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Volume 4 - Opinions of Counsel SBEA No. 113

Opinions of Counsel index

Special franchise assessment (title to equipment in municipality) - Real Property Tax Law, § 102 (17) :

Where an agreement between a private corporation owning street lighting equipment and a village where it is located purports to vest title to the equipment in the village, such equipment will nevertheless remain taxable as special franchise property unless the village has actually acquired the incidents of ownership to the equipment as well as title thereto.

Our opinion has been requested as to whether certain street lighting equipment installed in a village by a private corporation should be assessed as special franchise property. A rider attached to the rental agreement between the village and the corporation for the use of the equipment purports to transfer title to the village.

All real property in this State is subject to taxation unless specifically exempted therefrom by statute (Real Property Tax Law, § 300). Real property is defined in paragraph (h) of subdivision 12 of section 102 of the Real Property Tax Law to include “[s]pecial franchises as defined in subdivision seventeen of this section.” Subdivision 17 provides as follows:

17. “Special franchise” means the franchise, right, authority or permission to construct, maintain or operate in, under, above, upon or through any public street, highway, water or other public place, mains, pipes, tanks, conduits, wires or transformers, with their appurtenances, for conducting water, steam, light, power, electricity, gas, or other substance. For purposes of assessment and taxation a special franchise shall include the value of the tangible property situated in, under, above, upon or through any public street, highway, water or other public place in connection therewith. The term special franchise shall not include property of a municipal corporation or special district, nor shall it include a crossing less than two hundred fifty feet in length of a public street, highway, water or other public place outside a city or village, unless such crossing be the continuation of an occupancy of another public street, highway, water or other public place.

It is contended that the street lighting equipment in question is not special franchise property because of the language in subdivision 17 excluding “. . . property of a municipal corporation . . .” from the term “special franchise”. Pursuant to the rider attached to their rental agreement, the parties have sought to make this equipment “property of a municipal corporation”. However, it is our conclusion, based on a review of New York case law, that the village has failed to acquire any ownership in this equipment for purposes of assessment and taxation despite the language in the rider to its rental agreement.

The first case of importance is National Cold Storage Co. v. Boyland, 16 App.Div.2d 267, 227 N.Y.S.2d 147, aff’d, 12 N.Y.2d 808, 187 N.E.2d 129, 236 N.Y.S.2d 62. There, the court readily admitted that it was possible for a landlord and tenant to provide by agreement that the tenant should be the owner of the property; however, the court also stressed the fact that such agreement could be held meaningless unless incidents of ownership were actually conferred on the tenant. It appears that no incidents of ownership whatsoever have been conferred on the village in the instant case.

In United States v. Tax Commission of the City of New York, 22 App.Div.2d 290, 254 N.Y.S.2d 785, the primary issue was whether a substantial renovation of an old building by the government-tenant under a renewable long-term lease created taxable or exempt additions to the property under the U.S. Constitution as property of the United States; the lease agreements between the owner-landlord and the government-tenant provided title to the improvements should remain in the government-tenant. Under the lease agreements, the government was entitled to make substantial improvements, subject to the approval of the landlord, such approval not to be unreasonably withheld. While the improvements were declared to remain the property of the government, at the termination of the lease as extended, the improvements would be purchasable at the sole option of the landlord within a 60-day period from the date of termination for the price of one dollar. Citing with approval the National Cold Storage case (supra), the court stated (at p. 789):

The conditions contingently there described spring to reality in this case. Except for the verbal reservation of title in the government-tenant to the improvements made by it, there is no incident of ownership retained. It is, however, not only what the parties say they agreed to, but in fact what they did agree to. There is nothing retained by the government-tenant with respect to the improvements which it would not have merely as a tenant for a term of years. There is nothing yielded by the landlord which it would not have as owner to the improvements to its buildings, except that it must exercise an option within a 60-day period and pay one dollar. . . .

Such an option is not a reality as a legal construction or as a reflection of possible human conduct.  It is a mere verbalization, with hopeless contradiction too, without anchor in legal theory or the order of nature.  The only legal meaning it can have is that the improvements are not to be taxed because the parties say so, and they say so by calling it federal property although there is no other incidence, fact, or legal consequence which distinguishes it from the landlord’s private property... (emphasis added)

It is clear upon a review of the rental agreement between the village and corporation that the foregoing cases are controlling, and that since no incidents of ownership have been acquired by the village, this street lighting equipment should be considered the property of the corporation for purposes of assessment and taxation.

Pursuant to said rental agreement, the lessor (the corporation) is required to (a) furnish the street lighting equipment; (b) maintain and keep in operating condition such equipment so installed at the annual rental charges; (c) maintain dispatching and telephone facilities for the receiving of light out calls; (d) patrol location where the rental equipment is installed once each week, and replace all dim burning and burned out lamps;  (e) promptly repair outages (and penalties are imposed if such repairs are not prompt);  (f) replace damaged or defective equipment while reserving the right to recover damages sustained from the responsible party;  (g) carry workmen’s compensation and comprehensive public liability insurance at its sole cost and expense.

In return, the lessee (the village) agrees to pay rental maintenance charges monthly upon rendition of a bill.

While all incidents of ownership (e.g., repair and maintenance, insurance, etc.) rest with the corporation, the rider to this rental agreement purports to vest title in the village, with the corporation having the “option” (an “option” similar to that in United States v. Tax Commission, supra) of recapturing title to the equipment at the termination of the lease for the payment of one dollar, or, in the alternative to allow the village to purchase that right of recapture on mutually satisfactory terms.  Only bare legal title is held by the village, and in accordance with the foregoing cases, this is not sufficient.  In the absence of any incidents of ownership in conjunction with such “title”, this equipment should not be considered “property of a municipal corporation” for the purposes of assessment and taxation.  Therefore, the equipment is tangible property of a utility used in conjunction with its franchise to operate in the public way and it should be assessed and taxed as such, i.e., as special franchise property.

March 11, 1975

Updated: