MAYHEW TECH CENTER, PHASE II, Plaintiff and Respondent, v., COUNTY OF SACRAMENTO et al., Defendants and Appellants. [No. C008963. Third Dist. Mar. 10, 1992.] THE PEOPLE ex rel. DEPARTMENT OF GENERAL SERVICES, Plaintiff and Appellant, v. COUNTY OF SACRAMENTO, Defendant and Appellant.
Nos. C008317, C008963
Third District
March 10, 1992
4 Cal. App. 4th 497
John K. Van de Kamp, Attorney General, James B. Cuneo and Robert D. Milam, Deputy Attorneys General, for Plaintiff and Appellant.
Diepenbrock, Wulff, Plant & Hannegan, Brian T. Regan, John P. Wagner, Flynn & Stewart, Michael J. Flynn and John E. Cassinat for Plaintiff and Respondent.
OPINION
NICHOLSON, J.----These consolidated cases involve Sacramento County‘s effort to assess a property tax on land and improvements occupied by California‘s Franchise Tax Board under a lease-purchase agreement. We conclude the lease-purchase agreement is authorized by statute, does not violate the debt limitation provision of
FACTS
In 1982, the State of California (the State) issued a request for proposals for construction of a new facility for the Franchise Tax Board in Sacramento. The State accepted the bid of Mayhew Tech Center, Phase II (Mayhew), a general partnership. Under the agreement, (1) a trustee issued certificates of participation to finance acquisition of the property and construction of the facility; (2) Mayhew and the State entered into a long-term lease; (3) the State‘s rental payments were used to pay the certificate holders; (4) Mayhew transferred its right to receive rental payments to the trustee for the benefit of the certificate holders; (5) Mayhew transferred legal title to the property to ComPlan, Inc. (ComPlan), a Delaware corporation, even though the funds for acquisition of the property came from the proceeds of the sale of certificates; and (6) at the end of the lease, legal title will automatically vest in the State if all rental payments are made.
In order to avoid the necessity of legislative and voter approval under the debt limitation provision of
The following is a summary of the more important documents effectuating the parties’ agreement.
A. Lease Between Mayhew and State
The State, as lessee, and Mayhew, as lessor, executed a lease on March 1, 1983. The term of the lease runs from March 1, 1983, to January 31, 2006. Rental payments are due every six months, on June 1 and December 1, according to a rental payment schedule attached to the lease. As already noted, the State‘s obligation to pay rent is conditioned on the appropriation of rental funds by the Legislature and the Governor in each year‘s budget. Absent such an appropriation, the lease would terminate and the State would have no further rights or title in the property under the lease. The State is responsible for all maintenance and repair on the property during the term of the lease, and any insurance proceeds will be made available to the State for those purposes. The State is responsible for utilities and services provided on the property. The State also agreed to pay any taxes and assessments levied on the property. If at the end of the lease term the State has made all rental payments, title to the property will vest in the State. Finally, the State obtained an option to purchase the property on or after March 1, 1993.
B. Trust Agreement Between Mayhew and First Interstate Bank
In a trust agreement dated March 1, 1983, between Mayhew, as developer, and First Interstate Bank, as trustee, the parties made financing arrangements. The agreement authorized the trustee to issue certificates of participation in the principal amount of $42,055,000. The certificates represent an undivided ownership interest in the rental payments under the lease between Mayhew and the State. The proceeds of the sale of certificates were applied to several different funds: (1) the costs of issuing the certificates, (2) acquisition of adjacent property, (3) acquisition of the property owned by Mayhew, (4) construction of the facility, and (5) payment of the State‘s rent until the construction of the facility was completed. The trustee will deliver the grant deed to the State upon completion of rental payments. Should the State default in payment of rent, the trustee may take possession of the
C. Assignment Agreement Between Mayhew and First Interstate Bank
By an agreement dated March 1, 1983, Mayhew assigned to the trustee its right to receive rental payments from the State under the lease.
