Opinion
Rehearing Denied Nov. 16, 1965.
For Opinion on Hearing, see 50 Cal.Rptr. 546, 413 P.2d 146. Glenn & Wright, San Diego, Conron, Heard, James & Hamilton, and Calvin H. Conron, Jr., Bakersfield, for plaintiff and appellant.
Bertram McLees, Jr., County Counsel, Robert G. Berrey, Asst. County Counsel, and Lawrence Kapiloff, Deputy County Counsel, for defendant and respondent.
STONE, Justice.
This appeal is from an adverse judgment in an action to recover taxes paid under protest.
Appellant cattle company leased real property for grazing purposes from Vista Irrigation District. As a public agency, the district's fee ownership of the property is tax exempt, but the possessory interest of appellant is taxable at its full cash value. (Rev. & Tax.Code § 401; De Luz Homes, Inc. v. County of San Diego, 45 Cal.2d 546, 566, 290 P.2d 544.) Appellant bid $240,000 for a five-year term, payable in monthly installments of $4,000, or $48,000 per year, together with an option to renew the lease for two additional five-year terms.
Before taking up the method of assessment and determination of full cash value, we are met by the preliminary question whether 'native grass' is a growing crop. Appellant argues that the value of its grazing lease is predicated almost entirely upon the grass it is anticipated the land will produce; that growing crops are exempt from taxation under Constitution article XIII, section 1, and Revenue and Taxation Code section 202; and that to assess appellant's possessory interest for tax purposes largely We are cited no authority by either side that grass is or is not a growing crop within the contemplation of the Constitution and the Revenue and Taxation Code. The term 'growing crops' as used in article XIII, section 1, of the Constitution must be construed according to the meaning it had at the time the amendment was adopted. Revenue and Taxation Code section 202 must likewise be construed according to the meaning of the term 'growing crops' at the time article XIII, section 1, became law, since the Constitution cannot be amended by a statutory enactment. (Stribling's Nurseries, Inc. v. County of Merced, 232 A.C.A. 914, 917, 43 Cal.Rptr. 211; Forster Shipbuilding Co., Inc. v. County of Los Angeles, 54 Cal.2d 450, 456, 6 Cal.Rptr. 24, 353 P.2d 736.)
The meaning of 'growing crops' as used in article XIII, section 1, was articulated in the Stribling's Nurseries case, pages 917-918, 43 Cal.Rptr. page 214, as follows:
'In determining the meaning of the term 'growing crops' in the posture of Article XIII, section 1, the court, in Jackson & Perkins [Jackson & Perkins Co. v. Stanislaus County Board of Supervisors, 168 Cal.App.2d 559 (335 P.2d 976)], pointed out that under the 1849 Constitution no private property was exempt from taxation, but in 1894 an amendment to Article XIII, section 1, exempted 'growing crops.' Prior to the 1894 amendment, however, the Supreme Court, in Cottle v. Spitzer (1884) 65 Cal. 456, 4 P. 435, 52 Am.Rep. 305, held that 'growing crops' are only such crops as require an annual planting or sowing, or an annual harvesting. Thus, held the court in Jackson & Perkins, the Cottle definition of the term 'growing crops' is the meaning of that term as used in Article XIII, section 1.'
(Accord: Wohlford v. American Gas Production Co., 5 Cir., 218 F.2d 213, 215; Moore v. Hope Natural Gas Co., 76 W.Va. 649, 86 S.E. 564.)
Stribling's noted there was no case overruling either Cottle or Jackson & Perkins, and since the Supreme Court denied a hearing in Stribling's, we conclude that the language 'growing crops' in article XIII, section 1, of the Constitution, and in section 202 of Revenue & Taxation code, does not include native grass because it does not meet the Cottle test of 'annual planting or sowing, or an annual harvesting.'
Having determined that native grass which is not harvested carries no tax exemption as a growing crop, we are confronted with the troublesome question of the valuation of a possessory interest which stems largely from the value of grass.
In valuing the lessee's possesory interest, the assessor was faced with a situation just the reverse of that discussed in the De Luz case, which is cited by both appellant and respondent. There, the lessee paid a nominal rent of $100 a year and, as the court noted, capitalization of rent would not reflect the true value of the possessory interest. The court held that in this circumstance it is permissible for an assessor to capitalize the anticipated income from sublessees to determine present cash value of the lessee's possessory interest. Here, the lessee has no direct income; its cattle eat the grass and it is impossible to determine its income from the lease for the purpose of capitalization under the De Luz formula. Replacement cost is equally untenable as a basis for fixing market value.
The assessor elected to capitalize the income to the lessor, that is, the annual rent paid by the lessee. Although he expressed no accounting principle as the basis for adopting this method, it can be justified as imputed income to the lessees. Since no other feasible and fair method of appraising the possessory interest of a grazing lease appears adaptable, we cannot fault the assessor for assuming that capitalizing the rent lessee has agreed to pay fairly represents the basis for valuing the leasehold, or County of Tuolumne v. State Board of Equalization,
The record reflects the following testimony by the assessor:
'The computations are as follows:
Capitalization of rent:
Rent--$4,000.00 a month for a year--$48,000.00
$48,000.00 capitalized at 8% equals $600,000.00
'Because the fee assessment is posted in assessed value, the $600,000 value is reduced to assessed value.
