar facility, including exclusive use of the
facility, the right to all depreciation and tax advantages, retention of
all profits generated, and the rights to encumber the improvements
and assign or transfer them with proper authorization. Rare Air
also bears the burdens of ownership, including duties to maintain
the facility at its own expense, pay any assessed taxes pursuant to
the terms of the Ground Lease, and insure the facility at its own
expense. There is no evidence in the record that any other person
or entity possessed those benefits or burdens of ownership in the
hangar facility in tax year 2015.
¶ 21 Importantly, Rare Air holds title to the hangar facility. This
fact alone is often determinative in identifying who should be taxed
as the property owner. Hinsdale Cty. Bd. of Equalization v. HDH
P’ship, 2019 CO 22, ¶¶ 26-38 (identifying some of the narrow
circumstances that justify looking beyond record title to determine
7
who is the “owner” for tax purposes). And while title to that facility
may vest in DJC upon the expiration of the Ground Lease, there is
no evidence in the record that any other person or entity held title
to the hangar facility in tax year 2015. (The Ground Lease is not
set to expire until 2036, at the earliest.)
¶ 22 Even if Rare Air did not hold title to the hangar facility,
though, tax assessments on improvements are properly made even
against mere lessees when the lessee is, for all practical purposes,
the owner of the improvements. In this regard we are persuaded by
the analysis in Southard v. Board of Equalization, 996 P.2d 208
(Colo. App. 1999). There, a taxpayer leased airport land for a term
of twenty-eight years and constructed a terminal and aircraft
hangars pursuant to the lease but did not hold title to the
improvements. Nonetheless, a division of this court affirmed the
property tax assessment against the lessee, as the owner of the
improvements, because the lessee’s rights, including exclusive use,
the right to encumber, and the retention of all income generated,
constituted the substantial equivalent of complete ownership for
property tax purposes. Id. at 210-11.
8
¶ 23 The BAA correctly determined that Rare Air possesses a
taxable ownership interest in the hangar facility. And the owner of
such an interest is properly assessed taxes on that interest, absent
a lawful exemption. See HDH P’ship, ¶ 36 (noting the approach of
“imputing tax liability to all interests in real property, unless
lawfully exempted”); see also § 39-1-111(1), C.R.S. 2018 (all taxable
property located in each county on the assessment date is subject
to taxation); City & Cty. of Denver v. Bd. of Assessment Appeals, 848
P.2d 355, 360 (Colo. 1993) (“‘[O]wner’ of property is responsible for
property taxes regardless of how various property rights may have
been pledged or exchanged.”). Thus, we conclude that Rare Air was
properly assessed for its ownership interest in the hangar facility,
which is an improvement constituting a taxable interest in real
property.
2. Section 39-1-103(17) and Taxation of Possessory Interests
¶ 24 Rare Air further contends that section 39-1-103(17), C.R.S.
2018, is the sole authority for assessing taxes on possessory
interests and that the assessment on Rare Air is not within the
statutory grant of authorization for taxation of possessory interests.
As set forth above, we view Rare Air’s ownership interest in the
9
hangar facility to be that of direct ownership of improvements
taxable as real property. However, assuming, without deciding,
that Rare Air’s interest in the hangar facility should be assessed as
a possessory interest, we still reject Rare Air’s contention that any
such assessment is barred by statute.
¶ 25 A possessory interest is “[t]he present right to control property,
including the right to exclude others, by a person who is not
necessarily the owner.” Black’s Law Dictionary 1353 (10th ed.
2014). A possessory interest in public property is a “private
property interest in government-owned property or the right to the
occupancy and use of any benefit in government-owned property
that has been granted under lease, permit, license, concession,
contract, or other agreement.” 3 Div. of Prop. Taxation, Dep’t of
Local Affairs, Assessors Reference Library 7.69 (rev. Apr. 2019). A
possessory interest in tax-exempt property is taxable if it “exhibit[s]
significant incidents of private ownership that distinguish it from
the underlying tax-exempt ownership.” Vail Assocs., 19 P.3d at
1279.