D. Site Acquisition Agreement Between Mayhew and ComPlan
Also on March 1, 1983, Mayhew transferred legal title to the property to ComPlan, subject to all other agreements discussed.
Sacramento County (the County) assessed property taxes on the property for five fiscal years, 1983-1984 through 1987-1988. The taxes were paid as follows:
| FISCAL YEAR | ENTITY WHICH PAID TAX | SUBJECT TO CASE NO. |
|---|---|---|
| 1983-1984 | Mayhew | C008317 |
| 1984-1985 | Mayhew | C008317 |
| 1985-1986 | Mayhew or ComPlan3 | C008317/C008963 |
| 1986-1987 | ComPlan | C008963 |
| 1987-1988 | State | C008963 |
PROCEDURAL HISTORY
A. Action by Mayhew and ComPlan, Case No. C008317
Mayhew and ComPlan brought actions against the County for refund of taxes paid on the property for three fiscal years, 1983-1984 through 1985-1986. The superior court consolidated the two actions, and Mayhew, ComPlan, and the County each moved for summary judgment. The court granted the motion of Mayhew and ComPlan and denied the County‘s motion, finding the land and improvements were exempt from property tax liability because the State held beneficial ownership of the property. Thus, Mayhew was entitled to a refund for property taxes it paid in each of the three fiscal
B. Action by State of California, Case No. C008963
In a separate action, the State filed a complaint against the County for refund of property taxes paid for three fiscal years, 1985-1986 through 1987-1988. Both parties moved for summary judgment or summary adjudication of issues. The superior court denied both motions for summary judgment but granted, in part, the motions for summary adjudication of issues. The court held the State was entitled to a refund for property taxes it paid in fiscal year 1987-1988, but not for fiscal years 1985-1986 and 1986-1987, because the State did not pay the taxes for those years. Judgment was entered, and both parties appeal. The State contends the court improperly denied the refund for the two fiscal years the State did not directly pay the taxes to the County. The County reiterates the arguments it makes in case No. C008317 concerning the propriety of the property tax assessments.
We have consolidated case Nos. C008317 and C008963 for decision.
DISCUSSION
I
Ownership of the Property for Tax Purposes
Property owned by the State is exempt from taxation. (
Except for the lack of immediate indebtedness for the aggregate installments, the financing arrangement closely resembles the financing of a purchase through a loan secured by a deed of trust on the subject property. Here, the buyers of the certificates of participation provided funds for the purchase of the land and construction of the facility. The rents paid under the lease are for the benefit of the certificate holders, and, in the event of default in paying the rent, the trustee will sell or lease the property to pay off, first, the certificate holders. The remaining funds will go to the State. Mayhew is left without an interest in the property, and the legal title transferred to ComPlan does not include the right to receive the rents, contains no reversionary interest, and will be automatically divested in the event of expiration of the lease or default on the payment of rent. Consequently, most of the property rights are vested in the State, as they would have been in a normal purchase through a loan secured by a deed of trust.
The State holds the exclusive right to occupy and use the facility under the lease. Furthermore, the lease provides for automatic vesting of title in the State at the expiration of the lease if all rental payments are made. Even in the event of default on rental payments, the State would receive the funds remaining after sale of the property and payment of the certificate holders. In other words, any equity in the property belongs to the State. As in a conditional sale setting, the State holds beneficial ownership both in a practical and legal sense because it has possession and use of the property to the complete exclusion of all others, subject only to its own default and the remedies which would result. (See Sherman v. Quinn (1948) 31 Cal.2d 661, 663 [192 P.2d 17].) Under a review of essential indicia of ownership, we conclude the State holds beneficial ownership for tax purposes. (General Dynamics, supra, 51 Cal.2d at p. 67.)
In so concluding, we find support in an analogous situation which arises when a governmental entity transfers property to a private party. When the state sells property to a private party but retains title for security purposes, the property is no longer tax exempt under the California
In Los Angeles Dodgers, the City of Los Angeles transferred 40 acres of land to the Dodgers in the Chavez Ravine area because the Dodgers agreed to pay to build and maintain recreational facilities. In the event the maintenance of the facilities did not cost $60,000 in any given year, the Dodgers were to pay the difference between the cost of maintenance and $60,000 to the city so the city could use the money to maintain its other recreational facilities. Under the agreements between the city and the Dodgers, the city retained legal title to the 40 acres for 20 years to assure performance by the Dodgers of its duty to provide and maintain the recreational facilities. If the Dodgers fully performed the agreements for 20 years, the city would convey legal title to the Dodgers without further consideration. (Los Angeles Dodgers, supra, 256 Cal.App.2d at pp. 919-920.) After the Dodgers had spent $500,000 in the construction of the facility and had made four $60,000 payments to the city but had not yet taken physical possession or control of the property, the county levied taxes on the property. (Id.) When the Dodgers challenged the levy, the court held the Dodgers had acquired equitable and beneficial ownership of the property, despite the retention of legal title by the city. (Id.)
Even though the agreement between the State and Mayhew in this case was in the form of a lease, as stated above, the State has acquired beneficial ownership of the property. Much like the situation in Los Angeles Dodgers, the State will receive legal title, if it fully performs under the agreements, without further consideration. In Los Angeles Dodgers, the court stated: “The form of the transfer is immaterial; the determinative question is whether private rights have supplanted those of the government insofar as the use of the property is concerned.” (256 Cal.App.2d at p. 923, quoting Eisley, supra, 31 Cal.2d at p. 643.) In our case, the converse is true: The form of the transfer is immaterial; the determinative question is whether governmental rights have supplanted those of the private party insofar as the beneficial ownership is concerned.
“While it is generally recognized that tax exemption provisions must be strictly construed in favor of the taxing agency and against the taxpayer,
The State currently occupies the property as a beneficial owner and, in the normal course of the agreements, eventually will hold all incidents of ownership if it so chooses, regardless of anything anyone else might do. In finding the State is the beneficial owner of the property and thus finding the property is exempt from taxation, we also advance the objective of the constitutional provision which seeks to insulate the State from taxation. (See Eisley, supra, 31 Cal.2d at p. 642.) By the terms of the lease, the State must pay any property taxes. Therefore, the County seeks to take money from the sovereign‘s pocket.
Complying with the constitutional mandate which provides for the State‘s exemption from taxes, and recognizing the actual interests created in the State by these agreements rather than the apparent interests associated with the formalistic paper trail of legal title, we conclude the property is exempt from taxation under
II
Validity of the Agreements
According to the County, if the agreements between Mayhew and the State operated to convey to the State beneficial ownership of the property, the agreements are invalid because the Department of General Services was not authorized, under
We also reject the County‘s argument the agreements violated the debt limitation provision of
In Dean v. Kuchel, supra, a similar agreement qualified as a lease for debt limitation purposes. In that case, the State let property to a company for 35 years for $1. The company agreed to construct a building on the property and lease it back to the State for 25 years at a monthly rental of $3,325. If at the end of the 25-year lease the State had performed all covenants, the company would no longer hold any interest in the property. Regardless of the performance by the State, the property would vest fully in the State at the end of the 35-year lease to the company. (35 Cal.2d at pp. 445-446.) The State here, as in Dean, has no long-term liability for rental payments. If the Legislature and Governor do not provide funds annually for the rental payment, the trustee will sell or lease the property to pay off certificate holders and will give the remaining funds to the State. This year-to-year lease-purchase arrangement does not violate the debt limitation provisions of
III
The County‘s Affirmative Defense Concerning Who Paid the Taxes
Under
Citing this provision, the County‘s first affirmative defense in case No. C008317 alleged ComPlan did not pay the tax. The County now asserts the trial court granted summary judgment improperly because Mayhew failed to address this affirmative defense.
The first affirmative defense alleges only that ComPlan did not pay the tax. However, as noted earlier, the judgment was in favor of Mayhew only. The face of the pleadings and judgment show the County‘s contention lacks merit. Mayhew alleges it paid the taxes; the County alleges only ComPlan did not pay the taxes. The affirmative defense is irrelevant to Mayhew‘s recovery.
