*1 (No. 40607. People ex Korzen, Collector, rel. Bernard J. vs. American Airlines, Inc.,
Appellant, Appellee. Opinion Rehearing Nov. denied Jan. filed 1967.
House, J., dissenting. Stamos, State’s Attorney, Chicago, (Ed-
John J. Assistant Swain, M. ward Hladis Theodore J. State’s Attorneys, counsel,) appellant. *2 Hough
Spray, Price, Cushman, of Chicago, (Rob & Betts, ert S. Cushman and M. for counsel,) John appellee.
Mr. delivered the opinion Schaefer Justice court:
After an unsuccessful to the Board appeal Appeals under of Cook American Airlines County, paid protest in a taxes levied its leasehold interest upon property at Inter- and site located Chicago-O’Hare hangar hangar national Its Collector’s objections Airport. of taxes for the correct amount judgment fixing application American’s motion under were of on protest disposed paid and which was sustained summary judgment, part has to overruled in The Collector directly appealed part. court, American has The revenue this and cross-appealed. involved. ' land and are owned hangar by City Chicago for a term of years. leased to American forty and have been are month for the American’s rental $4,996 per payments Its month for the site and additional $54,845 hangar. per is- if revenue bonds the latter sum ceases obligation pay at are retired certain O’Hare sued to construct improvements term of the lease before the expires. But Assessor treated the land as exempt.
The County that the term of the lease will exceed the after determining of the he valued American’s leasehold hangar, useful life value of the and related interest at the hangar improve- amount, this the rele- $1,575,097, by ments. Multiplying 1.42, factor of he arrived at an vant equalized equalization valuation of on which tax of $2,236,638, assessed $116,752 The trial valued American’s leasehold at was levied. judge at which he arrived figure by multiplying $934,539, He factor. annual rental under the lease by equalization that the assessment was excessive therefore concluded a refund of directed $67,968. that a all under
American refund of taxes argues first, its leasehold is because protest required, exempt taxation, second, from because it is valueless. The Col- lector Asses- these contentions and disputes urges sor’s valuation is correct. original Two of the Revenue Act of are rele provisions "* * * vant. Section all from taxation exempts 19.6 owned or located by within any city village thereof, limits has such as heretofore incorporated except been leased or hereafter be leased such or vil may city to lessees who are bound under the lage terms lease the taxes on such Rev. Stat. pay (Ill. property.” Section 26 real “When chap. par. 500.6.) provides: *3 estate which from taxation is leased to another exempt whose is not and of which does property leasing exempt, taxable, not make the real estate the leasehold estate shall be listed as of the les appurtenances property thereof, see or his as real estate.” Ill. Rev. Stat. assignee, 1965, chap. par. 507.
The relevant lease is as follows: provision “Taxes on demised shall and all premises. City any pay assessments, taxes or if which be levied special any, may however, or assessed the demised upon premises; provided, that the shall not to taxes on foregoing any personal apply or leasehold of Airline located on the demised property premises.”