¶ 26 Contrary to Rare Air’s contention, section 39-1-103(17) does
not provide the authority for taxation of possessory interests nor
10
does it dictate whether an interest is taxable or not. No special
authorization by the legislature is required to tax possessory
interests because they are, in and of themselves, real property
interests subject to taxation unless exempted. See § 39-1-102(16)
(defining “[t]axable property” as “all property, real and personal, not
expressly exempted from taxation by law”); Vail Assocs., 19 P.3d at
1275; see also § 39-1-107(4), C.R.S. 2018 (property tax on
possessory interest assessed and collected in the same manner as
property taxes assessed to owners of real or personal property).
¶ 27 Furthermore, section 39-1-103(17), by its very terms,
addresses the valuation of taxable possessory interests. The title of
section 39-1-103 is “Actual value determined – when.” And the
statute provides, in pertinent part, that “[t]he general assembly
declares that the valuation of possessory interests in exempt
properties is uncertain and highly speculative and that the following
specific standards for the appropriate consideration of the cost
approach, the market approach, and the income approach . . . must
be . . . applied in the valuation of possessory interests . . . .” § 39-
1-103(17)(a).
11
¶ 28 Accordingly, we conclude that even if Rare Air’s interest in the
hangar should have been assessed as a possessory interest, such
an assessment would not be prohibited by section 39-1-103(17).
3. Unit Assessment Rule
¶ 29 Rare Air contends that the unit assessment rule applies and
that application of the rule requires any assessment on the hangar
facility to be made to DJC. We conclude, as did the BAA, that the
unit assessment rule does not apply.
¶ 30 The unit assessment rule is established by section 39-1-106,
C.R.S. 2018, which provides, as pertinent here, “it shall make no
difference that the use, possession, or ownership of any taxable
property is qualified, limited, not the subject of alienation, or the
subject of levy or distraint separately from the particular tax
derivable therefrom.” City & Cty. of Denver, 848 P.2d at 359. The
unit assessment rule “requires that all estates in a unit of real
property be assessed together, and the real estate as an entirety be
assessed to the owner of the fee ‘free of the ownerships of lesser
estates such as leasehold interests.’” Id. at 358 (citation omitted).
¶ 31 The rule “typically operates to tax land and improvements
together, without the additional separate taxation of lesser interests
12
therein, such as leaseholds, because taxation of the whole is
presumed to include taxation of the derivative parts.” Vail Assocs.,
19 P.3d at 1278. Where, as here, the landowner is tax exempt, the
rule operates to assess one tax on the various subordinate private
possessory interests, such as leasehold interests. Id. at 1279.
However, the unit assessment rule has no application when
separate and distinct interests in the property exist or have been
created. Vill. at Treehouse, Inc. v Prop. Tax Adm’r, 2014 COA 6,
¶¶ 32-33.
¶ 32 Rare Air states that the unit assessment rule prohibits
“multiple assessments on multiple taxpayers holding different
interests in a single property.” Be that as it may, as the BAA found,
the particular tax assessment contested here covers a single
property interest: Rare Air’s ownership of the hangar facility. And
the record contains no evidence that DJC, or any other taxpayer,
had an ownership interest in the hangar facility in 2015.
¶ 33 The BAA concluded that DJC “did not construct and does not
own the improvements located on the subleased land” and therefore
“has no ownership interest in the improvements.” As a result, the
13
BAA correctly found that the tax on the hangar facility must be
assessed to Rare Air.
¶ 34 Rare Air, in contrast to DJC, possesses significant incidents of
ownership in the hangar facility, including the exclusive use of the
hangar, the right to all depreciation and tax advantages, the
retention of all profits generated, the right to encumber the
improvements, and the right to assign or transfer the improvements
with proper authorization. But most importantly, Rare Air holds
actual title to the facility. It makes no difference that DJC might
acquire the hangar if Rare Air defaults on the lease. Given the high
value of the hangar in comparison with the leasehold, it is highly
speculative that Rare Air would allow such a default to occur.
¶ 35 In the absence of multiple taxpayers with interests in a single
property — the hangar facility — the unit assessment rule has no
application.
III. Conclusion
¶ 36 We conclude that Rare Air was properly assessed for its
ownership interest in the hangar, which constitutes a taxable
interest in real property. The BAA’s order is affirmed.
JUDGE PAWAR and JUDGE MÁRQUEZ concur.
14