IV
The State‘s Claim for Refund of Taxes It Did Not Pay
Citing
In Easton v. County of Alameda (1937) 9 Cal.2d 301 [70 P.2d 640], the Supreme Court enforced the provision for refunds only to those who paid the tax. Pursuant to the lease agreement, a lessee paid the property taxes assessed against the property. The owner then brought an action for refund. Construing Political Code section 3804, a predecessor of
Much like statutes of limitations and rules of pleading and practice,
DISPOSITION
The judgments in case Nos. C008317 and C008963 are affirmed. In case No. C008317, Mayhew is awarded costs on appeal. In case No. C008963, the parties shall bear their own costs.
Scotland, J., concurred.
BLEASE, Acting P. J.—I concur in the judgment and much of the majority opinion. I write separately to turn square the corners of the controversy and to set out in material detail the provisions of the agreements at issue.
The county (County) argues that the state (State) is party to a lease option agreement and that its only present interest is a possessory interest in the
The County poses the problem as a dilemma; either the State‘s interest is as a lessee, in which case ComPlan is liable for the property taxes, or it has entered a contract of sale which violates the debt limitations of the California Constitution. The dilemma does not hold up under analysis.
I agree with the majority opinion that the subject property is exempt from property taxation under
I
The property was developed by Mayhew Tech Center, Phase II (Mayhew) for the use of and eventual ownership by the Franchise Tax Board (State) pursuant to an integrated set of agreements.
A development and disbursement agreement between Mayhew, ComPlan, the State and First Interstate Bank of California (First Interstate) outlines the development project. In contemplation of a lease and eventual transfer of the property to the State, Mayhew undertook to develop the property, First Interstate agreed to monitor its construction and pay the development costs from funds held in an acquisition and construction fund pursuant to a trust agreement. Mayhew assigned to ComPlan, “as a limited successor in interest” the obligation to vest title in the property to the State as provided in sections 31, 32 and 33 of the lease between Mayhew and the State or “to convey title at the request of the Trustee upon the sale or other disposition of the Site and Project following termination of the Lease by reason of nonappropriation of funds by the State. . . .” Legal title to the property is vested in ComPlan pursuant to a site acquisition agreement between Mayhew, as seller, and ComPlan, as buyer of the property.
The lease provides that the State shall lease the property for the period March 1, 1983, through January 31, 2006. It is structured so that the acquisition and construction costs are paid off at the end of the rental period. A schedule shows the proportion of rents attributable to the reduction of
The State is obligated to make rental payments for the term of the lease subject to the “appropriation of funds” by the Legislature. Failing an appropriation the lease is terminated. “If on July 1 of each year during the term of this Lease funds are not appropriated by the California State Legislature [or 120 days thereafter] . . . this Lease shall terminate . . . and, . . . upon such termination the State shall vacate the Site and the Project and it shall have no further rights or title in or to the Site or the Project.” Upon a default in payment of rent the lessor is authorized to retake possession of the property.
The trust agreement, signed by Mayhew and First Interstate Bank (as trustee), provides for the funding of the project through the issuance of debt instruments called certificates of participation. A certificate fund is created for the receipt of rents and the payment of the certificates. Section 4.05 of the trust agreement says that any surplus remaining in the certificate fund on any February 2 or August 2 of any year shall be paid to the State and “any surplus remaining after redemption and payment . . . of all Certificates . . . shall then be remitted to the State.”
The trust agreement also provides for the case of a default in the payment of rents upon the failure of the Legislature to appropriate monies therefore. In that event the State has “no further rights or title” in the property except for the portion conveyed on January 1, 1991. The trustee is then authorized to retake possession of the property, lease it “for the account of the State” or, upon termination of the lease, “to sell, lease or otherwise dispose” of the property “except for the portion . . . conveyed to the State under Section 31 of [the] Lease.” The agreement to convey title at the completion of all rental payments is thus subject to defeasance upon the failure of the Legislature so to act. In such case the lease provides that the State “shall have no further rights or title in or to the Site or the Project.” Under section 12.06 of the trust agreement upon default the proceeds of any lease or sale are to be “deposited by the Trustee in the Certificate Fund upon the receipt thereof and applied to the payment of the obligations of the State under the Lease or applied to the redemption of the Certificates Outstanding.”
