House Joint Resolution No. 197 enacted by the 1980 Session of the Virginia General Assembly established a Joint Subcommittee of the House Finance Committee and the Senate Finance Committee to study the method of taxing exempt property when the owner leases the property to a lessee who is engaged in a profit making endeavor.

This area had been studied by the Revenue Resources and Economic Commission. That Commission after two years of study proposed legislation to the 1979 Session of the Virginia General Assembly which provided that this type of property be assessed at 100% of fair market value. The recommendation was due to become effective July l, 1980.

After the passage of this legislation a number of questions and problems arose. The problems concerned the impact of taxing this property at 100% of fair market value, and the use of the Federal Reserve Discount Rate on a particular date as the interest rate used in the capitalization process.

Because of these concerns the 1980 Session of the Virginia General Assembly delayed the effective date of the new legislation until July 1, 1981 and established this Joint Subcommittee to study this area.

The Joint Subcommittee met on a number of occasions this year to discuss the issues as well as to receive background, information, and alternatives from its staff. In addition, the Joint Subcommittee worked closely with Virginia's assessors as well as representatives of the affected industries.

The present existing leasehold interest legislation was enacted in 1975 and established uniformity among the localities in terms of how this type of property was to be valued and taxed. Before this time, there was no uniformity among the localities in the treatment of this property. The statute enacted in 1975 provided that if the term of the lease was 50 years or longer (or if the property could be acquired at the end of the lease period for a nominal sum) the assessment should be made as if the lessee were the owner. If the term of the lease was less than 50 years, the assessment must be reduced by 2% for each year that the remainder of the lease is less than 50 years, provided that this reduction cannot exceed 90%. That is, a declining value was placed on the property depending on the length of the remaining lease with a minimum assessment of 10% of fair market value. This procedure started with a value that was determined in the same fashion and used the same method as any other taxable property and was then adjusted downward to reflect the economic and appraisal reality that the shorter the life of the lease, the less the value.

This approach was studied by the Revenue Resources and Economic Commission and their two-year study recommended a change that would become effective July l, 1981. This new procedure would determine the value of the leasehold interest by capitalizing the net annual fair market value rent for such leasehold. The capitalization rate would be the Federal Reserve discount rate for the tax day.

The Joint Subcommittee has studied this legislation and recommends the repeal of this legislation which is due to become effective July l, 1981. The Joint Subcommittee believes this legislation would not accomplish its intent, that is, valuing the property at 100% of fair market value. In addition, the Joint Subcommittee does not believe that this type of property should be valued at 100% of fair market value since the property is worth less to the lessee. Moreover, the Joint Subcommittee believes it inappropriate to specify the use of a particular interest rate on a particular day since the Code of Virginia does not prescribe what interest rate appraisers and assessors should use when valuing other types of income producing property. In addition, the Joint Subcommittee has found that the Federal Reserve discount rate is so volatile that the use of· the rate on one day rather than another would yield significantly different tax values and thus be highly inappropriate.

After studying numerous options and considering various alternatives, the Joint Subcommittee makes the following recommendation. The Joint Subcommittee recommends that the present existing method of appraising and assessing leasehold interest property be retained with one change. The Joint Subcommittee recommends that the minimum assessed value be increased from 10% to 15%, or a 50% increase in the minimum assessed value. The increase in this minimum amount is an attempt to ensure that short-term leases which are routinely renegotiated pay on a more reasonable portion of value. For example, the Joint Subcommittee has found that currently Piedmont, United, and Eastern Airlines all operate on an eighteen month lease at Byrd Field. This is not representative of the probable length of the lease since Eastern has operated there since 1930 while the other two have operated there since 1948. The Joint Subcommittee has found that for most leases the lessee generally stays longer than the term of the specific lease. Thus, the Joint Subcommittee believes the value on certain short-term leases is understated. The Joint Subcommittee believes that an increase in the minimum will help to alleviate this inequity.

Finally, the Joint Subcommittee wishes to note that this is one of the most difficult and complex areas in terms of bringing "equity" to all parties involved. The Joint Subcommittee believes that its recommendation is a logical and understandable approach which allows the assessor to assess the property as if it were taxable like any other property and then provide a formula to reduce this value based on the remaining length of lease. The Joint Subcommittee believes this approach is a significant improvement over both the present leasehold interest law and the legislation that would become effective July l, 1981.