An appellate court has upheld San Diego County's reassessment of the Fashion Valley Shopping Mall in San Diego. The court concluded that Equitable Life Assurance Company's transfer of the mall's title to the operating company of a limited liability corporation, in which Equitable owned a 50% stake, amounted to a 100% transfer of ownership and thus triggered a reassessment for property tax purposes.
Equitable owned the mall in 2001 when it entered into a transaction with Simon Property Group, LP. They created a limited liability company, named Fashion Valley MM, LLC (FVM), to function as its holding company, with Equitable and Simon each getting a 50% interest. Equitable contributed the mall to FVM, while Simon provided $165 million. Simultaneously, a wholly owned subsidiary of FVM – Fashion Valley Mall, LLC, or Mallco – was created to hold the mall's title and act as management, leasing and development agent.
In 2002, the San Diego County assessor concluded that this transaction amounted to a 100% change in ownership, which, under Proposition 13, triggered a reassessment. The county raised the mall's assessed value from $247 million to $360 million, boosting its tax bill by more than $1 million a year.
Mallco appealed to the county's Assessment Appeals Board but got nowhere. It then sued to set aside the reassessment and get a property tax refund. A San Diego County Superior Court judge ruled against Mallco, and a three-judge panel of the Fourth District Court of Appeal unanimously agreed.
The central question, according to the appellate court, was "whether Equitable retained a 50% beneficial interest in the mall due to its status as a member in FVM." If the answer were yes, the county could not reassess the mall because ownership of more than 50% of a property must be transferred to trigger a reassessment. Mallco argued that because Equitable receives 50% of the income generated by the mall and has some control over it, it does have a 50% beneficial interest in the mall.
However, "beneficial use" and bare legal title may be split only in a "fiduciary situation," such as a custodianship or trusteeship, Justice Joan Irion wrote for the court. "As no such fiduciary situation exists in this case, we conclude that the entity that holds the beneficial interest in the mall is the same entity that holds legal title to the mall, namely, Mallco."
The fact that Equitable is a 50% member of FVM does not matter because "a member of a limited liability company does not hold any interest in the real property owned by the limited liability company," Irion continued.
In addition, the court refused to recognize a "reformation agreement" approved by Equitable, Simon, FVM and Mallco in 2004. That agreement stated that the original 2001 transaction amounted to a 50% change in mall ownership for property tax purposes, but that all other provisions of the 2001 transaction remained in effect. The court called the 2004 reformation agreement a sham and "nothing more than a paper transaction and a transactional artifice that exists for the purpose of seeking to avoid tax liability."
The Case:
Fashion Valley Mall, LLC v. County of San Diego, No. D053411, 2009 DJDAR 12211. Filed August 17, 2009.
The Lawyers:
For Fashion Valley Mall, LLC: C. Stephen Davis, Cahill, Davis & O'Neall, (213) 622-0600.
For the county: Walter DeLorrell III, county counsel's office, (619) 531-4860.
