Case Study #1: A Naval Defense Contractor on a waterfront “possessory interest” saves a boatload!

    Total Tax Savings: $230,000

    A defense contractor entrusted with building and repairing naval vessels, leases land from the Port of San Diego under a long term contract where their shipyard repair facilities are located. The tenant’s interest in the land is known as a “possessory interest” and the entire real estate is appraised for property tax purposes using specific valuation methodologies. Two key factors that must be considered when valuing a “possessory interest” are current lease rates and the remaining life of the lease. As the government downsizing began to impact the defense industry in the early 1990’s, lease rates fell precipitously. Our analysis of the shipyard’s financial information combined with our knowledge of the applicable valuation methods for “possessory interest” properties produced dramatic results. The final tax savings was bolstered by our knowledge that the value of the lease falls geometrically in value near the end of the lease contract. As a result our client is recognizing a continually declining property tax bill each year as the lease approaches its expiration.