State Supreme Court nixes bid to shield bank from tax reassessment.

Staunching a high-stakes legal challenge to Proposition 13, the state Supreme Court unanimously ruled this month that Security Pacific Bank could not sell its 55-story office building and then shield its buyers from reassessment and a resulting property-tax hike.

The decision was significant to California real-estate interests who knew the court could have opened a chink in the armor of the mighty tax-limiting amendment to the state constitution if it had sided with the landowner.

Specifically, the court ruled that a sale-leaseback transaction constitutes a "change of ownership" under Proposition 13 and therefore the property must be reassessed.

Thanks to broadly rising property values in the 1970s and 1980s, most reassessments result in higher property taxes to the new owner. Under Proposition 13, taxes are held down to just 1 percent of a property's 1975 value, plus inflation adjustments, until a new value is established by a change of ownership.

The case drew attention for several reasons. The property owner, Security Pacific National Bank, is the largest bank in L.A. County, with $81 billion in assets last year. Also, the contested property is Security Pacific Plaza, the county's largest office highrise, boasting 1.4 million square feet of space.

In 1984, a Security Pacific subsidiary sold the headquarters building for $310 million. The buyer, Metropolitan Life Insurance Co., signed three-quarters of the floor space back to Security Pacific under a long-term lease -- a "sale-leaseback" arrangement.

Following the sale, the L.A. County Assessor's office revalued the highrise based on the new $310 million price tag. The old tax-roll value was $171 million, so taxes shot up by $1.6 million annually.

Under Metropolitan Life's pass-through arrangement, tenant Security Pacific pays the majority of the property taxes. Under protest, the bank has paid the higher bill, which has mounted to $10 million since the squabble began in 1985.

Security Pacific argued successfully in the state Court of Appeal that its sale-leaseback did not extend beneficial use to the buyer or trigger other actions that amount to a true "change of ownership." The bank relied, in part, on language it inserted in the purchase agreement reserving an enduring interest in the property, termed an "estate for years."

While those legal words "appear to confer an exemption from reassessment," the transaction on other grounds was clearly reassessable, wrote Justice Stanley Most. Further, he said: " . . . there is no evidence showing a custodial or trust relationship, or that (the bank) sold the property for less than essentially the market price. Nor is (the bank) paying below-market rent under the lease . . . there can therefore be no question that when Metropolitan Life purchased the property in fee simple absolute it acquired its beneficial use during the lease term."

L.A. County Assessor Kenneth P. Hahn said he was elated by the outcome, noting that $10 million could have been lost by the county. "I think Justice Mosk came up with the only fair decision," said Hahn. A loss to the county could have encouraged more real estate interests to insert similar language into sale-leaseback accords to free themselves from reassessment, an "artificial" scheme to "get around the law," Hahn asserted.

It is not clear whether the case will be appealed to a higher court. Attorneys for plaintiff Pacific Southwest Realty Co. (a Security Pacific subsidiary) and for defendant L.A. County did not return telephone inquiries last week.