The County Assessment Appeals Board (AAB) has reduced the San Francisco 49ers’ Stadium Company’s (Stadco) property taxes on the NFL team’s use of Levi’s Stadium — called a possessory interest — by an estimated $6 million a year, Santa Clara County Tax Assessor Larry Stone announced last Wednesday.
Stone called the amount of the tax reduction “shocking and unexpected.”
Possessory interest is the financial value of a private business’ use of public property — for example, a cable company’s use of a public right-of-way or a privately owned restaurant in a public office building. Although the property is owned by the public agency, the business profits from its use of it.
After 21 hearings — the longest such appeal ever, according to Stone — the AAB’s finding was that StadCo gets no business benefit from Levi’s Stadium outside the football season. There was no controversy about the underlying valuation of the stadium.
The Assessor only has a summary of the decision and hasn’t seen the Findings of Fact with the justification for the Board’s decision. “I believe that this is incorrect, and an oversimplification at the heart of a flawed conclusion,” said Stone.
The appeal was first filed in 2015, and renewed every year since. Thus the AAB ruled that the 49ers are due $30.8 million in overpayments for the five-year period.
These refunds must be paid from the agencies that were funded by property taxes. These include: Santa Clara County ($5.3 million), the City of Santa Clara ($2.9 million), Santa Clara Unified School District ($13.1 million) and West Valley Community College District ($3.1 million). The refunds must begin immediately, even without detailed AAB findings.
As the biggest recipient of property tax money (40 percent), Santa Clara Unified’s general fund will lose about $2.5 million a year — about 1 percent of the district’s $346 million budget. The district received $263 million in property tax revenue in 2018.
“We can cover this loss,” said Superintendent Stanley Rose in a statement.
“We are not anticipating that this year’s refund and loss of ongoing annual revenue will lead to budget cuts. Our one-time revenues from this year and funds from our reserve for just these types of budget uncertainties will carry us through this year’s refund. Additionally, we are making adjustments to our revenue assumptions as we build future school year budgets.
“This is still disappointing news for the district to receive,” he continued. “Ultimately, the impact is on our students who would most certainly have benefitted from that $13M and ongoing annual revenue.”
The City will lose about $600,000 in annual property tax revenue — cities only get about 10 percent of property taxes. The City has issued no public statement on the subject and declined the Weekly’s request for comment.
Although last year Santa Clara’s property tax revenue surpassed its sales tax revenue for the first time, historically the City gets the largest share of its revenue from business sales taxes, such as those paid by Intel and NVIDIA.
A Complex Case
“This was without a doubt one of the most complicated assessments ever performed by my office,” Stone said in his remarks at a meeting of the affected agencies Wednesday afternoon. “The County Counsel assigned two attorneys and I had a team of people working on this appeal, including our Chief Appraiser.
“The agreements are so complicated that we retained a forensic accountant,” he continued, “as well as an… appraiser with experience in valuing stadiums and ballparks. The problem of determining Stadco’s interest is that it is defined by dozens of interlocking, intricate agreements …and structured, I believe, to achieve this very outcome.”
The Assessor can appeal this decision by bringing an action in the Santa Clara County Superior Court. However, the appeal can only address legal disagreements with the basis of AAB’s calculations, according to Deputy Assessor David Ginsborg.
In a memo to the Board of Supervisors, Stone wrote that “This is the primary reason why appraisal experience and credentials are so important for Assessment Appeal Board appointments. There is no place for appointing Board members with ‘minimum qualifications.'”
Each Supervisor makes an appointment to the AAB, and in the past Stone has clashed with Supervisors over appointments.
Evaluating Possessory Interest
The California Board of equalization sets four criteria for taxable possessory interest.
First, there must actual physical occupation of the property and rights for using it that aren’t shared by the general public.
Second, the business or individual must be able to “exercise significant authority and control over the management or operation” of the property — in other words, the leaseholder can’t just be a property manager.
Third, the leaseholder must have an exclusive use of the property that isn’t shared with any other users — for example, the right to operate a concession stand in a public park. Everyone is free to use the park but not everyone can operate that concession stand.
Finally, there must be a private benefit — to make a profit, use an amenity or pursue a private purpose. It doesn’t even have to be a financial profit — it only has to be a benefit that isn’t shared by the general public.
A Hornet’s Nest of Contracts
Although the Appeals Board has not made public its reasoning for this decision, the answer may be found in the language of the Stadium Lease Agreement and the structure of the multiple leases.
There are about 20 Levi’s Stadium contracts, agreements and contract amendments going back to 2011, which all can be found on the City’s website.
The Santa Clara Stadium Authority leases the ground under Levi’s Stadium from the City of Santa Clara. In turn, the Stadium Authority — a separate legal entity whose board is the City Council — leases the stadium to the 49ers Stadium Company, Stadco, which is the tenant.
The lease defines two “seasons” for the stadium: Stadco’s and the Stadium Authority’s. Stadco’s season is August 1 through January 31, and during that time all NFL event revenue except the City’s ticket fees goes to Stadco.
The Stadium Authority’s season is February 1 through July 31, during which time the Authority receives all the revenue except, again, ticket fees that go directly to the City:
“Stadium Authority Revenue for each Lease Year shall include all Non-NFL Event Revenue [including concessions] for such Lease Year, including all revenues from the sale of Tickets for Non-NFL Events conducted during such Lease Year, and all revenues received by the Stadium Authority from the promoter or other sponsor of any Non-NFL Event conducted during such Lease Year.”
This appears to say that Stadco gets no revenue from the non-NFL season.
The Stadium Authority then pays the City 50 percent of the net profit from non-NFL events as “performance rent.” The other 50 percent of those profits go into Authority expense and reserve accounts, not to Stadco. Manco, the 49ers Stadium Management Company, is a property manager, not a tenant.
For the entire year, however, Stadco does have the “sole and exclusive right to market and license the Suites in the Stadium, which shall allow the Suite licensees to purchase tickets and parking passes to all Stadium Events, including Non-NFL Events.” This would be an argument that Stadco does receive a financial benefit year-round.
There’s no word on when the Assessment Appeals Board will release its detailed decision.
Correction: A previous version of this article misstated that the $2.5 million in property taxes Santa Clara Unified would miss out on every year was about .01 percent of the district’s $346 million budget. However, $2.5 million is actually about 1 percent of the district’s budget. The article has been updated to reflect the correct information. We apologize for the error.