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Inclusion of billboard income in valuation of real property for tax purposes.

Pennsylvania statutes define what property is to be assessed for taxation, and what forms of property are to be omitted from an assessment. Amongst the real estate that is subject to taxation is land, ground rents, and buildings situated on the land. Property that is excepted from taxation includes "signs and sign structures." Specifically, "[n]o sign or sign structure primarily used to support or display a sign shall be assessed as real property ... regardless of whether the sign or sign structure has become affixed to the real estate."

The Chester-Upland School District (District) appealed the assessments of 26 properties, each of which contained an outdoor advertising sign, arguing that the assessments should be increased to account for revenue that the owners realized through ground leases or grants of easements to outdoor advertising companies that operated billboards on the properties. The 26 appeals were consolidated to address the common legal issue of "whether a taxing authority can use the presence of an outdoor sign to increase the real property tax basis" of the property.

After hearing arguments, the trial court concluded that the statutory exclusion from taxation for signs and their support structures prevented the existence of a billboard on a property from being considered in any manner to raise that property's assessment. Contrary to the District's arguments, the trial court held that the taxation of land and ground rents does not override the clear exclusion for signs and sign structures. The District appealed to the Commonwealth Court.

On appeal, the District acknowledged that a billboard and its structure cannot be considered as part of an assessment of property, but that nevertheless the sign-and-sign-structure exclusion does not preclude assessment of the land on which a billboard sits and the consideration of income derived from a billboard lease of that land. Thus, according to the District, the signs and sign structures were exempt, but the income derived there-from was legitimate to consider in valuing the land underneath the signs. The District claimed the trial court had erred in not only denying the existence of the billboard, but also denying any consideration of the effect of the billboard lease on the fair market value of the property.

The Commonwealth Court began its analysis by noting that real property is assessed at its actual value, meaning the price which a purchaser would pay an owner "taking into consideration all uses to which the property is adapted and might in reason be applied." Thus, when determining fair market value, the assessment must include all relevant factors having a bearing on that value. When real estate is subject to a long-term lease, the portions of the property subject to a leasehold interest cannot be disregarded. Rather, the economic reality of the lease must be considered in establishing the market value.

The landowners argued that the trial court's interpretation was correct because factoring in the rent paid by the billboard operators pursuant to leases would indirectly value the billboards themselves in violation of the exclusion. The amount of rent paid by the billboard operators necessarily reflects consideration of the billboards; taxing that rent operates as a "subtle-- but no less real--assessment" of the billboards themselves.

The court said that the landowners raised valid concerns and agreed that an appraiser must not indirectly value an existing billboard on a property by considering the revenue generated from the advertisements placed on that billboard in a given year. But the property's suitability for a billboard use, and the income earned from the rental of the property, should not be excluded from consideration.

Thus, the Commonwealth Court held that the sign-and-structure exclusion does not foreclose any consideration of any potential income that an owner may receive from the placement of a billboard in arriving at a fair market value assessment. The statutes do not justify failing to consider the effect of a lease or the property's suitability for billboard placement in arriving at the fair market value. The trial court's order was vacated, and the Commonwealth Court remanded the matter to the trial court to determine the impact of the Commonwealth Court's decision on each of the individual properties.

In re: Consolidated Appeals of Chester-Upland School District

Commonwealth Court of Pennsylvania

December 27, 2018

200 A.3d 1052

Benjamin A. Blair, JD, is a partner in the Indianapolis office of the international law firm of Faegre Baker Daniels LLP, where his practice focuses on state and local tax litigation for clients across the United States. A frequent speaker and author on taxation and valuation issues, Blair holds a juris doctor from the Indiana University Maurer School of Law, where he also serves as an adjunct professor. Contact:
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Title Annotation:Recent Court Decisions on Real Estate and Valuation
Author:Blair, Benjamin A.
Publication:Appraisal Journal
Date:Mar 22, 2019
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