Shuwa will continue landmark challenge to property tax bill.

Shuwa will continue landmark challenge to property tax bill

A landmark lawsuit, which could pry open an explosive property-tax loophole for real estate interests across the county, will be appealed following its defeat Nov. 30 in Superior Court, attorneys said last week.

An appeal would keep alive the question of whether land owners, using specially structured sales, can escape full reassessment after buying land in Los Angeles County.

Big money is at stake. Reassessments, triggered by sales of appreciated land, brought in about $270 million in additional tax revenue during 1989 alone.

For four years, Shuwa Investments Corp. has advanced a novel theory to lower the property tax bill on its twin Arco Plaza highrises in downtown Los Angeles.

Shuwa's $630 million purchase of the 52-story office buildings in 1986 was a record for L.A. County. The Japanese investor captured the attention of L.A.'s real estate community. It also caught the eye of the assessor, who promptly raised taxes based on the new value established.

A squabble ensued over the county's most expensive commercial property, which had appreciated more than $400 million since last assessed. Shuwa lost its case before the county Assessment Appeals Board and the Superior Court, which ruled summarily without trial. Next would be a hearing before the state Court of Appeal, which is perhaps one year away, a Shuwa attorney estimated.

"As far as we know, no one has gotten away with this before," said Sid Delgado, assistant assessor.

"It's a real narrow technicality that's obviously worth millions to Shuwa," commented real estate consultant Ronald Malmfeldt.

Shuwa is a real estate powerhouse. The American arm of Shuwa Corp. of Tokyo this year estimated its U.S. holdings are worth $2.7 billion. The 35 properties include 1900 and 1901 Avenue of the Stars office towers in Century City, the U.S. News & World Report Building in Washington, D.C., and the ITT Building in New York. The 12-year-old company develops, acquires and manages property from its Los Angeles headquarters.

Shuwa also seeks "to create a tax loophole" for its Arco Plaza property, according to county legal documents, using a "multi-stepped transaction to try to avoid a 100 percent reassessment."

That argument was dismissed by Thomas M. McCoy, one of several attorneys from O'Melveny & Myers hired by Shuwa.

"There's no loophole. There never was a loophole." McCoy countered. He noted that Shuwa from the start agreed it owes 50 percent of the tax increase. And each year Shuwa has paid the approximately $2 million disputed property tax, under protest.

McCoy said the dispute boils down to the county refusing to strictly observe certain state laws and guidelines governed by Proposition 13. He said these rules only trigger reassessment on one half of the property for certain buyers who purchase half a property in one step, and the remaining half in a second step.

"They're walking on real thin ice with that argument," said Malmfeldt, managing director of Landauer Associates Inc., a property valuation firm. "If they should win, you can be sure there would be major effects on quite a number of major office buildings that are owned in 50-50 partnerships," he speculated.

Examples of buildings capable of a Shuwa-like purchase include the 62-story First Interstate Tower in downtown L.A. and the twin 44-story Century Plaza Towers in Century City, he said. First Interstate's partnership is equally owned by First Interstate Bank and The Equitable. The Century Plaza partnership is owned 50-50 by The Prudential and AP Properties Ltd.

Theoretically, a party which bought those high-rises in two steps could duck out of half of its higher tax bill.

Observers were divided on whether land owners had employed the loophole in the past.

"We don't keep stats on this," said John McKibben, a county official who oversees its appeal board. The only similar case he could recall involved a widow from Sherman Oaks who prevailed on a two-step theory case that became a precedent in the appeals court. Her case, however, at the request of the county Assessor's Office was ordered de-published by the state Supreme Court, meaning the case cannot be cited as a precedent.

Private tax attorney John S. Warren said Shuwa is not the first to use the loophole. Asked for details, he said, "There's none that I can tell you about. I suspect that anybody that you talk to will not want to draw attention to transactions" they have crafted to use the loophole.

How many such transactions occurred? "I would suspect there are a lot," said a specialist in local and state taxes at law firm Loeb & Loeb.

"We get asked questions about it from time to time by counties and particular individuals," said Richard Ochsner, assistant chief counsel for the state Board of Equalization. "We're not getting 10 questions a day about it, which would indicate that this is really hot."

Shuwa's 2-step transaction

On Sept. 16, 1986, Shuwa acquired titled to Arco Plaza from its legal owner, Flower Street Ltd., a California limited partnership. A 50 percent interest in Flower Street Ltd. was owned by Atlantic Richfield Co. and 50 percent was owned by Bank of America National Trust & Savings Association.

The deal worked this way:

1) Shuwa purchased Arco's 50 percent interest in Flower Street Ltd. Then Shuwa and the bank dissolved Flower Street Ltd., taking possession of Arco Plaza as tenants in common with Bank of America.

2) The bank sold its 50 percent interest to Shuwa.

PHOTO : Arco Plaza: Disputed property taxes total $2 million a year