(Super. Ct. No. CV 070057) Charles S. Crandall, Judge Superior Court County of San Luis Obispo
The opinion of the court was delivered by: Coffee, J.
CERTIFIED FOR PUBLICATION
It is the duty of a county tax assessor to value property at its fair market value. To arrive at the fair market value of a television cable franchise, the assessor must determine its reasonably anticipated term. Rule 21, subdivision (d)(1), Title 18 of the California Code of Regulations, provides for situations, as here, where the reasonably anticipated term of possession is longer than the stated term of possession.*fn1
Appellant Charter Communications Properties, LLC (Charter) contends that the assessor violated Rule 21 when it valued its unexpired cable franchises.*fn2 Charter challenges the use of a reasonably anticipated term of possession longer than the remaining years of the stated term of each franchise agreement. Charter further challenges the use of Rule 21, subdivision (d)(2) factors to value the unexpired franchises. In this case, the Assessment Appeals Board (AAB), in compliance with Rule 21, found clear and convincing evidence of a mutual understanding between the County and the owner of franchises that the reasonably anticipated terms of possession of the franchises were longer than their stated terms of possession. Accordingly we affirm the judgment of the trial court which so found.
The subject property consists of Charter's eight unexpired television franchise possessory interests in the County. The County and several cities (Atascadero, Paso Robles, Grover Beach, San Luis Obispo, Pismo Beach, Arroyo Grande, and Morro Bay) entered into franchise agreements with Charter. At the time of the challenged assessments, between four and ten years remained of the unexpired franchise agreements' stated terms. Charter filed applications seeking $594,918 of property tax refunds for 2000 through 2005. The applications challenged two factors applied by the assessor in valuing the franchise possessory interests: the term of possession and the economic rent. This appeal does not concern the economic rent factor.
On April 16, 2004, the assessor and Charter appeared at the AAB hearing concerning its 2000 through 2003 property tax refund applications. During that session, the AAB decided to seek an advisory opinion from the legal staff of the State Board of Equalization (SBE), and continued the proceeding. The SBE issued an advisory opinion letter on July 13, 2005. Meanwhile, Charter had filed comparable refund applications for 2004 and 2005. On April 21, 2006, the AAB consolidated Charter's refund applications for 2000 through 2005 and resumed hearing Charter's applications.
The assessor and Charter agreed that the market value of the subject property should be determined by the capitalization of income approach, using the following factors: (1) growth rate (6 percent); (2) expense ratio; (3) economic rent percentage; (4) term of possession (number of years) used for valuation purposes; and (5) capitalization rate (12 percent). They also agreed as to the formula to be used to calculate the market value using those factors; and they agreed that the correct assessed value for each parcel would be the lesser of (1) market value computed according to the agreed upon manner or (2) the adjusted base year value of record.
Both parties presented evidence and arguments relating to the appropriate term of possession. Most of their arguments concerned subdivision (d)(1) of Rule 21, which provides as follows: "The term of possession for valuation purposes shall be the reasonably anticipated term of possession. The stated term of possession shall be deemed the reasonably anticipated term of possession unless it is demonstrated by clear and convincing evidence that the public owner and the private possessor have reached a mutual understanding or agreement, whether or not in writing, such that the reasonably anticipated term of possession is shorter or longer than the stated term of possession. If so demonstrated, the term of possession shall be the stated term of possession as modified by the terms of the mutual understanding or agreement."
Charron Sparks, a supervising assessor, presented the assessor's staff report. Sparks explained that "[t]he Federal Communications Act of 1936 specifically provides that the continuation of service is in the public's best interest and makes it essentially impossible for a franchise not to be renewed. [¶] The assessor is not aware of any franchise agreement throughout the state that has not been renewed."
Sparks gathered information from each of the franchising agencies in the county. She found that the renewal process was not contentious and "that franchise agreements are renewed indefinitely." Sparks testified about the perception of local franchise agencies from whom she collected data. Those agencies were not at all "concerned about their franchise agreements." As an example, she explained that the county franchise "was in limbo for three years [and] nobody really wanted to deal with it because it's a non-issue as far as they are concerned. It is just going to be what it is because they can't tell them not to be [t]here. They can[not] renew it. There is no option to not renew it. [Charter is] the only game in town. They are the only people with cable on the ground."
