In Charter Communications Properties, LLC v. County of San Luis Obispo (— Cal.Rptr.3d —-, Cal.App. 2 Dist., August 30, 2011), the 2nd District Court of Appeal considered a cable television franchise owner’s challenge to San Luis Obispo County’s assessment of the value of certain property used in connection with various unexpired cable franchises. The Court of Appeal held the County did not err in using the reasonably anticipated term of the cable franchises when assessing the value of such property, instead of the remaining terms of possession contained in the franchise agreements.
The County of San Luis Obispo (“County”) and several cities entered into cable television franchise agreements with Charter Communications Properties, LLC (“Charter”). The County Assessor (“Assessor”) assessed various possessory interests held by Charter in relation to eight of such television franchise agreements based upon a “reasonably anticipated term of possession” determined by the Assessor to be 15 years, regardless of the actual stated terms remaining in the franchise agreements. Charter filed applications seeking a reduction in such assessments for the tax years 2000-01 through and including 2005-06; challenging factors applied by the Assessor in valuing the possessory interests, including, primarily, the terms of possession. At the time the challenged assessments occurred, there were between four and ten years remaining under the stated terms of the franchise agreements.
In making the decision not to rely on the stated term, the Assessor relied on provisions of the Federal Communications Act of 1936 providing that “the continuation of service is in the public’s best interest” (which the Assessor contended would make it essentially impossible for a franchise not to be renewed). The Assessor presented evidence that he was “not aware of any franchise agreement throughout the state that had not been renewed,” and that “the renewal process was not contentious and ‘that franchise agreements are renewed indefinitely.” The Assessor concluded there was no option to not renew a franchise because Charter is the only company providing cable television in the area. Also, Charter filed a Form 10-K with the Securities and Exchange Commission (“SEC”) in which Charter stated that it had “sufficient experience with the local franchise authorities where it acquired franchises to conclude substantially all franchises will be renewed indefinitely.”
A county tax assessor has the duty to value property at its fair market value. In order to determine the fair market value, the Assessor was required to determine a reasonably anticipated term of possession. The Assessor contended that there was clear and convincing evidence that Charter and the franchise authorities mutually understood that the unexpired franchise terms were longer than the agreements’ stated terms, and, therefore, he was not required to use the remaining years of the original stated terms as the term of possession. Most such franchise agreements had 15-year terms and Charter had stated in its SEC filings that a 15-year term was the “best estimate of the useful lives of the franchises.” Accordingly, the Assessor applied a 15-year term as the reasonably anticipated term of possession for the unexpired franchises.
Charter and County presented their arguments to the Assessment Appeals Board (“AAB”). Charter asserted that because the franchises were unexpired as of the date the Assessor valued them, the proper term of possession was the number of years that remained under the terms of each agreement. The AAB found the Assessor presented clear and convincing evidence that Charter’s franchises were of an indefinite duration and that the term(s) utilized by the Assessor was appropriate. Charter filed a complaint in Superior Court seeking a refund of property tax. The trial court upheld the AAB’s findings regarding the term(s) of possession.
The Court of Appeal affirmed the judgment of the trial court. The Revenue and Taxation Code mandates that every assessor must “assess all property subject to general property taxation at its full value” and instructs that “‘full cash value’ or ‘fair market value’ means the amount of cash or its equivalent that property would bring if exposed for sale in the open market.” Where there is private use of a public property such use may be taxed as it constitutes a taxable possessory interest.
Revenue and Taxation Code section 107.7 governs the assessment of cable television possessory interests and provides in relevant part as follows: “When valuing possessory interests in . . . a cable franchise . . . the assessor shall value these possessory interests consistent with the requirements of Section 401 [at full market value].” Section 107.7 further provides that “[t]he methods of valuation shall include, but not be limited to, the comparable sales method, the income method (including, but not limited to, capitalizing rent), or the cost method.” However, “[t]he preferred method of valuation of a cable television possessory interest . . . by the assessor is capitalizing the annual rent, using an appropriate capitalization rate.” For purposes of section 107.7, “the annual rent shall be that portion of that franchise fee received that is determined to be payment for the cable possessory interest . . . for the actual remaining term or the reasonably anticipated term of the franchise . . . or the appropriate economic rent.”
The State Board of Equalization has adopted rules regarding the valuation of possessory interests including Rule 21, subdivision (d)(1) of title 18 of the California Code of Regulations, which provides: “The term of possession for valuation purposes shall be the reasonably anticipated term of possession. The stated term of possession shall be deemed the reasonably anticipated term of possession unless it is demonstrated by clear and convincing evidence that the public owner and the private possessor have reached a mutual understanding or agreement, whether or not in writing, such that the reasonably anticipated term of possession is shorter or longer than the stated term of possession. If so demonstrated, the term of possession shall be the stated term of possession as modified by the terms of the mutual understanding or agreement.” The parties agreed that Rule 21 applied.
The Court of Appeal held there was substantial evidence to support the lower court’s conclusion that there was clear and convincing evidence of a mutual understanding between local franchising authorities and Charter that the franchises had indefinite terms. The Assessor presented evidence that it was the understanding of local franchise authorities that the franchises would be renewed indefinitely and this understanding was also reflected in Charter’s filings with the SEC. This evidence amounts to clear and convincing evidence to support the conclusion that the parties had a mutual understanding that the terms of the unexpired franchises were indefinite.
The Court further held that the “AAB did not exceed its discretion or violate the standards prescribed by law by approving a term of possession that complied with constitutional and statutory mandate that property be assessed at fair market value.” Once the franchising authorities and Charter “mutually understood that a franchise had an indefinite term, it was the equivalent to a possessory interest of ‘otherwise unspecified duration.” Therefore, the interest must be valued as a “taxable possessory interest with no stated term of possession” as required by Rule 21, subdivision (d)(3).”
In such circumstances, Rule 21, subdivision (d)(2) provides that the following factors should be considered: (1) “The sale price of the subject taxable possessory interest and sales prices of comparable taxable possessory interests;” (2) “The rules, policies, and customs of the public owner and of similarly situated public owners;” (3) “The customs and practices of the private possessor and of similarly situated private possessors;” (4) “The history of the relationship of the public owner and the private possessor and the histories of the relationships of similarly situated public owners and private possessors;” and (5) “The actions of the parties to the subject taxable possessory interest, including any amounts invested in improvements by the public owner or the private possessor.”
The Court found that the criteria used by the Assessor and the AAB fall within the criteria delineated in Rule 21, subdivision (d)(2), thereby affirming the decision of the AAB and the Assessor’s determination of the reasonably anticipated term of possession.
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