The Pennsylvania Supreme Court has ruled that even where a landlord merely ground leases land to a tenant who builds a building on it—and the landlord collects rent only on the land—the value of that building is subject to real estate tax. The court’s decision in Tech One  Associates v. Board of Property Assessment, Appeals and Review of Allegheny County could have expensive tax consequences for both landlords and tenants, who have been protected for 20 years by the Marple Springfield decision.

The building in Marple Springfield was subject to a long-term lease at a fixed rent. Even though the tenant could, and did, sublease the building for twice the rent it paid, the landlord did not benefit from that extra rent. Accordingly, the court limited the taxable value of the property to the income stream the landlord actually received.

In Tech One, decided on April 25, 2012, the property owner ground leased vacant land for 50 years to a tenant who built a shopping center and earned substantial rent, while the landlord received only rent for the land. Under the General County Assessment Law, buildings and improvements are expressly subject to real estate tax. The court ruled that the assessment should be based on the value of both the land and the building. The court observed that if it accepted the landlord’s argument that no tax should be owed for the buildings, “a tenant under a long-term lease could build a Taj Mahal or an Empire State Building, and such a structure would be wholly exempt from taxation merely because it was owned as a leasehold.”

The court noted that under the ground lease, the tenant was responsible for paying real estate taxes. Nevertheless, the court said, “once the assessment is made, who pays the real estate taxes—the landowner or the tenant or subtenant—is not the concern of the taxing body.”

The court also emphasized that the ground lease identified the tenant as the owner of its improvements, presumably to establish the tenant as the owner for federal tax purposes.

In light of this decision, we expect future cases to address the meaning of ownership by a tenant, the relevance of which party pays the tax, and whether there should be a separate tax assessment directly against the tenant. Owners of shopping centers and retailers that use ground leases may face heightened scrutiny of their portfolios by taxing authorities, and greater attention to the specific language of their leases.

Ballard Spahr attorneys can assist you in defending your property against increases in your real property taxes, and in structuring leases to protect you. If you have questions, please contact Philip B. Korb at 215.864.8709 or; Michael Sklaroff  at 215.864.8700 or; or Matthew N. McClure at 215.864.8771 or

Copyright © 2012 by Ballard Spahr LLP.
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