The assessor's staff report includes an excerpt from the Form 10-K that Charter filed with the Securities and Exchange Commission for the year ended December 31, 2002. Relevant portions of that excerpt follow: "Franchise rights acquired through the purchase of cable systems represent management's estimate of fair value at the date of acquisition and generally are reviewed to determine if the franchise has a definite life or an indefinite life as defined by Statement of Financial Accounting Standards (SFAS) No. 142 . . . which eliminates the amortization of . . . indefinite lived intangible assets. . . . [B]eginning January 1, 2002, all franchises that qualify for indefinite life treatment under SFAS No. 142 are no longer amortized against earnings . . . . [¶] . . . [¶] The Company believes that facts and circumstances have changed to enable it to conclude that substantially all of its franchises will be renewed indefinitely, with those franchises where technological or operational factors limit their lives continuing to be amortized. The Company has sufficiently upgraded the technological state of its cable systems and now has sufficient experience with the local franchise authorities where it acquired franchises to conclude substantially all franchises will be renewed indefinitely." (Italics added.) Sparks also testified that Charter had expended almost $50 million in making technological upgrades to the subject property.
Based on the just-described factors, the assessor concluded that there was clear and convincing evidence that Charter and the franchise authorities mutually understood that the unexpired franchise terms were longer than the agreements' stated terms, and it was not required to use the remaining years of the original stated term as the term of possession. Since the parties mutually understood that the terms were indefinite, it was necessary to determine a reasonably anticipated term of possession, as in the case of an expired agreement.*fn3
Sparks then addressed the basis for the 15-year term that the assessor determined to be the reasonably anticipated term of possession of the indefinite, unexpired franchises. She referred to the following statements that Charter made in its Form 10-K: "Prior to the adoption of SFAS No. 142, costs incurred in obtaining and renewing cable franchises were deferred and amortized using the straight-line method over a period of 15 years. Franchise rights acquired through the purchase of cable systems were generally amortized using the straight-line method over a period of 15 years. The period of 15 years was management's best estimate of the useful lives of the franchises and assumed that substantially all of those franchises that expired during the period would be renewed but not indefinitely." Sparks further noted that most franchise agreements had 15-year terms.
Charter's representatives presented its case. Citing Rule 21, subdivision (d)(1), and other authority, Charter argued that because the franchise agreements for the subject property were unexpired as of the valuation date, the term of possession was the number of years remaining under the stated term of each agreement.
In disputing that there was any mutual understanding that the unexpired franchises had indefinite terms, Charter presented the testimony of Ed Merrill, its northern California representative. Merrill testified about two instances in which franchises briefly expired and the parties mutually agreed to short extension periods for further negotiations. He noted one situation where a city - Santa Cruz - initially refused to transfer a franchise from Charter to another company. Merrill also testified that Charter had identified several franchises that it did not intend to renew. During cross-examination, Merrill conceded that he could not cite "any franchise agreements in . . . California that eventually have not been renewed where service actually ceased and then a new cable provider came in . . . ."
Charter also presented documentary evidence, including appraisals, calculations, and the SBE July 13, 2005 Advisory Opinion Letter (SBE letter). One Charter exhibit showed that the remaining years of the unexpired franchise were as follows: Arroyo Grande, eight years; Atascadero, ten years; Grover Beach, seven years; Morrow Bay, seven years; Paso Robles, four years; Pismo Beach, seven years, City of San Luis Obispo, four years; San Luis Obispo County, ten years.
Charter asserted that the SBE letter supported its position. Relevant portions of that letter follow: "Rule 21(d) separates taxable possessory interests into two types: those with or those without a stated term of possession. . . . [¶] When a taxable possessory interest has a stated term of possession, rule 21 provides that the stated term of possession shall be the reasonably anticipated term of possession, unless the assessor can demonstrate by 'clear and convincing evidence' that the public owner and the private possessor have reached a mutual understanding or agreement such that the reasonably anticipated term of possession differs from the stated term of possession. If so demonstrated, the rule also provides that the term of possession for valuation purposes shall be the stated term of possession as modified by the mutual understanding or agreement. . . . [¶] For a taxable possessory interest without a stated term of possession, . . . the assessor may determine the reasonably anticipated term of possession based upon the intent of the public owner and the private possessor, or by the intent of similarly situated parties, using criteria such as that listed in rule 21(d)(2)(A-E). [¶] Rule 21(d)(3) states that a taxable possessory interest that runs from month to month, an interest without a fixed term, or an interest of otherwise unspecified duration shall be deemed to be a taxable possessory interest with no stated term of possession. [¶] If a cable system franchise is operating under a current document . . ., the presumption is that the stated term of possession, . . . remaining . . . thereunder on the valuation date, constitutes the reasonably anticipated term of possession. If the document or instrument has expired, the reasonably anticipated term of possession is to be determined . . . using the criteria listed in Rule 21(d)(2)(A-E) until . . . a new document or instrument is executed." (Italics added.)
In essence, Charter argued that the remaining years of the stated term constitute the reasonably anticipated term unless there is clear and convincing evidence that the parties agreed or mutually understood that another finite stated term would apply to the franchise. The assessor maintained that where the parties mutually understood that an unexpired agreement had an indefinite term, a reasonable construction of Rule 21 ...