Rare Air Ltd. v. Prop

2019 COA 134

• Court: Colorado Court of Appeals
• Decided: August 29, 2019
• Docket: 18CA0535
• Status: Published

Opinion

The summaries of the Colorado Court of Appeals published opinions constitute no part of the opinion of the division but have been prepared by the division for the convenience of the reader. The summaries may not be cited or relied upon as they are not the official language of the division. Any discrepancy between the language in the summary and in the opinion should be resolved in favor of the language in the opinion.

SUMMARY August 29, 2019

2019COA134

No. 18CA0535, Rare Air Ltd. v. Prop. Tax Adm’r — Taxation — Property Tax — Improvements

A division of the court of appeals considers whether an

improvement located on tax exempt land is subject to property tax

when the underlying land is government-owned land that is leased

from a private party that holds a possessory interest in the land.

The division concludes that tax assessments on improvements are

properly made even against mere lessees when the lessee is, for all

practical purposes, the owner of the improvements. This is so

where a lessee’s possessory interest in the land includes rights such

as exclusive use, the right to encumber, and the retention of all

income generated, because such an interest constitutes the substantial equivalent of complete ownership for property tax

purposes.

The division therefore concludes that the Board of Assessment

Appeals (BAA) correctly determined that Rare Air Limited, LLC (Rare

Air), possesses a taxable ownership interest in the hangar facility.

And, absent a lawful exemption, such an interest is properly

assessed taxes on that interest. In so concluding, the division

rejects Rare Air’s contention that because its interest in the

improvement should be assessed as a possessory interest, such

assessment is barred by section 39-1-103(17), C.R.S. 2018. The

division further concludes that, in the absence of multiple

taxpayers with interests in a single property, the unit rule

established by section 39-1-106, C.R.S. 2018, has no application.

Accordingly, the division affirms the BAA’s order upholding the

2015 tax assessment on Rare Air’s property. COLORADO COURT OF APPEALS 2019COA134

Court of Appeals No. 18CA0535 Board of Assessment Appeals Case No. 69880

Rare Air Limited, LLC,

Petitioner-Appellant,

v.

Property Tax Administrator,

Respondent-Appellee,

and

Board of Assessment Appeals,

Appellee.

ORDER AFFIRMED

Division II Opinion by JUDGE TERRY Pawar and Márquez*, JJ., concur

Prior Opinion Announced July 18, 2019, WITHDRAWN

OPINION PREVIOUSLY ANNOUNCED AS “NOT PUBLISHED PURSUANT TO C.A.R. 35(e)” ON JULY 18, 2019, IS NOW DESIGNATED FOR PUBLICATION

Announced August 29, 2019

Kutak Rock LLP, Kenneth K. Skogg, Dana B. Baggs, Denver, Colorado, for Petitioner-Appellant Philip J. Weiser, Attorney General, Robert H. Dodd, First Assistant Attorney General, Allison Robinette, Assistant Attorney General, Denver, Colorado, for Respondent-Appellee

Philip J. Weiser, Attorney General, Evan P. Brennan, Assistant Attorney General, Denver, Colorado, for Appellee

Kristin M. Bronson, City Attorney, Charles Solomon, Assistant City Attorney, Noah Cecil, Assistant City Attorney, Denver, Colorado, for Amicus Curiae City and County of Denver

*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art. VI, § 5(3), and § 24-51-1105, C.R.S. 2018. ¶1 In this property tax case, taxpayer, Rare Air Limited, LLC

(Rare Air), appeals the order of the Board of Assessment Appeals

(BAA) upholding the 2015 tax assessment on its property. We

affirm.

I. Background

¶2 This appeal arises out of a dispute over a property tax

assessment made on an aircraft hangar facility located at

Centennial Airport.

¶3 Centennial Airport, located in Arapahoe and Douglas

Counties, Colorado, is owned by the Arapahoe County Airport

Authority (Authority), which is tax-exempt as a political subdivision

of the State of Colorado. The Authority holds title to land in

Arapahoe and Douglas Counties.

¶4 In 2006, the Authority leased approximately seventy acres of

airport land in Douglas County, at a rate of five cents per square

foot, to Denver jetCenter (DJC) pursuant to a Master Lease. The

initial term of the Master Lease is forty years with optional

extensions of another fifty years.

¶5 Under the terms of the Master Lease, DJC is required to

construct, or contract for the construction of, certain improvements

1 on the leased land. Those improvements include an aircraft hangar

facility to provide specified aviation-related services. The Master

Lease further provides that DJC may enter into a sublease, with the

Authority’s approval, to provide some of the required improvements

and services.

