Bank courts tax loophole, avoids full revaluation.

Bank courts tax loophole, avoids full revaluation 

Security Pacific National Bank is successfully arguing in court that it can sell the largest office building in Los Angeles County and shield its buyers from a reassessment of real estate value. That avoids sharply higher property taxes.

The Los Angeles bank has convinced judges at the L.A. Superior Court and Court of Appeal. An appeal may take the test case before the California Supreme Court.

If Security Pacific ultimately triumphs, its precedent-setting move could bring favorable consequences for real estate investors. But the reverse is true for government agencies, which rely on property tax revenues to fund public programs.

In 1984 the Los Angeles bank sold its 55-story headquarters tower for $310 million. The buyer, Metropolitan Life Insurance Co., immediately signed over three-quarters of the space back to Security Pacific under a long-term lease. Security Pacific never moved out.

Property taxes leaped by $1.6 million annually, following an official revaluing by the County Assessor's Office, which pegged the building's value at the new sales price. But through Metropolitan Life's pass-through arrangement, tenant Security Pacific pays the majority of the taxes. The bank is paying the money under protest and its lawyers are suing the county over what it calls a mistaken reassessment.

County attorneys claim the Los Angeles bank is suing to pry a "loophole" in state law to benefit the type of deal Security Pacific did, a so-called sale-leaseback. In those transactions, the building owner sells to another party and then leases back much of the building's space.

Because the old owner never gives up control over its space, there is a legal question as to whether there is a true "change of ownership." Such a change must occur to justify full reassessment, according to the state constitution.

Sale-leasebacks typically undergo full reassessment in L.A. County.

Reassessments of most property in the 1980s resulted in higher property taxes, due to rising land values. (In California, property taxes are levied at 1 percent of values set by county assessors.)

Despite Security Pacific's court victories, the county assessor last week vowed to appeal to the California Supreme Court before his May 28 deadline.

The county tax man will have a tough time beating the bank in court, according to several real estate attorneys interviewed last week.

"Security Pacific did exactly what the statute said they could do," said attorney William Bullis, of McCarthy & Bullis in Century City. Bullis fought the county in a similar case and won more than $100,000 in attorney's fees for his 30-month effort.

Even the man who sat in the assessor's chair when the building was sold in 1984 agreed. "Their argument is pretty strong," said Alexander pope, now a private attorney with Barash & Hill in Century City.

Ken Sears said Security Pacific is testing a "critical issue." The attorney with Pasadena-based Valuation & Assessment Consultants said: "I'm glad to see they are leading the way on it. Of course I represent taxpayers, so I've been making this argument for a long time," he added.

Sears fought the reassessment of the Jacobs Engineering headquarters in Pasadena after its sale-leaseback. They lost before the Assessment Appeals Board and decided not to appeal to civil court.

Sears predicted the sale-leaseback issue could be resolved in Security's case because the stakes are so high: "This is a big one. The California Supreme Court will probably hear the case on a big piece of real estate."

The building boasts 1.46 million square feet of leasable space, more than any other building in the county.

The banking firm itself is big, with assets totaling $84.7 billion.

To try its case, the bank hired private attorneys at O'Melveny & Meyers, the second-largest law firm in the county. They referred questions to Security Pacific Executive Vice President Dick Warner, who declined comment.

County defense attorney Albert Ramseyer also declined comment.

In legal filings, Ramseyer claimed Security Pacific's lower-court victories "open a loophole for corporations that is unfounded in the Constitution" and contrary to its "plain meaning."

Nevertheless, the state Legislature enacted laws to carry out the state constitution's reassessment mandate. The bank points to one law, part of the revenue and taxation code, that seems to say a sale-leaseback is not a true ownership change. It reads: "Change of ownership shall not include: Any transfer by an instrument whose terms reserve to the transfer or an estate (i.e. lease) for years...."

The law also talks about who can use the building. "A 'change in ownership' means a transfer of a present interest in real property, including the beneficial use thereof. ..."

The bank put into its grant deed, which consummated the sale, language that reserves itself a 60-year lease. (State law considers leases of 35 years tantamount to ownership.)

"It's essentially a financing device, not a sale,' said attorney Sears.

"Security has a good case, because all they really did was finance the structure," said attorney Al Kaufer.

Both were referring to the motive of most businesses to sell and lease back: to pull cash out their property.

The bank sold its highrise to Metropolitan Life in 1984 and rented back approximately 73 percent of its space. The assessors first reassessed only the 27 percent which fell under Metropolitan's control. Then he reassessed the whole building to a new value of $323 million, up from $171 million, after receiving a supporting opinion from the Board of Equalization. That five-member panel rules on tax law for California businesses.

Burgoening tax bills are commomplace among property sold in the county, especially prime parcels or ones that have not changed hands for many years.

When the Pasadena Hilton hotel sold in 1989, the assessor nearly quadrupled its tax-roll value, to $42 million. Its old value dated to 1975. The change meant $311,000 more annual property taxes for the hotel owner.

The 10-story World Trade Center sold in 1987. Its value was reassessed at $78.3 million, up from $47.5 million. Only seven years had passed since its previous sale.

To bolster its case, the county points to actions that indicate the bank considered the deal a true sale. For state and federal income tax purposes, Security Pacific treated the transfer of title to Metropolitan as a sale and deducted its lease payments as payments of rent.

The bank "wants to sell its building and own it too," the county argued.

Yet Security Pacific never let go of its tight control of the building: It kept exclusive use of the building's helipad on the roof, the cafeteria and the Security Pacific sign name on the facade. The bank also controls security for the entire structure and extensive parking and private elevators.

PHOTO : Reassessed: Now worth $323 million