Section relates to the of the only taxability City. 19.6 It that un- owned provides by City property exempt it to another under a lease which less is leased requires to the taxes on the owned lessee pay property by City. American is not bound under the terms of its lease to pay
14 taxes on that and the fee interest in the property, City’s demised remains tax premises exempt. however,
The tax in was not levied on the question, demised are which owned but on the premises, by City, estate, lessee, which is the of the Ameri property can. The to tax in leasehold interests tax- statutory design exempt is clear it has often been See properties applied. Hendrickson-Pontiac, Inc., ex e.g., People rel. Paschen v. ; Ill.2d (1956) Chi City Chicago University 9 cago, 250 ; Co., Ill. People V. International Salt (1922) 302 455 ;see Annot., Ill. also A.L.R. (1908) (1923). 233 however, American that under Illinois State argues, Toll Korzen, Com. v. Ill.2d its Highway (1965), leasehold is not In that the lease subject taxation. case hold interests of those who restaurants and service operate stations, oases, called toll were held upon highway property, however, decision, to be from taxation. That did exempt not it section or to narrow creat purport by abrogate a broad for all leasehold inter ing exemption principle ests in some of the tax- devoted toway public purpose lessor. exempt Commission,
The Illinois State Toll the owner Highway case, in that is a and distinct unit property separate created to government discharge single responsibility, and the court that “the As the view General expressed that ‘all sembly, providing belonging property use, from Commission’ to its shall be without regard exempt taxation, here in to include the question.” meant Ill.2d at lease in that case involved expressly provided reduced an amount the lessee’s annual rental would be assessed his leasehold *4 valorem taxes against ad equal any ultimate burden of Consequently, improvements. lease, shifted, terms of the directly the taxes was contrast, the city In upon to the Commission. impact leasehold is at most American’s tax levied any against
15 Moreover, for commercial in of the demand indirect. view if the is denied likelihood that exemption air service the future be forced to negotiate will municipalities tax-exempt re- lower rentals is extremely leases for hangar appreciably there was no Thus, in toll road case mote. although taxes the exact amount of the doubt that under the lease Commission, the same conclusion be lost to would can be in this case. not reached such a shift in the burden of necessity avoiding
taxation to the Toll Commission is more Highway readily Reade, Dennis Walter Inc. v. apparent upon considering A.2d which Township, 435, (1962), upon 36 N.J. in we relied the Toll case. Reade heavily Walter Highway held the oases New the court did Jersey exempt. Although not disclose whether the New was Jersey highway authority to reimburse its lessees for taxes levied obligated against leaseholds, their it based its decision on a fear that if the oases were held taxable the burden “quite obviously * * *” must A.2d ultimately upon Authority (177 at in the 755.) form lower rents. The court found that a tax to toll road the New granting exemption properties was concerned with the Jersey legislature “fiscal success of * * the authorized “the observed that project of the restaurant experience facilities is of course a part the total fiscal A.2d at picture.” 177 26,
In view of the clear of section the absence language in this case of the fiscal toll unique problems confronting road and this court’s consistent adherence to projects, that “statutes from taxation principle exempting property must be construed and cannot be extended strictly by ju * * *” dicial Illinois Book & interpretation (Follett’s Store, Inc., Isaacs, Supply Ill.2d 606 (1963)), the Toll case must be limited. hold Highway We similarly that American’s not from taxation. exempt Accord, Lines, Coleman, Delta Air Inc. v. Ga.
S.E.2d (1963).
16 turn, therefore,
We to American’s contention that its leasehold has no value. Section Revenue Act pro vides that “Each taxable leasehold estate shall be valued value, at its fair cash estimated at the it would price bring fair, at a 120, sale.” voluntary (Ill. Rev. Stat. 1965, chap. American par. asserts that the 501(2).) value of a lease hold is to be ascertained by the amount capitalizing by which the rental present market value exceeds the rent “* * * called for the lease. It by if fair says: rental lease, exceeds the rents reserved in a then the lease hold has a ‘bonus value’ which fair measures its If value. rents reserved in the lease exceed the fair rental value the leasehold has premises, no bonus value and no fair market value.”
