Auerbach v. Assessment Appeals Bd. No. 1 for the County of Los Angeles

In Auerbach v. Assessment Appeals Bd. No. 1 for the County of Los Angeles (2006) 39 Cal.4th 153, a retailer leased property owned by a trust. The lease required the retailer at its own expense to either renovate the existing building, or demolish it and construct a new one, but required the trust's approval before undertaking the improvements. The lease provided that the retailer owned the alterations or new improvements during the lease term, but the retailer agreed to turn over all improvements on the property in good condition to the trust at the conclusion of the lease. The lease required the retailer to repair any damage to the property at its expense, but required the lessor to make any insurance proceeds available to the retailer for the repairs. Although the lease was silent on the issue, the evidence established that the retailer paid rent for the land, not the building on it. The retailer elected to demolish the existing building, and constructed a new one. When the beneficiaries in Auerbach received their interests in the trust, they applied for the $ 1 million grandparent-grandchild reassessment exclusion under section 63.1. Although the assessor granted the exclusion, he concluded the trusts owned the building as well as the land for property tax purposes, and applied the exclusion to both, allocating 92 percent of the exclusion to the building and eight percent to the land. The trustee challenged this allocation, contending the trust owned only the land, not the building, and therefore the exclusion applied only to the land. The California Supreme Court agreed with the assessor, concluding the trust held a present interest in both the land and the building. The court noted that despite the lease's statement that the retailer owned the building, the provision requiring surrender of the building at the conclusion of the lease demonstrated that the trust held the fee interest in the building. (Auerbach, supra, 39 Cal.4th at p. 162.)