News

Public Right of Way-Possessory Interest

July 29, 2015 by Nancy Tomlinson / Posted in Information.

Tags:

A possessory interest in real property results from the possession, a right to the possession, or a claim to a right to the possession of land and improvements that is independent, durable, exclusive of the rights held by others in the property and that provides a private benefit to the possessor. This equates to the leasehold interest in this analysis which is the tenant’s possessory interest created by a contractual obligation or lease.

The property type consists of the aerial, surface, and subsurface interests, within the public right of ways, that constitutes a possessory interest, that results from the possession of land and improvements that is independent, durable, exclusive of the rights held by others in the property and that provides a private benefit to the possessor.

Codified case law holds that a cable television company’s right of way in publicly owned real property (for placement of wires, conduits, and related equipment) contained in a cable television franchise or license constitutes a taxable possessory interest. (Cox Cable San Diego, Inc. V. San Diego County (1986) 185 Cal.App.3d 368, and Stanislaus County v. Assessment Appeals Board (1989) 213 Cal. App. 3d 1445.)

Valuation of the possessory interest in the public right of way can be accomplished utilizing the Across the Fence (ATF) method which is considered an indirect method, and the Income Capitalization Approach (discounted cash flow) which is considered a direct method.

Within the Sales Comparison Approach, the Across the Fence (ATF) methodology is typically employed for corridor valuation. The Sales Comparison Approach measures the value of the subject by comparing it to recent sales of properties with similar physical characteristics and utility. While no two properties are the same, units of comparison such as the price per square foot of land area can be extracted from the sales. Comparisons are then made to the sales to account for differences in elements of comparison, such as property rights conveyed, market conditions, financing, location, and physical characteristics.

According to the California State Board of Equalization, Assessment of Taxable Possessory Interests, AH-510, 2002, a taxable possessory interest may be valued using “direct methods” or “indirect methods”. Since cable television company’s rights of way in publicly owned real property (for placement of wires, conduits, and related equipment) do not typically sell on the open market, the Across the Fence (ATF) method is considered an “indirect” sales comparison method.

The ATF method is widely used and often required of third parties acquiring rights along (longitudinal) or across (transverse) existing corridors. The ATF method is defined as “A land valuation method often used in the appraisal of corridors. The across the fence method is used to develop a value opinion based on comparison to abutting land.”1

In the Income Capitalization Approach, a direct capitalization analysis and/or a yield capitalization or discounted cash flow can be employed. In the direct capitalization approach, the market rent for the subject is estimated through an analysis of rental rates in the market area. The Income Approach is a valuation methodology applied to “income producing” properties, i.e., those properties that can be leased out and produce an income stream for the fee owner. A potential gross income for the analysis year is estimated either based on an assignment of market rent as supported and indicated by recent leases in the market area or based on actual income of existing subject leases. Deductions for factors such as vacancy and unreimbursed expenses are made, and then a market-derived rate of return (overall capitalization rate) is applied to the resulting net operating income in order to yield a value indication for the subject.

With a yield capitalization or discounted cash flow (DCF) analysis a discount rate (yield rate) is applied to a set of projected income streams and a reversion. The analysts specifies the qualtity, variability, timing of the income streams and the quantity and timing of the reversion, and discounts each to its present value at a specified yield rate. This is the procedure applied in this analysis, absent any reversion, considered a Direct Method as characterized by Assesssors’ Handbook, Section 510, Assessment of Taxable Possessory Interests

Economic Rent is the basis for the Income Capitalization Approach which is defined as “the estimated amount that would be paid by the possessor, on the valuation date in cash or its equivalent, for the rights in real property provided by the taxable possessory interest if (1) the rights to possession were offered in an open and competitive market and (2) the public owner’s interest in the property were not exempt or immune from taxation. Economic rent does not include payments by the possessor to the public owner that are not paid as consideration for rights in real property, such as payments for the rental of personal property, for the provision of security services, and for advertising and promotional services.”2

Some of the market data necessary to perform these valuation methods include; 1) total plant miles; 2) public versus private plant miles; 3) number of pole attachments within the public right of way, as opposed to private parcel ownership(s); 4) percentage of plant miles that are aerial versus underground; 5) market pole attachment rate; 6) market underground rental rate; 7) market land values (ATF); 8) burden/  occupancy/percentage of the bundle of rights; 9) term of possession; 10) rental growth rate; and 11) market yield rate.

Successful application of these methods requires unique competency, and is definitely not for the timid.

 

Bradford D. Thompson, MAI, AI-GRS, SR/WA

 

 

1/    The Dictionary of Real Estate Appraisal, Fifth Edition, Appraisal Institute, 2010 Page 3

2/    State of California, Board of Equalization, Assessment of Taxable Possessory Interests, AH-510 2002