For this American relies on position v. Corrigan City * * Ill. in Chicago, which the court said: The measure of for the estate of compensation the tenant taken is estate, the value of her leasehold subject rent convenanted to be If the value exceeds the rental paid. she will be entitled to recover the excess. If it does not reserved, exceed the rent she will be entitled to nothing.” Ill. at (144 case 458-9.) Corrigan involved the compen sation to be to a tenant in an eminent domain paid proceed when the entire was ing taken. American asserts property that “The of fair cash value fair or market value concept does not the kind of in depend upon judicial proceeding true, which its determination becomes That is necessary.” but the of fair cash value does what concept depend upon valued. was valued in being What being Corrigan case was the of the lessee in a lease that had been equity What is valued here is abrogated. being right occupy and use the leased until the of the lease. property expiration
The distinction was drawn Mr. clearly Tray Justice in nor Texas Los Cal.2d Company Angeles, P.2d : (1959)
“A is not valuable less because it has not been rent advance, a distinction between and to draw paid has the lessee confuses the equity and rent to be paid paid either arise may its That in the leasehold with value. equity from excess of rent or from the lessee’s prepayment rent to be agreed use over the future the value of the it is of no In event not exist at all. any for it. It may in the interested only to a moment prospective purchaser for the un- value of use possession *6 for a will pay term of the lease. Such purchaser expired worth, it it is and since that interest what belongs he lessee, him at or it is taxable to that value whether not his other that has assumed rental or will obligations prevent * * * return to himself. realizing any “The distinction between the value of the lessee’s pos- and his therein why interest demonstrates sessory equity the of that interest is not same as the value damages receive if it taken eminent domain. the lessee would were of the interest In eminent domain the full value must for, but to since taking discharges obligation rent, the of that to the lessor future pay obligation Porter, must to him. Pasadena v. be awarded 201 City of Cal. P. A.L.R. 381, 387, 526, Although 257 53 to the value of his only lessee is awarded damages equal interest, receives the full value of his he possessory equity, to rent is for his pay discharged. obligation to hold that a inter- “It would be anomalous possessory the lessee has est has no value because merely agreed pay it is P.2d what worth.” 440, 443-4. 338 more than American has $700,000 agreed pay per that is essential to a commercial airline year at a The of arguing busy airport. incongruity operation that leasehold has no value obvious.
A leasehold consists of the to the use and right posses- for the full sion of demised term of the lease. premises however, American, would have us construe section 20 to authorize a tax available potential upon profit upon
18 interest, assignment of that rather than fair cash value of the interest. But that is not what the statute Al- says. American’s though of leasehold valuation theory has super- ficial and was appeal apparently St. tacitly accepted Louis Com’n., v. State Tax County S.W.2d (Mo. 406 644 it, we must 1966), reject as other courts have done. Texas v. Company Los County Angeles, Cal. 2d 55, 52 388 ; P.2d Homes, DeLuz (1959) Inc. v. San County 440 Cal.2d Diego, ; P.2d 546, Shaia v. (1955) 45 290 544 Richmond, City Va. S.E.2d 885, (1967). 207 153 257 Fair cash value is with fair synonymous market value. ex (See People M.D.B.K.W., rel. Frantz Inc., Ill.2d The (1966); Valuation of Bonbright, Property, 209 62 460- fair cash (1937).) value of a leasehold is its rental value in the market —the amount a lessee willing will pay lessor, transaction, in a willing for the voluntary right to use and Homes, occupy premises. DeLuz (See Inc. v. San P.2d Diego, (Cal. 1955); Shaia Richmond, v. City Va. S.E.2d For tax (1967).) evaluation tech purposes, approved is to calculate the sum that nique lump represents the pres ent economic equivalent periodic rental to *7 be the paid through term of the unexpired lease. Shaia (See Richmond, v. City Va. S.E.2d (1967). of Since a one, lease is longer more than a valuable shorter market rental tends to decrease from as year year the term of Moreover, the lease unexpired decreases. neither market rental nor the rate of the return are constant factors. affected, advances, are They for example, by technological fiscal in changing governmental fluctuations policies, the state of the There general is therefore both economy. room and for the of necessity exercise judgment.
The current annual market rental the current represents leasehold, annual value of the and is the base appropriate from which to the value of the figure compute leasehold for the But term. the rent is to in unexpired be annual of those installments, value not in a sum. The present lump The be ascertained. therefore installments must future one dollar if will one invested today equal amount which 6% At value that dollar. now is the from of year present At the be it would annually, compounded $0.94339623. return, of value one dollar payable rate of the same present of The sum today two from would years $0.88999644. an of the value is present these two figures, $1.83339267, & See Curtis for two years. annual one dollar payment ed. Mathematics (McCallion of Accounting Cooper, 1961). current market rental payable
The value of the present leasehold, future, in which the fair cash value of rental market can be determined current by multiplying value of annual payment a leasehold by present Babcock, one dollar for term lease. See unexpired & Curtis of Real Estate (1924); Appraisal 247-48 ed. Mathematics Accounting (McCallion Cooper, 1961). at other air-
Based a rentals upon comparison hangar stated: “It American’s real estate ports, expert appears fall from this annual economic rent would that the analysis materially in from $500,000 $625,000 which range He in the lease.” lower than the rental reserved $658,140 value then concluded that “the measure of leasehold since the con- is the of the difference between value capitalized rent, has tract rent and economic subject no fair cash market because the economic (current rental is the contract rent.” have al- less than We market) in that out involved the assertion ready fallacy pointed has to run and which which thirty-six years lease $600, command an annual rental of today’s would that a has no value. to the assertion It is equivalent $100,000 has because it for no value building purchased $100,000. cannot be sold more than land, The same stated with reference expert *8 from the “the current apart hangar market rental” building, value of the entire acres leased to the is objector 29.9 $46,888. That American’s leasehold has not been Over- valued however, is if we apparent, consider only expert’s as to testimony the current rental value of the hangar building.
