Instead of merely redevelop existing buildings to match their requirements, the build-to-suit model calls for the development and construction of brand-new structures that match the trade dress of other shops in a nationwide chain. Think CVS drug store, Walgreens and so on ...

By Michael P. Guerriero, Esq., as released by Rebusinessonline.com, March 2012

The build-to-suit transaction is a modern phenomenon, birthed by national merchants unconcerned with the resale value of their residential or commercial properties. Rather than merely redevelop existing structures to suit their needs, the build-to-suit design requires the development and building of brand-new structures that match the trade dress of other shops in a national chain. Think CVS drug store, Walgreens and so on. National retailers want to pay a premium above market price to establish shops at the exact areas they target.

In a normal build-to-suit, a designer puts together land to obtain the desired website, demolishes existing structures and constructs a building that complies with the nationwide model shop design of the ultimate lessee, such as a CVS. In exchange, the lessee indications a long-term lease with a rental rate structured to compensate the designer for his land and building and construction costs, plus an earnings.

In these cases, the long-term lease resembles a mortgage. The designer resembles a loan provider whose threat is based upon the retailer's capability to satisfy its lease commitments. Such cookie-cutter deals are the favored funding plan in the national retail market.

So, how exactly does an assessor worth a nationwide build-to-suit residential or commercial property for tax functions? Is a specific lease deal based upon a specific niche of national merchants' equivalent proof of worth? Should such national data be overlooked in favor of equivalent proof drawn from local retail residential or commercial properties in closer proximity?

How should a sale be dealt with? The long-term leases in place heavily influence build-to-suit sales. Investors essentially purchase the lease for the anticipated future cash circulation, purchasing at a premium in exchange for ensured lease. Are these sales signs of residential or commercial property worth, or should the assessor neglect the leased cost for tax functions, rather focusing on the cost simple?

The easy response is that the objective of all celebrations included should constantly be to figure out reasonable market worth.

Establishing Market Price

Assessors' eyes light up when they see a price of a build-to-suit residential or commercial property. What better evidence of value than a sale, right?

Wrong. The premium paid in many circumstances can be anywhere from 25 percent to 50 percent more than the free market would usually bear.

Real estate is to be taxed at its market value - no more, no less. That refers to the price a prepared purchaser and seller under no compulsion to offer would agree to on the open market. It is an easy definition, however for purposes of taxation, market price is a fluid idea and challenging to select.

The most reputable approach of determining worth is comparing the residential or commercial property to recent arm's length sales, or to a sale of the residential or commercial property itself. It is needed to pop the hood on each offer, however, to see what exactly is driving the rate and what can be explained away if a sale is irregular.

Alternatively, the income approach can be used to capitalize a projected income stream. That earnings stream is built upon rents and information from comparable residential or commercial properties that exist in the open market.

For residential or commercial property tax purposes, just the property, the cost basic interest, is to be valued and all other intangible personal residential or commercial property disregarded. A leasehold interest in the real estate is thought about "chattel real," or individual residential or commercial property, and is exempt to taxation. Existing mortgage or collaboration contracts are also neglected since the factors behind the terms and amount of the loan may be unpredictable or unrelated to the residential or commercial property's worth.

Build-to-suit deals are essentially building financing transactions. As such, the personal arrangement among the celebrations included need to not be taken upon as a charge versus the residential or commercial property's tax direct exposure.

Don't Trust Transaction Data

In a recent build-to-suit evaluation appeal, the data on sales of national chain stores was turned down for the functions of a sales contrast approach. The leases in place at the time of sale at the various residential or commercial properties were the driving elements in determining the rate paid.

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

For similar factors, the income data of most build-to-suit residential or commercial properties is skewed by the leased cost interest, which is intertwined with the cost interest. Costs of purchases, assemblage, demolition, building and revenue to the designer are packed into, and financed by, the long-lasting lease to the national merchant.

By repercussion, rents are pumped up to reflect healing of these costs. Rents are not derived from open market conditions, however generally are determined on a percentage basis of task expenses.

In other words, investors want to accept a lower return at a higher buy-in price in exchange for the security of a long-lasting lease with a quality national tenant like CVS.

This is illustrated by the considerably lowered sales and rents for second-generation owners and tenants of nationwide chains' retail structures. Generally, national retailers are subleased at a fraction of their initial contract rent, reflecting prices that falls in line with open market requirements.

A residential or commercial property that is net leased to a nationwide seller on a long-term basis is a valuable security for which investors are prepared to pay a premium. However, for tax purposes the assessment should distinguish in between the genuine residential or commercial property and the non-taxable leasehold interest that affects the nationwide market.

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

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