¶6 DJC entered into a sublease (Ground Lease) in 2011 with Rare

Air to satisfy its obligation to construct the hangar facility. The

Ground Lease covers about three acres out of the seventy acres

DJC leases from the Authority under the Master Lease. The

Ground Lease includes only land, requires rent payments of

thirty-five cents per square foot, and has a base term of twenty-five

years with an option to extend for an additional five years. If the

lease is extended the rent will be adjusted to include the land and

any improvements.

¶7 The Ground Lease obligates Rare Air to construct

improvements consisting of a building containing an aircraft

hangar, storage, and office space with a minimum area of 25,000

square feet. The Ground Lease provides that Rare Air will be

deemed to own, and will hold title to, all improvements made by

Rare Air, until the expiration of the lease, at which time title will

2 vest in DJC. If the lease is extended, title to the improvements will

then vest in DJC.

¶8 Constructed in 2012 at a cost of approximately $2.4 million,

the hangar facility consists of 30,000 square feet of hangar space

and 9900 square feet of office and support space. The hangar can

accommodate five jet aircraft, and contains office space, meeting

rooms, a lounge, a kitchen, and interior automobile parking. The

hangar facility is located on tax-exempt land owned by the

Authority.

¶9 Rare Air has the exclusive right to possess, use, operate, and

receive revenues from the hangar facility and owns and holds title

to all improvements it constructs on the leased land, including the

hangar facility. Rare Air further has the rights to all depreciation

and tax advantages, to assign or transfer the improvements with

proper authorization, and to encumber the improvements. It also

has the duty to obtain insurance and maintain any improvements

at its own expense.

¶ 10 For tax year 2015, the Douglas County Assessor’s Office

issued a notice of valuation to Rare Air for the value of the hangar

facility of $2,871,708.00. The value of the hangar has not been

3 disputed by the parties. Claiming that the hangar facility should be

assessed to DJC’s leasehold interest in the seventy acres of land

under the Master Lease, Rare Air sought and obtained from

Douglas County an abatement for the tax assessment.

¶ 11 But due to the size of the abatement, review by the Property

Tax Administrator was required. The Tax Administrator overruled

the abatement, stating that “all property, real and personal, located

in the State of Colorado on the assessment date . . . is taxable

unless expressly exempted by the Constitution or state statutes.”

¶ 12 Rare Air appealed the Tax Administrator’s decision to the BAA,

which upheld the decision of the Tax Administrator, determining

that Rare Air had been correctly assessed for its interest in the

hangar.

II. Analysis

¶ 13 Rare Air contends that the BAA erred in upholding the tax

assessment on improvements — the hangar facility — because (1)

DJC — not Rare Air — holds a taxable interest in the hangar

facility; (2) the assessment violates the statute governing taxation of

possessory interests; and (3) the assessment violates the unit

assessment rule. We disagree with each of these contentions.

4 A. Standard of Review and Applicable Law

¶ 14 Review of the BAA’s decision presents a mixed question of law

and fact. Farny v. Bd. of Equalization, 985 P.2d 106, 109 (Colo.

App. 1999). It is the function of the BAA to weigh the evidence,

make credibility determinations, and resolve any factual conflicts.

Bd. of Assessment Appeals v. Sampson, 105 P.3d 198, 208 (Colo.

2005). We therefore defer to the BAA’s factual findings and will not

disturb them unless they are clearly erroneous, meaning they are

unsupported by the record. Id.

¶ 15 Questions of law, including the meaning and scope of property

tax statutes, are reviewed de novo. Boulder Cty. Bd. of Comm’rs v.

HealthSouth Corp., 246 P.3d 948, 951 (Colo. 2011). Whether the

BAA’s decision comports with the statutory scheme is a legal

question that we review de novo. Lobato v. Indus. Claim Appeals

Office, 105 P.3d 220, 223-24 (Colo. 2005).

¶ 16 Judicial deference to an agency’s interpretation of a statute “is

appropriate when the statute before the court is subject to different

reasonable interpretations and the issue comes within the

administrative agency’s special expertise.” Huddleston v. Grand

Cty. Bd. of Equalization, 913 P.2d 15, 17 (Colo. 1996). Even so, we

5 are not bound by an agency decision that misapplies or

misconstrues the law. El Paso Cty. Bd. of Equalization v. Craddock,

850 P.2d 702, 704-05 (Colo. 1993).

B. Discussion

1. Property Taxation of Improvements

¶ 17 Rare Air contends that it does not have a taxable interest in

the hangar facility. We disagree.

¶ 18 “The Colorado Constitution directs that all real and personal

property, as defined by the legislature, must be taxed unless it is

exempted in accordance with law.” Bd. of Cty. Comm’rs v. Vail

Assocs., Inc., 19 P.3d 1263, 1275 (Colo. 2001) (relying on Colo.