If we assume that the annual market rental of Ameri can’s lease and if we only $500,000, assume rela equals tively of fair high 8%, rate return cash value leasehold, assessment, its as of the date of its would $5,860,000. further that the Assessor’s Assuming County is to assess practice of full cash value at only 50% after (see ex rel. Korzen v. Belt Rail equalization People Co., Ill.2d way 158), figure, resulting $2,930,000, than the assess substantially higher Assessor’s equalized ment $2,236,638. American, these all
Despite favorable to assumptions, therefore, it is that American has not its apparent, sustained burden of clear evidence demonstrating by convincing assessment was excessive. See county’s fraudulently ex M.D.B.K.W., Inc., Frantz People rel. Ill.2d 209; ex McRoberts, rel. Reinhardt v. 22 Ill.2d People The circuit court Cook judgment reversed and the cause remanded to that court with direc- tions overrule American’s objections County’s assessment. remanded,
Reversed with directions. Mr. House dissenting: Justice A leasehold cannot a value have as as the fee since high fee value is the sum value of the leasehold the value plus of the reversion. the assessor assessed the lease- Admittedly Therefore, as the hold assessment was fee. I too must dissent. necessarily high. does not majority opinion justify attempt valuation, but, instead,
assessor’s use of fee applies *9 the rentals artificial formula by discounting capitalizing leasehold a higher reserved in the lease which produces This is than method foreign valuation did the assessor. statute. Section 20(2) wording plain Stat. (Ill. par. Revenue Code Rev. chap. be reads: “Each taxable leasehold estate shall 501(2),) value, valued its fair cash estimated at the would at it price fair, aat sale.” Fair cash value has bring always voluntary been held this court to be with fair cash by synonomous Here, market the fair market value de value. cash to be leasehold, is the termined value of the the value not fee. The statute never of rental value contemplated to measure the of the payments value leasehold such a to, manner as to in a result leasehold value or in equal of, the excess value. fee It that the specifically provides leasehold valued “at the it at would a price fair, bring sale.” voluntary added.) (Emphasis The that easy answer the assessor’s fee value seemingly is too low is not available. It fixed in was with conformity fee values of other real this out property single for a of value would be a viola- higher percentage tion of be a uniformity. (There may of the question legality of classification in out certain leasehold interests singling others, for taxation while exempting but not question raised and cannot at this time be pursued.)
It seems obvious that a leasehold interest cannot have the same value as the fee interest of the property upon which lessee, the lease is To the granted. rental payments are a assumed it in order to liability by obtain possession of the facilities. It violates all of taxation to im- principles an assessment pose measured a solely which by liability pro- a duces than greater valuation the fee itself. The ultimate test is fair cash value of the in the open with the rental burden to be assumed purchaser.
As I that presented, agree American’s leasehold is not taxation, from I exempt but with strongly disagree method of valuation which fixing produces higher than the fee. The record is sufficient to determine the not re- value of the taxable leasehold and the cause should be facts manded for of the to the prin- relevant application In event it of leasehold valuation out. ciples pointed here, late I too to now the situation would rectify urge in the next case this we return to problem involving prin- established. ciples long
(No. 38480. People Illinois, vs. Appellee, State *10 Milani, H. Appellant. Joseph Opinion January 19, filed