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Rather than merely redevelop existing buildings to suit their requirements, the build-to-suit design requires the advancement and building of new structures that match the trade gown of other stores in a national chain. Think CVS pharmacy, Walgreens and so forth ...

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. Instead of merely redevelop existing structures to suit their requirements, the build-to-suit design calls for the development and building of new structures that match the trade gown of other shops in a national chain. Think CVS drug store, Walgreens and so forth. National sellers want to pay a premium above market worth to develop stores at the accurate places they target.

In a common build-to-suit, a developer assembles land to obtain the wanted website, demolishes existing structures and constructs a building that adheres to the national prototype shop design of the supreme lessee, such as a CVS. In exchange, the lessee indications a long-lasting lease with a rental rate structured to reimburse the developer for his land and building and construction costs, plus an earnings.

In these cases, the long-lasting lease is like a mortgage. The designer resembles a lending institution whose risk is based upon the seller's ability to fulfill its lease commitments. Such cookie-cutter deals are the preferred financing plan in the nationwide retail market.

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

How should a sale be dealt with? The long-lasting leases in place heavily influence build-to-suit sales. Investors essentially buy the lease for the awaited future capital, purchasing a premium in exchange for guaranteed rent. Are these sales signs of residential or commercial property worth, or should the assessor neglect the rented fee for tax functions, rather concentrating on the charge simple?

The easy response is that the objective of all parties involved should constantly be to figure out 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 numerous circumstances can be anywhere from 25 percent to half more than the free market would generally bear.

Real estate is to be taxed at its market price - no more, no less. That describes the cost a prepared buyer and seller under no obsession to offer would accept on the open market. It is a simple definition, however for functions of tax, market worth is a fluid idea and difficult to select.

The most trusted method 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 deal, nevertheless, to see just what is driving the rate and what can be discussed away if a sale is abnormal.

Alternatively, the income technique can be utilized to capitalize a projected earnings stream. That income stream is built upon leas and information from equivalent residential or commercial properties that exist outdoors market.

For residential or commercial property tax purposes, just the property, the interest, is to be valued and all other intangible personal residential or commercial property neglected. A leasehold interest in the realty is considered "effects genuine," or individual residential or commercial property, and is not subject to taxation. Existing mortgage funding or partnership agreements are likewise disregarded due to the fact that the reasons behind the terms and quantity of the loan may doubt or unrelated to the residential or commercial property's worth.

Build-to-suit deals are basically construction funding transactions. As such, the personal arrangement amongst the parties involved should not be taken upon as a penalty versus the residential or commercial property's tax exposure.

Don't Trust Transaction Data

In a current build-to-suit assessment appeal, the information on sales of nationwide store was turned down for the purposes of a sales contrast approach. The leases in location at the time of sale at the various residential or commercial properties were the driving aspects in figuring out the price paid.

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

For similar reasons, the earnings information of the majority of build-to-suit residential or commercial properties is skewed by the rented fee interest, which is linked with the cost interest. Costs of purchases, assemblage, demolition, construction and revenue to the designer are packed into, and financed by, the long-term lease to the nationwide retailer.

By effect, rents are pumped up to reflect healing of these expenses. Rents are not stemmed from free market conditions, but typically are determined on a portion basis of task expenses.

To put it simply, investors are willing to accept a lower return at a higher buy-in cost in exchange for the security of a long-lasting lease with a quality nationwide tenant like CVS.

This is shown by the noticeably lowered sales and leas for second-generation owners and tenants of national chains' retail structures. Generally, nationwide retailers are subleased at a fraction of their original agreement rent, showing prices that falls in line with free market requirements.

A residential or commercial property that is net leased to a national merchant on a long-term basis is an important security for which investors want to pay a premium. However, for tax purposes the evaluation must differentiate between the genuine residential or commercial property and the non-taxable leasehold interest that influences the national market.

The suitable method to worth these residential or commercial properties is by turning to the sales and leases of comparable retail residential or commercial properties in the local market. Using that method will allow the assessor to identify fair market value.

Michael Guerriero is an associate at law practice Koeppel Martone & Leistman LLP in Mineola, N.Y., the New york city state member of the American Residential Or Commercial Property Tax Counsel. Contact him at mguerriero@taxcert.com.