Taxable Possessory Interests in Public, Non-Taxable Property

Frequently Asked Questions

A taxable Possessory Interest may exist whenever there is a private, beneficial use of publicly-owned, non-taxable real property. Such interests are typically found where private individuals, companies or corporations lease, rent or use federal, state or local government owned facilities and/or land for their own beneficial use.

Possessory Interests include such things as:

  • ​A boat dock built on a public​ lake or river
  • A mini-storage facility built under a freeway
  • A private walkway built above a city street
  • An airplane tie-down at a county airport
  • Cattle grazing rights on Federal or State land
  • Private companies leasing government buildings
  • Tenants, concessionaires and exhibitors at Cal-Expo or the Community Center at any time during the year
  • The right to grow crops on land owned by a community college district
  • The right to have food vending machines located in a government building
  • The right to operate a rental car agency at an airport​

The valuation of Possessory Interests (PIs) differs significantly from other forms of property tax appraisal in that it is the appraiser's job to value only those rights held by the private possessor. The appraiser must not include the value of any rights retained by the public owner or any rights that will revert back to the public owner (the "reversionary interest') at the end of the term of possession.

As a result, Possessory Interest assessments are normally less, and often significantly less, than fee simple assessments of similar, privately-owned property.

In order to establish whether such a use is subject to local property tax, the nature of the use must be analyzed to determine whether it meets certain specific requirements of the law set forth in Revenue & Taxation Code Section 107 and Property Tax Rules 21 through 28.

In very simple terms, for a Possessory Interest to be taxable it must be:

  • Exclusive: Its holder must be able to exclude others from interfering with the use of the property, (or, where there is concurrent use, the concurrent use does not significantly interfere with the holder's use).
  • Independent: The use must be independent of the public owner. That is, its holder may exercise authority and control of the property apart from the rules and regulations of the public owner.
  • Durable: There must be reasonably certain evidence to show that the possession will continue for a determinable period of time.

Those who receive Possessory Interest assessments are often puzzled and perplexed by the apparent paradox of on the one hand paying rent to a government entity and on the other being asked to pay property tax as well.

The explanation is that government entities do not have to pay property tax and thus their rent charges do not include an increment to recover such taxes. At the same time, the private possessor still receives the services and benefits (fire and police protection, schools and local government) that other similar taxable properties enjoy.

The Possessory Interest tax helps to pay the holder’s share of those costs. Possessory Interest rents reflect only the public's return on its investment and do not include a property tax component. On the other hand, private sector rents include both the owner's return on investment and a property tax component to recover those taxes. As such, the separate collection of Possessory Interest tax does not result in double taxation.

The valuation approaches for taxable possessory interests are similar to the conventional approaches to value – the comparative sales approach, the income approach, and the cost approach – that are generally accepted and used in the valuation of a fee simple interest. However, the conventional approaches must be modified to accommodate the finite duration of a taxable possessory interest and the corresponding fact that a portion of the fee simple interest in those rights, the reversionary interest, is retained by the government owner and is non-taxable.

While any of the sales comparison, income, or cost approaches to value may be used by the Assessor in valuing taxable possessory interests, the income approach is the most commonly relied upon method of valuing them.

In the income approach, a taxable possessory interest is valued by discounting the future net income that the interest in real property is capable of producing during the anticipated term of possession. Where both economic rent and a reasonable term of possession can be determined, estimating the PI value involves capitalizing the potential rental income stream (less anticipated vacancy, collection loss and management expense from a landlord's point of view). The resulting figure is the value of the taxable Possessory Interest.

Capitalizing the economic net income for the term of possession measures only those rights possessed by the tenant and excludes any non-taxable rights retained by the governmental landlord.

A term of possession for the taxable possessory interest must be determined, using such evidence as the actual contract or rental agreement itself, any history of prior use by the current tenant, the government entity's current policies, or the history of other past or current tenants’ use of the same or similar rights to determine a reasonable term of possession.

It is not uncommon for holders of Possessory Interests to construct facilities on the leased property that will revert to the government owner when the lease expires. In that case (presuming actual rent is economic rent), the valuation of the taxable possessory interest rights using an income approach should reflect both the actual rent plus an imputed rent for the added improvements for the term of possession, or, the actual rent plus the value of the leasehold improvements built by the tenant.

Capitalization rates used in PI assessments reflect the landlord's perceived risk and are typically derived from sales of similar fee-owned properties. These derived rates are then adjusted to further reflect those risk considerations specific to each individual Possessory Interest situation.

In some cases, government owned property outside the boundaries of its jurisdiction is taxable under Section 11 of Article XIII of California's Constitution. Though not a common circumstance, government owners sometimes rent portions of their Section 11 properties to private tenants.

The procedure specified in the law for valuing Section 11 property recognizes both taxable and non-taxable interests in such property. In other words, Section 11 property is both partially tax exempt and partially taxable. It is the tax-exempt portions of those properties that are subject to Possessory Interest taxation when they benefit a private tenant.

Private tenants in Section 11 properties have a taxable Possessory Interest in a proportionate share of the difference between "Market" value and Section 11 value. In other words, although some of the government owned rights in a Section 11 property are taxed, a Possessory Interest may exist in the portion of those rights that have been exempted from taxation under the mechanism provided in Section 11.

Possessory Interests are normally assessed on the Unsecured Tax Roll because the property rights being assessed are not owned by the assessee and cannot provide security for the taxes owed. In other words, the county cannot seize the property in order to satisfy any delinquent property tax. Therefore, PI’s are assessed as real property on the Unsecured Roll.

It is possible for a PI to be assessed on the secured roll but only in a situation where the Assessor agrees that property (buildings) built by a tenant on the publicly-owned land is by itself sufficient security for the taxes owed.

Sacramento County unsecured Possessory Interest tax bills are identified as Class 44 billings and the box labeled "Class" on a PI bill will show the number 44 printed there. If a number other than "44" is printed in the "Class" box, it is not a Possessory Interest assessment.

The payment schedule for unsecured roll tax bills is significantly different than for secured roll tax bills and taxpayers should be aware of that difference. Unsecured bills are due and payable in full no later than August 31 each year. If paid after August 31, a penalty of 10% plus costs will be added to the amount due. Unsecured bills are not split into two installments with two different delinquency dates, as is true of Secured Roll tax bills.

Possessory Interest appraisal problems and philosophies are covered in much greater detail in Assessors' Handbook AH-510, Assessment of Taxable Possessory Interests.

If you have specific questions in regard to a particular Possessory Interest assessment, please call the Assessor's Office Customer Service counter at (916) 875-0700. Customer Service staff will then put you in touch with the appropriate Possessory Interest appraiser.

You may also write a letter requesting assistance to: The Sacramento County Assessor's Office, 3636 American River Dr, Suite 200, Sacramento, CA 95864-5952. If possible, be sure to include the full parcel number, business or owner's name and the street address of the property in question.

A public entity is required to report to the Assessor’s office all agreements which allow others to use real property owned by that jurisdiction by February 15th of each year using the Possessory Interest Lease Report​.

Additionally, please send along with the above form a copy of all new leases or lease amendments, or existing leases if not previously reported to the Assessor.​