Const. art. X, § 3(1)(a)). As a result, no affirmative tax provision

needs to be enacted for real and personal property to be taxed. But

exemptions from taxation must be expressly enacted into law. See

§ 39-1-102(16), C.R.S. 2018 (defining “[t]axable property” as “all

property, real and personal, not expressly exempted from taxation

by law”). “Real property” is defined to specifically include

“[i]mprovements.” § 39-1-102(14)(c).

¶ 19 Improvements are statutorily defined as “all structures,

buildings, fixtures, fences, and water rights erected upon or affixed

6 to land, whether or not title to such land has been acquired.” § 39-

1-102(6.3). Accordingly, buildings and structures are

improvements subject to taxation as real property unless exempted.

¶ 20 Rare Air constructed the hangar facility at its own expense.

The Ground Lease vests in Rare Air significant benefits of

ownership in the hangar facility, including exclusive use of the

facility, the right to all depreciation and tax advantages, retention of

all profits generated, and the rights to encumber the improvements

and assign or transfer them with proper authorization. Rare Air

also bears the burdens of ownership, including duties to maintain

the facility at its own expense, pay any assessed taxes pursuant to

the terms of the Ground Lease, and insure the facility at its own

expense. There is no evidence in the record that any other person

or entity possessed those benefits or burdens of ownership in the

hangar facility in tax year 2015.

¶ 21 Importantly, Rare Air holds title to the hangar facility. This

fact alone is often determinative in identifying who should be taxed

as the property owner. Hinsdale Cty. Bd. of Equalization v. HDH

P’ship, 2019 CO 22, ¶¶ 26-38 (identifying some of the narrow

circumstances that justify looking beyond record title to determine

7 who is the “owner” for tax purposes). And while title to that facility

may vest in DJC upon the expiration of the Ground Lease, there is

no evidence in the record that any other person or entity held title

to the hangar facility in tax year 2015. (The Ground Lease is not

set to expire until 2036, at the earliest.)

¶ 22 Even if Rare Air did not hold title to the hangar facility,

though, tax assessments on improvements are properly made even

against mere lessees when the lessee is, for all practical purposes,

the owner of the improvements. In this regard we are persuaded by

the analysis in Southard v. Board of Equalization, 996 P.2d 208

(Colo. App. 1999). There, a taxpayer leased airport land for a term

of twenty-eight years and constructed a terminal and aircraft

hangars pursuant to the lease but did not hold title to the

improvements. Nonetheless, a division of this court affirmed the

property tax assessment against the lessee, as the owner of the

improvements, because the lessee’s rights, including exclusive use,

the right to encumber, and the retention of all income generated,

constituted the substantial equivalent of complete ownership for

property tax purposes. Id. at 210-11.

8 ¶ 23 The BAA correctly determined that Rare Air possesses a

taxable ownership interest in the hangar facility. And the owner of

such an interest is properly assessed taxes on that interest, absent

a lawful exemption. See HDH P’ship, ¶ 36 (noting the approach of

“imputing tax liability to all interests in real property, unless

lawfully exempted”); see also § 39-1-111(1), C.R.S. 2018 (all taxable

property located in each county on the assessment date is subject

to taxation); City & Cty. of Denver v. Bd. of Assessment Appeals, 848

P.2d 355, 360 (Colo. 1993) (“‘[O]wner’ of property is responsible for

property taxes regardless of how various property rights may have

been pledged or exchanged.”). Thus, we conclude that Rare Air was

properly assessed for its ownership interest in the hangar facility,

which is an improvement constituting a taxable interest in real

property.

2. Section 39-1-103(17) and Taxation of Possessory Interests

¶ 24 Rare Air further contends that section 39-1-103(17), C.R.S.

2018, is the sole authority for assessing taxes on possessory

interests and that the assessment on Rare Air is not within the

statutory grant of authorization for taxation of possessory interests.

As set forth above, we view Rare Air’s ownership interest in the

9 hangar facility to be that of direct ownership of improvements

taxable as real property. However, assuming, without deciding,

that Rare Air’s interest in the hangar facility should be assessed as

a possessory interest, we still reject Rare Air’s contention that any

such assessment is barred by statute.

¶ 25 A possessory interest is “[t]he present right to control property,

including the right to exclude others, by a person who is not

necessarily the owner.” Black’s Law Dictionary 1353 (10th ed.