$600,000.00 X .252-$151,200.00 assessed value.
'Applying the $151,200.00 to the fee assessment of $881,980.00, the $151,200.00 represents 17% of the fee value. The Assessor's office has used .16 per cent as a further consideration of the lessee rights.
'The computation for the assessment is as follows:
Land value $881,980.00 fee assessed value
The restriction 16% $141,117.00
Reversionary land value $141,117.00
Present value factor for a 14-year term since we are accepting this year's assessment, 14 years remaining, at 8% .3405
Present value of the reversion $48,050.00
Preliminary possessory interest value $93,067.00
Now the Assessor's office allows another 15% restriction on this figure, which gives you possessory interest value of $79,107.00
We round off to the nearest $10 on the Assessor's roll, gives you a value of $79,110.00 for the lessee assessed value.'
Obviously, the assessor did not adhere to the capitalization-of-income method, but employed a hybrid system that produced an erroneous result. He first capitalized the annual rent of $48,000 at 8 per cent, and arrived at $600,000 as the amount of capital investment required to produce an annual income of $48,000. We are not here concerned with the 8 per cent rate, since it meets standard practices and, if anything, favors appellant. The capitalized rent was reduced to an assessed value of .252 per cent of $600,000, or $151,200. This amount the assessor fixed as the assessed value of the capitalized income from the possessory interest, which he compared to the $881,980 assessed value of the fee. The resulting ratio of 17 per cent of assessed value of the fee he reduced to 16 per cent in accordance with the uniform county practice. This step was a departure from the method or formula for determining value of a lessee's leasehold by the capitalization of rent.
The $600,000 capitalized rent was based upon a constant income factor, that is, a return that would be realized indefinitely or in perpetuity. A leasehold is for a limited term and when the value of that limited interest is determined by capitalization, the income factor must be converted from perpetuity to term income, that is, for the life of the lease. This is accomplished When the capitalization-of-income method is adhered to, the result is the value of the possessory interest, and any comparison or ratio-to-fee value becomes irrelevant. The assessor, by comparing the unadjusted capitalized income to the assessed fee value before applying the Inwood Coefficient, reached an anomalous result. This is evidenced by an $82,350 assessed value for the first year's possessory interest and $79,110 for the second year of a fifteen-year grazing lease for which the rent was only $48,000 per year; and this after the assessor reduced the avlue of the possessory interest 15 per cent for no apparent reason than that the hybrid system he used resulted in an unreasonably high value ($93,067) compared to the rent he purported to capitalize. Had the lease been privately negotiated, it might be argued there is no relevancy between rent paid and the value of the possessory right for which it is paid, but here a public agency put the lease up for competitive bidding and there were several bidders. In these circumstances it is decidedly unrealistic to impute a bonus value of some 70 per cent above the actual rent.
Once the present full value of the lease with fourteen years remaining, is determined by capitalizing the rent and applying the Inwood Coefficient, not only does the ratio to the assessed value of the fee become irrelevant, but so does appellant's assertion that the assessor failed to consider the possessory interests reserved by the lessor in waterwells and impounded water which it sells for $60,000 a year, and the reservation and separate lease of certain hunting and access rights.
Appellant argues that since it bid for the lease in the open market against some twenty other bidders, the amount bid, $48,000 per year, fixes the fair market value, or the full cash value of the year's possessory interest, for assessment purposes. Appellant cites the following language from De Luz Homes, supra, 45 Cal.2d at page 566, 290 P.2d at page 557:
'The standard of 'full cash value' applies equally to a leasehold interest. Accordingly, the assessor must estimate the price a leasehold would bring on an open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other.'
However, the value of the leasehold interest the first and second years of the term is not necessarily reflected in the monthly rental prorated equally over the five-year term, since the lessee has the sole option of whether the lease shall be extended for two successive periods of five years each. This right of extended possession for ten additional years, a right over which the lessor has no control, gives the lease a bonus value. In De Luz the court ordered income capitalized for a term including the option years, although the government, as lessor, rather than the lessee, had the power to terminate the lease at the end of the original term.
Although the 1961-1962 assessment was erroneously made, appellant did not seek a review before the county board of equalization for that assessment year. A taxpayer seeking judicial relief from an erroneous assessment must first exhaust his remedies before the administrative body empowered initially to correct the error. (Bank of America v. Mundo, 37 Cal.2d 1, 4, 229 P.2d 345; Marsh Wall Products, Inc. v. County of Los Angeles, 193 Cal.App.2d 58, 61, 13 Cal.Rptr. 699.) There are exceptions to this rule, such as where property assessed is tax exempt, outside the jurisdiction of the taxing agency, or nonexistent. Star-Kist Foods, Inc. v. Quinn,
Appellant did exhaust its administrative remedies as to the 1962-1963 assessment by applying to the local board of equalization for relief. Since we conclude that the assessment was erroneously computed and the tax excessive, appellant is entitled to relief from the 1962-1963 assessment.
The judgment is affirmed as to the 1961-1962 tax, and reversed as to the 1962-1963 tax assessment with directions to the trial court to remand the proceedings to the county board of equalization for action in accord with this opinion.
GERALD BROWN, P. J., and COUGHLIN, J., concur.