Guide to Taxable Possessory Interests
for Publicly Owned Real Property
Approaches to Value
When a new base year value is computed for a possessory interest property, the Assessor uses the income, comparative sales, or cost approach.3 The quality and quantity of the available market information, the type of interest being valued, and the estimated reasonable term of possession will determine which of the three valuation approaches is most appropriate to use.
This is the most commonly used method for valuing a possessory interest. Using this approach, the PI value is estimated by first determining the net income. The net income results from subtracting the anticipated vacancy rate, collection loss, and management expenses from the economic income. The net income is then multiplied by a present worth factor to arrive at the PI value.
Using the economic net income for the term of possession allows the Assessor to value only the rights “possessed” by the tenant and exclude any non-taxable rights retained by the government landlord.
In this approach to value, the sales price of the property or similar possessory interest properties is used to determine possessory interest value. Rent paid on the property and any other obligations assumed by the buyer are valued at present worth and added to the sales price.
In the cost approach, the land and improvement values are determined separately. The land value is determined using the comparative sales approach or the income approach. Consideration is given for the reversionary value of the land at the end of the anticipated term of possession. The improvement value is estimated by subtracting the accrued depreciation from the replacement cost.
Consideration is given for the estimated value of the improvements at the end of the anticipated term of possession. The total value of the PI is determined by adding the estimated land value to the estimated improvement value.
What is Taxable Possessory Interest (PI)?
When a person or entity leases, rents, or uses real estate owned by a government agency for its exclusive use, a taxable possessory interest occurs.1 The taxation of this interest is similar to the taxation of owners of privately owned property. However, a holder of a possessory interest frequently pays significantly less property tax than the private owner of a similar property.
Examples of Possessory Interests
Taxable PI's are created by almost any use of government-owned real property including the following examples.
- Boat slips on public lakes, rivers, or ocean marinas
- Mini-storage facilities under freeways
- Private walkways above city streets
- Airplane tie-downs and hangars at county airports
- Cattle grazing rights on government land
- Private entities leasing government-owned buildings
- Concession spaces at convention centers and fairgrounds
- Cabins and campgrounds on U.S. Forestry-owned lands
- Ski resorts on public lands
- Pro shops or golf operators at a public golf course
- Terminal and cargo spaces at airports
- Container operations at harbors
- Cable television right-of-way easements
- Retail business operations in a publicly-owned building
- Rental car facilities at airport
- Farming on community college district land
- Mining operations on public land
- Privately owned medical clinics operating in a county hospital
- Adult/night schools operating in a public school
- Christmas tree lots on a freeway underpass
- Stables on river annex
- Concert or air show on public land
- Employee housing on tax-exempt land
Possessory Interest Property Tax
Possessory interest tax helps pay the holders fair share of services and benefits that owners of similar taxable properties enjoy. These services and benefits include fire and police protection, schools, and local government.
The person or entity in possession of the property on the lien date (January 1) is liable for the entire subsequent fiscal year’s taxes. Unfortunately, no provision is made for the Assessor to prorate the taxes if the possessory interest is terminated after the lien date.
1For an expanded definition see Revenue and Taxation (R&T) Code Section 61, 107-107.9, 480.6 and Property Tax Rules 20,21-22, and 27-28 available online at www.boe.ca.gov/info/links.htm.
2A change in ownership occurs when a possessory interest is created, assigned, or upon the expiration of the lease per Revenue & Taxation Code Section 61 available online at www.boe.ca.gov/info/links.htm.
3Base year value computation is fully explained in Property Tax Rule 21 available online at www.boe.ca.gov/info/links.htm.
By law, every governmental agency in the county must respond to the Assessor’s annual request for information. The information assists the Assessor in conducting fair and accurate possessory interest assessments.
Valuing Taxable Possessory Interest
A base year value is established for taxable possessory interests upon a change in ownership or completion of new construction under the guidelines of Proposition 13.2 This value, by law, will only increase by a maximum of 2% per year, until a new reappraisable event (change of ownership or completion of new construction) occurs, or the property suffers a decline-in-value.
The valuation of possessory interests is different from other forms of property tax appraisal in two ways:
- Only the rights held by the private user are valued.
- The Assessor must not include the value of the lessor’s retained rights in the property or any rights that will revert back to the public owner (the “reversionary interest”) at the end of the lease.
As a result, possessory interest assessments are frequently less than the assessments of similar privately-owned property.