The lease and allied agreements are structured so that the State may acquire the property while avoiding the debt limitations of article XVI, section 1 of the California Constitution. To that end the parties engaged in a transaction that does not easily fit a recognizable category of real property. The property interests are split into possessory and remainder interests, both of which are held by the State; bare legal title is held by ComPlan by assignment from Mayhew. The State is also given an option to purchase the property. Title to a portion of the property has already been given the State. There is no right of reversion in Mayhew, the grantor. The property is held for the benefit of the creditors and the State. In addition to its possessory interest, the State appears to have a future interest in the property, a remainder which is vested subject to defeasance on the failure of the Legislature to appropriate money to pay the rents, an estate in land. (See 5 Miller & Starr, Cal. Real Estate (2d ed. 1989) §§ 11.27, 11.28.) Of consequence, the State has all of the incidents of ownership save those necessary to protect the interests of the creditors. As noted, the State also has an option to purchase the property. With respect to an analogous transaction it has been said: “Regardless of the form of the transaction, if the true substance is a sale, the courts treat it as a sale and not an option. The test is the economic impact on the parties from the terms of the transaction, as a question of fact. Even though the documents read as an option, if the practical economics of the transaction are such that, as a practical matter, the optionee must exercise the option or lose a valuable equity in the property, the transaction is, in effect, a sale of the property.” (1 Miller & Starr, Cal. Real Estate (2d ed. 1989) § 2:39, p. 664.) That is obviously the practical consequence of the transaction in this case.
III
The liability of the parties for property taxation must be judged from this vantage point. The State has the effective ownership interest in the property. ComPlan holds title to the property but its interest is limited to the obligation to convey title to the property as provided in the lease and allied agreements.
Ordinarily, the entire value of nonexempt land and improvements is assessed without distinction between possessory and reversionary interests. (See De Luz Homes, Inc. v. County of San Diego (1955) 45 Cal.2d 546, 563 [290 P.2d 544].) The State is exempt from property taxation. (
IV
The agreements avoid the debt limitation provision of
The City of Fresno had contracted with McBean to dispose of its sewage over a period of years, requiring the construction by McBean of sewage treatment facilities. The court held that the debt limitation provisions of the California Constitution then in force were not exceeded by reason of the length of the contract because the payment of each year‘s obligation was made contractually dependent upon the availability of revenues. “If there are not revenues for any given year sufficient and available for the payment of [McBean‘s] claims for that year, those claims become waste paper, and are not carried over as a charge against the income and revenue of a succeeding year.” (McBean, supra, 112 Cal. at p. 165.)
Here, the State‘s obligation to pay rents is dependent upon the appropriation of moneys for that purpose by the Legislature. This case differs from McBean in that there is a large stimulus to legislative action, the loss of a valuable piece of property upon termination of the lease for failure of an appropriation and the extinction of the State‘s interest in the property. Nonetheless, the point of the debt limitation provisions is the avoidance of a “full and complete” obligation to pay the “debt” beyond that which can be presently satisfied with State revenues. Here, as in McBean, the contract does not impose such an obligation.
Unlike the ordinary conditional sales contract the agreements provide that the Legislature may terminate the obligation to pay by failing to appropriate
This case differs in that the agreements provide that if the Legislature fails to appropriate money to pay the annual rents there is no contractual obligation to be enforced. Since there is no legal obligation to appropriate money for payments in future years there is no violation of the debt limitation provision of the California Constitution. (
A petition for a rehearing was denied April 3, 1992, and appellants’ petition for review by the Supreme Court was denied June 11, 1992, and June 12, 1992. Kennard, J., was of the opinion that the petition should be granted.