ASSESSMENT APPEAL CASE HISTORY
RETIREMENT HOME - LEASEHOLD VALUATION

Facts

When Chanute Air Force Base in Rantoul closed, the real estate was to be sold to private investors. Allen A Lefkovitz & Associates, P.C. was retained by a developer, the owner/operator of several retirement communities in the Chicago area, who wanted to purchase two Chanute dormitories and convert them into retirement homes.

In 1996, one of his partners attempted to purchase a group of buildings from the Air Force. One of the buildings was the dormitory our client wished to convert, and another was a second dormitory he planned to develop later. However, since other parts of the property were contaminated, the Air Force could not close on the sale. Instead, it leased the property to our client's partner, who in turn sub-leased one dormitory to our client.

When the Air Force owned the base, the real estate was exempt from the payment of property taxes. However, when federal property is leased to a taxable entity, a taxable leasehold is created.

In 1997, the assessor issued an initial assessment of a portion of the base that was leased to our client's partner. This assessment included the four dormitories, the PX, several small apartment buildings, the gymnasium and the underlying land. This assessment was appealed to the Champaign County Board of Review.

Issues

1. Whether the Champaign County Board of Review failed to properly assess the retirement community when it refused to reduce the assessment for those portions of the property that were vacant, uninhabitable and had not received certificates of occupancy from the Village of Rantoul.
2. Whether the land and buildings were assessable or if the assessment should be limited to our client's leasehold interest.
3. If our client's leasehold interest is taxable, how should that interest be valued?

Proceedings

Champaign County Board of Review

At the hearing before the Champaign County Board of Review we argued:

1. The $350,000 purchase price for the two dormitories is the best evidence of market value of the unimproved real estate. Added to that value was the $1.7 million in capital improvements for converting the one dormitory to a retirement community. We requested the Board of Review reduce the market value of these two properties from the assessor's $3 million value to $2,050,000.
2. We also requested that the Board of Review temper the assessment based on the fact that only 38 percent of the apartments were leased as of January 1, 1997, and several wings of the building were uninhabitable.
3. Based on all of these arguments we requested that the 1997 real estate assessment be reduced from $983,241 to $197,348.
4. The Board of Review provided inadequate relief, slightly reducing the 1997 real estate assessment from $1,371,085 to $1,225,585.

Property Tax Appeal Board

The next step was an appeal to the State of Illinois Property Tax Appeal Board. In addition to the facts argued at the Board of Review, we raised the issue of whether the assessment of the United States' land and buildings was proper or whether our client's leasehold interest was the only interest to be valued.

The Property Tax Appeal Board originally decided this appeal without a hearing and confirmed the Board of Review's decision. Its initial decision did not address our argument that the assessment was improper because the United States' interest was assessed and not just our client's leasehold interest. Upon our motion, the Property Tax Appeal Board vacated its initial decision and set this matter for hearing.

The Property Tax Appeal Board found there were two remaining issues presented in this appeal:

1. Whether our client's leasehold interest is the taxable interest.
2. Identifying the proper method of valuing this interest.

As to the second issue, our position was:

• The Board of Review's assessment implied a market value for the retirement home is $2,600,000;
• Market rent for this retirement home is $21,600 per month;
• The leasehold interest existed for only 13 months, between January 1, 1997 and January 28, 1998 when title to this property was transferred to our client ;
  
• 10 percent is the proper interest rate at which to calculate present value of these lease payments;
• The present value of the lease payments over the 13 months of the lease is $265,000, and the present value of the leasehold, rather than the value of the property itself, should be basis for the assessment.

Resolution

1. The Property Tax Appeal Board found that the leasehold interest of the single dormitory and its improvements are the only interests subject to taxation. It further found that the proper method of valuing such leasehold is to determine the present worth of the market rent for the term of the lease.
2. The 1997 real estate assessment of our client's property was reduced from $866,580 to $88,060.
3. The 1997 real estate assessment of the entire property was reduced from $1,225,580 to $467,090.
4. The 1997 real estate tax was reduced from $92,226.12 to $35,148.99.
5. The total refund of excessive real estate tax and interest amounted to $65,828.77.

The Champaign County Board of Review appealed the Property Tax Appeal Board's decision to the Appellate Court for the Fourth District. . After briefs were filed and an oral argument held, the Appellate Court affirmed in an unpublished decision the Property Tax Appeal Board's decision. 315 Ill.App.1235, 777 N.E.2nd 1092 (4th Dist., 2000)