2014). A possessory interest in public property is a “private

property interest in government-owned property or the right to the

occupancy and use of any benefit in government-owned property

that has been granted under lease, permit, license, concession,

contract, or other agreement.” 3 Div. of Prop. Taxation, Dep’t of

Local Affairs, Assessors Reference Library 7.69 (rev. Apr. 2019). A

possessory interest in tax-exempt property is taxable if it “exhibit[s]

significant incidents of private ownership that distinguish it from

the underlying tax-exempt ownership.” Vail Assocs., 19 P.3d at

1279.

¶ 26 Contrary to Rare Air’s contention, section 39-1-103(17) does

not provide the authority for taxation of possessory interests nor

10 does it dictate whether an interest is taxable or not. No special

authorization by the legislature is required to tax possessory

interests because they are, in and of themselves, real property

interests subject to taxation unless exempted. See § 39-1-102(16)

(defining “[t]axable property” as “all property, real and personal, not

expressly exempted from taxation by law”); Vail Assocs., 19 P.3d at

1275; see also § 39-1-107(4), C.R.S. 2018 (property tax on

possessory interest assessed and collected in the same manner as

property taxes assessed to owners of real or personal property).

¶ 27 Furthermore, section 39-1-103(17), by its very terms,

addresses the valuation of taxable possessory interests. The title of

section 39-1-103 is “Actual value determined – when.” And the

statute provides, in pertinent part, that “[t]he general assembly

declares that the valuation of possessory interests in exempt

properties is uncertain and highly speculative and that the following

specific standards for the appropriate consideration of the cost

approach, the market approach, and the income approach . . . must

be . . . applied in the valuation of possessory interests . . . .” § 39-

1-103(17)(a).

11 ¶ 28 Accordingly, we conclude that even if Rare Air’s interest in the

hangar should have been assessed as a possessory interest, such

an assessment would not be prohibited by section 39-1-103(17).

3. Unit Assessment Rule

¶ 29 Rare Air contends that the unit assessment rule applies and

that application of the rule requires any assessment on the hangar

facility to be made to DJC. We conclude, as did the BAA, that the

unit assessment rule does not apply.

¶ 30 The unit assessment rule is established by section 39-1-106,

C.R.S. 2018, which provides, as pertinent here, “it shall make no

difference that the use, possession, or ownership of any taxable

property is qualified, limited, not the subject of alienation, or the

subject of levy or distraint separately from the particular tax

derivable therefrom.” City & Cty. of Denver, 848 P.2d at 359. The

unit assessment rule “requires that all estates in a unit of real

property be assessed together, and the real estate as an entirety be

assessed to the owner of the fee ‘free of the ownerships of lesser

estates such as leasehold interests.’” Id. at 358 (citation omitted).

¶ 31 The rule “typically operates to tax land and improvements

together, without the additional separate taxation of lesser interests

12 therein, such as leaseholds, because taxation of the whole is

presumed to include taxation of the derivative parts.” Vail Assocs.,

19 P.3d at 1278. Where, as here, the landowner is tax exempt, the

rule operates to assess one tax on the various subordinate private

possessory interests, such as leasehold interests. Id. at 1279.

However, the unit assessment rule has no application when

separate and distinct interests in the property exist or have been

created. Vill. at Treehouse, Inc. v Prop. Tax Adm’r, 2014 COA 6,

¶¶ 32-33.

¶ 32 Rare Air states that the unit assessment rule prohibits

“multiple assessments on multiple taxpayers holding different

interests in a single property.” Be that as it may, as the BAA found,

the particular tax assessment contested here covers a single

property interest: Rare Air’s ownership of the hangar facility. And

the record contains no evidence that DJC, or any other taxpayer,

had an ownership interest in the hangar facility in 2015.

¶ 33 The BAA concluded that DJC “did not construct and does not

own the improvements located on the subleased land” and therefore

“has no ownership interest in the improvements.” As a result, the

13 BAA correctly found that the tax on the hangar facility must be

assessed to Rare Air.

¶ 34 Rare Air, in contrast to DJC, possesses significant incidents of

ownership in the hangar facility, including the exclusive use of the

hangar, the right to all depreciation and tax advantages, the

retention of all profits generated, the right to encumber the

improvements, and the right to assign or transfer the improvements

with proper authorization. But most importantly, Rare Air holds

actual title to the facility. It makes no difference that DJC might

acquire the hangar if Rare Air defaults on the lease. Given the high

value of the hangar in comparison with the leasehold, it is highly

speculative that Rare Air would allow such a default to occur.

¶ 35 In the absence of multiple taxpayers with interests in a single

property — the hangar facility — the unit assessment rule has no

application.

III. Conclusion

¶ 36 We conclude that Rare Air was properly assessed for its

ownership interest in the hangar, which constitutes a taxable

interest in real property. The BAA’s order is affirmed.

JUDGE PAWAR and JUDGE MÁRQUEZ concur.